Enovis Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 6, 2026

Key Takeaways

  • Positive Sentiment: Second-quarter organic sales grew 5%, led by 6% growth in Recon and 3% in PNR. U.S. Recon hips and knees and extremities each grew 8% in the first half, while Nebula, ARG, and the full commercial launch of ARVIS are gaining traction.
  • Positive Sentiment: Adjusted gross margin improved 120 basis points on an underlying basis, and adjusted EBITDA margin rose 70 basis points to 17.9%. Management cited favorable product mix, productivity, and Lima integration synergies, and expects continued multi-year margin expansion.
  • Positive Sentiment: Free cash flow improved by $27 million year over year to $31 million in the quarter, bringing first-half cash flow slightly positive. The company reaffirmed its target of greater than 25% free-cash-flow conversion for 2026 and aims to reduce leverage below 3x.
  • Neutral Sentiment: Enovis reaffirmed its 2026 guidance but expects a seasonally weaker-than-usual third quarter because of softer Western European markets and Middle East-related disruption, followed by sales acceleration in the fourth quarter.
  • Negative Sentiment: Inflationary pressure from raw materials, freight, distribution, and the Middle East conflict reduced second-quarter results by $2 million and is expected to total a $10 million full-year impact. Management said passing through additional costs remains difficult, particularly in PNR, because of competitive and market pressures.
AI Generated. May Contain Errors.
Earnings Conference Call
Enovis Q2 2026
00:00 / 00:00

Transcript Sections

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Operator

Hello, and thank you for standing by. Ladies and gentlemen, welcome to Enovis' 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 one 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.

Kyle Rose
Kyle Rose
VP of Investor Relations at Enovis

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. Our earnings release was issued earlier this morning and is available in the investor section of our website, enovis.com. We also posted a slide presentation to accompany today's call on our website. Both the audio and the slide presentation of this call will be archived on the website later this afternoon. During the 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.

Kyle Rose
Kyle Rose
VP of Investor Relations at Enovis

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?

Damien McDonald
Damien McDonald
CEO at Enovis

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. Ben will walk you through our financial results and outlook for Q3 in 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 Enovis 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.

Damien McDonald
Damien McDonald
CEO at Enovis

Our focused products of Nebula, ARG, and ARVIS continue to gain traction. 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. 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 Enovis. We have a robust pipeline of new product introductions planned across our key markets and geographies. ARVIS moved into full commercial launch in the U.S. in the second quarter, and I'm excited about the early feedback from surgeons and the commercial teams.

Damien McDonald
Damien McDonald
CEO at Enovis

We're using this launch as an opportunity to strategically target new customers. 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. New products are expected to start contributing more as we get into the later part of the year. We continue to execute across our businesses. I'll pass it over to Ben to walk through the financial details.

Ben Berry
Ben Berry
CFO at Enovis

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 100 basis point growth headwind. This represents about a 40 basis point headwind to total Enovis growth in the quarter. For the first half, Enovis grew 4% organically, 5% days adjusted, with Recon at 7% and P&R at 3%.

Ben Berry
Ben Berry
CFO at Enovis

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 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 and distribution costs stemming from the Middle East conflict.

Ben Berry
Ben Berry
CFO at Enovis

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 $0.90, 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 to 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.

Ben Berry
Ben Berry
CFO at Enovis

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 than in prior years due to market conditions in Western Europe and the continued disruption from the conflicts in the Middle East.

Ben Berry
Ben Berry
CFO at Enovis

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?

Damien McDonald
Damien McDonald
CEO at Enovis

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 Enovis. I'd been here about 90 days and found a company that had assembled a compelling portfolio, yet 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.

Damien McDonald
Damien McDonald
CEO at Enovis

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 Enovis mindset, working together across teams to drive growth and execution. With regard to commercial execution and 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 to our long-term growth strategy.

Damien McDonald
Damien McDonald
CEO at Enovis

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 teens 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. 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 optimizing 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.

Damien McDonald
Damien McDonald
CEO at Enovis

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. 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 our 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 organization 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 Enovis mindset, and it's driving engagement across the organization. Before we go to Q&A, I want to thank the Enovis team for their dedication and execution over this past year.

Damien McDonald
Damien McDonald
CEO at Enovis

Their efforts have been instrumental in delivering meaningful changes that we've discussed and positioning Enovis for long-term success. Kyle, why don't we open it up for Q&A?

Kyle Rose
Kyle Rose
VP of Investor Relations at Enovis

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?

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 one on your telephone keypad. If you would like to withdraw your question, simply press star one again. At this time, I would like everyone to know that in order to ask a question, please press star one, then the number one 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 US Bancorp BTIG. Please go ahead.

Ryan Zimmerman
Analyst at US Bancorp BTIG

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 saw a really nice growth, particularly in the hips and knees business. Extremities was a little softer than maybe I would've expected, given where the shoulder market's going. Maybe, Damien, you could spend a minute on parsing some of that out, what the dynamics are, particularly in U.S. extremities, as you think about the balance of the year.

Damien McDonald
Damien McDonald
CEO at Enovis

Sure. Hey, good morning, Ryan Zimmerman. 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, it was a pretty tough comp. I think importantly, we had a lot of med ed 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. Look at our scale. We move a couple of people here one week or another, and it materially affects us.

Damien McDonald
Damien McDonald
CEO at Enovis

I think the first half is the way to look at it. As we think about the back half of the year, we've got more work coming with ARG. We've got the ARVIS rollout expanding, that's why we're confident about the back half of the year.

Ryan Zimmerman
Analyst at US Bancorp BTIG

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

Ben Berry
Ben Berry
CFO at Enovis

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.

Ben Berry
Ben Berry
CFO at Enovis

Also you've got just deeper embedded, continuous improvement that we've been able to drive into both segments on PNR 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 operation supply chain. Overall, I would say it's a multi-levered effort, and we got a few tailwinds that help organically. 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. We did, in the quarter, get the benefit of a partial tariff refund as well, that helped in the quarter. 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.

Ryan Zimmerman
Analyst at US Bancorp BTIG

Thank you.

Operator

Thank you. Your next question comes from the line of Young Li of Jefferies. Please go ahead.

Young Li
Young Li
Analyst at Jefferies

All right, great. Thanks for taking the questions. I guess maybe starting with cash flows. Good to see the progress in 2Q, and it seems like you're on track for the 25%+ conversion for the year. Some of the EU MDR costs and integration costs goes away soon or next year-ish. Wanted to hear a little bit more on the key drivers that gets you to 40%-50% and then 70%-80% after that.

Ben Berry
Ben Berry
CFO at Enovis

Hey, Young. Thanks for the question. Yeah, I think you're really starting to see adjusted costs start to step down. Like we've talked about, 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 into next year and beyond. I think you're starting to see some productivity in our working capital as well. 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. It's starting to read through. It was nice to see the first half as positive free cash flow.

Ben Berry
Ben Berry
CFO at Enovis

Generally, you've seen us seasonally have a stronger second half when it comes to cash generation.

Young Li
Young Li
Analyst at Jefferies

All right, great. Very helpful. Then I guess the PowerPoint comments mentioned increase in market dynamics, including in the second half as well as in Western Europe. Can you maybe unpack that a little bit for us? Which segments are more impacted? Which geographies are more impacted?

Damien McDonald
Damien McDonald
CEO at Enovis

Yeah, Young. Look, 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. Predominantly, I would say, France, Spain, Italy. Again, it's no surprise that there are a lot of environmental things going on in those countries. So we just see a slightly softer market in the OUS markets, but particularly Western Europe.

Young Li
Young Li
Analyst at Jefferies

All right. Great. Thank you.

Operator

Thank you. Your next question comes from the line of Vijay Kumar of Evercore. Please go ahead.

Vijay Kumar
Vijay Kumar
Analyst at Evercore

Hi, Damien. Good morning, and thank you for taking my question. I guess my first question is on this back half guidance, right? There is a helpful slide in the deck, where you talk about your days adjusted growth by segments. Correct me if I am wrong, 3Q, I don't think there is any days differential, so your days adjusted and report organic should be in line-ish. That would sort of imply an acceleration from second quarter, right? On a days adjusted basis. I am curious, 3Q is seasonally, it is softer. What is driving this optimism? Am I thinking about it the right way?

Ben Berry
Ben Berry
CFO at Enovis

Yeah. Hey, Vijay, it is Ben. Thanks for the question. I think as we made comment, we are starting to see some of the benefits of the hard work that we have been doing around really putting muscle behind commercial execution, and scaling the new product. I think as we see ARVIS, the demand for that and the excitement for that 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 continued penetration of Nebula and ARG. We have opportunities there to just continue the acceleration. I think on the P&R side, you are also seeing some new products and some good discipline around commercial execution that is starting to read through, and customer conversions. Those will start to read through in the second half as well.

Ben Berry
Ben Berry
CFO at Enovis

I did say in my prepared remarks that we do expect a more seasonally soft Q3 than what we have seen in the past, so that will be a bit of a headwind that we will have to offset with some of these things that I just mentioned. Overall, I think, the way that you characterized it is correct. Then just a reminder that we do have one day in Q4 in terms of selling day impact, but Q3, as you mentioned, is zero impact year-over-year.

Damien McDonald
Damien McDonald
CEO at Enovis

Just to go on the new product things. Nebula we talked about. That's continuing its rollout. It's still early days, but we're getting a lot of great customer conversions there. You talked a little bit about P&R. I think what the team have done in Regen is really great. Now the proxies are out. We are meaningfully taking share in that Regen business, and I think that's a good sign about the commercial execution from that team. The Recovery Sciences team are going to be launching CT-RevitL for the laser treatment in the companion market. That's an exciting aspect and a big conversion funnel there, too. Again, a lot of good things that are coming the way on both sides of the house.

Vijay Kumar
Vijay Kumar
Analyst at Evercore

Understood. Maybe, Ben, one on sort of a fiscal 2027 question. Look, your guidance for 2026 now includes a tariff refund benefit, right? That's being offset by higher inflation. When you think about 2027, you lose the tariff tailwind, but inflation stays, right? I guess, is the margin algorithm for 2027 changing?

Ben Berry
Ben Berry
CFO at Enovis

No, we don't expect the algorithm for 2027 to change, Vijay. I think 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. As I think about stepping into next year, you'll also see continued step down in adjusted costs. As I think about our margins and cash algorithm for 2027, I would say that those are still intact.

Vijay Kumar
Vijay Kumar
Analyst at Evercore

Thank you.

Operator

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

Analyst at JPMorgan

Hi, everyone. This is Lily on 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. 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 is that a contributor to the macro disruption you called out?

Damien McDonald
Damien McDonald
CEO at Enovis

Why don't I start off, and why don't you jump in? I think, let's talk about U.S. 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. I would say- 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 proposal that's been put out has created some noise. I think the CJR-X has created some noise. On average, we see the markets as pretty stable. Do you want to?

Kyle Rose
Kyle Rose
VP of Investor Relations at Enovis

Yeah. Hi, Lily, this is Kyle. Yeah, 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. 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 play in. I think we're really excited about the progress thus far, and we'll see how the rest of the year plays out.

Analyst at JPMorgan

Got it. That's helpful. 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. 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? Do you think this has opened up a window for you to capture share in a sustainable way? Thanks.

Damien McDonald
Damien McDonald
CEO at Enovis

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. The fact that we are stable and growing, 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. 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.

Operator

Hi, Robbie. Is your line muted?

Analyst at JPMorgan

I'm all set. Thank you.

Operator

Thank you.

Damien McDonald
Damien McDonald
CEO at Enovis

Thanks, Lily. Bye.

Operator

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

Ross Osborn
Ross Osborn
Analyst at Wells Fargo

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

Damien McDonald
Damien McDonald
CEO at Enovis

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 knee, the new gap balancing technology that we put into 2.0 is reading through. 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. 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.

Ross Osborn
Ross Osborn
Analyst at Wells Fargo

As a follow-up, how do you feel about your rep headcount? Do you feel you have enough and the right people in place? How should we think about the incremental spend coming to the model in 2027?

Damien McDonald
Damien McDonald
CEO at Enovis

I think we've got plenty of opportunity to, A, attract talent, given what we're doing with new product launches. B, with what we're doing in terms of products like ARVIS, the productivity per rep is improving as well. 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. That's not the predication of our model.

Ross Osborn
Ross Osborn
Analyst at Wells Fargo

Thank you.

Damien McDonald
Damien McDonald
CEO at Enovis

Thanks, Rob.

Operator

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

Keith Hinton
Analyst at Freedom Capital Markets

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 last 90 days, or is that just over the course of the year? 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?

Ben Berry
Ben Berry
CFO at Enovis

Yeah. 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. 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. That is a net number. 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.

Ben Berry
Ben Berry
CFO at Enovis

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. We're trying to balance it. We're going to try to really get after it hard in the second half. 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. 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.

Ben Berry
Ben Berry
CFO at Enovis

Ideally, there would be some offset that could come from that, we're not planning on that to happen at this point.

Keith Hinton
Analyst at Freedom Capital Markets

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

Ben Berry
Ben Berry
CFO at Enovis

Yeah. Most of the cash continues to come from P&R. 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 be now past a lot of the heavy integration work and capitalizing on some of the synergies in that business. I think there's more opportunity there. Frankly, I think the quarter was a good sign. It was maybe a little bit better than our expectations in terms of our performance. 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, overall, I like the trend that we're on.

Keith Hinton
Analyst at Freedom Capital Markets

Okay, great. Just to be clear, nothing, no kind of one-timers or anything to call out in terms of the strong result?

Ben Berry
Ben Berry
CFO at Enovis

No. Other than the tariff refund, but I also mentioned there were some offsets to that. From our standpoint, it was a pretty strong read-through of execution.

Keith Hinton
Analyst at Freedom Capital Markets

Great. Thank you so much.

Ben Berry
Ben Berry
CFO at Enovis

Thanks, Keith.

Operator

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

Jeff Johnson
Jeff Johnson
Analyst at Baird

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

Damien McDonald
Damien McDonald
CEO at Enovis

Yeah, I would say it's more weighted to the transient. Again, strikes, fires, heat waves, all of those things we believe are transient and ultimately, 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. 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.

Jeff Johnson
Jeff Johnson
Analyst at Baird

All right. That's helpful. Thanks. 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 Stim 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 Bone Stim stuff now that that's been rolled back? Thanks.

Damien McDonald
Damien McDonald
CEO at Enovis

That's right, Jeff. Yeah, I don't know if you got that, but that's correct. 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.

Jeff Johnson
Jeff Johnson
Analyst at Baird

Perfect. Thank you.

Operator

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

Caitlin Roberts
Caitlin Roberts
Analyst at Canaccord Genuity

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? Just generally, is that market continuing to rebound?

Damien McDonald
Damien McDonald
CEO at Enovis

Yeah, we're very pleased with that team, actually. They'd had a great quarter, and we think the WAMGR there is, like, 4%-6%, and we were meaningfully above that. I think good commercial execution. We've had some great account conversions, and the innovation pipeline there is really strong. I'm actually really pleased with how that team's performing this year.

Caitlin Roberts
Caitlin Roberts
Analyst at Canaccord Genuity

Awesome. Then just thinking about, another one of your competitors has, a shoulder roll-up going on for their robotic system, their smaller format robotic system. How are you thinking about that versus ARVIS? Have you heard any comparison from surgeons in the marketplace or, not really hearing that?

Damien McDonald
Damien McDonald
CEO at Enovis

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 a large format robot, I think, is going to find tricky. I really think the market's going to continue to evolve. I think we've got a great offering now. We've got to continue to innovate to respond to that. This is an exciting opportunity for ARVIS.

Caitlin Roberts
Caitlin Roberts
Analyst at Canaccord Genuity

Great. Thanks so much.

Damien McDonald
Damien McDonald
CEO at Enovis

Thanks, Caitlin.

Operator

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

Steve Lichtman
Steve Lichtman
Analyst at William Blair

Thank you. Good morning. Damien, I appreciate your comments now one year in. You mentioned evaluating opportunities, without losing focus on cash flow. 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?

Damien McDonald
Damien McDonald
CEO at Enovis

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

Steve Lichtman
Steve Lichtman
Analyst at William Blair

Got it. Great. 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. It's obviously an important channel. Just latest thoughts on what's happening in ASCs for you guys. Thanks.

Damien McDonald
Damien McDonald
CEO at Enovis

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. Net, we think the trajectory in the near term is positive, but then the longer-term tailwind there is definitely a benefit for us.

Steve Lichtman
Steve Lichtman
Analyst at William Blair

Got it. Thanks, Damien.

Damien McDonald
Damien McDonald
CEO at Enovis

Cheers, Steve.

Operator

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

Vik Chopra
Vik Chopra
Analyst at BMO Capital

Hey, good morning, and thanks for taking the question too from 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? Then I had a quick follow-up, please.

Damien McDonald
Damien McDonald
CEO at Enovis

Hey, Vik. 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. I think that's kind of concurrently still in play as we think about the full-year outlook. 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. Our focus has been really driving that down, and we've seen good progress to get where we are at this point.

Vik Chopra
Vik Chopra
Analyst at BMO Capital

Great. Thank you. 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, margin expansion, or free cash flow conversion, or a combination of the three? Thanks.

Damien McDonald
Damien McDonald
CEO at Enovis

Look, that's a great question. The answer is yes. We think it's all three. We clearly heard from investors, as I came on board, that free cash flow, generating cash, debt reduction was key. You can see that we focused heavily on that capital allocation, and it's reading through. At the same time, growth. 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. 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 Services, and the service application of cost centers being aggregated.

Damien McDonald
Damien McDonald
CEO at Enovis

We have one in Portugal, one in Hyderabad in India. We're opening up a third in the Americas. We expect that to continue to meaningfully contribute to our margin accretion by putting Global Business Services into shared service facilities.

Damien McDonald
Damien McDonald
CEO at Enovis

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. We need to change our business systems, and we're doing that meaningfully, and all three are reading through.

Operator

Is your line muted, Vik?

Vik Chopra
Vik Chopra
Analyst at BMO Capital

I'm good. Thank you.

Damien McDonald
Damien McDonald
CEO at Enovis

Thanks, Vik.

Operator

All right. Thank you. Your next question comes from the line of Mike Matson of Needham. Please go ahead.

Analyst at Needham

Hey, everybody. This is Joseph on for Mike. Damien, maybe a follow-up just on margins just a little bit, or gross margins. It's great to see significant expansion in the last two quarters. Just looking at the second half of the year, I'm 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? Just with tariffs and 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?

Ben Berry
Ben Berry
CFO at Enovis

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 will read through in the second half. Again, I'm not giving specific H2 guidance on this, but I would say that we'll continue to make progress year-over-year in growth margins. It's a critical lever for us as we think about our profit expansion goals here over the next several years. We'll continue to focus on driving as much productivity as we can there and offsetting some of these new headwinds that are coming into fruition. Overall, I think we're pretty pleased with the progress we've made so far.

Analyst at Needham

Okay. Great. 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 the ARVIS launch in 2026 guidance. Maybe just generally for ASC market, where do you think your market share sits at currently?

Damien McDonald
Damien McDonald
CEO at Enovis

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. Again, I think that's a net advantage for us. The ARVIS, I think, is a 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. I think the economics work for ASCs very much in favor of an offering like ARVIS. For three different reasons, the feedback so far has been very positive.

Analyst at Needham

Great. Thanks very much. Congrats on a strong quarter.

Damien McDonald
Damien McDonald
CEO at Enovis

Thank you.

Ben Berry
Ben Berry
CFO at Enovis

Thanks, Joe. Cheers.

Operator

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.

Damien McDonald
Damien McDonald
CEO at Enovis

Thanks, everyone, for joining us today. This was an encouraging first half for 2026, and we've a lot of opportunity ahead of us. Against this complex external backdrop, it's more important than ever that we remain focused on what we can control and its disciplined execution through the second half of the year. 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.

Operator

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

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