Medline Inc. ($MDLN)

Hi, everybody. Thanks for joining us this afternoon. My name is Brandon Vazquez. Those of you who haven't met the one of the medical device analysts here at William Blair. We're excited to have Medline with us here. But first, I am required to inform you that if you would like a complete list of research disclosures or potential conflicts of interest please visit our website at williamblair.com. So we have with us Mike Drazin, CFO of Medline and also Amanda labs, EVP of Chief Product Officer. And we're going to do a fireside chat here as normal when we do these fireside chats because a lot of people are new to the story. I'm going to keep things pretty high level for the most part, maybe ask 1 or 2 kind of pertinent questions at some point. But Mike, maybe let's just start off. Like literally just start at the basic here. Talk to us about what Medline is and give a little bit of -- I think what's interesting here, too, is that you have a very long history of building this company what it is today. What you do and what was it about needing to be a private company for so long to get to where you can to do what you do today?

So Medline is the largest provider -- largest manufacturing distributor of medical surgical supplies. We've been around since 1966. And our mission really is to make health care run better. And we do that by offering the Medline brand, which is very broad with 190,000 of our Medline branded items. And we support that with our distribution capabilities, which are best in class, probably the best service levels in the industry. If you go back in history, what's important to know about Medline is we started as a manufacturer first -- our roots of our company, our products, which we manufacture or source the best quality, low-cost products in the industry to support our customers like a health care provider or acute care hospital. Over time, we got into distribution because our customers have asked us to. They wanted 1 supplier, we call a prime vendor for all their medical surgical supplies -- we got into that business, invested in distribution to become the best-in-class the highest service levels in the industry. The combination of the 2, which is our vertically integrated business model, what makes us unique and makes us the value player in the industry today.

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

Yes. So if you think about our business, right, we've invested billions of dollars to build out our distribution network over the many years. We have 45 distribution centers in the U.S., 29 million square feet of space. We carry almost $5 billion of inventory. We're very much -- we have our own trucks and trailers, 2,000 of our own trucks and trailers. We invest in automation, both auto store robotics our lowest unit measure. We're now in the process of investing in a new bulk automation, which a problem called Symbotic. So we've invested for growth. We've invested for the future. We've invested to build what we call best-in-class service levels or fill rates. We want to provide that customer with the product next day, the customer places an order today. We want to have the highest level of availability the next day to arrive in their facilities. And so the business has been built to provide service and products to the customer, the best supply chain, best supply chain resiliency to the customer. And we do that through our broad product portfolio where we add value and save money for that customer. We guarantee 5% to 10% savings every time we sell the Medline brand to that customer. The best service levels by offering them the best product the next day. We deliver 95% -- delivered next day 95% of our customers across the U.S. We also offer -- we serve the entire continuum of care. What I mean by that is we serve all points of health care. We serve hospitals, nursing homes, home health, hospice, physician office, surgery centers. No other distribution competitor serves all points of care like we do. We're the only provider that can do that. We built a scaled organization, our sales force of over 4,000 employees we're segmented by channel focused on those customers every single day. They're in those facilities every single day to add value and provide the best offerings to those customers as well. And we invested in our business through scale, which we are able to leverage, but by what I mentioned, our distribution network, our vast manufacturing footprint. We have 30 of our own manufacturing sites all over the world, where we manufacture about 1/3 of our own products. Our 600 suppliers across the globe where we source about 2/3 of our Medline branded items every single day. So the scale enables us to be successful and drive value for our customer.

You made a comment earlier that you -- or you started you're one of the largest -- you're the largest distributor in medical devices. And I'll ask you because I don't remember the number off the top of my head, but what percent of the top hospitals in the country already use you as a prime vendor or you're already a customer of part of the question to also, again, level set everybody here. You are this large, you've been successful. How much room is there left for you to grow over time?

Yes. We still think there's plenty of room left for us to grow. So if you think about the business, top 150 hospital systems in America, we are the prime vendor at about half of those hospital systems today, which means there's still 50% for us to go gain share. If you think about that space, the nonacute space where we also serve, so physician office as an example, we do about $1.8 billion and a $9 billion-plus mark, so plenty of room to grow. In the nursing home space, we are about 1/3 of the market. In the surgery center space, we're also about 1/3 of the market. So there's plenty of room to grow both in the acute care setting, which where we're the largest as well as in the nonacute space.

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

So a provider wants 1 supplier for all their medical surgical supplies -- so let's call it a prime vendor. So we entered to a prime vendor contract. Typically, it's a 5-year deal, where we are providing the vast majority of their supplies of them every single day. The objective there is to provide them one delivery of truck -- 1 truck a day essentially, 1 delivery a day versus having multiple different deliveries from multiple different fragmented suppliers. So if you think about our business, we segment our business into 2 segments: the Medline brand and supply chain solutions. Medline brand are our 190,000 Medline branded items that we source or manufacture every single day. Supply chain solutions are someone else's third-party products that we distribute on behalf of those suppliers to those customers. And so we leverage both the Medline brand and the supply chain to be best-in-class as it relates to being a prime vendor for those customers every single day. Now we offer value and drive value through our brand. So as we talked about earlier, when we deliver -- when we sell the Medline brand, we drive value and savings by guaranteeing 5% to 10% savings every single day. So our model very simply is this, win that prime vendor customer where on day 1, when we signed that prime vendor customer, it's typically 90% supply chain solutions and 10% Medline brand, then we go in and we drive value by converting them to the Medline brand over time. If you think about our curve, right, typically on day 1, it's 90% supply chain, 10% Medline brand, the average penetration can get up to 60% in a hospital setting today or 80% in the nursing home. And in the acute care setting, where it's up to 60%. Today, we average about 32% across our entire prime vendor portfolio. If you think about that, it's typically 10% in year 1. We get an extra 10% in that first year of conversions and then about 2% to 3% thereafter. So if you look at our cohort curve by year 10, we're at about 42% Medline brand penetration.

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

Yes. I think overall, when you think about that transition to Medline brand, you're going from Supply Chain Solutions margin of roughly 5% to Medline brand margin of roughly 20-plus percent -- and for us, it's really helping them to go along that chain to continue to have the benefit of better margin for Medline. I think at the same time, as we're diverting more customers, we're also gaining more scale, which then helps us to continue to develop those products and continue to drive cost down.

I had 1 time naively asked someone over at Medline, -- why does it take so long to convert from 10% to 90%. And I had someone very patiently explain to me about how just changing surgeons gloves is a big deal -- so let's start. I want to have a little bit of a Medline brand conversation specifically, but first start with like help frame for all of us. Why is this like a 10-year process to convert to Medline brand?

Yes. So first, I think when you think about that 60% for us, it's 190,000 different products across several different categories. And so for a customer, when you're going in having that conversation, you're having to take category by category to a clinician to a different part of the facility and make sure that you're talking about the value -- in some cases, it's very simple items that we can make a change and nobody really knows the difference, and those are things we typically handle upfront. So when Mike talks about, you start out and you go on each year, we're handling a lot of those commodity items upfront. But as you get into items like all and trap as you get into items like urological, those require trials. And there's only so much a hospital can absorb at a time. And so we found there are some facilities who are very aggressive, and they come to us and say, "We would like to do 20 categories this year." And if they have the right buy-in, we can do that. . Most facilities though, you're looking at the 190,000 different products, you're giving them choices in terms of what they would like to convert and you're handling 1 or 2 categories per quarter and going at their pace. I think the great news about our broad portfolio is you're really putting it in front of a customer and saying, what's your priority? That's our focus. Mike talks about a customer-focused organization. We really are focused on hey, listen, there's a lot of ways we can deliver value for you. You choose and will help you, and we'll go at your pace. And in the long run, that helps. But it's the big things, and it's also the small things. I mean you think about these are in a lot of store rooms. You have to change a lot of labels. So there's a lot to it.

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

We do. And I think it goes back to the customer. I think we're incredibly customer focused. We spend a lot of time in the field. We have 450 product managers who we really empower to spend time at the bedside to spend time in the OR to learn these products. And so when you think about some of the recent products we've introduced there's addressing product called OpteView, and it's a transparent dressing. And what happened is we had a product manager who went out and was at the bedside in servicing our foam dressing and they noticed that clinicians were lifting the foam dressing to look at the wound and to look at the site underneath. And they quickly understood that we could make something different that allow them to still have the protection, but had transparency to it. So they didn't have to lift the site. Of course, when you lift the site, you maybe have utilization issues, but you also have an issue of potentially having that not work for the patient anymore. So -- he -- the great news about our product managers, if they own that customer relationship. They also understand what's happening in our factories and the technologies we can leverage, and so he was able to go back create samples that he then brought back to that customer and said, "Hey, I noticed this is happening in the trial. Would you consider something like this." And then now it's a really important product for us in Advanced Wound Care that's helping us grow. It's also then helping us to go back and look at traditional foam spend where we didn't necessarily have that kind of conversation in the future. So I think that's really how we look at it, and we have product managers who are really empowered and they are across all of these categories and they're thinking about the investments we need to make to continue to expand our products.

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

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

How do you think about doing those organic versus inorganic?

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

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

So we did receive an FDA warning letter that was publicly released yesterday. That letter relates to our CHG wipe manufacturing at our ReadyCare walk-in facility, and it also is associated with the active ingredient that we make at our Heartland, Wisconsin manufacturing facility. And really what this goes back to is we had a matter that happened in October of 2025 that we identified that the FDA was aware of, obviously, that we made them aware of. And ultimately, then we took the action immediately to stop manufacturing that product in October of last year. We continue to work with the FDA to remediate the matter. We've invested -- we continue to invest in remediating the matter and we intend to, over time, put this product back on the market when we are ready to do so and the FDA has approved us doing so. We are -- we take product quality very, very seriously. This is not something that we look beyond. We are very intent on making sure that our product quality is at the highest level. And so we will continue to invest in our product quality and our quality management systems and our quality people to ensure that we provide the best quality products to the industry.

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

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

Okay. And then the other 1 to close this up because I've had a couple of questions on this as well that there was another warning letter a month or 2 ago on a different facility, I believe, the question just essentially being overall, you kind of hit on this, but how do you guys feel about quality? Are these linked at all -- is there kind of some recurring theme here that you guys continue to invest in for quality?

I mean there's no recurring theme. There's nothing systemic that at all that we would be worried about. But we do, as I mentioned earlier, we are taking product quality very seriously. We are investing in product quality matters. We've invested, like I mentioned in the specific facility to remediate this EHG wipe matter. We're also investing in broader quality management systems. We're investing in technology and people to ensure we have the right process to the right people in the right places. I want to just maybe comment on a higher level, just to give you a perspective, right? For us, we are the largest -- we have the broadest product portfolio in the industry, right? So there are going to be, from time to time, product challenges that we're all going to face, so not to minimize this at all, but the ultimate fact of the matter is we have a broad product portfolio. And the other thing I think that's important to understand is, is that because we sell our own products as well as someone else's products, when we do have situations like this, it may show up as a larger quantity of recalls than it really is. What do I mean by that? So if we have an item that is make it up a surgical instrument that gets recalled, -- if it's in our kit, it's in 12 kits, it will show up 12x as a product recall and the reality is that and it's only 1 recall. The other fact of the matter is that when there's a third-party provider that has a recall, we help them with the recalls as well. So that might also show up if it's in our kit as a recall as well. So the reality of the matter is we are focused on improving our quality and making sure we the highest quality. We're investing in it, but we do not think this is the step.

Good. Great. Let's go back to the prime vendor contracts. And historically, you guys have talked about, I think, the expectation is that every year, you'll sign about $1 billion of new prime vendor contracts. And I want to go back to 2025 because it will get -- it will let us hit a bunch of topics where you guys actually signed $2.4 billion of prime vendor contracts, would start at the high level, and I think that's going to bleed us into some other important concepts and topics here, but why did you sign such an elevated level in 2025.

Yes. So if you think about our business, right, we are very focused on gaining share every single day. We gain share through these new customer signings. And we signed, like you said, $2.4 billion. We're really pleased with those signings last year. The market dynamics allowed us to do. So part of it is our business model. Part of it is our value proposition that we've created and the value we provide for our customers. Part of it is the competitive landscape that's going on in the marketplace today. And part of it was, I think, the way that we handled the tariffs. If you think about the tariff situation, we were slow to respond intentionally. We potentially monitor the situation. We didn't overreact when they first came out, we waited to take our time to understand what's really going on in the marketplace. And then we took a price increase in August of last year. But we are very transparent with our customers on what that meant and why we were doing what we're doing. And in fact, we only absorbed a portion of the overall tariff impact -- so I think the combination of those 3 things, our value proposition, the market competitive dynamics and the way we handle tariffs have enabled us to really gain some share, additional share, and that's why you saw $2.4 billion. That will be probably your next question, not to take your next question, but it's going to be, well, how much are you setting as a goal for this year. Our goal this year, our goal every year is to sign a $1 billion. Why? Because that's what we can control. That's what we know is available to be controlled by us to win in the marketplace. There might be some years where we win more when the market dynamics allow us to do so. But ultimately, for us, we have line of sight and confidence in signing $1 billion of new kind of customer signings every single year.

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

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

Sure. And as you signed a larger mix of the prime vendors or a larger amount to prime vendors in 20 talk to us about what is the short-term financial impact of that? And then what should be the medium to long-term impact of it as well?

Yes. So when we sign a new prime vendor, our new customer signing, as I mentioned earlier, typically, in year 1, it's 90% supply chain. That's a 5% EBITDA margin. And over time, as we convert to Medline brand, it moves to 22% EBITDA margin when you convert to the Medline brand item. And so in year one -- it is margin percent dilutive to sign a new customer, essentially, right, because it's more supply chain. But over time, it drives margin accretion. But really, how we think about this is we don't care about margin percent. We're focused on margin dollar growth. So they will be margin percent dilutive when we sign a prime vendor. And over time, as we grow the business and we convert them to more Medline brand maring [indiscernible] and a earlier accretive and growth oriented for us.

Okay. Let's frame -- let's move a little bit into today into 2026. You talked about how Medline, 1 of the benefits to the customers is that you move slowly in the sense that you move thoughtfully is maybe a better word than slowly move thoughtfully and you don't take price increases right away. What does that mean for 2026? We have exposures to the Middle East inflation, et cetera? Just talk to us about the moving pieces in '26 guide now as you think about that again.

Yes. So at the end of the first quarter, we raised our sales guidance to 8.5% to 9.5%, given the strong first year -- first quarter growth, we grew 11% overall in the first quarter, we grew about 10.1% organically. So because of that strong performance in the first quarter, we raised our sales guidance 85.5% for the year. On the bottom line, we achieved our EBITDA all that we have set out. And we are facing some headwinds, as you know, from the Middle East. And so we have confirmed -- reconfirmed our EBITDA guidance of $3.5 billion to $3.6 billion for the year in the face of Middle East headwinds and some additional investment in our business. Offsetting that is favorability from the tariffs. So let me take them 1 by one. So on the tariff side of the house, we initially called out at the end of last year as in the first quarter -- at the end of last year and in February, when we reported guidance -- we communicated that there will be $490 million of tariff headwinds to our business overall, $200 million incrementally from 2025. That was prior to the Supreme Court ruling against the EPA tariffs. The tariffs change to 122 at 10%. So with that that changed the 10% and 122, we will see some favorability in that number in the second half of this year. So the favorability from the tariffs. The offset to that is the Middle East, in which we are starting to experience cost increases. Let me talk about that. So in the Middle East, there's 2 real factors. One is the bigger impact is raw materials and finished goods. So when we buy nitrolics and gloves we buy resins and plastics to manufacture, source their own goods. We're seeing elevated costs for those products. In addition to that, we have 2,000 of our own trucks and trailers. We spend money on diesel every single day to fuel those trucks and trailers. So we're seeing those cost increases as well on the diesel side. We are paying $3.89 in just 2 months ago, so now if you look outside, it's close to $6. So it it is cost us some dollars. The combination of those 2 are impacting us in the second half of this year, but we're offsetting that again with the tariffs. In addition to that, we've made a concerted effort to invest further in our business this year beyond what we initially had planned on to support the growth from our new customers and our existing customers. And so the combination of all of those, we're maintaining our guidance for the year.

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

Yes. So we made a decision in 2025 when the tariffs first hit to study the situation to be thoughtful. Not slow thoughtful about how we manage the situation. Make sure we understood what was going on before we reacted because we think about the customer first. How is this going to impact the customer -- once we have a better understanding of where the tariffs were going to land, we made a decision to eventually raise prices for a portion of the cost increases. We raised prices a certain percentage to still maintain our competitive advantage in the marketplace as a value provider. And so we absorbed a good portion of the tariffs. But we also believe we gained share from that action and we'll continue to focus on that going forward. Fast forward now to 2026, the Middle East cost have started to inflate. We'll see that in the second half of the year. And today, we have no plans to raise prices, but we are evaluating the same situation based upon what we see if this continues to persist, and it continues to elevate. We'll make a decision later this year if and when we should choose a brace prices.

Okay. Great. Maybe in the last 5 minutes here, I realize actually I'll take us through the beginning because what I didn't talk about is just the growth algorithm for Medline right? So let's finish on that so that everybody has that information as well. What do you expect this to be as a top line grower? And talk about the algorithm that you've communicated to hit that number and then talk about how you compound that on the EBITDA line.

Yes. So our long-term goal is to deliver high single-digit organic sales growth, and we've done that historically for the past many years. How we do that is both through same-store sales, so existing customer growth. We think the market is growing at 3% to 4%. And -- we think we can grow faster than the market. In addition to that, new customer signings. And I talked about before, we signed $2.4 billion of new customer signings last year. Our goal is $1 billion again, once again this year, and we're well on our way to achieving that goal. So the combination of same-store sales plus new customer signings would get you to high single-digit growth.

And as it relates to the bottom line.

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

Okay. And as you were talking about end market growth in the existing customer growth, 1 of the big topics that I'm sure a lot of people here have been asking about as well as kind of ACA subsidy headwinds in potential headwinds, Medicaid cuts coming up. What are you guys seeing so far from knees? And are they impacting growth at all what are you baking in the guidance for them as well?

Yes. So when we gave our full year guidance back in February after full year earnings, we basically guided to 8% to 9% organic growth -- and in that guidance, we basically said that we expect to see some moderation in same-store sales in the back half of 2026 because our customers were telling us they expected some impact to utilization and procedure volumes given the ACA enrollment given the Medicare Medicaid cuts, right? We didn't see that in the first quarter. Our first quarter results were very strong. Top line growth, as I mentioned, about 11% -- and so we have not seen that so far. We've maintained that assumption in our guide. So we maintained an assumption in our back half of the year. There'll be some moderation, not significant but some moderation sequentially in the same-store sales because of it. If that doesn't happen, there's further upside in our numbers.

Okay. To what degree, maybe the last question I'll leave here, and then we'll go out to the breakout room, but I think there's a little bit of push and pull as you think about this backdrop. And this isn't just the United States, right? If you look internationally, I mean, it might even be worse there with the budget constraints. But there's a little bit of a push here where it's just a tough market and maybe in some of your other lines, you can't take price to offset. But maybe arguably you're a part of the solution because you can drive more Medline brand, -- how do those 2 net out 1 another as you look at the market that we're in today.

Yes. I mean I think if you go back to history and even to this day, we tend to outperform in times of crisis and times of strife, right? If you go back to the pandemic, we performed extremely well during that time, right? We performed really well during 2022, coming out of '22 and '23 when the inflationary environment. I think we've done very well in '25 with the tariffs. And if you go back even way back and take the days with recession. So I think what really matters here is that our business model, our value proposition, the fact that we are the value player in the marketplace is what differentiates us. And our customers in times of challenge are looking for a low-cost solution, and they're looking for supply chain resiliency. And we offer both of those things because of our scale, because of our diversified network as of our product portfolio, because of our longstand relationship as being a product company first, you build that supply chain resiliency that I think really matters. And because of all this that as well and then some additional stuff, our ability to provide the lowest cost product and adding value and savings for them is what really differentiates us.

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

Thank you.