Ufp Technologies Inc Q1 FY2026 Earnings Call

Please note this event is being recorded. I would now like to turn the conference over to Ron Lataille, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our 2026 First Quarter 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 U.S. 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, including disclosures 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 earnings per share 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. I am pleased with our first quarter results and start to the year, including important progress on our strategic growth initiatives. Our revenue grew 4.1% with medical sales growing 5.9% and our nonmedical sales declining 15% as we continue to focus our efforts on best-fit, fast-growing segments in the MedTech space. Growth in our robotic surgery, patient surfaces & support and interventional and surgical segments of 7%, 11% and 15%, respectively, were partially offset by declines in Wound Care as two major customers slowed temporarily due to excess inventory. EPS grew more slowly than revenue due in part to, number one, start-up costs related to our four simultaneous program launches, each of which is slowly ramping up and expected to make meaningful contributions in the second half of the year. Number two, softer results at AJR versus Q1 of 2025 as they continue to work through their labor inefficiency issues related to turnover following our E-Verify (legal right-to-work) process last year. And number three, nonrecurring legal expenses related to a cyberattack and the CEO transition. A lot of exciting things are happening on the business expansion front. In addition to the four successful program launches, three of those four customers have already asked us to double our capacity on the new programs. We are also adding new buildings in both Santiago, Dominican Republic and La Romana, Dominican Republic to expand capacity and accommodate forecast growth in patient surfaces & support and robotic surgery. In both locations, we are co-investing with our customers and will take possession of the buildings in the second quarter of this year. We're also in the planning stages to add capacity in the APAC region to meet growing demand in Asia. Our new product development labs in La Romana and Grand Rapids are performing well, adding new programs and new talent to meet growing customer demand. On the acquisition front, we are reviewing multiple opportunities. Although we have been outbid on a couple of recent opportunities, we remain disciplined in our approach to vetting and valuing strategic acquisitions. The three acquisitions we completed in 2025 and the four in 2024 are all performing well and have increased our value to customers and strengthened our position in the market. Mitch Rock is excited to take over as CEO in June and is well prepared to succeed. We have a deep team of talented managers supporting him who understand our strategy and how they fit in. This team, together with our vendor partners, add significant value to our blue-chip customers in growing market segments. Each of these three critical components of our success—our team, our customers and our vendor partners—trust and respect Mitch and look forward to continuing to grow with UFP. So for these reasons and many more, I'm very excited about the future of UFP Technologies and the value it can create for our shareholders. Thank you, and I will now hand it back to Ron to provide more color on our financials.

Thank you, Jeff. Before reviewing operating results, I'd like to give a brief update on tariffs and the impact of the conflict in Iran on our raw material input costs. In general, effective tariffs are down from our last update. This should have a positive prospective impact on margins. Additionally, as our suppliers seek refunds from the government, we will be looking for these to flow through to us in the form of vendor credits. Countering these savings are raw material inflationary increases caused by the increased price of oil stemming from the conflict in Iran. It is difficult to estimate the ultimate impact as the news changes daily, and therefore the price of oil has been volatile. It remains our expectation that we will pass these through to our customers. Moving to operations, as Jeff mentioned, overall sales were up 4%, fueled by a 6% increase in medical sales. Strength in this area was driven by our robotic-assisted surgery, patient surfaces and support and interventional and surgical submarkets. As anticipated, organic sales growth for the quarter was essentially flat as we are slowly ramping our new programs and our non-medical business continues to soften. We anticipate that the new program revenue growth will accelerate in the second half of the year. In addition, approximately $1 million in sales was pushed into the second quarter due to a cyber event at one of our key customers. Of note, sales to our two largest customers collectively grew 7.5% during the first quarter. Gross profit as a percentage of sales, or gross margin, increased to 28.8% from 28.5% last year. This improvement was despite continued labor inefficiencies at AJR, which, although diminishing, are still impacting cost of sales. Helping to drive the improvement was a more than 200% increase in revenue in Santiago, Dominican Republic, enabling us to leverage fixed overhead costs at this location. SG&A expenses for our first quarter of 2026 increased by $2.2 million to $21 million. This is largely due to approximately $750,000 in wages and benefits for back-office investments made at various times during 2025 to support our larger organization as well as approximately $0.5 million in noncash equity compensation. We also incurred approximately $0.5 million in nonrecurring legal expenses due to the cyber breach incident in mid-February as well as the anticipated CEO transition. Adjusted operating margin for the first quarter was 16.7% of sales and adjusted earnings per diluted share outstanding was $2.48, up slightly from last year. We generated approximately $3.2 million in cash from operations during our first quarter. This was lower than is typical as a much stronger March sales month created a correspondingly high working capital need. Since March 31, we have paid down approximately $4 million in debt. Capital expenditures were $1.7 million during our first quarter, and we ended with a leverage ratio of approximately 1.14x. With that, I now turn it back to the operator for questions.

The first question comes from Brett Fishbin with KeyBanc Capital Markets.

I just wanted to start off with the robotics segment, and I saw in the press release you mentioned 7% growth in this category. I was hoping you could discuss this a little bit more, maybe touch on the contribution from the new products that are starting to ramp in this segment. And then also, how is growth trending across your larger customer base outside of the large robotics customer?

Sure. The 7% growth was a blend, but it's primarily existing anchor programs at this point. The new programs that we've launched are still in their infancy stage. Over time, they will be a bigger and bigger component of our growth. We are pleased with the start to the year in the robotic surgery area; at 7%, it was a little higher than we had originally forecast. With respect to the second part of the question, our business is becoming more and more diverse within Intuitive with additional programs and more diverse with additional customers. You will continue to see less of a dominant position in that one customer as we go forward.

I was asking about the new product launches and then also how non-Intuitive customers overall are doing.

Our business is becoming more diverse within Intuitive with additional programs and also more diverse across additional customers. You will continue to see less of a dominant position with that one customer as we go forward.

And then maybe just more broadly, you mentioned four large programs that are currently in the ramp phase. Maybe give a little more flavor around how you're thinking about those opportunities. I know you mentioned that they're expected to become significant contributors in the back half. Could you provide a bit more detail on your expectations?

Three of the four programs are brand new and one was a transfer. For the three new programs, each of those customers has already asked us to at least double our capacity with them. So these were very successful launches, but the start-up revenue is still small. Revenue will ramp into Q2 and be more robust in Q3 and Q4 and then continue on. As we add new capacity, those three programs will be meaningful contributors. Two were robotic surgery and one was an infection prevention program.

Perfect. One last question from me: the nonmedical business was down a little more than we were expecting. Do you think that's the right way to think about it for the rest of the year from a growth perspective, or is anything changing in a notable way as the year progresses?

Yes, absolutely. The dominant drop was in automotive, which I think is going to be the new normal as we phase out of that market. There was also softness in aerospace and defense, and that will flip; we already have some activity that's going to take that from slowing back to growing. Advanced components will continue to show little to no growth over time in certain markets like automotive, where we will completely phase out.

The next question comes from Justin Ages with CJS Securities.

You mentioned the four large programs ramping and contributing in the second half. Can we dig down a bit and talk about the impact to profitability from those? How long will the start-up costs be in there? Are we going to see those go down once the programs start contributing more in the second half?

The start-up costs relate to getting the whole team prepared and trained before the volume follows. All those hires have been made, and those people have been trained. As the volume ramps up, we'll be absorbing those costs, so the fixed costs won't increase but the revenue will. We'll ship a handful of parts, then a pallet, and eventually scale up production. By the second half of the year, I expect robust contributions from all three of those brand-new programs.

I appreciate that. You mentioned taking control of two buildings, one in La Romana and one in Santiago. Can you remind us how many buildings you have in each location and what the capacity looks like after that? You mentioned customers are asking for increased capacity, so are there additional buildings in the pipeline?

In La Romana, this will be our sixth building. It's approximately one-sixth more capacity and is primarily for robotic surgery. We set up a large infection prevention program in one of the other buildings, so the La Romana campus is dominantly robotic surgery. In Santiago, we're adding our third building, which is predominantly patient surfaces and support and will remain that way for the time being. If we have new low-cost country applications, we'll likely direct them to La Romana in the short term because that team is very experienced and their quality systems have been operating for decades, whereas Santiago is more of a start-up situation.

The next question comes from Andrew Cooper with Raymond James.

First, I want to touch on the Wound Care drag you called out tied to inventory. Can you give a sense of magnitude for those programs and what gives you confidence that this is purely an inventory dynamic that should normalize as the year progresses?

These are both large customers within wound care, but not necessarily large customers for UFP Technologies overall. Both had inventory issues that they thought would impact us for about an eight-month period. At the same time, we have two major programs that were in development in wound care. I'm long-term very bullish on wound care; there seems to be a resurgence of interest in this area. Probably a three-quarter impact from the slowdown in wound care, then a return to normal, and next year we would likely overlay some new programs.

Shifting to the AJR business: first, you called out the more than 200% growth coming out of Santiago. What inning of the transition of getting those products from Illinois to Santiago would you say we are in? Second, regarding the labor headwinds, where are we in terms of temporary labor versus full-time hires and getting those hires trained and back to full capacity so you can meaningfully work down backlog?

For the transfers, we think in terms of three major programs. Program #1 is completely transferred and running at rate. Program #2 is now completely transferred and about to ramp up in rate; we've seen approximately a tripling of volume over the last 12 months and that will continue to grow. Program #3 has not really started: we have the space and the equipment onsite, but there's a long PPAP and protocol process before it will get up and running, and that may take more than a year to be a meaningful contributor to Santiago. Regarding AJR, as Santiago comes up, it will take some pressure off AJR. We have a lot of employees in Chicago and we geared up quickly to get backlog down. The problem is we had overtime with a less efficient crew. That overtime is already beginning to subside. As we transfer more work, the less efficient employees will naturally fall off and the most efficient employees who are eligible for overtime and incentives will remain. I expect to see a smooth improvement. Between Q3 and Q4, we cut the problem about in half. Between Q4 and Q1, we made about a 25% improvement. There's still a ways to go, but I think it will accelerate when we ramp up in Santiago. Ultimately, we'll end up with a smaller, more efficient crew in Illinois.

Great. One last question: can you provide more color on what you're seeing in the M&A landscape and how you're thinking about it? You mentioned a couple of opportunities that were interesting but not compelling from a valuation perspective. Any update on the landscape?

We have a number of discussions underway, but it's a little quiet right now. There were some big deals that went through that we bid on, a couple unsuccessfully, which we are fine with. If we get outbid, we'd rather be outbid by a lot than miss it by a little. We are disciplined in our process: vetting strategically, vetting culture, and vetting value. We have some small ones we're working on and one very large opportunity percolating in the background that will probably take a while if it comes to fruition. The perfect deals for us are medium-sized ones, and there are fewer of those than we'd like, but we look at deals every week and have meetings with prospects every week. The pipeline is constantly refilled and vetted and some opportunities fall off. I still believe that over the next multiple years, acquisition growth will be 50% of our overall growth; it's just hard to time.

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

Thank you, operator, and thank you to everybody joining the call. Just to close, this is my last call as CEO, and I really appreciate all the support of our shareholders. I'm super excited about the future of the company. UFP is still the largest investment I have by multiples of greater than 10 over the next largest stock, and it's the most exciting stock in my portfolio. I think the team of people taking over is super fired up and super excited. It's a very deep team of people. Mitch is well respected. He is ready to go and well prepared to succeed. I will be there for the next year as Executive Chair to support him with acquisitions, key strategic hires, and so on. I just want to say thank you, and I appreciate everybody.

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