UFP Technologies Inc (UFPT) 2025 Q4 法說會逐字稿

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

I would now like to turn the conference over to Ron Lataille, Vice President, Treasurer, and Chief Financial Officer, please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our 2025 year-end 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-looking statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates or 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 and 8-Ks, 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, Rob. I am pleased with our 2025 results and our progress on key strategic initiatives. Sales grew 19.5% for the full year, bringing our total revenue to $602.8 million. This is a significant revenue milestone and represents nearly a tripling of revenue since 2021. During that same four-year period, operating income grew 435%, and EPS grew 419%.

We also made significant progress on several key strategic initiatives related to contract extensions, program launches, facility expansions and related moves, and adding and training of new direct labor talent in St. Charles, Illinois, related to our previously disclosed E-Verify attrition issues. 2025 EPS grew 15.4% despite absorbing $6.3 million in labor inefficiencies at our Illinois AJR facility.

The AJR E-Verify labor inefficiency was $1.2 million in Q4, less than half of the $3 million Q3 impact, demonstrating the progress that is being made in onboarding and training new direct labor team members.

We are continuing to make progress expanding our capabilities and capacity in the Dominican Republic. In Santiago, we launched our second major program and have recently negotiated a lease for a third building, which will allow us to further expand our safe patient handling business and transfer a third major program. Each program transfer, when complete, saves our customers' money and increases our profit potential.

In La Romana DR, three significant new programs launched. Our fifth building and related move of equipment, materials and personnel is now complete. It houses a new expanded product development center, a newly launched external capital program and a centralized warehouse to support buildings 1 through 4. We plan to take possession of a sixth building in April, which will further expand our robotic surgery capacity to support anticipated growth.

We have also expanded and extended our contract with our largest customer, materially increasing the volumes on existing programs and adding an additional program. We have also made exciting progress in other markets, signing a contract extension with our largest infection prevention customer that runs through 2030.

In the orthopedic sterile packaging space, we have also won new business and added new capabilities in Ireland, which adds significant value to our global offerings. On the human resources front, our new director level talent, one level below our corporate officers, is making significant contributions in the US, Ireland, and the DR. This group runs our day-to-day operations and is doing a great job.

On the acquisition front, integrations of the four acquisitions completed in 2024 and the three completed in 2025 are all progressing well. We continue to search for additional strategic acquisitions that will increase our value to customers while maintaining our disciplined approach.

And finally, our CEO transition planning with Mitch; Rock is essentially complete, and he is well prepared to succeed me as CEO in June. I will continue for one year as Executive Chair to support him and provide assistance in vetting new acquisition opportunities and key strategic hires.

With a robust pipeline of new growth opportunities, significant progress on our strategic initiatives, including multiple successful program launches, exciting new talent in our company, and a strong balance sheet to fund future growth, we remain very bullish about our future.

I'll now hand it over to Ron to provide more color on our financials.

Thank you, Jeff. I am also pleased with our fourth quarter and year-end results as we delivered solid numbers despite working through the labor challenge at AJR referred to by Jeff. Before I provide more color on our results, I want to spend a few minutes on the cybersecurity breach disclosed in an 8-K last evening. The attack was detected on the morning of Saturday, February 14. By that evening, forensic incident response consultants were engaged. And by Sunday evening, they were on site in Newburyport.

This was a classic ransomware attack that appears to have impacted many but not all of our IT systems. Data was taken and then destroyed. Fortunately, we had credible duplicate backups and a thorough contingency plan that allowed us to operate since the date of the incident. At this point, the incident caused minimal interruptions to our operations, and we believe our primary information systems are being brought back online this week in all material respects. From a financial standpoint, we have cybersecurity insurance and do not expect a material impact to our operations, cash or liquidity, though our investigation is continuing.

Moving to operations. Overall, sales were up nicely, largely fueled by growth in the safe patient handling, infection control, and orthopedic packaging medical submarkets. As anticipated, organic sales growth for the year was low single digits. This is largely due to abnormally high 2024 sales in robotic surgery as well as backlog in our safe patient handling business due to the labor issue at AJR. Gross profit as a percentage of sales or gross margin decreased in 2025 to 28.3%, largely due to the $6.3 million in extra labor costs incurred at AJR, which are all reflected in cost of sales. Absent these additional labor costs, gross margins would have increased to 29.3%.

As Jeff mentioned, we improved efficiency levels in the fourth quarter and anticipate further ongoing improvement. Adjusted operating margin for the year was 17.1% of sales within our target range of 17% to 20% despite the extra labor costs. Our effective tax rate of 17.2% for the full year of 2025 was down from a year ago, reflecting a continued shift in pretax income to the Dominican Republic, where we effectively pay no income taxes.

2025 was a strong year for cash generation. We had approximately $92 million in cash from operations. And despite $12.9 million in capital expenditures and funding three acquisitions, we paid down approximately $53.9 million in debt and ended the year with a leverage ratio of approximately 1.1 times.

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

(Operator Instructions) Brett Fishbin, KeyBanc Capital Markets.

This is Will on for Brett. Good news around the contract extension. Could you just provide us any directional color on how we should think about volumes with your largest customer in '26 and '27? And maybe how we should think about the minimum volumes for '28 and '29? Then I have one more as a follow-up.

Sure. I mean, clearly, the contract extension is great news for us. It extended two additional years, which we knew was coming, but it makes the rest of the world settle down, and it was expanded to add additional program and the two programs in place increased materially.

So our customers, all of them now, have come to us and said, please do not give any information that could allow the outside world to predict our business, and/or put us at any competitive disadvantage. So we are now unfortunately not able to give any commentary on how significantly it went up, but they agreed to the words, material, because it is a material increase of where we are now.

And the same applies, unfortunately, for giving guidance on the '26 and '27. You can kind of refer to the previous contract, and you know there's minimums that they have to hit. I think it has to be in the low 7s in the last couple of years. They have consistently been higher than those minimums. But under strict instructions from many of our customers, we're not going to be able to give specifics, unfortunately.

Okay. Yeah. I think that makes sense. And then maybe just going over to AJR. Regarding the headwinds, like you indicated $1.2 million impact in 4Q. How are you thinking about this impact in 1Q? And maybe just any impact in the rest of '26?

Yeah. So the team is making consistent progress. There's a couple of different objectives. One was to bring on new people because our team was way down. So we have staffed up to the level that we needed to be. Some are still temps. Some are permanent. When they get to a certain level of skill, they switch over.

And so two things happen then, the skill goes up and the cost goes down. So we are continuing to transition to temps, but we're not bringing in new people in general right now. So those two things are all forward progress we're going to look forward to.

And then we're running overtime now. So we're at their level. So we can keep up with our existing team and we're running over time to knock down any backlog that exists. And we did unfortunately have backlog carry over into this year, which is good news for the revenue of this year, but it's bad news that we haven't completely caught up with our customer. So when that backlog is worked down, we will get rid of the overtime as well.

So everything going forward should be progress. So we expect Q1 will have some impact. It will be less than the fourth quarter, and then it will diminish after that. So yeah, there will be some carry on, but continued progress is expected in each consecutive quarter.

Justin Ages, CJS Securities.

Can you give us a little more color on the puts and takes of the flat MedTech growth? I know you mentioned infection prevention, but just trying to take a look into 2026 and kind of size what's going to be the main drivers of growth there in MedTech. Thank you.

Sure. We're expecting continued robust growth in the patient services market. So that is expanding on its own, and we're catching up from the prior year. So I think that will be a super strong year. We've also launched three new programs of late, one, in infection prevention, two, in robotic surgery, which are both positive influences going forward.

There's some other markets that are coming along that sort of represent growth in the future that are in the development stages now. Those are a little more wound care and/or diagnostics. I don't think those will hit 2026 revenue, but they hit the list of things we're excited about going forward. And so that's sort of the update on what we expect to be robust growth next year.

And Justin, let me elaborate. It's Ron. So if you're talking about flat MedTech growth specifically for the Q4, just a reminder that we had some revenue pulled into Q3. So sales in Q3 were higher, if you recall, than we had anticipated. So that's part of the reason why sales specifically for the fourth quarter were a bit softer.

That's helpful. Thanks for that. And then second, on the cybersecurity incident, any -- I know it's just -- you mentioned systems are back in line, but is there any disruption in business that will impact growth rates? So operationally, it seems to be, things are back in order. But in terms of performing for customers, is there any impact there? Is that still under investigation?

I mean, big picture, it's not good news, obviously, that somebody is able to get into our system. It was really good news how our team responded and how robust our backup systems were. So we were back in action literally day one making parts, but we didn't have the ability day one to label everything properly and ship everything. So there will be a delay in how things get shipped.

I'll turn it over to Ron to give you some specifics. But the key is we're able to keep making everything we needed to make. There may be some delays in when some of these things actually ship.

Yeah. The event happened mid-quarter, and we are back online in all of our ERP systems as we speak. So the team -- fortunately, we had the wherewithal years ago, our Senior Vice President of IT in conjunction with our operations leadership developed a pretty robust contingency plan to operate without systems for this exact reason. And we launched that contingency plan. And so albeit inefficiently, we were able to make parts and ship to the customers with manual invoicing.

So I don't think there's going to be a material impact on Q1 in its entirety. It will be soft within the months, the month of February within the quarter, but we'll make up for it in March.

Max Michaelis, Lake Street Capital Markets.

A few here around the contract extension, just around the facility, I guess, so that sixth facility. Are you guys on the hook for that entire investment? Are you getting any help from your largest customer here? Or I should say, as well as what's sort of the time line of completion of that facility, too?

Yes. So with all of our major contracts, there's co-investment really without exception. Some of them, the customers are on the hook for literally all of the capital. So again, under confidentiality with the customer, we haven't been able to give out all those details. I can tell you our primary responsibility in this contract extension relates to leases and personnel.

So capacity is ramping up. So capital will be purchased, and it will be installed, and we will be starting -- I think we take possession of the sixth building in April. And so we will begin -- first of all, we have to get the thing fit for use, which is putting clean rooms and get it all set up. So it will start this year, and we'll be adding that capacity. And like I just mentioned, our primary responsibility is leases and personnel.

Perfect. Okay. And then you guys called out safe patient handling in the press release as well. Is there any way you can kind of size that opportunity for us? It seems like it's going to be a solid opportunity here. You expect more growth in 2026. So just kind of give -- can you give us an idea of what the market size is there? Or just any way you can help us?

Yes. So I think that's a large and growing market. And so we've partnered with the market leader. And so we're experiencing double-digit growth without making up for previous backlog additions. So I think that you can look forward to robust growth in that market for multiple years.

Andrew Cooper, Raymond James.

Maybe first, just want to clarify some of the commentary around new programs. I think in the release, you mentioned we launched three new programs, and it sounded like referring to the La Romana facility. So just curious, I know you had talked about two, and then you mentioned one new one in the extended contract. Are those the three? Or is there an additional program that's sort of net new that we need to think about for that facility or that line of business?

Yes. So two of the programs were the multimillion dollar programs we had referred to in the past that we're launching at the end of the year that were both robotic surgery related. And then the third one was actually not robotic surgery. We had three different plants sort of collaborate and come together with their materials expertise and process expertise to really design an infection prevention device, start to finish that we will ship directly to the patients. It will be packaged and ready to go from our facility.

So that one has launched in La Romana in our new building number 5. That is set up and going. It launches are slow, but we are making parts, but they'll go through a rigorous process of vetting those parts and they'll slowly ramp up. But yes, the third program is not robotic surgery.

Okay. That's helpful context. And then I know you're limited in what you're able to say in terms of the contract, but I think the release included noting that you added volume-based pricing matrices and some cost sharing provisions. I just want to clarify, are those net new? And is there anything to read into layering those in and how that maybe portends for sort of the long-term nature and maybe not needing to amend or adjust the contract as much going forward because you have some of these kind of features in place in the existing language?

Yes. So the contract -- the key to contract for us is when we make a long-term commitment to a customer, we want to make a long-term contract with a vendor at the same time. So part and parcel to this is if we make promises to the customer that relate to cost downs, very often, they're being financed by our vendor or together with our vendor. When we come up with cost-saving initiatives, they are typically shared with our customer.

So I think the customer wins, and we win in this process. So I don't think there's any negative to look forward to both, other than the increased volume. But there is when they hit certain milestones, whatever those are, there is cost sharing opportunities that is borne between the three of us or enjoyed between the three, I should say, the vendor, ourselves, and the customer.

I didn't mean to imply a negative. Sorry if that came across differently, but that's helpful. And then lastly, maybe just the AJR business. I mean, I think you talked about about $8 million of backlog at the last update. Just curious, did that work down at all in the quarter?

And if not, how should we think about the pacing of that starting to happen? And then just any updates on knowing you have this third program moving -- starting to move to the Dominican Republic, on kind of completion of and when we should expect kind of pacing of the shift to start flowing through the P&L and more?

So Ron, I'll let you tackle the backlog, and then I'll switch over and tackle the second question, which relates to program 3.

Yes. So our customer specifically asked us not to speak of backlog. The $8 million you referred to, Andrew, was the quarter, not the full amount. So I can tell you that the backlog going into '26 is higher than that, but I can't disclose the number. And we do expect to work it down gradually throughout '26.

Okay. With respect to program number 3, these were all Phase 1 and the next and the next. So program #1 was completely transferred up and running and running at rate. Program 2 has now been transferred. It's up and running, but not running at rate as we go through the process. And program 3 is scheduled to transfer when program 2 is complete. We're taking possession of a new building, I believe, in April also, and we'll get that set up. So that will be sort of the second half of the year assignment.

The key is that we have full capabilities already in Illinois to do these programs. So these are redundant capabilities. And when they move over, our customer enjoys some cost saves, and we enjoy the opportunity to make additional profits when we get to our run rate levels.

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

Thank you, operator. And thank you all for participating on the call. We are super excited about the future. The long-term contract hopefully dispels some of the concerns some people might have had. And we have really positioned ourselves with our top three or four customers for the next four or five years of really understanding what our growth trajectory is, and we have the vendors aligned right beside us.

I think we've done an excellent job in the transition plan for our new CEO. He is super fired up. He's been with us for 25-plus years. He was integral in helping develop the strategy. He's been integral in executing the strategy. We've had a development plan that has given him exposure to all different parts of the business, including to some of our investors of late. It has all gone super well. And so I think that's something for everybody to be excited about. I can tell you he is fired up. He's well qualified and a super smart guy.

So we appreciate your interest. We're excited about the future, and I'll end it there.

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