Part Advisors, thank you guys for joining us bright and early. The first presenting company of the day is UFP Technologies. With us here from the company today, we have Jeff Bailly, Chairman CEO, and Ron Lataille, CFO. UFP is a client of Three Part Advisors for a number of years. If anyone would like a follow-up call, anything, just reach out to me directly. Happy to help set that up. With that, I'll just turn it over to Jeff.
Thank you, Jeff. Good morning, everyone. I'd like to briefly draw your attention to our forward-looking statement. UFP is a contract development and contract manufacturing outsource partner, primarily in the medtech space. We focus on single-use and single-patient applications. The company was founded in 1963. We have over 4,000 employees across 20 different manufacturing facilities in five countries, and we have six design innovation centers. What we do is combine our design engineering capabilities, our materials expertise, and our precision manufacturing to help our customers either develop, improve, protect, or manufacture their products. At the front end, we're helping them on the innovation side, and then we transition to helping them de-risk their supply chain and take costs out of their supply chain. The materials part of our value proposition is very significant to us.
Our engineers travel the world looking for sort of the latest innovative new materials, and we find and we partner with those vendors at a very high level. For our top three vendors, we have either exclusive or semi-exclusive access to their materials, and we get early access to all their new innovations. This walks you through our process. Our process starts with a customer intake meeting. We have over 1,000 customers, including 26 of the top 30 med device companies in the world. It's typically engineer to engineer where we're trying to understand their problem. We have in-house prototype capabilities so we can quickly turn around prototypes to let their vision come to life. After that, it's on to tooling. Again, we have in-house tooling capabilities, which, number one, helps us hold very close tolerances, but number two, speeds up the process of making any changes to tooling.
Next is often custom equipment. A lot of the equipment we do, we manufacture ourselves. It's customized for the application. This also makes our application stickier because you can't just go buy an off-the-shelf piece of equipment to steal our solution. You have to go design the equipment yourself. Next, quality systems. Since a lot of the products we do are critical to patient outcomes, many are 100% tested, so we'll design quality systems together with our customer and often even build the quality test equipment. Next is validation and pilot manufacturing, and then on to commercial production at one of our factories. This front-end part of our business, the product development business, is very, very important to us. If you dialed back the clock even 10 years ago or 15 years ago, we used to give this away as a service in hopes of getting the manufacturing.
Now we charge full rates for it. It's a very profitable business for us. It helps us vet new opportunities to see if people are serious. We think of it as a virtuous cycle because with every single program that we do, we're learning new things that make us more qualified to do the next one. We're forming strong relationships with the engineers. It's sort of an engineer to engineer, a lot of high-five moments as they co-invent and develop things together, again, which leads to the next opportunity for us. Most importantly, this business feeds our factories with business. I think one of the easier ways to understand our business is to see some examples. Robotic drapes have been part of our portfolio for 20 years now.
About 20 years ago, one of our big customers came to us trying to design the piece that goes between the robot and the surgical instrument. We did that product for about five years and then redeveloped and redeveloped. Then about 15 years into that relationship, we decided to forward integrate, and we bought the next step in the value chain. Our product was shipping to the Dominican Republic. It was a critical product, but there were other products that came together, were formed into a drape, injection molded components, TPU, etc. We bought that company so we became more valuable to our customers. Now we are the major player in this space. We have 20 or 25 different customers with things in development, and we are by far and away the largest player. Across the top, revascularization.
This just shows how complicated some of the stuff we do. This is used for stroke patients. If you had a thrombus or blood clot in your brain that was cutting off oxygen, this is deployed through a catheter all the way up into your brain. That basket opens up and removes the blood clot and instantly saves your life. It's an unbelievable device. It was developed by Sarah Novice in one of our labs in Ireland. It was not our lab at the time. We bought the company, Advent, and now it's owned by J&J. We've had instances where patients have come to our factory and wanted to shake the hand of everybody that worked on their device because it saved their life. It's a very cool product. In the upper right, this is just an example where somebody came to us with just a concept.
They just said, "Hey, we have this idea, kind of like a coffee creamer. We want to be able to pull off the top. We want to have these little foam fingers with alcohol, and we want to be able to clean IV ports, which is a big source of infections." The product came to life in our conference room. We iterated with a lot of different designs and materials. We ultimately built the custom equipment. From there, their product took off. Years later, they wanted redundant capability in one of our other factories. We can offer that. They wanted it to be in El Paso, Texas. We had factories there. We had a factory there with both Class seven and Class eight cleanrooms. They duplicated the equipment, and all these years later, we're still sole source, and this product is wildly successful.
This company has also been sold. In the lower left, Med-Surge beds, a great fit for our skills. We're experts in RF welding and impulse welding and TPU films. These mattresses basically eliminate thread. Thread and blood, you can imagine, can cause bioburdens and problems in the hospital. These beds do not. They also have inflatable side stumps so you can lift and turn a patient. This is for Stryker. We do a lot of work with Stryker. The bottom middle, the thing I like about this one is, for years, UFP did this critical foam part. It's a very special foam that is critical to the function of this negative pressure wound therapy. What ended up happening is we were shipping this small part to another company, Dielectrics, that was finishing the device.
We forward integrated, bought that company, became at the same time experts in impulse and RF welding. Again, instead of selling a $1, $2 part, you're selling a $5, $10 part. Same with the drapes. The spend goes up by three to five times when you go to the next stage. That's one of our key strategic objectives, to sell more to our customers. In the lower right, this is a brand new application. We just bought this company, AJR, and they are dominant in safe patient handling. What happens in this particular case is this device goes underneath the patient and stays with them for their whole hospital stay. Here you see a patient being moved from one bed onto a surgical bed.
What happens is think of it almost like a pool float with little holes in it. It inflates and almost like an air hockey table, it just sort of moves the patient over. It protects both the caregivers and the patient. This is a rapidly growing market and an exciting one for us. Here's a snapshot of our medtech business. It's about 16% sterile packaging, 26% robotic surgery, and 58% devices. The thing that's interesting in this slide is this space is growing at 6.3%, but the outsource space is growing at double digits. More and more customers are outsourcing both the front end and the manufacturing. The contract or CDMO, as some people call us, contract design manufacturing outsource partner, is growing at 11%. What we did here is just break out the markets for you.
You can see robotic surgery is the largest and all the way down and show some pictures. As you get to the bottom and some of the smaller markets, these are ones that we think have significant promise. Diagnostics is something we're targeting. We think our skills are going to be a good fit for diagnostics and wearables and things like that. Now, here's just an example. We used the robotic surgery one here where you can see some of the drapes. You get some information on the market and how fast it's growing, but it also indicates why we bought some of the things that we did. When we bought DAS Medical, that was one I mentioned we forward integrated into the space, and also Dielectrics. Both of these made us way more capable of servicing this market, upped our RF welding skills.
Advent brought us injection molding. We're still in search of more injection molding companies because we'd like to get better and better at that. Marble brought us specialty adhesives and die cutting. You can see that green label there. There's a lot of sticky tabs that help the nurses know how to install the device, meaning the drapes. I want to review our strategy with you. We have a two-prong growth strategy, and we have been executing the same strategy for a number of years. The first prong we summarize is marketing to our sweet spot. We look for those markets and those segments that are the best fit, where we add the most value and therefore can enjoy the highest margins.
Strategic acquisitions, our goal is really just to become more valuable to our customers in one way or another, but I'll walk you through some of it. Whoops, sorry. On the market to our sweet spot, we basically profile our business almost like a bell curve every year, and we take the most profitable parts of our business, which are the best fit, and that sort of helps us orchestrate our sales strategy. We try to get more of the good stuff. The market would decide. The price increase to the six, and we were adding that kind of value or it goes away. This market to our sweet spot is an iterative strategy that has kind of marched us towards medtech. We were a much more diversified company in many other industries, but medtech turned out to be the best fit for us.
It was our sweet spot, and so we've moved in this. Key to this is single use and single patient. Think of low average selling price, super critical parts. In other words, no robotic surgery procedure can happen without the drape. Same with all of the parts that we do. They come to us because we do the most difficult things, and they're critical to the application, but they're typically a low average selling price compared to the device. Customer-Funded Development's critical too. On our acquisition strategy, our acquisition strategy has evolved over time. Originally, we bought companies a lot like us. We tried to share best practices and share purchasing power. Over time, we iterated to buying companies that made us more valuable to our customers by bringing either a new geography, a new capability, a new material.
We bought companies that were better at something, so we had this integration light strategy where we were not going to come in and tell them how to do things. We were not going to come in and cut costs. It was way more about growth synergies. We have since added one more element to that where we are looking for adjacent markets that are also rapidly growing with a best-in-class customer. AJR would be a good example of that. Safe patient handling was not a space we were in. They were with the market-leading customer, in this case, Sage, and now Stryker, and they were the best in class in what they did. We get an adjacent market that is valuable to our customers. Stryker went from a $20 million customer to a $100 million customer with a single acquisition. The acquisitions grow much quicker when they are with us.
I'll give you one example. DAS, when we bought them in 2021, was between $40 million and $50 million, close to $50 million in revenue. They'll be $150 million this year. These customers feel way more comfortable when they're partnered up with us. We buy companies that often have single customer concentration, which scares away some of the private equity investors and gives us a little bit of an edge. AJR was similar. We bought AJR, I think it was $75 million in revenue. It's been less than a year. They'll do $125 million with us. We've won new programs. The customers have more confidence when they're with a bigger company. Our goal is for our acquisitions to be accretive within the first year. This just shows the four. We did four last year. We have to be opportunistic when the target is ready.
In theory, we'd spread them out a little bit more, but this just shows some of our history and why we bought them. I'm not going to go through each one, but each one of these acquisitions made us a better company. The strategic geographies was a really critical part of our strategy if you backed up about five years. We really filled in the map nicely. We got a lot of pressure from our customers to get to low-cost country. It was the primary reason we would lose business that a low-cost competitor in the Dominican Republic could offer a 25% price reduction if they would move, and we would occasionally lose business that way. We were shipping to DR. It was taking eight days. We were shipping to Ireland. It was taking similar.
We go to the geographies that are critical to our customers. We become more valuable, but we filled in the map. We are now in Mexico, Costa Rica, Dominican Republic, Ireland. We do not really need a lot of new spaces to do our job, although we are looking at APAC. One of our customers has asked us to get to APAC. This slide just shows our progress. In 2021, medtech was about $132 million. You can see in 2024, it was $450 million. Our overall sales were about $200 million in 2021, and they grew to $500 million in 2024. Acquisitions are important to the strategy, but once we buy them, they grow even faster. It is a blend of internal and external growth. Why invest?
I know a lot of you are here looking for companies to see if it's a good fit for your portfolio. I want to just walk through some of the things that I think that UFP is a good investment. The first is significant growth opportunities. I'll give a little more detail on that. The next is barriers to entry. We spend a lot of time on barriers to entry. We had a long history of being an innovative company, but we did not always keep those innovations. Often, other people monetized our really clever ideas. Now we try to bulletproof our applications and try to enjoy the value ourselves. The strong customer relationships, this is leading to more and more business.
We have a blended strategy where we look for new customers as well as existing customers, but we could grow for decades with just our existing customers. Experienced management team, myself, Ron, and Mitch Rock, who's our President, have all been together 25-plus years. The guys below us, also officers, have made us a better company. We've added these guys, some talented guys that are helping up our game. Proven growth strategy. We've been executing the same strategy for 20-plus years and attractive metrics. On the growth opportunity side, I want to point out some of the trends really favor us, obviously aging population, etc. Within the medtech space, there's a huge focus on improving patient outcomes. There's a huge focus on infection prevention. This is right down the middle of the fairway for us and what we're good at.
The materials for infection prevention, I mean, one example I can give you is we're working on a lot of external catheters. Internal catheters for people in the hospital is a big source of infection, UTIs, etc. There is a lot of work being done on external catheters. If you can picture one of these devices, they first have to capture fluids. Both TPU and cross-linked foam are good at that. Within that device has to be something that absorbs and contains the fluid. Reticulate urethanes, we're expert in that. You need some way to evacuate the fluids, which would be tubing and RF welding. Everybody working on these things has found us. We are working with multiple companies on something that I think will become the norm in the future, external instead of internal catheters. Reducing healthcare costs.
There's just robotic surgery taking off. So there's a lot of Microtrends and Macrotrends that are favoring us. Competitive advantage. I talked about this. These barriers to entry, the materials access. So for our Cross-Linked Foam, the number one Cross-Linked Foam manufacturer in the world, Zotefoams, has given us exclusive access to 100% of their medical grades. Our TPU supplier, 100% exclusive access to their material. And then reticulate urethane, dozens with the number one supplier of semi-exclusive or exclusive applications. Custom equipment, etc. All these things help bulletproof what we do. Growth strategy we touched on. All right, financial targets. I want to review our financial targets for you because some of these have changed. So our revenue growth, 12%-18%. We look for about half through acquisition, half internal, so 6%-9% for each.
Obviously, we've had years where internal has been greater than 15% and acquisitions have been much greater. We have done a good job of being at or above this range for several years. Gross margins, 28%-31%. And adjusted operating margin, this is the one that just bumped up, is now 17%-20%. This just shows you kind of the nice smooth plus with our revenue growth. Gross profit. Again, coming out of COVID, a smooth plus. We got into the target range. This range was already raised once. You see a dip back. We talked about this in our press release. When we bought AJR, they did not have the same strict adherence to immigration right to work policies as we do. Everybody goes through a process with us.
For the first six months that we owned them, because this was a carve-out, they were still employees of AJR, and we were basically subcontracting them. Starting January 1, they became our employees. The law gives you 180 days to vet every single person through this e-Verify. It is a pretty stringent thing. People fall out. If you were not legal to work, you were going to fall out. We have had to retrain some people. You saw some impact of this in Q1. We will split it out for you. It is going to last a couple of three quarters as people come up to speed. A little dip back in gross margin, it is clearly a temporary thing for us. Otherwise, we would have adjusted the targets. Same effect on operating income.
In general, operating income, the steepness of the curve is quite a bit steeper because our fixed costs don't grow as fast as our sales grow. Again, a little bit of a dip back in Q1 related to AJR. This is the target range that popped up. This is our stock graph, which we've been including for a while. People ask for this. This shows 21 or 20-year performance versus the indices. You can see we've been well ahead of the indices. We've had a pullback. It's actually bounced back up a little. It just kind of shows a buying opportunity, in my opinion, but nice strong history of growth. That is our presentation. Happy to take questions if you have any. Yes, sir. What drove the increase in the operating margin target? I'm sorry, say it one more time.[Audio distortion]
What drove the increase in the operating margin target? Ron and I have both been accused of being too conservative. Our operating margin target, again, we had already gone through it. It was, I think, 15-18%, and we were at 18.3%. They are like, "Come on, you are already ahead of your target. You got to change your target." We try to put targets forth that are conservative and that we can hit, but we had literally gone through it already. We bumped it up actually by two percentage points.
Yes sir. You spent some time in the presentation talking about the customers wanting you to go into lower-cost manufacturers. 2025, how OUS is a bit of a challenge with tariffs. How are your customers now thinking about that lower-cost manufacturing versus tariffs?
Yeah, great question.
In the Dominican Republic, it's probably the one country where we ship nothing to the Dominican Republic. Everything gets done there and leaves. Our two big applications, our two largest customers, this is all public information, Intuitive Surgical and Stryker are our two largest customers. They're about to flip. Stryker is about to surpass Intuitive Surgical if they haven't already. They're both contractually responsible for the tariffs, so there's no tariff impact to us. About two-thirds of our factories and about two-thirds of our revenue are in the U.S. If anything, what we're seeing is a benefit from the tariffs. Customers that are bringing stuff in from China are saying, "Can you do this for us? How quickly can you ramp up?" I think there's a net positive. Ironically, when the tariff started, it was kind of aimed at Mexico a little.
Mexico has already been exempted for the med devices, which is interesting. The DR has not yet, but we think it will be. We think that noise will go away. We do have about $8 million in revenue that comes from the DR that's not from those two customers that we are responsible for. We believe it's legitimate to pass that on to our customers, and that is our strategy. I would say net positive, if anything, for the tariffs, but it's really too soon to tell. It kind of changes every day. We're not alarmed by the impact it might have on our business in any way.
Are you seeing your customers trying to shift that production even within your own factories?
No, we're not.
The savings, for instance, by manufacturing in the DR, even over Mexico, is well more than the 10%. The labor rates in Mexico are well below the U.S., and the labor rates in the DR are well below Mexico. It would not make economic sense. You're welcome.
Just talk about how you improved the AJR business since you met your goal from $75 million to $125 million. How you accomplished that and what the outlook is there.
Sure. The question is, how have we improved the AJR business and what's the outlook there? This is kind of a classic example. We had a trusted customer in Stryker that was in the middle and like two years into the process of trying to move one program to the DR. It was going very slowly with a small customer.
There's a lot of risk in moving things. They have to be revalidated and retrain people. It was going slowly. As soon as we teamed up with AJR, Stryker was like, "Yay." They quickly put the top three programs under contract. We had already successfully transferred for Stryker. Now we have the top three movers with exclusive manufacturing rights through mid-2030 with Stryker. Stryker is, as a matter of fact, one of the customers that's trying to move more stuff back from China. They already knew this company, AJR, was super talented and did great work, but they're nervous to give them too much. We are a trusted supplier, so the business quickly ramped. Some of it was won from competition, and some of it was because this market's just growing really quickly.
Safe patient handling is growing double digits, and we won some business from competitors. Some of it, they were already in the process of winning. It just seems like everybody's good fortune accelerates when they're teamed up with us. Any other questions? All right. I appreciate everybody waking up early to listen to this. Oh, you want more questions, sir?
Give us hints about the adjacent areas you might go into because we've sort of gone from, yeah, super difficult. Yeah. You've gotten very sort of specialized and just curious.
Yeah. The question is, can we give some hints about the adjacent markets that we might be looking at? Very difficult for us because if it's internal, it's usually under NDA. If it's external, it's usually a target that we're after that we would be kind of giving up that information to our competitors.
I can tell you the rule of thumb is if it's a market-leading customer, like they're dominating in the space with a market-leading technology in a fast-growing market, it meets all three. If we hit all three, we're really excited. Adjacencies would be typically a customer is already buying the product. Our customers vet our acquisitions for us. We literally talk to them, "Should we buy this one?" They're like, "Nope." "Should we buy this one?" "Yes." They literally help steer us. This technology roadmap that we have, I'll tell you one thing on our technology roadmap is injection molding. We buy $19 million worth of injection molding despite the fact that we do it ourselves. We're not very good at it. We're kind of the JV. We want to be the varsity.
This was exactly what happened to us with TPU. We kind of invented the TPU market for sterile packaging. It was us that found this solution, and now it's everywhere. We should have done a better job of bulletproofing it than we did. We were not great at welding and impulse welding. When we looked for an acquisition, Dielectrics was what we thought was the best in the world. They actually made the equipment themselves, and then slowly people came to them with the most difficult problem. When we bought Dielectrics, we went from good to great in one step. We were out looking at injection molding companies because we wanted to go from good to great. We think that's a nice adjacent technology.
The adjacent markets are the one I can't really give it up, unfortunately, because it would give up our strategy to our competitors. You're welcome. Yes.
[Audio distortion] You discussed some of the barriers to entry, I guess, on your supply side from low-cost production maybe coming in, trying to undercut price over time. And then also the barriers to entry to some of your key customers' insourcing some of these products.
Yeah. Customers' insourcing is probably our greatest source of potential competition. We don't have a lot of great competitors. We have a lot of spotty competitors who can take stuff. The biggest competitor was this company in the Dominican called Acumed, who was sort of stealing our business slowly. Since we moved there, they've stole zero. As a matter of fact, we've won two major programs since we were there that people gave us.
We almost never manufacture something we did not design. Two major multi-million-dollar programs came to us because we were finally a low-cost country. I'm sorry, can you repeat the second half of your question? I want to make sure I get it all.
[Audio distortion] The first half, actually. Some of the key products in your portfolio, is there any, what are the barriers that keep out another lower-cost manufacturer?
Thank you. With respect to the raw materials, and we have had this happen to us, we will have a customer that says, "We need a second source." They have to buy the raw materials from us. That is a pretty big barrier because we can mark them up. Now, we will not be anti-customer and try to prevent trade, but they would literally have to source the raw materials from us.
In certain instances, our customers can't even source the raw materials. Our customers have to buy it from us. Again, we wouldn't tend to be anti-customer. We sometimes have situations where a customer will say to us, and we had one of these with infection prevention, "We ultimately want to make this ourselves. We want you to design it." What ends up happening is we go through the design process, and then we have a year or two of manufacturing it. During that year or two, we drive down costs. The economics of them insourcing it go away, and very often they never take it. Insourcing is a possibility. These are very talented companies. It's just not worth their while. They're high-margin companies. This is low-margin business. We are experts at it. They would have to figure it out.
They do walk through our factories doing qualifications. They have a huge leg up. Our competitors do not get to walk through our factories. If anybody could steal it, it is the guys that got to walk through your factories. I think there was one other question somebody had. Did I see a hand before? Yes.
I was curious. How many of the products that you manufacture are you actually marketing beyond one customer?
Almost all of them. Our customers usually own the design, and we usually own the process. In the case of robotic surgery, everybody. We were pioneers in footwear originally. We did the very first running shoe insoles every time. We did it for every single company. We will not give somebody else's design.
Intuitive Surgical robotic drape will not work on anybody else's, and we will not give up any of their innovation. The only reason we would not choose to do it is if our customer is so dominant and already has a huge share, it would only upset them. We have the right to do it, but I would say in most cases, multiple customers in every segment. Keep your good customers happy. We try very hard. Yeah. Everybody good? Thank you. Appreciate you waking up for us. Have a great day.