Good day, and welcome to the Q2 2022 Flowserve Corporation Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jay Roueche, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, Tina, and good morning, everyone. We appreciate you participating in our conference call today to disclose our second quarter 2022 financial results. On the call with me this morning are Scott Rowe, Flowserve's President and Chief Executive Officer; and Amy Schwetz, Senior Vice President and Chief Financial Officer. After our prepared comments, we will open the call for questions. As a reminder, this event is being webcast and an audio replay will be available. Please note that our earnings materials due in this call include non-GAAP measures and contain forward-looking statements. These statements are based upon forecasts, expectations and other information available to management as of July 28, 2022, and they involve risks and uncertainties, many of which are beyond the company's control. We encourage you to fully review our safe harbor disclosures as well as the reconciliation of our non-GAAP measures to our reported results, both of which are included in our press release and earnings presentation and are accessible on our website at flowserve.com in the Investors Relation section. I would now like to turn the call over to Scott Rowe, Flowserve's President and Chief Executive Officer, for his prepared remarks.

Great. Thank you, Jay, and good morning, everyone. Thank you for joining our second quarter earnings call. We are pleased with our second quarter performance, which modestly exceeded the outlook we provided on our last call. The $0.30 of the EPS that we delivered in the second quarter keeps us on pace to deliver within our full year adjusted EPS guidance range. Closer benefited from top line growth in the quarter as our incremental adjusted operating margin was nearly 60% on a sequential revenue increase of 7%. Our end markets remain supportive, and we delivered strong book of $1.04 billion, primarily by aftermarket and MRO activity that is now above pre-pandemic levels. The overall operating environment was challenged in the second quarter, but signs of stabilization appeared late in the -- giving us renewed confidence in our second half outlook. During the quarter, bottlenecks remain for certain procured items such as electronics, soft goods and motors. Supplier lead times were still extended, but have begun to stabilize, providing us more certainty to incorporate their delivery dates into our production schedules and our customer commitments. China lockdowns continued headwind for most of the second quarter with lockdown easing and logistics improving late second quarter, allowing our facilities and suppliers to start the process of restoring their production. Additionally, our global suppliers continue to be impacted by labor ability issues and an inflationary environment that existed for most commodities and raw materials. While we are seeing evidence that pricing for some items may have peaked and could be starting to moderate, particularly as it relates to logistics materials, the 2 price increases that we have implemented so far in 2022 will support us to maintain price cost neutrality for the year. The first increase began to show this quarter and our most…

Thanks, Scott, and good morning, everyone. We are pleased with our second quarter financial results, which exceeded our prior expectations as well as the sequential progress we made. While the current operating environment continues to pose many of the challenges we faced in recent quarters, including supply chain issues, logistics and other frictional costs, we are encouraged by the modest improvements in these industrial bottlenecks that we began to see late in the second quarter. Considering these recent positive trends, we continue to anticipate additional stair-step progress in the quarters ahead. That said, I'd like to reiterate Scott's commentary that the major catalyst for the sequential growth we delivered in the second quarter was the hard work and unwavering dedication displayed by our associates. Their initiative and efforts to mitigate the challenges in the current landscape were integral to our performance. In the second quarter, we reported EPS of $0.34, which exceeded our adjusted earnings per share due to $10 million of below-the-line FX gains. Adjusted EPS of $0.30 excludes the FX gain as well as the $3 million noncash impairment and modest realignment charges of about $500,000. Both our reported and adjusted EPS results demonstrate the impact of what is top line leverage can deliver to closers results. Further, our quarter end backlog is up to $2.3 billion, an increase of 15.6% since year-end, driven by year-to-date book-to-bill ratio of 1.25x. This solid foundation and our outlook for constructive end markets to continue support our expectation that revenues will continue to increase in the coming quarters. As Scott highlighted, we are equally encouraged that demand for our comprehensive portfolio of flow control products looks to remain strong across all of our core end markets and within our 3D strategy. Specifically within that 3D strategy, we drove solid bookings in…

Thanks, Amy. As I mentioned earlier, we are encouraged by the strength of our traditional markets as well as the opportunity to further accelerate our growth as we execute our Diversified, Decarbonized and Digitized strategy. Our 3D strategy aligns directly with Flowserve's long-standing purpose to provide extraordinary flow control solutions to make the world better for everyone. The success we have had targeting opportunities in diversification, decarbonization and digitization in the first half of 2022 demonstrates that this is the right strategy for the current environment and for years to come. During my travels to the Middle East, Europe and the Americas, my discussions with customers have validated our expectations of increased investment in these areas, in our view that capitalizing on their increasing investment will deliver a more robust growth profile than just our traditional markets. One thing that became very clear from these discussions is that decarbonization is a consistently up the globe and is now appearing in all of our end markets. Currently, our energy transition for the next 12 months stands at $675 million versus $415 million at the beginning of the year. This growth supports our conviction that Flowserve's products and services are well positioned to serve this growing market. Let me now discuss our strategy for each of the 3D to provide some recent wins in these areas. Beginning with Diversified, we are aggressively targeting and expanding of our offering in previously underserved regions and markets that exhibit attractive long-term growth prospects, like water, chemicals and other general industries where we have strong capabilities. In the second quarter, we were pleased to be awarded a project, providing pumps to a specialty chemical manufacturer in Asia for the world's first integrated polylactic acid facility. Flowserve is helping to meet the increasing demand from diverse markets,…

[Operator Instructions] And we'll take our first question from Joe Giordano with Cowen.

Can you maybe kind of scale some of the opportunity in Europe like with nuclear and gas being considered green now and the size of LNG. Like if you were to take all of that, what is that now for you guys? And what can that potentially be over like a retooling of the European power situation?

Sure. Obviously, the situation in Europe is significant as they get less and less natural gas from Russia. And so what we're seeing is that the renewed interest in both nuclear, LNG, natural gas and then other forms of energy. These are all traditional markets service place for decades. We've got an incredibly strong team in Europe. We have great capabilities and great products for those markets. And so we're really inched about what's happening there and our ability to help Europe secure energy for the future. And just as a reference, year-to-date in nuclear, we booked about $140 million. That's substantially more than we've seen over the last couple of years, and that funnel continues to. And so we are positioned very nicely for nuclear. There will be significant spending there, and we're already seeing a lot of that, both on some of the expansion side, but also on just extending the life of those assets. And so we believe this an area of growth for us as we go forward. On the coming quarters, we'll continue to [ improve ] ourselves in term of success there.

And I noticed in one of the slides when you were just going through the financials of FPD and FCD. The gross margin was the same and SG&A was significantly less at FCD. So what's like the natural gap there? And how should we think about that going forward?

So generally, if we think about SG&A between the 2 segments, FCD, normally, we would expect to have a little bit of a lower run rate from an SG&A perspective. In part because of how we allocate R&D costs between the platforms, but I think that's a shift that you would expect to see continue going forward.

So the gap that we saw this quarter was like a -- that magnitude of gap is pretty normal for what you'd expect?

I wouldn't -- I don't think it was out of the ordinary in terms of what we saw this quarter or what we would expect going forward.

Okay. Great. And then just lastly, if you can maybe just comment on your working capital outlook for the rest of the year. I know you'll deliver more cash in the second half like you always do, but just your view on some of the key working capital accounts.

Sure. So I would start with inventory. And as we think about pushing working capital performance in 2022, we are not focused in driving down the inventory below where we're at today. We recognize that there are some investments that we need to make with respect to inventory coming into our plants in order to stabilize the supply chain. In addition to that, as these large bookings coming in that we will see growth in our assets moving forward. So where we need to continue to push from a working capital perspective is with respect to collection and obviously, our own pay, and we'll continue to do that. Receivables is an area where we put quite a bit of focus as a company through the transition projects, and we'll continue to work to drive collections improvements. Frankly, the mix that we see with strong MRO sales should help us do that. And from an AP and vendor perspective, we'll continue to work with our vendors to push on working capital. But overall, we're at 29.9% this quarter. Scott and I continue to have a goal of driving primary working capital as a percentage of sales down to the mid-20s. I would anticipate that this year, any improvement that we see over where we're at the second quarter of this year will be relatively modest.

We'll take our next question from Nathan Jones with Stifel.

Maybe just following up on the working capital question there. Typically, you're going to consume a little bit more working capital when the business is in growth mode, which clearly with the order rates growing and backlog growing, it's going to be. Does that target get a little bit more difficult to achieve in 2023 or 2024 as a result of potentially needing to support the growth in the business with working capital?

So I think 2 things will incur over time. Certainly, as the business grows, we see pressure on a receivables perspective, from an inventory perspective, and that would include, obviously, our contract assets and liabilities. What I will say, I think, is going to be a tailwind going forward as we work through the supply chain and fixed challenges, many of which are causing us to carry inventory at levels above where we would traditionally be at. I think as we think about this in terms of a 2023 and [ 2024 ] outlook, frankly, that will continue to moderate, be able to carry inventories at levels that are at safety stocks that are more normal for the industry. So although it's a challenge today, I think as we move forward 12 months and 24 months, it actually becomes an opportunity for us.

Great. And I wanted to ask a follow-up on -- I think you called it the decarbonization project funnel. I think it was like $675 million versus low $400 million at the end of the year. Can you give us some more color around that project funnel, kind of how quickly do these projects age? How quickly did they get awarded? What kind of win rate do you have on the funnel that you're tracking? Just some more details you can give us around that?

Sure. Yes. So the decarbonization side is something we're really excited about. And what we're seeing is -- and I said in the prepared remarks, is that across all of the end markets, everyone is doing something to reduce their CO2 emissions. And so we're seeing that either with energy reduction, right? So the amount of energy that's needed to run their asset. We're seeing it in electrification of the asset. We're seeing it in carbon capture and sequestration. And then we're also seeing lots of opportunities around the biodiesel side or the bio conversions. And then as we move forward, we're seeing that now in green energy, right? So whether that's concentrated solar power, the hydrogen award that I mentioned on our call. But what we're seeing is like this is happening in our traditional markets, and it's also happening with the new energy sources. So area is growing faster than anything that we -- any of our markets. And I would say that continues to grow as we move forward throughout the next -- probably the next couple of years. And so we are well positioned to that. Our offering, both in pumps, valves and seals is worked for a lot of the different applications. And we're continuing to invest our new product development in our R&D to make sure that we're well positioned for success as these markets and move more and more -- or move forward.

Are you win rates on those kinds of projects? Any difference to your traditional kind of projects that you track?

Yes, I think that they're slightly higher than what we would say is our traditional. And so a lot of these projects we're working directly with the end users. Some of them are through EPC. But when we can work directly with an end user, demonstrate our ability to help them in the front-end design and the engineered solutions, then we've got a much better chance of success. I wouldn't say we're double the win rate of our normal markets, but we're certainly doing a better job than just in the traditional markets there.

We'll take our next question from Damian Karas.

So we should go ahead and model the 60% incremental margin in perpetuity. Does that seem reasonable?

[indiscernible].

I wouldn't recommend that, but we do expect to continue to see incremental improvements in our [indiscernible].

Yes. So maybe you could just talk a little bit more about the backlog conversion and how that's trending. I think last quarter, you maybe through around a 46% number. what are you assuming for the rest of the year? And I guess, we think about the 12% to 14% margin where you plan to exit, does that basically assume you're kind of back to normal on that conversion ratio?

No. As we look at conversion rates, we saw some modest improvements in our valve portfolio in terms of conversion rates moving from the first quarter to the second quarter. But really, the improvement that we saw between Q1 and Q2 was some reduction in some of those frictional costs and improved marginality in the products that we shipped during the quarter. So as we move forward in the year, we're not anticipating a resumption of sort of that 46% average conversion rate of backlog moving forward that the fundamentals in the supply chain and our markets are just not there for the remainder of the year. But as we think about that fourth quarter exit rate, One, I would start by commenting that the fourth quarter is traditionally Flowserve's biggest quarter of the year from a revenue conversion, from an operating income and cash flow generation standpoint. And the operational bottlenecks that we've seen year-to-date really exacerbated that trend. So the fourth quarter is going to be big. In fact, we would think that the fourth quarter could produce roughly half of our full year adjusted EPS, and that's in part because of a pretty weak Q1. As we think about the third quarter, realistically, the second quarter and the third quarter oftentimes look pretty similar for Flowserve. And while this year, we would expect incremental revenue and earnings improvement based on the size of the backlog itself and not necessarily [ conversions ]. Our ability to fully capitalize on that backlog is somewhat limited by summer holidays in the Northern Hemisphere. And so by contrast, in Q4, not only do we have the backlog in place, but within our capabilities to manage them are improving. The pricing increases will be fully embedded and in our SG&A, which we've done a pretty nice job controlling we'll be able to be fully leveraged in the quarter.

Got it. That's quite helpful. And then Scott, you spoke pretty favorably earlier about the LNG and some of the demand you're seeing there. I'm just curious how competitive you're finding these LNG opportunities? And how are you thinking about the profitability there as you bid in on these projects? And really maybe any just additional color you can share on the types of wins you are seeing.

Sure. No. We are definitely doing well in the LNG space. And so we did approximately $30 million in the quarter on LNG awards. That's half of the $46 million we did in Q1. And so we believe, both on the pump side and the valve side and our mechanical seals, we've got a great offering for LNG. And so we're [indiscernible] to be very bullish on the outlook here and our ability to win awards from a margin or pricing perspective, LNG's a little bit favorable to the overall mix for us just because there are less people that can play in the cryogenic side to have the technology that we have. And so we like this market a lot and we see significantly strong growth over the next 12 months. In fact, our opportunity funnel for the year is over $400 million in the next 12 months.

We'll go to our next question from Andy Kaplowitz with Citigroup.

Scott, so orders have been relatively consistent over the last couple of quarters, both in aftermarket and OE. But you did mention some projects are moving to Q3 from Q2. Do you still see a potential positive impact from large projects coming over the next couple of quarters. And I know you've talked about some risk to the strength and duration of the cycle from inflation and/or potential recession. So what are your customers saying to you at this point in the middle of the year?

Sure. Yes. The large projects are always interesting because you can -- it's very difficult to predict timing on a quarterly basis. But what we've seen is over the last 2 years, 2020 and 2021, those projects were basically put on hold. And we're just now seeing a lot of those start to move the system and get funded. And so while slightly low in Q2, large projects than Q1, we still have significant visibility to large projects. In fact, our project funnel is up 13% since the beginning of the year, and we continue to be very optimistic in our ability to get projects in the second half of the year. And just as adapt we talked about in the first quarter, we had 4 large awards that were over $20 million. In Q2, we had no awards over $20 million, but we had 15 awards from the $5 million to $20 million. And we saw a couple that we expected to book in Q2 have now slid into Q3, which have already booked in July. And so I'd say certainly for the back half of the year, we have a lot of visibility, and we are well positioned for success in winning these large projects. And then I'd say -- and then as we kind of go forward, this is where we've got to talk about recession, inflation and everything else in the dynamics. But I would say today, I still feel reasonably confident that these large projects continue in 2023 and 2024. And it goes kind of what I said in the prepared remarks on the macro environment, right? We -- there's a need for energy independence. And so you're going to get significant investment in oil and gas and LNG and in nuclear. Know that there's a continued desire for the decarbonization and the CO2 reduction. And so there's going to be significant investment in the carbon [indiscernible] efficient, the biofuels, the recyclable plastics and the hydrogen. And so I just think that the net-net, we still think that there's a positive outlook for projects moving forward. And I had a bunch of customer conversations in the second quarter and nobody was talking about those projects moving out or being delayed. They were very confident in the continued movement and progression of funding and ultimately, execution of these large projects.

Very helpful, Scott. And then maybe could you give us a little more color into what you're seeing on price risk costs? I know you mentioned the 2 big price increases this year, but are you seeing any improvement as you bid on these larger projects yet? Or is there still a bit of slack in the system, so you kind of have to wait a little bit to see more significant improvement?

Yes. I'd say, we talked about this in the first quarter, and I said it really hasn't been a significant change. And so the larger projects attract more competition, absorption rates aren't where they need to be fully within our peer. And so the pricing is challenged on the larger projects. I feel good about our margin in backlog continuing to move up. We feel good that the price increase in the first quarter is making its way through the system in the second quarter and the end of the year. And then the price increase that we did, which was 11%, we feel confident that, that's going to start to show up in the back half of the year. And the price increases, as you know, Andy, are really on our assemble to order or configure to order work. The engineered to order work is mostly on a cost-plus basis. But I'll tell you, our team is incredibly focused as our bookings have improved as we've got better visibility to our capacity getting filled up site is certainly moving up that expectation of margin and backlog. And so I'd say we're in a perfect environment on pricing yet, but we are starting to see some improvements. From just [indiscernible] standpoint we feel good that we're catching material prices, inflation, all of the things that we would probably look at from a price cost standpoint, and we feel like we're at least neutral or going ahead of it at the -- as we exit the year. The areas that we still have to work on and reduce are Amy talked about in her script. And that's the cost were substantially lower in Q2 than in Q1 in the absorption side as well. And as we start to fill up and as we start to continue to minimize that frictional cost, then we start to see our margins progress up throughout the year.

We'll go to our next question from Deane Dray with RBC Capital Markets.

Can we circle back on China? Because it sounded like that was an area of last quarter and the debottlenecking that you would hope would happen seems to be going through. Just kind of some additional color. Is it back to normal? How soon does it come back to normal? Any other kind of repercussions?

Sure. And this is a background for everyone. We do have presence in China with both our pumps and our valves facilities in Suzhou. And then our supply chain significantly leveraged to China as well. And so as China gets locked down and has problems, it does have a significant effect on Flowserve. What we saw in the second quarter was an easing in the lockdowns really at the very end of the second quarter. And so that was a positive development. And as we kind of move forward, we expect that to continue to be reasonably stable, and we expect this to continue to progress there. So I'd say right now, we're not operating at 100% but we're operating more in that kind of 70% to 90%, depending on the week and the different situations. I'd just say, generally, the supply chain there is not -- like us is not fully back to 100% normal, but it's substantially better than what we saw in Q2 and the first 2 months of Q2. And I anticipate that Q3 and Q4 will be reasonably stable, but it's really hard to predict that, and I certainly don't want to bet money on the stability of China right now.

Understood completely and agree. And then follow-up question, I might have missed this data point, but if you step back and categorize your total orders this quarter within the context of 3D, what percent of the orders would fall within the diversified, decarb and digital?

Yes. So just as a reminder, the 3D bookings are really -- it's diversified, it's the decarbonized and the digital. That is stuff that we would have gotten additionally. And so we got to be a little bit careful how we think about it. But to answer your question directly, it's roughly 1/3 or close to 1/4 of our total bookings would fall in those categories. And so we're very -- obviously, we are very focused on that. It was $275 million of bookings in the second quarter alone. And then what I'd say is as we track projects, about 2/3 of overall project funnel in our project bookings were in that category. And so our organization is very much leaning in on this strategy. Our incentive plans are aligned to grow in these areas. And then like I said in the prepared remarks, as I talk to our customers, we're getting very good feedback that we're on the right. That will drive long-term growth in -- for Flowserve. And this doesn't mean we're walking away from our capital markets. In fact, we are very encouraged of the gas market, the power markets and our other traditional markets. At the same time, though, we believe that this gives us an accelerator as we move forward.

Good. And just related to this, on the Diversify mandate. When you go into an underpenetrated sector, you said water and chemicals. Do you need to compete more on price to build out a presence and a market share there? Is it -- so might that be lower margin either initially? Or does it not play out that way?

Yes, I think it depends. I wouldn't say it's not the same for each product in each market. Just one example order offering. We've had a product that historically has done really, really well in water. We kind of walked away from that kind of 10 years ago and didn't really invest in the product line and didn't invest in the channel of the market. What we did is send that product through our design to value center, we were able to take out roughly 20% to 30% of the cost. We were able to reconfigure the product and simplify that offering into something that took out part numbers, improved our ability to manufacture, took out space and wait and then drove the cost down by 20% to 30%. And so in that specific example, our margins are actually increasing in our ability to compete as substantially better. But there are times that when we're looking at something very specifically, and we've got to make some compromises on pricing to get in there and start to build a track record of success that we're used as a [indiscernible] and talk to our customers. But I would just say I don't think we're compromising on margins Diversified category. That's certainly not the communication and discussion with our teams. It's hard to say just because we do have a broad product line to say, one versus the other. But I'd say overall, I wouldn't expect margin deterioration to implement our diversification strategy.

We'll take our next question from John Walsh with Crédit Suisse.

Wanted to circle back to the Q4 exit rate, the 12% to 14%. I was just wondering if we could talk about the buckets that drive that and maybe put any numbers around it, meaning it sounds like you got visibility with the margin in the backlog, maybe OE aftermarket mix, what that's doing in Q4. Just any of those big buckets to kind of give people more confidence that, that's actually the right exit rate.

So I'll start by saying that there is a large component of that exit rate that is driven by volume. And so as we think about dozen number of things for obviously gives us more leverage over our fixed cost at a site level. From an SG&A perspective, we're not anticipating major increases in M&A over the year. And the absorption bucket to talk about real in 2 ways, coming because our OE is filling up, and we now have work as particularly our large engineer to order shops. It's also coming as we get more safety around the supply chain. And keep in mind, when I talk about certainty, that's not necessarily improvement. It's about the stability of the supply chain. We then hit the material that we need on the shop floor in order to progress work through and absorb the hours from our workforce at the plant level. So really, volume is going to be a significant number of that improvement of the 12% to 14%. As we think about other things that we include in the market of frictional costs, logistics has been another big story that we see there. And as we talked about in the first quarter of the year, literally, everything was being expedited across everything. But we were making pretty broad assumptions about what were the materials that needed to be expedited. As we transition from Q1 into Q2, we see more put around guiding materials. We've also seen better information flow to the site level to allow us to make decisions about what is the way that we're transporting goods to plant site. Can we use ocean freight instead of heavy weight there as an example, which leads to a significant decline in costs. Are we using a contracted route for our road shipments that allows us to move a lot. So we saw some improvement in logistics costs in Q2 particularly in the valve space, which we would expect to continue over the course of the year. But that's going to be a benefit that is working for quarter-on-quarter because those costs are actually embedded in our inventory. So if we think about the numbers around that quarter per quarter, it's volume, which will be less constrained in the fourth quarter and is not frankly on as it is traditionally on book to ship, the backlog's in place. And then that improvement that we're seeing and finally, those frictional costs around logistics and other areas of the supply chain.

Great. And then maybe just a follow-up around price/cost. So you've obviously done a lot of pricing initiatives over the last several years. Just thinking about if we snap the line on kind of certain commodity inputs, how you think you'll be able to keep price? I don't know how much of this was kind of surcharged versus you actually pricing for the value you're delivering to customers.

Sure. We did a surcharge examples primarily on fuel costs. But for us, we went hard on just doing an overall price increase. And so again, we had 5% at the beginning of the year, 11% implemented in May at this. And we believe that if we do our direct cost of products, so that would be our materials or labor, we feel relatively good about where we are on price cost. We experienced this year and in the first quarter were those costs in the under-absorption products through our facilities. And so those are the areas that we're working on. I think Amy described both of those in detail and how they get Q3 and Q4. So I would say if things go right now, then we feel we're in a pretty reasonable position on price cost, and that will translate to higher margins in the back of the year.

Yes. One thing just to note with our price increases, I would say, throughout 2021 and our first price increase of 2022, those were somewhat catch-up price increases in order to get us back to where we needed to be from a price cost perspective. I think that the May price increase that we put in place more anticipatory in terms of what we saw happening for the year. So I think we're now at a good place as well where we're looking at what has happened, what we anticipate will be happening in our major spend categories.

We'll take our next question from Josh Pokrzywinski with Morgan Stanley.

So Scott, a question for you on or I guess, Amy or Scott, whoever wants to take it on kind of what fourth quarter is trying to tell us about the backlog or maybe the margin profile here over the medium term. I guess, there hasn't been what you would call a normal year in some time, but 4Q margins tend to be sort of 2, 2.5 points above maybe what the following year is taking an average with a pretty wide range. Is that sort of a fair starting point? I mean, I know on one hand, you've had a lot of volatility, but we're also kind of in your 4, 5 of Flowserve 2.0 and an awful lot of tailwinds starting to pop up from some of these new markets, particularly around decarb. So just wondering how kind of fourth quarter is pointing us into the early read on future margins.

Yes. It's a really good question. Let me start, and then I'll hand it over to Amy to provide some more details on our progression from kind of where we are today and into the fourth quarter. I'll just start by saying that the environment that we're operating in is just unbelievably challenging. And as you can see from our results over the last couple of quarters, it is very difficult to predict what we're seeing and then how do we execute on that. What I would say is that we're seeing signs of stability externally, and we're seeing progress within our internal operations. And so if that stability continues, I'm confident the actions that we're taking, the things that we started way back in Flowserve 2.0, all of those things start to come through the system. But it's -- again, it's just such a volatile environment. You can see that in our numbers, you can see it with other manufacturers, it's a difficult time, but we're confident we're doing the right things, and we're very confident that we're going to be able to progress. But Amy, why don't you walk through some of the details on Q3 and then into Q4.

Sure. So just again, with our progression during the year. I think we need a couple of things to happen to continue to see the progress that we want to see to ultimately result in that exit rate. So we need materials in our shop floor, and we need the hours available from our labor force in order to push that product through. And we really see the fourth quarter of this year as being our opportunity to kind of -- to catch up on those longer lead times that we've seen from a supply chain perspective and then also deliver in the way that we've traditionally delivered in the fourth quarter at Flowserve. And you're absolutely right that as we look across really the last 3 years, whether it be 2020, 2021 and now 2022 with the unique challenges that we've seen in each of the years, they haven't necessarily played out as normal quarters. But I think as you hear us talk about that exit rate for 2022, we're talking about it as a momentum-building quarter. And that, frankly, as we go into 2023, without giving guidance, we think we're going to have a strong backlog. And so we start to return more to a traditional year for Flowserve in terms of what that looks like. And so that doesn't necessarily mean that -- and it doesn't mean that our exit rate of Q4 will be our margin rate in Q1. But it does mean that we're going to try and build off of that exit rate and move towards expanding margins over the course of 2023, knowing that what we delivered in the fourth quarter kind of resets the baseline of where we want to go in 2023.

And as there are no further questions, this will conclude today's call. Thank you for your participation. You may now disconnect.

Great. Thank you.