Good day, and welcome to the UFP Technologies First Quarter of 2025 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Also, please be aware that today's call is being recorded. I would now like to turn the call over to the Chief Financial Officer, Ron Lataille. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us on our first quarter 2025 earnings conference call. With me on today's call is our CEO and Chairman, Jeff Bailly. Today, we will be making 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, 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 operating income, SG&A and 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 its available on 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 had a strong first quarter, revenue grew 41%, operating income increased 45%, and EPS grew 35% to $2.21. Our medical business grew 50%, driven by strong demand in the safe patient handling space, which has grown significantly since UFP acquired AJR. This growth was the result of winning new market share combined with higher overall market demand. This is now our second largest segment behind robotic surgery. We also saw impressive growth in our interventional and surgical infection prevention, orthopedics and advanced wound care segments, which all grew by more than 25%. The scale and rapid growth of our safe patient handling business are strategically important as it adds a new high-growth market segment for our medical portfolio and further diversifies our company. Our recent acquisitions have performed very well. Our integrations are on track, and they have been solid contributors to our growth. Our organic growth was 2.3%, 5.4% growth in Medtech was offset by a 16.3% decline in Advanced Components as we continue to focus our resources on our fastest-growing med tech opportunities. This was in line with our expectations for the quarter. Robotic surgery after multiple years of 20%-plus growth declined 6% in Q1 is anticipated to have only modest growth in 2025 following the completion of an inventory build by our largest customer in 2024. Our robotic surgery business remains an exciting long-term growth opportunity. We have two major new programs launching later this year, and we are in ongoing discussions with our largest Robotic Surgery partner at ways to support more of their needs that are covered in our current agreement. During the quarter, we continued to make progress on our key strategic initiatives. Highlights include signing a key customer agreement in a…

Thank you, Jeff. Before discussing our operating results, I'd like to touch on tariffs. As Jeff mentioned, we do not expect that tariffs will have a material direct impact on our operating results. That expectation is based on what we know today. As you all know, the global trade environment is very dynamic, so this could change. Based on shipments we make from our manufacturing operations outside of the United States to customers within the United States, for which we are responsible for importation. We have approximately $8 million of sales that would be subject to the 10% tariffs. Our management is confident that most of this resulting $800,000 in tariffs will be passed on. What is unknown is whether there will be an impact on demand from our customers who are subject to tariffs on our shipments. In addition, we do not know if there will be any inflationary impact on our incoming raw materials. Although virtually all US materials are sourced from US suppliers is unknown if any of their components are sourced globally. Now to operating results. As Jeff mentioned, sales for the first quarter increased 41.1% to $148.1 million from $105 million last year. First quarter sales to the medical market increased 50.4% to $135.4 million, while sales to all other markets decreased 15% to $12.7 million from $15 million as we continue to focus resources on our fastest growing med-tech opportunities. Gross profit as a percentage of sales or gross margin decreased slightly to 28.5% for the first quarter of 2025 from 28.6% in the first quarter of 2024. As anticipated, we had some inefficiency in our newly acquired AJR operations related to onboarding many new direct labor associates. We were able to offset most of it by leveraging fixed overhead costs throughout the company. It is anticipated that the inefficiency at AJR will continue through the second quarter as we continue to onboard new associates. Adjusted operating income for the quarter increased 49.5% to $25.8 million. This growth rate exceeds our sales growth rate as we were able to leverage SG&A expenses. Our effective tax rate for the first quarter of 2025 was 15.3%, reflecting the positive discrete impact of vested equity and a state tax refund. For modeling purposes, I would suggest a normalized rate of 21% to 23% for 2025. First quarter GAAP and adjusted diluted earnings per share increased 34.8% and 39.5% to $2.21 and $2.47, respectively. First quarter adjusted EBITDA increased 45.9% to $30.2 million. During our first quarter, we generated $13.8 million in cash from operations paid down approximately $7 million in debt and ended the quarter with a leverage ratio of below 1.5 times. Capital expenditures were $2.8 million. With that, I now turn it back to the operator for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question here will come from Jaeson Schmidt with Lake Street. Please go ahead.

Hey, guys, thanks for taking my questions. Just looking at the robotic surgery business, I just want to clarify the comments surrounding modest growth through 2025. Is that that business as a whole? Or is that at your largest customer within that business?

It's actually both. So we have a forecast from our largest customer that slightly exceeds last year's low single-digit growth. And then for the robotic surgery as a whole because we have other platforms coming on, they will stack into that growth, so combined still low single digits. The decline in the first quarter of 6% is partly because Q1 of last year had some large equipment sales that we are ramping up our capacity for our biggest customer. So, the actual unit sales is probably closer to even or even a modest growth in Q1, but we do expect both the largest customer and the group as a whole to grow.

Okay. That's really helpful. And then I know you mentioned at that largest customer, you're potentially working on additional programs. I mean there's been a lot of speculation on your relationship and specifically kind of share shifts going on at that customer. Would just be curious if you could provide some commentary on how we should think about your share at that customer going forward?

Yes. Currently, our understanding is we probably have about two-thirds of the share that our largest customer does a small amount themselves and another competitor that's a small amount. We used to share about 50/50 with a competitor. Slowly over time, we gain share. And similarly, at the same time, our largest customer brought on some of their own capacity. They had been working on this for years. It's very important for them to have a bulletproof supply chain. It was an opportunity for them to control their own destiny if need be. It's, in fact, helpful to us if they're successful in this venture because they have a two-supplier mandate. And so if they are successful and can be a part of the supply chain themselves, then them and us could be the two suppliers. So, we are rooting for them to be successful. And we -- they are very transparent with us. They've been losing to see their operation when they come up with something things a breakthrough they share with us so that we can also get our cost down. We're very partnered up with them. We have a great relationship, and they have assured us that they will always have a manual drape supplier as part of their future. And then -- so we feel good about them.

Okay. I appreciate that color. And then just the last one for me, and I'll jump back in the queue. Just given the macro backdrop here, are you seeing any pockets of excess inventory at any of your customers?

We are not. Actually, almost like the destocking that was holding us back in some of the other markets seems to be behind us because a lot of them have come back to other markets we talked about infection prevention, interventional surgical, orthopedics, wound care, all growing nicely, and they had, had some destocking headwinds over the past couple of years sort of post-COVID. So, it seems like a lot of those issues are behind us, and we're back to business as usual. We don't have perfect visibility when people are building inventory. Our understanding is that most of what we're building is exactly for current demand at our customers.

Great. Thanks a lot guys.

You're welcome.

And our next question will come from Brett Fishbin with KeyBanc. Please go ahead.

Hey, good morning. Thanks for taking the questions. I'll switch gears a little bit to start. Some of the commentary around segments outside of robotics, such as interventional, surgical, infection prevention, ortho, wound care all seemed pretty positive this quarter with the 25% metric. I was wondering if you could maybe just touch on a couple of those different areas and like walk through some of the acceleration in growth and then like how you're thinking about the outlook for the ex-robotics medical business for the rest of 2025?

Yes, sure. So, I'll start with infection prevention. So, infection prevention, as we've talked about in the past, we've been doing a lot of development, particularly around external catheters. So, we're enjoying growth in these new products as well as in some of our conventional products. And so again, I think that they were impacted by the destocking that seems to be behind us. So we have a blend of our base business growing combined with new products. And so that one has been a nice grower for us. And same with interventional and surgical, we're seeing the destocking headwinds behind us, customers that had been quiet starting to reorder. And some of these market segments overlap with our new acquisitions. So we buy companies with these markets in mind. And so we're enjoying growth both internally at UFP as well as through our acquisitions. And in many cases, because we're teamed up as one company, we're growing faster than they would have on their own. And we've seen a bunch of examples of that, particularly with our largest acquisition, and that's around the patient services. So patient services, when we bought AGR revenue was about $75 million. They had one contract to move to transfer to the DR. And since we've teamed up now, we have three. And so the majority of their business is now under an exclusive contract. So now that we are one company with more capabilities and more substance and ability to transfer, we have sort of earned more of their business and more of their support. So our acquisitions are growing faster because they're part of our business, and it's true for really for all of them. They've all enjoyed additional growth by being part of the UFP team.

All right. Thank you. And then maybe I'll ask a follow-up, I think where you left off there, the acquisition revenue definitely stood out as above expectations this quarter and really taking another sequential step up to where it had been in the previous couple of quarters. I guess maybe like walk through what -- I think you touched on it a little bit, but what was driving the extra $7 million or $8 million in revenue compared to 4Q from the acquisitions? And are you now at the point with AJR, where you do have close to the vast majority of that market? Or is there still some share gain that's going to take place as you build out more capacity?

I think we've won most of what we're going to win because I think we're their primary supplier at this point. So infection prevention was the biggest driver of our growth. It was kind of the biggest surge, so that's the easiest one to track. It's all brand-new business. But I think that the -- it was hard for us to report on it because we didn't own them a year ago, but our understanding is they've grown 40-plus percent since this time a year ago. So that shows you how explosive that growth is in that segment. It's now our second largest segment with explosive growth, so it's a winning combination. And we are making things as fast as we possibly can. And this little small acquisition that we did was with Space and Talent Mind. It was two little small sister companies of AJR that we didn't originally buy. They occupied a decent portion of the building that we're in, and they had some talent, some equipment. And so our goal is to get more space to fit the equipment that we're buying to get additional people to do the direct labor work. And so that was just a little fold-in, but it's causing or helping us into get some relief.

Yes. And Brad, it's Ron. Good morning. So yes, if you go back to the 8-K that we filed with the AJR acquisition, the run rate, the trailing 12 run rate was $75 million in revenues, which would imply about $19 million per quarter. In the first quarter of 2025, we did $29.2 million at AJR. So that sort of emphasizes the growth that Jeff was referring to.

All right. Super helpful. And last question for me. Just on the new product opportunities in robotic surgery. Is there anything more you can tell us about like what you're working on with those initiatives? It sounds like maybe at least one of them is with your large customer in that end market? And just in terms of like how you're thinking about the guidance set up, like when you talk about like low single-digit growth in robotics. Is there like a meaningful contribution from those new products specifically or more of like a ramp-up period this year and benefit to 2026? Thanks very much for taking the questions.

Sure. It's hard to provide a lot of detail, but this was one of the benefits of us moving to low-cost country. I mean, we had a couple of objectives. One is because our customers asked us to be there. And number two, we tended to lose business it tends to be towards the end of a product life cycle when our customers had to take cost out and they moved it to low-cost country. So our primary goal is to lose less, but the secondary benefit we've got is we moved there two of our customers said, now that you're there, we'd like to transfer business that we are already doing to you. So both of these are programs that are up and running. So there's not going to be this long ramp that requires market adoption. It's more like us getting up and running and doing the business. So they're going to launch in the second half of the year as two separate customers, two separate programs, but we expect meaningful revenue starting in 2026 and modest revenue this year, actually.

All right very helpful. Thanks, again.

You're welcome. Thank you.

And our next question will come from Justin Ages with CJS. Please go ahead.

Hi. Good morning, all. Appreciate the color on the tariffs. I was hoping you could just give us an understanding on how some of your competitors might be impacted by the tariffs that might actually benefit you, put you in a better competitive position?

Yes, hard to tell. Originally, it looked like when there was a big battle going on with Mexico that we would be beneficiaries because some of our competitors were in Mexico. It seems like a lot of that has gone away, and it's been exempt under a different act. So there's no like instant gratification versus our Mexican competitors, but those that are importing from China or competitors in China. And we have won some business back, particularly in the safe patient handling that came from China. I think that we have a leg up. So those guys for at least the short term have no ability to compete us at all. But I don't think this is instant gratification from the tariffs. We do have about two-thirds of our manufacturing and two-thirds of our revenue in the US. And so we are well positioned to ramp up in the US at one of our customers manufacturing elsewhere would like to be back in the US. So I think we're better positioned than our competitors in that respect.

All right. That's very helpful. And then one more, just on capital allocation priorities. You guys paid down debt. Maybe you can give us an update on some larger acquisitions that you're looking at maybe smaller than kind of those two sister companies of AJR that you mentioned?

Yes. We have a number of companies we're talking to. We have seen in the past that we're focused on gaining more skills and injection molding. So we're looking at a number of different injection molders with the goal of upping our game in that space. Most of the things that we're in advanced talks with now are smaller acquisitions, none of them are enormous. But we do have one large opportunity that we're looking at that would be very substantial if it were to come to fruition. But I would say, it's pretty far out in the future. We're in early days of that discussion.

All right. Very helpful. Congrats on the quarter. Thanks for taking my question.

Thanks very much.

And our next question will come from Andrew Cooper with Raymond James. Please go ahead.

Hi, everybody. Thanks for the time. Maybe just starting with the large customer in safe patient handling, the 8-K talks about some price reductions as you make these transfers. Can you give a little sense for the magnitude of those reductions in terms of what that may do to just optical revenue growth? And then should we assume the operating profit dollars are maintained? Is it an improvement as those play out? And just help us think about maybe the pacing over time?

Okay, sure. Yes. So it varies product by product, but there is kind of a standard when stuff moves, it tends to be in the 50% to 20% price savings opportunity for our customers. And so if our savings are greater than that, which they typically would be, we share in some of the savings and they share in some of the savings. So in this particular case, we believe our efficiencies will allow our margins as a percent of sales to go up, despite the fact that revenue over time, it will take a couple of years for everything to transfer will be impacted negatively by that same 20%. So -- but all this is going to be offset by the fact that this market is growing rapidly. So the market growth may exceed the price decreases. So the revenue may still be greater by the time it gets there, if that makes sense.

Okay. No, that's helpful. And then maybe just jumping into the P&L a little bit. You talked about the inefficiencies at AJR that should be kind of temporary here as you staff up. Can you help us think about where those land on the P&L and then kind of the scope and the timing to normalize there? And I asked just with gross margins that were a little bit shy of what we were expecting here. I think that's where that lands, but I just would love a little bit more color.

Yes. Good morning Andrew, it's Ron. Yes, so AJR, so it's a little bit complicated, but we bought this company, all of the employees were technically employed by our sister company, and they became full-time employees of ours on January 1. So with that, new benefit programs, new compensation schemes, et cetera. And so it's not uncommon for us to have turnover in the direct labor space. And so as we replace the direct labor, which we are successfully doing, it tends to be inefficient. So we have to hire people onboard and train them, et cetera, the productivity is not as great. So that process we expect to last through the second quarter, and that shows up, up in basically one of the components of cost of sales, i.e., direct labor.

Okay. Great. And then maybe just one last one, kind of, bigger picture with all that's going on in terms of the tariffs, in terms of reshoring or not, obviously, the commitment to the Dominican Republic right now, has anything changed in terms of the way you think about the long-term footprint. Any thoughts on expansions, whether it's into Europe or Asia in a more meaningful way? Or just as you think about optimizing this footprint as you grow in scale for the long-term, what's maybe evolved over the last few months with the tariff discussions?

Yeah. Good question. So we are still pushing ahead aggressively with our expansion plans in the DR at the request of very specific customers and to support very specific programs. The DR was protected before by an act that we -- I think the 10% will get resolved in the DR is my personal prediction, but in any event, the savings of doing business there for our customers far exceed the 10%. So we are very committed to our expansion plans there. With respect to Europe, it's very market specific. Our recent acquisitions have been in Ireland. Now we have three different factories in Ireland. But I think that we're able to service most of the world from where we are. We have been asked by at least one customer to gear up in Asia Pacific to support their needs in those markets. So you may see us do some expansion there, potentially even via joint venture. But that's part of the one part of the world that we're not able to service our customers with the highest level of service that we'd like to. So that -- stay tuned on that one. But over the next couple of years, you may see us increase our capacity in that market only to serve that market.

I will stop there. I appreciate the time.

You're welcome. Thank you.

With that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Jeff Bailey for any closing remarks.

Thank you, operator. Thank you everybody for joining the call. We did start up calls at the request of a number of investors who said that they can't be on all calls at the same time, so at a minimum they could listen in. We had done a number of years without doing them. So hopefully, this is helpful. Feel free to give us any feedback to how we can make the call better in the future. But in the meantime, we look forward to speaking to you one quarter from now. Thanks very much.

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