Potlatchdeltic Corp (PCH) 2016 Q4 法說會逐字稿

Good morning. My name is Karen and I will be your conference operator today. At this time, I would like to welcome everyone to the Potlatch fourth-quarter 2016 conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Jerry Richards, Vice President and Chief Financial Officer, for opening remarks. Sir, you may proceed.

Thank you, Karen, and good morning. Welcome to Potlatch's investor call and webcast covering our fourth-quarter 2016 earnings. With me in the room are Mike Covey, Chairman and Chief Executive Officer; and Eric Cremers, President and Chief Operating Officer.

This call will contain forward-looking statements. Please review the warning statements in our press release, on the presentation slides, and in our filings with the SEC concerning the risks associated with these forward-looking statements. Also, please note that a reconciliation of non-GAAP measures can be found on our website at www.potlatchcorp.com.

I'll now turn the call over to Mike for some comments, and then I will cover our fourth-quarter results and outlook.

Thanks, Jerry, good morning. Strong performance by each of our three businesses and improved lumber prices drove solid earnings in 2016. Excluding the Central Idaho timberland sale, our EBITDA increased $21 million, or 20% compared to 2015.

Our resource segment managed through weather challenges during 2016 in order to successfully achieve our plan to harvest 4.2 million tons. The segment's results benefited from robust cedar log demand and excellent control over log and haul cost. While Southern pines sawlog prices remained flat this year, we are encouraged by the amount of capital being invested in manufacturing operations in our Southern wood baskets.

New mills or restarts are planned or under way in El Dorado, Arkansas; Demopolis, Alabama; and Louisville and Newton, Mississippi. It will take time for these capacity additions to absorb the oversupply of sawlogs, and we do not expect meaningful improvement in Southern sawlog prices for several quarters. However, the longer term outlook for sawlog price improvement in our wood baskets is improving.

Our wood products mills are operating very well and for the first time we produced 700 million board feet of lumber in 2016. The segment set a quarterly production record in the third quarter and then promptly beat that record in the fourth quarter. We are seeing the benefits of capital investments made at each of our mills over the past few years, as well as productivity and cost initiatives driven by an outstanding workforce.

Also, our industrial grade plywood mill continues to generate good returns. Wood products EBITDA increased $30 million this year compared to 2015.

Our real estate segment continues to find opportunities to drive shareholder value beyond our regular recurring sales of rural recreational real estate. The segment closed several attractive conservation sales this year. Turning to the balance sheet.

We lowered net debt $125 million this year. We finished the year with $83 million of cash and we repaid $43 million of debt that was not due until 2026. We also returned $67 million to shareholders in 2016 in the form of dividends and share repurchases.

Our stock price increased 38% in 2016, which narrowed the gap between our public equity price and our net asset value. While we trade at a discount to net asset value, we opted not to purchase any shares in the fourth quarter. We intend to be opportunistic and repurchase shares when our stock trades at a deep discount to our net asset value.

Looking ahead to 2017, we anticipate US housing starts to be between 1.2 million and 1.3 million units and we expect repair and remodel markets to remain strong. We expect our harvest and lumber shipment volumes to be flat compared to 2016. We also expect to sell about 20,000 acres in our rural real estate segment this year.

Upside relative to our 2016 results would be driven by higher lumber prices and continued increases in the price of cedar sawlogs. We believe that the softwood lumber trade dispute with Canada will cause lumber prices to be volatile. The US International Trade Commission made a preliminary ruling earlier this month that Canadian lumber imports have caused injury to the US industry. This means that the US Department of Commerce will continue its investigation into the petition filed by the US lumber coalition.

We expect the trade case to result in counter veiling and anti-dumping duties that will take effect in early May and late June. Given that almost half of our EBITDA is directly tied to lumber prices, a favorable outcome to the trade case is important to Potlatch. I'm excited about Potlatch's prospects and expect 2017 to be another good year.

I'll now turn it back over to Jerry to talk about the quarter and the forward look. Jerry?

Thanks, Mike. Beginning with page 3 of the slides accompanying this call, we reported net income of $14.4 million or $0.35 per diluted share in the fourth quarter. This compares to net income of $27.6 million or $0.68 per diluted share in the third quarter.

EBITDA was $35.1 million in the fourth quarter compared to $48.8 million last quarter. The sequential decline in earnings and EBITDA is normal in the fourth quarter and is primarily due to seasonal factors. I'll now review the results of our operating segments.

Information for our resource segment is displayed on slides 4 through 6. Operating income for the segment was $22.7 million in the fourth quarter, compared to $33.3 million last quarter. The decrease in earnings is largely due to seasonally lower sawlog prices and lower harvest volumes.

While down sequentially, the 1.1 million tons that we harvested in the fourth quarter was at the top of the range that we provided on last quarter's call. I'll provide more color as I cover each region.

Turning to slide 5, we delivered 474,000 tons of sawlogs in the north in the fourth quarter, which is higher than normal in a fourth quarter. As we discussed on the third-quarter earnings call, we were about 85,000 tons short of our harvest plan through the first three quarters of the year. Our employees and contractors did a good job closing the gap in the fourth quarter.

Northern sawlog prices decreased 13% on a per ton basis in the fourth quarter. About half of this decrease was a result of a seasonally lower mix of cedar sawlogs in the sales mix. The remainder of the decrease in Northern sawlog price realizations was the result of heavier logs due to higher moisture content and slightly lower prices on a dimensional basis, log prices are set on a dimensional basis in Idaho, not based on weight.

Demand and prices for cedar sawlogs continue to be very strong. The average price for cedar sawlogs increased 6% on a dimensional basis in the fourth quarter compared to the third quarter. I'll now turn the south on slide 6.

As discussed on last quarter's earnings call, harvest volumes were below plan through the third quarter due to abnormally wet conditions that interrupted operations. Logging conditions were favorable in the fourth quarter. As a result, we were able to harvest 617,000 tons in the quarter which more than made up the shortfall relative to the harvest plan.

Sawlog prices in the south decreased 7% due primarily to a seasonally lower volume of hardwood logs in the sales mix. The price of Southern pine sawlogs in all three of our Southern wood baskets remained flat quarter over quarter and the 2016 average pine sawlog price was equivalent to 2015 prices.

Results for the wood products segment are displayed on slide 7 and 8. Operating income was $8.3 million in the quarter compared to $10.6 million in the third quarter. This was the segment's second highest quarterly earnings in two years and occurred during what is typically a seasonally softer quarter.

Our average lumber prices decreased 2% and lumber shipments were 3% higher in the fourth quarter. All of the mills are operating well. As Mike mentioned, the segment set quarterly lumber production records in both the third and fourth quarters this year.

I'll now shift to our real estate segment on slides 9 and 10. Real estate's operating income was $6 million in the fourth quarter compared to $5.9 million last quarter. The segment sold 15% more acres in the fourth quarter as compared to the third quarter.

This was offset by a lower average sales price. The current quarter's sales mix was more heavily weighted to nonstrategic timberland which has lower selling prices than rural recreational real estate. Real estate's margin was flat quarter over quarter.

Turning to financial highlights on slide 11. We ended the quarter with cash of $82.6 million. We also have $249 million available on our revolver.

Capital expenditures were $4.6 million in the fourth quarter. Total capital expenditures excluding acquisitions were $19.3 million for the year. Now I'd like to comment on our outlook which is summarized on slide 12.

We plan to harvest 4.2 million tons in 2017. Slightly more than half the total harvest volume is planned to occur in the south, which is consistent with the 2016 harvest. Approximately 90% of the harvest in the north and 47% of the harvest in the south, including stumpage, is expected to be sawlogs.

The quarterly pattern of our harvest was skewed in 2016 by the effect of weather on harvest conditions. Our 2017 harvest plan assumes a more normal distribution across each of the quarters, with slightly lower volumes in the first, second, and fourth quarters, and higher volume in the third quarter compared to 2016. We expect to harvest between 750,000 and 800,000 tons in the first quarter.

We expect Northern sawlog prices to increase about 1% per ton in the first quarter. Higher prices for cedar sawlogs are expected to more than offset the effect of seasonally heavier logs. We expect Southern sawlog prices to decline 10% to 15% in the first quarter due to seasonally larger percentages of hardwood sawlogs in the mix and a higher percentage of pine sawlogs in weaker markets.

We expect Southern pulpwood prices to increase about 2% in the first quarter relative to the fourth quarter. At these volumes and prices we expect resource earnings to be comparable to the $10 million that the segment earned in the first quarter of 2016.

Turning to wood products. We expect lumber shipments to be 160 million board feet in the first quarter. The sequential decline in lumber shipments is due to in large part to three weeks of scheduled down time at our Warren, Arkansas sawmill for boiler maintenance and replacement of pollution control equipment in the first quarter.

The down time will have a significant effect on wood products financial results in the first quarter due to very high margins for Southern yellow pine lumber. We estimate that lost production and repair and maintenance expenses will result in a negative effect on EBITDA of about $4 million.

Our forecast assumes that the average lumber price realized will be flat in the first quarter compared to the fourth quarter of 2016. Wood products earnings would be slightly higher than the $1 million that the segment earned in the first quarter of 2016 at these volumes and prices.

Shifting to real estate. We plan to sell about 20,000 acres in 2017. We expect that approximately 50% will be rural recreational real estate, 45% HBU, and 5% nonstrategic.

We estimate that land basis will be between 25% and 30% of revenue for the year. In the first quarter we expect to sell approximately 6,500 acres at an average price of $2,000 per acre. Approximately 70% of the acres are expected to be HBU in the first quarter.

We estimate that land basis in the quarter will be just above 30% of revenue. We expect that corporate expenses will average just over $9 million per quarter in 2017. Approximately 40% of these expenses are related to our legacy defined benefit pension plan which was closed to new participants in 2011.

We expect interest expense to be $5 million in the first quarter and $7 million in each of the remaining three quarters of the year. The lower first quarter amount is due to the expected receipt of our annual patronage distribution related to our farm credit debt.

We estimate an annual tax rate of 10% to 15% in 2017. We expect the consolidated tax rate to be about 5% in the first quarter. We have budgeted capital expenditures of $27 million for 2017.

Approximately $15 million is for reforestation costs and logging road construction in our resource segment. Approximately $10 million is planned in our wood products business, mostly for maintenance and repair projects. The wood products spend includes $3 million to install a new stacker at our Warren, Arkansas mill.

That project has an estimated IRR of approximately 20%. To summarize, we expect earnings to be lower in the first quarter compared to the fourth quarter. This is the result of lower lumber shipment volumes due to mill down time and a return to normal seasonally lower harvest volumes.

We expect volumes to increase later in the year and that strong lumber and cedar prices will drive another solid year for Potlatch. That concludes our prepared remarks. Karen, I'd now like to open up the call to Q&A.

(Operator Instructions)

And your first question comes from Collin Mings of Raymond James.

Hey, good morning, guys.

Good morning.

First question from me, just on the harvest guidance, can you just discuss what's driving the mix shift toward the incrementally more sawlogs in the US South as compared to 2016?

Yes, Collin, this is Eric.

I don't know that it's a dramatic shift at the end of the day. We had about 39% of our harvest volume in 2016 was from sawlogs and that's not very far different from what we're expecting for 2017. I'm not sure what you're referring to.

Okay. Just looked like it; I think in the slide it referenced 47%. So just seemed like an uptick. I was just seeing if there was anything driving that.

Nothing specific, Collin. I think it's just, over time we will see a bit of a mix shift. I think the typical that you'd expect in the South is around 50/50. We're going back to more of that norm. My numbers were just -- were excluding stumpage, Collin. Mine were just our own fee harvest volumes.

Okay. Question: just as it relates to potential tax reform, just trying to get a sense of how important are 1031 exchanges as it relates to your real estate pipeline, some of the real estate sales activity that you guys engage in?

It's a good question, Collin, and certainly overall you aren't asking this question, but we're very encouraged by the tax reform ideas that are on the table. But specifically on 1031 exchanges, we have used those from time to time in the past. Now that we have moved beyond our built-in gains window, they're less important to us. It remains a tool in the toolbox, but is not something that we've used very actively here recently.

Okay. And then, switching gears a little bit, just during December you guys put out an 8-K just announcing a down-sizing of the Board in conjunction with a retirement. Any plans to increase the Board again, or are you feeling pretty comfortable with eight members?

We have six independent directors, two insiders, Eric and myself. But, Bo Dicky, who was a long-time Board member of ours and chaired our audit committee, retired this year due to age limitation. We'd anticipated that and added Linda Breard over a year ago to take Bo's place. We are where we intended to be at six independent directors and no plans to change that.

Okay. Just one last question from me and I'll turn it over.

Just as it relates to the Ida-Pine mills facility; I guess that was a former plum creek site, but reopening I believe in December. Any impact, does this have any impact either on your timber business or your mills in Idaho?

Collin, it's Eric.

We don't expect any impact from the opening of that mill. It's in Meridian, which is outside of Boise, so it's pretty far from our markets. That's also just a remanufacturing mill or planing mill, so no real incremental log demand from that mill.

Okay, great, thanks, guys.

Thank you.

And your next question comes from the line of Chip Dillon of Vertical Research.

Yes, hello, good morning.

Good morning.

First question is -- I'm sure I just missed something. What was the $4 million EBITDA drag that you talked about in the first quarter? Was that tied to a mill project? In wood products.

Yes, Chip, so at our Warren sawmill we had an electrostatic precipitator that's 26 years old at the mill, pollution control equipment. That needs to be replaced. While it's being replaced we're going to do some maintenance on our boiler at that facility, so it's going to force the mill to be down for about 12 days. It's going to result in about 10 million feet of lost production. So the net effect, if you include incremental expenses for the repair work and the lost production, it's going to impact EBITDA Q4 to Q1 of about $4 million.

Okay. Got you.

And then, second question is, you mentioned your view that sawlog prices in the South would remain kind of at current levels but that maybe we'd see some progress later in the year. As you think about your individual wood baskets, are you seeing any progress, maybe anecdotal, in terms of working down standing inventory that might provide some pricing power? If not later this year, next year?

Yes, so Chip, we are -- as Mike had mentioned, we are seeing a lot of incremental capital go into the US South. A lot of mill expansions, a lot of greenfield mills certainly in our three wood baskets. The forest is still growing faster than the rate at which the trees are being harvested. So growth to drain is still putting timber on the stump. So our view is, we won't see prices, Southern yellow pine prices, increase this year. There's a possibility that could start to happen next year as things get more in balance.

Okay. And then last question is, you all had talked about or actually implemented a plan a little over a year ago where you would, in essence, arbitrage the markets given when your stock had a 2 in front of it. Now, obviously, it's a different story with a 4 in front of it. Just remind us how much you have left on your authorization?

Real quick, Chip, we spent about 10% of our $60 million authorization, so we have $50 million of dry powder left.

Okay. Got you.

And again, just to be clear, you're ready to exercise that if the spread gets to a certain level in terms of your view of what the private market value is and whatever the stock price is at that time?

I think it's fair to say, again, keep the powder dry until our discount widens and be very opportunistic going forward with that share repurchase authorization.

Thank you.

And your next question comes from the line of Ketan Mamtora of BMO Capital.

How are you guys?

Good morning.

Good morning.

First question, can you talk a little bit about what you're seeing on the M&A side? And how willing will you guys be to take up leverage for the right kind of opportunity?

Well, the timberland M&A market was pretty active in 2016. There were -- setting aside the Weyerhaeuser/Plum Creek transaction, there were dozens of smaller deals in that $50 million to $500 million range. We evaluated several of those and elected not to purchase any of them in 2016. So I think the market's been pretty robust. We expect that to continue with the maturing of some of the TIMO funds and the need for some of their investors to liquidate, and we expect there will more property on the market.

Our debt to enterprise level today is in the low 20% range. We feel like we've got an untapped revolver of $250 million which actually has an accordion on it. We could expand if needed. So I think for the right opportunity we'd certainly look to continue to grow the Company.

Thanks for that.

On that debt to [eeny] metric, you said it's right now in the low 20% range. Would you be open to take it up to mid-30% range? Or is that some number that you have in mind?

So in terms of an upper limit on that debt to total enterprise value, I think that's one, Ketan, where, again, to Mike's point, the level of additional debt we would take on really depends on the opportunity. Something that starts with: what is it specifically that we would be acquiring? What is the cash flow stream? And then, what's our comfort level in terms of supporting that debt? We have not provided any public guidance, and quite frankly there's not a hard, bright line that we think about on that upper limit.

Okay. Thanks for that.

And then switching to wood products, obviously you all have had some very strong production of quarters in lumber, and you [allows] hitting the upper limit on your (inaudible) capacity. Are you guys starting to think about increasing production there? Or if you have any debottlenecking projects that you guys are thinking about?

Yes, Ketan this is Eric.

We're always looking at debottlenecking projects in each of our facilities. We've taken our production from, I don't know, 625 million feet back in 2015 to the 690 million, 700 million feet where we're at today. We are constantly looking for opportunities to grow and expand our wood products business, and usually that involves incremental projects down at the mills. So the answer to the question is yes.

And do you have anything specific in the next 12 to 24 months that you're thinking about?

Well, what Jerry mentioned on the call was a new stacker that we're putting in at our Warren sawmill. It's about a $3 million project with about a 20% IRR. The payback is going to come from reduced headcount, increased production volume, increased grade yield. Every year we try to identify a project or two like that and implement it.

That's helpful.

Last question: in the past you have talked about the next move in dividend being linked to increase in Southern log prices. Has there been any change in thinking around that, or any update?

I don't think so. This year we generated our cash available for distribution was in excess of our dividend this year by between $8 million and $10 million. And we think our dividend is very sustainable. But we are reluctant to institute an increase in the dividend until we can see a pathway for increased Southern sawlog prices. And to the degree that we think those are still several quarters away, I would be -- I think Management would be reluctant to recommend to our Board that we raise the dividend until we can see an improvement in those.

That's very helpful. Good luck in 2017. I'll turn it over.

And your next question comes from Mark Weintraub of Buckingham Research.

Thank you.

With interest rates having crept up some of late, and as you mentioned, the TIMOs having property that's going to be coming to market the next year or so, are you sensing at all any change in the opportunities that might present themselves this year or next 12, 18 months? Or does it feel like the market in terms of the valuations is probably going to remain at the types of levels which up until now you've been very circumspect to get too aggressive on? Clearly you have found some, but in general you've been circumspect.

I think these timberland valuations continue to be quite strong, regardless of the region of the country you look at. It's very hard to create shareholder value at these kind of full prices that you have to pay for timberland to win these auctions. We've seen no softening of that. Timberland prices vary, but that's largely to do with the stocking and the quality of the timberland. But for well-stocked, good quality Southern timberland, I think the deal metrics that are out there are still very strong.

And then second, have you seen -- you've been talking about new capacity coming on, et cetera. Are there any specific projects that you can point to, recent projects that over the next 12 to 18 months, whatever the time frame is, that might be particularly beneficial to some of your wood baskets?

Yes, Mark, there's clearly some plants that are starting up that will impact our wood baskets. The Conifex mill down in El Dorado is expected to start in, I think the latest was August of 2017. There is a mill that [de-word] constructed and it started up in 2016. It's going to consume almost 1 million tons of sawlogs a year. We expect that to be beneficial to our Mississippi operations.

And we're delivering logs there today.

We just started delivering logs to that today. There's the Two Rivers mill in Demopolis, Alabama. That's not going to get up and running until third quarter of this year. That, too, will consume nearly 1 million tons a year. Yes, there's many examples. The Winston plywood mill in Louisville, Mississippi, consumes 700,000, 800,000 tons a year. All those mills will pressure the wood basket and eventually we'll see some price movement.

That's real helpful. Has the Winston one started up, or is that yet to start up?

I think it's started up.

Started in the spring of 2016 and it's on a start-up curve.

Yes.

Great. Thanks very much.

(Operator Instructions)

Your next question comes from the line of Paul Quinn of RBC Capital Markets.

Thanks very much. Good morning, guys.

Good morning.

Just to dive into the guidance on the Q1 price outlook for the US South, that decrease of 10% to 15%. You mentioned lower mix with less hardwoods and also just a higher percentage of pine sawlogs. Maybe you could just break those out. The mix issue, how much of the 10% to 15% is related to that, as opposed to lower pricing expectation for pine sawlogs?

Yes, Paul, so there's a number of factors at play here driving that Southern sawlog price going from Q4 to Q1. So hardwood is going to drop from about 10% of the mix in Q4 to 3% of the mix in Q1. That's just normal seasonality in the South. And in addition to that, hardwood prices are coming down a little bit as well. In our key market, in Arkansas, prices are going to go from $84 a ton down to $69.

Back to your question of what's going on with pine sawlog pricing, in each of those markets for each of those tiers, pricing is relatively stable. What's happening is that we're having a mix shift, a little bit out of Arkansas, which tends to be a little bit higher pricing, over into Alabama and Mississippi, which tends to be, I don't know, $2 a ton lower in pricing. So prices are -- they're stable in each of those markets for each of those tier logs, but we're having a little bit of a mix shift this year into those other states.

Okay. So that idea that pricing on a regional basis is pretty flat is consistent with your idea that timberland values are going to hold at current levels?

Yes.

All right. And then just flipping over to softwood lumber because it's topical, what's the current status in negotiations right now? We've got a new US government in. I guess there's not formal discussions between Canadian and US governments at this point, but is the industry still talking? Are you hopeful for some kind of agreement in 2017?

I think it's a foregone conclusion that tariffs are going to be implemented later this spring. We view those as an interim step to a negotiated agreement that establishes a quota on Canadian lumber, and I think the industry's united in that. And it's really important because it's one that allows the US producers to invest and grow our lumber business here. There's plenty of logs available. Housing starts are improving. There's a good demand for the product. But we need to do that without being impaired by unfairly traded Canadian imports. A quota's really the only thing that solves that.

While I can't predict the timing of it, I don't think that it's going to happen soon. There's a couple of reasons for that. US trade representative that President Trump has nominated, Robert Lighthizer, has to go through a confirmation process. We expect that to take time.

As you know, BC has its elections in May with the Premier there running for the office. We think she's been very opposed to the quotas that the US has suggested. We expect it's going to take time to work through that after that election process in May in BC. And I think just in general I don't see any quick solution to this. The Canadians are going to want to wait and see what the tariffs look like later this spring.

We'll continue to push for a negotiated agreement as we go through the year. We expect it will take time, and for those reasons we expect pricing to be really volatile.

Okay. Understood. Where's your position on quota versus tariff?

I think the softwood lumber coalition's united in its opinion that a quota's the only long-term solution to the dispute.

Best of luck.

Thank you.

And your next question comes from the line of George Staphos of Bank of America.

Thanks. Hello, everyone. Thanks for taking my question. Congratulations on the year.

I want to pick up on that last topic. So, to the extent that you're expecting volatile lumber prices over the course of the year, what ultimately gives you confidence that -- it sounded like prices would be up in 2017. You said the year would be driven by, amongst other things, lumber prices. Or is that just a statement of fact and you're not necessarily taking a view on what lumber price will be in 2017?

Yes, George, it's Eric.

Yes, so if you take a look at what the pundits are forecasting for 2017, every single one anticipates higher prices. And the range is anywhere from up 6% to 7%, all the way to up 19%. I think most people have an expectation that this duty will go into place, or the quota under the Softwood Lumber Agreement will go into place to restrict Canadian exports into the US, and that together will drive prices higher. And most likely that's not going to happen until the second half of the year. And our view is consistent with what the pundits are thinking, although maybe not quite as aggressive.

Understood, and I was really referring to the first half of the year before the duties came in. Are you seeing any change in the flow of wood, realizing it's early in the year, from Canada on finished product? Or not really?

This year?

Yes.

I don't know that I've seen any data come out for January. I haven't heard anything from the field. Last year Canadian shipments to the US were up, I don't know, some 15%, 20%. So Canadians are pushing a lot more lumber into the US.

I think the only thing that we have seen, George, it's perhaps a nit, but it's meaningful to parts of our lumber business, and that is there is less low grade lumber, economy grade lumber if you will, being shipped from Canada into the United States. I think probably with the risk that they have that duties are going to be applied retroactively. They don't want it on low grade number, or on quotas related to that. We've seen the prices of low grade lumber in the US increase dramatically. That's very meaningful for our stud business because about 20% of what we produce is low grade lumber out of very small logs.

Thanks, Mike. That's actually very helpful.

I think the last conference call, I think it's a number that you've used in the past as well, was, I think, 12 million tons of incremental wood demand coming into the Southern wood baskets over time. Is that still the number? Or has there been a change in that, at least from your vantage point?

That's a number we've be using, George, it's in the 12 million to 13 million ton range. It's not going to happen overnight. Some of these projects, like the Sun Paper Mill in Arkadelphia, are going to take until 2019 perhaps to get started up. But yes, it's 12 million to 13 million tons.

Understand, just want to see if there's any kind of sequential change one way or another.

Last question I had, and there's probably just a reasonable explanation for this, but it seemed like the inventory figure popped up a bit more than I would have expected, fourth quarter versus third quarter. Was there anything behind that, that you had either called out in the past or that was just a factor specific in the quarter as it arose? Thank you.

Inventory of what?

Just on your balance sheet, looking at the cash flow statement, it was a sequential change, if I look at it correctly, on working capital. And as I look at the year as well, this year you had about $17.5 million of inventory on the cash flow statement, negative cash draw, if you will, versus a much lower number in 2015.

So George, this is Jerry.

Your observation is spot on and we ended the year with relatively high inventories, and most of that increase came in the form of logs. I think if you were to look at the end of 2015, we actually were light on log inventories. And I can remember Q1 or Q2 earnings call talking about -- actual it's probably Q1, running out of logs in our Northern region. So we consciously built those inventories a little higher this year and expect that, that will flip and turn into cash in the first half of the year as we work through the seasonality.

I see. Thanks, Jerry.

And there are no further questions at this time. I would like to turn the call back over to Management for any closing remarks.

Thank you, Karen. And thank you all for your interest in Potlatch. We look forward to catching up on next quarter's call.

This does conclude today's conference call. Thank you for your joining us today and all participants may now disconnect.