Interim results for the six month period ended June 2018

Summary

Enquiries:

Science Group plc

Martyn Ratcliffe, Chairman

Rebecca Archer, Finance Director

Tel: +44 (0) 1223 875 200

www.sciencegroup.com

Panmure Gordon (UK) Limited

Dominic Morley / Alina Vaskina (Corporate Finance)

Erik Anderson (Corporate Broking)

Tel: +44 (0) 20 7886 2500

*Alternative performance measures are provided in order to enhance the shareholders’ ability to evaluate and analyse the underlying financial performance of the Group. Refer to Note 1 for detail and explanation of the measures used.

Note: This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulations.

Interim Results 2018

Science Group plc (the ‘Company’) together with its subsidiaries (‘Science Group’ or the ‘Group’) is an international consultancy providing applied science, product development, technology advisory and regulatory services to a client base in medical, commercial and food & beverage markets.

The first half of 2018 has seen continued solid financial performance and good progress on the integration of Technology Sciences Group (‘TSG’), acquired in September 2017. Benefitting from the acquisition, the Group reports record revenues, converting into strong adjusted operating profit growth and an adjusted earnings per share increase of 15%. The balance sheet of the Group remains very strong with significant cash resources and freehold property assets.

Group Financial Performance

For the six months ended 30 June 2018, the Group generated adjusted operating profit of £3.7 million (H1 2017: £3.2 million) in line with the Board’s expectations, on revenue of £25.1 million (H1 2017: £18.0 million). Adjusted earnings per share increased to 7.0 pence (H1 2017: 6.1 pence).

Profit before tax was £2.5 million (H1 2017: £2.3 million). Profit after tax of £2.4 million (H1 2017: £2.0 million) includes a corporation tax charge of £0.1 million (H1 2017: £0.3 million) which benefitted from a tax credit of £0.2m relating to share options exercised in the period. Basic earnings per share was 6.0 pence (H1 2017: 5.1 pence) and diluted earnings per share in H1 2018 was 5.8 pence (H1 2017: 5.0 pence). At 30 June 2018, the Company had 40.0 million shares in issue (excluding treasury shares) compared to 39.4 million at 30 June 2017.

Approximately 85% (H1 2017: 80%) of the Group’s Core Business revenue is derived from international markets, with 32% being denominated in US Dollars (H1 2017: 32%) and 26% in Euros (H1 2017: 9%). The remaining international clients, primarily in Europe, are invoiced in Sterling. The average US Dollar exchange rate in the period was 1.38 (H1 2017: 1.26 and H2 2017: 1.32) and the average Euro exchange rate in the period was 1.14 (H1 2017: 1.17 and H2 2017: 1.12). As a result, the net effect of currency movements during the period on Core Business revenue and adjusted operating profit, relative to the prior year on a like for like basis, was a negative £0.3 million.

The Group retains a robust balance sheet with Gross Cash at 30 June 2018 of £18.5 million (30 June 2017: £26.3 million) and Net Funds of £5.1 million (30 June 2017: £12.1 million). In aggregate, Net Funds plus Freehold Property total £26.7 million (30 June 2017: £33.9 million) equivalent to 66.8 pence per share (30 June 2017: 86.2 pence per share), based on the balance sheet (cost-based) value of the freehold property, which is at the bottom end of the range of independent market valuations (as at March 2018).

Business Sector Review

The Applied Science and Product Development activities, accounting for 48% of Core Business revenue, reported growth on both a year-on-year and sequential period basis. The Medical sector delivered a strong performance in the period while the Commercial sector declined compared to the prior year, due to completion of some larger projects, sustaining revenue in line with the second half of 2017.

Following the acquisition of TSG, the Group’s Regulatory Services now account for 37% of Core Business revenue. Taking into account the acquisition integration impact, both TSG America and TSG Europe delivered performance in line with expectations, while the Leatherhead Food & Beverage Regulatory Services continued to make good progress.

The Technology Advisory Services, accounting for 14% of Core Business revenue, reported a flat performance. The sector structure within Technology Advisory increasingly aligns with other parts of the Group. Similar to the Applied Science and Product Development business models, the Advisory model mitigates volatility within any vertical market through a talented, scalable team of international scientific consultants who can operate across a diversity of industries.

Strategic and Corporate Developments

Following the TSG acquisition, the initial priority was to improve the financial and business processes in TSG America. This programme has also included a market segmentation initiative to improve profitability and reduce credit risk within the North American business. Good progress has been made during the first half of 2018.

In parallel, standardised policies and processes were also introduced into TSG Europe. However, during the first half of 2018, and coinciding with the appointment of a Head of the TSG European business, it became apparent that the strategy needed to be reviewed to focus on the larger European geographies which offer greater potential. As a result, in June, a new subsidiary in France was launched and a team recruited to service this strategic market where TSG had previously had minimal presence. In contrast, it became apparent that the small operations across Central/Eastern Europe, with an average of 2 consultants in each country, were absorbing a disproportionate amount of management and support resource relative to their profit contribution and future market potential. As a result, it was decided to close these sub-scale subsidiaries/branches and to appoint associate organisations, as deployed in other territories, to support multi-national clients in a more efficient business model.

With regard to the wider Science Group, where each business unit provides science-based services into client market sectors, the operating brands align with either a service (e.g. Sagentia with product development) or a market (e.g. Leatherhead Food Research with the food & beverage industry). Over time, the boundaries of these business units are increasingly blurred which enables the wider marketing of the Group’s breadth of services to our clients. To that end, the Group adopts a flexible resource model with alignment of incentive programmes to encourage collaboration and mobility between businesses. This approach also enables investment in areas of higher potential. During the first half of 2018, this evolutionary process continued, particularly within the Food & Beverage market and the Group organisation will continue to evolve along this path over the next 6-12 months.

The Board is also exploring the merits of separating the Harston Mill building from the Sagentia operations. This is a legacy structure which was tax efficient but now limits the benefits that could be derived from the Group’s freehold asset base and the separation of trading and property activities. However, any change in the ownership of Harston Mill, even within the Group, would result in a tax cash outflow in the range of £1.8 million to £2.1 million. The Group already carries a liability of £1.7 million on the balance sheet and it may be feasible to offset a proportion of the tax impact over a period of time through use of tax losses in the company previously used for the Group’s legacy investments.

Summary

In summary, the Group financial performance in the first half of 2018 has been in line with the Board’s expectations. The Group’s balance sheet remains very strong including significant cash resources. The long term debt is secured against the Group’s freehold property.

The integration of TSG is progressing satisfactorily, with improvements in financial controls and operating processes already translating into improved profitability. The strategy evolution of the North American business has been based around market segmentation while the European strategy developments have refocused the business on the major European markets whilst maintaining the wide geographical coverage to service TSG clients.

The Group strategy is continually evolving which is essential in a leading science & technology business. The combination of outstanding science, engineering, regulatory and advisory resources, providing leading edge technology services into vertical market sectors led by managers with deep industry knowledge and experience, provides a differentiated business model. Combining that outstanding capability with disciplined financial and commercial management, is the enabler for delivering shareholder value.