23rd Feb 2005 07:00
Paddy Power plc23 February 2005 Paddy Power plc 2004 Preliminary Results Announcement Record Results Paddy Power plc, trading as Paddy Power Bookmaker, Ireland's leading bookmaker,today announced record turnover, operating profit and earnings per share for theyear ended 31 December 2004. 2004 2003 • • Change Turnover 1,165.2m 913.6m 27.5% Operating Profit 31.1m 19.6m 58.6% Profit Before Tax 32.1m 20.4m 57.5% Profit After Tax 27.5m 17.6m 56.6% EPS 56.61c 36.97c 53.1% Cash Balance 47.2m 39.2m 20.5% Final Dividend 12.52c 8.59c 45.7% Commenting on the results, John O'Reilly, Chief Executive, Paddy Power plc said:"While all strands of the business performed well, I am particularly pleasedthat the online business has come of age." Ross Ivers, Finance Director, Paddy Power plc said: "When you have a businessthat's producing almost 60% profit growth in the year, you have got to be happy." 23 February 2005 Issued on behalf of Paddy Power plc by Drury Communications For reference: John O'Reilly Ross Ivers Chief Executive Finance Director Paddy Power plc Paddy Power plc Tel: + 353 1 4045936 Tel: + 353 1 4045912 Mobile: + 353 87 254 1688 Mobile: + 353 87 668 8772 Mark Cahalane /Oonagh Daly Trevor Phillips Drury Communications Ltd Holborn Tel: + 353 1 260 5000 Tel: + 44 207 929 5599 Mobile: + 353 87 855 4406 Mobile: + 44 7889 153628 Chairman's Statement "IT'S A GAME OF TWO HALVES" Dear Shareholder, The old football cliche 'it's a game of two halves' could certainly be appliedto the past year in Paddy Power. The year had its ups and downs (in that order) but was consistently exciting andinteresting. Through it all the team at Paddy Power produced yet another recordyear. This is the 16th consecutive year of turnover growth and, with theexception of one year when we had significant start-up costs associated with theintroduction of the online service, the 16th consecutive year of earningsgrowth. All in all an outstanding achievement. Turnover €1,165.2m (+27.5%) Pre tax profit €32.1m (+57.5%) EPS 56.61cent (+53.1%) Dividend 18.72cent (+45.2%) Cash balances €47.2m (20.5%) We frequently comment on the impact of short term sporting results on earnings.Favourable results (if you are a bookie) generated a bumper first half for PaddyPower, well ahead of everybody's expectations. Then, with the pendulum swingingback to punters, second half earnings were flat on 2003. Proof again that,while results often happen in 'runs', they average out over time. Unfortunately,favourites win or lose to their own schedule not necessarily to that of anypublic company's six month reporting timetable. Earnings for the year are well ahead of both our 2004 budget and the highestanalyst forecast at the start of the year. However, poor sporting results inthe fourth quarter, particularly December, meant we came in at the lower end ofanalysts' revised year end forecasts. This highlights once again thatre-forecasting based on interim "sporting results" is a hazardous occupation. Your Company enters 2005 in excellent health. Turnover growth, a key measure,continued strongly in the second half of 2004 as organic expansion continuedacross all divisions supplemented by the acquisition of two retail outlets inthe United Kingdom (UK). The pipeline of properties and licences, in bothIreland and the UK, should deliver sustained outlet growth in 2005. Our onlinedivision goes from strength to strength adding new products and diversifyinginto non-bookmaking products such as casino, poker and peer-to-peer games. The superior quality of Paddypower.com was acknowledged in January when it wasvoted the Best Online Bookmaker in the Racing Post/Netprophet survey ofbookmakers. Our telephone business also saw significant development,particularly in the UK, and continued to make a significant contribution to theGroup. Strategy 2005 will see a continuation of our existing strategy across all threedivisions. Underlying this is a fixation with the customer; delivering asuperior product range and customer service while increasing our distributioncapacity. We continue to obsess about the Paddy Power brand which remains one ofour key assets. However, given our relative size and differing objectives ineach market we must carefully select our marketing opportunities ensuring thatthey are cost effective and appropriate for those markets. The past year has seen a further evolution of the business as Paddy Powergenerated new non-bookmaking income. The success of Paddy Power Casino, virtualgames and peer-to-peer games in 2004 has had a significant positive impact onthe income volatility that is a feature of the traditional business. Therevenues from these activities are closely tied to turnover performance and arenot subject to the vagaries of sporting results which impact betting revenues.We will see further growth in these revenues in 2005, together with new revenuesfrom both online poker and fixed odds betting terminals (FOBTs) in our expandingUK retail estate. This overall change in revenue mix will increase absoluteearnings while reducing volatility due to "sporting results". While Ireland clearly remains the heart of our business, our success in the UKwill see it become an increasingly significant part of the Group. We enter 2005with 31 UK retail outlets as well as significant telephone and onlinebusinesses. The coming year will be an important year for the UK retailbusiness. Given the growth to date in the retail estate, and our expected futuregrowth through the opening of new outlets, increasing focus will be placed onthe operational aspects associated with managing the enlarged estate. Ourapproach continues to be one of sensible organic growth in new outlets coupledwith opportunistic acquisition, such as the two outlets acquired this year. 2005 should see continued progress in gambling deregulation in the UK. Aftermuch high profile progress in 2004, casino deregulation came to a surprise haltlate in the year. Bookmaking deregulation, however, has continued. Pending thepassing of the Gambling Bill, the formation of the Gambling Commission and theissuance of their policies and guidelines it is too early to predict the exactimpact on Paddy Power. We remain optimistic that deregulation in this area willbe delivered and that it will benefit Paddy Power. Until the Gambling Commissionis established and relevant policies and guidelines are issued I do not envisageany change in strategy. Data rights charges have been a strategic issue facing the industry for sometime as sporting organisations sought to charge bookmakers for taking bets ontheir sport based on their alleged database rights over the underlying data.However, the outcome of the European Court of Justice ruling in the BritishHorse Racing Board (BHB) V William Hill case has cast significant doubt on theexistence of these rights and the BHB's ability to charge for them. This is amatter which is being actively reviewed by Paddy Power both in the context ofthe BHB and others. People People are our greatest asset and 2004 has seen significant progress instrengthening the organisation as the size and complexity of the business hascontinued to grow. With almost 1,200 staff at year end, and further increasesplanned for 2005, continued investment in people and management structures isessential. The new appointments made throughout 2004 and referred to in my previous reportsare having a positive impact on the organisation. There is also a wealth ofknowledge and experience within the existing organisation that has developedover the past 16 years. Increasing focus on performance management and trainingand development throughout the organisation will help nurture the best talent.The increasing size of the Group will provide many opportunities for talentedstaff to progress their careers while providing succession throughout theorganisation. Board 2004 was a year of significant change for the Board as it develops to meet thenew commercial challenges facing the Group as well as meeting corporategovernance standards. As mentioned in last year's Annual Report and announcedduring the year, Messrs Ian Armitage, Edward McDaid and John Corcoran haveretired from the Board. Each has made a magnificent contribution to the Company.On your behalf, I want to acknowledge their contribution once again and thankthem for their commitment. The process of redeveloping the Board is in progress. During the year PatrickKennedy joined as a non-executive director and Breon Corcoran as an executivedirector. Both have already made a significant contribution to the Board. Asannounced on 16 February 2005, Brody Sweeney has joined the Board and I lookforward to his contribution in the years ahead. The development of the Board is ongoing and further appointments areanticipated. Our belief is that finding the best people is paramount and one forwhich we are happy to suffer some time delays. Dividends The Board is recommending a final dividend of 12.52 cent per share payable toshareholders on the register at 4 March 2005, bringing the total dividend forthe year to 18.72 cent per share, an increase of 45.1% on 2003 (12.9 cent). TheBoard's intention is to pay approximately one third of after tax earnings by wayof annual dividend. I look forward to the coming year with confidence as we continue to deliver onour promises. Together with the Board and the Paddy Power team I anticipate that2005 will be another successful year for your Company. Operations Review Although Paddy Power is primarily a small stake fixed odds bookmaker, 2004 hasseen a move into non-bookmaking activities through the online casino, fixed oddsbetting games and peer-to-peer games. Our UK retail estate also operates fixedodds betting terminals (FOBTs). The past year has been a very busy one across all three divisions as we continueto see significant expansion. This has been driven by the growth in the two keyeconomies in which we operate, together with an increase in brand awareness,distribution capacity and new product launches. The quality of our corebookmaking product continues to lead the market, driven by both our investmentin product development and ongoing focus on our customers. Volume growth in betslayed continued in all divisions which in turn drives turnover, operationalcomplexity, costs and ultimately profit. Customer service is, as always, central to our philosophy. We continue to leadthe market in generosity, be it via contracted money back specials or justrefunding money when it was fair to do so, and we remain the benchmark thatothers must attempt to follow. The Retail Division - Betting Offices The retail estate finished the year with 174 outlets (2003:149), with 143 (2003:137) in Ireland and 31 (2003:12) in the UK. It was a year of significant activity in the Irish and UK retail divisions withboth finishing the year with record numbers of outlets. However, just asimportant as the expansion of the estate, is the continued commitment to theexisting estate through an ongoing programme of refurbishments, extensions andrelocations. This continuous improvement in the quality of our retail space,together with the increasing investment in screens/broadcasting technology, iskey to driving the excellent like-for-like sales growth that we have enjoyed.Investment in capital across the retail estate totalled a record €23.1m in 2004. Six (2003:eight) new outlets were opened in Ireland during the year. 2005 isexpected to see approximately eight new outlets opened. In addition to newopenings, four (2003:10) relocations, four extensions (2003:three) and 27 (2003:10) refits were undertaken during 2004. The total number of premises developedtotalled 41 (2003:31), a new record for the Irish business. This process willcontinue through 2005 and at the time of writing we have already completed onerelocation, two extensions and seven refits. We also continue to operate fourracecourse shops as well as the stadium shops at Lansdowne Road. There were five(2003:five) surplus property leases at year end. Expansion in the UK continues apace with the retail estate increasing to 31outlets (2003:12) as at the year end. In addition, successful licenceapplications mean that a further five licences are held at the year end andthese outlets will be opened during 2005. We expect to have between 45 and 50outlets opened by the end of 2005. Our 31 outlets in the UK include two outletspurchased during 2004. Having now established over 30 outlets in the UK, 2005 will see a requirement tofocus on the additional operational aspects of running the enlarged UK estate aswell as continuing to open new outlets in line with our stated objectives. TheUK team is now in situ in our new office in London and the divisional managementstructure is in place. The Group commenced testing an EPOS solution in late 2004. Having completed headoffice trials this is now in place in a small number of outlets where it isundergoing field testing and modification. Subject to satisfactory performance amore extensive test will be undertaken in mid 2005 before a final decision ismade on a full estate roll-out. The cost of installing EPOS in the currentestate would be approximately €8 million. While there are many potential benefits of EPOS to both our customers and toPaddy Power, our intention would be to use it to improve the quality of customerservice by increasing the speed and accuracy of payout and expanding the productrange. The improved availability of risk information from the retail estateshould also help manage the gross win percentage over time. The technologyinfrastructure to support EPOS should also allow other benefits as it wouldprovide an intranet communications infrastructure within the estate allowinge-mail communication and local printing of marketing material and coupons. Itwould also provide an infrastructure for customer facing information terminalsor even internet access. Investment in technology has also continued with the installation of the newscreens system throughout the retail estate. The system, which allows for a 24screen display, is now installed in all of our UK estate and has been refittedinto 75 outlets in Ireland. It is expected that, by end of 2005, all of theestate that can be refitted will be. This is expected to be approximately 110 ofthe Irish outlets. In conjunction with these improvements in our outlets, the head office screenstechnology is also changing with a new version of our current software beingimplemented. This will allow us to tailor screen content for differentgeographies. Non Retail Non retail comprises the online division (internet betting, casino, andinteractive TV) and the telephone division. Active Customers Online Telephone 2004 2003 2004 2003 Ireland and rest of world 16,721 14,026 10,207 9,601UK 29,982 22,174 8,326 8,361 (Active customers are defined as those who have bet on the sportsbook in thelast three months) The Online Division The online division has seen significant development in 2004 as it has movedfrom being a bookmaking business to an increasingly "leisure betting and gamingbusiness". There have been significant ongoing improvements to the productoffering over the course of the year. These range from relatively simpleactivities such as relaying out a web page and reskinning the website through tothe introduction of new functionality and products. The online division remains the fastest moving part of the business and 2004 hasseen the introduction of a significant number of gaming products. The mostprominent of these is the Paddy Power Casino which was launched in the UK inearly 2004. We have seen continued growth in this business over the course ofthe year and it has generated a significant gross win contribution in 2004, asdiscussed in the financial review. In addition to the casino there have been ahost of smaller product launches. These include Paddy Park, Hi-Lo, Penalty ShootOut, and Spin 2 Win, the first two of which are available as mobile games. Allof these activities are algorithm based, thereby reducing our reliance onsporting activity and consequently reducing the volatility of earnings overtime. In addition to the gaming products noted above, 2004 also saw the addition of asuite of peer-to-peer games where Paddy Power takes no risk position in the gamebut earns its income by way of a commission on betting between two thirdparties. Early 2005 saw the launch of our poker product from which we earncommission and which will further insulate us from the short term impact ofsporting results. Notwithstanding the increased emphasis on non-bookmaking products, we have alsoseen considerable investment in the core bookmaking product as we continue toimprove the range of events covered and the depth of markets offered on eachevent. This is discussed further in the trading and risk management section ofthis review. The Telephone Division The telephone business has continued to develop in Ireland and the UK reflectingour market leading position in Ireland and relative newcomer status in the UK.As discussed below and in the 2004 interim statement, our UK business has beenslightly repositioned over the course of the year given the differentcharacteristics of the telephone business and our different position in the UKmarket as compared to Ireland. The telephone business is characterised by a high variable cost structure. Costis primarily driven by the volume of bets processed, not their value. This iscompounded by the need to flex the call center staffing to handle the varyingcall volume levels experienced over the course of any given week. Consequentlythere is a need to have a higher average bet value than the other channels. Our telephone customer base continues to develop. Given our leading position inthe Irish market, the telephone business plays several roles. As well asservicing our core telephone customers, it provides an alternative means ofaccess for customers who cannot get to an outlet or the internet. It alsoprovides access outside outlet opening hours. In the UK, the emphasis differs as there is a smaller retail estate to support.Following the repositioning of the telephone business in 2004, we expect that asthe UK retail estate and online businesses grow they will provide additionalsupport to the UK telephone business. In 2004, product development, driven by the trading and risk management group,has also been a key feature of the telephone business particularly in the areaof betting-in-running. While betting-in-running is predominantly a football andgolf activity, the US presidential elections also saw significant betting takingplace throughout the night of the results. Trading and Risk Management One of the core skills of a bookmaking business is the compilation of odds andthe trading of the "book". Together with a significant product development rolethis activity is undertaken through our trading and risk management group. This group has been busy in 2004 under its new head. The increasing size of thebusiness creates many new opportunities and therefore warrants continuedinvestment in this function. Secondary markets which were previously too smallto justify investment have reached critical mass e.g. financial betting.Investment in sophisticated mathematical models and processes that werepreviously uneconomic have become viable. Furthermore, opportunities in theonline division create a demand for new products that can also be marketedthrough the telephone and retail channels. In addition, the increasing size ofthe UK retail division is changing the overall risk profile of the business dueto a different product mix in our UK estate i.e. increased football business. The increasing size and complexity of these activities demands increasinglystructured internal processes. 2004 has seen changes to staff roles togetherwith more detailed trading rules and limits. Rather than restrict the activitiesof the division, these processes have improved its operation and are reflectedin our market leading product range. The number of events and associated markets that Paddy Power now offerscontinues to increase with over 118,000 events bet on in 2004. While the amountof money taken on each event varies, there remains a number of very popular highturnover betting events during the year. However, the gross win percentagecontinues to be determined by the overall mix rather than a few key events. Forinstance in the non retail business, the top 1,100 events only account for 10%of turnover. Marketing The Paddy Power brand has been built over 16 years thanks to a constant focus onfun (sometimes irreverent) and innovation and we are committed to maintainingour position as the punter friendly bookmaker. Irrespective of the size and typeof marketing activity undertaken it all contributes to our punter friendly imageand overall brand recognition. Our brand remains a key point of differentiation. Some of the highlights of 2004 include our ongoing sponsorship of all live horseracing coverage on RTE, our sponsorship of the Football Association of Irelandand the Irish Rugby Football Union. Our racing sponsorships include the verysuccessful Paddy Power Gold Cup in Cheltenham and the Paddy Power Chase inLeopardstown. Our more fun sponsorships, such as Brock the Jack Russell, whoadded so much to this year's Australian/Gaelic Compromise Rules match betweenIreland and Australia, continue to be a strong feature of our marketingactivity. Much of this activity is opportunistic. Coverage of our market leading customerfriendly pursuits generates significant exposure through betting related mediaand, most importantly, word of mouth. From the payment of €427,220 in January2004 to Catherine Egan as Ireland's largest single winning bet with a bookmaker,refunding money recently for the Tottenham goal that was, but was not, givenagainst Manchester United to the plethora of other events throughout the year,Paddy Power continues to lead the way. We continue to be the most frequentlymentioned bookmaker in the Irish media and have clearly broken into the topechelon of UK bookmakers on the basis of media mentions. This success is drivenby hard work together with the quality of the underlying product, accessibilityand the customer friendly nature of the brand. People I talked at length last year about the importance of people to the organisationand referred to a number of senior appointments that were made or were in theprocess of being made. Now, a year on, I am more convinced than ever of the needto continue to invest in quality people throughout the organisation. Having put in place a very capable senior management team, attention must nowturn to succession planning and development of talent throughout theorganisation. We are putting in place plans to develop the next layer of talentto ensure that we will have the best cashiers in the shops, the best shopmanagers and the best telephone operators in the call center. Paddy Power is a fast growing company and our people needs are evolving. We needmore of our existing skill sets as well as new ones. This opens opportunitiesfor both internal promotions and for attracting new talent. This growth bringschallenges to the Paddy Power culture. As we bring new people into theorganisation it is imperative that the training and induction process ensuresthat the values of the organisation are made clear and that people subscribe tothese values. This is particularly important in the UK retail business where theorganisation is relatively new and staff numbers are growing. It is essentialthat they are fully integrated into the distinctive Paddy Power culture. Looking Forward 2005 promises to be another exciting year for all in Paddy Power as we continuewith our successful organic growth based strategy. This will deliver expansionof both the Irish and UK retail estates while the non retail business will seethe development of its existing business channels and products supplemented bythe addition of new products such as the new poker business. Financial Review The Group has no discontinued operations and all activities are considered core. Turnover Bookmaking turnover is recorded as the amount staked by the customer withcustomer winnings recorded as a cost. However, given the high predictability andlow inherent gross win percentage in the casino and FOBT products, theirturnover is recorded as net customer losses i.e. amount staked less customerwinnings ("the drop"). The impact of this is that the relevance of turnovergrowth in the online division as a measure of business growth is reduced. As always the sporting calendar will vary from year to year with regard to highprofile sporting tournaments. In 2003 the Rugby World Cup took place, while in2004 we had the benefit of the European Football Championships. While thesetypes of events can have a small impact on year-to-year comparisons, they do notimpact trends in any material way. Turnover for the year to 31 December 2004 was €1,165.2m (2003: €913.6m) anincrease of 27.5% on 2003. Turnover growth has been strong across all threechannels ranging from 25.0% to 33.3%. Retail turnover grew by 25.0% in 2004 from €551.1m to €688.7m. The Irish estategrew by 18.4% to €628.1m from €530.6m in 2003. Like-for-like growth rates withinIreland were 14.1% in 2004 reflecting the continued strength of the market andPaddy Power's strong position within it. Like-for-like growth includes theimpact of our continuing refurbishment programme referred to in the operationsreview, but excludes the impact of the six new outlets opened during the year.We continue to invest in new in-shop display systems which, through the displayof additional product, will continue to drive turnover growth. The UK retail estate saw turnover growth of 198.3% to reach €60.6m (2003:€20.5m) as the rollout of the estate continued with eight of the 31 (2003: 12)outlets opened in December 2004. We are pleased with the turnover growth in theUK which has been driven by growth in the number of outlets, improving brandrecognition and continued product development. Customers now have the ability totake advantage of our larger estate by placing and collecting bets in differentoutlets. The online division continued to see strong growth with turnover increasing by29.7% to €240.0m (2003: €185.1m). Growth in the sportsbook was 22.4% which wasdriven by continued improvement in the online product offering. The quality ofthe product was recognised during the year when Paddypower.com was voted thebest online bookmaker by the Racing Post readers in 2004. Also included in online turnover is the turnover from gaming products of €13.4m(2003:nil) driven by the casino, fixed odds games and peer-to-peer games, allintroduced in 2004. The telephone business continued to develop in both markets, growing by a totalof 33.3% to €236.5m (2003: €177.4m). The UK now accounts for 46.67% of thisturnover increasing from 37% in 2003, as we continue to expand in thisrelatively new market for Paddy Power. Average slip/bet values by Channel 2004 2003 Change • • % Retail 18.21 16.98 7.2Telephone 83.45 67.64 23.4Online 27.09 27.18 (0.3) (Note: Retail slips can contain more than one bet per slip, while other channelshave a single bet per slip. Online comprises the sportsbook only). Average bet size continues to develop in the retail estate. Average bet size inthe UK estate is larger than in the Irish estate due to the different ageprofiles of the estates. However, it is similar to the average of our equivalentnew Irish shops. Given the different cost dynamics of handling bets througheach channel, we continue to seek a higher average bet size in the telephonechannel where the cost of delivery is higher. The overall stake patterns areconsistent with the previous year and with our expectations. Gaming machine income continues to grow in our UK estate with 97 machinesinstalled at year end. Average gross drop per machine per month was €2.5kalthough this is improving in the latter part of the year due to a change inmachine suppliers and a changing mix between FOBTs and AWP machines. Gamingmachines are not generally permitted in Ireland. Bet volumes 2004 2003 Change '000 '000 % Retail 37,811 32,464 16.5Telephone 2,835 2,623 8.1Online 8,363 6,808 22.8 (Note: Retail volumes refer to the number of slips processed while otherchannels refer to the number of bets processed. Online comprises the sportsbookonly). Gross Win and Gross Profit Gross win is measured as the amounts staked (excluding betting tax and levies)less the amount returned to customers as winnings. Gross profit is measured asgross win less discount on bets and gross win taxes. Customer drop from thecasino, FOBTs and most other gaming products are included in gross win at 100%margin. Gross win percentages by channel are set out in the table below. Gross Win % 2004 2004 2003 12 months 6 months 12 months to 31 Dec to 31 Dec to 31 Dec % % % Retail 12.88 11.61 12.32Telephone 8.31 6.66 7.43Online 10.73 9.69 7.31 Gross win percentages in the sportsbook are driven by a number of factorsincluding the underlying margin in the odds, the mix of events, the mix of bettypes, customer behaviour, the accuracy of the odds offered and the run ofresults. In particular the run of results has a significant impact on margin,with winning favourites giving poor results for the bookmaker and vice versa. Incontrast, the gross win percentage from gaming activities is lower, but lessvolatile given the inherent mathematics and different customer betting patterns. The first half of the year saw strong gross win driven by continued turnovergrowth, a good run of sporting results together with the new gaming revenuesfrom the online casino and peer-to-peer games. The second half of the year sawcontinued growth in turnover and improvement in the performance of the casinowhile sporting results in the fourth quarter, particularly in the busy Decemberperiod, were poor. The benefits of the increased gaming revenues can be clearlyseen in the second half where its predictability mitigated the impact of poorsporting results. As the casino and other non bookmaking income grows, overallgross win volatility should reduce. We continue to expect the sportsbook gross win percentage to fall within annualranges for each channel as follows: Retail 12% -14%Telephone 8.5% - 9.5%Online 7.5 - 8.5% Gross win increased by 41.8% compared to an increase in turnover of 27.5% as setout below. This reflects improved gross win across the sportsbook together with€7.9m (2003: nil) of online gaming drop. Gross Win by Channel 2004 2003 Change •'000 •'000 % Retail 88,701 67,907 30.6Telephone 19,664 13,179 49.2Online 25,745 13,524 90.4Total 134,110 94,610 41.8 Gross win in the UK shops is developing and we have seen continued improvementas the estate develops and the volume of bets increases. We expect margin tocontinue to improve over time as the shops increase their bet volume and enhancetheir product mix. Gross profit reflects the application of UK/Isle of Man betting taxes to thegross win and discounting of bets in Ireland. For business conducted under a UKbetting licence, 15% of the bookmaker's gross win is paid in betting tax whilefor business conducted under an Isle of Man betting licence, 1.5% of gross winis paid in betting tax. Gross profit in the year grew by 39.7% to €123.2m. This reflects the increasedgross win above offset by an increased level of discounted bets in Ireland and achange in mix of gross win based betting taxes. There was no change in the grosswin tax rates in the period. Operating Profit 2004 operating profit was €31.1m, an increase of 58.6% over 2003. This excellentperformance was driven by the 39.7% increase in gross profit referred to aboveoffset by a 34.3% increase in operating costs. Operating Profit by Channel 2004 2003 Change •'000 •'000 •'000 Retail 17,752 17,402 350Telephone 4,552 861 3,691Online 8,830 1,369 7,461Total 31,134 19,632 11,502 The retail division was almost flat for the year as the 13.55% increase in theoperating profit for the Irish estate was offset by expected start up losses inthe UK estate. We believe that losses in the UK have now peaked and expect thecore estate of UK shops to trade profitably in 2005 and beyond. Continuedinvestment in both management and new outlets means that we do not expect anoverall profit from the UK until 2006 and we remain confident that the UK retailestate will be a significant profit contributor over time. We expect the Irishestate to show continued earnings growth and cash generation. The telephone business had an excellent operating profit of €4.6m (2003: €0.9m)driven by strong turnover, an improvement in the average stake size, improvedgross win percentage and good cost containment. As noted above, the costdynamics of this channel differ from the other channels given the capacityconstraints of a call center and the high costs per transaction. Good earningsgrowth is dependent on increasing the average contribution per call, tight costcontrol as well as absolute turnover growth. The online business had an outstanding year as its profit contribution rose to€8.8m from €1.4m. This reflects the combination of strong gross profit growthwithin the core business and new gaming revenues. The relatively fixed costnature of the business allowed approximately 60% of the gross profit increase tofall to operating profit. While overall costs have increased by 34.3% this must be looked at in thecontext of a 27.5% increase in turnover and a 39.7% increase in gross profit.Costs are driven by both turnover and by gross profit (i.e. commissions, BHBlevies, etc.) as well as the need for investment in marketing new products,development of the brand and investment in the new UK retail division. We remainconfident that the cost base is correctly sized for the business. Tax Rate The corporation tax charge for the year was €4.6m (2003: €2.9m) representing aneffective tax rate of 14.5% (2003: 14%). This compares with the statutory ratein Ireland of 12.5% and the UK statutory rate of 30%. No corporation tax ispayable in the UK in respect of 2004 due to tax losses. The Group's effectivetax rate remains above the statutory rate due to the disallowance of certainexpenses and this is likely to continue going forward. Cash Flow, Cash Balances and Foreign Exchange Risk Cash balances at 31 December 2004 were €47.2m (2003: €39.2m), an increase of€8.0m. This includes cash held in customer accounts of €6.5m (2003: €4.8m). Cash from operating activities totalled €45.0m, an increase of €12.9m from 2003.Cash from operating activities included net cash inflow from customer accountsof €1.7m. Interest income was €1.0m, an increase of €0.2m, reflecting higheraverage cash balances offset by lower average interest rates. Capitalexpenditure increased by 27.5% to €27.2m from €21.4m in 2003. The significant capital expenditure reflects the high levels of propertyactivity in both Ireland and the UK due to the expansion and refurbishment ofthe retail estate. We expect this to continue as we expand at similar rates inthe future. Cash balances are invested in accordance with defined treasury policies approvedby the Board. These policies limit the risk rating of institutions that can beused, the concentration of risk with any one institution or within any categoryof institutions and the term of deposits. Cash balances are substantiallyinvested in short-term bank deposits with maturities of 120 days or less. At theyear end all deposits were available at twenty four hour notice. The Group has no borrowings. Interest rate exposure is thereby limited tointerest income on deposits and the impact of the economy in general. The Groupremains highly cash-generative and this, together with existing cash balances,will be used to fund expansion. As has been previously stated, only ondetermination of the scale of expansion in the UK, which is partly dependent onthe timing of deregulation, can the Board clearly identify potential surpluscash. Should the Group not require any of its cash reserves, the Board willdetermine the best method of returning it to shareholders. The Company has theability to buy back its own shares, which was granted by shareholders during2004. Foreign exchange risk in the business is small. As the Group expands in the UKit will require sterling to fund its capital expenditure. Much of this can benaturally hedged from the sterling gross profit generated in sterling from theonline and telephone divisions, as these divisions primarily have a euro costbase and so generate surplus sterling. Group policy allows the Group to hedgethe foreign exchange exposure for up to six months. At the year end, no foreignexchange contracts were open. The Group's functional currency is the euro andtranslation risk exists with its sterling subsidiaries. Employees The average number of employees of the Group during 2004 was 1,076 (2003: 913).At the year end, the total number of employees was 1,199 (2003: 1,032). Share Price The Group's share price traded in the range of €7.15 to €11.00 in 2004 with theyear's high reached on 25 November 2004. The share price at 31 December 2004 was€10.85 (2003: €7.15) giving a market capitalisation of €543m (2003: €342m). Theyear end free float (shares not held by the Directors or related parties) was88.03% (2003: 78.8%). Following a change implemented by the London Stock Exchange on 20 December 2004,the shares are now quoted only in euro. Trading and Risk Management The Group manages its betting risk through a central risk management and tradingteam whose role is to compile the initial odds and, subsequently, manage theodds and risk exposures through the life of the event. Risk limits are in placewithin the trading room and compliance with limits is reported daily to seniormanagement and internal audit. Internal audit also carries out reviews of therisk function. A betting risk management sub-committee of the Board was established in 2003under the chairmanship of David Power, a non-executive director. This Committeesets overall policy for betting risk. Limits are agreed with the Committee andset annually but are subject to review by the Committee at any time. The Group does not offer credit betting. Dividend The 2004 interim and proposed final dividend total 18.72 cent per share, (2003:12.89 cent per share), amounting to €9.3m (2003: €6.2m) an increase of 45.2% on2003. This represents dividend cover of 2.94 times (2003: 2.85). It is theBoard's intention to pay approximately one third of after tax earnings in annualdividends on average. International Financial Reporting Standards (IFRS) The Group is preparing for the implementation of IFRS in 2005. A review has beencompleted on the differences between current standards and IFRS. With theexception of accounting for share based payment schemes the impact of thechangeover will be limited to a small number of areas of disclosure. Thedifferent accounting treatment for both share option schemes and the long-termincentive plan will give rise to small balance sheet and profit and loss accountadjustments. Our estimate is that the impact on the 2004 EPS of accounting underIFRS would have resulted in a reduction in EPS of less than one cent. Outlook Trading for the year to date is satisfactory. While the pendulum of sporting results will continue to swing between PaddyPower and the punters, we look forward to continued growth across all channelsin line with our stated objectives. Fintan DruryChairman23 February 2005 CONSOLIDATED PROFIT AND LOSS ACCOUNTYear ended 31 December 2004 Year ended Year ended 31 December 2004 31 December 2003 •'000 •'000 Turnover 1,165,165 913,624 Cost of sales (1,041,960) (825,429) Gross profit 123,205 88,195 Operating expenses (92,071) (68,563) Operating profit 31,134 19,632 Interest receivable and similar income 1,060 883Interest payable and similar charges (54) (105) Profit on ordinary activities before taxation 32,140 20,410 Tax on profit on ordinary activities (4,662) (2,859) Profit on ordinary activities after taxation 27,478 17,551 Dividends on equity shares- paid (3,105) (2,053)- proposed (6,235) (4,107) (9,340) (6,160) Retained profit for the year 18,138 11,391 Profit & Loss account, start of year 42,596 31,205 Transfer in respect of long-term incentive 754 -plan Profit & Loss account, end of year 61,488 42,596 Earnings per ShareBasic €0.5661 €0.3697Diluted €0.5431 €0.3502 CONSOLIDATED BALANCE SHEETAs at 31 December 2004 31 December 31 December 2004 2003 •'000 •'000Fixed assetsIntangible fixed assets - goodwill 1,759 904 Tangible fixed assets 60,651 41,571 62,410 42,475 Current assetsDebtors 2,290 2,188 Cash at bank and in hand 47,206 39,173 49,496 41,361 Creditors (amounts falling due within one year) (39,241) (30,585) Net current assets 10,255 10,776 Total assets less current liabilities 72,665 53,251 Provision for liabilities and charges (876) (977) Net assets 71,789 52,274 Capital and reservesCalled up share capital 5,005 4,781 Share premium 6,680 3,975 Capital redemption reserve fund 662 662 Capital conversion reserve fund 260 260 Shares held by long-term incentive plan trust (2,306) - Profit and loss account 61,488 42,596 Shareholders' funds - all equity interests 71,789 52,274 CONSOLIDATED CASH FLOW STATEMENTYear ended 31 December 2004 Year Ended Year Ended 31 December 31 December 2004 2003 •'000 •'000 Net cash inflow from operating activities 45,021 32,144 Returns on investments and servicing of finance Interest received 1,086 865 Interest element of finance lease payments (54) (106) 1,032 759Taxation Corporation tax paid (3,800) (3,923) Capital expenditure and financial investments Acquisition of tangible fixed assets (26,262) (21,439) Sale proceeds on disposal of tangible fixed assets 69 96 Acquisitions (26,193) (21,343) Purchase of business (1,017) - Equity dividends paid (7,212) (5,262) Net cash inflow before financing 7,831 2,375 Financing Capital element of finance lease payments (421) (312) Proceeds from the issue of new shares 2,929 737 Purchase of shares held by long-term incentive plan (2,306) -trust 202 425 Net cash inflow 8,033 2,800 ACCOUNTING POLICIESYear ended 31 December 2004 The following accounting policies have been applied consistently in dealing withitems which are considered material in relation to the Group's financialstatements. Basis of Preparation The financial statements have been prepared in euro in accordance with generallyaccepted accountancy principles under the historical cost convention and complywith financial reporting standards of the Accounting Standards Board, aspromulgated by the Institute of Chartered Accountants in Ireland. Basis of Consolidation The Group financial statements consolidate the financial statements of theCompany and all its subsidiary undertakings based on financial statements at theyear end date. Turnover Turnover comprises proceeds from sports betting and gaming activities. Sportsbetting turnover, which is exclusive of betting tax and levies, representsamounts received in respect of bets placed on events that occurred during theyear. In accordance with industry practice, gaming turnover represents "customer drop" which comprises amounts staked net of customer winnings. Pensions The Group operates a number of defined contribution schemes for certainemployees and executive directors. Contributions are charged to the profit andloss account as incurred. Foreign Currency Transactions denominated in foreign currencies are translated at the exchangerates ruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies are translated into euro at the rates ofexchange ruling at the balance sheet date. The resulting profits and losses aredealt with in the profit and loss account. For the purposes of consolidation ofsubsidiaries, the closing rate method is used, under which translation gains orloses are shown as movements in reserves. Profit and loss accounts of overseassubsidiaries are translated at average exchange rates. Financial Fixed Assets Interests in subsidiary undertakings are stated in the Company balance sheet atcost less, where necessary, provisions for impairment. Intangible Fixed Assets - Goodwill Goodwill arising on the acquisition of a subsidiary or business, representingthe excess of cost over the fair value of the identifiable assets andliabilities acquired, is capitalised and amortised by equal annual installmentsagainst profit over its expected useful life, currently 20 years. Provision ismade for any impairment. Tangible Fixed Assets and Depreciation Tangible fixed assets are stated at historical cost less accumulateddepreciation. Depreciation is calculated so as to write off the cost lessestimated residual value of tangible fixed assets on a straight line basis overtheir estimated useful lives, as follows: • Freehold property - 50 years• Leasehold property and improvements - unexpired term of the lease, except for leases with an initial term of ten or less years, which are depreciated over the unexpired term of the lease plus the renewal length of the lease, if there is a right of renewal.• Fixtures, fittings and equipment - 5/7 years• Computer equipment - 3 years• Equipment screens - 5 years• Leased equipment screens - 3 years• Motor vehicles - 5 years Leases Assets held under finance leases are included in the balance sheet at theircapital value and are depreciated over the term of the lease. The correspondingliabilities are recorded as a creditor and the interest element of the financelease rentals is charged to the profit and loss account over the term of thelease to produce a constant rate of charge on the balance of capital repaymentoutstanding. Operating lease rentals are charged to the profit and loss accounton a straight-line basis over the lease term. Taxation Current tax, including Irish corporation tax and foreign tax, is provided on theGroup's taxable profits, at amounts expected to be paid using the tax rates andlaws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that haveoriginated but not reversed at the balance sheet date. Provision is made at therates expected to apply when the timing differences reverse. Timing differencesare differences between the Group's taxable profits and its results as stated inthe financial statements that arise from the inclusion of gains and losses intaxable profits in periods different from those in which they are recognised inthe financial statements. A deferred tax asset is regarded as recoverable and therefore recognised onlywhen, on the basis of all available evidence, it can be regarded as more likelythan not that there will be suitable taxable profits from which the futurereversal of the underlying timing differences can be deducted. Long-term Incentive Plan In accordance with UITF Abstract 17 (revised) "Employee Share Schemes", theexcess of the fair market value of the related shares over the exercise price ofthe share award on the grant date, is charged as employees' remuneration overthe period to which employee performance relates. A corresponding amount iscredited to the profit and loss account reserve. Payments to the Plan's Trustees to acquire Company shares which have beenconditionally allocated to executives under the terms of the long-term incentiveplan are shown as a deduction from shareholders' funds in the consolidatedbalance sheet. NOTES TO THE FINANCIAL STATEMENTS Year ended 31 December 2004 1. Turnover and Segmental Information The turnover, operating profit and net assets of the Group relate to the provision of betting and gaming activities, substantially all of which are conducted in the Republic of Ireland and the UK. Turnover by Delivery Channel Year Ended Year Ended 31 December 2004 31 December 2003 •'000 •'000 Retail 688,651 551,136 Telephone 236,546 177,418 Online 239,968 185,070 1,165,165 913,624 Turnover by Region Year Ended Year Ended 31 December 2004 31 December 2003 •'000 •'000 Ireland & other 829,541 702,240 United Kingdom 335,624 211,384 1,165,165 913,624 Gross Win by Delivery Channel Year Ended Year Ended 31 December 2004 31 December 2003 •'000 •'000 Retail 88,701 67,907 Telephone 19,664 13,179 Online 25,745 13,524 134,110 94,610 Gross win is measured as being amounts staked (excluding betting tax and levies)less the amount returned to customers as winnings. Gross Profit by Delivery Channel Year Ended Year Ended 31 December 2004 31 December 2003 •'000 •'000 Retail 81,196 65,676 Telephone 18,381 11,096 Online 23,628 11,423 123,205 88,195 Gross profit is measured as gross win less discount on bets and gross win taxes. Operating Profit by Delivery Channel Year Ended Year Ended 31 December 2004 31 December 2003 •'000 •'000 Retail 17,752 17,402 Telephone 4,552 861 Online 8,830 1,369 31,134 19,632 Net assets by delivery channel, and operating profit and net assets bygeographic segment are not disclosed as, in the opinion of the Directors, thisdisclosure would be seriously prejudicial to the interests of the Group. 2. Cost of Sales Cost of Sales comprises: Year Ended Year Ended 31 December 2004 31 December 2003Related Shares:
Flutter Entertainment