Flowserve Corporation (FLS) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thanks for joining us. We're going to keep it rolling here with Flowserve. I have CEO, Scott Rowe joining me on stage. Really appreciate you being here and the rest of the team as well. It's always a pleasure. Maybe just before we dive into questions, well, I guess one thing first, I always got to remember the disclosures. If you have any questions about our research disclosure, please visit the Morgan Stanley research disclosure website or reach out to your salesperson. Scott, before we dive into Q&A, maybe just give us a little overview of what are you focused on, kind of what the Flowserve strategy is today, just for a couple of minutes, and we'll dive into what you're seeing out there.

Yes. Perfect. So Josh. First, thanks for having us. This is a great conference. We're happy to be back in person with you and the Morgan Stanley team. So thank you for having us.

Of course. Weather beats the Zoom screen.

Yes. Indeed, it's very nice. So thank you. So just kind of overview at Flowserve, 2 things. One, we launched our 3D strategy at the beginning of the year. We're very excited on that. And so as we think about what does that do for us, it's kind of an acceleration on growth. We're very focused on the diversification lane, which gets us diversified kind of outside of that oil and gas in the markets that we see growing at a faster rate. The decarbonization lane for us is really, really important as well, and we're seeing tremendous growth on supporting our existing customers and helping them drive energy down and then also their CO2 footprint, but then also focus on the new technology for all of the decarbonization activities. So that could be CCUS, it could be hydrogen, it could be recyclable plastics. It could be biofuels, whether it's sustainable aviation fuel or just a refinery conversion. But there's a lot of activity there, and we're very excited about it. And then the third piece is the digitized space. And so we launched our RedRaven platform kind of 2 years ago on IoT. We're seeing tremendous uptake on the technology. And so that's now been out and operating. We've instrumented over 1,500 assets. We're getting incredible feedback on the technology. And so we're very excited about what that brings and allowing us to participate with our customers on helping them optimize their full loop. And so we can help on unplanned downtime, and we can help on productivity and uptime. And then just the other thing I want to say, so that's the kind of the strategic overview. And then just kind of operationally, where we are as a company. It's been a challenging year as we worked through supply chain challenges and different things that have happened, whether that's the logistics side, shutdown of ports in China or the supply chain issues that we faced on a global level or the labor crisis that we've seen in North America and Europe. And just broadly, we're seeing more stability than we have all year. And so we feel like we're starting to mitigate a lot of the challenges that are out there. We feel more constructive about kind of what's happening and how we work through it as an organization. The logistics side has subsided dramatically. Supply chain is settled outside of kind of 1 or 2 categories, and I can go into more details in Q&A. And then finally, on the labor side, we've made significant progress, and we're very comfortable with where we are on kind of direct and indirect labor to deliver the revenue that we need to.

Excellent. Helpful overview. Maybe just sort of the topic of the day, the press release out yesterday on kind of where we're standing on the quarter, both orders and the ERP stuff. I mean -- maybe let's start off with what is happening on the ERP side. Seems like the implementation had a few hiccups. Can you just walk us through kind of what happened? And then maybe how you see that resolution playing.

Sure. Yes. So it's certainly disappointing that we had to come out and press release in the middle of the quarter. It's not what we want to do. What I say is the teams are incredibly focused on recovering this, and I'm confident we have a path forward. And so -- this is a big business for us. It's a business that we've done conversions in Asia Pacific. We've done them in Europe, those were both very successful. It's the same template in the same system. And so now it's really about -- more training and coming up the learning curve. And so we've been augmenting the resources in our North American facilities with folks out of our European facilities, plus additional consultants, and we're nearly at the level of kind of the Q3 operating levels. And so I feel good that we've made the progress we need to. We have to continue to ramp up to kind of offset the revenue loss that we saw early in the quarter. But I'm confident if we can continue this trajectory then we're in really good shape, and this stays as kind of a Q3 event. The revenue comes out. We didn't lose this. It doesn't get canceled. There's no liquidated damages. And so really, the single issue for us is just recovering the revenue that we lost in July and August.

Got it. Is that something that you think you might be able to make up between now and year-end?

Yes. So I mean, that's the goal for sure. We didn't disclose that in the press release just because I haven't seen data yet for September. I've got 1 data point from last week. I want to see kind of how we progress in the next 3 weeks. And then in the Q3 earnings call, we'll talk about what Q4 looks like and how we project into 2023. But right now, we're making good progress on that ramp-up, and I'm confident that this gets behind us relatively soon.

Got it. And as you make that up, is -- is that business that should be good absorption, good margin? Or does that have some sort of extra cost or badness attached to it, where it'll still kind of drag even as it's flowing through?

Yes. No. So good and bad. The good news is this is a big business for us with great margins. The bad news is it's a big impact for us in the quarter. But as we catch up, there's no kind of lingering cost here, right? There's a little bit on the absorption side from July and August where we were under absorbed, but there's no future costs, and there's no additional cost to accelerate. It's more about just having our operators using this new system, unlocking things in the warehouse and the production floor to allow us to move forward. And so there's no -- again, no incremental cost, the margins look good. And so as that flows through the P&L in Q4 and Q1, then it's nice margins for us as we go forward.

Excellent. And then I remember when Flowserve 2.0 was introduced, there was sort of this the long ribbon of brands and ERP systems and sites that were kind of ripe for consolidation as you got a harder look at it. Where are you on the ERP journey right now? And then, I guess, what does that say about some of the other stuff that you can do on the fixed cost base?

Yes. So we were kind of 48 ERP systems when we launched that initiative. We're now down well below 30. And so we've made great progress. And again, all successful conversions and have not had an issue until now. We still have some work to do. I would say a lot of those are legacy and really small sites that quite frankly will either kind of close or just move off with minor impact. There's 1 or 2 things that we still have to do to get to kind of our in-state but we're getting really close. And kind of -- it's about 80% of all of our revenues are on what I'll call kind of the new setup of systems architecture. And so we feel really good about the ability to drive productivity and do good things in the new systems environment. And so it's not just ERP. We've done a lot of work there in getting the different manufacturing sites on there. But we've also focused on -- we've got an S/4HANA layer on the financial side. We've got a PLM, which is the engineering system that's now globally in place. We're moving aggressively to get more of the business on configure, price, quote and e-commerce. And then we're already on the supply chain side system across all of the facilities as well. And so we've made a ton of progress in the last 5 years. A lot of that work was under Flowserve 2.0. There's still some work to go, but I feel really good about our ability to have a robust architecture to be more flexible and more productive with our assets and our people going forward.

And is there a second phase once you're done with this that would have been harder to do before all the ERP systems were -- will normalize? I guess what comes next when you're through this?

So next is really like -- next one, once we get the ERPs in, it allows us to start to do configure price quote, right? It's hard to start with configured price quote when your ERP system isn't fully in place. And then that leads to e-commerce as well. And so this is kind of an unlock for us in terms of allowing us to do the different applications that truly drive productivity and drive some cost down on the front end of the business.

Got it. So it's not so much as a pricing tool or something that the customer would see. It's more about back-end productivity on the Flowserve side.

Yes. Definitely.

Got it. And then just on the demand environment. You mentioned orders in the context of the release, seems like the order environment remains healthy. Anything that is sort of caught your eye from an end market or geographic perspective as we've gone through the quarter on the order front that either stands out or is maybe different than what you've seen year-to-date?

Sure. So I'll break it up to the core markets and then 3D strategy. The core markets continue to be constructive. And so we've been constructive all year. We've had 2 quarters over $1 billion, strong aftermarket and MRO book in Q1 and Q2. We fully expect that to continue throughout the year and even into 2023. And so no change on that front. And then on the core markets, the oil and gas, the chemical, the power, the general industries, the projects coming through there are now starting to build up in our funnel, and we're getting more and more confidence that they come to us, and we can book them and ultimately convert to revenue. And so we're seeing FIDs get released or funding released for big projects. We're excited about some really nice awards that we feel that we're well positioned to win in the quarter, in the year, and as we go into 2023. And so I'd say the core markets and what we've typically been exposed to are doing really well. One big driver is energy security. And so that's helping on our oil and gas side. And so we're seeing renewed activity in nuclear, a lot of work on liquid natural gas and then just other forms of energy to shore up some of that shortage in Europe. So that all looks good. And then you layer in the 3D strategy. Our diversified lane is really meant to get out of oil and gas into some attractive markets that have long-term sustainable growth potential. So that would be water, some of the general industries around vacuum technology and then also on the special chemical side as well. And so good progress with that. And then you throw decarbonization on top of that, and we think that's kind of another catalyst for continued growth. And so we're very excited about what we can do in the decarbonization side. We saw tons of activity at the beginning of the year, and we're seeing even more in Q3 and Q4.

Got it. A lot of things in there I want to unpack. Maybe just to start on some of the more kind of macro-oriented in the core areas of the business. If I think about the amount of macro chop, certainly on the geopolitical front and supply chain front we've seen over the last year, I think at most points in time over the last decade, those would have been cycle killers, right? Like anyone writing a big check just sort of categorically shuts down. And I think Flowserve seemed that at points in time, especially with some of the heavier industries. I guess, certainly, Europe kind of changes the game on things like energy security. But do you feel like just more broadly even outside of that, customers are sort of treating their investments is something that they really can't hold back on or really can't be as kind of sheepish as they were in the past? Like it seems like there's more credibility. Is that showing up in your business? Do you see it that way?

No, absolutely. And we still feel constructive about the outlook. And so even if Europe kind of goes recessionary or slowdown in North America, like I still think 2023 is a good year for us. And it goes back to spending on energy security that's not going to change, like countries are adamant to make sure they shore up electricity and power for the future. And then the decarbonization lane doesn't go backwards either, right? I mean governments have mandated different regulation and different targets. Companies are committed to their ESG targets and people are spending a lot of money on this. So I think those 2 continue to go forward in a very constructive way. It will be -- it's -- both those lanes are very good for us. And then I just think kind of generally speaking, kind of as you said, like the CapEx pent-up is significant. It's 2 years of tremendous underspending. And so you think about regions like Latin America or Africa or the Middle East or Asia Pacific, like they're going to spend. And we're seeing that activity start to come up. And we've been talking about it for a while. We're seeing more and more activity and again, confidence that we start to get some of these larger bookings at the end of this year and into 2023.

And if I think about one of the big changes, part of your customer base went through and a lot of process industries is around capital efficiency, right? And being disciplined on that and maybe looking more return to shareholders from their own perspective. How has that shown up in your business? Are they targeting more like productivity over capacity or the cycle sort of rhyme if they don't repeat and that, look, we need more stuff. We got -- capacity isn't a dirty word all the time.

Yes, I'd say certainly on the oil and gas side, we saw a lot of that efficiency and doing the right things in capital returns, but back to this energy security. Like I think all bets are off with the war in Ukraine right now. And so now it's this amazing kind of race to getting energy. And I just -- as an example is, I mean we're seeing coal-fired power plants come back in Germany, which you would have never ever thought. And we've got a good presence there and folks are spending money on that. And so yes, I just think there's some structural things and some big macro pictures that are going to drive investment to move forward. And despite some of the things that have happened in the last year, I think we've got to make sure that -- the world's got to make sure there's energy in right parts and that we continue to move forward on the decarbonization side. And I just don't see either one of those slowing down.

How do you view your product offering and sort of where there are gaps, if any, that you need to fill in as part of the 3D strategy? We've seen some -- kind of smaller or midsized assets kind of trade around in the space or other folks that are involved in kind of the broader definition of fluid handling. Is that something that you think Flowserve could start to look at or start to be more involved in? I know that you're doing a lot of work under the hood of the corporation as well -- but how do you think about what assets need to kind of empower 3D?

Sure. Yes. So I just say anything on the acquisition side definitely falls under the 3D.

100%. 100%.

We're locked into that, and so we will deviate and go outside of that. And we've made quite a few smaller acquisitions. And so we've talked about some of them externally, but we're -- we did a small investment in a water company. We've done some work in the desalination space. We've done some on LNG and cryogenics. And so all of these would be kind of less than $10 million kind of investments, but things that were really going to help unlock our portfolio where we needed some help externally to get us a product and an offering that makes sense. And so we're confident those become commercial in the next 12 months, and you'll see some nice announcements from us as we start to release these things. So we're very focused on doing that. And then in conjunction and to answer your question specifically, we are looking at the M&A landscape and trying to bolt in some nice revenue and some chunkier businesses that will give us scale. And so there's areas that we're excited about. So anything on the gas side and the valve business is exciting to us and to getting our portfolio more gassy. Back to kind of this energy security, if there's nuclear applications that we kind of bolt on our existing nuclear portfolio then that makes a ton of sense. There's other things in water and other flow control aspects that look good. And so we are leaning in on this. We look at a lot of different things. And to your point, the other lens is we've got to make sure that we can integrate it. And so -- if it's a really difficult, messy integration, just given kind of where we are in our maturities operations, we probably won't do that. But if it's an integration that makes sense and it's less complicated, then we're definitely going to lean in and look at it and evaluate it.

Got it. And I guess on LNG specifically, the kind of the mechanics behind that. I'm clearly a non-engineer in case if that was not apparent already. Like that product set is just different. I know that there are some folks out there that you compete with or kind of elsewhere in the landscape that have some specialized product. Does it require kind of a readaptation of what you guys are already selling or to go outside the current product portfolio? Or do you have what you need to participate now?

Yes. So on the valve side, we've got pretty good coverage. We do cryogenic control valves. We've got the cryogenic butterfly and cryogenic on-off ball valves. And so we feel pretty good on that. There's some probably market share gains that we could do with some products, and so we're looking at things like that. And then on the pump side, the cryogenic pump itself is something we're very interested in. And so we get a lot of entitlement around all the other processes within an LNG facility, but we really want to get more in the cryogenic side.

Got it. And then how would you characterize the competitive landscape? I mean I know that there are incumbents out there, like yourselves. We're saying this is an attractive area, there's capital forming here. But probably some newer entrants as well. How is that playing out? And how do you view that kind of balance of power?

On LNG specifically or just generally?

I'll say in the 3D strategy, LNG is probably a great case study in it, but whatever you're seeing out there would be helpful.

Yes. So I think it is a dynamic and very diverse competitive landscape for us. And so we don't have one competitor that does pumps, valves and seals like we do. And there's -- obviously, people are flocking to things that look attractive right now. And so in the LNG space, there's what I'd say is that's a very technical space. And so you've got to be able to supply extremely low temperatures, but also provide a large range of temperatures. And that's not easy to do. And so that gets narrowed down very quickly in terms of who end users are willing to trust. Fortunately, we've got a long history of making product and flow control. And so typically, if we introduce something to the market, we get acceptance pretty quickly, whereas some others just don't have that luxury of being able to get on their AVL fast. And so yes, I feel like we're focused on the right areas, and I'm not concerned about our ability to participate and compete when we're there. Yes, there's -- it's a fragmented landscape of competitors. But I think when we, as an organization, focus on something, we typically can make a lot of progress, and we can get good market share with the customer base.

Got it. And if I just look at Europe specifically, very dynamic environment to say the least, right? On one hand, this pursuit of energy security should be very positive for Flowserve. On the other hand, it seems like most of that continent is kind of on the brink of recession for all the other reasons related to that. How do you view that tug of war? Is that -- I would assume the balance of that is positive, but are there pieces of the business that maybe get whittled down a little bit by some of that macro risk even as parts grow?

Yes. So we think the balance is net positive right now, right? And so that would be energy security and the decarbonization, which Europe is leading right now in terms of spending and progress. And so those 2, we believe, continue to move forward. The offset would be kind of the GDP-based businesses that would slow down in the recession and so...

General industry type?

Yes. So we do think general industries like food and beverage, there's some specialty chemical stuff or chemical, there's some other flow control things that would definitely subside. But I think overall, it's still net positive. I will say the one wildcard just depends on electricity and their ability to supply power to the continent as we go through the winter months. And so a big reliance on -- obviously, on Russian gas and Russian coal. And yes, I'd say Germany and Italy are most at risk. And so we've got big customers in both. We've got big operations in both. And so that's something we're carefully evaluating and watching and making sure that, one, we can stay up and operational with our own facilities and our own manufacturing but then also that, that customer base is still operating. We're still delivering aftermarket parts and services.

Is there a way to sort of ensure against that? I mean, I guess if Russian energy supply decided to get cut off tomorrow, that would be pretty problematic. But understanding that like we're still building inventory of energy through this part of the season. You haven't hit the colder months yet. Is there anything you to do -- you can do to try to get ahead of that risk and kind of build a pocket?

No. So we -- I mean, this is -- sadly, people have known about this now for almost 5 or 6 months. And so we've been working slowly on a plan to say, okay, how do we drive our own energy footprint down in our manufacturing facilities? What are the things that we can do? Can we offload some of this production to other parts of the world, certainly like a heavy energy-intensive like flow loop tests or things like that. So those are the different things that we're evaluating. The other thing I'd just say is in the COVID years, we are designated a critical service and somebody that didn't get kind of shut down or allowed to come to work. And so I would think we'd be a critical industry even if something on the power kind of rationalization went out as well. And so right now, we're optimistic that things stay relatively normal, but I'd just say that's something we're watching carefully, and it's certainly a risk to probably -- it's more Q1 not necessarily Q4. I think depending on how cold the winter is. It depends on how much gas they use and where they need to go. So it would be more like an end of January, February time frame.

Got it. Got it. That's an important day to watch. I appreciate that. On the power side, you guys have power exposure yourselves. I mean the power markets have changed quite a bit over the last decades for sure. How is your own exposure right now in terms of kind of fuel mix and -- how do you balance kind of what's changing out there against what you're trying to do in 3D?

Yes. So ironically, power has been one of our better markets this year. We've had great bookings year-to-date, and we think that continues. And kind of going back to this energy security, you folks need power. And so we're seeing investment back into coal again, which we wouldn't have expected in Europe or even in the Americas. And so we're getting -- we have a great entitlement with our pumps and valves in the coal-fired power plants. And then on top of that, you've got nuclear now in a resurgence, and we've got great products, both valves and pumps that support the nuclear environment. And so that's Europe, it's India, it's North American life extensions and then life extensions in Asia as well. And so if it's a western kind of license or a process, then we've typically got either valves or pumps or both in the facility. And so some of our nuclear bookings this year were really good. We announced or discussed a big award in the first quarter, and we expect more awards coming as we go forward. And so the mix of power is changing, but that is one that, prior to this year, I wouldn't have expected significant growth, but we're seeing that grow with this kind of -- this relook on power and surety of having energy. And then just the last one would be more in the decarbonization lane, but it's power related is concentrated solar power. And so we're seeing a lot of those projects, and that's a really tricky application with molten salt in super high temperatures. But again, probably the more complicated side of this is a big range in temperatures. And there's not many companies that can do pumps and valves that support that environment. And so we're well positioned for success. There's a lot of projects in the Middle East. You're seeing it in Spain and parts of Europe. But I think that starts to extend around the globe in terms of a source of power as well.

Got it. And then maybe just one more on the markets before we dive back in into kind of the cost side of the business or some of the other strategy. Refining turnaround season seems like there's a lot of activity going on. How would you characterize that? And is there anything, either labor or other supply chain that's kind of getting in the way of the end demand there?

Yes, the refiners had a great Q2, and so they're making a lot of money. Nobody wanted to shut down during the quarter. And so a lot of that work is coming. And so we've got a good outlook to turn around in maintenance and the refinery business. And so we'll see as the shoulder season comes around here, we'll get work there, and we'll see some more work in 2023. And so I think it's interesting because we've seen shutdowns of refineries. We've seen conversions to biodiesel, and we get some pumps and valves as they kind of retool to the buyer side. And then the other thing we're starting to see -- we're seeing it in Europe for sure, we're starting to see it in the U.S. is how do they begin to decarbonize their asset. So driving their energy footprint down, driving their kind of the energy consumption and then driving the CO2 down as well. And so we can participate every time they kind of think through different applications in what they need to do that asset.

Got it. That's helpful. So shifting over to kind of the margin equation. Price cost has been a pretty big irritant for most industrial companies. Certainly, those that...

Very difficult.

That have kind of major sourcing inputs. You guys seem to have gone through it pretty well. I'd imagine some of that has to do with kind of the pricing mechanisms and the systems. But I do think you buy a decent amount of steel. As that is coming down, how should we think about that as how that flows through the business? Do you tend to hold on to that in kind of the aftermarket mix or -- how does that pricing rubric kind of flow through?

So just kind of -- we'll go backwards before we talk about the future. But in the last year, we've done 6 price increases. Like, it's unbelievable. Like, I mean it has been an incredible inflation environment, both on the material side and the labor side as well. And so we feel like we're neutral to slightly positive at this point, and it's obviously we've got a big portfolio. So it's hard to say that across everything. But net-net, we feel pretty good. We do 2 things. We kind of look at the macro picture on the different inflation mechanisms plus our pricing and where does that look. And then we pressure test it back in the system by looking at kind of a basket of goods to say, okay, what's that costed bill of material versus the price this year, last year and then previous years. And right now, when we do those checks, it's all coming out at least neutral to slightly positive. We're -- that kind of all works for about half our business. And then we've got the project business that is cost plus in the big project business, which is even a smaller point -- percentage of that is smaller. But that's the area that we're really trying to make sure that, that once we cost the project, then it's a margin expectation. We're trying to move those margins up in backlog. And so with the hyperinflation environment that we saw in the last 6 -- kind of the last 4 quarters, it's been hard to hold those margins in the larger projects, but we've been doing things significantly differently. We've always held our suppliers to the quotes that we get. But now we've seen people breaking contracts. I don't foresee that going forward. We've got inflation mechanisms built into the longer projects. And then we've just done a much better job putting contingency and padding into some of these bids. And so I feel like on the forward look, we're going to be at a much better place on large project pricing. And then to your point, if we project forward the indices right now would tell us that pricing is coming down. And so whether that's the different metal indices or some of the other commodities, all of that is now starting to roll over. I would say we're not necessarily seeing that with our purchases at this point, but it's just a matter of time. And so as that potentially softens and comes down in 2023, we're not going to be pulling our pricing down. And so it should be the ability for us to eke out a little bit more margin into 2023 than we have right now.

Got it. The other thing that seems pretty pervasive right now is this whole geography of inventory debate. Someone has inventory out there. Someone has a lot of it, but not the right people. I don't think your customers in distribution are ones that have too much inventory. How would you view that? And over what time frame do you think that they get back to something more normalized?

Yes. So we have a big distribution channel, mostly in North America -- for those that don't follow our business fully, but -- so North American distribution is a big part of our business. Those numbers have been moving up the last 2 years, and we've seen significant growth through that channel. When we look at the kind of public company comps and the folks that we can talk to on the distribution side, their inventory levels have come up. But if you look at the velocity of the inventory or inventory as a percentage of revenue, it's nowhere close to historical levels. So there's still catch up. And in fact, I'm on personal basis with a couple of the CEOs of those companies and they're desperate to get more inventory. And so I still think that's an opportunity for us to get their levels up to a level that they would like. And it's really driven by some of the extended lead times right now. So they want more for sure.

Got it. And when you think about the bottlenecks on those more kind of stock or standardized products. Is that on your material conversion? Is that on your supply base? Where is sort of the hang up there?

Yes. So it's just -- it's extended lead times in the whole network, right? And so back to -- inflation is kind of rolling over, lead times have stabilized, but we haven't really seen them fully contract yet. And so lead times are still up. And so whether that's a casting, a forging, a motor, all of those are still out there. And so I do expect lead times to start to come back certainly for some of the commoditized items, but we're not there yet. And so that extended lead time is causing some of the inability to stock up on their inventory levels.

Got it. I want to take kind of a deeper cut here on the margin side. Back before you consolidated the pump business, you had engineered and industrial, and I think industrial had kind of a bit more of a margin deficit there in terms of where it could go. Harder to see that today, but how would you characterize the progress you've made there? Obviously, kind of hard to do it purely quantitatively, but are you satisfied with some of the progress you've had versus kind of that more breakeven position 5, 6 years ago?

Yes. So the industrial side of the pump business has actually done really well. And so it didn't get as hit as much as the engineered side, which is more of an oil and gas footprint. And so we didn't see the big drop. And then we started to see growth in '21 and '22. When we had it disclosed and separated, some of those margin -- that the issue for the lower margins was operational. And we feel really good about the progress we've made in the industrial pump side to really start to move those margins up. And we still have a ton of runway there. And so I feel like that can continue to progress. And then on the engineered side, that's the business that really got hit hard in the COVID year, didn't see a big recovery in 2021. We're just now starting to move that up. And so that business as revenue starts to convert, the big margin lever is absorption. And so we'll start to see absorption moving in our favor and really helping on the margins there. And as you know, right, when you looked at either of those businesses, as revenue started to grow, we've always delivered nice incrementals on the upside of that business.

Got it. And then maybe just last question, you're talking about the absorption front. We're not too far off from lapping some of the bigger underabsorption from COVID having kind of the outages from earlier this year. As you look across your labor base today as we're kind of lapping that, do you feel like we're in a closer to normal spot in terms of kind of that 4 wall inside the plant, people at work being productive, reasonably trained that kind of stuff. I know ERP is kind of a narrative, but maybe zooming out more broadly how you feel...

Yes, sure. On the labor side, we look good. And so we were really worried kind of earlier this year just on turnover and inability to hire and get people in. And I would say, really, in the last 2 months, we've made great progress. So the attrition rates have started to come down. And really, it's always been a problem in North America and Europe. And so that's settled, and we feel good about our workforce. I'd say, -- we have a lot of new people. And so training them and getting them fully productive is still something we're very focused on. That was a little bit of a contributor to some of the ERP issues. We just had a lot of new folks, new to the business plus new to the system. But I'd say as we kind of work into the back half of Q3 into Q4, the labor situation is reasonably stable. And so that was a big risk early in the year that we've jumped on it, we've mitigated, and I just think the general environment has kind of settled down on people in manpower.

Understood. Scott, I really appreciate it. It's always a pleasure. Thanks for coming out. Thanks for everybody in the room for your attention.

Yes. Thank you, guys. Appreciate your attention today. And Josh, thanks for having us again. Appreciate it.