NuVasive (NUVA) Q4 2018 Earnings Conference Call Transcript

NuVasive (NUVA)
Q4 2018 Earnings Conference Call
Feb. 20, 2019 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants
  
  See all our earnings call transcripts.

Prepared Remarks:

Operator

Greetings, and welcome to the NuVasive fourth-quarter and full-year 2018 conference call. [Operator instructions] As a reminder, this conference is being recorded. I'd 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 -- Vice President of Internal and External Affairs

Great. 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 would like to remind you that 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 the 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 those 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 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 -- Chief Executive Officer

Thank you, Suzanne, and good afternoon, everyone. Earlier 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'll provide an overview of full-year 2018 results, then turn to 2019 key technology launches, planned investments and a high-level commentary on financial guidance. Raj will then add some color on fourth quarter and full-year 2018 performance and share detailed financial guidance and assumptions for 2019.

Let's 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 $1,102,000,000. On an organic basis, revenue grew 5.1%. I continue to be encouraged by these growth rates against the backdrop of an overall U.S.

spine market that has turned relatively flat or remained stable. These results were primarily driven by continued strength in U.S. hardware business, solid U.S. commercial execution and strong performances in key international regions.

The U.S. spine market 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 result for the organization.

We delivered non-GAAP operating margin of 15.1% this year. This has been the guidance range provided in the third quarter of 2018 and reflect the challenges we faced during the related to in-sourced 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 core 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 differentiations that place us in a strong competitive position to support future growth. In 2018, we redefined the potential of a surgeon and patient experience with the introduction of Surgical Intelligence, our ecosystem connecting technology and tools to align the right patient with the right surgery for the right outcome. Surgical Intelligence is the basis of our PULSE platform and modular operating system that will bring together monitoring, planning, imaging, 2D and 3D navigation, automation capabilities and insights to help deliver a connected and optimized OR and quality patient outcomes. Surgical Intelligence will continue to be a thrust in the year and which I will discuss in more detail next along with other key innovation areas.

Building upon the foundation of excellence for 2019, the 4 technological focus areas include: One, Lateral Single-Position Surgery; two, Surgical Intelligence; three, Advanced Materials Science; and four, Complex Spine, otherwise known as deformity. The planned launches and investments that support these core focus areas align with our philosophy of assembling [Technical difficulty] 

Questions and Answers:

Operator

Thank you for standing by. The conference will resume momentarily. OK. We apologize for any technical difficulties and delay there.

The team is back on now.

Chris Barry -- Chief Executive Officer

On the four areas of focus. So speaking up there, building upon the foundation of excellence for 2019, the four technological focus areas include: Lateral Single-Position Surgery; two, Surgical Intelligence; three, Advanced Materials Science; and four, Complex Spine, otherwise known as deformity. The planned launches and investments that support these core focus areas align with our philosophy of assembling technologies to drive safer and more reproducible spine surgery. Now I'd like to elaborate a bit more on each of these focus areas.

First, the expansive lateral procedure portfolio with Lateral Single-Position Surgery, or LSPS for short, powered by Surgical Intelligence, continues to achieve great 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 in introducing disruptive technology that supports safer and better patient outcomes. This procedure has launched globally too with completed cases in the U.K., 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 to treat patients without repositioning 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 to 60 minutes in the OR, this procedure drives productivity to reduce OR time and lower cost with related cost reduction of about $5,000 per case. Subsequently, the associated reduction in hospital stay costs. Further, using the LSPS procedure equates a less time the patient under anesthesia.

In addition, I'm excited to announce we've started the development assessments on our fully integrated robotic offering. With this under way, I am confirming our intent to debut the PULSE robotics platform in September at NASS 2019. The robotics technology is a combination of both internal and external R&D development and leverage the input of early adopters in spine robotics. Leveraging PULSE's platform, the NuVasive robotics offering will further enable faster, safer and smarter spine surgery.

In parallel, the launch of PULSE remains on track with preorders already under way. This modular platform is a tangible example of the company's evolution from being product focused to a shift toward systems-based solutions. PULSE is a foundational component of our end-to-end solutions, not only enable predictable clinical and economic outcomes, but also pull through NuVasive procedural solutions to create market stickiness and increase the cost of disruption of switching to another provider. By integrating many disparate technologies into a single platform, we're executing an application system environment that addresses current gaps in the market and is applicable in 100% of 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 intraoperative visualization and allowing to switch between 2D and 3D imaging acquisition seamlessly without interrupting surgical workflow and quality assurance during spine procedures, serving to further support the adoption of a minimally invasive surgery. We'll also focus on continuing to build out the Advanced Materials Science portfolio of spine interbodies. Increased adoption of NuVasive proprietary porous PEEK and third-generation optimized porous interbody titanium implant supports our further evolution as the leader of the most sophisticated implants from a clinical perspective.

Our porous implants have been shown to promote increased bone in-growth compared to solid implants, while maintaining important imaging properties that allow surgeons to more easily assess fusion following procedures. We'll also invest in our deformity portfolio, or what we now call Complex Spine, that delivers solutions that address the most difficult-to-treat and debilitating spine pathologies in children and adults. This year, we'll just -- this year, we'll add several products to the Premier RELINE fixation portfolio that support increased use of various corrective techniques for complex deformity, thoracolumbar fixation surgery without -- along with further development of proprietary MAGEC growing rod system. Another exciting development that serves to advance the spinal technology portfolio and NuVasive partnership, the Biedermann Technologies.

Biedermann Technologies is well regarded for its world-class design, expertise with many medical device industries and holds one of the most comprehensive and innovative patent portfolios in the field of spinal surgery. Within the terms of the license and services agreement, Biedermann Technologies have granted NuVasive licenses to intellectual property relating to its spinal technology portfolio. Through this collaboration, we have the ability to integrate proprietary screw innovations into the IGA platform to advance the development of NuVasive's next-generation RELINE complex spine system. Finally, within the NuVasive specialized orthopedics business, we'll introduce some several exciting new initiatives with the largest product launch of the year being the Precice Bone Transport System.

This is the first of its kind minimally 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 oncology. We recently received FDA 510 clearance and CE Mark for this technology and it will be commercially available in the third quarter. Turning to investments for 2019.

As you've just heard, we'll deliver a lot of new exciting technology in 2019 to our surgeon partners and patients. Also earmarked for this year are several key investments related to further globalization, R&D for our core business and to continue to develop of our PULSE and PULSE Robotics Platform and operational improvements to sustain our growth and 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 and investments are necessary to drive operational efficiencies within the company.

It's important to understand these investments are significant to drive the company into the next phase of growth. We'll 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 and 2019 guidance, we'll continue to view the U.S. spine market as stable with no significant shift from the view we carried 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 efforts 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 acknowledge this is a departure from what the company has discussed in the past with 100 basis points of operating margin improvements each year. We are committed to driving non-GAAP operating margins over the longer term to the 20% to 25% range and the leveraged efficiency in-sourced manufacturing and international scale are still intact. However, we must make certain the investments this year that I just described, which I'm confident will drive tailwind into 2020, I believe these guidance ranges are realistic and position us to deliver on our commitments to our shareholders.

Raj will provide much more detail on drivers and the guidance ranges in his remarks. What I'd like to leave you with today is 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 a 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'll continue to strengthen our reputation as the leader -- the leading innovator in spine with several noteworthy launches this year, especially our PULSE platform and the build-out of our PULSE Robotics Solution.

Our path to operational excellence includes continuing to leverage our in-sourced manufacturing capabilities, which have now stabilized, along with a focused approach to improving global logistics and fulfillment. Finally, we'll achieve operating leverage through disciplined spending and execution, while balancing the investments to drive future growth. With our 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'd like to turn the call over to Raj.

Raj Asarpota -- Chief Financial Officer

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% year over year on a reported basis and 6.9% on a constant currency basis.

This was driven primarily by solid performance in key geographies, increased tractions with introductions of new spinal hardware products and solid commercial execution. We also achieved growth in our Services business, driven by the SafePassage acquisition and strong billings and collections performance in our core clinical service business, or NCS. U.S. Spinal Hardware revenue grew 4.5% year over year to $156.6 million.

Notable new product revenue contributors included 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 rates. 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 businesses -- 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 broadened portfolio and continued diligence in managing pull through, the business is 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 introduction, we're driving market recognition while educating customers on the significance of a procedurally integrated 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 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 returns from investments in Germany and ongoing synergies from acquiring a Swiss distributor last year. Continued headwinds in the U.K. associated with government health system pushback on lateral 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, New Zealand, resulting from new surgeon conversions. 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 instrument set supply constraints.

Moving to fourth-quarter operating margin. We're turning to the rest of the P&L, non-GAAP gross 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 and approximately $2 million of incremental inventory reserves, driven by demand in global new product introductions, placing 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 nonsales and back-office functions executed earlier this year. Focus on diligent expense management and international scale will drive further flexibility for reinvestment in key areas.

Non-GAAP research and development, or R&D, expenses totaled 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 margin 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 gained efficiencies 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 a reduction in foreign currency losses. Now turning to tax. Our non-GAAP tax expense of the quarter was $4.6 million resulting in a non-GAAP effective tax rate of 11.3%.

This significantly lower-than-expected rate for the fourth quarter reflects a 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 million or $0.45 per share in the same period last year. Please refer to our earnings press release for the supplemental financial information file on nuvasive.com for further information related to our GAAP versus non-GAAP adjustments. Now for a quick 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 of 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, and 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 of $2.23 compared to $1.89 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 improvements in working capital tied to a strong year in billings and collections.

Year-end cash and cash equivalent balance was $117.8 million, up $45 million from prior year. Moving now to guidance for 2019 and our expectations. We estimate revenue for full-year 2019 to be in the range of $1.14 billion to $1.16 billion, reflecting a 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 in 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 buoyed by the recovery of temporal disruptions experienced in the back half of 2018 in the U.K. and Brazil geographies; third, within our surgical support business, I expect the biologics business line 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 will build sequentially through the year with higher revenue growth occurring during the second half of the year with typical seasonality factors, new product introduction timing, a 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 will be on managing our healthy Services business with the completion of the final integration effort with SafePassage in the first quarter. This will be followed by a shift to recharging business development capabilities to account marketing, new account activation and strategic market entry, where we have a significant geography -- geographic presence in both the hardware and services side.

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 an 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 related to the benefit impact from Ohio. The majority of the unfavorable manufacturing variances roll off from the first 6 months of last year and, therefore, we expect to see this lift weighted toward the back half of the year. Full-year 2019 non-GAAP R&D expense will be approximately 6% of revenue, an increase of 30 basis 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 will be incurred associated with compliance-related EU MDR, 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. The slight increase is driven by incremental investments in global logistics and fulfillments, IT infrastructure and sterile packaging, partially offset by streamlining initiatives that were executed in 2018. Non-GAAP operating profit margin will be in a range of 15% to 15.5%.

For 2019, the non-GAAP effective tax expense rate will be approximately 23%. 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 the 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 buildout and capital associated with sterile packaging.

With strong operating free cash flow and full draw availability on the revolver, our capital department strategy will continue to incorporate a mix of R&D and operational investment 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 enables positive and predictable outcomes. As Chris stated in his remarks, we're increasing our R&D spend to accelerate the robotics initiative, making foundational globalization investment this year that will enable us to remain competitive in the EU market and, finally, investing in operational efficiency initiatives to drive improved logistics.

I'm confident these investments will drive significant returns to the company through revenue growth and margin expansion in the near future. As these investments take root, the executive team have managed the business diligently with an emphasis on operational excellence and leverage to drive profitable growth. We are committed to an Investor Day later this year, so Chris and I, along with NuVasive 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. [Operator instructions] Our first question here is from Jonathan Demchick from Morgan Stanley. Please go ahead.

Jonathan Demchick -- Morgan Stanley -- Analyst

Hi. Thanks for taking the questions. Raj and Chris, thanks for all the commentary around the moving pieces on operating margins this year. And I guess, understanding this is a bit of a movement from prior conversations around leverage commitments.

What's the philosophy on margin improvement going forward? Does the additional investments, I guess, for growth this year make the 100 basis points or so margin improvement targets in outyears less likely? Or is this more of a one-time reset?

Raj Asarpota -- Chief Financial Officer

So the way I think about it -- this is Raj. We -- I think we've been saying over the last 6 months in terms of our margin expansion, the 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 are 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 could 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 margins as an example, next year could be 120 based on 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 investments, but that we will continue to grow operating leverage and margin in the future. Chris, anything on your side?

Chris Barry -- Chief Executive Officer

I think you said, I mean, we're still committed to it. I think as we make the investments, we're ensuring that we maintain good focus on top line growth, balancing the top line growth through profitability is going to be something we're going to focus on. We've got some unique situations this year with the need to continue to lead in the hardware side of our business, including launching the Pulse and with some of the key issues that we need to address with the MDR, or the European Medical Device Regulation, ensuring that we have those investments to continue to fuel that top line growth is something that is required. Having said that, as we continue to move throughout this year and into 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, and we still think that 20% to 25%, as I stated earlier, is within reach. But again, we'll continue to look at that and talk more about that in the upcoming investor day that we're planning later this year.

Jonathan Demchick -- Morgan Stanley -- Analyst

Thank you very much.

Chris Barry -- Chief Executive Officer

Thanks.

Operator

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

Shagun Chadha -- Wells Fargo Securities -- Analyst

Thank you very much. This is Shagun in for Larry. It was encouraging to hear the progress you're making toward 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 compare and contrast it with other offerings in the marketplace? Thank you.

Chris Barry -- Chief Executive Officer

Thank you. I'll talk a little bit about it. I mean, consistent with our discussion around Pulse, our focus has been to 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're excited about applying that same philosophy to Pulse robotics. And the fact is we recognize the utility of the current platforms you see in the market. We also recognize the limitation of the utility of those systems. So with PULSE as the underlying architecture, from a mechanical automation platform, we're excited to demonstrate capability for a wider range of clinical applications.

So you can expect from us to continue to build upon the platform of PULSE. Expecting at NASS, we're looking to unveil our system. We'll 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 that is partly robotics but also in our minds and the way that we're thinking about this, many other technologies that we also think make up a safer more connected operating room to ultimately drive better patient outcomes.

Shagun Chadha -- Wells Fargo Securities -- Analyst

Great. Thank you. And then Chris, since you 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? Thank you.

Chris Barry -- Chief Executive Officer

It's -- I guess, a lot of positives. I think I came in understanding some of the key challenges, and I'll address that and the focus we have. I've been impressed with our technology and the folks around technology, not only we talk a lot about Pulse and talk about where we're going in robotics but our core hardware, our continued focus on lateral surgery, our ability to 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 we've driven significant volume, there's a lot, I think, we can do. It's a positive and a key focus for us going forward. Operational excellence.

I do believe, and I've said this in 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 and 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 the three major focus areas that I'm going to push and drive. And over the next 12 to 24 months, we're going to continue to focus, No. 1, on being an 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.

Shagun Chadha -- Wells Fargo Securities -- Analyst

Thank you very much.

Chris Barry -- Chief Executive Officer

Thank you.

Operator

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

Unknown Speaker

This is Will on for Matt. Thanks for taking the questions. 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 lost robotic systems, deeper pricing erosion? Any rep turnover? And then, looking at your guidance for '19, maybe just help us understand how you reached the 2% to 4%. Thanks.

Matt Link -- President -- Analyst

This is Matt. I'll take the Q4 U.S. hardware. So in the quarter, U.S.

hardware was 5% growth, and like we said, we consider it to be a stable market. The issues we describe as temporal in the quarter recovering into 2019, and ultimately, that's been considered in our guidance for 2019. So we believe that that has been accounted for with respect to the direction we provided.

Unknown Speaker

And then any comments on...

Raj Asarpota -- Chief Financial Officer

Yes. This is Raj. I'll take the guidance question, right. So if you think about the performance in 2018, the U.S.

hardware business is up a little over 4%. And the way we're thinking about 2019, the range is around the 2% to 4%, we think, against the backdrop of a stable market, getting NPI traction, commercial execution and the fact that we had an extra billing day in 2018, we feel pretty good about getting to 4%. It's still an expansion or multiple of market growth, and we feel pretty good about achieving that rate.

Unknown Speaker

Great. Thanks. And then my follow-up is regarding surgical support, the guidance for the year, 1% to 3%. There definitely seems to be a pretty sizable number of tailwinds of biologics improving, Pulse launching in the middle of the year and the GPO contract.

Just wondering how you reached the 1% to 3%.

Raj Asarpota -- Chief Financial Officer

Yes. So again, if you break down 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 tailwinds from the prior year, disruption in billings and collections. And then -- so I think, overall, as you look at that segment, it was up just around 30 basis points.

So we have feel good about the 1% to 3% is, like you said, biologics, you get a good tailwind. You think that business can return to flat and maybe grow a little bit and then overcoming the unfavorable comps from NCS, we do see that business still growing, just that we don't have the tailwind from the 2017 billings and collections. And then, like you said, LessRay and Pulse, the mix contribution, albeit toward the back half of the year, there'll be nominal expansion from that piece. So all in all, the 1% to 3% seems pretty balanced given the segments I took you through.

Unknown Speaker

Great. Thank you.

Operator

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

Josh Jennings -- Cowen and Company -- Analyst

Hi. Good afternoon. Thanks. Chris, I just wanted to start off with you and just your joining the NuVasive team.

Can you just talk about they historically have had a distinct culture. Let's talk about where the culture is, the stability of the workforce, particularly the sales force and whether or not you're assuming any net adds or net attrition of sales reps or feet on the street in 2019 within your guidance.

Chris Barry -- Chief Executive Officer

I'll take that. Hit the culture first. The culture is one of the things that drew me here, and it's been reinforced by my time here. So I think there's very much of an 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 our mission of transforming spine and beyond and be 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're directing as we come larger as an organization, over a $1 billion company, making sure we're directing 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're installing some of those things now as part of the operational rigor and discipline that I spoke of 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 -- Analyst

Sure. It's about the facility of the workforce and the facility particularly what's baked into -- are you expecting to be net adders in 2019 for feet on the street to hit your guidance targets or...?

Chris Barry -- Chief Executive Officer

No. We've -- from an attrition perspective, we're looking at a stable environment. Our attrition rate is within the realm of what we call normal. We don't see a major issue within our sales force.

As a matter fact, I think good stability within U.S. sales force. So nothing necessarily. I mean, obviously, as we look at additional headcount that we may be adding, it's more in their line of supporting some of the specialty focus that we have as an organization, but from a core-hardware perspective, I feel good about the organization.

I feel like we're in a stable position. Obviously, the nature of this business from time to time has people come and go. But overall, very optimistic on where we are as an organization and feel that we're in a stable environment.

Josh Jennings -- Cowen and Company -- Analyst

Great. If I could just follow-up. I mean, there's -- one of your competitors is integrating an acquisition. Do you see an opportunity there, the potential for disruption, and could NuVasive benefit from any disruption in 2019? Thanks for taking the questions.

Thanks.

Matt Link -- President -- Analyst

Yes. This is Matt. We've obviously seen some movement toward consolidation in the marketplace, and anytime there's an effort to integrate sales channel, there's a potential for disruption. I would say at this point, still early days, and we'll continue to assess the environment but would expect that some opportunity may present itself.

But again, early stages of this ongoing integration of the two businesses you described.

Operator

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

Joanne Wuensch -- BMO Capital Markets -- Analyst

I have two questions, one which I hope you can say something about and one which I'm sure you can say something about. I mean, every now and then, NuVasive is up for sale or The Street thinks that they're up for sale or the lay press says something about they're being up for sale, and we're 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 -- Chief Executive Officer

Well, as 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 somewhat up for sale, but to us, we're focused on driving business in 2019, and that's really all I'll say about that.

Joanne Wuensch -- BMO Capital Markets -- Analyst

OK. I had to ask. My next question was, what has changed internally that moved you more toward a robot at NASS from the cobot that we've been talking about previously? And thank you very much.

Matt Link -- President -- Analyst

I think we may be talking about somewhat semantics here. I think there's a role or automation in surgery. We certainly have seen that from a market-requirements perspective, and there's clearly a value, as Chris alluded to in 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 or again the ecosystem we refer to as Surgical Intelligence of which Pulse is a major component and Pulse robotics is an application in that environment, I wouldn't get too focused on the terminology or nomenclature of robot versus cobot.

There's a role for mechanical automation, and there's a role for other enabling technologies to drive safer more reproducible surgery.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Thanks.

Operator

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

Sara Silverman -- Goldman Sachs -- Analyst

Hi. This is Sara Silverman on for Isaac. I just wanted 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 some commercial timelines and also just want to clarify what you guys meant by using external R&D in the context of developing a platform?

Chris Barry -- Chief Executive Officer

Yes. I mean, what I'll say is we'll unveil our prototype system at NASS. We're not going to get into regulatory approval or any specific time line 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.

That's exactly what we'll divulge from a timeline perspective. So we're excited about it. It also comes in parallel to our Pulse launch. And again, the systems and the architecture of our software, I think, resonate with the opportunities to drive.

A robotic application, I think, is a great addition to what we've already started talking about within the Pulse system. From an internal versus external R&D, I'm not going to get into specifics on that, but it's in a combination with working with outside parties as well as working internally to develop what we will disclose at NASS as our approach to robotics in the market.

Sara Silverman -- Goldman Sachs -- Analyst

OK. Thanks.

Operator

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

Unknown Speaker

Hi. This is Jamie on for Rich. I 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% of spine procedures on day one of launch? Or is this going to be something that's gradual where you have the intention over time to address 100% of spine procedures? And the reason I'm asking this is because some of the competitors have recognized that they've made their introduction in the robotics in one specific category of pedicle screw placement and then they're in pursuit of broadening applications.

Matt Link -- President -- Analyst

Right. So this is Matt. So specifically, the clinical application today as is typical through trajectory, which again, I think is -- has had some about clinical validation in the marketplace. And certainly, we need to understand that as the requirement.

To answer the question specifically, the intent will be to continue to scale clinical applications over time to have that broad-based utility. And so the ability to participate in 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 over time to broaden those applications both in terms of number of procedures and the percent of the overall procedure that the technology can't participate in.

Unknown Speaker

OK. Great. That was very helpful. 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 shortfalls that happened in 2018. And yes, what are some of the factors, yes, that give you confidence in this.

Raj Asarpota -- Chief Financial Officer

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 deployed to '19, which will happen. And as I said, as we continue to get to stable ops, which we did at the end of last year, we will deliver that 130 basis points.

Given the timing of the unfavorable variances that flowed to the P&L that were hung up last year, most of those kind of burn out in the first half of the year. So you'll 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 also see a little bit of decrement from MDR, but really, it's all about the timing of Ohio variances and how that will flow through the P&L.

Unknown Speaker

OK. Great. Thank you.

Operator

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

Robert Marcus -- J.P. Morgan -- Analyst

Great. Just 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 many and how much that'll impact and which quarters? And then maybe, you used to words 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 NuVasive specific. So they 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? Thanks.

Raj Asarpota -- Chief Financial Officer

You said that's on the international side, correct?

Robert Marcus -- J.P. Morgan -- Analyst

Fourth quarter in the U.S., I think, is what you talked about for part of the shortfall, then outside the U.S.

Raj Asarpota -- Chief Financial Officer

Oh, the billing days. Yes. So in Q -- for '19. 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've got one less billing day and that has a growth impact of 1.4%. Did that answer your question in billing days?

Robert Marcus -- J.P. Morgan -- Analyst

Yes. On the surgeon disruption, I'll just say that it wasn't a market issue. It was 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 surgeon 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, except should allow us to absorb what I consider to be normal course of business events, and I said before, coming out of the third quarter, we were likely a bit aggressive on now we set that guidance.

The guidance now, we believe, better reflects the ability to overcome what are anomalies that happened throughout the year, including certain times customers that go off-line, it's not share loss, because it's truly just disruption to our case volume. We haven't lost those customers that we've 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've said before, the guidance that I provided, I think, allows us to observe any disruption, such as we talked about in Q4 as we move forward.

Thanks a lot.

Operator

Last question here is from Ryan Zimmerman from BTIG. Please go ahead.

Ryan Zimmerman -- BTIG -- Analyst

All right. Thanks for squeezing me in on the last one, guys. So I want to follow up on Jon's question earlier about the philosophy on margin expansion. And just -- I know this is looking out a little farther 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 from investment standpoint kind of looking out beyond that, that you may need to follow up on, given you are adding a surgeon education facility. You are making investments in the West Carrollton. That should start to impact gross margins, but just anything beyond that, that we should be thinking about from an investment standpoint as you sit here today. And then I have a follow-up on PRECISE.

Thank you.

Raj Asarpota -- Chief Financial Officer

Yes. Hey, Ryan. This is Raj. So all the operating levers we've talked about to expand margin are still intact, right? We talked about continuing skill from our international business.

As that continues to grow at the mid-teens level, we recognize the leverage from all the investments that we've made. So that business, on that side, I'm sorry, we'll continue to get margin expansion. Likewise, invest Carrollton, the 400 basis points of expansion over the long range that we've talked about are still very much intact, including getting to 130 basis points this year. Beyond that, efficiency as we think about product life cycles, queue management, sterile packaging, all of those are also contributors of 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's about 850 basis points of expansion. And even coming down to 2019, if you kind of think about the walk from the 15 1 to what happens next year, the 130 basis points of gross margin expansion from West Carrollton is in our -- in that number, and we've 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. So if I -- if you think about kind of discounting the fact that we have to invest in sterile packaging, MDR, and some of the infrastructure around cybersecurity, etc., if those weren't in our walk, we would be expanding gross margin anywhere from 150 to 170 basis points. So expanding 40 to 50 basis points this year, but that's kind of as a result of the puts and takes we discussed. So I think over the long range, to answer your question, we've got a lot of opportunity.

Ryan Zimmerman -- BTIG -- Analyst

That's very helpful. And then you've got clearance for this precise bone transport system. This seems at least from my perspective to be a different call point than you've 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.

Chris Barry -- Chief Executive Officer

Yes. So when we acquired Ellipse Technologies, we incorporated the spinal applications of MAGEC within our core portfolio, and we retained a orthopedic distribution channel through NuVasive specialized orthopedics, which is the same channel which currently sells and distributes in the U.S. and internationally, the PRECISE system. So this is -- you should think of bone transport as a line addition to PRECISE, 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.

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'd like to reiterate how excited I am about the future of the company.

With guidance expectations set along with a 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. Thanks.

Operator

[Operator signoff]

Duration: 71 minutes

Call Participants:

Suzanne Hatcher -- Vice President of Internal and External Affairs

Chris Barry -- Chief Executive Officer

Raj Asarpota -- Chief Financial Officer

Jonathan Demchick -- Morgan Stanley -- Analyst

Shagun Chadha -- Wells Fargo Securities -- Analyst

Matt Link -- President -- Analyst

Josh Jennings -- Cowen and Company -- Analyst

Joanne Wuensch -- BMO Capital Markets -- Analyst

Sara Silverman -- Goldman Sachs -- Analyst

Robert Marcus -- J.P. Morgan -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

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