Forward-Looking Statements and Non-GAAP Measures This presentation and oral statements made in connection with this presentation contain certain statements that are not historical facts, including information regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings and net sales; financial performance and condition; liquidity; products and services, including for new adoptions; outlook for full year 2018; prospects; growth; markets and market share; strategies, including with respect to investing in our core solutions and extensions businesses and operational excellence; efficiency and cost savings initiatives; the industry in which we operate; and potential business decisions. Those statements constitute “ forward-looking statement s” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results express in or implied by our forward-looking statements, including, but not limited to, those identified under the caption “ Forward-Looking Statement s” in our news release issued on August 2, 2018 and in the “S pecial Note Regarding Forward-Looking Statement s” an d “R isk Fact ors” in our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no obligation, and do not expect, to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, this presentation and oral statements made in connection with this presentation reference non-GAAP financial measures, such as adjusted EBITDA and free cash flow, and operating measures, such as billings. The use of these non-GAAP measures are limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP measure. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures (to the extent available without unreasonable efforts) and a calculation of operating measures are provided in the appendix to this presentation and in our news release issued on August 2, 2018, which are posted on hmhco.com under the Investor Relations section. 2
Market Opportunity & Strategy 3
The HMH Business Intervention Professional Trade Extensions Learning 13% 45% Core Solutions 42% Supplemental Sources: 2017 HMH Billings Mix
13,000 Districts 3,000,000 Teachers 88,000 Schools 50,000,000 Students 650 Sales Representatives 42,000 Service Engagements 5
Classrooms consist of students with diverse academic ability, requiring different instructional needs Core Solutions Professional Services Supplemental Intervention English language development 6
Riverside Divestiture: Overview • HMH to sell Riverside Clinical and Standardized Testing to Alpine Investors for $140 million in cash • Riverside Portfolio was non-core to our 2020 strategy • Divestiture sharpens focus and creates opportunity to accelerate investment in faster growing, high margin Extensions • Riverside generated Billings of approximately $80 million in 2017 • Approximately $135 million of net proceeds expected to be re-deployed in faster growing, high margin Extensions opportunities • Year-to-date results and full year guidance will be adjusted to reflect the divestiture by the Q3 2018 earnings call 7
U.S. K – 12 Market: Instructional Materials Spend $11B Magazines Video Trade Books Manipulative Print Supplements Digital Supplements State Level Tests Courseware Assessment Services $1.4B $1.2B Basal Curriculum $.2B Instructional Materials Spend 2017 HMH Education Billings 2017 HMH International & Trade Total 2017 HMH Billings Billings Sources: 2017 HMH Billings 8
HMH Extensions: Market Opportunity Supplemental $2.0b Professional Learning $2.3b 4% Growth 3% Growth $ 6B 4% Growth Intervention $1.5b Sources: Simba, Company Annual Reports, SEC, Oliver Wyman November 2014 Intervention Web Survey, Oliver Wyman analysis, RAND Corporation School Leadership Interventions Under ESSA report; as of 2017. 9
From K12 Publisher to Learning Company
HMH Strategy: Three Pillars Enhance & Extend the Core Develop Integrated Solutions Achieve Operational Excellence • • • Provide highly differentiated products Integrate offerings to unlock true value Standardize IT infrastructure, that leverage data analytics and to customers designed to improve streamline back office and standardize learning science to personalize learning student outcomes product catalog to eliminate unnecessary variation • • Expand into faster growing, higher Increase revenue through cross selling • margin extensions in Supplemental, and upselling go-to-market initiatives Move to Lean Agile Continuous Intervention Solutions and Professional Delivery model for Software Services development • Platform + advanced analytics + • Improve processes and technology to continuous delivery = efficacy engine elevate customer experience 11
Transforming from HMH Differentiators Publisher to Learning Company Submitted: English on April 6, 2018 • Spanish on May 18, 2018
Financial Overview 13
Long-Term Billings 1 Growth Framework Trade Business Line Billings Growth Framework Publishing 13% Annual growth in line with market Core Solutions Core Solutions Long-term average growth in low single digits 42% Extensions 45% Extensions Low-to-mid single digits Trade Low single digits Billings Mix in 2017 1 An operating measure which we derive from net sales taking into account the change in deferred revenue. See appendix for a calculation of this measure. 14
2017 Cost Structure Our Adjusted Fixed Cost Structure Benefited From Restructuring Actions Taken in 2017- Targeting $70-80m in Run-Rate Cost Savings 47% 2017 Adjusted Fixed Costs Percent of Billings 1 38% 2017 Adjusted Variable Costs Percent of Billings 1 1 An operating measure which we derive from net sales taking into account the change in deferred revenue. See calculation of this metric in the appendix to this presentation. 2 Please see appendix for a reconciliation of non-GAAP measures (to the extent available without unreasonable efforts). 15
Variability in Content Spend Driven by Major Adoptions $139 $127 $124 Program Development commences ($ in up to two years before major $116 Millions) ELA adoptions Math $104 Higher spend associated with: Social • Multiple major adoptions in upcoming Studies Math & two years Social Reading Science Studies • Reading and Math programs Reading In 2017 the calendar includes adoptions in: Science & • California Social Studies (2018) Math & Social Science Studies Math • Florida Science (2018) Reading Social & Studies Social • Texas Reading (2019) Studies • Florida Math (2019) 2013 2014 2015 2016 2017 • California Science (2019) CA Math TX Social CA Reading CA Social Studies Studies First Year FL Math, Reading of Adoption FL Science TX Math, Science Note: Amounts are as reported and do not include content spend of the Ed Tech business prior to the May 29, 2015 acquisition. 16
PP&E Capital Investment Supports Operating Model Transformation Major Components FACILITIES ($ in • 4 office moves in 2016 (non recurring) Millions) • Modest ongoing maintenance IT SYSTEMS • New ERP implementation (planning) • System updates (ongoing) • Ongoing maintenance PLATFORM • Ongoing Ed feature enhancements • Maintenance of legacy platforms until sunset $60 $67 $83 $106 $58 2013 2014 2015 2016 2017 Note: Amounts are as reported and do not include PP&E spend of the Ed Tech business prior to the May 29, 2015 acquisition. 17
Looking Ahead 18
Understanding HMH Share of U.S. K-12 Market Total AAP Market 6 Contributing Members Includes: o Basal Curriculum Total U.S. K – 12 Market o Program-Based Services o Educational Assessment Instructional Materials o Coursework Disciplines Include: • Math • Reading/Language Arts • Science Outside U.S. K – 12 Market • Social Studies • International • World Languages • Trade • Vocational $11B HMH Share of • Music Addressable • Advanced Placement AAP Market HMH Revenue HMH’s Addressable Outside AAP but within U.S. K – 12 Market AAP Market • Practice-Based Services • Only includes opportunities • Clinical Assessment where HMH has products (e.g., • Extensions not included in AAP Market excludes Vocational, Music, and Advanced Placement) 19
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