Good morning, and welcome to the WESCO-Anixter update. All participants will be in listen only mode. Should you need assistance, please signal our conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to your host today, Brian Begg. Please go ahead, sir.
Thank you, Keith. Good morning, ladies and gentlemen. Thank you for joining us. Joining me on today's call are John Engel, Chairman, President, and Chief Executive Officer, and Dave Schulz, Senior Vice President and Chief Financial Officer. This conference call includes forward-looking statements, and therefore, actual results may differ materially from expectations. Please see the webcast slides for additional legends. For additional information on WESCO International, please refer to the company's SEC filings, including the risk factors described therein. The following presentation includes a discussion of certain non-GAAP financial measures. Information required by Regulation G of the Exchange Act with respect to such non-GAAP financial measures can be obtained via WESCO's website at wesco.com. Means to access this conference call via webcast was disclosed in the press release and was posted on our corporate website. Replays of this conference call will be archived and available for the next seven days.
With that, I'll turn the call over to John Engel.
Thank you, Brian. Good morning, everyone, thank you for joining us today. The purpose of today's call is to provide an update on the merger with Anixter International that we announced in January. As you saw from the press release we issued on Thursday, the waiting period under the Hart-Scott-Rodino Act has expired, satisfying one of the conditions of the closing of the proposed transaction. We've made substantial progress over the last several weeks that I'm excited to share with you, we are pleased to provide additional details regarding our integration plan and the compelling financial metrics for this combination. Beginning on page four. This transformational combination creates an industry leader in electrical and data communications distribution. There are five key points that this presentation will address.
First, the combined company will benefit from a step change in scale and capabilities in the highly fragmented electrical and data communications distribution space. At closing, the combined company will be an industry leader in North America with over $17 billion in revenue and $1.1 billion in EBITDA on a pro forma basis, including the identified cost synergies. Second, the two businesses are highly complementary in terms of products, industries, and geographies, which enables us to sell more products to more customers in more locations around the world, and more importantly, accelerate sales growth by more than 100 basis points versus standalone projections. Third, we've developed an execution plan to deliver over $200 million of cost synergies and have significant upside potential beyond this amount. We've engaged one of the world's leading consulting firms to serve as our integration partner, and planning is underway.
Fourth, the financial benefits of this combination that will be generated will be exceptional. We expect our EPS growth rate to double, Adjusted EBITDA margins to expand by more than 100 basis points through the cost synergies just discussed, and the transaction to be 40%-50% accretive to EPS in the third year. Fifth, the combined company is expected to generate substantial free cash flow, over $600 million annually by year three, which should enable rapid deleveraging to within our target range within 24 months, as well as provide future capital deployment options to drive value creation. Overall, this combination provides a substantial value creation opportunity for our shareholders. Turning to page five. The enhanced scale that this merger will create is clear. This transaction brings together two highly complementary companies.
Combining them will benefit our customers and create value through significant cross-selling opportunities, premier supply chain services, acceleration of our digital technologies and innovation, and improved operational and supply chain efficiencies. In 2019, the business-generated revenue of more than $17 billion and EBITDA of $1.1 billion on a pro forma basis, including $200 million of cost synergies. The combined company has operations in more than 50 countries with approximately 18,900 employees. Moving to page six. The North American electrical distribution industry is very large and highly fragmented. With an estimated total size of $114 billion per year, neither WESCO nor Anixter has a share above 7%. On a combined basis, the company will have a share of approximately 13%. The market remains highly fragmented following this transaction and offers substantial opportunities for accelerated organic growth.
Both Anixter and WESCO have invested in supply chain services to differentiate their overall customer value proposition. The combination of these two companies not only increases overall scale, but also improves our ability to better serve customers through an expanded product and services portfolio. Turning to page seven. Complementary product offerings and sectors served provide a differentiated and diversified platform to customers. In the two upper charts, you can see how WESCO's capabilities in industrial and non-residential construction are complemented by Anixter's capabilities in network and security solutions. Both companies have utility businesses that drive enhanced value and a more robust supply chain for customers on a combined basis. Anixter's electrical and electronic solutions segment is most comparable to WESCO's industrial and construction business. On a geographic basis, WESCO has historically had a larger Canadian business than Anixter, and Anixter has historically had a larger international customer base.
Coupled with the complementary industries shown above, this will enable the combined company to provide a more comprehensive product and services portfolio across the entire enterprise. The combined business will clearly offer significant growth synergy opportunities on top of the over $200 million of cost-saving synergies. Turning to page eight. There is tremendous value in the additional growth that this business will drive on a combined basis. Compared to our standalone revenue growth opportunity, we expect the merger of these two companies to accelerate our sales growth rate by more than 100 basis points. The complementary nature of the respective portfolios that we discussed a moment ago translates into new selling opportunities for both companies. WESCO will be positioned to capitalize on Anixter's capabilities in wiring, cable, datacom, and security, and Anixter will be positioned to utilize WESCO's robust portfolio in electrical, automation, broadband, lighting, and safety.
As an example, in a customer manufacturing facility where WESCO has historically sold electrical MRO, switchgear, and lighting, the combined business will add Anixter's wiring cable capabilities, particularly in machine-to-machine applications and capital projects that will increase the addressable spend with that customer. Another example is in our respective national and global account programs. WESCO and Anixter both serve large customers on an international level, although each have historically been focused on different products and industries. This combination will enable Anixter to bring WESCO's expertise in core electrical, MRO procurement, broadband, and automation to its national account customers. While WESCO customers will benefit from access to a broader array of wiring cable, datacom, and security offerings. With a combined geographic reach in over 50 countries, we will be able to serve existing customers in new geographies where we historically did not have an in-country presence.
Both companies offer our respective customers value-added services that create stickier and longer-lasting relationships. For example, consider a traditional non-residential construction project, where Anixter's reel-to-reel technology and cable management systems can add significant capabilities to WESCO's construction services. While WESCO's energy services business and lighting renovation and retrofit capabilities can be sold across Anixter's customer base. The company's increased scale and profitability will yield significant increase in investable capital to accelerate the build-out of differentiated capabilities and digital applications and solutions. Taken together, our cross-selling opportunities and increased investments in digital will drive an acceleration in our organic growth rate of more than 100 basis points.
I would now like to hand it off to Dave to take you through our cost synergies, integration management and synergy capture plan, the upside potential, and our resultant financial value creation in terms of margin expansion, EPS accretion and growth, and substantial free cash flow generation. He will then wrap up with a transaction update and the critical actions to closing. After that point, we'll open up the call to Q&A. Dave?
Turning to page nine. We provided our estimate of over $200 million of pre-tax cost synergies when we announced the transaction on January 13th. These are cost synergies only and do not include the significant incremental sales opportunity that this combination enables. These estimates represent detailed analysis that we conducted in conjunction with a leading global accounting firm during the due diligence process, and were determined independently through a separate internal analysis that our leadership team conducted during the same period. We expect to incur $140 million of one-time operating costs and $85 million of capital to achieve these synergies. Year one synergies of $68 million are primarily focused on the elimination of duplicative corporate costs. We are highly confident these savings will be realized within the first 12 months of ownership. We believe that these synergies are only the starting point, and that there should be significant upside potential.
Although our analysis was robust, in the weeks since that time, we have identified several areas that will collectively add materially to this number. The $200 million cost synergy amount represents just over 1% of the combined company's revenue, while comparable transformational combinations are typically able to generate a significantly higher percentage. Turning to page 10. You may recall that we previously provided a breakdown of the identified cost synergies, with approximately 55% generated from supply chain and field operations, and 45% coming from corporate and administrative costs. In the chart on this page, we've provided additional detail of the composition of these percentages, as well as some further information and examples about the primary drivers of those synergies. Of the 45% that is corporate and administrative, approximately two-thirds will come from the elimination of duplicative general and administrative costs, and one-third will come from corporate overhead.
The corporate overhead costs primarily represent the significant cost of operating a public company and the associated professional services. Both the general administrative and corporate overhead are expected to make up the bulk of the year one synergies. Of the 55% that will be generated from supply chain and field operations, the majority will come from supply chain efficiencies with the rest generated from field operations. The field operations include the footprint rationalization of both companies' branch networks. Approximately two-thirds of WESCO and Anixter facilities in the U.S. are within 20 mi of each other. Additionally, we have identified over $70 million of supply chain related synergies for the combined platform business that will have $14 billion in total cost of goods.
Both the supply chain and field operation synergies are expected to begin in year one, but the bulk of these opportunities will be realized in years two and three. We are confident in achieving these synergies and believe they can be realized efficiently with minimal disruption to our day-to-day business. Moving to slide 11. Our top focus is executing a detailed, rigorous, and process-oriented integration that delivers our committed synergies as well as the clear upside potential while combining the best elements of each company. We have partnered with one of the world's leading consulting firms to serve as our integration partner during this process. In addition to offering one of the top M&A integration consulting practices, the firm we engaged has done significant work for WESCO previously and brings a strong knowledge of our business and the industry in which we operate.
The three objectives that our planning has encompassed are, first, executing a flawless first 100 days post-closing that ensures business continuity and an effective onboarding process. Second, delivering the value of the combination through both the cost and sales growth synergies. Third, implementing an operating model for the new enterprise with the best leaders of each company and deploys cutting-edge digital tools. The six value delivery work streams that are working in our integration plan include commercial, digital and IT, supply chain, operations, marketing, and corporate functions. We are also mindful of the critical importance that culture plays in the value creation opportunity of this transaction. Based on all of our interactions with the Anixter team, as well as knowledge of them over the years, we know that the cultures are quite similar.
Both are customer and solution-oriented, drive innovation and collaboration across the business, and maintain a relentless focus on winning with our customers by partnering with our suppliers. Moving to page 12. As John outlined earlier, we believe that the $200 million of cost synergies is just the beginning of the synergy opportunity of this combination. Additional upside synergies will be identified as we work our way through the integration process. As we learn more through the integration process and the businesses come together, we are confident there will be additional upside supply chain and procurement opportunities. We also believe that we can drive further network optimization and implement Lean initiatives across the combined business over time. Recall that WESCO has utilized Lean for nearly 20 years to streamline and achieve efficiencies in our operations and business processes, including those of our acquisitions.
As with EECOL and many others before, we believe Lean will generate meaningful improvements as we integrate Anixter. As mentioned earlier, none of the key growth opportunities have been included in the $200 million estimate, and we believe there is significant opportunities to accelerate growth. Turning to page 13. This transaction is highly compelling from a financial perspective. The merger is expected to provide over 100 basis points of margin expansion and 40%-50% EPS accretion in year three, and to double our standalone EPS growth rate. It is important to note that these ranges reflect $200 million of cost synergies only. We have not assumed any of the upside synergies that we are confident we will generate. We are considering various scenarios and mixes of debt, equity, and equity content securities to generate the most favorable financing structure.
I would also note that before going effective with the registration statement on Form S-4 in connection with the transaction, we expect to update the pro forma financial information to reflect an equity offering in the range of $400 million-$500 million. This pro forma financial information will be further refined in connection with any registered offering of equity or equity content securities. From a cash EPS basis, we expect this merger to result in 50%-60% accretion. Note that we are currently assuming $78 million per year in amortization expense for intangible assets. This is based on our preliminary analysis and allocation of the purchase price. Turning to page 14, both WESCO and Anixter have strong track records of generating free cash flow throughout the economic cycle. Over the past five years, the businesses generated an average of $370 million in free cash flow on a combined basis.
With the combination of earnings growth and the realization of cost synergies, we expect the annual cash generation of the combined company will expand to over $600 million per year by year three. The strong free cash flow and earnings growth will enable us to rapidly de-leverage the balance sheet. We are expecting to return to leverage within our target range of 2x- 3.5x net debt to EBITDA within 24 months of closing. Our liquidity is also expected to be very strong at closing, with aggregate availability under bank credit facilities and cash balances of greater than $800 million. We anticipate increasing the size of our low-cost asset-based securitization and revolver facilities to approximately $1 billion each in conjunction with the transaction.
We use an estimated 6% cost of debt for our accretion analysis. Our ratio of fixed rate debt to variable rate debt is expected to be at or above 70% at closing. Our capital deployment in the near term will be focused on investments to deliver the synergies and debt paydown to manage leverage. Three years post-close, we expect to be within our target leverage range with over $600 million of free cash flow available for further investment in the business and deployment of capital to shareholders. Moving to page 15, there are several conditions to be met before the merger can close, and we are making good progress in that regard. We announced last week that the 30-day waiting period for Hart-Scott-Rodino review in the U.S. had expired on February 26th. We've also made the regulatory filings in the other required jurisdictions, including Canada.
Anixter has set the date for its special stockholder meeting to seek approval of the transaction on April 9th. Finally, we're working to finalize the registration statement on Form S-4 now that each of WESCO and Anixter's 10-Ks have been filed. We remain on track to close the Anixter acquisition in Q2 or Q3 of 2020. I'll hand it back over to John for some final thoughts. John?
Thank you, Dave. Now turning to page 16. We are very excited about the value creation opportunities that this transformational combination presents. The increased scale, complementary portfolios, and the synergies of this combination will translate into accelerated growth, margin expansion, and substantially higher free cash flow, and will ultimately drive significant value creation for our shareholders. With that, we will now open the call for your questions.
Yes. Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble the roster. The first question comes from David Manthey with Baird.
Hey, good morning, guys.
Morning, Dave.
First question on the growth outlook. I think from the proxies, both WESCO and Anixter were expecting top-line growth of something in the 5%-6% range. If you're saying 100 basis points acceleration, that's 6%-7%. Could you talk about the organic market growth that you're assuming under that assumption?
Dave, good morning. It's Dave Schulz. If you take a look at what's in the analysis that was provided to the boards of each company, you would find that for the out years, the top-line growth rate is about 4%. Again, looking at both companies, I would consider that more on an organic sales basis. We have identified these growth opportunities based on the combination, the scale, and the capabilities of this merger would provide that we do see incremental upside from a revenue perspective based on what you're seeing in the pro formas that were presented.
Okay. You're saying roughly 4% going to 5%, and that would still encompass a low single-digit organic growth rate, market growth rate plus outgrowth?
That's correct.
Yes, Dave.
Again, when you take a look at what was provided in the preliminary S-4 by both companies, it's in line with what both companies have provided historically in terms of their long-term growth algorithm. Again, we're still assuming that there would be market opportunity, low single digits, plus some outperformance based on both companies. Then on top of that, given the scale and the complementary capabilities, we believe that there are significant growth opportunities above that with the combined company.
Okay. My follow-up on the potential of any downside here. Have you run Monte Carlo analysis or anything to plumb the downside of what would happen if we experienced a recession, for example, over the forecast period in terms of revenues, EBITDA, leverage, just to give us some comfort that if something didn't go according to plan, we would still be okay?
I'd make two comments in general, Dave, you may want to add to that. I think that both companies have been well established and longly successful businesses in the distribution industry. If you look backwards, we've both experienced a series of economic cycles, right, in our history. The most challenging being the great global recession. Given the underlying and inherently strong free cash flows and the counter-cyclicality nature of those cash flows, we think that's what underpins the strength of this combined company. Just fundamentally strong cash flows across all phases of the economic cycle. As two independently publicly traded companies and bringing these together, we've talked about the upsized and substantial free cash flow generation as a result of the combination. We think that underpins the strength, Dave, looking forward against a wide array of economic scenarios. That's how we think about it going forward.
Yeah, and I'll just make two points to you, Dave. Obviously, both companies understand how to operate through the cycle, and both companies have historically been investing heavily in capabilities where we see a significant market outperformance in key product verticals. When you think about Anixter traditionally being a datacom and security company, we've invested heavily on the WESCO side against datacom and security, but also against automation, broadband, lighting. We do see significant upside just based on the investments that both companies have made. As we bring these together, we believe that will provide a powerful combination to provide some of these growth synergies. Secondly, obviously, as we go through the cycle, both companies have a track record of being able to generate significant free cash flow.
Obviously, if there is a downturn, both companies will be able to manage working capital historically, and on a combined basis, we will continue to do so. We believe that we have appropriately tested the downside, and we're very confident in our ability to deliver the value creation to the shareholders.
I think the final point I would make is, just to amplify, the complementary nature of the two respective portfolios. If you put the two together, you think about just a much stronger, diversified, more robust portfolio in terms of opportunities against our wide array of served industries and customers in those industries. In the unlikely scenario of a severe economic downturn, this combination makes even more sense. When you think about what we outlined in our investor day last year, a very strong view that given the state of digital application development, digital disruption, that the bigs had to come together in the distribution portion of the value chain. This is exactly that. We're doing what we said we're going to do. We wanted to lead that effort in our distribution verticals.
I think that under all scenarios, as you look forward, and particularly under the scenario of a significant downturn, it would be even more important for the leaders to combine and deliver these synergies that strengthens the company and puts it in a better position to serve customers as we manage our way through, if in this case scenario, a potential downturn, and would come out the backside even stronger.
Thanks for the color, guys. Best of luck.
Thanks, Dave.
Thank you. The next question comes from Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone. Hope everyone's staying healthy, and we appreciate the update here.
Morning, Deane.
Hey, I didn't hear if there were any ground rules for this call on any kind of updates, but since it is such of high interest right now, any comments about look, we know China is not a revenue opportunity today, but anything on the supply chain, any disruptions, any color that you can add, what you're seeing real-time?
Deane, good morning. It's Dave Schulz. We obviously, like every company, we've been closely monitoring the situation. Many of our suppliers do have a direct exposure to manufacturing or sourcing in China. We've been in active communication with not only our customers, but also with our suppliers. Most of our suppliers that do operate or have exposure in China are telling us that their operations are back up and running, but not at full capacity. There are some logistical delays. At this point, we've not had any issues servicing our customers and fulfilling orders. We started the year with a healthy inventory. Obviously, no one, I think, could have predicted how coronavirus was going to impact over the long term. Again, we're typically starting the year with some significant buys in preparation for the heavy construction season in Q2, Q3.
We feel that we're in a good position right now. Obviously, it's something that we continue to monitor.
That's helpful. Just, I don't know, coincidentally, one of your largest suppliers had an analyst meeting yesterday in New York, and we had the opportunity to talk to the Chief Executive Officer, and he is still speaking glowingly about the merger prospects. What have been your conversations with other suppliers? Certainly, your largest supplier is enthusiastic. Is there any other color from suppliers or customers that you could add?
Yeah. Thanks for that question, Deane. The feedback, let me start first with customers. The customer discussions we have had to date, they've been wide-ranging, as you can imagine, because we announced this powerful combination in mid-January. Obviously once it got out into the marketplace, immediate discussions started first and foremost with customers and then with suppliers. Across the board with the customer discussions, I'm very pleased. They see the power of the combination, they clearly see the rationale. We will be in a better position to provide a much more complete set of offerings, both product services, and overall solutions for managing their supply chain. I couldn't be more pleased with the initial customer reaction, that's across the board.
In terms of our top supplier partners, I've had numerous discussions, and by now I've spoken to virtually all of them, and many of them multiple times. Again, we continue to run both our respective businesses day to day. There's significant engagement on a real-time basis, as you know, with our supplier partners as we're serving customer demand. I would say that, again, across the board, very strong support for the power of this combination. I think this is a case where 1 + 1 = 3 in terms of the growth prospects and opportunities to better serve customers. Explicitly as part of this combination, we outlined a priority, and this goes back to our investor day last year in June, of using the substantially greater scale and investment-based investable capital to invest in digital and accelerate our digital applications and solutions.
There's a lot of excitement around that, Deane, with our supplier partners in terms of this combination, we, WESCO and Anixter, are taking a leadership role in digitizing the value chain and providing a more complete set of digital solutions in conjunction with our supplier partners. Very exciting and compelling proposition for those partnerships and relationships.
That's all good to hear. Just last question from me, and I appreciate the answer you gave to Dave's question about the top-line assumptions in that year three 40%-50% EPS accretion. Just specifically, are you factoring in any dyssynergies? Just when you say two-thirds of the branches are within 20 mi, sometimes there can be disruptions when you consolidate branches, especially on the salesperson. Some of the salespeople get merged and disaffected and leave.
Yeah.
I've had some investors ask me about how that issue might be addressed, and are you assuming anything in the way of dyssynergies? Your color and perspective along those would be helpful.
A very good question, and we've also received that question, Dave, and I, and Brian, and company. Let me be really clear. The $200 million, it's $200+ million of cost synergies by year three, and that's a net synergy number. We've factored in some dyssynergies in coming up with the $200+ million of net cost synergies. We also think that now that we have engaged with one of the world's leading consulting firms, that's very recent, i.e., within days. We just engaged with that firm, and now as we continue to work between the sign and close process, we're highly confident we'll identify additional cost synergies above and beyond the $200+ million. Again, that's a net number, but we'll look to identify more. We're highly confident we'll identify more. We're above that number now, but we'll continue to work that number up.
We will set our internal targets well above that number. That's cost synergies. In terms of revenue and growth synergies, none of that's in the $200+ million. What we've tried to do in this presentation is outline a number of the areas that we think offer substantial upside to drive increased top-line synergies. When you think about this, we've got two, and I'm going to round it, $8.5 billion companies coming together. We double in size. When you look at the complementary nature of the two portfolios, there's just an outstanding combination of one plus one, I think, is equal to three. The increased international footprint is especially compelling because where we serve current customers, but we're unable to serve them in other geographies, leveraging a new expanded and combined footprint will position us for that. Hopefully that helps, Deane.
Yes, there is dyssynergies that are factored in. Just philosophically, we want to be very clear on the number that we're committing to as kind of the hard cost synergies. We'll drive to targets that exceed that. Then on top of that, we'll be driving for the revenue growth synergies as well.
That's really helpful. Thank you.
Thanks.
Thank you. The next question comes from Nigel Coe with Wolfe Research.
Hey, good morning, everybody. This is Brian on for Nigel. Just real quick, maybe if you have any more color on the thinking between the equity versus equity content mix for that $400 million-$500 million offering and anything around the timing?
Yeah, good morning. We have not been specific on the timing, the amount, or the nature of the equity raise at this point. Clearly, there are number of factors that will come into that. Obviously, most meaningful will be the current market conditions. We have provided you a little bit more of a roadmap in terms of, we expect that that equity and equity content security raise would be in the $400 million-$500 million range. Obviously, as we evaluate timing in the markets, we'll be much more specific with the registration statement. You'll be able to see the details. We're just not at a position at this point to provide further clarity on that equity content raise.
Okay, great. Just real quick on the leverage. Is there any potential that you don't meet that 4.5 times leverage target by closing? What would be the implications there with ratings and cost of debt and things like that?
Clearly, it's an issue that we have been thinking about quite a bit since we were working pre-announcement back in January about what is the right leverage for this combined company to be at. We've targeted being at four and a half turns, remember that four and a half turns also includes $68 million of the year one synergies that we've highlighted. Excluding that synergies, we'd be closer to 4.8 turns upon the close. Obviously, we'll take a look at the market conditions, and we will put together the most efficient capital structure that we can. Obviously, the leverage, the timing, and the amount of equity content securities is a decision to be made at a future date.
Dave, could you also comment on the meeting with the rating agencies and what they've published thus far?
Certainly. Clearly, one of the things that we're balancing is how much leverage can we take on to ensure that we still maintain a suitable cost of financing. If we were going to lever up considerably, we believe that there would be an impact to the rating, which would also have an impact on our cost of financing. That's something that we are very mindful of. We have had some discussions with both ratings agencies. I'm sure that you saw that Moody's came out, and as expected, is going to give us 100% equity credit for the preferred that will be issued to the Anixter stockholders. Initially, S&P came out said that they would not give us any credit. They have since revised that issued a press release that they will now be providing 50% credit for the preferred.
That does not impact our balance sheet. What it does impact is the rating. Again, we started this process with assumptions on how both Moody's and S&P would treat the preferred. Both of them have announced via press release that they will treat it as we thought that they would. That's in line and therefore should have no impact on our overall rating going forward.
Great. Thanks.
Thank you. The next question comes from Patrick Baumann with JP Morgan.
Hi, John. Hi, Dave. Thanks for all the great additional detail here. Really helpful. Thanks for taking the question.
Good morning.
Good morning. I think you're targeting 6% + EBITDA margins eventually to this combination, versus what looks like in 2019, I think was about 5% combined EBITDA margins. Maybe at the prior peak was something in kind of the mid-sixes or thereabouts. Can you just give some perspective on why margins have come down over time, and then why you think the synergies here won't eventually be competed away? I guess I'm thinking in context of what still seems like a pretty fragmented industry, even with the combination as per slide six that you show kind of the breakout of the big players.
Certainly. As we highlighted in our prepared remarks that we've highlighted the 100 basis points improvement to the EBITDA margins. Think about that in terms of what we expect from the $200 million of cost synergies. We've also highlighted that we do believe that there are incremental cost and growth opportunities that would also be accretive to that EBITDA margin. Obviously, as you've talked to Anixter over the past several years, you understand that their margin story, as you think about where WESCO is from the overall margin perspective, when you think back to some of the previous operating margin percent, where we are today, clearly there's been a couple of factors that have influenced that. Our peak operating margin, closer to 6%, was when we had parity on foreign exchange rate with Canada.
We do have a significant business in Canada, and Canada also has a higher operating margin in the balance of WESCO. Over the course between 2014 and now, we went through the industrial recession, so clearly, that had an impact on our margin, particularly as we saw the top line erode. Over the last couple of years, we've seen some pressure on the operating margin, primarily coming from the amount of price increases that we've seen. I would call the last couple of years really outside the norm when it comes to the pace and rate of those supplier price increases. That's impacted our margin. Based on the models that we've put together, we do anticipate being able to do a better job passing through those margins. We typically have a lag period, and so we've included that in our accretion model going forward.
Again, we're very confident that we can deliver the synergies. We understand that it's still a fragmented industry. We believe that we have been appropriately conservative with reflecting only the $200 million of cost synergies in our accretion model, and we know that there is upside from that. We're confident on being able to get the margin expansion going forward.
Which translates to which Dave said, and I'll just amplify, the confidence in the compelling financial metrics associated with this combination. Which is over 100 basis points of operating margin expansion, 40%-50% accretive to EPS by year three. Doubling the EPS growth rate. Most importantly, which I think is a critical point, the substantial step up and increase in free cash flow generation. I think that's been an underappreciated aspect of both companies, quite frankly. A well-run distribution company produces very strong free cash flows across all phases of the economic cycle. When you look at both companies have done very well, looking backwards, all the way throughout their entire publicly traded existence.
Going forward, the significant step up in combined cash flow generation creates just a much more valuable enterprise and gives us the increased optionality to further invest in the business and also return capital to shareholders appropriately.
Yeah. No, I think it cuts both ways. I mean, the scale really stands out on slide six as well. Can you talk about maybe some of the big digital investments you're making and how the smaller players are going to be able to compete with that? It seems like you'd be able to differentiate yourself even further from that perspective.
This is an area that obviously, because it's so central to the strategic rationale for leading our portion of the industry with this combination and consolidation, it's so central. Your question is something we'll be talking about forevermore going forward at length. With that said, I think that you can think about those digital applications falling into two major categories. The first being applying digital tools and technologies to our business models. I'd point you back to our investor day last year in June, where we outlined a number of those. You'll recall that we had six strategic planks to our strategy, and the first strategic plank was called Digital Plays. That's where we're applying digital tools and technologies to various business models and helping transform how we're partnering with suppliers and servicing customers.
Taking advantage of our relationship with Plug and Play, the tech accelerator startup, that relationship's been well underway for closing in, not quite a year yet, but a very strong relationship. Second area that we're applying digital tool is our business processes. That's applying digital tools and technologies to our day-to-day business. One thing that we've done very recently, in fact, it's really been launched at the start of 2020, is we've taken WESCO's long-standing Lean Process, and we're in the second decade of that Lean journey, which, by the way, never ends. It's all about continuous improvement. I've been with the company now 16 years, and it was started a year before I joined the company. It's well developed. We apply Lean inside our four walls and up and down the value chain with our supplier partners and our customer relationships.
We've done something further, and we've taken digital tools and applications and made that an explicit component and part of the how, a step in the Lean Process. As we go through the process re-engineering, it's not just about re-engineering the process using the Lean tools, reducing cycle times, eliminating Muda. We're looking at also using digital tools and technologies as part of the how to do that and an accelerant to that. That's something that we integrated into our Lean program to start 2020. We're in the very early days of that, having just two months kind of underway now and past us for 2020. I'm very encouraged by some of the initial applications. It's a great question. Thank you for that. This is something we'll be further developing as we go forward and be talking about at length.
Yep, makes a lot of sense. Just last one for me, following on Deane's question. I have to try to get an update on February, if possible. I think I don't know if there was an extra day in the month or whatever, but any color on how things look versus that 2%-5% you expect for the first quarter?
Yeah, good morning. We're not making any changes to our outlook at this point. We talked about on our earnings call that January came in right at the midpoint of the range. Progress has continued here in February. No change to our outlook for Q1.
There is not an extra work day, just to be clear, right?
There's not. Okay. I was thinking leap year, but I got that off. Thanks so much for the time.
Be clear, not through February. There's no extra work day through February, just to be clear, but there is an extra work day in March. February, year- to- date, quarter- to- date, no extra work day. March, we'll have an extra work day.
Thanks. Thanks a lot, John. Really appreciate the time.
Yep.
Thank you. The next question comes from Hamzah Mazari with Jefferies.
Hi, this is Mario Cortellacci filling in for Hamzah. Just piggybacking off of the digital question. Could you update us again on the IT systems that WESCO is currently using and how the integration plan is expected to play out with Anixter's expected new system?
Yeah. Great question. Thanks for that. If you go back and look at our presentation this morning, on page 11, that talks about the approach we're taking to overall integration. As we've mentioned, we got really three top objectives. Those are absolutely critical. We partner with a leading global consulting firm. As I said, that engagement now has been locked down and we're underway in the early days of that, activities will ramp up significantly now, in the coming days and weeks as we move between today and closing. If you take a look at that page, we've outlined on the bottom, near the bottom of that page, six value delivery work streams. You'll see that explicitly one of those is digital/IT.
Expressly as part of that is all the digital applications, those great opportunities that I just alluded to in terms of architecturally how we're going about it, two buckets, applying digital to business models, applying digital to our business processes. It also includes our entire IT infrastructure and environment. We will be taking a fresh look at WESCO's IT environment as well as Anixter. Anixter started moving down a path. I think you've all been aware of what they've been doing. That will be expressly part of one of the key value delivery work streams. Looking at, as a result of this integration, leveraging the best of both, and figuring out what is best available in terms of the entire IT environment and ecosystem. That includes all the various applications that are required to run our full supply chain management and distribution enterprise.
As we work down that path and substantial work to be done there, obviously, we'll keep you well informed along the way. I should make a comment, and I meant to make this at the front end. We did commit to you that as we move between sign and close, we would keep you updated and keep you updated on a real-time basis. We continue to do that with this update call. We thought it was important having passed a major milestone with the Hart-Scott-Rodino expiration period. We put out that press release and established this call.
We thought it was also very critical, as we mentioned in our Q4 earnings call, because there was a wide range of numbers that were out there across the analyst community in terms of expectations on what the tremendous financial benefits were of this combination. We thought it was important to put a stake in the sand and share with you exactly what we see and what we're targeting on a minimum basis. Again, we commit that to you. We'll continue that kind of aggressive and robust updates as we make progress. There'll be substantial progress ramping from here, as I said, through close. Obviously post-close, we want to have an executable plan that ensures a flawless day one to day 100 execution.
Great. Just one on supply chain synergies. Just I know you said you've gotten good feedback from suppliers and from clients, and you're expecting the synergies to come in in more of a year two, year three, type of timing. Could you just comment on when you expect those individual negotiations to take place? Maybe just what's your game plan? Are you going to start with larger suppliers first and work towards the smaller ones? Do you think there's a timing difference, or how long it would take for you to negotiate with a larger supplier versus a smaller supplier?
Look, I think we'll keep our commentary with how we've outlined thus far. For that category of savings, which is substantial, and which also includes, as we engage with our suppliers, remember, the way we're viewing it is 1 + 1 = 3 . How do we partner even better with suppliers to capture more of the addressable demand together with this broader portfolio and broader array of services we can wrap around our suppliers' products. With that said, those take time to work and that'll happen in years two and three, and then we'll carry on forward beyond that. This is absolutely a critical element of the integration plan. As Dave mentioned in his commentary, we're laser-focused on the immediate synergies that can be captured in year one.
We'll be working all of these in parallel, I think what's going to be most critical is to ensure that we capture the immediate synergies that fall into the G&A and corporate overhead areas. Not only have we outlined a $200+ million of cost synergies as kind of a minimum commitment, we said that $68 million of that $200+ million cost synergy bucket will be realized in the first year post-close. It's going to be absolutely critical of, and you go back to that integration page on page 11, delivering the value capture. It's absolutely critical that we're focused on delivering out of the gate. This is not a case where, okay, trust us and wait till year two or three. It's about delivering right out of the gate.
Great. Thank you.
Thank you. The next question comes from Steve Barger with KeyBanc Capital Markets.
Thanks. Good morning.
Morning, Steve.
John, to your point on the immediate synergy of $68 million, are the cash costs on the integration front-loaded? Do you have an estimate for the actual or annualized free cash flow for the first year of operations?
Hey, Steve. It's Dave Schulz. We've not provided any of the specific details, but clearly there are cash costs. When I think about it on the 12-month first year of ownership, clearly we are still expecting that on a combined basis, we will still be cash flow positive. Even with some of the integration costs and some of the other costs associated with generating the year one synergies, we will be cash flow positive. We've not provided any specific detail yet. There's obviously a lot of factors that will go with that, including as we get into our more detailed planning of how and when each bucket of synergies are delivered.
Got it. Thank you. Did you say when you expect to file the registration statement?
Right now, we're still working on updates based on the 12/31 financials. We would anticipate that that would be filed here in the near term. Again, as we make further decisions about timing of equity, there will be further registration statements that will be filed.
Understood. I know it's too early to talk about mix of equity versus equity content securities, but will that decision be based on market price of the equity at the time? Are there any other factors, a shareholder vote or anything else that would influence how you go to market with that?
There's a number of factors, obviously, market conditions and how we believe that we can get the most efficient capital structure, and best execution against that design.
Okay. Would there be a shareholder vote in any scenario?
There would not be a requirement for a shareholder vote from WESCO shareholders.
Okay. That's understood. Just last question. I'm on the road, so I don't have my model in front of me, but if I run the revenue forward for three years at 5%, it gets towards $20 billion. The $600 million in free cash flow would be about 3% conversion from revenue, which is not that different from WESCO's free cash flow margin over the last three or four years. Can you talk about a path to driving improving free cash flow leverage, on a go-forward basis as you think about how the portfolio should operate?
Yeah, sure. First, we have not included any of the growth opportunities in our model. If you take a look at what's been filed in the preliminary registration statement, you can see what both companies have used to evaluate this merger opportunity. As I mentioned earlier, both companies have rough rounds just shy of a 4% growth rate over the near term. We've not included any of that incremental growth opportunity at this point in our accretion dilution model. Again, the way that we are thinking about it is both companies will come together. We will continue to operate with a very strong focus on cash flow. That is primarily the networking capital component, as all distributors have to demonstrate a significant opportunity to manage that networking capital.
We do believe that there is a significant opportunity to continue to drive free cash flow on the combined basis of these companies. We've called it out as year three in terms of the accretion dilution. We've not provided any specifics outside of the $600 million on free cash flow. That does incorporate that both companies do have base capital spending, and then we will have capital expenditures to drive the synergies to the bottom line.
Really appreciate the detail. Thank you.
Thank you. Does conclude our question and answer session. I would like to turn the floor to John Engel for any closing comments.
Well, thank you all for your time today. As I said, we remain committed to keeping you updated as we progress as fast as we can to closing. This is a very exciting combination. I think you can sense and see our excitement around the tremendous opportunities as a result of putting these companies together. We will be meeting with investors and attending the Raymond James Conference today. I know we'll have a lot of great discussions following it out throughout the day, and it'll go in through tonight. Please reach out to Dave and Brian with any additional questions that you have. Thank you and have a great day.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.