NuVasive Inc

F:NK8

Earnings Call Transcript 2018-Q4

[Operator]

Greetings and welcome to NuVasive Fourth Quarter and Full Year 2018 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Suzanne Hatcher, Vice President, Internal and External Affairs. Thank you. You may begin.

[Suzanne Hatcher, VP of Internal and External Affairs]

Thank you, Matt. Welcome to NuVasive's Fourth Quarter Full Year 2018 Earnings Call. The Company's earnings release, which we issued earlier this afternoon, is posted on our website and has been filed on Form 8-K with the Securities and Exchange Commission. We've also posted supplemental financial information on the IR website to accompany our discussion.

Before we begin, I'd like to remind you the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors which, if they do not materialize or prove to be correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

Additional risks and uncertainties that may affect future results are described in NuVasive's news releases and periodic filings with the Securities and Exchange Commission. NuVasive assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures include cost of goods sold, gross margin; sales, marketing and administrative expenses; research and development expenses; operating margins, non-GAAP earnings per share, free cash flow and EBITDA. Reconciliations to the most directly comparable GAAP financial measures may be found in today's news release and the supplementary financial information, which are accessible from the IR section of NuVasive's website.

Joining me on today's call are Chris Barry, Chief Executive Officer; Raj Asarpota, Chief Financial Officer; and Matt Link, President.

With that, I'd like to turn the call over to, Chris.

[Chris Barry, CEO]

Thank you, Suzanne and good afternoon everyone. Early today, we reported fourth quarter and full year 2018 revenue results in line with preliminary revenue results we announced in January.

On today’s call, I will provide an overview of full year 2018 results then turn 2019 key technology launches, planned investments and outlook and commentary on financial guidance. Raj will then add some color on fourth quarter and full year performance and share detail financial guidance and assumptions for 2019. We will start with 2018 revenue performance and profitability highlights.

In 2018, global revenue grew 7.3% on a reported basis or 7.1% on a constant currency basis to 1,102 million. On organic basis, revenue grew 5.1% I continue to be incurred by this growth rates against the backdrop of an overall U.S. spine market that has trended relatively flat or remain stable. These results were primarily driven by continued strength in the U.S. hardware business, solid U.S. commercial execution, and strong performances in key international regions.

The U.S. spine hardware business grew 4.4% over prior year driven by new product introductions throughout the year as well as strong adoption of our expandable, titanium and Porous PEEK implants, this in addition to strong results in international markets like Japan and Southern Europe.

Looking holistically at the business, I would characterize more than 5% organic growth or 7% reported growth as a solid year end results for the organization. We did look our non-GAAP operating margin of 15% this year. This has been the guidance range provided in the third quarter 2018 and reflected the challenges we face during the year related to the in-source manufacturing efforts along with targeted investments to sustain revenue growth objectives in 2019 and beyond.

Turning to some innovation highlights. As a truly innovative spine company focused on bringing disruptive technology to the industry, we launched more than 20 new products across our four spinal hardware business in 2018 and unveiled our Pulse surgical automation platform. These technologies combined with our best-in-class surgeon education initiatives are key differentiators that placed us in a strong competitive position to support future growth.

In 2018, we redefined the potential of the surgeon and placed experience with the introduction of Surgical Intelligence, our ecosystem connecting technology and tools to align the right patients with right surgery for the right outcome. Surgical Intelligence is the basis of our Plus platform and modular operating system that will bring together monitoring, planning, imaging, 2D and 3D navigation, automation capabilities and insight to help deliver a connected and optimized OR in quality patient outcomes.

Surgical Intelligence will continue to be addressed in the year in which I will disuses in more detail next along with other key innovation areas. Building from the foundation of excellence for 2019, the forward technological focus areas include; one, lateral single-position surgery; two, surgical intelligence; three, advanced material science; and four, complex spine otherwise known as deformity.

The plan launches an investment that supports these core focus areas align with our philosophy of the…

[Operator]

Okay, we apologize for any technical difficulties in the way there. The team is back on now.

[Chris Barry, CEO]

On the four areas of focus, so picking up there and building upon the foundation of excellent for 2019, the four technological focus areas include lateral single-position surgery; two, surgical intelligence; three, advanced material science; and four, complex spine otherwise known as deformity.

The plan launches an investment that supports these core focus areas align with our philosophy of assembling technologies to drive safer and more reproducible spine surgery. Now, I would like to elaborate a bit more on each of these focus areas. First, the expansion lateral procedure portfolio with lateral single-position surgery or LSPS for short powered by Surgical Intelligence continues to achieve greater adoption not only among traditional NuVasive lateral surgeons but also with recently converted surgeons.

The ability to deliver this advanced lateral approach is a tangible example of how NuVasive continues to lead the way and introducing disruptive technology that supports safer and better patient outcomes. This procedure has launched globally too with completed cases in the UK, Italy and Switzerland.

Now with more than a full year of commercial availability, we have validated certain clinical and economic value propositions associated with this innovative procedure. This includes enabling surgeons treat patients without repossessing for T4 to S1 spinal fusion and in turn has expanded the scope of spinal surgery that can be performed in the lateral position.

With an average repositioning taking up 60 minutes in OR, this procedure drives productivity through reduced OR time and lower cost with related cost reduction about 5,000 per case. Subsequently, the associated reduction hospital stay cost, further using the LSPS procedure equates the less time the patient is under anesthesia.

In addition, I’m excited to announce we have started the development assessment on our fully integrated robotic offering. With this underway, I’m confirming our intent to debut the Pulse Robotics platform in September at NASS 2019. The robotic technology is a combination of both internal and external R&D development and leveraged the input of early adopters and spine robotics.

Leveraging Pulse's platform, NuVasive robotic offering will further enable faster, safer and smarter spine surgery. In parallel, the launch of Pulse remains on track with preorders already underway. This modular platform is a tangible example of the Company's evolution from being product focus to a shift towards systems-based solutions.

Pulse is a foundational component of our end-to-end solution not only enable predictable clinical and economic outcomes, but also pull through innovative procedural solutions to create markets stickiness and increase the cost of disruption of switching to another provider. By integrating many disparate technologies in a single platform, we're executing on an application system environment that addresses current gaps in the market and is applicable in a 100% spine cases.

As part of our Spine Precision Partnership with Siemens Healthineers, we're looking forward to integrating their cutting edge mobile 3D imaging called Cios Spin into our Pulse platform. This combined offering provides surgeons with enhanced intra-operative visualization and allowing to switch between 2D and 3D imaging acquisition seamlessly without interrupting surgical workflow and quality assurance during spine procedures, serving the further support the adoption of minimal invasive surgery.

We will also focus on continuing to build out the advanced material science portfolio of spine inter-bodies, increased adoption of NuVasive proprietary Porous PEEK and third-generation optimized Porous inter-body titanium implant supports the further evolution as the leader of the most sophisticated implant from a clinical perspective.

Our Porous implants have been shown to promote increased bone in growth compared to solid implants while maintaining the forward imaging properties that allow surgeons to more easily access fusion following procedures. We will also investment in our deformity portfolio to what we now call complex spine that delivered solutions that adjust the most difficult to treat and debilitating spine pathologies in children and adults.

This year, we will add several products to the premier realign fixation portfolio that support increased use of various directive techniques for complex deformity, thoracolumbar fixation surgeries without along with further development of proprietary MAGEC growing rods system. Another exciting development that serves to advance the spinal technology portfolio innovation partnership with Biedermann Technologies.

Biedermann Technologies is well-regarded for its world-class design, expertise with many medical device industries and was one of the most comprehensive and innovative patent portfolios in the total spinal surgery.

Within the terms of the license and services agreement, Biedermann Technologies are granted NuVasive licenses to intellectual property relating to the spinal technology portfolio. Through this collaboration, we have the ability to integrate propriety screw renovation into the iGA platform to advance the development of NuVasive's next-generation RELINE complex spine system.

Finally, with NuVasive's specialized orthopedics business, we will introduce some several exciting new initiatives with the largest product launch of the year being the Precice Bone Transport System. This is first of its kind minimal invasive method to treat segmental bone defects up to 10 centimeters in the tibia and femur being an implantable intramedullary nail with a magnetically adjustable dual slot designed to support the transport of bony tissue to facilitate healthy regeneration.

Specifically, the system will help expand our presence to tumor and oncology. We recently received FDA 510 Clearance and CE Mark to this technology and it will be commercially available in the third quarter.

Turning to investment in 2019. As you've just heard, we delivered a lot of new exciting technology in 2019 to our surgeon partners and patients. Also earmarked for this year's several key investments related to further globalization R&D for our core business and continue develop of our Pulse and Pulse Robotics platform and operational improvements to sustain our growth momentum.

Specifically, globalization investments relate to compliance with the new European Medical Device Regulation including sterile packaging in Europe to strategically and fully participate in key markets. Other systems investments are necessary to drive operational efficiencies within the Company.

It's important to understand, these investments are significant to drive the Company into next phase of growth. We will make the investments in a disciplined way with the cost contribution tied to each one of them. Raj will discuss how investing in these long-term growth drivers will impact the P&L in 2019.

Let’s turn to market guidance and overall outlook for 2019. Moving now to the market outlook in 2019 guidance will continue to view U.S. spine market as stable with no significant shift from the view carry through 2018. This is based on regular dialogue and interaction with surgeon customers, hospital systems and insurance providers, as part of our ongoing assessment and effort to address market dynamics. Against the backdrop, we project reported growth for full year in 2019 in the range of 3.5% to 5.5% and accordingly revenue in the range from 1.14 billion to 1.16 billion.

Non-GAAP operating margin guidance range is 15 to 15.5%. I have knowledge this is a departure from what the Company is discussed in the past with 100 basis points of operating margin improvement each year. We are committed to driving non-GAAP operating margins over the longer-term to 20% to 25% range, and the levers efficiency, in-source manufacturing and international scale are still intact. However, we must make certain investments this year that I just described which I am confident will tailwinds in the 2020.

I believe these guidance range are realistic and position us to deliver on our commitments to our shareholders. Raj will provide much more detail in drivers in the guidance ranges in his remarks. But I would like to leave you today that I’m truly excited and energized by the opportunity to lead NuVasive and help treat more patients with safe, predictable and positive outcomes. Being in the CEO seat for little more than three months now, I along with my leadership team have developed the 2019 strategy based on three fundamental pillars for results disruptive technology, operational excellence, and profitable growth.

We will continue to strengthen our reputation as the leader, the leading innovator in spine with several noteworthy launches this year, especially our Pulse platform and build out of Pluse Robotics solution. Our path to operational excellence includes continuing to leverage our in-source manufacturing capabilities which have now stabilized along with the focused approach to improving global logistics and fulfillment.

Finally, we will achieve operating leverage to discipline spending and execution by balancing the investments to drive future growth. With the strategic execution of these priorities along with our competitive advantage that offers differentiated, integrated and procedural offerings in the marketplace, I firmly believe NuVasive is well-positioned in this evolving healthcare environment.

I would like to turn the call over to Raj.

[Raj Asarpota, CFO]

Thanks, Chris, and good afternoon everyone. Before we get started with the financials, let me remind you many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings news release as well as the supplemental financial information on nuvasive.com for further information regarding our non-GAAP reconciliations.

For the fourth quarter, 2018 revenue was $288.3 million, up 6.3% over prior-year period on a reported basis and 6.9% on a constant currency basis. This is driven primarily by solid performance in key geographies, increased tractions with the deduction of new spinal hardware products and solid commercial execution. We also achieved growth in our services business driven by the SafePassage acquisitions and strong billings and collection performance in our core clinical services business or NCS.

U.S. spinal hardware revenues grew 4.5% year-over-year to 156.6 million, notable new product revenue contributors include TLIF and XLIF Modulus, Porous PEEK implant offerings COHERE and COALESCE, TLX 20 Degree expandable cage and RELINE Small Stature. Additionally, the total RELINE portfolio achieved double-digit growth in Q4 based on strong surgeon adoption rate.

Revenue from U.S. surgical support came in at 75.3 million, up 8.9% over prior year. Organic NCS revenue excluding the approximately $5 million contribution from SafePassage, improved 12.9% year-over-year. For the full year, the SafePassage acquisition achieved revenue expectation of approximately $20 million. The integration of the services business is progressing well with the adoption of best practices from both businesses coupled with operational improvements.

Turning now to Biologics, while this business line was down 6.5% year-over-year, it sequentially improved 4% over the third quarter. The sales force continues to make strides selling Biologics in the majority of spine cases, along with expanded use in other orthopedic areas. Additionally, in the fourth quarter we added three new product lines which are gaining traction in the field and placing NuVasive in a much stronger position competitively. With a broadest portfolio and continued diligent to managing full through, the business has positioned well for future growth.

LessRay performed slightly below expectations driven by a delay in capital orders which have shifted into the first quarter of 2019. The Pulse surgical automation platform has also gained significant momentum since the unveiling at NASS last year. With that in production, we’re driving market recognition while educating customers on the significance of the procedurally integrating platform. This in turn drives an improved OR workflow, enabling more predictable and reproducible outcomes for surgical spine procedures.

Our international revenue was 56.4 million for the fourth quarter of 2018, growing 11% year-over-year on a constant currency basis. The EMEA region grew 11.1% year-over-year on a constant currency basis with strong performance in the dark region, driven by recurring from investments in Germany and ongoing synergies from acquiring our Swiss distributor last year. Continued headwinds in the UK associated with government health system pushback on elective procedures resulted in case volume pressure. Significant growth in the Southern Europe region came primarily from Italy and Spain.

On a constant currency basis, Asia -Pac grew 9.5% with consistently strong results from Japan and Australia and New Zealand, resulting from new surgeon conversion. On a constant currency basis, Latin America grew 18%, attributed to an uptick in procedural volumes and continued recovery in Puerto Rico. This was offset by weaker than expected performance in Brazil due to instruments set supply constraints.

Moving to fourth quarter operating margin. Turning to the rest of the P&L, non-GAAP margin for the fourth quarter was 70.1%, 230 basis points below prior year of 72.4%. As expected, we saw 110 basis points of benefit from our in sourcing efforts offset by headwinds from the acquisition of SafePassage and price erosion.

During the quarter, we experienced headwinds from U.S. product mix an approximately $2 million of incremental inventory reserves, driven by demand in global new product introductions, facing additional pressure on gross margin. Non-GAAP SM&A expenses as a percent of revenue decreased compared to prior year 110 basis points to 48.4% in the fourth quarter or 139.5 million, primarily due to lower stock-based compensation tied to executive departure and mark-to-market accounting treatment relative to certain equity awards.

In addition, we continue to see a benefit from the streamlining of non-sales and back-office functions executed earlier this year. Focus on diligent expense management and international scale to drive further flexibility for reinvestment in key areas. Non-GAAP research and development or R&D expenses total approximately 16.7 million in the fourth quarter of 2018, or 5.8% of revenue. The 110 basis point increase primarily reflects investments in future product offerings.

Fourth quarter 2018 non-GAAP operating profit margins came in at 16%, a decrease of 220 basis points over prior year. The variance was primarily driven by the margin pressure from gross margin and R&D investments, which was partially offset by gain deficiencies in SM&A as discussed earlier. Moving further down the P&L, interest and other expense net on a non-GAAP basis was 5.3 million in the fourth quarter, down from 6.6 million in the same period last year, primarily driven by reduction in foreign currency losses.

Now turning to tax. Our non-GAAP tax expense in the quarter was 4.6 million, resulting in non-gap effective tax rate of 11.3%. This significantly lower than expected rate for the fourth quarter reflect the couple of discrete favorable tax settlements in the period from finalizing tax returns from the year prior.

We also continue to see favorable impact compared to prior year from U.S. tax reform and ongoing tax planning. Fourth quarter non-GAAP net income was 36.1 million or non-GAAP earnings per share of $0.69 compared to non-GAAP net income of 29.1 million or non-GAAP earnings per share of $0.56 for the same period last year.

Turning to our GAAP results. GAAP net earnings for the fourth quarter of 2018 were 12.2 million or $0.23 per share, compared to 23.5 or $0.45 per share in the same period last. Please refer to our earnings press release or the supplemental financial information file on nuvasive.com before the information related to a GAAP versus non-GAAP adjustments.

Now quickly review of our full year 2018 numbers before I discuss guidance. As Chris stated on a full-year basis, revenue grew at 1.1 billion, 7.3% as reported and 5.1 on an organic basis. Gross margin was 71.9% or 200 basis points below prior year driven primarily by incremental inventory charges along with the impact to SafePassage acquisition and to a lesser extent price erosion.

Non-GAAP operating margin for the year was 15.1% compared to 16.5% in the prior year driven primarily by gross margin pressure as just discussed an investment in R&D partially offset by streamlining of back office functions.

Moving further down the P&L, non-GAAP other income expense was 24.9 million and our non-GAAP effective tax rate was 17.9% which is about 500 basis points below our normalized rate due to discrete items in the year and the mix of income. This equates to a non-GAAP net income of 116.6 million and non-GAAP earnings per share $2.23, compared to the $89 in the prior year.

Finally, free cash flow for the year was at 117.3 million compared to 66.7 million in 2017. The increase over prior year was driven by improvement in working capital which tied to a strong year end billing and collection. Year-end cash and cash equivalents balance was 117.8 million, up $45 million from prior year.

Moving now to guidance for 2019 and our expectation. We estimate the revenue for full year 2019 to be in the range of 1.14 billion to 1.16 billion, reflecting our reported growth range of 3.5% to 5.5%. Currency will have a negative impact of approximately 4 million.

Let me provide some context around our confidence and the achievement of these results within the range provided. Our views are predicated upon three major factors. First, in our belief that the U.S. spine market will continue to remain relatively flat but stable. Second, our outlook on international sales growth is anchored around the mid teens void by the recovery of temporal disruptions experienced in the back half of 2018 in the UK and Brazil geographies. Third, within our surgical support business I expect the Biologics business lines will continue trending positively as experienced throughout 2018 and NCS will perform roughly in line with market growth.

In addition, there will be nominal impact from the expected launch of Pulse in the back half of the year. Expectation of quarterly revenue cadence was built sequentially to the year with higher revenue growth occurring during the second half of the year with typical seasonality factors, new product introduction timing, shift in billing days and favorable comp from our international business.

U.S. spinal hardware revenue is expected to grow 2% to 4%, driven by the adoption of new product introductions during the year, which Chris discussed in detail. The U.S. surgical support is expected to grow approximately 1% to 3%, driven by stable contribution from our core NCS accounts.

The focus would be on managing our healthy services business for the completion of the final integration effort with SafePassage in the first quarter. This will be followed by a shift to reach business development capabilities to account marketing, new account activation and strategic market entry where we have a significant geographic presence in both the hardware and services site.

The expectation of upward trend in Biologics will continue throughout the year along with the benefit of commercial launch of Pulse surgical automation platform, as I mentioned earlier in the second half of the year. For 2019 on a constant currency basis, the international business is expected to grow approximately 14% to 16% or 12% to 14% on as reported basis with continued share taking in key markets including Japan, Italy, Germany and Australia. Going deeper and driving penetration remains the core of our strategy for delivering growth in these markets.

Non-GAAP gross margins will be approximately 72.5% to 73% for 2019 or approximately 90 basis points higher than prior year. The 130 basis point benefit of the Ohio manufacturing facility will be partially offset by recurring annual price erosion and increased investment needed for sterile packaging, which helps us continue to compete effectively in the European market.

A quick note on the timing relates the benefit impact from Ohio. The majority of the unfavorable manufacturing variances roll off from the first six months of last year and therefore we expect to see this lift weighted towards the back half the year.

Full year 2019, non-GAAP R&D expense will be approximately 6% of revenue, an increase of 30 different points over 2018 to continue funding innovation for the development of new products and technologies with a focus on core spine procedures and automation platforms related to Pulse and Robotics. Additional R&D costs would be incurred associated with compliance related EU and ER which enables compliance with EU market regulations.

Non-GAAP SM&A is expected to be within the range of 51 to 52 as a percent of revenue. This slight increase is driven by incremental investments in global logistics and fulfillment, IT infrastructure and sterile packaging partially offset by streamlining initiatives that were executed in 2018.

Non-GAAP operating profit margin would be in the range of 15% to 15.5%. For 2019, the non-GAAP effective tax expense rates would be approximately 22%. This rate is in line with 2018 when normalized for the discrete items, I discussed earlier.

As the international business continues to scale along with ongoing tax planning, the tax rate will shift down to 20% range in the future. The Company estimates non-GAAP earnings per share for the full year 2019 in the range of $2.20 to $2.30. On a GAAP basis, we estimate the range to be $1 to $1.10 per share. You can find further details of our GAAP expectations on nuvasive.com or in today's press release.

The final Item on guidance. We expect capital expenditures to increase to approximately $115 million in 2019 from prior year number of 102 million, driven by investments in the new surgeon education facility, IT infrastructure build out and capital associated with sterile packaging. With strong operating free cash flow and full drop availability of the revolver, our capital deployment strategy will continue to incorporate a mix of R&D and operational investments as well as opportunistic M&A in support of revenue growth.

In conclusion, I believe NuVasive's ability to thrive and be the leading innovator in spine. In 2019, we will continue developing disruptive technology that touches patient lives and enable positive and predictable outcomes. As Chris stated in his remarks, they are increasing our R&D spend to accelerate the robotics initiative, making foundational globalization investments this year that will enable us to remain competitive in the market and finally investing in operational efficiency initiatives to drive improved logistics.

I'm confident these investments will drive significant recurrent to the Company through revenue growth and margin expansion in the near future. As these investments take root, the executive team will manage the business diligently with an emphasis on operational excellence and leverage to drive profitable growth. We’re committed to an Investor Day later this year, so Chris and I along with the NuVasive's executive management team can demonstrate NuVasive's go forward strategy.

Thank you and with that, Matt, we can turn to Q&A.

[Operator]

Great, thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question here is from Jonathan Demchick with Morgan Stanley. Please go ahead.

[Jonathan Demchick, Morgan Stanley]

Raj and Chris, thanks for all the commentary around the moving pieces on operating margin this year, and I guess understanding this is a bit of the movement from prior conversations around leverage commitments. What’s the philosophy on margin improvement going forward? Does the additional investments I guess for growth in this year make the 100 basis points or so margin improvement targets in out years less likely? Is this more of a onetime reset?

[Raj Asarpota, CFO]

So, the way I think about it. This is Raj. I think we've been seeing over the last six months in terms of our margin expansion, levers for growth are still intact and we did discuss that the linearity of the 100 basis points will be impacted or in other words, there won’t be linearity of 100 basis points. With the current reset like I said those levers that's still intact and the way we’re thinking about this is, maybe it's about like it is what it is in our guidance right now, but going forward, you would expect 100 points on average.

So if this year is down, let’s say like we’re expanding about 30 or 40 basis points of operating margin as an example, next year could be 120 basis of the investments we're making. To make a long story short, I think you’re right, this is going to be more of a reset as we put in to invest, as we look at short-term investment, but that will continue to grow operating leverage and margin in the future. Chris, anything on your side?

[Chris Barry, CEO]

I think you've said, I mean, we’re still committed to it. I think as we make investments for ensuring that we maintain good focus on top line growth, balancing that top line growth. The profitability is going to something we're going to focus on. We've got some unique situation this year with the need to continue to lead in the hardware side of the business including launching the Pulse and with some of the key issues that we need to address with the EMDR or the European Medical Device Regulation, ensuring that we have those investments to continue to feel that top line growth is something that is required.

Having said that, as we continue and move throughout this year in the future years committed operational margin expansion to Raj's point, don’t see it as a linear event, but every year we’re looking for improvement we still think that 20% to 25% as I stated earlier is within reach, but again we will continue to look that in and talk more about that in the upcoming Investor Day that we’re planning later this year.

[Operator]

Our next question is from Larry Biegelsen from Wells Fargo. Please go ahead.

[Shagun Singh, Wells Fargo]

This is Shagun in for Larry. It was encouraging to hear of the progress you are making towards Robotics. Can you provide some color on what we can expect at NASS? And how do you see your Robotic platform or rather how do you compared and contrasted with other offerings in the marketplace?

[Chris Barry, CEO]

I'll talk a little bit about it. I mean consistent with our discussion around Pulse, our focus has been really develop a spine platform with a broad clinical utility in the broadest or the widest range of spinal surgeries. And the Pulse application based architecture, we think achieves this. We are excited about applying that same philosophy to Pulse robotics and the fact is we have recognized the utility of the current platforms we see in the market. We also recognize the limitation of the utility of those systems.

So, with Pulse as the underlying architecture from mechanical automation platform, we are excited demonstrated capability for wider range of clinical applications. So, you can expect from us to continue to build upon the platform of Pulse, expecting at NASS, we are looking to unveil our system. We will talk more about when we intend to launch that system. But to compare and contrast the other systems in the market, we want to bring a system that is applicable to 100% of spine surgeries and that is partly robotics, but also in our minds and the way that we are thinking about this many other technologies that we also think makeup the safer, more connected operating room to ultimately drive better patient outcomes.

[Shagun Singh, Wells Fargo]

And then, Chris, since you've joined NuVasive as CEO in late October, I was wondering if you could characterize what some of the major positive and negative surprises have been? What are your top priorities in 2019? Of course Robotics is definitely one of them. And how would you like to position NuVasive over the next 12 to 24 months?

[Chris Barry, CEO]

I guess a lot of positives, I think, I came in understanding some of the key challenges and I'll address that in the focus that we have. I had been impressed with our technology and the focus around technology, not only we talk a lot about Pulse and talk about where we are going in Robotics, but our core hardware, our continued focus on lateral surgery, our ability continue to drive minimally invasive surgery through disruptive technology that is going to be a key focus.

Our international opportunity just came back from spending several days with our international teams and our -- still really nascent approach to globalizing our business although with driven significant volume. There's a lot of things we can do at the positive and a key focus with going forward.

Operational excellence, I do believe and I said just on a few different engagements, the need for us to really mature the organization to balance our top line revenue growth with operational leverage is going to require operational discipline and rigor, in applying that to the way we develop products the way we globalize our business our financial rigor that we apply to all aspects of how we run the organization. These are three major focus areas that I'm going to push and drive.

And over the next 12 to 24 months, we are going to continue to focus; number one, on being the innovator, focus on technology and disruptive technology. And as we move forward really start to gain the capability to have sustainable predictable leverage within the organization to better fuel future growth opportunities as well as advance and accelerate our business.

So hopefully that answered your question.

[Operator]

Our next question is from Matthew O'Brien from Piper Jaffray. Please go ahead.

[Unidentified Analyst]

This is Will on for Matt. Thanks for taking the question. Just to start off with U.S. hardware in the fourth quarter just curious what kind of trends you saw with the surgeon disruption that was mentioned in the preannouncement? Was it related to any competitive loss robotics systems, deeper pricing erosion any rep turnover? And then, looking at your guidance for 19 maybe just help us understand how you reached 2% to 4%?

[Matt Link, President]

This is Matt. I will take the Q4 U.S. hardware. So in the quarter, U.S. hardware was 5% growth and like we’ve said we considered to be a stable market. It should be described as temporal in the quarter recovering into 2019 and hopefully that’s been considered in our guidance for 2019. So, we believe that has been accounted for with respect to direction you provided.

[Raj Asarpota, CFO]

This is Raj. Yes, I will take the guidance question, right. So, if you think about the performance 2018, the U.S. hardware business is up a little over 4% and maybe thinking about 2019, the range is on 2% to 4%. We think against the backdrop of the stable market, getting NPI traction, commercial execution in the fact that we had an extra bidding day in 2018, we feel pretty good about getting to 4%. It's still an expansion or multiple off market growth and we feel pretty good about achieving that rate.

[Unidentified Analyst]

My follow-up as regarding surgical support, the guidance for the year 1% of 3%, it definitely seems to be pretty sizable number of tailwinds and Biologics improving, Pulse launching in the middle of the year, and GPO contract. Just wondering how you reached the 1% to 3%?

[Chris Barry, CEO]

Yes, so again, if you breakdown sort of what happened in 2018 on surgical support, Biologics as you know was down around 7%. Our NCS, clinical services organically was up 8.5% and that was on with the tailwinds from the prior year disruption and billings and collections. And then, so I think overall as you look at that segment was up just around 30 basis points. The way I feel good about the 1% to 3% is like you said, Biologics you get a good tailwind, we think that business can return to flat and maybe grow a little bit.

And then overcoming the unfavorable comps from NCS, we do see the business still growing, just that we don’t have the tailwind from the 2017 billings and collection. And then like you said, LessRay and Pulse, the mix contribution albeit towards back half of the year, there will be a nominal expansion from that piece. So all-in-all the 1% to 3% seems pretty balanced given the segment I took you through.

[Operator]

Our next question is from Josh Jennings from Cowen and Company. Please go ahead.

[Josh Jennings, Cowen and Company]

Chris, I just wanted to start off with you and just you've jointed NuVasive team. Can you just talk about the historic day that has had a distinct culture? Let's talk about where the culture is, the stability to work for us particularly to sales fore and whether or not you’re assuming any net ads or net attrition of sales reps or feet on the street in 2019 within your guidance?

[Chris Barry, CEO]

I'll hit the culture first thing. The culture is one of the things that drew me here. And its been reinforced by my time here so I think there is very of entrepreneurial spirit of the organization, a patient centric focus a surgeon partnership that I think allows us not only to grow the business but to really live up to your mission of transforming spine and beyond. And we have seen as the innovator in the space and I believe the culture supports that.

I mentioned earlier, elements of the culture that we have to make sure that we are directing as we come larger as an organization we are a billion dollar company I think we are direction that passion that entrepreneurial spirit to the right things which is going to drive us as an organization to prioritize more deliberately, more effectively. So we are installing some of the things now at part of the operational rigor and this one that I spoke out earlier.

As I look at second part of your question I'm not sure I answered it. Can you just remind me second part?

[Josh Jennings, Cowen and Company]

Oh, sure. It's about the facility of the workforce and the facility, what' baked into or do you expect to be net adders in 2019 for feet on street to hit your guidance targets?

[Chris Barry, CEO]

No, from an attrition perspective, we are looking at stable environment. Our attrition rate is within the realm of what we call normal. We don’t see a major issue within our salesforce matter of fact I think the stability within U.S. salesforce. So nothing necessarily, I mean, obviously as we look at additional headcount that we maybe as more in the line of supporting some of the specialties focus that we have as an organization but from a core hardware perspective I feel good about the organization. I feel like we are in a stable position. Obviously this is the nature of this business from time to time as people come and go, but overall very optimistic on where we are as an organization and feel that we are in a stable environment.

[Josh Jennings, Cowen and Company]

If I could just follow up, I mean there is a -- one of your competitors is integrating an acquisition. And just you see any opportunity there the potential for disruption? And could NuVasive benefit from any disruption in 2019?

[Matt Link, President]

This is Matt. I mean we have obviously seen some movement towards consolidation in the market place and any time there is an effort to integrate sales channels. There is a potential for destruction. I would say at this point still early days, and we will continue to assess the environment but we would expect that some opportunity present itself. But again early stages of this ongoing integration of the two businesses you described.

[Operator]

The next question is from Joanne Wuensch from BMO Capital Markets. Please go ahead.

[Joanne Wuensch, BMO Capital Markets]

I want to ask two questions, one was I hope you can say something about, one which I am sure you can say something about. Every now and then NuVasive is up for sale or at the street things are there out for sales or the LessRay said something about them being up for sale. We are in that moment quite again. How do we think about that? How do you comment on that as it sort of seems to be the elephant in the room right now?

[Chris Barry, CEO]

Well, I think as you would suspect, we don’t comment on rumor or speculation. I guess as a publicly traded company I guess all companies are somewhere up for sale, but to us we are focused on driving the business in 2019 and that's really all I'll say about that.

[Joanne Wuensch, BMO Capital Markets]

Okay, I had to ask. My next question was. What has changed internally that moved you more towards a robot at NASS from the co-bot that we've been talking about previously?

[Chris Barry, CEO]

I think we may be talking about somewhat semantic here. I mean there is a role for automation in surgery, we certainly seen that from our market requirements perspective and there is clearly a values as Chris alluded to and his earlier comments to other enabling technology based on the ability to have the broadest impact on spine surgery.

So, I think when you think about the broader platform ecosystem, we refer to as surgical intelligence that was Pulse as a major component and Pulse Robotics is an application in that environment. I wouldn’t get to too focus on the terminology or nomenclature of robot versus co-bot. There is a role for mechanical automation and there is a role for other enabling technologies to drive safer more reproducible surgery.

[Operator]

Our next question is from Isaac Ro from Goldman Sachs. Please go ahead.

[Cheryl Silverman, Goldman Sachs]

This is Cheryl Silverman on for Isaac. I just want to follow up on Robotics. When you guys say, you’re going to debut the platform at NASS, what does that mean in terms of FDA submission and same commercial timelines? And also just want to clarify what you guys meant by using external R&D in the context of developing platform?

[Chris Barry, CEO]

Yes, what I will say is we will unveil our prototype system at NASS. We're not going to get into regulatory approval or any specific timeline at this time as we move closer to that date, as we retire risk within the development process, we will make a decision going into NASS as exactly what will develop from a timeline perspective. So, we're excited about it. It also comes in parallel through our Pulse launch.

And again the systems and the architecture of the software, I think resonate with the opportunity to drive a robotic application. I think it’s a great addition to what we've already started talking about in the Pulse system. From an internal versus external R&D, I’m not going to get into specifics on that but its in the combination with working with outside parties as well as working internally to develop what we will disclose at NASS at our approach to robotics in market.

[Operator]

Our next question is from Richard Newitter from Leerink Partners. Please go ahead.

[Unidentified Analyst]

This is Jamie on for Rich. Wanted to follow up and maybe ask the robotics question in a different way. So you guys are saying that it's applicable for 100% of spine procedures. What I’m interested in kind of hearing from you guys is, is this the intention of the Company to actually address 100% same procedures on day 1 of launch? Or is this going to be something that gradual where you have the intention overtime to address 100% of spine procures? And the reason I’m asking this is because some of the competitors have recognized that they have made their introduction in the robotics and one specific category of pedicle screw placement and then they are in pursue of broadening application.

[Matt Link, President]

Right, this is Matt. So, specifically, the clinical application day is pedicle through trajectory, which again I think is, has had some clinical validation in the market place. And certainly, we need to understand that is as the requirement. To answer the question specifically, the intent will be to continue to scale clinical applications overtime to have that broad base utility.

And so, the ability to participate 100% of cases will be in combination of the robotics automation platform with the Pulse architecture of software and the intent would be that we would continue to phase development overtime to broaden those applications both in terms of number of procedures in the percent of the overall procedure that the technology can't participate in.

[Unidentified Analyst]

And then just one quick follow up. Gross margins, I know you guys don’t give specific guidance on that line item, but I was just curious. How should we be thinking about the cadence of that as we ramp through 2019, just given some of the short falls that happened in [indiscernible]? What are some of the factors that gave you confidence in that?

[Chris Barry, CEO]

Yes, so the biggest factor the key driver in terms of the timing on gross margin and where it comes from really is the West Carrollton, Ohio factory right. So, we were 130 basis points -- that was supposed to come in '18 and got differed to '19 which will happen. And as I said, as we continue to get to stabilize which we did at the end of last year we will deliver that 130 basis points.

Given the timing of the unfavorable variances that flow through the P&L that were hung up last year, most of those can burnout in the first half of the year, so you will see a ramp through the back half of the year when that 130 basis points come through. And then the other factors on gross margin are the usual suspects around price and you would also see a little bit of decrement from MDT but really it's all about the timing of Ohio variances and how that will flow through the P&L.

[Operator]

Our next question is from Robbie Marcus from JP Morgan. Please go ahead.

[Robbie Marcus, JP Morgan]

I'll squeeze two quick ones in here. One, you mentioned part of the cadence of the year is due to billing days. Can you help us with how much and how much that will impact in which quarters? And then maybe you used the word temporal to describe the shortfall in fourth quarter in the U.S. in the back half of the year in international, but it doesn't look like the market itself slowed down. It looks like it's a bit more new basis specific. So maybe you just help us understand what exactly temporal means? And are those going to come back in the first half of the year? Or is it just pure share loss?

[Raj Asarpota, CFO]

You said that on the international side correct?

[Robbie Marcus, JP Morgan]

Fourth quarter in the U.S., I think, is what you talked about for prior the short fall and outside the U.S.

[Raj Asarpota, CFO]

The billing days, yes. So in '19 in the first quarter -- sorry, so, we have one less billing day, but we pick up an extra billing day in the third quarter. So if you compare billing days from last year to this year there is no impact really. But in the first quarter we have got one less billing day and that has a growth impact of 1.4%. Does that answer your question on billing days?

[Robbie Marcus, JP Morgan]

Yes, thank you.

[Matt Link, President]

On the surgeon disruption I'll just say that that it wasn’t a market issue, it was a existing base business with some anomalies in the numbers. We still grew mid single digits in the fourth quarter with that temporal disruption. So I would say that the temporal disruption in some ways subsides the surgeons that we identified that were not practicing in the fourth quarter will ramp back in over the next several weeks and months, but that disruption is reflected in our guidance.

So the guidance that I have set should allow us to absorb what I consider to be normal course of business events. And I've said before coming out of the third quarter, we were likely a bit aggressive on how we set that guidance. The guidance now we believe better reflects the ability to overcome what are anomalies that happens throughout the year, including certain times customers that go off-line. It's not share loss it's truly just disrupting to our case volume.

We haven’t loss those customers that we have identified, so again, the temporal disruption of our existing users is the way I would describe what we faced in Q4. I would just say that they will be coming back online over time. And as I said before, the guidance that I provided I think allows us to absorb any disruptions such as we talked about in Q4 as we move forward.

[Suzanne Hatcher, VP of Internal and External Affairs]

Matt, this will be our last question.

[Operator]

Our last question here is from Ryan Zimmerman from BTIG. Please go ahead.

[Ryan Zimmerman, BTIG]

So I want to follow up on John's question, earlier about the philosophy on margin expansion and just I know this is looking out a little further ahead. But you're making some investments this year that are going to stun margin expansion a little bit, but can you from your standpoint today see anything on the horizon for an investment standpoint, kind looking beyond that, you may need to follow up on given you are adding a surgeon education facility, you are making investments in West Carrollton that should start to impact gross margins? But just anything beyond that we should be thinking about from an investment standpoint, as you sit here today and then I have a follow on PRECICE?

[Raj Asarpota, CFO]

Ryan, this is Raj. So all the operating levers we talk about to expand margin are still intact, right. We've talked about continuing scale from our international business as that continues to grow at the mid teens level we recognize the leverage from all the investment that we made. So that business -- on that side, I’m sorry, we will continue to get margin expansion. Likewise in West Carrollton, the 400 basis points of expansion over the long range that we talked about are still very much intact, including gained 130 basis points this year. Beyond that asset efficiency as we think about product lifecycle, queue management, sterile packaging all of those are also contributors to about 200 basis points.

And then finally sales force efficiencies, as we continue to work to expand the layers getting productivity in our sales force, we see those levers intact as well. So, over the long-term horizon, we still think there is about 850 basis points of expansion and even coming down to 2019 if you kind think about the walk from the 15 one to what happens next year the 130 basis points of gross margin expansion from West Carrollton is in that number and we done a fair amount since Chris has come on board and even before in terms of kind of restructuring and optimizing the organization from a back office standpoint.

If you think about kind of discounting the fact that we have to invest in sterile packaging, MDR and some of infrastructure on cybersecurity, et cetera. If those warrants in our walk, we will be expanding growth margin anywhere from 150 to 170 basis points. So, we're expanding 40 to 50 basis points this year, but that kind as a result of the puts and takes we've discussed. So I think over the long range to answer your question, we have got a lot of opportunities.

[Ryan Zimmerman, BTIG]

And then you have got clearance for this PRECICE Bone Transport System. This seems at least from my perspective to be a different call point than you have historically been in. So maybe help me understand kind of how you intend to commercialize this? And what you see is the market opportunity for this product?

[Matt Link, President]

Yes, so when we acquired Ellipse Technologies, we incorporated these spinal applications of MAGEC within our core spine portfolio and we retained orthopedic distribution channel through NuVasive's specialized orthopedic, which is the same channel which currently sells and distributes in the U.S. in internationally the PRECICE system. So, this is -- if you think the bone transport is a line edition to PRECICE, it’s a separate indication for bone segmental defects up to 10 centimeters as we described earlier. So, it is represented within the existing channel.

[Chris Barry, CEO]

Hey, thank you all for participating in our earnings call today. Sorry Matt. I just wanted to thank everyone for participating in our earnings call today. I would like to reiterate how excited I'm about the future of the company. We've got an expectations set along with the strong NuVasive business strategy and management team in place, I'm optimistic about the future of NuVasive and the value we can deliver to our shareholders. We look forward to speaking with you in the next quarter.

[Operator]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.