Good morning, and welcome to the Wesco Anixter Update. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to your host today, Brian Baig.
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 CEO 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 atwesco.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 7 days. With that, I'll turn the call over to John Engel.
Thank you, Brian. Good morning, everyone, and thank you for joining us today. The purpose of today's call is to provide an update on the merger with Anix Inter 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, the closing of the proposed transaction. We've made substantial progress over the last several weeks that I'm excited to share with you, and we are pleased to provide additional details regarding our integration plan and the compelling financial metrics for this combination.
Beginning on Page 4. This transformational combination creates an industry leader in electrical and data communications distribution. There are 5 key points that this presentation will address. 1st, 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 $17,000,000,000 in revenue and $1,100,000,000 in EBITDA on a pro form a basis, including the identified cost synergies.
2nd, 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. 3rd, we've developed an execution plan to deliver over $200,000,000 of cost synergies and have significant upside potential beyond this amount. We've engaged 1 of the world's leading consulting firms to serve as our integration partner and planning is underway. 4th, 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% to 50% accretive to EPS in the 3rd year.
And 5th, the combined company is expected to generate substantial free cash flow, over $600,000,000 annually by year 3, 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 5. The enhanced scale that this merger will create is clear. This transaction brings together 2 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 $17,000,000,000 and EBITDA of $1,100,000,000 on a pro form a basis, including $200,000,000 of cost synergies. And the combined company has operations in more than 50 countries with approximately 18,000 900 employees. Moving to Page 6. The North American electrical Industry is very large and highly fragmented.
With an estimated total size of $114,000,000,000 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 Atixter 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.
Now turning to Page 7. 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 nonresidential construction are complemented by Anixor's capabilities in network and security solutions. Both companies have utility businesses that drive enhanced value and a more robust supply chain customers on a combined basis. And 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 Axtor, and Axtor has historically had a larger international customer base. Coupled with the complementary industry 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 gross synergy opportunities on top of the over $200,000,000 of cost saving synergies. Turning to Page 8. 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 wire and 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 real and real technology and cable management systems can add significant capabilities to WESCO's construction services. While WESCO's energy services business 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 the transaction update and the critical actions to closing. After that point, we'll open up the call to Q and A. Dave?
Turning to Page 9. We provided our estimate of over $200,000,000 of pretax cost synergies when we announced the transaction on January 13. 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 $140,000,000 of one time operating costs and $85,000,000 of capital to achieve these synergies.
Year 1 synergies of We are highly confident these savings will be realized within the 1st 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. Furthermore, the $200,000,000 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 2 thirds will come from the elimination of duplicative general and administrative costs and 1 third will come from corporate overhead. The corporate overhead costs primarily represent the significant costs 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 1 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 2 thirds of WESCO and Anix Sur facilities in the U. S. Are within 20 miles of each other. Additionally, we have identified over $70,000,000 of supply chain related synergies for the combined platform business that will have $14,000,000,000 in total cost of goods.
Both the supply chain and field operations synergies are expected to begin in year 1, but the bulk of these opportunities will be realized in years 23. 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 1 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 and 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. 2nd, delivering the value of the combination through both the cost and sales growth synergies. And third, implementing an operating model for the new enterprise with the best leaders of each company and deploys cutting edge digital tools. The 6 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 $200,000,000 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 E. Col and many others before, we believe lean will generate meaningful improvements as we integrate Anixter.
Finally, as mentioned earlier, none of the key growth opportunities have been included in the $200,000,000 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% to 50% EPS accretion in year 3 and to double our standalone EPS growth rate. It is important to note that these ranges reflect $200,000,000 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-four in connection with the transaction, we expect to update the pro form a financial information to reflect an equity offering in the range of 400 $1,000,000
to
$500,000,000 This pro form a 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% to 60% accretion. Note that we are currently assuming $78,000,000 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 Anister have strong track records of generating free cash flow throughout the economic cycle.
Over the past 5 years, the businesses generated an average of $370,000,000 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 $600,000,000 per year by year 3. The strong free cash flow and earnings growth will enable us to rapidly deleverage the balance sheet. We are expecting to return to leverage within our target range of 2 to 3.5 times 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 $800,000,000 We anticipate increasing the size of our low cost asset based securitization and revolver facilities to approximately $1,000,000,000 each in conjunction with the transaction.
We used an estimated 6% cost of debt for our accretion analysis and our ratio of fixed debt 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 pay down to manage leverage. 3 years post close, we expect to be within our target leverage range with over $600,000,000 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 Hot Scott Rodina review in the U.
S. Had expired on February 26. We've also made the regulatory filings in the other required jurisdictions, including Canada. AnixServ has set the date for its special stockholder meeting to seek approval of the transaction for April 9. Finally, we're working to finalize the registration statement on Form S-four now that each of WESCO and Anixter's 10ks 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. And the first question comes from David Manthey with Baird.
Hey, good morning guys. Good morning, Dave.
So first question on the growth outlook. I think from the proxies, both WESCO and Anixter, we're expecting top line growth of something in the 5% to 6% range. And if you're saying 100 basis point acceleration, that's 6% to 7%. Could you talk about the organic market growth that you're assuming under that assumption?
Dave, good morning. It's Dave Schulz. So 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%. And again, looking at both companies, I would consider that more on an organic sales basis. And 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. So 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?
Yes, sure. Yes, Dave. And again, when you take a look at what was provided in the preliminary S-four by both companies, it's in line with what both companies have provided historically in terms of their long term growth algorithm. And so again, we're still assuming that there would be market opportunity, low single digits, plus some outperformance based on both companies. And 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. And then my follow-up
on the potential of any downside here. If you run Monte Carlo analysis or anything to plumb the down side 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?
So I'd make 2 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. And 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 countercyclicality nature of those cash flows, we think that that's what underpins the strength of this combined company, just fundamentally strong cash flows across all phases of the economic cycle. As 2 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.
So we think that's underpins the strength, Dave, looking forward against a wide array of economic scenarios. And that's how we think about it going forward.
Yes. And I'll just make two points to you, Dave. I mean, obviously, both companies understand how to operate through the cycle. And both companies have historically been investing heavily in capabilities where we see significant market outperformance in key product verticals. So when you think about Anixter traditionally being a datacom and security company, We've invested heavily on the West Coast side against datacom and security, but also against automation, broadband, lighting.
So we do see significant upside just based on the investments that both companies have made. And 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 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.
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 2 respective portfolios. So if you put the 2 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. And 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, in this case scenario, potential downturn and will come out the backside even stronger. Thanks for the color guys. Best of luck.
Thanks, Dave.
Thank you. And the next question comes from Deane Dray with RBC Capital Markets.
Thank you. Good morning, everyone. Hope everyone is staying healthy and we appreciate the update here.
Good 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 a 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?
Dean, good morning. It's Dave Schulz. So 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. But at this point, we've not had any issues servicing our customers and fulfilling orders. So 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.
But 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, but obviously it's something that we continue to monitor.
That's helpful. And just, I know coincidentally, one of your largest suppliers had a analyst meeting yesterday in New York and we had the opportunity to talk to the CEO and he is still speaking glowingly about the merger prospects. So what have been your conversations with other suppliers, certainly your largest suppliers enthusiastic? Is there any other color from suppliers or customers that you could add?
Yes. Thanks for that question, Dean. The feedback, let me start first with customers. The customer discussions we have had to date and they've been wide ranging as you can imagine, because we announced this powerful combination in mid January. So and obviously, once it got out into the marketplace, media discussions started 1st and foremost with customers and then with suppliers.
So across the board with the customer discussions, I'm very pleased. They see the power of the combination and they clearly see the rationale. We will be in a better position to provide a much more complete set of offerings, both products, services and overall solutions for managing their supply chain. So just I couldn't be more pleased with the initial customer reaction. And 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. And again, we continue to run our both our respective businesses day to day. So there's significant engagement on a real time basis, as you know, with our supplier partners as we're serving customer demand. But 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 equals 3
in terms
of the growth prospects and opportunities to better serve customers. And 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. And there's a lot of excitement around that, Deane, with our supplier partners in terms of if we this combination, we, Wesco and are taking a leadership role in digitizing the value chain and providing 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. And just last question for me. And I appreciate the answer you gave to Dave's question about the top line assumptions in that year 3 40% to 50% EPS accretion. Just specifically, are you factoring in any dis synergies? Just when you say 2 thirds of the branches are within 20 miles, sometimes there can be disruptions when you consolidate branches, especially on the sales person.
Some of the sales people get merged and disaffected and leave. And I've had some investors ask me about whether that is how that issue might be addressed? And are you assuming anything in the way of dis synergies? Or your color and perspective along those would be helpful.
Very good question. And we've also received that question, David, I and Brian and company. Well, let me be really clear. The $200,000,000 it's $200,000,000 plus of cost synergies by year 3, and that's a net synergy number. So we've factored in some dis synergies in coming up with the $200 plus 1,000,000 of net cost synergies.
We also think that now that we have engaged with 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 plus 1,000,000 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. And we will set our internal targets well above that number. In term that's cost synergies. In terms of revenue and growth synergies, none of that's in the 200 plus 1,000,000 dollars And 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. I mean, when you think about this, we've got 2 and I'm going to round it, dollars 8,500,000,000 companies coming together, we double in size.
And when you look at the complementary nature of the 2 portfolios, there's just an outstanding combination of 1 plus 1, I think, is equal to 3. And the increased international footprint is especially compelling, because where we serve current customers, but we are unable to serve them in other geographies, leveraging a new expanded and combined footprint will position us for that. So hopefully that helps, Dean. Yes, there is dis synergies that are factored in. And just philosophically, we want to be very clear on the number that we're committing to.
It's kind of the hard cost synergies. We'll drive the targets that exceed that. And 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. And 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 $400,000,000 to $500,000,000 offering And then anything around the timing?
Yes, good morning. So we have not been specific on the timing, the amount or the nature equity raise at this point. Clearly, there are a number of factors that will come into that. Obviously, most meaningful will be the current market condition. So 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 $400,000,000 to $500,000,000 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, equity content raise.
Okay, great. And then just real quick on the leverage. Is there any potential that you don't meet that 4.5 times leverage target by closing? And what would kind of 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 preannouncement back in January about what is the right leverage for this combined company to be at. We've targeted being at 4.5 turns. Remember that 4.5 turns also includes $68,000,000 of the year 1 synergies that we've highlighted. So 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.
So obviously, the leverage, the timing and the amount of equity, 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. So 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. And if we were going to lever up considerably, then we believe that there would be an impact to the rating, which would also have an impact on our cost of financing. So 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 and P came out and said that they would only give they would not give us any credit. They have since revised that and 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.
And so again, we started this process with assumptions on how both Moody's and S and P would treat the preferred. Both of them have announced via press release that they will treat it as we thought that they would. So that's in line and therefore should have no impact on our overall rating going forward.
Great. Thanks.
Thank you. And the next question comes from Patrick Baumann with JPMorgan.
Hi, John. Hi, Dave. Thanks for all the great additional detail here. Really helpful. And thanks for taking the question.
Good morning. Good morning. So I think you're targeting 6% plus EBITDA margins eventually versus what looks like in 2019, I think was about 5% combined EBITDA margins. And maybe at the prior peak was something in kind of the mid-6s 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 6 that you show kind of the breakout of the big players?
Certainly. So as you think about, as we highlighted in our prepared remarks that we've highlighted the 100 basis points improvement to the EBITDA margins. So think about that in terms of what we expect from the $200,000,000 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 I think 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. And 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.
So 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.
And so 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 $200,000,000 of cost synergies in our accretion model. We know that
there is upside from that. So 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, right, which is over 100 basis points of operating margin expansion, 40% to 50% accretive to EPS by year 3 and then doubling the EPS growth rate. And most importantly, which I think is a critical point, the substantial step up and increase in free cash flow generation. And I think that's been an under appreciated 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 the both companies have done very well looking backwards, all the way throughout their entire public, publicly traded existence. And then 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.
Yes. No, I think it cuts both ways. I mean, the scale really stands out on Slide 6 as well. I mean, 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 would be able to differentiate yourself even further.
So I think that's where I and 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. It's that particular 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 2 major categories. The first being applying digital tools and technologies to our business models.
And 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 6 strategic planks to our strategy and the first strategic plan was called digital plays. So 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 and taking advantage of our relationship with Plug and Play, the tech accelerator startup. And that relationship has been well underway for closing in not quite a year yet, but a very strong relationship. 2nd area that we're going to be that we're applying digital tool is our business processes.
So that's applying digital tools and technologies to our day to day business. And 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 lien process and we're in the 2nd decade of that lien journey, which by the way never ends, right? It's all about continuous improvement. I've been with the company now 16 years and it was started a year before I started, joined the company and it's well developed. And we apply lean inside our 4 walls and up and down the value chain with our supplier partners and our customer partnerships.
But 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 reengineering, it's not just about reengineering 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. So that's something that we integrated into our lean program to start 2020. We're in the very early days of that, having just 2 months under kind of underway now and past us for 2020.
I'm very encouraged by some of the initial Yes, makes a lot of sense. And
Yes, makes a lot of sense. And then just last one for me following on Dean's questions. I have to try to get an update on February, if possible. I think there's an extra I don't know if there's an extra day in the month or whatever, but any color on how things look versus that 2% to 5% you expect for the Q1?
Yes, good morning. We're not making any changes to our outlook at this point. So we talked about on our earnings call that January came in right at the midpoint of the range. Progress has continued here in February, so no change to our outlook for Q1. And there is
not an extra work day, just to be clear, right?
Oh, there's not? Okay. Okay. I was thinking leap year, but I got that off. Thanks so much for the time.
No, but not but to 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. So 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. Yes.
Thank you. And the next question comes from Hamzah Mazari with Jefferies.
Hi, this is Mario Cortellacci filling in for Hamzah. Just kind of 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?
Yes. 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. And as we've mentioned, we've got really 3 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. And activities will ramp up significantly now in the coming days weeks as we move between today and closing. But if you take a look at that page, we've outlined on the bottom near the bottom of that page, 6 value delivery work streams.
You'll see that explicitly one of those is digitalIT. So 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, 2 buckets, applying digital business models, applying digital to our business processes. But it also includes our entire IT infrastructure and environment. So 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. And that will be expressly part of one of the key value delivery works teams, 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. So as we work down that path and substantial work to be done there, obviously, we'll keep you well informed along the way. And I should make a comment, and I meant to make this at the front end.
So 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, that we would come out with 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.
So again, we commit that to you. We'll continue that kind of aggressive and robust updates as we make progress. And there'll be substantial progress ramping from here, as I said, through close. And then obviously, post close, we want to have an executable plan that ensures a flawless day 1 to day 100 execution.
Great. And then 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 2, year 3 type of timing. But I mean, could you just comment on when you expect those individual negotiations to take place? Or maybe just what's your game plan?
Are you going to start with larger suppliers first and work towards the smaller ones? Or also, 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?
Yes. So 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 equals 3. So 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. But with that said, those take time to work and that will happen in years 2 3 and then we'll carry on forward beyond that.
This is absolutely a critical element of the integration plan. And as Dave mentioned in his commentary, we're laser focused on the immediate synergies that can be captured in year 1. We'll be working all of these in parallel, but I think what's going to be most critical is to ensure that we capture the immediate synergies that fall into the G and A and corporate overhead areas. And we've not only have we outlined the $200 plus 1,000,000 of cost synergies as kind of a minimum commitment, we said that $68,000,000 of that $200,000,000 plus cost synergy bucket will be realized in the 1st year post close. So that's 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 were focused on delivering out of the gate. So this is not a case where, okay, trust us and wait till year 2 or 3. It's about delivering right out of the gate.
Great. Thank you.
Thank you. And the next question comes from Steve Barger with KeyBanc Capital Markets.
Thanks. Good morning.
Good morning. Good morning.
John, to your point on the immediate synergy of $68,000,000 are the cash costs on the integration front loaded? Do you have an estimate for the actual or annualized free cash flow for the 1st year of operations?
Hey, Steve, it's Dave Schulz. So we've provided we've not provided any of the specific details, but clearly there are cash costs. And when I think about it on the 12 month 1st year of ownership, So even with some So even with some of the integration costs and some of the other costs associated with generating the year 1 synergies, we will be cash flow positive. But 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. And did you say when you expect to file the registration statement?
So right now, we're still working on updates based on the twelvethirty one financials. So we would anticipate that that would be filed here in the near term. And again, as we make further decisions about timing of equity, there will be further registration statements that will be filed.
Understood. And 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 Westco shareholders.
Okay. That's understood. And 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 3 years at 5%, it gets towards $20,000,000,000 So the $600,000,000 in free cash flow would be about 3% conversion from revenue, which is not that different from West free cash flow margin over the last 3 or 4 years.
So 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?
Yes, sure. So first, we have not included any of the growth opportunities in our model. So if you take a look at what's been filed in the preliminary earlier, both companies have rough rounds just shy of a 4% growth rate over the near term. So we've not included any of that incremental growth opportunity at this point in our accretion dilution model. So 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 3 in terms of the accretion dilution. We've not provided any specifics outside of the $600,000,000 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. And that concludes 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. And as I said, we remain committed to keeping you updated as we progress as fast as we can, the 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.
So I know we'll have a lot of great discussions following it out throughout the day. And I'll go in through tonight. And please reach out to Dave and Bryant 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.