HMH Earnings Call Second Quarter and First Half 2017 August 3, - PowerPoint PPT Presentation

HMH Earnings Call Second Quarter and First Half 2017 August 3, 2017

FORWARD LOOKING STATEMENTS AND NON-GAAP MEASURES This presentation and oral statements made in connection with this presentation contain certain statements that are not historical facts, including information regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, including billings and net sales; financial performance and condition; liquidity; products and services, including for new adoptions; outlook for full year 2017; prospects; growth; markets and market share; strategies, including with respect to investing in our core basal business and extensions thereof; efficiency and cost savings initiatives; the industry in which we operate; and potential business decisions. Those statements constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results express in or implied by our forward-looking statements, including, but not limited to, those identified under the caption “Forward-Looking Statements” in our news release issued on August 3, 2017 and in the “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. We undertake no obligation, and do not expect, to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In addition, this presentation and oral statements made in connection with this presentation reference non-GAAP financial measures, such as adjusted EBITDA, billings and free cash flow. The use of these non-GAAP measures are limited as they include and/or do not include certain items not included and/or included in the most directly comparable GAAP measure. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is provided in the appendix to this presentation and in our news release issued on August 3, 2017, which are posted on hmhco.com under the Investor Relations section. 2

Agenda Welcome / Introduction Business Updates Financial Overview Questions & Answers 3

Business Updates

First Half 2017 Highlights Net Sales $615 ($ in Millions) • Net sales of $615 million, up 3% compared to the first half of 2016 $598 • Billings 1 of $579 million, flat comparable to H1 2016 H1 2017 first half of 2016 • Free cash flow 1 was a usage of $224 million, Billings 1 ($ in Millions) an improvement of $66 million compared to $580 $579 the first half of 2016 • On track to deliver 2017 annual guidance H1 2016 H1 2017 1 Please see appendix for a reconciliation of non-GAAP measures. 5

Focused on Driving Growth STRENGTHENING OPTIMIZING FREE ALLOCATING CAPITAL TO OUR CORE BASAL CASH FLOW THROUGH HIGH-GROWTH, HIGH- BUSINESS THE CYCLE MARGIN EXTENSIONS 6

1H Net sales Performance Led By Trade and Extensions EXTENSIONS TRADE • Extensions contributed strong performance in the • First-half sales up 13% year over year first half of the year, with sales up $25 million year over year • Growth driven by Whole30 series, Tools of Titans and Papi, stronger eBook sales as well as strong • Intervention sales increased due to strong Read backlist titles 180 Universal growth • Heinemann growth driven by Classroom Libraries • Integrated solution selling provides opportunity to increase share of wallet 9% 100% A N N U A L C E RT I F I E D T U R N O V E R 7

Financial Overview

Second Quarter and First Half 2017 Highlights 1 • Q2 and YTD results consistent with 2017 outlook Billings 2 Net Sales • Net Sales were essentially flat in 2Q, and grew 3% YTD $580 $579 $413 $395 Billings 2 were down 4% in 2Q, and were essentially flat • $615 $598 YTD $392 $393 Adjusted EBITDA 3 declined 3% in 2Q, and grew 43% • YTD • Free Cash Flow improved 31% in 2Q, and improved 23% Q2 2016 Q2 2017 YTD 2016 YTD 2017 YTD Q2 2016 Q2 2017 YTD 2016 YTD 2017 • Net Loss increased 65% in 2Q, but improved 13% YTD Adjusted Net Income (Loss) Free Cash Flow 3 EBITDA 3 $73 $75 ($28) ($47) ($83) ($120) $49 $34 ($168) ($224) ($194) ($290) Q2 2016 Q2 2017 YTD 2016 YTD 2017 Q2 2016 Q2 2017 YTD 2016 YTD 2017 Q2 2016 Q2 2017 YTD 2016 YTD 2017 1 Three and Six months ended June 30, 2017 2 An operating measure which we derive from net sales taking into account the change in deferred revenue. See calculation of this metric in the appendix to this presentation. 9 3 Please see appendix for a reconciliation of non-GAAP measures.

Second Quarter and First Half Business Updates • Operating efficiency program on track – Organizational design changes substantially complete – Expect $70 to $80 million in annualized cost savings by end of 2018 • Next Generation Science program submitted to Florida – Billings opportunity in 2018 • Next Generation Social Studies program submitted to California – Billings opportunity in 2018 • Next Generation Reading and Math programs in development – Large expected adoptions in Texas and Florida, with billings opportunities beginning in 2019 • Reaffirming guidance for 2017 10

Questions & Answers

Appendix

New State Adoptions - 2016 to 2019 State 2016A 2017E 2018E 2019E Texas Foreign Language Reading/Language Arts Reading/Language Arts Reading/Language Arts Reading/Language Arts ESL Social Studies California-SA Mathematics ESL/Mathematics Social Studies Science Reading/Language Arts Science Florida Mathematics Social Studies Social Studies Mathematics Reading/Language Arts Social Studies Social Studies Georgia Reading/Language Arts Science Science Mathematics Tennessee Science Social Studies Reading/Language Arts South Carolina Social Studies Louisiana Reading/Language Arts Social Studies Oklahoma Reading/Language Arts Reading/Language Arts Mathematics Reading/Language Arts New Mexico Mathematics Oregon Reading/Language Arts Reading/Language Arts Virginia Mathematics Mathematics Mississippi Reading/Language Arts 13

Financial Highlights $ in Millions Q2 YTD 2016 2017 Variance % 2016 2017 Variance % Net Sales $392 $393 0% $598 $615 3% Change in Deferred Revenue 21 2 (88%) (17) (36) 104% Billings 1 413 395 (4%) 580 579 (0%) Net Loss (28) (47) 65% (194) (168) (13%) Adjusted EBITDA 2 75 73 (3%) 34 49 43% Cash and Short Term Investments 3 307 79 (74%) Free Cash Flow 2 (120) (83) (31%) (290) (224) (23%) Pre-publication Costs (32) (29) (9%) (65) (57) (12%) Capital Expenditures 4 (64) (39) (39%) (121) (84) (31%) 1 An operating measure which we derive from net sales taking into account the change in deferred revenue. See calculation of this metric in the appendix to this presentation. 2 Please see the appendix for a reconciliation of non-GAAP measures. 3 As of December 31, 2016, cash and short term investments included cash and cash equivalents of $226.1M and short term investments of $80.8M. As of June 30, 2017, it includes cash and cash equivalents of $78.7M. 4 Capital expenditures include pre-publication costs and property, plant, and equipment expenditures. 14

Non-GAAP Reconciliation – Adjusted EBITDA 1 Q2 2 YTD 2 ($ in millions) 2016 2017 2016 2017 Net Loss (28) (47) (194) (168) Interest Expense 9 10 19 21 (Benefit) Provision for Income Taxes (3) 6 32 21 Depreciation Expense 19 19 38 38 Amortization Expense 52 49 104 98 Non-Cash Charges - Stock Compensation 4 3 7 5 Non-Cash Charges - Loss (Gain) on Derivative Instrument 1 (1) (0) (1) Purchase Accounting Adjustments 1 - 3 - Fees Expenses or Charges for Equity Offerings, Debt or Acquisitions 1 (0) 1 0 2017 Restructuring Plan - 33 - 37 Restructuring/Integration 6 - 10 - Severance, Separation Costs and Facility Closures 4 0 5 1 Legal Settlement 10 - 10 (5) Adjusted EBITDA $75 $73 $34 $49 1 Details may not sum to total due to rounding 2 Three and Six months ended June 30, 2017 15

Non-GAAP Reconciliation – Free Cash Flow 1 Q2 2 YTD 2 $ in Millions 2016 2017 2016 2017 Net Cash Used in Operating Activities ($56) ($44) ($169) ($140) Additions to Pre-publication Costs (32) (29) (65) (57) Additions to Property, Plant, and Equipment (31) (9) (56) (27) Free Cash Flow ($120) ($83) ($290) ($224) 1 Details may not sum to total due to rounding 2 Three and Six months ended June 30, 2017 16

Billings 1 Q2 2 YTD 2 $ in millions 2016 2017 2016 2017 Net Sales $392 $393 $598 $615 Change in Deferred Revenue 21 2 (17) (36) Billings $413 $395 $580 $579 1 Details may not sum to total due to rounding 1 An operating measure which we derive from net sales taking into account the change in deferred revenue. See calculation of this metric in the appendix to this presentation. 2 Three and Six months ended June 30, 2017. 17