NuVasive's (NUVA) CEO Gregory Lucier on Q4 2015 Results - Earnings Call Transcript

| About: NuVasive, Inc. (NUVA)

NuVasive, Inc. (NASDAQ:NUVA)

Q4 2015 Earnings Conference Call

February 11, 2016 04:30 PM ET


Carol Cox - Executive Vice President, External Affairs and Corporate Marketing

Gregory Lucier - Chairman and Chief Executive Officer

Quentin Blackford - Chief Financial Officer

Pat Miles - President and Chief Operating Officer


Matt Miksic - UBS

Matthew O'Brien - Piper Jaffray

Raj Denhoy - Jefferies

Josh Jennings - Cowen & Company

Craig Bijou - Wells Fargo

Kaila Krum - William Blair

Jeff Johnson - Robert W. Baird

Jonathan Demchick - Morgan Stanley

Robert Hopkins - Merrill Lynch

Joanne Wuensch - BMO Capital Markets


Greetings, and welcome to the NuVasive Incorporated's Fourth Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Carol Cox, Executive Vice President, External Affairs and Corporate Marketing. Thank you. You may begin.

Carol Cox

Great. Thank you, Stacy, and welcome everyone to NuVasive's fourth quarter and full year 2015 earnings call. Earlier today, we issued our earnings release which is posted on our website as an investor presentation both of which have been filed with Form 8-K with the Securities and Exchange Commission. We’ve also published supplemental financial information on our Investor Relations section of the website, so copying today's discussion.

On the call, we will be covering information that is included in the investor presentation and I incur you to access these materials so that you can follow along.

Before we begin today, I do need to remind you that the discussions during today's call will include forward-looking statements which are based on current expectations, 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 also described in NuVasive's new releases and periodic filings with the SEC. We assume no obligation to update any forward-looking statements or information, which speak as of their respective date.

This call may also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles. 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. Reconciliation for the most directly comparable GAAP financial measure may be found in the news release and the supplementary financial information which are also accessible from the Investor Relations section on the Company's website.

Joining me on today's call are Gregory Lucier, our Chairman and CEO; Pat Miles, our President and Chief Operating Officer; and Quentin Blackford, our CFO.

With that, I would like to turn the call over to Greg.

Gregory Lucier

Thank you, Carol, and good afternoon, everyone. 2015 was a year defined by NuVasive’s category focused innovation. In May last year, we launched the biggest innovation platform since the introduction of XLIF with Integrated Global Alignment or iGA to address the critical elements in successful spine surgery alignment.

In conjunction with iGA, we entered the adult deformity market in the big way with our ReLine comprehensive posterior fixation system that is helping drive strong thoracolumbar results. And we saw a strong resurgens in our cervical business with the success of our differentiated Archon and VuePoint II fixation system.

Finally, at the beginning of 2015, we announced the acquisition of Ellipse Technologies to enter the high value early on [indiscernible] 2015 was indeed a very big year.

Our revenue performance for 2015 delivered growth and multiple to the market ending the year at $811.1 million up 8.2% on a constant currency basis. This growth underscores strengthening U.S. performance and included a continued sequential improvement in lumbar for the fourth quarter in a row following the launch of iGA and ongoing strength in cervical.

I am also pleased to report that our localized business plans are driving positive results in Western Europe as we look to reaccelerate our growth in key international markets. Asia Pacific continues its strong growth trajectory as well, offsetting weakness in Latin American and the Middle East.

We also delivered record profitability expansion for the year with the 400 basis point improvement in our non-GAAP operating profit margin to 15.4%. This was driven by a continuing dedication to capturing well identified operating efficiencies to optimize our scale and rapidly bring our profitability profile in line with our peer group.

Our full year non-GAAP EPS performance came in at $1.31, nearly doubling over our 2014 results and growing at a rate significantly higher than that our revenue growth. We expected strong leverage to continue as we benefit from increasing scale.

2015 was a dynamic year for NuVasive for the change of CEO and other members of the leadership team. While the natural reaction to this event uncertainly the initial reaction from Wall Street was on a concern this changing of the guard actually provide an opportunity to strengthen the company. Now taking anything away from the previous administration, we have moved fast to put in place new provinces in systems that fundamentally improve execution.

Have you seen as investors is a commitment to every higher profitability, how we do it is due to much more rigorous examination of where we spend money today and what return we will get for the next incremental dollar of investment. We enter 2015 with a much more align and disciplined organization ready to do even bigger things.

Looking ahead, there is no doubt we are operating in not only a rapidly evolving healthcare landscape, one that is becoming ever more complex. With an increasing amount of market influences to navigate NuVasive’s ability clearly demonstrates clinical and economic value has never been more relevant. It will define our success going forward.

We expect then to continue to take advantage of the lack of focus we’ve seen from the larger players in spine were also strengthening our competitive stands more dynamic peers. Central to this effort will be our strategic move from a vendor focused on transactions to true partner focused on transformation. We have a new vision for comprehensive spinal health that probates our commercial strategies and lead the industry and supporting one of the most profitable service lines for hospital systems spine surgery.

Today, hospital guard offer the 15% of the profitability from spine related procedures and yet their ability to measure that performance that alone impacted for the better is very limited and therefore we come in.

Our approach is not only partner on technology but the entire service continues. We believe this differentiated value proposition will keep NuVasive in a leading position even as the market landscape continues to evolve.

At the same time, we will continue to execute against our clear formula for success; first, driving innovation that addresses unmet clinical need and improves clinical and economic outcomes. Second, driving organic growth in U.S. and internationally will also pursue strategic M&A as strengthen and deepened our leadership in spine. And finally number three, delivering increased profitability to operational excellence, in-sourcing and scale.

Our innovation remains at the heart of what NuVasive does best and enables us to operate at the generation above the competitive set. In 2016, we expect to deliver innovation up and down the spine with new products and line extensions for interior and posterior application as well as the innovation for cervical offerings including iGA for cervical spine procedures.

We are also committed to investing in an Ellipse Technologies platform to further strengthen by disruptive leadership and deformity.

We will continue to drive revenue growth at multiple to the market, targeting approximately 923 million of revenue for 2015 or approximately 14% growth over 2015 inclusive of our acquisition of Ellipse Technologies. Organic growth in core spinal hardware business and pull through of biologics and monitoring service will come through focus on our commercialization strategy. This center is around compelling hospitals and surgeons to use more NuVasive technology and services. Key initiative will include our enhanced surgical conversion and a push around winning national strategic accounts and securing service line partnerships.

Finally, we optimize our globalization initiatives to increase our scale and to nearly double revenue contribution from our international business over the medium term. In 2015, this includes a deeper penetration market for Japan, Australia, Italy, Germany and United Kingdom.

Turning now to profitability, we remained committed to drive profitability to an even higher level. We have plans in place to deliver nearly 1,000 basis points of improvement in our non-GAAP operating profit margins as we reach beyond 1 billion in revenues. This significantly increased profit performance will be driven by the overall better management of our business including a clear focus on improving both asset and sales force efficiencies in addition to our in-sourcing initiatives and international scaling.

There are tremendous efficiencies with where we can gain asset of the management that will impact sales force effectiveness. We only turn inventory for one time a year right now. Today, we made solid progress with backward of reductions, increased fulfillment throughput and accuracy and improved field asset management. These changes are setting the foundation for dramatic improvement in our working capital over the next 36 months.

With regarding in-sourcing, we have been - it will be a particular meaningful source of margin expansions with approximately 400 basis points of improvement expected over the next several years. Central to our efforts will be the development of our new West Carrollton, Ohio manufacturing facility.

Improvements of the building have begun and recruiting efforts are well underway as we worked to have manufacturing facility up and running by year-end and at full capacity by the end of 2017.

International scalability will be another profitability driver in 2016. As I mentioned, our localized and differentiated surgeon conversion plan are working now in Western Europe. We’ve experiences particularly encouraging results in countries like Germany, where we saw nearly 30% growth in revenue for the fourth quarter 2015 setting itself for ongoing momentum this year when those strategies take hold in that market. We are also layering on the added benefit of the geographic strength that we gain from Ellipse Technologies to drive scale international.

Importantly, we can achieve significant overall profit margin expansion, while continuing to drive top line growth. We’re committed to reinvesting in the business properly to drive this growth but a tremendous runway, dramatically improve our profitability at the same time.

Another contributor to our success is strong performance going forward is the acquisition of Ellipse Technologies which we officially closed today. Integration efforts are underway and we are excited to bring together NuVasive with its highly scalable platform that has exceptional growth prospects.

Ellipse added 2015 strong will approximately 44 million in the revenue or nearly 70% year-over-year growth. The team remains committed delivering approximately 60 million on pro forma basis revenue in 2016.

With our acquisition of Ellipse Technologies, we’re entering the early onset performing market in the big way. We see an initial addressable market opportunity of 570 million for the MAGEC technology alone which provides [Technical Difficulty] and distraction system for the treatment for early on portfolio [ph]. This does not include the meaningful opportunity to both NuVasive hardware which we expected to be further upside in the future. We also look to capture the $700 million market opportunity for the PRECICE limb lengthening system to drive market share with its highly differentiated orthopedic technology.

Finally, we’ll look to further explode this as an innovative magnetic technology platform to fuel our R&D pipeline to address broader spine and niche orthopedic application.

Now for our performance for the fourth quarter of 2015 and guidance expectations for 2016, I’ll just turn the call over to our CFO, Quentin Blackford.

Quentin Blackford

Thanks Greg, and good afternoon, everyone. Before we get started with the financials, let me remind you that many of the financial measure cover today will be on a non-GAAP basis. Please refer to the supplementary financial information field our website in the Investor Relations sector for all the detail covered on today’s call and to reconcile their non-GAAP items to their GAAP counterparts.

Let’s begin with our revenue performance for the fourth quarter 2015. Revenue came in at $215.3 million or 5.4% growth year-over-year including approximately $2.9 million of currency headwinds.

On a constant currency basis, revenue for the quarter increased 6.8% year-over-year. Our revenue growth was driven primarily by accelerating procedural volume growth in our U.S. lumbar and cervical businesses as a result of new product introductions somewhat offset by softer than anticipated growth in certain of our international markets, particularly in Latin America and the Middle East.

Turning to the composition of revenue in the quarter, sales for U.S. Implants and Services accelerated for the fourth consecutive quarter in a row growing 9.9% for the fourth quarter 2015, representing record quarterly growth for the year. Procedural volumes and mix were strong, up 11.3% during the quarter. We continue to experience strong results in our lumbar product portfolios and to increase adoption of iGA and its industry leading case planning and reconciliation capabilities and the increasing utilization of our ReLine posterior fixation system.

Our cervical portfolio offers exceptional growth during Q4, up approximately 15% as momentum continues around our Archon anterior cervical plating.

U.S. Biologic sales for the fourth quarter were down 2.7% to prior year below our expectation. The weakness that we saw in the prior quarter continued to Q4 as we can see that may have been cyclical or trialing by surgeon users. Overtime, we do expect that the growth in our biologic portfolio will return to approximate the procedural growth of our hardware business.

Our international business, which includes Puerto Rico, increased 1.9% on a constant currency basis and was down 8% for the fourth quarter on a reported basis. We continue to experience significant growth in markets, like Japan, Italy and Australia where we lead with a differentiation of XLIF in our minimally invasive solutions. We are also making progress with the refocusing of our efforts in several of our key Western European market. In particular, we’re pleased with resurgens we begun to see in Germany which Greg pointed out from nearly 30% for the fourth quarter on a constant currency basis.

Our localized plans are driving this important momentum, significantly strengthening our positions to meaningful grow NuVasive’s international market share over the long term.

Our Latin American performance continues to experience weakness primarily due to monitory policy factors unrelated to the procedural volumes we see in countries like Brazil. We also experience softer than expected results in the Middle East as well as Puerto Rico where we saw lighter surgeries get to the normal in Q4.

Turning to the rest of the P&L and results, non-GAAP gross margin in the fourth quarter was 76.2%, down 100 basis points from the 77.2% reported in Q4 2014 and up 70 basis points sequentially from the third quarter. The decrease versus prior year was driven primarily by cost related to product transitions associated with the introduction of new products and softer international sales, as well as some onetime benefits mentioned in the fourth quarter of last year that did not repeat. These headwinds more than offset 130 basis points of benefit related to the exploration of certain Medtronic related royalties.

We did not realize any benefit from our in-house manufacturing efforts in the quarter. However, as previously announced, we’ve purchased a manufacturing facility in West Carrollton, Ohio which will allow us to drive approximately 400 basis points of benefit to our gross margins overtime. The effort to set up and transfer manufacturing will take place throughout 2016 and we expect to begin to realize the benefits in 2017. The impact of price is continue to be consistent with prior period declining approximately 1% and was not a material factor in the quarter.

Non-GAAP sales, marketing and administrative, or SM&A, expenses totaled $118.8 million in Q4 2015, up nominally from $118.4 million in Q4 2014. SM&A expense was 55.2% of revenue for Q4 2015, representing 280 basis points of improvement compared to the 58% reported in Q4 2014. This year-over-year improvement was a result of our continues effort to reduce SM&A spending as a percent of revenue and was primarily driven by increased asset efficiencies associated with our instruments and our support functions.

Additionally, we continue to realize benefits from stock based compensation expenses resulting from the better management of our equity plans and management changes earlier in the year.

Non-GAAP research and development, or R&D, expenses totaled $8.5 million in Q4 2015 compared to $9.4 million in Q4 2014. R&D expense was 4.0% of revenue for Q4 2015 versus 4.6% in Q3 2014. The lighter spend in R&D is primarily related to the timing of development projects.

Overtime we expect that R&D expense as a percent of revenue will increase with long term goals of spending roughly 7% of revenue on research and development efforts.

We are very pleased to report that fourth quarter non-GAAP operating profit margin increased to 17.1%, resulting in a strong 440 basis points of operating margin expansion compared to the 14.7% we reported last year.

As we continue to introduce greater discipline to the organization, the tangible benefits are being realized through our performance as we meaningfully enhance the underlying core operating margin profile of our business.

Interest and other expense net on a GAAP basis was essentially flat at $7 million in Q4, 2015 versus the prior year. Included in the quarter was at $4.1 million charge of non-cash interest expense related to our convertible notes.

Income tax expense on a GAAP basis for the fourth quarter 2015 was a $11.4 million compared to $10.4 million of expense in the fourth quarter of 2014. This resulted in a GAAP tax expense rate of 50.7% and a non-GAAP tax expense rate of 47/3% for the quarter. For the year, we finished with a GAAP and non-GAAP tax expense rate of 41.7%.

Fourth quarter non-GAAP earnings were $18 million or $0.35 per share compared to $13 million or $0.26 per share in Q4 2014, a 37% increase in non-GAAP EPS year-over-year. In addition, adjusted EBITDA margin which excludes the impact of non-cash share based compensation was 25.9% for Q4 2015 and 80 basis point improvement compared to 25.1% in Q4 2014.

Our cash and investment balance at the end of the fourth quarter was $470.1 million, up from $451.2 million last quarter. With the closing of the Ellipse Technologies acquisition today, we used the significant amount of our cash and investments to fund a $380 million upfront payment due at closing.

To give ourselves from additional financial flexibility, we entered into a credit agreement with Bank of America earlier this week for a five year secured revolving line of credit with an aggregate available amount up to $150 million. We drew down $50 million under the facility which we expect to use for general corporate purposes.

The credit facility has turned to consistent with general market conditions and more details can be found in the Form 8-K that was filed with the SEC today in connection with our earnings announcement. You will see that we also filed a stand along Form 8-K today regarding the closing of the acquisition of Ellipse Technologies. That Form 8-K includes information regarding the acquisition as well as financial information for Ellipse Technologies and pro forma for the combined company.

Free cash flow for the fourth quarter 2015 came it at $24.9 million which included purchases of equipment during the quarter related to the build out of our new manufacturing facility. For the year, free cash flow was $13 million which was negatively impacted by payments litigation settlements noted in the third quarter in our continued transition to a cash tax payer over the course of 2015. These items together represented approximately $65 million of incremental headwinds in the year. Adjusting for these items, underlying free cash flow grew by 26% for the year.

We finished 2015 with a very strong performance. Revenue growth for the full year 2015 was up more than 8% on a constant current basis with non-GAAP operating profit margins expanding 400 basis points, more than 100 basis points ahead of our initial guidance for the year. In addition, non-GAAP operating profit dollar were up more than five times revenue growth growing well over 40% for the year, while non-GAAP earnings per share were up nearly 100% as our strong earnings expansion story continues to play out.

Before I turn to guidance, let me highlight a change we will be making to our revenue disclosure and guidance practices commencing with Q1 2016. We are taking steps to further rebind our revenue categories to better reflex how we manage the business, better communicate the underlying performance of the company and be more in line with our peers. Additionally, it is the structure that we believe will best incorporate Ellipse Technologies into our revenue disclosure practices and also provide a flexible go forward reported structure that should allow for the easy integration of any future acquisitions.

Beginning in the first quarter 2016, we will begin to report revenue in the following three categories; one, U.S. spinal hardware and other, U.S. surgical support and other and international. U.S. spinal hardware and other will be inclusive on our implants and hardware and includes the performance of the Ellipse Technologies, product families, MAGEC−EOS spinal bracing and distraction system for treatment of early onset scoliosis and PRECICE limb lengthening system. U.S. surgical support and other will be inclusive of monitoring, biologics and disposables.

We believe this breakout most accurately reflects our four business drivers in U.S. spinal hardware and other with key pull through our products and services represented by U.S. surgical support and other. International will continue to be replaced by total international results.

Going forward, our revenue results and guidance will be aligned to this breakout are ease of modeling and to help you better understand this change we have provided a historical two year recaps of this revenue detail as a part of our supplemental financial information posted in our IR website this afternoon.

Additionally, we expect to disclose pro forma results, highlighting the impact of Ellipse Technologies in our quarterly performance this year to both this quarter’s contribution and the continued growth of our quarterly base on business.

With this in mind, let me take a moment to run down our performance guidance for 2016 which is inclusive of the impact of Ellipse Technologies acquisition that we report in our results for 2016. To be clear, this includes the anticipated results of Ellipse Technologies from today through the end of the year. With regard to revenue, we expect full year 2016 revenue to grow double digit at approximately 13.8% year-over-year to approximately $923 million. This includes $870 million of organic revenue from NuVasive’s core business that we previously communicated and $53 million of revenue that we expect to recognize from the acquisition of Ellipse Technologies from today through the end of the year. Our revenue growth assumptions reflected SM&A negative impact of $2 million from currency headwinds during the year.

On a pro forma basis, normalizing for a full year NuVasive and Ellipse Technologies combined in both 2015 and 2016, we would expect 2016 of roughly $930 million or approximately 9% growth, which is consistent with our high single digit go forward growth expectations as a combined company. Further, this reflects an approximate $60 million of pro forma revenue for the full year from Ellipse Technologies for 2016 as the company continues with exceptional growth trajectory.

U.S. spinal hardware and others is expected to grow approximately 14% which represents organic growth of 7% and an additional 7% of growth from revenue contributions expected from MAGEC and PRECICE. The organic growth is 7%; will continued to be fueled by the momentum we are gaining with the utilization of iGA, RAVINE and our cervical portfolio.

U.S. surgical support and other is expected to grow approximately 3% for 2016. This lower growth in this category is reflected by the slower growth expectations for both our biologics and services businesses consistent with prior year trends. Overtime, we would expect this category to approximate the growth that U.S. spinal hardware and other.

For 2016, we expect our international business to grow by approximately 36% which includes a negative $2 million currency headwind. On a constant currency basis, we expect international to grow approximately 38% which contemplates core organic growth of 20% and roughly 18% from the newly acquired MAGEC and PRECICE product families.

In 2015, we took the opportunities reevaluate our localized market penetration networks in certain key markets. We began to see momentum as we exited the year. As a result we expect continued strong performance from markets like Japan, Italy and Australia as well as resurgens in West Europe in particular which will offset continued volatility in the Latin America market. As you know we have tremendous runway head of us internationally.

We expect significant growth in this area of the business well into the future as well look to nearly double the revenue contribution from global markets.

We expect non-GAAP gross margins to be approximately 76.9% for 2016 or 90 basis points better than prior year primarily as a result of the two year suspension the medical device tax and favorable product mix from the stronger growth in our lumbar and cervical portfolios partially offset by the lower margins from Ellipse Technologies.

In addition, we expect to make tremendous progress in preparing our new West Carrollton manufacturing facility for full time production throughout the majority of 2016 and therefore do not anticipate that benefits from our in-house manufacturing initiative will positively impact gross margins until 2017.

We expect non-GAAP SM&A expense to be approximately 55.5% for 2016 or 90 basis points better than the prior year. This year-over-year improvement will be primarily driven by core NuVasive asset efficiencies focused on better utilization of instruments and our support functions as well as leveraging our operating expenses to the growth of our international business. In addition, we expect to continue to drive efficiencies in our U.S. sales force.

We anticipate full year 2016 non-GAAP R&D expense to be approximately 5.6% of revenues, up 130 basis points year-over-year as we continue to fund disruptive innovation. This also includes reinvesting approximately 40 basis points of the medical device tax benefit back into innovation. While we expect to increase R&D spending in our quarterly base of business by roughly 60 basis points, the addition of Ellipse Technologies and their focused efforts of expanding the MAGEC technology platform result in the additional 70 basis points of investment. This will enable us to support a robust R&D pipeline capable of introducing the continues innovation of new and differentiated products and line extension each year.

We expect the non-GAAP operating profit margin inclusive of Ellipse Technologies of approximately 15.8% for 2016, an improvement of 40 basis points versus 2015’s performance. This expectation reflects an improvement is core NuVasive operating profit margins by 140 basis points reflective of the 100 basis points of core operating margin improvement that we target annually plus 40 basis points of the result of the temporary repeal the medical device tax net of reinvestment. Including the acquisition of Ellipse Technologies, we expect that non-GAAP gross margin and SM&A expense will improve by nearly 180 basis points combined partially offset by a meaningful 130 basis point increase in incremental investments into R&D.

Despite the significant investment in R&D, non-GAAP operating profit dollars are expected to grow roughly 70% in 2016.

We anticipate full year 2016 interest and other expense to be approximately $31.9 incusing roughly $17 million of non-cash interest expense.

For 2016, we expect our GAAP and non-GAAP effective tax expense rate to be approximately 42% and 41% respectively for the full year. Of note, we’ve benefited from discrete items that drove our rate lower in 2015 that had as well ahead of expectations it will not repeat this year which is a factor in our expectation for 2016.

We anticipate our 2016 non-GAAP earnings per share to approximately to $1.48 or a 15% increase in EPS over 2015 performance and expected GAAP EPS to come in approximate $1.2 for 2016.

Lastly a quick note on the first quarter of 2016, while we have not historically provided quarterly guidance, the first quarter of 2016 will include a partial quarter of results from the Ellipse Technologies acquisition. Therefore to provide a greater clarity in terms of expectations and for your modeling purposes, we expect revenue to approximately $205 million for the first quarter of 2016. We also expect that non-GAAP operating profit margin in the first quarter will be in line with the prior year at approximately 12.6% as we focus our efforts on integrating of its technology.

We are very pleased with our outlook for 2016 as further on our cap of profitable growth. Following our Investor Day in December, we updated our multiyear goals that would have us driving our non-GAAP operating profit margins upwards 25% with adjusted EBITDA margins expanding to approximately 32%. The acquisition of Ellipse Technologies expands our ability to even further executing into those goals for accelerating top line growth. We are executive exceptionally well against these goals and are more excited than ever as we remain laser focused on creating incremental shareholder value for years to come.

With that, I’ll turn the call back over to Greg.

Gregory Lucier

Thanks Quentin. We’re setting up for a strong performance in 2015 and are well positioned to deliver on our long term performance guidance. Our bullish outlook is driven by our focused on reimagining the spine space, thinking in terms of customer transformation, finding unmet clinical needs in spine and delivering exceptional economic value.

With all the uncertainly going on in the stock market right now, NuVasive is a great place to be. The need to spine surgery is not going away and the drive to improve the patient experience and change lives to the better has never been more relevant. iGA continues to gain momentum as we not only are noted the lateral company but are defining the global alignment must look like going forward to climb. By speaking to our core strength, NuVasive is set to become the fine franchise by being the best and then being first.

I have incredible confidence in our ability to innovate and we have the right plan in place that will allow us to operate with certainty and deliver the results to you. The world is volatile, we are not going to. We will be better expending incremental dollars to drive growth and we had a multipronged approach for thoughtful surgeon conversion, revolutionizing the spine supply chain with strategic service line partnerships and true globalization of our business now becoming a reality. We had a great 2015 and 2016 is going to be just that much better.

With that, we’d be happy to take any questions you might have.

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matt Miksic with UBS. Please proceed.

Matt Miksic

Hi, thanks for taking the question. You hear me okay.

Gregory Lucier

We can hear it fine.

Matt Miksic

Great, so just one question on something that you mentioned that seems to gaining attraction across the broader MAGEC based is the you know call it kind of center of that but service to our distance and these to run their spine services better, could you talk a little bit about can you put that into play and understanding that you know that be ease in headcount and people are deeply associated with that, you have that into your pay down? And I have one follow-up.

Gregory Lucier

Certainly, we’ve done some studies to better analyze where our customer that been hospital systems make their revenue and make their earnings. And the analysis review of that the spine service line is one of the special ingredients to driving both top line and the bottom line. And as I said in my prepared comments, about 15% to 20% of their profitability comes from the spine care.

That said, if you ask those group of people running hospitals, where they make their money, I suspect it have difficult to answering the question a little low in pinpointing it back down the spin care with service line. So for us not only that study but then also our engagement with one of the major healthcare systems in the United States were we begun done this half of partnering has revealed a lot of learning to us just about how important we can be in that partnership to not only provide technology but provide know how and consultation to really help them drive that top line and top line as spine care. So we think for us that that’s the direction NuVasive is going to go. We are just incredibly focused on obviously spine and spine alone and we think it’s going to allow to move fast take the right active indicative.

Matt Miksic

Great and then that’s helpful. One follow-up here, is just on environment in terms of you know your monitoring progressing this year and you know how things like price or mix are impacting that, you mentioned that metric factor and some other factors, but help us understand in this environment and is a stable environment kind of how those factors play into your margin expectations? Thanks.

Gregory Lucier

Certainly, I’ll take the first part of it and then I’ll let Quentin add to it. For us we have been over the last several years about the same amount of price deflation impacting the business. And again I’ll let Quentin get into the exact numbers. And that’s been through an up and down economic cycle. And in such throughout our business is somewhat remove from the general economy as you might expect. And so as we think about 2016, we have modeled in both certain list price increases, we modeled in new product introduction and we modeled in the normal degradation of pricing that you see in older contract. And all of that comes together with a pretty clean outlook on price for us in our financial.

You know what we would tell you is that innovation is how you get price in that business. And so we have been able to be very pinpoint of what we launch and get price with that and that will be the strategy going forward to continue to have important economic chancing innovation but actually more of it. Quentin?

Quentin Blackford

Yeah, I terms of you know margin expectations and you point a little bit back to 2015 and the degradation year-over-year, you know for the full year, we ended up with 76% versus the prior year of 76.1. And frankly didn’t see any benefit from the in-house manufacturing efforts that we have launched and that was a confess decision of our to really slow down, we are doing, it start to ramp that up in a new facility, you are going to see that come back through gross margins into the future, there is at least you know 400 basis points of opportunity ahead of us as we come a real manufacturer of our product and take what we do and from 30% closer to that 100% overtime.

The other thing that you see and it’s requested in our guidance is there is a bit of a mix benefit in next year’s gross margin expectation that we put out there of 76.9% and that’s - that being fueled by the back, we have our lumbar business and our cervical businesses both drawing faster than the rest of the corporate average. So even though those areas might under bit more priced pressure they want to think about it. The gross margin profile those particular categories are higher than the corporate average, so you end up getting a mix benefit from it. And so we would definitely think about gross margin is expanding out in the future is just the real improvement is going to come in ‘17 at the earliest when you start to see the benefits of the in-house manufacturing.


Thank you. [Operator Instructions] Our next question comes from Matthew O'Brien with Piper Jaffray. Please proceed.

Matthew O'Brien

Good afternoon. Thanks for taking the question. Just real quick Quentin, on Q1, when I back out the benefit from Ellipse, it looks like your growth in Q1 is only calling for about 3% for the core business, is that the right math and then is that a function of the biologic business, if there is anything to contract or any color there would helpful? And then I have one real quick follow-up.

Quentin Blackford

Yeah, that’s true. Good question. If you were to normalize it, you ought to get into about 5% growth rate in the core business on a constant currency basis which is in the closer to 4% on a reported basis. So we are going to have the largest currency headwinds of any quarter in Q1 and that is the way the rates have moved and when you look at on year-over-year. So you have to take that into account. But the other thing that you got to consider is the fact that we grew our international business north of 30% last year in Q1, so that we came out in the year flat to down in that international business. So that’s going to provide a headwind in the quarter itself. And then biologics to your point, last year grew about 13% in Q1 and we’ve seen that’s low as well.

So you are going to have a bit of a tougher comp in the first quarter, you’ll start to see the growth accelerate once you get beyond Q1 and that’s just on a core organic basis. With the Ellipse, one of the things that are bit unique about Ellipse that you may not fully appreciate the fact their seasonality is very different in the quarterly base of business and Q1 is a core and that’s generally pretty wide for them, most of the procedures happened over the summer months. So you are going to get some different seasonality in the business as a result of Ellipse as well.

Matthew O'Brien

Okay and then just real quick follow-up on the international growth. I think about third of your year-over-year core has becoming from international market and Quentin, like you mentioned you know you are seeing some softness there especially in Latin America, just confidence that you are going to deliver that type of growth as you are exiting the year with pretty soft performance here in the back half again you know not just early in NuVasive but just like - just the line of stage that you have in the country perspective or product perspective, and can give us comfort that that bucket will deliver the growth that you are committing there?

Quentin Blackford

Sure. So you look at the back half of 2015 and some of the softness we saw in Europe was self-inflected and we spoke openly about that in Q3 and we saw that rebound in Q4, but Germany is approaching nearly 30% growth. So we’ve already seen the results of those efforts. And think that it will normalize our international growth for 2015 excluding Latin America; we were growing that business well more than 20% in the mid to high 20s excluding Latin America. So we already have the business performing at that level, it’s just - Latin America was an incredibly challenging market for us of the course of ‘15. And we head into ‘16, no we are not expecting a whole lot of growth out of Latin America, we expect to continue to do what we are doing in Europe and Asia Pac and so when we do that we’ll be able to deliver on those numbers pretty well. So I think we got a pretty high degree of confidence in our ability to execute in the international space.

Matthew O'Brien

Thank you.


Thank you. Our next question comes from Raj Denhoy with Jefferies. Please proceed.

Raj Denhoy

Hi, good afternoon. Just curious actually about the guidance around spending for 2016, you know when we kind of bake in the percentages you’ve given us for the various categories, I know your operating spending goes up you know close to $70 million, I’ve realized that should be part of that but you kept your spending relatively constant in the last couple of years, where do you expect to really start into ramp that spending and can you do with that aggressive so quickly?

Quentin Blackford

Yes, so good question. Obviously we are going to make investments that are going to position us for growth into the future. You know Greg talked early around strategic sales, service line partnership, partnering with, those opportunities as we see different ways to create value in the market place when we make sure that we have the investments there to do that. You know at the same time, we’ve been focused on SM&A expense reductions for years. We’re going to continue to do that, but we’re committed as we’ve said to the 100 basis points of improvement for year that we want to make sure we have the opportunity to invest in that the growth opportunities and do that. To the extent that we can go faster we will, this is we’re not going to set the expectations right out the gate and to be able to deliver more than a 100 basis points of core operating margin improvement. So it’s not that we’re taking our foot off the accelerator, we’ll continue to get focus there but it’s early in the year.

Raj Denhoy

Okay. Maybe just one follow-up, I mean you mentioned the U.S. Implant business was very strong in the 10%, you mentioned iGA, is there anything else, anything tangibly you can provide us in terms of like how adopted that is now by the customer base, you know any new customers that you are bringing because of it, just anything would be helpful to understand its impact?

Pat Miles

Yeah, this is Pat, Raj. No - specifically our gain other than kind of this objective dynamic of, we are seeing more, more guys appreciate the kind of what requirements is of gaining alignment and firming alignment. I think that clinically there is such great momentum for a leisure and from a podium perspective that we’re just seeing people appreciate the value that the thing bring. And so really no hard direction but it’s just what seem where it’s very recent of the excellent experience, it’s - when something fulfilled beyond the expectations, we certainly get more momentum.

Raj Denhoy

Okay, thank you.


Thank you. Our next question comes from Josh Jennings with Cowen & Company. Please proceed.

Josh Jennings

Hi, good afternoon, gentlemen, thanks a lot. I just had a quick question on the deformity market opportunity; you guys have been building adult deformity product lines and now have Ellipse. You're book-ending the adolescent scoli market. How do you view that opportunity, and are you positioning NuVasive to move more in, formally into the adolescent scoli market at some point?

Gregory Lucier

Yeah, let me add patent to that one and then if there’s any numbers follow up, I’ll get that to Quentin, so the adult deformity.

Quentin Blackford

It’s not really tried, but I will tell you that we were in head on into adult deformity, which is really extremely complex surgery, where we’re making sure of the fixed spine. The whole idea element is it is really trying to bring the combination of less invasive approaches to correcting the alignment. And so clearly we made a significant bet on that, we’ve seen significant momentum as it relates to the delivery of iGA and in that true line, a number of inner body elements and IOS contribution. It’s clearly an opportunity in a place that we want to participate and we believe there is significant innovation opportunity with regard to what’s it done with early onset scoliosis and where we’re heading into the idiopathic space as well. And so, it’s clear we rise for a fresh look in an aggressive approach and I think that the listing gives us nothing but momentum on our way into - we’re exploding that opportunity.

Gregory Lucier

Yeah, I’ll do one thing. I’ll would add to it, I think he got a total deformity market all-inclusive of adult down to early onset of close to $2 billion of opportunity. With the acquisition of Ellipse Technologies, we can now play really in that entire space and all 2 billion becomes available to us and so that’s how we think about the opportunity around the formula.

Josh Jennings

Great and if I could ask one more, I know Greg, you’ve talked about some efficiencies in the sales force that you can capture and just considering the clinical associate role and I was just hoping you could walk us through the risks and benefits of that as I was deferring up your sales rep to build out the business in different territory. But a lot of the feedback we get from surgeons is that sales rep presents in the OR is one of the reasons why this historically been success with NuVasive in that account. Can you help us thing about how are you balancing those two things that I just brought up and in terms of realizing the sales force efficiencies going forward, thanks a lot.

Gregory Lucier

So, we would agree with that later comment that the NuVasive represented in the OR is one of the key factors that drive the surgeons to want to be partner or member with NuVasive. You know that said early in 2015, we experimented with creating the clinical associate role, a person with a good operational room experience said detraining in NuVasive technology and understanding how to be a service partner and we prototype that in a couple of geographies to see if that could be a way as we have said in other venues to then remove the more expensive if you will sales representatives unless them clump a bit more. We tried it out in certain geographies, the result came back extremely positive. Having said that we still are very cautious about the rollout of that idea across the nation, across the world. And so what happens in the balance of 2015 was we sat down with each of our major sales representatives, we’ve caucus with them to see if they wanted to try this out and we probably deployed but I’m not going to disclose how many we deployed but a fair amount of them across United States and measured them their impact.

What we found when we deployed them is we didn’t lose customers and we actually accelerated growth rate in those geographies. And so it is a good idea, it is an idea that doesn’t fit everywhere it depends on the surgeon but we are ranking up the idea in 2016, in the right geographies to get additional growth. So that’s how we think about it.


Thank you, our next question comes from Larry Biegelsen with Wells Fargo. Please proceed.

Craig Bijou

Hi guys, it is actually Craig on for Larry. I wanted to ask on M&A strategy I think Greg on the Ellipse call you’d mentioned that you saw a potential deal coming in the next few months, I want to know if that still a far expectation and then secondly what is the appetite for new deals and would you guys will be willing to adapt for the right deal.

Gregory Lucier

Well let me answer the question by always coming back to first principles. For us it is about return on invested capital and it is about delivering a strategic advantage. We want to very discipline on the deployment of capital and if it is going to be more of a tuck in or smaller accusations we want to get a return on capital above our weighted average cost to capital meaningfully within three years, if something bigger transformational certainly by five years. And has point Ellipse technology and all of our work and all of our modeling certainly meet those goals. Key cusp is the very fast revenue growth is seeing and we have planned for the business. We build on a very competent, very strong corporate development team to our lawyers not only understand our own innovation but what others are doing and think when and if it make sense to make acquisitions. So we are always looking at things I do anticipate that would probably make other acquisitions in 2016. But I’m not going to comment on how big or small they are or if we needed a take on debt or not. So, I come back to my first principle, we are going to be extremely, extremely principle in the deployment of capital.

Craig Bijou

Thanks and if I just could squeeze one more China was in acquisition focus for 2015 and just want to get your thoughts on 2016, is it still a focus?

Gregory Lucier

China is still a focus, beyond the headline, beyond the volatility healthcare spending in China remains very strong. The growth rate in the healthcare market in China are substantially above other markets around the world. We had 0% the right now and if anything now is probably better time than before to buy assets that you are going to move into China, just given the rest of the uncertainties in the world. I’m not ready to announce anything because again I come back to first principles any deal we do is going to be good deployment of capital.

Craig Bijou

Great, thanks for taking the questions.


Thank you our next question comes from Kaila Krum with William Blair. Please proceed.

Kaila Krum

Hi guys just looking at the guide and the slower growth excited from the surgical support [ph] segment in 2016. Can you just help us understand how you’re thinking about in driving improvements in that area over the next 12 to 18 months and so that segment might accelerate into 2017.

Quentin Blackford

Hi, Quinn here, the one thing that we’re up against in that biologics segment which falls under the surgical support, it is going to be tough comp, we are doing biologics 13% or so in Q1 and still roughly about double-digit in Q2 and then back half comp little bit easier. So we got work ourselves through that but over time you would expect biologics would pull through comparable to your hard work role, which is really a procedural volume. So once you get through the tough comps you would expect to see that category start to come back in line and then the other think that bog down the surgical support and others is the services business which is generally been growing in both single digits. We would expect that would continue to continue at the longer the same trajectory and that’s what we modeled in. But that’s going to continue to grow at a slower rate and our procedural growth at least for the time being. But I think over time you should see that categories get closer to the procedural growth, you’re going to see in the spinal hardware comp category.

Kaila Krum

Okay and then I know with Ellipse you guys mentioned that incremental R&D spending and we know that the company has trauma presence there today. How do you think about that opportunity investment of the core spine segment, is that a segment you like to have more of a presence in the longer-term and or there any R&D dollars today being allocated towards that segment.

Patrick Miles

Yeah, this is Pat and we are extremely do think about the unique utility of that mechanism and there is a fair amount of experience already obviously in limb lengthening side and in the translation of a limb lengthening strategy to a complex trauma strategy. It is so much straightforward and has a great moment. So we have a great enthusiasm as it relates to the elegance of R&D that is been done up at Ellipse prior to the acquisition. So I see every reason to perpetuate them.

Kaila Krum

Great, thanks.


Thank you our next question comes from Jeff Johnson with Robert W. Baird. Please proceed.

Jeff Johnson

Thank you good evening Pat, could I maybe follow-up on that I do want have another follow-up book question but just on that point on the precise side of the Ellipse deal. It’s been a month since the deal was announced any changes at this point in the go to market strategy or how you are thinking on, I’m sorry about the go-to-market strategy. Do you - partners you discussed last month, do you do that with your own credit agency and distribute based business. How do you go to market there?

Patrick Miles

Well, I think the same way you know we are thinking about the our knee strategy. We believe this could be nice little assembly of really specialized orthopedics product and so we see it as an opportunity for us and so really can no change in terms of the with working go-to-market strategy other than really bullish and believe the opportunity look like.

Jeff Johnson

All right there are nothing and Quinn I just want to make sure I understand the international number from the fourth quarter you know we kind of went into this quarter thinking there was going to be a few million dollars headwind from the European distributor to direct switches that we are going on and the it sounds like that it didn’t materialize. So instead was just all volume weakens in Puerto Rico, Middle Eastern and Latin America or there was some payment issues there, may be just little more color on kind of what was happening and how should we be thinking about that as we go into the first half of 16 here.

Quentin Blackford

Yeah, the big issue Jeff was around Brazil frankly and not being able to get any money out of the country to get paid and recognize that revenue. So that what we saw in the quarter itself. Our guidance that anticipated that we would continue to stay positive at historic trends within that business and their ability to pay. We didn’t anticipate some of the benefits we had in the prior year if you remember we talked about that point a bit back in the middle of the year there was some one-time benefit in 2014 and we said that would repeat in 15 or at least guide them. But we thought the core business would continue and what we saw in the fourth quarter was the inability to get any dollars out of the country at all. So we didn’t recognize much of any revenue in Brazil.

The underlining procedural volume were still there though and they are still being reformed in the country. So it is more of a timing issue and that half will come, the revenue will come but in the quarter itself we weren’t able to recognize that. Now that incremental challenge we had fully anticipated and that was really isolated to Brazil. There was have some headwinds in the Middle East, that we talked about between the Middle East and Brazil those were really challenges. The transitions we made throughout Europe as we noted with Germany specifically, we are seeing growth come back in a pretty dramatic, 30% growth in the quarter. So it is more timing issue just working through the ability to get payments through distributors.

Jeff Johnson

Thank you.


Thank you our next question comes from Jonathan Demchick with Morgan Stanley. Please proceed.

Jonathan Demchick

Hello, I have a quick question on the competitive landscape I guess spine. Over last three quarters some of your larger competitors replaced management and appeared to have an increased focus on spine across the board from investing into the product lines filling the hospitals more broadly. Have you seen any change in the competitive landscape and that’s kind of able to describe you know if there is any sort of changes that you guys need to make your strategy going forward.

Gregory Lucier

We get that question quite a lot and we reply very simply that we haven’t seen any change on the competitive set or the competitive dynamics or the deal. And I would just make the personal comment that usually management in those big companies just create a ripple effect of the uncertainty and then a lack of further focus on execution. So that’s what we think.

Jonathan Demchick

Understand, is it fair to ask one quick follow-up on the emerging market discussion we kind of recently had on obviously it has been a big scheme across medical devices across the floor and can you maybe describe as what you are really expecting in for - what you’re assuming in the guidance for next year on the emerging market growth. You are expecting it to say relatively neat throughout the year or is it something that can recover relatively quickly?

Gregory Lucier

It is relatively nominal in terms of growth expectations next year, we are not looking at it as contribute to growth. We are also not looking to go back with a meaningful way but at the same time there is not a whole lot of room to go back but it is not a significant part of the business and with the stuff here in Brazil happen does not have a huge base that we are working of so the plans guidance is more the first flat year-over-year in those markets and the growth sees international is really coming from are direct markets which are primarily Japan, Italy, Australia, now Germany is coming back online with some nice growth but that is how it is going to be feel on the overall growth.

Jonathan Demchick

Understood it is implying guidance organically, OUS growth of about 20% when it kind of back a little.

Quentin Blackford

You got it, yes.

Jonathan Demchick

Thank you very much

Quentin Blackford

I think that’s what - yes it is 20%.


Thank you our next question comes from Robert Hopkins with Merrill Lynch. Please proceed.

Robert Hopkins

Hi thanks, just a couple of quick follow-up questions just sort of one last one on the OUS growth I realized you guys said really good US growth like to focus of this things that maybe weren’t going as well. So what percentage of your OUS sales are in kind of Latin America and Middle East.

Quentin Blackford

We haven’t disclosed that for a while. I’ll tell you the last time we did talk about it was about third across each region. Obviously the growth in major, accelerating well beyond the overall international growth, it is more weighted in that area and Latin America has become much less. So it kind of give you sense of where it might be.

Robert Hopkins

Okay and then couple of little things can Quinn can you just give an update on the targets on the tax rate and how are things going relatively to your expectations here is the close of the year and then in progress day expecting to make over because of the fear and going forward.

Quentin Blackford

Yes, sure the little tax rate continues to be well too high for a company of our size you may know big part of that comes back to our international presence and ability to drive profitability there and we are focused on doing that. The same time we are making good progress in bringing it down we came in at the year guiding through an expectation of around 47% on the non-GAAP tax rate, we saw it coming around 42%. So we made good progress over the course of the year and we would hope to repeat that kind of progresses as we head into the future but there were couple of one-time discrete items that helped us to get us there in the current year that at least at this point wouldn’t repeat. So I think it normalize said you saw us generate probably about 300 basis points in improvements, our guidance says roughly 100 basis points in improvement. Next year we feel very good about that but to an extent we can accelerate international and the profitability efforts there we should be able to do more quickly.

Robert Hopkins

And then lastly for me the last little thing I want to touch on just the attraction just want to see on how things are going with that launching perspectives for us just want to get some general comments on how things are going on.

Quentin Blackford

Attract has come along. Well we planned to roll that out broader ones and the US in the mid-part of the year. And so you start to see some contributions from that in the back half of the year. I would take things are going fine there.

Robert Hopkins

Okay and so quickly you said that guidance for the year on OUS is 20% growth excluding the contribution of the acquisition.

Quentin Blackford

That’s right if you were to look at core NuVasive business with no acquisition are on the contest currency basis yes 20%.

Robert Hopkins

Perfect thank you very much Quinn.

Quentin Blackford



Thank you our next question comes from Joanne Wuensch with BMO Capital Markets. Please proceed.

Joanne Wuensch

Thank you thank you many of my questions have been answered so I’ll be back somewhat brief. Strictly all been answered I am going to ask different question what are we going to talk about in six months or 12 months I mean you started laying out OUS, Ellipse and the try to be a full service provider. I have the suspicion you have something else in mind as your next phase you feel like sharing some of that with those now.

Gregory Lucier

Well it wouldn’t be any fun as we told you what is coming. What I want to give assurance on is that the current agenda of fundamentally improving execution, delivering great improvement profitability and continuing to invest in innovation whether it is our own or acquiring key technologies it is going to continue. I would further add that while I don’t control it, I at least anticipate it that the competitive playing field really wants change very much in the next 12 months. And we think we’ll continue to gain market share a result. So we are feeling, as I said in my prepared remarks were the world’s volatile around us, we are going to be steady and we are going to have a great year.


Thank you. We have come to the end of today’s call. I would like to turn the floor back over to Mr. Lucier for closing moments.

Carol Cox

I think yeah, we are all good.

Gregory Lucier

Thank you very much.


This concludes today’s teleconference. You may disconnect your line at this time and thank you for your participation.

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