Ladies and gentlemen, thank you for standing by. Welcome to Dril-Quip’s Conference Call. [Operator Instructions] An updated investor deck was posted under the investors tab on the company’s website yesterday along with the earnings release and will be referenced during today’s call. This conference is being recorded and a replay will be made available on the company’s website following the call. Before we begin, I would like to remind you that Dril-Quip’s comments may include forward-looking statements and discuss non-GAAP financial measures. It should be noted that a variety of factors could cause Dril-Quip’s actual results to differ materially from the anticipated results or expectations expressed in these forward-looking statements. Please refer to the fourth quarter 2019 financial and operational results announcement we released yesterday for full disclosure on forward-looking statements and reconciliations of non-GAAP measures. I would now like to turn the conference over to Blake DeBerry, Dril-Quip’s President, and Chief Executive Officer. Please go ahead, sir.

Thank you. On behalf of the management team, I would like to welcome all of you to today’s year-end conference call. Last February, we hosted our initial conference call and said we believe that hosting these calls annually made the most sense for Dril-Quip and the investment community. We received positive feedback from that call along with our plan to do them once per year and are pleased to have you join us again this year to discuss the strong results we had in 2019. I'll begin with a high level review of our 2019 results and highlight many accomplishments that we were able to deliver, including a detailed review of our highly successful transformation launched in late 2018. I will then turn the call over to Jeff Bird, Senior Vice President of Production Operations and Chief Financial Officer to review the financial results and give general guidance for 2020. I will then provide some closing comments and open the call to questions. I'm particularly proud of the many achievements we made in an improving but still uncertain offshore energy environment over this past year. Our employees and management team continue to provide new products, which deliver permanent cost savings to our customers, transform our operating model to drive efficiencies, execute operationally and generate free cash flow while we reduce cost and rationalize our global footprint. As part of our transformation, our commitment to our customers remained unchanged and we continue to provide the highest level of service and support to our expanding customer base. Our operational focus and execution led to a $30 million or 8% year over year growth in revenue to 415 million. We saw revenue growth throughout 2019 with Q1 2019 revenue at 94 million and Q4 2019 revenue at 109 million. More importantly, though, we…

Thank you, Blake and good morning, everyone. Our financial results for the fourth quarter showed continued improvement. Revenue for the fourth quarter increased from the prior quarter to $109 million. This was at the high-end of our guidance range of $100 million to $110 million and was primarily driven by increased service and leasing activity. For the full year of 2019, our revenues were $415 million, an increase versus 2018 of about 8%. On a segment basis, our Western Hemisphere revenue for the fourth quarter of 2019, continued to increase from the prior quarter by $5 million or 8%, primarily driven by increases in subsea wellheads entries as well as aftermarket revenue in the Gulf of Mexico and parts of Latin America. Our Eastern Hemisphere revenue decreased by approximately $4 million or 14% in the fourth quarter, compared to the prior quarter, due to timing of product sales. Asia-Pacific revenue was flat sequentially. We continue to see that our cost initiatives translated to stronger overall operating margins. For the full year 2019 gross operating margin was 29%, which was up from the 24% we realized in 2018. As a reminder, revenue increased over $30 million, yet costs of sales only increased $1.4 million. This is despite a negative mix impact from higher fabricated joint revenue, mostly seen in the second half of 2019. Moving to SG&A expenses. For the fourth quarter of 2019, SG&A was $21 million, a reduction of $6.5 million, compared to the third quarter, primarily due to a onetime year end adjustment to stop compensation expense. For the full year 2019, SG&A expenses decreased to $97 million from $101 million in 2018. We captured meaningful savings in 2019 and brought our organization in line with anticipated future needs. These gains were partially offset by salary inflation as…

Thanks, Jeff. As we look to 2020 and beyond, we remain cautiously optimistic about the offshore energy recovery, despite the recent decline in oil pricing and downward pressure on global demand due to the coronavirus. Our proactive approach in 2019 to focus on our bottoms up strategic plan with a vision towards the long-term viability of Dril-Quip has made us a stronger company with the flexibility to adapt to changing markets. While we experienced some supply delays due to the coronavirus, we are able to ramp up our production and facilities outside of the Asia Pacific region to meet our customer's demands. This near-term disruption has us forecasting revenue for the first quarter of 2020 to be between $95 million and $105 million. Prior to this, we were expecting providing more favorable guidance in the range of $110 million to $115 million. Despite these uncertainties, I am encouraged that, our product bookings estimate for the fourth quarter remains between $85 million and $105 million. We spent the past 18 months re-evaluating our overall business and product lines and believe that, we've realigned and reorganized our entire company to operate more efficiently in any macro environment. We will no longer manufacture everything in every location, but instead, we will find the cost-effective manufacturing solutions that leverage our newly created supply chain capability and ensure our customers get quality products, while maximizing the returns for the company. We will continue to make strides in fine tuning our supply chain to ensure that we capture long term sustainable improvements. We have an experienced results driven organization, delivering first class service and a strong clean balance sheet with nearly 400 million in cash on hand. We will continue to focus on R&D and leverage our technologically innovative products to grow revenue and product bookings. Most recently, we are getting interest from both independents and majors regarding our impressive new product pipeline. As a result, we expect to spend an incremental $8 million to $10 million on research and development in 2020 to accelerate product development and future growth in revenue for these new products. Therefore, we estimate quarter engineering expense to now average around $7 million. Finally, we will build on our long history of generating free cash flow and delivering profitable growth which should meaningfully add value to our shareholders. With that, I will turn the call over to the operator to open the line up for questions.

Thank you. We will now begin the question and answer session. [Operator Instructions] And our first question will come from David Anderson of Barclays. Please go ahead.

So, question on Brazil. In your presentation you highlighted Brazil is one of the main growth areas. The 2023 seems to be one of the few offshore markets is actually starting to move right now. So, I guess two questions there. One, can you remind us where you stand now kind of contracts for wellheads with your customers, I think there was a big carry over from some of these contracts from last cycle. So, I'm kind of curious, is there any left on those contracts or do they need to be renewed. And then secondarily, can you give us a status on your inventory in the grab Make. I think kind of maybe I missed it, but I think you said something about taking some of those wells from Make to supply other parts. But is it, as I recall, there's a lot of inventory on the ground and it was already paid for but never installed. Can you just kind of refresh our memory here on where we stand on it?

So, on your first question with respect to existing contracts primarily with Petrobras in Brazil, that contract did expire. Petrobras, if you remember we renegotiated the contract Petrobras had an obligation to acquire a minimum or place purchase orders for a minimum amount of products for the extended period they fulfilled that requirement and so that contract although we may still supply some items under I don't I don't expect it will get any new orders under that contract specifically. Secondly, we expect inventory your recollection is pretty good. I think it was about two years ago, we were down in Make and at that point Petrobras commented to us that they had 300 wellhead systems in inventory at that time. They have been burning through that inventory. It's actually been quite positive for us. We've worked hard to try and make Dril-Quip the preferred provider in there. I think currently five out of every six wells that have Petrobras drills uses a Dril-Quip wellhead. So, the good news is they're consuming our wellheads at a faster pace and we are hearing indications that Petrobras is going to come out for a tender for about 70 wellhead systems sometime in 2020. So, we're looking forward to them resuming a more normal purchase and consumption operation.

That's good. That was actually my next question, if any tenders on the horizon so that's great to hear. Second kind of different subject altogether. On a Subsea Tree side, can you just tell us how much of the kind of 2019 orders came from Trees, but just kind of a little bit bigger picture here, Subsea Tree market was probably flat again for 2020. Is it fair to say, kind of any material orders for you guys is unlikely? I would think the big three guys out there are pretty aggressive is not typically a game you guys like to play. So, is it fair to say that probably '21 is probably a better timeframe for some of these orders on the Tree side?

Actually, no. So, 2019 we had a pretty successful year. We booked nine Subsea Trees in 2019. So, we were pleased with that result, and for 2020, we're actually internally expecting a little bit better bookings. Should the macro-environment hold, we're expecting a little bit better bookings than nine. So, we're pretty positive about that. That's one of the reasons that, we've guided up our R&D. We've spent a lot of time on the Subsea Tree space trying to get a differentiated product. I believe we have one. We're going to, we've sold the first one of those. We called VXTE. So, you can watch this space at OTC. We're going to unveil that product at OTC this year and that product has gotten a lot of interest both from independents, but more importantly from major operators because it does provide a significant differentiation that they can save them some money during the installation. And we have sold the first of those products and we expect to deliver that in the third quarter and hopefully get that installed in the fourth quarter of 2020.

That's great, Blake. I've been covering you guys for 15 years now, and this is the first time I've ever asked a question on one of your calls. So, I'm asking a third question.

Okay.

I think I've waited long enough. So, just curious on the supply chain. You talked about that a couple times. Can you just give us an update on your forging operations? It's now being run by AF Global. Is that transition complete? How's it gone? Kind of, what's your I guess thoughts and kind of where we stand right now?

Sure. Actually it's very positive. So, the transition is complete. AF Global is fully operational in that forge facility. We do have a supply contract from them. Our supply chain people interact with AF Global probably almost daily looking at forward demand. They're setting up a stocking program for us. So, we believe, the lease arrangement of that forge facility AF Global is beneficial to both companies. And quite honestly, Jeff and I meet with the leaders at AF Global on a regular basis, just to do a health check to make sure things are going well because our view is this arrangement is beneficial to both companies.

Great. Thank you very much.

Our next question will come from Sean Meakim of JP Morgan. Please go ahead.

So let me just start off. Could you just help us think about the lower expectations for 1Q revenue flow into the rest of the year? In other words, is there a catch up opportunity or does the rest just get pushed to the right in terms of the cadence? And is there a margin impact from the shift away from Singapore in the near-term?

Jeff, you want to take that?

Yes. So, what we experienced in Q1 candidly, is just a temporary disruption and candidly that's just a result of an extended Lunar New Year and a number of our workers in Singapore, go back to China for that New Year. And as they came back in, we essentially lost about three weeks worth of production, and then kind of a slow ramp from there. We are setting up operations in Houston to mitigate any future risks there. There'll be really an immaterial impact from a margin standpoint, it'll primarily be as we're setting that up that in Q1, Q2 less than a million dollars I would imagine and right now we view this as very temporary will be up and running in Houston by the end of the first quarter, beginning of the second quarter, and we're fully operational in Singapore now again.

And then, just thinking, a lot of heavy lifting on self help last year in our recent discussions, you talked about M&A being back on the table. You bought that additional stock in the fourth quarter. Your long term business environment changed your stock's a lot cheaper, as we've seen the new interest in the market. And you can share your latest thoughts on uses of cash beyond organic CapEx and how that's evolving, considering what's happening with your stock versus maybe what sellers are expecting out there in the M&A space?

Sure. So, first off, through 2019 we were intently focused on the cost out program. I mean we did not spend a lot of energies on anything other than let's execute on the cost out and quite honestly, that shows in the results that we have. We exceeded the top end of our target. As we roll into 2020, we're stepping back and we're doing just a bottoms up strategic review again, based on what's the market doing, what are our new capabilities and quite honestly, as Jeff and I have said before, through this self help program, we basically integrated ourselves and in so doing developed a lot more skills within our management team that changes how we view acquisitions going forward. So, we're going to hit the pause button here and do that strategic review and see where that takes us as we go forward. Share repurchase will probably always be in the mix that is our preferred method to return cash to the shareholders due to the cyclical nature of our business. But, we want to do that strategic review first and have a more broader look at what the market is offering before we make the call.

Our next question will come from Marc Bianchi with Cowen. Please go ahead.

I wanted to ask on the order outlook. You guys, you tempered the revenue outlook for obvious operational reasons. I'm curious, if we didn't have this virus concern and kind of the concern on the oil price, would your order outlook look any different and Blake, I know it's early days here with the impact of the virus. Can you kind of talk to any customer conversations you've had and how customers might be thinking about what to do from here?

Look, you know, as we said in the call, we were prepared to forecast the Q1 revenue kind of a 110 to 115 range. We were entering 2020 very optimistic we've done the heavy lifting our sales transformation and execution is paying dividends and still is. We did not change our bookings forecast for the quarter. We're having conversations with our customer. Most of our customers are still in the wait-and-see mode. Most believe this is transitory. It's going to come and go, and particularly in the offshore space unlike the shorter cycle business, our customers' views are much longer term and plan to development and first oil, it's just a broader time period. So, I think, you know, I'm hoping that we don't really see any change in our bookings profile as the year progresses.

Okay. That's encouraging. On the margin side for first quarter, Jeff, you mentioned the million dollars related to this repositioning of throughput. Just the other factor I think that's going on or maybe there's a couple factors. You had the higher fab joint mix in the second half of '19. So, it sounds like maybe that could be a tailwind to margins as that rolls to a lower share going into '20. But I'm also wondering if new products are also a tailwind. Could you kind of talk about how that progresses here into the first quarter and beyond and maybe quantify to the extent you can, how much that can help?

Yeah. So on the fab joints, we would see that high level of fab joints really continue into the first quarter of 2020, and then as we get near the end of the year, we'll start to see that go back to a more normalized level, but that will only probably happen in the back half of the year. And from a quantify standpoint, given we're not giving full year guidance right now, probably not going to comment on an exact number there. And then the other spot on margin, the million dollars you mentioned in the first quarter, it will probably below that million dollars you mentioned in the first quarter, but that will be transitory in the first quarter.

Right.

I would say Marc. This is Blake jumping in here. I would say that, the product mix to more fab joints, we actually view as encouraging because the dynamic that's happening there, is that our customers are consuming wellheads that they have in inventory, buying the tubular products to go with that. And so, that means that inventory is drawing down and indicating a likely increase in demand for the wellhead products which will improve the mix.

Right, right. Okay guys. Thanks for that. I'll turn it back.

And our next question will come from Ian Macpherson with Simmons. Please go ahead.

Thanks. Good morning Blake, Jeff. I also just want to, sorry to flog the horse here on margins. There is a lot that's moving. And Jeff, you still have 20 plus million of annualized benefits to capture this year, but I'm struggling to bridge from Q4 to Q1, given there will be some decremental with a revenue decline and then you've got G&A and your engineering and product development expenditures higher as well. So, in my mind's eye I'm seeing 5 million to 10 million of EBITDA decrement from Q4 to Q1. Is that too extreme or not?

That's too extreme. So when, and we we're talking about it on an adjusted EBITDA basis, so let me just talk about the, the different elements there. If I look at it on the margin side, a little bit of headwind as we reposition the manufacturing from Singapore to Houston, that's $1 million we just spoke about. On the SG&A side, because of the onetime nature of the stock com charge that makes that number look artificially low and in the fourth quarter, but if you think about the 25 million that we guided in our SG&A that's really in line with exactly what we did on a full year 2019. So, that's 25 million a quarter and that's in spite of the fact that, we're returning to a more normal merit cycle. And then when you get to R&D or engineering, you're right to say there will be some headwinds there. On the engineering side, we said we're going to invest $8 million to $10 million in incremental R&D projects this year, that'll ramp up throughout the year, probably starting on the low side in Q1 and then ramping up to a full number by the fourth quarter. So, if you think about that, as call it to $2.5 million a quarter it'll start on that low side in Q1 and probably wouldn't be at the full $2.5 million run rate until the fourth quarter.

Perfect. That's super helpful, thanks. On the working capital side, you've already made a lot of improvement over the past couple years and your inventory returns coming down from I guess, internationally high levels. So, closer to normal levels for your business now, but still some more ways to go there. But then on the receivables that's been moving away from you recently. Can you just talk about what you think are the easier and harder objectives within work capital this year that you're going after?

Yes, so if you look at the presentation that we posted on Slide 13, we walk through kind of the cash to cash improvement that we expect over the next year and a half. If I look at the easy things, the easy things, candidly are probably going to be the bottom two, which is inventory reduction, and improve vendor payments. We did invest a little bit in inventory in 2019 and we'll invest a little bit more in 2020, but not much more. There's a lot opportunity there though is we get ourselves set up and we burn through some of the excess inventory in those cells to move from, a model where we might have been speculatively buying product, we're not buying it as close to actual production time. So, that's what we're working on there and that's 20 to 25 days of reduction that you see there. The vendor payment terms, actually as a side benefit of the supply chain work that we did in 2019. So we did a lot of good work in 2019 to drive costs down there, but at the same time, we were doing that work to drive costs down. We're also being more aggressive around vendor terms. So, you did see an improvement from 2018 to 2019 in DPO, we believe we can expand that even further over the next 12 to 18 months. The tougher part because it's not within our control is the vendor milestone payments and candidly, we get a lot of questions around price as it relates to our customers. What we don't get a lot of questions around our payment terms and candidly, just as payments as price was pushed during the downturn, payment terms were also pushed during the downturn as well. So, what we're looking at this year is the first step back, if you think about a pricing environment, one of the first step back in gaining price is really starting to gain more reasonable terms. So, we're going to be working a lot with that on our customers this year, just from a milestone payment. Blake mentioned, the nine trees being more aggressive around milestone payments around those trees. But then there's also an opportunity with a number of our customers to really work hand in hand with them on with some of our lean tools, and reducing that billing cycle and the number of errors we see between ourselves. And our customers is actually a couple of customers that we've actually had joint Kaizens with, for working on those type of projects. So, hopefully, that's helpful.

And our next question will come from George O'Leary from Tudor Pickering Holt and Company. Please go ahead.

The increased spend on R&D makes a lot of sense to me as you guys have always been innovators and always very focused on the technology side of the equation. I wonder if you could share a little bit about, kind of where that R&D spend that incremental R&D spend year-over-year is directed and what types of problems your customers are looking for you to solve. Just any incremental color where you guys are focused on deploying that incremental R&D spend would be super interesting.

Certainly. So first off, just to say, we've invested in R&D throughout the downturn and that's one of the benefits of having the balance sheet that we have and the free cash flow, and our focus really has been on developing products that structurally change the way our customers drill wells to provide them permanent cost savings going forward. So, what you're really talking about there is giving them time, right? You're giving them back time you're reducing installation time, which is incredibly meaningful to them. It helps on both the IRR space. And quite honestly, it helps their ESG, right. If I spend less days off-shore, got a smaller carbon footprint. So, looking at 2019, I talked about the new VXTE product and really our Tree products in general. We've got a lot of traction in that SPS space, and as we looked at that, and one of the things that we evaluated is, is the whole package of Trees, which includes Subsea controls. We do have a Subsea controls business and we haven't been funding R&D in that Subsea control space as much as we have the hardware products. And so, the bulk of this R&D is really focused on our subsea controls product line and business to update that controls, modernize it, and also make it a much more flexible product going forward. And we believe that's going to help us in the entire SPS space, right. Selling trees and controls in an integrated package.

Very interesting. I appreciate that color, Blake. And then you guys mentioned on the call, you're kind of looking at your manufacturing footprint and moving to a model where you don't make everything, everywhere. I wondered if you could provide some examples of some products that once upon a time you were making it at certain facility and now you'll only be making them at one or two facilities and how that translates into cost savings for you guys. Because I just thought that was an interesting comment.

Sure. I'm going to hand that on to Jeff.

So, if we look at our facilities, we've really set it up as centers of excellence. So, if you step back and you went back to 2018, virtually every facility made products for their region and that made them inefficient, different products going over different machines a little bit more complicated, not able to rearrange the shop for in a way that's most efficient for specific products. So, we started '19 really looking at center of excellence and these are the large products obviously, a center of excellence for wellheads in Houston and we rearrange, candidly rearranged machines. So that the machines were closer together to make producing just wellheads in Houston, much simpler. So, the example we often give is pre this rearrangement, a wellhead would've traveled two and a half miles in our Houston facility beginning end, and now it's literally a matter of feet that it travels beginning end and so you can imagine the opportunity there, forklifts and inventory and expeditors and all the things that happen there. So, that's Houston, we manufacture our connectors, largely all our connectors now in Singapore and those cells are up and running and we're continuing to optimize those cells and we'll expect some more savings from those in the future as well. And then we manufacture our subsea trees in Aberdeen. Now that cell is not quite up and running yet, because we had to make some capital investment there that should be up and running by the middle of this year. So, we should see benefit as that comes up and running. They'll be benefit obviously in Aberdeen but there'll be knock on benefit because some of the other regions that are helping them produce those trees right now are running less efficient than they will post when that COE is up and running. So, hopefully that's helpful.

And our next question will come from Connor Lynagh of Morgan Stanley. Please go ahead.

I was wondering if we could expand a little more on the incremental engineering expense? I mean, how would you think about what you're growing your addressable market or what incremental revenue could look like from some of the things you're investing and just any way to think of the return on that investment?

Sure. So, if you take a subsea tree, the controls portion of that is going to be is going to add about additional 1.5 million to $2 million per tree. So, that's the price. Right. So, as you grow your SPS business, having a you're basically going to add a million 1.5 million to $2 million per tree in the control side. It's additive to the sales price of the trees.

And then I think, I think the other the other knock on effect is that the controls fees within as you have a world class tree and you have the controls built out as well. And you look at the fact that we booked nine trees in 2019, and you look at a market that's essentially 300 plus trees awarded every year there's an opportunity really for us to drive share gain there as well. So, that's really the win as a. get more every time you sell a tree, but also the opportunity to drive share in the industry market as well.

Okay, that makes sense. I mean, do you guys have any higher level targets for if we're in a relatively flat market just for the sake of argument, how much would you expect market share innovation etc to drive growth relative to that market bring that up?

So, right now, our market share is relatively low in trees sub 5% and so there's just a lot of runway there and the other challenge that we've had is the breadth of the subsea tree products we didn't we couldn't fulfill all the different varieties that our customer needs. So, what we first thing is we've expanded our available market, so of the 300 to 350 trees a year, maybe we had 15% of them was our available market. We're moving that up now to the 20%, 30%, 40% of the available market and that's us getting us more to bid on. There's still some areas that are always challenging because of local content. So we, there's some areas that we won't participate in. But, we believe with our new products, we definitely have a differentiated product that's attractive to our customers. Right now we have four major operators reviewing our VXTE design as we make the first one. So, that they can quickly qualify it and get it accepted, giving us an opportunity to bid, that that's something that we haven't had in the past, right. We've been really good with the independents, but getting a major operator interested in Dril-Quip subsea production systems has been elusive, like I said, we got four of them interested at the present moment.

Got it. That's helpful. Just to sneak one more in here and just a broader market more on the wellheads side of things. I think you guys have talked about for the past couple of years, there's been a bit of a catch up quarter effect a sort of a restocking. Would you say that's played out at this point or is there a little more to go and I appreciate the uncertainty on the oil price within that.

Yeah. I mean. Let's set the oil price aside. I think every customer has a little bit different inventory position. I think it is winding, most of them are winding down. We're getting feedback even from the independents. Hey, it's time to reorder and these are people that have been dormant for three or four years in the offshore arena, that are picking back up and consuming inventory they've had. And so, our view going forward is we're more back to a more normal order of consumption portion in the cycle.

Alright. Thanks very much.

And our next question will come from the Vebs Vaishnav of Scotiabank. Please go ahead.

Hey. So, typically you get about 40% of any product bookings in Brazil any reason why that should not hold the same product that 70 wellhead tender you spoke about in Brazil coming up this year.

So, Brazil is interesting. They're changing their model a bit. And so, they're going to a more shorter cycle, shorter quantity, but broader tender base. So, I think, I think the model of the past is waning Vebs. I think, it's a competitive bid process, and a lot of it I think is because they're partnering with so many IOCs that it's changed their bidding model. I will say that our relationship with Petrobras is very, very good. We've done a lot of work to allow them to consume their existing inventory, even though they've changed their own technical specifications. We've done some additional qualification, made some new products, and that's what's allowed them to or driven them to use more of our wellheads on a per-well basis. So, we're optimistic about the tender but, yeah there's going to be an open tender process, not necessarily a split arrangement as they've done in the past.

Got it. Okay. We have seen increased product bookings, has the mix shifted one way or the other? Can you talk about that.

You mean within our backlog.

Within new orders and backlog? Yes.

Yeah. So, in 2019, we have seen a little bit higher percentage booking on the subsea wellheads, which gives us confidence that as we roll into 2020 as Jeff spoke earlier, we're going to shift more to the normal mix.

Got it. And maybe question for Jeff. So, if I'm thinking about this correctly, you're talking about a $100 million SG&A and maybe $8 million to $10 million of higher R&D. That is despite 40 million to 50 million off cost savings that you guys had. Can help me bridge the gap between the two?

So the 100 million SG&A and the 28 million R&D. The SG&A is flat year on year, the R&D is up that 40 million to 50 million of cost savings comes across all lines, not just those lines and the vast majority of that actually comes more on the manufacturing and supply chain side versus the SG&A engineering. There were some very early wins on SG&A and engineering Vebs. But those really happened in late '18, early '19. So, the full year savings from those would have been booked in late '18. You had that full year savings there. You're not going to see incremental savings, not much incremental savings in SG&A and R&D from '19 to '20. Most of that remaining 20 million that needs to come out is going to be a manufacturing and supply chain .

And is the implication that yes in the first quarter the margins would be, had some headwinds because of the shift in due to corona virus. But beyond that margins should get back to where we saw second half of '19 or maybe better?

Yes, I mean, I think with the profile that you see is there will be a little bit of headwinds on margins because of that and then look just a lower volume off, obviously puts a little bit of pressure on margins as well. But candidly, as you go back to back to the backend of the year and you start to see the $20 million roll through those that should improve the margins as well through the back half of the year. So, we'll probably start with a little bit of margin headwind in Q1, and ramping up through Q4.

We have time for one more question and that will come from Blake Gendron of Wolfe Research, please go ahead.

You mentioned M&A as use of cash, you've typically done smaller tuck in deals. I'm just wondering in light of the R&D comments and wanting to make your SPS offering a little bit more marketable here, if you could potentially go for something a little bit larger, maybe on the control side, or just given your R&D budget is can be larger this year, if you're going to just go at it organically, just trying to understand what the opportunity set is out there for the SPS?

Yes, so thanks for the question. So, the way that we look at it is we have a very clear SPS roadmap that does include controls. We are always evaluating if it's faster and easier to get there in organically versus organically. But we're not going to sit around and wait for the perfect inorganic opportunity to come along. It's got to be the right price and the right value and if it's not the right price and the right value, candidly we've demonstrated that we can develop R&D and we've done that with the OTC spotlight awards that you've seen over the last two or three years and we would expect to have the same success on the control side. If you talk about larger acquisitions, as Blake mentioned earlier, that we've largely got the transformation piece behind us now. We're doing another kind of 18 months later and other bottoms up strategic plan. And I fully expect what will come out of that is a capital allocation strategy that talks a little bit more around what size M&A projects we look at.

Got you, that's totally fair. So, that's all the same. This framework as it currently stands doesn't preclude any larger deals or would you like to keep it kind of small?

No, it does not preclude larger deals. I think as we look at where we are in the cycle right now and what's going on our industry I think everything's on the table as it relates to acquisitions.

Totally fair. Thanks for squeezing out here. I'll turn it back.

I would now like to turn the conference over to Blake DeBerry for any closing remarks.

Just in closing, I am extremely proud of our organization, our efforts on the cost out exceeding performance, our sales organization for a incredible bookings here. We look forward to 2020 and we look forward to catching up with you as the year progresses. Thanks for attending the call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.