LSC COMMUNICATIONS Fourth Quarter Results. February 23, 2017

Transcription

1 LSC COMMUNICATIONS 2016 Fourth Quarter Results February 23, 2017

2 LSC COMMUNICATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 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 of 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 forwardlooking 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 information statement, dated September 23, 2016, filed as an exhibit to our Current Report filed on Form 8-K filed on September 23, 2016 and LSC Communications periodic filings with the SEC. LSC Communications does not undertake to and specifically declines any obligation to publicly release the results of 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. 2 LSC COMMUNICATIONS

3 NON-GAAP FINANCIAL INFORMATION 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. 3 LSC COMMUNICATIONS

4 STRATEGIC FOCUS Highlights + Results in line with our previous guidance + Momentum building in supply chain solutions offering + Significant developments in our portfolio of offerings + Paved the way to opening new revenue streams for LSC + Enhancing our solution portfolio with strategic acquisition opportunities Key Initiatives + Stemming the tide of piracy + Streamlining asset management workflow + Investing in HP digital production technology + Diversifying our portfolio - Web & mobile-based publications - Kitting & subscription boxes + Expanding best-in-class codistribution services + Increasing the purchasing power of our clients teams + Enhancing our position as a low-cost domestic provider of private label and branded office products 4 LSC COMMUNICATIONS

5 2016 FINANCIAL SUMMARY (US $ millions) 4Q Q 2015 FY 2016 FY 2015 $ millions Net Sales $919 $1,004 $3,654 $3,743 As Reported % Change -8.5% -2.4% Organic % Change (1) -6.3% -3.5% Total Cost of Sales $781 $825 $3,031 $3,090 SG&A Expenses $63 $69 $259 $280 Restructuring, Impairment, and Other Charges- Net $7 $5 $18 $57 Depreciation and Amortization $41 $47 $171 $181 Income from Operations $27 $58 $175 $135 Interest Expense (Income)- Net $18 - $18 ($3) Investment and Other Expense (Income)- Net ($1) Income before Income Taxes $10 $58 $157 $138 Income Tax Expense $1 $20 $51 $64 Net Income $9 $38 $106 $74 Non-GAAP Adjusted EBITDA (2) $80 $111 $370 $398 Non-GAAP Adjusted EBITDA Margin (2) 8.7% 11.1% 10.1% 10.6% 5 LSC COMMUNICATIONS (1) Please refer to slide 13 for organic revenue reconciliations (2) Please refer to slides for reconciliation of non-gaap measures

6 SEGMENT OVERVIEW Print ($ in millions) 4Q'16 4Q'15 FY'16 FY'15 Revenues $ 789 $ 873 $ 3,127 $ 3,181 Non-GAAP Adj EBITDA (1) $ 69 $ 91 $ 310 $ 324 Non-GAAP Adj EBITDA Margin (1) 8.7% 10.4% 9.9% 10.2% Office Products ($ in millions) 4Q'16 4Q'15 FY'16 FY'15 Revenues $ 130 $ 131 $ 527 $ 562 Non-GAAP Adj EBITDA (1) $ 20 $ 15 $ 69 $ 67 Non-GAAP Adj EBITDA Margin (1) 15.4% 11.5% 13.1% 11.9% + Overall Print segment sales down 7.3% (2) on an organic basis in 4Q 2016 (down 3.2% FY) due to volume declines and price pressure + Sales decline partially offset by growth in service offerings (CMR co-mail and Book supply chain management) + Non-GAAP Adjusted EBITDA margin decreased 170 basis points (1) primarily due to unfavorable business mix and price erosion; partially offset by productivity improvements + Office Products sales flat (2) on an organic basis in 4Q 2016 as gains in the wholesale and online channels offset declines at the major retailers due to their ongoing store consolidation initiatives + Non-GAAP Adjusted EBITDA margin increased 390 basis points (1) due to strong productivity gains in both manufacturing and materials procurement Focus on further growth in supply chain services and driving cost reductions across segment Continue to expand e-commerce channel as avenue for growth while maintaining cost-out initiatives 6 LSC COMMUNICATIONS (1) Please refer to slides for reconciliation of non-gaap measures (2) Please refer to slide 13 for organic revenue reconciliations

7 $ millions STRONG LIQUIDITY AND DIVIDEND 4Q 2016 Free Cash Flow (1) $ in millions $95 $13 $82 Debt, Liquidity, and Pension (2) Dividend Yield (3) $ millions $ in millions 4Q'16 3Q'16 Total Debt $ 794 $ 808 Cash $ 95 $ 55 Stated amount of the Credit Agreement Less: availability reduction from covenants - - Amount available under the Credit Agreement (1) Usage Borrowings under Credit Agreement - - Letters of Credit (12) (12) Net Available Liquidity (2) $ 483 $ 443 4% 3% 2% 1% 0% 3.8% 2.0% S&P Seasonality of working capital requirements drives strong free cash flow in 4Q + Included interest payments of $7 million (vs. zero in 4Q 2015) and does not include allocated pension income (vs. $6 million in 4Q 2015) Underfunded Pension (2) $ (280) $ (358) + 2.1x Non-GAAP Gross Leverage Ratio (2) + Used cash on hand to pay in advance the full $50 million of Term Loan B 2017 amortization payments + Pension underfunding decreased by $78 million since 9/30/16 (2) + January 18, 2017: Board of Directors declared regular quarterly cash dividend of $0.25 for shareholders of record as of February 15 7 LSC COMMUNICATIONS (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, Debt Leverage Ratio, and Pension Underfunded Status calculations (3) Dividend Yield is calculated as an annualized dividend ($1.00) per share divided by the closing LKSD stock price as of February 22, 2017

8 FULL YEAR 2017 GUIDANCE (US $ millions) 2017 Guidance 2016 Actuals Net Sales $ $3.65 billion $3.65 billion Non-GAAP Adjusted EBITDA 9.75% % 10.1% Depreciation and Amortization $155 - $165 million $171 million Interest Expense- Net (1) $68 - $72 million $18 million Effective Tax Rate 33% - 36% 32.5% Capital Expenditures $60 - $65 million $48 million Free Cash Flow (2) $125 - $155 million $183 million 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, spinoff-related transaction expenses, 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 ongoing operations, given that such excluded items are not indicators of business performance. 8 LSC COMMUNICATIONS (1) Since LSC Communications executed the spin-off from RR Donnelley & Sons Co. on 10/1/2016, LSC Communications only incurred one quarter of interest expenses in 2016 (2) 2016 Free Cash Flow includes $7 million of cash interest payments and $28 million of allocated pension income

9 9 LSC COMMUNICATIONS Q&A

10 10 LSC COMMUNICATIONS Appendix

11 NON-GAAP FINANCIAL MEASURES ($ millions) Total LSC Communications Q1 Q Q2 Q2 YTD Q Q3 Q3 YTD Q Q LTM LTM LTM Net sales $3,654 $3,743 $3,853 $880 $861 $3,762 $906 $879 $1,786 $1,740 $3,789 $949 $999 $2,735 $2,739 $3,739 $919 $1,004 Net income Restructuring, impairment and other charges, net Spinoff-related transaction expenses Pension settlement charge Acquisition-related expenses Purchase accounting inventory adjustments, net Gain on bargain purchase - - (10) Depreciation and amortization Interest expense / (income)-net 18 (3) (4) - (1) (2) (1) (1) (1) (2) (2) 1 (1) - (3) Income tax expense Non-GAAP Adjusted EBITDA $370 $398 $391 $96 $74 $420 $93 $88 $189 $162 $425 $101 $125 $290 $287 $401 $80 $111 Non-GAAP Adjusted EBITDA margin 10.1% 10.6% 10.1% 10.9% 8.6% 11.1% 10.3% 10.0% 10.6% 9.3% 11.2% 10.6% 12.5% 10.6% 10.5% 10.7% 8.7% 11.1% Net cash provided by operating activities $231 $275 $307 $14 $19 $270 $41 $55 $55 $74 $256 $81 $82 $136 $156 $255 $95 $119 Capital expenditures (48) (42) (60) (12) (13) (41) (7) (10) (19) (23) (38) (16) (9) (35) (32) (45) (13) (10) Free cash flow $183 $233 $247 $2 $6 $229 $34 $45 $36 $51 $218 $65 $73 $101 $124 $210 $82 $ LSC COMMUNICATIONS

12 NON-GAAP FINANCIAL MEASURES ($ millions) Print Segment Q1 Q Q2 Q2 YTD Q Q3 Q3 YTD Q Q LTM LTM LTM Magazines, catalogs and retail inserts $1,632 $1,807 $2,036 $407 $438 $1,776 $377 $423 $784 $861 $1,730 $407 $450 $1,191 $1,311 $1,687 $441 $496 Books 1, , , Europe Directories Net sales $3,127 $3,181 $3,353 $752 $723 $3,210 $764 $731 $1,516 $1,454 $3,243 $822 $854 $2,338 $2,308 $3,211 $789 $873 Income from operations Depreciation and amortization Restructuring, impairment and other charges, net Purchase accounting inventory adjustments, net Non-GAAP Adjusted EBITDA $310 $324 $338 $76 $61 $339 $78 $70 $154 $131 $347 $87 $102 $241 $233 $332 $69 $91 Non-GAAP Adjusted EBITDA margin 9.9% 10.2% 10.1% 10.1% 8.4% 10.6% 10.2% 9.6% 10.2% 9.0% 10.7% 10.6% 11.9% 10.3% 10.1% 10.3% 8.7% 10.4% Office Products Segment Q1 Q Q2 Q2 YTD Q Q3 Q3 YTD Q Q LTM LTM LTM Net sales $527 $562 $500 $128 $138 $552 $142 $149 $270 $287 $545 $127 $144 $397 $431 $528 $130 $131 Income from operations Depreciation and amortization Restructuring, impairment and other charges, net Purchase accounting inventory adjustments, net Non-GAAP Adjusted EBITDA $69 $67 $62 $17 $14 $70 $17 $18 $34 $32 $69 $15 $20 $49 $52 $64 $20 $15 Non-GAAP Adjusted EBITDA margin 13.1% 11.9% 12.4% 13.3% 10.1% 12.7% 12.0% 12.1% 12.6% 11.1% 12.7% 11.8% 13.9% 12.3% 12.1% 12.1% 15.4% 11.5% 12 LSC COMMUNICATIONS

13 ORGANIC GROWTH RATES ($ millions) Magazines, Catalogs, and Retail Inserts Books Europe Directories Total Print Total Office Products Total LSC 2015 FY Net Sales as Reported $ 1,807 $ 925 $ 305 $ 144 $ 3,181 $ 562 $ 3,743 Adjustments (1) FY Net Sales Pro Forma $ 1,857 $ 1,043 $ 305 $ 144 $ 3,349 $ 562 $ 3, FY Net Sales as Reported $ 1,632 $ 1,097 $ 272 $ 126 $ 3,127 $ 527 $ 3,654 Adjustments (1) FY Net Sales Pro Forma $ 1,676 $ 1,097 $ 272 $ 126 $ 3,171 $ 527 $ 3,698 As Reported % Change -9.7% 18.6% -10.8% -12.5% -1.7% -6.2% -2.4% Pro Forma % Change -9.7% 5.2% -10.8% -12.5% -5.3% -6.2% -5.4% Non-GAAP Adjustments: Impact of pass-through paper sales -3.6% 3.4% 0.0% -6.3% -1.2% 0.0% -1.0% Impact of changes in foreign exchange rates -1.0% 0.0% -4.3% 0.0% -0.9% -0.5% -0.9% 2016 FY Organic % Change -5.1% 1.8% -6.5% -6.2% -3.2% -5.7% -3.5% (1) 4Q 2015 Net Sales as Reported $ 496 $ 254 $ 83 $ 40 $ 873 $ 131 $ 1,004 Adjustments (1) Q 2015 Net Sales Pro Forma $ 509 $ 254 $ 83 $ 40 $ 886 $ 131 $ 1,017 4Q 2016 Net Sales as Reported $ 441 $ 256 $ 63 $ 29 $ 789 $ 130 $ 919 Adjustments (1) Q 2016 Net Sales Pro Forma $ 449 $ 256 $ 63 $ 29 $ 797 $ 130 $ 927 As Reported % Change -11.1% 0.8% -24.1% -27.5% -9.6% -0.8% -8.5% Pro Forma % Change -11.8% 0.8% -24.1% -27.5% -10.0% -0.8% -8.8% Non-GAAP Adjustments: Impact of pass-through paper sales -3.5% 2.0% 0.0% -12.5% -2.0% 0.0% -1.8% Impact of changes in foreign exchange rates -0.6% 0.0% -3.6% 0.0% -0.7% -0.8% -0.7% 4Q 2016 Organic % Change -7.7% -1.2% -20.5% -15.0% -7.3% 0.0% -6.3% Adjusted for net sales of acquired businesses: Courier and Continuum 13 LSC COMMUNICATIONS

14 LIQUIDITY, LEVERAGE AND UNDERFUNDED PENSION CALCULATIONS $ millions 4Q'16 3Q'16 Total Debt $ 794 $ 808 Cash $ 95 $ 55 Stated amount of the Credit Agreement Amount available under the Credit Agreement (1) Usage Net Available Liqudity Less: availability reduction from covenants Borrowings under Credit Agreement - - Letters of Credit (12) (12) Net Available Liquidity (2) $ 483 $ 443 $ millions Leverage at December 31, 2016 Short-Term and Current Portion of Long-Term Debt $ 52 Long-Term Debt 742 Total Debt $ 794 Non-GAAP Adjusted EBITDA LTM 12/31/2016 $ 370 Non-GAAP Gross Leverage 2.1x Pension Plans Qualified Non-Qualified Total $ millions December 31, 2016 Benefit Obligation $2,439 $92 $2,531 Fair Value of Plan Assets $2,249 $2 $2,251 Unfunded Status ($190) ($90) ($280) September 30, 2016 Benefit Obligation $2,502 $96 $2,598 Fair Value of Plan Assets $2,240 - $2,240 Unfunded Status ($262) ($96) ($358) (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 Credit Agreement ) which expires on September 30, The Credit Agreement is subject to a number of covenants, including, but not limited to, a minimum Interest Coverage Ratio and a maximum Leverage Ratio, as defined in and calculated pursuant to the Credit Agreement, 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 Credit Agreement as of December 31, LSC COMMUNICATIONS

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