Medline Inc. (MDLN) Q4 FY2025 Earnings Call Transcript & Summary

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.