LSC COMMUNICATIONS 2017 Second Quarter Results August 3, 2017 LSC - - PowerPoint PPT Presentation

LSC COMMUNICATIONS

2017 Second Quarter Results

August 3, 2017

This presentation includes certain "forward-looking statements" within the meaning of, and subject to the safe harbor created by, Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, strategy and plans

• f LSC Communications and its expectations relating to future financial condition and performance. Statements that are

not historical facts, including statements about LSC Communications management’s beliefs and expectations, are forward- looking statements. Words such as "believes," "anticipates," "estimates," "expects," "intends," "aims," "potential," "will," "would," "could," "considered," "likely," "estimate" and variations of these words and similar future or conditional expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such

• statements. While LSC Communications believes these expectations, assumptions, estimates and projections are

reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond LSC Communications’ control. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon future circumstances that may or may not occur. Actual results may differ materially from LSC Communications’ current expectations depending upon a number of factors affecting the business and risks associated with the performance of the business. These factors include such risks and uncertainties detailed in LSC Communications’ Form 10-K filed on February 23, 2017 and LSC Communications’ periodic filings with the SEC. LSC Communications does not undertake to and specifically declines any obligation to publicly release the results

• f any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the

date of such statement or to reflect the occurrence of anticipated or unanticipated events.

LSC COMMUNICATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

2 | LSC COMMUNICATIONS

This presentation contains certain non-GAAP measures. The Company believes that these non-GAAP measures, such as non-GAAP adjusted EBITDA, non-GAAP net income and free cash flow, when presented in conjunction with comparable GAAP measures, provide useful information about the Company’s operating results and liquidity and enhance the overall ability to assess the Company’s financial performance. The Company uses these measures, together with other measures of performance under GAAP, to compare the relative performance of operations in planning, budgeting and reviewing the performance of its business. Non-GAAP adjusted EBITDA, non-GAAP net income and free cash flow allow investors to make a more meaningful comparison between the Company’s core business operating results over different periods of time. The Company believes that non-GAAP adjusted EBITDA, non-GAAP net income and free cash flow, when viewed with the Company’s results under GAAP and the accompanying reconciliations, provides useful information about the Company’s business without regard to potential distortions. By eliminating potential differences in results of operations between periods caused by factors such as depreciation and amortization methods, historic cost and age of assets, financing and capital structures, taxation positions or regimes, restructuring, impairment and other charges and gain or loss on certain equity investments and asset sales, the Company believes that non-GAAP adjusted EBITDA and non-GAAP net income can provide useful additional basis for comparing the current performance of the underlying operations being evaluated. By adjusting for the level of capital investment in operations, the Company believes that free cash flow can provide useful additional basis for understanding the Company’s ability to generate cash after capital investment and provides a comparison to peers with differing capital intensity.

NON-GAAP FINANCIAL INFORMATION

3 | LSC COMMUNICATIONS

STRATEGIC FOCUS

Highlights

+ Experienced significant improvement in our earnings trend compared to recent quarters + Announced two acquisitions that add new capabilities, new clients, and new solutions + Invested in new advanced technology-driven solution

• fferings

+ Office Products e-commerce sales were up over 50% compared to the second quarter of last year

+ Acquired Fairrington and announced Creel signing + Launched our IntercepTagSM Technology Platform + Announced an equity investment in Artificial Intelligence technology through AUTHORS, Inc. + Continuing to work with a strategic acquisition pipeline that will provide growth and synergy opportunities to benefit all stakeholders

Key Initiatives

4 | LSC COMMUNICATIONS

($ millions) Q2 2017 Q2 2016

Net sales $848 $906

As reported % change

• 6.4%

Organic % change (1)

• 6.8%

Total cost of sales 705 745 SG&A expenses 64 68 Restructuring, impairment, and other charges - net 21 5 Depreciation and amortization 39 44 Income from operations $19 $44 Interest expense (income) - net 16 (1) Investment and other expense - net 1 Income before income taxes $3 $44 Income tax (benefit) expense (2) 16 Net income $5 $28 Non-GAAP Adjusted EBITDA (2) $82 $93 Non-GAAP Adjusted EBITDA Margin (2) 9.7% 10.3%

Q2 2017 FINANCIAL SUMMARY

(1) Please refer to slide 14 for organic revenue reconciliations (2) Please refer to slide 12 for reconciliation of non-GAAP measures

5 | LSC COMMUNICATIONS

SEGMENT OVERVIEW

Print Office Products

+ Print segment sales down 6.0%(2) on an organic basis in Q2 2017 mainly due to lower volume and pricing pressure

• CMR trends slightly improving, particularly in

catalogs and long-run magazines

• Organic decline in Book driven by lower than

anticipated volume in educational books + Non-GAAP Adjusted EBITDA margin decreased 130 basis points(1) primarily due to lower volume in the Book platform, an unfavorable product mix, and regular pricing pressure + Office Products sales down 12.0%(2) on an organic basis in Q2 2017 primarily due to lower volume driven by continued contraction of brick & mortar retail industry + Continue to experience strong growth from e-commerce distribution channel + Non-GAAP Adjusted EBITDA margin remained flat (1) due to cost control and focusing on improved product mix Recent acquisitions enhance capabilities and complement

• rganic investments in co-mail and digital solutions

Continue to expand e-commerce channel while providing cost-effective solutions for traditional channels

(1) Please refer to slide 13 for reconciliation of non-GAAP measures (2) Please refer to slide 14 for organic revenue reconciliations

6 | LSC COMMUNICATIONS

($ millions)

Q2'17 Q2'16

Revenues 125 $ 142 $ Non-GAAP Adj EBITDA (1) 15 $ 17 $ Non-GAAP Adj EBITDA Margin (1) 12.0% 12.0%

($ millions)

Q2'17 Q2'16

Revenues 723 $ 764 $ Non-GAAP Adj EBITDA (1) 64 $ 78 $ Non-GAAP Adj EBITDA Margin (1) 8.9% 10.2%

STRONG LIQUIDITY AND DIVIDEND

$ millions

Q2 2017 Free Cash Flow (1)

+ 2.27x Non-GAAP Gross Leverage Ratio (2) + Expect to fund cash portion of purchase price for announced acquisitions with cash

• n hand and drawings under the

Revolving Credit Facility

(1) Please refer to slide 12 for a reconciliation of Free Cash Flow as a non-GAAP financial measure (2) Please refer to slide 15 for details concerning Net Available Liquidity and Debt Leverage Ratio calculations (3) All underfunded pension amounts represent values last reported in the 2016 Annual Report on Form 10-K (4) Dividend Yield is calculated as an annualized dividend ($1.00) per share divided by the closing LKSD stock price as of August 2, 2017

Debt and Liquidity (2) Dividend Yield (4)

+ July 20, 2017: Board of Directors declared regular quarterly cash dividend of $0.25 payable September 5 for shareholders of record as of August 15

$ in millions

5.1% 2.0% 0% 1% 2% 3% 4% 5% 6%

S&P 500

+ Strong working capital performance offset by cash interest ($27mm) related to debt issued related to the spin + Capital spending includes investments in co-mail services capacity and our digital production platform for books

$ in millions 7 | LSC COMMUNICATIONS

$14 $(15) $(1)

Q2'17 Q4'16

Total Debt

744 $ 794 $

Cash

98 $ 95 $

Stated amount of the Revolving Credit Facility

400 400 31

• Amount available under the Revolving Credit Facility

369 400

Usage Borrowings under Revolving Credit Facility

• Letters of Credit

(20) (12)

Net Available Liquidity (2)

447 $ 483 $

Underfunded Pension (3)

(280) $ (280) $

Less: availability reduction from covenants

RECENTLY ANNOUNCED ACQUISITIONS

8 | LSC COMMUNICATIONS

+ Digital print assets provide manufacturing flexibility with top-line growth potential, new product offerings + Digital, analytics, and mobile products add new capabilities and solutions for customers + Expands LSC’s west coast manufacturing footprint + Co-mail assets bring additional capacity for growing service offering, adding volume and scale + Strong freight management capabilities to better serve customers, provides base for growth  Approximately $160 million of aggregate annual revenues  Expected incremental annual non-GAAP Adjusted EBITDA of approximately $30 million post synergies

• Expect approximately $5 million of non-GAAP

Adjusted EBITDA impact in 2017  Approximately $120 million in aggregate purchase price

• Financed with combination of cash on hand,

revolver borrowings, and ~ 1 million shares of LSC stock  Expect minimal impact on year-end 2017 leverage

LSC Financial Impact

(1) LSC Communications entered into a definitive agreement to acquire CREEL Printing which is subject to customary closing conditions

($ millions) Current 2017 Guidance (1) Previous ฀ 2017 Guidance Net Sales $3.55 - $3.60 billion $3.55 - $3.65 billion Non-GAAP Adjusted EBITDA 9.60% - 10.00% 9.75% - 10.25% Depreciation and Amortization $155 - $165 million $155 - $165 million Interest Expense- Net $68 - $72 million $68 - $72 million Effective Tax Rate 33% - 36% 33% - 36% Capital Expenditures $60 - $65 million $60 - $65 million Free Cash Flow $125 - $155 million $125 - $155 million

FULL YEAR 2017 GUIDANCE

9 | LSC COMMUNICATIONS (1) Updated 2017 Guidance for expected impacts from announced acquisitions of CREEL Printing and Fairrington along with ongoing business trends Certain components of the guidance given in the table above are provided on a non-GAAP basis only, without providing a reconciliation to guidance provided on a GAAP

• basis. Information is presented in this manner, consistent with SEC rules, because the preparation of such a reconciliation could not be accomplished without

"unreasonable efforts.“ The Company does not have access to certain information that would be necessary to provide such a reconciliation, including non-recurring items that are not indicative of the Company's ongoing operations. Such items include, but are not limited to, restructuring charges, impairment charges, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment and other similar gains or losses not reflective of the Company's ongoing operations. The Company does not believe that excluding such items is likely to be significant to an assessment of the Company's

• ngoing operations, given that such excluded items are not indicators of business performance.

Q&A

10 | LSC COMMUNICATIONS

Appendix

11 | LSC COMMUNICATIONS

NON-GAAP FINANCIAL MEASURES

12 | LSC COMMUNICATIONS

Total LSC Communications

($ millions)

Q2 2017 TTM Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q2 2017 YTD Q2 2016 YTD Net sales $3,537 $848 $821 $919 $949 $906 $1,669 $1,786 GAAP Net income (loss) 51 5 (1) 9 38 28 4 59 Restructuring, impairment and other charges, net 37 21 6 7 3 5 27 8 Separation-related transaction expenses 8 2 1 4 1

• 3
• Pension settlement charge
• 1
• 1

Acquisition-related expenses 1 1

• 1
• Depreciation and amortization

160 39 40 41 40 44 79 90 Interest expense / (income) - net 52 16 17 18 1 (1) 33 (1) Income tax expense (benefit) 19 (2) 2 1 18 16

• 32

Non-GAAP Adjusted EBITDA $328 $82 $65 $80 $101 $93 $147 $189 Non-GAAP Adjusted EBITDA margin 9.3% 9.7% 7.9% 8.7% 10.6% 10.3% 8.8% 10.6% Net cash provided by operating activities $254 $14 $64 $95 $81 $41 $78 $55 Capital expenditures (65) (15) (21) (13) (16) (7) (36) (19) Free cash flow $189 ($1) $43 $82 $65 $34 $42 $36

NON-GAAP FINANCIAL MEASURES

13 | LSC COMMUNICATIONS

Print Segment

($ millions)

Q2 2017 TTM Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q2 2017 YTD Q2 2016 YTD Magazines, catalogs and retail inserts $1,609 $378 $383 $441 $407 $377 $761 $784 Book 1,067 262 239 256 310 288 501 531 Europe 247 56 56 63 72 67 112 137 Directories 121 27 32 29 33 32 59 64 Net sales $3,044 $723 $710 $789 $822 $764 $1,433 $1,516 Income from operations 109 22 12 27 48 34 34 66 Depreciation and amortization 145 36 35 36 38 39 71 80 Restructuring, impairment and other charges, net 18 6 5 6 1 5 11 8 Non-GAAP Adjusted EBITDA $272 $64 $52 $69 $87 $78 $116 $154 Non-GAAP Adjusted EBITDA margin 8.9% 8.9% 7.3% 8.7% 10.6% 10.2% 8.1% 10.2%

Office Products Segment

Q2 2017 TTM Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q2 2017 YTD Q2 2016 YTD Net sales $493 $125 $111 $130 $127 $142 $236 $270 Income from operations 48 12 9 16 11 13 21 27 Depreciation and amortization 15 3 4 4 4 4 7 8 Restructuring, impairment and other charges, net 1

• 1
• 1
• Non-GAAP Adjusted EBITDA

$64 $15 $14 $20 $15 $17 $29 $35 Non-GAAP Adjusted EBITDA margin 13.0% 12.0% 12.6% 15.4% 11.8% 12.0% 12.3% 13.0%

ORGANIC GROWTH RATES

14 | LSC COMMUNICATIONS

($ millions) Magazines, Catalogs, and Retail Inserts Books Europe Directories Total Print Total Office Products Total LSC Q2 2016 Net Sales as Reported 377 $ 288 $ 67 $ 32 $ 764 $ 142 $ 906 $ Adjustments (1) 14

• 14
• 14

Q2 2016 Net Sales Pro Forma 391 $ 288 $ 67 $ 32 $ 778 $ 142 $ 920 $ Q2 2017 Net Sales as Reported 378 $ 262 $ 56 $ 27 $ 723 $ 125 $ 848 $ Adjustments (1)

• Q2 2017 Net Sales Pro Forma

378 $ 262 $ 56 $ 27 $ 723 $ 125 $ 848 $ As Reported % Change 0.3%

• 9.0%
• 16.4%
• 15.6%
• 5.4%
• 12.0%
• 6.4%

Pro Forma % Change

• 3.3%
• 9.0%
• 16.4%
• 15.6%
• 7.1%
• 12.0%
• 7.8%

Non-GAAP Adjustments: Impact of pass-through paper sales 0.5%

• 2.4%

0.0%

• 9.4%
• 1.0%

0.0%

• 0.9%

Impact of changes in foreign exchange rates

• 0.3%

0.0% 0.0% 0.0%

• 0.1%

0.0%

• 0.1%

Q2 2017 Organic % Change (2)

• 3.5%
• 6.6%
• 16.4%
• 6.2%
• 6.0%
• 12.0%
• 6.8%

Q2 2016 YTD Net Sales as Reported 784 $ 531 $ 137 $ 64 $ 1,516 $ 270 $ 1,786 $ Adjustments (1) 29

• 29
• 29

Q2 2016 YTD Net Sales Pro Forma 813 $ 531 $ 137 $ 64 $ 1,545 $ 270 $ 1,815 $ Q2 2017 YTD Net Sales as Reported 761 $ 501 $ 112 $ 59 $ 1,433 $ 236 $ 1,669 $ Adjustments (1) 1

• 1
• 1

Q2 2017 YTD Net Sales Pro Forma 762 $ 501 $ 112 $ 59 $ 1,434 $ 236 $ 1,670 $ As Reported % Change

• 2.9%
• 5.6%
• 18.2%
• 7.8%
• 5.5%
• 12.6%
• 6.6%

Pro Forma % Change

• 6.3%
• 5.6%
• 18.2%
• 7.8%
• 7.2%
• 12.6%
• 8.0%

Non-GAAP Adjustments: Impact of pass-through paper sales

• 0.5%
• 0.9%

0.0%

• 6.3%
• 0.8%

0.0%

• 0.7%

Impact of changes in foreign exchange rates

• 0.5%

0.0%

• 0.7%

0.0%

• 0.3%

0.0%

• 0.3%

Q2 2017 YTD Organic % Change

• 5.3%
• 4.7%
• 17.5%
• 1.5%
• 6.1%
• 12.6%
• 7.0%

(1) Adjusted for net sales of acquired businesses: There were no acquisitions during the three months ended June 30, 2017. For the six months ended June 30, 2017, the adjustment to

net sales of an acquired business reflects the net sales of HudsonYards Studios ("HudsonYards") (acquired March 1, 2017). For the three and six months ended June 30, 2016, the adjustments for net sales of acquired businesses reflect the net sales of HudsonYards and Continuum Management Company, LLC ("Continuum") (acquired December 2, 2016).

(2) Adjusted for net sales of acquired businesses, the impact of changes in FX rates and pass-through paper sales.

LIQUIDITY AND LEVERAGE

(1) Liquidity does not include uncommitted credit facilities, located primarily outside of the U.S. (2) The Company has a $400 million senior secured revolving credit agreement (the “Revolving Credit Facility”) which expires on September 30, 2021. The Revolving Credit Facility is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a maximum Consolidated Leverage Ratio, as defined in and calculated pursuant to the Revolving Credit Facility, that, in part, restrict the Company’s ability to incur additional indebtedness, create liens, engage in mergers and consolidations, make restricted payments and dispose of certain assets. There were no borrowings under the Revolving Credit Facility as of June 30, 2017 and December 31, 2016. (3) The Company would have had the ability to utilize $369 million of the $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement. Availability under the Revolving Credit Facility was reduced by $20 million related to

• utstanding letters of credit.

(4) On February 2, 2017, the Company paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the senior secured terms loan B facility (the “Term Loan Facility”). 15 | LSC COMMUNICATIONS

$ millions

Q2'17 Q4'16

Total Debt 744 $ 794 $ Cash 98 $ 95 $ Stated amount of the Revolving Credit Facility (2) 400 400 31

• Amount available under the Revolving Credit Facility

369 400 Usage Borrowings under Revolving Credit Facility

• Impact on availability related to outstanding letters of credit (3)

(20) (12) Net Available Liquidity 447 $ 483 $ Less: availability reduction from covenants

Net Available Liqudity (1)

$ millions

Short-Term and Current Portion of Long-Term Debt 26 $ Long-Term Debt 718 Total Debt (4) 744 $ Non-GAAP Adjusted EBITDA LTM 6/30/2017 328 $ Non-GAAP Gross Leverage 2.27x

Leverage at June 30, 2017

investor.relations@lsccom.com | 773-272-9275 | 191 N Wacker (Suite 1400), Chicago, Illinois 60606