So those will start to read through in the second half as well. I did say in my prepared remarks that we do expect a more seasonally soft Q3 than what we've seen in the past. So that will be a bit of a headwind that will have to offset with some of these things that I just mentioned. But overall, I think the way that you characterized it is correct. And then just a reminder that we do have One day in Q4 in terms of selling day impact, but Q3, as you mentioned, is zero impact year over year.

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 region 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. And then the recovery sciences team are going to be launching Revital for the laser treatment in the companion market. I mean, that's an exciting aspect and a big conversion funnel there too. So again, a lot of good things that are coming the way on both sides of the house.

I understand. And then maybe Ben, one on that. Sort of a fiscal 27 question. Look, your guidance for 26 now includes a tariff refund benefit, right? And that's being offset by higher inflation. But when you think about 27, you lose the tariff tailwind, but inflation stays, right? I guess, is the margin algorithm for 27 changing?

No, we don't expect the algorithm for 27 to change, Vijay. I think we will continue to mitigate the inflation that's coming our way. Sometimes that takes a little bit of time. As I mentioned, there's productivity opportunities for us to continue to drive. And 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.

Thank you.

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

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. So I'm curious what you've been seeing on your end and if there's been any disruption from declining ACA and Medicaid enrollments and to what extent is that a contributor to the macro disruption you called out?

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

Yeah. Hi, Lily. This is Kyle. 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. I mean, if you look at 6% growth in total U.S. recon, and if you zoom out a little bit and look at the second half, 7%, that looks to be above the broader peer group when we look at some of the main market segments we play in. So I think we're really excited about the progress thus far and we'll see how the rest of the year plays out.

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

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

Hi, Robbie. Is your line muted? I'm all set. Thank you.

Thank you.

Thanks, Louie. Bye.

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

Good morning. This is Ross Osborne for Larry. Thanks for taking our questions. So maybe looking at Arvis, with the full commercial launch underway, can you discuss how conversations are evolving beyond the initial KOL and high volume 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?

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

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

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

Thank you. Thanks, Rob.

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

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

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

Great.

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

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

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

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

Great. Thank you so much. Thanks, Keith.

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

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

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

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

That's right, Jeff.

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

Perfect, thank you.

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

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

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

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

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

Great. Thanks so much.

Thanks, Caitlin.

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

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

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

Got it.

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

Thanks. 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 seriously. in the ASCs than large format systems where contracts can be locked up for multiple years. So we think the trajectory in the near term is positive, but then the longer term tailwind there is definitely a benefit for us.

Got it. Thanks, Damien. Cheers.

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

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

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

All right. Thank you. You know, as you look ahead to next year, I'm just curious if you expect the value creation from the company to be driven more by improving revenue growth, margin expansion, or free cash flow conversion or a combination of the three. Thanks.

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

Is your line muted, Vic?

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

Thank you. Your next question comes from the line of Mike Madsen of NEDAM. Please go ahead.

Hey, everybody. This is Joseph on for Mike. Damien, maybe a follow up just on margins just a little bit or gross margins. You know, it's great to see significant expansion in the last two quarters. But just looking at the second half of the year, 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 or 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?

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

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

Well, yeah. Disclose where we think about market share. We know we're definitely skewed more towards ASCs than some of our competitors. And again, I think that's a net advantage for us. The Arvis, I think, is a perfect, perfect offering for the ASCs. Again, it's mobile. You can move it between rooms easily. A clinician can take it from account to account. I think that's a big deal. And I think the economics aspect work for ASCs very much in favor of an offering like Arvis. So for three different reasons, the feedback so far has been very positive.

Great. Thanks very much, and congrats on a strong quarter. Thanks, Joe. Cheers.

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.

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 that we remain focused on what we can control and it's disciplined execution through the second half of the year. So we really appreciate your continued interest and the support and we look forward to updating you again on our third quarter in early November.

Thanks a lot.

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