Good afternoon. Let's go ahead and get started. Welcome to the 2019 WESCO Investor Day. It's great to see a number of familiar faces here with us this afternoon, but for anyone I haven't met, my name is Will Ruthroft. I'm the Director of Investor Relations at WESCO.
On behalf of the entire WESCO team, I just want to say thank you for your presence here this afternoon. We appreciate the investment of your time as well as your interest and learning more about the company. Safety is at the forefront of what we do at Wesco every day. It's customary for us to begin meetings with a safety minute. So in that light, I just want to point out a couple of things for you.
There are 2 emergency exits in the room, 1 in the back of the room, door that you entered and one to behind the stage, behind that screen. This exit is connected to a stairwell, a fire exit. The other stairwell is at the far end of the building. A couple of quick items before we begin. First, a reminder to please silence any mobile devices if you haven't done so already.
Secondly, during the presentation, we ask you hold any questions you may
have until the end.
That will help keep us on schedule as well as ensure that the entire team is available to address any questions. And lastly, we hope you'll join us for a cocktail reception following the presentation, it should be an excellent opportunity to get to know the WESCO team a bit better. Turning to the presentation, I ask
that you please familiarize yourself with
the language found on Page 2 regarding forward looking statements and non GAAP measures. We will be discussing WESCO today using forward looking statements. Important to remember that they include risks and uncertainties that we're unable to predict. And for that reason, actual results may differ materially from expectations. That's all I have.
Now I'd like to welcome our next speaker, John Engel, Chairman, President
and CEO.
Good afternoon, everyone. Pleasure to be here and welcome to our 2019 Investor Day. Thanks for taking time to join us. We're very pleased to be here as I said and very excited to share the next chapter in our Resco story and our refined strategy for enterprise value creation. I'd like to start out with a few introductions.
Several members of our West Reported Directors are in attendance. So I'd ask them to stand please when I call your
name. Jamie Singleton, our Lead Director, Lynn Otter, Bobby Griffin, East Sundaram,
our newest addition to the Board, welcome, Ish, and thank you to the directors for joining us as well. Depicted here is the Westco leadership team. You'll be hearing from Dave, Nelson, Juan and Haymon this afternoon. Diane, Chris and Rob are also in attendance and they're part of my direct reports and I'd ask them to stand in the back, there at the back row. Diane, Chris and Rob Diane is our General Counsel.
Chris Wolfe is one of our most recent additions to the team. She's our CHRO, Chief Human Resources Officer and Rob Menacost, our CIO. I've been with Lexco for 15 years now and CEO for the last ten. This is the strongest leadership team that we've had. And I think it's interesting to note that the majority of these leaders are new to WESCO within the last 3 plus years.
Going forward, we are well positioned with this team at the leadership helm of WESCO. Moving to the agenda, I'll start out with the state of the WESCO business and as I said, share the next chapter of our WESCO story. You're then going to hear from our Westfield leaders as they focus on our key themes of our Investor Day, our services portfolio, our value proposition for customers and the actions we're taking that digitize our business models and our business processes, all of which will leverage Resolute Big Data. You'll also hear from 3 additional voices this afternoon and we've included a video in each of Delson's Blonde's and Haymont's presentation.
These voices will be from 3 different customers who will provide their view of WESCO and the value that
we provide to their business. So, very excited to share those with you today. That's something that we've not done in the past. When Nelson and Ron present, I'll give an overview of their respective businesses as well as outline our value proposition and our position in each of our 4 end markets at the WESCO enterprise level. So they'll present their business to close and foremost, but then rise back to the WESCO enterprise level and take you through those end market key position value prop that being industrial, construction, utility and CIG as for commercial, institutional and governmental.
We'll then have a short break. Hayman will bring us back after the break and we'll address our progress and plans for improving our operations, improving our margins and managing our ESG agenda. Finally, Dave Schulz will present our financial outlook and revised acquisition strategy and capital deployment framework. We'll then open it up for Q and A and as Will mentioned, we'll conclude with cocktails this evening and so I hope you'll be able to join us. These are our key messages.
Take a moment and give them a read. Wesco is focused on growth and margin improvement as well as leading the industry consolidation. We're differentiated by our product and service offerings that leverage our supplier partnership and our big data to provide complete solutions for our customers. And we generate strong and consistent free cash flow across all phases of the economic cycle and have the financial strength to drive multiple sources of value creation. WESCO is an industry leader, record sales last year of $8,200,000,000 We partner with 30,000 suppliers and shipping 1,000,000 different products a year.
We wrap those in our services, deliver them to customers and then provide complete solutions for their operations and supply chain management needs. It's important to note that over 70% of our product sales are tied to our services with our customers. One final point, 2019 is a noteworthy year as we're celebrating very important milestones. This year is our 25 year anniversary of spinning out of Westinghouse as a standalone becoming a standalone company with a management backed LBO in 1994. In addition, our 20 year anniversary of becoming a publicly traded company, we had our IPO back in 1990.
This page outlines our mission, our vision and our value. We partner with our top suppliers and industry experts to transform world class branded products and industry leading service capability in the cost effective innovative supply chain solutions. We help our customers build, operate, connect and power their business to improve their bottom line and sustain the world we live in. Our rest of our value can best be summed up with the letters WESCO. W stands for winning with customers and suppliers.
E stands for our extra effort workforce. S stands for safety and sustainability. C stands for collaboration and O stands for ownership. And you can see our values outlined at the bottom of this page.
This page outlines our differentiators. It's our product first.
That's the portfolio by partnering with a leading array of suppliers. It's our relationship with blue chip customers and suppliers. We're in
the middle of the value chain. It's our geographic reach
of global footprint service capabilities to serve our multi site customers around the world.
It's our services, a broad array of
over 50 service offerings is forming the basis of our supply chain solutions for our customers. And I'd refer you to this, the handout that we have available in front of you. This has been updated and represents our latest WESCO Value Creation Solution Selector Guide. I think you'll find that very instructive because that provides us an excellent summary of the broad array of services and solutions that we bring to bear on our customer.
It's also our employees, a strong and experienced team known for extra effort and
a lean continuous culture. And it's our financial position, strong balance sheet and a history of strong free cash flow across all phases of the economic cycle. To sum it up, it's our services, our big data and the financial strength that are our key differentiators and our strong cash flow generation gives us the optionality and the investment ability to fund our growth and future value creation. Our B2B addressable markets remain large and fragmented and we're focused on serving 3 demand streams MRO, OEM and capital projects, capital projects being new construction as well as retrofit renovation and upgrades. I've always believed that opportunity is directly proportional to the fragmentation of the industry that you operate in and that you serve.
And that is clearly the case for WESCO's addressable markets. Westco has evolved as an electrical only captive district in Westinghouse founded in 1922, almost 100 years ago, to a diversified supply chain powerhouse. Phase 1 of our evolution was the LBO spin out through the IPO, that's our 1st 5 years. The last 15 have been Phase 2 where we diversified our platform capabilities through a whole series of acquisitions and we developed complete supply chain solutions. We completed over 45 acquisitions since spinning out of Westinghouse in 1994 and outlined here you can see a few of the more notable ones.
OEM in 2,005, Datacom in 2,006, broadband communications in 2010, a major electrical consolidation play and move in 2012 when we acquired Ecol in Canada and then strengthening our lighting services platform through a series of moves giving us a turnkey retrofit renovation and upgrade capability with the acquisition of Alux, Lumadent, Needham and most recently SLS. So what's
our next step and that's shown
on the right hand side of this page over the next decade and we're very excited to move to this next chapter. First, it includes digitizing our business. 2nd, continuing to expand our broad and extensive services portfolio and supply chain solution offering. 3rd, ensuring delivery to the act, what is that? It's delivering to our customers their solutions whenever and wherever they need them.
And finally, leading the consolidation of our sector. This page outlines West Coast performance over our 1st 2 decades since becoming a public company, strong results over the last 20 years, 5% sales CAGR, 10% EPS CAGR, strong and growing free cash flow. Our first decade since going public, we generated $1,200,000,000 in free cash. The 2nd decade, the last 10 years, dollars 2,300,000,000 so almost doubling our cash generation capability from decade 1 to decade 2, again a hallmark of our
company. So that was a
quick overview of WESCO and kind of bringing you current. Now let's shift and let's shift looking forward. Here's our outlook over the longer term for our markets and competitive ecosystem And I think they can best be summed up with 1 freight. Digital is accelerating, impacting our industry and overall supply chain. I've always believed that industries like products and like companies go through S curve And our industry value chain is at the beginning of the steep part of the S curve of digital transformation.
And that's resulting in these key trends that are outlined on this page. Most notably, consolidation where the bigger getting bigger faster and I know we've talked about that over the years. I've always said it's going to take an interesting set of conditions that cause that to accelerate. We're clearly seeing that occur in our supplier base, incumbent upon distribution to also move with greater speed there. Overall, I'd say there's many in our industry that view digital as a threat.
I view it as an opportunity, particularly for an industry leader like WESCO. And make no mistake about it, WESCO intends to be a consolidator of our industry and a digital leader. So given these market outlooks and trends, what does that apply for a bit? It's clear that success in the future requires products, services and data. The left hand side of this page is the price of admission, the table stakes so to speak for a successful distributor historically, if any of these are still required today.
It's the right hand side that outlines the future requirements for success, all of which we're working on. The key takeaway is WESCO's big data is an asset to be leveraged. Now let's shift to our strategy and I referred to that earlier, what is our refined strategy going forward? It has 6 strategic planks, each is composed of a series of initiatives and these are our 6 plan digital growth plays, commercial excellence initiatives, operational excellence initiatives, technologies to support digitizing our business and managing WESCO's big data, organizational talent culture, strengthening our team and our capabilities to execute change, and portfolio in M and A, accelerate the building of scale with bigger transformational M and A. We're going to bring a number of these to life this afternoon throughout the various presentations.
So let's start with digital growth plays. That's our first strategic plank. Here are 4 of our key initiatives and these are across a series of our business models as you'll see. So moving from left to right, starting with the first initiative, that's a product category play, which we're initially applying to our lighting category. And it's our view that and we're already seeing some great gains, I won't steal the thunder of Juan, who'll address this later, but that can be extended to other categories over time.
The second initiative is mobile solutions for contractors. The third is digitizing our global account business model and the way we manage those customer relationships. The 4th is digitizing our capital project management process and capabilities. So these are 4 different business models of the business, capital project management, global account, solutions for contractors at the branch level and then taking a major category play. And in the case of lighting, it's turnkey retrofit renovation and upgrade.
They are all focused on improving our customers' operations and solutions through digitizing our business and leveraging our big data. And Nelson and Juan will be touching upon each of these in their presentations later this afternoon. For the 2nd strategic client, commercial excellence. And by the way, commercial excellence for us is these are the initiatives focused on and I'll use the term the front end of our business, front end being sales, marketing, demand creation, managing sales force, converting demand to sales and then sales management and execution. Here are 4 of our key strategic initiatives.
Again, left to right, sales force transformation, digitizing our customer and sales support, so that's focused inside our 4 walls, merchandising and category management for all our major product and service categories and new strategic tactical and pricing model. These are all focused on driving sales and profit growth by improving the data and the digital tools that we're providing to our sales force, to our branches and to our function. Group. Move to the 3rd strategic plank, operational excellence. I told you commercial excellence is front end of the business, operational excellence we think about applying to kind of the middle back end of our business down the supply our supply chain with our suppliers.
And these are 3 of our key strategic initiatives as part of this strategic plan, distribution center and branch network, last mile delivery and WESCO Intelligent Automation. The way you should think about this is this expands our lean implementation to include a new tool in our toolbox, RPA for robotic process automation. So we're well into our 2nd decade of our lean journey and it's been a key driver of value for us over the years and robotic process automation just fits very nicely in with that lean toolset. As we think about process mapping a process, streamlining that through process redesign, compressing cycle time, eliminating the mood and driving more efficiency and effectiveness in all processes, including administrative processes. Now you add this toolbox RPA and that allows a degree of automation that further accelerates the efficiency and productivity gain.
As you can see, these are all focused on sales and profit growth through improved supply chain management and improved distribution processes and capability. Hemant will be addressing various of our CE, commercial excellence and OE, operational excellence initiative in his presentation shortly this afternoon. That's the first three strategic planks. These last three strategic planks, I told you, there were 6, are outlined here and these are really foundational to our strategy. I talked about technologies that better manage our big data and provide business intelligence, improved business intelligence to our sales force, our branch teams, our operating teams to drive the business, organization talent and culture and portfolio and strategic M and A as I mentioned.
These are all focused again on maximizing the potential of our work, our team and the overall portfolio. So I mentioned that a key element of our strategy is digitizing our business models and our business processes. So in executing this objective, we know we can't do it alone. We're going to need some help and some external service providers to help us. And specifically, leveraging the digital tools and capabilities in the tech ecosystem is what we're focused on.
One of these partnerships is outlined here and was announced via press release last night. So very excited to announce our relationship, our newly formed relationship with a company called Plug and Play that has deep roots in the Silicon Valley as a tech startup incubator and we're launching a new vertical with them, which we call B2B, Business Sales and Distribution Accelerator. So we've got over 15 different verticals that have been formed over the last couple of decades and either well developed, so they have a well developed series of processes and we'll be working with them on standing up this new vertical. It turns out that there's a significant amount of investment that's moving in to that's in the tech sector, moving in and becoming focused on B2B, the B2B value chain. The B2B value chain is much larger for the first more complex than the B2C retail distribution value chain.
So I'm talking B2B wholesale. And again, I think we're just at this interesting point in time, I mentioned the S curve analogy of being early at the C part of the S curve. So what will this for WESCO and you'll hear a lot more about this obviously in the coming months quarters years, but this will position WESCO to engage in the digital development in the tech ecosystem by giving us early access to startups and other high growth companies focused on technology solutions applications for B2B sales and distribution. So we're looking at it to accelerate the digitization of our business. Let me shift gears to ESG, Environmental, Social and Governance.
We have a comprehensive and sound approach to managing our ESG requirements and our overall agenda, 1st starting with environmental. We made good progress on our environmental and safety goals over the years and we'll be issuing our next corporate sustainability report later this year. Hemant will expand on it further in his presentation. I think what's really important to note and it's critical is that for WESCO, we're not a manufacturer. Our sustainability goals include delivering sustainable products and services to our customers to help them meet their
goals. The reality is we can have a much bigger impact in
the value chain than we can inside our own 4 walls because we're not a manufacturer. This is a key differentiator for us and it's going to it's how we will maximize our positive impact on the environment by super serving our customers and helping them meet their sustainability goals. For social, we have a comprehensive array of initiatives focused on talent management, development, inclusion and diversity, and employee and community engagement. And then for governance, finally, our thoughtfully composed Board provides outstanding leadership, oversight and management of its duties. Our Board is diverse with a broad and appropriate skills mix and that's evidenced by the fact that our most recent Director addition, Ishu is sitting in the back row as announced earlier and Isha is our most recent Director addition and brings a very strong set of digital and supply chain management skills to our Board.
So what's the
takeaway? We're committed to good corporate citizenship and continuous improvement inside our 4 walls and up the value chain with customers. So now let me shift let's look forward to WESCO's next decade. Our financial goals are focused on continuing to drive organic sales growth above the market, delivering double digit EPS growth and continuing our strong and consistent free cash flow generation, which funds our investment and our return of capital to shareholders. We're also reinforcing that acquisitions remain a very high priority as depicted by here in the gray bar in terms of sales and future profit contribution.
We've refined our active strategy to include larger transformational deals as part of a more focused capital allocation strategy and Dave will outline that in more detail in his presentation. So with that again, thanks very much for joining us. We're excited about this next chapter of Wesco. And with that, I'd like to now hand it off to Nelson.
Good afternoon, everyone. Great to be here with you again and thank you for joining us today. I want to talk a little bit about Canada first, a lot going on north of the border. Winter is finally over about a week ago. Although I thank the hotel for giving us a Canadian like climate here in the auditorium today.
So we once spent did not have any teams in
the Stanley Cup finals. So what we did is rooted we rooted for the team that had the most Canadians on its team, which happened to be St. Louis Blues with 20 Canadians on the team. And so we were happy to get that win last night. What's even more impressive though is that we've become a basketball bad nation.
And so on the Sunday game, half of the population tuned into the basketball game, if you can imagine that. And of course, they didn't win. But there's always tonight. And so we're keeping our fingers crossed that we can actually have the NBA champion north of the border for the first time. So I'm going to give you an overview of the businesses that I have direct responsibility for and also talk about a couple of the global platforms that really we're leveraging everywhere to drive growth here in the U.
S, north of the border and in all the countries we operate in around the world. So I'll start first with the largest portion of my responsibility and that is Canada. We have a enviable position north of the border. We're the only supplier that has coast to coast capabilities. It's a big country.
And so having that kind of capability is extremely important. And if you are a customer of WESCOs, you can pretty much get what you need same day, worst case next day. We've leveraged this with key national and global accounts and we continue to have the largest market share position in Canada and we continue to expand that business by diversification. I've talked to you about that in the past and I'm going to update you on some of the progress that we've made there. But it's a great leverage point.
It's great to be able to go out, talk about our capabilities and say to a customer, we can be we already are and can be everywhere where you operate. And again, it's a great differentiator and we're unmatched in that capability. Next, talk about the international footprint. The way I would describe this is WESCO uses a very thoughtful approach as to where to go, but we're typically going to follow a blue chip customer. We're going to go where they go because they rely on us to provide the value added services, expertise, technical assistance that we can do for them here in the States, in Canada and elsewhere.
And so we've gone to a number of countries around the world to do that. We continue to build that customer base and continue to expand our capabilities. Another part of the business that I'm responsible for is our integrated supply business and we also leverage that around the world with turnkey solutions and we're doing that here in Canada and all around the world.
And talk
a little bit more about Canadian landscape. So here you see depicted some dynamics and some current situations. We've had 3 provincial elections in the last 12 months. There's going to be a national or federal election later this fall. And so far, the changes that have occurred, we would basically rate as more business friendly.
And so that's a good thing for us. And as both a major company and having a large customer and supplier base, we're encouraged by some of the actions that are being taken, not only by the current government, but also from some of these new provincial governments that have come into place. One of the things that is a great opportunity for us is high capacity utilization. We even talked about this a couple of years ago. And our businesses and industry continues to get tighter and tighter and it is stimulating new investment.
And we're seeing that and we're participating in that with a lot of our solutions and I'll talk more about that in a bit. Government infrastructure, this is something certainly that the Trudeau government was very committed to and we're seeing this happen all across the country. One of the stated goals in Canada is to increase its overall population over the next decade. But to do that, they need to add the capacity, the infrastructure. So think schools, hospitals, roads, buildings, not just high rises, but apartment buildings, single family homes, huge opportunity for a company like WESCO, we're well positioned and are really taking advantage of that.
LNG is big story these days though and I'll talk more about that in a second, But it has a multi decade promise of investment and opportunity for the long haul. We're very excited about that. We're already participating in some of the early stages of the construction that's going on in British Columbia. Put low unemployment here, the unemployment rate is as low as it ever has been since they've been keep keeping records in Canada. And as a matter of fact, I believe Canada added more jobs in the last month than the U.
S. Did or certainly in the last quarter. So it's a pretty strong job market. And what that means, of course, is skilled labor is in tight supply. So companies can turn to WESCO and offload some of these things such as product management, supply chain management, procurement, kitting, staging, all these different things that we have that are capable that we can deliver to a project site and really take some of that effort and expense away from the customer and it's a great value proposition for us.
So we actually see demand picking up for those kinds of services. Price of oil and gas, it's an interesting dynamic. We've seen a rebound from where Canadian crude was last fall. I think all of you know the biggest issue is being able to transmit it, I. E.
Get it out of the ground. No problem getting it to points where it can be shipped overseas or to the U. S. Is a bigger challenge. Our expectation is with the government that's in place in Alberta now and some of the recent court rulings that we're finally going to see some light at the end of the tunnel for these pipelines.
And those should get built over the next several years and we'll see that resource unlocked to its full extent. That will stimulate more investment. It will stimulate more opportunity. WESCO already has a wonderful market share there. We're in position with strong customers.
We're delivering everyday services and value added. There'll just be more opportunity over the longer haul. So back to diversification, I've spoken to you about this a couple of times in the past. John touched on it as well. Prior to 2010, we had not made any acquisitions in Canada and you see the business was about 800 $1,000,000,000 Today, 2018 number is $2,100,000,000 So the business has more than doubled some of that obviously through acquisition, but the key one being the Ecol acquisition that John referenced, but a lot of good solid organic growth.
And one of the things that we've been focused on the last 3 or 4 years is further diversification of the portfolio is really taking full advantage of these acquisitions, the broad customer mix and the customer base and the opportunity we have and we're building out the business. There's still plenty to and lots of opportunities to do that. But as
I've said before, we want
to still be the number one player in oil and gas, but we want to make sure that we're there for multiple other markets, whether that's industrial, MRO, OEM, etcetera. And so we've built out our resources, our capabilities. We've added key people to be able to do that and we're seeing the results of that investment. So a little bit more about our long term growth opportunities. We could go on here for a while, but these are the big ones.
And 1st and foremost is Canada LNG. And what's fantastic about that is 2 years ago, even 18 months ago, we would not have had this on the slide. So this is a recent development. It's been talked about for years. It's fought its way through the courts.
Ground has been broken and we're often running in Kitimat, British Columbia building the first two trains of which will be a 4 train LNG terminal. And there's also the potential for further investment from brand new sources of investment in Kitimat to build yet another terminal. The good news here is that this will have legs for decades and probably the majority of the spend occurring from the year 2020 onwards, so next year. And West Coast already won 1,000,000 of dollars of orders in some of the pre construction work, building the man cans, building out the pier, temporary electrical, etcetera, etcetera. And we're well positioned.
We have multiple facilities up there. We have a team on the ground already and we're there to serve. What's also interesting about this is you can't do a project and this project is C40 billion, largest project in the world period in terms of construction. You can't just do that in one country. So they're executing this all around the world, the JV that's building this plant and we're positioned everywhere where they are.
So if you go to China and you look at the construction yards, WESCO has a presence there. Where they're everywhere where our customer needs us to be to provide a solution. I talked a little bit about government infrastructure. This is a place where WESCO has always been strong and we continue to win more than our fair share of opportunities. Multiple multi $1,000,000,000 hospitals are being built.
There's a huge one, the Calgary Cancer Center, a north of $1,000,000,000 standalone Greenfield investment, a new one larger than that in Oakville, which is in the Greater Toronto area and West Coast well positioned and already winning some of the key orders to build those facilities. Why are we doing that? It's because we've got the value added services. We've got the right people on the ground. The contractors rely on the expertise that we can bring to deliver unique solutions, saving them time and money.
Data and Broadband Communications, another huge opportunity. I've spoke in the past about the desire to get high speed Internet to every far corner of Canada. They're actually doing I was reading just last night an email where we are providing a specialized cable that has a wire mesh on it and it's actually going to lay on the permafrost as opposed to be buried underground and it has a wire mesh around it to keep the polar bears from biting through it. That's true. So unique needs, but unique opportunities and WESCO is already serving that business.
You're going to hear from one
of our very important customers in a few minutes as the testimonial showing how we are a partner. We sit at the table with them and we've given them scale and capability that they could not create on their own. So a huge opportunity for them, a huge opportunity for us and we're succeeding together in the Canadian marketplace. Talked about healthcare already, LED and lighting, a huge opportunity in Canada. Canada has very strong 5 year energy reduction mandates.
There's a lot of rebate money available in the province in the various provinces, excuse me. And the beauty of this is when a customer wants to do this, they can just place one call to WESCO. We can come in and bring in the capability, the technology, subject matter experts and we can design a solution for them and help them all the way through filing for their rebates and their credits, etcetera. We were very good at this. And as a matter of fact, before the acquisition, we were already partnering with SLS in Canada to achieve some of the success.
Now they're part of the family and our expectations there is we're going to continue to show significant growth and leadership in that part of the business. So we had a first slide in here for Canada LNG to just give you an idea of this. It's the largest private sector investment in Canadian history and it may be the largest investment of its pipe in our lifetimes. It's just that big. We are already involved in the project.
As I mentioned a few minutes ago, we're winning orders there. It's really everything we can bring, global capability. We're on the ground in China. We're interacting with purchasing teams in Manila and India. We're all over this.
In Japan, it's an unprecedented scale in terms of job, in terms of participation and we expect to be there for the long haul. As I said earlier, we have had a team on the ground in Kitimat for a long time, long before this project was ever announced. We've moved into bigger facilities. We're there. We're ready to go.
And so our customers are already relying on us to bring the value that they would expect anywhere else in the country or the world for that matter to a place like Kitimat, British Columbia. If you look at it on the map, it's way far north. It's kind of off the beaten path, but it's going to be an important part of our business and an important part of the Canadian landscape for decades to come. I'm going to move now to a broader subject and talk about one of the end markets that John highlighted, commercial, institutional and government. You'll see it's 15% of WESCO sales.
And this is where there's an incredible amount of opportunity, very solid growth rates, a very good track record of success. And this is where WESCO truly leverages its capabilities across the board. And what's really neat about what we're doing with this is we're digitizing it. John talked a lot about this. We've taken it to the next level.
Frankly, when you look at some of these things such as 5 gs and LED, etcetera, it lends itself. This is new technology. It's at the forefront of what any company is out there doing and we are right there lockstep with these customers delivering these great solutions. And why can we do this? You see this on the right, the differentiators.
We've got a complete solution for networking and infrastructure. We can do it anywhere in the world. We've got end to end LED lighting capabilities that just got stronger with our recent acquisition of SLS. And as I've touched on a few times, we have the scale to go with our customers anywhere in the world. And so it's unmatched capability.
It's remarkable when you look at the expertise we have, the experts that we can put in front of a customer, speak the same language, work together on these kind of opportunities and we're delivering in the market. We're now going to play a customer testimonial. So Rebecca, please roll the tape.
Shalia Subhani, I'm the Vice President for our customers, network implementation. Wesco and your team members, they took a lot of interest in knowing that business. What we do, they always had good recommendations for us, right? And that's what we always look for in a partnership spirit because we don't want to be on one side to keep telling our partner, hey, go do this and go do that. The overall package deal that we were getting by going with Vespal, we did not see that value from anybody else.
When we started our relationship, it was predominantly for Western Canada and your great presence there was very encouraging. We knew that you could deliver the material when we need, where we need for the very short cycle time. When we first moved our cable business with Wesco, we had set an SLA of 2 weeks. At an average, the order fulfillment was done in 5 days. So it's fantastic, right?
It gives us a lot more flexibility to drive more improvement and efficiency out in the field. At TELUS, we have a culture and a mindset of transformation and we rely a lot on our external partners and we really rely on them for their expertise and for their ability to drive innovation into our business. WESCO has been a strong supporter of our internal women leadership forum that we call Conception and they've been supporting our events for the last couple of years. VESCO has helped us reduce our cycle time from design to ready to build, right? As I talk about the construction and as I talk about share size of build, that is a very important time period because you have designs ready to go, you have crews ready to go, you don't want them to be waiting for the material to come.
So VESTA has really helped us shrink that period between those two milestones. This has helped us cut down on our end to end cycle time by 2 weeks. And 2 weeks is huge when you talk about construction project where they are related to customer loading. With the partnership characteristics that we see in West Coast, I feel very comfortable that in near future, we will be in a position to discuss more growth opportunities with the team. They are also with us in our annual planning and standing there with us as a partner and helping us get everybody at a single platform.
So the relationship is not just to doing business transactions. We look at the relationship to be very resilient by that.
So I want to thank Shazia for doing that for us. They're great customers, they're a tough customer. They've got tough but logical demands. And I also want to thank our team in Canada for the great work they're doing to support this very important customer. The last comment I would make about this before I move on is that every dollar we do with them, every transaction we do is all digitally enabled.
And so what's wonderful about that is we've been able to scale that up almost infinitely because we're using a digital platform to interact with the customer. Obviously, there's lots of human beings behind the scenes getting things from point A to point B. But it's great to see that we both embrace the digitization of the business and we're really able to take care of them faster and better by doing that. So again, thank you to TELUS for this that testimonial. I want to move on to the construction end market.
Obviously, an extremely important market for WESCO. It's a third of our business. It's an even bigger share of our business in Canada. This is an area where WESCO has unmatched capabilities. And I'm going to talk in a minute about how we're even enhancing those capabilities by utilizing digital platforms and online collaboration, etcetera, to really drive more efficiency in the process.
Why are we there? You see the trends and opportunities. Talked about this already, the skilled labor shortage. They need people to help them do what they do. There's more demanding.
We have an aging infrastructure. We've heard all about that. One of the things though that if you've spent time in this industry is it's really just beginning to modernize. The model that they operate on is decades old.
It works, but it's got
some issues from an efficiency standpoint. That's where WESCO can help. We do everything. We can bring job site services on. So, the Calgary Cancer Center that I just talked about, there's a WESCO on-site presence.
We've got vehicles, we've got trailers, etcetera. We can take care of the customer as they need something immediately take care of their needs. It makes them more efficient. It allows them to stick to the schedule, so on and so forth. We've got great suppliers.
Our suppliers work with us very well to make sure they're part of this. And so we bring all that connectivity together and the ability then we have the ability to scale with them. A perfect example of this would be LNG, once again, where they're relying on us to leverage our capabilities around the world to bring solutions, cut down on cost and squeeze on lead times. You heard Shaozia talk about that, that we've exceeded their expectations. And as a result, we've made them more efficient and save them money.
We're focused on cost and schedule. Well, that's where we should be focused. And what this diagram talks about is the fact that we have active material management, we have people on the ground, we've got centers of excellence that leverage this. It brings unmatched capabilities and this assistance and offloading provide to these customers to let them focus on what they need to do. John talked a lot about this.
We're utilizing data, so we can help them with consumption. We can anticipate their needs. We can also then provide tailor made solutions to solve some of the challenges they have. Some of the best work that WESCO does is looking at a spec sheet, working with a customer and figuring out a more efficient way of doing what they need And we bring value, it creates repeat customers, it creates that stickiness and reliability on us that we want and they need and it's a great partnership. We've shown this slide in the past, but it shows the complexity of one of these job sites.
So everything from pre fabrication, I think those yards in China supporting Canada LNG, the switch gear conduit, the things that people don't see that are in the building and then the various capabilities, having a job trailer on-site, physical security, lighting, we're involved in every part of the food chain. And so we are making these customers more efficient, more effective in what they do. And ultimately, what it should be able to do is allow not only WESCO, but our customer to scale up its capacity, meaning they can take on more because we can take on more and we become a very reliable, consistent, predictable partner as a result. Talk a little bit more about digitization. This is really the next step for us.
We've actually been using a version of this software for more than 10 years, but we've invested in it. We've fine tuned it. We've turned it into something now that has taken a paper laden, paper intent process and completely digitized it. Our customers love it, but they lever the things that there's an online collaboration capability in the tool. So real time, an engineer on a job site can pull up a laptop or an iPad and communicate with the WESCO project management team to understand where we are on something, check on a lead time, etcetera, etcetera.
This used to be a paperwork drill. And our ability to bring this kind of capacity and capability to them, again, has made them more efficient, has allowed them to take on more opportunities, while at the same time, it's made them more cost efficient. It also helps WESCO because we're able to better manage the project. So think about billing, thinking about change orders, all the things that go on in a complex project like this, we're able to better manage because we have these capabilities. I want to talk about what we're doing for contractors in general.
We service contractors of all sizes, small, medium, large, mega sized contractors. And what we're trying to do here is essentially enhance their entire experience and build out how they can do business with WESCO. So this is entirely through the digital transformation that's going on with our customers, with our company, with our supply chain. So we do have customers that rely on the in branch experience. Smaller companies that want to pick up the kit they need for the job today, today.
You can go to one of our facilities and at 6 o'clock in the morning and there's a line forming at the door. It's a great sight to see. And so what we've done there though is we're using tools, digital tools inside the branch to allow them to find what they need faster, allow us buying technical information to give them a solution faster and really move them through the facility so they can get out of there and go do what they need to do, get to a job site. So that's been something we've worked on over the last 6 months to a year. We've continued to increase those capabilities.
But it's really all what happens at the job site that matters. And so what we're trying to do is bring the best of both worlds and say, our branch is there, we've got what you need, warehouse or stock down that location, but we can take care of you regardless of how you want to do business with us. If you want to place an order over the phone, you want to send it to us through our portal, do you want to send this via email, we'll give you a status of the job. We have a automatic texting system. We have all these things that allow us to communicate through the whole cycle, the whole sales cycle with the customer.
They want to pick it up, we can do that. We can put it in a lockbox. We can put it in a parcel locker. We can ship it same day. We could ship it same afternoon.
We're adding capabilities so that when these contractors need something, they're going to call us first because we can get the job done. And it's a huge differentiator. And again, we are trying to bring the best of both worlds, giving them the branch flexibility, the people there with these with the decades of product knowledge, helping them find solutions, but giving them multiple ability to serve and deliver and take care of them. The next step and we're already doing this is to then fully digitize this, so that we can do an end to end resource commitment, allow them to do business with us as many different ways as they want, but still give them the technical expertise. And this is the difference between WESCO and the Internet.
When you call WESCO, you get solutions, you get people that know their products, they can provide real time information, help a customer make the right choice, make sure they don't make the wrong choice, we make them more efficient and they come back to us because we can solve their problems. And so it's a great position to be in. We're going to build on that and just continue to give them more capabilities and more ways to do business with us. So I'm going to wrap up and finish with Canada. Talked about this a couple of years ago, but the opportunities are endless and enormous in Canada and we continue to diversify and continue to build out our capabilities across the business.
I gave you some examples today. There is many others where we're well positioned to build on that, grow and to really build on our leading market share position in the country. We can take what we do around the world. This is very important for customers that do business and want the same reliability and capability regardless of where they do business. Not all of our competitors can do that.
We can do it and we do it well. And we have a very focused organization that's out there doing that and figuring out ways to bring value to customers around the world. John talks about this a lot, but the whole reason I believe we're here is because we are a value added services and solution provider. This is what distinguishes us. It's why we're distinct in the market.
It's the capability that we bring. It's these long time, long standing customer relationships. People come to us because we know what we're talking about and we can help them do what they do better. And so just building on those service and value capabilities is something that's foremost in our thinking. It's how we're organized.
It's what we're trying to do in the marketplace. And our belief is, as we continue to wrap services and bring value added, customers will continue to do business with us and we see that every day. We've taken big steps now to digitize the business. We're really still at the forefront of this, but the reaction from our customers has been very positive. They love the fact that we are trying to find new ways to bring them value.
If it's a guy on a site that just wants to text back into a system rather than an individual to get an answer, taking care of people, I need this by certain day, etcetera. Our project management function, these enormous multimillion now, multimillion dollar projects, we can bring a digital capability that's unmatched out there. We can serve a customer like TELUS anywhere in Canada because of the infrastructure that we have, but then also our digital capabilities that we can do business with each other while we're sleeping in bed. It's fantastic. It's something that we have to continue to grow and leverage and continue to delight our customers.
So and last, I want to take another moment to say thank you to all of our employees, all of our team members across the world, regardless of the geography you're in. Thank you for your work and service and providing this value to customers. It's extremely important and it really distinguishes us from our competition globally. So thank you. I'm now going to ask Juan Faccone to come up and I'll turn it over to you Juan.
Thank you.
All right.
Good afternoon, everybody. I'm Juan Picon. It is my pleasure to be here with you today. I will be presenting to you an overview of the U. S.
Business and I'll talk about some growth opportunities and initiatives that we have. I will also highlight industrial end market, global account and give you some perspective about our utility market. But before I start, this is the first time that we meet, I'd like to introduce myself. I have the distinct pleasure to be with Wesco since January 2018 and I lead the U. S.
Business. Prior to Wesco, I was with General Cable and Honeywell where I spent 19 years in multiple roles of increased responsibility in aerospace, automotive, what we call today the safety and productivity solutions and Home and Building Technologies. I will be around after the presentation. It will be my pleasure to meet with you and interact a bit more during the reception. As you can see in this slide, U.
S. Business represents 75% of West Coast total sales by geography, over $6,000,000,000 in revenue participating in our 4 end markets. We do have strong position in each of these 4 markets, which gives us a great diversification of the business in the U. S. On the top right, you can see a map that shows an overall U.
S. Structure. With roughly 340 branches, 6 regional distribution centers that will soon become 7 with the opening of Chicago, WESCO has a clear competitive advantage in terms of scope and scale in the U. S. Hemant will give you more details regarding our regional distribution center strategy for years.
Something that we have said in the past, which I believe is important to remember is that in the U. S, over 50% of our resources are in customer facing positions. These operators are currently engaging with customers and selling our value proposition all over the U. S. Electrical Distribution market is highly fragmented.
3,500 distributors, the top 5 with Wesco is the 2nd largest represents roughly 1 third of the market. With our great position in the large segmented market, robust customer propositions and a strong balance sheet, Wesco has great opportunity for organic and inorganic growth.
When we look at the U. S. Landscape,
the growth opportunities don't come without some important challenges. The tariffs, trade war has resulted in a record number of supplier price increases. After a lag, we have been successful at pushing through these increases and expanding our gross margin. Raising prices govern EBITDA, but it is a very critical one in order to preserve and grow our margin. In spite of some of the challenges, these are fascinating times in the U.
S. As John mentioned, the industry is going through transformation that opens up huge amount of opportunity for Wesco to grow and maintain equal value to our customers. Infrastructure and that renewable energy acceleration, changes in business models driving productivity and cost efficiency are opportunities that play into Western sweet spot to deliver value to our customers. I will be addressing this topic more in detail in the next few slides. Talking about some of our growth opportunities, all have long life cycles ahead.
For instance, America's infrastructure is desperately in need of investment. According to the American Society of Civil Engineers, they estimate that U. S. Is to spend some $4,500,000,000 by 2025 to fix the country's roads, bridges, vans and other infrastructure. Related to energy, the majority of the station and distribution lines
that were built in the mid-twenty century and have
a life expectancy of about 50 years, meaning that they are already outdated. Between 2016 2025, there is an investment gap of over $170,000,000,000 This is for infrastructure that supports electricity like power plants and power lines. As we'll discuss in a minute, this represents a great deal of growth opportunity for our utility and construction business in the U. S. Many U.
S. States have renewable portfolio standards that require certain percentage of electricity come from renewable sources, mostly wind and solar power. Renewable portfolio standards have already been enacted by 29 states, Washington, District and 3 territories. These mandates are intended to promote economic development within the nation's growing market for wind, solar and other renewable energy sources while we reduce greenhouse gas emissions. With a strong team of renewable energy specialists in all the key markets, WESCO is uniquely positioned to support this important market trend.
The same goes with our 5 gs build out. New infrastructure requirements will be necessary to launch 5 gs applications to support mobile, broadband, IoT and mission critical applications like autonomous driving. As a result, experts have predicted that network related capital expenditures will have to increase 60% from 2020 to 2025. Resco has excellent capabilities and has been making significant investments in broadband, datacom and security to capture this growth. The widespread shortage of qualified labor was also driving an increasing investment to each productivity.
With Industry 4.0, the connected factory or smart factory, changes are expected to be more expensive than ever before in today's manufacturing. Industry 4.0 continues underpinned by further digitization, technical advances, big data and data analytics, the Internet of Things, robotics and artificial intelligence. WESCO has technical specialists helping solve the solutions for the challenges in the industrial space. We're very excited about the lighting growth opportunities. According to the U.
S. Department of Energy, there is $300,000,000,000 of lighting installed base with the potential to be converted to solid state LED application. The LED adoption rate is approximately 15% leading a substantial piece of the lighting market available for retrofitting. WESCO is very well positioned to support this conversion. Overall, WESCO sells close to $1,000,000,000 of lighting material services in our space.
This is one of our digital workplace. And going forward, we will continue to leverage in it to capture these LED retrofit market opportunities. We have made several investments in lighting capabilities over the past several years. The acquisition of Ella brought to us dedication in turnkey retrofit and renovation. For construction, EIG, ISCO, the energy service company and other end user products.
Nearham acquisition enhanced the lighting capabilities with a focus on national retail. This was further strengthened this year with the SRS acquisition, which I would like to present on the next slide. SLS is our post acquisition. We acquired the assets of Sylvania Lighting Solutions in the Q1 of this year. This acquisition was all about the tap.
We acquired more than 200 lighting professionals distributed across the U. S. That will leverage West Coast sale and National Foods. We are encouraged by the response we are getting from the market in the early days of ownership. Not only are the operators pleased to be part of the company, providing the priority and the core competency, but customers have also been very receptive.
The integration is on track and the early returns are positive. Now I'd like to review industrial end markets. At 36% of sales, West Coast Industrial is our largest. We organize this market by verticals like oil and gas, metal and mining, food and beverage, pulp and paper, technology, etcetera. We specialize resources and knowledge around the different challenges and opportunities for each of these verticals.
Our largest customer in these markets are global blue chip companies. We have long standing product and service based contracts to support the manufacturing plant and global supply chain. Our successes in the industrial space are driven by our global account and integrated supply businesses models as well as our OEM capabilities. Many of these customers are large, multi site and geographically diverse with locations spread all over the world. Our OEM business provides direct material to the product line that are used as component parts for original equipment manufacturers.
As Nelson mentioned, Wesco Integrated Supply provides sourcing procurement and logistics solutions to industrial customers looking to optimize the supply chain activity with an outsourcing. Our pipeline of opportunities is the largest it has ever been and our bidding activity is at record level. Customers are actively looking for more solutions and services from Westco to help them optimize their supply chain processes and drive out costs. As I present in our next slide, our global account and integrated supply capabilities combined with our point of sale and e commerce solution allow us to capitalize on those brands. As I mentioned before, our global accounts are our largest and more strategic customers.
We have around 500 customers across 16 verticals including many Fortune 1,000 companies. WESCO has been recognized as a leader in global accounts for more than 2 decades within the electrical industry. Our success is driven by our ability to take a broad range of customer needs across multiple customer locations and create single consistent programs across all of their operations. Geographically, most of our business is in North America. However, we have followed our technology, oil and gas and mining customers around the world to support their capital projects and business expansion.
Our business is focused on all the electrical, industrial, safety and datacom products that keep customer facilities up and running efficiently. MOSIS report capital projects directly with end user customers. Capital projects typically are lighting, retrofit and renovation work and electrical distribution system upgrades for existing facilities of nuclear structures. Additionally, an increasing number of our global account customers transact digitally with our branches. This enables us to continue to expand our offering with existing customers and develop new business opportunity.
Going forward, as John mentioned, this is one of our key growth plays and we are investing to digitize the global account software experience. The size of WESCO's structure, the products and unique services we have to offer allow us to gain sticky relationship with our global account customers based on delivery. When working with potential global account customers, we take a consultative approach and we win because we design programs for them that help them meet their internal goals and objectives. Upon award of an agreement, a dedicated implementation team is dispatched all of the customer locations to identify the products that are currently used and the services Westfield will have to deploy as well to ensure a smooth change management process. The implementation team understands the complexity of supporting multiple customer locations across multiple WESCO branches and professionally executes the agreement.
Once the contract was implemented, a dedicated account management team works with an experienced customer service team to deliver on our contractual commitments and create long term relationships with our customers. We manage a checkerboard process across the customer base. The checkerboard provides us visibility of the opportunities by product category and by customer location. We know the implementation process, the sales that we expect to receive from each customer location. The checkerboard highlights the areas to focus on with each customer.
For instance, this page represents a view of our sales before and after the checkerboard process for a large petals and mining customer. We were doing a significant amount of business annually with this customer and successfully expanding into new business opportunities. However, when we pull together all the customer locations and all the product categories, we could see the amount of opportunities we were missing. Once we began focusing on the individual product categories by location, we were able to help local branches clearly identify which suppliers and products they needed to leverage to maximize the business opportunities. As a result, we have been able to more than double the annual revenue
customer.
Thanks to our approach, WESCO revenues its total account customers and we had 100 percent renewable rate in 2017 2018. Once implemented and running, we continue to identify opportunities to maximize the revenue and ensure we capture the awarded scope. The final end market we are going to discuss today is utility. WESCO will deliver the electrical heating space across 3 major customer segments investors owned utility, public power and utility contractors. These customers are dealing with substantial changes, including renewable portfolio standards for power generation and the need to modernize and harden the existing grid.
Reliability for customers is paramount. They therefore depend on their supply chain service partners to ensure availability of their network and to recover falling storms and natural disasters. Similar to Global Account, we are providing solutions to utility under multiyear contracts. We differentiate our services by offering innovative and cost saving solutions within our partnership. Thanks to our robust value proposition, we have grown our sales to this end market for 7 consecutive years and are poised to continue that trend.
The following customer testimonial will provide you with an example of this value proposition.
Northwestern Energy is an electric and gas utility. We have a relationship with WESCO for many, many years, but they've been our strategic alliance supplier for the last 15 years. Obviously, as an electric gas provider, reliability is critical. So in the relationship with emergency response. WESCO has a local footprint here in Butte, Montana.
They've got a great staff and they have supported us for many years. Wesco has a very cost effective proposal. They're very hands on and
they're really trying to get
their operation to our needs here in the state of Montana, especially. Our staff is very supportive of our operation. They do things way outside the funnel. We had some snowstorms and some issues in the past where we've had to be of snow in Williston, Montana. And we had our Westco person get in his truck and drive materials there on a Saturday because that was the best way to get it there and we needed it.
WESCO interacts directly on a daily basis, sometimes several times with our storekeeper and warehouse staff and there isn't a week that doesn't go by where WESCO personnel or one of their folks from the branch shows up in our general office here. Westco did a really good job for us.
We learned from them
and we appreciate that they keep bringing us innovative ways to do things and just different ways to serve our customers.
I want to thank the U. S. Team for doing such a great job every day supporting customers across the U. S. In summary, as you could see, WESCO, an industry leader, very well positioned to take advantage of many long term growth opportunities in the industrial and security end markets.
Thanks to our solution based selling, Wesco has been recognized as a leader in global accounts for more than 2 decades within the electrical and distribution industry. And finally, we keep increasing our services and solutions portfolio to meet the needs of our customers. This includes our digitization capabilities to interact better, faster and more efficiently throughout the supply chain. So with this, I'd like to thank you again for being here After the break, Raymond will take it over and he will be presenting the supply chain and operations as well as the. We will break for 15 minutes.
Thank you. See you back to you soon.
All right. We're going to get started here in a minute. Everybody can take their seats, grab a coffee or drink. Okay. Good afternoon, everyone.
Welcome back. It's good to be back at York City to give you an update on what I presented to you a couple of years back. I'll also take the opportunity to highlight a whole host of initiatives we're working on. So far today, you've heard John, Nelson, Juan outline our strategy and the growth opportunity for WESCO. My focus is to enable this profitable growth.
You heard me say this before, to build a company, you have to build the people. To grow a company, you have to grow the people. It gives me great pleasure to inform all of you that we've made excellent progress on our journey by putting digital at the heart of everything that we do and in large part due to the extra effort of our 9,000 employees. The mandate for my function is the same, deliver on the 7 hours of supply chain, right product, right cost, right price, right place, right quality, right quantity and at the right time.
There are 4 key areas I will cover today.
Our leveraging our big data to build digital solutions that improve margins, which is key to our commercial excellence strategy that John talked about progress we've made on our network strategy and our operational excellence initiatives 3, safety, which is just not a priority, It's a core value at Red Cross. It's an integral part of our DNA. I have a belief if we take care of our employees, our employees will take care of our customers and our customers will take care of our shareholders. And finally, actions we're taking to drive sustainable business practices to improve sustainability of the customers we serve and the communities we operate in. Our goal at WESCO is to be the true north of 2B Distribution.
This slide is a great visual of the power of Marketo and the synergies we get leveraging our digital and physical assets across the entire supply chain. We have a world class supply base of 30,000 suppliers. Dollars 6,000,000,000 in source spend gives us both scale and leverage. Focus for this team is consolidating spend with our preferred suppliers and cost negotiation. We carry $1,000,000,000 in inventory, depth and breadth that allows us to meet customer demand for product.
The KPIs we focus on for inventory are fill rate at maximizing churn. From a pricing standpoint, we price millions of SKUs every day given our diverse supply base across multiple product categories. The objective for pricing is to maximize margin through segmentation across product categories and end markets. Our operations allow for multi cash on inventory optimization with an objective of reducing safety stocks by cutting lead times and increasing fill rates for our branches and customers. 10 distribution centers soon to be 11 as Juan talked about earlier with an extensive network of branches strategically located to deliver services and solutions to customers.
We focus on the sustainability of our operations by continuously evaluating ways to shrink our environmental footprint. The operating markup is reduce, reuse, recycle to minimize what eventually goes into landfills. My team manages significant transportation spend with multiple carriers with thousands of fixed assets to meet customer needs from the 1st mile to last mile. Metrics we measure there are cost to serve as a percentage of sales and margin, fleet safety and on time delivery. WESCO orchestrates its comprehensive supply chain working with 70,000 customers and 30,000 suppliers to deliver products, services and the solutions that add value to all stakeholders.
And you've heard from both Nelson and Juan about specific examples of how we do that. Leading these physical and digital assets, strong management, we have a good balance of long standing WESCO employees with decades of distribution experience and new hires for challenging our thinking. Together, building a sustainable business to deliver on the long term finance commitments that John outlined earlier. John always reminds us scale matters in distribution. This slide this all the time internally is a constant reminder of our scale.
Now we're starting to exercise our supply chain muscle. You heard John talk about the vertical excellence strategy. I'll highlight some specific actions we're taking for margin improvement. The formula for margin improvement in our business is very simple. 1, buy as low as we can to cross site negotiation 2, sell as high as we can by pricing in our service and solution capabilities.
We execute thousands of transactions every single day at Wesco and generate large amounts of data. Last time I told you about organizational changes that were made to better align our pricing resources with our sales leaders. The next priority for the team was to build digital assets that we can leverage with big data to generate insights for our customer facing sales teams and our pricing teams. We've now done that. And as you can see from the chart, our gross margin has been improving over the last several quarters in the face of significant supplier pricing.
To give perspective, supplier pricing were 2.5x 2017 levels in 2018. Through the 1st few months of the year, we've seen over a 50% increase in the number of supplier price increases. We're on pace for another record year of supplier price increases. Since May 10, tariffs on List 3 goods imported from China have gone from 10% to 25%. And immediately following that announcement, we started seeing price increases in the double digit range.
Our current view is that the increased percentages in 2019 will be higher than what we experienced in 2018. Margins in part improved because of the processing tools we've deployed. 1 of the tools was built to manage supplier price increases, something we at Restful called Spin. As soon as we receive price increase notifications from our suppliers, reports that calculate the estimated margin impact are generated for our sales teams.
Shortly after the announcement of headline increase,
we get detailed information at a SKU level of suppliers. Immediately following that, we have seen application to our sales associates line item detail by customer and SKU during the margin dollar impact that the cost increase will have if the sale price is not adjusted. Given a higher level of visibility, automation, closed loop accountability, we're now able to rapidly deploy supplier pricing. Thanks to some excellent work done by our IT team thank you, Rob we've established a branch command center. You can think of it like a cockpit that gives business intelligence with powerful visualizations to our sales, sourcing and pricing teams, directing them to areas that have an opportunity to increase all in margin.
We're also in the early stages of exploring data science to further our journey of prescriptive analytics to predictive analytics and ultimately prescriptive analytics. In Wesco, our lean culture perpetuates a mindset where we are laser focused on making today better than yesterday and tomorrow better than today. Now I'll give you insight into our operational excellence initiatives. Footprint optimization is a never ending process and we are agile and responds to the needs of our businesses and customers. You heard both Nelson, Juan and John talk about our ability to serve customers globally.
In the last decade, we've consolidated over 120 branches and opened 16 new locations.
Since our last Investor Day,
we opened 2 large One Westco branches in Orlando and Denver. Bringing multiple businesses under one roof helped both our top line and our bottom line. Sales and operations teams have access to broader set of suppliers to customers and their synergies from those daily interactions. In addition, it fosters sharing of best practices and lowers our total cost to serve. As I've engaged with our sales leaders and suppliers on a distribution center network strategy, 2 things have been very clear.
1, that our DC to expand their SKU appointment and have inventory more festive to the markets they serve. And 2, the deliveries from the DPs to the branches need to come in early morning so local deliveries can be made on time. In order to achieve those 2 goals, we have to maximize the number of branches within a 400 mile radius of a distribution center. So, we use advanced optimization algorithms to build out a DC network using shipment data, analytics and modeling. We now have a network strategy that optimizes our service capabilities, working capital as well as our cost of service.
Now that this network model is built, we're maintaining a digital twin of our physical network We'll have the capabilities to do what if analysis in real time. We went live with our Galaxy Education Center in 2017 and next quarter we'll open a distribution center in Chicago. From a metric standpoint, we're closely monitoring direct to customer fulfillment from our distribution centers. And that metric is important because it's a proxy for the number of touches before products actually reach our customers. The serving customers direct from our DC also improves lead time for our customers and improves our cost to serve, which translates to higher profit.
Let me now talk about the last mile. And I think I talked about this before, the last mile of any network typically represents 30% of all transportation costs. In the past, our trucks were routed manually by our warehouse. We introduced a route optimization platform at a branch in Chicago in late 2017 and a group of investors and analysts had an opportunity to keep Descartes live and act free. Based on successful results of the 2017 pilot, we went live in over 50 branches in 2018 and by the end of this year, we'll have Descartes live at every location across our operations and fleet.
This is also an example of our digital transformation. From a result standpoint, we're seeing a 10% to 20% improvement in the miles per stop as a result of the routing.
And now,
we also have real time visibility to our fleet. Another upshot is electronic proof of delivery with a photo of the shipment which our customers appreciate. Next step in our evolution on the last mile is to give customers real time visibility to their shipments which is a significant value to customers that are receiving delivery on construction sites. Our Wesco Transportation team just received the Excellence and Innovation Award from Descartes to recognize both the speed with which we've deployed the solution across our network and 2, more importantly, the innovative approach we took to deploy the routing algorithm. Lastly, on this slide, there are many other digitally enabled opportunities working on concurrently.
John talked about our Intelligent Automation Center of Excellence. While we're still in early innings there, we expect to launch a production digital robots in a matter of days. Currently, we're also piloting fixed by voice at one of our branches. Early results are promising and we are seeing a 25% improvement in productivity with a 99% plus accuracy rate. Once that pilot is beat, we will evaluate expansion fixed by voice across our branch network.
We talk about picking, several researchers and engineers have studied picking activity. You can assume how much time it takes across any and all B2B distribution or for that matter B2B B2C distribution. It's estimated that 50% of
our picker's time is spent traveling from
one storage rack to another and 35% of the time is spent locating and picking product from the current bin. Bottom line, significant time is spent rubbernecking in front of our rack. If you've gone grocery shopping, you know what I mean. The pick by heads up display drives a higher level of productivity than any other picker to part systems by eliminating the whole phenomenon of rubbernecking. We have a front row team for market leader in augmented reality develop this application for commercial use.
Earlier this year, we tested 8x5 heads up display at our distribution center in Canada. As outlined, we're constantly optimizing our operations to improve working capital and operating margin. Let me give you some more insight on our safety initiative. So every year, benchmark our safety performance with other B2B distribution companies with more than $1,000,000,000 in sales. We have one of the same operations in QB Distribution and have plans to improve on our performance.
We're maintaining our focus by creating awareness, training and accountability for safety at every level. Last year, we required warehouse associates to take an online course of safety every quarter. This year, we've expanded that training curriculum to all employees of Westco and by the end of the year, every employee will be required to take courses focused on job specific hazards and behaviors that have caused injuries in our operations. We've implemented post injury guidelines and care to ensure that every injury is handled quickly and efficiently. Near misses are a leading indicator of the this year we built a near miss mobile application that lets our employees identify and track services during their daily safety walks.
Safety is also a good business because many of our customers expect that we have world class safe performance. As one of Nelson's leaders likes to say, we should strive to create an environment where employees feel safer at work than any other place. We're applying the same focus on safety to our commercial fleet. Let me switch from our ex Rapid employees to our fleet. So our safety scores from a fleet standpoint and we benchmark that across $1,000,000,000 company plus is in the 98 percentile and we believe there's an opportunity to further improve our performance and strive for 0 accidents using artificial intelligence and computer vision.
The research has shown that 70% of all collisions are related to distracted driving and aggressive driving. Computer vision and artificial intelligence will allow our operators to easily identify high risk behaviors and personalized driver insights to prioritize poaching opportunities. We've recently initiated 2 for pilot concept with 2 sort of companies to test these technologies in our fleet and we'll evaluate the rollout based on results for those tests. Switching gears to ESG, in 2017, we released our 2nd PSR report using the global reporting initiative format. The second half of the year, we're going to publish our 3rd report.
Based on the feedback we received from our first report or the last report, this addition will include more disclosures and metrics particularly in the social and ethics session. As a company, we're constantly looking for ways to improve our ESG performance from lighting that profile to increasing recycling to finding other innovative ways to make an impact. Recent highlights include our Veterans Hiring Program, smart plugs for facilities, addition of hybrid cars for fleet and winning the sustainable Pittsburgh competition at a distribution center in Warrondale led by our employees at that facility. When Hurricane Harvey an area, our team immediately sprang into action. Once we determined that our employees were safe and secure, we used our logistics capabilities to bring food, products, services and solutions to our customers and more importantly their employees.
We recently implemented an inclusion and diversity strategy and we're also named the Bloomberg Gender Equality Index. So one external measure of progress is our Ecowritus score. And if you haven't heard about Ecowatus, Ecowatus is a company that several of our large customers use to rate their supply chain. In 2017 2018, we earned a silver rating indicating we're now in the top 30% of all companies that they measure. In the spirit of making tomorrow better than today, the plan is now to go for growth.
We also joined the Twin Global Compact and we're committed to its 10 principles. So I've always been together, so this area is near and dear to my heart. The responsible use and protection of the environment through conservation and sustainable practices is something we take seriously at Wesco and we've added investments to deliver results. Another example of us driving sustainability is increasing electronic transactions with both customers and suppliers. We've doubled our EEI usage for our customers who already heard from Nelson about our digital engagement model with TELUS.
Last year, we quadrupled the number of suppliers to do business with digitally. We have made a lot of progress against our environmental goals since our first report in 2012, the actions already taken. We are now going to commit to a further reduction of our environmental footprint by 2022. Next, I'm going to play a video on how we're working with our customers to enable sustainable cities and help all businesses grow. Rebecca, if you can roll the video.
Elevation Solar is a residential focused solar company. We actually started with WESCO literally day 1. We at the time did not have the capital as a startup to go out and buy a bunch of product and have a warehouse. So we wanted to find a service provider at Westor that could provide that product to us and not just sell the product to us, but actually deliver it for us as well. So 8 different markets across the U.
S, over 4,000 different job sites with the customers that we serve. We have a unique supply chain strategy. We don't have any warehouses and everything is just in time inventory for us and we do that through rest of them. The focus on the partnership is huge for us. We joke that one of the rest doesn't carry has now become one of ours and has a permanent depth in our office.
Having that personal interaction and being able to sit down at my table and actually forecast and plan with WESCO. That's a very, very important part of our business. About a year and a half into our business, one of our financing partners essentially ran out of credit and was unable to form the loan that we're funding our construction projects, trying to figure out how to handle that with the start up company. Westco was so understanding of that situation and so willing to get creative on helping us to bridge that capital gap with terms and with payment abilities. And honestly, that's the same company.
You don't have to own warehouses or inventory management systems. Essentially an ongoing business and a partner in the business in that way. So we'll have to be very efficient on our inventory management. As a solar company, we're all about sustainability. And so, Westfield is very much a part in our focus on sustainability.
I think that sustainability is more than just the environmental aspect of that, but it's also figuring out ways to do it more economically to the end user. And because of WESCO and the efficiencies we've done that partnering with WESCO, we're able to pass along to customers. We're grateful for the partnership with WESCO and clearly the long term Gexpo on our part and a long term strategy utilizing a distribution hub like Gexpo to see
So as you saw from that window, simplifying the supply chains of our customers by reducing their working capital outlook and operational costs is a clear tangible value for them. It builds a stickier relationship and a sustainable long term business for WESCO. In summary, there are 3 key messages I will leave you with. As Juan mentioned, Industry 4.0 is here and applications are being developed. Machine learning, IoT, augmented reality, artificial intelligence is just no longer a buzzword Con Valley.
These technologies will bring, I believe, unprecedented levels of change, productivity and cost efficiency and Wesco in the middle of it all. As you saw from the press release, we're plugged into the ecosystem and actively experimenting with several of these disruptive technologies, leveraging our big data to build self driving supply chain for the future. 2, I'm confident that the operational excellence initiatives we're working on will deliver efficiencies and result in improved margins and cash generation for investors 3, maintaining focus on ESG is personal for me and we'll continue to push forward on that front. In closing, what our extra effort employees have accomplished over the last couple of years and really honestly even long before that is truly remarkable and personally rewarding. Winston Churchill said, proves to change to be perfect, change often.
As an organization, we're primed to face this next wave of digital change with our momentum vector. Thank you for your attention today. I'll now hand over to Portia to Dave who will give you a financial update. Thank you.
So thank you, Hemant. It's a pleasure to be with you here today and thank you all for your interest in WESCO. You've heard from a number of our key business leaders about how we're leveraging our scale and digitizing our business. I would like to provide you our financial outlook and update you on our deployment of capital going forward. Three key points I want you to leave here with.
1st, John mentioned, our long term growth algorithm includes above market revenue growth and operating leverage to deliver a 10% plus EPS growth. 2nd, WESCO generates significant operating cash flows through all phases of the economic cycle. 3rd, because of our strong cash flow, we have the flexibility to invest in our business, acquire new capability and deploy capital to shareholders. Let me start by updating you on our commitments from our last Investor Day in 2017. We outlined 3 specifics: 1st, drive above market sales growth 2nd, expand margins and 3rd, generate strong free cash flow.
You can see the results on the slide here. Coming out of the industrial slowdown in 2015 2016, over the last 2 years, we've averaged 6% sales growth. We have delivered a record $8,200,000,000 of sales in 2018. Margins have been an industry issue. As you saw from Haymon's presentation, we've made considerable progress over the past year expanding gross margin.
We're encouraged by this progress, particularly when we take into account the significant number of supplier price increases that we've experienced over the past 18 months.
We're also pleased with some
of the benefits we're getting from some of the new digital tools that we're providing to our organization to deliver better margins. On cash, we generated $261,000,000 of free cash flow in 2018, that's 116 percent of net income against our long term target of greater than 90% of net income. You will recall that in 2017, our free cash flow was only 68% of net income and that's below our long term target, but was primarily driven by the shape of our sales growth in 2017 leading to an increase in accounts receivable and other net working capital. Combined over these 2 years, 2017 2018, we delivered free cash flow at 95% of net income. And over the last 2 years, we've also delivered 12.6% growth in our earnings per share.
I'd like to provide you a quick update on the 2nd quarter. During our earnings call in early May, we provided you with our update our outlook update for sales, operating margin and our tax rate. We're off to a slower start than we anticipated in the 1st 2 months of the quarter. We are seeing huge strength in our Canadian business, in our utility business, but we are seeing some softness continue in OEM and core industrial and construction branches in some regions of the United States. The backlog at the end of May is stable and it's in line with our historical seasonal trends.
Revenue is tracking to the low end of our outlook range of 3% to 6% for the 2nd quarter. I remind you that our April sales came in at +6 percent on a reported basis, May was +1% and through Tuesday, our June May to date was plus mid single digits. Our earnings call is scheduled for August 2nd. I will provide you more details on the results of our quarter and the update to the full year outlook. I'd like to spend some time now providing you some insight into 2 specific areas.
First, our contract future revenue stream and the margin profile of our various businesses. So starting with the revenue, during our earnings call, we often call out specific contract wins. So, we called out in the Q1 of 2019 a significant win with one of our utility alliances that resulted in a $350,000,000 contract win over multiple years. What we haven't done previously to provide you, what does that mean, what's the context of those contractual wins. And so I just want to remind you that our global accounts, our WESCO Integrated Supply and our utility alliances business, we provide customers with products and supply chain services that are generally in the MRO demand stream.
The MRO demand stream makes up about 40% of overall WESCO revenue. We enter into multi year contract that provide a significant foundation for future revenue and cash flow. So the chart to the right that you see on the screen provides the by year contracted revenue streams under these purchase agreements. A couple of key points, this data is as of March 31st this year. Also, this does not assume that any of our current contracts are renewed.
So, this only includes the contracted purchase agreements, does not assume that any of those contracts are renewed. That's why you see the drop off between 2019 2020 and that total purchase revenue under agreement. It's because we do have contracts that are up for renewal here in 2019 that we expect we will win and we will add to those numbers for 2020 beyond. As Juan mentioned earlier, we have a high renewal rate for these types of supply agreements. We believe the value that we're providing our customers, products and services creates a strong relationship and our expectation is that our customers recognize this value and it puts us in an excellent position to renew these purchase agreements.
I'd also like to provide a little more insight about the margins of the overall company by business. To summarize, there is considerable variability in gross margins between our end markets and ship type, but overall they're in line with the overall WESCO average. By geography, we do have higher margins in Canada, which is one of the reasons that we invested in the Canadian market over the past several years and have established a leading market position. We discussed our margins across 3 vectors: the end market, geography and shipment type. On an operating margin basis, each of our 4 end markets has an average margin relative to the overall WESCO enterprise.
This is driven I'm sorry, this is driven in part by the overall shipment type, which is used to serve some of these end markets. So for example, you can see that our industrial end market has an above average gross margin, but the cost to service that is generally higher than perhaps a direct shipment or special order type of shipment type. Lastly, our business by geography has a different margin profile. Our large U. S.
Business has company average gross and operating margins. The Canadian business tends to have higher margins. On the operating margin line, it's in the range of 200 basis points higher than the WESCO app, that's primarily driven by this industry is more consolidated and we have a leading share position in Canada. Our international business tends to have lower margins. This is highly dependent, however, on the mix of the business and the shipment type.
The operating margin is lower than the line average given the cost to service customers in numerous locations throughout the world. I'd like to switch gears to our investment thesis. We believe that our broad product and services portfolio enables us to continue to outperform the market, generating over the long term 4% plus revenue growth. We focus on margin improvement and generating a 50% pull through, meaning that 50% of the year over year increase in gross profit dollars falls to the bottom line. This requires our continuing management of our operating cost growth below the rate of sales growth.
The combination of this revenue growth and pull through generates a 10% plus earnings per share growth. Additionally, we expect to generate over $300,000,000 of operating cash flow on average in the out years. This significant cash flow enables us to invest organically in the business, acquire companies' new capabilities and return a significant amount of capital to our shareholders. Free cash flow generation has been a strength for WESCO. As John mentioned earlier, over the past 10 years, we've averaged about $225,000,000 of free cash flow generation per year or 114% of net income.
You see from the chart in years with significant organic sales growth such as 2014 and 2017, we tend to fall below our target greater than 90% free cash flow generation due to the timing of increases in working capital, primarily accounts receivable from the higher sales. Conversely, a downturn in the business cycle results in a significant reduction in working capital providing a meaningful source of operating cash flow that can be deployed. Comparing our free cash flow yields over the past 5 years, we've outperformed the peer group and this peer group here consists of other electrical and industrial distributors. I'd like to switch gears now to capital allocation. Our strong capital enables multiple sources of value creation.
On the left hand side of this chart, you can see for the years 2014 to 2018, we generated about $1,300,000,000 of operating cash flow.
Our first priority was investing in
the business about $120,000,000 over that period or approximately $25,000,000,000 per year. We made several acquisitions using approximately $340,000,000 of cash. We bought back $375,000,000 of our shares and we used $400,000,000 to retire debt. As we think about future uses of cash, over the next 5 years, we expect to generate approximately $1,500,000,000 of operating cash. We will continue to invest in our business roughly $35,000,000 per year in capital expenditures as we continue to digitize our business.
We will continue to prioritize new capabilities via M and A and we've assumed in this hypothetical example approximately $50,000,000 per year for tuck in acquisition. On share repurchase, we will continue to buy back shares at a minimum to offset dilution of management awards approximately $30,000,000 per year. This leaves us with a significant amount of cash over this period for further deployment. We will continue to manage our leverage within a reasonable range, 2x to 3.5x EBITDA and will also provide additional capital for incremental acquisition. Additionally, we will have significant flexibility to return capital to shareholders and we anticipate the company will begin paying a dividend at some point over this period.
Let me provide
you a little bit more details on the share repurchases. We initiated $100,000,000 share repurchase in November of 2018, which was completed here in Q1. In May, we initiated an additional $150,000,000 share repurchase. This is an incremental $75,000,000 from what we initially shared with investors back in 2018 when we said that our intent between November of 2018 and the middle of 2019 was to repurchase approximately $150,000,000 of our shares. So this is an incremental $75,000,000 from our initial assumption.
This decision was driven by the current count of the stock price relative to our intrinsic value. So we've now used $275,000,000 of the current $400,000,000 share repurchase authorization that expires at the end of 2020. I'd also like to provide you an update on how we're thinking about mergers and acquisitions. In the past, we provided you with our guidelines for acquisition targets. Our strategy going forward is to focus on 3 specific areas.
1st, consolidating. We will prioritize large transformational acquisitions that provide significant synergies within the electrical distribution space. We believe the industry is going to consolidate and we intend to be part of it. 2nd is expand. We will expand our product service capabilities to create competitive advantage and synergies by leveraging these capabilities through our existing businesses.
Our recent SLS acquisition and several of our service acquisitions that we completed over the past several years are good examples of these types of deployments of capital. We believe again we are getting revenue and cash flow synergies by these tuck in acquisitions that provide incremental service capabilities throughout our business network. Lastly, we will invest. We'll invest or partner with companies that can advance our digital strategy. Now our focus will always be on driving value for our shareholders, but we are moving away from acquisitions of standard branch based business models.
We are focused on acquisitions that can drive significant synergies with large transformational consolidation that will provide cost synergies and expanding and investing in capabilities that will generate revenue synergies and incremental cash. We have a strong balance sheet with significant flexibility to support our value creation strategies going forward. As I mentioned earlier, our target leverage is 2 to 3.5 times trailing 12 months EBITDA and we finished 2018 at 2.7x EBITDA on a net debt basis. We are willing to leverage our balance sheet, support our transformational acquisition strategy as we have done in the past 2012. We increased leverage above 4x to acquire the E.
Col business and we have consistently reduced our leverage since that time.
So to summarize, I'd like to just put
it all together for you. As John mentioned earlier, we expect over the next 10 years deliver 4% plus sales growth and 10% plus EPS growth, excluding the impact of acquisitions. WESCO has historically generated significant cash flow Throughout the business segment, we expect to generate about $1,500,000,000 of operating cash over the next 5 years. And lastly, this cash flow generation capability provides numerous options to increase shareholder value. We will continue to invest in our business, we'll seek out the transformational acquisition, we'll add new capability and
we will deploy capital to our shareholders.
With that, I will turn it over to John for closing remarks.
Okay. Well, thanks. First, I want to recognize the presenters. Terrific job. Thank you for that.
And then thank you to all of you. Thank you for taking the time today and then thank you for your support, much appreciated. Hopefully, we had a good opportunity here to get a sense of the next chapter of WEX and we're very excited about that. It's focused on digitizing our business models and processes, continuing to build out our strong services portfolio and wrapping that around our supplier's products and forming solutions for our customers and obviously ensuring a strong and consistent cash generation remains in place. We have some new things that we've signaled here, right, nothing is by accident.
And I think by sharing our view of the market and the value chain and the current competitive ecosystem and the changes that are occurring at a much more rapid rate, I think you've got a sense of how we think about how the future has been unfold, right. We don't get a chance to shape that. We need to respond to it appropriately. I think we've got a terrific platform that's been established and we're increasing the aggressiveness of our posture as we move forward. So we're very excited about it as we shift as I said it in this next chapter.
With that, I'm going to turn me back
up here and I'm going to
open it up for Q and A. So let's since this is webcast, we have some mobile mics, so please wait for the microphone. And if you could just announce yourself that it's captured in the webcast. Ash. So Dean, we'll start with you.
Right over there.
Yes, thank you. Good afternoon. It's Dean from RBC. And I just want to echo your comments that a lot of very interesting wrinkles and the evolution of WESCO is on display here this afternoon. The one that just jumped out at me was Dave providing some not numbers, but color around margins by business.
That's you haven't done that before. We've kind of had to drag it out of the Investor Relations guys to get some of that color, but that's really, really helpful. And if there's one slide that is brand new, that whole job complexity site that Nelson got to use, that's a great picture of all the different services. So
for me to start, you teased multiple times, John, in
your opening remarks about some renew wrinkles in your acquisition strategy. And I think I've got some of it, but if you could expand, you mentioned consolidating at least 2 or 3 times, but then you said you're not acquiring standard branch based business models primarily. So can you just expand on that point, because if you are going to consolidate, then you are going to take on new branches and where does that fit
So let me be more precise. So we're not just looking at doing small roll up tuck ins of standard branch based distribution businesses in local markets. I think we've already shown and experienced the benefit of really what scale can deliver. I've talked at length over the years about the consolidation of the Canadian market and that was true pre us starting the acquisitions in 2010. Remember, Westgate did a single acquisition in Canada till 2010.
And then it culminated with a large ECo acquisition. You could think about the Ecol acquisition as somewhat transformational and that we've established a leading share position. And then we've been able to work on that business in conjunction with WESCO Canada over the years. We've diversified that business to a much greater extent as NELFT showed. And now we're well positioned, I think with the backdrop of a strong global Canadian marketplace to leverage that scale going forward, Dean.
And then that we've always talked about the margins being higher there and it's again, it's because of the greater scale that we have and the greater share and ability to operate that. So now if we think about the U. S, the U. S. Is starting to consolidate at a more rapid rate.
It's been relatively slow over the years. I've always said, I think talked about this at length, right, it's going to require some external catalyst. You look at our supplier base, they are ramping up the rate of consolidation. The largest and most recent move is ABB buying GE Industrial, right. But if you look at the last 5 to 10 years, the suppliers are kind of scaling up and combining at a more rapid rate.
What I'm signaling here is something that we've talked about in the past, but I think with the backdrop of the market trends chart that I showed and where I think we are in terms of the S curve of the industry, it's incumbent upon distribution to scale up quicker. It's got to happen. And so, we have done a good job over the years participating and leading and I'm being very clear that we intend to continue to lead in terms of consolidation, coupled with the meantime digitizing our business. Does that help?
It really does. And the follow-up question is exactly where you left off in digitizing your businesses, because in our coverage of the electrical product So
maybe
if
you could share
with us out of So maybe if you could share with us out of those 1,000,000 products, 1,000,000 SKUs, how many of those have already been digitized and where does that stand and what does that mean for you in terms of efficiency and selling and design systems and getting spec in and so forth?
Thank you for that question. That's an outstanding question. And AR, when you asked it, I kind of I was reflecting on maybe an area that we've worked on very aggressive over the last few years that we did not include explicitly in today's Investor Day, which is our Master Data Management. So upon Rob, I introduced earlier joining the company a little over 3 years ago upon him joining as our new CIO 3 years ago. One of the things that was really critical for us, Dean, was to look at the construct of our 3 master data files, customer master file, supplier and product.
And that was priority 1, Rob, for you, right, when you joined 2 tests years ago. We've spent the last several years rearchitecting those 3 master files. We want to make sure that we are very clear about the attribute data that we want to capture that forms the basis of our big data warehouse that we then can use to effectively manage our business more effectively and create value for customers. So that is a very heavy lift over the last 3 years. And as part of that, it's where the question started, the suppliers as they work their activities to digitize their products, that's a feeder into that.
And so, we're leveraging that. And that is something that is very different today if I give you a historical perspective than even 5 or 6 years ago. And if I reflect and I think with the company 15 now, so the quality and robustness of the data that our supplier manufacturing are providing for their products is really increasing the rapid rate and that's great because we've always wanted the need of that. So hopefully that helps. So that's the supplier master file, but what's really critical for us is to our product data, which includes services and then our customer data.
So that does not show up on the balance sheet, but that customer data is an incredibly valuable asset because we have that captured for many, many years and that point of sale data is really valuable because we can determine from that what products were sold with what and over what timeframe and that becomes the front end of a demand creation engine for new product introductions, upgrades and such. So a little maybe lifting the covers on that a little bit, if that helps. I think Sam, the next graph before you.
Hi, thank you. Sam Darkash, Raymond James. I've got a couple of questions. They're fairly elementary, so I apologize. Getting back to the appetite for large scale transformative M and A, how do you reconcile that with the acceleration near term of share repo?
One would think that, hey, if you you never know when a large business would come up for sale, why not deleverage so you don't have to issue a whole lot of equity if and when that happens?
Sam, that's a simple answer. Where our stock price was trading and is trading, we thought we were the best investment, right. So we obviously went after that and leveraged the buyback, point 1. Point 2, we have very strong balance sheet, a sufficient balance sheet capacity and any of the big combination, hypothetically speaking here, when you put those together, there will be substantial synergies. And remember, we've got a terrific set of financing vehicles in place with a securitization for our AR accounts receivable and our revolver for the inventory and those have accordion features.
So I just we've been through this before we understand and so putting a big making a big deal happen, I have very I don't have any concerns about the financing.
Okay. My second question also basic, but the investments you're making, digitizing your business, making efficiencies in the supply chain, last mile, these are all cost savings related investments. Your pricing model as we know is mostly cost plus as opposed to list discounts. So help me understand how you plan to retain these cost savings from your investments as opposed to your customers getting them and then therefore you're not going to be able to expand more?
Yes. So let's be clear, most of the savings on what Paymont addressed in the low E and C initiatives result in significant productivity improvements. Our number one cost is people. Our number 2 is transportation of what's controllable, but that separates out our cost of default, which I'll come back to. So as we execute those CE and OE initiatives and get productivity, sales force transformation, which is improving the margin generated per sales rep example, right?
And the examples that Haymon gave.
What we're able to that
feeds into our pull through model. So as we grow, we don't have to add capacity at the same rate that our top line is growing. And that we've been very successful with that over the year by 15 years with the company. That's the model. So we're in our 2nd journey, 2nd decade of lean, we're working these initiatives, we now introduce RPA.
Expedal allows essentially to process a lot more business with the same number of people effectively, right. So we get that leverage in our SG and A, that SG and A leverage is very, very critical. In terms of the initiatives that Haymont addressed around the cost of goods sold, right, buying lower pricing higher. We have a range of pricing models and a range of different business models. So you're right in that fundamentally, we're not a catalog business with flash discounts, right.
But we're obviously there's a wealth of opportunities that's inherent in that data as we look at it. We've done a whole series of new tools. We've got much better insight into where the pricing opportunities are. It's all inside our 4 walls quite frankly. And these digital tools applications are helping give us greater insight and where we can squeeze out some more margin.
So, we're working with single basis points matter. So with the 2 digital tools, we're grinding away and just and that's kind of that's kind of just basically how we run the business.
Final question, it's quick, I apologize. You mentioned the 30,000 suppliers, few years ago it was 25,000, a few years before that it was 17,000. So the number of suppliers has been rising. The percentage of your purchases from your top 10 have basically always been around that 32%, 33% or so. So where are we in the supplier rationalization efforts and how can we see it externally since it's not easily apparent?
Thanks.
So, I would say that of all the initiatives that we have underway, we've made just minimal progress there. That's still an opportunity, I would say. But we've focused on other aspects of the business. So you're not going to see that easily because in terms of an overall impact to the whole enterprise, it's been minimal to date. So put that in the category of an opportunity to go forward.
Yes. And as we've grown the amount of products and services that we can provide to our customers, product lines that have added to that. But as John said, we still have an opportunity here.
I think we're also Sam coming back to the response to Dean's question now that we've got a much we kind of rebuild our MDM master files. We've got a much better data set to be more strategic and thoughtful about how we target that consolidation too. So not an excuse, just I'm always going to share exactly where we are. That's been an opportunity, but we weren't as positioned as we could have been to go after that aggressively. I think we're in a bit different position.
Rob? Hey, thanks. It's Rob Barry from Buckingham. Actually wanted to circle back to the M and A, just curious how you define large, what does that mean for WESCO? And how does the pipeline look?
How active is it? And when you talk about synergies, like what would be just the flavor for some of the synergies that get back to one of these large?
Yes. So, I mean that's all large is on the order of how we went after E. Coli in Canada, that was large to cash. It's large, Rob, right? So there's a handful of a series of large players, a series of very large players, midsize to large players and then there is a whole in thousands and thousands of small local and regional distributors.
So, we're clearly setting a message of what we're looking at there, while also looking at key capabilities to add like we did with an Alox, Lumagen and an SLS. Okay. So and when you put 2 big entities together, there are significant synergy benefits across all the cost categories just to start with. But then it's going to depend on what that combination is Because again, there's a lot of difference across all the big size, the larger players. So that's all hypothetical at this point.
And I think one of the ways that we've talked about our acquisitions in the past is a lot of our acquisitions met a specific focus area. A lot of it was we expanded into the geography or we expanded with a product line, but generally those acquisitions did not provide synergies. What we're focused on now are acquisitions that are large transformational that have that synergy opportunity to really drive shareholder value creation.
And again, I'm going to bring it back to which is why we position it this way, that market trend page and what I see happening in the competitive ecosystem and the value chain. And again, I guess, I have the benefit of a 15 year view now and it's speeding up at a rapid rate. And I'll go back to it, which I didn't mention. It really started with the customer end of our value chain that is driving hard the consolidation because they are really increasing. These are the discussions we're having.
And you heard it somewhat from that even the customer testimonials that were here today and specifically TELUS, right. So they'd like to have a smaller number of larger partners. That's driving a consolidation pressure down the value chain and clearly suppliers are moving at a more rapid rate. So it's incumbent, it's a must do for distribution to I think the conditions are set and it's a must do for distribution to scale up quicker.
Got you. And second, I just want to follow-up on the comments about the quarter tracking to the low end of the range. Just maybe a little bit more color there on what's coming in softer than you expected. And I just wanted to clarify that you weren't reiterating the annual outlook today and if there was a reason why you didn't want to do that?
Sure. Let me address the quarter first. So we called this out on the slide. We haven't seen the recovery in OEM that we were experiencing in Q1. We called that out during our earnings call.
There are certain pockets of the U. S. Where we're not seeing the sales recovery that we had anticipated. Again, we're pleased with the bounce back that we saw June to month to date. But again, looking at the results in the 1st 2 quarters, it's below our anticipated result.
So that would put us at the low end of that 3% to 6 percent sales outlook that we provided earlier in May. We have not addressed our annual outlook at this point. Again, these results are still relatively fresh for us and we will address the full year outlook during our earnings call on August 2.
Thank you. Mike McGinn, Wells Fargo.
I just want to ask a quick question on the acquisition strategy. As you're acquiring these more service based solutions businesses, is there does this increase your scope with EPCs? Or is there a line you need to tow that there you become sort of competition for them?
Excellent question. No, we've not seen that as of yet. In fact, Nelson's example of the LNG project is one of the most complex projects I think and we share with our team that they'll probably face in their careers. And you look at what our relationship is and in terms in terms of overall construction project management. So I don't I've seen zero tension or zero issues with that to date.
And again, if you look at the types of services we'll provide, you think about what the competence of the EPC is, it's the engineer procure construct. But what's being engineered, procured and constructed, we're focused on the big ticket items. When you look at these large complex projects of which again Dean was citing the one page in Nelson's deck. Look at all that in the scope that really are not being driven by that EPC responsibility, right? They're feeding that off to the supply chain, the electrical bolts, the wire and the wire cutting to feed the job site on time for all the different locations, etcetera, cable management.
So you start looking at all these various packages, they're not doing an engineer portion of that job. We essentially as part of the supply chain solutions provider is doing it. So does that help?
And then secondly, if I can just go into one of the verticals you mentioned, data centers, 5 gs. Can you give us kind of a brief overview where you operate best? I know hyperscale has kind of low down a little bit, they go more to direct. So where do you fit in and what's the cross sell opportunity within there for lighting, cooling, cabling, etcetera?
So we support data centers of all types and varieties, enterprise class data centers that are captive to a particular end user customer enterprise, hyperscale colos. We've called out over the years and even in recent quarters how we've done with certain large, I'll call it end user customers where they have their own captive data center. So we have a broad capability across data centers. It started with I'd say, the deepest strength is it came out of our CSC acquisition that we've built on and we did that acquisition in 2006. So we don't do I think there's many in the room that we don't do the networking gear, but we'll do the fiber optic connectivity, structured cabling, the racks, the cooling system, everything that will tie that the server rack and equipment into the infrastructure, which includes IP security.
And so that's our full set of solutions and we're partnered with a CommScope, Pandurate, Corning for fiber and such. So that's a $1,000,000,000 plus piece of our business, not just for data centers, but datacom all in. And then we also have broadband communications. So we have that fiber capability, fiber connectivity inside plant as I'm describing data center and outside plant And TELUS is a good example of outside plan. In terms of pull through, that's something we continue
to work on. It doesn't
to date, it hasn't naturally lent itself to an easy combination sale because of who makes the decisions on the fiber piece and the datacomp piece of the data center versus what the other packages are. But we have all those we have the full range of solutions and the electrical spend is actually 3 times the data set spend in a data center on average. And we win that separately, but we are working a series of strategies to try to bundle that and get that leverage together. So I think we're well positioned portfolio wise to do it, but the way the customers the power structure in the customers and the way they've ordered and transacted to date hasn't lent itself easily to that, but it's an opportunity we're working and we'll and again given our position here, I think we'll be able to make some headway there.
Thank you. This is Martin Sankey from Neuberger Berman. During Dave's presentation, he mentioned that a dividend would be a real possibility coming from WESCO sometime in the next 5 years. With the Chairman of the Board and I believe about half the Board present, could
you go
through the we hear some of the thinking that goes in around that in the sense that last month the Board decided that additional $75,000,000 would be returned to the shareholders via share repurchase. They could have gone or at least some of it gone to the creation of a dividend. So what's the Board of thinking? What might trigger a dividend? And would it be fair to think that a dividend, cash dividend is not likely until after the current stock repurchase authorization has been fulfilled?
So Mark, thanks for that question. I don't want to foreshadow specific timing. I think what we wanted to be clear on is and the best way I could answer that is to go back to a comment I made in my opening section. We're entering our 3rd decade of WESCO since we've been a publicly traded company, right? Decade 1, we generated $1,200,000,000 of cash, free cash flow in aggregate, decade 2, dollars 2,300,000,000 almost double that.
So I think we're at the point where we have such a strong, stable, consistent cash generation. Our cash generation ability on an annual basis is now continues to grow. We're very focused on maintaining and building off of that. So the message we're sending in, the dividend is not an if, it's only a when. I know you're asking some of the when question, but we're saying, look, it's not if, it's only when, it's a question of when.
We're still going to have those investments to make that determination, but we do want to signal that it is in our future. Again, decade 1, good cash generation, decade 2, doubled up on the cash generation and we expect, as they gave an outlook, even stronger cash generation going forward. So that's the signaling today. We'll continue to have those discussions. To your point, we do have a current authorization open and we intend to execute that.
And again, in terms of Sam's question and where why we've been moving down the buyback route is again given where we think the stock price is versus what we think our intrinsic value is given what we did give you a deeper insight into today, right, which is where the company is and our strategy is going forward to create enterprise value.
Okay. I would just make a comment that adult companies do pay dividends. Yes.
Understand.
And I use the word adult instead of mature.
Good comment.
But I'm just trying to get an idea of some of the banking. I have a second question, which is an entirely different subject entirely. There's been much mentioning of employee engagement inclusion and there's a school of thought that says that one of the biggest measures of employee engagement and motivators of employee enthusiasm is equity ownership, broad based equity ownership to be precise. How do you think about that? How much do your employees own outside of the executive band?
And what are you doing to improve or not improve employee ownership? And where is it now? Where would you like to be?
You want
to start with that, David? Sure. So
I believe we're right around 3% of our shares outstanding are owned by directors and management of the company. Again, that is just what we know about in terms of what's managed through our record keeper. I know that there are employees that have ownership outside, they purchase stock on their own through their own broker. We don't have a good line of sight to that. I think the real question is, as we think about driving down that ownership of the company, as part of our incentive compensation through various levels of the company, we do provide a long term equity based compensation.
So, for example, my organization, we go down several levels and individuals are receiving stock awards as part of their annual compensation program. So, does that answer
your maybe can you go on, because I think you started Martin with employee engagement. And so let me stay there for a moment, because I think it's really important, your question, It's a great question. Chris Wolf has joined us now as our HR leader. She's been on board less than a year. And we're very aggressively working on employee engagement programs.
We do a survey every other year and we've got very good feedback on what's important to them. And those are the items that we're aggressively working. And I think with Chris now on board and her leadership, we're positioned now to go think about that very thoughtfully.
For example, there are many number of companies that might do a 401 match in stock as a alignment of a motivator. Right.
That was offered to our employees in the past. Part of the current thinking on fiduciary responsibilities related to 401. Most companies are no longer offering a matching company stock as part of the 401. But as John mentioned, it's something that we'll work with Chris and we'll understand better how we can address this issue of equity ownership by our employees.
And I would parenthetically add that there's changes in law along the way that are being enacted regarding 401s.
Right.
Absolutely.
Thanks, Martin. Easy handout.
It's Telkfil, it's Topgfil. I'd just point out for every $50,000,000 you might spend on a dividend, whether it's next year or somewhere towards $5,000,000 you save 1,000,000 shares of stock that you might put out in a big acquisition. True. And I would think that
the shares you put out
in acquisition might be much more important.
Yes, true. Thank you. Very good
Chris Danker, Longbow. John, you touched on the plug and play alliance earlier.
I'm just kind of curious,
is that more of a
headline thing? Is there something tangible there? Are we kind of onboarding projects and technologies at this point? Just any additional color around that line would be interesting.
Yes. So I mean, it is a headline because we just announced it, okay. So we do we have engaged with them and if any of you don't have a sense of what they've done over the years and there's other they have other competitors, RocketSpace and a few others, I'm just very well entrenched in the tech ecosystem and do a terrific job of servicing companies that are working on solutions and applications that are very specific to business requirements and needs. So, our strategy here is, again, given that digital is accelerating and driving we think changes the whole B2B value chain. We're going to we are engaging and this didn't start a month ago, but it did start within the last year, put some timeframe around that.
Engaging in that tech ecosystem and we have very specific areas of B2B sales and distribution that we're looking to the tech community for in terms of how they're beginning to address these problems. There is a significant amount of investment uptake in the tech community around B2B, around construction tech, areas that are very critical to us. It's actually exploding. And so we need to be plugged into that real time and the best way to plug into that real time is to leverage an infrastructure and ecosystem that's been working. At a prior life, some of you know pre West Coast, I lived and ran a business based out of Silicon Valley for 4 or 5 years pre West Coast, so I lived out there.
So we're plugging into that fuel system now. Again, B2B was not being worked. It's being worked now and it's exploding. And so I think we've got some excellent opportunities to plug into that. With this setting up this new vertical, because again, plug and play is a series of other verticals, we'll have a whole series of other companies that engage with us that are broad distribution based and this is B2B distribution based much broader than we're not talking about the $200,000,000,000 addressable market.
We're talking about the $2,500,000,000,000 addressable market, which is the annual market for B2B distribution in the U. S. Based on MDM data. So the distribution company, of course, the broader B2B vertical that we're engaging here, do they want to be part of this, get access to this process and this process will be very focused. We'll have a big adventure in the second half of the year, it will be in the 4th quarter.
Given the requirements we're looking for, this is where we leverage Play and Play's process. Those are out there, the sourcing, the screening, it's a funnel process, start with thousands of parts of companies, renew it down to 500, then it's down to 200 to 250, we engage, bring it down and then we go into a deep set of reviews with a very focused number of companies. And what the way this works is, this is a challenge I think for a lot of large corporations around the world and in corporate America, the ability to innovate within your own infrastructure. The beauty about Resco is we provide a tremendous, I'll call it incubator, the proof of concept pilots that can be run. So you think about a particular startup that's working on a specific problem that we see great value in, but we haven't figured out how to solve, we could run a little proof of concept pilot.
They have to spend those dollars, right?
They're trying
to find that application and so we get the free R and D, we work it out and we kind of run it. So that's how we're going to work it. Hema's example of the card is a great example of a company that we tapped it to that has a digital capability plugged it in. The way we did that is how we're thinking about doing this with the other companies we're exposed to. We started Hema with 1 branch
proof of concept. We said
that was very late 2017. We saw some interesting benefits. We then rolled it out to 50 branches in 2018. Now we have a whole network in 2019. And yes, it does, it's clear there are meaningful savings in terms of miles per delivery, the electronic proof of delivery and really the improved customer satisfaction and support because we're able to now tell them more precisely when they're going to get their delivery at exactly at the right spot on the job site, which is very critical and improved that it occurred.
It sounds like a simple thing, but that's not a table stakes capability that exists in the industry today. So again, just a great example. That's one small example, but you can imagine literally numerous examples. And so as we also plug into that tech ecosystem, I think we'll be able to get exposed to a lot of other interesting development in companies and It's the
beginning. Yes, I mean, definitely excited to hear kind of how that progresses, but thanks for the color. I guess, I was kind of curious on and Hemant touched on the spin approach to pricing, I guess. How long has that been in place? Is it active across all segments?
Does it still leave kind of room for salesperson discretion? Just any kind of color on pricing and kind of how that's been rolled out as well?
So, we've been working on it for the last couple of years, like I said in the presentation. We knew that was an area focus and opportunity. And so it's available across all of our end markets and all product categories. So we look at it and vary from a supplier price increase standpoint. So irrespective of what the price increase comes in, whether it's in technical supplier or any communications, it's honestly agnostic.
So the application is built to be able to do that basically across all end markets and all product categories that we do business with. So that's the answer, the simple short answer, but yes.
Hi, Pat Brown from JPMorgan. Just had, I'm just trying to tie together the comment on Canada margins being 200 basis points higher than the U. S. And that being driven by scale, I think. Can you just remind us where market share margins in Canada were prior to the e coal yield that you did?
And where market share is now in Canada? And then remind us in the U. S. What your current share is? And if there's anything structural besides scale getting those results in the U.
S. Closer to Canada, like is there a level of scale required or is there something structural that would kind of keep
So the best way to answer that would be the top 10 electrical distributors in Canada have 3 quarters of the market. The top ten concentrated in the 3 quarters of the market. The top 5 quarters in the U. S. Have about 35% of the market.
And as Ron mentioned in his presentation, there's over 3,500 distributors in the U. S. So again, it's a much more fragmented distribution value chain in the U. S. With a long tail.
Canada is more consolidated, substantially more consolidated and now we have a clear number one position post feed coal. Again, we were growing organically fast in the market and have been for quite some time. But again, that's that benefit. You jump across all the Europe and those markets are even a bit more consolidated than Canada. So, depending on which country you look at, again, much more mature markets, longer standing.
So, it's the way the value chain ends up working, the relationship integrative partnership because it has to be, because it has to be quite frankly. It's distribution economics. I know it's textbook, that is absolutely true. Just a side note, I'll digress. I joined the company 15 years ago.
It's one of the first things I looked at with a bunch of analysis and try to get a sense of what's our local market feel and presence versus what the operating markets are. And so you can and the market was more locally driven then. So again, back to my trends page, that's shifting a bit, but that is a high correlation coefficient between market share and margin in distribution.
So taking that to say that it would be tough. I mean, you'd have to do a lot of consolidation in U. S. To kind of drive that kind of a dynamic.
Yes. So again, that's where digital comes in now because when you think about digital as an accelerant, but also what that can do in terms of giving you scale quicker in different ways. Put that together, why we're working digital very hard.
Understood. Thank you. Yes.
Hi, Arthur Baptist with Golden Gate Capital. I just had 2, 1 on kind of operating leverage and then one on tariff. I guess the first on operating leverage, I guess just based on the Q1 and kind of Q2 trends. To the extent that sales are at the low end of the 2019 range or lower, do you have levers on the expense side, to still achieve that $5.10 to $5.70 EPS target this year?
We'll be updating the full year outlook when we do our earnings call. But the short is yes. We do have levers that we can pull. Again, we have plans that we intend to execute, investments that we plan to continue to execute here in 2019 to grow long term shareholder value creation. But in the near term, there are levers that we can pull.
We've done it in the past. Everything would be on the table. We'll provide you the full outlook on August 2. And I guess just
to push on, if we do hit kind of a choppier macro longer term, Could you give a couple of examples? I mean one thing I've noticed is the headcount stayed kind of relatively flat over the last 3 years. You've done a nice job kind of leveraging that headcount base. What are some of the areas you could cut?
Sure. So, some of the initiatives that we even talked about today, we are investing in because they are generating operating margin advantages and productivity for us. So, we will continue to execute those specific initiatives to drive margin improvement. In the past, you have mentioned, we closed branches and we consolidated the headcount to certain locations to reduce overall FTEs on the books. That's something that we haven't discussed as a leadership team yet, but there are various other levers that we will continue to pull.
I've been through multiple cycles since I've been with the company, including probably and I hope this is the case, the toughest cycle I'll ever have to deal with, which was the great global recession. So, if you just take a look at what we've done in the past, we've shown that we absolutely move with speed and precision when required. A decade ago, we took out over 1,000 people and took out $100,000,000 of inventory in less than 4 quarters. That's something we like to do or have to, but we do what we have to do. We're going to maintain I'll be very clear, we're going to maintain the operating cost structure of the company as a percentage of sales.
That low cost SG and A as a percentage of sales being low cost versus our competitors, I think ultimately is a key foundational strength of the company. And honestly, you can trace it back to the LBO roots, right. The initial LBO in 'ninety four, leverage recap in 'ninety eight, I think that's been built into and ingrained in the culture of the company. I did create that when I joined in 2004 that was there, but I was thrilled it was there and I protected and defended that. We will always keep that.
That's where Alene plugged in nicely, right. So continuing to drive, continue to improve and create that capacity that you then can use to grow or obviously create that capacity that you can then capacity if you need to. Obviously, that's not the preferred utilization of that, but hopefully that gives us that's discretionary expenses too. We ratchet those down and there's variable compensation that we pull very hard levers on.
And then just the one on tariffs, I mean there were few mentions in the presentation on it today. If you could just anything you could do to quantify kind of maybe your percent of cost of goods sold that could be impacted by tariffs? And then I guess just as you think about the number of supplier increases you called out, I'm a little surprised it's not maybe flowing more through the revenue line in Q1 and Q2 to date, just given the number of supplier increases. Why aren't you are you not able to pass through that level of pricing or could you just talk about that?
So let me address first the direct impact tariff,
the things that we as a
company would bring in from a country with a high tariff, that's low single digit percent, things that we are sourcing directly from say China, very low percentage of our total cost of goods sold. Clearly though, a lot of the products that we are purchasing from our suppliers do have some component of a tariff associated with it. That is driving some of the increase that we've seen in supplier price increase notices throughout the first half of the year. Hemant mentioned that we're 50% plus higher than we were at this point in 2018. So again, we talked about we saw pricing moderate to some degree in the Q1.
Again, our goal is to not only pass through those price increases to our customers, but to actually increase our margin rate as well. Clearly, over the past 4 quarters, we've been doing a much better job of that. We would anticipate that we will continue to focus on that going forward.
Remember, and I know this is math, right, we have a 7% price increase on the cost side. If we only took price up, our price up 6%, our margins compress. Right. So again, we have to when we are faced with this barrage of price increases from suppliers on the input side of the cost equation, we've got to take those price increases plus a bump to even maintain to even hold margins. And obviously, our goal is to expand margins.
And there's always a time lag. I think that's pretty important to understand, again, based upon what product, what part of the business that they feed into.
Hi, Martin Steinke from Neuberger again.
In thinking
about your presentation, there's a substantial proportion of revenues that don't flow through your warehouses, but are drop shipped directly from your supplier partners. How and clearly customer satisfaction is partly dependent upon that. And to get how what are you doing to work with your suppliers in order to get a better customer experience? And what savings might you achieve by doing that?
Yes. So,
yes, very good question, Mark. And then something that was really surprising to me, if I take you back to when I first joined the company, I was pretty surprised that just structurally what percentage of the sales
and it's not unique to West though.
I mean, it's how core electrical distribution works, what percentage of sales is direct shift. And that's where that particular product or system is engineered for that customer application. And so and those respective components that form that system solution are not being pulled out of a distributor's warehouse because that by and large that solution is getting specified and designed for the customer's application. So that's something that we deal with every day. And so we work very we work hand in hand with our suppliers well ahead of the fulfillment portion of the cycle.
So that direction, we're working with them when to take an example in Core Electrical, switch gears getting specified and determined for that customer's application or in the case of new construction or an automotive company can expand their production lines and Rockwell Allen Bradley is the automation and control solution that where the authorized distributor will working with that automotive end user customer directly to get what configuration is expected as they stand up that new production line. So that's how that's very critical to how we do business today, working with that supplier well in advance of the fulfillment, but it starts very early on in the cycle when the application needs and requirements are defined and when we're determining the solution. And then we met, we work with the supplier through that process to ensure that if it's new gear that's getting built or in the case of Rockwell that we have those particular, the PLC and the software load that we need, etcetera, to meet that application, we make sure that we have that lined up and staged on when it's needed for the project schedule. So making that more seamless for the customer is critical.
And when we talked about the 4 digital growth plays, we talked about that construction project management, that application is really building off of a software package that we have to help manage complex construction projects. Building that digital platform out is a way to help ensure more efficient execution of projects. When we look at the direct ship, a lot of time it is for the core equipment for new construction.
Are you finding that your IT platforms are ahead of or behind those of your suppliers in terms of being able to do the coordination that's necessary for seamless customer experience.
I would say there's a wide array. So it's hard to paint our supplier base with 1 paintbrush. Even the bigger, larger supplier partners we're partnered with are not single global instance ERP instances. So there is a complexity in that, but it's something that we manage through. So that's we do have Rob and his team is directly engaged with the IT groups of our supplier partners with ongoing meeting sessions.
And it gets to your first question, Martin, on how can we tie ourselves together better for all part of the value chain to create a more integrated seamless experience, so we can better serve customers. Okay. So we went a little bit over on Q and A though, but excellent Q and A. Cocktails are being served. Thank you so much again for your time and your attention and your support.
And again, I think you sense our excitement about the next chapter of Wesco. Hopefully, you share in our excitement. We'll see you at the cocktails.
Thanks, everybody.