Business Breakdowns
· Matt Reustle, Andy Gardner
[00:00:00] S0: And I'm sure the last theme plays a role in that survival and risk management as well. Diversification. You've made some references before, but spell that out a little bit more in terms of how it's embedded into the foundation. [00:00:00] S1: The most underappreciated strength of Amphenol is its extraordinary diversification. Like many competitors that grew up serving one dominant industry, Amphenol has deliberately spread itself across a wide range of end markets. And after World War II, Amphenol pivoted from military to consumer markets. In later decades, it added aerospace, telecoms, autos, and industrial equipment. And that history of broadening markets means that no single sector dominates the business. Today, they say that no single end market, if you break down revenues, accounts for more than 25% of sales. So it has hundreds of thousands of products across tens of thousands of customers. And the largest customer is not greater than 3% of sales. And that breadth acts as a natural shock absorber. So when aerospace demand collapsed after 9/11, or when auto production fell sharply during COVID, other segments such as broadband buildouts, defense programs, or more recently, data center demand, they've kept the company moving forward. And that demonstrates their resiliency and the reasons why they've been outperforming peers. Diversification has never been scattershot. Amphenol's used acquisitions to deliberately strengthen weaker areas or expand into emerging technologies. And the result is a balanced, resilient earnings profile across various cycles.
· Matt Reustle
[00:00:00] S0: When you think about the growth for this business, obviously diversification makes it challenging to just make a blanket reference point in terms of its growth. You talked about some of the thematic things that they're exposed to. But how do you frame thinking about the growth of this business? It's been around for so long, tapping into those exposures. I would just be curious from your perspective, how you go about that.
· Andy Gardner
[00:00:00] S1: When we think about growth at Amphenol, ultimately the simplest way to frame it is through the structural megatrends the company is plugged into. That's the electrification, digitization wave impacting all markets. Every time a car, a factory, or a server becomes smarter and more electronic, Amphenol's content per unit rises. That's the flywheel of growth. Amphenol reports its businesses in three broad divisions. These are not hard silos we've found with other companies that we've investigated. They're more accounting categories designed to reflect a decentralized style. But they are useful starting points to understand how products fit together. The first of these business divisions they call Harsh Environment Solutions, or HES for short. That represents about 30% of revenue and operates at around 25% EBIT margin, just above group average. So HES offers an extensive portfolio of rugged connectors, cable assemblies, and interconnect systems for mission-critical applications in harsh operating conditions. These products are engineered to withstand extremes of temperature, vibration, moisture, and other environmental stresses. HES collaborates with an extensive list of OEMs across automotive, aerospace, industrial companies, to space and satellite companies. And an interesting anecdote is that Amphenol's products have been used on every manned space mission since Apollo. The second division, that's Communications Solutions. So about 40% of sales and again operating at about 25% margin. Here we're talking about high-speed copper and fiber optic connectors, radio frequency connectors, as well as antennas, power distribution products. Essentially these applications are used in data centers, broadband buildouts, 5G networks, smartphones. The way to think about this, if the data center is a city, communications is Amphenol's freeway system. Every new lane of GPU traffic needs more bridges, ramps, and guardrails. So unsurprisingly, it is currently the fastest-growing division. But it is also the most dynamic. So it does have quicker technology cycles and shorter product life cycles. And as such, R&D as a percentage of sales will be slightly above average here. The third and final business division is Interconnect and Sensor Systems, or ISS.
· Andy Gardner, Matt Reustle
About 30% of revenue, again slightly lowest margin in the group, it's about 19%, but that's still very respectable and above peers. But it is where Amphenol has moved beyond connectors into sensing technologies, things like fluid pressure, temperature, position sensors, as well as medical cables and assemblies. These feed into integrated solutions across EV battery monitoring, industrial robotics, medical imaging. It's a relatively recent, but a deliberate strategic bet. Sensors and integrated systems are a natural adjacency to connectors. They leverage Amphenol's engineering strengths but broaden its addressable market. And the strategy is arguably paying off handsomely. One German automaker they recently profiled had doubled dollar content between 2018 and 2023 by expanding from standalone sensors into assemblies and power distribution units. So essentially, as vehicles and machines require more sensing, Amphenol is increasingly the trusted partner, building on those decades of reliability that it's demonstrated in its connector business. So that's the structural view by product or application type. It's more useful to really understand where growth comes from. [00:00:00] S0: If we could get into some of the end markets or which customers they are connected to, that would be particularly useful. You tapped into it with some of the thematic trends, but getting some sense of how they're actually exposed to particular industries, I think would be even more telling. Whether there's percentages of revenue or whatever it might be in terms of categorization.
· Andy Gardner
[00:00:00] S1: Revenue exposure is broken down by end markets, and that's really how customers are categorized, and that's how megatrends flow through the business. And it is diversified across eight major end markets. And we've touched on some of these. But if you go in an order for each of them, you can start with Automotive. That's about 15% of sales. It's one of Amphenol's longest standing end markets. It's also undergoing the most profound transformation. Historically, connectors supported things such as lighting or infotainment and airbags. But today the big growth engine is electrification, pardon the pun. EVs materially increase connector and power distribution content per vehicle. So the battery pack alone can require dozens of rugged, high current interfaces that can safely handle up to 1,000 volts. Add to that the growth driver of assist systems, radar, lidar, camera sensors, all of which need reliable interconnects. You can quickly see why Amphenol's content per vehicle is rising much faster than overall car production. So customers in this segment range from OEMs, Tesla, BYD, Toyota, Volkswagen, the whole gamut, as well as the tier one suppliers such as Bosch or Continental. In recent growth, the end market was a little soft in 2024, as it has been for that market, but the outlook is very strong. Global auto production may only grow low single digits, but because Amphenol's content per car is growing high single digits, especially now EVs, it's a really nice business through cycle. Next end market is IT and Datacom, about 25% of sales. This is the segment that's most in the spotlight today because of the AI buildout. The products here are high speed connectors, backplane systems, fiber assemblies that allow data to move at hundreds of gigabits per second inside servers and switches. A traditional enterprise server might contain a handful of connectors, but an AI server designed to train these large language models can consume 50 to 100 times more connector content. In this division, Amphenol will supply again all the major networking players such as Cisco, Arista, Juniper, the server manufacturers such as Dell and HPE, and also obviously the hyperscalers that are building out these huge clusters. It also participates in broadband and telecom, making antennas and RF connectors for 5G and fiber networks.
· Andy Gardner
AI is what's supercharging the growth rates here. And last year it reported organic growth of 56% and it could double again this year. But we think it will inevitably normalize in the coming years. But while it may remain sensitive to these extraordinary CAPEX numbers at the moment, the ongoing structural trend towards more accelerated computing and technology adoption will remain and that will continue to drive incremental demand for high performance interconnects. Next division is industrial. That's approximately 20% of sales, perhaps less glamorous compared to what we've just discussed, but it's equally as important here. Amphenol's connectors and sensors go into factory automation systems, robotics, machine tools, energy infrastructure and heavy transportation trucks and trains. So if you think about, for example, the wiring systems inside a Siemens robot, or the power connectors inside an ABB solar inverter, or the rugged interconnects that keep a Caterpillar mining truck operating in extreme conditions. So the growth drivers here, essentially the digitalization of factories, the rise of industrial robotics, and obviously the energy transition, particularly renewable energy, where offshore wind and solar farms require durable interconnects to function reliably for decades in very harsh conditions. Again, some familiar names of customers, just to highlight a few, you've got Siemens, ABB, Rockwell, Caterpillar, Vestas. There's a long list. Now growth suffered a little bit relative to the rest of the other business units in 2023-2024 due to some destocking and soft underlying demand post-COVID. But through cycle it's been mid to high single digits really supported by those long term structural tailwinds such as automation and electrification. Coming up to the last two, there's aerospace and defense. This makes up around 15% of sales. This is a very long cycle stable business. Amphenol has connectors designed into aircraft platforms such as the Boeing 737 or Airbus A320, which can stay in production for decades. It also supplies high reliability connectors for government communications satellites and defense systems. And as you might expect, these programs are really sticky. So once Amphenol is on the platform, it tends to stay there for the life of the aircraft or the system.