Welcome to the 4th Quarter and Fiscal Year 2018 Stanley Black and Decker Earnings Conference Call. My name is Shannon, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded.
I will now turn the call over to the Vice President of Investor Relations, Dennis Lang. Mr. Lang, you may begin.
Thank you, Shannon. Good morning, everyone, and thanks for joining us for Stanley Black and Decker's 4th quarter and full year 2018 conference call. On the call, in addition to myself, is Jim Laree, President and CEO Don Allen, Executive Vice President and CFO and Jeff Ansell, Executive Vice President and President of Global Tools and Storage. Our earnings release, which was issued earlier this morning and a supplemental presentation, which we will refer to during the call, are available on the IR section of our website. A replay of this morning's call will be available beginning at 11 am today.
The replay number and the access code are in our press release. This morning, Jim, Don and Jeff will review our Q4 and full year 2018 results and various other matters followed by a Q and A session. Consistent with prior calls, we're going to be sticking with just one question per caller and as we normally do, we will be making some forward looking statements during the call. Such statements are based on assumptions of future events that may not prove to be accurate and as such they involve risk and uncertainty. It's therefore possible that the actual results may materially differ from any looking statements that we might make today.
We direct you to the cautionary statements in the 8 ks that we filed with our press release and our most recent 'thirty four Act filing. I'll now turn the call over to our President and CEO, Jim Laree. Okay.
Thanks, Dennis, and good morning, everyone, and thanks for joining us. As you saw in today's release, we delivered a respectable 4th quarter, continuing our trajectory of above market organic growth and delivering strong EPS growth and solid free cash flow dollars and conversion. As many of you know, in 2018, we faced an unusual and sudden onslaught of large and volatile external headwinds, most of which developed during the course of the year. Specifically, pressure from input cost inflation, FX and tariffs had by 4th quarter grown from our initial January guidance of 150,000,000 dollars pretax to $370,000,000 which at the EPS level would have been about 25% dilutive to prior year EPS had we not managed to offset all but $50,000,000 of that with additional price cost management and other actions. The fact that we ended up quite remarkable.
It speaks volumes as to how Agile experienced Agile, our experienced management team deals with short term adversity and operating environment challenges, while continuing to pursue above market growth and moving the company forward strategically. More on that in a few minutes, but first a few words about the 4th quarter. Revenues were up 5% to $3,600,000,000 with organic growth of 6%. Tools and Storage delivered 7% organic with strength in all major geographies and business units. The tools growth was driven by the continued rollout of the Craftsman brand, price realization and leveraging our portfolio of growth catalysts.
Industrial delivered 14% total revenue growth, inclusive of the Nelson Fastener acquisition, and organic was up 4% for industrial. The oil and gas business exceeded our plan this quarter and delivered a robust 27% organic growth derived from increased pipeline project activity in North America. Our total company adjusted operating margin rate was 13.3% as volume leverage, price and cost actions were more than offset by the impact of currency commodity inflation and tariffs. Security was a bright spot this quarter delivering both operating margin dollar and rate improvement versus a year ago. The security team is energized and focused, and we are looking forward to realizing a significant and growing benefit from that business' transformation as 2019 unfolds.
EPS for the quarter was $2.11 in line with expectations. And now I'll turn to full year highlights. Full year revenues were $14,000,000,000 up 8%, including 5% organic growth and 3 points from acquisitions. Excluding charges, diluted EPS for the year was $8.15 a 9% increase versus 2017 and our operating margin rate remained solid at 13.6 percent despite absorbing the $370,000,000 of headwinds previously mentioned. Turning to capital allocation.
We continued our balanced approach once again in 2018. During the year, we repurchased $500,000,000 of our shares and increased the dividend once again, the 51st consecutive year of increases. From an M and A point of view, we closed on Nelson Fasteners, which further diversifies the engineered fastening business into industrial markets. We also announced the IES Attachments acquisition and our entry into large outdoor power equipment with MTD as our equity partner. We're excited to see these opportunities progress and fuel future growth in the coming years.
In summary, 2018 was a successful year, one in which we cut through challenges to deliver solid results. This performance is attributable to the agility, passion and dedication of our workforce. And I want to take this opportunity to thank every employee for their commitment and their resolve because it is our people to whom we attribute this great culture and the passion to perform well in any environment. They live our purpose every day with incredible energy and commitment. As we enter 2019, the external challenges don't magically disappear.
However, we are well prepared and positioned to tackle them. In addition, there are signs that the global economic growth is slowing and that the U. S. Economy may soon be coming to the end of one of the most enduring recoveries in U. S.
History. We are leaning into these challenges and will leverage our SFS 2.0 operating system while deploying an impressive array of growth and margin improvement initiatives to once again be successful in 2019. The investments we've made to support organic growth in our recent acquisitions have created the strongest pipeline of revenue generating catalyst we've ever had during my almost 20 years as a C level executive in this company. These opportunities will provide a foundation for continued share gain and can act as a buffer to the revenue impact that could result from potentially slower markets. We will see benefits in 2019 from the rollout of the Craftsman brand, the largest product program in our history, as well as the repositioning of the STANLEY and the STANLEY FATMAX brands in the North American home center channel.
With these programs, we are unlocking new opportunities for share gain by aligning our brands across core user groups within the Tradesman and Professional segments, while leveraging our brands fully with our retail partners. The response we have seen from our customers and end users with the Craftsman rollout encourages us regarding the potential for 2019 and beyond. Our core and breakthrough innovation initiatives are stronger than ever and our innovation focus permeates the entire company. We expect to see future revenue benefits not only from Flexvolt, which is a well traveled story, but also from new innovations coming to market fastening and other industrial businesses as well as security. In terms of the Lennox Irwin acquisitions, we're attacking the revenue synergy opportunities, which will represent $100,000,000 to $150,000,000 of organic growth over a multiyear period as we broaden the distribution of these products around the world.
In the emerging markets, we continue to deliver outsized growth and share gain, and we are leveraging our unique business model, the strength of our brands, including STANLEY branded midpointmidpricepointcordedandcordlesspowertools as well as hand tool products. And we're having immense success, growing at 2 to 3 times the market rate. And across both developed and emerging markets, e commerce remains a key revenue growth driver for us. This year, it represents a $1,000,000,000 high growth business, a channel in which we are the industry leader across the globe by a wide margin. And turning to our recent acquisitions, in addition to the organic growth opportunities I mentioned with Craftsman and Lennox Irwin, we expect to generate inorganic growth from the IES acquisition in 2019 for which we are awaiting government approvals.
Additionally, as I said earlier, our MTD partnership is just getting started, and we are excited about the future benefits from this relationship. As part of the deal, we have secured an option to purchase the remaining 80% in 2021 and beyond for an amount which should approximate 7 to 8 times EBITDA. This provides clear visibility to almost $3,000,000,000 of instant growth in the early 2020s at what will truly be a great acquisition price based on the joint value creation efforts underway between the companies. So with all these incredibly robust growth catalysts, we are in an excellent position for a successful march to $22,000,000,000 of revenue by 2022. In fact, we are so well positioned that we are now shifting our near term emphasis from identifying and acquiring new growth catalysts to, 1st, continuing to execute the ones that we already have and then, 2nd, focusing on margin rate accretion.
For starters, we will leverage our $250,000,000 cost reduction program, which is substantially complete as well as pricing and productivity benefits in 2019. Beyond that, we are now in the process of developing and executing an array of margin expansion initiatives, many of which are aided by applying modern technology, such as elements of Industry 4.0 and advanced analytics. More to come at our Investor Meeting in May, but rest assured this will be a powerful and substantial initiative that will generate future margin accretion and buffer our earnings and cash flow from the vagaries of economic cycles in the external operating environment. In addition, we have redirected allocation in the short term to a deleveraging posture, keeping the balance sheet in a prudent place as is appropriate for this stage of the cycle. This will give us maximum flexibility in the future for opportunistic repurchases and for acquisitions as our long term capital allocation strategy of 50% back to the shareholders and 50% reinvested in growth remains intact.
So in summary, there's a lot
to be excited about with this powerful growth story. And now adding the additional focus on margin expansion will ensure that the benefit of all this revenue growth makes its way into even higher growth rates for operating margin and EPS. And now I'll turn it over to Don Allen, who will walk you through more detail on the segment performance overall financial results and 2019 guidance. Don?
Thank you, Jim, and good morning, everyone. I will now take a deeper dive into our business segment results for the 4th quarter. Tools and Storage delivered 4% total revenue growth with 7% organic growth and a 3 point headwind from currency. Organic growth included 5 points of volume and 2 points from price. We continue to see sequential improvement in our price realization, which represented a full quarter benefit from the price actions we executed during the Q3.
The operating margin rate for the segment was 15.4%, down from the prior year as benefits of volume leverage, pricing and cost control were more than offset by the impacts of currency, commodity inflation and tariffs. The impact of these headwinds amounted to $135,000,000 for Stanley Black and Decker. Approximately 90% of this figure impacted Tools and Storage in the Q4. The strong organic growth and related share gains were experienced across each Tools and Storage region and SBU. First, on a geographic basis.
North America was up 10% organically with strong performances across all channels. U. S. Retail and U. S.
Commercial markets both posted low double digit growth and our industrial and auto repair markets generated mid single digit growth. North America's growth continued to be fueled by new product innovations, including FlexFold, the Craftsman brand rollout and price realization. The Craftsman rollout is continuing to be well received by end users and our customers. For the year, it drove close to 2 points of revenue for Tools of Storage net cannibalization. We are excited and encouraged by the success we are seeing as we continue the rollout in 2019.
More on that from Jeff a little bit later. Europe delivered 4% organic growth in the quarter. 9 out of 10 markets grew organically, an impressive performance as we did see some weaker market conditions in Europe. The team once again leveraged our strong portfolio of brands and expanded our retail relationships to produce above market organic growth. Finally, emerging markets delivered 3% organic growth.
Diligent price actions to offset currency headwinds, Lennox and Irwin revenue synergies as well as a continued focus on e commerce and the ongoing MPP launch continued to support growth in this part of the Tools and Storage business. These actions were partially offset by severe market contractions that we saw in Argentina and Turkey. These two markets reduced growth by approximately 360 basis points and that is not unexpected given the recent foreign exchange volatility we've seen in those two countries. However, Latin America continued to be strong with double digit growth. Brazil, Colombia, Ecuador, Chile and Mexico had high single digit or double digit organic performances.
Additionally, in Russia, India, Korea and Taiwan, they all posted high single or double digit organic growth as well. Now taking a look at the Tools and Storage SPUs. All lines showed high single digit growth in the quarter. Power tools and equipment delivered 7% organic growth and benefited from new product introductions and strong commercial execution. Flexvolt delivered a robust mid teen growth for the year, while delivering improved as new product introductions, a continued Craftsman rollout, as new product introductions, a continued Craftsman rollout and then solid performances within the construction and industrial focused product lines, and of course, the contribution from Lennox and Irwin revenue synergies, all these items contributing to their growth.
In summary, an excellent quarter and a very successful year for the Tools and Storage organization with growth in every region. Operating margin for the quarter was strong at 15.4% as the benefits from volume leverage, pricing and cost control were more than offset by what we saw around the headwinds in currency, commodity and tariffs. This team continues to be resilient and is acting with agility to return this business back to margin expansion in Turning to Industrial. This segment delivered 14% total revenue growth, which included 12 points of growth from the Nelson Fastener acquisition and a negative two points from currency. Organic growth was 4% and operating margin rate declined year over year to 13.2% as productivity gains and cost control were more than offset by commodity inflation, the dilutive impact from the acquisition of Nelson Fasteners and then an unfavorable revenue mix within the 4th quarter.
Engineered Fastening posted total growth of 14%, which included the contribution from Nelson Fasteners. Organic growth for Engineered Fastening was 1% due to higher system shipments and fastener penetration gains in the automotive business, which were partially offset by a decline in global light vehicle production. The latest global light vehicle production for full year 2018 shows a modest retraction versus the prior year. As demonstrated this year, our fastener business can still grow in this environment as we increase the fastener content within our customers. For the year, our auto fastener growth was 6%, over 600 basis points ahead of global production.
The infrastructure businesses delivered robust growth, up 18% organically. This was primarily due to stronger North American oil and gas pipeline projects, which contributed an impressive 27% organic growth in the quarter. We also had modest growth within our hydraulic tool business. Finally, the Security segment declined 1% with bolt on acquisitions contributing 3 points of growth, which was offset by an organic decline of 2% and unfavorable currency of 2%. North America declined 2% organically as higher volumes in automatic doors and healthcare were more than offset by lower installation revenues in commercial electronic security.
Europe was down 2% organically as growth in Sweden was offset by weakness in the UK and France. In terms of profitability, the segment operating margin expanded to 12%, improving 100 basis points versus the prior year. The security team continues to make progress on the transformation plan, namely optimizing our cost to serve, while positioning the business to provide new and differentiated offerings to our large key account customers and to our small to medium sized accounts. This quarter and the second half demonstrated an important first step towards stabilizing the margin performance of this business by delivering operating margin dollars and rate improvement versus 2017. We expect these transformation initiatives to gain further traction in 2019 as we continue to position the business for meaningful margin dollar and rate expansion and more consistent organic revenue growth.
In summary, it was another promising quarter for security with the team delivering year over year margin expansion for the first time since late 20 16. Let's take a look at our free cash flow performance on the next page. I would like to highlight that we are presenting the 2017 cash flow amounts as previously reported and exclude the impacts of the new accounting standards that were adopted in January of 2018. We believe that presenting the cash flow results in this manner provides a more meaningful comparison of the company's operating cash flow performance. Similar to past years, we were able to drive significant working capital improvements during the quarter.
Our full year free cash flow performance was solid as we generated $769,000,000 in 2018. Cash from operations declined $158,000,000 versus 2017, which was driven by higher tax payments due to the addition of the toll charge that was included within U. S. Tax reform and we also had higher M and A related payments. We saw our capital expenditures increase by $49,000,000 in 2018 as we made investments to expand our manufacturing and distribution capacity, made technology investments to support functional transformation and Industry 4.0 and invested to support our acquisition integrations.
This performance resulted in free cash flow as a percentage of net income of approximately 119%. Excluding the non cash net charges associated with U. S. Tax reform, free cash flow conversion was approximately 90%, in line with expectations communicated in our October earnings call. From a working capital turn perspective, we delivered 8.8 turns in the 4th quarter, a decrease of 0.3 turns versus the prior year.
This decline is primarily due to carrying higher levels of inventory to support the Craftsman rollout and to a lesser extent, the dilutive impact from the acquisition of Nelson. Working capital management remains a key pillar of the SFS 2.0 operating system. We continue to drive working capital improvements across the company with heavy focus on improving the performance of our recent acquisitions and eventually moderating the inventory levels from our tools, brands, transitions that are happening right now when we feel that's appropriate. We are confident in our ability to bring our working capital turns back about 10% in the coming years. Now let's move deeper into our 2019 guidance.
We are targeting approximately 4% organic growth in 2019 with an adjusted earnings per share range of $8.45 to $8.65 up approximately 5% versus prior year at the midpoint. The free cash flow conversion will be approximately 85% to 90%. The free cash flow conversion is slightly below our historical performance and long term targets due primarily to 2 factors. 1, we are expecting that much of the cash payments associated with our Q4 2018 cost reduction program will occur in 2019. The second factor is the ongoing cash payment associated with the toll charge that we'll see for the next 7 years.
Over the long term, we are still confident that a conversion rate of approximately 100% is still achievable as we use our core SFS principles to drive working capital out of
this business.
On a GAAP basis, we expect earnings per share to range from $7.45 to $7.65 which is inclusive of various one time charges related to M and A as well as some one time costs related to our margin enhancement initiative that Jim just discussed, also including the ongoing security transformation. Turning to the drivers of core EPS growth. You can see on the left hand side of the chart, we expect the benefits from organic volume to generate $0.30 to $0.40 of EPS accretion. The cost reduction program we executed at the end of 2018 is expected to deliver $1.05 of EPS, which is net of a modest set of investments to support value driving activities such as Industry 4.0, advanced analytics and our security transformation. These items will be partially offset by $0.90 to $1 of incremental tariff, commodity inflation and currency headwinds, net of both carryover price benefits and new pricing actions implemented earlier this year in response to tariffs.
We expect a tax rate of approximately 17.5%, which represents a $0.15 EPS headwind year over year. And then lastly, the benefits from the MTD partnership and the lower share count, partially offset by higher interest expense, should deliver a positive $0.10 in EPS. I would highlight that we have included Section 301, List 3 at a 10% assumption for the full year. If this does increase to 25%, it could represent a gross headwind of approximately $100,000,000 before pricing and other mitigation efforts. As you read in the release and heard from Jim, we are preparing to take additional cost and margin driving activities to insulate ourselves from this and other risks.
Also, as you know, we always build a level of contingency to ensure that we can deliver our guidance and absorb a certain level of unknown market or external headwinds. And we will continue to do that in 2019. I would now like to review one other miscellaneous guidance matter. We expect the Q1 earnings to be approximately 13% of the full year performance. This is about 400 basis points lower than last year.
The primary factor driving this lower percentage of full year delivery is that we continue to expect elevated levels of external headwinds, particularly in tools, which from a profile perspective are more heavily weighted towards the front half of the year. This will cause the Q1 to show operating margin rate and dollar retraction as we have a headwind of approximately $125,000,000 to $135,000,000 net of pricing benefits, which is nearly 3 quarters of the expected $170,000,000 full year net headwind. Now turning to the segment outlook on the right side of the page. Organic growth within Tools and Storage is expected to be at mid single digits in 2019. There are multiple catalysts supporting growth, including core innovation, continued benefits from FlexFold, the Lennox and Irwin revenue synergies, emerging market opportunities and the continued brand transitions with Craftsman, Stanley and Stanley Fatmax.
Margin rates are expected to be positive year over year. We are expecting the external environment to continue to be challenging in 2019, presenting another year of large external headwinds as I just mentioned. However, we will continue to leverage multiple margin levers, including price realization, cost actions, margin enhancing initiatives and volume to offset these headwinds and position the business for a return to margin expansion in 2019, with stronger performance expected for the second half. In the Industrial segment, we expect a relatively flat organic performance reflecting softening conditions within the automotive end market. We're expecting Engineered Fastening to be relatively flat organically with continued growth within automotive fasteners.
Our systems outlook reflects a softer year as we have been seeing a more constrained CapEx spending environment with our auto customers. In oil and gas, we are planning for low to mid single digit growth driven by stronger North American pipeline project activity and then hydraulic tools growth will be relatively flat due to slower market conditions in that space. We expect operating margins to be flat year over year with productivity and cost actions offset by commodity inflation and tariffs in our Industrial segment. Finally, in the Security segment, we are expecting the organic growth to be up low single digits in 2019 as the team continues to execute its transformation strategy. This should translate into improved operating margins year over year as we continue to stabilize margins and deliver on our initiatives to lower our cost to serve.
So in summary, 4% organic growth, 4% to 6% adjusted EPS expansion despite a 2 point tax headwind, a solid result and a balanced view that acknowledges the current market conditions and today's view of the external headwinds, which are front half loaded. We believe we are taking the appropriate actions to position the company for success in 2019 despite a very dynamic operating environment. We remain focused on our organic growth catalysts, margin expansion initiatives, strong free cash flow generation and successful acquisition integrations. With that, I would like to turn the call over to Jeff.
Thank you, Don. I would like to provide a few more points on the Tools and Storage performance for the year, including updates on our strategic brand partnerships for Craftsman and Stanley. We closed 2018 with high single digit organic growth enabled by record setting new product launches, best in class commercial partnerships and integration excellence. As evidenced, Erwin, Lennox and Waterloo have delivered double digit organic growth since becoming part of Stanley Black and Decker. Adding to the strong acquisitive performance is Craftsman, which is exceeding both our and our customers' expectations.
We're on track to $1,000,000,000 in revenue growth by 2021, 7 years ahead of schedule. This progress is being driven by strong user acceptance. As such, we have achieved a 4.6 star rating across well over 1,000 products and outstanding in store execution by both Lowe's and Ace. We also announced last quarter that the Home Depot will now be the exclusive home improvement retailer for STANLEY and STANLEY FATMAX hand tools and storage product portfolios, both in store and online beginning this year. The product will begin to ship in the front half of twenty nineteen.
Now I'll turn the call back over to Jim to wrap up today's presentation.
Thank you, Jeff. In summary, 2018 was a year of solid performance despite the volatile external environment. As we said, we delivered 8% total revenue growth, including 5% organic. And OM rate remained robust at 13.6% and adjusted EPS grew by 9%. Our team's active with speed and agility while facing into and overcoming an unprecedented impact from currency, commodity and tariff headwinds.
And while these headwinds will gradually abate as 2019 unfolds, they will be with us for a while and the economic growth backdrop also looks to be slowing as well. So with that as context, we are pleased that our 2019 outlook calls for 4% organic growth with a 4% to 6% EPS expansion, and we feel good about that. We remain focused on delivering above market organic growth with operating leverage, reenergizing our focus on margin expansion, continuing to successfully execute our recent acquisitions and generating strong free cash flow. And as always, our seasoned leadership team will act with agility and leverage SFS 2.0 and all available avenues to maximize our value creation for shareholders. In other news today, we are announcing that Stanley Black and Decker was named to the carbon disclosure A List for both climate change and water.
This great recognition is an honor and it underscores our commitment to continue to conduct ourselves in a socially responsible manner. I would like to thank my senior management team and all of our Stanley Black and Decker associates around the world as well as all our stakeholders, including the investment community for your support. We are looking forward to another successful year in 2019 and continuing our pursuit of strong financial performance, pervasive innovation and social responsibility. Thank you. And with that, we are now ready for Q and A.
Dennis?
Great. Thanks, Jim. Shannon, we can now open the call to Q and A, please. Thank you.
Thank you. Our first question comes from Rich Kwas with Wells Fargo Securities. Your line is open.
Hi, good morning.
Good morning.
Good morning. First on Jim, so focus on deleveraging here kind of base level for capital deployment, doesn't seem like this is going to be a year of meaningful M and A. What would you characterize, given where we are in the cycle as the puts and takes consideration in terms of additional M and A? And then Don, real quick on the free cash flow conversion and the over underlying conservatism in the guidance. Maybe you could make some comments on conservatism?
And then second, on FCF, is there any working capital headwind with regards to the transition of the Stanley brand to Home Depot?
Okay. It's Jim. I'll start. At this point in the cycle, our plan is to kind of go in strong, stay strong and emerge stronger. And that's exactly what we did in 'eight, 'nine, if you recall, those that followed us for a long time.
When we went into this the cycle, we actually had our balance sheet in great shape, and we continued to maintain as much operating margin and cash flow as we could squeeze out of the company even though the revenues were down a little bit. And in 'nine, at the tail end of all that chaos, we actually negotiated the Black and Decker transaction and transformed the company subsequently. Now I'm not suggesting that we have any plans to do that, such a transaction again. But what I will say is that it's really amazing when you come out of the end of the cycle and look at all the opportunities that are out there, large and small, that derive from others who have not maintained themselves in the same manner during this downward part of the cycle. So with that, debt to EBITDA right now is about 2.6x and we are deleveraging this year.
We may do 1 or 2 very small emerging market transactions, but that would be about it. And I'd say by the end of 2019, we're going to be in really great shape from a balance sheet perspective. We are already, but even better shape. And then we'll see where we go from there.
So your second question, Rich, on free cash flow conversion for 2019 guidance. I mentioned the 2 items that are resulting us being an 85% to 90% with one being the total charge and then the other being M and A or restructuring related payments associated with the Q4 charge that we took of about $100,000,000 So most of that cash outflow will happen in 2019. On the working capital front, we don't actually see a dramatic improvement in working capital turns in 2019 because we do have to continue to work through these brand transitions that we've discussed throughout the last year related to Craftsman, but now also related to what's happening with Stanley and Stanley Fatmax and the Home Depot. And we have to make sure that we have the right level of inventory to meet the needs of our customers. And we're not going to get overly aggressive in our supply chain until we work through those transitions.
So we're not counting on a dramatic improvement in working capital turns in 2019. But as I mentioned, once we work through that, we can regulate and moderate to levels that are more historical for us and begin to work our way back to 10 turns over the next few years.
Thank you. Our next question comes from Tim Wojs with Baird. Your line is open.
Yes. Hey, guys. Good morning.
Good morning, Tim.
I have a quick 2 parter. I guess, first, could you just talk about within the tools growth guidance, what is embedded in there in terms of accretion from Craftsman and the STANLEY hand tool changes? And then secondly, I just the cadence of Q1 margins being lower, is the implication that tools margins be positive through the remainder of 2019? Just want to clarify that.
Yes. So if you think about Tools and Storage organic growth, we said mid single digits. So you interpret what that is, but it can range anywhere from 4% to 6%. So it's probably leaning towards closer to the high end of that range. Within there, we see Craftsman performance net of cannibalization.
So when we call Craftsman net of cannibalization, we're including the impacts of what's happening with STANLEY and STANLEY FATMAX and porter cable coming out of Lowe's. We believe that impacts probably 2 to 3 points in 2019. And so that kind of gives you a gauge of where we think it is. So it's relatively close to what we experienced in 2018, maybe a little bit better. The second question was related to what was the second question, Dennis?
1st quarter margin. 1st quarter margin. So yes, what it does imply as we look at the second, third and fourth quarter, we would expect to start to see in the Tools business margin rate and dollar expansion year over year. So the first, as I mentioned, a significant amount of that net of $170,000,000 $125,000,000 to $135,000,000 is happening in the Q1. That's a dramatic impact to the Q1, which makes sense given the timing of the headwinds last year.
Our next question comes from Jeffrey Sprague with Vertical Research Partners. Your line is open.
Thank you. Good morning, everyone.
Hi, Jeffrey.
Hi, good morning.
Jim, I was wondering if
you could elaborate a little bit more on what the kind of other margin enhancement actions you are taking. I assume those are above and beyond the Q4 restructuring. And then also just maybe as a follow on to that last question, it would seem you would still expect actual adjusted EPS to probably be down
on a year over year basis
in the Q2. Is that correct?
You take the second part.
Yes. Yes. It's not true, Jeff, that we actually expect adjusted EPS to grow. We do have a low tax rate again in the Q2 and we had one last year. So that's not it's a bit of a headwind, but it's not a significant headwind.
And we do expect OM dollars to grow year over year.
Okay. And on the margin enhancements, I'll give you a little appetizer. I think the main course, we'll serve up at the analyst meeting. But essentially, we've as soon as we completed the work in the Q4 on the cost takeout, the near term cost takeout, We said to ourselves, our margins are under attack from these headwinds. We need to get back what we've lost already, so that $250,000,000 will help.
But what if we get more of the same? What if we go into a downturn in back half of 'nineteen or in 'twenty? And so we said we really need to basically create some protection for, call them, black swans or economic cyclical aspects. And also, our objective here is to grow our operating margins by 50 basis points a year. Obviously, that didn't happen in 2018, and we're committed to do that.
So we need a way to get there. And we thought about this and we said, 'twenty two, 'twenty two. We're 2 years in. We've done enough deals now and every one of them is a deal that we do over again if we could. We love these deals.
We've done enough so that we can actually see our way pretty much to 2022, 2022 from a revenue point of view. Now let's figure out how we can make sure that we get the margin to go with it to create operating leverage so that we really get that double benefit of lots of revenue growth and margin expansion at the same time. And so we've been working a lot on different elements of digital technology and how that can be used to create value in our company, both from a value proposition point of view in our products and our business models, but also in our functional processes and so on. And it really occurred to us that if we could accelerate many of these things that we're working on and put some serious accelerated focus on them, that we started adding up the benefits from these various initiatives like Industry 4.0, advanced analytics, procurement 2.0 and indirect cost management, the technologies that exist today to use analytics to really do those in a manage those various topics in a much more efficient manner is really compelling. And so we've been experimenting with some of that, and we feel confident now that we have something that can generate 100 of 1,000,000 of dollars of benefit over a 2 to 3 year period.
And we'll figure out what the exact amount is that and we'll share that with you in May. But it's a very large number and it's a very focused initiative. We're going to run it like an acquisition integration with governance. And like I said earlier, we're going to focus on executing the growth initiatives that we already have, and we're going to focus on margin expansion. And I think the combination of those two things is going to be incredibly powerful.
Thank you. Our next question comes from Julian Mitchell with Barclays. Your line is open.
Hi, good morning. Good morning. Good morning.
Just a quick update on what the sort of delta is in your earnings guidance versus previously the commentary around high single digit growth. Is it simply about a point or so less volume growth assumption? Or has anything changed in terms of your confidence around pricing initiatives, particularly in tools?
Yes. I would say that there's certainly a point difference in growth, as you mentioned, versus just looking at the markets as they played out in the Q4 and the view of U. S. Housing and the automotive space for production, it just feels like there's still growth there, but it's slowing. So that's certainly one factor.
We do have a little bit bigger tax headwind as well because we did come in lower for 20 18. So that's a little bit of a headwind in addition. And then the third thing is, we need to continue to monitor the impact of all the price in the markets. And like we said in October, we're putting a fair amount of price actions into the market. We're going to manage this, both looking at what's the right thing to do for price and what's the right action to ensure we have the right level of volume, and we're going to manage those in concert with each other to achieve the right outcomes.
So as we continue to do that, there'll be a little bit of pressure probably in the margin rate versus previous expectations, and we saw that play out in the 4th quarter. But those are really the 3 main factors.
Thank you. Our next question comes from Michael Rehaut with JPMorgan. Your line is open.
Thanks. Good morning. Good morning. Just a little bit more detail, if possible, around some of the moving pieces of 2019 guidance and obviously appreciate all the help so far. First on the margin I'm sorry, quarterly cadence, with the biggest hit of the commodity inflation being in the Q1.
Are we to understand that the reason you have the confidence that you'll switch to operating margin positive in the remaining quarters is because of the cost actions that have already been put in place? Or is there some amount of price realization as well that you're still expecting? And secondly, also on the deleveraging, how do you think of share buyback for 2019? When you talk about the benefit that you expect from lower shares, is that just the flow through from what you've done in 2018 or is there anything incremental in 2019?
Yes. So on the cadence of the quarters, clearly, the biggest impact in the second quarter is going to be the headwinds going down dramatically year over year as we begin to annualize those headwinds in the Q2. If you remember in 2018, we certainly vividly remember the timing of all this. But as we went into March April, we began to see commodity prices increase. We got into May and we saw FX shift dramatically.
And then in June, we saw tariffs come onto the scene. So in the Q2, we saw a significant ramp up of the headwinds and that continued into the Q3. So as we get to the end of the second quarter and into July, we will have comped a lot of those headwinds. And so you look at that aspect and then you look at the impact of the cost reductions, which the impact is relatively even across the 4 quarters. And so it's about $60,000,000 per year for a quarter, I'm sorry.
And therefore, that impact combined with a lower level of headwinds year over year because of that comp issue is really why we believe we can grow our operating margin. And also
the fact that the pricing actions are kind of accumulating over time and getting bigger every quarter sequentially. And so that has a benefit, too, especially as we get into Q2 of 2019.
Thank you. Our next question comes from Nigel Coe with Wolfe Research. Your line is open.
Thanks. Good morning, guys.
Good morning, Nigel.
Just wanted to just unpackage your 4% to 6%, so let's call it 5% tool and storage growth in 2019. Roughly, how that shake out between North America, Europe, Rest of World? And what would your estimate be for market growth in North America in 2019? Thanks.
I think the actual range Don provided was probably 4% to 6%. So it was probably going to be a little bit on the more towards the high side of that. So I think that's what we're looking at for the over the course of 2019. And I think you'll see we're absolutely committed to growth in all markets. So you look at growth we'll have growth in North America, we'll have growth in Europe, we'll have growth in the global emerging markets, consistent with what we had this year.
Of those 3, probably the leading growth contender will be North America as it was in 2018. But again, growth in both of those other places as well. And we think with that estimate, we'll grow above the market, therefore representing market share gain again in 2019 consistent with what we had in 2018. Yes. And I think
we all know that the European economy slowed quite a bit. Germany went negative. The U. K. Is in chaos and confusion with Brexit.
Italy is a disaster. And despite all that, our European outlook for tools is going to be decent. It will be probably 2% to 4% kind of growth. So it's still continuing to forge ahead in Europe. And then emerging markets, we have some specific markets that are challenged right now as almost as we almost always do.
I think in this case, Turkey is tough. Argentina is really difficult. And we've had major currency devaluations in those markets, but also just the economies themselves are really difficult. So we might see a little bit slower growth in emerging markets this year than we did last year, But still, we're going to be significantly positive, and we'll be running at least 3x higher than the overall market growth.
Thank you. Our next question comes from Susan Maklari with Credit Suisse. Your line is open. Thank you. Good morning.
Good morning. Good morning.
I just wanted to get a little bit more color on what you're thinking in terms of some of the commodity inputs. We've seen some of those pull back in the later parts of 2018. What's embedded in the forecast from that perspective for 2019?
Yes. So I talked about net headwinds of $170,000,000 If you break that down a little bit, the gross headwind is about $320,000,000 and you have an offsetting price impact of $150,000,000 Of that $320,000,000 approximately half of that is commodity inflation. So it's a significant number. We have seen positive trends around certain commodities for sure, but we do have to remember that a lot of the commodities that we get are really engineering grade commodities. And we haven't seen as much of a movement in those commodities versus some other more straightforward commodities and steel in particular.
So we've seen a little bit of benefit since December. And as we continue to look at this, it may continue to trend in the right direction and it could result in an opportunity for us as the year goes on. But at this stage, we actually have not seen a dramatic movement in our commodities that we buy because we tend to buy at the higher end of the grades. And as a result, that hasn't moved as much as some of the other commodities. But the trends are positive, which we feel good about right now.
Thank you. Our next question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open.
Hi, good morning guys.
Good morning. Good morning.
Just a question on the bridge. I know there's kind of a lot of moving parts here and maybe with the outstanding numbers from 3Q, could you use a little bit of an update? I guess the real delta here would seem is that on normal organic growth, if the right number is kind of a 20% incremental margin, you guys seem to be closer to 10%. And it looks like there's been, at least on the surface, some slippage in that $250,000,000 of cost reduction. And a lot of that soaks up the relief that you've gotten on tariffs or baking in List 3 at 10%.
Is that kind of the rough math of it? Because I guess both of those numbers, both the headwind and the tailwind seemed a little bit lower than what I would have thought on the surface
just to start out.
Yes. I think on the leverage front, you probably have to really look at it on a volume basis versus total organic. So if you look at volume, you can use an assumption like 20%, 25%. And it kind of gets you through the numbers that we're talking about. And then there's a separate price benefit that's netted in the headwinds that we've laid out for guidance and for actual results because we've really dissected that because pricing can kind of mute the leverage numbers or change the leverage numbers quite a bit.
And as a result, you're better off looking at them in those separate categories.
Thank you. Our next question comes from Nicole DeBlase with Deutsche Bank. Your line is open.
Yes, thanks. Good morning, guys.
Good morning. Good morning.
So I guess, just a couple. One is kind of a box ticking item. On the margin enhancement initiatives, could that possibly give upside to second half with respect to payback or is that more of a 2020 payback? And then if you could just talk about the impact of what's going on at Sears on your Craftsman rollout expectations?
Okay. Well, it's Jim. I'll have Jeff handle the second question. And on the margin enhancement initiative, the benefit that we're going to see from that is going to be recognized over a 2 to 3 year period. We're going to do everything we can.
We're going to work really hard to try to bring some benefit into 2019 as an insurance policy. And it's not clear that it's going to be a huge number, but I think it's there's probably something there, and we'll go after it.
Regarding the question
relative to Sears, I think it's really based on everything that just has just occurred in the last 2 weeks, you'd say it's very much business as usual. If you look at the trend over the last at least 36 months, that company would typically announce a closure plan following holiday sales and that would be updated over the course of the year to include more and more stores. This year, it's not much different. So the fact that those stores will remain in operation at a lower count than the prior year, etcetera, is very consistent with what's happened in prior years. So we expect that our Craftsman rollout will continue to take share as that presence atrophies in the marketplace.
So not that different than any other prior year.
Thank you. Our next question comes from Michael Wood with Nomura Instinet. Your line is open.
Hi, good morning. Good morning. Good morning. If we take into account Craftsman accretion to growth and where we think you're running at for price. It seems like there's not much organic growth outside of Craftsman in Tools and Storage volumes.
You seem to be tracking well above that currently. So I'm curious what is explaining the deceleration in that lack in the business ex Craftsman and does that concern you?
Well, I think we try to make it very clear that the economic backdrop is one of slowing growth. It has nothing to do with our market share. Our market share continues to outperform the market. And I think the reality is setting in, hopefully, not just us, but in most industrial companies are facing slower economic growth in the United States, in China, in pretty much most parts of Europe and the emerging markets. And I mean, it's essentially the whole world except for a few bright spots like India, for example.
But the reality is the economic growth that we see for 2019 is pretty is probably a good point lower than it has been in the recent couple of years. And then on top of that, it's no secret that the construction markets in the United States have slowed as well. So baked into our guidance is a reality check on the slowing markets. It's not catastrophic. It's nothing that we can't handle, but our long term growth objectives are 4% to 6%.
We're putting 4% out there at a time when economic growth is slowing.
It makes perfect sense to me. Yes. And at the end of the day, we think that's the right thing to do for all the reasons that Jim articulated. And by any chance we're wrong, the markets are a little better, then we'll all be happy. But this is the right approach given the signals that we've seen in housing, the signals that we've seen in the automotive production space.
They're all showing growth for the most part except for auto production. It looks like it's going to be down next year. But they're slowing, and we have to be realistic of what the trends are right now.
Maybe one last addition would be, if you look at 2018, our growth was 6% to 7% in tools in a market that grew slower than that. That market, we think, is going to be compressed by about a point this coming year, and our growth looks pretty similar to that, 5% to 6%. So our growth rates will still be accretive to market growth, although the market is growing just
a little slower, kind of it.
Thank you. Our next question comes from Joe Ritchie with Goldman Sachs. Your line is open.
Thank you. Good morning, everyone.
Good morning.
Good
morning. Just maybe following up on that a little bit, Jim, and the slowing that you saw that you're expecting to see in the U. S. I mean, Tools and Storage still put up 10% organic in North America. And so can you talk about whether you started to see slowing in 4Q as the quarter progressed?
And then I guess my second question for Don, in talking through that $250,000,000 cost benefit number, did you recognize any of that in 2018? And what's the cadence of that number as we progress through 2019?
Okay. I'll take the first part. The slowing in the tools market, I think, started in the Q3, concurrent with the interest rates increases that were being implemented by the Fed. And we saw the same thing in automotive as well. The interest rate sensitive type markets, housing, automotive, impacted by rising interest rates.
And it continued in the Q4. We were thinking, well, maybe that's an anomaly in the Q3. Sometimes you get those for a couple of months or a couple of months. And it really did continue into the 4th quarter pretty steady in the sense that it didn't get worse. It just kind of felt a little bit more anemic in the Q3 and Q4 than it did in the beginning of first half of the year.
And on the cost take outside, we did get a modest benefit in the Q4 just because some of them were implemented in the November timeframe, but it wasn't significant. And the cadence is really, as I mentioned earlier, pretty equal across the year. So, it's roughly $60,000,000 to $65,000,000 per quarter.
Maybe one other addition to what Jim just highlighted is that we said for 2018 that North America outpaced Europe and the Global Emerging Markets. That is also true for 2019. And in that retail North American retail and North American commercial, therefore, will be accretive to the overall rates we just described. So it's very consistent with 2018.
Thank you. Our next question comes from Justin Speer with Zelman and Associates. Your line is open.
Thanks guys. Appreciate it. I had a couple of questions. First, being on channel inventories across your core end markets and your customers. Was there any pull ahead risk, particularly in slowing traffic in some of these customers that we're seeing?
Any potential pull forward risk into the quarter from tariff related price increases in your core pools businesses?
Yes, I would say we don't really know if anybody pulled anything ahead for tariff reasons. So our customers honestly tell us that they're doing those types of things. I would say that the inventory levels did modestly increase as we exited the year versus the previous year end, but frankly, they're not significant. It's not something that we view as a major concern as we go into the Q1 and the year.
Maybe additionally, the POS as we exited the Holiday Seas, it continued to be quite strong. So what Don described was we did have a little bit of inventory build in the course of the quarter. Most of that was gone by the end of the year, very, very consistent with where we wanted to be at the end of the year and where we ended last year. Secondly, in terms of pull forwards, the retailers and so forth have gotten so sophisticated, system driven that there's very little pull ahead these days when you announced pricing. So that was not a big impact to the quarter.
Thank you. Our next question comes from Robert Barry with Buckingham. Your line is open.
Hey, guys. Good morning. Thanks for taking Ian here. Just a couple of things. One is a follow-up on an earlier question on commodities.
Did that headwind actually go up versus that 3Q? Because I thought it was $100,000,000 and now you said I think you said 50% of 3.20. Dollars And then on the tariffs, is that now in the walk $100,000,000 headwind? And just curious to the extent to which the change in the value of the renminbi might actually be able to help you offset that. Thanks.
Yes, the commodity number has gone up primarily because of just some accounting dynamics on how certain things get accounted for. There's a number that's kind of hung up in inventory as we go into this year that will impact the numbers. So it's up by $40,000,000 to $50,000,000 versus maybe what we were thinking in the middle of last year, primarily because of that dynamic. And the other thing is on the tariff side, yes, that number is correct, incremental $100,000,000 year over year.
Thank you. This concludes the question and answer session. I would now like to turn the call back over to Dennis Lang for closing remarks.
Shannon, thanks. We'd like to thank everyone again for calling in this morning and for your participation on the call. Obviously, please contact me if you have any further questions. Thank you.
Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.