Medline Inc. (MDLN) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Medline's Third Quarter 2026 Results Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Karen King, Global Head of Investors.

Welcome to Medline's Third 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 statements and risk factors contained in our earnings release, which accompanies these remarks as well as our most recent 10-K and other SEC filings for more information regarding these risks and uncertainties. We will also reference non-GAAP financial measures, which exclude certain items from our financial results calculated in accordance with GAAP. You can find a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP measures in the earnings release and the disclosures and non-GAAP reconciliations that accompany these remarks, which are available at our website at ir.medline.com under quarterly results. With that, I will now turn the call over to our CEO, Jim Boyle.

Thank you, Karen, and good morning, everyone. We executed well during the quarter, delivering strong broad-based growth. Third quarter net sales increased 10% as compared to the third quarter of 2025. Net sales from Medlinee brand grew 7% with growth across all product categories and Supply Chain Solutions grew 14%, driven by new customer implementations and growth within existing customers. Adjusted EBITDA rose 12% to $1 billion. Strong sales growth and tariff refunds drove the increase, partially offset by higher operating expenses, higher cost of goods sold from inflation and customer mix. With that backdrop, I'd like to highlight 5 areas that demonstrate the progress we're making across the business. First, customer signings. We had another strong quarter of total new customer signs across multiple channels, including an agreement to supply physician offices for one of the largest health systems in the United States and a contract to serve the hospital labs of a large Midwest nonprofit integrated delivery network. Based on our results so far this year and the strength of our pipeline, we're confident in reaching our full year goal of $1 billion. Second, Canada. We're very encouraged by the progress we're making in Canada with our first prime vendor partnership with Mohawk Medline now live at 5 hospitals delivering strong service levels and receiving positive customer feedback. We expect to finish the rollout by the end of the first quarter of 2027, marking an important step in bringing our prime vendor model to Canada. Third, Tracy, nearing an important milestone in Northern California following the fire at our previous facility. Our new distribution center in Tracy is on track to open by year-end, adding capacity to serve customers across the region. The facility will include our largest single auto store installation to date, automating the picking of less than case items, which we expect to improve throughput and efficiency in mid-2027. Fourth, network capacity. Beyond Tracy, we're making significant investments across our distribution network. We're adding millions of square feet of distribution space at 3 new facilities with auto store automation increasing capacity and operational flexibility across our distribution network. In March, we now plan to construct a 1.2 million square foot distribution center in Dallas, Fort Worth, in July, we announced plans to open a new distribution center in Southern California, adding another 1 million square feet to support health care providers across the state. And recently, we announced that we are building an 800,000 square foot facility in Michigan to support customer demand in that region. Together, it will help make our supply chain more resilient and responsive. Fifth, quality. I want to provide an update on the progress we're making under our Global Quality action plan. Patient safety and product quality remain paramount. As part of the plan, we have engaged independent third parties to conduct assessments across our more than 30 manufacturing sites worldwide. Given the breadth of our global network, we expect these assessments to be a multiyear effort. We're also investing in people, processes and technology to strengthen our quality systems and capabilities while continuing to remediate any impacted products. These investments based on what we know today, are reflected in our 2026 guidance and our 2027 framework, which Mike will discuss here in a moment. Overall, we're pleased by the momentum we're seeing and the progress we're making against our priorities. We're on track to achieve our total new customer signings goal, expand our distribution capacity and advance our global quality action plan. At the same time, we remain focused on navigating near-term margin pressure, as Mike will discuss shortly, while continuing to invest in the capabilities to support our customers and drive long-term growth. With that, I'll turn the call over to Mike to walk through our financial performance and outlook.

Thank you, Jim, and good morning, everyone. We delivered another strong quarter with every segment and channel contributing to growth. Third quarter net sales increased 10% year-over-year to $7.9 billion, driven almost entirely by organic growth with minimal impact from foreign currency. The Medline Brands segment generated third quarter net sales of $3.6 billion, an increase of 7%, with growth across all 3 product categories. Surgical Solutions generated net sales of $1.7 billion, up 8%. Growth was driven by surgical kitting, one of our largest product divisions and broader demand for operating room products. We continue to gain share by expanding kits with existing customers, helping them run more efficient operating rooms and by launching new kitting programs. Front Line Care net sales were $1.7 billion, up 4%, driven by healthy demand in exam gloves and personal care. Lab and diagnostics generated net sales of $272 million, up 14%, driven by growth with existing customers and new customer implementations. Many of the multichannel agreements we signed this year include lab, contributing to the strong growth. One recent example of the acute care lab business of a large minimus nonprofit health system that Jim mentioned earlier. The Supply Chain Solutions segment delivered third quarter net sales of $4.2 billion, up 14%, driven by new customer implementations and growth with existing customers. This growth expands our opportunity for customer conversions to Medline brand products over time. Moving to sales by channel. U.S. acute care net sales grew 12% year-over-year at $5.5 billion, driven by new prime vendor customers and existing customer growth. U.S. nonacute care net sales grew 6% year-over-year to $1.9 billion, driven by existing customers and new customer signings, primarily in physician offices, surgery centers and post-acute care. International net sales grew 8% to $518 million driven by volume growth in Canada and Europe. Turning to adjusted EBITDA. Third quarter was up 12% year-over-year to $1 billion, and margins increased 10 basis points to 12.2%. Results included an $81 million benefit from IEEPA tariff refunds and associated customer repayments. Without giving effect to these benefits, higher sales volumes were partially offset by higher operating costs, higher cost of goods sold from inflation due to elevated oil prices and mix. This includes customer mix of prime vendor relationships at lower margins, channel mix towards acute care sales and segment mix as Supply Chain Solutions continues to outgrow the higher margin at [ Lindblad.] Looking at the segments, Supply Chain Solutions adjusted EBITDA margin was 4.4% in the quarter, primarily due to the customer mix I just discussed as well as an increase in operating expenses. We have had success winning and implementing new prime vendor business, and those relationships have lower initial margin due to first year rebates. This can also apply to existing customer renewals where we believe there are additional opportunities over time for greater Medline brand conversion. We anticipate Supply Chain Solutions margin will remain in the mid-4s for the remainder of this year. Providing an update on the financial impact of the fire at our Tracy, California Distribution Center in June, related costs in the third quarter reduced net income by $80 million and are excluded from adjusted EBITDA. While we expect full insurance recovery over time, we have received and recognized $100 million through the third quarter. Moving to free cash flow and the balance sheet. We generated strong free cash flow of $1.8 billion for the first 9 months of the year. This reflects net tariff benefits and favorable working capital, partially offset by investments in CapEx. CapEx for the first 9 months was $348 million, reflecting investments in automation across our distribution network, construction of new distribution centers and expansion of our Mexico kitting facility. Cash and short-term investments were $3.6 billion and net leverage improved to 2.5x, down from 2.9x last quarter. Our cash generation gives us meaningful capital allocation flexibility. Our priorities remain investing in the business to drive sustainable organic growth through operational investments, capital expenditures and working capital. Pursuing strategic bolt-on acquisitions in products, channels and services or we can apply the midline business model to drive attractive returns. Maintaining a strong balance sheet and a disciplined approach to leverage as demonstrated by the $750 million term loan prepayment we made in October and returning capital to shareholders when supported by our cash generation, balance sheet capacity and valuation. Our newly authorized $1 billion share repurchase program gives us flexibility to do so opportunistically. Moving to 2026 guidance. Given continued strong demand and consistent commercial execution, we are raising our full year 2026 organic sales guidance for the third consecutive quarter to 10% to 10.5% from 9% to 10%. As a reminder, this guidance reflects the impact of IEEPA tariff-related customer repayments, which reduced sales by $78 million in the first 9 months. We are reaffirming our adjusted EBITDA guidance of $3.3 billion to $3.4 billion and expect to land at approximately the midpoint. Strong sales are helping us offset cost pressures that have intensified through the year, primarily inflation tied to elevated oil prices, which has increased our estimate of Middle East conflict costs from $70 million to $80 million and mix as well as continued investments in our distribution network and global quality action plan. We now expect the timing of inflation to weigh more heavily in the fourth quarter than the third as higher cost inventory flows through the cost of goods sold. As a reminder, this guidance does not reflect the benefit of EPA tariff refunds in 2026 and including the $324 million in net refunds through the third quarter. Turning to the initial framework for 2027. While we are now providing 2027 guidance today, we want to share how we currently see next year shaping up. This preliminary framework reflects our current view and is subject to change. We expect 2027 net sales growth in the high single digits, driven by the same factors that have historically fueled our growth, same-store sales, new customer implementations and modest pricing. In addition, we plan to implement a larger than usual price increase, early in the first quarter to offset a portion of inflationary cost pressures. Moving to earnings. We expect adjusted EBITDA growth in the low to mid-single digits. Consistent with our 2026 guidance, this 2027 framework does not reflect IEEPA tariff refunds received or expected in '26 or '27. Our goal is to give you a clear view of the underlying earnings of the business without the distortion of onetime refund benefits. Several factors support earnings growth next year. First, sales growth, the underlying drivers I just outlined, same-store sales, new customer implementations and price. Second, mainline brand conversion, which generates savings for our customers and margin dollar growth for Medline. Third, tariff favorability. We are assuming tariff rates remain at current levels through 2027. And fourth, continuous improvement. We recently launched a restructuring program to improve our productivity and deliver cost savings. This program is designed to streamline our organizational structure, reduce duplication, and sharpen our enterprise-wide focus, helping to fund additional investments. Through this program, we expect to incur approximately $20 million to $30 million in restructuring costs to be recorded in the fourth quarter and excluded from adjusted EBITDA. We expect these actions to generate approximately $80 million to $90 million in annualized savings, primarily realized in 2027. At the same time, several factors will put pressure on margin. Inflation. We assume diesel raw materials and finished good costs remain at current elevated levels through 2027. Operations. We are investing in capacity, automation and capabilities to support our growth, as Jim mentioned previously. In quality, we are advancing our global quality action plan including investments in people, processes and technology as well as ongoing remediation. Taken together, these factors explain why we expect adjusted EBITDA growth to trail net sales growth in 2027. We are deliberately investing to support future growth. Importantly, our underlying commercial momentum remains strong. The slower adjusted EBITDA growth relative to sales in 2027 primarily reflects elevated costs and deliver investments in capacity, automation and quality to strengthen the business. Our review of Medline's long-term earnings power remains unchanged. We continue to expect adjusted EBITDA growth to return to at or above net sales growth in 2028. We felt it was important to share our preliminary framework for 2027 today, and we will provide guidance on our fourth quarter and full year 2026 earnings call early next year. In summary, strong demand allowed us to raise our sales guidance once again. While we manage near-term margin pressures, we continue to invest in the business to serve our customers and strengthen our competitive position. Together with a strong balance sheet and disciplined capital allocation, we believe this positions us to return to our earnings algorithm in 2028 and create long-term value for shareholders. I'll now turn it back to Jim for closing remarks.

Thanks, Mike. In closing, we're confident in the strength of our business and the opportunities ahead. As Mike outlined, we're navigating some near-term margin pressures, but are confident that our long-term earnings power has not changed. Thereby industry-leading scale, a resilient, profitable business model and a healthy balance sheet. Most importantly, our customers rely on us for service value, reliability and quality. These strengths differentiate Medline and it's why we're confident in our ability to drive sustainable growth over the long term. Thank you for joining us. We will now open up the call for questions.

[Operator Instructions]. Our first question today is from Glen Santangelo from Barclays.

Jim, I just wanted to comment on -- I just want to ask a quick question about your margin commentary for 2027. I mean it seems like the raw material input costs were up materially since you guided last quarter on August 5. And I was wondering if you could just put some parameters around that to help us think about the magnitude? And then I was interested by your comments that you're saying to input a pretty sizable price increase on the first of next year. How much latitude do you have to sort of raise prices just sort of given the longer-term nature of your contracts? I mean do you have the ability to take price to offset some of this cost inflation? Or do you have to wait until your contracts come up for rebid before trying to pass some of those costs through? Any sort of detail to help us think about that dynamic would be helpful.

Thanks, Glen. So I'll take the first question and Jim will take the pricing question. So as it relates to the inflation from the Middle East, let's first start with 2026. We originally had called out about $70 million of inflationary pressures primarily from raw materials and finished goods in 2026. In our last quarter call, we are now expecting close to $80 million of impact for the year. That's because we've seen elevated costs on the raw material antigen. We've also seen increased costs on the diesel side. We're now paying close to $6.25 per diesel. If you think about 2027 and our 2027 framework, we are expecting -- we are assuming that the costs will remain elevated at current rates. So diesel at $6.25 oil where it's at today and our raw materials and finished goods at our current cost today. And that would mean that we will see that for the whole year of 2027. That will mean elevated costs on a full year basis in our guide, which gets us to that low to mid-single digits for 2027 as it relates to the overall framework.

Yes. And then from a pricing perspective, as you know, historically, whether that's during the pandemic, whether that's what's going on in straight or inflation, we've actually chosen to absorb and take time to understand the impact and see if it was going to be sustainable as opposed to pushing pricing to the market and price has never been a lever for growth. It's been more of a market cap realization from a cost parameter perspective that is consistent and ongoing. And so when we look at pricing, pricing is not a lever for growth. It's a lever to actually impact real COGS that are impacting the business on a sustainable long-term basis. And that's where we are today. And the way our contracts are written is we have the opportunity to have those discussions with our customers. And in these moments in time when we've been absorbing for as long as we have, you can see what happened with the tariff based on how much is refunding back to us and how much we pass on to our customers. We think it's important to be in the boat with our customers for as long as possible. And then when we see the pricing a new reality, that's when we put the price increase to the market and we have the ability to do that within our contract infrastructure.

Our next call is from Michael Cherny with Leerink Partners.

If I can maybe build a little bit on Glen's question. As you think through the planning process into next year, the high-level details are clearly helpful I heard you on price. How else are you thinking about the strategic opportunities you have to continue to find ways to accelerate the business? Are there pushes and pulls that you have, be it on business mix, be it on how you're focused on brand conversion that you would do above and beyond what would be normal course of business? And how does that all factor into the desire, the push to drive the shareholder returns you're focusing on relative to what obviously is a lot of pressures that are outside of your control.

Well, there's a couple of things. First and foremost is our business model. First and foremost, taking share and continuing to capture on that $1 billion prime member signings because volume actually yields both top line revenue and the opportunity for margin lift. You hit the nail on the head, making sure we continue to drive value and savings to our brand, to our customers, while we're also increasing the ability to grow margin on the left-hand side because it's a win for the customer and a win for Medline. The other thing that's very important, as Mike mentioned, we did a restructuring is managing our SG&A to create the right leverage in the business so we can actually spend at a rate that actually yield a positive impact on the overall margin profile. And so if you look at what's happening in the market today, there's concerns around softening from a volume perspective, there's concerns about reimbursement. And we have the best model to drive value and savings for our customers in that resonate. So I look at the market very, very similar to what I have in the past. We are the value player in the marketplace. We are the player that can also get the right product to the right place at the right time at the best total value. And so I mean, your -- the real question is, if we do those things, it's going to generate what you're talking about is generating both top and bottom line games, which is what you should have expected of us.

Our next question is from [ Kevin Caliendo ] from UBS.

This is Andrea Alfonso in for Kevin. So I appreciate the updates on the inputs for the second half cost base. So I guess, last quarter, you talked about the $200 million in incremental cost framing sort of what would be temporary versus structural you now are absorbing about $10 million in extra oil-related costs, but that's also netted now against this recently launched cost program. So I guess how -- when you're thinking about framing that for 2027, how do you think about sort of that ratio of temporary versus structural?

Yes. Thanks for the question. So if you think about what we said last quarter, right, the one thing we called out specifically was the Middle East and the Middle East would be an incremental increase year-over-year and it's becoming more sizable than it was previously. We reseal thought that was going to be transitory in nature. And now we're sort of thinking it may not be so much transitory in nature. So our full year '27 framework assumes it continues through the whole year at current rates. If you think about sort of that framework, right, we talked about previously, our strong top line sales growth, driven by sort of the continued new customer signings same-store sales growth and the price increase that Jim talked about previously. On top of that, the Medline brand conversion that we are continue to generate as well as the favorability from tariffs year-over-year. At current rates, if we assume current rates for tariffs, you'll see some favorability year-over-year that we are seeing here in the second half plus the enterprise cost savings initiatives restructuring are the tailwinds for 2027. And then ultimately, the pressures that we talked about are the inflation on Middle East, the operations and quality investments we continue to make in our business.

Our next question is from Sean Dodge with BMO Capital Markets.

This is Thomas Keller on for Sean. On the lab and diagnostic side, what percent of your prime vendor partners are also buying lab and diagnostic supplies? And is there anything different about the rate at which those customers will convert to Medline branded products within their portfolio relative to the broader MedSurg categories?

It's important to remember, we're in lapping diagnostics in the acute. So the hospital market in the physician office market just for segmentation, so you can get that. And every single one of those customers purchase something from a lab perspective, they have an in-hospital lab. And so the opportunity set is where we are a prime vendor for MedSurg. There's also an opportunity for living diagnostics. We have between [ Leping ] diagnostics right now with about 30% convertible opportunity and the run rate is fairly consistent from a penetration perspective, going back to we capture about 10% of that. We double the opportunity when we signed a new plant vendor and then we grow 3% to 4%. So it looks and feels very, very similar to the playbook from a MedSurg distribution perspective. And as you know, the beautiful thing about that is the wheels in the truck that are delivering the med-surg supplies are the same wells on the truck that they're delivering the lab of diagnostics. So the incremental cost of distribution is very minimal, and it allows us to drive an outsized service model for our customers at a better total value.

Our next question is from Erin Wright with Morgan Stanley.

Great. So on prime vendor wins. So first, how are some of the outsized wins from last year flowing through now relative to your expectations? Anything you can do on that front in terms of escalating them in terms of, I guess, Medline brand conversion. And then just on the prime vendor wins this year, can you speak just to the nature of those from a profit perspective as we head into next year? I just want to make sure we're thinking about the cadence correctly, given some of the dynamics in terms of profitability on that front with the outside business wins last year.

Thanks, Erin. So if you think about the $2.4 billion that we signed in 2025, by now, all of that has gone live and has been implemented. And as we talked about previously, we saw about 25% of that recognizes revenue in 2025. We see about 65% of that recognized in 2026, and the remainder will flow into 2027. As it relates to the new signings that we're having here in 2026, nothing really has changed relative to what they have seen previously as far as the overall profitability of that business. ultimately, we continue to sign those new deals, and they'll roll into our business and a similar sort of cadence as they historically do. And it's our job to continue to drive that Medline brand conversion. And I would say the Medline brand converge story on those new implementations will be consistent with prior history, which is in that first year, we expect to get about 10% brand conversion and that, as Jim mentioned, 2% to 4% thereafter.

Our next question is from Matt Taylor with Jefferies.

I just wanted to dig into the pricing comments and the cadence on pricing. I think historically, by memory, you notify customers around now of price increases next year, and they could start to come through in the beginning of the year. Is that the right way to think about it? And given your philosophy to kind of be made whole on COGS versus drive growth, how much pricing is in this initial '27 framework that you've given?

A couple of things. You have the nail on the head. We do price increases January 1 and July 1. So we notified customers 30 to 60 days in advance, depending on the contract. We're not offsetting all the COGS or offsetting a portion of the COGS what we think is the right thing to do to actually kind of mitigate what's going on from the impact of the business but also do what's right by our customers. At the end of the day, that's the most important thing. How do we do it in a way that yields the right outcome for long-term sustainable growth. while also covering some of the impact from a COGS perspective.

How much is in 27, if you can provide any color on that?

Yes, we're not going to comment on how much price we're going to take in '27 at this time.

The next question is from David Larsen with BTIG.

Congratulations on the good quarter. Can you maybe talk about the hospital buying environment? It looks like the Democrats have won in the Senate and the House -- what does that mean for your business, if anything? I think there's some chatter around potentially improving 340B reimbursement possibly, which would obviously be a relief to some hospitals, generally I think the Democrats are perceived as being more favorable towards reimbursement for the health care system. Just any color there would be very helpful.

Well, you're asking me to predict what's going to happen in the political environment. So I'll start with that. I think you're right. I think there's -- the impacts have a favorable position to actually soften some of the impacts in customer Medicaid. So interesting to see that through from a hospital volume perspective, patient population and people that are sick really doesn't tie out to whether the Republic or Democrats are in-house. Depends on whether they need access to care. So I don't think volumes are going to change because it was recently happening. So you have heard from some of the -- I'm sure you've heard us on the earnings calls, some of our providers are sharing that they're seeing softness in surgical volume. I can tell you, we whether it's through growing same-store sales or being partners with the ones that continue to have outsized growth in that volume are seeing nice growth in Surgical Solutions. So we're not feeling the burden of that pain.

Our next question is from Brandon Vazquez with William Blair.

Congrats on the quarter here. It's in a difficult macro environment. I wanted to ask about the Canada prime vendor model that has gone live now in the country. Can you maybe just spend a minute talking about what is the market opportunity in Canada, specifically, how large is the prime vendor market there? And then just talk a little bit about is this essentially the same strategy that we've come -- that you guys have become known for within the U.S., primarily where you kind of get a foot in there with something like 10% of the business's Medline brand at the start and then as a prime vendor, you're looking to every year, convert those accounts more and more? Just kind of comparing your tracks to the U.S.

So first off, the contract in Mohawk going extremely well. We're -- we've got 5 hospitals implemented and we should have the rest of it done through March of 2027. So the real answer is this is still a learning moment, right? We're working with the market because of the reimbursement model, how they actually contract and how they convert product categories is different than the U.S. Your general comment is correct. We're going in. We're offering better supply chain solutions, the right place, right time at the best value with additional Medline brand conversions to drive intrinsic value, but we got to live within the framework of how the Canadian reimbursement system works and how the actual contract, which we think we can do in a way that actually yields tremendous value to the customers, lives within the framework of the reimbursement model and actually helps us continue on the path we're on. Candidly, we haven't defined the market itself yet because right now, we're understanding who do we think is going to be and this is really the first brand that are ever in Canada. I can tell you we do have other markets calling us asking for access to it, but we are intentionally going to this in a crawl, walk, run strategy because we want to make sure we build the right model that's going to yield the right outcome, both from the top line and a bottom line perspective. And make sure we understand the customers' needs hold before we launch this fully. But we are extremely optimistic about it. We think it's a game changer for the Canadian market and could lead to accelerated or outsized growth in the market.

Our next question is from Michael Polark with Wolfe Research.

I have a question on the Global Quality App and 2-parter. One, can you frame for 2027 in the totality of the spend that you have contemplated in your in your prelim comments for next year, that's part one. And then part 2 is, I saw the home care bed exit recently. And my question is, is that output of the quality action plan or was that an independent decision? Is there risk in the next few years as the global quality action plan has rolled out that we could have some smaller product exits like we saw in home care beds.

I'll start with the second part, and I'll let Mike walk through some of the financial impact. But listen, the bad thing is something we've been working and communicating with the FDA on for over a year. In October, as you know, we launched an exit of the business. And subsequently, we launched a program to offer repair replace option for the market. Why exit the market, I mean we would not characterize this as kind of representative of our broader portfolio. Most of what we sell is used in replaced. This is a capital piece of equipment that has electrical components on it. And we believe in consultation with the FDA, we made the right decision. It's not a giant -- in fact, it's roughly $60 million, so from a burden perspective, we don't see this as bad. We think it's the right thing to do for patients. We think it's the right thing to do for Medline and for our customers. And our job is to make it as seamless as possible for the end user, and that's kind of what we're working on. But this is actually something the overall global quality action plan is looking at the entire book of business, making sure that we're taking good hygiene and assessing our organization, which is a good thing. And I would look at it as a good thing as it probably when you receive the table. But this is this product we've been working on for over a year. So is it integrated into the global quality action plan? Yes. However, it's something we were already aware of and already working in concert with the FDA.

And Mike, on your first question about the financials, we've not quantified the impact of 2027 publicly, obviously, is a component of our overall 2027 framework. What I would say is it's incrementally growing relative to 2026, why as we have made investments in the second half of 2026 that will carry over on a full year basis in '27. In addition to that, we are making some additional incremental investments in this area in '27 as well.