Medline Inc. (MDLN) Earnings

Management highlights

### Commercial Execution & New Customer Growth - Secured multiple new PrimeVendor and customer partnerships across acute care, physician offices, labs, skilled nursing, senior living, home health, and hospice. Through the first half of 2026, the company achieved over $650 million in total new customer signings, representing 65% of its full-year $1 billion goal. A key win was an expanded PrimeVendor Agreement with Alina Health in the Upper Midwest, covering both acute care and physician office settings. - New customer signings are currently tracking ahead of the pace needed to hit the $1 billion annual goal, and management expects to exceed this target in 2026. ### Supply Chain Resilience Post-Tracy Warehouse Fire - A mid-June fire destroyed the Tracy, California distribution center. The company quickly leveraged its existing broad distribution network, excess inventory, and internal MedTrans transportation fleet to minimize customer disruption, and relocated Tracy employees to nearby facilities within weeks. - Within one month, the company secured 1.6 million square feet of new distribution space across two Northern California locations, expanding the region's footprint by 45%. The new Tracy facility will begin serving customers in Q4 2026, and the Stockton facility is expected to open in January 2027. - The company also announced a new 1 million square foot distribution center in Southern California, bringing total California footprint to nearly 5 million square feet by mid-2027, with modern automation to improve network resiliency and support future growth. ### Quality & Regulatory Remediation - Patient safety and product quality remain the company's highest priority. The company continues to undertake remediation activities, strengthen its quality organization, and has modified its internal complaint review process, which is expected to increase Medical Device Reporting (MDR) submissions in the second half of 2026. - Some products removed from the market due to recalls and FDA inspection findings (including CHG wipes manufactured at the Waukegan facility) are taking longer than originally expected to bring back online, resulting in foregone earnings. ### Retail Business Restructuring - The retail channel, which represents less than 2% of total sales and is almost entirely Medline Brand, has faced unplanned softness driven primarily by the loss of a portion of business from one large customer, due to misalignment with customer needs. The company has realigned its sales organization to better serve retail customer needs and is working to recover lost business.

Guidance

- Organic sales guidance: Raised for the second time in 2026, to 9% to 10% from the prior range of 8.5% to 9.5%. This guidance includes $89 million of planned IEPA tariff refunds to customers. - Adjusted EBITDA guidance: Lowered to $3.3 billion to $3.4 billion from the prior range of $3.5 billion to $3.6 billion. The updated guidance excludes net IEPA tariff refund benefits to reflect underlying core performance. - Full-year 2026 net tariff impacts are now estimated at $350 million, down $140 million from the prior estimate of $490 million, following the replacement of Section 122 tariffs with Section 301 forced labor tariffs. Further tariff rate changes in 2026 are expected to have an immaterial impact on results, with most impact falling to 2027. - Capital expenditure guidance updated to $500 million to $600 million to account for costs related to the Tracy fire. Tax distribution guidance narrowed to $250 million to $300 million, the lower end of the prior range. - Sequential quarterly expectations: Q3 2026 has one fewer business day than Q2, so sequential sales are expected to be relatively flat, before increasing in Q4 (which has one more business day than Q4 2025) due to seasonality. Adjusted EBITDA is expected to increase sequentially each quarter, with the strongest growth in Q4. - Approximately half of the incremental cost pressure driving the EBITDA guidance reduction is transitory, and half is permanent and will become part of the future cost base. External factors (Middle East conflict, Tracy fire) account for ~25% of the total incremental impact, while internal factors (operational growth investments, quality remediation, retail softness) account for ~75%. Roughly one-third of the $200 million incremental full-year cost will be incurred in Q3, with the remaining two-thirds in Q4. - 2027 guidance will be provided during the Q4 2026/full-year earnings call in Q1 2027.

Segment performance

Overall company: Second quarter 2026 net sales increased 12% YoY to $7.7 billion; first half net sales were $15 billion, up 11% YoY. Adjusted EBITDA increased 13% YoY to $1.1 billion, with an adjusted EBITDA margin of 13.8% (up 20 bps YoY). 1. Medline Brand segment: - Second quarter net sales: $3.5 billion, up 7% YoY (IEPA tariff customer repayments reduced reported growth by 3 percentage points). First half net sales: $7 billion, up 6% YoY. - Sub-segments: - Surgical Solutions: Q2 net sales $1.6 billion, up 9% YoY (3 percentage point drag from tariffs). First half net sales $3.2 billion, up 8% YoY. Driven by strength in surgical kitting and operating room products. - Frontline Care: Q2 net sales $1.7 billion, up 4% YoY (3 percentage point drag from tariffs). First half net sales $3.3 billion, up 5% YoY. Growth from strong demand for exam gloves and personal care, partially offset by unplanned retail softness. - Lab and Diagnostics: Q2 net sales $248 million, up 12% YoY. First half net sales $541 million, up 6% YoY. Driven by new customer implementations and multi-channel prime vendor agreement growth. - Revenue contribution: Medline Brand accounts for approximately 45.5% of total Q2 net sales. 2. Supply Chain Solutions segment: - Second quarter net sales: $4.1 billion, up 16% YoY. First half net sales $8 billion, up 16% YoY. - Revenue contribution: Supply Chain Solutions accounts for approximately 53.2% of total Q2 net sales. By channel: - U.S. Acute Care: Q2 net sales grew 50% YoY to $5.4 billion. First half net sales $10.5 billion, up 13% YoY. - U.S. Non-Acute Care: Q2 net sales grew 4% YoY to $1.7 billion. First half net sales $3.5 billion, up 5% YoY. - International: Q2 net sales grew 9% YoY to $533 million. First half net sales $1 billion, up 10% YoY.

Risks & headwinds

- Macroeconomic and geopolitical risk: The ongoing Middle East conflict has created higher-than-expected inflationary pressure on fuel, raw material, and finished product costs, with input cost volatility creating uncertainty for margin projections. - Operational disruption risk: The Tracy distribution center fire incurred $336 million of pre-tax losses in the first half of 2026, with an additional $50 million to $100 million of expected costs in the second half. While the company expects sufficient insurance coverage for losses, the timing of recoveries is uncertain. - Quality and regulatory risk: Remediation activities and delayed re-launch of recalled products are creating near-term margin pressure, and increased MDR reporting requirements in the second half create potential for additional regulatory scrutiny. - Retail business risk: The retail segment's softness is creating a disproportionate headwind to Medline Brand segment growth and profitability, despite its small overall size. - Timing risk: New large customer contracts require upfront investment in labor and operations 3-6 months before full revenue realization, creating near-term margin pressure as the company brings a larger-than-usual volume of new business online.

Analyst Q&A

• Q: The analyst asks how the company's current strategy of investing ahead of growth aligns with its long-term approach to share gains, and what conditions are needed to return to EBITDA growth outpacing revenue growth. /

  A: Management confirms that investing ahead of demand has long been core to Medline's strategy. The company is currently investing in operations, quality, and infrastructure to support faster-than-expected growth, just as it has invested in new facilities and teams in prior periods. Underlying business performance remains strong, with organic growth of ~13% when adjusting for tariff refunds. The company maintained a conservative approach to guidance, excluding the $243 million net tariff benefit from adjusted EBITDA to show underlying core performance, even while raising sales guidance despite including $89 million of customer repayments. (339 characters)

• Q: The analyst asks for clarity on how much of the incremental cost pressure will persist into 2027, how much is transitory, and what the baseline 2027 run rate should reflect. /

  A: Management explains that roughly half of the total incremental margin impact is transitory, and half is permanent and will roll into the 2027 cost base. Middle East conflict and Tracy fire costs are mostly transitory and will subside once the new California distribution centers are fully operational with automation. Operational and quality investments are mostly permanent, while product launch delays and retail softness are expected to be transitory as the business recovers. The company is executing enterprise-wide cost savings initiatives to offset part of the permanent incremental burden, but external uncertainties remain. (415 characters)

• Q: The analyst asks about the company's current approach to pricing: whether the company will absorb current inflationary headwinds or push through price increases, and if there is a path to return Medline Brand to its historical mid-20% margin range. /

  A: Management states that during periods of cost uncertainty and volatility, the company prioritizes absorbing costs to gain share rather than pushing through price increases that may need to be reversed later. This approach worked well during the pandemic and prior periods of volatility. When cost levels stabilize and become the new norm, the company will push through justified price increases, as it has done historically. Price flexibility exists in existing contracts, so over time the company can return to its historical margin profile, with share gains preceding margin expansion. (401 characters)

• Q: The analyst asks if near-term margin pressure on supply chain solutions is driven by operational investments for new customers, and if there has been a change to the long-term margin expansion framework. /

  A: Management confirms that the near-term pressure is driven by the large volume of new business won last year that is coming online in 2026. ~90% of new prime vendor business is initially supply chain solutions, and first-year contracts include standard rebates that reduce near-term margins, which will fall away in year two. The segment's adjusted EBITDA margin is expected to land between 4.9% and 5% for 2026, aligned with current market conditions and investments. There has been no change to the long-term margin expansion framework. (364 characters)