Hi, everybody. Thanks. Thanks for joining us this afternoon. My name is Brandon Vasquez. Those of you haven't met the one of the medical device analysts here at William Blair. We're excited to have Medline with us here. But first, I am required to inform you that if you would like a complete list of research disclosures or potential conflicts of interest, please visit our website at William Blair dot com. So we have with us Mike Drazen, CFO of Medline and also Amanda Labs, EVP of Chief Product Officer. And we're going to do a fireside chat here as normal when we do these fireside chats, because a lot of people are new to the story. I'm going to keep things pretty high level for the most part, maybe ask one or two kind of pertinent questions at some point. But Mike, maybe let's just start off. Let's like literally just start at the basic here.

Talk to us about what Medline is and give a little bit of, I think what's interesting here too, is that you have a very long history of building this company, what it is today what do you do and what was it about maybe needing to be a private company for so long to get to where you can to to do what you do today so so medline is the largest provider largest manufacturing distributor of medical surgical supplies we've been around since 1966 and our mission really is to make health care run better and we do that by offering the medline brand which is very broad with 190,000 of our medline branded items and we support that with our distribution capabilities, which are best in class, running the best service levels in the industry. If you go back in history, what's important to know about Medline is we started as a manufacturer first. Our roots of our company, our products, which we manufactured or sourced the best quality, low-cost products in the industry to support our customers like a health care provider, acute care hospital. Over time, we got into distribution because our customers asked us to. They wanted one supplier we call a prime vendor for all their medical surgical supplies. We got into that business, invested in distribution to become the best in class, the highest service levels in the industry. The combination of the two, which is our vertically integrated business model, what makes us unique and makes us the value player in the industry today.

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

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

So the scale enables us to be successful and drive value for our customer you made a comment earlier that you're or you started you're one of the largest you're the largest distributor in medical devices um and i i'll ask you because i don't remember the number off the top of my head but what percent of the top hospitals in the in the country already use you as a prime vendor or you're already a customer of part of the question to also again level set everybody here you are this large you've been successful, how much room is there left for you to grow over time?

Yeah, we still think there's plenty of room left for us to grow. So if you think about the business, the top 150 hospital systems in America, we are the prime vendor at about half of those hospital systems today, which means there's still 50 more percent for us to go gain share. If you think about that space, the non-acute space where we also serve, so physician office is an example, we do about a billion eight in a nine billion dollar plus market, so plenty of room to grow. In the nursing home space, we are about a third of the market. In the surgery center space, we're also about a third of the market. So there's plenty of room still to grow, both in our acute care setting, which where we're the largest, as well as in the non-acute space.

Okay. The scale and the distribution you guys have built over time has allowed you, as you were talking about this prime vendor model, let's dive into that for a second. I think just so everybody understands, because this feels like it's an integral part of the thesis here. What is a prime vendor?

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

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

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

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

Yeah. So first, I think when you think about that 60%, for us, it's 190,000 different products across several different categories. And so for a customer, when you're going into having that conversation, you're having to take category by category to a clinician, to a different part of the facility, and make sure that you're talking about the value. In some cases, it's very simple items that we can make a change and nobody really knows the difference. And those are things we typically handle up front. So when Mike talks about you start out at 10% and you go on each year, we're handling a lot of those commodity items up front. But as you get into items like gowns and drape, as you get into items like urologicals, those require trials. And there's only so much a hospital can absorb at a time. And so we've found there are some facilities who are very aggressive and they come to us and say, we would like to do 20 categories this year. And if they have the right buy-in, we can do that. Most facilities though, you're looking at the 190,000 different products, you're giving them choices in terms of what they would like to convert, and you're handling one or two categories per quarter and going at their pace. I think the great news about our broad portfolio is you're really putting it in front of a customer and saying, what's your priority? That's our focus. Mike talks about a customer-focused organization. We really are focused on, hey, listen, there's a lot of ways we can deliver value for you. You choose and we'll help you and we'll go at your pace. And in the long run, that helps. But it's the big things and it's also the small things. I mean, you think about these are in a lot of storerooms. You have to change a lot of labels, you know, so there's a lot to it.

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

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

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

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

How do you think about doing those organic versus inorganic?

It's mostly organic right now, but certainly we're looking for opportunities.

And, you know, with the Microtech acquisition, that was a good example. so when it's the right opportunity at the right price we we go for that okay let's stick on Medline for a second and Medline brand and talk about something topical now that we've received a lot of questions on there was an FDA warning letter disclosed yesterday let's first maybe hit on that FDA warning letter and we'll maybe have a because this flows into this conversation right you're a manufacturer as well let's talk about quality and start on that that warning letter so we did receive a FDA warning letter that was publicly released yesterday that letter relates to our CHG wipe manufacturing at our ReadyCare Waukegan facility, and it also is associated with the active ingredient that we make

at our Harlem, Wisconsin manufacturing facility. And really what this goes back to is we had a matter that happened in October of 2025 that we identified that the FDA was aware of, obviously, that we made them aware of, and ultimately then we took the action immediately to stop manufacturing that product in October of last year. We continue to work with the FDA to remediate the matter. We've invested and continue to invest in remediating the matter. And we intend to, over time, put this product back on the market when we are ready to do so. And the FDA has approved us doing so. We take product quality very, very seriously. This is not something that we look beyond. We are very intent on making sure that our product quality is at the highest level. And so we will continue to invest in our product quality and our quality management systems and are quality people to ensure that we provide the best quality products to the industry.

Maybe two more questions on this topic, and we'll move on. One, just a homework on that one, any financial impact that we should think about this morning, Leonard?

Yeah, as we talked about in our first quarter earnings call, we highlighted the fact that when we have things like product recalls, which we've had in the past so far, none of those have been material to our overall financial statements.

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

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

Great. Let's go back to the prime vendor contracts. And historically, you guys have talked about, I think, the expectation is that every year you'll sign about a billion dollars of new prime vendor contracts. contracts and um i want to go back to 2025 because it'll get it'll let us hit a bunch of topics where you guys actually signed 2.4 billion of private vendor contracts let's start at the high level and i think that's going to bleed us into some other important concepts and topics here but why did you sign such an elevated level in 2025 yeah so if you think about our business right we are we are very focused on gaining share every single day we gain share through these new customer signings uh and we signed like you said 2.4 billion dollars we're really pleased with those signings last year.

The market dynamics allowed us to do so. Part of it is our business model. Part of it is our value proposition that we've created and the value we provide for our customers. Part of it is the competitive landscape that's going on in the marketplace today. And part of it was, I think, the way that we handled the tariffs. Think about the tariff situation. We were slow to respond intentionally. We intentionally monitored the situation. We We waited to take our time to understand what was really going on in the marketplace. And then we took a price increase in August of last year. We were very transparent with our customers on what that meant and why we were doing what And in fact, we only absorbed a portion of the overall tariff impact. So I think the combination of those three things, our value proposition, the market competitive dynamics, and the way we handled tariffs have enabled us to really gain some share, additional share. And that's why you saw $2.4 billion. Now, probably your next question, not to take your next question, but it's going to be, well how much are you setting as a goal for this year our goal this year our goal every year is to sign a billion dollars why because that's what we can control that's what we know is available to be controlled by us to win in the marketplace there might be some years where we we win more when when the market dynamics allow us to do so but ultimately for us we have we have line of sight and confidence in signing a billion dollars of new kind of customer signings every single year okay when you're signing these relationships what do they typically look like in terms of duration and maybe talk to us a little about retention over time with your prime vendors? Typically, they're five-year contracts with rights for multiple years of renewals. And the retention rate is 98% over the past five-plus years. We focus on our existing customers and take care of our existing customers. They're as important to us, if not more important to us, than new customers, right? If you lose existing customers, you can't grow the business. So for us, we want to make sure we retain our existing customers first and then sign new customers.

And as you signed a larger mix of the prime vendors or a larger amount of prime vendors in 2025, talk to us about what is the short term financial impact of that and then what should be the medium to long term impact of it as well.

Yeah, so when we sign a new prime vendor, a new customer signing, as I mentioned earlier, typically in year one, it's 90% supply chain. That's at a 5% EBITDA margin. And then over time, as we convert to Medline brand, it moves to 22% EBITDA margin when you convert to the Medline brand item. And so in year one, it is margin percent dilutive to sign a new customer, essentially, right, because it's more supply chain. But over time, it drives margin accretion. but really how we think about this is we don't care about margin percent we're focused on margin dollar growth so there will be margin percent diluted when we sign a prime vendor and over time as we grow the business and we convert them to more medline brand it's margin dollar creative and growth oriented for us okay let's frame uh let's let's move a little bit of this into today into 2026 you talked about how medline one of the benefits to the customers is that you you move slowly in the sense that you move uh thoughtfully is maybe a better word than slowly move thoughtfully and you don't take price increases right away.

What does that mean for 2026? We have exposures to the Middle East, inflation, et cetera. Just talk to us about the moving pieces in the 26 guide now as you think about that again.

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

Okay, that's great. Now, on the pricing side, you had made a comment that in 25, and correct me if I'm wrong, that maybe you don't pass through 100% of the price at the end of the day.

Talk to us about where you decide you can and can't, or maybe can and can't isn't the right word. don't want to and choose not to yeah so we made a decision in 2025 when the tariffs first hit to study the situation to be thoughtful not slow be thoughtful about about how we manage the situation make sure we understood what was going on before we reacted because we think about the customer first how is this going to impact the customer once we had a better understanding of where the tariffs were going to land we made a decision to eventually raise prices for a portion of the cost increases we raise prices a certain percentage to still maintain our competitive advantage in the marketplace as a value provider and so we absorb a good portion of the tariffs but we also believe we gain share from that action and we'll continue to focus on that going forward fast

forward now to 2026 the middle east costs have started to inflate we'll see that the second half of the year and today we have no plans to raise prices but we are evaluating the same situation based upon what we see if this continues to persist and it continues to elevate we'll make a decision later this year if and when we should choose to raise prices okay great maybe um in the last five minutes here i realize actually i'll take us to the beginning because what i didn't talk about is just the growth algorithm for medline right so let's let's finish on that so that everybody has that information as well what do you expect this to be as a top line grower and talk about the algorithm that you've communicated to hit that that number and then talk about how you compound that on the EBITDA line?

So our long-term goal is to deliver high single-digit organic sales growth. And we've done that historically for the past many years. How we do that is both through same-store sales, so existing customer growth. We think the market is growing at 3% to 4%. We think we can grow faster than the market. In addition to that, new customer signings. And I talked about before, we signed $2.4 billion of new customer signings last year. Our goal is $1 billion again, once again, this year. And we're well on our way to achieving that goal so the combination of same store sales plus new customer signings will get you the high single digit growth okay and as it relates to the bottom line bottom line so our long-term target there is EBITDA growth at or greater than sales again we are not a margin percent accretion we're not focused on expansion we're focused on dollar growth and so for us EBITDA growth at or greater than sales now you won't see that in 2026 because of the tariffs in the Middle East but as we move further out we expect to see EBITDA growing at or greater than sense.

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

Yeah. So when we gave our full year guidance back in February after full year earnings, we basically guided to 89% organic growth. And in that guidance, we basically said that we expect to see some moderation in same-store sales in the back half of 2026 because our customers were telling us they expected some impact utilization and procedure volumes given the ACA enrollment, given the Medicare and Medicaid cuts, right? We didn't see that in the first quarter. Our first quarter results were very strong, top-line growth, as I mentioned, about 11%.

And so we have not seen that so far we've maintained that assumption in our guide so we maintain an assumption in our back half of the year there'll be some moderation not significant but some moderation sequentially in the same store sales because of it if that doesn't happen there's further upside in our numbers okay to what degree maybe the last question i'll leave here um and then we'll we'll go out to the breakout room but you know i think there's a little bit of push and pull as you think about this this backdrop and this isn't just the united states right if you look in in internationally i I mean, it might even be worse there with the budget constraints, but there's a little bit of a push here where it's just a tough market and maybe in some of your other lines, you can't take price to offset, but maybe arguably you're a part of the solution because you can drive more Medline brand. How do those two net out of one another as you look at the market that we're in today?

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

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