X-Rite, Incorporated Q4 2007 Earnings Call Transcript

Executives

Thomas J. Vacchiano, Jr. – President, Chief Executive Officer, Director

Mary Chowning – Chief Financial Officer, Executive Vice President

Analysts

Alexander P. Paris, CFA - Barrington Research Associates, Inc.

James Ricchiuti - Needham & Company, LLC

Charles Murphy - Sidoti & Company, LLC

X-Rite, Incorporated (XRIT) Q4 2007 Earnings Call March 4, 2008 11:00 AM ET

Operator

Good morning ladies and gentleman. Welcome to the X-Rite, Incorporated Fourth Quarter and year-end 2007 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Vacchiano, Chief Executive officer, and Ms. Mary Chowning, Chief Financial Officer of X-Rite, Incorporated.

Thank you Miss Chowning, you may begin.

Mary Chowning

Thank you Anthony. Good morning to all of you and thanks for joining us. Before we begin I’ll read our Safe-Harbor statement and get the housekeeping out of the way. I have to caution you that the information we have released and will be discussing may contain certain forward-looking statements within the meaning of the Private Security Litigation Reform Act. Actual results may differ materially from those projected in the forward-looking statements due to a variety of factors, some of which may beyond our control. Factors that could cause such differences include our ability to include operations and realize cost savings, competitive and general economic conditions, our ability to access new markets and other risks described in the company’s filings with the FTC. The company undertakes no obligations to publicly update or revise any forward-looking statements whether as a result of new information, future events or for any other reason.

In addition to the results reported in accordance with generally accepted accounting principles (GAAP) X-Rite may provide certain information which is considered non-GAAP financial measures. Management believes these non-GAAP financial measures are useful to both management and its investors in their announced underlying business and operating performance. Management also uses this information for operational planning and decision making purposes. Non-GAAP financial measures should not be considered a substitute for any GAAP measure.

Additionally, non-GAAP financial measures as presented by X-Rite may not be comparable to similarly titled measures reported by other companies. A reconciliation of these items can be found on our website at www.XRite.com in the Investor Relations section.

With the housekeeping out of the way, we can move onto the primary topic for our call today. A discussion of our Fourth Quarter and Fiscal 2007 results and an update on the progress we’ve made integrating the Amazys and Pantone acquisitions into the new X-Rite.

Lynn Lyall, who joined X-Rite yesterday as our new CFO, is also on the call today and Tom will briefly introduce him towards the end of the call.

As is our usual practice, we will focus on several topics including a review of X-Rite’s Fourth Quarter and Fiscal 2007 consolidated results, an update on our progress with the Amazys integration and an update on our acquisition of Pantone. Tom will cover an overview of our company performance for the quarter and total year. Additionally he will review X-Rite’s revenue by major market category and geography for Q4 and the full year. I’ll cover a review of PNL and balance sheets including operating income, EBITD, net income from continuing operations, EPS and cash EPS, as well as some key balance sheet items.

I’ll also review key elements of our Amazys integration.

Together Tom and I will provide you with an update on the Pantone acquisition, review our synergy records for evaluating the progress of the combined company, as well as our general expectations for revenue growth in 2008. Then we’ll take your questions.

Before we begin our detailed discussions, however, I need to cover a few line items. As a reminder, we sold our non-core Labsphere subsidiary for approximately $14.3 million in early February of last year. We’ve accounted for Labsphere as a discontinued operation in accordance with U.S. Staff.

The Fourth Quarter of 2007 represents the second quarter of comparative results since we acquired Amazys on July 5, 2006. We will continue to provide you with performer information for Q1 and Q2 of 2006 to help you with your comparisons on our year-to-date results. As you recall, as a Swiss public company Amazys reported its results using IFRS on a half-year basis. While U.S. Staff information on a quarterly basis is not available, I think it is helpful for you to have an approximation of the U.S. GAAP revenues and total operating expenses for Amazys for Q1 and Q2 of 2006. You can use that for comparative purposes.

For Q1 and Q2, revenue on a U.S. GAAP basis for Amazys on a stand alone basis was $56 million and total operating expenses were $25 million. I’d like to caution you…these are not definitive U.S. GAAP numbers and should be used only as a directional estimate of the results for Amazys.

Using these U.S. GAAP estimates for Amazys and excluding Labsphere the performer revenues for the combined companies were $112 million for Q1 and Q2 of 2006.

With the Pantone acquisition, we will now report our business as we meet the FTC requirements for segment reporting. Pantone will be operated as a stand alone business unit and that is what is driving this segment reporting. Specifically, the core X-Rite business will be reported as color management and the Pantone business will be reported as color standards.

Now to Tom for his portion of the review.

Tom Vacchiano

Thanks Mary. Good morning everyone. For those of you who have been following X-Rite over the past two years, you know it has been an exciting ride. In July 2006 we acquired Amazys, doubling our size, extending our global reach and committing to delivering a combination of significant cost synergy while materially raising the level of new product innovation to support future growth.

2007 was our first full calendar year of combined operations and I’m pleased to report that while the year did not go exactly as we’d planned it did go well. Before highlighting significant areas of focus and related performance for Q4 and for the total year, I should comment about the acquisition of Pantone in October 2007.

While not part of our original 2007 plan, this acquisition represents what we believe to be one time opportunity for a truly unique aspect with very high strategic fit for X-Rite. We now are clearly the leader in color management and color management solutions, a position we expect to leverage well into the future. With just a few months under our belt, our enthusiasm remains high for our Pantone business and we are working very hard to plan and achieve the best opportunities for market, product and cost synergies.

I would now like to turn to important 2007 areas of focus and how we performed.

For the fourth quarter we achieved 9.6% revenue growth over prior year excluding the impact of the Pantone acquisition. The percentage increase is favorably influenced, however, by a soft Q4 close in 2006 when we had some operational issues which pushed about $2 million of shipments into Q1 2007. For the year, we were up 7.6% excluding the Pantone impact and without currency about (inaudible – 3:06) over year.

Our year end order backlog does remain healthy, but Q1 2008 deliverable backlog is down about $1 million compared to the same quarter last year. This unfavorable comparison is primarily the result of the delayed 2006 shipments I referred to in my point earlier.

The worldwide sales and marketing team made very good progress in the second half of 2007 driving and winning important design wins in major accounts that will yield multimillion dollar projects over 2008, 2009 and 2010.

For example, Wal-Mart…we won their digital retail supply chain business. Canon…we won an important new project embedding our technology in their printing copying systems. Sencore…we won an industry leading opportunity to play in the area of digital entertainment services area, so it is an exciting win.

Our engineering and product development teams were very, very hard at work focusing on developing some really exciting new products and services which will be launched in 2008 beginning in spring and potentially rolling out in summer and fall.

Our adjusted gross margin excluding acquisition related items and the impact of Pantone bounced back to more familiar territory in Q4 at about 60.7%. This was helped by our Q4 volume mixed and some of the actions we have underway to improve our operations performance. This yield was a total 2007 adjusted gross margin percent of just under 50% which is flat when compared to performance in 2006.

We realized another 1.6 million of cost synergy in Q4, bringing our cumulative six quarter total to $21.1 million. If we adjust for the currency effect the cumulative total achieved is actually $24.7 million.

Operating expenses, while negatively affected in the quarter by foreign exchange rates, some timing and some one time items, have met our 2007 total year expectations.

2007 non-GAAP EBITD grew by 37% over 2006 excluding the impact of the Pantone acquisition.

Our asset management performance was mixed. We ended the year with higher than planned inventory, but performed very well managing our receivables achieving a year-end day sales outstanding of 57 days.

The finance and IT teams, supported by a broad range of cross-functional employees, completed the necessary work with the Amazys acquisition to achieve our Sarbanes Oxley compliance by year end.

And our new Pantone business group shows strong, double-digit revenue growth and very healthy profit and (audio break) in their first two months as a part of the X-Rite (inaudible).

As you might expect, overall we feel pretty good about the progress we’ve made but we do understand that we have a lot of work left to do. We are completing the final elements of the Amazys integration and beginning the integration and alignment for Pantone. We have a sound strategy in place for the next two years and are enthusiastic about the potential market opportunities both for our core business and now with the addition of Pantone.

To realize these opportunities and accomplish our goals our leaders and employees will need to continue to execute at a very high level. I personally am quite confident that our people are up to the challenge.

Now let me turn to our Q4 and 2007 revenue performance by major market, category and geography.

As we reported, in total we achieved 9.6% growth excluding the effects of Pantone in the fourth quarter and 7.6% growth overall.

The category information below excludes the Pantone acquisition impact to help you better understand X-Rite’s core business. Our imaging and media category led our organization with the highest growth rate. INM grew approximately 10% for the year 2007 over 2006. Key drivers for this growth were a strong OEM sales year as well as a very healthy printing and pressroom market for color control systems.

Our retail and medical category experienced just under 6% year-over-year growth in 2007. Retail Europe continued the high double-digit revenue growth we’ve experienced over the last three years and medical/dental also contributed favorably to the results as we shipped our new dental product, Shade-X, in the second half of 2007.

Retail paint matching solutions, which have been our bread and butter systems in North America, did experience slowing sales as large accounts for franchise chains are adding fewer new stores or are awaiting our next generation of solutions to be launched later in 2008.

Our industrial category reported revenue growth of approximately 4% in 2007 over 2006. Although not impressive in its own merits we are pleased that it is moving in a positive direction. This was particularly true and driven by Asia and EEMEA (that is Europe, Middle East and Africa regions). We believe that bringing new, innovative solutions to this category will yield materially better growth rates as we look out over the next two to six quarters.

The new Pantone business also started off in a positive way as we enjoyed strong double-digit growth in this business in the last two months of the calendar year as they became a part of our X-Rite enterprise.

Looking at our 2000 revenue growth performance by geography, we saw our Americas revenue marginally decline by about 1% versus 2006. This has been primarily driven first by the ships off shore of important manufacturing segment investments as a part of the globalization of supply chain. Second by the lack of new product innovation required in North American markets and third from the improvements we need to make in our sales coverage model. This includes dealing with things like selling our complete range of products as well as improving our effectiveness in major account selling.

Asia revenue group was up in 2007 by just under 7% over 2006. Its growth rate is less than we expected and was negatively affected by a slow down in our Japan and channel business. We are allocating significant time right now to assess the issues here and how to get back on track.

Our EEMEA region was the start geographic performer in 2007 as we enjoyed 17% year-over-year growth. Even adjusting for the strong Euro, Swiss and British pound currency effect, our European region was able to achieve operational double-digit revenue growth. This was driven really across the board in OEM sales, in large sales like the Heidelberg, as well as our channel business.

2007 then continues to reflect the true global nature of the new X-Rite as we continue to experience faster growth outside America’s region in the last four, five and six quarters. The result is that more than 60% of our business is generated in EEMEA and Asia combined. Interestingly, Pantone has also developed a significant international revenue flow in which approximately 50% of their business sits outside the United States.

While an economic slow down in North America would certainly have an impact on our business, we believe our strategic decisions over the last two years and the resulting global diversity of our business really helps position us to withstand slowdowns in the America’s region.

Now with that revenue summary completed, I’ll pass it back to Mary.

Mary Chowning

Thanks Tom. Let’s start off with a review of the PNL for Q4 and fiscal 2007.

Understanding our financial results has further complicated this quarter with the addition of Pantone for approximately two months. In order to provide you with information to assess the core X-Rite and Pantone businesses we’ll try to provide separate information wherever practical.

Starting off at the revenue line, Tom gave you a detailed assessment. Our revenues in total, $74.6 million, included approximately $66.1 million for X-Rite and $8.5 million for Pantone. The X-Rite stand-alone revenues, as Tom mentioned, are up 9.6% and foreign currency represented 3.8% of that.

Stand-alones for the fiscal year, we had 7.6% growth with approximate uplift of 2.7% for foreign currency. Pantone’s stand-alone revenues for the two month period since the acquisition increased in the double-digit range due to strong textile sales and the launch of key new products in the graphic arts market.

Our gross margins, as you recall in Q3, we experienced a 5-point decline. I’m pleased to report that our gross margins, adjusted for acquisition related items in Q4, have returned to more normalized levels at 60.7% for the stand-alone X-Rite business. This recovery is partly the result of the execution of the targeted corrective actions that we outlined in our Q3 call. Also volume and product mix favorably influenced our margins.

While we continue to have work to do in each of the areas we identified in Q3, we believe our progress is on track and (inaudible) in the next quarter or two.

On a full-year performer basis, our adjusted gross margins remain flat at 59.9% from year to year for the X-Rite stand-alone. The impact of the Q3 items which we outlined lowered the full-year growth margin by approximately 1.2 percentage points. So we would have had 61.1% gross margins had we not had our blip in the third quarter.

The Pantone business typically has gross margins in the 62-65% range so we’ll see a small favorable impact as Pantone represents approximately 15% of the overall X-Rite portfolio. Additionally, we expect to see improvement over time in the function of our integration and alignment efforts.

Moving onto operating expenses. We continue to benefit from our synergy focus and cost containment efforts. In Q4, however, we experienced several unusual items that negatively impacted our expenses. These items included unemployment related claims of approximately $700,000. We’ve appealed (inaudible) selected to fully reserve the claims to be conservative. We had cash, non-cash market declines of about $500,00 related to our Founders Insurance portfolio. These are market losses in the fourth quarter and again they are non-cash.

Our former headquarters is contributing to some operating costs that were unplanned including approximately $500,00 in Q4. This included a special tax assessment that will be recovered upon the closing of the sale of the property.

Other items included professional consulting fees of about $400,000-$500,000 covering tax patterns, some real estate and a foreign pension review, as well as some other items.

On the synergies front, as Tom mentioned, we achieved $1.6 million of incremental synergies in the fourth quarter, bringing our cumulative total of achieved synergies to $21.1 million without the currency effect of $3.7 million. The currencies have resulted primarily from headcount reduction, facility consolidation, the elimination of duplicate expenses, the consolidation of our engineering centers and other restructuring efforts.

Overall, we are pleased with our cost synergies to cost structure, but will continue to look for opportunities to further improve.

Foreign currency unfavorably impacted our operating expenses by approximately $1.3 million in Q4 and $3 million on a year-to-date basis.

Total operating expenses for stand alone X-Rite excluding Amazys and Pantone deal related amortization and integration and restructuring costs were as follows.

In Q4, $29.9 million for 45.2% of sales in 2007, versus $25 million or 41.5% of sales in 2006.

On a full-year basis, our operating expenses were $108.4 million or 45.1% of sales in 2007, versus $112.8 million or 50.5% of sales in 2006. So you are starting to see that leveraging impact of the cost synergies.

Income taxes…our full-year income tax expense of approximately $9.8 million reflects valuation allowances for NOL’s and certain deferred tax assets under FASB Statement 109 as well as the non-deductibility of certain equity compensation items and foreign tax credits, charges related to FIN 48 and other acquisition related items.

As the company generates U.S. profits, we will see the reversal of the valuation allowances which will favorably impact our effective tax rate in the future. Future periods as we have income there will be little or no tax associated with it as those valuation items reverse themselves.

Our tax rate continues to fluctuate as we execute our new tax structure and account (inaudible) issues with FASB Statement 109 and our amortization related to the intangibles. This will likely continue for the foreseeable future. Once our new structure is in place we expect our cash-tax income rate to settle into the 28-30% range.

Moving on to acquisition and restructuring related expenses, they total $8.3 million in Q4 and $21.2 million for the full year. We outlined these in our press release but I’ll cover them quickly.

They included product line integration related write off’s of about $100,000 in the quarter and $200,000 for the full year. An amortization charge for the Pantone inventory write-up where we write the inventory up to fair market value. You’ll also see a large increase reflected in our balance sheets. The charges related to that were $2.6 million in both the quarter and for the full year since we acquired Pantone in October.

We have the amortization of the intangibles related to the Amazys acquisition. $2.7 million in the quarter. $10.7 million for the full year.

We also have amortization of Pantone related intangibles now. That totaled $1.6 million in both the quarter and full year given that we acquired them in October.

Finally, we have integration and restructuring costs which totaled $1.3 million and $6.1 million for the quarter and year respectively.

The bulk of our integration and restructuring efforts related to Amazys have been implemented. The open integration activities are primarily in the manufacturing and operations area and are expected to be completed during the first three quarters of 2008.

The Pantone integration work remains in the early stages as the deal closed at the end of October of last year.

In addition we have got two other items of significance that were below the operating income line that I think weren’t commented on. These include a currency loss of $600,000 which represents non-cash revaluation of our inner company accounts as the result of the weakening dollar versus the Euro, Pound and Swiss Franc primarily.

Additionally, we have a loss on our extinguishment of our former debt package of $5.5 million. This represents a non-cash charge related to the refinancing that we put in place to acquire Pantone. The write-off included any unamortized costs related to our prior deal package.

Moving on to operating income and EBITD for the fourth quarter of 2007. As you know given the debt that we’ve taken on to finance our acquisitions we believe that EBITD (Earnings before interest, taxes, depreciation and amortization and operating income) are key financial matrix to measure the health and growth of our business.

At the operating income line we reported GAAP operating income of $4.5 million for Q4 which includes $2 million for X-Rite stand alone and $2.5 million for Pantone.

Consolidated adjusted operating income excluding acquisition and restructuring expenses was $12.8 million or 17.1% for the quarter.

On a performer basis, operating income excluding last year for Q4 of 2006 was approximately $11 million or 18.2% of sales.

Year-over-year adjusted operating income grew approximately 15% over the Q4 levels over the prior year.

For the full year 2007 GAAP reported operating income was $16.6 million, which included $14.1 million for X-Rite stand alone and $2.5 million for Pantone.

Consolidated adjusted operating income excluding acquisition and restructuring expenses was $37.8 million or 15.2% of sales.

On a performa adjusted basis, operating income excluding Labsphere for the full year of 2007 was approximately $20.9 million or 9.4%.

Year-over-year adjusted operating income grew approximately 80% over 2006 levels. The significant increase in adjusted operating income versus the prior year performer results were driven primarily by the leverage of our cost synergies, the addition of Pantone results, as well as general revenue growth.

EBITD – moving on. Consolidated EBITD excluding acquisition and restructuring expense was $15.6 million or 20.9% of sales for the quarter and $48.9 million or 19.6% of sales for 2007 full year. EBITD excluding acquisition and restructuring expenses for X-Rite on a stand alone was $13 million or 19.6% of sales versus $14 million or 22% of sales in the quarter.

Performer EBITD for 2006 totaled $33.7 million or 15.1%. Pantone contributed 2.6 or 30.6% of sales for both Q4 and the full year as the acquisition was completed at the end of October.

Year-over-year EBITD growth of 45% was driven by the acquisition of Pantone, realization of cost synergies and general revenue growth.

Cash flow from operations. During the full year the company generated approximately $6 million of cash flow from core X-Rite operations. Cash flow from our business is driven primarily by earnings, less cash restructuring expenses as well as changes in core working capital which includes accounts receivable and inventory.

Management of our inventory is a key priority for 2008 and should provide us with additional key free cash flow as we better manage this asset. We continue to be focused on our operating cash flow and on paying down debt in the upcoming quarters.

Lets move on to net income from continuing operations and cash earnings.

To provide you with additional information we believe will be helpful in understanding our financial results we also provide you with a cash earnings (inaudible) in addition to our reported net income and EPS numbers.

As I mentioned before, we sold Labsphere and those numbers have all been classified as discontinued operations. So we are talking about net income from continuing operations here.

We reported a consolidated net loss from continuing operations of $20.3 million or 70 cents per basic share for Q4 and a net loss from continuing operations of $20.8 million or 72 cents per basic share on a full year basis.

Our Q4 and 2007 cash earnings from continuing operations and EPS exclude the following items: Acquisition, restructuring and integration related expenses; amortization of intangibles related to the Amazys acquisition as well as the Pantone acquisition; inter-company foreign currency expenses; debt extinguishment costs related to our refinancing.

Our cash net loss from continuing operations was $5.8 million or 20 cents per basic share for Q4. Net income from continuing operations of $7.2 million or 25 cents per share for the full year. Both Q4 and the full year were impacted by deferred tax asset valuation reserves under FASB 109 of approximately $13 million, which impacted our tax rate.

Moving on to the balance sheet. Our balance sheet changed considerably as the result of our Pantone acquisition. We currently have approximately $20 million in cash, $380 million of debt related to the transaction and approximately $9 million of debt related to our former headquarters in Grandville.

Our net debt position is approximately $370 million. As such, management of our working capital is a top priority. Our two largest working capital assets are receivables and inventory and our global DSO has remained steady and improved by about 8% versus Q1 levels and is now at 57 days on a global basis. Given that 60% of our revenues are generated outside of the U.S., we are very pleased with that number.

Inventory turns decreased in Q4 and inventory levels for X-Rite on a stand alone basis increased by approximately $3.6 million since Q3. We have made a number of changes in our operations group with the aim to better control inventory levels and will continue to report on that in future calls.

Moving on now to an overview of our synergies that we have achieved to date. As we have discussed in our past calls and investor materials, we initially expected to achieve approximately $25 million of annual cost synergies by mid-2009 related to the Amazys acquisition. This was approximately three years from the closing of the deal. We are making very good progress towards this goal and have achieved $21.1 million in synergies in our first six quarters of combined operations.

Our synergies calculations that we have reported to you have been very conservative and have not included any adjustments for the weakening U.S. dollar and are based on full-year 2005 costs. Had we adjusted for the effect of foreign currency, we would have had $3.7 million of additional cumulative synergies in the 18-month period, putting us potentially at our goal of $25 million in total cumulative cost synergies a full 18 months ahead of schedule. So we have effectively reached our goal assuming that we count the currency in half the time that we originally estimated.

During fiscal 2008 we also expect to realize some additional cost synergies related to Amazys totaling $1-3 million. We did not realize any significant synergies related to the Pantone acquisition as the transaction closed at the end of October.

Total cost synergies for the Pantone acquisition are expected to be approximately $6 million and will be achieved by the end of 2009.

Moving on to our restructuring and integration reserve requirements. Our initial estimate of the total restructuring charges from last quarter related to Amazys have not changed. It is approximately $33 million. $22 million of that is cash and $11 million of that is non-cash.

As you know, under U.S. GAAP, a portion of these costs for the restructuring accrual in the opening balance sheet while the (inaudible section with no audio for 1 minute) $4.5 million. We expect to have approximately $5-6 million of cash restructuring and integration related costs related to Pantone. Specifics of these costs will be outlined in our Q1 call.

Now we’d like to discuss Pantone, our very recent acquisition, and will provide you with our outlook for revenues and synergies through the end of 2007. Tom.

Tom Vacchiano

I am pleased to report that former to the Pantone acquisition we are as excited today as we were on October 24^th when the deal closed. The combination of X-Rite and Pantone continues to be compelling from both a strategic and financial perspective. This acquisition will significantly build on X-Rite’s position as the leading global color company.

We believe Pantone will enable the company to further leverage its substantial scale, advantages to drive innovation to maximize operating efficiency and to attract the most desirable companies and industries in the world.

Pantone is a very unique asset. The company operates in complementary and adjacent key markets of the color business and we have successfully partnered with them over the past couple of years to develop some very exciting products like the huey.

Further, it brings an iconic brand, a good management team and very strong financial performance which is in line with X-Rite’s historical revenue growth rate, margins and overall profitability.

Over the past year, I hope you see that we have demonstrated that we are well-equipped to execute on our integration plan as we have met or exceeded the Amazys milestones. Therefore, we are confident in our ability to manage the integration of the Pantone deal while driving the remaining $1-3 million cost synergies from Amazys that Mary mentioned earlier.

Now Mary will provide a quick overview of the Pantone integrations and synergies.

Mary Chowning

We outlined the core Pantone business in our call announcing the transaction so I’ll be brief in going over a quick overview.

Pantone’s business, which is headquartered in Carlsbad, New Jersey, is focused in the graphic arts, textile and fashions industry and is the defacto language of color. They are the leader in color standards and communication in color inspiration.

Pantone has a very strong financial base and a proven track record of profitability. Revenues which are $45 million for the trailing 12 months of June 2007 have grown in the 7-9% range over the past three years.

Their geographic mix is fairly complementary to ours with about 50% from the America’s, 25% from Europe and 20% from Asia.

Adjusted EBITD has remained in the 27-29% range over the past three years and for fiscal 2007 was $13.5 million.

They have had steady gross margins of approximately 62-65% in that period also. They have very low CapEx maintenance requirements and overall they are a very good fit for the financial model that X-Rite runs with.

In terms of cost synergies, as Tom highlighted earlier, we believe there is significant synergies in the operating costs available to X-Rite through this transaction. On the revenue front, we believe that the levels of revenue attrition for Pantone’s business will be minimal. However, I want you to understand that we believe we have the ability to absorb a certain level of revenue attrition while still delivering an (inaudible) outcome.

The identified cost synergies of $6 million by year two are based on an in-depth, bottoms up analysis similar to the one that we prepared for Amazys. The expected synergies will largely come from office consolidation, headcount reduction, operating cost efficiencies in marketing, tradeshows and related costs, and administrative cost reductions including professional and consulting fees, simplified IT systems and other related costs.

We expect planned cash restructuring costs, as I mentioned before, of $5-6 million during the first year primarily related to severances, lease write-off’s and other integration related costs.

We believe that the integration challenge and risk associated with this transaction is significantly lower than the Amazys integration. That doesn’t mean it won’t be hard work, but it is work in areas that we have clearly demonstrated experience in.

Now on to our outlook. There are two areas where we provide you guidance. Timing of our synergies and overall revenue growth expectations. I’ll cover the synergies guidance and Tom will discuss our revenue expectations.

In 2008, we anticipate achieving $1-3 million of incremental synergies related to the Amazys acquisition and meeting or exceeding our target of $25 million well ahead of the original forecast date of mid-2009.

We also expect to achieve $1.5-2 million of synergies related to the Pantone acquisition in 2008 with the remaining synergies coming in 2009.

Tom…

Tom Vacchiano

In terms of the 2008 revenue outlook, we remain cautious about our growth given the various integration dynamics we are dealing with a now an uncertain economic climate. The good news is our business has limited exposure to the financial services and home building industries in North America. However, some of our businesses do have exposure to various consumer end markets and thus we believe it makes sense to remain cautious as we set expectations.

For calendar year 2008, we expect to see revenue growth for the full year in a range of 5-8% on a comparable year-to-year basis.

Candidly we are excited about the new product that we will be launching later this year, but will remain somewhat uncertain about the market conditions.

Further, we expect the first half of 2008 revenue will be off to a slower than expected start, which could include a fairly flat top line expectation for our first fiscal quarter in 2008.

First half expectations are dampened by a few factors including the macroeconomic environment, DRUPA not occurring until the end of 2008, and adoption cycles for our new products which are always difficult to predict.

Further, as we noted earlier, Q1 of 2007 included some delayed shipments and some other significant items that will provide for a difficult comparison.

The second half of 2008 should, however, be stronger as we see the impact of several planned new products, a hopefully strong DRUPA show and the continuation of a healthy printing and pressroom market.

Looking beyond 2008, we believe that the market opportunities can sustain double-digit growth through the internal investment and acquisitions…through both internal investment and acquisitions. Our priority is to achieve this in a timely but sustainable way while balancing an equally important goal of better profitability. This is something we have been talking about now throughout the course of 2007.

Before I wrap up my comments though, I would like to take the opportunity to recognize Mary Chowning’s significant contributions to X-Rite’s success over the last five years. As you likely know, she will be leaving the company on April 15^th. Clearly without her experience, leadership and commitment to X-Rite, we would not be where we are today. I have had the privilege to be her partner and colleague over the last two years and I know you will agree with me that we will miss her and that we all wish her very, very great success in her future.

At the same time, I would like to officially welcome Lynn Lyall to the team. Lynn began with us yesterday, March 3, brings with him a wealth of experience and talent and we have high expectations of how he will help us move forward. I believe that you will enjoy meeting and working with Lynn and to help that get off to a good start Mary, Lynn and I are planning to do some traveling over the course of the next 45 days to spend some time in the financial market and look forward to trying to touch as many as you as practical so that we can get off to a fast start.

To summarize, we continue X-Rite to be focused on five key priorities:

First, achieving our synergies for both Amazys and Pantone.

Retaining and growing our customers and our revenue base.

Investing in renovation for long-term sustainable growth, whether it is in technology or new business models.

Managing our cash effectively.

Of course, continuing to build a high performance team that is passionate about the business of color.

In closing, X-Rite’s position as the leading global color company is an important asset that will allow us to penetrate deeper within our existing customer base and move into new markets. Our passion for developing color solutions, success in integrating high value acquisitions such as Amazys, as well as the opportunity of Pantone, really provides us a wonderful and unique opportunity. We continue to believe that we have a wonderful opportunity to build a market leader and a great company while delivering exceptional stakeholder value.

Our job continues to be to execute.

Thanks for your support and now we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. If you’d like to ask a question please press *1 on your telephone keypad. A confirmation tone will indicate your line in the question queue. Press *2 if you’d like to remove your question from the queue. For participants using speaker equipment, it will be necessary to pick up your handset before pressing the * keys. One moment as we poll for questions.

First question comes from Chuck Murphy with Sidoti and Company. Please proceed with your question.

Chuck Murphy - Sidoti

Good morning guys. Just wondering, as far as the integration issues that you experienced in the third quarter it seems like you feel pretty good that you are back on track here. Could you talk about maybe what would improve, specifically maybe where you still have some work to do?

Tom Vacchiano

Sure. Of course, one of the things that helped a lot was our product mix from Q3 to Q4. You’ll remember back in Q3 we talked about the effect, for example, Heidelberg being an extraordinarily high contribution in Q3 and in Q4 we moved back to a more normal contribution. That was one of the more natural fixes.

Also we were able to make progress in our professional services business where in Q3 we really struggled and in Q4 they bounced back and again helped us. So that was a product service mix. So that helped us. And of course volume in Q4 always helps with manufacturing absorption rates and so we always get a nice hit there.

On the flip side we made a little bit of progress, for example, in freight costs and freight recovery. But we did not achieve anywhere near what our goals are for 2008. So, there’s a mix of things that helped us, which we thought would help us. There is a mix of things where we’re making some progress but there’s more to be done.

Chuck Murphy - Sidoti

Yeah. I think you had mentioned something about something maybe ERP implementation not going as quickly as planned.

Tom Vacchiano

Yes, well we had what we lovingly call the “big bang” which occurred in the third quarter and in the big bang there were a fairly high degree of what we call in (inaudible) and kind of band-aids to keep everything together and to keep our customers having a reasonable experience and those band-aids or experiences where things aren’t working as efficiently as you thought do cause incremental or extraordinary kinds of costs. We are making progress there but I’ll tell you that we won’t be through that big hoop until probably sometime towards summer. There is still work to be done.

Mary Chowning

Additionally, remember what we did is when we made that systems conversion we identified some items that we chose to write off and those were really truly one time. I will also tell you we did a physical inventory in November and we’ve had very good results from that which indicate that we’re making progress on making sure our controls are in place and we won’t have any future significant items.

Chuck Murphy - Sidoti

And could you just maybe kind of dig into a bit more detail of what was going on with the different markets and I think you mentioned imaging media is still strong. I’m just kind of wondering given especially Heidelberg’s recent results…you know how you feel like you’re maintaining the momentum here.

Tom Vacchiano

Well I think it plays back to our outlook for 2008. We are talking to a lot of major accounts and strategic OEM partners and I will tell you from first hand experience in talking to them, including Heidelberg, there is what I would call cautious optimism. But everybody is kind of pulling back and being careful. So I think everybody is sort of taking a breath and saying, “Now what are we going to expect,” and what are the upside and downside risks and people are being more conservative. In the first part of 2008 we are also seeing that the very large accounts, particularly the large OEM’s, are sort of stepping back a little bit and being a little bit more conservative and their expectations for 2008, at least for the first half of 2008, are less bullish than what they were in 2007.

Chuck Murphy - Sidoti

Okay. And one final question and I’ll turn it over to somebody else…can you just remind me kind of what the terms of your debt are again, especially curious about let’s say covenants.

Mary Chowning

Well actually we will file the agreements with our 10K so you’ll be able to read the entire thousand pages of that.

Chuck Murphy - Sidoti

I’m looking forward to that.

Mary Chowning

We have covenants around EBITD, debt coverage, interest coverage and a minimum EBITD covenant. Those are the three covenants that we maintain in terms of financial covenants. There are also some affirmative covenants that we have to maintain. Those covenants kick in 03/31 and that’s basically it. We have a limited number of covenants. They were set off of some projections that have a fair degree of cushion.

Chuck Murphy - Sidoti

So can you say what like the EBITD…

Mary Chowning

I actually don’t have it in front of me. The first one is the debt to EBITD is a maximum liability of six.

Chuck Murphy - Sidoti

Okay. But you feel very comfortable that won’t be a problem kind of thing.

Mary Chowning

Well it’s adjusted EBITD. Obviously if the company performs as we would like it to, we should be in compliance.

Chuck Murphy - Sidoti

Okay. I’ll turn it over to somebody else. Thanks

Operator

Our next question comes from Jim Ricciuti of Needham and Company. Please proceed with your question.

Jim Ricciuti - Needham

Hi. Good morning. Mary I wonder on that last question I wonder if you would be willing to provide any kind of range for adjusted EBITD or range you know given the many moving parts as we’ve got in operating expenses.

Mary Chowning

No. Jim as you know guidance is a pretty slippery slope and we’ve committed to giving a revenue guidance and synergy timing guidance. Obviously Lynn and Tom will review that periodically but not right now.

Jim Ricciuti - Needham

Okay. Tom…in the Heidelberg comments from the December quarter it looks like they had pretty good quarter intake in the quarter. If I’m not mistaken I think they said it was stronger than a couple of the other quarters previously in 2007. Are you getting the sense from them that it is more back-end loaded and a softer OEM than the first half of the year?

Tom Vacchiano

Well actually Heidelberg’s last quarter did not show very good results. In fact their order rate and backlog rate if I remember correctly was actually flat so they’ve actually slowed down late in 2007. We have their 2008 forecast of our product. I can’t share that in detail, of course, but I can tell you that they are being cautious particularly in the first half because DRUPA this year which is a major print manufacturing show doesn’t start until the last week of May, or close to the last week of May, and is usually the case a lot of customers wait to buy to see if there is going to be either something really cool and new or if there is going to be some important promotion. So I think that Heidelberg is kind of holding its breath a little bit at least early in the year and is hopeful that things will bounce back in the second part of the year.

Jim Ricciuti - Needham

Okay. In your businesses that you can tell in recent months, which markets if any have you started to see softening as the result of some of the recent slowing in the economy?

Tom Vacchiano

Well I would say that our very large OEM’s are seeing some softness and of course when they are not pulling through out products and their own products we feel that so companies like Heidelberg are an example and there are others, which I won’t name, who have come back and said their own demand is softening a little bit and quite frankly it is in a variety of places. The other thing I would say is our retail paint matching solutions, which I talked about earlier, in North America which is our bread and butter retail business and has been now for the last four or five years…in North America we need to regenerate with new innovative solutions for that space and until we do that is going to stay soft as it has been now for I think three or four quarters.

Jim Ricciuti - Needham

Okay. Just looking at the graphic arts business…we’ve got DRUPA coming up in the end of May…I think initially your thought was that Japan leading up to this show would be pretty strong. Is it the sign of softening within the OEM’s that gives you a little bit more pause on the DRUPA effects this year?

Tom Vacchiano

Well it’s actually a broader range than that. Let’s go back to your point. I would tell you that the pressroom printing market in 2007 was very healthy and it did contribute to our 2007 success. However, the outlook for that space in Q1 and Q2 has materially softened really within the last 75 days in terms of some reforecasts from some of our partners and so on. So I’m not so sure that the health of the printing pressroom market is going to be as strong the first part of the year. Part of that may be a general softening or part of that may be just people waiting for DRUPA to see if there is something cool and new or if there is some promotion coming on. I’m not sure. I do know that our major partners are pulling back a little bit in that space and that’s having an effect on us.

Jim Ricciuti - Needham

One last question. You commented on you’re seeing this even outside Europe?

Tom Vacchiano

Yeah. It’s worldwide.

Operator

Our next question comes from Alexander Paris of Barrington Research Associates. Please proceed with your question.