UFP Technologies Inc (UFPT) 2025 Q3 法說會逐字稿

Good day and welcome to the UFP Technologies third-quarter 2025 earnings conference call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ronald J. Lataille, Senior Vice President, Treasurer, and Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning and thank you for joining us on our third-quarter 2025 earnings conference call. With me on today's call is our CEO and Chairman, Jeff Bailly.

Today, we will make some forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast, and similar expressions. Our forward-look statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates of views on any subsequent date.

Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent 10-Qs, including disclosure of the factors that could cause results to differ materially from those expressed or implied. During this call, we will discuss non-GAAP financial measures which include organic sales growth, adjusted gross margin, adjusted operating income, adjusted SG&A, adjusted EPS, and EBITDA and adjusted EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website.

I'll now turn the call over to Jeff.

Thank you, Ron, and thank you to everyone joining the call. UFP delivered solid Q3 results despite absorbing abnormally high costs related to the labor inefficiency challenge at our AGR Illinois facility. Overall sales grew 6.5% to $154.6 million. Our MedTech business grew 7.3% with impressive growth in interventional and surgical, orthopedics and wound care, each of which grew greater than 30%, offset by a 23% decline in patient services and support, which is our AJR, Stryker business.

Advanced components for non-medical business declined 2.7% as we continue to focus the majority of our resources on our MedTech business. AJR, one of six acquisitions we completed over the last 15 months, faced an issue when we went through the process of verifying the team's eligibility to legally work in the US. The E-Verify process led to the turnover of greater than 50% of the direct labor workforce.

Retraining a large percentage of our workforce reduced our output resulting in a significant reduction in revenue in a third-quarter $3 million reduction in gross profit and operating income and a $0.28 reduction in diluted EPS. We expect much of the revenue from delayed orders will be recaptured in the coming months when our capacity ramps back up to required levels and we can work down the backlog of open orders.

We've made significant progress in hiring and training new associates. July was the low point of our inefficiency when we suffered a significant loss in Illinois, and it made steady progress since with a smaller loss in August and a return to solid profitability in September. Although we expect the inefficiency to impact a couple more quarters, the greatest impact is now behind us.

[AJR's result] of the Dominican Republic should also continue to improve as qualifications are completed and production of transfer programs ramps up. Our first program is in commercial production. Second is in the qualification process, and we anticipate a third program transferring in 2026, all of which was contemplated in our five-year exclusive supply agreement with Stryker.

On the robotic surgery front, revenue was up 5.1% in Q3. We're completing the launch of two significant new programs. The combined revenue of those two programs should be greater than $10 million in 2026, and they continue to grow rapidly from there.

We are also in discussion to increase and extend our $500 million contract with our largest customer. They've asked us to plan for significantly increasing volumes. Both companies plan to make multi-million-dollar investments towards increasing capacity and efficiency at our La Romana facilities. We are simultaneously working on extending our exclusive supply agreement for a critical raw material in robotic drapes.

As a result, we remain very bullish about our long-term future in robotic surgery. Our two recently completed acquisitions, UNIPEC and TPI, are both performing well ahead of expectations and have been immediately accretive to our earnings. Organic growth for UFP was essentially flat in Q3 due to the reduction in AJR sales quarter over quarter. Setting aside acquisitions completed in the prior 15 months, UFP's based business grew approximately 5%.

In conclusion, we have a lot of positive momentum and good news to look forward to: AJR's return to profitability and improving operating efficiency as new team members complete their training positive impact of the transfer business in the Dominican Republic, launching and then reaching commercial production, two new robotic surgery programs launching and beginning commercial production, an extension process for a long-term contract with our largest cost with significantly increased volumes contemplated, and planned multi-million dollar capital investment by our customer, and the positive impact of our recent acquisitions combined with our efforts to find strategic acquisitions that increase our value to customers.

I will now hand it over to Ron to provide additional details on our financial results.

Thank you, Jeff. I am also pleased with our third-quarter results as we delivered solid numbers despite working through the large non-recurring labor challenge at AJR. Before I provide more color on these numbers, I'd like to start providing a brief update on tariffs.

As mentioned in our second-quarter call, we do not expect to be directly subject to a material amount of tariffs, and that was true in our third quarter when we paid approximately $160,000 in tariffs to the government, of which all was or will be passed through to our customers. On the supply side, our new estimate of the annual amount of tariffs to be passed through by our suppliers is approximately $6 million, down from the $9 million estimate in Q2. Like the direct tariffs, we anticipate passing through the raw material increases to our customers, some of which have already occurred.

Switching back to operating results, as Jeff mentioned, organic sales were essentially flat as the AJR business flipped from inorganic to organic for all of Q3. Due to the labor problem at AJR, more than $8 million in incremental orders were unable to be fulfilled during the quarter. Had we been able to meet the production demand, organic sales would have grown approximately 6%.

In light of these unfilled orders, backlog going into Q4 is approximately $16 million, much of which we expect to fulfill by early 2026. Gross profit as a percentage of sales or gross margin decreased to 27.7%, largely due to the $3 million and extra labor costs incurred at AJR, which are all reflected in the cost of sales. Absent the $3 million and additional labor costs, gross margins would have increased to 29.6%.

As Jeff mentioned, we have turned the corner in terms of recovery, and in fact, last week, the amount shipped were 3 times higher than the low point since the problem surfaced. Adjusted operating margin for the third quarter was 17% of sales, within our target range despite the $3 million of extra labor costs. Interest expense was down significantly as we continue to delever our balance sheet and our effective tax rate of 22.2% for the third quarter was down slightly from a year ago.

During the third quarter, we generated $35.9 million in cash from operations, paid down approximately $17.5 million in debt, and ended the quarter with a leverage ratio well below 1.5 times. Capital expenditures were $3.4 million.

With that, I now turn it back to the operator for questions.

(Operator Instructions) Justin Ages, CJS Securities.

Hi, good morning all. Can you give us a bit more color on the growth in robotic surgery, that 5% -- how much was from your largest customer. Any more details on that?

Yeah. So if you do the math on our largest customer, their growth was actually higher than that. It was closer to 8%. And the reason is we had this sort of one-year phenomenon if you go back in time, we were producing pouches, that sort of critical part between the robot and the surgical instrument, for the last couple decades, some of which were sold directly to Intuitive Surgical, some of which were sold to our competitor.

When we moved to Dominican Republic, those sales were no longer -- to an outsider, they were part of the product that we sold to Intuitive ourselves. So this is one year where this impact is going to happen. So robotic surgery sales of about 5.1%, with a blend of Intuitive Surgical being higher than that offset by this one-time impact.

That's helpful. Thanks. And then on the -- some of the other MedTech, the interventional orthopedic that grew, I think it's strong, around 30%, just looking, any indication or any hints if the demand that you're seeing, if we can expect that to continue going forward?

Yeah, I mean, we're seeing very strong demand in all three of those markets. It was a blend of some of our acquisitions and some of our internal growth. But the only market really across the board that we saw any compression and related to patient surfaces and support, which is literally our AJR/Stryker. So we see like a nice tailwind in in most of our markets offset by this sort of one-time item that we have to work our way through.

All right, I appreciate you guys taking the question. Thank you.

Brett Fishbin, KeyBanc.

Hey guys, good morning, Jeff. Good morning, Ron. I wanted to follow-up on some of the commentary about the contract dialogue. And you noted in the press release and then again in prepared remarks that you're in discussions to extend and expand that contract with your largest customer and mentioned that volumes are expected to increase significantly. So I wanted to follow-up and just see if there's any additional color you're able to provide on that.

And I was really wondering, just the word expand imply that the contract may include additional SKUs relative to what's been done in the past. And then can we assume that higher volume also means higher overall value for UFP? Thank you.

Sure. So yes, we have been requested to revisit the contract. I think the goal is going to be a rolling four-year contract. So there's a couple years left, maybe a little bit more. And so they're looking to extend it out a couple years.

The key is from our perspective, they need us to plan for substantially higher volumes. In order to do that, we literally have to get a brand-new building. If you recall, we brought our building five this year in our robotic surgery campus. We're going to have to add a sixth building. We're going to have to add new capital, new personnel, et cetera. So we need a commitment from them. And conversely, they need a commitment from us so that they can be assured of continuity supply.

In general, when we do a new contract, it does incorporate all the products, not just the XI, it would roll in all the other ones at the same time. Simultaneous, we are working on that contract with Intuitive -- we're going back and negotiating with our key supplier. So we'll look for our supplier to give similar commitments for volume that we do over the same four-year period.

And the volumes that are being contemplated are significantly increased over where we are now, particularly in the outyears. We have the capacity already to do, I think, about 9 million drapes, but they're looking for us to plan to do substantially more than that in the outyears.

All right, super helpful. And then maybe I'll just follow-up on in the quarter, I think inorganic revenue was again higher than we were expecting. And looking at the 12-month run rate, I think it was a little bit above 9 million. So maybe just touch on how the acquired businesses performed versus your expectations and whether the upside relative to call out the trailing 12-month rate with more from the new ones UNIPAC and TPI or from the final subperiod from some of your deals from last year. Thank you again.

Sure. So to start, both of our two new ones are small, but they're performing fantastically well. They're turning out to be homeruns even though they're little, both strategically by bringing us new capabilities and financially. So I would say the impact from the new acquisitions is relatively small. And so the inorganic growth you're more seeing is from the previous ones rolling forward, but we are thrilled with both of our new small acquisitions. And despite the fact that the small ones are not as impactful that we're able to -- I come up with much more pro-shareholder valuations in those than we're seeing in the market for the much larger deals, so we're still happy with the small deals.

All right, thanks so much again.

Max Michaelis, Lake Street Capital Market.

Hey guys, thanks for taking my question. I want to go back to the two programs that are expected to ramp in 2026. I think you mentioned the $10 million number in revenue contribution for next year, but sort of help me out. What do those two programs look like in terms of size maybe once that's fully scaled, let's call, in 2027 or 2028.

Yeah, so our estimate of $10 million in my feeling is very conservative. I think one of those programs alone could be $10 million in 2026 and the other about half that size. We're always very conservative in year one because we don't know if there's going to be delays in launching. But they're both substantial, greater than $5 million dollar programs that rate in both growing rapidly.

So in the outyears, one of them could be $20 million-plus within a few years, and the other one, harder to say, but they're both rapidly growing programs that we're super excited about. So I would take the $10 million as conservative and then look for 2027 to be a wonderful uptick from there.

Awesome. And then just with the recent discussions and the extension of your contract Intuitive. I know you talked about sort of an investment needed in the building six. I mean, how much are you guys in terms of investment on the hub for? Is this all, on their side I guess?

So it's being discussed and negotiated. They have already committed to a multi-million-dollar investment that's related to improving efficiency. Some of their internal initiatives came up with some efficiencies that are helpful to us and they share all these things with us. So they're in the process of a multi-million-dollar investment right now.

Typically, the shared capital at a minimum would be on the hook for investing in the leases, et cetera. I think the inclination of late is more that it would be Intuitive's capital than ours, but it has not been decided. It could be 100% either one or it could be split down the middle. In the past, we've done both, but I would expect some multi-billion dollar sharing of capital in the end.

Awesome. All right, thanks, guys.

Cooper Andrew, Raymond James.

Hey, guys. This is [Nolan] on for Andrew. Just wanted to get a sense for the AJR pacing. You call out $8 million of incremental orders this quarter, $16 million in backlog. I think you said earlier the a question you haven't seen any demand impact. So how should we think about you working down that backlog over the next few quarters and should we expect AJR be able to return the growth as you see those efficiencies? And so what should we expect in kind of that non-intuitive business that's kind of major, so just get a sense there.

Sure. So we're working hard to reduce that backlog. Unfortunately, their -- or fortunately, their business itself is growing, so the demand internally is growing in the backlog, as you say, is about a $15 million or $16 million. Our goal is to work it down as fast as possible. I think that they like us to have it done in the year. I think that's going to be a tall order. We're way more interested in output than efficiency right now, so we're throwing a lot of resources at getting their backlogged down.

As we go into next year, we're still expecting the business to continue to grow. So all on its own, it'll grow at a double-digit rate plus we'll be working down the backlog. So we have quite a bit of tailwind going into next year, So our goal, like I said, is to get our customer's orders fulfilled as fast as possible with less focus on efficiency. Next year, we'll turn our attention to doing things much more efficiently.

Okay, awesome. And then just one quick follow-up, in this -- and kind of following up to that, point on efficiency, we've already had that labor headwind, sort of troughing in 3Q and getting better from here. So now that you're sort of working -- now that you're working through all of that, how should we expect gross margins to pace going forward? I know you're [lapping] like the headwind next year, but just kind of curious how should we expect margins to trend, as you pull out those efficiencies in light of your LRP ranges.

This is Ron, Nolan. So yeah, we would anticipate gross margins gradually improving. As Jeff mentioned in his script, the inefficiencies are not going to be 100% eliminated. They'll linger into Q4 and potentially even into Q1 of next year as we focus on output rather than efficiency. So I think they will gradually improve from where we were in Q3, but I don't think they'll be back to where sort of adjusted gross margins would have been had we had no inefficiency in Q3.

Okay, awesome. Thank you.

[Wagned Ted, AFR].

Hey guys, thanks for taking the question. I just want to drill out on the $8 million of orders that weren't filled in the quarter. I think you mentioned it, Ron, in your prepared remarks. But just so I'm clear, that closed July of '24, so it is considered organic this this quarter year over year?

It is.

And so in a perfect world where you had delivered those, we should actually think about medical being more like $150 million, roughly 13%, 14% growth year over year?

Yeah, I think that's right (multiple speakers) To be clear, if we were able to deliver on the $8 million of backlog, organic growth would have been approximately 6%. Factoring in the inefficiency, the $3 million if we were -- if we did not have that $3 million, gross margins would have been -- adjusted gross margins would have been approximately 29.7%. EPS would have been approximately $2.67, and adjusted EBITDA would have been approximately $33.7 million.

Got it. And thinking about that EBITDA, I get that there was the $3 million of AJR cost, but I got to imagine there's cost associated with the ramp up in the qualification programs that you guys were getting started in in the quarter?

Yeah, 100%. Every program launches with losses and then transitions to breakeven and then to profitability. So the programs launching the DR are still in the losses phase and the program's launching in La Romana will be in the loss phase for the first quarter or two.

I mean, how would you -- can you size that for us or how should we think about that? It's just -- I'm trying to -- obviously, you guys -- you punched above your weight in a quarter with a lot going on, and I'm trying to kind of dig at what would be a good -- how should we kind of view, I don't know, lack of a better term, run rate EBITDA, and I'm -- you know I get it, $30.7 million of EBITDA, [add $3 million] and then you have these one-time cost. How big are those roughly?

I mean, for us, it's the cost of doing business because we're constantly launching programs, so we usually don't quantify them. Per program, it's not millions of dollars, but it's hundreds of thousands of dollars per program. But again, we're used to this. We factored into our planning, so we're constantly launching programs and constantly absorbing modest losses. But those several $100,000 of losses will turn into profits over the next couple of quarters. So it'll be meaningful, but it's just the cost of doing business for us.

And I know you guys talked about obviously wanting to serve the customer, getting that product out the door, not worrying so much about efficiency. But is it fair to assume the incremental margin on that additional $8 million probably would have been something a little greater than 20% or in that 20% to 25% range?

We would probably think of it more as contribution because all the fixed costs are kind of there, the rent of the engineers and everything. So the contributions considerably higher than that, when you subtract direct costs.

Yeah, it's probably in the 30% to 35% range.

So I mean, we should be thinking about it in a perfect quarter where none of this stuff happened, you're actually kind of run rating more like a $36 million, $37 million of EBITDA.

That's right.

Thanks. I'll get back in the queue.

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Bailey for any closing remarks.

Yeah. Thank you all for your participation and interest in UFP. As you can tell, we are super bullish about our future, particularly in the long-term front for robotic surgery. We will work our way through this one-time AJR issue. We have for the first time in the history of our company actually filed a claim after doing 20-something deals for miss on a rep and warranty. So maybe or maybe not, we'll get reimbursed for our expenses.

But one way or another, they're one time in nature. We'll move through them. We're working through them quickly. So we appreciate your patience in the process and we appreciate your interest in the company.

Thank you. The conference has now concluded Thank you for attending today's presentation. You may now disconnect.