Earnings Call Transcript - MDLN 2026-05-06

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Medline First Quarter 2026 Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. 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.

Karen King, Head of Investor Relations

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 Drazen, our Chief Financial Officer. During today's call, we may make forward-looking statements regarding our expectations for the future, including our business plans, strategy and investments, and expected timing and impact. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainty. 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 one less day versus the first quarter of 2025, which is a headwind. We have included the calendar of 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.

Speaker 6

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 a line for Q&A. Turning to our performance, we started the year with 11% top-line growth in the first quarter, powered by one 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 held those accounts for more than a decade, and most of the deals span multiple channels highlighting Medline's differentiated model and unique ability to serve customers across the entire continuum 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 in 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 prime mentor customer in Canada, and I'm excited to announce that we have partnered with MMC, or Mohawk MedVite Corporation. Mohawk MedVite is a dominant player in Ontario, serving over 300 total healthcare organizations, and we have been selected to serve as their prime mentor for nine 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 parameter 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 Symbotic. The Symbotic system is an AI-powered robotic platform that automates picking, storage, and retrieval of bulk items for distribution. Medline is the first healthcare company to deploy Symbotic, 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 four 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 in power our ai enabled digital supply chain control tower designed 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 M-Power to most issue cash 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 maintained 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 of 10 percentage points from five years ago. This scale and complexity require a 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 one complaint per million units sold, well below Six Sigma VIX 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 deadlines 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.

Michael B. Drazin, CFO

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 one 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. Frontline 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 2025 and expected new customer signings in 2026. Transitioning to supply chain solutions, the segment delivered $3.9 billion of net sales in the first quarter, up 15% for 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 billion, driven by growth with new PrimeMender customers and solid same-store sales growth. U.S. Non-Acute grew 7% to $1.7 billion, supported by strong existing customer growth and new customer signings in post-acute, surgery centers, and physician offices, the latter of which was impacted by the soft 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, got 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 investment to support net sales growth, partially offset by higher net sales volumes. Medline brand adjusted EBITDA decreased $65 million to $765 million. dollars. Adjusted EBITDA margin declined 330 basis points to 22.1 percent, primarily as a result of higher import costs due to tariffs. Supply chain solutions adjusted EBITDA increased five million dollars to 187 million. Adjusted EBITDA margin declined 60 basis points to 4.8 percent, primarily as a result of customer mix and operational costs to support customer demand. Moving to free cash flow in the balance sheet, we generated free cash flow of $316 million in the first quarter, driven by net income, excluding non-cash 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-kidding manufacturing. Cash and cash equivalents were $2.2 billion, and net leverage remained at 3.1 times. Aligned 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 eight and a half to nine and a half percent from our previous range of eight to nine 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 3.5 to 3.6 billion dollars. We expect to generate some favorability from the lower tariff rate, offset by continued investments and 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 mid-year and then return to the higher rates we experienced prior to the Supreme Court IEPA 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 the minimum sales in the region. From an input cost perspective, we spend approximately 50 basis points of our total cost of goods on fuel for domestic freight and fuel surcharges for inbound freight. We experience minimal impact at the P&L in the first quarter, and we expect to see a bigger impact, albeit 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 nitrile and van gloves, resins, and plastics, and are working to mitigate these costs where possible. Given we carry a significant amount of inventory, we don't expect to see these inflationary costs hit our P&L until late Q2 or early Q3. Consisting with how we have historically managed inflationary matters, we do not intend to react immediately will take a measured approach as we assess the situation. Should the conflict evolve, we will plan to execute our playbook and share updates on the impact to our business. As you consider the quarterly cadence of our results, we expect to see continued operational investments as for customer demand in Q2, as well as head moves from the Middle East conflict, as I just indicated. As sales grow and the benefits from mitigation actions and tariffs transpire 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'm now going to call back over to Jim for closing remarks.

Speaker 6

Thanks, Mike. Mike, to wrap up, we are pleased with a 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 We also posted another strong quarter of new signings, most of which are multi-channel, 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 bidder deal in Canada, the expansion of Empower, 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.

Operator

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. We ask that you please limit yourself to one question so we may accommodate as many participants as possible. You are welcome to queue up again if you have any follow-up questions. Please stand by while we compile the Q&A roster. Our first question is from Michael Czerny of Leering Partners. Please proceed with your question.

Michael Czerny, Analyst — Leerink Partners

Good morning, and thanks for taking the question. 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? Thank you.

Michael B. Drazin, CFO

Hey, Michael, thanks for the question. So we have not made the determination yet that we're going to raise prices as it relates to the Middle East conflict. We still continue to evaluate the impact to our business, how long this may last, what costs are being impacted 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 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 raised prices around August of last year. And we really did that on purpose in 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.

Operator

Thank you. One moment for our next question. Thank you. Our next question comes from Charles Ray of TD Cohen. Please proceed with your question.

Charles Rai, Analyst — TD Cowen

Yeah, thanks for taking the question. You know, if we're walking through sort of the guidance here, you know, obviously you're raising organic revenue, you're maintaining adjusted HEPA dot guide. It appears that maybe we saw fast and expect decline implementations, which benefits revenue, but may be true of higher OPEX. Is that the right way to think about it? And then maybe to follow up on Michael's question, any conservatism around potential, your thoughts on the input costs related to the conflict?

Michael B. Drazin, CFO

Yeah, 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 to $3.6 billion in the face of both the Middle East conflict, additional investment in our business, offset by some favorability from terrorists and so we feel good about when we expect to be able to deliver on our ebitda guidance based upon all those of those factors as it relates to conservatism and our and 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 involves as oil prices continue to moderate from day to day we are going to take a you know a reaction too quickly as we have a better understanding of what where we're going to settle as it relates to things like nitrile, xan 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 use so today. Got it. I appreciate it. Thanks for the comments.

Operator

Thank you. One moment for our next question. Thank you. Our next question comes from Patrick Donnelly of Citi. Please proceed with your question. Hey, guys. Thank you for taking the

Michael Polark, Analyst — Wolfe Research

questions. I was wondering just for a little more detail on the prime vendor signings in the quarter. you know 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. Morning, Patrick. We did see a strong start to

Speaker 7

the year ending five-minute signings. We aren't giving quarterly kind of actual numbers on that because as you know they can be lumpy. You can't extrapolate you know if we did 500 million this quarter it doesn't mean we're going to do 500 million every quarter and 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 billion dollars in the ground under signings. So we're headed in the right direction, and we feel very good.

Operator

Okay, that's helpful. Thank you. One moment for our next question. Our next question comes from Elizabeth Anderson of Evercore ISI. Please proceed with your question.

Karen King, Head of Investor Relations

Hi, Aya. Thank you so much for the question. 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 ramps are sort of on ahead, et cetera, of your schedule sort of on those ramps coming up? Thank you.

Michael B. Drazin, CFO

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 billion of new implementations 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 implementations, 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 it 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 to continue to drive the growth on 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 AI capabilities, and to invest in things like warehouse management and other capabilities as well. So we continue to invest in business in the long term. Those two things, both the mix and the investments, impacted our margin and supply chain solutions for the quarter.

Speaker 6

Good morning, Elizabeth.

Speaker 7

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 the rest in the third year. We had some large signings in 2025 implemented earlier in the year that yielded 25% revenue realization in 2025. we'll get 65 in 2026, and the rest will be in 2027. So it's in line with what we shared in the past.

Operator

Great, thanks. Thank you. One moment for our next question. Thank you. Our next question comes from Sean Dodge of BMO Capital Markets. Please proceed with your question.

Michael B. Drazin, CFO

Yeah, thanks. Good morning. Maybe just going back to the tariffs, you all talked about before the various tools you have to mitigate uh some of the burden from those um some of them can have a pretty immediate impact like mike you talked about the price increases others uh like changing countries where you manufacture who you partner with can 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 timelines when benefits from those should start to flow through i guess are there likely mitigation benefits that that continue to

Speaker 7

come through over the rest of this year and then maybe lag into next two? Hey, Sean. Good morning. 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 five 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 and 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 straight-row moves is access to oil, which actually is one of the number one things for NBR, and the ability to actually take exam gloves, for example, that'll have a burden. We own our fleet of trucks, so 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 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 and understand what's happening today, not react in terms of actually pushing price increases through until 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 can change tomorrow. If you remember, tariffs last year went from 30% to 145% and then went back down to 30% in a very short time frame. And had we reacted in that time, we would have looked silly, and that's the way we view this 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, because we're going to get some now, some later, and some long-term. Okay, great. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Lisa Gill of J.P. Morgan. Please proceed with your question. Great. Thanks very much and good morning. Jim, I wonder if you could maybe just talk about new product launches and your expectation of, you know, what you saw in the quarter and kind of what your expectations are going forward and where your new customers are most focused.

Speaker 6

You know, both from product launches,

Speaker 7

there were very few new products launched in the first quarter. We did launch the forced air 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 are focused on mitigating any challenges for our customers on a go-forward basis. But 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 double the Medline brand penetration, going from 10% to 20%, and then with our existing customers continuing 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 current challenge state, and then focusing it on making sure we continue to drive value through our customers through our existing categories, and then finally expanding the brand through new categories from product on.

Operator

Thank you. One moment for our next question. The question comes from Matthew Taylor of Jefferies. Please proceed with your question.

Matthew Taylor, Analyst — Jefferies

Hi, good morning. Thanks for taking the question. 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 debate or concern about utilization softening with things like ACA X-freeze or just the macro uncertainty that we're seeing globally. So I'd love any more color you can provide on the trends you're seeing with utilization and spending.

Speaker 7

Yeah, we can tell you in the first quarter, we didn't see much change in utilization. Really, the acceleration in growth for us is share gains, but the actual utilization seemed pretty consistent or 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 of reimbursement, due to lack of access to insurance, the OBBA. I mean, there is some conservatism and some concern around that in the marketplace, which which may lead to some softening of really consumers or patients having a willingness to go get access to care. I will tell you the inverse of that is that consumer or that patient 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. Great. Thank you very much.

Operator

Thank you. One moment for our next question. Our next question comes from David Broman of Goldman Sachs.

David Broman, Analyst — Goldman Sachs

please proceed with your question uh thank you good morning everybody um i wanted to see if we could you could go into a little bit more details 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 there was an impact here on lab and diagnostics consistent with what everyone has talked about on flu and and and related sales in 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.

Michael B. Drazin, CFO

Yeah. 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. Circuit Circle 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 two 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 that 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 diagnosis business to be very strong this year, given sort of the continued core-based business growth. And that food respiratory virus season really happened primarily in the first quarter. So really expecting continued strong growth getting out of the first quarter here for that lab and diagnosis business overall. Medline 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 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 signs. We expect that to continue throughout the year, given that $2.4 billion of signs 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 and the challenges we may face given the uncertainty around ACA, OBBA, those types of things. So overall, they're still expecting strong growth out of the supply chain business.

Karen King, Head of Investor Relations

Thank you.

Operator

One moment for our next question. Our next question comes from Pito Chickering of Deutsche Bank. Please proceed with your question.

Pito Chickering, Analyst — Deutsche Bank

Guys, thanks for taking my questions. I guess brand versus your supply chain solutions. And, you know, you talked about the inflationary pressures, sort of, you know, 2Q and 3Q. Can you sort of break that out of how you 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 – thank you.

Michael B. Drazin, CFO

Yeah, so on an inventory basis, we carry about 80 days of inventory on hand overall. We carry more in the Medline brand side, less obviously in the supply chain solution side. So to the point about inflationary pressures, let's talk about those for a second. If you think about the tariffs, let's start with the tariffs first and the quarterly cadence. As we called out last year, we were expecting about $200 million of incremental tariff headwinds year on year, $490 million overall. We expected 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 impact in the first quarter, $85 million incrementally. Essentially, the remainder of that inventory that's at 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 to hit us 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 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 impact. So, diesel costs as it relates to our trucks and our trailers to move our products around and domestically, we have started to see some impact from that as diesel fuel is above $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 gloves, resins, and plastics will really happen and starting to happen now as far as the cost increases but those won't land in the US until sort of the second half of the year and show up under B&L at that point in time. Then the The last component of our quarterly cadence would be the 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.

Operator

Thank you. One moment for our next question. Thank you. Our next question comes from Stephen Valaket of Mizzou Securities. You may please proceed with your question.

Michael B. Drazin, CFO

Yeah, thanks. So, yeah, my question was maybe somewhat similar to that last one, But I guess I was just trying to figure out, you know, across all the manufacturing inputs for, you know, exam gloves, you know, the residence plastics, et cetera, you know, what percent of your overall Medline brand product portfolio may be impacted by, you know, the rising commodity inputs? We're talking about, you know, 10% to 20% of the total MB book of business or maybe something greater. And then also it's safe to say that, you know, exam gloves is the biggest product category that may be impacted by this, or is that not necessarily the case?

Pito Chickering, Analyst — Deutsche Bank

I was just trying to get more context around all that.

Michael B. Drazin, CFO

We're not going to quantify for you that impact right now, Stephen, and the reason for that is because only a percentage of our overall cost of those goods are actually impacted by the oil. If you think about that, the reality is that if you think about exam gloves, an example, a portion of the exam glove is impacted by oil prices. But natural exam gloves is our biggest category. Plastics and resins, we buy some resins for purposes of manufacturing plastics. We buy plastics as well. Those are the three 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.

Operator

Thank you. One moment for our next question. Thank you. Our next question comes from Jailendra Singh of True Securities. Please proceed with your question.

Jailendra Singh, Analyst — Truist Securities

Thank you, and thanks for taking my questions. 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?

Speaker 7

Good morning, Jalendra. The billion dollars of prime vendor signings is U.S. only, so that new prime vendor 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 products are delivered and could lead to an acceleration of the Medline brand conversions in that space as well. It is the first prime vendor in the Canadian market. As we talked about, it's a nine hospital system that we're working with Moloch MedBuy Corporation 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 or any 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 Mohawk 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, the right place at the right time for the best value. but it is in addition to, and we think it's really an opportunity to change the dynamics in really healthcare. Great. Thanks a lot. Thank you. One moment for our next question.

Operator

Next question comes from Michael Pollark of Wolf Research. Please proceed with your question.

Michael Polark, Analyst — Wolfe Research

Hi, good morning. 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? Thank you.

Speaker 7

You hit the nail on the head. We are in physician office in acute care in some educational lab that's what we're focused on right now. And candidly, it's a $25 billion TAM that we do a billion dollars in 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

Speaker 6

other things and one of the things we always do is try not to really eat the

Speaker 7

pizza all at once for any piece of time and in the way I look at this is this is something we're focused on and and it's just a tremendous opportunity and and as Mike mentioned earlier the core lab growth taken that apart from really what happened with flu is up double digits, right? So it's growing significantly. And it's something we're pretty excited about. And really within that framework between lab-y diagnostics, 30% of that is a medline-brank deferral opportunity. So right now, candidly, we're focused on the opportunity.

Operator

Thank you. One moment for our next question. Our next question comes from Eric Coldwell of Baird. Please proceed with your question.

Eric Coldwell, Analyst — 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. Thank you very much.

Speaker 6

Thanks, Eric.

Speaker 7

As you know, we bought Sinclair and the Canadian market, and really that's a way for us to really understand the dental 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 office and surgery center space, so we could drive value for our customers from a Medline brand perspective and to create a margin lift for our brand. And I can tell you we're ahead of the curve, and we already have 30% convertible opportunity. Our Medline brand divisions are doing a stellar job at creating Medline brand equivalent to that market. What we're also learning is really that service model and making sure we have those service techs that 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 bedline categories. That is a brand business. That is not a distribution business. We're not looking to be a distributor of dog food and flea collars, but we want to be as a manufacturer of medical supplies in that space. We're leveraging partnerships with Covetris, 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.

Operator

Thank you. One moment for our next question. Our next question comes from David Larson of BTIG. Please proceed with your question.

David Larson, Analyst — BTIG

Hey, 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 client's performance or perhaps improves your COGS, and then also any more color around the robotics in the warehouse would be very helpful. Thanks a lot.

Speaker 7

Yeah, 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 disruptions in 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 end up 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 have given our customers advance notice to really stockpile some inventory in advance of the challenges that were coming ahead. And I can tell you Empower is 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 it questions. co-pilot is the brain, and it has access to their entire kind of data set, both from a fulfillment throughput and item master perspective. It's creating standardization across their platform and recognizing where there's redundancy and duplication across their 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 date, reduction, and 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 roadmap from a features perspective to where eventually we'll have a 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 two more installations across our distribution centers. That increases the throughput by 250% and reduces the labor burden by 50%. So it's a very meaningful input, both from a labor reduction and a quality and service perspective. And we're launching the first installation of Subotic to navigate the bulk side of the house. The bulk side of it 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 you think about AutoStore, AutoStore manages less than case volume. Seventy percent 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 distribution center. We're really excited about that.

David Larson, Analyst — BTIG

Excellent. Thank you.

Operator

Thank you. One moment for our next question. Next question comes from Brandon Vazquez of William Blair. Please proceed with your question.

Brandon Vazquez, Analyst — William Blair

Hi, everyone. Thanks for taking the question. Mike, just a question of clarification on Taros. I think in the prepared remarks that I hear 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 wanted to clarify that, and then if you could talk about why you would assume they'd 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 two might be, that would be helpful as well. Thank you.

Michael B. Drazin, CFO

Thanks, Brandon. Yes, that is correct. we we did say that we expect that the the rates will go back to pre SCOTUS ruling in in the obvious time so time this summer essentially and the reason for that is we were taking an approach to try to be realistic about what might happen we know that the 122s run out after 150 days in late July and so what we are hearing is that they're looking at use that are 232s or 301s to to recreate what they had previously. And so taking a realistic or conservative view of what might happen in our business, how we're going to navigate and attack that, of course.

Speaker 7

That being said, we did submit a robust educating them on kind of what this actually could mean for the industry. And if you remember back during the pandemic, in the public comment period, we did get some exceptions. So, I mean, we'll see what happens.

Operator

Thank you. One moment for our next question. Thank you. Our next question comes from Andrew Oban of Bank of America. Please proceed with your question.

Speaker 16

David Ridley Lane Good morning. This is David Ridley Lane on for Andrew. The 50 basis points higher overall revenue growth in 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 percent rate through August offsets all the other inflationary impact on your cost of goods

Michael B. Drazin, CFO

in 2026? So, yeah, as we've caught up before, we're holding our guidance to $3.5 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 three things combined are going to offset, leading to our guidance remaining at 3.5, 3.6. Thank you very much.

Operator

Thank you. Thank you. One moment for our next question. Our next question comes from Ryan Halstead of RBC Capital Markets. Please proceed with your question. Good morning. Thanks for

Speaker 5

taking the question. 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. non-acute segment. Just curious to hear how you feel you're tracking versus expectations in that segment and, you know, if you still feel strongly about the market opportunity and the like-for-like conversion

Michael B. Drazin, CFO

opportunity there. Yeah, we still feel very good about our U.S. non-acute business. The U.S. non-acute business grew 7% on a reported basis, 9% adjusted for days 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 non-acute space. We do expect the market to grow at a faster rate than non-acute space. We do expect in 2026, our U.S. acute care business will grow faster than the U.S. non-acute because of the new customer signings that we had last year, the $2.4 billion that we signed overall. We still feel very good about the non-acute space. We continue to take share in that space and grow at a greater rate than the market. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Aaron Wright of Morgan Stanley. Please proceed with your question.

Aaron Wright, Analyst — Morgan Stanley

Great. Thanks. I have kind of a broader question just on the landscape for new customer wins and just the 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, you know, is the pipeline building on that front? Like, what's your line of sight into that, either by, also by channel as

Speaker 7

well? Thanks. Thanks, Erin. The pipeline is very robust. Modern Healthcare just reported a top 100 health systems in America, and we have about 50 percent of them, which means there's 50 percent we don't have. So, there's a tremendous amount of opportunity in front of us. From a competitive landscape. We have good competitors, but they're running their same playbook that they have in the past, which historically we've had really a significant differentiation, both through 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 opportunities set in front of us. Healthcare continues to consolidate, and as they consolidate, we tend to do better because as customers are looking for a partner that can serve all classes of trade that they own, both from the acute care to the physician office, to the home health, to the hospice. And Medline is the only provider in healthcare that can do that. I'll pair that with our ability to drive significant value through our brain. And that is both true in the acute care space and in the non-acute space.

Operator

The question comes from Navan Tai of BNP Paribas. Please proceed with your question.

Navan Tai, Analyst — BNP Paribas

Hi, good morning. Thanks for taking my questions. I wanted to hear if you had any updated expectations for the Section 232 tariff on BPME 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.

Michael B. Drazin, CFO

Thanks for the question. So, you know, as we called out previously, we do expect, we do anticipate that the 122s will run out in the end of July, and the administration intends to put new in place. They may use either 232s or 301s. The 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 one that's going to occur or what's going to happen, but we'll monitor the situation and be ready. As it relates to leverage, we ended the quarter with 3.1 times leverage. We carry about $2.2 billion of cash on hand. And our intention is, first and foremost, to invest in the business. With that excess cash that we have on hand, we're going to lean in on M&A when we see the right opportunity to do so. And then over time, over 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.

Operator

Thank you. Thank you. One moment for our final question. Thank you. Our final question comes from Rick Wise of Stiefel. Please proceed with your question.

Speaker 5

Thanks so much. Good morning, Jim. Hi, Mike. 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, who 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? Thank you so much.

Speaker 6

Yeah, thanks, Rick.

Speaker 7

Listen, you hit the nail on the head. We tend to perform better in times of crisis or challenge because our value profits are differentiated. When you think about the cuts and 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 deliver value to our customers. It'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 in prime vendor closings. And so the market dynamics from a consolidation perspective, from a custom reimbursement perspective, from 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 we'd be out there. 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 a time of need, and we will continue to do that. So I'm going to differentiate it.

Operator

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.

Speaker 7

Thank you for joining us on our first quarter earnings call. We are pleased with the 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

Operator

today's conference call. Thank you for participating. You may now disconnect.