Medline Aktie

Good afternoon, everyone. My name is Erin Wright. I'm the lead health care services analyst at Morgan Stanley, and welcome to the 24th Annual Global Morgan Stanley Healthcare Conference.

We're happy to have Medline with us today, a recent IPO in the space, CEO, Jim Boyle. Thank you so much for joining us as well as CFO, Mike Drazin. I appreciate the time today.

So we'll kick it off with a bigger picture question. There's a lot on people's minds, obviously. But we've always thought of Medline as this sort of critical solutions provider across the broader health care system. The supply chain sits underneath this like bigger health system and you do everything from the Medline brand to the services component. And some of that framing gets compressed into an organic growth number or an EBITDA number on a quarter-to-quarter basis every 90 days. And Medline has an extensive history of a private business, right, and a private company. And you're 3 months into being a public company. What has changed? What has preserved from your private company days? And what has changed or what has surprised you since December?

Yes. I would say, listen, we're a 60-year-old company, not much about what we've done has changed. When you have 60 years of consecutive growth and you have a playbook that works, changing it isn't the right thing to do. It's always evolving. So change is part of the business, but adding additional levers for growth, adding additional arrows in our quiver as it relates to value prop to our customers is just a core tenet of who we are. But investing in the business in advance of demand will continue to be something we do. Having a very relentless focus on our customer and listening to them, to what their needs and challenges are so we can make sure we're meeting that expectation. Right product, right place, right time as it relates to our distribution service offering at the best value will continue to be a leading indicator and maximizing the value we deliver to our customers, to our brand, and we'll continue to do that.

So I think the biggest kind of change is our business isn't sequential, right? It's lumpy. And when we win new prime vendor business, it is different by quarter. How we grow as a lagging indicator margin to revenue is something I think the markets are going to have to learn. We'll capture revenue and take share and then the kind of the margin will pick up in the following kind of pathway as it relates to the Medline brand penetration and conversion curve. I think it's going to take a little while for the public markets to understand the cadence of our business and how it flows through.

But what we look at is a long-term sustainable growth, first and foremost, taking share and then maximizing the brand and delivering value over time. I think it's going to take a little bit of time for the public markets to know that. I will tell you, it's easier to be in a private company than it is a public company because I have all of you asking 95 questions as opposed to the family asking a few questions. So I think it's more about getting familiar and consistent as it relates to what the right kind of macro factors to communicate to you all is to make sure you understand kind of the long-term health of the business.

Yes. Okay. Speaking of some of those macro factors, let's talk about the most recent quarter and the guide. So organic sales guidance was increased in the second quarter, but adjusted EBITDA guidance moved a little bit lower here. Can you walk us through the bridge from the original EBITDA guide to the new guide range? And how much of that is attributable to the Middle East inflation, the Tracy fire, operational investments as well as some of the quality remediation and retail softness as well?

Yes. So let's first start with the quarter. The quarter was really strong top line growth of about 11.6% on a reported basis. If you actually adjusted out the impact from the tariff refunds, customer repayments, we actually grew close to 13%. So really, really strong top line growth, really strong top line demand, growth across both of our segments and all of our channels. And so we're really proud of the great signings. Sales growth that we're seeing in our business. It reflects the strong market share gains that we're taking.

From an earnings perspective, you're right, we did take down earnings by about $200 million in totality for the full year for our full year guidance. Our new guidance for EBITDA is $3.3 billion to $3.4 billion from $3.5 billion, $3.6 billion. So $200 million at the midpoint of the range, really made up of a couple of internal factors and a couple of external factors.

So on the external side of the house, the Middle East is impacting us, as you can imagine. We quantified that in totality for the year of about $70 million of impact. That $70 million impact is primarily made up of the cost of raw materials and finished goods, like things like polyethylene, polystyrene, NBR that's used to manufacture and source certain products that we make.

In addition to that, the cost of diesel is obviously up as well. Diesel fuel was at $3.89 heading into the -- before the conflict. Diesel fuel is now closer to $5.5, $6. And so you're seeing that impact our cost of our transportation as we ship about 80% of our products on our own trucks here in the U.S.

The other external impact was a fire. We had a fire in our Tracy facility back in June, unplanned, obviously, and very devastating, lost 1 million square feet of space. The great thing about that is the team rose to the occasion and within 6 weeks, were able to bring product back to our customers at the similar levels to what they were receiving previously. And so really proud of the work the team has done to really drive through a great outcome for our customers.

The combination of those two are about 25% of that $200 million or $50 million. The remaining $150 million is primarily made up of what we'll call internal factors. And they're about equal with the third one being retail being slightly less. So we are continuing to invest in our business on the operations side of the house. As you all know, we signed $2.4 billion of new customer signings last year. That signings was a record year for us, really, really strong signings in the year. That led to us implementing a lot of that in 2026.

And so what we're seeing is, in certain cases, we're having to make investments in operations to support those new signings. For instance, in a facility like Romulus, Michigan, where we have pretty much the entire Detroit market that we've ultimately won through our signings, we're having to invest in people without automation at the current point in time to support that growth. As we put automation in those facilities and expand that facility, as an example, you'll see those costs start to come down. But ultimately, right now, we're inefficient in our Romulus facility. That's the operational side of the house.

We also are making investments in quality. We have decided and Jim has decided the right thing to do for us is to further lean in on quality and to focus on a global action plan to drive quality across the organization. That's not to say our quality is not good. Our quality is good. However, we want to continue to invest in driving growth -- driving the improvements in our quality across the globe. And so we are taking action to invest in quality in that space as well.

And then lastly, the third impact to us was the retail business. On the retail business, that's about 2% of our sales, so a smaller piece of our overall business. The business is a little bit lumpy, as you can imagine, right, from day to day, it can bounce around. It's not like our typical prime vendor business where it's a 5-year contract. And so we saw a product loss product from one of our customers in that space that has impacted us. That's all Medline brands, so the margin was more impactful than it would be if it was a prime vendor deal. But our objective is to go get that back over time here. It's just in the near term, it's going to be a loss for us. So the combination of all that is about $150 million, those three external factors overall.

Okay. And you characterized roughly half of the $340 million impact as transitory and half as permanent. I guess as we think about the launch pad for 2027, what do we think about as the right baseline? I think consensus is at $3.7 billion for 2027 EBITDA. Is that the right framework to think about as we kind of normalize for some of these impacts, whether it's permanent or temporary?

Yes. I think what we were trying to signal to the market was roughly half of the cost that we believe that we're incurring is sort of permanent, will remain in our base, things like some of these ops costs, some of these quality costs, our investments in people. So those will remain in our base. Obviously, the retail business is sort of lost. We'll get it back over time, but that's in our base.

As we expect that over time, the Middle East will, at some point, hopefully subside. But I would tell you that right now, as we sit here today, we expect the Middle East will continue, unfortunately, into 2027 will be a cost headwind for us into 2027.

I think overall, we're not ready to guide for you yet what '27 will look like. We'll give you some better view of what that might look like in the future. But I think the best way for us to tell you this is our landing spot for 2026 is $3.35 billion, and we'll grow off of -- that's the midpoint of our range. We'll grow off of that.

And the components of the 2027, just to make it simple, are sales volume, Medline brand conversion. Middle East should be a headwind for us, unfortunately, if costs remain. Tariffs right now, if tariffs don't change, will be a tailwind for us. And then quality and ops investments will continue to some extent as they actually annualize into 2027 as well. But more to come in the future on that.

Okay. And you're annualizing some of the outsized business wins or the prime vendor wins from last year with -- you have $650 million in new customer signings through the first half of this year. Can you speak to the nature of a lot of those relationships and how does the quality and composition of those -- of the pipeline, what does it look like now? And how do you think about that playing forward in terms of those?

Yes. As I talked about each market, we commit to $1 billion of new prime vendor signings. That's what we believe we can control, and we have complete visibility to. So that's what we get -- guide to every year. Last year, $2.4 billion in signings. We did that because we took advantage of market conditions. We took advantage of some competitors struggling in the marketplace or getting out of the business. We took advantage of how we handled the tariffs in terms of price increases. We delayed price increases until August 1, which is different than the competition did, which opened up doors.

Customers are looking for sustainable, resilient supply chain partners that can support them in times of crisis or need, 29 million square feet, $5 billion of inventory, completely different than what you might think our competitor set is. And customers are looking for folks that actually want to be in the business we're in. Those are all tailwinds that were hitting last year that are still hitting this year.

Last year, we had the good fortune of signing some very, very large home run deals. This year, the $650 million is made up single, doubles and triples. We didn't -- there's not a giant deal in there. We'll continue to take share at the pace we expected to take it at. I feel optimistic about what's in front of us. And so I think the market looks very, very similar as it relates to what we believe we can control, and we will continue to take advantage of those market conditions that actually are favorable for us. So I just think we're sitting in a position with a different playbook to offer value to our customers as compared to the competition, and that's what customers are looking for.

And then finally, they're looking for speed to value. They're concerned about what's happening with OBBA. They're concerned about cuts in Medicare, Medicaid, and we are the value player in the marketplace. And whenever inflation happens and the ability to actually kind of increase their margin profile, they look to us as the value player in the marketplace to actually drive significant savings to them.

Okay. I think that's a good segue into my next question, which is just on broader utilization trends. And what have you incorporated, I guess, into guidance from an underlying utilization trend standpoint in terms of volume that you're seeing from the acute side as well as kind of other markets? How would you characterize?

Yes. We haven't seen softness. Listen, we talked about softness in our guidance because we're listening to our customers. But it is important to say this out loud, I just had lunch with a large hospital CEO on Friday. And her comment to me was: "You're continuing to see outsized growth even though we're continuing -- we're starting to feel the pain of indigent care." I don't actually think you're going to see a slowness of patient volume. What you're going to see is an increase of indigent care and folks that actually can't pay their bills because guess what, whether you have insurance or not, you need access to health care, you're still going to go in the hospital and you're still going to need access to care. As it relates to us, we're still selling those supplies. It actually burdens unfortunately, the health care ecosystem from a provider perspective.

Second, when you think about folks that don't have access to insurance, what they do is they wait until they're sicker before they actually go to get care. So they have the cold, they have the flu, they don't go to the primary care doctor, they end up in the emergency room with pneumonia, they end up in the ICU. And for us, that's a higher acuity of product and they get higher utilization of supplies. So in an odd way, it can actually be more supplies rather than less.

So when I look at what's happening in health care, I'm less worried about -- because we don't measure patient volume, we measure flow of goods. And I can tell you that the first half of the year, we've had fantastic same-store sales. And so that's maybe different than you hear in the marketplace. But what I believe is happening is we're going to see an elevation in folks that don't have access to insurance that creates kind of negative income for the health care ecosystem.

So in reality, and how do you think about your even sensitivity to hospital volumes or elective procedures? What did you see in prior macro cycles on that front?

Very similar. I mean we're consistent as it relates to kind of growth from that perspective from same-store sales. I mean we're heading in the right direction. I think there's some talk about potential softness in surgical volume. We haven't seen that. Our supply chain -- excuse me, our Surgical Solutions business was up 9% for the first half of the year, and that's including custom trays that go into open hearts and total hips and total knees. So we have not seen softness.

Okay. Great. And so -- once the current macro and some of the idiosyncratic kind of dynamics play out and normalize, what would a typical Medline year look like from an organic growth, EBITDA growth and margin progression standpoint as we think about the long-term growth algo?

Yes. I mean our long-term targets are very simply $1 billion of new customer signings every year, which we're on track to achieve this year, earnings -- organic sales growth at high single digits and earnings growth at or greater than sales. Those are the -- and then ultimately, the last one would be for that leverage target will be less than 3x. So the combination of those four things, what we think will continue to drive over the long term in our business.

Okay. Just switching gears to Medline brand, you've discussed about $5 billion of Medline brand conversion opportunity within that existing prime vendor base. How should we think about the piece (sic) [ pace ] of that conversion?

Yes. So it's important to frame that out. When we talk about the $5 billion in prime vendor, the definition of prime vendor -- our definition of prime vendor is acute and acute affiliated. So it's specific to that channel. Take the non-acute out of it. That's an $18 billion segment of our total sales, $5 billion of that within that existing $18 billion has a Medline brand equivalent that we can convert to for our customers.

And when you think about the conversion curve of the brand, we sell about $1.8 billion of our brand through competitive distributors through Owens, through Cardinal, through Schein, and our brand stands on its own. So when we sign a new prime vendor deal, about 10% of that business is already in our brand. So we sign a new prime vendor deal, 90% is third-party products, 10% is in our brand. In the first year, we normally doubled the penetration rate going from 10% to 20%, that's a lot of the commodities, think about gauze, think about underpads, think about tongue depressors, things that are very easy from a clinical acuity perspective to convert. And then every year thereafter, we see a 3% to 4% penetration rate of our brand. That's intentional, by design, through many years of trials and tribulation. If you go too fast, you can create pain for the clinical team because they can only handle so much change at a given time. And if you go too slow, you don't deliver enough value for the CFO from a savings perspective.

So 3% to 4% is what we do. We literally have a road map with every single customer. This quarter, we're going to do incontinence and surgical drapes and gowns. This quarter, we're going to do DME and capital equipment. This quarter, we're going to do exam gloves. So we have a very consistent road map to value and savings for our customers. So we never get to that what have you done for me lately? The maximum penetration rate is about 60% of the total spend. So Medline brand, if you have $100 million MedSurg customer, 60% of that can convert to our brand. If you take the entire book of business right now, we have about 35% of it in our brand, which is why we still have $5 billion in convertible opportunity.

So that is a focus of our sales force. That is what our sales force is paid on. They are paid on the brand alone, and their job is to communicate the value to the customer to ultimately deliver incremental savings for them and accretive margin growth for us.

And as you expand your own brand into more categories, how do you evaluate some of those potential new categories and new opportunities when is an acquisition preferable rather relative to internal investment?

Yes. If you think about the history of the company, 90% of our growth has been internal and organic -- we built it ourselves. So you buy or build. So we have a tremendous muscle to actually leverage our internal resources to build something, research, duplicate and improve upon at a better value. We do that very, very well.

That doesn't mean we don't buy things. I mean we have bought things and we've integrated them very well, but we look for things that we think we can create incremental value and something that actually might be -- I'll give you an example. We tried to get into respiratory many years ago competing with Hudson RCI. That is a very broad-based set of SKUs, and it takes a while to actually get 100% of the SKU mix. We were about 60% to 70% of it, and it's hard to compete with the competition. We don't have the entire SKU mix. Hudson came up for sale. That was an example of better to buy it than it is to build it, folded that into our ecosystem and all of a sudden, we had 100% of the line and we were actually able to produce their products in our factories at a lower cost. We got some leverage and some synergies there.

So when I think about a go-forward basis, when I started in 1996, about 20% of what a hospital buys had a Medline brand equivalent. Today, it's 60%. A nursing home today, 80% of what we sell. 80% of what they buy has a Medline brand equivalent. Over the next several years, my aspiration is to get somewhere between 70% to 75% convertible opportunity because every year, we add new Medline brands to our category. A recent example is a forced air warming system. If you know much about it, Solventum sells a product called Bair Hugger. They were the only product on the market. It's an SMS material that you blow hot air in and you increase the core temperature of the body in surgery. There was no competition. We went out, actually created a product, competed with it. We just launched it. So now all of a sudden, we have a $400 million TAM that we didn't have access to yesterday.

So every year, we're adding line extensions to the existing categories, and we're looking for new categories to get into to expand the brand. First -- we normally look first, can we build it ourselves because I'd rather take the business for free. And if we can't, then we'll go out and see what the acquisition profile looks like.

Okay. Can you talk a little bit about the Lab & Diagnostics space? It's now a $1 billion business, estimated, I think, $25 billion market, which is what you've quantified in the past. I think you've mentioned about 30% of that can be converted to Medline brand. Is that still the case? Do you still see a significant opportunity there? Has your thoughts changed on that market? How do you think about your deeper push into that channel and the competitive landscape as well?

Yes. That's probably the most exciting new market that we're in. We started getting into about 10 years ago, and I think we had the fully baked solutions started about 3 years ago. So we really started competing about 3 years ago in this space.

And for us, when we look at new market entry, we look at how can we leverage our existing playbook to maximize the value and actually leverage some of our existing infrastructure to create incremental gains. What I mean by that is lab and hospitals and lab and physician offices, we were able to leverage the same wheels and the truck to deliver the MedSurg supplies, to deliver the lab supplies. So the incremental cost of distribution is almost 0. So we get some tremendous synergies and value for us as it relates to adding to our existing infrastructure ecosystem, and it actually drives value for the customer.

So for Lab & Diagnostics, it looks and feels very, very much like MedSurg distribution. It just happens to be microscope slides, pipettes and things like that as opposed to gauze and underpads. So what our job was, first and foremost, to see could we create Medline brand equivalent to actually create that incremental value for savings for our customers and an incremental gain in margin for Medline. And the answer is yes. To your point, we have 30% convertible opportunity. And every year, we're adding new categories to that line. We're in acute care and physician office lab. We're not in reference labs and things like that. But for us, those are markets we're already in.

Our supply chain is way more robust and offers way more optionality than the competitive landscape in Lab & Diagnostic distribution today. So we can do unique differentiated things for our customers as it relates to the modality of delivery coming into their ecosystem and we can give them a differentiated experience from a cost to serve because we're adding it to a truck that's already backing up to the dock.

So to your point, it's a $25 billion market. It's about $1 billion. We're -- through second quarter, I think we were up 11%. First quarter, it was 1%, but it was burdened by the lack of flu. The base business was up 9%. So the business is growing very well. It's outpacing the growth of the overall organization, which I expect to happen on a go-forward basis.

Okay. And then what about other areas like dental? You did a transaction, Sinclair Dental, in the past as somewhat of a test case for going into this market. What have you learned so far from that experience? What is the opportunity for you there? And is there a playbook in dental or animal health or other verticals as you think about as you think about your business?

Yes. I don't want to be what the current dental landscapes from a supplier look like today. I want to be who we are in MedSurg distribution and dental, and I need to prove that out before we do it because I want to make sure the margin profile isn't dilutive to who we are. So what I mean by that, when we bought Sinclair, the kind of the base case was can we serve this market from a supply chain and a brand perspective and create Medline brand alternatives. Today, we're already up to 30% convertible Medline brand in the dental space in the Canadian market.

And really, the dental space -- it's two halves of a whole. First and foremost, can you be the supply chain provider? And second, can you be the service provider, which is something that we've never done before. It's something we got with the acquisition of Sinclair in Canada. So we had both halves of the whole, and we're learning and understanding that.

So the question we have to ask ourselves before we deploy outside of Canada is the service model, we think -- something we can build and do it extremely well because it's critical to the importance of the overall dental office that you do that extremely well. So we're assessing, is that something we want to be on. And if it is, do we buy or build that expertise? Because on the left-hand side, we have in spades. We have the distribution. We don't have to build a new distribution center. We own the trucks. We have the products. That part is easy. The question is, can we build the service model? I can tell you that the Sinclair acquisition is outperforming the deal model and doing extremely well. I'm optimistic about the business, but we're currently assessing the overall landscape as it relates to how we would potentially deploy in the U.S.

From an animal health perspective, that is a brand business. I have no interest in being a flea and tick collar distributor or a dog food distributor. It's more of gauze, exam gloves. Think about the things that you use in a doctor's office, they're using the same thing in a veterinary office, and we're leveraging partnerships with Vetco, MWI and Covetrus for access to those markets. It's a $4 billion market just in our brand today that we continue to expand as we add new categories.

Yes. And as we see consolidation across that space, too, you could see some of these consolidators like DSOs or vet clinics kind of then go for a hybrid approach and secure kind of consumables from a Medline brand perspective and maybe equipment and some of the high-touch stuff or brand therapeutics elsewhere. Is that kind of the right way to think about it?

It is. We think we can reach that market through an e-commerce platform, to your point, to create almost a double-edged sword because we have the ability to get the products to them if they're willing to buy it direct. And we think we can actually give them some access in a different way that will create differentiation.

Yes. Okay. So I want to shift gears a little bit to some of the macro. I know we talked about it before, but underlying fuel cost dynamics, again, you embed about $70 million in terms of Mid East-related inflationary impact in your 2026 guide. But remind us of what you've pegged oil price to? I think you mentioned your diesel price, but what about the input cost component of it, too as well? Could you comment on that?

Yes. So when we gave our guidance back in, I think it was July or August, at the time, diesel was around $5. Today, it's obviously higher than that. The reality of the diesel -- the fuel impact -- the Middle East impact to us is the vast majority of the impact is not really diesel related. It's more the raw materials and the finished goods. There are a number of raw materials and finished goods that we purchase for either our own finished goods purposes or we source for manufacturing our finished good product that are impacted.

And I would tell you that as of the time we gave our guidance back in August, the costs have bounced around, but are somewhat similar to what they were back at that point in time. So right now, as you sit here in 2026, I can't tell you what's going to happen as far as guidance. But ultimately, we don't expect anything impactful as far as 2026 related to the fuel or the raw materials or finished goods on the Middle East impact.

If you think about going into 2027, I think we're not ready to give you that, obviously yet. Everyone wants to know that. I'm not ready to share that with you yet. Obviously, as you sit here right now, we do expect it to continue. And I ultimately would tell you that, that will be a headwind to our overall '27 numbers. That being said, we are looking at ways in which to mitigate the impact to our business, one of which would be obviously a possible price increase. And so more to come on that as we get further out in the year.

That was my second part of the question is when do you start to reassess that? How much -- and I think you give them your customers usually a little bit of time ahead of sort of those price increases. Have you given them that window yet? How do you think about when you kind of pull the trigger from a pricing perspective?

We have an annual pricing cycle every January and every July, we push price increases through. So it's not something that's unexpected. And we normally give our customers 60 days notice. So November 1, we'll tell our customers what the burden will be. And to Mike's point, we'll assess our normal pricing model and then we'll bolt on what we think the actual long-term impact of what's going on right now from a COGS perspective is.

And so think about the Strait of Hormuz, think about what's happening. I think this is here. I mean the reason we haven't raised it through the rest of the year, very, very similar to what we did last year with tariffs is we wanted to get to what was happening, why was it happening and how are we mitigating it before we explain that to our customers. I think we're at a point now where we can have that conversation.

Okay. I want to move to technology, automation, AI. I think one of the more impressive things when you visit one of your facilities is really how integrated it is on that front. And you introduced Mpower, an AI-enabled digital supply chain control tower kind of built in collaboration with Microsoft. You are expanding the pilot kind of to the broader acute care rollout. Can you talk a little bit about some of the KPIs that you're tracking to measure Mpower's impact across the inventory landscape and what you're excited about there?

Yes. I think Mpower is something -- me personally, I'm very excited about because when I came into health care in 1996, my degree is in supply chain, I managed a frozen food distributor, HEB, a grocery store chain, I managed a frozen food distribution center for my first job, and I can tell you, grocery store supply chain in 1994 is better than health care, hospital supply chain is in 2026. It just hasn't evolved.

And so when I first came in, I couldn't understand why it was so broken. If you think about what happens today, a tech goes to a supply room in every department, call it labor and delivery. They do cycle counts. They don't actually count it, they're like I need 10 of these, 4 of these, 5 of these. They push an order and it goes to a buyer, buyer places a PO. They end up with obsolescence, they end up with expiration. They have no clue what their inventory on hand is. They end up with wasted space, and it's a very antiquated old model that doesn't get you what you need.

And so our aspiration was how do we displace that and actually do it in a way that leverages AI automation and infrastructure and creates a hub-and-spoke model that's all the way from that supply room to our distribution center where we could actually take ownership and management of the flow of goods.

So future state, not too far from now, there'll be a camera in that room. We actually have 5 betas going on from a camera perspective. The control tower is already built, and I'll explain that to you. But the future state, there'll be a camera in that room. The camera will decrement the inventory. It will [ create ] both demand and replenishment signals. It'll tell you, these 14 bins are about to expire in the next 60 days. You better do something about it before you have to throw it away. It'll tell you these 10 bins are obsolete, you need to remove them from the room because you're wasting real estate. It will tell you your caregiver is walking 47 steps to the high-velocity items, you need to move those items closer to the door. And that supply room, we can become a spoke to our distribution center and actually place the orders directly with us, and we will replenish those.

So you don't need the human to do cycle counts anymore. You don't need the buyer to place POs anymore, and you can reallocate those resources of the health care system to higher-value functions. 80% of the physical movement of goods is only represented by 20% of the spend. That's where we live, tongue depressors, gauze, underpads. 80% of the spend is in 20% of the physical movement of goods. So if they could take those assets and redeploy them to stents, to total hips, to total knees, the higher-value expense items, they can get more value out of those resources, and we can manage the supply chain in a much more efficient fashion.

It also gives you visibility across the entire landscape. So you can say, "Hey, did you know across your physician offices, your surgery centers and your hospitals, you're buying 19 different exam gloves. If you consolidate to these 3 that make up 90% of your aggregate volume, you'll save 7% and you'll actually get better service over time." It's going to have complete visibility to suggestive kind of improvements in the business. And the buyers in the health care ecosystem will be able to treat it like ChatGPT and ask questions of it, and it will give answers based on the real data and the real throughput.

It also is going to have visibility from raw materials to that supply room. So one of the big asks health care wants, especially over the last several years is tell me that there's going to be a problem before there's a problem, so I can get ready before it happens. So this system will say, "Hey, there's a hurricane about to hit Puerto Rico. Here's the 5 vendors that currently have a plant in Puerto Rico. Here's the 3 things that you've authorized as a sub. I suggest you order these today in advance of the disruption that's coming tomorrow." So it's going to create a major differentiation in how the overall connectivity between us and them and candidly, the overall environment understands predictive analytics and something we're very excited about.

It's been launched. There's 20 customers currently using it. It's about to be launched more robustly from a supply chain control tower perspective. We've taken 5 camera systems, narrowed it down to 2. And I'm very optimistic that, that will happen in, I don't know, call it, 6, 7 months because I want to make sure we're proving it out. But it's something that we think will create a major differentiation between us and the competition and create much more continuity for the health care ecosystem from a supply chain perspective and evolve them from 1994 to 2026. So...

One of the advantages as well kind of that we see in terms of Medline is how much you've invested in your own facilities and own infrastructure, in things like AutoStore, Pick and Pack Pro (sic) [ Pick Pack Pro, ] Symbotic. Robotics is a big theme at Morgan Stanley, if you haven't heard. So can you talk a little bit about where you are at in that evolution, how much you've implemented that across your distribution centers and what opportunity that brings?

Yes. AutoStore, we were the first installation in the U.S. for AutoStore and we're the largest installation of AutoStore. AutoStore is a less than case goods-to-person pick system. And so anything out of the case, whether that's box or eaches that fits in the tote will go into the system, takes half the labor it takes in the manual pick and it's about 250% more efficient. So think of it, you get 2.5 more throughput for half the labor burden. So it's a fantastic ROI, and it does a phenomenal job. It also shrinks the internal footprint in the building by about 1/3 of the space. So you get 1/3 of your asset infrastructure to utilize for something different.

And so we have about 2,100 robots in AutoStore deployed across our network. We're adding another couple of hundred in the next couple of years. We'll continue to invest in that as we see needs, right? You have to have a market that actually has less than case volume to justify the expense. We just had another market pop up last year with Romulus, Michigan. We won almost all the business in the Detroit Medical Center market. We didn't have AutoStore in there before. We're going to have an AutoStore in it tomorrow because we have such a robust installation.

The biggest owner of real estate in a warehouse is bulk distribution. So you think about our distribution centers are built in a way that serves every care setting and the modality they need to be served from a supply chain perspective. Physician office is different than surgery centers is different than hospital, 53-foot truck, box van, parcel delivery. You have to be able to do all those things.

When you think about production in a distribution center, the production is in our distribution center is about 25% to 30% of the space, and the rest of it is storage of bulk goods. The best way to actually create throughput automation and maximization is figure out how do we actually automate and shrink the internal footprint in the bulk side of the house. And that's what Symbotic is going to do. It's going to do something very similar to what AutoStore did for less than case to the bulk side of the house, shrink the internal footprint, decrease the labor burden and increase the throughput, which we're pretty excited about. We have our first installation going in, in Columbus, Ohio. I can't -- I'm telling you what I believe will happen. I'll tell you what actually happens once we get it installed and actually justify the why.

And then Pick Pack Pro creates an automation for our health care and our health plan business. You know much about that. That is a very high volume in a very given month. At the end of a quarter, you get so many lines that no human can pick it. Without automation, you can't actually meet the demands of the customer. So we've built an automated system that will actually lift in those high spike environments across multiple branches.

So we will continue to invest in that infrastructure. We will continue to invest in automation and differentiation because it allows us to create leverage for our customers, increase the throughput and the quality of the delivery we got going to them.

Lastly, just capital deployment. You've talked about willingness in terms of bolt-on M&A. What about larger scale transactions? What does the M&A pipeline look like now? What size of deals is your sweet spot? And kind of what's some of that primary criteria that you're looking for?

Yes. Listen, I -- the nice thing is we have plenty of cash, right? So there needs to be assets to buy for us to buy something. So there needs to be an attractive asset on the market that we think we're interested. I do think some of the med tech competitors are going to start dumping some of their noncore assets that don't fit within what they're trying to become. We'll be ready for that. That hasn't happened yet, but I see it's on the horizon. I think there's some distribution assets in the marketplace that are attractive that we can buy. Internationally, I think there's some opportunities for us to buy some things as well.

So the key is for us to find an asset that is available that is able for us to purchase. So reality is, are we ambitious and willing? Yes, it needs to be something that's interesting first. If we don't get to a point where there's something on the market and we continue to build our cash basis, we'll do things like share repurchase. We will buy down debt further. We're already below 3x right now. So we'll do the right things with money at a given time. But right now, we're assessing a few potential acquisitions. And so we're not looking for things that are going to change the -- transformational or things that look within the framework of who we are.

Would you be biased in terms of distribution versus products...

No, we buy. In distribution, so there's a couple of different places. First and foremost, we're looking at products, right? What are products that can expand our brand. Second, markets or channels. About 10 years ago, we bought a physician office distributor to get into that space. Last year, we bought dental in Sinclair. So markets or channels.

Distribution assets or some kind of service offering that will create differentiation for us. I'll give you an example. About 3 years ago, we bought a system called PrefConnect that ties out the doctor preference cards in the surgical environment with Epic or Cerner. So they have connectivity, so we can always update the preference card so it's right when the doctor is actually doing the procedure every single time. And that ties out with our kitting facility. So we're always picking and building the right system. So those are the 4 areas we buy in.

Perfect. Okay. Great. Thank you so much for your time.

Yes, thank you. Appreciate it.

Good morning, and thank you for standing by. Welcome to Medline Second Quarter 2026 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would like to now hand the conference over to your first speaker today, Karen King.

Welcome to Medline's Second Quarter and Half Year 2026 Earnings Conference Call. This morning, we issued our earnings release and shared supplemental materials. Joining me on today's call are Jim Boyle, our Chief Executive Officer; and Mike Drazin, our Chief Financial Officer.

During today's call, we may make forward-looking statements regarding our expectations for the future including our business plans, strategy and investments and expected timing and impact. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainties. Please see the cautionary statements and risk factors contained in our earnings release, which accompany these remarks as well as our most recent 10-K and other SEC filings for more information regarding these risks and uncertainties.

We may also reference non-GAAP financial measures, which exclude certain items from our financial results calculated in accordance with GAAP. You can find a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP measures in the earnings release and the disclosures and non-GAAP reconciliations that accompany these remarks, which are available on our website at ir.medline.com under Quarterly Results.

With that, I will now turn the call over to our CEO, Jim Boyle.

Thank you, Karen, and thank you all for joining Medline's second quarter earnings call. I'll begin with a brief performance update. Mike will review our financial results and outlook, and I'll return with closing remarks before opening up the call for questions.

Medline delivered strong top line growth of 12% in the second quarter, reflecting positive momentum across our business. Medline Brand grew 7% for the quarter, including the impact of an IEEPA tariff price refund to customers. Supply Chain Solutions exceeded our expectations, growing 16%, driven by new customer signings and growth within existing customers. This segment remains central to our long-term strategy because it strengthens customer relationships and creates opportunities to deliver savings and value over time through conversion to higher-margin Medline Brand products. We are pleased with the continued momentum across the business and are raising our fiscal year organic sales outlook to reflect stronger demand and solid execution by our team.

Adjusted EBITDA increased 13% year-over-year to $1.1 billion as strong sales growth was partially offset by higher cost of goods sold, increased operational expenses and net tariff related impacts. This includes a net benefit of $243 million from IEEPA tariff refund. As we look to the second half of the year, several external and internal factors have led us to moderate our adjusted EBITDA outlook. Our outlook reflects several headwinds, including the Middle East conflict, the Tracy warehouse fire, growth-related operational investments, quality remediation efforts and softness in our retail business. Mike will walk through the details, but we believe these investments will strengthen the business and position Medline to capture the significant growth opportunities that we see ahead.

I will turn now to several key developments during the quarter. First, we secured multiple new prime vendor and customer partnerships across several channels, including acute care, physician office, lab, skilled nursing, senior living, home health and hospice. Through the first half of the year, we achieved more than $650 million in total new customer signings, representing over 65% of our annual goal of $1 billion. Among those wins, we announced our expanded presence in the Upper Midwest, including a new prime vendor agreement with Allina Health. This agreement expands our existing relationship across their acute care and physician office settings. While new signings vary quarter-to-quarter, these wins underscore the opportunity we have to gain share across the continuum of care.

Second, I'm incredibly proud of our employees who demonstrate agility, grit and determination in responding to the mid-June fire at our Tracy, California distribution center. Their resilience is core to who we are and guide the commitments we make every day to our customers and to one another to make health care run better. Our team responded quickly to the fire by leveraging our outsized inventory position, broad distribution network and MedTrans transportation fleet to continue delivering products and minimize customer disruption.

Employees at our Tracy DC went above and beyond to support the effort and quickly transitioned to nearby Medline site over the first few weeks. Within a month, we secured 1.6 million square feet across 2 distribution centers, expanding our customer-facing Northern California footprint by 45%. We have already taken occupancy of the new Tracy distribution center, which we expect to begin serving customers out of in the fourth quarter and plan to occupy our new Stockton facility in January 2027. Together, these facilities will restore capacity and support customers across Northern California.

What our teams have accomplished in such a short period of time is truly remarkable, and Medline is stronger because of their efforts. I also want to thank our customers for their continued trust and our suppliers for helping us maintain continuity as we build an even stronger network going forward.

Next, in addition to our Northern California expansion, we announced plans to open a new 1 million square foot distribution center in Southern California to enhance the flexibility and resiliency of our supply chain and reinforce our commitment to health care providers across the state. With this announcement and our Northern California expansion, our California footprint is expected to reach nearly 5 million square feet by mid-2027 and to have many of the same automation technologies already in use at other Medline facilities. This is about more than scale. It reinforces resiliency and redundancy across our network and reflects our dedication to anticipating customer needs, supporting future growth and investing ahead of demand.

Finally, as I mentioned last quarter, our goal as a vertically integrated manufacturer and distributor of medical surgical products is to operate the broadest and most robust supply chain in the industry. Achieving that requires continued investment along with rigorous supply chain, quality and regulatory discipline. Patient safety and product quality remain our highest priority. We continue to undertake remediation activities, strengthen our quality organization, enhance our manufacturing processes and work to reintroduce recalled products to market.

For the past couple of months, we have proactively engaged with the FDA to discuss and launch our global quality action plan. To further strengthen our quality organization, we are investing in people, processes and technology and accelerating these initiatives to support growth and better position Medline for future demand. As part of this work, we have also modified our complaint review process, which we expect will increase medical device reporting or MDR submissions in the second half of the year. Our updated guidance reflects our current expectations of these investments and remediation efforts.

Overall, I am pleased with our commercial execution this quarter. Our top line momentum strengthens our confidence in the opportunities ahead. Prime vendor signings are tracking ahead of the pace needed to reach our $1 billion annual signings goal, and the team showed tremendous resolve in continuing to serve customers despite the Tracy fire.

While we are encouraged by our commercial momentum, we are not satisfied with the margin challenges we are currently facing, and we are focused on addressing them. We believe continued execution of our growth strategy, along with disciplined cost savings initiatives to address incremental cost pressures will position us to return to our long-term objective of growing earnings at or above the rate of sales growth.

With that, I will turn the call over to Mike for a deeper look at the financials and an update on our 2026 outlook.

Thank you, Jim, and good morning, everyone. Before walking through the results, I want to thank our employees, particularly the Tracy teams, distribution team members across the network and everyone who supported our California customers for their extraordinary effort and commitment this quarter. As I discuss our performance, I'd highlight that our results include several notable items this quarter, including IEEPA tariff refunds and impacts related to the Tracy fire.

Looking through these items, underlying performance was strong. Second quarter net sales increased 12% year-over-year to $7.7 billion, driven primarily by organic growth, minimal foreign currency impact. The customer repayments tied to IEEPA tariff refunds reduced growth by approximately 1 percentage point. For the first half, net sales were $15 billion, up 11% year-over-year.

The Medline Brand segment delivered second quarter net sales of $3.5 billion, up 7%. The customer repayments tied to IEEPA tariff refunds reduced growth by approximately 3 percentage points. For the first half, net sales were $7 billion, up 6% year-over-year.

Turning to Medline Brand sales by product category. Surgical solutions generated second quarter net sales of $1.6 billion, up 9%. The customer repayments tied to IEEPA tariff refunds reduced growth by approximately 3 percentage points. The strong growth was due to continued strength in surgical kitting, one of our largest product divisions, and the operating room. We continue to gain share by delivering differentiated solutions, onboarding new kitting programs and helping customers improve efficiency in existing programs. These kits provide deeper insights into facility needs in the operating room and create a forum to discuss product conversions, providing opportunity to drive additional Medline Brand growth. First half net sales were $3.2 billion, up 8%.

Front line care net sales were $1.7 billion in the second quarter, up 4%. The customer repayments associated with IEEPA tariff refunds reduced growth by approximately 3 percentage points. Strong demand across multiple product divisions, especially in exam gloves and personal care, was partially offset by unplanned retail channel softness. Unlike our prime vendor business, which is based on long-term contracts, retail is a shorter demand cycle business that sells products directly to consumers through major retailers.

While retail represents less than 2% of our overall sales, it is almost entirely Medline Brand, creating a disproportionate headwind to growth and profitability. To better support this channel and improve competitiveness, we have realigned our sales organization around retail customers and their specific needs. For the first half of 2026, front line care net sales were $3.3 billion, up 5%.

Lab and diagnostics generated second quarter net sales of $248 million, up 12%, driven by new customer implementations and existing customer demand. Many of our new prime vendor agreements are multichannel, including lab, driving strong core acute care lab growth. First half net sales were $541 million, up 6%.

The Supply Chain Solutions segment delivered second quarter net sales of $4.1 billion, up 16%, supported by new customer implementations and growth with existing customers. First half net sales were $8 billion, up 16%, expanding the opportunity for Medline Brand conversion.

Moving to sales by channel. U.S. acute care net sales grew 15% year-over-year to $5.4 billion, driven by new prime vendor customers and existing customer growth. The customer repayments tied to IEEPA tariff refunds reduced growth by approximately 1 percentage point. For the first half, acute care net sales were $10.5 billion, up 13% year-over-year. U.S. non-acute care net sales grew 4% year-over-year to $1.7 billion. The customer repayments tied to IEEPA tariff refunds reduced growth by approximately 2 percentage points. Growth was primarily driven by existing customers and new customer signings in physician office and post-acute channels, including skilled nursing, long-term care and home health, partially offset by retail softness. For the first half, non-acute net sales were $3.5 billion, up 5% year-over-year. International net sales grew 9% to $533 million in the second quarter and 10% to $1 billion in the first half, driven by volume growth in Canada and Europe.

Turning to adjusted EBITDA. Second quarter results were $1.1 billion, up 13% year-over-year. This includes $243 million of net IEEPA tariff refund benefits. Without giving effect of these benefits, higher net sales volumes were partially offset by increased operating costs, including head count to support sales growth and higher cost of goods sold, including the impact of tariff costs. Adjusted EBITDA margin increased 20 basis points to 13.8%.

Expenses from the Tracy distribution center fire are excluded from adjusted EBITDA, but reduced net income by $336 million, primarily reflecting inventory and fixed asset losses and other related costs. We believe we have sufficient insurance coverage and expect future recoveries related to property, inventory and general liability.

Moving to free cash flow and the balance sheet. We generated strong free cash flow of $920 million in the first 6 months of the year, as in the past, working capital was a usage. This reflected the IEEPA tariff refund receivable and higher trade accounts receivable from sales growth. CapEx for the first 6 months was $207 million, reflecting investments in distribution center enhancements and automation as well as capacity expansion of our Mexico kitting facility. Cash and cash equivalents were $2.3 billion and short-term investments were $350 million, reducing net leverage to 2.9x. We are pleased to have reached our long-term leverage goal of less than 3x, providing flexibility as we continue investing in growth.

Let me now transition to our updated 2026 guidance. Given strong demand, continued commercial execution and broad-based momentum, we are raising our full year organic sales guidance for the second time this year to 9% to 10% from our previous range of 8.5% to 9.5%. This guidance includes the $89 million of IEEPA tariff refunds we plan to provide to our customers. The higher outlook reinforces our confidence in our business model, resilient health care demand and our ability to continue gaining share.

At the same time, we are lowering our full year adjusted EBITDA outlook to $3.3 billion to $3.4 billion from $3.5 billion to $3.6 billion. The revised outlook does not reflect IEEPA tariff refund received or expected but includes several other internal and external factors. Externally, we are seeing slightly higher-than-expected inflationary pressure related to the Middle East conflict as discussed on our Q1 earnings call as well as costs related to Tracy fire.

Internally, the outlook reflects increased operational investments to support customer demand, the quality investments Jim discussed earlier and softness in our retail channel. In total, we estimate that roughly half of the incremental earnings impact from these factors is transitory, roughly half is more permanent and will become part of our future cost base. I'll walk through this component shortly, but first, let me update you on our tariff cost assumptions.

As discussed on our last earnings call, the lower tariff rate from Section 122 tariffs in February through July of this year created favorability versus our prior guidance. Section 122 tariffs have now been replaced by Section 301 forced-labor tariffs. Based on this, we now estimate full year 2026 net tariff impacts of approximately $350 million, down $140 million from the $490 million we provided during our fourth quarter earnings call last February. Given our significant inventory on hand, any tariff rate changes from this point forward are expected to have an immaterial impact on our financial results in 2026 and to primarily affect 2027.

Now moving to the drivers of the adjusted EBITDA guidance change. Starting with the Middle East conflict, consistent with our discussion during our Q1 earnings call, most of the inflationary pressures, including fuel and product costs are offset by the tariff benefit I just mentioned. Consistent with our long-standing practice of supporting long-term customer relationships, we have chosen to absorb these costs at this time rather than broadly pass them on to our customers, an approach that has served both Medline and our customers well over time.

As I mentioned earlier, our first half results include $336 million of costs related to the Tracy fire. These costs are excluded from our adjusted EBITDA and therefore, not included in our guidance. In the second half of 2026, we currently expect to incur an additional $50 million to $100 million of Tracy-related costs. A portion of these costs such as cleanup costs, product rerouting and airfreight will be excluded from adjusted EBITDA. Other costs, including lease expenses and labor inefficiencies as we operate without automation will remain in our base.

Consistent with our Q1 earnings call, some operational costs are expected to be offset by tariff benefits. However, since last quarter, these costs have increased as we invest in staffing, technology and scaling efforts to meet faster-than-anticipated demand growth. While these investments are creating near-term inefficiencies, they position Medline to become more efficient over time as our team ramps and new technology is optimized.

As Jim mentioned in his opening remarks, we discussed our global quality action plan with the FDA. We have identified and quantified expected remediation costs, which include enhancements in our quality organization and investments in our manufacturing network. In addition, a portion of the impact relates to products that were taken off the market due to recalls and/or FDA inspection findings. Based on our latest assessment, some of those products, including our CHG wipes, manufactured at our Waukegan facility are taking slightly longer than originally expected to complete the necessary work to bring back online, which results in earnings loss.

The final component is related to the unplanned retail channel softness we discussed earlier. This is impacting front line care and U.S. non-acute sales and margins. While we are taking steps to improve retail, we expect it to remain a headwind through the balance of the year. To help frame the impact of this overall reduction in adjusted EBITDA guidance, the external factors, including the Middle East and the Tracy fire account for approximately 25%, with the internal factors, including operational investment, quality remediation efforts and softness in retail remaining 75%.

We will provide our 2027 outlook during our Q4 and full year 2026 call in the first quarter of 2027. However, the fundamental drivers of earnings growth remain the same and include sales volume growth, Medline Brand conversion, approximately $5 billion of conversion opportunity, leveraging our scale to drive savings in sourcing, manufacturing and distribution and operational efficiency initiatives. We continue to monitor the impact of our business from both the Middle East conflict and tariff rates, and we'll execute on the playbook we have discussed previously to mitigate the impact to our customers and to Medline.

Finally, we remain focused on disciplined execution of enterprise-wide productivity and cost savings initiatives designed to offset incremental cost pressures that will enable us to mitigate the additional costs we are incurring to achieve our long-term objective of delivering sustainable and strong earnings growth at or greater than sales growth over time.

If you look at quarterly cadence for the remainder of the year, the third quarter of 2026 has 63 days, 1 fewer than Q2, while the fourth quarter 2026 has 66 days, 1 more than Q4 2025. As a result, we expect sequential sales to be relatively flat in Q3 before increasing in Q4 due to the seasonality and days. Adjusted EBITDA is expected to increase sequentially each quarter with the strongest contribution in Q4. With respect to the $200 million of incremental costs, we expect approximately 1/3 to be incurred in Q3 and the remaining 2/3 in Q4.

Turning to the rest of our outlook assumptions. All of the ranges remain consistent with our prior outlook, with the exception of tax distributions, which we have narrowed to $250 million to $300 million, the bottom end of the guidance range, reflecting sponsor sale activities in the first half of the year. And CapEx, which we updated to a range of $500 million to $600 million to account for the Tracy fire. While we anticipate receiving insurance coverage from the incremental $100 million in capital, the timing of recovery is uncertain.

In summary, we delivered strong top line performance with double-digit sales growth in both the second quarter and first half, demonstrating broad-based momentum across the business and continued commercial execution. Our organic growth-driven strategy continues to deliver results and create significant opportunity ahead. This performance supports our decision to raise full year organic sales guidance for the second time this year. In spite of the near-term pressures we are managing, we remain confident in the underlying long-term earnings power of the business.

While we are absorbing higher costs in certain areas that create near-term margin pressure, they support the priorities that matter most to our customers: reliability, quality, service and scale. We believe these investments strengthen Medline's competitive position and support long-term value creation.

I'll now turn it back to Jim for closing remarks.

Thanks, Mike. In closing, we are encouraged with the top line momentum we continue to see across the business. We are executing with discipline and investing decisively to support our growing customer base. Medline is well positioned for durable long-term growth, supported by a deep commitment to our customers, industry-leading scale, a resilient, profitable business model, a healthy balance sheet and a compelling long-term opportunity. We remain highly confident in our market position and ability to create sustainable shareholder value by delivering the service, value, reliability and quality our customers expect that continues to differentiate Medline in the marketplace.

Thank you for joining us. We will now open the call up for questions.

[Operator Instructions] Our first question comes from the line of Michael Cherny from Leerink Partners.

Mike, I want to dive a little bit into some of these expenses and whatnot that you discussed relative to the future baseline thought process. A lot of it, clearly, as we can hear, is tied towards outperforming on new business. So as you think philosophically about your pathway forward for share gains over time, is the general philosophy that the idea of overspending, if you want to use it, that relative to your baseline is part of the pathway forward for how you plan to drive new business?

And I guess along those lines, what are the market conditions that you need to see? I'm not trying to get to '27 guidance, but the changes that you need to see to get back towards that EBITDA leverage above revenue growth.

Yes. Thanks, Michael. So yes, the answer is actually, yes. If you think about our business, we've been intentional for many, many years of investing in our business for growth ahead of the growth. And so if you go back in the history of the performance of the business, we would invest in things like new distribution centers, new manufacturing sites. We'd add additional sales team members to support the growth of the future. And that's no different than what we're doing here today in areas like operations and quality as we called out.

I think, overall, for our business, we're very happy with our underlying performance of the business, delivering top line sales growth in the second quarter of 11.6% on a reported basis, but really 13% if you exclude the tariff, IEEPA refund customer repayment, is really, really solid performance. So overall, the underlying performance of the business is strong and remains strong, and we expect to see that continue as we head out into the rest of the year given our -- overall raising our sales guidance.

From the standpoint of the future of the business, I think we need to see continued execution of our overall performance relative to things like operational investments and our quality remediation efforts. We continue to see continued signings -- new signings, and we're proud about the signings we've had so far this year of over $659 million to date. So those are the types of things that we need to continue to see, but we are seeing in our business that suggests that our overall performance will be strong going into the future period of time.

I want to take a minute before we go to the next question, just to clarify one thing that I think is causing a little bit of confusion for people. And that's -- so if you think about how we've approached this, we took a conservative approach to how we handle the tariff refunds in our guidance. Most importantly, we wanted to maintain transparency in our results.

And so if you think about what we've done, we've excluded from our adjusted EBITDA guidance the net tariff refunds of $243 million to show you the true underlying performance of the business. So we took down our EBITDA guidance to $3.3 billion to $3.4 billion, our original guidance did not include this $243 million of tariff refunds. In addition, on the revenue side, we kept the $89 million of customer repayment in our sales guidance, just to maintain simplicity in how we show the numbers. And even with that $89 million in our sales guidance, we were still able to raise our overall sales growth to 9% to 10% for the year.

Our next question comes from Elizabeth Anderson from Evercore ISI.

I appreciate the clarification that you just gave, Mike. And I realize a lot of these factors are not necessarily entirely in your control. But as we kind of think about this new guidance and being kind of like the new baseline, can you help people understand the level of conservatism that you've baked in about some of these like longer-term macro factors like oil and shipping and those kind of items.

Yes. So the external factors that we think about are the Middle East and the Tracy fire. On the Middle East side, just to give you a number, we have a $70 million of estimated or expected impact for 2026 in our overall guide. That is inclusive of, as I talked about before, both the diesel fuel cost to fuel our transportation from our MedTrans fleet and third-party trailers. In addition, it also includes a lot of the product and raw material costs that we're purchasing. So overall, we've assumed roughly diesel prices around $5 in that guide. And we've essentially used our costs of our raw materials and finished goods as of roughly 2 weeks ago. So that's the $70 million in the Middle East.

As it relates to the tariffs that we talked about, we have assumed that tariff rates do not change essentially for the rest of the year. If tariff rates were to change at this point in time, it would be a very immaterial impact to our overall results. So it would impact 2027.

Our next question comes from Sean Dodge from BMO Capital Markets.

Yes. Maybe just kind of staying on the guidance and just to clarify, last quarter, you talked about increasing the operational investments to support customer demand. It sounds like you're stepping those up even more now. Is that right? And how much is the step-up related to those?

And then just any examples of what these new investments are? And if I'm hearing right, it sounds like we should be thinking about these being kind of more of the kind of the inclusive of the run or additive to the run rate?

Yes. So the operations investments that we're making are not new. We talked about them last quarter. We had -- as we talked about bringing this $2.4 billion of new business online, we had to invest in additional people to support that. If you think about the investments we made, we invested in people to support the new customer signings plus existing customer growth as well. And the example we gave last quarter was, as we saw these new customers signings come online, we saw it happening in a couple of DCs where we didn't have automation and we had inefficiencies. And so you're seeing inefficient labor at the moment. But what we're doing is we're making investments in our auto-stores in those facilities.

And we're also expanding our network capacity by adding new distribution centers. Jim talked about it previously, we were adding a DC in Texas, we're adding a DC in California. We're also talking about adding a couple of more DCs in the Midwest to help support this current growth. So as we add new distribution centers, as we add automation, we expect to see those inefficiencies subside and ultimately see some savings in our business.

You also have to remember that when we add -- think about the $2.4 billion we're adding, we're adding the labor burden in advance of the revenue realization. So in some cases, we're adding it 3 to 6 months. So this year, because we had such an outsized growth last year, that's being realized this year from a prime vendor perspective, we're seeing an outsized pre-add of labor in advance of the distribution. So that's weighing the number down as well.

Our next question comes from the line of Daniel Grosslight with Citi.

This is [ Brendan ] on for Daniel. Just a quick question on the overall tariff refund. You guys accrued around $89 million this quarter. I'm curious just what's overall like customer response to that and whether all repayments have been accounted for? And if there are potential for additional payments to be made in the future and if they will receive the same accounting measures?

Yes. So as we've called out, the total tariff refund that's available to us is $507 million. We recorded in our financials for the first half of this year a net tariff benefit of $240 million. That is basically $330 million of phase 1 tariffs that have -- what we believe we are going to collect or have collected, net of the $90 million roughly of customer repayments. That $90 million of customer repayment is for the full amount of the $507 million of tariffs. We expect to receive all of that over time.

We have not yet made that payment. We booked that as an accrual on our balance sheet as of today. Our expectation is to make that payment to our customers in the latter part of this year. And we have communicated that we are making this payment to our customers. We've not yet quantified that for them individually, but we're going to do so in the coming months.

Yes. You have to remember, we absorbed the vast majority of that $500 million. The only thing we pass through to the customers is the $89 million, and that's the full accounting of the prices. That's why it's fully accounted for.

Our next call comes from Pito Chickering from Deutsche Bank.

I just wanted to sort of dig back into that $200 million of inflationary pressure. You said 1/4 of it is external, 3/4 of it is internal, and [ 1/3 ] of the impact is in 3Q and 2/3 is in the fourth quarter. Can you just help us think about the internal and external pressures as we use fourth quarter as the launch pad for 2027? So which continue into next year and at what pace, which ones fade away?

Yes. So if you think about, we roughly have estimated about half of the cost or the impact to margin is transitory and about half of it is really permanent and will roll into our base overall. And if you think about what the drivers of that are, obviously, we believe the Middle East is a bit transitory. The fire -- Tracy fire impact is transitory and will have some impact rolling in '27, but over time, will subside as we stand up the new distribution center in Tracy and Stockton and add automation to those facilities.

Obviously, the operational investments and some of the quality investments will be more permanent in nature and will roll into our base in 2027. Some of the product-related costs as it relates to quality, we're not -- so as we talked about before, we took the time to delay a little bit to going live with a couple of products. We'll go back live in 2027. So those are more temporary or transitory in nature. And then lastly, on the retail side of the house, those are probably more permanent in the short term. But as Jim mentioned, we do expect to -- we have realigned our organization to go after that business and make sure we drive growth again in that market.

Our next call comes from Steven from Mizuho Securities.

It's Steven Valiquette from Mizuho. Just a quick financial question here. This may be pretty obvious, but I guess just to confirm, the EBITDA -- the adjusted EBITDA in the June quarter of the $1.060 billion, I mean, I'm assuming it includes the $243 million benefit from tariff refund. But when thinking about trying to model out for the full year, should we think of that as $817 million, I think, in trying to arrive at EBITDA for the full year within the $3.3 billion to $3.4 billion. I'm just thinking ahead here, there could be some confusion within the consensus numbers for EBITDA for the back half, if some people are treating it differently, et cetera. Hopefully, that question makes sense.

Yes, it does. Thank you, Steven. That does make sense. So yes, we do -- the true performance -- the true underlying performance of the business in the second quarter for adjusted EBITDA was $817 million. That was a beat versus consensus. We're very proud of that result, given the strong performance in the quarter. But yes, for purposes of that $243 million, we are isolating that and calling that out separately. We don't think you should include that in our overall guidance number. We're not including our overall guidance numbers, so you should not include it in your consensus.

Yes. We just -- we think it's responsible to be conservative in our approach and just guide based on the actual results of the business, not on a refund.

Our next call comes from Matthew Taylor with Jefferies.

I actually wanted to ask one about the customer signings. So you said you're $650 million towards your $1 billion goal halfway through the year. Could you talk about the achievability of $1 billion or more this year, maybe giving an eye to the signings that could happen in the second half, if you have any visibility there, et cetera? And maybe just talk about the trends that you've seen so far this year?

Yes, Matt, thanks for the question. First, we're pleased with the $650 million in the first quarter (sic) [ first half. ] We're ahead of pace to achieve the $1 billion, and we're confident that we're going to hit the $1 billion plus. I mean, that is the goal that we believe we can control. It's within the framework of what we have visibility to. And we do see a line of sight as it relates to what's available in the marketplace to achieve that goal.

Just for context, that $650 million is made of a bunch of singles and doubles. Last year, we had several home runs. That's what actually led to the $2.4 billion. And each year, the signings makeup looks different, right, and they can be lumpy from quarter-to-quarter, which is part of the reason why we didn't give a number in the first quarter because if I would have said, we signed $50 million in prime vendor closings in the first quarter, everybody would say, "oh, no, what's going on with Medline." But if I would have said $500 million in the first quarter, you guys would have judged us on $2 billion. So we think it's important to give you a context mid-year, that $650 million gets us on track, actually ahead of pace of achieving it. And we feel confident we're headed in the right direction from that perspective.

Our next call comes from David Larsen with BTIG.

Can you talk a little bit about the Allina win and how much sort of incremental revenue that could be tied to that? What led to that win? And then just also with the IEEPA tariffs, was there a drag in 3Q '25, 4Q '25 and 1Q '26 related to the IEEPA tariffs that I guess are going to remain on the books, though the reverse sort of benefit will not be recognized as we progress through the rest of the year?

I'll take Allina. I'll let Mike handle the IEEPA perspective. So Allina is a great win in the Upper Midwest. It is expanding our relationship across multiple classes of trade, acute care physician office and several others. We don't actually give kind of the numbers as it relates to each individual deal. It was a sizable deal.

The next question would be, do we think something is going to change with the Sutter acquisition? The answer is no. We actually happen to be the prime vendor at Sutter Health as well. But I can just tell you, it is a -- it went live about 3 weeks ago and went live very, very well. We see them as a tremendous partner and an opportunity to expand the relationship even further over time. But it was a good win and it's something we're proud of.

And on the tariff question, David, the IEEPA tariffs hit us in the second half of last year. And our peak quarter was really the fourth quarter as well as the first half of this year. So -- and this year, overall so far in 2026, we've seen about $230 million of total tariff headwinds in our results.

Now to your question, as the IEEPA tariffs were ruled illegal and they put 122s in place. Essentially in the back half of this year, you're going to see our P&L being burdened by the 10% roughly rate, which is a benefit to what we called out in our guidance originally. So we originally called out $490 million of impact, which was including all IEEPA tariff impact. So now we're looking at $350 million at the new 10% rate.

Our next caller is Kevin Caliendo with UBS.

So I want to kind of go a little bit further on Pito's question. If we take the guidance for the second half of the year, adjust for the one-timers that you called out, the expenses that are -- some are going to be consistent, some are not. If we take that run rate, understanding there's some seasonality, adjust for those one-timers, is there any reason to not take that run rate, think about the new business wins and the sort of normalized growth and come up with sort of a number for '27.

Is there any other headwinds or tailwinds we should be thinking about there as we sort of -- because I think that's where there's a lot of confusion as to what the real run rate is and how to think about what it should look like for next year. Like what's the baseline that we're operating off of. So any help there would be great.

Yes, Kevin. So let me try to clarify that for you. So if you think about the overall impact of the business, on an annualized basis. If you exclude the $140 million of the tariff benefit that we talked about a minute ago, you're really looking at about $340 million of overall impact, right, change and impact to the bottom line, right? And so ultimately, if you take that, you apply the same metrics, like 50% transitory, 50% permanent, that gives you a better perspective how to think about the run rate going forward into 2027.

That being said, we've not stopped identifying cost savings opportunities in our business. And so we are looking at enterprise-wide cost savings initiatives to mitigate some portion of that burden that we're facing in our overall results. And so while I can't quantify for you what 2027 is going to look like. We obviously are doing our best to try to mitigate what we can. The other area that I would say is just uncertainty are the external factors like the Middle East and the tariffs. And so those 2 also have to play into the math, and we have to wait and see how those settle out.

Our next call is from Brandon Vazquez from William Blair.

I wanted to ask, there's a lot of moving pieces in the cost line here, there's Middle East, inflationary pressure, there's tariffs. In the past, you guys have kind of taken a thoughtful approach to pricing, and you're absorbing those prices now. But you, in the past, have eventually pushed pricing through to kind of offset some of these headwinds. So can you guys just level set us where you are today on kind of assessing what prices you can and can't push through?

And then when you might think of doing another round of pricing increases to offset some of this? Because the -- I guess, the follow-up kind of question to all of this that investors are asking a lot is the Medline Brand margins are in the low 20 range now. It used to be mid-plus 20% range. Is there a pathway to get back there? And what's kind of the catalyst to expect to get there?

Brandon, thanks for the question. And you're right, this is a play we've seen historically, right? This is not a new game. And right now, we don't act in times of uncertainty and chaos and crisis. And if you just look at the cost of oil and the cost of raw material over the last 6 months, they've gone up and down depending on what's going on with the Strait of Hormuz. Is it on -- is oil flowing through? Is it not flowing through? And we think in those times when we don't have visibility to certainty, it's better to absorb and take share than it is to take price that you ultimately have to pull back and give. And that's just a different philosophy than the competition in the marketplace.

That said, as we've done historically, price is an option. And when we feel like we're at a place where we understand what the true cost impact are, we understand the burden on the business, we will push price increases through. And we do have levers and contract terms in our agreements that allow us to do that. So over time, if this is the new norm, will we push price increases through? The answer is yes.

So we do have an avenue to get back to the margin profile you're describing. What we find in these moments is it's better to take share and have the margin lift kind of follow. And we did that during the pandemic. We've done it during multiple scenarios where we focus on feeling the pain and the burden at the same time as the customer, being in the boat with the customer, winning share in the marketplace and over time, pushing those price increases through where we could actually justify it to our customers.

Our next question comes from Erin Wright with Morgan Stanley.

So can you speak a little bit more higher level just on overall utilization trends right now, remind us of how that fits into the growth algo, what sort of end market trends are you most levered to? And then you mentioned strength in the kitting business where you do have sizable share. I guess, how does that play into that? And then how do you think about just the health of your hospital customers as well more broadly in the current backdrop?

Thanks, Erin. So when you think about kind of flow, we don't measure patient volume, which I think is what you're hearing a lot from a lot of the kind of the providers in the network and concerns around the OBBBA and the Affordable Care Act and the lack of patients flowing into the market. What we measure is volume or throughput of supplies. And I can tell you that the first 2 quarters, we've seen no slowness. As a matter of fact, part of the reason why we're raising our guidance is we've seen same-store sales outperform what we anticipated.

And so do we have a little softness baked into the back half of the year based on what we are hearing from our customers and what they're saying to the Street? We do. However, our business model tends to benefit either way. And what I mean by that is when a person doesn't have access to insurance, they tend to not go to the primary care and they delay their need for health care until they actually have a higher acuity of care need and they end up in the emergency room or they end up in the med-surg floor or the ICU, which for that patient actually has a much higher utilization of supply.

So even if the overall volume is down across the different care settings, the actual volume and utilization of supply either maintains or goes up because that patient actually ends up needing more than if they went to the doctor for pneumonia, right, or cold or something like that. So I will tell you, we have seen as it relates to what we measure, flow of goods, a lift, not a drop. But we are being conservative in how we look at the back half of the year tied out to what we're hearing from our customers. So there's a modest softness what we see in kind of the back half of the year, but we have not seen that in our business today.

The next call comes from Michael Polark from Wolfe Research.

A question on the retail business. I heard 2% of total revenue, mostly Medline Brand, for sake of round numbers, $600 million of revenue. My question is margin profile on that revenue? Is it meaningfully higher than Medline Brands segment? Or should we use the segment? I'm trying to understand profit mix. Is it 4%? Or is it more than that? And then just why weak, why soft, what's the assessment? Is it execution? Or is it macro?

I'll take the first question, Mike and Jim will take the second part of the question. So our retail business is less than 2% of our overall sales. Your number is close, maybe a little bit higher than where we're at. And if you think about the business, that business is pretty much all Medline Brands, so it runs at Medline Brand margin. So therefore, that's why we're taking the EBITDA down by a larger percentage relative to what you see on the overall mix of the business in the back half of the year just from the retail business.

Yes. And really, the burden that we're feeling is a loss of a portion of a customer, candidly, just to a lack of our sales team understanding the needs of the customers and meeting them where they were. And so we actually lost a portion of the business that are a decent-sized retail customer. But I can tell you what we've done is we've redesigned the sales team, we've actually engaged with the customer, and we're working to earn that business back.

The retail business tends to be much more volatile. It doesn't have the same contract terms and really the stickiness that we do in our base business, think about acute, non-acute, which means you can lose it fast and you can win it fast. So I can tell you, we're adjusting how we engage. We understand the needs of the business, and we're working towards winning that back.

Your next call comes from Navann Ty at BNP Paribas.

I have one more on the retail side. If you had seen weakness across retailers or focused on a certain type, and it sounds like the weakness was Medline specific. If you could confirm that?

And my second question is on the investment. If you could discuss the continued investments across service levels in IT and AI, et cetera, and what metrics are you monitoring to slow down the investments. And sorry, if I missed it.

So on your first question, Navann, that is correct. It's Medline specific. It's not the overall retail market. It's retail softness relative to our business, specifically in that one customer that Jim talked about.

On your second question, we are continuing to make investments in our business to drive efficiencies across the entire organization. We are always looking for ways in which to drive productivity and throughput in our operations facilities. We're always looking at ways to drive efficiency in our manufacturing sites. We are making investments in AI to drive efficiencies, how we deliver service to our customers. And so that is part of what we are doing today, and we'll always do in our business to drive productivity for ourselves and for our customers.

Our next caller is Jailendra Singh from Truist Securities.

I want to go back to large customer implementations, creating near-term margin pressure within Supply Chain Solutions. Is that all driven by the operational investments you're doing to bring these customers on board? Or is there something unique about these customers? Just trying to better understand if there's any change in terms of your general margin expansion framework you laid out last year in terms of starting point or pace of ramp? Any color would be helpful.

Yes, Jailendra, thank you very much for the question. The answer is it's not a margin change. I mean, it's -- we had an outsized lift on kind of $2.4 billion. So we had a big growth. Remember, 90% day 1 is Supply Chain Solutions. And we burdened the business based on the throughput and the volume of the widget that we're selling. And the first year signings normally have a first year rebate and that first year rebate impacts the margin of Supply Chain Solutions more than it does Medline Brand because 90% of it is in the Supply Chain Solutions business. So when you think about the $2.4 billion with that first year rebate that goes away in the next year, you'll see a lift in the next year.

So just to add to that, on the Supply Chain Solutions margin, we reported 4.9% adjusted EBITDA margin for the quarter. And I would tell you that's probably more in line with where we're going to land for the year. While we don't give guidance on our segments, I think now just given the -- both the year 1 rebates plus the operational investments that we called out earlier in the business, we're looking at more like 4.9% to 5% adjusted EBITDA for that business.

Our next call comes from Eric Coldwell with Baird.

Just a quick one in the slides and in the commentary, I think you mentioned what you call notable wins in physician and lab market. Was hoping for some color on what's driving those wins, where it's coming from? Is it affiliated with existing customers, maybe doing expansions in existing customers? And then also, if you would, an update on the lab market specifically after the Q1 seasonal and low illness season items, just give us some better sense on how that snapped back?

Yes. So when you think about the wins, both in the physician office and in the lab market, it was a combination of both. It was expanding relationships with existing acute prime vendors where we didn't have those secondary classes of trade, where we were able to pick up the physician office business or pick up the lab business in those existing customers and some large independent physician office networks, specifically -- and some lab wins in customers where we are not the prime vendor, which is a beautiful thing because whenever you can be a prime vendor in the lab, it gives us an opportunity to actually win the rest of the business, no differently than when we're a prime vendor for the acute care business, it gives us the opportunity to win that secondary and tertiary markets that they own, so think about surgery centers, physician office labs.

So it is a part of our playbook is both to win, just literally brand-new things -- brand-new store sales and to grow same-store sales within their existing network. So we saw a blend of both of those things. From a lab perspective, you think about the first quarter did have a drag because of seasonality, and we saw a very nice uplift in the second quarter, specifically our core business grew significantly. I mean we ended up growing nicely in acute care, especially. I mean that's where we saw a really nice lift in the lab business. So we're very happy with the results this quarter.

Our next call comes from Andrew Obin from Bank of America.

Just a question. You were talking about prime vendor wins and I'm a customer of NYU Langone. I think you press released a win there. You said that here today, signings have been more singles and doubles, to use your analogy. But are there some potential home runs in the pipeline? And just a follow-up question. Are any of your competitors also passing through IEEPA funds? And is this a differentiator for you that allows you to win these orders?

A couple of things. There are absolutely more home runs in the marketplace and opportunities for us to win. They tend to be boulders, you move them a little slower than you move some of the singles and doubles and triples, if you will. And they take a little bit longer time to actually kind of build really that cadence of understanding of the opportunity we can drive in order to win the business. It's important to understand most of the wins we won in acute care were not through an RFP or a bid cycle. We won them because the customer chose to leave the competitor.

And so from a prime vendor perspective, I just -- we don't have a giant win. Last year, we had CommonSpirit. That would be -- that, in my opinion, is a home run. It's a large customer that we won. And then second -- what was the second part of the question?

Do your customers -- do your competitors sort of passing through IEEPA refunds?

Thank you. Sorry about that. The answer is we don't comment on what they're doing. What -- I think we're doing things -- candidly, what we believe is we have to be transparent, fair and do the right thing every time. And I think that's a different approach than the market takes, but I can't tell you exactly what they're doing. What I can tell you is this is the right thing to do for our business.

Our next call comes from Charles Rhyee from TD Cowen.

Maybe just going back a little bit on sort of your estimates for the impacts from the Middle East here. Understanding that a lot of it is out of your control, but just trying to understand a little bit your thought process. You sized it at sort of right now, input costs at $70 million. Obviously, a lot of back and forth going on right now at a -- obviously, at a macro level here.

Can you give us a little bit more thoughts on your thought process on how you are trying to figure out what sort of a new norm is? Because obviously, when you think about the current administration and sort of the back and forth. It seems like it's changing all the time. Just curious how you are trying to put some -- I can't even say guardrails, but some rails around sort of this -- sizing this impact. Anything there additional would be helpful.

Yes. So Charles, the $70 million is primarily made up of product costs, raw materials and finished goods that we source or that we buy in order to manufacture our own finished goods. That's the vast majority of the cost. The smaller portion are the cost of fuel, diesel and the inbound freight costs, fuel surcharges we pay.

So obviously, we're doing our best to negotiate and work with our suppliers to understand the potential impacts on all these raw material costs. We're identifying ways in which to mitigate those costs through actions. We're leveraging our broad sourcing relationships across the globe to do that, ultimately moving production around where we can. And we'll continue to monitor the situation. It is a fluid situation. And so we can't sit here and tell you where we're going to land. But ultimately, we'll just keep on running the playbook we've run all along and leverage our broad scale relationships, leveraging our footprint to drive as much cost savings as we can to mitigate the impact to our business.

And I think last quarter, you mentioned that you would start to see some input costs rise. Is that very broad-based now? Or is that still sort of selective depending on sort of your suppliers? Or maybe what's happening for -- up the supply chain in terms of what your suppliers are feeling in terms of their input costs?

Yes. I mean I think there's a ton of different input costs that we have to deal with, for example, on exam gloves we deal with the NBR as an example, or with resins, we deal with polypropylene and polyethylene. So it depends on the individual raw material that we're talking about, but we're seeing sort of this, I would call it, a whipsaw effect where one week, it's going up and the next week, it's going down.

So we're trying to -- not trying to react to the weekly uncertainty and sort of stay calm and balanced throughout this approach and try to work with them on a more long-term basis, which is how we've always operated. It's not about today, it's about the future and how we work with them to make sure we provide the right level of supply, the best quality at the best cost, the things that we're ultimately focused on.

This concludes the question-and-answer session. I'd like to turn it over to CEO, Jim Boyle, for closing remarks.

Thank you. Thank you all for joining the call. We are pleased with our second quarter results and the lift in revenue guidance for the back half of the year. We are implementing enterprise-wide cost savings initiatives to address the margin headwinds, and we're committed to delivering long-term value for our shareholders. Thank you all very much for joining the call, and I hope you have a great week.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good morning, everybody. Very pleased to have the management team from Medline here, Jim Boyle, Chief Executive Officer; and Mike Drazin, Chief Financial Officer. I want to keep this as interactive as possible -- should there be any questions, obviously, feel free to raise your hand, we'll get a mic over to you for the benefit of people participating via webcast.

A lot to talk about Medline and kind of your journey here into the public markets. But I wanted just to start with -- it's very topical we're getting a lot of questions on is just quality remediation, the warning letter that you just received. Maybe just sort of frame for investors what's going on? How do we contextualize this? Why isn't this a bigger problem? How does this not metastasize, et cetera??

Yes. Thank you for asking, and thank you all for being here. Quality of Medline is paramount, right? Patient safety is the most important thing that we focus on each and every day. And the most recent warning letter was from our ReadyCare Waukegan facility, which is where we make CHT wipes, which is a pre-surgical antiseptic.

This goes back to October. We actually informed the FDA that we found some things we were not happy with. We actually closed the factory down. So the warning letter was not a surprise as anticipated. And part of our job is to make sure that we inspect ourselves as arduously as the FDA would to make sure that we're delivering the right product at the right place at the right time with the right quality metrics.

And so just from a recall perspective, overall, last year, we had 29, we've had 15 this year. We make 190,000 different products. I'd love to tell you that we could never have a recall or never have a quality issue, but unfortunately, that's just not the case. It does come up. And how you respond to it, I think, is what matters. So first and foremost, how do we mitigate the burden to the customers to offer something that actually allows them to continue to operate in a proficient fashion. Specific to this recall, we actually worked with Sage to bring in inventory to actually supplement the inventory for our customers. As a distributor, we have the ability to do that. I'll give you another recall example.

We recalled some surgical drapes and gowns earlier in the year. One of our factories that we had done business with was not meeting the expectations through one of the inspections we did. So we chose to cut them off. The beautiful thing about having redundancy across your network category, we were able to shift that volume to other meet the demands of the customer from a fulfillment and throughput perspective.

So from a quality perspective, we take it very seriously. We have over 2,700 people of quality across the globe. We invest hundreds of millions of dollars in the organization. We're investing $10 million in the plant we're talking about in Waukegan and that's currently subject to the warning letter, and we're working very closely with the FDA to make sure we're not only meeting but exceeding their expectations.

And I think sometimes there's perhaps a misunderstanding of what the recall actually means and how it materializes. I get a lot of questions, which is, the FDA made them do this. Maybe just remind people like how a recall originates, what the process is and just broadly the interaction with the agency through that?

Yes. Every recall we've had has been voluntary, meaning we did it to ourselves. And part of that is a rigor in inspecting yourselves. So we have a responsibility as an organization, as a manufacturer to make sure that you're inspecting yourself as if the FDA was doing it. So the FDA is not dictating that we recall. We report to the FDA that we are recalling and then we work with the FDA on the remediation efforts as it relates to what the cause of the recall was. So the partnership with the FDA is more about remediation and actually getting to the right outcome than it is actually delivering the recall.

And that kind of 29 recalls, 15 recalls, are the ones -- how quickly does it take to sort of reach your definition of resolution on any of these matters?

It depends on the product category. In the surgical drapes and gowns, we literally displaced it almost immediately, right? We discontinued manufacturing with one of our suppliers, moved it to another supplier, and we're able to fulfill customers' demand. So that was almost a nonimpact to the market.

In terms of the ReadyCare Waukegan, we actually shut the factory down and we are not producing and we will not produce again until we actually meet the expectations we've set for ourselves in conjunction with the FDA, which could be later sometime this year. So it really depends on the complexity of the recall.

And then maybe just to round out this conversation, just how should we think about the financial impact or financial risk associated with the shutdown of the Waukegan plant and just quality remediation in general?

It's not going to be material to our numbers. Every recall we've had this year has been small, and it won't be material to our numbers, and we're still confident in our guidance.

Okay. Excellent. Maybe we can just segue over to the business. You started the year at 8% to 9% organic revenue growth guidance. You raised that here after the first quarter. Maybe just give some background as you came into the year, the initiation of guidance, what you were seeing in end markets and in your business and then what you saw exiting the first quarter that gave you confidence to increase the outlook for the year?

Yes. We were really pleased with our results in the first quarter. We -- organic growth of about 10%, overall growth of about 11%. That's not adjusted for days. So if you adjusted for days, our actual growth is closer to 13%. So really pleased with the demand across all of our businesses. The acute care channel grew at close to 12%, non-acute grew close to 7% and international grew close to 10%.

So really, really pleased with the overall results that the sales demand levels remain strong. And so we see -- we saw the opportunity to increase our guidance for the full year. So our new guidance as we set at the beginning of the first quarter -- at the end of the first quarter is organic sales guidance of 8.5% to 9.5%.

And it would seem like you are diverging a little bit from what your -- some of the end market trends that you've talked about. One of the things I believe that's reflected in your guidance is the risk around some deterioration in utilization, hospital purchasing as we go through the balance of the year. So in that context, in your increased outlook obviously implies greater share capture. So maybe just help us think through what's happening in the end markets and what's driving that divergence in your -- that widening divergence in your performance?

Yes. We're seeing -- in the first quarter, we did not see softness, and we don't measure patient volume. We measure flow of supplies. And I can tell you, the flow of supplies from that line was as good as normal. And candidly, the outsized growth in the first quarter was tied to sales growth outpacing what we predicted and some acceleration of the prime vendor implementations going into the quarter.

So it's both share gains and same-store sales growing better than we actually anticipated. So when you think about the reason we don't measure patient volume is we don't have visibility to that. We have visibility to the flow of goods. And our business tends to benefit on both sides of the equation. So if patient volume goes up, that means more procedures, that means more supplies used. But when patient volume goes down, specifically around uninsured, so you think about what's happening with the Affordable Care Act, what's happening with the OBBBA, cuts of Medicare -- Medicaid, when uninsured patients don't have insurance or consumers. They don't go to the doctor for the flu. They don't go to the doctor for a cold.

They wait until they have pneumonia, they end up in the emergency room and they end up in the ICU. So for us, that's a much higher utilization from a procedure -- really a cost of care. So we're seeing a lift in the number of supplies based on the incident of care as compared to a doctor's visit. So we're covering up the diminished patient volume by the utilization of what the procedure that they went into the facility for was. So our flow of goods in the first quarter was as good or better than it was last year, which is why we saw it.

So we are baking into our numbers and just listening to our customers that they are anticipating some potential softness from a volume perspective in the back half of the year. That's what's baked into our numbers. If that doesn't happen or we benefit from the same thing we benefited from in the first quarter, there's some favorability in the back half of the year.

And just to be clear, the first quarter, did you see that acuity benefit? Or it is really just same-store sales growth execution? The acuity dynamic that you laid out, that's a theoretical impact.

Well, you saw acute care sales grow 12%. So we did see an acceleration. So it's a higher acuity in that. So you saw some acceleration in acute care.

All right. Great. Maybe it's a good opportunity to go into a little bit more detail on some of the individual business drivers. Maybe we'll start with Supply Chain Solutions. You talked about $2.4 billion of prime vendor contracts sold last year above the $1 billion average run rate that you expect and what you're contemplating for 2026. Maybe just Help us understand a little more like what drove that outsized growth? And then remind us kind of on the conversion of that contract to revenue.

Yes. So we commit to $1 billion every single year because that's what we know and believe we can control. We know what's coming up for renewal with our customers. We know what relationships we have, and we know where we are in the sales cycle. So that's the $1 billion is what really we can control in any given year that we can actually account for, if you will. And then we take advantage of market conditions that are currently in play that are favorable to our business model.

If you remember last year, we did not raise prices initially when the tariffs hit. We do not react in times of prices or chaos and act when we don't actually have an idea of what's going on. So we chose to wait to raise prices. And first and foremost, what could we do internally to mitigate as much as possible. We educated our customers on what was happening, why was it happening and what were we doing about it in advance of doing anything. And we waited until August 1 to push any price increases through, which is different than our competition did and opened some doors that historically have been closed. Some of our outsized wins last year were tied to that.

Second, customers are all looking for speed to value. We are the value player in the marketplace. And what's happening with custom reimbursement has opened doors that historically have been closed. That customer yesterday that wasn't willing to look, now is looking for the value player in the marketplace and created some outsized wins last year.

Third, consolidation in health care is not slowing down. It's picking up. The integrated delivery networks in these large health care systems emerging is becoming more robust and really larger from a geographical footprint perspective, Medline is the only supply chain solution provider that serves every single point of care, anywhere a caregiver, a patient or a consumer needs access to patient. Medline is a supply chain solution, a product formulary, a clinical engagement platform and a sales force dedicated to that individual care setting.

And we have the ability to merge them all and serve really an integrated delivery network with a consistent solution across their entire network, and we are the only ones who can do it. That's also been a tailwind. And so those things are still relevant today, right? We still have financial crisis.

Now we have the Middle East. Tariffs are still in play. There's concern around resilience with some of our competitors. Customers want resilient, sustainable long-term supply chain partners. And candidly, I think we might be the only people that want to be in the business we're in right now. We continue to invest in the business and customers see that, and they want to be with the player that's going to be around for the long haul, not for the short term.

Very helpful perspective. And maybe as you kind of think about the Medline brand, side of the business. There's sort of two pieces to it, right? There's the prime vendor contract winning and then converting distributed products to Medline products. And there's also an opportunity, I think, within each of the three segments to drive higher penetration of Medline brands, especially in lab and diagnostics, but also in the other two in MedSurg and Front Line Care also. But maybe we could start on the conversion opportunity and then maybe go into a little bit more...

Yes. When we sign a new prime vendor business, it's important to realize 90% distributed products. 10% of the business is already in our brand. We're distributing about $1.2 billion of our brand through competitive distributors. Our brand stands on its own. In that first year, we normally see our Medline brand penetration double to get to 20%. So we see a

lift. And normally, that's surgical custom procedure trays. Just for context, what is that? That's a bundle of goods picked, non-sterile, put into a bundle and sequence that actually increases really the turnover rate in the operating room and actually decreases the cost and actually keeps them from having to open 100 packages they open one. And it's a bundle of goods already built for like a total hip, an open heart, a lap chole tray. And then we also pick up a lot of the commodity items in the first year. So think about your tongue pressures, your comes, your exam gloves, your underpad.

Those are easy for the clinical team to accept in a positive manner. And then from year 2 on, we see anywhere between a 3% to 4% penetration rate lift, and that's an intentional pace of change that we've built and learned through many years of trials and tribulation, right? When you go too fast, it's hard for the clinical team to accept that change because too much change is hard for them to say. Believe it or not, when the box changes from red to blue, they freak out if you don't actually tell them the boxes changes from red to blue, even if it's the same item in the box.

We also learned if you go too slow, you don't deliver enough incremental value and savings for the CFO. So that pace of change is built through many years of really evidence-based conversion to deliver value to the customer on a consistent basis. We have every quarter mapped out in our 5-year agreements with our customers saying this quarter, we're going to do underpad as an example of. This quarter, we're going to do advanced wound care and DME.

And so there's a predictable road map to conversions and value for the customer that they can map out. And we never get to that what have you done for me lately because we're always driving intrinsic value for our customers each and every day. When you think about the segments, lab and diagnostics is something we're very excited about. It's a $25 billion market we just got into 10 years ago at the request of our customers. They saw a lack of competition in the marketplace. We do $1 billion in that space, and it's growing pretty nicely. The first quarter, we saw 1% growth, but that was diminished by a slow flu season.

The actual base business was growing in the teens, and we're going to see that recover in the back half of the year because of all the lab and diagnostics space we signed last year that will go live this year. Surgical Solutions was a very robust growth driver last year. We saw a lift in custom procedure trays and conversions from competitive accounts moving over to us, very similar to the prime vendor model, customers were moving to us for the custom procedure trays because they want resilient, sustainable partners in that operating room to make sure that they can actually do cases every single day.

And we did see a nice lift in Front Line Care. When you think about Front Line Care, think about your daily use goods, literally everything from exam gloves to guts to urology to advanced wound care. It's a very, very robust subset that plays across every single care setting. Your surgical solutions lives mainly in your hospitals and your surgery centers, the frontline care lives across the entire continuum of care.

And how does it work? If you have a prime vendor contract that maybe you sign I'm making it up 5 years ago or something like that, and there are categories that you didn't participate in then. How do you go access those accounts? So if you -- as you think about closing that $1 billion to $25 billion, again, trying to use the pictures in the IPO slides to figure out which products you might be going after.

But as you start to launch some of those products, what's the mechanism to go back and add to existing prime vendor contracts? And does that create opportunity for growth beyond that incremental -- that initial penetration that you talked about?

Well, the entire brand is on the contract. So when we sign a prime vendor deal, we build in, let's say, escalators from a conversion curve to allow them to buy down the cost of distribution. So when you think about today, when I started in 1996, 20% of what a hospital buys from a medical surgical budget had an equal Medline brand alternative. Today, it's 60%. In the next 5 years, my aspiration is to get somewhere around 75% because every single year, to your point, we're adding new categories to the line.

And so when you think about the way this thing is built is our reps are incented to present every opportunity to the customer every single day, and then they parse that out saying, this quarter, we're going to do this and this. So as the new categories are added on, that gets added to their bag and that gets added to their sales cycle as they're doing their quarterly business reviews.

They're saying, "Hey, Mr. Customer, we just added forced-air warming, which is a new product category for Medline that competes with Bair Hugger." If you don't know what that is, it's a blanket that forces hot air to increase your core temperature before surgery and during surgery. And so it isn't around -- it's really the brand itself. And as the brand expands, our job is to actually present every opportunity to the customer every single time.

And a question that I always get on Medline conversion is -- what is the sort of interplay between distributing for your customers then become your competitors? Just talk to us a little bit about that relationship and how you find the right equilibrium there?

Because one, why would take the Bair Hugger example, why would they ever distribute through you if you're just going to start making your own product. But at the same time, it seems like their ultimate end customer wants you to be the distributor. So just help us think about all the different moving parts there.

I think the best way someone is asking is why would a inner go through you when they know you're going to cannibalize the business, right? That's basically what you're asking. Here's the most important thing to remember. The customer is making every decision. Medline is making no decision. And so most of our manufacturing competitors are not distributors. They have to access the distribution channel to get access to the customer. The customer is choosing their prime vendor.

And when they choose Medline, there is no optionality for third-party manufacturers to get into that channel without accessing their prime vendor or their distribution channel. So the customer, when they choose Medline, that is the avenue for the competitive brands to go into our channel. I would tell you, the competitive brands would say, Medline as a distributor is a fantastic partner. They keep more inventory on hand, so we don't have back orders. They actually serve our customers better. They actually pay their bills on time. And we also offer them some nontraditional services like backhaul functions and some other things that our competitive distributors don't because we own our fleet of trucks.

They would also tell you that Medline is very transparent and very honest and says, "Hey, we're going to go to market and compete with you and made the best company wins, right?" If you win, we're going to distribute your product. If we win, we're going to distribute our product. But ultimately, the customer is making the decision both with their distribution partner has and what product they're buying. And so the real answer is the customer is making the decision and dictating what avenue they have to access in order to access them as a distribution partner.

And ultimately, that $1.2 billion that's being distributed to others is the vision to bring that -- is that a target for a prime vendor relationship or...

Yes. So when you think about different ways to actually engage a customer, right, when you get the opportunity to sell your brand, then all of a sudden, you have the opportunity to discuss the customer what the overall value prop is. And so a backdoor entry would be say, we're going to sell our brand first, get an opportunity to actually sell a widget. And then as we get a better relationship with that customer, we can sell the entire value prop.

I would also tell you, because we sell in every class of trade, we may be the prime in the physician office space and not in the acute care space. That is another way to enter into the acute care market to actually pick up the business and vice versa, right? We may own the acute care distribution channel. We don't own the surgery center and physician office. It's a way to capture that market share as well.

And maybe to kind of wrap this all together, as we think about kind of your end markets growing, call it, the 3% to 4% range, obviously, for this year, contemplating growth more than double that you've been generating that pretty consistently. As you kind of reach higher levels of penetration, the 60% example you gave about comparable Medline brands, how do you keep going at a rate that is so significantly above the end markets you serve?

Well, I mean, you have to think about our business, we still have a long way to go. We serve $175 billion TAM in the U.S., and we sell $28.4 billion. So there's -- I always raise until you have 100% of the business, you don't have it all, right? And so we're going to go after every single dollar that we can.

And -- when you look at the acute care market, we have about 45% share. It's growing 12%. So we're doing pretty good in that. And you look at traditional post-acute, which is like skilled nursing facilities, nursing homes and home health and hospitals, we have about 35% of that business, which means we still have a tremendous amount of growth.

In surgery centers, we have roughly 1/3 of that business. In physician office, we do $1.5 billion in a $9 billion market that we just got into 10 years ago, growing nicely. So I don't see a limit in our potential for growth across the business segment. And then when you look at -- think about the brand, our 10-year cohort average penetration rate is about 42%, some at 60% fully maximized and some in the 30s, more like your academic medical centers who give limited choice actually don't force the conversion curve. So I just see -- I mean, there's a $75 billion TAM in our brand alone, and we did $12.5 billion in our brand last year. So there's a tremendous amount of opportunity in front of us.

Okay. I want to go to margins, but just open it up to see if there are any questions from people in the audience. Okay. We'll keep going.

Before I actually get to margins, maybe just kind of -- it was kind of a good transition, I guess, talk about the guidance. I mean I think people understand the strategy to run the business annually. As you experienced on your first -- on the reaction to first quarter earnings, the privilege now of being public is that there's tremendous focus on the quarters. So help us think about like how you manage that interplay between how you run the business and then kind of meeting short-term expectations.

Yes. So you're right, David. We think about the business in years, not days or quarters. And so we've always run this business for the long term. We'll continue to run the business for the long term. We invest for the long term, and we invest for top line growth first. And so our objective is to provide annual guidance to all of you so you understand where we're headed for the year. As we report our quarterly results, we'll tell you what that means to the overall full year guidance.

And we need to continue to educate and manage how we're thinking about the quarters because the quarters don't have a linear run to them, right? So the first quarter is always our lowest quarter. Why? Because days matter in our business. There's 61 days in the first quarter or 66 days in the fourth quarter. So our fourth quarter is always the largest quarter. There's also some seasonality to our business. For instance, like the flu respiratory virus season, as Jim mentioned earlier, we saw a weak or low severity respiratory business in the first quarter relative to last year. You saw that show up in our lab and diagnostics business.

And then lastly, I would say that the bond patterns and demand levels of our customers always tend to spike in the fourth quarter as well. And so there's variability from quarter-to-quarter. We'll do our best to educate you on what that means for the overall year and help you understand how we think about the full year guidance overall.

And as I look at your guidance for this year, the $3.5 billion to $3.6 billion of adjusted EBITDA, and look at where consensus numbers ended up getting kind of weighted after your Q1 results, it does put an onus on the back half of the year. So maybe just help us think about the cadence of EBITDA and profitability.

So there's a couple of things playing out in the first half of the year versus second half of the year that's important to understand. One is, as we called out, the tariff impact is pretty burdensome in the first half, and it will be favorable in the second half. Why?

Well, we're still taking impact to our P&L from the tariff rate, which is at the old EIPA rates. As of February 28 or March 1, we went to a 10% rate, which is favorable to what we were paying previously. And so that will show up in our sales in the second half of the year. So tariff favorability will be a net positive for us in the back half of the year. Offsetting that, though, will be a couple of things.

One will be the Middle East. And so we've talked about the Middle East. Let me just frame it for everybody, right? The Middle East inflationary pressures on our business will show up in the second half because they're sitting in inventory right now, and that really relates to two things. One, our fuel costs. So we buy diesel fuel every day to run our trucks and trailers. We have 2,000 trucks and trailers that we operate.

In addition, we pay a fuel surcharge for our inbound container costs. Now that inbound container cost won't show up until the second half of the year because of our contractual obligations. But that's a smaller impact to our business from the Middle East. The bigger impact are raw materials and finished goods that we're sourcing today to manufacture our own products or the finished goods that we're sourcing to sell to our customers. And so those are nitrile exams.

Those are plastics that we're acquiring to make the resins we're requiring to make plastics or the plastics we're acquiring that are finished goods. We have seen a spike in costs in the last couple of months from those that are now in our -- sitting in our inventory and will become impactful to our P&L in the second half of the year. We have not made a plan yet to raise prices. That's a question we always get. We are continuing to run the play we always run, which is to try our best to mitigate the cost first, driving our normal playbook that we've run historically.

And if we see costs continue to rise and costs continue to persist for a long period of time, we'll evaluate the idea of issuing a price increase, much like we did last year with the tariff price increase on August 1. So that's how we operate and mitigate the Middle East impact as much as possible.

And then the second piece of this is that we talked about this in the first quarter earnings. We have made intentional investments in our business to support the growth. Now some of the first quarter year-over-year OpEx expense -- OpEx increase, sorry, was driven by just investments in second quarter, third quarter, fourth quarter of last year. So that's that quarterly variability that I talked about. But we also were intentional in making a few investments in our operations to support both our existing customers and new customer growth.

As we talked about, we signed $2.4 billion of new customer signings last year. As we bring those customers on and go live, we've had to make some investments in operations in a couple of key regions. For instance, in Michigan, where we brought in a number of prime vendor customers last year. We had a smaller warehouse that did not have automation. And so we've had to add additional labor resources to support that ongoing customer implementation and maintain our service levels. And as we expand that facility and we add automation, that will drive that cost down over time.

Okay. So as we -- I think you also said that tariff savings would help offset some of those incremental costs. So if you think about that as a plus 1, minus 1, I don't know if that's the right way to think about it, you still end up with like well over 50%, like 60% of implied adjusted EBITDA in the back half of this year. Is the Q2, I think it should be a little bit better than Q1, just you scale revenue? Like is that a fair representation?

Yes, that's a fair representation. I won't give you the number for the second quarter, but we do expect some modest sequential -- I mentioned on the first quarter call, modest sequential improvement from Q1 to Q2 and then the second half will be much stronger.

And then as you think longer term about margins, I think you've talked about growing adjusted EBITDA dollars at least in line with revenue. And maybe just pick apart some of the building blocks that get you there. I mean I had thought when I looked at 2027, obviously, things are evolving, but we kind of had said we thought that, well, you have a lower tariff run rate exit in the fourth quarter of '26. You'll have -- should have some leverage on year 2 of being a public company and then maybe there's some underlying margin improvement in each of the segments. But help me kind of reconcile all that.

Yes. So it's too early to call '27, but you're right, that's what we said when we went through the road show was we believe '26 will be a year in which there'll be a burden from the tariffs. We'll see tariffs normalize into the base business by the second half of the year. And so going into 2027, we expect to deliver earnings growth at or greater than sales. That was our commitment. That's our long-term commitment.

And we'll evaluate what that means as we think about the Middle East here in the next couple of quarters and how that plays out into '27. But that is our commitment, long-term earnings growth at or greater than sales. How do we get there? The building blocks of that are very simply volume growth. If we grow top line at a very healthy rate, high single digits, you'll see volume growth and margin dollar growth from that. You'll see us continue to drive Medline brand conversion as we drive Medline brand conversion. You see that improve the margins going from 5% EBITDA margin to 22-plus percent EBITDA margin.

It's our investment -- sorry, it's our manufacturing and our sourcing initiatives that we drive savings every single day. We have these 450 product managers. We have a global sourcing organization, a broad manufacturing footprint. Those team's jobs are to reduce the cost of goods in the products that we operate, that we sell or manufacture and focus on driving those costs down to our customers. And then lastly, operating leverage, as you mentioned. So as we continue to grow the business, we'll leverage our scale and drive operating leverage in the business and will drive margin dollar growth at or greater than sales over time.

And can you get margin expansion in each of the segments? I think like in Supply Chain Solutions, you were on this like roughly 50 basis points a year of improvement. Obviously, I know one quarter doesn't make the trend for a year, but can you see underlying margin expansion by business?

I wouldn't -- margin percent expansion, I think, is not really sort of something we want to talk about or to highlight, but I think it's more margin dollar growth. And so Supply Chain Solutions, as your point, yes, we did 5.5% EBITDA margin last year in 2025. The first quarter was sort of 4.8%, which is lower than the 5%, obviously. That's not representative of what we expect the full year to look like. We expect to get back into the 5s. But we don't think about SBS, Supply Chain Solutions or even Medline brand on a margin percent expansion. It's more about the dollar growth. And our commitment again is longer term growing at a greater than sales.

Okay. And the other thing I would say is Supply Chain Solutions was overburdened with something I think we did a bad job explaining. So the first year we signed a prime vendor, we give a first year conversion rebate. It's a 1-year hit and it hits Supply Chain Solutions. So Supply Chain Solutions being hit with a pretty big input especially in the first quarter of this rebate that we're paying to customers tied out. So that's -- that will normalize. That's a 1-year deal that heals itself in the next year.

And I think you offset this dynamic of incremental investments to support customer onboarding without the revenue. And I assume most of that was -- most if not all of that was allocated to supply chain solutions, which also depressed the margin.

That's correct. The operations investments, when you think about that new prime vendor customer that we bring on board, it's 90% supply chain. So it gets allocated to that more than does.

Onboarding all the labor. And so we onboard labor 90 days in advance of revenue realization, right? We have to train them to pick pack and ship before we actually onboard the customer. Recently, we've been onboarding them 5 to 6 months because what we've seen is competitors leave the business much faster. So instead of giving a 90-day to 120-day conversion ramp, they're giving them 30 days, and we want to be ready in advance of that. So there is a cost of labor. I mean you think about the third and fourth quarter hitting the first quarter, which a higher spend as relative to last year, that will fill itself over time.

And as you execute that margin expansion, you obviously generate free cash flow. I think relative to other sponsor-backed IPOs, you're pretty underlevered even today. And then you obviously -- you delever pretty quickly without actually paying down any debt, but maybe you'll choose to do that. But help us think through your capital allocation framework and how you're prioritizing use of cash, especially as you continue to strengthen the financial position.

Yes. You're right. We generate a ton of free cash flow every year. And so we -- our first priority is to invest in the business. That's really how we thought about this for the long term. As I mentioned earlier, we have long-term investors. So investing in our sales force, investing in our operations to support the new customers or existing customers, investing in new product development. We spent about $500 million a year on capital to support both our distribution network.

We're adding two new DCs in Texas and California. We're adding automation every year to our business, both in AutoStore and now we made an investment in Symbotic on the bulk automation side. We add new trucks and trailers every day. We think about the manufacturing footprint, we're expanding our Mexico manufacturing footprint, which we believe will go live here in the next couple of months. that 3-year plus expansion that we've been doing in our Mexico facility for our kitting business.

We'll add new production lines as well throughout our network, and we invest in technology. So that $500 million of CapEx every year is sort of a good view for us. In addition to that, we have intentionally invested in working capital. Working capital for us will always be a usage as long as we're growing the business, which we expect to grow for the long term. Why? Because we carry more inventory than our competition, 80-plus days on hand. It's been intentional that drives service -- the best service rates, service levels or fill rates in the industry and allows us to step in when our competition have problems.

And so really focused on that, and we'll continue to focus on working capital being a usage. So after the free cash flow, we have close to $1.3 billion last year before the one-timers. We will -- you'll see us lean in a little bit more on M&A, right? As we talked about and Jim talked about a lot, like M&A for us is an opportunity to drive strategic growth in our business. We'll be disciplined. We'll focus on products, focus on channels. We'll focus on service offerings. You'll see us lean in on M&A. If we don't have any M&A to do or less M&A to do, over time, we would consider delevering in the business.

Now to your point about deleveraging, we're at 3.1x. We do long term, want to be investment grade. And you saw us just in the last couple of weeks, we dabbled in the investment-grade market. We issued $2 billion of investment-grade secured bonds. And so as we see sponsor sell-down, lower ownership on the Board and we further see deleveraging, you'll see us step into the investment-grade markets.

And then any parameters you can help us think about from an M&A standpoint, like what types of acquisitions are you looking for? Are there different channels of care of interest, geographic expansion? I know you did a small dental deal in Canada, and I think that was sort of kind of let's experiment with the market, see what we can learn as a participant. Maybe lay that out for folks.

Yes. First and foremost, we look for additional opportunities to expand the brand. 90% of our growth historically has been through internal creativity, not through M&A. 10% has been through M&A. So it's been a nice to have, not a need to have. That being said, I think there's going to be some opportunistic M&A from a product perspective. that comes to market in the next 18 to 24 months because what we're seeing is a lot of our manufacturing competitors move up into the Class III and Class IV devices. And the Class I and II don't fit within their strategy.

So they're going to sell some noncore assets and we'll be there ready to pick those up. So we're -- of $2.2 billion in cash on hand. So we have plenty of dry powder to do that. And we think there's an opportunity. We did that last year with Ecolab's Microtek Surgical Solutions business, and we also bought ConvaTec's skin care line and they sit perfectly within what we do, and they did not perfectly within what they do. You mentioned Sinclair. Sinclair was an opportunity for us to have a petri dish to test the dental market to see if it's something we're interested to do in the U.S.

I can tell you we're outperforming the deal model. It is very interesting. I don't want to be what the current distributors are in the dental market. I want to be what we are in the med-surg market in the dental market, meaning a manufacturer that distributes that delivers value to their brand. We're on the path to be a 30% Medline brand convertible opportunity within dental already, which I'm very proud of our divisions for doing that. So then it looks like a wash for repeat from a model perspective and just a different channel, similar to what we did in lab and diagnostics. So I am opportunistic. We'll know the answer to that by the end of this year.

So we're looking at different channels. We're getting into animal health. We did that just through internal muscle. Is there an opportunity to do some M&A? Maybe Internationally, I think there's an opportunity for us to create some acceleration in growth in the international markets from a brand perspective. Remember, that is not a distribution business. That is a brand business alone because the prime model doesn't live outside of that. And then some of the service offerings. A couple of years ago, we bought a company called PrefConnect. that helps caregivers manage the preference cards for surgical procedures, which today are, on average, 75% accurate and they're manual and nobody updates.

This ties in with Epic and Cerner, has visibility into what's actually used in the procedure. It goes all the way back to our kitting manufacturer. So we're always building the right most robust custom tray to meet the needs of the surgeon every time they walk in. So we will continue to look at those things. We're pretty excited about what's ahead of us. And my guess is we'll probably be more opportunistic than we have in the past to realize to M&A.

Excellent. Maybe I'll turn it back to you to close this out here. Any -- you've obviously been at different investor conferences. You met with a number of people here. How do you want people to kind of walk away from this conference and key takeaways for those in the room and on the webcast?

People keep asking if we're going to change who we are now that we're a public company, and the answer is no. with 59 years of consecutive growth, what we've done actually works, and we know it works, which is why we're not giving quarterly guidance. We're giving annual guidance because we know what we can do. And our business, to Mike's point, isn't sequential.

You can't take $3.5 billion to $3.6 billion and divide it by 4. That's not how the business works. And so my ask would be take some time to learn the sequential nature of our business, the seasonality of our business, and you'll understand why we're portraying the numbers the way we do. I mean, simply put, I mean, our job is to make health care run better to deliver improved clinical, financial and operational outcomes, and we're going to continue to do that in an outsized fashion as compared to the market.

Excellent. Well, I very much appreciate your participation and look forward to the next update, I guess, in July, August.

Thank you, everyone.

Thank you.

Thank you.

Hi, everybody. Thanks for joining us this afternoon. My name is Brandon Vazquez. For those of you haven't met, I'm one of the medical device analysts here at William Blair. We're excited to have Medline with us here. But first, I am required to inform you that if you would like a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com.

So we have with us Mike Drazin, CFO of Medline, and also Amanda Laabs, EVP of Chief Product Officer. And we're going to do a fireside chat here as normal when we do these fireside chats because a lot of people are new to the story. I'm going to keep things pretty high level for the most part, maybe ask 1 or 2 kind of pertinent questions at some point.But Mike, maybe let's just start off let's like literally just start at the basic here, talk to us about what Medline is and give a little bit of -- I think what's interesting here, too, is that you have a very long history of building this company, what it is today. What do you do? And what was it about needing to be a private company for so long to get to where you can to do what you do today?

So Medline is the largest provider -- largest manufacturer and distributor of medical surgical supplies. We've been around since 1966. And our mission really is to make health care run better. And we do that by offering the Medline brand, which is very broad with 190,000 of our Medline branded items.

And we support that with our distribution capabilities, which are best-in-class, running the best service levels in the industry. If you go back in history, what's important to know about Medline is we started as a manufacturer first. Our roots of our company are products, which we manufactured or sourced the best quality, low-cost products in the industry to support our customers like a health care provider, acute care hospital.

Over time, we got into distribution because our customers asked us to. They wanted one supplier, we call a prime vendor, for all their medical surgical supplies. We got into that business, invested in distribution to become the best-in-class with the highest service levels in the industry. The combination of the 2, which is our vertically integrated business model, is what makes us unique and makes us the value player in the industry today.

Spend a minute going -- let's kind of deep dive into -- you mentioned highest service levels in the industry. What does that mean? And what kind of investment in CapEx, what kind of investment in distribution do you need to be able to reach that? Because it feels like to me, what I -- part of what I like about this story is a lot of times in med tech, people ask what's the competitive moat and you kind of had soft points, but you have very hard tangible moats here of what it is to reach the service levels you're talking about.

Yes. So if you think about our business, right, we've invested billions of dollars to build out our distribution network over the many years. We have 45 distribution centers in the U.S., 29 million square feet of space. We carry almost $5 billion of inventory. We're very much -- we have our own trucks and trailers, 2,000 of our own trucks and trailers. We invest in automation, both AutoStore robotics, for lowest unit of measure.

We're now in the process of investing in a new bulk automation with a product called Symbotic. So we've invested for growth. We've invested for the future. We've invested to build what we call best-in-class service levels or fill rates. We want to provide that customer with the product next day. The customer places an order today. We want to have the highest level of availability the next day to arrive in their facilities.

And so the business has been built to provide service and products to the customer, the best supply chain, the best supply chain resiliency to the customer. And we do that through our broad product portfolio where we add value and save money for that customer. We guarantee 5% to 10% savings every time we sell the Medline brand to that customer. The best service levels by offering them the best product the next day. We deliver next day to 95% of our customers across the U.S.

We also offer -- we serve the entire continuum of care. What I mean by that is we serve all points of health care. We serve hospitals, nursing homes, home health, hospice, physician office, surgery centers. No other distribution competitor serves all points of care like we do. We are the only provider that can do that. We built a scaled organization, our sales force of over 4,000 employees who are segmented by channel, focused on those customers every single day. They're in those facilities every single day to add value and provide the best offerings to those customers as well.

And we've invested in our business through scale, which we are able to leverage by what I mentioned, our distribution network, our vast manufacturing footprint. We have 30 of our own manufacturing sites all over the world where we manufacture about 1/3 of our own products. Our 600 suppliers across the globe where we source about 2/3 of our Medline branded items every single day. So the scale enables us to be successful and drive value for our customer.

You had made a comment earlier that you're -- or you started you're one of the largest -- you're the largest distributor in medical devices. And I'll ask you because I don't remember the number off the top of my head, but what percent of the top hospitals in the country already use you as a prime vendor or you're already a customer of.

Part of the question to also, again, level set everybody here, you are this large, you've been successful. How much room is there left for you to grow over time?

Yes. We still think there's plenty of room left for us to grow. So if you think about the business, the top 150 hospital systems in America, we are the prime vendor at about half of those hospital systems today, which means there's still 50 more percent for us to go gain share.

If you think about that space, the non-acute space where we also serve, so physician office as an example, we do about $1.8 billion in a $9 billion-plus market. So plenty of room to grow. In the nursing home space, we are about 1/3 of the market. In the surgery center space, we're also about 1/3 of the market. So there's plenty of room still to grow both in our acute care setting, which where we're the largest as well as in the non-acute space.

Okay. The scale and the distribution you guys have built over time has allowed you as you were talking about this prime vendor model. Let's dive into that for a second. I think just so everybody understands because it feels like it's an integral part of the thesis here. What is a prime vendor? How do you become a prime vendor? And why are they selecting you to be this?

Yes. So a provider wants one supplier for all their medical surgical supplies. So let's call it a prime vendor. So we enter into a prime vendor contract. Typically, it's a 5-year deal, but we are providing the vast majority of their supplies to them every single day. The objective there is to provide them one truck a day essentially, one delivery a day versus having multiple different deliveries from multiple different fragmented suppliers.

So if you think about our business, we segment our business into 2 segments: the Medline brand and Supply Chain Solutions. Medline brand are 190,000 Medline branded items that we source or manufacture every single day. Supply Chain Solutions are someone else's third-party products that we distribute on behalf of those suppliers to those customers.

And so we leverage both the Medline brand and the supply chain to be best-in-class as it relates to being a prime vendor for those customers every single day. Now we offer value and drive value through our brand. So as we talked about earlier, when we deliver -- when we sell the Medline brand, we drive value and savings by guaranteeing 5% to 10% savings every single day.

So our model very simply is this, win that prime vendor customer, where on day 1 when we sign that prime vendor customer, it's typically 90% Supply Chain Solutions and 10% Medline brand. Then we go in and we drive value by converting them to the Medline brand over time. And if you think about our curve, right, typically on day 1, it's 90% supply chain, 10% Medline brand.

The average penetration can get up to 60% in a hospital setting today or 80% in a nursing home. And in the acute care setting where it's up to 60%. Today, we average about 32% across our entire prime vendor portfolio. And if you think about that, it's typically 10% in year 1, we get an extra 10% in that first year of conversions and then about 2% to 3% thereafter.

So if you look at our cohort curve by year 10, we're at about 42% Medline brand penetration.

Clearly, as you are coming into these accounts, there's an upfront benefit from the prime vendor just streamlining supply chain and distribution a little bit for them. The other part now is giving them a little bit of cost savings. Talk a little bit on your end on the Medline side, as you convert and you go from 10% to 60% of your products in the account being Medline branded, what do you -- what are the benefits you see as a company at Medline?

Yes. I think overall, when you think about that transition to Medline brand, you're going from Supply Chain Solutions margin of roughly 5% to Medline brand margin of roughly 20-plus percent. And for us, it's really helping them to go along that chain to continue to have the benefit of better margin for Medline.

I think at the same time, as we're converting more customers, we're also gaining more scale, which then helps us to continue to develop those products and continue to drive cost down.

I had one time naively asked someone over at Medline, why does it take so long to convert from 10% to 90%? And I had someone very patiently explain to me about how just changing a surgeon's gloves is a big deal. So let's start -- I want to have a little bit of a Medline branded conversation specifically, but first start with like help frame for all of us why is this like a 10-year process to convert to Medline brand?

Yes. So first, I think when you think about that 60%, for us, it's 190,000 different products across several different categories. And so for a customer, when you're going in and having that conversation, you're having to take category by category to a clinician to a different part of the facility and make sure that you're talking about the value.

In some cases, it's very simple items that we can make a change and nobody really knows the difference. And those are things we typically handle upfront. So when Mike talks about you start out at 10% and you go on each year, we're handling a lot of those commodity items upfront. But as you get into items like gowns and drapes, as you get into items like urologicals, those require trials.

And there's only so much a hospital can absorb at a time. And so we found there are some facilities who are very aggressive, and they come to us and say, we would like to do 20 categories this year. And if they have the right buy-in, we can do that. Most facilities, though, you're looking at the 190,000 different products. You're giving them choices in terms of what they would like to convert and you're handling 1 or 2 categories per quarter and going at their pace.

I think the great news about our broad portfolio is you're really putting it in front of a customer and saying, what's your priority? That's our focus. Mike talks about a customer-focused organization. We really are focused on, hey, listen, there's a lot of ways we can deliver value for you.

You choose and we'll help you and we'll go at your pace. And in the long run, that helps. But it's the big things, and it's also the small things. I mean, you think about these are in a lot of store rooms. You have to change a lot of labels. So there's a lot to it.

Okay. Amanda, maybe we'll stick with you on kind of the product side. And as you think of Medline brand, clearly, you've gotten to the SKUs that you have over time. How do you -- internally, how do you guys think about developing new products? And when you enter markets, maybe not always, but it seems like there are a lot of examples in your portfolio that you may try to bring a little bit of differentiation. So talk to us about that process and where you kind of focus on.

We do. And I think it goes back to the customer. I think we're incredibly customer-focused. We spend a lot of time in the field. We have 450 product managers who we really empower to spend time at the bedside, to spend time in the OR to learn these products. And so when you think about some of the recent products we've introduced, there's a dressing product called OptiView, and it's a transparent dressing.

And what happened is we had a product manager who went out and was at the bedside in servicing our foam dressing. And they noticed that clinicians were lifting the foam dressing to look at the wound and to look at the site underneath. And they quickly understood that we could make something different that allowed them to still have the protection, but had transparency to it.

So they didn't have to lift the site. Of course, when you lift the site, you maybe have utilization issues, but you also have an issue of potentially having that not work for the patient anymore. So he -- the great news about our product managers is they own that customer relationship. They also understand what's happening at our factories and the technologies we can leverage.

And so he was able to go back, create samples that he then brought back to that customer and say, "Hey, I noticed this is happening in the trial. Would you consider something like this?" And then now it's a really important product for us in Advanced Wound Care that's helping us grow. It's also then helping us to go back and look at traditional foam spend where we didn't necessarily have that kind of conversation in the future.

So I think that's really how we look at it. We have product managers who are really empowered and they are across all of these categories, and they're thinking about the investments we need to make to continue to expand our products.

If I remember correctly, you have a product portfolio in the Medline brand that can reach -- service about 60% of the market. What's the thought process on, is 60% the right number? Are there more opportunities to take that higher?

Yes. We definitely believe that there's close-in opportunities to continue to expand. And when you think about our product management team, there's a handful of things that are really big products that we'll introduce, but we do a lot of singles that expand our TAM in that way that are important to us.

How do you think about doing those organic versus inorganic?

It's mostly organic right now. But certainly, we're looking for opportunities. And with the Microtek acquisition, that was a good example. So when it's the right opportunity at the right price, we go for that.

Okay. Let's stick on Medline for a second and the Medline brand and talk about something topical now that we've received a lot of questions on. There was an FDA warning letter disclosed yesterday. Let's first maybe hit on that FDA warning letter and we'll maybe have a -- because this flows into this conversation, right? You're a manufacturer as well. Let's talk about quality and start on that warning letter.

So we did receive an FDA warning letter that was publicly released yesterday. That letter relates to our CHG wipe manufacturing at our ReadyCare Waukegan facility, and it also is associated with the active ingredient that we make at our Heartland, Wisconsin manufacturing facility. And really, what this goes back to is we had a matter that happened in October of 2025 that we identified that the FDA was aware of, obviously, and we made them aware of.

And ultimately, then we took the action immediately to stop manufacturing that product in October of last year. We continue to work with the FDA to remediate the matter. We've invested and continue to invest in remediating the matter. And we intend to, over time, put this product back on the market when we are ready to do so and the FDA has approved us doing so.

We are -- we take product quality very, very seriously. This is not something that we look beyond. We are very intent on making sure that our product quality is at the highest level. And so we will continue to invest in our product quality and our quality management systems and our quality people to ensure that we provide the best quality products to the industry.

Maybe 2 more questions on this topic, and we'll move on. One, just a homework on that one. Any financial impact that we should think about this warning letter?

Yes. As we talked about in our first quarter earnings call, we highlighted the fact that when we have things like product recalls, which we've had in the past. So far, those have been material to our overall financial statements.

Okay. And then the other one to close this up because I've had a couple of questions on this as well that there was another warning letter a month or 2 ago on a different facility, I believe. The question just essentially being overall, you kind of hit on this, but how do you guys feel about quality? Are these linked at all? Is there kind of some recurring theme here that you guys think you need to invest in for quality?

I mean there's no recurring theme. There's nothing systemic at all that we would be worried about. What we do, as I mentioned earlier, we are taking product quality very seriously. We are investing in product quality matters. We have invested, like I mentioned, in the specific facility to remediate the CHG wipe matter. We're also investing in broader quality management systems.

We're investing in our technology and people to ensure we have the right processes, the right people in the right places. I want to just maybe comment at a higher level just to give you a perspective, right? For us, we are the largest -- we have the broadest product portfolio in the industry, right? So there are going to be from time to time product challenges that we're all going to face.

So not to minimize this at all, but the ultimate fact of the matter is we have a broad product portfolio. And the other thing I think it's important to understand is that because we sell our own products as well as someone else's products, when we do have situations like this, it may show up as a larger quantity of recalls than it really is. What do I mean by that?

So if we have an item that is making up a surgical instrument that gets recalled, if it's in our kit, it's in 12 kits, it will show up 12x as a product recall. And the reality is that it's only one recall. The other fact of the matter is that when there's a third-party provider that has a recall, we help them with their recalls as well.

So that might also show up if it's in our kit as a recall as well. So the reality of the matter is we are focused on improving our quality, making sure we have the highest quality, we're investing in it, but we do not think this is systemic.

Good. Great. Let's go back to the prime vendor contracts. And historically, you guys have talked about, I think, the expectation is that every year, you'll sign about $1 billion of new prime vendor contracts. And I want to go back to 2025 because it will get -- it will let us hit a bunch of topics where you guys actually signed $2.4 billion of prime vendor contracts.

Let's start at the high level, and I think that's going to bleed us into some other important concepts and topics here. But why did you sign such an elevated level in 2025?

Yes. So if you think about our business, right, we are very focused on gaining share every single day. We gained share through these new customer signings. And we signed, like you said, $2.4 billion. We're really pleased with those signings last year. The market dynamics allowed us to do so. Part of it is our business model. Part of it is our value proposition that we've created and the value we provide for our customers.

Part of it is the competitive landscape that's going on in the marketplace today. And part of it was, I think, the way that we handled the tariffs. If you think about the tariff situation, we were slow to respond intentionally. We intentionally monitored the situation. We didn't overreact when they first came out. We waited to take our time to understand what was really going on in the marketplace. And then we took a price increase in August of last year.

But we were very transparent with our customers on what that meant and why we were doing what we're doing. And in fact, we only absorbed a portion of the overall tariff impact. So I think the combination of those 3 things, our value proposition, the market competitive dynamics and the way we handle tariffs have enabled us to really gain some share, additional share, and that's why you saw $2.4 billion.

Now probably your next question, not to take your next question, but it's going to be, well, how much are you setting as a goal for this year? Our goal this year, our goal every year is to sign $1 billion. Why? Because that's what we can control. That's what we know is available to be controlled by us to win in the marketplace.

There might be some years where we win more when the market dynamics allow us to do so. But ultimately for us, we have line of sight and confidence in signing $1 billion of new customer signings every single year.

Okay. When you're signing these relationships, what do they typically look like in terms of duration? And maybe talk to us a little bit about retention over time with your prime vendors.

5-year -- typically, they're 5-year contracts with rights for multiple years of renewals. And the retention rate is 98% over the past 5-plus years. We take -- we focus on our existing customers, and take care of our existing customers. They're much more -- they're as important to us, if not more important to us than new customers, right? If you lose existing customers, you can't grow the business. So for us, we want to make sure we retain our existing customers first and then sign new customers.

Okay. And as you signed a larger mix of the prime vendors or a larger amount of prime vendors in 2025, talk to us about what is the short-term financial impact of that? And then what should be the medium- to long-term impact of it as well?

Yes. So when we sign a new prime vendor or a new customer signing, as I mentioned earlier, typically in year 1, it's 90% supply chain. That's a 5% EBITDA margin. And then over time, as we convert to Medline brand, it moves to 22% EBITDA margin when you convert to the Medline brand item.

And so in year 1, it is margin percent dilutive to sign a new customer essentially, right, because it's more supply chain. But over time, it drives margin accretion. But really, how we think about this is, we don't care about margin percent.

We're focused on margin dollar growth. So it will be margin percent dilutive when we sign a prime vendor. And over time, as we grow the business and we convert them to more Medline brand, it's margin dollar accretive and growth oriented for us.

Okay. Let's frame -- let's move a little bit into today into 2026. You talked about how Medline, one of the benefits to the customers is that you move slowly in the sense that you move thoughtfully is maybe a better word than slowly.

You move thoughtfully and you don't take price increases right away. What does that mean for 2026? We have exposures to the Middle East, inflation, et cetera. Just talk to us about the moving pieces in the '26 guide now that as you think about that again.

Yes. So at the end of the first quarter, we raised our sales guidance to 8.5% to 9.5% given the strong first quarter growth. We grew 11% overall in the first quarter. We grew about 10.1% organically. So because of that strong performance in the first quarter, we raised our sales guidance to 8.5% to 9.5% for the year.

On the bottom line, we achieved our EBITDA goal that we had set out. And we are facing some headwinds, as you know, from the Middle East. And so we have confirmed -- reconfirmed our EBITDA guidance of $3.5 billion to $3.6 billion for the year in the face of the Middle East headwinds and some additional investment in our business.

Offsetting that is favorability from the tariffs. So let me take them one by one. So on the tariff side of the house, we initially called out at the end of last year or in first quarter -- end of last year or end of February when we reported guidance, we communicated that there will be $490 million of tariff headwinds to our business overall, $200 million incrementally from 2025.

That was prior to the Supreme Court ruling against the IEEPA tariffs. The tariffs changed to 122s at 10%. So with that change to 10% and 122s, we will see some favorability in that number in the second half of this year. So there's favorability from the tariffs. The offset to that is the Middle East in which we are starting to experience cost increases. Let me talk about that.

So in the Middle East, there's 2 real factors. One is the bigger impact is raw materials and finished goods. So when we buy nitrile exam gloves, we buy resins and plastics to manufacture or source our own goods, we're seeing elevated costs for those products.

In addition to that, we have 2,000 of our own trucks and trailers. We spend money on diesel every single day to fuel those trucks and trailers. So we're seeing those cost increases as well on the diesel side. We were paying $3.89 just 2 months ago. Diesel now, if you look outside, is close to $6. So it is costing us some dollars.

The combination of those 2 are impacting us in the second half of this year, but we are offsetting that again with the tariffs. In addition to that, we've made a concerted effort to invest further in our business this year beyond what we initially had planned on to support the growth from our new customers and our existing customers. And so the combination of all of those, we're maintaining our guidance for the year.

Okay. That's great. Now on the pricing side, you had made a comment that in '25, and correct me if I'm wrong, that maybe you don't pass through 100% of the price at the end of the day. Talk to us about where you decide you can and can't or maybe can and can't isn't the right word, don't want to and choose not to.

Yes. So we made a decision in 2025 when the tariffs first hit to study the situation, to be thoughtful, not slow, to be thoughtful about how we manage the situation, make sure we understood what was going on before we reacted because we think about the customer first, how is this going to impact the customer?

Once we get a better understanding of where the tariffs were going to land, we made a decision to eventually raise prices for a portion of the cost increases. We raised prices a certain percentage to still maintain our competitive advantage in the marketplace as a value provider. And so we absorbed a good portion of the tariffs.

But we also believe we gained share from that action, and we'll continue to focus on that going forward. Fast forward now to 2026, the Middle East costs have started to inflate. We'll see that in the second half of the year. And today, we have no plans to raise prices, but we are evaluating the same situation based upon what we see if this continues to persist and it continues to elevate, we'll make a decision later this year if and when we should choose to raise prices.

Okay. Great. Maybe in the last 5 minutes here, I realize actually, I'll take us to the beginning because what I didn't talk about is just the growth algorithm for Medline, right? So let's finish on that so that everybody has that information as well.

What do you expect this to be as a top line grower and talk about the algorithm that you've communicated to hit that number and then talk about how you compound that on the EBITDA line.

Yes. So our long-term goal is to deliver high single-digit organic sales growth. And we've done that historically for the past many years. How we do that is both through same-store sales, so existing customer growth. We think the market is growing at 3% to 4%. We think we can grow faster than the market.

In addition to that, new customer signings. And I talked about before, we signed $2.4 billion of new customer signings last year. Our goal is $1 billion again once again this year, and we're well on our way to achieving that goal. So the combination of same-store sales plus new customer signings will get you to high single-digit growth.

Okay. And as it relates to the bottom line?

Yes, bottom line. So our long-term target there is EBITDA growth at or greater than sales. Again, we are not a margin percent accretion. We're not focused on expansion. We're focused on dollar growth. And so for us, EBITDA growth at or greater than sales. Now you won't see that in 2026 because of the tariffs in the Middle East. But as we move further out, we expect to see EBITDA growing at or greater than sales.

Okay. And as you were talking about end market growth and the existing customer growth, one of the big topics that I'm sure a lot of people here have been asking about as well is kind of ACA subsidy headwinds and potential headwinds, Medicaid cuts coming up. What are you guys seeing so far from these? And are they impacting growth at all? What are you baking in the guidance for them as well?

Yes. So when we gave our full year guidance back in February after full year earnings, we basically guided to 8% to 9% organic growth. And in that guidance, we basically said that we expect to see some moderation in same-store sales in the back half of 2026 because our customers were telling us they expected some impact to utilization and procedure volumes given the ACA enrollment, given the Medicare, Medicaid cuts, right?

We didn't see that in the first quarter. Our first quarter results were very strong. Top line growth, as I mentioned, about 11% -- and so we have not seen that so far. We've maintained that assumption in our guide. So we maintain an assumption in our back half of the year. There'll be some moderation, not significant, but some moderation sequentially in the same-store sales because of it. If that doesn't happen, there's further upside in our numbers.

Okay. To what degree, maybe the last question I'll leave here, and then we'll go out to the breakout room. But I think there's a little bit of push and pull as you think about this backdrop. And this isn't just the United States, right? If you look internationally, I mean, it might even be worse there with the budget constraints.

But there's a little bit of a push here where it's just a tough market and maybe in some of your other lines, you can't take price to offset. But maybe arguably, you're a part of the solution because you can drive more Medline brand. How do those 2 net out one another as you look at the market that we're in today?

Yes. I mean I think if you go back to history and even to this day, we tend to outperform in times of crisis and times of strife, right? If you go back to the pandemic, we performed extremely well during that time, right? We performed really well during 2022, coming out of '22 and '23 when there was an inflationary environment.

I think we've done very well in '25 with the tariffs. And if you go back even way back in the days with recession. So I think what really matters here is that our business model, our value proposition, the fact that we are the value player in the marketplace is what differentiates us. And our customers in times of challenge are looking for a low-cost solution, and they're looking for supply chain resiliency.

And we offer both of those things because of our scale, because of our diversified network, because of our product portfolio, because of our long-standing relationship as being a product company first, we built that supply chain resiliency that I think really matters.

And because of all that as well and then some additional stuff, our ability to provide the lowest cost product and adding value and savings for them is what really differentiates us.

Okay. Great. Well, thank you, Mike. Thank you, Amanda. We are going to go up to Mayor breakout room, and we'll have a little more Q&A there. Thanks, everyone.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the Medline First Quarter 2026 Results Conference Call. [Operator Instructions] After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Karen King, Global Head of Investor Relations. Please go ahead.

Welcome to Medline's First Quarter 2026 Earnings Conference Call. This morning, we issued our earnings release and shared supplemental materials. Joining me on today's call are Jim Boyle, our Chief Executive Officer; and Mike Drazin, our Chief Financial Officer.

During today's call, we may make forward-looking statements regarding our expectations for the future including our business plan, strategy and investments and expected timing and impact. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainties.

Please see the cautionary statement and risk factors contained in our earnings release, which accompanies these remarks as well as our most recent 10-K and other SEC filings for more information regarding these risks and uncertainties. We may also reference non-GAAP financial measures, which exclude certain items from our financial results calculated in accordance with GAAP. You can find a discussion of our non-GAAP financial measures and reconciliations to comparable GAAP measures in the earnings release and our disclosures and non-GAAP reconciliations that accompany these remarks which are available on our website at ir.medline.com under quarterly results.

I want to remind you that we close and report on a 4-4- 5-week calendar, which can create differences in days per quarter. What this means is that certain quarters could have slightly more or less days than the same quarter in the previous year.

For the first quarter of 2026, we had 1 less days versus the first quarter of 2025 and which is a headwind. We have included the calendar days in the supplemental disclosures available on the Medline Investor Relations website.

With that, I will now turn the call over to our CEO, Jim Boyle.

Thank you, Karen. Welcome to Medline's First Quarter 2026 Earnings Call. We appreciate you joining us. I'll begin with a brief performance update for the quarter. Mike will then review our financial results, and I'll close before we open the line for Q&A.

Turning to our performance. We started the year with 11% top line growth in the first quarter, powered by 1 of our strongest quarters ever in Supply Chain Solutions. That momentum is being fueled by implementation of the $2.4 billion in new customer signings we delivered in 2025 and existing customer growth.

We also delivered another strong quarter of new customer signings. Several of our larger wins displaced long tenured incumbents that have helped those accounts for more than a decade and most of the deals span multiple channels highlighting Medline's differentated model and unique ability to serve customers across the entire continuum of care. Adjusted EBITDA was $776 million, 11% decline versus prior year, reflecting robust sales that were more than offset by anticipated higher cost of goods sold including incremental tariffs and continued operational investments to support our customers and long-term growth.

I also want to highlight the progress we've made across several key initiatives during the quarter. First, we've been diligently working on signing our first run liner customer in Canada, and I'm excited to announce that we have partnered with MMC or Mohawk Medby Corporation. Mohawk is a dominant player in Ontario, serving over 300 total health care organizations and we have been selected to serve as their prime meter for 9 acute member hospitals in Southwestern Ontario.

We are looking forward to starting implementation in the second half of 2026. We are encouraged by the opportunity this represents and believe this partnership can help demonstrate the strength of our perimeter model and support future PV opportunities across Canada.

Second, aligned with our investment thesis in next-generation supply chain technology, we announced our partnership with Symbiotic. This Symbiotic system is an AI-powered robotic platform that automates picking, storage and retrievable bulk items for distribution. Medline is the first health care company to deploy symbiotic, and we expect to begin piloting this technology next year at our Ohio distribution center, with the goal of increasing throughput and scalability to provide even more efficiency for our customers.

We also introduced PicPac Pro, a new automation fulfillment system in our Montgomery, New York distribution center. PicPac Pro is an innovative combination of 4 separate advanced technologies that address the unique needs of our health plan customers by improving speed, accuracy and reliability for a more efficient fulfillment solution.

Finally, we continue to make strong progress rolling out Empower. Our AI-enabled digital supply chain control tower design in partnership with Microsoft. In Q1, we added several customers to the pilot, reaching 10 in total and we are receiving early feedback that customers are already realizing efficiency gains, improved inventory flow visibility, stronger supply and demand planning and predictive insights to help stay ahead of disruptions.

We aim to expand the rollout in Q2 and offer Empower to most issue care customers by year-end. Our goal has always been to operate the most broad and robust supply chain in the industry as a vertically integrated manufacturer and distributor. To do so, we believe we must continue to evolve and invest accordingly.

As the global operating environment becomes more complex and the tariffs geopolitical uncertainty and supply chain disruptions, we have further strengthened our manufacturing and distribution footprint and maintain robust inventory levels to support our customers. Our Medline brand includes approximately 190,000 products supported by an increasingly diversified global supplier network.

Today, nearly 90% of our Medline brand products are multi-sourced up 10 percentage points from 5 years ago. This scale and complexity requires constant and rigorous supply chain, quality and regulatory discipline. For us, patient safety and product quality come first. Our customer complaint rate is less than 1 complaint per million units sold well below Six Sigma base Farms. Any Medline recall is an action we believe is in the best interest of patients and our customers made in close coordination with regulators and designed to minimize risk and disruption.

Our recalls today are immaterial to our financials. We remain committed to building the most broad and robust supply chain in the industry to enhance resiliency and regulatory compliance across our network and to better position, Medline to navigate global complexities.

With that, I'll turn the call over to Mike to do a deeper dive into the financials and update on our 2026 outlook.

Thank you, Jim, and good morning, everyone. We had a strong start to the year with the first quarter net sales of $7.4 billion, up 11% versus prior year. The majority of our growth was organic with minimal contribution from foreign currency changes. The 1 less business day in the quarter provided a headwind of approximately 2 percentage points.

The Medline Brand segment delivered $3.5 billion of net sales in the first quarter, up 6% versus prior year or 8% adjusted for days. Looking at Medline brand sales by product category, starting with Surgical Solutions, net sales were $1.6 billion, up 7%, led by continued strong growth in surgical kitting as we discussed last quarter.

Front Line Care net sales reached $1.6 billion, up 6%, driven by robust demand across multiple product divisions, including exam gloves and personal care. Lab and diagnostics generated net sales of $293 million, up 1%. Double-digit core lab growth was offset by seasonality related to softer respiratory virus testing. We remain confident in our growth expectations for the remainder of the year due in part to the large number of lab signings in '25 and expected new customer signings in '26.

Transitioning to supply chain solutions, the segment delivered $3.9 billion of net sales in the first quarter, up 15% or 17% adjusted for days. This was a great quarter for the segment, which benefited from new customer implementations and existing customer growth, further increasing our pipeline for future Medline brand conversion opportunities.

Moving to sales by channel, U.S. acute care grew 12% to $5.1 million, driven by growth with new Primato customers and solid same-store sales growth. U.S. Non-Q grew 7% to $1.7 billion, supported by strong existing customer growth and new customer hirings in post-acute, surgery centers and physician offices. The latter of which was impacted by the softer respiratory season, as I mentioned earlier.

International grew 10% to $495 million due to foreign currency and volume growth in Canada and Europe. Turning to adjusted EBITDA. The first quarter came in at $776 million, down 11% versus prior year. Adjusted EBITDA margin declined 250 basis points to 11% due to higher costs, including an incremental $85 million related to tariffs or $120 million net impact and continued investments to support net sales growth, partially offset by higher net sales volumes.

Medline brand adjusted EBITDA decreased $65 million to $765 million. Adjusted EBITDA margin declined 330 basis points to 22.1%, primarily as a result of higher import costs due to tariffs. Supply Chain Solutions adjusted EBITDA increased $5 million to $187 million. Adjusted EBITDA margin declined 60 basis points to 4.8%, primarily as a result of customer mix and operational costs to support customer demand.

Moving to free cash flow and the balance sheet. We generated free cash flow of $316 million in the first quarter, driven by net income, excluding noncash items, partially offset by increased trade accounts receivable related to sales growth, increased inventory and investments in CapEx.

CapEx for the first quarter was $96 million, which included investments in enhancements and automation in our distribution centers. and capacity expansion of our Mexico kitting manufacturing. Cash and cash equivalents were $2.2 billion and net leverage remained at 3.1x. In line with our disciplined capital allocation policy, we will continue to invest in the business and seek opportunities that are aligned with our strategic direction, optimize our balance sheet and bring value to our customers.

Let me now transition to 2026 annual guidance. Based on our strong sales performance in Q1, we are now raising our full year 2026 organic sales growth guidance to a range of 8.5% to 9.5% from our previous range of 8 to 9. This is reflective of the solid same-store sales growth in the quarter due to steady health care utilization and procedural volumes.

Our full year organic sales guidance still assumes some moderation of same-store sales growth on a sequential basis in the second half of the year, as previously communicated. We are maintaining our full year adjusted EBITDA guidance of $3.5 billion to $3.6 billion. We expect to generate some favorability from the lower tariff rate offset by continued investments in operations, sales and IT, support customer demand and headwinds from rising oil prices due to the Middle East conflict.

We have assumed that the current 10% tariff rate will expire midyear and then return to the higher rates we experienced prior to Supreme Court IPA decision. Let me provide a brief overview of the situation in the Middle East. From a top line perspective, our exposure remains limited as we generate de minimis sales in the region. From an input cost perspective, we spent approximately 50 basis points of our total cost of goods on fuel for domestic freight and fuel surcharges for nonfreight.

We experienced minimal impact to the P&L in the first quarter, and we expect to see a bigger impact on the overall immaterial in Q2 with diesel above $5 a gallon. We have begun to see cost increases from our suppliers tied to raw material spend for petroleum-based products, including gloves, resins and plastics, and our working to mitigate these costs where possible.

Given we carry a significant amount of inventory, we don't expect to see these inflationary costs in our P&L until late Q2 or early Q3. Consistent with how we have historically managed inflationary matters, we do not intend to react immediately we'll take a measured approach as we assess the situation.

Through the conflict involved, we will plan to execute our playbook to share updates on the impact to our business. As you consider the quarterly cadence of our results, we expect to see continued operational investments to support customer demand in Q2 as well as headwinds from the Middle East conflict, as I just indicated. As sales grow and the benefits from mitigation actions and tariffs transpire in the second half of the year, we expect sequential adjusted EBITDA growth.

In summary, we began 2026 with strong momentum, delivering double-digit sales growth and raising our full year organic sales guidance. While operating in a dynamic environment, we remain focused on delivering value for our customers. Through continued investment in our operations and an agile approach, we believe we are positioned to navigate near-term challenges and capitalize on opportunities ahead.

I'll now turn the call back over to Jim for closing remarks.

Thanks, Mike. To wrap up, we are pleased with the strong start to the year, driven by the implementation ramp of our $2.4 billion in 2025 total new customer signings and solid same-store sales growth. We also posted another strong quarter of new signings, most of which are multichannel, reinforcing our differentiated ability to serve customers across the full continuum of care, and we're investing to scale this growth while maintaining the high service levels our customers expect.

We are energized by the opportunities ahead, including our first prime deal in Canada, the expansion of npower and continued automation across our distribution network, positioning Medline to create value for our customers, drive durable long-term growth and enhance shareholder value.

Thank you for joining us. We'll now turn the call over for questions.

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question is from Michael Cherny of Leerink Partners.

Maybe if I can dive into the macro dynamics, Mike, I heard you talk about the moving pieces and how you tend to address it historically. But as you're seeing the price increases, how much lead time are you planning to give both to your clients and your manufacturer partners on changes that you want to make? And how should we think through maybe using tariffs as an example, the push and pull in terms of what you're assuming that's embedded within your reiterated EBITDA guidance?

Michael, thanks for the question. So we have not made a determination yet that we're going to raise prices as it relates to the Middle East comp it. We still continue to evaluate the impact to our business, how long this may last. -- what costs are being impacted and at what rates. And we'll evaluate and run our playbook as we have run in the past. If you think about price increases in the past as it related to tariffs, we typically have notified our customers about 45 to 60 days in advance of those price increases.

But if you recall back to the tariff impact we had earlier last year, we took a time to absorb those cost increases to evaluate the situation. Ultimately, we then raise prices around August of last year. And we really did that on purpose to sort of to maintain our understanding of the situation.

And that led to share gains for us as you see from the $2.4 million of signings that we had last year.

Our next question comes from Charles Rhyee of TD Cowen.

If we're walking through the sort of the guidance here, obviously, you're raising organic revenue, you're maintaining adjusted EBITDA guide. It appears that maybe we saw fast decline implementations, which benefits revenue but maybe drove higher OpEx. Is that the right way to think about it? And then maybe to follow up on Michael's question. Are your conservatism? around potential -- your thoughts on the input costs related to the conflict?

Yes. So on guidance, you got it right, Charles. We essentially believe that given our strong performance in the first quarter as it relates to sales growth of almost 11% growth, top line, 13% adjusted for days. We have raised our organic guide to 8.5% to 9.5% for the year. We feel very good about being able to achieve that goal.

On the EBITDA side, we have held EBITDA at $3.5 billion to $3.6 billion in the face of both the Middle East conflict additional investment in our business, offset by some favorability from tariffs. And so we feel it about what we expect to be able to deliver on our EBITDA guidance based upon all of those factors. As it relates to conservatism in our Middle East guidance. What I would say to you is this, we -- the situation is obviously very, very dynamic and uncertain.

And so as we understand the situation, as the situation evolves, as oil prices continue to moderate from day to day, we are going to take a reaction too quickly as we have a better understanding of where we're going to settle as it relates to things like hand gloves, resins and plastics will then take action accordingly to run our playbook and then take the mitigation actions we need, which could include price increases, but we have not made that decision to do so today.

Our next question comes from Patrick Donnelly of Citi.

I was wondering just for a little more detail on the prime vendor signings in the quarter, obviously, coming off a really strong 25% on that front. If you could just give a little more detail on what you saw in the quarter and the right way to think about expectations as we work our way forward on that front would be helpful.

Patrick. We did see a strong start to the year in new prime inter signings. We aren't giving quarterly kind of actual numbers on that because as you know, that can be lumpy. You can extrapolate. If we did $500 million this quarter, it doesn't mean we're going to do $500 million -- that's a made-up number. So I'm not given what the actual number is, but we are in line with our expectations and expect to achieve our goal of the $1 billion in new premeeting. So we're headed in the right direction, and we feel very good about what we closed here today.

Our next question comes from Elizabeth Anderson of Evercore ISI.

Maybe one, could you help us understand the puts and takes in the supply chain business, maybe a little bit more, particularly on the profitability in the quarter? And then two, could you just comment on whether you think last year's PV ramp sort of on ahead, et cetera, of your schedule sort of on those ramps coming up on top.

Thanks, Elizabeth. So I'll take the first question and then Jim will take the second question. On the Supply Chain Solutions business, this quarter, we saw really strong top line growth of over 15% growth, 70% if you adjusted for days. So really, really pleased with our results there, a little bit better than our expectations as we called out, -- and really, that was driven by both same-store sales growth, strong growth on the demand side from our existing customers as well as we saw these new implementations that we talked about previously, the $2.4 million of new implementations that occurred that we signed last year as we recognize them in the current quarter.

From an EBITDA perspective, EBITDA came in a little bit behind our expectations, but really driven by the fact that we had both some mix as it relates to new customer signings and the margin on those new customer signings given the size of those implementation, but also given the investments in our business. And let me talk about the investments in our business for a second.

We've always talked about the fact that we invest for the long term. We invest to sustain our growth. So we made an effort to do that again in the first quarter. But also, if you think about those investments, those investments happened back in the second quarter, third quarter and fourth quarter of last year as well, it carried into the first quarter of this year.

And so we're investing in our sales continue to drive the growth in the top line. We're investing in operations to make sure we have the best service levels in the industry. We're investing in IT to make sure we have the best cyber, the best, the best AI capabilities and to invest in things like warehouse management and other capabilities as well. So we continue to invest in the business in the long term. Those 2 things, both the mix and the investments impacted our margin in Supply Chain Solutions for the quarter.

Elizabeth -- and we are on par with the ramp-up we talked about of the $2.4 billion in total new customer signings for 2025. And as you remember, historically, it's normally been 10% in the first year, 70% in the second year and in the rest of the third year. We had some large signings in 2025 implemented earlier in the year that yielded 25% revenue realization in 2025, will be 65 in 2026 and the rest will be in 2027. So it's in line with what we shared in the past.

Our next question comes from Sean Dodge of BMO Capital Markets.

Maybe just going back to the tariffs. You all talked about before the various tools you have to mitigate some of the burden from those, some of them can have a pretty immediate impact. Like Mike, you talked about the price increases. Others like change in countries where you manufacture who you partner with can take longer.

So can you just frame for us like how much work is happening behind the scenes on some of these like longer-term mitigation efforts, like changing countries, changing partners -- and then just anything on time lines when benefits from those should start to flow through? I guess are there likely mitigation benefits that continue to come through over the rest of this year and then maybe lag into next to.

Sean, listen, what you're describing is in our DNA every day, regardless of what's happening, and it's something we focus on with very, very intentional focus. That's part of having over 90% of our products from Medline brand have multiple sourcing options and that's up 10% as we talked about from 5 years ago.

And so our teams are always navigating kind of what's the best geography and location and sourcing platform to get the best outcome, and they're doing it both during in advance of the challenges so we can actually move quickly with urgency based on what's happening. And as you know, part of the challenge right now through the Strait of Hormuz moves is access to oil, which actually is 1 of the #1 things for NBR and the ability to actually take like exam goods, for example, that will have a burden.

You also have -- we own our fleet of trucks. You have some challenges with fuel. So we're doing everything we can to navigate that and making sure we're sourcing from the right location. We are buying in advance of the challenge and to make sure that we get enough inventory on hand to kind of solve some of the things that are going on. So we will continue -- as Mike mentioned, we're going to leverage our playbook in understanding what's happening today, not react in terms of actually pushing price increases through into but we fully understand the problem.

And as Mike mentioned, the current situation is very, very dynamic, and it's changing every day and who knows, it could change tomorrow. If you remember, tariffs last year went from 30% to 145% and then went back down at 30% in a very short time frame. And how we reacted in that time, we would have looked silly and that's the way we view the situation. We're going to continue to leverage our playbook to do as much as possible internally to mitigate any challenges before we pass anything on to our customers. and that you'll fill that throughout the entire year as we're going to get some now or some later in some long term.

Our next question comes from Lisa Gill of JPMorgan.

Jim, I wonder if you can maybe just talk about new product launches and your expectation what you saw in the quarter and kind of what your expectations are going forward? And where your new customers are most focused?

Both from product launches, we -- there were very few new products launched in the first quarter. We did launch the Forestar warming we've talked about in the past in a pretty more robust fashion in the first quarter. Our teams are focused on making sure we continue to add additional categories to our line each and every year.

We have more that will come throughout the rest of the year. Honestly, what we've been focused mainly on is making sure that we create stability around the current challenges and really layers of focused on mitigating any challenges for our customers on a go-forward basis. From a new customer perspective, we continue to sign new customers. We continue to advance the brand throughout the conversion profile with our existing customers. Both with those new customer signings. As you know, the first year, we normally doubled the Medline brand penetration going from 10% to 20%.

And then with our existing customers continue in that pipeline of 3% to 4% increase, consistently driving value for our customers. So it's been first and foremost, focusing on the current situation to make sure we mitigate and really create differentiation and really scalability and optionality around the core challenge state and then focusing on making sure we continue to drive value to our customers through our existing categories and then finally, expanding the brand through new categories from a product launch perspective.

Our next question comes from Matthew Taylor of Jefferies.

I guess you made a couple of comments in the prepared remarks about a stable operating environment and utilization -- and I guess I was hoping just with your broad lens, you could comment more on that because there's been a debate or concern about utilization softening with things like ACA expiries or just the macro uncertainty that we're seeing globally.

So love any more color you can provide on the trends you're seeing with utilization and spending.

We can tell you in the first quarter, we didn't see much change in utilization. The -- really, the acceleration in growth for us is share gains, but the actual utilization seemed pretty consistent are on par with what we expected. That being said, we do anticipate some softening in the back half of the year, just specifically due to cuts to reimbursement, people lack of access to insurance the BBA. I mean there is some conservatism and some concern around that in the marketplace, which may lead to some softening of really consumers or patients having lines to go get access to care.

I will tell you the inverse of that is that consumer that patients who is not going to get care for the flu. In many cases, actually ends up in the hospital or in the emergency room with actually a more complex procedure, which ends up increasing the cost of care. So the net effect might actually end up being something very consistent from an overall total revenue or total impact perspective to the marketplace.

It just might look different as opposed to patient volumes. It might be a higher acuity case that's coming into health care. But -- right now, the way we look at it is the first quarter, we didn't see much impact from a reduction in patient volumes. However, I think the entire industry is indicating that there might be some softness coming in the back half of the year.

Our next question comes from David Roman of Goldman Sachs.

I wanted to see if we could go into a little bit more detail on some of the underlying drivers here on the Medline brand side of the business, both in Q1 and how you're thinking about the balance of the year, understanding that there was an impact here on lab and diagnostics consistent with what everyone has talked about on flu and related sales in that category.

But maybe help us think about some of the key drivers in that franchise as you go through the balance of the year and then how that factors into just the overall mix of performance Medline brands versus supply chain solutions in the updated outlook.

David, thanks for the question. So Medline brand growth of about 6%, reported growth of 6% or 8% adjusted for days was very much in line with our expectations. Frontline Care grew at about 6%, really sort of in line expectations as well. Solid growth there given the market dynamics. Surgical Solutions continues to be a strong category for us, up almost 8% and almost 10% adjusted per day.

And then as you called out, lab and diagnostics, really growing only 1%. But if you really look at the 2 components, there's a core business there that actually grew high double digits, high teens. And then there's a seasonal business, respiratory virus testing business. It basically was down year-over-year, as you may recall, given the fact that the severity of the flu season was weaker this year relative to last year.

We still expect the lab and diagnostics business to be very strong this year, given sort of the continued core base business growth. And that food respiratory virus season really happened primarily in the first quarter. So really expecting continued strong growth getting out on the first quarter here for that lab and diagnostic business overall.

Midland brand continues to be a strong growth driver for us, as you know, given both the same-store sales growth as well as our continued focus on conversions with our existing customer base. From a supply chain solutions perspective, we already talked about this, but Supply Chain Solutions grew at a very healthy rate in the top line given both same-store sales and new customer signings.

We expect that to continue throughout the year given that $2.4 billion of times we had. Now as we recalled out previously, and Jim just mentioned this, we do expect some moderation in our same-store sales growth on a sequential basis in the back half of the year given the challenges we made face given the the uncertainty around ACA, ODBA, those types of things.

So overall, we're still expecting strong growth out of the supply chain business.

Our next question comes from Pito Chickering of Deutsche Bank.

I guess how many days inventory do you typically run between your Medline brand versus your supply chain solutions? And -- you talked about the inflationary pressures sort of 2Q and 3Q. Can you just sort of break that out of how we should think about the inflationary pressures in both segments? Or if it's just a Medline brand, -- and any way you can help quantify for us if these current plastic resin, fuel costs remain stable at these levels for the rest of the year?

Yes. So on an inventory basis, we carry about 80 days inventory on hand overall. We carry more on the Medline brand side, less obviously, in the supply chain solution side. So to the point about inflationary pressures, I suppose talk about those for a second. If you think about the tariffs, I'll start with the tariffs first and the quarterly cadence.

As we called out last year, we saw -- we were expecting about $200 million of incremental tariff headwinds year-on-year. $490 million overall. We expect the majority of that to happen in the first half of this year, and it's playing out just as we thought. We saw about $120 million of tariff and tariff impact in the first quarter, $85 million incrementally. Essentially the remainder of that inventory that had a higher tariff cost will be sold here in the second quarter. And then if you think about the fact that the tariffs are now at a 10% rate as of essentially late February, early March, we expect the favorability from that 10% rate it is in the back half of 2026.

So you'll see some favorability on the Medline brand margin side. given that tariff favorability. The flip side of that is, is we expect to see the Middle East impact, not really hitting us materially until the back half of the year, although we're starting to see some fuel cost impacts. So diesel costs as it relates to our trucks and our trailers to move our products around in domestically. We are starting to see some impact from that as diesel fuel $5, a gallon at the moment. And so we'll see some impact from that.

The biggest impact on the inventory side from both nitrile exam loves, resins and plastics, what really happened and starting to happen now as far as the cost increases, but those won't weigh in on the U.S. until sort of the second half of the year and show up in our P&L at that point in time.

Then the last component of our quarterly cadence would be the operations operating investments in our business. Obviously, we've made those investments last year. Some are continuing into this year. And so those are going to show up throughout the next couple of quarters as well.

Our next question comes from Steven Valiquette of Mizuho Securities.

My question was maybe somewhat similar to that last one, but I guess I was just trying to figure out across all the manufacturing inputs for exam gloves, the resin plastics, et cetera. what percent of your overall midline brand product portfolio may be impacted by the rising commodity input -- you were talking about 10% to 20% of the total MB book of business or maybe something greater -- and then also it's safe to say that exam gloves is the biggest product category that may be impacted by this? Or is that not necessarily the case? Just trying to get more context around all that.

Yes. We're not going to quantify it for you that impact right now, Steven. And the reason for that is because only a percentage of our overall cost of those goods are actually impacted by the oral. If you think about that -- the reality is that if you think about exam glove is an example, a portion of the exam glove is impacted by oil prices. But hand gloves is our biggest category, plastics and resins, we buy some residents for purposes of manufacturing plastics, we buy plastics as well.

Those are the 3 major categories that are impacted. What we tell you now is that the Middle East impact that we expect in the back half of this year is offset by the tariff favorability.

Our next question comes from Jailendra Singh of Truist Securities.

I want to ask about your first prime vendor partnership in Canada, -- congrats on that. I know it's still pretty early here, but has anything changed from your expectations or how you think about that market and opportunities there? And as it relates to your annual goal of $1 billion in new customer signings, did this already include signings from the Canadian market? Or could we see some upside if you keep signing more customers there?

One, the $100 billion -- $1 billion of prime inter signings is U.S. only, so that new prime inter closing in Canada is in addition to -- and we're really excited about it because it's a way to potentially change the dynamics of the market of how cards are delivered and could lead to an acceleration in the Medline brand conversions in that space as well.

It is the first primer in the Canadian market, as we talked about, it's a hospital system that we're working with BedmiCorporation on -- we're in the beginning stages of it, and this is something that we will learn. I think it's too immature for me to give guidance for our earning kind of anticipation around what we expect.

What I can tell you is we will leverage the playbook we have in the U.S. to drive significant value to the Canadian customers who are in this partnership. And I can tell you, we already have customers asking could we be next, but we want to actually build really the playbook and really the design -- with this group of customers to make sure we deliver the right value and really the right supply chain mechanisms to create the right product at the right place at the right time at the best value. But it is in addition to -- and we think it's really an opportunity to change the dynamics and really health care distribution in the Canadian space.

Our next question comes from Michael Polark of Wolfe Research.

I have a big picture long-term question on your lab and diagnostics franchise. I perceive most of those products to serve hospital labs, doctor office labs and maybe high-volume clinical labs. My question is, what is the ambition for building that portfolio to serve research laboratories, education settings, maybe pharma or industrial manufacturing.

Where does that stack rank on your priority list of long-term business expansion.

You hit the nail on the head. We are in physician office in acute care in some educational labs that we're focused on right now. And candidly, it's a $25 billion TAM that we do $1 billion. And so there's so much opportunity what we have in perfecting how we go after that business and capitalizing on the opportunity in front of us is really, first and foremost, before we think about research labs and other things.

And 1 of the things we always do is try not to really defeats all at once. We're going to get a piece of time. And the way I look at this is this is something we're focused on, and it's just a tremendous opportunity. And as Mike mentioned earlier, the core lab growth taken apart from really what happened with flu is up double digits, right? It's growing significantly. And it's something we're pretty excited about. And really within that framework between lab and diagnostics, 30% of that is in Medline bring convertible activity. So right now, candidly, we're focused on the opportunity in front of us before we think about expansion.

Our next question comes from Eric Coldwell of Baird.

Thanks very much, and good morning. I guess I'll stick with my buddy Mike's line of questioning on market expansion since most of the main topics have been covered. I'm curious on an update on your initiatives, progress, next steps in dental and Animal Health. If you could provide us some updates in those categories would be fantastic.

Thanks, Eric. As you know, we bought Sinclair in the Canadian market. And really, that's a way for us to really understand the digital space and what our teams have been focused specifically on is creating the Medline brand, convertible opportunities within that segment to make sure that we could actually build a model that mimics how we do it in the U.S., both in the acute and physician offices and surgery center space.

So we can drive value for our customers from a Medline brand perspective and accretive margin lift through our brand. And I can tell you we're ahead of the curve. I mean we already have 30% convertible opportunity. Our Medline brand divisions are doing a stellar job of creating Medline brand equivalent to that market. What we're also learning is really that service model and making sure we have the service techs to can service the business because if you don't service the business, you don't get the opportunity for the distribution. So we're building that out.

I'm very optimistic in where we're headed. And I do think it's a potential for the U.S., but we want to get really the full playbook built in advance of doing that. But I can tell you we're ahead of the curve in terms of where we planned -- and I think there's an opportunity to make it look and feel not much different than the rest of the business in the U.S., which would be very, very positive.

Second, from an animal health perspective, that is a market today, it's a $4 billion TAM. We continue to expand that TAM as we add new me mine categories. That is a brand business that is not a distribution business. We're not looking to be a distributor of dog food and fleet colors, but we want to be as a manufacturer of medical supplies in that space.

We're leveraging partnership with Covetrus Vetco MWI from a distribution platform, and it's growing nicely, and we think it's a tremendous opportunity for growth on a go-forward basis. question.

Our next question comes from David Larsen of BTIG.

Can you talk a little bit more about your AI efforts, empower the digital supply chain control tower. Just any color you can put around how that improves your clients' performance or perhaps improve your COGS? And then also any more color around the robotics in the warehouse would be very helpful.

Yes. We're really excited about Empower because we think it's going to change the dynamics of how customers look at their overall supply chain and give them advanced analytics so they can be prepared in advance of any challenges. So -- we're already seeing a 50% improvement of throughput and engagement as it relates to disruption to the market.

One of the biggest challenges in health care is how do we get in front of hurricanes. How do we get in front of supply chain disruptions to give our customers supplies in advance of the need. So they didn't know with back orders. I mean if you remember, last year, we had the challenge with IV fluids, right? If we would have been in front of that, we could think given our customers advanced notice to really stockpiles inventory in advance of the challenge coming ahead.

And I can tell you, Empower's helping drive that. I mean, the AI and the analytics and understanding our customers' business, giving them visibility to their entire supply chain giving them predictive analytics and really the ability to ask a questions, the brain and it has access to their entire kind of data set, both from a fulfillment throughput and Itemaster perspective.

In creating standardization across their platform and recognizing where there's redundancy and duplication across the supply chain. It is creating a hub-and-spoke model to their supply room in the facility all the way to our distribution center.

So we have the ability to actually reduce inventory on hand, eliminate reduction in really items that are candidly not being used from an obsolescence perspective and from an exploration perspective. We're really excited about it. And I can tell you, early innings, it's delivering more than what we expected. And we have a pretty robust road map from a feature perspective to where eventually what the camera in the room, decrementing the inventory, creating demand and replenishment signals and giving customers real-time data on what's in their inventory. So that is headed in the right direction, and we are launching it to more customers.

Internally, in the distribution centers, when you think about efficiency and throughput and leveraging our existing assets and infrastructure, the way you actually do more with what you have is you get better throughput. When you think about Autostore, we have 2,100 robots across our network. We're adding 2 more installations across our distribution centers.

That increases the throughput by 250% and reduce labor burden by 50%. So it's a very meaningful input both from a labor reduction and quality and service perspective for our customers. We're launching the first installation of symbiotic to navigate the bulk side of the house. The bulk side of the house is really what owns most of the real estate in the distribution centers. So if we can create efficiency and throughput on that side through AI and robotics, -- it gives us the ability to leverage our existing asset infrastructure and minimizes the need to expand buildings because we can pick back and ship in a much more robust fashion.

So if you think about Autostore. Autostore manage is less than case volume. 70% of our lines are less than case. And then when you think about bulk storage because we keep so much inventory on hand, Symbotic will help us manage that on the right-hand side of the distrition center, and we're really excited about it.

Our next question comes from Brandon Vazquez of William Blair.

Mike, just a question of clarification on tariffs. I think in the prepared remarks that I heard correctly, you said that in the back half of the year, you're assuming that tariff rates go back to the pre SCOTUS decision. One, I wanted to clarify that. And then if you could talk about why you would assume that go back up because I think your blended rate pre SCOTUS was higher than the 10%. And if you can give any quantification at all of what the difference between the 2 might be that would be helpful as well.

Thanks, Brandon. Yes, that is correct. We did say that we expect that the rates will go back to pre-cooling in August time sometime this summer essentially. And the reason for that is we're taking an approach to try to be realistic about what might happen. We know that the run out after 150 days in late July. And so what we are hearing is that they're looking to use it or 232s or 301 to recreate what they had previously.

And so taking a realistic or conservative view of what might happen in our business and how we're going to navigate and attack that accordingly.

That being said, we did submit a robust public comment statement just educating them on kind of what this actually could mean for the industry. And if you remember, Vectranmic, in the public comment period, we did get some exceptions. So I mean, we'll see what happens.

Our next question comes from Andrew Obin of Bank of America.

This is David Ridlon on for Andrew. The 50 basis points higher overall revenue growth and the guidance equates to about $140 million of revenue or maybe $40 million or so of gross profit dollars. Is it Fair to say that, that year-over-year change in the tariff assumption, basically having the 10% rate through August offsets all the other inflationary impact on your cost of goods in 2026?

So yes, as we've called out before, we're holding our guidance to $3.5 billion and $3.6 billion. We are seeing -- we expect to see favorability from the tariffs at the 10% rate through the end of July, offset by higher investments in our business as well as the impacts from the Middle East as we know of them today. And so those 3 things combined are going to offset, leading to our guidance remaining at $3.5 billion, $3.6 billion.

Our next question comes from Ryan Halsted of RBC Capital Markets.

Maybe just wanted to dig a little deeper in the strong sales performance and ask a question about your sales channels, specifically the U.S. nonacute segment. Just curious to hear how you feel you're tracking versus expectations in that segment? And if you still feel strongly about the market opportunity and the like-for-like conversion opportunity there?

Yes. We still feel very good about our U.S. non-acute business. The U.S. Q business grew 7% on a reported basis, 9% adjusted per day. in the quarter, really driven by both our post-acute, which is nursing home, home health and hospice, our surgery centers and our physician offices.

So really solid growth in all of those channels in the nonacute space. We do expect the market to grow at a faster rate in the nonacute space. We do expect in 2026, our U.S. acute care business will grow basin U.S. non-acute because of the new customer signing that we had last year. the $2.4 billion that we signed overall. But we still feel very good about the nonacute space.

We continue to take share in that space and grow at a greater rate than the market.

Our next question comes from Erin Wright of Morgan Stanley.

I have kind of a broader question just on the landscape for new customer wins and just a longer-term pipeline there. Are you seeing any changes in the competitive landscape on the distribution side, for instance, just with changes from a corporate structure perspective or otherwise, maybe how -- or even how others are responding from a fuel cost perspective or otherwise there. I guess, I know you say you're on track with kind of new wins, but -- is the pipeline building on that front? Like what's your line of sight into that, either by -- also by channel as well?

Thanks, Erin. The pipeline is very robust. -- modern health care just reported a top 100 health systems in America and we have about 50% of them which means there's 50% we don't have. So there's a tremendous amount of opportunity in front of us. From a competitive landscape, we have good competitors with they're running their same playbook that they have in the past. -- which historically, we've had really a significant differentiation, both to our brand and the ability to serve the entire continuum of care.

We just have a different value prop and a different supply chain vehicle that delivers best-in-class service. So -- we don't see much change in the market dynamics as it relates to the opportunity set in front of us. Health care continues to consolidate. And as they consolidate, we tend to do better because customers are looking for a partner that can serve all classes of trade that they own. Both from the acute care physician office, the home health to the hospice, and Medline is the only clip provider in health care that can do that. I'll pair that with our ability to drive significant value to our brand, it just creates a different value prop as compared to the voters of the marketplace.

And that is both true in the acute care space and in the nonacute space. Both where they're affiliated with the acute care system or integrated delivering that for an independent provider. So we feel optimistic about the future the market opportunity in front of us as fast, and we have the visibility to what's available and what we think we can actually earn.

Our next question comes from Navann Ty of BNP Paribas.

I wanted to share if you had any updated expectations for the Section 232 tariffs on PPE and medical consumables and equipment? And also, a second question is on your leverage target and how high on the priority list M&A is for Medline in the current environment?

Thanks for the question. So as we called out previously, we do expect -- we do anticipate that the 122 will run out in the end of July, and the administration intends to put new in place, they may use either 232 or 301. 232 investigation happened many months ago, we responded with our response and shared really good information about the market and the situation and we'll continue to work with the administration as necessary to help them inform them of the market dynamics. I can't call out when that's going to occur or what could happen, but we'll monitor the situation to be ready to act as we have in the past. As it relates to leverage, we ended the quarter with 3.1x leverage. We carry about $2 billion -- $2.2 billion of cash on hand. And our intention is, first and foremost, to invest in the business with that excess cash, we have my hand we're going to lead in on M&A when we see the right opportunity to do so.

And then over time, in the long term, if we don't see M&A opportunities, we will use that capital to reduce our leverage even further. But ultimately, our goal right now is to identify and grow organically first. and look for M&A opportunities that would drive strategic growth in our business for the long term.

Our final question comes from Rick Wise of Stifel.

I just was reflecting on some of your comments, particularly about some of the challenges in the current environment and reflecting that, obviously, it's having impacts on your competitors or I would personally imagine are less able to optimally deal with it.

And I was wondering -- so my question is, -- maybe talk to us a little about the competitive environment or displacements you're seeing. And just when you reflect back in years past at moments like this, are there unique opportunities for you to sort of press more aggressively on the offense as other competitors perhaps less well positioned or distracted or pressured? And just any incremental color or thoughts there as we end the call.

Yes. Thanks, Rick. Listen, you hit the nail on the head. We tend to perform better in times of crisis or challenged because our value profit is just differentiated. When you think about the customer reimbursements, customers are looking for speed to value. We have the best value story in the marketplace because we can drive value to our brand, and we can drive value to the cost of distribution.

And so we're in a position to take advantage of what's in front of us. And when I say take advantage, it means to deliver value to our customers in a meaningful way that's differentiated as compared to the competition. So I do think we're in a position to create additional opportunity that happened during the pandemic.

It happened last year during the tariff situation, which is why we had $2.4 billion perimeter closings. And so the market dynamics from a consolidation perspective, from a customer reimbursement perspective, from a really a unique environment with what's happening with some of our competitors really divesting or selling off resources.

It just creates an opportunity and really a segment for us to do really outsized growth as compared to what the -- that doesn't mean we don't have good competitors. It just means we have a different value prop. So I do think we're in the right position. I do think we have the ability to help our customers in the time of need, and we will continue to do that. So in a differentiated fashion going forward.

We have reached the end of the question-and-answer session. I would now like to turn it back to Jim Boyle for closing remarks.

Thank you for joining us on our first quarter earnings call, and we are pleased with our performance and excited that we're able to expand really our revenue projections that hold our earnings guidance. We are optimistic about the future and looking forward to what's to come. We hope you have a great week.

This does conclude today's conference call. Thank you for participating. You may now disconnect.

Okay. With that, why don't we get started? Good morning, everyone. Thank you for taking the time to join us for our next presentation. We're very excited to have Medline here with us. For those of you who don't know me, I'm Glen Santangelo. I'm the analyst at Barclays that covers Medline. To my right is Jim Boyle, the CEO of the company. To his right, Mike Drazin, who's the CFO of the company; and Karen King, heads the Investor Relations function that I think many of you may know.

So with that, let me just say, I mean, congratulations to you guys for all that you've accomplished in the last sort of year. I mean, the biggest IPO of 2025, how exciting. I mean, it's performed very well out of the gate. So congrats to you all on that success. It's been exciting to watch. And I was just mentioning a long time coming, I feel like covering the distributors for 25 years, I feel like we've been watching you guys in the shadow continuing to grow, and it's great to see it finally come to the public market. So congrats on all that.

All right. Well, why don't we just sort of jump right into it. Since you are new, and I think probably most people here probably know you, but maybe not everybody does, I think it maybe is worth, Jim, just giving a minute or 2 on a thumbnail sketch on the business, so people can maybe better understand Medline and sort of what differentiates the company from the competition.

Sure. Yes. Good morning. Good to see everyone. Medline is the largest vertically integrated medical surgical manufacturer and supply chain solution provider serving all points of care and health care. Our mission is to make health care run better. We do that by driving improved clinical, financial and operational outcomes. The #1 way we drive value to our customers is through the depth and breadth of our brand. We make 190,000 Medline brand products. The company started the first 30 years of the company, we were solely a manufacturer of medical supplies. We didn't get into prime vendor distribution until 1996. So I'd like to say we're a manufacturer that distributes. We're not a distributor trying to be a manufacturer. I mean the core DNA of the company is a manufacturer first. That's where we drive most of the value to our customers. We guarantee savings on the brand. It's where we drive most of the income for the business.

We are also the largest supply chain solutions provider in health care today. We have 29 million square feet of distribution space. We own our fleet of over 2,000 trucks. We employ our drivers. We have $4.5 billion of inventory on hand that drives 98% to 99% fill rates, which is best-in-class in health care. And then from a clinical solutions perspective, our job is to help our customers deliver better patient outcomes. How do we work with them in those never event situation. Think about hospital-acquired infections, hospital-acquired conditions. We deploy our clinicians along with intelligent design products to help make sure that the patient is leading better than when they came in. And we do that in a pretty robust fashion.

So the organization is -- we're 59 years old. We have 59 years of consecutive growth, 18% CAGR since day 1. I've been here since 1996. When I started the company, it was roughly $400 million. So it's been an amazing journey. We finished last year at $28.5 billion. So it's been a pretty cool business to be a part of.

That's excellent. And Mike, maybe I'll shift it to you, given that the company just reported its first quarter as a publicly traded company and gave your initial guide for fiscal '26. Maybe just give a quick financial thumbnail, talk about 4Q, talk about the guidance and then we can sort of dive right into it.

Yes, sure. Thanks. So revenues for the fourth quarter were strong. We generated revenues of $7.8 billion, up almost 15% year-over-year. Now keep in mind that's not -- there's one extra day in the quarter. So adjusted for days, we still performed well with growth of 13%. Adjusted EBITDA, about $805 million. That's roughly flat year-on-year, but you have to take into consideration the fact that we had over $140 million of tariff headwinds that impacted us in the fourth quarter alone. So adjusting for that tariff headwind, we actually really solid earnings growth. From a signings perspective, for the year, we signed $2.4 billion of new customer signings. That's well above our $1 billion goal for the year. Really proud of our signings and the share gains that we're taking in the marketplace. From an overall guide perspective as it relates to 2026, we're projecting to grow sales growth or organic sales of 8% to 9% year-over-year, and our EBITDA -- adjusted EBITDA will be $3.5 billion to $3.6 billion for next year.

Okay. Excellent. And maybe that's a good segue into where I wanted to start. I mean the growth outlook for fiscal '26, very impressive, and that's augmented by the $2.4 billion in new signings, which is much above sort of your annualized target.

And so Jim, maybe a good place to start is talking about what sort of drove that? I mean, clearly, the company has a natural competitive advantage being able to serve all points of care. But at the same time, we're seeing some shift in the competitive landscape a little bit. I mean people here have been living with Owens & Minor for the last kind of couple of decades. McKesson's made some recent announcements on maybe divesting -- not maybe actually divesting their medical business. So just maybe give us an assessment for the competitive advantages you have on the supply chain side versus a shifting competitive landscape that's maybe driving the share shift and help us think about the durability of what we're -- these trends that we're seeing.

Yes. First, I'd say we might be the only company want to be in the business we're in, right, if you just look at what's happening in the landscape. So we commit to $1 billion of prime vendor signings every year. That's what we believe we can control. That's what we believe is going to become available in the marketplace. That's kind of our goal that we think we can manage. And then we take advantage of those market conditions that are in place. So you mentioned one, customers are concerned about long-term viability and sustainability of some of the competitors in the marketplace. And they look at us as a resilient, sustainable supply chain provider that can get the right product to the right place at the right time every time. So that's one.

Two, customers are concerned about cuts in the Affordable Care Act, the OBBA, lack of reimbursement. And in times of financial crisis or financial strike, we tend to do better because we are the value player in the marketplace. So that customer yesterday that was not willing to listen, all of a sudden doesn't have a choice but to listen because they need to drive value today to really remain financially viable on a go-forward basis. And so we're winning because of that. Third, when you think about how we handled the tariff situation, it was vastly different than the rest of the market. We did not raise a single price until August 1. Instead, we chose to kind of wait and actually get to a normalized run rate of what we thought reality was. We don't react in times of crisis and chaos.

If you remember, early last year, tariffs went from 30% to 145% in China. We're like this is not real. We're going to wait until what we believe will be a normalized run rate. We're going to understand what reality is. We're going to focus on internal mitigation efforts and what we can do to mitigate first. And then we're going to focus on educating the customers on what's happening, why is it happening and how are we working to actually solve some of the problems. So first and foremost, we didn't push price increases until August. That opened doors that historically have been closed. And then there's many customers who are having kind of challenges, if you will, from a service level perspective. You can't take care of patients if you have 85% fill rates. And when that happens, we tend to win because we have the 99% fill rate and service level.

And then finally, consolidation in health care is speeding up. 90% of the deals we signed last year in the acute and acute affiliated were for all classes of trade they own. We are the only supply chain solution provider that serves all points of care, meaning home health, hospice, nursing, home physician office, anywhere a consumer or patients need access to medical supplies, Medline has built a solution for that. I mentioned on the earnings call, a large faith-based health system that had 5 distributors across their physician office, their home health, their acute facilities, their lab and diagnostics. And the way they put the RFP to marketplace is they would only accept bids from an organization that could serve every single care setting that they own. We are the only player that can do that. That created an acceleration as well. All the tailwinds I just mentioned are still available in 2026. So the $1 billion we think we can control, we're going to target that, and we're going to take advantage of those market conditions that I just described.

Jim, you talked about sort of the supply chain efficiency and the advantages that you have and the fill rate advantages that you have. I mean I think sitting in our seat, working on our Excel models, it's very hard for us to appreciate all the technology investments that your company has made probably relative to the competition. And so could you maybe just touch on that for a minute? I mean, the robotic technology, the symbiotic technology for bulk packaging, the AI-powered solutions you have at the customer sites. I think that kind of gets lost on all of us here in our day-to-day analytical work and maybe it's -- it really makes a difference and it's translating into customer wins. So maybe just 30 seconds on that advantage that you have.

Yes. We were the first installation of a robotic pick technology called AutoStore. We installed our first installation 15 years ago. Today, we have 2,100 robots across our network that leverages AI automation and robots to increase throughput, quality and value for our customers. It decreases the labor burden. It decreases the footprint in the building, so it gives you excess capacity in your existing network. And it's been an extremely successful throughput for less than case.

So think about not pallet goods, but either [indiscernible] or boxes, which 70% of our lines are less than case. It decreases the labor to pick that by about 75%. So you're decreasing cost, increases the throughput by 2x and decreases the footprint in the building by about 66%. So think about taking your existing asset infrastructure and getting 66% capacity back, that decreases your need to add additional buildings, allow you to get more from your existing asset infrastructure and push it through and do it in a much more efficient, effective way. You mentioned symbiotic. Symbiotic is a new technology. We're about to do our first pilot. Walmart has a pretty robust installation of it, but it does the same thing that AutoStore does for less than case for bulk picking.

In a warehouse, the largest real estate owner is bulk picking pallet goods. One of the challenges I gave our Head of Supply Chain is how do we shrink the internal footprint in our 29 million square feet and make it act like and perform like 32 million square feet without adding an additional building. What you do is you shrink the internal footprint. So symbiotic will do the same thing for pallet goods, leveraging AI, robotic pick technology, reduce labor by about 50% and actually increase capacity in a building roughly 40%, which we think is going to be pretty amazing. So decreasing G&A, increasing throughput, decreasing labor burden, especially with the labor challenging environment we have in really the warehouse space. This is a great way to create a job that a warehouse order wants to be there for.

And then finally, you mentioned the AI kind of empower program that we're launching for our customers, where we're going to partner with Microsoft to build a technology that will completely change the dynamics of how both demand replenishment and really cycle counts happen in health care. There'll be a camera in the room in the future. The brain of that camera will be copilot. It will decrement the inventory or create both demand and replenishment signals. We have real-time visibility to total inventory on hand. It will change really the kind of the footprint of how caregivers have access to goods to bring it closer to the patient. and we'll have real-time data to understand kind of what's happening in the environment, how do we create channel optimization, how do we streamline standardization. And then from raw materials all the way to that supply room, we'll be able to predict challenges and get in front of the challenge. So we'll say, hey, there's a hurricane going through Asheville, North Carolina. We might have some issues with fluids. We should probably do some backup ordering from one of the competitors so we get in front of any supply chain challenges. So we're pretty excited about that.

Jim, in your initial statement, you were sort of talking about the fact that Medline is a manufacturer and then a distributor. And the Medline brand gets so much attention on the street. And I think it's obviously, because maybe the margin differential on the Medline brand is significantly higher than the third-party products that you distribute. Can you just remind everyone where you are in terms of penetration, what maybe the goals and aspirations could be? And within that context, you got the $2.4 billion of new signings. Could you talk about when you bring new customers on, maybe how you grow that Medline brand product within that new sort of customer?

Yes. So in a traditional acute care facility, up to 60% of their medical surgical budget has a Medline brand equivalent that we can convert to our brand. So it drives significant value to our customer. Day 1, when we sign a new Prime deal, we take it from a competitor. 90% of that product is in other people's products because the competitive landscape distributes about $1.2 billion of our brand through their channel. So 10% is already in our brand. In the life cycle of a deal in the first year, we normally double the penetration rate from 10% to 20%. And then over the life of the deal, we aspire to convert 3% to 4% additional conversions to our brand. And that is something we learned through many years of trials and tribulations. Sometimes you go too fast, the pace of change can be challenging for the clinical team. And when you go too slow, you don't drive incremental value at a pace of change that actually yields the savings value they need.

So 10% -- so doubling the penetration in the first year and increasing 3% to 4% the following years drives incremental value on a consistent basis. We work with our customers to build a playbook that we're all aligned on. This quarter, we're going to do exam gloves and underpad. This quarter, we're going to do custom trades and drapes and gowns. And it's built in a way that always drives incremental value. So you never get to that what have you done for me lately relationship with your customer.

In a non-acute setting in skilled nursing facilities and nursing homes, up to 80% of what they buy is in our brand. It's mainly incontinence, DME, advanced wound care and enterals and feedings. We happen to be market leaders in all of those. And that conversion curve happens much, much faster within the first 90 days of signing the deal with all Medline brand. And that's something we take advantage of both from a value prop to our customers and a margin gain. And when you compare the margin profile, it's 5% EBITDA margins on the Supply Chain Solutions business and 24% on Medline brand. So every time you flip it over the edge, you're growing margin extremely high, if you will. What's interesting is you're also creating dilution in your revenue because you're saving 5% to 10% every single time. So it's kind of an earnings increase and a revenue decrease.

Mike, can you talk about the impact that has on the margin and as a natural sort of tailwind as that Medline brand increases?

Yes. So if you think about the overall business, right, the total EBITDA margins are in the 12 percentage range overall. If we sign a new prime vendor customer, that margin percent is under pressure, obviously, because we're signing it at 5% margins, 90% of it at 5% margins. But to Jim's point, over time, as we convert to Medline brand, it grows our overall margin of the business. The reality is that we drive margin improvement and margin dollar growth. That's really what we're focused on. We focus our business on growing earnings at or greater than sales over time. And we do that by leveraging our sourcing relationships, leveraging our manufacturing footprint, driving growth in our overall sales volumes and ultimately delivering operating leverage to ourselves.

Mike, maybe just sticking with you for a second. Investors have become very concerned about the macro all of a sudden, right? Heading into 2026, I think there was a view that the consumer was strengthening due to anticipated tax refunds. And then obviously, the AI sort of movement has sort of manifested itself in some corporate layoffs until people are sort of worried about things on the utilization front. Now let's put the conflict in yet another -- Middle Eastern conflict and yet another basket to sort of damage sentiment. On the most recent call, I think you sort of talked about a moderate slowdown in utilization. Does all the sort of confluence of events sort of impact your thinking at all as we sit here in sort of 1Q? And maybe could you just elaborate a little bit on those comments you made on the conference call?

Yes. So when we gave our organic growth guide of 8% to 9% for the year, which we feel is obviously very strong, we did highlight the fact that if you think about our overall model, our algorithm is very simple. We generate both new signings, new customer signs that generates revenue plus our same-store sales growth. The combination of the 2 leads to strong organic growth. On the same-store sales side, we've seen really solid growth in 2025, driven by the demand levels in our customers, both from a utilization perspective and procedure volumes.

And while we expect that to remain strong, we do expect it to moderate a bit. If you look at what our customers are saying and we talk to our customers every day, they're telling us that they expect to see some moderation in that because of the ACA reforms, because of the OBBA. And so if you look at the enrollment levels in the ACA and now, it's a little bit down from where it was previously. And so we are expecting some moderation, albeit still strong overall same-store sales growth.

Okay. And while we're on the topic of financials, can we talk about the tariff impact? Could you just remind people how much that impacted you in 2025 and then 2026 and so we can think about the year-over-year impact?

I would say it wouldn't be a meeting if we didn't talk about tariffs, right? So tariffs for us have been a headwind, as we all talked about. The overall impact to the business is $490 million in totality. We saw $290 million of impact in 2025, and we expect an incremental $200 million in 2026. Now that is based upon the old tariff regime that is not based upon the Supreme Court ruling that recently announced that the IEEPA tariffs are not valid. So we are holding our guidance for now as we continue to evaluate what's going to happen in the future. As we all know, they put Section 122s in place at 10% and those only can last about 150 days. And we expect at the end of that, they'll put out 232s and 301s, which we also expect to be back to where we were today previously.

And so ultimately, we are kind of maintaining our guidance as being net neutral for the year. We're, as Jim mentioned this earlier, we are a company that does not react in times of crisis. We'll continue to study and evaluate the situation and do what's best for our customers first and then share with you our overall impact to our business.

And Jim, maybe the natural follow-up, are you having any conversation with customers over the Supreme Court decision? I mean, are they expecting any sort of refunds back? Are you expecting any refunds back? Or do you think you sort of take a wait-and-see approach before making any next moves? Like how do you think about the evolution of what we've seen here in the last sort of 60 days?

Yes. Well, first off, there has to be a refund in order to give anything back to anyone. So let's see if that actually happens, right? So we'll see. We're going to be in line with everyone else to see if that doesn't. So the truth of the matter is we are having conversations. And to Mike's point, we think what this is going to -- what's going to happen with 232 and 301, you're going to end up net neutral with the administration wants to get back to the same revenue that we're generating. So we don't think there's going to be much of a change. So we are having conversations with our customers.

What's interesting about the way my at it, the vast majority of the tariffs we either mitigated or we absorbed. We had a modest increase we pushed through on [ 81 ]. So if we had to give some kind of refund, which if we got a refund, we would get a refund back to our customers, it will be small relative scale to the macro numbers. So it would be overall a net positive from a reimbursement perspective and from an income perspective. So if that comes to fruition, it will be good for our customers, and it will be good for us. But it is the biggest number and biggest...

Can we maybe talk about some of your other businesses that maybe get less attention. The labs and diagnostics business, right, maybe flies under the radar screen, over $1 billion in revenues now. I mean, it grew 9% last year. I mean do you think we on the Street should be paying more attention to that? I mean I feel like we don't talk about that enough. I mean, is that something or anything else like that on your radar screen that you'd like to sort of highlight or.

Yes. I think we're probably -- of the new markets we're in this is the market I'm most excited about. It's a $25 billion market that we do $1 billion in. And the market dynamics are changing. And it's a business we've been in for about 10 years. Over the last 5 years, we started really earning our stripes. And now players -- our customers see us as a player in the game. And what's also happened is used to medical surgical distribution, so the medical facilities, so physician office surgery center, home health hospice, acute was under one supply chain leader and lab was under someone else. Now they're actually pulling the lab supply chain under the same supply chain leader and going back to the continuum of care, they're looking for one source of truth for everything they actually manage. So that's a tailwind for Medline because we're the only ones that can do that. That's what happened with a large health care system. I mentioned on the earnings call, they actually brought lab under the supply chain leader, and she included that in the RFP. So that's one.

Two, the wheels on the truck that deliver medical surgical supplies are the exact same wheels on the truck that deliver the lab supplies. So the incremental cost of distribution to us and the customer is almost 0. So our ability to drive cost savings and value to the customer from a supply chain is pretty robust as compared to the competition. Three, when you look at our supply chain, the robustness, the customization that we can actually deliver is not even close to what the current lab distributors do. So we can deliver refrigerated supplies in a differentiated manner. We can deliver their consumables in less than case, which is different than their current provider. So the experience they get is completely different.

And then finally, I would tell you that 30% of the lab and diagnostics today is convertible to Medline brand. So we're doing the same playbook we did in Med Surg, where we're offering the Medline brand at a value. We're offering a more robust, less costly supply chain solution, and we're taking share at a pretty decent pace. And we're pretty -- last year was our largest year ever of...

Just to follow up on that. I mean the company is starting to stretch its core competency a little bit, and you're starting to dabble in animal health, you're starting to dabble in dental. And I feel like we on the street, we've sort of seen this a couple of times, right? Henry Schein aggregated dental, medical, animal health. Cencora is in the Animal Health business and now it's kind of getting out. Henry Schein sort of got out of the Animal Health business. How do you think about the synergies between these businesses? Or is that something that the company is trying to better understand?

And then maybe the follow-up question to that is because we're starting to run on time. The international segment is something that you highlighted as well. That feels like yet another big investment that kind of needs to be made. But how do we think about you stretching your core competencies into these other areas and geographies?

We're not actually merging animal health and dental to your point about they're separate entities. Animal Health for Medline, we're no interest in being a distributor. We don't want to be a dog food, fleet collar distributor. That's not -- we have no aspirations for that. What we want to sell is medical products into that space. So it's a $4 billion market, same exam gloves used in a physician office with the same exam gloves that use in a vet office, the same guys, same tongue depressors. So think about that as a brand business only where we're leveraging MWI, Covetrus and VetCoach for access through a distribution channel, but our brand stands on its own. So think about it as a brand business. It's a $4 billion TAM that is growing every day as we enter into new products that look and feel just like the medical surgical business, so brand alone.

Dental looks and feels potentially no different than physician office. I don't want to be a distributor only. I want to be a manufacturer that distributes. And so we bought Sinclair Dental in the Canadian market to test it kind of like a petri dish. And what our 28 Medline brand divisions are creating Medline brand alternatives in the dental space. So we now have Medline brand burs in place, Medline brand toothpaste, Medline brand floss, Medline -- so think about all the items in the dental space. Can we do the same playbook we've done in traditional Med Surg and health care. And I can tell you, we're pretty optimistic that we're significantly outperforming the deal model, and it's looking like something we think we can deploy in the states that won't be dilutive to our earnings, but it will look very, very similar to physician office in the States.

And then international. International is about $1.8 billion, about 7% of our total revenue. It's a $200 billion TAM. 85% of that business is either in Canada or in Europe. We do have a LatAm and an Asia Pac business, but they're pretty small. But if you go to Canada, we're on the verge of signing our first -- this doesn't exist. The prime vendor model doesn't exist in Canada. We're on the verge of signing the first prime vendor model in the Canadian market, which will completely change the dynamics of that market and create an acceleration in growth very, very similar to what happened in the U.S. So we're pretty excited about that.

And then you think about Europe, only 1/3 of our products have CE marks. And most of what we're selling in the European market is in the surgery markets like custom trays, drapes and gowns, surgeons gloves. And it is not a distribution business. Prime vendor model doesn't exist in Europe. So think about it as a brand business. Our leader is currently working on expanding the CE mark. So we're expanding the bag of our sales force that's currently calling on the acute care market. And she's also building a bag to call on the non-acute market, going back to what we talked about earlier, incontinence, advanced wound care, DME and minerals and feedings. If we can get CE marks on that and build a sales team, we can grow for double digits for many years to come, and it's a business we're pretty excited about.

Mike, maybe just a couple of quick financial questions before we wrap. Just to remind everyone the revenue guidance, 8% to 9% this year, and EBITDA will be slightly up in '26 versus '25, but that mainly reflects the tariff impact. So could you just remind people, you highlighted on the conference call a couple of things that could push us above, below within that range. And I think you cited utilization, implementation of sort of new customer wins. How do you think about flexing within that range?

So our organic growth guide of 8% to 9% is -- can be -- within that range can be driven by a couple of things. One, it could be driven by, again, the same-store sales growth if we see higher demand or lower demand. Two would be based upon timing of implementations of existing signings or it could be timing of implementations of new signings that we signed in 2026. From an EBITDA perspective, things that can move the needle one way or another could be obviously the tariff impact overall, what happens with tariffs. It could also be certain other inflationary matters as we see happening in the marketplace today as well as our ability to continue to generate operating leverage in our business.

And anything you want to call out with respect to the cadence in 2026?

Yes. From a cadence perspective, the only thing I would call out is the tariffs. From a tariff perspective, we said we are calling out $200 million of tariff headwinds incremental to 2025. That incremental impact will be primarily showing up in the first half of the year and bleeding into the third quarter. By the end of the fourth quarter, which we should be having tariffs normalized into our base.

Well, listen, Jim and Mike, we're out of time, but I want to push it back to you guys and give you guys the last word. I don't know if there's anything else that you were hoping to cover, we didn't cover. Any message you want to leave with the investors, anything you think is important to sort of share. I'll flip it back to you guys for the last word.

The only thing -- people ask me what keeps me up at night. What keeps me up at night is making sure we protect the culture that got us where we are. We have a healthy sense of paranoia. We recognize you have to treat existing customers that they're more important than new customers because you can't grow, you don't retain your business. That's why we have a 99% fill rate. So a relentless customer focus. Every day, we have to earn our spot on the team and order the right to serve our customers. We have an extreme ownership and empowerment model in the company where every single human that has a job is 100% responsible for that and actually can elevate all the way to me. Me, Mike and Karen are the only people that you will ever see. The rest of the people are going to be focused on growing the business. So that's where we are, and thank you very much.

Well, Jim Boyle, Mike Drazin and Karen. Medline, thank you guys very much. Congrats again on everything.

Thank you.

Ladies and gentlemen, thank you for standing by. Welcome to the Medline Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to Karen King, Global Head of Investor Relations. Please go ahead.

Welcome to Medline's Fourth Quarter and Full Year 2025 Earnings Conference Call. This morning, we issued our earnings release and shared supplemental materials. Joining me on today's call are Jim Boyle, our Chief Executive Officer; and Mike Drazin, our Chief Financial Officer.

During today's call, we may make forward-looking statements regarding our expectations for the future, including our business plans, strategy and investments and expected timing and impact. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainties. Please see the cautionary statements and risk factors contained in our earnings release, which accompanies these remarks as well as our most recent 10-K and other SEC filings for more information regarding these risks and uncertainties.

We may also reference non-GAAP financial measures, which exclude certain items from our financial results, calculated in accordance with GAAP. You can find a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP measures in the earnings release and our supplemental disclosures that accompany these remarks, which are available on our website at ir.medline.com under quarterly results. I want to remind you that we close and report on a 4-, 4-, 5-week calendar, which can create differences in days per quarter. What this means is that certain quarters could have slightly more or less days than the same quarter in the previous year.

For the fourth quarter of 2025, we had one more day versus the fourth quarter of 2024, which is a benefit. For the full year 2025, we had one less day versus the full year 2024, which is a headwind. We have included the calendar days in the supplemental disclosures, which is available on the Medline Investor Relations website. Also in that information, you will find historical quarterly information for both 2024 and 2025. We have provided an income statement, sales by channel and segment, segment adjusted EBITDA and a reconciliation of net income to adjusted EBITDA by quarter to help you fill in your models and do year-over-year comparisons as you forecast 2026.

With that, I will now turn the call over to our CEO, Jim Boyle.

Thank you, Karen. Welcome to Medline's Fourth Quarter and Full Year 2025 Earnings Call, our first as a public company following our IPO last December. We appreciate you joining us. I'll begin with the key highlights from the year. Mike will then review our financial results, and I'll close before we open the line for Q&A.

2025 was a milestone year for Medline, capped by a strong fourth quarter. Notably, we are ending the year with a healthier balance sheet and greater financial flexibility, which enables us to invest in future growth and continue providing value to our customers. Let me recap a few of the highlights. We added $2.4 billion in total new customer signings driven by our ability to deliver best-in-class supply chain solutions and value through our brand. This includes both prime vendor and non-prime vendor customers. Major wins included the U.S. Department of Veterans Affairs, and one of the largest faith-based Integrated Delivery Networks, or IDNs in the U.S.

The latter was a great example of the health care system who consolidated from five previous distributors to Medline, seeking a provider that could service them across their entire continuum of care, including acute care facilities, physician offices, ambulatory surgery centers, home health agencies and laboratory departments.

We continue to invest in and enhance our distribution network through automation and technology. Our Colorado facility received its first AutoStore installation and two California sites added their second installations. As a reminder, AutoStore is an automated pick module, a storage and retrieval system for individual products, what we call less than case. We are now operating AutoStore in 19 U.S. facilities with more than 2,100 robots, improving picking quality, accuracy and speed.

While AutoStore is used for picking less than case, we are preparing to implement a pilot in our Columbus, Ohio distribution center for bulk picking. We're excited to partner with Symbotic as their first customer in the health care vertical. They are using AI-powered robotic technology to move high-volume goods through complex supply chains and many other sophisticated verticals, including grocery, food and beverage and consumer packaged goods. Like AutoStore, for less than case, we believe this technology can improve picking quality, accuracy and speed across our network.

We expanded our Medline brand product portfolio of approximately 190,000 products with new product innovations, including the ComfortTemp patient warming system. This is a forced air warming blanket commonly used to warm the body prior to and during surgery. Our product division in conjunction with our sales team and our customers identified the need and designed the products to address limitations in existing solutions that make the unit easier for clinicians to position.

Earlier in the year, we announced an AI-based collaboration with Microsoft called Mpower. Mpower is a digital supply chain control tower, our prime vendor customers will be able to access to automate and streamline workflow processes for things like inventory stabilization, forecasting, product substitutions and approvals. The system is designed to prioritize areas at risk of supply chain disruptions before they happen and suggest product substitutions automating the workflow. We are piloting Mpower with multiple health systems and plan to begin a broader customer rollout starting midyear. And finally, we closed the year with a successful IPO, raising over $7 billion, further strengthening our financial position and bolstering our financial flexibility.

Turning to our performance. Annual net sales for 2025 grew $3 billion to $28.4 billion, up 12% versus prior year or 11% organically, driven by strong demand from existing customers and new customer signings. Adjusted EBITDA was $3.5 billion, a 3% increase versus prior year, reflecting robust sales, partially offset by higher cost of goods due to tariffs and investments in our business. Our Medline Brand segment grew 10% with volume gains from existing customers and convergence to Medline Brand products as key drivers. Surgical Solutions primarily benefited from strong demand for our custom procedure trades or what we often refer to as kitting.

Our Supply Chain Solutions segment grew 13%, fueled by new customer signings and growth with existing customers, driven by recognition of Medline's scale and reliability across continuum of care. We ended the year with strong free cash flow and continued investment in long-term growth, increasing capacity in our Mexico kitting facility, upgrading our distribution center technology and investing in our people. These investments strengthen our ability to reliably support our customers and the patients they serve.

With that, I will turn the call over to Mike to do a deeper dive into the financials and our 2026 outlook.

Thank you, Jim, and good morning, everyone. We had a strong end of the year with fourth quarter net sales of $7.8 billion, up 15% versus prior year. The majority of our growth was organic, minimal contribution from acquisitions. The one additional business day in the quarter provided an approximately 180 basis point benefit.

For the full year, net sales were $28.4 billion, up 12% versus prior year with a 1 percentage point contribution from acquisitions. The one less business day in the year provided an approximately 40 basis point headwind. The Medline Brands segment delivered $3.7 billion of net sales in the fourth quarter, up 12%. On a full year basis, net sales were $13.7 billion, up 10% versus prior year.

Breaking down Medline Brand sales by product category, starting with Surgical Solutions, net sales for the fourth quarter were $1.7 billion, up 12% by strong growth in surgical kitting and other OR products. Kitting, which improves operational efficiency at our customers' facilities is one of our largest product divisions. We were pleased to see continued strong demand in the quarter and the full year. For the full year, net sales were $6.2 billion, up 13% due to the reason I stated for the quarter and a 3 percentage point contribution from the Microtek Surgical Solutions acquisition, which we lapped in the third quarter of 2025.

Front Line Care net sales for the fourth quarter reached $1.8 billion, up 11% with strong volume in personal care, home medical equipment, Ready Care, including the Coloplast skincare acquisition and Wound Care, which benefited from Medline Brand conversions. For the full year, net sales were $6.5 billion, up 7% with strong customer demand across multiple product divisions, including Ready Care, Wound Care and Personal Care and a 1 percentage point contribution from the Coloplast skincare acquisition, which we lapped in the fourth quarter of 2025.

Lab & Diagnostics generated net sales in the fourth quarter of $289 million, up 12%, driven by existing customer demand and new customer implementations. This was one of our largest years of lab signings, which were part of the $2.4 billion in new customer signings Jim mentioned earlier, driving strong growth and share gains. For the full year, net sales were $1 billion, up 9%, driven by volume growth in laboratory products in both existing and new customers.

Transitioning to Supply Chain Solutions. The segment delivered $4.1 billion in the fourth quarter, up 18%, supported by new customer implementations and existing customer growth. For the full year, net sales were $14.7 billion, up 13%, creating efficiencies of scale, operating leverage and opportunity for Medline Brand conversion.

Moving to sales by channel. U.S. Acute care grew 16% in the fourth quarter to $5.3 billion and 12% for the full year to $19.5 billion, driven by growth with new prime vendor customers and solid same-store sales growth due to strong utilization and procedure volumes at our customers' facilities. U.S. Non-Acute grew 12% in the fourth quarter to $1.9 billion and 11% for the full year to $7 billion, supported by strong existing customer growth and new customer signings in post-acute, which includes skilled nursing facilities, long-term care and home health and hospice as well as our physician offices and surgery centers. International grew 12% in the fourth quarter to $537 million and 11% for the full year to $2 billion. Strong performance was driven by volume growth in Canada and Europe.

Turning to adjusted EBITDA. The fourth quarter was $805 million, roughly flat year-over-year. Adjusted EBITDA margin declined 160 basis points to 10% due to higher costs including tariffs and increased investment in head count to support net sales growth, partially offset by higher net sales volumes. Consistent with the framework communicated at the IPO. We have continued to invest deliberately in our people and capacity to support long-term growth. Our fourth quarter adjusted EBITDA came in better than our expectations due to favorable tariff cost timing and strong sales volumes. For the full year, adjusted EBITDA was $3.5 billion, up 3% versus last year. Adjusted EBITDA margin declined 100 basis points to 12.2% due to the same reasons I cited for the quarter.

In 2025, the organization did a great job of tariff mitigation, including shifting production across sourcing partners, optimizing internal manufacturing sites, and leveraging U.S. FCA and Nairobi exemptions. We also work closely with our customers to help them navigate the evolving landscape. In August of 2025, we implemented a tariff price increase to offset a portion of the tariff burden. For the full year 2025, the net tariff impact totaled approximately $290 million, much of which was weighted in the second half of the year. This was better than the $325 million we have projected due to timing of inventory deferrals. While tariffs remain a meaningful headwind, our mitigation actions and pricing discipline demonstrates the resilience of our model. I will share more in a few minutes on both the overall impact and the estimated tariff burden in 2026.

We generated full year free cash flow of $1.3 billion. While cash flow was strong, it was impacted by both a net payment for legal settlements in the second quarter of 2025 and the impact from increased tariffs in the current year compared to prior year. CapEx for the full year was $447 million, which included capacity expansion in our Mexico kitting facility to support long-term demand and continued investment in our distribution centers, including the additional automation Jim talked about earlier. Cash and cash equivalents at year-end were $1.9 billion, including $1 billion from the IPO proceeds. We used $4 billion of the IPO proceeds to pay down debt, reducing net leverage from 4.9x at the end of 2024 to 3.1x at the end of 2025.

Moving to 2026 annual guidance. We believe the strong momentum for new customer signings in 2025 will enable us to deliver another year of strong sales growth. We are guiding to full year 2026 organic sales growth in the range of 8% to 9%. Activities that could impact where we land within the range include the timing of implementation of the $2.4 billion of new customer signings, additional signings in 2026 and same-store sales growth driven by health care utilization and procedure volumes. Adjusted EBITDA is expected to be between $3.5 billion and $3.6 billion. The tariff environment continues to be fluid, particularly following last week's Supreme Court decision related to IEEPA. We are currently evaluating the impact of the ruling, are aware that new tariff rates have been implemented and believe there's a high likelihood that additional tariff actions could take place.

Consistent with our approach in April last year, we do not intend to react immediately. Instead, we will take the time to thoughtfully assess the situation and determine the best course of action for our customers and for Medline. The adjusted EBITDA guidance of $3.5 billion to $3.6 billion includes an incremental $200 million tariff headwind, which reflects tariff policy prior to the Supreme Court decision. This takes into account more recently reduced rates in China and India, balanced by a shift of roughly $35 million in tariff expenses from '25 to '26 due to inventory timing. In total, we are estimating the annualized net impact of tariffs after planned mitigation strategies to be approximately $490 million.

Ongoing operational investments to drive growth, the timing of Medline Brand conversion and tariff mitigation efforts are all factors that can influence our final adjusted EBITDA performance within the projected range. To help you with your modeling for full year 2026, we expect net interest expense to be between $575 million and $625 million, reflecting our debt paydown from the IPO proceeds. This assumes an average interest rate of 4.8%, but does not assume any future debt refinancing or M&A, which could impact interest income generated from cash on hand. Capital expenditures are projected to be approximately $500 million as we complete the capacity expansion in our Mexico kitting facility built two additional distribution centers in California and Texas and further invest in automation. The effective tax rate is expected to be between 17.5% and 19.5%.

Tax distributions to NCI or Non-Controlling Interest holders in Medline Holdings, LP, our limited partnership are expected to be in the range of $250 million to $350 million. Both the effective tax rate and the tax distribution estimates are based on our current ownership in which 60% of the partnership income is allocated in Medline Inc., a publicly traded company. It does not reflect the impact of any future changes to ownership upon sponsor sell-downs to provide for comparability purposes, if Medline Inc. was 100% structured as a C corporation, the estimated tax rate will be between 24% and 26%. While the company has recorded a $3.5 billion TRA for tax receivable agreement liability as of year-end 2025, we do not expect to make our first payment to early 2027 as permitted under the TRA.

For diluted earnings per share, we will wait to provide guidance until 2027, and we have a full year basis for comparison. To help you with your 2026 calculation, we are estimating approximately 1.4 billion fully diluted shares outstanding. You can find the exact number on the guidance page in our accompanying earnings slide deck and Medline's IR site. That figure could change over time due to the issuance of equity-based compensation. In summary, we ended the year with broad-based double-digit sales growth. Adjusted EBITDA remained stable despite tariff headwinds and the IPO strengthened our balance sheet while providing us with additional capital to fund future, strategic and accretive M&A opportunities.

I'll now turn it back over to Jim for closing remarks.

Thanks, Mike. To wrap up 2025 was a milestone year for Medline. We experienced strong demand from existing customers and earned a $2.4 billion in new customer signings, many of which include multiple end markets or channels. We're excited about our continued investments in partnerships like Mpower and technology in our distribution centers and manufacturing capacity and in our people. We are driving innovation and bringing new products to market and ended the year with a successful IPO of strengthening our financial position.

I want to thank our more than 45,000 employees around the world who work every day to deliver products and services that create value for our customers and make health care run better. We are grateful to our new shareholders who supported us during the IPO and to the analysts who launched coverage this year. We have a strong and resilient business model with favorable tailwinds. We are confident that our scale, customer relationships and disciplined investment position will allow us to create durable long-term value. We look forward to sharing our progress throughout the year. Thank you for joining us.

We will now open the call for questions.

[Operator Instructions] Our first question will come from the line of Elizabeth Anderson from Evercore ISI.

Congrats on your first quarter out. I was wondering if you -- from a high-level perspective, what are you hearing from your hospital customers regarding their priorities in 2026? And just sort of places where you think maybe you guys have incrementally something that would change versus what we still saw in 2025 now that we know a little bit more about the current utilization environment, et cetera. And secondarily, if you have any comments on the current utilization expectations embedded in your guidance, that would also be helpful.

Elizabeth. Thank you for the call. This is Jim. Listen, health care is going through what I would call a crisis complexity right now. They're dealing with cuts in Medicaid, Medicare. They're worried about the one Big Beautiful Bill. They're concerned about what's happening with the Affordable Care Act. So first and foremost, they're looking at creating stabilization around their reimbursement profile and mitigating kind of risk in the future as it relates to that.

And they're looking for a value player in the marketplace, and we fit directly within that being the lowest cost provider in health care. So I mean, our job is to be in the boat with our customers, looking for ways to serve them as it relates to their long-term financial viability by driving value. Second, I think you're going to see an acceleration in consolidation in health care with health care shifting outside of the four walls of the hospital and go to those non-acute settings.

Think about your higher level surgical procedures like your open -- like your hips and your total knees moving to surgery centers, they're going to start acquiring surgery centers and redeploying really that mode of care to the non-acute segment. And I think you're going to see an expansion and consolidation in physician offices.

So how are they navigating that to make sure that they create the best network to deliver the best care at the best value. Medline is the only provider in health care that serves all points across the continuum of care. And then finally, they're looking for resilience as it relates to supply chain partners, supply chain and really cost of goods sold from a supply perspective is the second largest expense on their budget, second to people. And they want resilient, sustainable supply chain partners that can deliver value, get the right product to the right place at the right time at the lowest cost on a consistent basis, and we fit directly within that.

As it relates to really volumes, I think we're going to see some -- a little bit of slowness with really the cuts in Medicare, Medicaid, what's happening with one Big Beautiful Bill. It's not going to disappear from a growth perspective, but it might soften a little bit going into this year as they understand what's going on. Mike, do you want to answer?

Yes. So Elizabeth, thanks for the question. So if you think about it from our guidance perspective, we are still providing a pretty strong guide for 2026. 8% to 9% organic growth on the top line. That growth is made up of really two components, both new signings from our $2.4 billion that we signed in 2025 plus new signings in 2026, along with some same-store sales growth. We expect same-store sales growth to remain strong, albeit to Jim's point, we do expect it to moderate a little bit relative to 2025 given the OBVA and the ACA and Medicare impacts.

Our next question will come from the line of David Roman from Goldman Sachs.

And I appreciate very much, Karen, Patrick and the team's preparation of all the supplemental materials in your first quarter here post IPO, very helpful detail. Maybe you could just jump in a little bit as this is your first quarter. And Mike and Jim, maybe just walk us through a little bit kind of your philosophy in constructing the guidance, what are some of the puts and takes that you considered when creating the outlook. I know you've had a long track record of growth. But now as you move into the domain as a public company, your thought process in putting together the forward outlook here, both from an end market and Medline perspective? And then maybe any help you can give us on how to think about just the cadence of earnings and revenue throughout 2026 and especially given the tariff impact increasing year-over-year?

Thanks, David. A lot to unpack there, but I'll try to cover it. So if you think about our guidance for 2026, we provided you with what we believe is a realistic set of projections that we believe confidently we can achieve. We have broken this up into both our sales growth, organic sales growth and adjusted EBITDA. From an organic sales perspective, really, as I mentioned earlier, it's really driven by two components.

First, our new customer signings. We feel very good about the $2.4 billion that we signed in 2025 playing out in 2026. We expect about 65% of that will be recognized as revenue incrementally in 2026. From a same-store sales perspective, I already commented on that, but essentially, we expect to see strong same-store sales growth once again in 2026, albeit a bit moderated from the standpoint of the OBVA and the impact on our customers from a utilization perspective. If you think about our segments for a second, just to talk about those, we generated in 2025 sales growth in supply chain of about 13% and Medline brand at about 10%.

That's a positive indicator for us, and we're seeing supply chain grow at a faster rate than Medline brand. We expect the same thing to happen here again in 2026, given the signings we had and the share gains we generated in 2025. From an EBITDA perspective, again, we continue to see strong growth in EBITDA in the base business, albeit impacted by the tariffs. The tariffs to the tune of $200 million incrementally in 2026, as we called out, that number really hasn't changed in totality from what we provided with you previously for 2026, but it has sort of shifted as far as how the impact plays out from the standpoint of what's impacting it.

If I get to your question about the quarterly view, I think the best way to think about our business is that we guide for the full year. We run the business for the full year, not the quarters. There will be some seasonality in the business by quarters and days do matter. So we have intentionally tried to provide you with the days view in our supplemental financial information. That days view does suggest that our first quarter will have one more day -- one less day this year than last year, whereas in Q4, we have one more day. But overall, for the full year, we have the same number of days. So you will see some seasonality from that perspective. In addition, we do see seasonality normally in our business, primarily in the fourth quarter, as you saw here in 2025, given sort of the volumes that we see coming out of our customers. That being said, we'll do our best to provide you with our quarterly results and tell you how those compare relative to our overall annual guidance for 2026.

Our next question will come from the line of Patrick Wood from Morgan Stanley.

Jim, Mike, I'd love to hear a little bit about the Q4 prime vendor contract wins. It sounds like lab and post-acute had done particularly well. But any kind of color you could give on how those are trending into Q4 and really the areas of strength and how we should think about that then flowing through into 2026?

Patrick, good to hear from you. As you know, we closed $2.4 billion in 2025, which is a record year for us, and it's something that we're pretty proud of and pretty excited about. We take advantage of market conditions. Our commitment is $1 billion a year in new prime vendor closings because that's what we believe we can actually control and what we think is available just through natural occurrence in the marketplace.

Beyond that, if you think about what happened this year, customers were looking for resilient, sustainable supply chain partners. We have 29 million square feet in the U.S. We have over $4.5 billion of inventory. We have 99% fill rates. We have the ability to drive value through our brand, which is what they're looking for is cost savings and consistency in terms of throughput and delivery model.

We are the only provider serving all points across the continuum of care when you think about consolidation that's happening. You are spot on. We did see some expansion in the lab and diagnostics in the fourth quarter from a conversion perspective and from a prime vendor signings perspective. And in the non-acute business in and of itself organically is growing faster than the acute care business. So we're taking advantage of that. You might ask the question, why did the acute care business grow faster than non-acute, because we saw outsized growth in our prime vendor signings in 2025. So we took more share gains in the acute care segment, which is why we grew faster than the acute care business.

So we still have our commitment to $1 billion in prime vendor signings in 2026. It's something we have communicated openly, and we will continue to go down that path. But I think the market conditions are favorable for our value prop. And our job is to make sure we continue to deliver value to our customers and get the right product to the right place at the right time at the lowest cost.

Our next question will come from the line of Matthew Taylor from Jefferies.

So I know there's some uncertainty with ultimately where tariffs shake out, and you expressed that in your remarks. I guess, I wanted to understand two things. One, ultimately, do you think there's a potential that the tariffs are less onerous. And I guess, what would you do with that? Would you drop that through? Or would that give you some opportunities to reinvest? And when will we know more about your impacts on your projections?

Matt, thanks for the question. So yes, I mean, there is a bit of uncertainty right now as it relates to tariffs. It feels like we're back in April of 2025 all over again. I think in our process here, we're not going to react until we have a better understanding of what is going to happen just like we did back in 2025.

We obviously have a playbook in place that we've implemented over the past many, many years. That playbook has really been driving true mitigation efforts for our customers and for our Medline, and we'll continue to execute on that playbook. We would tell you that we expect more to come in the near term from the administration as far as how they plan to lay out this program.

There also probably will be future impacts as it relates to 301 and 232. And so I really can't project what they're going to do. The only thing we can do is remain nimble and flexible and be ready to act based upon whatever they put in place. Once we have a better understanding of what those look like, we'll obviously -- we will obviously be able to share that with you and be more -- provide more clarity around what that looks like for our full year 2026 and beyond.

The only thing I would add to that is it's important to remember that we either mitigated or absorbed the vast majority of the tariffs. We had a small price increase that we pushed out to the marketplace. So it's something that we believe we have to be in the boat with our customers and share in some of the burden of the pain. And as Mike said, as this situation evolves, we will actually act responsibly, but we do not act in times of uncertainty and crisis.

Our next question will come from the line of Eric Coldwell from Baird.

A little bit of a follow-up to Patrick's question. On the annual signings, understanding the $1 billion guide that is standard in place guidance for the year, I am curious on your thoughts on the overall pipeline and market RFP activity relative to the recent past? Better, worse, the same, no change kind of commentary. And then as well as you've seen any if you've seen any market changes or mood changes in discussions with clients, given that the third largest acute care distributor just went through an ownership transition and the largest non-acute distributor has announced plans for a lengthy separation ahead. Curious on if that's changing market dynamics.

Yes, great question. And listen, the $1 billion is what we commit to and the conditions that I described are still in existence, right? You still have customers having challenges as it relates to reimbursement, looking for ways to save money. You have consolidation in health care speeding up. You have the non-acute care market growing faster. Think about our signings, our signings are both acute and non-acute. So prime vendor and what we call supply deals in the non-acute care market that is growing as well.

And so you think about the conditions of what's happening with our competitors, right, there is some uncertainty around what the future looks like there as they look to change their strategy and more from the new organization. So listen, I believe that the market conditions look very similar in '26 that they did in 2025. But we don't commit to things that we don't control. We take advantage of things we don't control.

That's why we're sticking with our $1 billion. And then what we'll do is we'll partner with customers and where there's opportunities where customers are having service challenges and they're looking for a better service provider, we take advantage of that. When there's customers that are looking for value and savings and outsized pace of change from a cost conversion perspective, we take advantage of that. And when we look at customers who have uncertainty around what's happening with their potential kind of competitors from a consolidation and change perspective, we take advantage of that. And none of that has changed. In some cases, it's actually accelerated. So we feel confident about the future.

Next question will come from the line of Andrew Obin from Bank of America.

Congratulations on the first call. Yes, just a question on the timing of the tariff impact. I think you said on the call that it's $290 million this quarter versus $325 million projected. And I think for next year, you said $490 million. So I just want to understand if there was any sort of shift of the tariff impact into '26 because the '25 number seems to be $35 million lower, but '26 is broadly in line with what you were telegraphing before. Just want to understand what this $35 million of EBITDA goes.

Yes. Thanks, Andrew. So we originally had called out through the IPO process, we thought we would be impacted to the tune of $325 million in 2025 from the tariff impact. We actually ended the year at $290 million, $35 million less than we expected. That really is just a timing matter. It's capitalized under inventory, will be recognized as a tariff burden in 2026.

So it's just shifting $35 million from '25 to '26. That being said, under the old regime prior to the Supreme Court ruling, they did reduce China and India's tariff rates that also impacted us favorably to the tune of about $35 million. So the net impact overall to our overall tariff burden is $490 million versus the $525 million we previously told you. So the overall burden has come down, but the impact for 2026 still remains at $200 million, $35 million shifting from '25 to '26, offset by the reduction in China and India's lower rate.

Now that being said, as we've talked about before, given the recent Supreme Court ruling and the recent announcement of 122 tariffs, we will continue to evaluate what that means for our business and act accordingly once we have a better understanding.

That's great. But it's the $35 million, does it show up in first quarter? Or is it pretty smooth over next year?

So the majority of the tariff burden for 2026 will be in the first half of the year. A little bit of it will trickle in Q3, but the vast majority will be in the first half of the year. We expect tariffs to normalize into our base in 2026 in the back half.

Our next question from line of Lisa Gill from JPMorgan.

Tim, you've made a comment several times around the changes, whether we think about Medicaid or ACA and the potential impact on utilization. Can you talk about what you've seen here in the first part of '26? Has there been an impact on utilization? And then secondly, can you just spend a few minutes talking about potential Medline product areas of expansion? Do you see anything that particularly ripe for share gains as we move into '26?

Lisa, good to hear from you. Listen, there's no change to date as it relates to utilization. We're just giving a cautious view of the future and what we think could happen depending on what the overall impact is. If you want to know the #1 area that I think it will create a challenge is community or rural health. Those folks are heavily kind of slanted towards that risk of reimbursement going away, which may lead to faster consolidation for those community facilities so that we don't end up completely removing access to care in the community kind of locations.

If we did that, what would happen is folks would actually wait until they were sticker and had much, much broader complications before they went into the ER and one of the metroplexes and they end up in the ICU and we actually raised cost of health care. So that's the biggest risk from an overall [ Eco ] system and really a cut in kind of reimbursement profile. But to date, no, there hasn't been a time.

From a Medline brand, we saw outsized growth in 2025 in our surgical kitting business. It was our largest signing year ever. Surgical kitting is like open heart trays, left cola trays all the way into nursing procedure trays, think about suture removal trays in kind of nursing procedure kits or dressing change trays.

That -- we believe we will continue to see outsized growth in 2026. And the nice thing about that business is the TAM expansion is organic because we can work with our customers to find those categories of those really procedures that have many items they're having to pick to care for the patients and create that consolidated delivery model through a custom kitting solution where they pick one item that has everything they need for that procedure.

And really, it creates a much more cohesive solution for the customer and leads to better outcomes for the patients. So I think there's opportunity there. I think lab diagnostics, that $25 billion market that we currently do $1 billion in is something we're very excited about that we should see significant growth in on a go-forward basis, just purely because the market in and of itself is looking for change that's ripe for disruption and they're looking for differentiation.

When you look from a channel or a market perspective, you start looking at physician office, a $9 billion market that we do $1.8 billion. And again, another area I think we'll see outsized growth. Some of the newer segments we've gotten into animal health, $4 billion market that we just got into in the last couple of years, we're going to see significant growth. So I think we've got many different verticals that we'll be able to take advantage of from an opportunity set perspective. But from a brand perspective, surgical kitting, really think about what's happening as it relates to the lab and diagnostic growth. And then Front Line Care, I think we'll continue to see growth there. I feel confident in which we saw 10% growth in the Medline Brand this past year.

Our next question will come from Michael Cherny from Leerink Partners.

Maybe to build on leases, ever so slightly. You talked a lot about capital deployment, cash flow generation, debt pay down. One thing you didn't spend as much time talking about is M&A. As you think about forget the organic expansion, what are some of the best opportunities that are ripe for M&A from here? And maybe just because as your first call as well, can you give us some of the more recent success stories you've had, be it product or channel based on using M&A to bolster your offering?

We're pretty optimistic about M&A. As you know, historically, our 90% of our growth has been organic, only 10% has been through M&A. However, just because of the IPO and how we handled it, we have $1.9 billion in cash on the books, specifically allocated for looking for those M&A opportunities. And I think the market in and of itself is right for M&A.

I think you're going to see some of our competitors sell some of their noncore assets. Some of our competitors are actually looking to move up really the clinical curve to those Class III and Class IV devices where the Class 1 and 2 make sense in their overall product portfolio. So I think we're going to see some opportunities there for us to take advantage of.

Very, very similar to channels, right? We're going to continue to look at channels. We bought DiaMed in 2012 to get in the physician office space. It was a $50 million physician office distributor. We bought it because the owner, we thought could help us actually build the business model. That's a $1.8 billion business for us. That was a great acquisition. Recently, we bought ConvaTec skin care line, which again was a noncore asset for them.

We bought Sinclair Dental business in the not-too-distant past to really test out the dental market in Canada to see how that looks. And we bought the surgical -- so kind of driving beyond surgical business from Microtek from Ecolab last year, which again was a noncore asset for them. And then we're looking at services, right?

A couple of years ago, we bought a solution that actually provides Preference Card Management for our customers called PrefConnect. So we're looking at product categories that we think fit within the flywheel of who we are. We're looking for markets or channels that can allow us to expand our really our TAM expansion, if you will, or to strengthen our position in existing markets that we serve or what kind of service offering can actually make us better on a go-forward basis, and we will continue to do that. But I do think there's opportunities. And then I also believe there's going to be some opportunities from an M&A perspective internationally that will help us accelerate the growth outside of the U.S.

Our next question will come from the line of Patrick Donnelly from Citi.

Mike, it might be one for you. Just you touched a little bit on some of the pricing strategies around tariffs. I would love if you could just expand a little more how you're approaching the pricing side, where you're looking to be strategic in terms of passing some of that along. Is that still an upside lever as we go through the year? It would be helpful just to talk through the pricing strategy a bit, particularly on the tariff side.

Yes, Patrick. So yes, in 2025, we implemented our playbook that we've been implementing for years as it relates to managing our cost structure and our products to provide the best value to our customers. That playbook includes both moving production around to lower-cost locations and includes driving down -- improving efficiencies in our own manufacturing facility.

We leveraged the USMCA [ Robi protocols ] as well. And we did implement a price increase. That price increase happened in August of last year. That was a tariff-specific price increase. We do not expect to do any additional tariff price increases at this time. We have returned back to our normal pricing model, which is every year, we do what's called smart pricing once a year, twice a year, once in January and again in July. And those typical price increases, as we called out in the past, are typically less than 50 basis points of overall growth for us as a company. Price has not been a lever for growth. Really, we've been driving volume and share gains through our continued value delivery to our customers.

Next question comes from the line of Glen Santangelo from Barclays.

Maybe just one quick one on the regulatory front for me. I mean, I feel like we've already talked about tariffs. But Jim, I'm kind of curious, have you heard anything else on the regulatory front that's sort of on your radar and in particular, I'm sort of focused on the CMS has been weighing around a proposal that would benefit hospitals at by American. I'm just kind of curious if there's anything else that's being kicked around Washington that you guys may be have on your radar screen at this point.

You're specifically referencing the domestic PPE tied to Medicare reimbursement, right? And that represents about 20% of the total spend in health care. So it's not meaningful. But here's the reality. What's happening now, very, very similar to the Section 232, where you can actually publicly submit comments. We suggested we could move production domestically if there was committed volume by the government.

There's going to have to be some significant stance, if you will, in order for us to move production of PPE into the United States. You have to remember the cost of manufacturing some of these items in the states is 3x to 7x what it is out of the United States. So it's going to have to be a meaningful impact in order for that to happen. What we will do is we will continue to advocate and communicate what we think it would take in order to move production here. During the pandemic, we actually did stand up a face mask production facility in Lithia Springs, Georgia.

And we will continue to do those types of things where it makes sense. Candidly, I don't think that's near term because the cost model won't justify it. And our job is to, first and foremost, deliver the right cost quality and service to our customers regardless of where we can find that. So we are always looking both in country and out of country, where do we deliver on those three key metrics, cost quality and service. So if there's some kind of advantageous nature that the government wants to put in place to actually incent manufacturing these goods in the states, we will participate in that. But I can tell you, I don't think that's near term and it's a discussion now. It's not a policy change. And that's all we're hearing today.

Our next question will come from Kevin Caliendo from UBS.

Can you explain sort of the logistics of how -- if and when the tariffs change, what you actually do what the process is like what actually happens, what happens to the inventory that's already here, what happens at the docs and the ports when tariffs are applied how -- and when would you actually see any impact financially? I'm just trying to understand like how this all works logistically and what it would actually mean to you from an accounting perspective, financial perspective, inventories on hand and stuff like that.

Yes. Thanks, Kevin. So if you think about the tariff rates, the rate just changed effective yesterday to 10% across the Board from the 122 change that the administration announced. So effective as of yesterday, that arrived into a port yesterday would be charge a 10% tariff duty. Prior to that, anything that was already in our inventory would be in our inventory and capitalized at the higher tariff rate. And if you think about our inventory, we carry more inventory on hand than most of our -- all of our competitors intentionally to provide the best level of service to our customers.

And so our Medline Brand inventory is somewhere in the neighborhood of, call it, three to five months on hand. So if you think about what's sitting in our inventory today, there's probably roughly four months of tariff inventory at a higher tariff rate. So it takes time for that to bleed off of our inventory, which is why you see the timing impact that I talked about in 2025 going into 2026. So even if the tariff rate were to change the 10% yesterday, which it did, you would still see us be impacted in our cost of goods by the higher tariff for the next, call it, four to five months into our P&L.

Next question will come from the line of Charles Rhyee from TD Cowen.

Maybe just a quick clarification there, Mike, on tariffs real quick first. Is there any reason you wouldn't apply for a refund on the IEEPA tariffs even as the 122 are in place? And then my main question, though, is can you remind us, obviously, signed $2.4 billion of prime vendor contracts for last year.

Can you give us a sense on the timing of when you expect those new contracts to roll on and sort of remind us sort of what your expectations for Medline Brand conversion within that new prime vendor cohort here in '26? And maybe just think about how that ramp typically goes and if there's any sort of deviation or kind of adjustments relative to sort of your historic patterns, you would expect for this big tranche?

I'll take that one. This is Jim. So first and foremost, yes, absolutely, we will apply for the refunds. And I'd be willing to take bets on when those are actually going to come through, right? And so we will 100% apply to the refunds and take advantage of any opportunity for us to regain that business. So that's first. As Mike said, they're already putting new tariffs in place. We're analyzing what that means in terms of relative still to what the [ liberation ] day tariffs were and how does that relate to our customers from a cost perspective and from a price perspective.

As it relates to the $2.4 billion in prime vendor signings, 25% of that revenue was realized in 2025. You'll see roughly 65% realized in 2026 and 15% of that realized in 2027 from a throughput perspective. From a Medline brand, the way the Medline brand, when we sign a new prime vendor customer, we already have 10% of the business in our brand.

And when you think about the kind of the conversion of day one is 90% of other people's products when the truck yesterday was maroon and today, it's blue, 90% of the products is third-party distributors, 10% is in our brand. In the first year, we normally see a lift of 100% of Medline brand conversions year-over-year, so from 10% to 20%.

And then from a go-forward basis beyond that, we have an intentional pace of change, learned through many years of tribulation to make sure we change at a pace of change that is accepted in a positive manner. So we look for a 3% to 4% lift in additional Medline Brand conversions post year two. And the opportunity in the acute care business is roughly 60% convertible opportunity of the total business in a traditional nursing home, it's up to 80%. And in the other segments in the non-acute segment, it tends to be higher than what some of the other areas are. But we don't expect to see much of an acceleration, although we did see a few customers accelerate trying to get in front of the cuts in reimbursement. But we think the pace of change is going to be very, very similar to what it has been in the past.

Next question come from the line of Jason Bednar from Piper Sandler.

Mike, hoping you can help with an accounting one here, just how you handle hedging and how we should think about FX movements impacting your COGS line asking really in part as we look at movements in the pace over the past year, knowing you have a sizable and growing manufacturing presence in Mexico. Just -- so really, how should we think about those dynamics flowing through the P&L this year?

Thanks for the question, Jason. So we do not hedge our currency. We have a natural hedge for the vast majority of our business. However, that being said, as you call out, we do have a little bit of currency risk as it relates to our Mexico operations. The Mexican peso does impact our labor costs. And so we have baked an assumption into this-- into this 2026 guide that our current Mexico rate is the current rate of roughly today.

And if that were to change, obviously, it would impact either favorably or unfavorably the overall earnings of the business. That being said, we obviously have efficiency plans in place, initiatives in place to reduce the cost of our product. So we'll continue to do that with labor being one element for other elements as well, such as our sourcing savings that will help to drive that impact to our business.

Our next question will come from the line of David Larsen from BTIG.

Congratulations on a great quarter and year. Can you just talk a little bit more about automation in your picking and packing capabilities. I think you mentioned in introductory comments. You got the low unit measure very well covered and you're expanding potentially into the larger products. Just what could that mean overall? Any numbers you put around it would be great. Let's say it actually works. How far can you expand this into your facilities? Any metrics around timing service, things like that would be very helpful.

Yes. So you hit the nail. -- just for target 70% of our lines are less than case, which is why AutoStore is so important, 2,100 robots across our network. We were the first installation of AutoStore in the United States and it's been an extremely successful model. AutoStore is a goods-to-person picking module. It shrinks the square footage in the distribution space from a manual pick, which increases the capacity for utilization in our distribution centers.

And it also increases the quality of the accuracy and the speed and the throughput for our customers. And it's something that we will continue to expand across our network. 19 facilities currently have that, and we will expand even further this year. From an ownership of real estate, I mentioned we have 29 million square feet of distribution space in the U.S. that will be expanded in the next year as we add a couple of new DCs.

But that 29 million square feet, one of the challenges I gave our Head of Ops is how do we make that 29 million square feet operate as if it was 32 million square feet. The only way you do that is you shrink the internal capacity. And the largest real estate owner in a distribution center is your bulk pick, your college goods where you store stuff. Symbotic will help us do that. It helps shrink the internal footprint, leverages AI and robotics to actually create quality picking faster, much more reliable throughput, decreases the labor burden and allows us to increase the capacity within our existing footprint.

Our first installation is in Columbus, Ohio, that takes about 18 months to get that thing deployed. That is a beta, right, that's going to test it out. And if it proves out, we will move that to the hubs across the country, because a couple of things. One, it will decrease the labor burden. Two, it will shrink the internal footprint throughout our network. So we will have more capacity within our existing network without having to build a new building.

And we think it's something that will create differentiation in our ability to serve our customers. So AI automation and really technology is focused specifically on reducing cost and increasing the quality and service to our customers throughout our distribution network and something we will continue to invest in on a go-forward basis.

That's great. And then I think you mentioned that you won a large IDM that had been using five distributors previously. Can you maybe just talk about that win in particular and what enables you to bring that on board, was it pricing? Just any more color there would be very helpful.

Yes. This is a health care system that was a merger of two very large systems. One side of the house, Medline was the prime vendor in their acute care business. The other side of the house, someone else was the prime vendor for their non-acute business. And one side of the house, another vendor was the prime vendor for the surgery center business.

The other side of the house, a different vendor was the prime vendor for their surgery center business. Same thing with physician offices, same thing for labs. So every care setting that they owned across each setting had a different provider partner. And that's normally what happens when you have systems that consolidate or aggregate multiple classes of trade and acute care facilities in a pretty fast fashion.

When they put the RFP to market, they put the RFP to the market saying we will only accept bids from folks that can serve the entire continuum of care we own, so we can, number one, maximize cost, how do we get the best value from a cost perspective. Number two, how do we look at our entire network to really create consolidated -- really channel optimization and standardization of product across both our delivery model and the products that we use across our ministry.

And they were looking for resilient, sustainable supply chain partners. So listen, when they put the bid market, Medline is the only provider that can serve every single care setting they own. So they went from multiple distributors across multiple classes of trade to one distributor for their entire ministry, which is something that we feel very proud and thankful to be a part of.

It actually is just now going live, and it's something that is pretty robust and something that I think is going to be the norm in the future because customers need to have visibility across their entire network regardless of the care setting the model is being delivered in so they can drive maximum value and savings and really get the best overall outcome for their caregivers and for their patients.

So maybe just -- so maybe just two quick things before we wrap. One Jim said it earlier, but I just want to reiterate because I know everybody is getting used to the terms of the business. Total new customer signings when we say that, that is both prime vendor and non-prime vendor. So I wanted to reiterate that. Second thing is thank you to the analysts for actually keeping your questions shorter so that more people had a chance to ask. We appreciate that as well. And for those that did not get a question in, we look forward to speaking with you after the call. So thanks, everybody, for joining.

Thank you very much. We appreciate it.

Operator, you can go ahead and disconnect. Thank you.

Thank you for participating. You may now disconnect. Everyone, have a great day.

All right. Great. Good afternoon, everyone, and welcome. My name is Lisa Gill, and I head up health care services here at JPMorgan. It is with great pleasure this afternoon that I introduce Medline for their first JPMorgan Healthcare Conference as a publicly traded company. So we're incredibly happy to have them here with us today.

Presenting for the company will be Jim Boyle, their CEO. Mike Drazin, their CFO, is going to join us for the Q&A portion. But before we get started, Karen King, who is Head of Investor Relations, is just going to read an opening reg FDC.

Thanks, everybody, for attending. During the following remarks, we will make forward-looking statements regarding our expectations for the future, including those related to our long-term financial targets. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainties.

Please refer to today's presentation deck, which accompanies these remarks as well as our most recent SEC filings for more information regarding these risks and uncertainties. Additionally, we will refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP.

Please refer to the non-GAAP information contained in today's presentation that accompanies these remarks, which is available on our website at ir.medline.com under Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. And with that, I will turn it over to Jim.

Thanks, Karen, and thank you, Lisa, and thank you to JPMorgan for having us here for our first presentation as a publicly traded company. We are a company that's 59 years old, 60 years this year, been a privately held company for the entire life of the organization. So this is a new chapter, and I'm excited to talk about kind of where we're headed and what we're doing. My name is Jim Boyle. I'm the CEO. I started in 1996, going on my 30th year. And when I started with the company, it was roughly $450 million in total revenue.

And with our trailing 12 months is about -- since in September is about $27 billion. That's been an amazing journey. I feel very, very fortunate to have been a part of it, and I'm excited to tell you the story. First and foremost, our mission is to make health care run better. Our job is to deliver the best total value to our customers, and we do that by improving clinical, financial and operational outcomes. The way we drive financial, first and foremost, comes from the depth and breadth of our brand.

Our Medline brand can represent up to 60% of what a hospital buys in their medical surgical budget, and we guarantee savings on that. We understand the cost and health care is one of the #1 challenges, and we have a mission to be in the boat with our customers to drive down costs. Second, we have clinical solutions that solve for those never events, hospital-acquired infections, hospital-acquired conditions, think about catheter-associated UTIs, think about falls prevention, wrong-site surgery, hospital-acquired pressure ulcers. Our clinicians will go out and train and educate caregivers paired with intelligent design products to yield better patient outcomes.

And third, our job is to deliver improved operational outcomes, and that is derived by delivering the right product to the right place at the right time at the lowest delivered cost and that is empowered by the depth and breadth of our supply chain. When you think about Medline, I mentioned this just a minute ago, through September, our TTM is $27.4 billion. We finished 2024 at $25.5 billion for perspective. We have over 335,000 products that go through our supply chain, 190,000 of those are Medline brand products.

We have 43,000 employees for context. I am employees at 1,117, so it's grown a little bit from when I started. We have 29 million square feet of distribution space empowered by $4.5 billion of inventory on hand that enables us to fill at 99% service levels. Our customers need products at the right time, at the right place, and our distribution network enables that. We also own our fleet of trucks. We employ our drivers, which creates a differentiated experience, especially in times of crisis.

Our history is pretty amazing. We have 58 years of consecutive growth. Every year since inception, since 1966, we have grown at a pace of 18% CAGR, pretty amazing to be a part of. In 1966, Jim and Jon Mills started the business to solve for the #1 challenge in health care, which at the time was cost, which ironically still happens to be the challenge in health care from a #1 cost perspective.

Their perspective was we want to be a manufacturer that brings low-cost goods -- high-quality low-cost goods into the environment to drive down the cost of health care. In the first 30 years of the company from 1966 from 1996, we were solely a manufacturer of medical supplies. The roots in the core DNA of who we are as a company as a manufacturer first.

We didn't get into prime vendor distribution until 1996. If you're not familiar with what prime vendor distribution is it's where a health care system, regardless of care sitting chooses a single consolidated logistics partner to buy the vast majority of their medical supplies. They're looking for fewer, fuller trucks, delivering in the modality that actually best fits the care setting. We got into that in 1996 at the request of a customer. I can tell you most of what we have was by listening to our customers and expanding the depth and breadth of our offering by actually paying attention to what their opportunities were and what their challenges are.

When we got into prime vendor distribution, that is really the engine that created the explosive growth over the next 30 years. It gave us the opportunity to own 100% of the supply chain and have visibility to what our customers' challenges are, what the opportunity set was. And our 28 Medline brand product divisions could mine that data to look for additional Medline brand categories to expand the depth and breadth of our offering.

When I started in 1996, when we got our first Prime vendor deal, up to 20% of what a hospital buys had a convertible opportunity to our brand. Today, it's 60% and then the next 5 years will be somewhere around 75%. Every single year, we expand our brand by leveraging that data and working in conjunction with our customers to make sure we're delivering the right value to them.

In addition, over the next 30 years, we built a specialization based on every single in care setting. What we learned is when you specialize by in care setting, you narrow the bag and you narrow the call point for the sales force, you just do better. We built the right supply chain solution, the right product formulary, the right data and analytics and the right clinical engagement platform based on every single care setting, so physician office, home health, hospice, nursing home.

We have 11 primary sales forces. Every single point of care across the continuum of care from cradle to grave, we've built specialization based on that individual care setting. Sometimes it's better to be lucky than good. It forced kind of us to understand the expertise of each care setting and then the Affordable Care Act hit and it forced that convergence of care and the creation of integrated delivery networks. Now what you see is hospitals owning the physician offices. Owning the surgery, owning the surgery centers, owning the home health agencies.

And what they're looking for is one consolidated logistics partner that can serve every point of care they have to drive consistency, to create SKU rationalization and SKU consolidation to leverage the price parity of that acute care business to drive down the cost in the non-acute business, and Medline is the only supply chain provider in health care today that serves every single point of care. And that's something we're pretty proud of and something we're pretty excited about.

In October of '21, after 55 years of being owned by the Mills family, we partnered with Carlyle Blackstone and H&F and the largest LBO from a health care perspective in history. That was October of 2021. In December 17 of last year, we entered into the public markets, and we're embarking on the next chapter of the company. We serve a large and growing TAM of over $375 billion, $200 billion internationally and $175 billion in the United States.

What I'm more excited about is health care in and of itself is going to grow organically. Those of us aged 50 and older are going to double in terms of population in the United States in the next 30 years. So health care in and of itself from a need and access to care is going to grow 3% to 4% just because -- so we all have a responsibility to figure out how do we solve for that from a cost perspective to enable our customers to do it in a much, much more efficient way.

When you think about the shifting sites of care, you're starting to see the non-acute care market, think about your surgery centers, your physician offices, that's -- and candidly, your traditional SNF and nursing homes, that segment is going to grow faster than your acute care market. What you're seeing is some of the more complex procedures leaving the four walls of the hospital. You see total hips, total knees, in some cases, spine and heart actually leaving the four walls of the hospital and going into the surgery center space.

So we're going to see a growth in that. And that is an area we see as a growth vector for Medline. In addition, you see cuts in Medicare, Medicaid, cuts in reimbursement, concerns around the Affordable Care Act, concerns around the One Big Beautiful Bill. And our job is to work in conjunction with our customers to leverage really the overall value prop we have to bring down COGS in advance of the custom reimbursement.

So we see that as a tailwind. And then finally, I think consolidation in health care is going to speed up in order for health care systems to continue to, I would say, survive, they're going to have to leverage more assets to do more across the continuum. And the fact that we are the only provider in health care that serves the entire continuum of care could be a tailwind for growth on a go-forward basis. Our business model is split almost 50-50.

This is '24 revenue, $12.5 billion in Medline brand, over 190,000 SKUs in the Medline brand, 26% EBITDA margins. That is paired with those distributed products, the third-party manufacturers we push through our channel at the request of our customers, $13 billion in revenue, 5% EBITDA margins, 145,000 products. It really is a force multiplier, owning that distribution channel and leveraging the 29 million square feet in our overall network and empowering that with our brand, we work in conjunction with our customers to make sure we're getting the right product to the right place at the right time at the lowest delivered cost every single time. And that is empowered by our culture.

I mean we have a healthy sense of paranoia and we understand we have to earn the right to serve our customers every single day. And that is the secret sauce of Medline, right? You don't take an existing customer for granted. You treat your existing business as if they're more important than your new customers because they're the ones who got you there. And if you think about Prime vendor, the Prime vendor as a definition in this book is acute and acute affiliated.

And the reason we do that is we define and really have a magnifying glass on the convertible opportunity within that business. That's where we drive the savings and value to our customers. And that's what we work with our customers on to convert. If all we did was, convert that $4 billion and didn't grow another dollar, there's $1 billion in potential incremental margin gain just by focusing on that within our existing business.

$16 billion was 2024. So at $25.5 billion, $16 billion of the $25.5 billion was in Prime vendor acute and acute affiliated. In 2025, through the first 3 quarters of the year, we closed $2.1 billion in new Prime vendor business, and that doesn't include the fourth quarter. Our commitment is $1 billion in new Prime vendor closings. What I can tell you is the way we handled the tariff situation, concerns around the viability of some of the competitors in the marketplace, concerned around reimbursement and looking for savings has accelerated the conversion curve to Medline across the different customer base and it's something we're pretty excited about.

That $2.1 billion that we just added, added an additional convertible opportunity in that $1 billion. So it's about $5 billion now in convertible opportunity, which is something that we will mine and actually leverage to drive value to our customers. We have a 98% retention rate. Again, I go back to treating existing customers and always driving value and earning the right to serve them every day is a core function of who we are as an organization, and it's a responsibility that we take seriously.

When you think about kind of when we earn a new Prime vendor customer, up to 60% of the medical surgical spend in the hospital is convertible to our brand. Day 1, about 13% when we switch from yesterday, the truck was maroon, today, the truck is blue from a consolidated logistics partner, 13% of that is already in our brand. We sell $1.2 billion of our brand through competitive distributors, through Owens, through Cardinal, through McKesson, through Schein. Our brand stands on its own. Our sales force is incented to call on customers, whether we're the Prime vendor or not and sell our brand.

In the first year, we normally see a doubling of that, getting closer to 24%. So a 10% to 12% lift in conversions. That first year, we convert that commodity stuff. Think about the easy stuff, talking, compressors, Q tips, exam books, things that are easy for the clinical team to accept. And then over the next kind of conversion curve, we see 3% to 4% lift in additional Medline brand conversions. And that rate of change, we've learned over many years of trial tribulation.

And when you go too fast, that pace of change, it gets to a point where the clinical team can't accept the pace of change in a positive manner. And we work with our customers and we build a road map for convergence. So we are always driving intrinsic value and savings on a go-forward basis. We are an innovative company. We have over 400 510(k), 2,100 granted patents, 600 pending patent applications. I go back to -- we've been in manufacturing and sourcing literally for 59 years. This is what we do for a living. One of the ways we expand is understanding and mining that data to distributor to look for those opportunities that fit within the framework of a Class I and Class II device that we can actually do better than the competition.

So both -- one is creating markets. The other thing is looking at what's out there and research, duplicate, improve upon at a better value to drive savings for our customer. And that's something we do in a pretty robust fashion. And this is just a few examples of that. From an M&A perspective, 90% of our growth as a company has been through-- organic right? Internal muscle and creativity, only 10% has been through M&A.

So M&A for us historically has been a nice to have, not a need to have. However, we do have the muscle to actually push it through our channel and actually bolt-on M&A in a very, very accretive fashion. And I'll give you a few examples. We buy in product categories, service channel or market or some kind of solution we think that differentiates us. If you look at DiaMed on the bottom left, in 2010, that was a $50 million physician office distributor that we bought out of Columbus, Ohio. It was our first entry in the physician office market.

We bought it because the leader had a tremendous knowledge of that market, and we wanted to glean that knowledge from. He actually still works for us 15 years later. And that business is $1.8 billion. So it was a decent kind of growth from $50 million to $1.8 billion in 15 years. And we think that's a way to actually kind of build the market and leverage our existing strategy as it relates to a medical surgical manufacturer and distributor across different segments.

Ecolab on the top right was our largest acquisition ever. It was a $900 million acquisition of the Surgical Solutions business from Ecolab. That didn't necessarily fit with their strategy, but it fit perfectly within what we do and how we do it. And these are things that we think will continue to create accretive growth on a go-forward basis, and I am actually optimistic on a go-forward basis from an opportunity set perspective. Our culture, if you were to say, what's the one thing that keeps you up at night, it is maintaining and protecting the culture that got us where we are.

That relentless focus on the customer, that healthy sense of paranoia, the agility and flexibility. I like to describe Medline as an aircraft carrier that we drive like an 18-foot speedboat when our customer asks us to change, it's important that you change quickly and you don't have some slow pace to change. We operate with a gritty infrastructure to make sure that everyone rolls their sleeves up. We have an extreme ownership culture across our business.

The first 18 months of the company, when someone comes in, has a pretty high turnover rate because a lot of folks are afraid to have 100% control and extreme ownership. We follow a concept called DRI, directly responsible individual. And when that person is identified, they own 100% of whatever it is and the entire organization works for them, including me. After 18 months, people stay forever, and it's something that I think is healthy because I'd rather have people self-select out if they don't fit within the culture and the framework of who we are and the folks that want to stay forever, we're very, very proud of.

So this is something that we as a leadership, walk, engage and train and set an expectation. And that's one thing that we hold very, very dear to our hearts and something that we have to take forward on a go-forward basis. From a financial perspective, I'll give you a perspective on what our top line and margin growth vectors are. First and foremost is to grow with our existing Prime vendor customers. I'd love to tell you we pick up 100% day 1, we sign a Prime vendor. That's not the case. We normally sign 85% to 90% of the business. And then we follow a process called sweep in the corners where we pick up those nontraditional distributors those items that are being bought direct that can fit through that consolidated logistics model, where we can deliver it on a truck and the modality that, that customer needs it in the care setting they need it. So that's number one.

Number two is growing with those non-prime vendor customers and selling our brand direct. That's where that $1.2 billion comes from that we're selling to our customers kind of outside of the distribution model. Our brand stands on its own. Our reps are paid on Medline brand, and that's what their job is to actually communicate the value to our customers. Winning new Prime vendor customers is we committed $1 billion in new Prime vendor closings each and every year.

And that's both in the acute and the non-acute segment. I mentioned the definition of Prime vendor acute and acute affiliated. In the non-acute segment, we have something that looks very, very similar to our prime vendor model. But in a skilled nursing facility or a nursing home, up to 80% of what they buy can be in our brand and the conversion curve is much, much faster. So we committed $1 billion in new customer signings each and every year.

We will continue to expand the depth and breadth of our brand. Our team -- our product divisions have two jobs. First and foremost is to make sure our existing categories are best-in-class from a cost perspective and best-in-class from a feature advantage and benefits so we don't become complacent. And second, to look for new opportunities for innovation and expansion in new categories we can get into.

We always look for new channels to expand in. I mentioned physician office in 2010. In this past year, we bought a company called Sinclair Dental in the Canadian market to test out the dental space. If you were to ask me, Jim, do you want to do dental the same way the current competition does in the States? The answer would be no. But if we're able to mimic really the savings model that we do in med-surg, which we're testing in the Canadian space, can we actually create 40% to 50% Medline brand convertible opportunity to drive savings for our customers and margin for Medline, we would absolutely deploy that.

I can tell you that, that deal model is being outperformed and that business is performing extremely well. We also expanded into animal health in the last year. That's a $4 billion market. We're not interested in distribution. It's more of a product market. The gauze they use on animals is the same gauze they use on humans, exam gloves. It's a very, very product-centric market and something we're pretty excited about.

From an M&A perspective, I mentioned 90% of our growth has been organic, 10% has been through M&A. However, I do think there's opportunistic M&A that's going to come to market in the near future that we're pretty excited about, both in country and international. International is about 7% of our total revenue. It's $1.8 billion in a $200 billion market. This is a channel that we are excited about that we see tremendous opportunity for growth.

About 85% of that business is in Canada and Europe. We do have a LatAm and Asia Pac business, but most of it is Canada and Europe. From a margin perspective, first and foremost, is Medline brand conversions. That's how we drive value to our customers, and that's how we drive accretive margin to Medline. And that is how we fuel that CapEx investment to make sure we have the right distribution platform, that we have the right product mix, how do we continue to expand what we're doing. That's how we fund M&A so we can continue to drive value for our customers.

And then finally, managing your checkbook in a way that creates positive leverage, right, managing that SG&A and the operational excellence to make sure we're doing more with less from an expense perspective, so we can always drive value and increase margin. From a capital allocation perspective, we're very disciplined in how we look at it. First and foremost, and really the most important thing is investing in the business to make sure we have the tools, the resources and the assets to fuel the growth on a go-forward basis. We don't wait until we need it.

We invest today for tomorrow's growth, which has been a differentiator for Medline. We've done that for the entire life of the company. We will continue to look at bolt-on M&A. As I mentioned, I'm pretty excited about the potential opportunities that are coming to market in the near future. We will focus on debt repayment at the IPO. We raised $5.2 billion of primary, $1 billion of that went to -- excuse me, $4 billion of that went to buy down debt, and we're sub 3.25% now from a debt ratio perspective, and our commitment is to go below 3%.

And then finally, very, very in this thing and not anytime soon, if there's some reason why we had excess cash in the future where we don't need to invest it in the business, we would either do share repurchases or dividends, but that's down the road. That's not in the near future. With that said, the last and final thing I think that people want to know is what are we committing to long term.

First and foremost is single digit -- high single-digit top line revenue growth. Second would be $1 billion in new Prime vendor signings each and every year. Third would be adjusted EBITDA growth at or in line with sales growth. That will start in 2027. We're actually overcoming some of the tariff burden in 2026 because we chose to actually participate in the burden with our customers and took a pretty big hit this year, just like they did.

And then our commitment is to get to below 3% from a net leverage ratio perspective. So this is kind of what our playbook is and what our commitment to the market is on a go-forward basis, and we're pretty excited about it. So with that, I'll turn it over to Lisa.

Thanks so much, Jim. Thanks for all the comments. We really appreciate it. We'll give you a minute to get your breath, and I'm going to start with Mike. So as a new publicly traded company, maybe you just spend a minute talking us through how you're thinking about your philosophy around guidance and when you'll give guidance and some of the key metrics and things to think about.

So we, as a company, as Jim mentioned, we are long-term focused. We don't run the business for a quarter or for the month. We run the business for the year and for the long term. So from our standpoint, we plan to give annual guidance. Our annual guidance will be driven by giving you organic growth of our business.

There will be total revenue growth if we do acquisitions, and we'll share with you adjusted EBITDA growth of the business. In addition to that, we are going to report our results every quarter. Our quarterly results will be very transparent and clear about what drove the results of the business.

And we will be very clear to share with you the performance of the business from a segment perspective as well as from a channel perspective. So you have a better understanding of what drove the business. We'll also be able to tell you how the quarter is playing out relative to the year relative to our annual guidance.

As I think about the $1 billion a year that you've committed to signing for prime vendor relationships this year, thus far, we haven't heard about the fourth quarter yet, but $2.1 billion. From our perspective, it seems to set you up really well for '26 and '27. Really two questions there.

One, was there anything that's changed in the market that allowed you to drive that incremental $1 billion-plus than what you've normally done? And then secondly, you talked a little bit about the conversion, but will it run along the same time line of what you've seen historically? Or again, is there anything different in these new Prime vendor relationships?

Yes. Listen, we -- the reason we commit to $1 billion is we believe that's what's going to come available every year that we can actually engage our customers in control. So we have a pretty good visibility into what that -- and then we take advantage of those market conditions that come to play by listening and actually learning from our customers.

So this year, a few things actually accelerated the growth. First and foremost, how we handle the tariff situation. We aided the tariffs for the first 7 months of the year because we did not want to act in the time of chaos and crisis and a lack of understanding of what reality was. So we waited until August to do anything, and we did not push all the tariffs that we aid a significant portion of them even after the price increase. So that's first.

Second, we have customers that are looking to accelerate value, and we are the value player in the marketplace, and they're trying to get in front of what's going to come with the cuts and reimbursement. How do we get the value play faster so we're ready for what's to come in the future from a cuts and reimbursement perspective. Third, there's concerns. I mean, just bluntly said, of the long-term viability of some of the competitors in the marketplace where our customers are saying, "Hey, we want to be with a supplier who we know is going to be around for the long term.

And I say those three things have been accelerated for growth. And then finally, I think consolidation in health care and customers looking for one supply chain solution provider that can serve every care setting that they own has also been a tailwind. And those aren't going away in 2026. However, we're not committing to anything that we don't control. We have to work with our customers to earn that, which is why it's still $1 billion.

From a conversion perspective, there's two ways to look at the conversion. One is revenue realization from that $2.1 billion. The way that works is 20% we realized in the first year. So in 2025, we realized 20% of that $2.1 billion. The second year, we realized about 60%. So in 2025 was 20%. In 2026, we realized 60%, in 2027, we realized 20%.

So there is a pretty good confidence in what our potential growth is because we have visibility into what's going to be realized. And then finally, that conversion for Medline brand will be consistent. However, we do have a very large customer that we signed this year who said, "Hey, we want to convert all of the Medline brand before we actually convert the Prime vendor distribution because we want to get the savings now to prepare for tomorrow. So we are seeing some acceleration happening.

Jim, is that unusual in the marketplace for them to want to convert first before the Prime vendor relationship? Do you think that sets a precedent? I mean, clearly, a lot -- we've heard this, right, affordability, I thought I heard about cost consistently over the last 2 days at this conference, where hospitals are really battling right now.

You talked about cuts to the ACA. You talked about cuts to Medicaid. And so do you think that this sets a precedent for others to do something similar as we move into the next few years?

I think that's an N-of-1 that I just described, right? It's not like this, but you do have customers that are accelerating value streams, and they're looking for how do we get the best value day 1 and day 365 because you can't do it once.

You have to do it on a consistent basis. And so do I think this could actually be an accelerator for growth from that perspective? The answer is yes. But I also -- and candidly, we tend to be the parameter at pace of change because too fast can actually create more problems than it actually yields from a value perspective.

You've captured a lot of market share in the acute market over the last several years. When I think about the non-acute market, what are some of the opportunities there? You touched on it a little bit that the Prime vendor is primarily in the acute and the adjacent to the acute, but what are some of the opportunities in the non-acute market?

Yes. So Prime vendor, we use the term, and we call it supply deals in the non-acute market. It exists in surgery centers. It exists in physician offices. When you sign a nursing home or skilled nursing facility, you normally get 100% of the business. We just don't call them Prime vendor deals because we have a focus around maximizing the conversion curve. And it's a much slower pace of change in the acute care market.

But I think those markets will grow candidly, probably twice as fast as the acute care market because of the shifting sites of care. So it is an opportunity. And the integrated delivery networks are starting to own much more of those and really owning kind of where does that patient get the best care for the lowest cost of care right?

Like the worst place for you to go if you have a cold is the emergency room. It's the highest cost of care, you may get the worst outcome. The best place is actually to do it, a call and-- right, to say, "Hey, doc, can you call Z-Pac for me. And so we have to work in conjunction with our customers to figure out how do we actually navigate that change and do it in a way that yields the best outcome.

When I think about your model as being really differentiated in the marketplace, it's really about this vertical integration that you've pulled together. When we think about competition in the marketplace, you talked about the fact that this company is nearly 60 years old.

We've seen a lot of different iterations of medical supply companies over the years, whether it's distributors trying to get into private label or the manufacturers trying to self-distribute in some way. Can you maybe just spend a minute talking about the competitive landscape and the moat that you believe that you have within Medline?

Yes. I think one of the major differentiators is we started as a manufacturer first. We have 33 manufacturing facilities that we own and operate. So that represents about 1/3 of the Medline brand. 2/3 is actually leveraged through 500 global sourcing partnerships, 300 of which are exclusive to Medline. Some of them are 30- to 40-year relationships. And the fact that we built that muscle and that DNA first before we got into distribution is a major differentiator between us and the competition.

And then when we got into Prime vendor distribution, we didn't get into it to compete with health care. Health care needs to evolve and actually -- I mean, my first job was in grocery store supply chain in 1994, and I can tell you the grocery store supply chain in 1994 was better than the health care supply chain is in 2025. And so how do we actually bring them forward into the future and create a supply chain that competes with any industry. And so the CapEx allocation that we've invested in supply chain is literally 5 to 6x the competition.

That's why we have 29 million square feet. We have robotics. We have over 2,000 auto store robotics throughout our network that fix less than case. We just invested in Symbotic, if you're not familiar with that, that actually automates the bulk side of the distribution center and actually shrinks the internal footprint and cuts the labor by about 50%.

I think the -- we have great competition on the manufacturing side, and we have good competition on the distribution side. What we don't have is a competitor that actually does both in an effective way. And the way we look at it is we're a best-in-class manufacturer. We're a best-in-class distributor, leveraging both sides of the hole to actually do a complete solution for our customers. And that is the difference between us and all of our competitors.

Let's spend a few minutes on the Medline brand. If we look at Surgical Solutions, it's been a real standout, the driver of the top line growth. You've had solid utilization backdrop, unfortunate for my managed care companies. But beyond the end market strength, what's really been driving that double-digit growth in that business line?

Yes. Our largest product category is kitting. And that kitting is what you -- when you go into a surgical procedure, call it a lapco and open heart and total knee, we actually bundle the supplies that they actually pick for that procedure into a surgical kit. And this is our largest growth year conversion year ever. And I think it specifically has to do with we handled some of the really trade compliance guidelines and some of the tariff situation from a USMCA perspective different than the competition in a way that we were actually able to drive savings when competition was raising prices.

And so that led to an exponential growth in that segment. And what's amazing about that business is there's so much greenfield when you meet with a customer and you find that they're pulling 100 items for a specific procedure, it creates an opportunity instead of them opening 100 items for a procedure, you can actually build it in a way where you sterilize it one time instead of 100 times and you build it in a sequential way where they open it up on the back table and they can do the procedure and turn the room over and actually add extra cases, which generates revenue and income for the organization.

So the #1 reason why Surgical Solution is performing is we are outgrowing and outpacing both in the operating room, and there's also kits in the nursing procedure area, think about laceration trays, Suture removal trays, bloodstream infection kits. I mean all those things are growing in a pretty robust fashion.

I know we've met several times and we've talked about different Medline products and expansion into other areas within Medline products. Can you maybe just talk to the group around where you see opportunities for incremental products within Medline and where your focus is right now?

We've got -- we follow a process called growth vectors. Everyone in the company knows what it is. And every product division, every commercial division and every support function is empowered to actually suggest really, here's a new category we should get in, here's a new service we can get in and here's a new market we can get in. That's how we ended up in animal health is we had a sales leader that do some research, came to us and said, "Hey, we're interested in animal health.

He said, "All right, go check it out and come back and tell us the why. And that's how we've launched into the space. We just launched into forced air warming. If you know much about Bair Hugger, it's a forced air warming that actually increases the core temperature of the body before you go into surgery.

And we follow the same kind of playbook, research, duplicate and improve upon our competitors, think about a hose that you connect to some didn't have a click. So sometimes that would pop off in surgery, we actually put a securement device on that. So it's things like that, that we continue to do. But I would tell you, we're going to stay in Class I and Class II device manufacturing. We're not interested in getting into Class 3 and 4. I get asked that all the time. We know who we are and we know who we're not. And there's tremendous opportunity within the existing categories or landscapes that we actually go after.

When we think about your ability to take price increases, I know that you've talked several times about tariffs and that you waited some period of time to take some amount of price increase. How do you approach balancing price increases with the value proposition versus other manufacturers? And how did 1/1 shake out? Is that usually when you take a price increase is the beginning of each year like we see in pharma?

Yes. So pricing has never been a lever for growth. It's less than 50 basis points in our history. So that has not been a lever that we've kind of maximized because we focus on how do we mitigate the price increase by working with our partners to actually convert to Medline brand because I would rather get the Medline brand, drive the savings and the value and mitigate the cost increase to our customers.

However, I would tell you, and we did have to push price increases last year. Our normal pricing cycle is January 1 and July 1. We call it smart pricing. And those are categories that are either kind of negative margin that we have to do something in order to continue to manufacture it or things that are significantly below the market that we can actually increase to actually put money back in the bucket for us to invest in the business, but that's how we look at it.

When I think about the Medline brand margin on the surface level, when we think about '25, it's going to step down from '24. Our expectation is that it steps down a little bit again in '26. After the anniversary the new tariffs, how do I think about the time line of the margin recovery and what the key components of that are?

Yes. So if you think about our Medline brand margin, it's adjusted EBITDA of 26%, that is going to come down with the tariffs. The impact from the tariffs are impacting our Medline brand margins. The things that drive our Medline brand margin are the following things: our ability to leverage our sourcing relationships that Jim talked about, our ability to operate our manufacturing sites more efficiently, our ability to leverage our existing SG&A and our fixed costs that drive our overall margin improvement.

And lastly, our ability to drive Medline brand product mix. If you think about our margin goals, we're not driven by margin percent. We're focused on delivering to the company overall EBITDA growth at or greater than sales.

Just, Mike, as a reminder, it's been a few months when we think about the actual impact from the tariffs. So do you want to remind us what's in your expectations?

It wouldn't be a meeting without a tariff question, right? So if you think about the tariff impact to us, as I mentioned earlier, the Medline brand is really what's been impacted -- we have quantified that impact to us. It's a $525 million impact. That is a net of mitigation impact. That's a net number. And that $525 million has impacted us in 2025 to the tune of $325 million, and it will impact us by an incremental $200 million in 2026.

The vast majority of the impact to us happened in the second half of '25 and into the first half of 2026. We see the tariffs start to normalize into our base as you get into the back half of 2026. So mitigation impacts are favorable, right? We've driven a number of impacts to drive down that cost. Let me talk about a few of them. One, this is not new to us. We have a very strong muscle to be able to supply -- to generate supplier diversification.

We're very focused on moving our production to lower cost, lower tariff countries. It's something we've been doing for many, many years. We did this during the pandemic. We did it in 2022. We continue to do it today. In addition to that, we are leveraging Nairobi and the USMCA exemptions.

Third, we are leveraging our operating -- our manufacturing footprint to have operational efficiencies. Four, we raised prices, as Jim talked about on August 1. And lastly, we have the benefit of being able to go to our customers and say, there's a $1 million price increase. However, if you convert to these three Medline brand categories, you can offset the cost of that price increase. We continue to do that today to offer those value savings to our customers.

As we sit here today, we're waiting for the Supreme Court to make a decision on the tariffs. Really two questions here. One, if they were to be stricken down, does the government give you a check back? No. Not back the -- and then secondly, as we think about Section 232, if it is -- if they do strike the tariffs, do you think that they look at that more closely and try to come at it from 232? And if it stays, is there an incremental tariff that could happen with Section 232?

We do expect that once -- if the Supreme Court were to strike down the IEPA tariffs, there would be a follow-on tariff set from the government, which would ultimately then lead to possibly 232s. The 232s -- the benefit of 232s has been the fact that we've been able to share information with the government.

We gave them a lot of information. And if you go back in the prior Trump administration, we had a lot of products that were exempted from tariffs. And so we are hopeful that as we share that information again, we'll have the opportunity to get exemptions on health care products. If you think about the current IEPA rules, we're not able to get exemptions.

We only have a minute left. I can't believe how fast this went. I generally like to end these sessions to make sure that investors walk away with the right message from the management team. So Jim, as we're sitting here a year from now, what do you hope that investors will appreciate and understand better about Medline than perhaps they do today?

I think the #1 question I keep getting asked is what's going to change about the company? And the answer is nothing. We do town halls. I did town halls when we did the LBO, telling our employee and our staff, yesterday, your job is to deliver results. Tomorrow, your job is to deliver results. And the way we built the company is intentional and how we plan to go forward is in the same way.

First and foremost, focus on the customer, listening to our customer, creating innovative solutions and driving value to our customers. And so we, as a company, are going to -- Mike, Karen and I are going to shield the organization from all of you, and we're going to focus on doing the right things for our customers, which I believe will yield consistent growth on a go-forward basis.

Great. Well, we look forward to seeing you next year and hearing about what happens here in 2026. Thank you, everyone, for joining us, and thank you to Medline for your first presentation.