LSC COMMUNICATIONS 2017 First Quarter Results May 4, 2017 LSC - - PowerPoint PPT Presentation

LSC COMMUNICATIONS

2017 First Quarter Results

May 4, 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

+Reaffirmed our full-year guidance +Significant progress in growing supply chain services +Expanded digital and print premedia production capabilities +Strong growth and demand in co-mail services +E-commerce office products sales remain strong and continue to

• utpace market

+ Increased book educational market contract signings + Acquired HudsonYards Studios + Invested in co-mail capacity coming

• nline in the second half of this year

+ Drove growth and optimized product, price and marketing approach by utilizing real-time data for online

• ffice products retailers

+ Continue to work with a strategic acquisition pipeline that will provide growth opportunities to benefit all stakeholders

Key Initiatives

4 | LSC COMMUNICATIONS

Q1 2017 FINANCIAL SUMMARY

(1) Please refer to slide 13 for organic revenue reconciliations (2) Please refer to slide 11 for reconciliation of non-GAAP measures

5 | LSC COMMUNICATIONS

($ millions) Q1 2017 Q1 2016

Net Sales $821 $880

As Reported % Change

• 6.7%

Organic % Change (1)

• 7.1%

Total Cost of Sales $692 $722 SG&A Expenses $65 $62 Restructuring, Impairment, and Other Charges- Net $6 $3 Depreciation and Amortization $40 $46 Income from Operations $18 $47 Interest Expense- Net $17 $0 Income before Income Taxes $1 $47 Income Tax Expense $2 $16 Net (Loss) / Income ($1) $31 Non-GAAP Adjusted EBITDA

(2)

$65 $96 Non-GAAP Adjusted EBITDA Margin

(2)

7.9% 10.9%

SEGMENT OVERVIEW

Print Office Products

+ Print segment sales down 6.0%(2) on an organic basis in Q1 2017 due to lower volume and pricing pressure + Organic sales decline partially offset by growth in service

• fferings (CMR co-mail and Book supply chain

management) and in Mexico + Non-GAAP Adjusted EBITDA margin decreased 280 basis points(1) primarily due to lower volume, an unfavorable mix, and pricing pressure, partially offset by higher commodity price levels for materials by-products and cost reductions + Office Products sales down 13.3%(2) on an organic basis in Q1 2017 primarily due to lower volume in filing, note taking, and binder products as the office supplies superstores continue to close locations, pricing pressure and unfavorable sales timing compared to Q1 2016 + Non-GAAP Adjusted EBITDA margin decreased 150 basis points(1) due to lower volume and pricing pressure, partially offset by cost control initiatives and productivity improvement Investments in co-mail services, digital print assets and HudsonYards acquisition to further enhance service offerings Continue to expand e-commerce channel while providing cost-effective solutions for traditional channels

(1) Please refer to slide 12 for reconciliation of non-GAAP measures (2) Please refer to slide 13 for organic revenue reconciliations

6 | LSC COMMUNICATIONS

($ millions)

Q1'17 Q1'16

Revenues 710 $ 752 $ Non-GAAP Adj EBITDA

(1)

52 $ 76 $ Non-GAAP Adj EBITDA Margin

(1)

7.3% 10.1%

($ millions)

Q1'17 Q1'16

Revenues 111 $ 128 $ Non-GAAP Adj EBITDA

(1)

14 $ 18 $ Non-GAAP Adj EBITDA Margin

(1)

12.6% 14.1%

STRONG LIQUIDITY AND DIVIDEND

$ millions $ millions

Q1 2017 Free Cash Flow (1)

+ 2.2x Non-GAAP Gross Leverage Ratio (2) + Used cash on hand to pay in advance the full $50 million of Term Loan B facility amortization payments due in 2017

(1) Please refer to slide 11 for a reconciliation of Free Cash Flow as a non-GAAP financial measure (2) Please refer to slide 14 for details concerning Net Available Liquidity and Debt Leverage Ratio calculations (3) Dividend Yield is calculated as an annualized dividend ($1.00) per share divided by the closing LKSD stock price as of May 3, 2017

Debt and Liquidity (2) Dividend Yield (3)

+ April 6, 2017: Board of Directors declared regular quarterly cash dividend of $0.25 for shareholders of record as of May 15

$ in millions

3.8% 2.0% 0% 1% 2% 3% 4%

S&P 500

+ Strong free cash flow due to working capital improvements + Capital spending includes investments in co-mail services capacity and our digital production platform for books

$ in millions 7 | LSC COMMUNICATIONS

$64 $21 $43

Q1'17 Q4'16

Total Debt

744 $ 794 $

Cash

89 $ 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

• Letters of Credit

(13) (12)

Net Available Liquidity (2)

476 $ 483 $

Less: availability reduction from covenants

REAFFIRM FULL YEAR 2017 GUIDANCE

(1) 2017 Guidance has not changed from previously announced ranges on February 23, 2017 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.

8 | LSC COMMUNICATIONS

($ millions) 2017 Guidance

(1)

Net Sales $3.55 - $3.65 billion Non-GAAP Adjusted EBITDA 9.75% - 10.25% Depreciation and Amortization $155 - $165 million Interest Expense- Net $68 - $72 million Effective Tax Rate 33% - 36% Capital Expenditures $60 - $65 million Free Cash Flow $125 - $155 million

Q&A

9 | LSC COMMUNICATIONS

Appendix

10 | LSC COMMUNICATIONS

NON-GAAP FINANCIAL MEASURES

11 | LSC COMMUNICATIONS ($ millions)

Total LSC Communications

Q1 2017 TTM Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Net sales $3,595 $821 $919 $949 $906 $880 GAAP Net income (loss) 74 (1) 9 38 28 31 Restructuring, impairment and other charges, net 21 6 7 3 5 3 Spinoff-related transaction expenses 6 1 4 1

• Pension settlement charge

1

• 1
• Depreciation and amortization

165 40 41 40 44 46 Interest expense / (income)-net 35 17 18 1 (1)

• Income tax expense

37 2 1 18 16 16 Non-GAAP Adjusted EBITDA $339 $65 $80 $101 $93 $96 Non-GAAP Adjusted EBITDA margin 9.4% 7.9% 8.7% 10.6% 10.3% 10.9% Net cash provided by operating activities $281 $64 $95 $81 $41 $14 Capital expenditures (57) (21) (13) (16) (7) (12) Free cash flow $224 $43 $82 $65 $34 $2

NON-GAAP FINANCIAL MEASURES

12 | LSC COMMUNICATIONS ($ millions)

Print Segment

Q1 2017 TTM Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Magazines, catalogs and retail inserts $1,608 $383 $441 $407 $377 $407 Book 1,093 239 256 310 288 243 Europe 258 56 63 72 67 70 Directories 126 32 29 33 32 32 Net sales $3,085 $710 $789 $822 $764 $752 Income from operations 121 12 27 48 34 32 Depreciation and amortization 148 35 36 38 39 41 Restructuring, impairment and other charges, net 17 5 6 1 5 3 Non-GAAP Adjusted EBITDA $286 $52 $69 $87 $78 $76 Non-GAAP Adjusted EBITDA margin 9.3% 7.3% 8.7% 10.6% 10.2% 10.1%

Office Products Segment

Q1 2017 TTM Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 Net sales $510 $111 $130 $127 $142 $128 Income from operations 49 9 16 11 13 14 Depreciation and amortization 16 4 4 4 4 4 Restructuring, impairment and other charges, net 1 1

• Non-GAAP Adjusted EBITDA

$66 $14 $20 $15 $17 $18 Non-GAAP Adjusted EBITDA margin 12.9% 12.6% 15.4% 11.8% 12.0% 14.1%

($ millions) Magazines, Catalogs, and Retail Inserts Books Europe Directories Total Print Total Office Products Total LSC Q1 2016 Net Sales as Reported 407 $ 243 $ 70 $ 32 $ 752 $ 128 $ 880 $ Adjustments (1) 14

• 14
• 14

Q1 2016 Net Sales Pro Forma 421 $ 243 $ 70 $ 32 $ 766 $ 128 $ 894 $ Q1 2017 Net Sales as Reported 383 $ 239 $ 56 $ 32 $ 710 $ 111 $ 821 $ Adjustments (1) 1

• 1
• 1

Q1 2017 Net Sales Pro Forma 384 $ 239 $ 56 $ 32 $ 711 $ 111 $ 822 $ As Reported % Change

• 5.9%
• 1.6%
• 20.0%

0.0%

• 5.6%
• 13.3%
• 6.7%

Pro Forma % Change

• 8.8%
• 1.6%
• 20.0%

0.0%

• 7.2%
• 13.3%
• 8.1%

Non-GAAP Adjustments: Impact of changes in foreign exchange rates

• 0.7%

0.0%

• 1.4%

0.0%

• 0.5%

0.0%

• 0.4%

Impact of pass-through paper sales

• 1.4%

0.8% 0.0%

• 3.1%
• 0.7%

0.0%

• 0.6%

Q1 2017 Organic % Change (2)

• 6.7%
• 2.4%
• 18.6%

3.1%

• 6.0%
• 13.3%
• 7.1%

(1) Adjusted for net sales of acquired businesses: For the three months ended March 31, 2017, the adjustment to net sales of an acquired business reflects the net sales of HudsonYards

Studios ("HudsonYards"). For the three months ended March 31, 2016, the adjustments for net sales of acquired businesses reflect the net sales of HudsonYards and Continuum Management Company.

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

ORGANIC GROWTH RATES

13 | LSC COMMUNICATIONS

LIQUIDITY AND LEVERAGE

(1) Liquidity does not include uncommitted credit facilities, located primarily outside of the U.S. (2) The Company has a $400.0 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 March 31, 2017 and December 31, 2016. (3) Net available liquidity was reduced by $13 million related to outstanding letters of credit. On April 18, 2017, the Company issued a letter of credit related to its workers’ compensation program which will further reduce the availability by $38 million. (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”). 14 | LSC COMMUNICATIONS

$ millions

Short-Term and Current Portion of Long-Term Debt 15 $ Long-Term Debt 729 Total Debt

(4)

744 $ Non-GAAP Adjusted EBITDA LTM 3/31/2017 339 $ Non-GAAP Gross Leverage 2.2x

Leverage at March 31, 2017

$ millions

Q1'17 Q4'16 Total Debt 744 $ 794 $ Cash 89 $ 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

• Impact on availability related to outstanding letters of credit

(3)

(13) (12) Net Available Liquidity 476 $ 483 $ Less: availability reduction from covenants Net Available Liqudity

(1)

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