Enovis Corporation

Hello and thank you for standing by. Ladies and gentlemen, welcome to Innova's second quarter 2026 earnings call. Please note that this call is being recorded. At this time, all participants are in listen-only mode. There will be some opening remarks followed by a question and answer session. If you wish to ask a question, please press star 1 on your telephone keypad. Thank you. I'd now like to turn the call over to Kyle Rose, Vice President, Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us today for our second quarter 2026 earnings conference call. I'm Kyle Rose, Vice President of Investor Relations. Joining me on the call this morning are Damien McDonald, Chief Executive Officer, and Ben Berry, our Chief Financial Officer. Thank you for joining us. Future events and results. These forward-looking statements are subject to risks and uncertainties, including those set forth in the safe harbor language in today's earnings release and in our filings with the SEC. Actual results might differ materially from any forward-looking statements that we make today. The forward-looking statements speak only as of today, and we do not assume any obligation or intend to update them except as required by law. For further details regarding any non-GAAP financial measures referenced during the call today, The accompanying reconciliation information can be found in our earnings press release and in the appendix of today's slide presentation. With that, let me turn it over to Damien. Damien?

Hey, thanks, Kyle. And good morning, everyone, and thank you for joining us today. On today's call, I'll start with an overview of our second quarter results, discuss performance across our two operating segments, Recon and P&R. And Ben will then walk you through our financial results and outlook for Q3 and 2026. After that, I'll come back and highlight a few quick themes before we open the call for questions. Our second quarter results demonstrated the strength and stability of our diversified product portfolio, improving execution from our global teams, and the ongoing adoption of the one-a-novus mindset. We delivered organic growth of 5%, driven by 6% organic growth in recon and 3% organic growth in P&R. In U.S. recon, we grew 6% organically in the second quarter led by 8% organic growth in hips and knees. Our focus products of Nebula, ARG and Arvis continue to gain traction and we're excited about the momentum we're carrying into the second half of the year. In hips and knees, we continue to execute our commercial plans across the hospital and ASC settings and Nebula continues to be a driver of growth with over 80% of new instrumentation sets going to competitive users in Q2. Internationally, we grew 6% in recon on an organic basis, including double-digit growth in shoulders. We continue to strengthen our global portfolio and remain positioned to take market share. Innovation is a core pillar of our growth strategy at Inovus. We have a robust pipeline of new product introductions planned across our key markets and geographies. Arvus moved into full commercial launch in the US in the second quarter, and I'm excited about the early feedback from Surgeons, and the commercial teams. We're using this launch as an opportunity to strategically target new customers, and we expect to see continued adoption in shoulders as we move through the second half of 2026. Now, moving to P&R, this segment grew 3% on an organic basis year over year. Global bracing grew 4%, with mid-single-digit growth in the U.S. driven by revenue cycle management and spine bracing. Recovery Sciences and Bone Stim were another source of strength for the quarter, delivering mid-to-high single-digit growth, and new products are expected to start contributing more as we get into the later part of the year. So, we continue to execute across our businesses, and I'll pass it over to Ben to walk through the financial details.

Thanks, Damien. Hello, everyone. We reported second quarter sales of $583 million, up 3% versus prior year on a reported basis. and up 5% on an organic basis. Reported growth included 100 basis point tailwind from foreign currency, a 90 basis point tailwind from selling days and a 260 basis point headwind related to the divestiture of Dr. Comfort. For the quarter, days adjusted organic growth was 4% at the enterprise level, 5% in recon and 3% in P&R, which was in line with our guidance. Second quarter results for our international businesses were negatively impacted by the ongoing conflict in the Middle East, resulting in a 100 basis point growth headwind. This represents about a 40 basis point headwind to total Inovus growth in the quarter. For the first half, Inovus grew 4% organically, 5% days adjusted, with recon at 7% and P&R at 3%. This growth is highlighted by strong performance in U.S. recon with both extremities and hip and knee growing at 8%, driven by strong commercial execution and new products. We delivered adjusted gross margins of 62%, an underlying improvement of 120 basis points, driven by an $8 million benefit from two 2025 tariff refunds and operational productivity. This was partially offset by $4 million of ongoing tariff impact and $2 million of unplanned inflationary pressure as a result of higher raw material and freight distribution costs stemming from the Middle East conflict. Adjusted EBITDA margin was 17.9%, an improvement of 70 basis points on an underlying basis, and up 20 basis points through the first half. Our second quarter effective tax rate was 24%. Interest expense was $8 million for the quarter versus $9 million in the prior year. Overall, we posted adjusted earnings per share of 90 cents, representing 14% underlying growth in the quarter and 12% earnings growth through the first half. We remain focused on disciplined capital allocation. Free cash flow in the quarter was $31 million, an improvement of $27 million versus prior year, which gets us the slightly positive free cash flow generation in the first half, A significant improvement. We expect to continue our positive momentum and cash flow and will continue pursuing opportunities to make investments to support growth. Turning to guidance, we are reaffirming our 2026 guidance. Commercial execution remains critical to delivering our 2026 commitments. We continue to focus the organization's attention on increasing commercial agility and targeted share gain opportunities. On the profit side, we expect the $8 million benefit from the partial tariff refund to be offset by $10 million of full year impact from the increased inflationary environment we are currently facing. Additionally, we expect free cash flow conversion of greater than 25% in 2026, as laid out in our prior calls. In terms of quarterly phasing for the second half, we expect the third quarter to have a heavier impact by seasonality. that in prior years due to market conditions in Western Europe and the continued disruption from the conflicts in the Middle East. We expect sales acceleration across both segments in the fourth quarter as we continue to scale and launch new products against the backdrop of improving market volumes as we close out the year. To summarize, second quarter was in line with our expectations given the dynamic market environment. We remain confident in the strength of our company The diversified portfolio we've built and the continued execution leading to consistent market share gains. Now I'll turn it back over to Damien for closing comments. Damien? Hey, thanks, Ben.

Before we get into Q&A, I just want to take a few minutes to reflect on my first year. A year ago this week, I led my first earnings call at Inovus. I'd been here about 90 days and found a company that had assembled a compelling portfolio of It was early in its journey of value creation. When I spoke to you then, I outlined three priorities, commercial execution and innovation, operational excellence and financial discipline. These priorities are driving meaningful change in how we operate and remain the foundation for how we will deliver sustainable, profitable, capital efficient growth. Most of what we did in the first year was foundational. We changed the operating cadence and attracted new talent to the senior leadership team. We put real rigor around daily management and revised our incentive plans to align with our strategic priorities. We pushed EGX deeper into the business and we shaped the portfolio most visibly with the divestiture of Dr. Comfort. We also put a focus around fostering a one and novice mindset, working together across teams to drive growth and execution. With regard to commercial execution innovation, it was clear that our teams had been stretched by complex integrations and rapid product launches and we needed to create space for our teams to bring their A-game to every customer facing activity. We continue to grow above market in both of our business segments and still see potential for further acceleration. Innovation is a key area for our future growth and we continue to invest in people, process and product to remain a nimble innovator. It's clear that innovation and enabling tech will be foundational for our long-term growth strategy. This means investing in the technologies, the teams, and the capabilities that will improve clinical outcomes, optimize surgical efficiency, respond to customer preferences, and ultimately define the next generation of orthopedic surgery. On operational excellence, I said last August that high teams EBITDA margins were not sufficient for this company's ambition, and I still believe that. We held our margins through tariffs and unexpected inflationary headwinds while stepping up our investment in R&D. And our gross margins have expanded on the back of mix and productivity. Over the next year, the emphasis moves from embedding our foundational business system to optimising our operating model. On financial discipline, for the past year, our response to every capital allocation question has been debt reduction, and it needed to be. We've since moved from negative free cash flow to positive, brought leverage down to 3.1 times and refinanced our balance sheet to improve terms and capacity. And this is also the last year of heavy investment in the Lima integration. As the balance sheet strengthens, we're beginning to evaluate how we can advance that portfolio for durable long-term growth without losing our focus on cash generation and debt reduction. I'm more optimistic now than I was 12 months ago and it isn't because of any single product or quarter. It's because this organisation has embraced change faster than I anticipated and I've seen what we can do when everyone is pointed in the same direction. This is the One Inovus mindset and it's driving engagement across the organisation. So before we go to Q&A, I want to thank the Inovus team for their dedication and execution over this past year. Their efforts have been instrumental in delivering meaningful changes and positioning a novice for long-term success. So Kyle, why don't we open it up for Q&A?

Thanks, Damien. In an effort to accommodate everyone in the Q&A session, we ask that analysts limit questions to one question and one follow-up. You are welcome to rejoin the queue and we will fit you in if we have more time. With that, we'd like to now open it up to take questions. Operator?

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. At this time, I would like everyone to know that in order to ask a question, please star 1 then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Ryan Zimmerman with U.S. Bancorp, DTIG. Please go ahead.

And thanks for taking our questions. I appreciate your thoughts, Damien. One year post the position. Maybe to begin, I'd like to drill into U.S. Recon for a moment here. You know, you saw really nice growth, particularly in the hips and knees business. Extremities was a little softer than maybe I would have expected given where the shoulder market's going. So maybe, Damien, you could spend a minute on kind of parsing some of that out, kind of what the dynamics are, particularly in U.S. extremities, as you think about the balance of the year.

Sure. Hey, good morning, Ryan. Thanks for the question and joining us. Yeah, look, I'm really proud with how the team have executed in both spaces, hips and knees and shoulder. If you look through the first half Hips and knees are up 8%. Extremities are up 8%. The Q2, yeah, we had some challenges there with a few things. One is we're lapping the ARG launch from last year, so it was a pretty tough comp. But I think importantly, we had a lot of MedEd events in Q2 that took a lot of our high-volume KOLs and surgeons out of the space for a few weeks The first half performance, I think, is the thing to look at. I mean, look at our scale. We move a couple of people here one week or another, and it materially affects us. So I think the first half is the way to look at it. And so as we think about the back half of the year, you know, we've got more work coming with ARG. We've got the Arbus rollout expanding. And so that's why we're confident about the back half of the year.

And maybe turning to Ben, gross margins, if you look over the last six quarters, have been trending favorably or so. Ben, can you talk about your gross margin progression, where you think that can go, and what levers you have, particularly against the backdrop of some of these inflationary pressures that you're experiencing?

Thanks, Ryan, for the question. It's one of the things that we're proud of in terms of how we've built the portfolio with regards to how the product mix flows through the P&L with the way that we've established the segments and what's growing the fastest is generally coming with higher standard margins. You layer that on top with continuing to get added benefits as we get further Downstream with regards to all the integration work that we've been doing within the recon business, being able to start to capitalize now on some of the synergies from the Lima deal as we're consolidating and expanding production facilities in lower cost locations. And then also you've got just deeper embedded continuous improvement that we've been able to drive into both segments on P&R and recon with regards to productivity and making sure that we're working through how do we get the most out of our manufacturing and operations supply chain. So overall, I would say it's a multi-levered effort, and we got a few tailwinds that help organically, but then it's about making sure that we're offsetting some of the surprises that come our way, like the inflationary pressure that we've been continuing to face. And then we did in the quarter get the benefit of a partial tariff refund as well. That helped in the quarter. But overall, I think as we look at it, we see a multi-year cadence of margin expansion, and a lot of that driven by gross margins.

Thank you.

Thank you. Your next question comes from the line of Yong Lee of Jeffries. Please go ahead.

All right, great. Thanks for taking the questions. I guess maybe starting with cash flows, you know, good to see the progress in 2Q, and it seems like you're on track for the 25-plus percent converter for the year. You know, some of the UMDR costs and integration costs goes away soon or next year-ish. I wanted to hear a little bit more of the key drivers that gets you to 40% to 50% and then 70% to 80% after that.

Hey, Jan, thanks for the question. Yeah, I mean, I think you're really starting to see adjusted costs start to step down like we've talked about. You know, we're in year three of a pretty complex integration of a European asset in Lima, and we'll expect that to continue to step down even as we enter 2020. into next year and beyond. I think you're starting to see some productivity in our working capital as well. I mean, I think Damien made in his prepared remarks that we've realigned incentives around cash flow for the company, and that's an area where we're bringing more discipline and more of the EGX toolkit into making sure that there's the right organizational focus around cash flow and it's starting to read through. So it was nice to see the first half as positive free cash flow and generally you've seen us seasonally have a stronger second half when it comes to cash generation.

Great, very helpful. And then I guess the PowerPoint comments mentioned increasing market dynamics including in the second half as well as in Western Europe. Can you maybe unpack that a little bit for us, you know, which segments are more impacted, which geographies are more impacted?

Yeah, look, so let's, apart from the Middle East, right, which we've characterized well before, I think we saw some softer markets in Western Europe, inside international Western Europe, and predominantly, I would say, you know, France, Spain, Italy. Again, it's no surprise that there are a lot of environmental things going on in those countries, and so we just see a slightly softer market in the OUS market, but particularly Western Europe. Okay, thank you.

Thank you. Your next question comes from the line of Ditya Ipumar of Evercore. Please go ahead.

Hi, Damien. Good morning, and thank you for taking my question. I guess my first question is on this back half guidance, right? There's a helpful slide in the deck where you talk about your phase-adjusted growth by segments. And correct me if I'm wrong, CQ, I don't think that there's any phase differentials, so your phase-adjusted and reporter organic should be in line, actually. That would sort of imply an acceleration from second quarter, right, on a day-to-day basis. I'm curious. CQ is, you know, seasonally, it's softer. What is driving this optimism? Am I thinking about it the right way?

Yeah. Hey, Vijay, it's Ben. Thanks for the question. I mean, I think as we make comment, I mean, we're starting to see Some of the benefits of the hard work that we've been doing around really, you know, putting muscle behind commercial execution and scaling the new product. So, I mean, I think as we see Arvis, the demand for that and the excitement for that, you know, starting to pick up here, we would expect that will be a contributor for us in the second half of the year as well as, you know, continued penetration of Nebula and ARG And, you know, we have opportunities there to just continue the acceleration. I think on the P&R side, you're also seeing some new products and some good discipline around commercial execution that's starting to read through in customer conversions. So those will start to read through in the second half. as well. I did say in my prepared remarks that we do expect a more seasonally soft Q3 than what we've seen in the past, so that will be a bit of a headwind that we'll have to offset with some of these things that I just mentioned. But overall, I think the way that you characterized it is correct. And then just a reminder that we do have, you know, one day in Q4 in terms of selling day impact, but Q3, as you mentioned, is, you know, zero impact year over year.

Yeah. Just to go on the new product things, I mean, Nebula we talked about, I mean, that's continuing its rollout. It's still early days, but we're getting a lot of great customer conversions there. And you talked a little bit about P&R. You know, I think what the team have done in region is really great. I mean, now the proxies are out. You know, we are meaningfully taking share in that region business. And I think that's a good sign about the commercial execution from that team. And then You know, the recovery sciences team are going to be launching Revital for the laser treatment in the companion market. I mean, that's an exciting aspect and a big conversion funnel there too. So again, a lot of good things that are coming the way on both sides of the house.

I understand. And then maybe, Ben, one on sort of FSLR27 question. Your guidance for 26 now includes a tariff-free fund benefit, right, and that's being offset by higher inflation. But when you think about 27, you lose the tariff, Calvin, but inflation stays, right? I guess, is the margin algorithm for 27 changing?

No, we don't expect the algorithm for 27 to change, Vijay. I think, you know, we will continue to mitigate The inflation that's coming our way, sometimes that takes a little bit of time. As I mentioned, there's productivity opportunities for us to continue to drive. And if I think about stepping into next year, you'll also see continued step down in adjusted costs. So as I think about our margins and cash algorithm for 2027, I would say that those are still intact. Thank you.

Thank you. Your next question comes from the line of Robbie Marcus of JP Morgan. Please go ahead.

Hi, everyone. This is Lillian for Robbie. Thanks for taking the question. Following up on the question around macro trends, on the general market and procedure backdrop, we've heard some different commentary from some of your peers around the health of the ortho market in the second quarter. So I'm curious what you've been seeing on your end, and if there's been any disruption from declining ACA and Medicaid enrollments, and to what extent does that contribute to the macro disruption you called out?

Why don't I start off, and why don't you jump in, Kyle? I think, let's talk about US. I don't think we're seeing any change in the underlying dynamics, but there's sort of week-to-week and month-to-month volatility that's crept in. But I would say, you know, If you look at our first half, we're pleased with how the market evolved and where we landed with both hips and knees and in extremities. I think there's a lot of noise. The physician payment thing that proposal has been put out has created some noise. I think the CJRX has created some noise, but on average, we see the markets as pretty stable. Do you want to?

Yeah, hi Lily, this is Kyle. I think we agree with Damien there. I think we're encouraged with the growth that the recon team put up in the first half of the year and in the second quarter in particular. I mean, if you look at 6% growth in total U.S. recon, and if you zoom out a little bit and look at the second half, 7%, that looks to be above the broader peer group when we look at some of the main market segments we plan. So I think we're really excited about the progress thus far, and we'll see how the rest of the year plays out.

Got it. That's helpful. And then just as a follow-up, a lot of your major competitors have been experiencing some form of disruption this year, whether it be Salesforce reorganization or preparing to separate their orthopedics business. So I'm curious the impact that that's had on the competitive landscape. Have you seen any material change in dynamics over the last few months, and do you think this has opened up a window for you to capture a share in a sustainable way? Thanks.

Yeah, that's a great question. I would say, I talked about being a nimble innovator and what we've been doing in product introductions I think has created some noise on the commercial side and it's made us, I think, a more attractive venue and the fact that we are stable and growing, you know, we use the word talent magnet. I'm excited about what we're creating and I really hope that people who want to grow businesses are interested in coming to join us. So I can't comment about what's going on inside each of those other competitors that you're talking about. What we're doing is trying to create a really great environment for people to come and grow businesses and that's been reading through in how we've attracted talent over the last six or 12 months.

Hi Robbie, if you're lying to me then. I'm all set. Thank you. Thank you.

Thanks, Louie. Bye.

Your next question comes from the line of Lawrence B. Johnson of Wells Fargo. Please go ahead.

Good morning. This is Ross Osborne for Larry. Thanks for taking our questions. So maybe looking at Arvis, with the full commercial launch underway, can you discuss how conversations are evolving beyond the initial KOL and high volume circuit base? What aspects of the platform are resonating most strongly? Where are you encountering a skepticism or a pushback? And what education is still required to help surgeons fully appreciate the benefits?

Yeah, thanks for that, Rob. I think one of the things that we're really hearing about is just how versatile the system is. It's mobile. It's small. It really deals with, in shoulder in particular, the anatomy that's quite complex. For me, the new gap balancing technology that we put into 2.0 is reading through. So the feedback has been very positive in both the med-ed settings and the clinical settings. The demand funnel is tremendous. In the back half, we're going to be rolling it out more in shoulder and then starting into the international markets. So we're really encouraged by the early feedback, both from the clinicians and the commercial team. Their access has been improved as well by having something like this to talk about.

And then as a follow-up, how do you feel about your RAP headcount? Do you feel you have enough and the right people in place? And how should we think about the incremental spend coming to the model in 2017?

I think we've got plenty of opportunity to, A, attract talent, given what we're doing with new product launches, but, B, with what we're doing in terms of products like Arvis, the productivity per rep is improving as well. So I don't see us needing to do massive headcount hiring to achieve our goals. Like I said, if we can attract talent and use that as an opportunity for account conversion, tremendous opportunity. but that's not the predication of our model.

Thank you.

Thanks Rob.

Thank you. Your next question comes from the line of Keith Hinton of Freedom Capital Markets. Please go ahead.

Great. Yeah, a couple of P&L cash flow questions here starting off with the inflation figure that you put out. I think you said about a $10 million impact I don't recall whether you've put out a number like that before. So I'm curious, is that sort of all incremental in the, you know, in the last 90 days or, you know, is that just over the course of the year? And is that $10 million impact net of sort of any price increases you can take on the P&R side or anything else you can do to protect margins? Or is that kind of a gross number that then gets netted down through those other things?

Thanks, Keith. I think we started to see it really materialize at the beginning of the second quarter here and kind of starting to read through there near the end of the quarter. I mentioned in my remarks we had a $2 million impact in Q2, so the balance of that eight will be in the second half of the year, probably a little bit more weighted to Q3 than Q4 as We start to build in some of the mitigation efforts. So that is a net number. And yes, we will try to continue to pass through as much of it as we can. We've struggled with that a little bit, frankly, given some of the market dynamics and some of the competitive dynamics that we have at play. Particularly, this impacts the P&R business the most. And so we're continuing to try to balance that. because we've been under a pretty heavy inflationary environment, be it tariffs or now this Middle East conflict for a while now. And we can only do so much when it comes to passing some of that on before we start to put some of the revenue at risk. So we're trying to balance it. We're going to try to really get after it hard in the second half. But we do think it is a bit of a detriment to the second half here in terms of how that's going to play through. Now, We did get a partial benefit of tariffs in Q2. It's not the full benefit. We don't really know how that's going to play out. Ideally, there'd be some offset that could come from that, but we're not planning on that to happen at this point.

Great. And then just on free cash flow, you know, obviously a pretty strong quarter here. So, I just wanted to ask, you know, anything to call out there it doesn't look like you know looks like there were some working capital moves but they were they mostly netted out neutral so just anything to call out any upside to that 25 percent or higher guide for this year and you know I know you guys don't break out free cash by segment but you know can you speak to that at all on a on a high level is the is the recon segment You know, free cash positive on a standalone basis, or is most of this free cash coming from P&R?

Yeah, most of the cash continues to come from P&R. I mean, we are seeing improvement year over year on the recon side. We still see more opportunity there, as I mentioned earlier, with regards to continuing to embed the business system and and be now past a lot of the heavy integration work and capitalizing on some of the synergies in that business. So I think there's more opportunity there, frankly. I think the quarter was a good sign. I mean, it was maybe a little bit better than our expectations in terms of our performance. and given our second half history in terms of cash generation, we feel pretty confident that we're on a pretty good trajectory here. I'm not going to change guidance at this point, but overall I like the trend that we're on.

Okay, great. And just to be clear, nothing, you know, no kind of one-timers or anything to call out in terms of the strong results?

No, no, I mean, other than the tariff refund, but I also mentioned there were some offsets to that. So, you know, from our standpoint, it was a pretty strong read-through of execution.

Great. Thank you so much. Thanks, Keith.

Thank you. Your next question comes from the line of Jeff Johnson of Baird. Please go ahead.

Thank you. Good morning, guys. Damien, I just wanted to follow up, you know, we can all debate, I guess, ACA and Medicaid and some of those issues on the U.S. market, but your European comments, France, Spain, Italy, you know, we have picked up a few stories here and there, some transient strikes, maybe out of some austerity concerns or potential issues in Europe. So I guess your comments on those markets, are those due to just kind of transient strikes that, you know, maybe disrupted a little bit in the second quarter, not sure if that'll continue, or is it more you're seeing a slowing demand trend there or something that concerns you more on the patient or surgical volume side? Thanks.

Yeah, I would say it's more weighted to the transient. So, you know, again, strikes... fires, heat waves, you know, all of those things we believe are transient and ultimately, you know, you keep the patient in the funnel, it's just you delay the procedure. I think the only thing for me is sentiment as the war in the Middle East continues and what does that do as people reorient funding towards military spend versus healthcare We haven't seen any of that read through, but that's the watch out. So in line with that, we're very focused on commercial execution and what do we have to do to double down on account conversions and market share gains to get ahead of anything like that.

All right, that's helpful. Thanks. And then just to follow up on P&R, it's a simple one, but I think you had been accruing for some of the proposed changes on the bone stem side. Obviously, those got reversed. I'm assuming you just reversed those accruals during the period and no real impact in the period or expected going forward on that phone stem stuff now that that's been rolled back? Thanks.

That's right, Jeff.

Yeah, I don't know if you got that, but that's correct. And as I said in my comments earlier, I'm really pleased with how that team is executing and we're meaningfully taking share in that space. Perfect. Thank you.

Thank you. Your next question comes from the line of Caitlin Roberts of Scanaccord Genuity. Please go ahead.

Hi, thanks for taking the questions. Just a quick one on foot and ankle. I think one of your competitors called out strong growth there this quarter. How was performance for you guys and just generally is that market continuing to rebound?

Yeah, we're very pleased with that team actually. They had a great quarter and, you know, We think the WAMGA there is like four to six percent and we were meaningfully above that. So I think good commercial execution. We've had some great account conversions and the innovation pipeline there is really strong. I'm really pleased with how that team's performing this year.

Awesome. And then just thinking about another one of your competitors has a shoulder rollout going on for their robotic system. and their smaller format robotic system. How are you thinking about that versus Arvis and have you heard kind of any comparison from surgeons in the marketplace or not really hearing that?

Yeah, I think that's an interesting one. Look, we really believe that there's an opportunity, actually a big opportunity for enabling tech in the shoulder. We think Arvis right now is a real and validated option. It deals with the anatomical differences that, you know, a large format robot, I think, is going to find tricky. But I really think the market's going to continue to evolve. So I think we've got a great offering now. We've got to continue to innovate to respond to that. But this is an exciting opportunity for Arbus.

Great. Thanks so much.

Thanks, Caitlin.

Thank you. Your next question comes from the line of Steve Lichtman. of William Blair. Please go ahead.

Thank you. Good morning. Damien, I appreciate your comments now one year in. You mentioned evaluating opportunities without losing focus on cash flow. Think about portfolio management. And again, without losing focus on cash flow, which is, of course, important. Are you still evaluating the portfolio the other way in terms of potential more divestitures and or SKU reductions on either side of the business?

Great question and you're right I didn't specifically call that activity out but yes that's definitely a way we're thinking about the portfolio evolution of you know what else makes sense to keep or not and SKU reduction for me is one of the great parts of EGX So, yeah, I would say it's convex and concave on that respect with capital allocation.

Got it. Great. And then what trends are you seeing in your ASC business? I think you talked in the past about having P&R and recon under one roof is a competitive advantage there. So it's obviously an important channel. Just your latest thoughts on what's happening in ASCs for you guys.

Yeah, we really like the ASC setting for a number of reasons. I think there's a lot of patient preference for it. I think there's an increasing physician preference for it. Some of the reimbursement dynamics that we talked about earlier I think are going to drive it even more towards ASCs. Obviously, and people talk about this, the downside is the pricing. The upside for us is the market share gain and the fact that contracting isn't so fixed and players like us, I think, have a more dynamic opportunity to take market share and account acquisition in the ASCs than large format systems where contracts can be locked up for multiple years. So, we think the trajectory in the near term is positive, but then the longer term, of Kyle Wynn there is definitely a benefit for us.

Got it. Thanks, Damien.

Cheers.

Thank you. Your next question comes from the line of Vic Chopra of DMO Capital. Please go ahead.

Hey, good morning, and thanks for taking the question, too, for me. It's nice to see the progress on the free cash flow. I'm just curious at what leverage level do you expect your capital allocation to shift more towards M&A? And I had a quick follow-up, please.

Hey, Vic. Thanks for the question. Yeah, I think we've said that we've been continuing to drive our leverage ratios down with the goal to get that down below three here this year. So I think that's, you know, kind of concurrently still in play as we think about, you know, the full year. Outlook. So, overall, I think we're pleased with that progress. As we start to step below three, that gives us more freedom to think about other things. But, you know, our focus has been really driving that down, and we've seen good progress to get where we are at this point. All right.

Thank you. You know, as you look ahead to next year, I'm just curious if you expect the value creation from the company to be driven more by improving revenue growth and Margin Expansion or Free Cash Flow Conversion or a combination of the three? Thanks.

Look, that's a great question. The answer is yes. We think it's all three. I mean, we clearly heard from investors as I came on board that free cash flow, generating cash, debt reduction was key. And you can see that we focus heavily on that capital allocation and it's reading through but at the same time, growth, growth, growth and we've done a great job, I think, of driving growth in key markets and continuing to innovate. The more we do that, the more we read through into margin accretion but this is why I talked about EGX and the business system because we've got work to do still that I think is meaningful in terms of margin accretion by the way we operate. We, for example, have set up two facilities now, we call it global business systems, and the service application of cost centres being aggregated. So we have one in Portugal, one in Hyderabad in India, we're opening up a third in the Americas, and we expect that to continue to meaningfully contribute to our margin accretion by putting global business services into shared service facilities. So we want to continue to focus on the capital allocation because we know that's important to investors. We believe growth is essential to value creation. The more we do that, the more margin we accrete, but we need to change our business systems and we're doing that meaningfully and all three are reading through.

Is your line muted, Vic?

I'm good, thank you. Thanks, Vic.

All right, thank you. Your next question comes from the line of Mike Madsen of Needham. Please go ahead.

Hey, everybody. This is Joseph on for Mike. Damien, maybe a follow-up just on margins a little bit or gross margins. you know it's great to see significant expansion in the last two quarters but just looking at the second half of the year wondering a bit just maybe about the sustainability or the cadence of margin expansion from here should we be looking at second half as similar to first half or just with tariffs and you know the initiatives you talked around EGX are there Some different levers that could move that materially up or down from where you guys landed in the first half.

Yeah, Joseph. I think as we think about gross margin, again, I think the mix of the business is playing a role to help us here. Now it's being offset a little bit by some of this added inflation that we're seeing that we'll read through in the second half. So Again, I'm not given specific H2 guidance on this, but I would say that we'll continue to make progress year over year in growth margins. And it's a critical lever for us as we think about our profit expansion goals here over the next several years. So we'll continue to focus on driving as much productivity as we can there and offsetting some of these new headwinds that are coming up. in the fruition. But overall, I think we're pretty pleased with the progress we've made so far.

Okay, great. And then, you know, it's good to see some of the early feedback on ARVIS. Maybe just wondering how those conversations are looking at in the ASC setting, what you guys have really thought about, you know, the ARVIS launch in 2026 guidance. and then maybe just generally for ASC market, where do you think your market share sits at currently?

Well, we don't disclose where we think about market share. We know we're definitely skewed more towards ASCs than some of our competitors and again, I think that's a net advantage for us. The Arvis, I think, is a perfect Perfect offering for the ASCs. Again, it's mobile. You can move it between rooms easily. A clinician can take it from account to account. I think that's a big deal. And I think the economics work for ASCs very much in favor of an offering like Arvis. So for three different reasons, the feedback so far has been very positive.

Great. Thanks very much, and congrats on the strong quarter.

Thank you. That concludes our question and answer session. I would now like to turn the call back over to Damien McDonald, CEO, for closing remarks. Please go ahead.

Thank you everyone for joining us today. This was an encouraging first half for 2026 and we have a lot of opportunity ahead of us. Against this complex external backdrop, it's more important that we remain focused on what we can control and its disciplined execution through the second half of the year. So we really appreciate your continued interest and the support and we look forward to updating you again on our third quarter in early November. Thanks a lot.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.