McGraw-Hill Education Q Investor Update

Transcription

1 McGraw-Hill Education Q Investor Update March 27, 2018 This presentation has been prepared for investors in the currently outstanding debt of McGraw-Hill Global Education Holdings, LLC and MHGE Parent, LLC.

2 Important Notice Forward-Looking Statements This presentation includes statements that are, or may be deemed to be, forward-looking statements. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms believes, estimates, anticipates, expects, intends, plans, may, will or should or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this presentation and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this presentation. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this presentation, those results of operations, financial condition and liquidity or developments may not be indicative of results or developments in subsequent periods. Any forward-looking statements we make in this presentation speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data. Non-GAAP Financial Measures Certain financial information included herein, including Billings, EBITDA and Adjusted EBITDA, are not presentations made in accordance with U.S. GAAP, and use of such terms varies from others in our industry. Billings, EBITDA and Adjusted EBITDA should not be considered as alternatives to revenue, net income from continuing operations, operating cash flows or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, debt covenant compliance or cash flows as measures of liquidity. Billings, EBITDA and Adjusted EBITDA have important limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under U.S. GAAP. This presentation includes a reconciliation of certain non-gaap financial measures to the most directly comparable financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA, which is defined in accordance with our debt agreements, is provided herein on a segment basis and on a consolidated basis. Adjusted EBITDA by segment, as determined in accordance with Accounting Standards Codification Topic 280, Segment Reporting, is a measure used by Management to assess the performance of our segments. Adjusted EBITDA on a consolidated basis is presented as a debt covenant compliance measure. Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements. 2

3 Business Review

4 McGraw-Hill Education 2017 Investor Update MHE gained market share amid industry transition Digital Billings and paid activations grew as the digital transition continues - Gained market share for the 5 th consecutive year in Higher Ed and 3 rd consecutive year in K Higher Ed performance stabilized due to new frontlist, improving market conditions and digital growth - K-12 business maintained leadership position in key Adoption States and gained share in Open Territory Adjusted EBITDA margins and cash flow continued to be strong Preparing for future opportunities - Higher Ed focusing on student affordability offers including digital, Rental, loose-leaf and Inclusive Access - K-12 investing to participate in large upcoming State Adoptions - Separated International and Professional businesses and appointed new leadership Voluntarily prepaid $250M+ in HoldCo debt during 2017 with cash-on-hand and incremental, lower rate term loan - <15% of funded debt matures before 2022 McGraw-Hill Education, Inc. Fiscal Year Ended December 31, 2017 Total MHE Performance MHE Billings $1,866M (-2.4%) MHE Digital Billings 2 $823M (+8.0%) % Digital Billings 2 44% (vs. 40% in 16) Direct-to-Student E-Commerce Net Sales $199M (+15%) MHE EBITDA Before Pre-Publication $499M (-2.6%) Pre-Publication Investment $99M (+10.6%) MHE Adjusted EBITDA $400M (-5.4%) Key Indicators Connect/LearnSmart Paid Activations 3.6M (+8.0%) ALEKS Unique Users 4.0M (+20.6%) MHE Inc. Liquidity at 12/31/17 Cash $408M Credit Line Capacity $350M Total Liquidity $758M 1 Higher Ed market share based on unrestated annual MPI data. K-12 market share based on unrestated annual AAP data except for 2017 which is sourced from the December monthly AAP report; 2017 annual report not yet available. 2 K-12 digital Billings adjusted during finalization of year-end financial results. All other results in line with preliminary metrics. 4

5 Higher Education Business stabilized and gained market share; significant opportunities ahead Higher Ed business stabilized in 2017 Net Sales grew in 2017 vs. a 9.5% decline in 2016; actual returns remained favorable Y/Y Larger 2018 drove front-list Net Sales growth after three consecutive years of decline Digital e-commerce expanded to 28% of total Net Sales FY 2017 Billings declined low-single-digits (vs. -11% in 2016) Variance between Billings and Net Sales due to reserve for returns; year-end reserve established ahead of March/April visibility into return patterns for larger 2017 front-list (2018 ) Q4 Billings declined mid-single digits, excluding the impact of an accounting adjustment and return reserve 1 - December Net Sales continued to shift into Q1 - Rate of Q4 Billings decline narrower than prior year 2018 front-list (2019 ) opportunity anticipated to be roughly comparable to 2017 levels New Rental program on target for summer launch with additional distribution partner signings expected in Q2 Higher Education Fiscal Year Ended December 31, 2017 McGraw-Hill Higher Ed Performance: Net Sales (net of actual returns) 2 $717M (+0.6%) Front-List Sales $311M (+4.5%) Back-List Sales $406M (-2.2%) Actual Product Returns Change -$29M (-12.3%) Billings (net of accrued returns) 3 $719M (-2.3%) % Digital Billings 62% (vs. 56% in 16) E-Commerce Net Sales 2017 Direct-to-Student $199M (+15.4%) YTD Jan 31st Direct-to-Student $51M (+7%) vs. Industry Performance per MPI: YTD 12/31/17 (Y/Y) 4 MHE Market Share Change +~50 bps Industry Net Sales (net of actual returns) -1% Key Indicators Connect/LearnSmart Paid Activations 3.6M (+8.0%) ALEKS Unique Users 1.7M (+30.6%) 1 Billings no longer includes the change in deferred royalties which had a ~3% impact in Q4 and is immaterial on a FY basis. Q4-17 Billings declined ~8% Y/Y excluding the impact of the change in deferred royalties and the return reserve. 2 Net sales is gross sales net of actual returns and is the industry market share measure. 3 Billings is gross sales net of accrued returns and is the measure of company performance. 4 Per Management Practice, Inc.; 2016 annual data is on an unrestated basis. 5

6 Higher Education: Inclusive Access Overview Driving affordability for students while increasing access to digital Distribution model between publisher, educational institution (and sometimes bookstore) that provides affordability, first day of class access and digital adaptive courseware for an improved learning experience Materials are made available to all students in a course at the beginning of a semester for a discounted price usually billed directly to the university which then bills the student as part of a materials fee Larger, recurring sell-through within a class supports lower selling price 1 School is invoiced after drop/add period; may impact timing of revenue and collections across quarters Digital materials (usually) integrated into the campus Learning Management System (LMS) or provided via the campus bookstore Inclusive Access is currently a small component of Higher Ed Billings but expected to grow >$30M Inclusive Access Net Sales in 2017, +~60% Y/Y MHE targeting institutions where we can expand the use of Connect Announced partnership with Barnes & Noble Education (BNED) in February Inclusive Access drives affordability, accessibility and improved student performance Program Overview Content available to all registered students within course Currently partnering with 275+ institutions Students Discounted price Most current materials available on first day of class Instructors/Institution Drives student affordability Most current materials available on first day of class Preserves instructor choice and academic freedom McGraw-Hill Education 100% sell-through potential within class supports lower price More predictable demand planning; no returns to forecast Promotes digital transformation Billing primarily from institution directly to student Distribution Channel (Bookstores) Can serve as an intermediary at university request 1 Sell-through is the percentage of students in a given class who are purchasing instructional materials in which the publisher receives compensation. Digital sell-through is typically 100% of a class in an inclusive access model. 6

7 Higher Education: Print Rental Update Opportunity to earn our fair share of revenue generated by our intellectual property 2018 Rental program launched with Barnes & Noble Education / MBS and Chegg Conversations continue with additional potential partners Program will be a phased roll-out and includes hardbound versions of MHE s 2019 (this summer s early release front-list), only available for rent - Each future year s copyrights will be added to Rental program (3-5 years to complete transition) Books provided on consignment to distributors for a share of rental income, subject to a minimum revenue per transaction to MHE - Retail price determined by the distributor - For distributors who do not participate in the Rental program, MHE s 2019 will be available for sale digitally, in loose-leaf, or as a custom product Expect to be accretive to Billings and Adjusted EBITDA in ~1-2% negative impact to 2018 Billings; ~5% negative impact to 2018 Adjusted EBITDA as program builds 1 - Potential timing impact to Billings, inventory and receivables 1 Our Rental program, in conjunction with other affordability initiatives, is a win-win-win-win for students, instructors, distributors and McGraw-Hill Education Students Improved affordability Preserves student choice High-quality copies of most current materials Instructors Most current materials available Preserves instructor choice and academic freedom Distributors Eliminates cost and complexity of sourcing used books Attractive rental economics Retain control of pricing and student experience Ability to offer discounted Connect and rental bundles Reduces prevalence of counterfeits McGraw-Hill Education Participate in greater share of demand for our titles Sustained performance from term to term Provides greater flexibility in revision cycle timing Authors will share in the benefits of the program 1 Reference to rental impact on Billings, Adjusted EBITDA and working capital is on a total MHE basis. 7

8 Higher Education: Affordability Initiatives Reception to Rental and Inclusive Access programs has been positive University of Missouri System, McGraw-Hill Education Expand Access to Affordable Course Materials McGraw-Hill Education ebooks will be affordable through UM's AutoAccess program COLUMBIA, Mo. (March 7, 2018) - The University of Missouri System and learning science company McGraw-Hill Education today announced a new agreement that will increase student access to affordable course materials, lowering the cost of all McGraw-Hill Education electronic textbooks by an additional 38 percent to meet the university system's definition of low cost. McGraw-Hill Education will offer its entire higher education ebook catalog through the university system's AutoAccess program. The initial agreement gives students access to content purchased for five years. "Adoption of free and low-cost course materials that lessen the financial burden of education on students is a priority for us, UM System President Mun Choi said This partnership with McGraw-Hill Education is very innovative. As the state s leading public higher education institution, we consider this a key factor in creating a better learning environment for our students. Textbook Rentals Tackle Skyrocketing Costs McGraw-Hill Education has announced that it is expanding its rental opportunities through its distributors, including campus bookstores, in order to defray the high price of education The expected savings is as high as 70% off the list price when renting a title over purchasing it - Mercy Pilkington, Good E Reader, February 2018 McGraw-Hill Education and Unizin to Make Affordable Digital Learning Materials Available to 25 Universities and Nearly 1 Million Students NEW YORK and AUSTIN (March 13, 2018) - Learning science company McGraw-Hill Education has announced a new agreement with Unizin, Ltd. ("Unizin") to provide its 25 member universities with affordable, high-value, digital learning materials through an Inclusive Access model automatically giving students easy access to materials on the first day of class. The non-profit Unizin consortium serves nearly 1 million students and is dedicated to improving teaching and learning environments with digital technology. Under the agreement, all McGraw-Hill Education materials will be available to Unizin member universities for the same low, flat fee, which will save students money. Content will be available to students and faculty either on Unizin's Engage ebook platform or McGraw Hill Education's Connect digital learning platform. The two organizations will also contribute data to the Unizin Data Platform (UDP) and collaborate on learning analytics to support faculty and students. Old Dogs Learn New Tricks: How a New Partnership Led by McGraw-Hill Is Driving Down the Cost of Textbooks This month, McGraw-Hill, Barnes & Noble Education, and Chegg have partnered to enhance student access to more affordable higher education textbooks Their new partnership comes at a much needed time - Henry Kronk, Elearning, Inside News, February 2018 McGraw-Hill Education Launches Textbook and E-Book Rental Program College students may be able to save as much as 70 percent off their textbooks through a new rental program from McGraw-Hill Education. Starting this spring, the company is offering rentals on more than 250 of its copyright titles - Rhea Kelly, Campus Technology, February 2018 Barnes & Noble, McGraw-Hill Partner on Course Materials Basking Ridge-based Barnes & Noble Education Inc. and McGraw-Hill Education have partnered to provide students, faculty and institutions greater access to affordable course materials - Emily Bader, ROI New Jersey, February 2018 *Note that discounts mentioned reflect discounts off typical retail prices to student, not off wholesale prices. 8

9 Higher Education: Print Sale vs. Print Rental Opportunity Achieving higher sell-through and greater revenues with lower priced Rental program How our Rental program can increase print revenues over time Status Quo unit sales decline rapidly while rental sell-through is higher and stable Sell-Through % To Course Enrollment With higher rental sell-through, print units and revenues can grow vs. Status Quo Copyright Years Which leads to a greater share of course enrollment for our intellectual property Rental Status Quo Divot Secondary Market MHE Units MHE Units With Secondary Market Recapture Pub Yr (Partial) Yr 1 Yr 2 Yr Calendar Years Status Quo Rental Status Quo Sell-through to course enrollment for newly revised book can vary from 60%-90% depending upon on title and subject area All books are new in year of publication; sell-through declines in years 2-4 due to availability of used and rental alternatives Print Rental Lower priced rental option will promote higher sell-through on a recurring basis With each new copyright year, overall revenue will increase over time by recapturing share from the secondary market 9

10 Higher Education: Print Rental Economics Rental becomes increasingly more positive in subsequent years after first year divot Billings Lower Billings in 2018, but turns positive beginning in 2019 Rental program is being launched one copyright year at a time beginning with 2019 in the Fall of 2018: Billings are for a partial year only - new copyrights introduced each year are first sold in the Fall Because sell-through for a new title is at its highest in pub year under Status Quo model, Rental will result in a divot in the first partial year (given lower unit pricing), but with significant long-term upside In 2019 and subsequent years, we will have full year rentals (Fall, Winter, etc.), with sustained unit sales vs. significant fall-off that occurs under the Status Quo model We will introduce 2020 for rental in 2019, which will create a divot similar to the 2019, but this divot will be more than offset by the increased revenue from second year rentals of 2019 Returns will decline as inventory is consigned rather than sold EBITDA Lower EBITDA in 2018 due to lower Billings, but turns positive in 2019 as Billings turn positive Gross margin percentage earned on Rental and Status Quo revenues will be similar Gross profit will follow the sales pattern Inventory for Rental will be consigned to resellers and amortized over two years (rental life/~4 turns) Author royalties for Rental will be paid at the same percentage of Billings as Status Quo Working Capital Pre-publication Investment Minimal impact to working capital with changes primarily in AR and inventory Generally, the Accounts Receivable (AR) balance at year-end for Status Quo consists of sales made in Q4 Under Rental, Q3 rental revenue will be billed and collected in Q4 resulting in lower AR at year-end Sales made under Status Quo in Q4 will shift to Q1 as rentals, to be billed and collected in Q2 Inventory will increase initially with the investment in consigned inventory, to be amortized over 24 months. As inventory is amortized over time, inventory levels will decline for a given copyright Payment cycles for royalties to authors will be unchanged, with lower accrued amounts at year-end More stable investment cycle No incremental investment Greater flexibility in revision cycle timing 10

11 Higher Ed Business Driver Overview Digital growth and front-list sell-through are key in 2018 Timing Driver Results/Status Oct. Nov. Dec. Jan. Feb. Feb. Apr. Apr. June Actual product returns Digital Sales Digital sales / Inclusive Access Actual product returns Inclusive Access Low digital; Start of print ordering by channel Actual returns declined at a similar rate to 2016 but off a smaller base - Year-end reserve established pending March/April visibility into return patterns for larger 2017 front-list (2018 ) December net sales continued to shift into Q1 as digital e-commerce and Inclusive Access increase and occur at the start of the semester - Print ordering by the channel is later and more conservative Paid activations driven by e-commerce, Inclusive Access and channel ordering of digital cards - E-commerce sales $51M, +7% Y/Y, through Jan 31 st - Inclusive Access (predominantly digital) later in Q1 with some e-commerce overlap Key return period for larger 2017 front-list (2018 ) - Watching March/April actual returns - Inclusive Access billed in arrears so December to January shift is more of a December to Q1 shift (and possibly into April) Digital sales later in season - Digital orders continue to shift to start of school as direct-to-student sales increase End of June early Sept. New front-list (2019 ) for rent Shift to Rental for front-list moves sales from late Q2/Q3 to early Q4 - Rental and Inclusive Access revenue booked in arrears - Back-list print sales continue - E-commerce also drives sales from early summer to late summer/early fall Oct. Dec Rental and Inclusive Access Actual Product Returns Shift into Q4 for Rental and Inclusive Access billings - October and November is prime returns season - December becoming less important due to e-commerce, Rental and Inclusive Access 11

12 K-12 Gained market share despite tough comp vs. prior year; investing for MHE continued to gain K-12 market share and grow our digital footprint - Achieved #1 market position in California and Florida and gained market share in Open Territory Billings declined 3% Y/Y, in-line with YTD 9/30 results; Q4 remains seasonally small for K-12 Adoption Performance: - CA Reading performed well despite very tough comparison to outsized share gains in 2016 FL Social Studies performance exceeded expectations both in market size and market share Approved by CA Adoption Board for Social Studies sales beginning in 2018 Gained share in Open Territory due to change in go-tomarket strategy Market smaller due to deferred purchase decisions in will likely be a cyclically smaller year for the adoption market but MHE is positioned to compete in all major new adoptions through : TX Reading (K-8), CA Science & SS and FL Math : TX Reading (9-12), FL Reading, CA Science & SS K-12 Fiscal Year Ended December 31, 2017 McGraw-Hill K-12 Performance: Billings (net of accrued returns) $733M (-3.3%) % Digital Billings 1 35% (vs. 31% in 16) Key K-12 State Performance (new and residual): 2 CA Billings >$200M FL Billings >$60M vs. Industry Performance per AAP: YTD 12/31/17 (Y/Y) 3 MHE Net Sales -2.5% Industry Net Sales -3.6% MHE Market Share Change +~30 bps MHE Adoption Net Sales -2.6% Industry Adoption Net Sales -0.2% MHE Market Share Change -~75 bps MHE Open Territory Sales -2.4% Industry Open Territory Net Sales -6.5% MHE Market Share Change +~90 bps Key Indicators: ConnectED Unique Users 8.6M (+21.6%) ALEKS Unique Users 2.3M (+14.2%) 1 K-12 digital Billings adjusted during finalization of year-end financial results. All other results in line with preliminary metrics. 2 K-12 state performance includes all subjects but is primarily ELA in CA and Soc. Stud. in FL. 3 As per monthly AAP data; cohort of publishers for monthly data differs for annual data.. 12

13 K-12 New Adoption Market Update as of March 2018 Significant market opportunity in 2019 & 2020; cyclically smaller market in 2018 Big-3 State New Adoption Estimated Total Market E 2019E 2020E California Reading* ~$400M Reading* ~$60-80M Social Studies* ~$85-115M Social Studies* (Yr.3 Remainder) Social Studies ~$60-80M Science ~$ M Science* (Yr. 2) Florida Social Studies >$100M Science ~$ M Math ~$ M Reading Texas Reading ~$ M Reading (9-12) Big-3 State New Adoption Estimated Total Market All Other State New Adoption Estimated Total Market >$500M ~$ M ~$ M ~$ M ~$ M ~$ M Total New Adoption Estimate ~$ M ~$500-$600M ~$900-$1,100M ~$900-$1,000M - Open Territory (new and residual) total market estimated to fluctuate -3% to +3% per annum over next several years with large new adoptions historically stimulating open territory growth. - Adoption market data above is new adoption only and does not include off-list / residual sales that fluctuate but can be as large as new adoption sales in a given year. - Market size ranges driven by several factors including 1) applicable enrollment, 2) potential use of core instructional funds for off-list purchases (e.g. supplemental), and 3) other factors that may influence or defer purchase decisions. Source: MHE estimate of total market without adjustment for participation or market share. *Disciplines reflect 2 nd and 3 rd year of major purchasing. 13

14 International and Professional International success in Middle East and Asia; Professional subscriptions drive growth International International Billings declined 2% Y/Y on a constant currency basis excluding the Canadian K-12 business which was sold mid-year New opportunities in China and Middle East largely offset print declines in Latin America and other markets Management is undertaking a review of the International business to identify opportunities to improve operating performance Separated International and Professional businesses and appointed new leadership Professional Professional performed well in 2017 and returned to topline growth largely due to strong Q4 digital sales and growth in print/ebook revenue Digital growth was driven by the successful execution of new wins on the Access subscription platform International Fiscal Year Ended December 31, 2017 McGraw-Hill International Performance: Billings (as reported) $287M (-2.8%) Billings (on constant FX) $283M (-4.2%) Digital Billings % 17% (vs. 17% in 16) Key Indicators Connect/LearnSmart Paid Activations >390K ALEKS Unique Users >140K Professional Fiscal Year Ended December 31, 2017 McGraw-Hill Professional Performance: Billings $125M (+2.7%) Digital Billings % 53% (vs. 52% in 16) Key Indicators Access Platform Renewal Rate 93% 14

15 Digital Ed Tech Highlights 16+ billion cumulative adaptive interactions on LearnSmart and ALEKS since 2009 (Millions) CONNECT/LEARNSMART PAID ACTIVATIONS 1 (US HIGHER ED) ConnectED UNIQUE USERS 1 (K-12) CAGR: +13% % CAGR: +40% % IMPROVING OUTCOMES AND DRIVING ENGAGEMENT ALEKS UNIQUE USERS 2 (GLOBAL HIGHER ED, K-12) CAGR: +29% +21% Digital adaptive offerings continued to penetrate MHE s addressable course base in 2017 Student engagement on digital platforms continued to reach new highs - 109M assignments submitted through Connect, up 10% Y/Y - ~9.3B interactions (questions answered) on LearnSmart since ~6.8B interactions (questions answered) on ALEKS since 2010 K-12 Higher Ed 1 Connect/LearnSmart paid activations exclude >390K of International paid activations. 2 ALEKS Unique Users include >140K international unique users. 15

16 Higher Ed Digital Billings Digital is more than 60% of Higher Ed Billings DIGITAL VS. PRINT BILLINGS MIX % 66% 62% 55% 44% 38% STRONG DIGITAL MOMENTUM IN 2017 Digital Billings continued to grow and reached 62% of total Higher Ed Billings in 2017 Direct-to-student e-commerce channel drove significant digital sales in % 38% 45% 56% 62% Digital Print (Traditional + Custom) Digital purchases continue to shift later (into Q1) as students buy closer to the start of the semester and Inclusive Access sales are billed in arrears Digital remains a key driver for MHE Higher Ed growth and is central to the long term strategy especially as distribution models such as Inclusive Access scale ~Two-thirds of our digital sales are made on a standalone basis E-COMMERCE NET SALES ($ in Millions) $105 $140 $ % $199 - For bundled sales (print and digital), the revenue is bifurcated based on the stand-alone prices of the components with any discounts applied proportionally $

17 Financial Review

18 McGraw-Hill Education Digital Billings Mix MHE digital Billings continued to grow in 2017 ($ in Millions) Digital % of Total Billings MCGRAW-HILL EDUCATION +8% +2% $151 $154 $763 $823 42% 45% 40% 44% Q4-16 Q Higher Ed digital Billings growth partially offset by the ongoing shift from distributor sales in December to direct to-student and Inclusive Access in Q1 K-12 driven by product mix; 2017 Florida social studies adoption more digital than 2016 CA Reading adoption HIGHER ED $410 +9% $447 K-12 $238 +8% $258 Digital % of Total Billings -2% $90 $88 52% 61% Q4-16 Q % 62% Digital % of Total Billings +23% $20 $16 30% 38% 31% 35% Q4-16 Q INTERNATIONAL Digital % of Total Billings $49 $49-4% +6% $19 $18 * % Y/Y change not meaningful PROFESSIONAL $25 $26 +4% $64 $66 21% 19% 17% 17% Digital % of 61% 58% 52% 53% Q4-16 Q Total Billings Q4-16 Q

19 McGraw-Hill Education Financial Review Improving fundamentals positions MHE for success in upcoming opportunities ($ in Millions) Digital % of Total Billings MHE TOTAL BILLINGS 1-6% $361 $340 42% 45% Q4-16 Q % $1,913 $1,866 40% 44% 2016 Constant FX (-7%) $337 (-3%) $1,862 MHE EBITDA BEFORE PRE-PUBLICATION INVESTMENT 2017 McGraw-Hill Education BILLINGS 1 MHE FY 2017 Billings declined 2% Y/Y, -3% on constant fx, as the business continues to transition from print to digital MHE Billings declined 6% in Q4 as lower Billings primarily in Higher Ed more than offset growth within International and Professional EBITDA BEFORE AND AFTER PRE-PUBLICATION INVESTMENT Q4 EBITDA before pre-publication investment primarily impacted by margin flow-through on lower Billings in Higher Ed FY pre-publication investment increased 11% Y/Y, in-line with expectations, in support of the new Higher Ed front-list and K-12 new adoption opportunities FY 2018 pre-publication investment anticipated to be % Y/Y (vs. $99M in 2017) with the majority of the increase resulting from investment in upcoming K-12 adoptions MHE ADJUSTED EBITDA 2-35% -3% $513 $499 * % Y/Y change not meaningful -5% $423 $400 Margin % $32 $21 9% 6% 27% 27% Q4-16 Q Margin % 22% 21% nm nm $(2) $(5) Q4-16 Q Constant FX nm -$5 (-6%) $397 1 Effective Q4-16 and prospectively, MHE no longer incudes change in deferred royalties within change of deferred revenue. On a FY basis, net change is immaterial. 2 Includes the impact of pre-publication investment incurred in advance of future year sales. Pre-publication investment relates to the cost of developing products and is capitalized and amortized over the life of the new product for GAAP purposes and in Adjusted Post-Plate EBITDA reflected as cash investment. 19

20 Higher Ed Financial Review Business remains in transition with optimism for the future ($ in Millions) HIGHER ED TOTAL BILLINGS 1-2% $736 $719 Higher Education BILLINGS FY Billings declined 2% Y/Y as digital growth and sales of MHE 2018 were more than offset by print declines of earlier copyrights - Net Sales stabilized in 2017 due to digital growth and a narrower rate of print front-list decline Digital % of Total Billings -17% $173 $144 52% 61% 56% 62% Q4-16 Q Q4 Billings declined partially due to the impact of an accounting adjustment and return reserve (~50% of the overall decline), more conservative ordering by the channel and the ongoing shift of digital purchases from Dec to Q1 Q4 Billings declined mid-single digits, excluding the impact of the accounting adjustment and return reserve EBITDA BEFORE AND AFTER PRE-PUBLICATION INVESTMENT Adjusted EBITDA declined in Q4 primarily due to margin flow-through on lower Billings HIGHER ED EBITDA BEFORE PRE-PUBLICATION INVESTMENT HIGHER ED ADJUSTED EBITDA 2-1% $263 $261-2% $234 $228 Margin % -36% $52 $33 30% 23% 36% 36% Margin % $39-39% $24 23% 17% 32% 32% Q4-16 Q Q4-16 Q Q4-17 Billings declined ~8% Y/Y, excluding the impact of the change in deferred royalties and the return reserve. 2 Includes the impact of pre-publication investment incurred in advance of future year sales. 20

21 K-12 Financial Review Continue to lead the market while building for future opportunities ($ in Millions) Digital % of Total Billings K-12 TOTAL BILLINGS $54-3% $53-3% $758 $733 30% 38% 31% 35% Q4-16 Q K-12 BILLINGS Billings declined 3% Y/Y in the FY and Q4 as strong performance across K-12 in the state of CA and the FL social studies new adoption did not offset record market share capture in the 2016 CA ELA adoption Gained share in Open Territory amid a delayed funding environment following changes in the approach to urban markets Continue to expect 2018 to be a smaller new adoption market and anticipate purchasing to resume within Open Territory EBITDA BEFORE AND AFTER PRE-PUBLICATION INVESTMENT FY Adjusted EBITDA declined due to lower Billings, higher royalties and increased pre-publication investment ahead of new adoptions - Q4 impacted by cost savings and timing of pre-publication investment K-12 EBITDA BEFORE PRE-PUBLICATION INVESTMENT K-12 ADJUSTED EBITDA 1-8% $173 $159 $138-19% $112 +4% 23% 22% +4% 18% 15% Margin % nm nm Margin % nm nm ($61) ($58) Q4-16 Q $(72) $(69) Q4-16 Q Includes the impact of pre-publication investment incurred in advance of future year sales. 21

22 International Financial Review New leadership and a renewed focus on operational performance ($ in Millions) Digital % of Total Billings INTERNATIONAL TOTAL BILLINGS +4% $92 $96 Q4-16 Q % $295 $287 21% 19% 17% 17% International BILLINGS FY Billings declined 4% on constant fx primarily due to lower print sales; Billings declined 2% adjusted for the sale of the K-12 business in Canada Billings increased 4% Y/Y in Q4 due to new arrangements in China and the Middle East EBITDA BEFORE AND AFTER PRE-PUBLICATION INVESTMENT FY EBITDA before pre-publication investment declined primarily due to lower Billings; Q4 favorably impacted by Billings growth Pre-publication investment impacted by upfront spend in 2016 associated with the multi-year UAE contract Constant FX (+2%) $94 (-4%) $283 INTERNATIONAL EBITDA BEFORE PRE-PUBLICATION INVESTMENT INTERNATIONAL ADJUSTED EBITDA 1 $20 +17% $24 $36-19% $30 * % Y/Y change not meaningful $12 $21-4% $19 $18 Margin % 22% 25% 12% 10% Margin % 13% 21% 6% 6% Q4-16 Q Q4-16 Q Constant FX nm $21 nm $15 K-12 business in Canada was sold in May Includes the impact of pre-publication investment incurred in advance of future year sales. 22

23 Professional Financial Review Strategic focus in select print disciplines and digital Access platform ($ in Millions) Digital % of Total Billings PROFESSIONAL TOTAL BILLINGS +11% $41 $45 +3% $122 $125 61% 58% 52% 53% Q4-16 Q Professional BILLINGS Business continued to transition to a subscription based model while leveraging strength in core print disciplines Q4 and FY Billings increased 11% and 3% Y/Y respectively due to print sales of medical and technical publications and growth on the Access platform Digital Billings mix impacted by strong growth in print sales in Q4 EBITDA BEFORE AND AFTER PRE-PUBLICATION INVESTMENT Adjusted EBITDA favorably impacted by higher digital Billings and ongoing cost saving efforts across the business PROFESSIONAL EBITDA BEFORE PRE-PUBLICATION INVESTMENT PROFESSIONAL ADJUSTED EBITDA 1 +13% $20 $23 $42 +15% $48 $18 +15% $21 $34 +18% $40 Margin % 50% 51% 34% 38% Margin % 44% 45% 28% 32% Q4-16 Q Q4-16 Q Includes the impact of pre-publication investment incurred in advance of future year sales. 23

24 Capital Structure and Liquidity Significant cash generation; $350M revolver undrawn Strong cash flow generation resulted in over $750M of liquidity at year-end, with more than $400M of cash-onhand Voluntarily prepaid $256M of MHGE Parent (Holdco) debt through cash-on-hand and $150M incremental term loan - $244M Holdco debt outstanding at 12/31 - Company considering alternatives for Holdco debt outstanding although not due until August No other material funded debt maturities before 2022 Hedged $500M of floating rate debt at 6.1% - 49% of total debt fixed Term loan restricted payment capacity of $88M at Q Will fluctuate quarterly based on seasonality - Opco Notes RP basket remained sizably larger based on original deal structure Nominal (<$1M) term loan excess cash flow recapture payment due - Use of general RP basket in December refinancing mitigated ECF obligation ($ in Millions) MCGRAW-HILL EDUCATION LIQUIDITY: 12/31/17 Cash and Cash Equivalents $408 Available under Credit Facilities 350 Total Liquidity $758 MCGRAW-HILL EDUCATION DEBT PROFILE: 12/31/17 Senior Secured Term Loan due 2022 $1,701 Revolving Credit Facility due 2021 ($350M) 0 Total First Lien Indebtedness $1,701 Less: Cash and Cash Equivalents (OpCo) (407) Net First Lien Indebtedness $1,294 Net Leverage 3.1x Senior Unsecured Notes Due Net Total Indebtedness - McGraw-Hill Global Education $1,694 Net Leverage 4.1x MHGE Parent Notes Due Net Total Indebtedness MHE Inc. $1,937 Net Leverage 4.7x Net First Lien Leverage covenant in revolving line of credit takes effect only if 30% of the revolving line of credit is drawn at quarter end. None was drawn (except for $0.3M letters of credit) at 12/31/17. Revolver covenant level is 5.25x in Q2 and 4.8x in Q1, Q3 and Q4. EBITDA used to calculate this ratio is Adjusted EBITDA plus pro-forma adjustments that are permitted under the Credit Agreement and Indenture, which totaled $416M for the year ended 12/31/17. Net First Lien Indebtedness and Net Total Indebtedness McGraw-Hill Global Education excludes $0.4M in cash held at MHGE Parent LLC (HoldCo) / MHE Inc. 24

25 Summary Education market at inflection point; initiatives in place to drive long term growth 2017 was a successful year of market share gains, digital performance and operating cash flow generation Continued to successfully navigate the ongoing transition from print to digital in Higher Ed Achieved stability in Higher Ed Net Sales as new 2018 drove front-list Net Sales growth after three consecutive years of decline Expanded Higher Ed affordability solutions through Rental and Inclusive Access in 2018 K-12 had another successful year in State Adoptions and gained share in Open Territory while investing to compete effectively in large adoptions Separated International and Professional businesses and appointed new leadership Management and owners continue to review alternatives for HoldCo debt outstanding due in

26 Appendix

27 Financial Terms and Acronyms Financial Terms Adjusted EBITDA Billings (formerly referred to as Adjusted Revenue) Change in Deferred Revenue Change in Deferred Royalty Digital Billings (formerly referred to as Digital Adjusted Revenue) EBITDA Front-list and Back-list Net Sales Pre-publication Investment Sell-through KPI Terms Paid Activation Unique User on a platform Description Non-GAAP financial measure that includes adjustments required or permitted in calculating covenant compliance under our debt agreements. Adjusted EBITDA is a non-gaap financial measure defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-publication investment cash costs) and adjusted to exclude unusual items and other adjustments required or permitted in calculating covenant compliance under our debt agreements less cash spent for pre-publication investment in addition to the change in deferred revenue and deferred royalties. Non-GAAP financial measure that we define as U.S. GAAP revenue plus the net change in deferred revenue excluding the impact of purchase accounting. Billings, a measure used by management to assess sales performance, is defined as the total amount of revenue that would have been recognized in a period if all revenue were recognized immediately at the time of sale. The Company receives cash up-front for most product sales but recognizes revenue (primarily related to digital sales) over time recording a liability for deferred revenue at the time of sale. This adjustment represents the net effect of converting deferred revenues to a cash basis assuming the collection of all receivable balances. Royalty obligations are generally payable in the period incurred with limited recourse. This represents royalties primarily associated with digital sales which are deferred and amortized over the subscription period. It is the net effect of converting deferred royalties to a cash basis assuming the payment of all amounts owed in the period incurred. Represents standalone digital sales and, where digital product is sold in a bundled arrangement, only the value attributed to the digital component(s) is included. The attribution of value in bundled arrangement is based on relative selling prices (inclusive of discounts). Earnings before interest (net), income tax, depreciation and amortization. Front-list represents brand new titles and new revisions of existing titles previously published. For example, the 2017 front-list represents 2018 and 2017 copyrights sold in Back-list represents copyrights from 2016 and prior sold in Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue. Pre-publication costs reflect the costs incurred in the development of instructional solutions, principally design and content creation. These costs are capitalized when the title is expected to generate future economic benefits and are amortized upon publication of the title over its estimated useful life of up to six years. Represents the percentage of net sales a new or revised title generates vs. prior editions of the same title. Description A user who accesses a purchased digital product for the first time. Access can be through a physical access card purchased from a bookstore or directly over MHE s e-commerce channel. An individual who authenticates a product at least once during a given period of time. 27

28 Digital Product Offering Descriptions Product Description Higher Education K-12 International Professional Access Digital subscription platform that provides easily searchable and customizable digital content integrated with dynamic and functional workflow tools ALEKS Adaptive learning technology for the K-12 and Higher Ed markets Connect Connect2 Open learning environment for students and instructors in the Higher Education market and K-12 students taking AP courses Collaborative teaching and learning environment for the International Higher Education market ConnectED Content delivery platform for the K-12 market ELLevate English Six level English Language Learning (ELL) course Engrade Developer of an open digital platform for K-12 education that unifies the data, curriculum and tools to drive student achievement and inform district educational strategy Inclusive Access LearnSmart Redbird SmartBook StudyWise A predominantly digital solution in Higher Ed that provides students with required materials on the first day of class at a reduced cost, offering greater affordability to students Adaptive learning program which personalizes learning and designs targeted study paths for students A leading digital personalized learning company that offers courses in K-12 math, language arts and writing, and virtual professional development programs for educators Adaptive reading product designed to help students understand and retain course material by guiding each student through a highly personal study experience Adaptive offering that supports students in adaptive practice on smartphones. StudyWise extends the reach of Connect and Connect2 allowing students to efficiently learn in their natural environment 28

29 Supplemental Financial Disclosure

30 Billings and Adjusted EBITDA Billings is a non-gaap sales performance measure that provides useful information in evaluating our period-to-period performance because it reflects the total amount of revenue that would have been recognized in a period if we recognized all print and digital revenue at the time of sale. We use Billings as a sales performance measure given that we typically collect full payment for our digital and print solutions at the time of sale or shortly thereafter, but recognize revenue from digital solutions and multi-year deliverables ratably over the term of our customer contracts. As sales of our digital learning solutions have increased, so has the amount of revenue that is deferred in accordance with U.S. GAAP. Billings is a key metric we use to manage our business as it reflects the sales activity in a given period, provides comparability from period-to-period during this time of digital transition and is the basis for all sales incentive compensation. In the K-12 market where customers typically pay for five to eight year contracts upfront and the ongoing costs to service any contractual obligation are limited, the impact of the change in deferred revenue is most significant. Billings is U.S. GAAP revenue plus the net change in deferred revenue. EBITDA, a measure used by management to assess operating performance, is defined as net income from continuing operations plus net interest, income taxes, depreciation and amortization (including amortization of pre-publication investment). Adjusted EBITDA is a non-gaap debt covenant compliance measure that is defined in accordance with our debt agreements. Adjusted EBITDA is a material term in our debt agreements and provides an understanding of our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements. EBITDA used to calculate MHE s Net First Lien Leverage covenant ratio is Adjusted EBITDA plus pro-forma adjustments that are permitted under the Credit Agreement and Indenture, which totaled $416 million for the year ended 12/31/17. Each of the above described measures is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income from continuing operations, or any other measure derived in accordance with U.S. GAAP as a measure of operating performance, debt covenant compliance or to cash flows from operations as a measure of liquidity. Additionally, each such measure is not intended to be a measure of free cash flows available for management s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Such measures have limitations as analytical tools, and you should not consider any of such measures in isolation or as substitutes for our results as reported under U.S. GAAP. Management compensates for the limitations of using non-gaap financial measures by using them to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than U.S. GAAP results alone. Because not all companies use identical calculations, our measures may not be comparable to other similarly titled measures of other companies. Management believes Adjusted EBITDA is helpful in highlighting trends because Adjusted EBITDA excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax rules in the jurisdictions in which companies operate, and capital investments. In addition, Billings and Adjusted EBITDA provides more comparability between the historical operating results and operating results that reflect purchase accounting and the new capital structure post the Founding Acquisition as well as the digital transformation that we are undertaking which requires different accounting treatment for digital and print solutions in accordance with U.S. GAAP. Management believes that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about certain material non-cash items and about unusual items that we do not expect to continue at the same level in the future as well as other items to assess our debt covenant compliance, ability to service our indebtedness and make capital allocation decisions in accordance with our debt agreements. Note: In compliance with SEC interpretative guidance, we now refer to Adjusted Revenue as Billings throughout the presentation. 30

31 Higher Ed Front-List / Back-List Net Sales 1 ($ in Millions) Twelve Months Ended December Digital Net Sales Front-list $100 $126 $132 $156 $149 $166 Back-list Total Digital Net Sales $237 $278 $326 $376 $411 $447 Y/Y % Front-list (6.0%) 25.1% 5.2% 18.2% (4.7%) 11.9% Back-list 53.7% 11.8% 27.1% 13.4% 19.2% 7.0% Total Digital Net Sales 21.1% 17.4% 17.2% 15.3% 9.3% 8.8% Print Net Sales Front-list $317 $323 $291 $233 $149 $145 Back-list Total Print Net Sales $523 $538 $524 $411 $302 $270 Y/Y % Front-list (23.9%) 1.9% (9.9%) (20.0%) (35.9%) (2.7%) Back-list 0.6% 4.7% 8.5% (23.6%) (14.6%) (17.8%) Total Print Net Sales (15.9%) 3.0% (2.6%) (21.6%) (26.7%) (10.6%) Total Net Sales Front-list $418 $449 $423 $389 $298 $311 Back-list Total Net Sales 2 $760 $817 $851 $787 $713 $717 Y/Y % Front-list (20.3%) 7.5% (5.7%) (8.1%) (23.4%) 4.5% Back-list 16.7% 7.5% 16.2% (6.8%) 4.1% (2.2%) Total Net Sales (7.0%) 7.5% 4.2% (7.4%) (9.5%) 0.6% Other (Accounting Accruals/Reversals) 2 (1) 4 5 (2) 1 Total Net Sales 3 $762 $816 $855 $793 $711 $718 Y/Y % (7.5%) 7.1% 4.8% (7.3%) (10.3%) 1.0% front-list represents 2018 and 2017 copyrights sold in 2017; they do not begin to impact current year until very late Q2. 2 Gross sales less actual returns; net sales are not adjusted for the impact of accruals / net change in deferred revenue. 3 Reflects the impact of accounting related to accruals / deferrals. 31