Earnings Call Transcript - UFPT 2026-11-04

Operator

Good day, and welcome to UFP Technologies 3rd Quarter 2026 on e-Conference Call. All participant line will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask a question. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note that this event is being recorded. I would now like to turn the conference over to Ron Letai, Senior Vice President, Treasurer, and Chief Financial Officer.

Ronald Lataille, CFO

Please go ahead. Thank you, Operator. Good morning, and thank you for joining us on our 2026 third quarter earnings conference call. With me on today's call is our CEO, Mitch Rock. Today, we will make some forward-looking statements within the meeting 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 and 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 Mitch. Thank you, Ron.

Mitchell Rock, CEO

Good morning, everyone, and thank you for joining us. Our third quarter reflects solid execution across UFP and steady progress on our long-term growth strategy. Third quarter sales were $172.4 million, up 11.6%. Organic growth was 11.1%. Gross margin increased to 29.4%. Adjusted operating income grew 14.5%. Adjusted earnings per share increased to $2.88. Year-to-date, sales are up 10.3% to $500.6 million. MedTech grew 11.7%, and our top five MedTech customers collectively also grew 11.7%. What stands out to me is how broad the growth is. MedTech sales were up 12.5% in the quarter, with demand across the portfolio. One of the real strengths of UFP is that our growth does not depend on any single customer, program, or end market. We were proud to be recognized by one of our top five customers with a supplier award for creating value through innovation and cost savings. That's exactly what we're aiming for. Line up with where our customers are going long-term and help them scale while taking costs out. On operations, we are continuing to make progress. We are scaling new programs in the Dominican Republic. Margins are improving in our legacy UFP operations. And at AJR, we've made significant year-over-year progress, both in the U.S. and in the Dominican Republic. That said, we're behind schedule moving AJR activity to the Dominican Republic. We remain committed to finishing those transfers, scaling up operations, and delivering the savings we anticipate. At the same time, We're investing ahead of growth in other parts of the business. At DAS Medical, we are adding capacity ahead of anticipated double-digit growth, along with the people and capabilities to support it. And we are broadening what we can do. In August, we acquired CI Medical, a niche medical device printing business. That prints on injection-molded and extruded plastic components. CI Medical serves device development and low-volume, high-mix applications. It's a strong fit with our growing plastics business. We also see an opportunity to expand medical injection molding. Our 2025 investment in TPI gave us a strong initial position in this large and established market. And CI Medical adds the printing capability that goes along with injection-molded and extruded components. Together, they expand what we can offer our customers and add value across the UFP platform. Beyond these investments, acquisitions have always been a key part of our growth strategy, and we're positioning UFP to do more. We are making progress on several opportunities, and as UFP has grown, so has the size and range of the businesses we can take on. We remain disciplined on strategic fit and valuation. In parallel, we're working to expand our credit facility, which gives us room to invest in high-quality businesses that meet our criteria. Between a strong, conservative balance sheet, a bigger team, and our decentralized operating model, we believe we can bring on larger businesses and keep investing in organic growth. As we look to 2027, I'm optimistic. We have strong customer relationships, expanding capabilities, new capacity coming online, meaningful organic growth opportunities, and an active acquisition pipeline. We also have areas where execution needs to improve, and we remain focused on those. Our strategy remains consistent. Grow with our customers. Invest in our people and capabilities, improve our operations, make discipline acquisitions, and create long-term value for our shareholders. None of this happens without our thousands of team members around the world. I want to thank them for their commitment to our customers, to each other, and to getting better every day. Thank you. And with that, I'll turn it over to Ron. Thank you, Mitch.

Ronald Lataille, CFO

With regard to operating results, as Mitch mentioned, overall sales were up 11.6%, fueled by strength in the patient beds and handling, cardiovascular, infection control, and orthopedic sub-mockets. Organic sales growth for the quarter was strong at 11.1% as our launch programs accelerate, and we continue to improve efficiencies at AJR. Gross profit as a percentage of sales or gross margin increased to 29.4% from 27.7% last year. This improvement was despite continued margin headwind at AJR as high labor products scheduled to be transferred to the Dominican Republic continues to be contingent on customer qualification. SG&A expenses for our third quarter of 2026 increased by $4.1 million to $23.2 million. This is largely due to approximately $1.9 million in wages and benefits for back office investments. Increased members of our senior management team designed to accelerate growth and variable compensation, as well as approximately $800,000 in non-cash equity compensation caused partially by duplicate CEO equity costs. On a sequential basis, SG&A remained relatively similar. Adjusted operating margin for the third quarter was 17.5%, and adjusted earnings per diluted share outstanding was $2.88, up significantly from last year. We generated approximately $38.5 million in cash from operations during our third quarter. Capital expenditures were $3.9 million during our third quarter, and we ended with a leverage ratio of well under one time. With that, I now turn it back to the operator for questions.

Operator

Thank you so much. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any times your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from the line of Justin Aegis with CGS Securities. Please go ahead. Justin, you may please proceed with the question.

Justin Aegis, Analyst — CGS Securities

Yes. So, you mentioned strength in patient beds and a couple areas. Can you give us a sense on where robotic surgery growth was?

Mitchell Rock, CEO

Good morning, Justin. How are you? Yeah, so as Ron mentioned, we had, you know, broad growth in those four subsegments, actually double-digit growth, and as... We have indicated throughout the year that 2026 is a flat-to-down year in robotic surgery, so the results were consistent with that.

Justin Aegis, Analyst — CGS Securities

That's helpful. Thank you, Mitch. And then, you know, really strong free cash flow generation, and I know you talked on an active M&A pipeline. Can you kind of... Let us know about capital allocation priorities where you're looking at acquisitions or maybe instituting buybacks or anything like that.

Mitchell Rock, CEO

I would say broadly we're focused on allocating capital to support organic growth. And as you know, we have a capital light model, you know, so that pivots our focus to acquisitions. We've been... We are – that we have an active pipeline, and we're positioning the business to do more.

Justin Aegis, Analyst — CGS Securities

All right. Thanks for taking the question. You bet.

Operator

Thank you. Next question comes from the line of Brett Fishman with KeyBank. Please go ahead.

Brett Fishman, Analyst — KeyBank

Hey, guys. Thank you so much for taking the questions. Now, I wanted to just ask on AJR, and I know you guys are progressing in moving some of the product lines offshore, not quite done. So, I was just curious if you can give any updates on, you know, how it went during the quarter, and then any updated thoughts on the timeline to get the final programs moved offshore, and whether that could take place this year, or if that's more of a 2027 item.

Mitchell Rock, CEO

Good morning, Brett. Thanks for the question. What we would say broadly is we're really aligning our resources with our customers' priorities, and our customers' priorities over time can shift. I mean, this is a growing business with some moving parts that has a complex transfer. The overall business is contributing, so we're making it better. And then we are looking forward to 27 to complete additional transfer activity. So that's how I would think about it.

Brett Fishman, Analyst — KeyBank

All right, perfect, perfect. And then You know, I know you guys have the longer-term guidance framework, which is 12% to 18% growth, generally 50% organic, which gets to 6% to 9%. You know, you've been above that range in both 2Q and 3Q with double-digit growth. Maybe just any directional comments on, you know, what you kind of anticipate for 4Q and into 2027, if 6 to 9 is still kind of the right general baseline range to be thinking about.

Mitchell Rock, CEO

Yeah, I mean, as you know, we don't give quarterly or annual guidance. I think we're comfortable with the 6% to 9%. You know, obviously, we've had two good quarters. Q4 is traditionally softer, and as we've moved more activity to the DR, I expect that to continue to be true because we have more holiday shutdowns down there. So I think we're comfortable with the organic growth range and then the overall 12 to 18 with regard to organic and inorganic growth combined.

Brett Fishman, Analyst — KeyBank

Perfect. And last question from me. You know, you guys noted in the press release and then again on the call that some of the additional capacity you're adding to DOS Medical could support double-digit growth for that business next year. So just interested in any more color around your early assumptions here and kind of what gives you confidence and visibility into that range. Thank you so much.

Mitchell Rock, CEO

Yeah, great question. So this has been a five-year journey of investing in this business. In Q1, we signed an extension to support growth. So we have three things going on. We have the growth that we've invested in as far as supporting that long-term agreement. Two, we'll get the full-year benefit of the things that we've launched this year, the programs we've launched this year. And then lastly, more broadly, which is exciting, is that there are robotic surgical platforms that are gaining market adoption that have been what I would say is subscale so far, and we'll see some meaningful contribution as we move into 27 and beyond. So it's a great story.

Operator

Brett, have you done with the question?

Brett Fishman, Analyst — KeyBank

Yep, all said. Thank you so much.

Operator

Thanks, Brett. Our next question comes from the line of Andrew Cooper with Raymond James. Please, Brett.

Andrew Cooper, Analyst — Raymond James

Maybe first, just on margins and maybe how it plays into the AJR transition, I mean, you've continued to drive margins higher despite the, let's just say, lack of capture of the upside that you expect when those transitions do happen or the final transfers happen. So what's kind of enabled you to continue pushing higher from that perspective on the gross margin side? And how should we expect that to trend in 27 when those transfers do finalize?

Mitchell Rock, CEO

Good morning, Andrew. Great question. What I would think broadly about the portfolio is I would think we're focused on revenue growth and operating margin. There are quits and takes on the gross margin, so I think we're excited that we've made progress there. And I think the story is broad across the portfolio, a combination of volume and the team continuing to take costs out. So I think we're comfortable in our range of 28 to 31, and I think we're settling in at that 29%. So I think we're comfortable thinking about that that way.

Andrew Cooper, Analyst — Raymond James

Okay, helpful. And then maybe one on kind of some of the M&A commentary and obviously talking about upsizing some of the capacity there. I think it's interesting you called out TPI as well. Is injection molding an area where you think you can add meaningfully from maybe an organic investment perspective? Is that, you know, one of the focus areas when we think about M&A and just how do we think about the comment in the press release around broadening injection molding capabilities?

Mitchell Rock, CEO

Yeah, I think if you look at our platform from a capability perspective, you know, we have scale in films, foams, fabrics, and we're subscaling some other interesting areas like plastics or extrusion or adhesives. And, you know, it's probably the largest space in kind of single-use CDMOs. So, we have seen a lot of assets in that space, and we continue to be thoughtful about how to add it to the portfolio, both from an organic perspective and from an acquisition perspective.

Andrew Cooper, Analyst — Raymond James

Okay, helpful. And then maybe just one big picture one. It feels like there's a lot going on in med tech world and in your customer base overall. Has there been any, you know, change in tone or aggressiveness around kind of how they're thinking about development work and new product rollouts and, you know, ordering patterns, etc., as you think about the last, you know, call it couple of months of conversations you've had with some of these key accounts?

Mitchell Rock, CEO

Nothing really sticks out to me. I mean, I think, you know, ultimately, this, the macro trends in the space of, you know, trying to develop widgets that deliver a better patient outcome and ultimately drive costs out are consistent. So I think we will continue to, you know, map our resources to those customer needs.

Andrew Cooper, Analyst — Raymond James

Great. I'll stop there. I appreciate it. That.

Operator

Thank you. Our next question comes from the line of Luke Fingersun with Lake Street. Please go ahead.

Max Michaelis, Analyst — Lake Street

Max Michaelis, first question for you guys. SG&A is up about 20% year-over-year. Should we expect this to keep stepping up into 2027, or how should we think about that going forward?

Mitchell Rock, CEO

Good question. You know, a few points there. There is one-time duplicate CEO cost that will roll off. We do have additional cybersecurity costs that will be permanent. And then we've really invested ahead of growth in terms of the team, and so we suspect that that will moderate as we grow into those investments by both growing the business organically and adding some businesses to the platform via acquisition.

Max Michaelis, Analyst — Lake Street

Got it. Thank you. And then on capital allocation, so you expanded the credit facility and mentioned onboarding larger businesses. How much leverage are you guys willing to run on a larger deal? And then how are you guys thinking about structure when it comes to deal size?

Mitchell Rock, CEO

I think we're going to maintain the playbook. You know, we're going to look at, you know, continuing to, you know, our current credit facility is, we can borrow at 3.25 times EBITDA, and we're just thinking about it in the same way, just at a larger scale, given the size of the enterprise now.

Max Michaelis, Analyst — Lake Street

All right. Thank you.

Operator

Thank you. That was the last question for today. I now turn the conference back to Michelle Rock for any closing remarks. Thank you. And over to you, Mish.

Mitchell Rock, CEO

Oh, thank you. Well, thanks, everyone. I just want to thank our customers. And our team members, you know, without those two constituents, we wouldn't have a great business. We're super excited about going into 2027, and we appreciate all the support from the investment community. So have a great Thanksgiving and holiday season. We'll talk to you next quarter. Thank you, Mish.

Operator

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