NuVasive Inc

F:NK8

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the NuVasive Inc. Fourth Quarter and Full Year 2019 Earnings 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 of Internal and External Affairs. Thank you. You may begin.

[Suzanne Hatcher, VP, Internal & External Affairs]

Great, thank you, Doug. Welcome to NuVasive's fourth quarter and full year 2019 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 have 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 the Generally Accepted Accounting Principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, 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 Investor Relations section of NuVasive's website.

Joining me today on the call are Chris Barry, Chief Executive Officer; Matt Harbaugh, Chief Financial Officer and Matt Link, President.

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

[Chris Barry, CEO]

Thank you, Suzanne. And good afternoon everyone. Earlier today we reported fourth quarter and full year 2019 revenue results in line with the preliminary results we announced on January 13. On today's call, I'll provide a high level overview of full year 2019 results, then turn to our 2020 strategy including key technology focuses and planned investments.

Matt Harbaugh, our newly appointed CFO, will then share additional details on the fourth quarter and full year 2019 performance as well as 2020 financial guidance. In 2019, full year revenue came in at $168 billion, growing 6% as reported and 6.6% on a constant currency basis.

I continue to be encouraged by these above market growth rates as a result of our innovative technology, best-in-class clinical training and focused execution against the backdrop of a stable spine market. These results were primarily driven by the continued strength in the US spinal hardware business led by the adoption of our X360 system, our comprehensive approach to lateral single position surgery. The X360 system leverages advanced techniques and technologies to deliver patient specific care, while enhancing operating room workflow and efficiency. X360 is inclusive of Exela and expectation, and we view this procedural system is a key driver of future growth.

In addition, our commercial teams focused and executed well on selling across the entire portfolio, as we saw our biologics product line return to growth. I'm pleased with how we finished out this year on the international side, growing at the top end of our guidance range. Matt will share additional financial commentary on each business line relative to fourth quarter trends and how that sets us up for 2020.

For full year 2019, we delivered a non-GAAP operating margin of 15.8%, a 70 basis point improvement over last year. This is a reflection of continuing to balance profitability, strategically investing in key areas of future growth, was at the same time consistently improving on our operational performance. Overall, the business performed well in 2019. Coming into the role as CEO at the end of 2018, my goal was to balance top line revenue growth with increased profitability while consistently delivering on our results. I believe we achieved that this year, all while serving our purpose of transforming surgery advancing care and changing lives.

And I'd like to turn to 2020 and share with you some new technology updates that supports our five-year strategic plan. As an innovative spine company focused on bringing disruptive technology to the industry, NuVasive 16 new products across our portfolio in 2019. In 2020, we anticipate to once again deliver more than a dozen new technologies that align with the needs of our surgeon partners and support better clinical and economic outcomes to enable more predictable and reproducible spine surgery. These new innovations are focused on three key goals. Driving increased adoption of less invasive spine surgery, developing enabling technology to accelerate this adoption and investing further in favorable open spine surgery segments of the market.

First, to further penetrate the MIS segment and enable less invasive spine surgery, we will continue our efforts on surgeon training to support the global adoption of the X360 system. The most comprehensive lateral system on the market. The MIS segment is growing three times faster than traditional open spine surgery and offers clinical and economic benefits to both patients and hospitals.

Last year we saw a growth from traditional NuVasive lateral surgeons, and experienced good momentum converting new surgeons in the back half of 2019. We're also starting to see an increased demand for X360 from surgeons new to a lateral surgery approach. The ability to deliver this advanced lateral approach through superior technology and best-in-class clinical training is a tangible example of how NuVasive is bending the adoption curve for less invasive spine surgery.

And equally excited about the traction X360 you're seeing outside the US. We recently held our international sales meeting where we saw surgeons from UK, Italy and Germany to name a few, discussed there adoption of X360 in the positive effect it has had on their patients and practices.

We continue to generate data that validates the value propositions associated with our X360 system. Last year, performing lateral spine surgery using X360, we estimate we save more than 3,500 hours in the operating room, equating to roughly $14 million in cost savings for hospitals. These outcomes, along with several patient benefits including less time under anesthesia are powerful data points that are proliferating the game changing approach to spine surgery. In support of our focus on delivering a comprehensive procedures to enable better outcomes, we also are focused on developing differentiated implants and instrumentation to enable these techniques. We'll build out the Advanced Material Science portfolio of spinal interbodies to support many procedural categories. This includes the full commercialization of cohere XLIF and several key porous PEEK and optimize 3D printed titanium alpha launches related to ALIF, TLIF and more.

We continue to receive positive feedback from surgeons on the novel spinal implants validating the importance of and focus on surface structure and radiolucency to enable better clinical outcomes for their patients. To further our position as a spine implant leader, we currently have several clinical studies underway, and are planning to kick off several more this year to demonstrate the efficacy and superiority of the porous PEEK implant for bone in growth.

Another dimension for growth is investing and penetrating targeted open spine surgery segments of the market. We plan to make solid headway on the development of a new cervical portfolio, which will rival what is currently on the market. This includes launching an anterior cervical plate to treat degeneration, trauma and deformity, as well as a new cervical fixation system to improve posterior surgery.

Our commercial team, as well as the surgeons who are currently participate in the alpha launches of these products are very excited about the prospects for this new technology. And I'd like to turn to an update on Pulse and our broader enabling technology strategy. As discussed previously, we've been working through Pulse beta evaluations for the last several quarters. As is the purpose of the beta phase, we gather a lot of important feedback from surgeons and hospitals on many different aspects of the system, from technical performance to measuring gain deficiencies from the platforms use in the operating room. Through insights learned during the verification and validation testing process, we've made the decision to continue to iterate on the platform's development. We expect this work will continue throughout the year. I've been a part of the development of these types of foundational technology systems many times in my career. And it's critical that the release of the system is a smooth as possible and delivers on optimal clinical experience.

I want to reiterate that the Pulse platform capabilities continue to receive excellent feedback from customers. The strategy of offering a modular, integrated platform that is applicable and nearly 100% respond cases resonates with surgeons and hospital administrators. We need to ensure it exceeds our customers' expectations right out of the gate. Our strategy remains the same, and we will continue to forge ahead with the further development of Pulse and Pulse robotics in parallel.

Now turning to R&D in 2020. We will continue to invest in our core spinal hardware products enabling technology. In addition to these focused efforts, we'll also fund several key investments related to further globalization and operational improvements to sustain our growth momentum.

One key area of investment specific to globalization, our initiatives to comply with the European medical device regulation, this includes sterile packaging, which enables us to fully participate in key global markets. This is an undertaking that requires focused attention resources and investment again this year. In addition, we're making necessary system investments to foster operational efficiencies and drive the company into the next phase of growth. These planned investments were made in a disciplined way to support the long-term strategic goals. What I'd like to leave you with today is that I'm energized by what we see ahead in 2020. Coming off a strong 2019, we have multiple ways to continue to grow and make an impact on the market.

On the operational front, we've made steady improvements over the past year, allowing us to drive margin improvement. We're increasing our focus on operational excellence and fully leveraging our insource manufacturing capabilities, along with a focused approach to improving global logistics and fulfillment to make it a true competitive advantage.

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

[Matt Harbaugh, CFO]

Thank you, Chris. And good afternoon everyone. Before we get started with the financials, let me remind you that 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 www.nuvasive.com for further information regarding non-GAAP reconciliations.

For the fourth quarter 2019, revenue was $310.4 million, up 7.6% year-over-year on a reported basis and 7.8% on a constant currency basis. This above market growth was driven by US hardware and international. US spinal hardware revenue grew 7.9% year-over-year, to $268.9 million. This strong performance is attributed to continued surgeon adoption of our differentiated X360 system and Advanced Materials Science implants. NuVasive's strategy around procedure realization continues to take hold as we see steady implant pull through across various product portfolios. We also saw a mid-single digit percent increase within our cervical portfolio. An outcome of strategic execution in targeted open spine surgery segments where we have historically been under-penetrated. Revenue from US surgical support came in at $77.3 million, up 2.7% over prior year. Surgical support revenue growth was attributed to NuVasive Clinical Service's billing and collections normalizing, resulting in low single-digit growth as expected.

Biologics return to growth in the fourth quarter, up nearly 5% over the prior year period. We are pleased to see biologics turn the corner as we have worked to expand the portfolio to include competitive BBM and synthetic biologic offerings, as well as annualizing price and mix headwinds.

Turning to international, revenue was $64.1 million for the fourth quarter 2019, growing 13.6% year-over-year as reported, and 14.3% year-over-year on a constant currency basis. This performance was led by Europe growing more than 20% year-over-year on a constant currency basis, with contributions across all geographic regions. We look forward to continue elevating NuVasive spine, pediatric and specialized orthopedic portfolios in this region. Asia-Pacific performed in line with internal expectations, growing high single digits as forward progress was made in the quarter to improve the set constraint issue in 2019.

On a constant currency basis, Latin America grew in the mid double-digits, primarily driven by solid growth in Brazil and Mexico as set availability improved throughout the back half of the year.

Overall, we are pleased with how the international business ended the year, finishing at the upper end of our guidance range. Turning to the rest of the P&L, non-GAAP gross margin for the fourth quarter was 73.2% or a 310 basis point improvement over prior year of 70.1%. Gross margin expansion was driven by efficiencies across manufacturing operations, as well as timing of inventory reserves related to new product introductions.

Non-GAAP SM&A expenses increased by 13% compared to prior year, to 50.9% of revenue in the fourth quarter or $158 million. Approximately 5% of the increase relates to mark-to-market adjustments from stock based compensation driven by the 56% increase in our stock price in 2019. The remaining investments were primarily driven by supply chain initiatives, European medical device costs, and revenue related expenses. Non-GAAP research and development or R&D expenses totaled approximately $18.3 million, or 5.9% of revenue in the fourth quarter of 2019. The 9% increase over prior year primarily reflects innovation investments in Pulse and Pulse robotics.

Fourth quarter 2019 non-GAAP operating margin came in at 16.4%, an increase of 40 basis points over prior year. This was primarily driven by efficiencies from insource manufacturing and disciplined spending, partially offset by the previously mentioned stock based compensation headwind. Turning to tax, our non-GAAP tax expense in the quarter was $7.8 million, resulting in a non-GAAP effective tax rate of 16.8%. This lower than expected rate for the fourth quarter reflects a couple of discreet one time, favorable tax adjustments in the period. Fourth quarter non-GAAP net income was $38.5 million or non-GAAP diluted earnings per share of $0.73 compared to non-GAAP net income of $36.1 million, or non-GAAP diluted EPS of $0.69 for the same period last year.

Turning to our GAAP results, GAAP net earnings for the fourth quarter of 2019 were $29.9 million, or GAAP diluted earnings per share of $0.55 compared to $12.2 million or GAAP diluted EPS of $0.23 in the same period last year.

Now a quick review of our full year 2019 numbers before I discuss 2020 guidance. As Chris previously stated, on a full year basis, revenue came in at a $168 billion, growing 6% as reported and 6.6% on a constant currency basis. Non-GAAP gross margin was 73.3%, or 140 basis points above prior year with expansion primarily driven by manufacturing efficiencies. Non-GAAP operating margin for the year was 15.8% compared to 15.1% in the prior year. Operating margin expansion was driven by gross margin improvement, and benefits from streamlining of non-sales and back office functions partially offset by strategic reinvestments in key areas of the business.

Non-GAAP other income and expense was $20.2 million, and our non-GAAP effective tax rate was 21.3% for the full year. Full year non-GAAP net income was $129.8 million, or diluted earnings per share of $2.47, compared to non-GAAP diluted EPS of $2.23 in the prior year, an increase of 10.8%. Finally, free cash flow for the year was $112.4 million, compared to $117.3 million in 2018. The decrease over prior year was driven by our operating performance, offset by higher expenditures for inventory and surgical instrument sets. Year-end cash and cash equivalents was $213 million, up $95.2 million from prior year. With regard to our guidance for 2020, we estimate revenue growth for full year 2020 to be in the range of 4% to 6%. We expect currency to have an immaterial impact.

Let me provide some context in setting these expectations within the provided range. Our guidance reflects a few macro and internal factors. First, we expect the US spine market to continue to remain stable in 2020 at rates similar to what we experienced in 2019. Second, the outlook for the US spinal hardware business line remains strong, driven by similar trends we saw in 2019, with the adoption of our X360 system and Advanced Materials Science implants. Third, we expect international sales growth in the low double digits.

US spinal hardware revenue is expected to grow multiples of the market at 5% to 7%, driven by the adoption of new product introductions and accelerated training on our X360 system. We will fully leverage and expand our best-in-class clinical development program for surgeon training by expanding capacity in several key locations, including the East Coast and international.

We will also continue our focus on targeting traditional open spine surgery market segments where we are underrepresented, and where we have an opportunity to gain market share, like TLIF, cervical and deformity. The first half of 2020 will be a focus on alpha products in these respective areas with anticipated full commercial launches in the back half of the year. We look to maintain competitive instrumentation and implants by launching about a dozen new products, all while continuing the development and commercialization of our enabling technology offering.

US surgical support guidance range is a decline of 3% to positive 1% growth. We believe this is realistic based on tough comparisons from 2019, which included the tailwinds from a historical NCS billing and collections that we don't expect to continue. This range also assumes continued pricing pressure in our IOM product lines and biologics growing at market rate. For 2020, the international business is expected to grow low double digits. This is predicated on continued share taking in key markets going deeper and driving new product introductions remains at the core of our strategy for delivering international growth.

Moving on to operating margin, we expect our non-GAAP operating margin for 2020 to be in the range of 15.8% to 16.2%. This is in line with what we communicated at last year's Investor Day and our strategy of driving 20% plus operating margin by 2024. In 2020, we must invest in infrastructure, the European medical device regulation and sterile packaging to deliver growth in future years. In terms of timing and cadence of margin growth, expect it to be heavily weighted to the second half of the year due to timing of stock based compensation, and annualization of investments we made throughout fiscal year 2019. To be clear, we expect some margin contraction in the first half of 2020, and expansion in the back half of the year to achieve our guidance.

The company estimates non-GAAP diluted earnings per share for the full year 2020 in a range of 255 to 265. On a GAAP basis, we estimate diluted earnings per share in the range of $1.15 to $1.25. This range reflects headwinds from several one-time favorable tax items in 2019 that we don't expect to repeat. You can find further details on our GAAP expectations on nuvasive.com in the Investor Relations section or in today's press release.

One final item on guidance, we expect free cash flow to be greater than $100 million, which will be driven by improved operating cash flow, offset by an increase in capital expenditures. This increase in capital expenditures is primarily due to surgical instruments associated with our sterile packaging roadmap, investments in the new surgeon education facility at our San Diego headquarters and manufacturing operations. With strong free cash flow, our previous disclosed capital allocation strategy remains the same. We will continue to balance our investments in R&D, procedural assets and company infrastructure and we will also consider opportunistic M&A, as well as potential share repurchases under our authorized repurchase program.

In conclusion, I believe in NuVasive's ability to thrive and continue to be the leading innovator in spine. In 2020, we will drive disruptive technology that changes patients' lives and enables positive and predictable outcomes. We plan to increase R&D spend on enabling technology to make foundational globalization investments to remain competitive in the European market, and invest in operational efficiency initiatives to drive improved supply chain performance in the years to come.

I am confident these investments will drive significant returns to the company through revenue growth and margin expansion into the future. Thank you.

And with that, I'd like to begin the Q&A session.

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Josh Jennings with Cowen & Company. Please proceed with your question.

[Josh Jennings, Cowen & Company]

Hi, good afternoon and thanks for taking the questions. Congratulations on a strong 2019 and congratulations to Matt on his new position. I was hoping, Chris, just a follow-up on your Pulse comments and maybe any incremental color you can share just on what capabilities or features need optimization. And just a follow-up on that is just in terms of timing, it sounds like we should be expecting, I guess the navigation piece of Pulse to launch maybe in 2021. You talked about them in parallel continued development on the robotics module. Is that still a 2021 timeline for robotics? So, there's a couple of Pulse questions in there, but any incremental color answer to those question would be great. Thanks for taking the question.

[Chris Barry, CEO]

Thanks, Josh. Yes, basically just to kind of level set, the beta valuation to be extended throughout really the remainder of this year, as we previously communicated. We do expect minimal revenue contribution on Pulse this year and you're right on. We're expecting it to be in the market in the 2021 timeframe. And really, the commentary here is just a function of our verification validation efforts to ensure the system is stable. Like I said in my previous comments, the value proposition, I think, has been very well received by our customers. Our ability to ensure that all of the systems, that all the different technologies in the system are working together. It's just a situation that I've probably been a little bit more assertive in saying let's make absolutely sure. Let's extend the testing as long as we need to, let's not let the sense of urgency overwhelm us. That pushes the way from the strategy of driving the most effective technology in the market and really fulfilling the value proposition we described.

To that end, the extenuating beta testing with Pulse does work in parallel with Pulse robotics and we're still actively developing that technology in parallel. So the current situation of Pulse, we don't believe has a material impact on the launch of a robotic application. Obviously the predicate has to be Pulse, but then on top of that, we plan to bring the robotic application to market quickly thereafter. It's a little early now to talk about 2021 with robotics. But clearly, as we move through this year, with the final stages of development of the robotic application and with the final launch of Pulse, we'll have more insight as we move through.

[Operator]

Our next question comes from the line of David Lewis with Morgan Stanley. Please proceed with your question.

[Unidentified Analyst]

Hi, this is Mason on for David, thanks for taking the questions. This Chris, as a follow-up to the first question here. It sounds like the base case timeline for a more full-scale launch, we should clarify as back half '20 or first half '21. And then as a quick follow-up on that, are the increased investments you're going to have to make it to iterate this system, is that going to be a risk to margin expansion at all this year? Or will you appropriately balance kind of drop through and reinvestment? Thanks.

[Chris Barry, CEO]

Thanks, Mason. Basically what we'll do is we'll be in -- we'll extend the beta testing throughout 2020 with our desire to fully launch in mid-2021. This doesn't -- we don't believe puts any further risk, other than what we've already described. We are investing heavily in the organization this year, and part of that investment is continuing to support the overall enabling technology strategy inclusive of Pulse and robotics. So, it doesn't necessarily indicate any change in our overall spend profile. It just extends the timeline that we had originally thought on when we could fully launch the product with confidence. We're making sure that we launched the most stable, safe and effective product into the market and ensuring that we do so, we're just extending this testing for really throughout the year 2020.

[Matt Harbaugh, CFO]

Yes. And Mason, the only thing I would add -- this is Matt, Matt Harbaugh, excuse me, is we do expect a very nominal revenue contribution from Pulse this year. So, the guidance that we provided today incorporates our thinking around Pulse.

[Unidentified Analyst]

Got it. That's helpful. And as a quick follow-up on US surgical support is it potential to the client this year mainly a factor of comps? I mean you have biologics growing in line with market, so call it flat. And then some contribution from Pulse, but where could we see the most opportunity for declines here is kind of what we're trying to get at? Thanks very much.

[Matt Link, President]

Yes, I think, referenced -- this is Matt Link, referenced in the earlier comments, it's a normalization and billings. We had some benefit, one-time benefits over the course of last year as we were updating systems and integrating the acquisitions across our own businesses. And so we saw some one-time benefits on the billing and collection side, that we don't expect to recur in 2020. So as you normalize that out, along with just competitive pricing pressures we see across segment that's the major driver there in the surgical support.

[Matt Harbaugh, CFO]

Yes. The other thing -- this is Matt Harbaugh. The other thing I'd like to add to this is that one-time billings and collections that Matt talked about on a full year basis was about $10 million in incremental revenue that we posted last year. Importantly though, $4 million of that was in the first quarter of last year, and as we kind of gone through where we're at on consensus for the first quarter, it doesn't look like that was considered in some of the analyst projection. So we would just encourage you to go back and take that into consideration.

[Unidentified Analyst]

Right.

[Operator]

Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

[Matt Miksic, Credit Suisse]

Hey guys, thanks for taking the question. So I'll keep it to one. But it has to do with the sort of open spine surgery opportunities you've talked about a couple of times, now TLIF, cervical, deformity. I appreciate the timing and the color on how you plan to attack that. I just, maybe, was wondering if you could talk a little bit about what the company has learned from its historical efforts to enter some of these segments. What have been the barriers? Why it's not a bigger part of your business now? It's been at scale or a focus issue in the past, and maybe Chris or Matt what are some of the challenges you see that we should be mindful of, as you gear up to make a bigger push as you described?

[Matt Link, President]

So this is Matt Link, I'll take that. Look, I think what you've seen historically was a bit more of a blue ocean approach to unique or novel segment specifically in MIS and lateral. As the company has grown and really built out the portfolio to compete as a full line spine company, we've decided to focus in these other more conventional areas that you described, like cervical and TLIF. Look, I think the major opportunity for us is to leverage our internal capabilities around proceduralization to develop comprehensive and complete clinical solutions, regardless of whether it's an open or MIS approach. And we've seen that as a driver in the TLIF segment in particular, which we have had a number of new product offerings that we introduced to the market over the course of the last two years, so the proceduralization is a key component.

You hear us talk a lot about the Advanced Materials Science, so advancing material capabilities to enhance bio compatibility, (technical difficulty) Advanced Materials Science innovation really applies across all interbody segments, so you can bridge that up in the cervical spine as well. Where we've seen growth in adoption across our cohere porous PEEK as well as our Modulus surgical platform. And as we've talked about, I think there is that a huge opportunity for us to round that out procedurally with the product introductions that Chris referenced earlier, the answer your cervical plating and posterior cervical fixation system and again taking, I think a novel approach towards proceduralization looking at not just the fixation component in the interbody components, but really instrumentation access just as we have across our entire portfolio. So again, I think really leveraging the historical experience around proceduralization and product innovation is key.

[Matt Miksic, Credit Suisse]

That's great. Thank you.

[Operator]

Our next question comes from the line of Richard Newitter from SVB Leerink. Please proceed with your question.

[Richard Newitter, SVB Leerink]

Hi, thanks for taking the questions. The first one, just going back to Paul's, Chris, can you remind us what your prior benchmark or milestone timelines were for both components to the Pulse initiative, both the robotics and the regular? I think you had given us when we could expect first in man, for the robot. And then when reasonable timeframe for approval might be and the commercialization? And then the same thing, just, just for Pulse remind us what it had been, and then exactly where it is now. Thanks.

[Chris Barry, CEO]

I think Rich, I think you have the numbers. Exactly.

[Matt Link, President]

Yes. So the original time frame -- this is Matt Link, again, was focused on the Pulse platform commercialized, full commercialization in 2020. We never really provided a more detailed timeline on Pulse robotics and targeting first in the back half of 2020, and that's really all the guidance we provided on the robotics platform beyond the unveiling last fall.

[Richard Newitter, SVB Leerink]

Okay. So I guess is that first in man in the back part of 2020 off the table now or that potentially kind of holds?

[Matt Link, President]

Yes. As per Chris's comments earlier, we run these development processes in parallel, again just to kind of reframe and reiterate for everyone the concepts or philosophy behind the Pulse system is Pulse an ecosystem our platform of applications of which robotics is an application. Albeit, a major one, it is an application. So it's development pathway continued to run in parallel concurrent to the current Pulse evaluation efforts as well.

[Richard Newitter, SVB Leerink]

Okay. And maybe on X360, I'd be curious as you, as you move into 2020 and you think about the momentum and the opportunity that you have in front of you and what drives the momentum over the next 12 months. Are you moving past your kind of friends and family, or your installed base of XLIF users, and well what degree should we expect to training to start to move more into non-XLIF users? And then also kind of a similar type of question with respect to the pull through aspect of X360. Are you starting to see an increased contribution to growth coming from other parts of the overall procedure capture outside of the lateral portion, or the posterior fixation because people are adopting X360? Thanks.

[Matt Link, President]

Yes. So I'll try to tackle that in two waves. So like that the characterization of the customer segmentation and training on X360 hasn't been sort of broken out in it from a process perspective of current lateral users to X360 new lateral users. Again those run concurrently. So we have seen both the opportunity to expand the utility and clinical application of lateral surgery with the tools and proceduralization of X360. So, we've expanded the utilization within an existing lateral customer base. I think also the very important as we've seen pretty strong adoption from new lateral users who looked at the limitations of a standard direct lateral approach, inability to access the lower segments of the spine specifically L5S1 and perhaps some of the challenges with repositioning the patient, and this has created an access point for them into the lateral portfolio. And so we continue to see training and adoption across those two segments of surgeons as well as with competitive lateral users. Again, going back to I think Chris's earlier comments, we're going to continue to invest heavily in surgeon training and brand new experience center here in San Diego. We're also expanding our training capabilities on the East Coast as well as internationally. So very focused on our efforts through our CPD or clinical professional development program to continue to optimize the opportunity for equity.

And as we said on many occasions, our goal is really to expand in a meaningful way, the overall lateral market by making it more accessible to more surgeon customers based on the procedural solutions we provided. From a pull-through perspective, I think we've oftentimes referred to the fact that XLIF as a flagship procedure tends to create a strong draft for the rest of our portfolio. I think you referenced in your question. One of the strongest areas of pull through clearly with posterior fixation. But we do see continued uptake across other segments of our portfolio within our X360 customers, which is encouraging.

[Operator]

Our next question comes from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

[Ryan Zimmerman, BTIG]

Thank you. So, I just want to follow-up on the surgical support guidance. I appreciate there is some kind of one-time components in guidance that clouded it in the early part of 2020. But, when do we get to call it a steady state on surgical support in your view? And what does that steady-state look like? And if you could expand whether it's monitoring or biologics kind of how, what are your underlying assumptions for growth and say the US biologics market? Thank you.

[Matt Harbaugh, CFO]

Yes. So this is Matt Harbaugh. Let me just kind of start with kind of what we see for 2020 as the drivers of the guidance that we provided today, and then I'll turn it over to Matt Link to provide a little more color. As I mentioned earlier on the NCS billings and collections that revenue growth is going to normalize. And as I said earlier, we had $10 million in incremental through billings and collections, 4 million of which was in the first quarter of last year. And so we will definitely see a decline from that. So we enjoyed the benefit last year. We also are going to continue to see some competitive pricing pressures within the IOM product line in the service businesses. And so that's also factored in there.

As I mentioned earlier, very minimal contribution from capital sales in 2020. And then with regard to Biologics, while we were happy with the results we saw in the fourth quarter. It's more likely to come in the low single-digit growth, and that's also in the forecast or in the guidance that we provided today.

[Matt Link, President]

Yes, I'll just comment, with respect to the biologics. We expect that to sort of sort of be in range with market growth. We think we have been very judicious in building out the portfolio to ensure that we can address what the market requirements are, in particular as it relates to pricing with some lower-priced options as an alternative to premium options, and biologics like our stem cell biologics. And so we expect that to remain in the range of market growth and continue to manage that through procedural attachment and other measures.

[Ryan Zimmerman, BTIG]

Thank you.

[Operator]

Our next question comes from the line of Matt O'Brien with Piper Sandler. Please proceed with your question.

[Matt O'Brien, Piper Sandler]

Afternoon. Thanks for taking the questions. And I'm sorry to continue down this path on the surgical robot, but there is a lot of anticipation for the arm components of that system. And I understand Pulse is very compelling, but is it a fair characterization today to say that the first in man will likely be sometime in early 2021 for the arm components? And is it a fair characterization to say that the actual launch, however limited it was going to be next year, is maybe three to six months delayed versus what you may have been thinking a few months ago.

[Chris Barry, CEO]

It's in the ballpark of what you're saying I think is accurate, although I still believe that our desire to have first in man potentially out of this year is still within the realm of opportunity. But again as we go through some of the final testing and development of the Pulse system, and then also ultimately as where we house the application of robotics. We do have to keep that in consideration. So I don't, I wouldn't -- I would say that what you're saying is in the ballpark. But we're forging ahead full steam ahead with our robotic application and feel like that the current situation with Pulse doesn't necessarily have a material impact on our entrants in the market with the arm.

[Matt O'Brien, Piper Sandler]

Okay. So a modest delay and at the end of the world is still very bullish on the technology. No major design changes needed?

[Chris Barry, CEO]

Absolutely.

[Matt O'Brien, Piper Sandler]

Okay. And then on the international side of things, Chris or Matt, the 10% to 12% outlook this year they point a little bit below that 14% CAGAR that you've talked about through 2024, and I know you weren't specific as far as when we would see what levels of growth over that projection period. But as you get bigger it gets harder to grow 14% per year. So, are we still committed to that 14% CAGAR? Should we start to see a bigger ramp up in and the performance of that international business next year? And then '22, '23? Or how do we think about that?

[Chris Barry, CEO]

It's obviously again the CAGAR was over a longer period of time. And if you think about the 14%, it's probably it more to think about the low double digits. It could swing in any given year based upon a myriad of different things. I'm still very bullish about the national market. A lot of the work that we talk about in building operational capability supports our international growth. So we've got to get our supply chain in a robust, in a very operationally efficient scenario. So that we can support widespread growth internationally. And I think right now we're still somewhat gated at times. You've heard us talk about set availability. Some of these items are predicates to unlock full-scale globalization efforts. So to that to extent, or to that end, our focus on driving operational efficiency and operational excellence and continuing to really build out a robust supply chain, and our ability to really generate world-class of thermal logistics on a global scale is a gating item for us to fully -- to take full advantage of the global opportunity.

So, I think the story is very consistent. What we talked about at Investor Day. I think the growth next year is a solid growth number. And as I said, as we build a more robust operational capability as we launched some of these enabling technologies, which will also resonate and key markets in Europe and elsewhere. I think that's what gives us that tailwind to that growth story in the back half of the strat [ph] plan.

[Matt O'Brien, Piper Sandler]

Got it. Thank you.

[Chris Barry, CEO]

Yes. Thank you.

[Operator]

Our next question comes from the line of Robert Marcus with JPMorgan. Please proceed with your question.

[Robert Marcus, JPMorgan]

Great, thanks for taking the question. Two financial ones, I'll just ask and one. We see where the operating margin guidance is, I was hoping you could just give us a little more color on how to think about interest and tax and shares for the year. And then I heard you talk about greater than $100 million in free cash flow, it looks like you ended up doing 112. Should we expect something north of 2019's $112 million in 2020? And if not, maybe just spend a minute on where the extra spending is coming from thanks.

[Matt Harbaugh, CFO]

Yes, you bet. So, I think generally interest will kind of be in line with what we saw in 2019. Obviously, we do have some decisions to make around the converts and our cap structure. But it was around $20 million, $21 million, if you see what we posted on a full year basis. From a tax rate perspective, we expect the tax rate to be more in line with kind of the historical guidance that we've given on the tax rate. The tax team did an excellent job in 2019. And we did get some kind of one-time favorability in there that aided our earnings per share, particularly in the fourth quarter and took our tax rate down. But as we were thinking about guidance from an earnings perspective, we took into consideration a tax rate more akin to 22%, 23% range that we've predicted historically. I'd say shares similarly are going to be in that $51 million, $52 million shares outstanding. So I don't see anything significantly moving that.

With regard to your question around the $100 million in free cash flow, I would say that's just kind of a range number to use right now. We do foresee some significant capital investments that we're in the process of making in the prepared remarks. I am sure you heard about some of the work that we're doing here at the headquarters. We also have some significant investments going into our supply chain, that being the sterile pack, and then the European medical device regulations. So that's putting some pressure on our capital spend, but that really sets us up to be able to deliver on the long-term strategic plan that we rolled out at Investor Day.

So the way we've been characterizing and internally is that 2020 is definitely a year of investment, where some of the infrastructure investments that we're making is definitely going to pay off in the long-term future. Excuse me, I meant to say $52 million to $53 million shares outstanding.

[Operator]

Our next question comes from the line of Raj Denhoy with Jefferies. Please proceed with your question.

[Unidentified Analyst]

This is Anthony [ph] for Raj. Thank you. I have one X360, and then one on strategy for Chris and Matt. Just on 360, it's a follow-up to Rich's question, and I'm just wondering what the penetration actually into your existing NuVasive accounts is at this point, where that can go over the next couple of years? And a quick follow-up on that would be, what is the price and volume pull through you're seeing on those accounts? And then, the strategy question would be for Chris and Matt. You're both long-term cavity alums, the DNA there had restructuring and M&A. So I'm just looking to take the temperature there, where you see restructuring and M&A playing out over the next few years. Thanks.

[Matt Link, President]

Yes. So is Matt Link on the X360 penetration, we sort of generally have spoken around penetration with respect to training in the range of, say 20% to 25% of our existing customer base. And so we continue to expect to build on that, and we'll do so through the investments mentioned previously. As we talked about the sort of pull through, our attachment opportunity associated with XLIF is we tend to see higher values per case based on larger procedural capture that's also reflected through oftentimes more levels per case. And so those are, continued to be strong tailwinds with respect to the overall extra X360 portfolio performance.

[Chris Barry, CEO]

Yes. And this is Chris. On the strategy question, you think about it, I came in roughly 16 or so months ago, and really wanted to get an understanding of the strategic levers that we were going to pull to grow the company. And as we sort of, as we articulated those over the past year and really put a finer point of our Investor Day, to me sets up the runway for us to then become much more active in M&A. So looking at how do we accelerate our focus on MIS through furthering our portfolio around lateral, potentially further equipping our system of X360 -- or our Pulse, Pulse with robotics and equipping that with other key technologies, we clearly feel like we've got a significant amount of runway in the open surgery segments we've talked about cervical and deformity. And we're actively looking at opportunities that we could deliver our portfolio through M&A, and business development in that area. And then broadly the globalization front how do we accelerate our globalization efforts to really get out ahead of some of the commitments that we've made to deliver the growth we talked about back in August.

So I'm bullish. I feel like we've got, we sort of taken a bit of a bit of a breath over the last year. But I don't expect that to continue. So I'm anxious to really consider M&A is a primary lever that we pull to really grow the business. As far as restructuring, I'll turn it over to Matt.

[Matt Harbaugh, CFO]

Sure. Matt Harbaugh. Thank you for the question. I'd say a couple of things that we're going to be very focused on which goes back to the DNA, you mentioned between Chris and I, we are definitely going to very much focus on the underlying profitability of the businesses, both in the United States and around the world. Make sure that we're delivering returns for all the efforts that we put in all of those countries, we are going to look at our OpEx and look at optimization and some of that may actually require capital investment through IT and other areas, but we're thinking long-term. We want to deliver on the long-term strategic plan that we laid out last year. And in order to take out some costs, sometimes you have to invest in order to get the returns, but we definitely will take a look at OpEx. I'd say we also are very focused on manufacturing. We've seen good results in 2019, particularly in Ohio, but there is more work to be done there to mine more efficiency out. I think we've made really good progress, but there is more to come in the coming years. So the answer to your question is yes, we are going to really be focused on optimization.

[Unidentified Analyst]

Thank you.

[Operator]

Our next question comes from the line of Shagun Singh with Wells Fargo. Please proceed with your question.

[Shagun Singh, Wells Fargo]

Thank you so much for taking the question. I have one on the cadence of operating margins. Can you give us the magnitude or help us understand how you're thinking about the contraction in the first half relative to the expansion in the back half? And in the LRP, I guess you guys had stated or the expectation was that there would be investments in the front half, which will drive you towards your goals in the back half. So how should we think about the step up in margins in 2021? Is 50 to 70 basis points still the right ballpark? And then, plus 100 hundred basis points thereafter? Thank you.

[Matt Harbaugh, CFO]

Yes. So from an operating margin perspective, I would point you to our guidance today. Particularly, on a non-GAAP basis of 15.8 to 16.2. That's going to have significant pressure in the first two quarters, that being the first and second. We believe that the data is a bit of a floor on a full year basis, but there is a lot of expenses that we're going to see in the first half that we'll work our way through. In particular, I would highlight stock compensation that will occur in the second quarter and that correlates with the share price, and so that we'll have to work our way through. We're going to continue to invest in Pulse to realize the opportunity there. We've got sterile pack. We've got EU medical device infrastructure investments that we definitely need to make that we're making as we speak. And so, as you're modeling out the year you should be putting pressure on that operating income in the first and second quarter, and then seeing a lift in the back half of the year as we kind of work our way through some of these issues.

The other thing I would add, that's also helping us in the back half of the year as new product introductions, which is going to also help us on the top line, but also it will bring more margin in which will help us offset some of these expenses. So it definitely is a back end loaded plan.

[Chris Barry, CEO]

As far as the plan, we're still committed to the guidance we gave at the Investor Day, a really driving that 20% number by 2024. So I'm always hesitant to give an exact number in outer years, but what we believe the investments we make over the course of -- really we made over the course of 2019 into 2020 set us up for margin expansion as we move forward.

[Shagun Singh, Wells Fargo]

I got it. And then, if I could just follow up on the EUMDR, it gets implemented in the near future here. Just wondering how does it impact your-- what are your latest thoughts and also how does it impact your international strategy? Especially as you reduce your SKUs and you likely exit some product lines. Thank you for taking the question.

[Chris Barry, CEO]

Yes, good point, you're exactly right. It does impact our strategy. It forces us in an area that in the short-term, CASM expense associated with, you're seeing that reflected in our numbers this year, where we're having to streamline the portfolio. We're having to build sterile packaging capability and obviously having to put forth resourcing to just comply into insure that all the all the documents and all the regulation around the MBR are in order. Over time, it does create a scenario that I think, we think allows us a chance to have a more streamlined portfolio based upon the expense burden that you've that you will incur of having a broader portfolio in Europe. I don't think that's a bad thing. I think that's actually a good thing, but in short-term, it's a challenging scenario, but it's definitely, as you think about our focus going back to what I talked about with globalization being a primary growth engine that is contributing the single biggest source of revenue for us over the five-year period, it's existential for, in our opinion, we've got to, we've got to fully participate in the European markets and obviously by participate in European markets we participate in all the CMR countries that are that adhere to the CMR regulations.

You're definitely you're definitely right. It does create a streamlined portfolio going forward. But it does create a bolus of expense in the short-term that we're having to overcome.

[Shagun Singh, Wells Fargo]

Thank you so much.

[Chris Barry, CEO]

Thank you.

[Operator]

Our next question comes from the line of Kalia Krum with SunTrust. Please proceed with your question.

[Kalia Krum, SunTrust]

Hi guys, thanks so much for taking our question. So, one on the robot and then one on the spinal implant market. So first on the robot, I mean I know your customers are really excited about the robotic system, and your reps are excited about robotics. So how do you manage that excitement and surgeon expectations ahead of the launch? Are you guys are you warming up your current customers right now? What sort of timelines are you giving them? And are you finding they're willing to wait for your robotic application?

[Matt Link, President]

Yes, this is Matt Link. Look so we acknowledge that the enthusiasm in the market for robotics. I think you also have to be measured and take a step back and assess, what is the current capability and what is the desired future state. And as we've said all along with Pulse, that's really been the road map is building a platform and applications that have broad clinical utility. As we refer to 100% of spine cases that provide incremental, clinical decision-making capability and clinical support through the integration of those applications and then that becomes the foundation for future robotics application. If you look at a market today where there's still relatively lightly utilized with respect to number of cases and the percent of the case that a robot can participate in, I think we hear consistently from our customers, the desire to have an application or a platform with broader clinical utility. And that's what we're seeking. So, as we referenced earlier, we're going to continue to build towards that.

[Chris Barry, CEO]

I'll just add on that, that the way we're kind of warming up our customers is very much in line with what we've always done. You got to think about the enabling technology, specifically robotics, is an extension of our current utilization strategy where we make sure that we have world-class instrumentation to provide access. We ensure that we've got a robust portfolio that we focus on Advanced Material Science to really provide world-class interbodies. And we surround that with technologies like biologics and some of the work we've done there. And we continued to hone in and fully round out our portfolio and increase the effectiveness of portfolio around fixation. So we continue to tell a story that says that robotics is a part of our solution, and is not an independent strategy, it is a part of our proceduralization strategy. I think it resonates with our customers. I think it resonates with the market. Clearly, we're anxious to come to really solidify that proceduralization strategy by having Pulse and robotics, but I think I think we're ahead of the -- I think we're ahead of the pack in many ways with the proceduralization strategies that we put in the markets thus far.

[Kalia Krum, SunTrust]

Got it, okay. No, that makes a ton of sense. And then just kind of high level on understood spinal implant market, I'm curious for any out of ordinary puts or takes you're seeing or hearing. Just given your unique neuromonitoring and yes, specifically, it seems like there is more conversation about spinal cord stimulation moving out in the treatment paradigm. And then now physician guidelines were put out a little less than a month ago on both acting and those have sort of mix read on spines. So just kind of generally speaking, what you guys are hearing or seeing that might be different there?

[Matt Link, President]

Yes. So we haven't seen any material disruption our shift in the market as we have commented in prior calls and conversations. We see the market is stable, nothing that at this point, we've seen to materially change. While we certainly recognize that alternative therapies, and in particular other conservative measures interventions are appropriate, with respect to managing and treatment of low back pain in particular. There's still, I think, a well-established segment that is indicated appropriately for spinal surgery. And we ultimately believe with the advancement of our technology platforms, in particular on the MIS side, and enabling technologies when you can continue to facilitate a more reproducible and predictable intervention, there's the opportunity to address a wider patient population that is appropriately indicated for surgery. So at this point we see it as stable, but we'll continue to monitor the market conditions.

[Kalia Krum, SunTrust]

All right, thank you guys so much.

[Chris Barry, CEO]

Thank you.

[Operator]

There are no further questions. I'd like to hand the call back to Mr. Barry for closing remarks.

[Chris Barry, CEO]

Thank you, Doug. And thank you all participating in our earnings call today. With guidance expectations set, along with the strong five-year business strategy 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 next quarter. Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.