LSC COMMUNICATIONS Bank of America Merrill Lynch Leveraged Finance Conference November 29, 2017
SAFE HARBOR 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 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 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
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 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
LSC REPRESENTATIVES Drew Coxhead Chief Financial Officer Janet Halpin SVP, Treasurer & Investor Relations Kent Hansen SVP, Chief Accounting Officer 4 LSC COMMUNICATIONS
AGENDA + Business Overview + Investment Highlights + Financial Overview + Appendix 5 LSC COMMUNICATIONS
6 LSC COMMUNICATIONS Business Overview
LSC COMMUNICATIONS: A GLOBAL LEADER LSC AT A GLANCE EXTENSIVE PRODUCTS & SERVICE CAPABILITIES Global leader in traditional and digital print, print-related services and office products Serves the needs of publishers, merchandisers and retailers Service offering includes supply chain management, mail and distribution services, and e-book formatting Serves over 3,000 customers Strategically located operations with 56 production and manufacturing facilities in the U.S., Europe and Mexico 24 acquisitions completed since 2004 $3.65BN of revenues with $370MM of EBITDA (1) in 2016 Print Europe 8% Office Products Office Products 14% Directories 3% $3.65BN 2016 Sales Books 30% Magazines, catalogs & retail inserts 45% GLOBAL PLATFORM WITH SIGNIFICANT SCALE UNITED STATES MEXICO POLAND Print Locations Office Products Locations 1. Non-GAAP adjusted EBITDA 7 LSC COMMUNICATIONS 48 Production Facilities in the U.S. 8 International Manufacturing Facilities ~20 million Square Feet of Owned Facility Space
VALUE CREATION STRATEGY LSC IS UNIQUELY POSITIONED WITH A CLEAR STRATEGY FOR DELIVERING SIGNIFICANT VALUE TO ITS SHAREHOLDERS IN A DYNAMIC MARKET ENVIRONMENT Leverage Scale Disciplined M&A Value Creation Improve Operational Efficiency New Revenue Streams Grow Select Existing Revenue Streams 8 LSC COMMUNICATIONS
PRINT SEGMENT OVERVIEW SEGMENT SNAPSHOT + Print segment (86% of total revenues) produces magazines, catalogs, retail inserts, books and directories and provides print-related services + Largest producer of books in the U.S. + One of the largest producers of catalogs, magazines and retail inserts in North America + Offers a wide range of products and services to customers: Books: Produces hardcover and softcover books serving the education, trade, religious and testing sectors Magazines, Catalogs & Retail Inserts: Produces catalogs, magazines & retail inserts to customers specifications using either offset or gravure printing processes in combination with either onpress finishing, saddle-stitch binding or patent binding Directories: Produces directories which are mainly phone directories that support local and small business advertising Print-related Services: + Supply chain management offering includes procurement, warehousing, distribution, and inventory management for book publishers + Mail services offering includes list processing and mail sortation services that optimize postal costs for magazine and catalog customers + Other offerings include e-book formatting and distribution services $3,353 $381 $787 $149 NET SALES ($MM) $3,181 $3,127 $144 $126 $305 $272 $925 $1,097 $2,036 $1,807 $1,632 2014 2015 2016 Magazines, Catalogs & Retail Inserts Books Europe Directories SELECT CUSTOMERS 10 of the top 10 book publishers in North America 9 of the top 10 direct mail catalogers 9 of the top 10 magazine publishers 9 LSC COMMUNICATIONS
OFFICE PRODUCTS SEGMENT OVERVIEW SEGMENT SNAPSHOT + Office Products segment (14% of total revenues), produces a wide range of branded and private label products in five core categories: filing products, note-taking products, binder products, forms and envelopes + Customers include office superstores, office supply wholesalers, independent contract stationers, mass merchandisers and retailers and e-commerce resellers + Expanded offering with Ampad, Oxford and Pendaflex brands through the acquisition of Esselte s North American operations in 2014 KEY BRANDS & OFFERINGS NET SALES ($MM) $500 $562 $527 2014 2015 2016 SELECT CUSTOMERS Filing Products Private Label Note-taking Products Binder Products Forms Envelopes Private Label Private Label Private Label Private Label Product placement at 9 of the top 10 retailers Services 5 of the top 10 ecommerce retailers Top 5 supplies-vendor at both of the office supply superstores 10 LSC COMMUNICATIONS
LONG-TERM REVENUE OUTLOOK: NEXT 5 YEARS LSC OUTLOOK BETTER THAN INDUSTRY DRIVEN BY CONTINUED GROWTH IN SERVICES AND INNOVATION INITIATIVES Magazine, Catalog, Retail % of 2016 Net Sales 45% 30% Near-to-Medium Term Organic Growth Outlook (1) (7%) to (2%) Books (2%) to 3% 7% Europe (4%) to 1% Commentary + Ongoing shift in advertiser spend from print to electronic media + Offset by share gain from investment in co-mail, sourcing, and premedia + Catalog demand is expected to decline less rapidly than retail inserts and magazine volume + Modest declines from ongoing electronic substitution + Offset by growth from supply chain services + Upside from innovation initiatives including Anti-Piracy and Channel Management + Based on the mix of catalog, magazine, retail, and directory products along with premedia services 3% Directory (15%) to (10%) + Rapid electronic substitution for these products is expected to continue + Continuing to look for new revenue streams to offset decline Total Print Segment (4%) to (1%) Office Products (2%) to 3% 14% + Modest declines in demand for select office products + Offset by growth in private label volume Blended LSC Outlook: (3%) to 0% Industry Outlook: Low-to-mid single digit decline 1. Long-term revenue guidance reflects guidance in Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission, and is not being reaffirmed here. 11 LSC COMMUNICATIONS
12 LSC COMMUNICATIONS Credit Highlights
CREDIT HIGHLIGHTS 1 Leading Player Within a Large, Highly Fragmented Market 2 Extensive Product & Service Profile 3 Long-Standing Relationships with a Premier Customer Base 4 Strong M&A Track Record 5 Sharp Focus on Cost Structure with Additional Opportunities to Rationalize 6 Strong Cash Flow Profile 7 Experienced Leadership Team 13 LSC COMMUNICATIONS
1 LEADING PLAYER WITHIN A LARGE, HIGHLY FRAGMENTED MARKET IN A HIGHLY FRAGMENTED PRINT INDUSTRY, ONLY A SMALL NUMBER OF PLAYERS HAVE THE SCALE TO EFFECTIVELY ADDRESS A CHANGING MARKET ENVIRONMENT U.S. Print Industry Revenues MARKET TRENDS LSC ADVANTAGE $77 Billion Total LSC s Core & Related Target Markets are Significant Excess Industry Capacity Experienced Team Managing Facility Closures across US, Mexico and Europe LSC Core Related Unrelated Highly Competitive Environment Industry Consolidator with Strong M&A Track Record Highly Fragmented Core Market Largest Players by Revenues in Core LSC Markets (1) $ in billions Top 2 Players Represent Only a Fraction of the Core Market Customers Focus on Total Cost Scale Enables Postal & Supply Chain Efficiencies for Customers $4.3 QUAD $3.1 LSC Next largest company has less than $0.5BN in revenue Technological Changes / Volume Pressures Exposure to Growing Book Segment, Services Offering and Industry Leading Digital Print Platform to Help Offset Tech-driven Declines Source: IBISWorld, Printing in the US, June 2017. Company filings. 1. Represents latest fiscal year reported revenue. Sales reflect revenues from the entirety of Quad Graphics and LSC Communications Print segment. 14 LSC COMMUNICATIONS
1 LEADING PLAYER WITHIN A LARGE, HIGHLY FRAGMENTED MARKET LSC S SCALE ENABLES ITS CO-MAIL SERVICES WHICH COMBINES THE DISTRIBUTION OF PRINTED PUBLICATIONS IN AN EFFICIENT MANNER TO PROVIDE POSTAL SAVINGS Illustrative Cost Breakdown for Catalogers and Magazine Publishing Customers Postal Savings Based on Sortation Level (2) 48% 57% 63% Print & Print Materials (1) ~50% Postage ~50% Significant opportunity for savings through co-mail 21% 5 Digit Carrier Route High Density Saturation Sortation Level LSC MAKES CONTINUED INVESTMENTS TO LOWER TOTAL COSTS TO CUSTOMERS + Continuing investments to grow capability and capacity in co-mail services to support future growth + Continued enhancement of mail-list optimization software + Investments in materials and distribution to enable customer efficiencies LSC s Growing Co-mail Business (3) 2006 2011 2016 Source: United States Postal Service. 1. Includes costs for paper, print & bind, and pre-media. 2. Cumulative savings versus piece rate cost for 3-Digit/SCF level. Based on postal rates for barcoded machinable flats for periodicals outside county. 3. Represents LSC s co-mail units. 15 LSC COMMUNICATIONS
2 EXTENSIVE PRODUCT & SERVICE PROFILE ALLOWS US TO PROVIDE UNIQUE SOLUTIONS THAT MORE NARROW COMPETITORS CANNOT EASILY DUPLICATE BOOK EXAMPLE: END-TO-END PRINT & SUPPLY CHAIN SERVICES Vendor Management Materials Manufacturing Book Fulfillment Services Order-to- Cash Logistics SERVICE OFFERING SCALE DIGITAL PRINT PLATFORM CLIENT BENEFITS + Largest U.S. digital print platform for printing books + ~13 billion pages of capacity (1) + Growing platform for quick-turn production + Platform for short-run markets (selfpublishing) Significant savings on paper and procurement costs Cash flow improvements Quicker fulfillment rates to customers Increase in titles available for sale TRADITIONAL BOOK PRODUCTION SCALE WAREHOUSING & FULFILLMENT Reduce total payroll costs + 95 offset printing presses + 80 binding lines + 15 sheet-fed presses + Extensive component, finishing, packaging, and logistics capabilities + 4.1 million square ft. of warehouses + Full service offering includes: High volume storage Returns Kitting Fewer out-of-stock products Less inventory obsolescence Reduction in warehouse space 1. Calculated using expected go-forward annual digital print capacity after 2017 investment in HP Digital Production Technology. 16 LSC COMMUNICATIONS
2 EXTENSIVE PRODUCT & SERVICE PROFILE DESPITE CONTRIBUTING TO A MINIMAL PERCENTAGE OF REVENUES TODAY, LSC S INNOVATION EFFORTS REPRESENT SIGNIFICANT UPSIDE OPPORTUNITY WITH POTENTIAL FOR STRONG GROWTH AND A HIGH MARGIN REVENUE STREAM LSC S INNOVATION FOCUS BOOKS SECURITY & AUTHENTICATION SERVICES LSC has developed technologies for book publishers to allow for: Reputation as an industry leader for quality and innovation Counterfeit Detection End User Registration Return Validation Textbook Rental Programs Work to develop advanced technologies and solutions to enhance efficiencies, reduce time-to-market and deliver the best to our customers Supply Chain Visibility BOOK ANTI-PIRACY EXAMPLE Increased Sales of Additional Products & Services Focus on recognizing customer needs and responding quickly Piracy is a serious issue for publishers. Book piracy, whether in print or digital form, is costing publishers around the world billions of dollars annually -- International Publishers Association LSC launches SIMS (Secure Identity Management System) New technologies to protect clients IP Know Your Customer applications could have significant market potential 17 LSC COMMUNICATIONS
3 LONG-STANDING RELATIONSHIPS WITH A PREMIER CUSTOMER BASE More than 3,000 customers across print and office product segments Broad base of blue-chip customers Leading players in their industries Top customers average relationship tenure of 45+ years PRINT 9 of the top 10 direct mail catalogers 9 of the top 10 magazine publishers 10 of the top 10 book publishers in NA SELECT CUSTOMERS 55+ years 30+ years 50+ years 20+ years 80+ years OFFICE PRODUCTS Product placement at 9 of the top 10 retailers 25+ years 15+ years 35+ years 25+ years 35+ years 50+ years 80+ years 55+ years 80+ years Services 5 of the top 10 ecommerce retailers Top 5 supplies-vendor at both of the U.S. office supply superstores 18 LSC COMMUNICATIONS
4 STRONG M&A TRACK RECORD WE HAVE A PROVEN ABILITY TO STRATEGICALLY ACQUIRE, INTEGRATE AND RATIONALIZE QUICKLY AND OUR FUTURE TARGET UNIVERSE REMAINS ROBUST IN A FRAGMENTED MARKET M&A CRITERIA SIGNIFICANT TARGET MARKET THAT FITS CRITERIA Enhance existing product offerings Expand technological capabilities Top 400 Largest Printing Companies by 2016E Revenue (1) Companies in Relevant Target Segments (2) 54% Breakdown by Revenue Size >$25MM+ 54% Provide synergy opportunities Attractive financial return on investment Over 115 companies in relevant target sectors with more than $25MM in annual revenues TARGET CHARACTERISTICS 24 acquisitions completed since 2004 Private / Family-owned Sub-scale Niche customer bases Regional players Unique capabilities Innovative solutions Source: Company Management. 1. Printing Impressions, Printing Impressions 400, December 2016. 2. Includes companies with primary specialties in book manufacturing, catalogs, directories, inserts and/or publications and periodicals. 19 LSC COMMUNICATIONS
4 RECENT ACQUISITIONS (Closed on 11/8/2017) (Closed on 9/7/2017) + Background: Leading producer of high quality envelopes, mailing supplies, and assorted packaging items + Purchase Price: $39 million + Approximate 2017 Annual Sales: $110 million (1) + Strategic Rationale: Enhanced product portfolio growing overall share of wallet with key Office Products customer accounts Significant synergy opportunities + Background: Printing solutions provider with capabilities including offset printing, prepress and distribution services for magazines + Purchase Price: $70 million + Approximate 2017 Annual Sales: $170 million (1) + Strategic Rationale: Enhances printing capabilities Strengthens presence in short-run magazines platform Significant synergy opportunities (Closed on 8/17/2017) (Closed on 7/28/2017) + Background: Offset and digital printing company with capabilities such as full-color web and sheetfed printing and integrated digital solutions + Purchase Price: $78 million (2) + Approximate 2017 Annual Sales: $110 million (1) + Strategic Rationale: 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 + Background: Full service, printer-independent mailing logistics provider + Purchase Price: $40 million (3) + Approximate 2017 Annual Sales: $50 million (1) (1) Approximate 2017 annual sales represent expected sales for FY 2017. Note : Only sales after the closing date of each acquisition will be reflected in LSC s results (2) 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 (3) $20 million of the purchase price was paid in cash; the remaining purchase price was paid with approximately 1.0 million shares of LKSD common stock 20 LSC COMMUNICATIONS + Strategic Rationale: Co-mail assets bring additional capacity for growing service offering, adding volume and scale Strong freight management capabilities to better serve customers, provides base for growth
5 SHARP FOCUS ON COST STRUCTURE AND EFFICIENCY IMPROVEMENT EXPERIENCED TEAM PROACTIVELY MANAGING FACILITY COSTS AND RATIONALIZATION PROCESS LSC S FACILITY RATIONALIZATION PROCESS COMMITMENT TO EFFICIENCY Rationalization Considerations: Evaluation of new business wins and upcoming RFPs Utilize proven facility rationalization model to understand annual P&L savings Real estate value as an offset to restructuring cost Work to minimize customer disruption and need to move large presses / binding lines Impact on distribution timing and cost Time of year for potential closing 13 facilities rationalized over last 5 years Best-in-class Safety Metrics: Injury rate 24% below the industry average 11 facilities with 1+ years/1million work hours without a Days Away Case Continuous Productivity Improvement Initiatives Plant overhead reviews resulting in identifiable cost reductions across the company Technological solutions identifying optimal ways to load assets and reduce labor costs Six Sigma methodologies leading to process improvements focused on reducing inventory and overall working capital 21 LSC COMMUNICATIONS
6 STRONG CASH FLOW PROFILE CASH FLOW HIGHLIGHTS NON-GAAP FREE CASH FLOW ($MM) Disciplined approach to capital expenditures and cost management $300 $250 $247 $233 + Recent capital spending includes investments in co-mail services capacity and digital production platform for books Focus on capital efficiency driving strong cash flow conversion Stable cash flows enable deleveraging to complement M&A strategy $200 $150 $100 $50 $0 $183 $125 - $140 2014 2015 2016 2017E (1) % Conv. (2) 63.0% 58.5% 49.5% 36% 42% Note: Historical cash flows do not reflect interest payments, standalone costs and includes allocation of pension income. See reconciliation of non-gaap financials in appendix. 22 LSC COMMUNICATIONS 1. Full year guidance as of 3Q 2017 Earnings Call on November 2, 2017 and is not being reaffirmed here. 2. Represents free cash flow as a percent of Non-GAAP Adj. EBITDA.
7 EXPERIENCED LEADERSHIP TEAM LSC HAS AN EXPERIENCED MANAGEMENT TEAM WITH A PROVEN ABILITY TO EXECUTE OPERATIONALLY AND FINANCIALLY IN A DYNAMIC MARKET ENVIRONMENT Name / Position Years with RR Donnelley / LSC Years in Industry Tom Quinlan President, Chief Executive Officer and Chairman of the Board of Directors Drew Coxhead Chief Financial Officer Sue Bettman Chief Administrative Officer and General Counsel Kent Hansen Chief Accounting Officer and Controller Richard Lane Chief Strategy and Supply Chain Officer Dave Houck Chief Information Officer Janet Halpin Senior Vice President, Treasurer & Investor Relations Dave McCree President, Book and Directory Dave Cardona Senior Vice President, Magazine Group Jim Ellward President, Office Products John Coyle President, Group Sales 13+ years 26+ years 22+ years 22+ years 13+ years 13+ years 1+ years 1+ years 20+ years 28+ years 11+ years 26+ years 9+ years 9+ years 29+ years 29+ years 30+ years 30+ years 16+ years 16+ years 13+ years 34+ years 23 LSC COMMUNICATIONS
24 LSC COMMUNICATIONS Financial Overview
HISTORICAL FINANCIAL PERFORMANCE SNAPSHOT NET SALES ($MM) NON-GAAP ADJ. EBITDA ($MM) $5,000 $4,000 $3,853 $3,743 $3,654 $3,550 - $3,600 $500 $400 $392 $398 $370 $334 - $346 $3,000 $300 $2,000 $200 $1,000 $100 $0 % Reported Growth / (Decline) 2014 2015 2016 2017E $0 (1) (1) 2014 2015 2016 2017E 3.0% (2.9%) (2.4%) (2.8%) (1.5%) % Margin 10.2% 10.6% 10.1% 9.40% 9.60% $100 $80 $60 $40 $20 $0 CAPITAL EXPENDITURES ($MM) $60 $42 $48 $60 - $65 2014 2015 2016 2017E $300 $250 $200 $150 $100 $50 $0 NON-GAAP FREE CASH FLOW ($MM) $247 $233 $183 $125 - $140 (1) (1) 2014 2015 2016 2017E % of Sales 1.6% 1.1% 1.3% 1.7% - 1.8% % Conv. (2) 63.0% 58.5% 49.5% 36% 42% Note: Historical cash flows do not reflect interest payments, standalone costs and includes allocation of pension income. 2015 net sales included $184mm from the acquisition of Courier, representing net sales from close date of 6/8/2015 to 12/31/2015. See reconciliation of non-gaap financials in appendix. 25 LSC COMMUNICATIONS 1. Full year guidance as of 3Q 2017 Earnings Call on November 2, 2017 and is not being reaffirmed here. 2. Represents free cash flow as a percent of Non-GAAP Adj. EBITDA.
CAPITALIZATION DEBT AND LEVERAGE ($MM) as of 9/30/2017 TOTAL LIQUIDITY ($MM) as of 9/30/2017 Capitalization Cash & Cash Equivalents $23 Term Loan Facility due Sept. 2022 $304 8.75% Senior Secured Notes due Oct. 2023 450 Borrowings under Revolving Credit Facility 140 Capital Lease Obligations 3 Unamortized Debt Issuance Costs (13) Total Debt $884 Less: Current Portion (177) Total Long-Term Debt 707 Total Liquidity Cash $23 Stated Amount of Revolving Credit Facility $400 Less: Availability Reduction from Covenants - Amount Available Under the Revolving Credit Facility $400 Usage Borrowings Under the Credit Agreement 140 Impact on Availability Related to Outstanding LoC 58 Net Available Liquidity $225 Net Debt $861 Q3 2017 LTM Adj. EBITDA $323 Gross Leverage Ratio (1) 2.74x On February 2, 2017, LSC paid in advance the full amount of required amortization payments, $50 million, for the year ended December 31, 2017 for the Term Loan Facility 26 LSC COMMUNICATIONS PENSION PLANS ($MM) as of 12/31/2016 Qualified Non-Qualified Total Benefit Obligation $2,439 $92 $2,531 Fair Value of Plan Assets 2,249 2 $2,251 Unfunded Status ($190) ($90) ($280) Note: See reconciliation of non-gaap financials in appendix (1) In the twelve months ended September 30, 2017, the Company acquired Publishers Press (acquired September 7, 2017), CREEL (acquired August 17, 2017), Fairrington (acquired July 28, 2017), HudsonYards (acquired March 1, 2017) and Continuum (acquired December 2, 2016). The 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.
FINANCIAL POLICY LEVERAGE & LIQUIDITY PENSION PLANS CAPITAL EXPENDITURES + Continuing to target 1.75x to 2.25x gross leverage (1) + Strong free cash flow (2) generation supports commitment to leverage target + Combination of pre-payable and long term debt provides ability to efficiently pay down debt + US pension plans closed and frozen + De-risking actions and liability driven investment structure reduces funded status volatility while minimizing required contributions + Approximately 1.5% to 2.0% of net sales MERGERS & ACQUISITIONS + Selectively pursue strategic acquisitions + Strategy governed by target leverage DIVIDEND POLICY + Board of Directors to review dividend quarterly 1. Gross leverage defined as total debt / LTM non-gaap adjusted EBITDA. 2. Free cash flow defined as net cash provided by operating activities less capital expenditures. 27 LSC COMMUNICATIONS
FULL YEAR 2017 GUIDANCE 2017 Guidance (1) Net Sales $3.55 - $3.60 billion Non-GAAP Adjusted EBITDA 9.40% - 9.60% Depreciation and Amortization Interest Expense- Net $150 - $160 million $68 - $72 million Effective Tax Rate 32% - 35% Capital Expenditures Free Cash Flow Diluted Share Count $60 - $65 million $125 - $140 million Approximately 33.9 million (1) Full year 2017 guidance as of Q3 2017 Earnings Call on November 2, 2017 and is not being reaffirmed here. Certain components of the guidance given in the table above are provided on a non-gaap basis only, without providing a reconciliation to guidance provided on a GAAP basis. Information is presented in this manner, consistent with SEC rules, because the preparation of such a reconciliation could not be accomplished without "unreasonable efforts. The Company does not have access to certain information that would be necessary to provide such a reconciliation, including non-recurring items that are not indicative of the Company's ongoing operations. Such items include, but are not limited to, restructuring charges, impairment charges, pension settlement charges, acquisition-related expenses, gains or losses on investments and business disposals, losses on debt extinguishment and other similar gains or losses not reflective of the Company's ongoing operations. The Company does not believe that excluding such items is likely to be significant to an assessment of the Company's ongoing operations, given that such excluded items are not indicators of business performance. 28 LSC COMMUNICATIONS
29 LSC COMMUNICATIONS Q&A
30 LSC COMMUNICATIONS Appendix
NON-GAAP FINANCIAL MEASURES ($ millions) Total LSC Communications Q3 2017 TTM Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 FY 2016 FY 2015 FY 2014 Net sales $3,523 $935 $848 $821 $919 $949 $3,654 $3,743 $3,853 GAAP Net income (loss) 10 (3) 5 (1) 9 38 106 74 58 Restructuring, impairment and other charges, net 94 60 21 6 7 3 18 57 132 Separation-related transaction expenses 8 1 2 1 4 1 5 - - Pension settlement charge - - - - - - 1 - - Acquisition-related expenses 3 2 1 - - - - 14 2 Purchase accounting inventory adj. 1 1 - - - - - 11 2 Depreciation and amortization 159 39 39 40 41 40 171 181 181 Gain on bargain purchase - - - - - - - - (9) Interest expense / (income)-net 70 19 16 17 18 1 18 (3) (4) Income tax expense (benefit) (22) (23) (2) 2 1 18 51 64 30 Non-GAAP Adjusted EBITDA $323 $96 $82 $65 $80 $101 $370 $398 $392 Non-GAAP Adjusted EBITDA margin 9.2% 10.3% 9.7% 7.9% 8.7% 10.6% 10.1% 10.6% 10.2% Net cash provided by operating activities $153 ($20) $14 $64 $95 $81 $231 $275 $307 Capital expenditures (64) (15) (15) (21) (13) (16) (48) (42) (60) Free cash flow $89 ($35) ($1) $43 $82 $65 $183 $233 $247 31 LSC COMMUNICATIONS
NON-GAAP FINANCIAL MEASURES (Cont d) ($ millions) Print Segment Q3 2017 TTM Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 FY 2016 FY 2015 FY 2014 Magazines, catalogs and retail inserts $1,650 $448 $378 $383 $441 $407 $1,632 $1,807 $2,036 Book 1,033 276 262 239 256 310 1,097 925 787 Europe 243 68 56 56 63 72 272 305 381 Directories 115 27 27 32 29 33 126 144 149 Net sales $3,041 $819 $723 $710 $789 $822 $3,127 $3,181 $3,353 Income from operations 51 (10) 22 12 27 48 141 96 47 Depreciation and amortization 142 35 36 35 36 36 154 164 164 Restructuring, impairment and other charges, net Purchase accounting inventory adjustments, net 75 58 6 5 6 1 15 53 127 1 1 - - - - - 11 - Non-GAAP Adjusted EBITDA $269 $84 $64 $52 $69 $85 $310 $324 $338 Non-GAAP Adjusted EBITDA margin 8.8% 10.3% 8.9% 7.3% 8.7% 10.3% 9.9% 10.2% 10.1% Office Products Segment Q3 2017 TTM Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 FY 2016 FY 2015 FY 2014 Net sales $482 $116 $125 $111 $130 $127 $527 $562 $500 Income from operations 48 11 12 9 16 11 54 47 40 Depreciation and amortization 15 4 3 4 4 4 15 16 15 Restructuring, impairment and other charges, net Purchase accounting inventory adjustments, net 1 - - 1 - - - 4 5 - - - - - - - - 2 Non-GAAP Adjusted EBITDA $64 $15 $15 $14 $20 $15 $69 $67 $62 Non-GAAP Adjusted EBITDA margin 13.3% 12.9% 12.0% 12.6% 15.4% 11.8% 13.1% 11.9% 12.4% 32 LSC COMMUNICATIONS
ORGANIC GROWTH RATES ($ 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% 33 LSC COMMUNICATIONS
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