LSC COMMUNICATIONS 2017 Third Quarter Results November 2, 20 17 - - PowerPoint PPT Presentation

LSC COMMUNICATIONS

2017 Third Quarter Results

November 2, 20 17

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

Highlights

+ Results for the third quarter were in line with our expectations and continued the trend of improving comparisons in year-

• ver-year earnings.

+ Made significant progress in driving expansion of our offerings, both

• rganically and through acquisitions.

+ Expansion of Book Publisher Services technologies has continued to gain momentum.

• Added a number of new clients to the

IntercepTag TM platform this quarter, and are down the path to establishing the industry standard for anti-piracy.

Continued focus on: + Driving down cost for our clients and adding scale to

• ur core offerings.

+ Expanding services in: Media Services Digital Technologies Management Services Logistics Key Initiatives

4 | LSC COMMUNICATIONS

STRATEGIC FOCUS

($ millions) Q3 2017 Q3 2016

Net sales $935 $949

As reported % change

• 1.5%

Organic % change (1)

• 6.6%

Total cost of sales 778 783 SG&A expenses 65 66 Restructuring, impairment, and other charges - net 60 3 Depreciation and amortization 39 40 Income from operations ($7) $57 Interest expense (income) - net 19 1 Investment and other expense - net Income before income taxes ($26) $56 Income tax (benefit) expense (23) 18 Net income ($3) $38 Non-GAAP Adjusted EBITDA (2) $96 $101 Non-GAAP Adjusted EBITDA Margin (2) 10.3% 10.6%

Q3 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, including Non-GAAP Adjusted EBITDA and Non-GAAP Adjusted EBITDA Margin (3) Q4 2017 E represents implied fourth quarter results based on full year expected Non-GAAP Adjusted EBITDA in FY Guidance from November 2, 2017

5 | LSC COMMUNICATIONS

Q3 2017 Results

$(40) $(20) $- $20 $40 Q1 2017 Q2 2017 Q3 2017 Q4 2017 E

Non-GAAP Adj. EBITDA $ Change vs. Prior Year

($31) ($11) ($5)

+ Improving year-over-year earnings trend throughout Fiscal Year 2017 + Expected to improve year-over-year profitability during Q4 2017(3) primarily due to incremental earnings from acquisitions, increase in co-mail volume, and productivity within Book platform

(3)

($ millions)

$11 - $23

SEGMENT OVERVIEW

Print Office Products

+ Print segment sales down 6.2%(2) on an organic basis in Q3 2017 mainly due to lower volume and pricing pressure

• Book organic declines driven by lower volume in educational

and religious products, partially offset by strong digital services demand

• CMR organic declines driven by pricing pressure and lower

volume, particularly in retail inserts + Non-GAAP Adjusted EBITDA margin was flat(1) primarily due to strong productivity and cost reductions, partially offset by the impacts of price pressure and unfavorable product mix + Office Products sales down 9.3%(2) on an organic basis in Q3 2017 primarily due to lower volume driven by continued challenges with brick and mortar retail industry as well as the resulting impact on wholesale distributors and price pressures + Continue to experience strong growth from e-commerce distribution channel, partially offset by decline within wholesaler business + Non-GAAP Adjusted EBITDA margin increased 110 basis points(1) primarily due to strong cost control and improved productivity, partially offset by lower price and an unfavorable product mix Recent acquisitions enhance capabilities and complement

• rganic investments in co-mail and digital printing

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)

Q3'17 Q3'16

Revenues 819 $ 822 $ Non-GAAP Adj EBITDA (1) 84 $ 85 $ Non-GAAP Adj EBITDA Margin (1) 10.3% 10.3%

($ millions)

Q3'17 Q3'16

Revenues 116 $ 127 $ Non-GAAP Adj EBITDA (1) 15 $ 15 $ Non-GAAP Adj EBITDA Margin (1) 12.9% 11.8%

STRONG LIQUIDITY AND DIVIDEND

$ millions

Q3 2017 YTD Free Cash Flow (1)

+ 2.74x Non-GAAP Gross Leverage Ratio (2)

• Leverage temporarily elevated due to

acquisitions

• Expected to be at the high end of

targeted 1.75x – 2.25x range by 12/31/2017 + Used cash on hand, drawings under the revolving credit facility, and ~ 1 million shares of common stock to pay for acquisitions

(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 November 1, 2017

Debt and Liquidity (2) Dividend Yield (4)

+ October 26, 2017: Board of Directors declared regular quarterly cash dividend of $0.25 payable December 4 for shareholders of record as of November 15

$ in millions

6.4% 1.9% 0% 1% 2% 3% 4% 5% 6% 7%

S&P 500

+ Timing of 2017 sales peak driving seasonally high working capital, particularly in A/R

• Expected to reverse in Q4 following

normal historical patterns + Capital spending includes investments in co-mail services capacity and digital production platform for books

$ in millions 7 | LSC COMMUNICATIONS

$58 $(51) $7

Q3'17 Q4'16

Total Debt

884 $ 794 $

Cash

23 $ 95 $

Stated amount of the Revolving Credit Facility

400 400

• Amount available under the Revolving Credit Facility

400 400

Usage Borrowings under Revolving Credit Facility

(140)

• Letters of Credit

(58) (12)

Net Available Liquidity (2)

225 $ 483 $

Underfunded Pension (3)

(280) $ (280) $

Less: availability reduction from covenants

Q3 2017 ACQUISITIONS

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(1) The contingent consideration for Creel in the form of cash payments of up to $10 million is due to the sellers to the extent certain financial targets are achieved (2) $20 million of the purchase price was paid in cash; the remaining purchase price was paid with approximately 1.0 million shares of LKSD common stock

Background Closing Date Financial Information Strategic Rationale + Printing solutions provider with capabilities including offset printing, prepress and distribution services for magazines + September 7, 2017 + Purchase Price: $70 million + Approximate Annual Sales: $170 million + Enhances printing capabilities + Strengthens presence in short-run magazines platform + Significant synergy opportunities + Offset and digital printing company with capabilities such as full-color web and sheetfed printing and integrated digital solutions + August 17, 2017 + Purchase Price: $78 million (1) + Approximate Annual Sales: $110 million + Digital print assets provide manufacturing flexibility with top-line growth potential + New product offerings + Expands LSC’s manufacturing process to the west coast + Significant synergy opportunities + Full service, printer-independent mailing logistics provider + July 28, 2017 + Purchase Price: $40 million (2) + Approximate Annual Sales: $50 million + 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

Current 2017 Guidance (1) Previous ฀ 2017 Guidance Net Sales $3.55 - $3.60 billion $3.55 - $3.60 billion Non-GAAP Adjusted EBITDA 9.40% - 9.60% 9.60% - 10.00% Depreciation and Amortization $150 - $160 million $155 - $165 million Interest Expense- Net $68 - $72 million $68 - $72 million Effective Tax Rate 32% - 35% 33% - 36% Capital Expenditures $60 - $65 million $60 - $65 million Free Cash Flow $125 - $140 million $125 - $155 million Diluted Share Count Approximately 33.9 million Not provided

FULL YEAR 2017 GUIDANCE

9 | LSC COMMUNICATIONS (1) 2017 Guidance updated to reflect expected impacts from announced acquisition of Publishers’ Press 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

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Total LSC Communications

($ millions)

Q3 2017 TTM Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q3 2017 YTD Q3 2016 YTD Net sales $3,523 $935 $848 $821 $919 $949 $2,604 $2,735 GAAP Net income (loss) 10 (3) 5 (1) 9 38 1 97 Restructuring, impairment and other charges, net 94 60 21 6 7 3 87 11 Separation-related transaction expenses 8 1 2 1 4 1 4 1 Acquisition-related expenses 3 2 1

• 3
• Purchase accounting inventory

adjustments, net 1 1

• 1
• Pension Settlement Charge
• 1

Depreciation and amortization 159 39 39 40 41 40 118 130 Interest expense / (income) - net 70 19 16 17 18 1 52

• Income tax expense (benefit)

(22) (23) (2) 2 1 18 (23) 50 Non-GAAP Adjusted EBITDA $323 $96 $82 $65 $80 $101 $243 $290 Non-GAAP Adjusted EBITDA margin 9.2% 10.3% 9.7% 7.9% 8.7% 10.6% 9.3% 10.6% Net cash provided by operating activities $153 ($20) $14 $64 $95 $81 $58 $136 Capital expenditures (64) (15) (15) (21) (13) (16) (51) (35) Free cash flow $89 ($35) ($1) $43 $82 $65 $7 $101

NON-GAAP FINANCIAL MEASURES

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Print Segment

($ millions)

Q3 2017 TTM Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q3 2017 YTD Q3 2016 YTD Magazines, catalogs and retail inserts $1,650 $448 $378 $383 $441 $407 $1,209 $1,191 Book 1,033 276 262 239 256 310 777 841 Europe 243 68 56 56 63 72 180 209 Directories 115 27 27 32 29 33 86 97 Net sales $3,041 $819 $723 $710 $789 $822 $2,252 $2,338 Income from operations 51 (10) 22 12 27 48 24 114 Depreciation and amortization 142 35 36 35 36 36 106 118 Purchase accounting inventory adjustments, net 1 1

• 1
• Restructuring, impairment and other

charges, net 75 58 6 5 6 1 69 9 Non-GAAP Adjusted EBITDA $269 $84 $64 $52 $69 $85 $200 $241 Non-GAAP Adjusted EBITDA margin 8.8% 10.3% 8.9% 7.3% 8.7% 10.3% 8.9% 10.3%

Office Products Segment

Q3 2017 TTM Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q3 2017 YTD Q3 2016 YTD Net sales $482 $116 $125 $111 $130 $127 $352 $397 Income from operations 48 11 12 9 16 11 32 38 Depreciation and amortization 15 4 3 4 4 4 11 12 Restructuring, impairment and other charges, net 1

• 1
• 1
• Non-GAAP Adjusted EBITDA

$64 $15 $15 $14 $20 $15 $44 $50 Non-GAAP Adjusted EBITDA margin 13.3% 12.9% 12.0% 12.6% 15.4% 11.8% 12.5% 12.6%

ORGANIC GROWTH RATES

14 | LSC COMMUNICATIONS

($ millions) Magazines, Catalogs, and Retail Inserts Books Europe Directories Total Print Total Office Products Total LSC Q3 2016 Net Sales as Reported 407 $ 310 $ 72 $ 33 $ 822 $ 127 $ 949 $ Adjustments (1) 101

• 101

2 103 Q3 2016 Net Sales Pro Forma 508 $ 310 $ 72 $ 33 $ 923 $ 129 $ 1,052 $ Q3 2017 Net Sales as Reported 448 $ 276 $ 68 $ 27 $ 819 $ 116 $ 935 $ Adjustments (1) 42

• 42

1 43 Q3 2017 Net Sales Pro Forma 490 $ 276 $ 68 $ 27 $ 861 $ 117 $ 978 $ As Reported % Change 10.1%

• 11.0%
• 5.6%
• 18.2%
• 0.4%
• 8.7%
• 1.5%

Pro Forma % Change

• 3.5%
• 11.0%
• 5.6%
• 18.2%
• 6.7%
• 9.3%
• 7.0%

Non-GAAP Adjustments: Impact of pass-through paper sales 1.0%

• 4.5%

0.0%

• 6.1%
• 1.2%

0.0%

• 1.0%

Impact of changes in foreign exchange rates 0.2% 0.0% 6.9% 0.0% 0.7% 0.0% 0.6% Q3 2017 Organic % Change (3)

• 4.7%
• 6.5%
• 12.5%
• 12.1%
• 6.2%
• 9.3%
• 6.6%

Q3 2016 YTD Net Sales as Reported 1,191 $ 841 $ 209 $ 97 $ 2,338 $ 397 $ 2,735 $ Adjustments (2) 294

• 294

5 299 Q3 2016 YTD Net Sales Pro Forma 1,485 $ 841 $ 209 $ 97 $ 2,632 $ 402 $ 3,034 $ Q3 2017 YTD Net Sales as Reported 1,209 $ 777 $ 180 $ 86 $ 2,252 $ 352 $ 2,604 $ Adjustments (2) 200

• 200

4 204 Q3 2017 YTD Net Sales Pro Forma 1,409 $ 777 $ 180 $ 86 $ 2,452 $ 356 $ 2,808 $ As Reported % Change 1.5%

• 7.6%
• 13.9%
• 11.3%
• 3.7%
• 11.3%
• 4.8%

Pro Forma % Change

• 5.1%
• 7.6%
• 13.9%
• 11.3%
• 6.8%
• 11.4%
• 7.4%

Non-GAAP Adjustments: Impact of pass-through paper sales 0.1%

• 2.3%

0.0%

• 6.2%
• 0.9%

0.0%

• 0.8%

Impact of changes in foreign exchange rates

• 0.2%

0.0% 1.9% 0.0% 0.0% 0.0% 0.0% Q3 2017 YTD Organic % Change (3)

• 5.0%
• 5.3%
• 15.8%
• 5.1%
• 5.9%
• 11.4%
• 6.6%

LIQUIDITY AND LEVERAGE

(1) Liquidity does not include uncommitted credit facilities, located 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 the 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 $140 million of borrowings under the Revolving Credit Facility as

• f September 30, 2017.

(3) The Company would have had the ability to utilize the entire $400 million Revolving Credit Facility and not have been in violation of the terms of the agreement as of September 30, 2017. Availability under the Revolving Credit Facility was reduced by $58 million related to outstanding 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”). (5) Leverage ratio calculation includes non-GAAP Adjusted EBITDA since the respective closing date of each acquisition, so does not include a full 12 months of non- GAAP Adjusted EBITDA 15 | LSC COMMUNICATIONS

$ millions

Short-Term and Current Portion of Long-Term Debt 177 $ Long-Term Debt 707 Total Debt (4) 884 $ Non-GAAP Adjusted EBITDA LTM 9/30/2017 323 $ Non-GAAP Gross Leverage (5) 2.74x

Leverage at September 30, 2017

$ millions

Q3'17 Q4'16

Total Debt 884 $ 794 $ Cash 23 $ 95 $ Stated amount of the Revolving Credit Facility (2) 400 400

• Amount available under the Revolving Credit Facility

400 400 Usage Borrowings under Revolving Credit Facility (140)

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

(58) (12) Net Available Liquidity 225 $ 483 $ Less: availability reduction from covenants

Net Available Liqudity (1)

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