UFP Technologies, Inc. Q3 FY2025 earnings call

• UFP achieved solid Q3 results despite high costs from labor inefficiency at AJR Illinois facility. - MedTech business saw 7.3% growth, with Interventional, Surgical, Orthopedics, and Wound Care each growing over 30%, offset by a 23% decline in Patient Services and Support. - Advanced Components declined 2.7% as resources were focused on the MedTech business. - AJR faced labor inefficiency issues leading to workforce turnover, reduced output, a $3M reduction in gross profit and operating income in Q3, but delayed orders are expected to be recaptured. - AJR in the Dominican Republic is improving with transfer programs ramping up. - Robotic surgery revenue increased by 5.1% in Q3, with 2 new programs launching in 2026, expected to have combined revenue over $10M in 2026 and grow rapidly thereafter. - In discussions to extend the long-term contract with the largest customer with increased volumes, and the customer planned a multimillion-dollar capital investment. - Recently completed acquisitions UNIPEC and TPI are performing well ahead of expectations and are accretive to earnings.

Overall sales grew 6.5% to $154.6 million. The MedTech business grew 7.3%, with Interventional and Surgical, Orthopedics and Wound Care each growing over 30%, while Patient Services and Support (AJR, Stryker business) declined by 23%. Advanced Components (non-medical business) decreased by 2.7%.

• Expect delayed orders revenue from AJR to be recaptured in the coming months as capacity ramps up. - The impact of AJR inefficiency is expected to continue for a couple more quarters but the greatest impact has passed. - The 2 new robotic surgery programs are expected to have combined revenue over $10M in 2026 and grow rapidly thereafter. - In process to extend the long-term contract with the largest customer with significantly increased volumes contemplated. - The customer planned a multimillion-dollar capital investment.

• Labor inefficiency at AJR Illinois facility led to a $3M reduction in gross profit and operating income and a $0.28 reduction in diluted EPS. - Tariffs paid in Q3, all passed through to customers, but the supplier tariff pass-through estimate was reduced. - New programs launching may have initial losses as they transition from losses to breakeven and profitability.

Q: 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?

A: Yes. When looking at our largest customer, their growth was actually higher than 5%. It was closer to 8% due to a one-year phenomenon where sales to Intuitive Surgical changed as production moved to the Dominican Republic.

Q: And then on the -- some of the other MedTech, the Interventional Orthopedic that grew, I think you said strong around 30%. Just looking any indication or any hints of the demand that you're seeing, if we can expect that to continue going forward?

A: Yes. We saw very strong demand in all three markets, a blend of acquisitions and internal growth, with only patient services and support (AJR/Stryker) showing compression.

Q: I wanted to follow up on some of the commentary about the contract dialogue. I think you noted in the press release and then again in the 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, does 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.

A: Yes, we are revisiting the contract with the goal of a rolling 4-year contract. They need us to plan for substantially higher volumes, requiring a new building and capital investment. The contract will incorporate all products, and volumes are contemplated to be significantly increased.

Q: I want to go to -- go back to the 2 programs that are expected to ramp in 2026. I think you mentioned a $10 million number in revenue contribution for next year. But sort of help me out, what do those 2 programs look like in terms of size, maybe once that's fully scaled, let's call it, in 2027 or 2028?

A: Our estimate of $10M in 2026 is conservative. One program could be over $10M in 2026 and the other half that size, both rapidly growing with potential to be over $20M in a few years.

Q: This is Noah on for Andrew. Just wanted to get a sense for the AJR pacing. You called out $8 million of incremental orders this quarter, $16 million in backlog. I think you said earlier to 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 being able to return to growth as you see those efficiencies? And so what should we expect from kind of that nonintuitive business that's kind of major. So just get a sense there.

A: We are working hard to reduce the backlog. Their business is growing, so demand is increasing. We aim to work down the backlog as fast as possible, with the business expected to continue growing in 2024 with a double-digit rate plus working down the backlog.

Q: I just want to drill on the $8 million of orders that weren't filled in the quarter. I just -- 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 quarter year-over-year?

A: It is.

Q: 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?

A: Yes, if we could deliver the $8M backlog, organic growth would be approximately 6%. Without the inefficiency, gross margins would be around 29.7%, EPS around $2.67, and adjusted EBITDA around $33.7M.

Q: 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 the 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 get it, $30.7 million of EBITDA, add $3 million and then you have these onetime costs. How big are those roughly?

A: For us, it's the cost of doing business. Per program, it's hundreds of thousands of dollars, but these losses will turn into profits in the next couple of quarters.

Q: 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?

A: We would think of it more as contribution, likely in the 30% to 35% range considering fixed costs.