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W.R. Grace & Co. (NYSE:GRA)

Q2 2011 Earnings Call

July 26, 2011 11:00 am ET

Executives

Alfred Festa - Chairman of the Board, Chief Executive Officer and President

Lisa Mikes -

Hudson La Force - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Michael Sison - KeyBanc Capital Markets Inc.

James Barrett - CL King & Associates, Inc.

Patrick Duff

Laurence Alexander - Jefferies & Company, Inc.

Unknown Analyst -

Operator

Good day, ladies and gentlemen, and welcome to the W.R. Grace & Co. Second Quarter 2011 Earnings Conference Call. My name is Jen, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Lisa Mikes, with Grace Investor Relations. Please proceed, ma'am.

Lisa Mikes

Thank you, Jen, and hello, everyone. Welcome to W.R. Grace's earnings call for the second quarter of 2011. Joining me on today's call are Fred Festa, our Chairman and Chief Executive Officer; and Hudson La Force, our Chief Financial Officer.

Our earnings release and the corresponding presentation are available on our website. To download copies, go to grace.com and click on Investor Information. Links are available on the upper right-hand corner of the page.

As you know, some of our comments today will be forward-looking and made under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. Please see our recent SEC filings for more details on the risks that could impact Grace's future operating results and financial condition.

We will also discuss certain non-GAAP financial measures, which are described in more detail in this morning's release and on our website. Reconciliations to the most directly comparable GAAP financial measures and other associated disclosures are contained in our earnings release and on our website.

The agenda for today's call is on Page 3 of the presentation. With that, I will turn the call over to Fred.

Alfred Festa

Thanks, Lisa, and good morning to everyone. Thanks for joining us on today's call.

Q2 was a good quarter for Grace. Sales grew 21%, adjusted EBIT grew 46%. Our gross profit percentage increased 110 basis points year-over-year, and our adjusted EBIT margin increased 280 basis points.

Our materials science expertise, customer focus and innovation capabilities were important elements of our success this quarter. By capturing the value of our new products, and working closely with our customers on pricing, we were able to grow our sales and cover the significant increase in raw material cost we incurred in the quarter.

We also benefited from good customer demand in our Refining Technologies, where our sales volume grew 10% in the quarter. Our refining customers are operating at good utilization rates, which tends to increase demand for FCC catalyst.

ART, our hydroprocessing catalyst joint venture signed an important new agreement with the Kuwait Catalyst Company this quarter. ART is the largest shareholder in Kuwait Catalysts and has entered into an agreement to gain exclusive access to KCC's hydroprocessing manufacturing capacity. By combining ART's product technology and global commercial capability with KCC's state-of-the-art manufacturing, significantly improved our position in the hydroprocessing catalysts market. ART is seeing many new opportunities for distillate catalyst sales, and its product technologies have become widely accepted in the market.

Our Specialty Technologies business continued its strong growth, growing 9% year-over-year and 9% sequentially. We continue to expect this business to grow solid double digits for the full year.

In Q2, we further strengthened our position in the Middle East by extending our multiyear catalyst supply agreement with Borealis. Construction products had its best overall growth rate since 2008, but that growth rate came almost entirely from the emerging regions, which grew 28% in the quarter. Sales volumes in the mature markets were essentially flat year-over-year, with North America showing slightly positive growth in customer demand and Europe showing slightly negative growth in customer demand. I'm delighted with our emerging region growth, but we have not seen meaningful growth in the mature markets. Customer demand in the mature markets has become more predictable, but we believe any significant growth is still a year or more away.

With the delayed recovery in the mature markets and continuing raw material cost pressures, we have begun a formal strategic review of certain GCP noncore product lines to identify opportunities to improve overall profitability. These noncore product lines account for less than 15% of GCP's total sales but are significantly diluted to gross profit and EBIT margins. We do not expect this review to change our commitment to our global cement, concrete and waterproofing businesses. We have made 4 acquisitions in these businesses in the last year, including the De Neef acquisition that closed this month.

Shifting gears slightly, during quarter 2, Grace completed our annual strategic planning process. I thought these were very productive discussions, and I want to share a few takeaway points from you, especially for those investors that are still getting to know us. First, we remain focused on our core business units and are committed to strengthening them. They serve large global markets in which we have built leading market positions, leveraging our materials science expertise, customer focus and innovation capabilities. We intend to continue investing in strategic customer relationships and in the product technologies that drive our profitability. Second, we will continue to use our scale and technical capabilities to differentiate our products at the customer level. We achieve the best returns when we do this successfully. Best current example of this approach are in our FCC catalyst and polyolefin catalyst businesses, where highly-differentiated products are driving significant growth and profitability for Grace. Third, we'll use our cash flow as an asset for investments in growth. We have the cash flow and the financial flexibility to continue investing in our core businesses for both internal investment and bolt-on acquisitions.

Obviously, this investment focus includes the emerging regions. All of our recent acquisitions have had important emerging-region elements. In Q2, we opened an additional construction chemicals plant in India. In Q3 and Q4, we'll be starting up the new silicas capacity in Latin America and Asia. And I've already mentioned the new agreement with Kuwait Catalyst Company.

Finally, we are focused on reducing complexity throughout the company to drive productivity. This manifests itself in a number of ways that will improve our profitability over the next few years. We're simplifying our product offering, reducing process and organizational complexity, better leveraging our purchasing power and eliminating legacy IT systems, amongst many other actions. All with the goal of adding at least 1 point to EBITDA margins by 2013. Together, these 4 strategies have, and will continue to drive our commercial success and long-term financial performance.

Hudson will now discuss our second quarter results in more detail.

Hudson La Force

Thank you, Fred. Grace's sales increased 21% in the quarter due to improved pricing, favorable currency translation and higher sales volumes. Gross profit percentage was 36.8% compared with 35.7% in the prior-year quarter and 36.2% in the first quarter. The increase in gross profit percentage was primarily due to improved pricing, partially offset by higher raw materials costs. Adjusted EBIT increased 46%, and adjusted EBIT margin improved to 16%. Adjusted EPS also increased 46%. As detailed in the Appendix to this presentation, our adjusted EPS of $1.11 includes adjustments of $0.11, primarily for Chapter 11 and asbestos-related costs.

Adjusted EBIT ROIC was 31% compared with 25% in the prior year quarter. The increase was driven by higher earnings and good control of net working capital. We focus on adjusted EBIT ROIC as one of our key financial performance measures, as you all do as well. We are pleased with the significant improvement in our ROIC over the last few years. We intend to continue focusing on this measure going forward, but you should know that our ROIC could decline from current levels as we invest for growth in our businesses. Some of our internal growth investments are both -- for bolt-on acquisitions maybe made at returns below our current ROIC.

Let's review the businesses, beginning with Grace Davison. Please turn to Pages 7 and 8.

Davison's second quarter sales increased 25% due to improved pricing, favorable currency translation and higher sales volumes. Gross profit percentage was 38% compared with 36% in the prior-year quarter. Segment operating income was $146 million, up 37%. Sales in our Refining Technologies business increased almost 50% year-over-year due to improved pricing, higher sales volumes, and favorable currency translation. The improved pricing includes increased base pricing for our FCC catalysts, reflecting the value of our newest product technologies, particularly the lower rare earth catalysts launched in Q1. Adoption of these new catalysts has been strong. Almost 50% of our customers have adopted at least 1 of our new low, or no rare earth, products.

The improved pricing also includes the impact of the rare earth surcharges implemented beginning in Q4 last year. The surcharges have increased significantly, as the market price of rare earths has increased over the last year. The average price of rare earth used to determine our surcharges in Q2 increased over 900% from Q2 last year and 42% from Q1.

Our Refining Technologies team has done a remarkable job working with our customers and suppliers over the last year to ensure that our customers stay well-informed of market developments and that we experience no supply disruptions. We expect rare earths to remain an area of uncertainty for the foreseeable future, and market conditions could change quickly. We are confident, however, that our team will continue to manage this issue well.

The results we're seeing today reflect significant investments in our FCC catalyst business, in addition to good technical execution by our team. Our product technology innovations and investments in manufacturing technology and capability are paying off with the success of our new low, and no rare earth catalysts. We believe these investments improve the quality of our business in a sustainable way.

We also benefited from opportunities in good execution in our rare earth supply chain. These benefits are less significant strategically, and may not be as sustainable. Obviously, the most important issue for our customers is that we continue to deliver high-performing catalysts that are cost-effective in their refining operations. The strong adoption rate of our newest catalysts is good evidence that we have continued to meet that value expectation.

Please turn to Page 9 for a moment. One issue that need to be clear on is the impact of higher rare earth prices on our reported gross profit percentage. We have said since Q4, that we intended to manage the rare earth issues to protect our percentage margins, and through Q2, we have been able to do so. At this point, however, rare earth prices have risen to such a level that we may not be able to maintain our percentage margins going forward. We expect our gross profit percentage to decrease in Q3, due simply to the mathematical effects of the higher rare earth surcharge. If today's rare earth market price of about $140,000 per metric ton had been used to calculate our rare earth surcharges for all of Q2, Davison's reported gross profit percentage would've been about 2 to 2.5 percentage points lower than the 38.1% actually reported for the quarter. The actual impact on our margins will vary from this estimate, of course, and will depend on several factors in addition to the market price of rare earth, including our technology, pricing and supply chain actions. Again to be clear, we do not expect our gross profit dollars to decrease. But the calculated gross profit percentage may.

Let's turn back to Page 8, and we'll move on to our Materials Technologies business.

MT sales increased 10% due to price increases implemented during the quarter to address higher raw material costs and favorable currency translation. Our pricing actions improved gross profit margins sequentially, and we expect further improvement in the third quarter as the price increases take full effect. MT sales volumes were down 3% during the quarter, primarily due to lower sales of packaging products and market segments that did not support the price increases. In addition, volume growth has been limited in many of our silica products where we are in sold-out positions. We are starting out new capacity in Latin America and Asia in Q3 and Q4, which will support higher volume growth in the second half.

Fred has commented already on Specialty Technologies sales. In Q2, we experienced a decline in operating margins due to increased startup and investment costs incurred in the quarter. We expect margins in this business to return to typical levels in Q3.

Please turn to Page 10, and we'll discuss our Construction Products business. Construction Products sales increased 12% in the quarter due to favorable currency translation; higher sales volumes, particularly in the emerging regions; and improved pricing. Sales in the emerging regions increased 28%, with sales in Latin America up 43%, and sales in Asia up 24%. Gross profit percentage was 34% in the second quarter compared with 35% in the prior-year quarter and 33.7% in the first quarter. Segment operating income for the second quarter grew 15%.

GCP is experiencing raw material cost inflation in the high-single digits. In the Americas, we fully offset higher costs with improved pricing and increased our Q2 gross profit margins to year-ago levels. But in Europe and Asia, improved pricing has not fully offset raw material costs, and our gross profit margins remain below last year's levels. At the time of our Q1 call, we expected to offset raw material cost inflation by year-end, but today, we are not as confident that we can do so unless raw material costs moderate.

In some portions of our market, conditions simply do not support higher prices at this point. We may reduce sales volumes on lower-margin products to help improve overall profitability.

Q2 is an important quarter for construction activity in the northern hemisphere. Prior to the construction downturn in 2008, we typically experienced a 20% sequential increase in sales in North America, reflecting the acceleration of construction activity following the end of winter in Q1. In 2009 and 2010, the sequential increase in sales from Q1 to Q2 was much lower, signaling a weak year for construction. This year, sales in North America grew 18% from Q1 to Q2. I am encouraged by the improved sequential performance, although it was still below prior levels.

We have better visibility to customer demand in mature markets than we have had for some time, although demand data remains mixed. Preliminary industry data for Q2 indicates that U.S. commercial construction starts increased approximately 6%, while U.S. residential housing starts decreased approximately 4% from last year. Industry demand for FCC products appears to be flat to slightly up versus Q2 last year. We think sales volumes in North America will grow low single digits for 2011. For GCP as a whole, we think sales volumes will grow mid-single digits this year.

Please turn to Page 11, and we'll discuss our updated 2011 outlook.

Our performance in the first half was better than we expected at the beginning of the year, and we have updated our outlook to reflect our current expectations. We expect 2011 sales to be $3.25 billion to $3.30 billion, adjusted EBIT to be $465 million to $480 million, and adjusted EBITDA to be $585 million to $600 million. We expect to maintain our gross profit percentage within our 35% to 37% range, including any decline in Grace Davison's second-half gross profit percentage, as explained earlier.

Some investors have asked us to update our 2013 financial performance targets. These are long-term targets that we issued about this time last year. We're not going to change our targets at this point, but I will give you some color on our current thinking.

We remain comfortable with our sales target -- with our sales growth target, of 8% to 10% compounded annually through 2013. We also remain comfortable with our target of 20% adjusted EBITDA margins by 2013. We have made good progress improving our EBITDA margins. We're getting better operating leverage than we expected, and we have had more opportunities to improve pricing than we expected. Our back-office productivity initiatives are still in early stages, and will not start to impact profitability until 2012. Obviously, the rare earth surcharges are increasing our sales today, but that may not sustain through 2013. And the level of rare earth surcharges may start negatively affecting our calculated gross profit percentage, and would similarly affect our calculated EBITDA margin percentage.

Two final points on cash flow, and I'll turn the call back over to Fred. First, we generated adjusted operating cash flow of $109 million in Q2 and we managed our net working capital to 56 days, despite the impact of higher rare earth costs. Higher rare earth costs added $48 million to accounts receivable and inventories as of June 30. Total cash was just over $1 billion. Second, we continue to operate at a low-cash tax rate. For the first 6 months of 2011, our global cash tax rate was 10%.

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

Alfred Festa

Thanks, Hudson. Let me take a minute to update you on the bankruptcy proceedings. As you know, the oral arguments for the appeals to the confirmation order were held on June 28 and 29. The hearing went exactly as we expected, and we were not surprised by any of the arguments or issues raised by the appellants. Now the District Court has to decide whether to affirm our plan and how to rule on the appeals. We remain highly confident that the court will rule in favor on all our matters.

We received some questions as whether we can emerge, with certain appeals outstanding. If the District Court affirms our plan, and rules in favor on the appeals, the appellants would have the choice to appeal further to the Third Circuit Court of Appeals. It is possible that we could emerge with certain type of appeals outstanding. For example, we may seek to emerge with the default interest issue on appeal, or with other issues on appeal that do not affect, excuse me, the resolution of our asbestos liability. That decision would have to be made with consultation with our co-proponents.

The bankruptcy has been an incredibly long process, and we are all eager to see it conclude as soon as possible. Our only real course at this point is to wait for the District Court ruling on affirmation and the appeals.

I remain very excited about Grace's business opportunities. Certainly, we've had our challenges. By effectively executing our strategies and continuing to invest in our businesses, I am confident we will achieve our stated long-term financial objectives.

With that, I'm going to turn the call back over to Lisa, and look forward to your questions.

Lisa Mikes

Thank you, Fred. Before we begin taking your questions, I want to remind you that my comments on forward-looking statements and non-GAAP financial measures apply both to the prepared remarks and to the Q&A. Jen, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Laurence Alexander with Jefferies.

Laurence Alexander - Jefferies & Company, Inc.

I guess, first of all, just a couple of questions on FCC. When you introduce products which are -- have lower rare earth content, are they substituting for the high rare earth products on a equal volume basis? Or do you get a tailwind to volumes as well?

Alfred Festa

Well, it's -- Laurence, this is Fred. It's generally just equal -- equal to equal. We're not getting any additional volume on it. I will tell you that the new rare earth products -- the new products introduced are higher-margin products.

Laurence Alexander - Jefferies & Company, Inc.

So the volumes that you're reporting, those are like clean volume numbers so to speak. There's no substitution mix effects driving it?

Alfred Festa

That's correct.

Laurence Alexander - Jefferies & Company, Inc.

And secondly, as you think about the longer-term targets, assuming that the surcharges fall off, I mean, let's just take that scenario, and I realize it looks unlikely at this point. But if the -- if rare earth prices were to fall, would that also be a drag on the profitability, on the actual net profit, because you'd be maintaining the same gross -- the same EBITDA margin?

Alfred Festa

The broad answer, Laurence, is no. But it's connected to how successfully we move customers from the higher rare earth products to the lower rare earth products. It's a big part of the driver here.

Laurence Alexander - Jefferies & Company, Inc.

Okay. And then just -- the H -- the ART JV partnership acquisition that you mentioned. Could you flesh out a little bit what that means? I mean, is it significant in terms of giving you an increase in market share, or is it just another technology line?

Alfred Festa

No, this is significant. We are the largest shareholder in Kuwait Catalyst Company, and what this does is give us additional capacity that we did not have access to, prior to consummating this deal in the quarter, and it gives us local production as well in the Middle East.

Laurence Alexander - Jefferies & Company, Inc.

But I guess, what I mean is, does it give you like an extra 1% capacity? Or is it more like an extra 30%? Any rough ballpark?

Alfred Festa

No, it would be in the 20% to 30% range.

Laurence Alexander - Jefferies & Company, Inc.

Okay. And then lastly, on Construction Chemicals. Can you give a little bit more detail as to which of your product lines saw the improvements? So that we get a better sense of what's going on inside the business?

Alfred Festa

Yes. As Hudson said, a lot of our improvement has been in the emerging markets. And if you think of the emerging markets, it's really across our chemical additives, either concrete or cement additives initially. We hope to grow the waterproofing side in that. In the mature market, it's basically a mix. It's basically balanced between the chemicals for cement and concrete additives, as well as the waterproofing products.

Operator

Your next question comes from Mike Sison with KeyBanc.

Michael Sison - KeyBanc Capital Markets Inc.

In terms of the newer catalyst that you've noted, does that 50% of customers -- does that continue to move up in terms of the percent, using those new catalysts over the next couple of quarters?

Alfred Festa

We hope so. We've put a lot of investment into our technology, and we've got more than 50% of our customers testing that new technology. So hopefully the acceptance will continue to grow.

Hudson La Force

We don't think it will be 100%, Mike. But we do think that it keeps moving up from here.

Michael Sison - KeyBanc Capital Markets Inc.

And the margin delta relative to your other products, is it pretty, I mean, looks pretty significant, but anyhow, any way to help us understand how much better that is?

Hudson La Force

We're not going to quantify it, Mike, but it is measurable.

Michael Sison - KeyBanc Capital Markets Inc.

Got it, okay. And then in terms of sales volumes, you noted operating rates from refining customers seem pretty healthy. Is that sort of a good run rate as we head into the second half, in terms of your outlook for Refining Technologies?

Alfred Festa

Yes, we think it is. I mean, there's still a lot of uncertainty out there with crude and macro economics, but yes. I mean, we -- given where our customers are and the price of gasoline and so on, we feel pretty good about going into the second half.

Michael Sison - KeyBanc Capital Markets Inc.

Okay. And then in the mature markets for Grace Construction, do you feel pretty comfortable that things have stabilized in the U.S. and Europe? Is that a good way to characterize what's going on there?

Alfred Festa

Let me break them up. In the U.S., we feel, yes, very good that things have stabilized, and have become more predictable. In Europe, we still saw a slight decline in the second quarter. And with all the uncertainty around the government funding and issues, from that standpoint, well, we're less confident.

Michael Sison - KeyBanc Capital Markets Inc.

Okay. And then just to make sure I understand the -- I mean, your business in the U.S. and Europe for construction is still sort of mirroring recessionary or pretty low levels.

Alfred Festa

Sorry. Just go ahead, Mike. Finish your...

Michael Sison - KeyBanc Capital Markets Inc.

Yes, I just want to make sure I understand the leverage. There's still significant amount of offside if this business sort of turns around?

Alfred Festa

Yes. I mean, we've talked about many times. Those -- they are well below the 2000 peak, as far as 30% to 50% below that peak. And we've been taking a lot of actions to make sure that it does leverage up when it comes back, from cost productivity and repositioning and so on, so.

Operator

Your next question comes from Jim Barrett with CL King & Associates.

James Barrett - CL King & Associates, Inc.

Hudson, could you isolate the benefit from favorable currency in the quarter?

Hudson La Force

From a top line perspective -- I'm sorry, Jim, you've caught me unprepared -- from a top line perspective, it was for 4 to 5%. From a bottom line perspective -- this is translation, this is not [indiscernible] gains and losses. And so, it is all translation. There is some benefit on the earnings side, but it's not at the same level as on the sales side.

James Barrett - CL King & Associates, Inc.

Okay, understood. And did any of your customers, in front of your various price increases -- did any of them have the wherewithal or did they choose to accelerate any purchases of your products in front of those increases?

Hudson La Force

No. I think -- No, is the answer, Jim.

James Barrett - CL King & Associates, Inc.

And then -- and within Grace Construction Products, when I look at how your customers are performing in North America, it would appear as if you might be picking up a little bit of market share in the cement, concrete admixtures and catalysts. Is that a fair statement? Or how is the competitive dynamics in North America on the Specialty Chemicals side?

Alfred Festa

Relative to the admixture side, I think our position is basically balanced. I mean, we've -- share is a funny piece in the Construction Chemicals side, because in North America, you could have 1 region of the country doing very well, and another 1 that hasn't come out of the recession at all yet. So net-net, we think we like our position and we feel that our position is basically unchanged.

Hudson La Force

One thing I would add, Jim. Globally, not just in North America, but globally, we're managing our construction business more for returns today than for share.

Operator

The next question comes from Pat Duff with Gilder.

Patrick Duff

Just a couple of things I wanted to, I guess, clarify. In the Materials Technologies segment, the capacity expansions for Latin America and Asia Pacific. Could you kind of help us quantify, not too exact, but what -- on what order increase -- because I know the business has been sold out -- so, what these capacity expansions might help provide that business in terms of the second half and 2013 growth possibilities and from a percentage point of view?

Alfred Festa

Yes. Pat, this is Fred. They'll yield 2% to 5% of volume increase on the total for -- when those come online, fully implemented.

Patrick Duff

Okay, all right. Great. In the FCC business, you mentioned more than 50% of the current customer base is in a testing mode on the reformulated catalyst. Have you had -- and I don't know whether or not this is even part of the game plan -- but have you had any new customers, noncurrent customers, looking at testing these catalysts, considering the surge in the rare earth prices?

Alfred Festa

It's -- these units, there's I don't know, 400-and-some-odd FCC units around the world. They are constantly testing everyone's products, and constantly looking for what's the best product that will run under their situation relative to the feed that they're trying to run and whether they're trying to maximize propylene or get some activity pot [ph]. I don't -- I think we're -- that's just the normal activity that's running right now.

Patrick Duff

Okay. All right. So I mean, you wouldn't call out the potential for share gain with these reformulated catalysts, then?

Alfred Festa

We like our share position. We just want to ensure that our customers have every opportunity to maximize their returns and -- through our technology.

Patrick Duff

Okay. And then if I might just indulge in one more question. Hudson, if we look at the updated EBITDA guidance, and then considering the pension plan payments planned for this year and CapEx and then, I don't know what you all think working capital will be as terms of a source or use this year, considering the increased rare earth component. But any thoughts on what the cash balance might look like if you were to hit the midpoint of EBITDA number for the year?

Hudson La Force

At the end of the year, Pat?

Patrick Duff

Yes.

Hudson La Force

Honestly I haven't looked through the end of the year. I will tell you, we -- the second half of the year, we generate more cash typically than we do in the first half of the year. I don't think the high investment in rare earth that we've had to make is just going to change that profile this year. Last year, we generated a little over $200 million of total increase in cash, net of everything. And I think we'll do something a little better than that this year.

Operator

[Operator Instructions] The next question comes from Charles Rose [ph] with Rose & Company.

Unknown Analyst -

I wanted to touch on what are the metrics one should be thinking about, balance-sheet-wise? Obviously, you've disclosed publicly to the investor and to ask the approval of Judge Fitzgerald to embark upon a strategic acquisition? Obviously, you're on a path of significant deleveraging. Whatever the acquisition you do here, or other acquisitions you do, what should be debt-to-EBITDA metrics and other cash flow considerations one should look at, going forward, that you want us to feel comfortable with? If you did a $0.5 billion deal or a $1 billion deal or a $2 billion deal, what types of ratios you want us to feel comfortable with? And what types of sources of financing? Would financing be purely from internal cash flow? Or would you look at external issues? Or, give us a little framework of what you're thinking about over the next couple of years?

Alfred Festa

Sure. Obviously, Charlie, we won't comment on any potential acquisition. But let me answer your question just generally, the way we think about our balance sheet. First and foremost is the return on invested capital metric. That's the one that we prioritize as we're thinking about our investments and how we manage our balance sheet and the returns we're regenerating. A big piece of that is our net working capital investment. And we've been in the low 50 days -- it bounces around a little bit -- but in the low 50 days for a couple of years now. We've come up a little bit because of the higher cost of rare earth that's in our inventory and our receivables, but we want to keep that net working capital number -- my goal is actually 50, but I want to keep it in the low 50s, to be sure. In terms of leverage, the leverage is going to be an outcome of the strategic investment decisions that we make. We're generating a lot of cash, as Pat highlighted a moment ago, but we're also working hard to reinvest that cash in our business. We are in a very good leverage position today, and -- but we haven't set any specific targets or limits. It's going to be an outcome of the strategic decisions we make.

Unknown Analyst -

Are your sources of external financing focused on debt capital or equity or combinations, as you look at larger things in the future?

Alfred Festa

Well, while we're in bankruptcy, I think realistically, the only source of financing available to us would be a debt capital through a dip-type structure. Once we're out of bankruptcy, we'll revisit that. We don't obviously have any plans. It would be completely speculative, at this point.

Unknown Analyst -

Right, right. One last item. Do you need to get -- as you stay in bankruptcy? I hate to use that word, Hudson. Does the need for getting approvals from all your constituencies hinder opportunities, still? If you need to get debtholders, equity committees, the Asbestos Trust, all these various constituencies to approve of deals, does that hinder you and make it more difficult to successfully do larger strategic things? Or it doesn't matter? Or how do you see that process?

Alfred Festa

Charlie, this is Fred. It does not hinder us. We have worked diligently with these committees over the last 10 years, and as you know, you followed our case for a long time, we've gained the credibility with them, that we do what we say we're going to do. And as you know, we've done things that normal companies don't do within bankruptcy: funding EPA settlements early; paying over $500 million into our pension plan; other smaller acquisitions, and so on. So I am very confident. They know our businesses well, the financial advisors that support these committees have been with these committees a long time and really understand our businesses. So I'm not concerned over that. Sometimes, however, in the last case, or this case that you're referencing, certain parties want to ensure that the committees have approved it, and it's requiring the bankruptcy approval. And that's what happened in this case.

Unknown Analyst -

Do you have any last thoughts, Fred, on the emergence timeframe still? Or is it still -- with this more recent announcement of the strategic transaction, do you look at that as a 2012 issue, or not?

Alfred Festa

Charlie, every time I put a date down, I'm wrong...

Unknown Analyst -

Yes, I know.

Alfred Festa

So I -- I really not. I mean, as I said, I want to reiterate, I liked how the court proceedings went. This is a no-nonsense judge that really understood the facts, was well-prepared for the case. I felt very good about the presentation of it. And we'll see when we get our affirmation hearing, and we'll -- we want to get it behind us as well, but good part about it is it's not slowing us down from doing the things to improve this company.

Operator

Ladies and gentlemen, this will conclude our question-and-answer session for today. I would like to turn the call over to Ms. Lisa Mikes for closing remarks.

Lisa Mikes

Thank you, Jen. That ends the Q&A portion and our call today. On behalf of the entire Grace team, thank you for participating in today's call, for your questions, and for your interest in Grace. We look forward to talking to you further.

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Source: W.R. Grace & Co.'s CEO Discusses Q2 2011 Results - Earnings Call Transcript

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