Medline Inc. (MDLN) Earnings Call Transcript & Summary

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?