Enovis Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2025

Key Takeaways

  • Positive Sentiment: Innovus delivered Q2 sales of $565 million (+7% YoY, +5% organic) and achieved adjusted EPS of $0.79 (+27%), prompting management to raise full-year revenue, EBITDA, and EPS guidance.
  • Positive Sentiment: The Recon segment grew 8% on an organic constant currency basis, led by 10% U.S. extremities growth and anticipated acceleration in hip and knee sales as new products ramp.
  • Negative Sentiment: Tariff headwinds persisted with $6 million paid in Q2, and related cost impacts are set to flow through the P&L in Q3 amid ongoing trade uncertainties.
  • Neutral Sentiment: Next-gen ARBUS augmented reality platform launch is now delayed by six months to integrate enhanced features, though early surgeon feedback remains encouraging.
  • Neutral Sentiment: New CEO Damian MacDonald outlined near-term priorities—commercial execution & innovation, operational excellence, and financial discipline—with a focus on debt reduction before pursuing M&A.
AI Generated. May Contain Errors.
Earnings Conference Call
Enovis Q2 2025
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good day, and welcome to Innovus Second Quarter twenty twenty five Earnings Conference Call. All participants will be in the listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch tone phone. To withdraw your questions, please press star then 2.

Operator

Please note this event is being recorded. I would now like to turn the conference over to Kyle Rose, VP, Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining us today for our second quarter twenty twenty five results conference call. I'm Kyle Rose, Enovus' Vice President of Investor Relations. Joining me on the call this morning are Damian MacDonald, Chief Executive Officer and Ben Barry, Chief Financial Officer. Our earnings release was issued earlier this morning and is available in the Investors section of our website, enovus.com.

Speaker 1

We will be using a slide presentation in today's call, which can also be found on our website. Both the audio and the slide presentation of this call will be archived on the website later today. During this call, we'll be making some forward looking statements about our beliefs and estimates regarding 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.

Speaker 1

These 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 relating to those measures 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 Damian.

Speaker 2

Thank you, Kyle. Good morning, everyone, and thank you for joining us today for our second quarter earnings call, and my first as CEO of Innovus. Before we walk you through the quarter, I want to take a moment to speak directly to our investors and shareholders. I recognize the trust you place in this company and in me as its new leader. Your confidence and support are what make our growth possible.

Speaker 2

I stepped into this role with a deep sense of responsibility to our patients, to our health care partners, to our employees, and to you. I look forward to engaging with you and earning your confidence with our results. I've been at Innovus for just over ninety days, and I would like to share with you my observations on the company and the opportunities ahead of us, as well as begin to outline our near term priorities. I started in my role shortly after the third anniversary of the spin off that created Innovus, a medical technology company with an unmatched portfolio spanning surgical solutions, bracing and rehabilitation. All technologies that align with our orthopedic continuum of care needed by patients and their providers.

Speaker 2

In those three years, we've bought more than 10 companies into our portfolio. Our transformation has been notable scaling from $1,400,000,000 to $2,200,000,000 in revenues, from 56% to 60% in gross margins, and from 14% to close to 18% in adjusted EBITDA margins. This growth has been deliberate and driven by organic expansion, portfolio shaping and targeted acquisitions that align with our strategy to globalize our business towards faster growing, higher margin end markets. It's clear that we've got a strong foundation and an unmatched diverse portfolio of solutions. But to realize our full potential, we must maximize the power of what we've built.

Speaker 2

There are opportunities to improve the durability and consistency of our organic growth, margin expansion and cash flow generation. Each of these improvement opportunities will be supported by disciplined capital allocation. In my first three months, I've been out in the field and actively listening and engaging stakeholders who are key to our success. This included visiting customers, hospitals, and medical centers and meeting key physician partners. It was encouraging to hear how highly they regard our portfolio of products and their views on the opportunity we have to gain share.

Speaker 2

I've also been busy internally, connecting with our senior leaders and spending meaningful time with our teams around the world. It's been incredibly energizing to witness firsthand our passion for restoring motion and improving patients' lives. Having toured all our major manufacturing sites and corporate offices, I'm now concluding comprehensive reviews of each of our business segments, functional teams and sales regions to inform a multi year roadmap centered on profitable, capital efficient growth in order to improve patient outcomes, become a talent magnet, and deliver outsized shareholder returns. In the near term, I intend to focus the organization on three key priorities: commercial execution and innovation, operational excellence, and financial discipline. In terms of commercial execution, Enovus operates in attractive, sizable markets and competes against some of the strongest and most financially capable technologies in medtech.

Speaker 2

We have and we will need to always bring our A game to every customer facing activity. I know that there have been instances where complex integrations and rapid product launches have stretched our teams. The opportunity lies in further embedding and expanding disciplined commercial practices across the enterprise. With respect to innovation, we must use size to our advantage and reinforce our ability to be nimble by quickly identifying and addressing key market trends and making focused investments in those areas with the highest differentiation and market potential. An immediate priority for our team will be accelerating our product pipeline with a particular focus on enabling technologies that improve clinical outcomes and surgical efficiency.

Speaker 2

Regarding operational excellence, a large part of my experience in this area centers on focused business system philosophies to deliver exceptional long term financial outcomes. High teens EBITDA margins are not sufficient to achieve our company's goals and ambitions. To that end, we are developing detailed plans to optimize resources, augment gross and operating margin, improve cash flow and leverage address leverage directly, while continuing investments in customer facing and R and D activities that promise differentiation and profitability. Additionally, while EGX is central to our operating philosophy, its implementation remains in varying stages of maturity, largely following the successful acquisitions over the last five years. I believe the accelerated application of this business system will improve capital allocation and operating efficiencies, and I am confident we will see tangible improvements in cash generation, leverage and productivity in the near term.

Speaker 2

And third, with multiple operating companies under our umbrella, it is important to further embed organization wide financial discipline to expand margins, improve working capital and CapEx efficiency and significantly reduce integration related costs. As our foundation gets stronger, we will create the flexibility for broader capital allocation decisions in the future. Finally, under my leadership, Innovus will build on our strong culture of thoughtful speed, transparent accountability and collaborative empowerment. Our employees remain central to achieving our mission, and we are actively investing in their development, fostering an open high performance environment and encouraging cross team collaboration to get better every day. Now let's turn to our second quarter results.

Speaker 2

In the second quarter, we delivered reported growth of 75% on an organic constant currency basis. We delivered strong earnings growth and positive cash in the quarter, while managing tariff headwinds. Our teams have made good progress on new product launches, and we have clear line of sight into a multiyear cadence of meaningful NPI. In recon, we delivered organic growth of eight percent, including U. S.

Speaker 2

Growth of 6% and international growth of 10%. Growth in U. S. Extremities was 10% driven by strong double digit growth of shoulders led by the launch of our augmented reverse glenoid system. U.

Speaker 2

S. Hip and knee growth was flat, reflecting the impact of fewer selling days and headwinds in capital sales as customers deferred orders in anticipation of our next generation hardware launch. Underlying implant growth in hip and knee was mid single digit, and we expect acceleration in the second half of the year as new products ramp. Early commercial feedback on the Nebula system and the OrthoDrive surgical impactor has been encouraging with a positive reception from surgeons and sales teams. Our launch activities to date have been controlled as we scale inventory and ramp surgeon training.

Speaker 2

Outside The U. S, we benefited from our recent geographical expansion and continue to take share in a resilient market. Our Optimus Stem and RM Cup continue to drive competitive share gains in international hip. Similarly, our SMR and PRIMA shoulder portfolios continue to be a highlight as we integrate and capitalize on cross selling opportunities. A consistent theme in my conversations with our commercial teams and surgeons is the growing conviction that enabling technologies are key to having a comprehensive portfolio.

Speaker 2

Our entry and key platform in this space is ARBUS, an augmented reality platform that delivers real time intraoperative intelligence, guidance and navigation. ARVIS stands out in the market because it is simple, portable and scalable, enhancing surgical precision without adding complexity to the workflow. It fits seamlessly into both inpatient and outpatient settings regardless of the reimbursement model, delivering real value where it matters most. Our next generation platform builds on this foundation with a lighter, more complex headset, improved visualization, faster registration, and enhanced tracking. These upgrades also enable future expansion into real time soft tissue balancing for knee procedures and differentiated shoulder applications.

Speaker 2

All important steps towards building a broader, more versatile multi anatomy ecosystem. The addition of these features has extended our commercial timeline. We're now about six months behind where we expected to be, but the excitement we're seeing with surgeons gives us confidence that the enhancement will be a meaningful addition to our global portfolio. In P and R, 3% organic growth reflects a stable market environment and disciplined execution. Overall, this business is performing in line with our strategic plan and will benefit from the Manifuse LIPUS technology launch and several key new bracing products in the coming quarters.

Speaker 2

Adjusted EBITDA margins in P and R improved 130 basis points year over year as we continue to use EGX tools to drive consistent productivity improvements and proactively shape the portfolio for profitable capital efficient growth. I've been in the medical industry for more than thirty years, and I'm passionate about its power to improve people's lives and longevity. I'm grateful I've been given this opportunity to bring my experience to Innovus and lead the company into its next chapter of growth. Since joining, my initial optimism about the potential has only grown stronger, and I am confident in the near term strategic objectives and commitments we've made to investors, including our updated guidance that Ben will outline shortly. As I mentioned, my immediate priority is reinforcing organic growth and margin expansion, while also unlocking capital efficiencies across the business.

Speaker 2

I look forward to sharing a detailed multi year roadmap in the future. And now I'll turn it over to Ben to take you through the P and L details. Ben?

Speaker 3

Thanks, Damian. Hello, everyone. We are pleased to report second quarter sales of $565,000,000 up 7% versus prior year and 5% on an organic basis. The quarter included approximately 200 basis points of positive currency tailwinds, offset by roughly 200 basis point headwind from selling days. Overall, our recon business saw organic growth of 8%, led by high single digit growth in global extremities and mid single digit growth in global hips and knees.

Speaker 3

Our growth in PNR continues to be stable at 3% in the quarter. For the first half of the year, organic growth was 8% at the Innovus level, 10% in recon and 5% in P and R. We are encouraged with the momentum building in both segments and believe the diversity in the portfolio produces durability of growth as we continue to navigate ever evolving end markets. Adjusted gross margins improved 90 basis points in the quarter and 200 basis points year to date. This expansion is driven by favorable segment and product mix and in flight productivity programs in manufacturing and supply chain.

Speaker 3

Second quarter adjusted EBITDA was flat versus prior year at 17.2%, primarily a result of the phasing of expenses and increased investments in R

Speaker 1

and D. Year to date, we

Speaker 3

have expanded our adjusted EBITDA margins by 75 basis points. Second quarter effective tax rate was 23%. Interest expense was $9,000,000 for the quarter versus $17,000,000 in 2024. Overall, we delivered adjusted earnings per share of $0.79 an increase of 27% versus prior year. First half adjusted EPS grew 42%, driven by margin expansion and reduced interest expenses.

Speaker 3

We are pleased with the financial progress we've made so far in 2025 and are excited about the value creation opportunities in front of us as we continue to execute. With this in mind, we are raising our guidance. We are increasing our revenue range by 25,000,000 to $2,245,000,000 to $2,275,000,000 This is driven by an improved currency outlook, particularly strength in the euro and organic growth execution. We expect foreign currency to be a slight tailwind in 2025. This compares to our prior expectation of flat versus 2024.

Speaker 3

For organic growth, we are raising our constant currency growth guidance to 6.25% to 6.75%, an increase of 25 basis points versus the prior range. We continue to expect high single digit growth in recon and low single digit growth in P and R. We are also raising our guidance for margins and earnings. On margins, we are raising our adjusted EBITDA range to $392,000,000 to $4.00 2,000,000 This is a $7,000,000 increase versus our prior guidance and reflective of our updated view on tariffs, which improved versus our prior guidance due to the ninety day pause on the elevated tariff rate in China. The tariff situation remains very fluid.

Speaker 3

We paid $6,000,000 in tariffs in Q2, mostly related to P and R. As the new costs have worked their way through inventory, as we've previously outlined, we will begin feeling the impact in the P and L starting in Q3 as we expect our mitigation efforts to accelerate through the balance of the year. No adjustments have been made to our outlook for depreciation, interest, tax rate, or share count. Considering these changes, we are increasing our adjusted earnings per share range by $0.10 to $3.05 to $3.2 Lastly, we reiterate our expectation for positive free cash flow in 2025 and are focused on using generated cash to pay down debt and reduce leverage as we exit the year. To summarize, the first six months of 2025 demonstrated the strength of our platform and the intentional diversification we have built into our business.

Speaker 3

We are pleased with our improving business mix and are excited about the new product innovations that should continue to ramp over the 2025. The underlying fundamentals of the business remain strong and robust, and we are poised to manage the business responsibly through this dynamic environment and maintain progress towards our strategic goals and financial commitments.

Speaker 1

Kyle? Thanks, Ben. Before we begin the Q and A session, in an effort to accommodate everyone on the call, we ask that analysts keep the questions to one question and one follow-up. You are welcome to rejoin the queue if we have time. With that, operator, please open the call to questions.

Operator

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.

Operator

At this time, we will pause momentarily to assemble our roster. First question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead.

Speaker 4

Hi. Thanks for taking my question. Damien, congrats and welcome to, I guess, your first earnings call. May maybe my first question for you on, you noted this delay in the Arvest launch. Hip and knees were flattish, U.

Speaker 4

S. Hip and knee. So when you think about the back half acceleration here on recon, What are you assuming for Arvis in if Arvis is now pushed out by six months, are there any other new products that would drive the back half step up?

Speaker 2

Hey, good morning, Vijay. How are you? And thanks for the question. There are a couple of things that I think are important for recon in the back half. We've got the Nebula hip is just really coming into the market.

Speaker 2

We've been in limited market release. And as I said in my prepared remarks, the response has been tremendous and we're really looking forward to that being more available in later Q3 and Q4. Similarly, would say the ARG for shoulder is a really great opportunity for us in The U. S. Again, response.

Speaker 2

And as I've spent a lot of time in Europe too with the international team, they're really coming into their own with the cross selling in the extremities. The PRIMA SMR cross selling opportunity is really driving great share gain in shoulders. So I see a lot of opportunity with the emerging portfolio. And as I also said in my prepared remarks, doubling down on how we execute on the commercial operations in particularly in The U. S, I think is an opportunity for us.

Speaker 4

Understood. And maybe Ben, one for you. I wanna ask on the guidance, maybe more focused on adjusted EBITDA and free cash. I think a recent report raised some questions on adjusted EBITDA, to some of the points raised for the sorority agreements and whether that's a period expense that's being non GAAP, and inventory step up costs. I'm curious on your comfort around the adjusted EBITDA metrics that you report.

Speaker 4

And I think a lot of these debates would end if free cash flows normalize, right? So I know you said free cash positive for fiscal twenty five. When do we get back to 70 to 80% of net income free cash conversion for the company? Thank you.

Speaker 3

Yeah, thanks for the question, Vijay. Let me just reiterate our commitment to maintaining high standards of transparency, accounting controls, reporting and compliance with all the rules and regulations. I mean, we're confident that we've represented the company in the right way and continue to make the right calls with regards to how we're representing the business. So overall, if you think about where we are in our cycle, we are in a period here where we've been heavily integrating Lima over the past two years. And with that, we've been spending a lot of efforts to make sure that we're getting the right momentum of that company coming into Innovus.

Speaker 3

And we've shown some of that with the growth that we've been able to continue to demonstrate as we've been integrating it. When it comes to the royalty piece, I mean, we talked a little bit about this on the Q1 call. This was a shift in our model to essentially remove some bias in terms of the innovation cycle with some of our key surgeon partners. So nature, it was non cash, it's over a seven to nine year period. So there's no clear, I'd say, benefit that rolls through the P and L here.

Speaker 3

If anything, it's relatively neutralized with regards to the shift in the model that we've just executed. But your point is the right one with regards to the focus on free cash flow. I think you saw progress that we've made in free cash flow in the second quarter, particularly with the pressure that we felt on tariffs. I think you heard in my prepared remarks that we took $6,000,000 of payments of tariffs in the second quarter, but still posted positive free cash flow. So you're seeing some of those adjusted costs neutralize a little bit as we're completing more of the integration and we're reducing the burden there due to that.

Speaker 3

So we feel very strong about our ability to continue to incrementally make progress on cash flow throughout the course of this year. And then as we step into next year, we're very much entitled to see step ups, particularly as the European medical device regulation spend significantly diminishes and LIMA integration costs significantly step down. So that entitlement right there puts us on the pathway towards the 70% to 80% conversion and very clear line of sight for us to continue to step up towards those levels over the coming years.

Speaker 5

That's helpful. Thank you.

Operator

Thank you. Next question comes from the line of Vik Chopra with Wells Fargo. Please go ahead.

Speaker 5

Hey. Good morning, and thank you for taking the questions. Congrats on a nice quarter. Damian, welcome. Two questions for me, maybe one on a high level, one for Damian.

Speaker 5

Maybe just talk about some of the lessons learned from your previous company that you think you can apply at Innovus? And then I had a follow-up, please.

Speaker 2

Well, I think there's some tremendous things. So thanks for the question, Vic. In terms of growth, I think we've got huge opportunities of applying discipline to the way we think about customer segmentation and targeting, account acquisition and account penetration, and really driving innovation. So I think bringing some of the things that I learned at my previous role around pipeline development and execution, is really key. I think also the fact that the DNA of Innovus has EGX in it, is really a great opportunity for us.

Speaker 2

I've had a lot of experience with that business system mentality, and what I am excited about is the fact that we have it and people use it, but the real opportunity is expanding that across the entire business and making it applicable to not just the ops groups, but the carpet land as sometimes it's referred. So we've got great opportunity to really use that again to focus on capital efficiency and generating more cash and really thinking about how we get leverage down.

Speaker 5

Great. Thank you for that answer. Follow-up question is, how should we think about your M and A strategy post Lima? And maybe just talk about how you're thinking about balancing debt paydown with doing tuck in deals in 2025? Thank you.

Speaker 2

Yes. So let's be very clear, I think I alluded to this in my opening comments. The capital allocation priority right now is debt reduction. And Ben and I have spent a lot of time talking about this and also with the board. So our intention is to be very focused on debt reduction.

Speaker 2

Look, when our foundation is stronger, we'd look at either opportunistic share buybacks or focused M and A. But in the near term, you should think about our capital allocation priority as debt reduction.

Operator

Mr. Chopra, are you done with your question?

Speaker 6

Yes. Thank you very much.

Operator

Thank you.

Speaker 2

Thanks, Vic. Cheers.

Operator

Next question comes from the line of Young Lee with Jefferies. Please go ahead.

Speaker 6

Alright. Great. Thanks for taking our questions. Welcome, Damian, and looking forward to working with you. You know, we'll probably hear a lot more about this as you spend more time with the business, but wanted to hear a little bit more about your early impressions of the business and key near term focuses and priorities.

Speaker 6

I'm sure we'll hear more about your long term views later. And in particular, wanted to hear a little bit more about your comment on focusing on enabling technologies to drive faster growth. Where does robotics fit in that framework? And also your thoughts on the portfolio management in general?

Speaker 2

Thanks, Jungkook. A lot to unpack in that question. Let me start with look, I watched Colfax and later Innovus for many years. And as the conversations with the board evolved, I was really intrigued by the portfolio of products that had been assembled, but also the development pipeline that was emerging. And the opportunity to work with the team to create value through disciplined execution was really compelling.

Speaker 2

And so the near term priorities are, as I mentioned, this doubling down on our organic growth with a focus on commercial execution and innovation, really working with the team on operational excellence, and looking at capital efficiency, margin expansion and in the financial discipline. And Ben and I have had a lot of discussions around CapEx cost management, shared service utilization. So we're going to really focus on those three priorities in the near term. With respect to enabling tech and robotics, look, we've clearly heard the message that enabling tech is a key part of having a complete global portfolio. And our first solution is focusing on the steps of planning and navigation.

Speaker 2

If you think about it as planning, navigation and assistance, we're still continuing to examine whether large format robots are cost effective solutions and improve patient outcomes, and whether entry into the market at this point is really valid. And we've got resources dedicated to exploring all the viable pathways. And I'm actively engaged with that team in the short time I've been here. ARVIS for us, really, I think it gives us an opportunity to extend into that space. We wanted to launch our next gen with a hardware and a software update at the same time.

Speaker 2

We were doing some really great research and voice of customer. And in that development, really understood a lot more about the software and wanted to ensure that those were incorporated into the next gen release, hence the delay. And right now we're working with the team to really explore how to maximize the potential of that and really drive more implant growth. I think the key aspect of this is there's the capital, but really what we're trying to get at is implant growth. And that's a key focus area for me in terms of that commercial execution and innovation discussion that I said.

Speaker 6

All right. Very helpful. I guess on the extremities business, the 10% growth, sounds like shoulders did better than foot and ankle. Maybe if you can provide us a little bit more color on the growth and performance of each of the segments and key products and initiatives to drive faster growth. Why don't I do shoulders and you do foot and ankle?

Speaker 6

So the shoulder thing, I

Speaker 2

think is two things. Firstly, in The U. S. With the release of ARG, the ULTOVATE reverse glenoid, we've been again in limited commercial release there. It's progressing really well.

Speaker 2

Our opportunity is later in Q3 and Q4 to really expand that. Internationally, speaking with the team and spending time with them, the cross selling is really the great opportunity there. We had a PRIMA system that is more about simple procedures and the SMR system that really comes out of like a fracture mentality. And and the ability of the team now to firstly be trained and competent and capable to talk about those two different philosophies, and then take either PRIMA customers and introduce SMR or SMR customers who were doing complex cases and bring PRIMA to their portfolio has really been what's driving the international growth. So I see it as really again back to this focus on commercial execution, and I think that team's doing a tremendous job.

Speaker 3

Yeah, and on foot and ankle, Young, I think we're still very bullish on the capabilities of the product lines that we've put together there and what the end market potential is. And we would expect that that business continues to contribute to our growth algorithm as we think about the strength in extremities. Second quarter for foot and ankle was a little bit softer from a market volume standpoint. As we look at it, it was more volume procedural driven than it was anything that we think was disruptions in our business. But we're launching some new products, getting new inventory out in the field, which will expect some acceleration in the second half.

Speaker 3

So overall, we still feel comfortable that we'll be well within our guidance with regards of what we've set expectations around and see some acceleration in foot and ankle in the back half.

Speaker 6

All right. Great. Thank you very much.

Operator

Thank you. Next question comes from the line of Mike Matson with Needham. Please go ahead.

Speaker 7

Hi, guys. This is Joseph on for Mike. Welcome, Damian. Nice to meet you over the phone. Apologies if you guys noted this in the prepared remarks, but the guidance increase in revenue, was that due to currency or was this more outperformance of CoraNovus?

Speaker 2

And then

Speaker 7

the acquisition revenue in PNR, I don't know if you guys had announced that. It looks small. I was just curious where that was coming from.

Speaker 3

Yeah. Hi, Joseph. On the guidance piece, it's a combination of currency and organic performance. So we shifted up the range $25,000,000 with a combination of that coming from slightly better currency than what we expected as we went into the last call and taking our organic growth range up 25 basis points. So it's a little bit of a combination there.

Speaker 3

If you think about what that acquisition was on the P and R side, very, very small little bolt on thing that we did to reinforce our leadership position outside The U. S. So relatively immaterial in terms of the size of that thing, but it was an acquisition that was completed in the quarter.

Speaker 7

Okay, great. That's helpful. And then just on gross margin, it was great to see all the expansion there just on a GAAP and non GAAP basis. But just curious on the flow through, I guess we're expecting more of it to flow through EBITDA margin there. I mean, it looks like you're flat year over year.

Speaker 7

So just curious what are the levers in there that we didn't see more flow through? Thanks again.

Speaker 3

Yes, again, think we're pleased with the performance that we've seen against the expectations that we set, especially through the first half. Second quarter, yes, I think you're seeing some positive mix elements that are continuing to work in our favor with regards to gross margins. And from an expense side, in my prepared remarks, I talked a little bit about some of the phasing and investments in R and D on the operating expense side. So overall, again, I think we're well in line with what our expectations were that we set for the year, especially through the first half. And we are still bullish in terms of our ability to continue to expand our margins with the evolving business mix that we have as a company.

Speaker 7

Okay, perfect. Thanks, Eva. Congrats on the quarter.

Speaker 2

Thanks. Thanks, Josh. Cheers.

Operator

Thank you. Next question comes from the line of Caitlin Kronin with Canaccord Genuity. Please go ahead.

Speaker 8

Hi. Thanks so much for taking the questions, and, Damian, welcome. You know, just to start on the ARVIS shoulder launch, just any updates on how that's going, and then how important will kind of the NextGen updates to ARVIS be to this ongoing shoulder launch?

Speaker 2

Well, thanks. I appreciate the question, and I look forward to working with you. I think, ARVIS, I was just with a large group of shoulder surgeons in Madrid a few weeks ago. I would say the reaction to Arvis in shoulder has been tremendous. I think if you think about large format robot versus a tool that's very portable and scalable in shoulder, is why we think ARVIS is going to be exciting.

Speaker 2

I think what people were particularly excited about was the next gen ARVIS. We showcasing that and giving people a chance to use that in a lab. And the lighter headsets I think is meaningful. The visualization acuity is meaningful. The software as I mentioned, the software development and the feedback we got from KOLs as we developed it has been meaningful.

Speaker 2

I'm really excited about what Arbus can do for shoulder and continue to help us expand our market share gains in that portfolio.

Speaker 8

That's great. And then you also, I think, noted EMDR costs expected to step next year. Just maybe remind us what products you expect to be approved in the EU and then when you expect those to contribute to growth over there?

Speaker 3

Yeah, thanks, Caitlin. Yeah, if recall, the EMDR costs are really the remediation of tech files to be able to continue selling products on the market in Europe. So we've completed the vast majority of that remediation. So this would be the last meaningful year of spend with regards to that remediation.

Speaker 8

Got it. Okay. That makes sense. Thanks so much.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Next question comes from the line of Danielle Antalffy with UBS. Please go ahead.

Speaker 9

Hey. Good morning, guys. Thanks so much for taking the question, Damian. Excited to to work with you. Just two questions here.

Speaker 9

One on the shoulder market dynamics. And I'm just curious, you know, it's it's gotten to be a little bit more of a competitive market. Appreciate you guys are one of the market leaders here, the market leader here. I guess, Damian, as you look at the competitive environment, how do you see Innovus? Or what is your strategy to keep Innovus as the market share leader?

Speaker 9

And then just a quick follow-up on PNR, but that's my first question.

Speaker 2

Hi, Danielle. Look, great to work with you. First of all, I'm excited that you've elevated us to market leadership, and that's what we're aspiring to. And I think we've got the momentum to get us there. I think this is going to be a multifactorial commercial execution play here.

Speaker 2

So let's talk about first thing is the relationships we have. I think we've built tremendous relationships. The key opinion leader panel, I just spent time within Madrid you know, with probably 15 of the best shoulder surgeons in the world and just how excited they are about our portfolio, and how committed they are to the medical education of the next generation of surgeons, think is tremendous. So, it all starts, in my opinion, with relationships and the patient in mind. And so I think the first thing is that second, I think about the commercial execution and how we help make our products more available and more applicable to existing customers.

Speaker 2

And we're doing a good job, again, particularly in Europe, I see the opportunities there being executed well. And as I mentioned in an earlier question, the cross selling of the premier and SMR portfolio is tremendous. We've got people who are using and trust our systems, just getting them to use it in either complex cases or simple cases depending on which way they're traveling from the portfolio choice is incredible. And then lastly, we're releasing new products. ARG is just a great product.

Speaker 2

And the reaction we've been having, particularly in The U. S. Has been tremendous. So I see this as a layered approach to being competitive. And then lastly, as we mentioned, the ARBUS next gen, is really going to I think be key to shoulder.

Speaker 2

And then the assistance and part of this is, I think, less important with a robot arm. What's important is is the planning and navigation. Yeah.

Speaker 3

I'll just pile in there a little bit too, Danielle, with regards to how important the Lima acquisition was to unlock our ability to really lean into shoulder growth, not only from the robustness of portfolio and innovation capabilities that we got with acquisition, but then the market access that it unlocks with regards to our ability to leverage this broader portfolio around the world. So we're really excited about what's happening in shoulder. The ARG was coming at a critical time, and we think that there's some really good momentum that's being created here in terms of our shoulder performance around the world.

Speaker 9

Got you. Okay. That makes a lot of sense. And, Damian, we hear the same thing regarding the implant mattering a lot more than a robot. Just a question on PNR, that's been a business that's undertaking a bit of a turnaround.

Speaker 9

I'm just curious about where you would characterize sort of where we are in that turnaround and how to think about, appreciate you're not going to give guidance for 2020 but sort of where that business can go. Thanks so much.

Speaker 6

Well, I'll

Speaker 2

talk a little bit about what I've seen and why don't you jump in with the future. I really have a lot of faith in the ability of this team to continue to execute well. We know the markets are lower growth markets, but I think this team execute really well in multiple spaces, and they're very focused on financial discipline and really continuing to do that. You saw that in their margin expansion. But even right now there's a President's Kaizen going on in Dallas with the team to really look at how they get more

Speaker 2

And so I like this team in terms of its focus and execution, but I also like the fact that we're continuing to invest in bringing new products to market like the Manifuse launch, which I think is going to be meaningful. And that's a tremendous product and has a huge unmet need. So a combination of great discipline and continuing to invest in new product launches, I think is a great opportunity for us.

Speaker 3

Yeah. I think what you've seen from us there, Danielle, on PNR is it's been much more consistent. Mean, you look past at the last eight to twelve quarters, I think it's in that low single digit growth around that 3% to 4% range, and we were even a little bit north of that here in the first half of the year. So if you think about where we are in PNR, it's really a story around how do we continue to shape and improve it. So we've been looking at how do we continue to do that.

Speaker 3

Damian mentioned one with some new products that we're launching, but we're really trying to up the frequency of new product launches and you're starting to see some of that play through with some of the choices that we've made from a shaping standpoint as well. So overall, we feel like this business is continuing to perform in that level that it has consistently. I think our expectations will be that it will continue to do that. We're continuing to look at how do we make it even better, right now, I wouldn't propose to give any updated guidance other than to say I think we see it continuing to be consistent in terms of growth.

Speaker 9

Thank you.

Operator

Thank you. Next question comes from the line of Tien Tsin Reinhart with Baird. Please go ahead.

Speaker 10

Hey, good morning, guys, and welcome, Damian. Thanks for taking the questions. I guess, first question just on end markets here. I think your U. S.

Speaker 10

Hip and knee even normalized mid single digit growth was a bit lighter than I think you were closer to kind of high single digit growth last quarter. So just any updates on how end markets are kind of evolving as we go through the summer months here? Obviously, I think one of your bigger competitors pointed to a slowdown in June. So just curious what you're seeing maybe both in The U. S.

Speaker 10

And internationally and how that's progressed through July so far.

Speaker 3

Yes. Thanks, Dane. I mean, I think what we're seeing really is the post COVID norm, really. I mean, you have ebbs and flows in terms of the market. Some like we had said, we got off to a nice solid start in the first part of the second quarter.

Speaker 3

I think we did see some of that with regards to vacation schedules, especially as we ended our quarter on the July 4. I think there's some of that. But again, if look at our performance, I think Damian outlined it within hip and knee one, we're still in that controlled launch phase of the stem and impactor. We had the headwind of capital with regards to delays with getting harvest out. And then you had some days pressure in The US as well with Good Friday and fourth of July that were impacting The U.

Speaker 3

S. Market a little bit more heavily in the quarter. So overall, I mean, it's not where we want to be from a growth in the hip and knee standpoint. But as we think about the underlying performance of it, implants are still performing pretty well. And we think that the new products coming and some of the commercial execution efforts that Damian also outlined will help us to accelerate in the second half.

Speaker 10

Thank you. And then on tariffs, I know last quarter, I think you kind of highlighted a $20,000,000 impact. Any sense of what that is now? I know you mentioned it's a little bit lower. And then just remind us again how that kind of flows through into next year.

Speaker 10

And then I'll just add one kind of quicker one, hopefully, or hopefully for Damian. You mentioned kind of trying to be more nimble and a little bit maybe higher spend on R and D. Just does that change at all kind of the LRP for 50 basis points of margin expansion going forward? Thanks for the questions, guys.

Speaker 2

Do you want do tariffs first? Yes. Yes. So I'll take the tariffs. So

Speaker 3

yeah. Yeah. I mean, I think what we saw, Dane, is that the the tariff rate for China pause, the ninety day, given that was 75% of our total exposure was a helpful thing for us. Now the question mark is, you know, lot of these trade deals still aren't completed, so there's still a lot of uncertainty with regards to what gets actually agreed to here as we go through the balance of the year. So we improved our EBITDA guidance for the year.

Speaker 3

That primarily, I would say, because we're seeing some favorability there, but we're still being a bit conservative because of the uncertainties that still exist. And as you think about how that plays through, I mean, we're taking a little bit of that through now, as I mentioned, with the cash flow impacts in the second quarter. It works its way through inventory to where we start to feel the effects here in the third quarter in the P and L. We've started to work the mitigation actions. Most of those really scale in the fourth quarter to drive offsets.

Speaker 3

And what we had committed to everyone when we outlined the tariff exposure plan was that we will make sure that next year's impacts are less than what we feel this year. So overall, still pretty dynamic situation. We're monitoring it. I'd say we're cautiously optimistic that it can get better. We've given a little bit back now, but hopefully, we'll be able to continue to see improvements here as these deals get executed.

Speaker 2

So with respect to R and D, you saw a slight uptick in the quarter. I would characterize it like this. As I said, we're reviewing all the programs, and that's not just on the SG and it's also on the R and D side. I'd consider this more about a shift in resource allocation than an expansion in spend. Our OpEx is healthy to say the least.

Speaker 2

And as I mentioned, we're looking to really understand our capital efficiency and the way we spend. So I wouldn't say that we're looking to increase spend. What I'm looking for is a change in allocation through this review of all the programs, looking at effectiveness and focus. Not all programs are created equal, and there are some that I think have more near term impact and ability to execute, some that are critical for our longer term. And then there are always projects that I think maybe should be reexamined.

Speaker 2

And so again, don't look at this as a signal that we're increasing overall OpEx. Think about this as a shift in resource allocation. So get at it, Dane?

Operator

Mister Reinhart, are you done with your question?

Speaker 10

Yes. Thank you very much, guys.

Operator

Thank you. Next question comes from the line of Brandon Vasquez, William Blair. Please go ahead.

Speaker 11

Hi, everyone. This is Russell on for Brandon. Thanks for taking the questions. My first one's a bit of a nuance. In the slide deck, it mentioned that recon was impacted by ARVIS.

Speaker 11

Is that just because ARVIS itself had lowered sales or ARVIS resulted in an impact to sales?

Speaker 3

Yes, it's kind of twofold there, Russell. One is as we were starting to gain some momentum of Arvest last year, we were selling the devices as capital and having multiple business models, but we were selling the product last year and you saw some uptick in that product line as we executed through last year. That coupled with the delayed launch of the next gen version and people waiting on the sidelines created that impact year over year.

Speaker 11

Got it. That's helpful. And then more broadly, recon saw growth in line with your long term guide. What gives you confidence in sustaining those levels of growth and your levers to drive further growth? And have you seen any changes in the competitive field in recon lately that's impacting recon at all?

Speaker 2

Again, I'll come back to what I think is really important. First of all, doubling down on our organic growth opportunities now that we have this expanded portfolio. And I really like the way that the Lima team have come in to the broader portfolio and using that not only the team and the market access that Ben mentioned earlier, but also the product portfolio I think is key. I think related to that the new product cadence that we have, hip with Nebula, the ARG with shoulder. I'm excited about where we're going with our knee portfolio.

Speaker 2

Empower two point zero to put a label on it, I think is going to be an exciting expansion for us ultimately as we look at the knee portfolio globally and having a system that has a global application and working in both primary and revision. So, on multiple levels, I think we've got an opportunity to continue our trajectory. It's going to take discipline. It's going to take focus. These things don't happen overnight, but I'm confident that we can continue to do a good job in terms of outlining the growth that we talked about.

Speaker 11

Got it. Thank you.

Operator

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Damian MacDonald for any closing remarks.

Speaker 2

Well, thank you. Let me just say I appreciate the, welcome from all of you, and, you have my commitment to be open, engaged, and and visible. And, if you need access, please, make sure you reach out. I know we're on a start of a new journey together and it's an important part of, how we're going to build trust and a relationship. On behalf of the Innovus team and the Board of Directors, I'd like to thank you all for joining this morning, and we look forward to sharing our third quarter results with you in November.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Powered by Quartr