Medline Inc. ($MDLN)

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.