NuVasive Inc (NUVA) Q2 2019 Earnings Call Transcript

NUVA earnings call for the period ending June 30, 2019.

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NuVasive Inc (NASDAQ:NUVA)
Q2 2019 Earnings Call
Jul 30, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Operator: Greetings. And welcome to NuVasive Inc. Second Quarter 2019 Conference Call. [Operator Instructions] As a reminder this conference is being recorded.

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

Suzanne Hatcher -- Vice President, Internal and External Affairs

Thank you, Sherry. Welcome to NuVasive Second Quarter 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 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 are prove to be correct could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

Additional risks and uncertainties that may affect future results are described in NuVasive's news releases and periodic filings with the Securities and Exchange Commission. NuVasive assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.This call will also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures include 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 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.

J. Christopher Barry -- Chief Executive Officer & Director

Thank you, Suzanne. Earlier this afternoon reported second quarter 2019 revenue results of $292.1 million, representing 3.7% reported growth or 4.7% constant currency growth over prior year. These results are primarily driven by a solid performance from the U. S. Spinal Hardware and the NuVasive's Clinical Services business, offset by anticipated slower growth in the international business.Overall, we delivered a strong performance for the first half of the year and I'm pleased with how the business is executing on the objectives we set out against at beginning of this year.Based on the year-to-date performance, we are raising our full year guidance for non-GAAP operating margin and earnings per share. Raj will share more about the updated full year guidance as well as provide additional commentary on how we believe the rest of the year will play out.Now let me elaborate on second quarter revenue results. U.S. Spinal Hardware revenue increased approximately 6% year-over-year, highlighted the quarter with strong increase in case volumes, plus tangible growth in both the XLIF and ALIF franchises driven by continued of NuVasive's X360 system.We've trained more surgeons year-over-year on NuVasive's surgical procedures, including the X360 through our world-class clinical professional development program and we are confident, we'll continue to see for the ramp in the second half of the year.

U.S. surgical support was flat over prior year, however we saw continued momentum in the NuVasive Clinical Services business primarily driven by another strong quarter of strong billings and collections and solid growth in volume. These positive drivers are associated with the focus over the last six months of discipline business execution to drive account profitability. Biologics performed in line with expectations at about a 1% decline year-over-year.Revenue from the international business grew approximately 2% on a reported basis and approximately 7% constant currency. Sequentially, this growth was lower than Q1 2019 as expected and reflects first half international revenue growth of 11%. In Q2, we saw continued strength in the EMEA region carrying over from the first quarter, offset by slower growth rates in Asia-Pac and LATAM. We continue to hone in our globalization efforts and I remain confident in our ability to take share across key international markets in the near and long-term.

Turning to profitability. Non-GAAP operating margin came in at 16.3% for the second quarter of 2019. Flat year-over-year, but higher than expectations. We are balancing profitability with strategically investing in key areas for future growth. I am encouraged by the disciplined execution throughout the organization, with manufacturing in the West Carrollton facility performing well.Now I'd like to give an update on innovation. At its core, NuVasive is med-tech company committed to leading the spine industry by delivering new technologies to enable better clinical and economic outcomes that are more predictable and reproducible. Our focus remains on technologies that drive a complete procedure, enhancing the entire surgical experience and expanding current offerings in key market segments. We're on track to launch more than a dozen new products this year, spanning from solutions in core implant and fixation product lines to enabling technologies to support the further adoption of minimally invasive surgery.

This past quarter, we further built out our Advanced Materials Science, or AMS, portfolio. NuVasive continues to pioneer design and manufacturing methods that focus on combining the inherent benefits of PRECICE, where the advantages material properties of PEEK and titanium. This provides surgeons with a portfolio of advanced material implant options that best suit their patient needs.This includes Modulus TLIF-O, a porous titanium spine implant engineered for TLIF; the most commonly performed cervical procedure in the spine industry. We also had the first case use of COHERE XLIF, the first of its kind lateral Porous PEEK implant for XLIF in lateral single-position surgery. It's also important to understand, as the AMS portfolio is built up, we're also investing in clinical studies to further substantiate implant technology that leads to better, more predictable and reproducible outcomes.Last quarter a study was published in the Journal of Spine & Neurosurgery of 167 patients presenting with degenerative cervical disc disease, who underwent ACDF using Cohere Porous PEEK, structural allograft or smooth PEEK interbody implants. The study concluded that patients receiving Cohere Porous PEEK exhibited significant clinical improvements relative to preoperative scores, better outcomes than alternative treatment as early as six weeks and sustained improvements relative to other treatments through 12 months post-op.

NuVasive's key product launch of The Pulse platform occurred earlier this month, signifying an important milestone on our journey to transform surgery, advanced care and changed lives through enabling technology. Pulse is the first single platforms to include multiple technologies designed to help surgeons adopt more efficient less disruptive surgical approaches in all spine procedures.I am proud of our team of engineers, developers, product marketing teams and support functions, who worked tirelessly to bring Pulse to market and excited about how Pulse positions NuVasive for the future. Pulse addresses many of the challenges faced in spine surgery by combining neuromonitoring, surgical planning, rod bending, radius reduction, imaging and navigation functions with extensible capabilities to enable increased surgical efficiencies in the OR. This technology can be used in a 100% of spine cases giving the NuVasive immense potential to shift the standard of spine surgery as we work to accelerate, the adoption of less invasive surgery.With Pulse commercially launched in the U.S. alpha and beta trials are in international markets are now under way with hospital sites already identified in Europe, New Zealand and Australia. We anticipate gaining CE Mark later this year which is a milestone to launch the system globally.

Pulse is the foundational of our innovation roadmap to make spine surgery more reproducible, less invasive and more driven by patients' specific insights. The platform will continue to evolve within the OR with the flexibility to add additional applications including robotics, smart tools and more. We would share more details of how the Pulse system that we further built out at our Investor Day in early, August. And as previously indicated, we plan to unveil the post robotic application at NASS, at the end of September.Finally, it's great to see the excitement surrounding NuVasive's X360 system, the enthusiasm of surgeons and our sales force is quite tangible. Spine surgeons, access surgeons and hospital systems are clearly seeing the benefits of the X360 system to the care they can deliver. By eliminating the need to reposition the patient during surgery, the X360 drives shoulder surgery times in the OR, which means the patient spend less time under anesthesia and hospitals and surgeons gain efficiencies and increase productivity.We continue to see great adoption of this procedure not only among traditional NuVasive XLIF surgeons, but also with converted surgeons, who have made -- who may have less experience with lateral procedures. These are just a few examples of the innovations we'll bring into market. Overall, this is just the beginning and the next phase of NuVasive's future growth. And I hope you share my excitement for the opportunities in front of us.Before turning over the call to Raj to discuss our financial performance in more detail, I want to take a minute to discuss our progress relative to the three priorities I laid after shareholders when I joined NuVasive. Hopefully, what you've heard and seen through our actions over the last two quarters is driving confidence in our ability to do what we've said we're going to do and executive on the financial commitments we communicate to you.

In January, I outlined three priorities to enable NuVasive to continue to grow at multiples of market and be an attractive investment. Number one, create disruptive technology and continued to be the leader in spine innovation. Number two, focus on operational excellence and deliver world-class execution across all aspects of our business. And number three drive profitable growth through renewed rigor and discipline on operating leverage.In terms of the scorecard, for innovation and profitability, we're making clear headway in these categories. We continue to outpace others and technology that truly aligns with the more predictable and reproducible spine surgery focus on improving patient lives. With the post commercial launch in U.S. in combination with our robotics application, while under way the current and future product portfolio has never been stronger.In terms of profitability, the teams focused execution on balancing top line revenue growth, while driving operational leverage is progressing and could seen in the financial results so far this year. Governance mechanisms along with clear alignment across the organization on business priorities is driving accountability and find execution.Operational excellence continues to be ingrained within our internal teams on how we do business. Improve supply chain logistics is a work in progress, and there's a fair amount of process improvements to drive further efficiencies. The day to day execution about the organization is key to making use three priorities a competitive advantage for NuVasive. I will continue to operate the business in a focused manner and look for opportunities to accelerate our growth.

With that, I'd like to turn over to Raj to further discuss our Q2 financial performance. Raj?

Rajesh Asarpota -- Chief Financial Officer & Executive Vice President

Thanks Chris and good afternoon everyone. Before get started with the financials, let me remind you that many of the financial measures coverage on today's call on a non-GAAP basis unless noted otherwise. Please refer today's earnings release as well as the supplemental financial information on nuvasive.com for further the information regarding non-GAAP reconciliations.For the second quarter 2019, we reported revenue of $292.1 million, reflecting 3.7% reported growth year-over-year and 4.7% growth on the cost of currency basis. These solid quarterly results we're driven by above-market growth in U.S. Spinal Hardware, largely due to strong case volumes as well as the U.S. Surgical Support and International fall in line with expectations.Now, let me discuss some of the specific drivers that supported these results. U.S. Spinal Hardware revenue was $160.2 million for the quarter growing 6.3% over the prior year. Performance continues to be driven by solid commercial execution, new product and procedure introduction, and robust case volume growth.

The further ramp-up of surgeon training and adoption of the X360 System continues to make a meaningful impact on adoption rates leading to double-digit growth in lateral and anterior procedures this quarter.Offsetting topline growth was pricing pressure of negative 2%. As I mentioned last quarter, when NuVasive pricing pressure continues to be lower than our competitors, we're now seeing consistently more aggressive hospital pricing environment. We believe driving for the innovation in the spine market from both new technology and a continued focus on proceduralization will continue to help offset industry pricing trends. We expect to balance pricing with volume trade-offs to help capture further market share.Revenue from U.S. Surgical Support was $73.9 million for the quarter, generally flat compared to prior year. NuVasive Clinical Services performance was up 6% and attributed to steady volumes and continued strength in billing and collections.

Partially offsetting NCS growth was a decline in IOM products, driven primarily by the competitive pricing landscape. Biologics revenue for the second quarter was down 1% over prior year which is in line with expectations.We are still on track to achieve flat to modest growth in this franchise by the end of the year, especially as volumes continue to increase on last year's new product introductions and deployment of strategies to penetrate new accounts.International revenue was $57.9 million going forward 2.1% as reported and 6.6% on a constant currency basis. As anticipated, the International business growth rate slowed in the quarter, resulting in a blended growth rate of approximately 11% constant currency for the first half of the year.For the quarter, EMEA revenue growth was driven by solid execution, particularly, in Italy, Spain, and the dark region, we have continued into new accounts and execution on tenders secure last year. This was offset by limited set availability in Asia-Pac and Latin America as well as lower than expected growth in newly entered markets.

Moving to probability, non-GAAP gross margin for the second quarter was 73.4%, an increase of 60 basis points compared to 72.8% in the second quarter of 2018.The radiance to prior year was driven by savings realized from manufacturing efficiencies, while partially being offset by price erosion. Manufacturing efforts are progressing as expected to slightly ahead for the year. Further integration of additional processes start this past quarter including the source of additional; SKUs, new product introduction, prototyping and further implementation of lean Six Sigma practices.Our focus was to remain on ensuring that investment in the factory continues to deliver the supply chain benefits for the balance of the year and beyond. Non-GAAP SM&A expenses for the quarter were $149.7 million compared to $144.1 million for the prior year period, both representing 51.2% of revenue.We continue to be discipline and rigorous in spend to drive efficiency across organization in order to fund strategic investments. Within the quarter supply chain investments were made and planned for MDR and sterile packaging initiatives as well as the boundary models.

SM&A spend in total was favorable to our internal expectation, primarily driven by the impact of stock-based compensation. Non-GAAP research and development or R&D expenses totaled $17.3 million in the quarter or 5.9% of the revenue, an increase of 60 basis points compared to second quarter of 2018. R&D spend remains inline with expectations with a focus on investing in surgical intelligence, robotics and a core hardware business.Second quarter 2019 non-GAAP operating profit margin was 16.3% flat compared to the prior year and above expectations. This year-over-year performance was driven by manufacturing and SM&A efficiencies offset by planned R&D investment. We continue to make steady progress in management operating expenses and reinvesting into the business.The unexpected benefits as previously mentioned between gross margin and SM&A equated to about 100 basis points to favorability within the quarter. Based on two quarters of solid execution, I will discuss updated full year non-GAAP operating margin guidance shortly.Moving further down to P&L. Interest and other expense net on non-GAAP basis was $4.9 million in the second quarter down from $8.1 million in Q2 of 2018. The reduction is due primarily to higher unrealized foreign currency losses in the prior year.

Now turning to tax, non-GAAP tax expense in the quarter was $9.8 million resulting in a non-GAAP effective tax rate of 23%, an increase of 300 basis points over prior year. This was due to reduced windfall tax benefits and inclusion of global intangible low taxed income within the current year.Second quarter non-GAAP net income was $32.8 million or non-GAAP diluted earnings per share of $0.63 compared to non-GAAP net income of $30.3 million or non-GAAP diluted earnings per share of $0.58 in the same period last year, an increase of $0.05 or 8.6% over prior year.Turning to GAAP results, GAAP net income for the second quarter of 2019 was $15 million or diluted earnings per share of $0.29 compared to $11.5 million or $0.22 per share in the same period last year. Adjusted EBITDA margin which excludes the impact of non-cash stock-based compensation and other non-GAAP adjustment was 25.9% for the quarter compared to 24.8% in the same period last year. This increase was primarily due to the impact of higher operating profit in the -- period and unrealized foreign currency losses recognizing the prior year period. Finally, free cash flow for the quarter was $37.5 million compared to $16.6 million in the same period last year. The increase was driven by an improved net income and a one-time litigation settlement payment in the second quarter of last year. Increase was offset in part by additional investments in surgical instrumentation this past quarter.

Moving into guidance. Based on first half results in outlook for the remainder of the year we are updating full year guidance for 2019. We maintained full year revenue guidance of $1.14 billion to $1.16 billion which now incorporates currency headwind expectations of approximately $5 million compared to prior guidance of $4 million. This is reflected in the adjusted full year reported revenue growth range of 3.4% to 5.4%, compared to prior guidance of 3.5% to 5.5%.Full year constant currency revenue growth remains in the range of 3.8% to 5.8%. We're raising our full year non-GAAP operating margin guidance range to 15.3% to 15.7% compared to a prior range of 15% to 15.5%. We're also updating non-GAAP earnings per share guidance range to $2.25 to $2.35 compared to previous guidance of $2.25 to $2.30.Let me give you some additional context on the increased financials and remind you of few puts and takes that we are discussed at the beginning of the year. The U.S. Spinal Hardware business is now expected to grow between 3% to 5% for the year, compared to prior guidance of 2% to 4%. This increase was driven performance in the first half of the year, while still reflecting the expected lower growth rates in the back half of the year, primarily due to harder comparisons.

U.S. surgical support full year guidance remains in the range of 1% to 3% growth. We anticipate the strength in the NCS business to continue, which remain prudent with the performance expectations from billings and collections in the first half of the year with slow down in the second half of the year along with continued pricing pressure in our IOM product line.In regards to the international business, it grew as expected at approximately 11% in the first half of the year on a constant-currency basis. As we look to the second half of the year, we have lowering full year revenue guidance to range of 12% to 14% growth on a constant-currency basis compared to prior guidance of 14% to 16%. This updated guidance reflects a revised outlook based on the market dynamics, we are seeing particularly in Asia Pac and Latin America compared to the beginning of the year.And operating expenses as a expected, we saw increased spend in the second quarter toward planning and execution of key business priorities investments including EU MDR and sterile packaging as well as investments in surgical intelligence and integration of robotic capabilities into Pulse. Spend on these investments and further accelerate in the back half of the year, and will partially be offset by gains in operational efficiencies. We expect the cadence of operating margin in the back half of the year to be similar to the cadence we saw in the first half of the year with a third quarter below our second quarter results based on typical seasonality and then improving in the fourth quarter with incremental volumes. With two solid quarters behind us and confidence in raising full year guidance midway through the year, we remain optimistic on delivering on our financial commitments for 2019.

With that, I would like to open up the call for Q&A.


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Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Please also note that we ask that participants limit their remarks to one question during today's Q&A session. Our first question is from Matt Miksic with Credit Suisse. Please proceed.

Matt Miksic -- Credit Suisse -- Analyst

Hi. Thanks for taking the question. So congrats on a really solid quarter. I just wanted to maybe ask you to talk a little bit more about some of the dynamics in the U.S. spine business and how, if any, impact you're seeing from some of the competitors our there on the robotic surgery side, in terms of contacting or pricing or how that's affecting you at all. Doesn't seem to be affecting you too much at the moment, but any color on that front.And then on the component of Pulse that we hear an awful lot about in the marketplace, which is LessRay. Now it's kind of built into the platform, but may be where that's finding traction? How it's affecting the uptake of Pulse? Those two elements, be super to hear a little more about.

J. Christopher Barry -- Chief Executive Officer & Director

Yeah. Thanks, Matt, appreciate the comments. Let me start about the spine market in general. Clearly, we continue to have good success in U.S. market. I think that's a direct reflection on our continued focus on proceduralization X360, most recently Advanced Materials Science portfolios that's rolling out that we've talked about.I do believe that our competitors with some of the key commercial tactics are driving with robotics. I don't know but it's having direct impact on our ability to grow, but it is challenging. U.S. market is a very competitive market. I do believe some of the competitors that were maybe not as competitive over the last several years have renewed their focus through robotics and some other key technology.

So I think we're competing well and I think our focus on proceduralization has paid off in dividends and clearly, I think, as representative by what we posted over last couple of quarters, we continue to see the ability to take share. But very clearly, the entrance of Pulse and ultimately our pursuit of robotics gives us better competitive footing against other competitors that have parts of portfolio that we simply don't have today.So we're laser focused on continuing to drive the adoption of X360 and lateral surgery, minimally invasive surgery in the short-term, but are very excited to come to market with competitive alternatives to some of those systems in the mid-term. So no direct impact on our business today, but I would say that the competitiveness of the market has increased over the last 24 months, Matt Link is sitting here beside me, I'll have him comment and also he can come in and will answer your question.

Matt Link -- President

Yeah. So I think, as Chris characterized it accurately, we're seeing a general movement to consolidation of the market. I think when we think about consolidation, critical factors include having a comprehensive offering, procedural solutions in technologies and so. The work we've done truly build out the portfolio comprehensively. It's really participated in a market as a full line spine provider has been critical. And then, obviously, the role enabling technology display is important as well.Well, with respect to LessRay, it's a critical component of the Pulse platform, but ultimately would come back to and reference that the value proposition of Pulse is really around an integrated platform of enabling technologies, of which LessRay is a critical one. When we think about significant or barriers to adoption with respect to advance technologies and procedures like minimally invasive procedures, radiation exposure and imaging integration as a key component that's obviously an area where LessRay shines.

We think about integration of enabling technologies in the workflow integration to make those technologies actually improve interoperative efficiencies that then supports great patient outcomes, LessRay again is a platform technology that's critical to that. So we've had benefit, obviously, of having some experience with LessRay as a stand-alone technology in the OR over the last several months, but at the same time we see it as a valuable addition to a comprehensive integrated solution that includes a, really a suite of imaging technologies to advance spine surgery.

The International business, maybe Chris or Matt if you could talk about your confidence and your visibility into some of the factors that you expect to improve growth in Asia Pac and Latin America and timing of some of those events?

J. Christopher Barry -- Chief Executive Officer & Director

Yeah. Let me just -- let me kind of back up. I think that the globalization efforts that we've taken on over the last couple of years have been really impactful to drive growth for NuVasive and also diversify geographical diversification of where we our revenue has been concentrated, which has primarily been in the U.S. market.So over the last six, eight, 12 months what I think we've started really looking at was what is our longer term globalization strategy? And that goes from anything for how do we ensure that we've got sustainable growth build in some of the larger markets, Western European markets, Japan, Australia, New Zealand. How do we thoughtfully move into markets, so that we don't over commit onto deliver how do we ensure? We have the robust NuVasive technology, but also the clinical education and support, how do we make sure we have the assets to fully support?So, just getting more thought on how we enter markets? So, all of those things honestly are working well. The diversification that we see within EMEA is offsetting some weakness we saw recently in Asia Pac.

I say Japan and you reference Japan and some of the key markets, listen Japan is still growing very well for us. Double digit growth yet we just are not growing as much as we thought we're going to grow in the first half. We're ramping up through new product innovation, new product introduction in that markets we'll see good results in the back half, we've got some competitive pressures, we're dealing with Australia and New Zealand. We're working through those as we speak, but generally speaking some softness compared to expectation in Japan, but relatively very good results versus market.

Some challenges we're facing in just Australia and New Zealand and really a good strength we're seeing in EMEA. So a pathway to how do we ensure that we continue to diversify? How do we continue to make sure that we're focused with a clear understanding of how we're going to win in these specific markets and I feel like we're making good progress there.

Operator

[Operator Instructions] Our next question is from Josh Jennings with Cowen and Company. Please proceed.

Josh Jennings -- Cowen and Company -- Analyst

Hi, thanks for taking the questions and congrats on the solid quarter. I was hoping that you may be able to help us just -- with expectations for next week's Investor Day. I mean primarily on the guidance that we just receive 2019 guidance update, thanks for that. And should we be expecting targets out three years, five years and also may be just we should be expecting with kind of the Pulse update with, you guys has been clear that most of that will be -- will happen at NASS, but maybe you can start with that?

And then secondarily, just if we could just understand the dynamic of lower guidance in the international side and higher guidance for U.S. Spinal Hardware, whether that's been the biggest driver of the opening margin target revision? Thanks for taking the questions.

J. Christopher Barry -- Chief Executive Officer & Director

Yes. I'll take the first one, Josh and I will let Raj take the second one. The expectation you know next week we're are excited, really a few things we want to do. We want to really reframe and reestablish some of the key boarding's we talked about that -- and the key drivers that we're looking to execute on over the next five years. We'll give you a much more in-depth hands-on perspective of the innovation and innovation pipeline that we're both currently launching. And then a future look at some of the things that we're looking to focus on as we move foreword. And we will give that 5-year range of where we expect to be and that will be a specific guidance for 2020, 2021 or 2022.

But clearly, we'll give a range of where we want to take the company was the topline and the bottom line perspective. And hopefully give you some confidence that we've got clear line of sight in order make sure that we do that in a confident way, so that as we said before the company of priorities of delivering our commitments and ensuring that we meet our both internal and external commitments are very important.So we're going to have myself, Matt we'll have some key surgeons there to talk. We'll have a demo or hands-on workshop. So hopefully you'll walk away with a much better understanding of where we're going, how were going to get there and a better sense of a longer-term financial strategy. So hopefully, I answered your questions Josh. I'll turn it over to Raj to hit on the question on the guidance.

Rajesh Asarpota -- Chief Financial Officer & Executive Vice President

Yes. Josh, so I think kind of the question you asked on international post which is what's going on there in terms of lowering the guidance. So first and foremost, if you think about the first half of the year that was a line with expectations. The results in Q2 like Chris said, were driven by strong performance in EMEA and that was offset a little bit with growth in Asia, Asia-Pac and Latin America.

So the update in guidance really driven by our current outlook of the growth factors that's laid out in the first half and then Q2 in particular. So, we expect that the deceleration that we saw little bit in Latin American in Q2 will continue into the second half. We had -- yet some surge in relocation there, but that's just moving from one geography to the other. So there is no big deal there.Chris also talked about the expectation of newly entered markets. We've been very thoughtful into making sure that the market that we've you know like -- the markets that we enter are providing sustainable growth rather than turning on market for the sake of growth.So and then the last thing that Chris mentioned again which was -- look we are seeing some competitive pressure in Asia-Pac and that's also been taking into account as we think about the guidance for the international through the rest of the year, which is why we updated the range there.

Operator

Our next question is from David Lewis with Morgan Stanley. Please proceed.

David Lewis -- Morgan Stanley -- Analyst

Good afternoon. Just real quickly from me, Raj. You had over 100 basis points of margin expansion in the first half, second half guidance applies more flattish margins. I know, you talked about reinvestment, but is the right way to think about it, it looks like there's some durable improvement now for several quarters in some of the internal initiatives. So is the right way to think about it, you expect all that improvement to be fully offset by increased investments into the back half of the year? Thanks so much.

Rajesh Asarpota -- Chief Financial Officer & Executive Vice President

Yeah. So -- so, yeah, I mean, I think, if you think about, sort of, the puts and takes into opening margin guidance. First and foremost, West Carrollton and our manufacturing facilities continuing to deliver the expectations that we had and maybe even a slightly bit ahead of plans. So we are very pleased with what's happening there.

And then, just on the SM&A, R&D and gross margin line, we expect to continue ramping up our investment in robotics on the MBR site store, packaging, boundary models. So these investments can offset the margin improvements from Ohio and some of the other workforce efficiency that we started to work through last year. So those are sort of the puts and takes, but really gross margin certainly being helped by that skeleton and we've got some investments that we need to finish playing through the rest of the year.

J. Christopher Barry -- Chief Executive Officer & Director

Yeah. David this is -- I would say, you're dead on. There is durability growing within our business, like, what I said before, both the performance of some of the initiatives around West Carrollton, but also just disciplined, execution and a much more conscious focus on spending and expense controls inside the company.

There are some very clear initiatives that we have to deliver on including some work in the MBR initiatives and sterile pack. Obviously standing up the Pulse platform and ultimately investing in robotics. I think those are one timers per say, but clearly they're headwinds that offer some of the underlying durable gains that we are feeling. So still committed to expanding margins, but some of the things that we have to ensure that we deliver on our acute to the next several quarters. So that's the way we should think about that.

Operator

Our next question is from Kyle Rose with Canaccord Genuity. Please proceed.

Kyle Rose -- Canaccord Genuity -- Analyst

Great. Thank you for taking the question. Can you hear me all right?

J. Christopher Barry -- Chief Executive Officer & Director

Loud and clear.

Kyle Rose -- Canaccord Genuity -- Analyst

Great. I just wanted to touch on two questions. One, Raj, you talked a little bit about you're seeing some pricing pressures accelerated. It sounds like maybe some of that's coming from some of the consolidation of venders but I just wonder if you could really talk about that a little bit more. Is it in specific areas from a technology standpoint? Is it like blinking across-the-board, just help us to understand that.

And then, secondly, where are you in the rollout of the boundary model? And how long do you expect that rollout to take? And then, kind of, how long until you expect to see some of the leverage come off of that? As far as, you're making up front fixed cost in the investments and then over what time period should we start to see the leverage follow off that boundary model? And I'll hop back in the queue. Thank you.

J. Christopher Barry -- Chief Executive Officer & Director

I'll let Matt to take that one. He's rather closest to both of those conversations, so Matt?

Matt Link -- President

Yeah. So first on the pricing side, I think, that we've obviously seen a consistent compressional headwinds, based on pricing the market, for a number of years now. As you would probably expect that pressure is largest in areas where there is greater commoditization. So, think about things like conventional fixation products, open pedicle screws, cervical plates and the like one of other areas we tend to see an increase pressure on prices is for disposables and that's reflected in some of the results that that Raj referenced in his comments earlier as it relates to the IOM products and the Surgical Intelligence. What we do continue to see is the benefit of our new product -- our cadence of new product introduction, in each of the areas that I've described. We have a project pipeline related to new technology, our line addition to our existing portfolio. Also, as you think about conventional fixation areas like particles to fixation, our investment in the complex spine and deformity segment so larger constructs brings with it some benefit of higher ASP purchase even though we may see some compression on component pricing. So the puts and takes kind of flow across the portfolio in that manner.

As it relates to the boundary model, I'd say we're still somewhat in the early days in the rollout of the boundary as you heard us reference in the past we are further along in certain markets, Chicago being one and we're being judicious in our measurement and the performance, not just financially, but the importance of the assets. So, turned rates associated with sets set utilization, sales force efficiency. So we can really understand the mix of the deployment model as we continue to move forward into other geographic areas. We don't anticipate moving away from a central linear model completely, but we recently want to understand where we can gain efficiencies with the regionalization assets to better serve our customers as well as our sales force. So still working through that, but so far the results have been good.

Kyle Rose -- Canaccord Genuity -- Analyst

Thanks for the question.

Operator

Our next question is from Joanne Wuensch with BMO Capital Markets. Please proceed.

Joanne Wuensch -- BMO Capital Markets -- Analyst

Good afternoon. And very nice -- . When I -- when we enter this year I was thinking of 2019 and start of an investment year and a restructuring year. Some of that you're starting to see the benefits of already on the operating margin for example, but could you sort of give us the State of Union on how you're thinking of the year?

J. Christopher Barry -- Chief Executive Officer & Director

Yeah. I mean, I am thinking I'm honestly coming in new CEO a lot of this year I wanted to really get an assessment of where we were and kind of those three areas we talked about and I wanted to really understand our innovation, and I wanted to understand the region some of the structural elements I changed early on to get a real good sense of what's happening in the region what are the key needs. I wanted to get a better sense of how we operate at the company. And ultimately, get a better sense of how -- what were the challenges we're facing on consistently delivering our commitments. The good news is the key element of all of those things that actually exceeded my expectations was innovation. And so the innovation pipeline is driving a lot of growth that is actually helping me get to some of the other areas faster than what I probably expected.

I'm -- we established a new strategic framework that will and will at the Investor Day. I think we made tremendous strides in establishing strategic priorities, and selling governance mechanisms, and starting to get much better and discipline and rigor around financial forecasting and things like that will potentially areas of opportunity. So we're actually ahead of where I had hoped to be, and nowhere near where I want to be. But all those things together, I think allows us to both deliver on our commitment and starts to transition the company and for sustainable longer-term growth. We're just getting started, but the organization seems to be responding well, and like I said, the hardest thing for us to be to do -- I think the company does really well which is innovate and lead and really driving better clinical outcomes.

The things I think we're challenged with. We're working diligently on is driving operational discipline and ensuring that we hold ourselves accountable delivering on our comments both internally and externally. And the prioritization that comes with those -- with the planning, communication and coordination of our resources is something we continue to work on. So I'm happy with where we are and I'm thrilled to deliver two solid quarters but we still we are -- we're working through muscle building organization and that's the way I look at it this year. Thanks for the question.

Operator

Our next question is from Larry Biegelsen with Wells Fargo. Please proceed.

Larry Biegelsen -- Wells Fargo -- Analyst

Good afternoon. Thank you for taking the question. Raj just two quick ones for you. Maybe if you could elaborate on the comment's you made about making pricing and volume trade-offs and capture share. This suggests this incremental pricing pressure? And just secondly Raj, I apologize for the background noise. In first half, we'll get -- constant currency of about 5.5% where you guidance requires about 4% in the second half. So just the comps are topper in the second half -- and how should we think about the cadence of growth in Q3 versus Q4. Given that I think you have one extra day in Q3, but the comp is clearly tougher? Thanks for taking the questions guys.

Matt Link -- President

So Larry, this is Matt. I apologize, with the background noise difficult to hear, I am going to try to distill the first part which I think was around price and price to volume trade-offs. So in line with expectations, I guess, that I've highlighted through some earlier comments. Certain segments of the portfolio where we are seeing perhaps greater pricing pressure than other segments, but currently, we are comfortable with the current pricing environment and our ability to continue to perform in line with expectations and have volumes growth to offset that pricing in fact, as reflected in the guidance. With respect to the second part, it was a little more of a challenge understanding the question. So I will put that to Raj.

Rajesh Asarpota -- Chief Financial Officer & Executive Vice President

Yeah. I think -- I think Larry what you are alluding to was sort of the comparables in the second half. And if I can maybe talk you through a little bit on both international and on the U.S. side. So like we said, we had some really strong growth on the U.S. side last year, which makes comps a little bit harder as get into the second half of the year. And on the international side, it's the other way around, where we have a lot more tailwind as we get in the second half. So it's clearly a tale of two cities over here. So with that kind of in mind given the usual seasonality factor and jurisprudence in terms of the risks and opportunities, we've got it pretty well-balanced and we still think that the guidance and expectations we've given enables us to hit in both those geographies. Hope that answers your question, but if not, I can further clarify.

Operator

Our next question is from Richard Newitter with SVB Leerink. Please proceed.

Richard Newitter -- SVB Leerink -- Analyst

Just two questions here. The first is I think Raj you provided a growth rate for your lateral portfolio. I think you said it was mid-teens. If you could just provide what that trend has been over the last few quarters, I would be curious to see the extent to which is accelerating? And then, the second question maybe Chris. The -- I just wanted to make sure I'm keeping straight. You've got Pulse, which is an ecosystem. What exactly is launching and commercial and where and when? And then when can we expect to start seeing revenues being booked for? I remember, you launched Pulse late last year and you said you weren't start booking revenue until mid 2019. So where are we on that? And I guess, you're looking for CE Mark. Is that the official global launch of the Pulse? And then when do you think even though you're showing the robot let just say, at mass, when you think you start actually commercializing and booking the robotic portion of Pulse revenue wise? Should we think of that about mid to late 2020? Thank you.

J. Christopher Barry -- Chief Executive Officer & Director

All right. I'm going to take a shot of this. There was a lot of questions in that question. Let me sit on the lateral side. We really look at the lateral is a part of what we consider to be the minimally invasive side. It's a little tough sometimes because you have lateral ALIF you have lateral XLIF surgery obviously. You got X360, which is combination of those. So we look at that entire MIS side of our portfolio and we think that's growing interim around 6% to 10% not necessarily teens, but 6% to 10% and that fits and reflects what we've seen over the last several months and quarters. So that's that, that is compared to for instance open spine surgery, which we think is more in the 0% to 1%, 0% to 2% range.

So clearly winning in the MIS side of the portfolio is very important to our growth story and what we're doing to really innovate. As far as Pulse goes, Pulse is launched. We are in the process of going through the final initial launch phases and we expect to recognize revenue over the next two quarters. We're not recognized revenue today, but we will in very short order, we're going through the final -- the final process of launch. Available is are the elements that we've talked about. We are in the process of continuing to enhance the system through a roadmap of technology. We will show robotics at NASS. I am not going to talk yet about launch dates or revenue recognition in relation to that application of Pulse. But we will be more than happy to continue to really articulate our vision for Pulse and Pulse Robotics as we move foreword. There maybe another questions in there. I think I got the just of it, but if you have additional questions you can follow-up with us or talk to us at Investor Day. Thanks for the question.

Operator

Our next question is from Raj Denhoy with Jefferies. Please proceed.

Raj Denhoy -- Jefferies -- Analyst

Hi. Good afternoon. I wanted to ask a little about the single position lateral system the X360 you've talked about. I think you've made some comments about the pace of surgeon training and the like with that system. And I'm curious if that competitive surgeon wins you're seeing with that system? Or is it really you're seeing more traction with your current users? And really anything you could offer just in terms of how that's driving your results?

J. Christopher Barry -- Chief Executive Officer & Director

Yeah. Thanks for the question. I'll let Matt hit it, but I would just tell you that just packing up on X360 one of the key things I think that we do here NuVasive is really look for innovative procedural approaches and this is a great example of that and has very clear clinical and economic benefit. But I'll talk -- I'll let Matt kind of hit notes. He's been involved from day one.

Matt Link -- President

Yeah. So I think one of the more exciting elements of X360 is we seeing wins sort of across all segments of customers. So new lateral customers, so think of it -- existing NuVasive customers that may be new lateral customers, expansion of their application of lateral procedures within an existing lateral user, as well as conversion of comparative user.

So that's really driving, I think, a lot of the enthusiasm internally, that we're seeing the innovation be well received. We're seeing the clinical validation of what we believe is, not just a more efficient procedure in the operating room, but one that supports our goal of driving better patient outcome. So with that, we'll continue to apply the resources across the surgeon training functions, as well as inventories we continue to scale this globally.

Raj Denhoy -- Jefferies -- Analyst

May just as a follow-up to that. There's a lot of lateral systems, this is obviously very different. Can you speak a bit about the intellectual property or the protection of that system relative to competitors?

Matt Link -- President

Look -- so, one of the key elements of the lateral portfolio for NuVasive has been the intellectual property around the integrative of the procedure. So, certainly, there's protections around specific elements of the procedure, but really the integration of technologies across the procedure, so the integration of neurophysiology is a retractor system as well as some of the interbody designs as we've looked to scale not just in X360 but across our entire interbody portfolio. The AMS technology portfolio with -- which includes Modulus and the COHERE platform have unique intellectual property components as well. So it's -- again it's a realatievly comprehensive approach to the complete procedural solution.

Operator

Our next question is from Robbie Marcus with JPMorgan. Please proceed.

Robbie Marcus -- JP Morgan -- Analyst

Hi. Thanks a lot for taking the question. Chris or Raj, I just wanted to focus on the guidance, specifically the U.S. hardware and the international. And I appreciate the desire to be conservative here at this point in the year, still got half way to go. But I wanted to focus on the U.S. where you said that comps are getting tougher.

But it actually looks, on a two-year basis, like, comps are getting a little easier and to get to the midpoint of the range, it looks like you have to do something like 2% growth versus 6% growth in the first half of the year. So maybe just -- as you think about all that, what are the puts and takes that we should be focusing on and how you're thinking holistically about guidance here?

J. Christopher Barry -- Chief Executive Officer & Director

Yeah. I mean, it comes down to a couple of things. You hit a couple. We're -- we have some tough comps, we talk about that. One of the earlier questions referenced back to, we do have renewed competitors that are investing in this market through things like -- we're seeing with some of our key competitors.We are launching Pulse. That is a -- in itself, it's not isolated to a Pulse team. We're using some capital specialists; we're also using our existing organization. Now I don't want to -- I don't want that to be a headwind, that should be a tailwind for us in the future, but all those things coinciding in Q3 and Q4, just gives me some pause to get overly aggressive in taking revenue guidance up.

So that's what's driving my thinking. There's a lot going on. We're learning a lot. We're in the process of launching an evolutionary product within our within our organization and I can tell you that, there's a lot of learning that happens every day around that. That coupled with, like I said, tougher comps and ultimately some -- it is a competitive market. From an international perspective, it's really just the puts and takes of -- I'm seeing strength in EMEA. I'm seeing some things that I don't necessarily like another key markets. I feel like we're on those, but I need to see those turnaround. And so I'm going to make sure that I see the improvements that am hoping to see in Japan and the initiative we put in place to actually deliver rather than what we've seen in the first half.

Although as I said before Japan still growing nicely, just not to the extent we thought it would two quarters ago. So that's the thinking there, I wouldn't say, I was being overly conservative. I think I am being realistic. I'm optimistic, we'll continue to see success, but the fact is, those were the contributing factors that give me pause to do anything. I feel good about the process we're make -- progress we're making in that margin. And I feel those are well within our control and its why, I feel very confident and comfortable taking that guidance up. But on the revenue side, I wanted only to be cautiously optimistic, but ensure that we're doing what we need to deliver our commitments.

Hey, Robbie if I could just also add little bit to what Chris said, just primarily on the U.S. Hardware side, again, its -- in 2018 primarily in the third quarter we saw that increased case volume growth. I think part of that was spent up from the prior year you know impact from the hurricanes etcetera. So they're just being at this point, given everything that's on placing a little bit cruising in terms of what we're seeing. So I think the business is really strong. The hardware growth is tracking nicely, but we are cautiously optimistic on that front.

Operator

Our next question is from Ryan Zimmerman with BTIG. Please proceed.

Ryan Zimmerman -- BTIG -- Analyst

Thanks for taking the question. So just wanted turn the biologics for a minute, here. You've lapped now, I think these comps in the biologic line. When does that turn positive and what we're seeing this quarter? May be if you could parse out volume versus price and what you're seeing on the pricing line relative to your volume gains or losses and biologics? And then I have a follow-up. Thank you.

J. Christopher Barry -- Chief Executive Officer & Director

Yes. I'll start then Matt if you want, you can jump in too. But Ryan, we saw biologics was down a little over 1% this quarter and 4% or 5% in the prior quarter. So in terms of answering your question, when does it turn positive, it turned positive in the second half?

So like we said we're expecting our guidance to be -- for the total year to be at flat two kind of modest growth. So to answer your question straight on, we expect positive uplift in the second half of the year. We've talked about several new product lines that we've introduced in -- on the biologics side over the last nine months.

Those all kind of taking traction and there is still volume price trade-offs going on as we trade out Osteocel which is the more expensive product for sort of the DBMs synthetics. So we're continuing to make those price volume trade-offs. Matt anything?

Matt Link -- President

Yes. To echo Raj's comments, there is a make shift in the portfolio, but we continue to manage, to ensure that we are offering a complete line of biologics solutions and that we're also continuing to integrate it into a complete procedural solution, consistent with what our philosophy as a company has been. And much like other products in the portfolio, we monitor and measure attachment rates to see where we're creating that complete solution. So under the leadership of the biologics team, it's been a good sort of correction in the business and we're inline with expectation for the balance of the year.

Operator

Our next question is from Matt O'Brien with Piper Jaffray. Please proceed.

J. Christopher Barry -- Chief Executive Officer & Director

Yes. Let me just get -- I'll hit a quick market overview. We feel very good about what we're seeing in EMEA as we talked about strong growth there. We -- if you could turn to Asia-Pac before two major markets; Japan and Australia-New Zealand. Japan, we saw double-digit growth, we've forecasted something higher than that. We did have some assets that we didn't get to Japan in the timeframe that we thought, cause some slowdown. We expect it to resolve most of that in the back half, but we've sort of missed some of our ramps, so I do think there will some challenge to hit our original expectation in Japan. Again I'll stress the fact it had still well ahead of market as they grow today.Australia-New Zealand, we just have to competitive pressure. We're digging into what exactly is -- what are recovery and what remediation plans are there, but the fact is we'll hit some kind of competitive pressure outside of that. I'll leave it there for now, but I do feel like that will continue to the back half and create some level of risk in Asia-Pac.

From a LatAm perspective, we had couple of key elements, primarily set asset opportunity in Brazil. We've continue to -- we challenge with some of the customers' related issue over the past several months. We think we're getting some of those resolved and we need to continue to get more sets into Brazil to grow that market.So, we think that will continue to improve over the next few quarters, but again, some of these things are getting through the customers' challenges can be difficult. Those things together continue to think we'll see good strength in the U.S., in EMEA. I feel like we'll see decent recovery in Japan with some challenges in ANZ and expect to see some level of recovery in Brazil, but all things considered, in line with what we've guided to.

Operator

We have reached the end of our question-and-answer session. I would like to turn the call back over to Chris Barry for closing remarks.

J. Christopher Barry -- Chief Executive Officer & Director

Thank you. And in closing just thank everyone for being on the call today. I look forward to seeing all of you or as many of you as I can at our Investor Day, August 8th, which is next week in New York City and sharing with you our long-term growth and financial outlook. So, with that, I'll end the call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 63 minutes

Call participants:

Suzanne Hatcher -- Vice President, Internal and External Affairs

J. Christopher Barry -- Chief Executive Officer & Director

Rajesh Asarpota -- Chief Financial Officer & Executive Vice President

Matt Link -- President

Matt Miksic -- Credit Suisse -- Analyst

Josh Jennings -- Cowen and Company -- Analyst

David Lewis -- Morgan Stanley -- Analyst

Kyle Rose -- Canaccord Genuity -- Analyst

Joanne Wuensch -- BMO Capital Markets -- Analyst

Larry Biegelsen -- Wells Fargo -- Analyst

Richard Newitter -- SVB Leerink -- Analyst

Raj Denhoy -- Jefferies -- Analyst

Robbie Marcus -- JP Morgan -- Analyst

Ryan Zimmerman -- BTIG -- Analyst

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