1st Mar 2006 07:02
Paddy Power plc01 March 2006 Paddy Power plc 2005 Preliminary Results Announcement Paddy Power plc, Ireland's largest betting and gaming company, today (1 March2006) announced strong financial results for the year ended 31 December 2005. 2005 2004 • • Change Revenue 1,371.7m 1,159.7m 18.3%Operating Profit 30.1m 31.1m -3.2%Profit Before Tax 31.3m 32.1m -2.5%Profit After Tax 27.0m 27.5m -1.8%EPS 54.08c 56.55c -4.4%Cash Balance 52.3m 47.2m 10.8%Dividend 20.59c 18.72c 10.0% Commenting on the results, Patrick Kennedy, Chief Executive, Paddy Power plcsaid: "While the run of results and structural change in the Irish marketplaceimpacted our gross win percentages during the year, 2005 saw strong revenuegrowth across all our channels - a key indicator of the health of the business." Our online operations, which accounted for 56% of Group earnings in the period,performed particularly well, delivering a 92% increase in operating profit. Trading in the first two months of the year has been satisfactory and we lookforward to another year of growth". ENDS 1 March 2006 Issued on behalf of Paddy Power plc by Drury Communications Ltd For reference: Patrick Kennedy Ross IversChief Executive Chief Financial OfficerPaddy Power plc Paddy Power plcTel: + 353 1 404 5912 Tel: + 353 1 404 5912 Billy Murphy / Oonagh Daly Trevor PhillipsDrury Communications Ltd HolbornTel: + 353 1 260 5000 Tel: + 44 207 929 5599Mobile: + 353 87 855 4406 (OD) Mobile: + 44 7889 153628 Chairman's Statement Dear Shareholder I am pleased to report on another year of progress in Paddy Power. Revenue €1,371.7m (+18.3%) Pre tax profit €31.3 m (-2.5%) EPS 54.08 cent (-4.4%) Dividend 20.59 cent (+10%) Cash balances €52.3m (+10.8%) 2005 was a challenging year. I have talked before about how a run of sportingresults can favour one side or the other of the betting equation; last yearcertainly did not advantage bookmakers. That is not a moan. It's just a fact oflife in this business. 2005 also witnessed structural change in the Irish retailbetting market. These two factors meant that, despite record revenue, theresults were off where we would have hoped such a strong performance would haveplaced us. The structural shift in the Irish retail market place gave rise to a revision ofthe expected gross win percentages in our domestic retail business. While thisis undoubtedly a disappointment, we remain very confident that Paddy Power isbest placed to take advantage of the opportunities associated with thisstructural shift. Our position as market leader, together with the introductionof tax free betting in the Irish retail market, offers the opportunity forprofitable growth in 2006 and beyond. We have made considerable progress on business development since my Statement inlast year's Annual Report. Much of the benefits of these advances will start tocome through over the coming year and into 2007. The business is innovatingconstantly and I am confident that this will enhance shareholder value in themedium term. Strategy On this, our fifth anniversary as a public company, I believe it is worth takingthe time to reflect on the strength of the Company and the significant growthopportunities available. The past five years has seen revenue grow from €362m to €1,372m an averageannual growth rate of approximately 31%, while operating profit has grown by anaverage annual growth rate of approximately 30% to €30m. In that time, thebusiness has been transformed from an Irish betting shop operator to amulti-channel, multi-national betting and gaming company with over two thirds ofits operating profits coming from non retail activities and 29% of revenuecoming from outside the Irish market. Paddy Power, through its continuedcustomer focus, has remained the number one betting and gaming company inIreland and has now established itself as a significant player in theconsiderably larger United Kingdom (UK) market. Our expansion has diversified our income sources, with non bookmaking incomebecoming an increasingly significant revenue stream. This in turn has allowed usto broaden our customer base, both by customer type and geographic market, andprovides various cross selling opportunities that will fuel further growth. Paddy Power is a growth company. We have a track record of growing start upbusinesses organically while at the same time growing overall earnings and thisis set to continue. The online channel has strong short and long term earningsgrowth potential in Ireland and the UK as the online betting market grows and wecapture more market share. 2006 should also see us commence online operationstargeting continental Europe where there are significant opportunities. We willalso continue to invest in the roll out of our UK estate where significant longterm potential remains. Regulation 2005 saw some significant regulatory changes. In the UK, the Gambling Act waspassed which, amongst many other provisions, has finally eliminated the demandtest for betting shop licenses. It remains unclear as to when the relevantprovisions will be enacted, but the formal consultative period has commenced andwe remain hopeful for significant progress this year. In Ireland, the 2005 Budget eliminated customer based betting taxes from July2006, replacing them with a 1% revenue based tax levied on the bookmaker. Intrue Paddy Power fashion we decided not to wait; instead we offered ourcustomers tax free betting from the morning after the Budget, with Paddy Powerabsorbing the full 2% charge until July 2006. Both we and our customers welcomethe Budget change which now gives retail customers the same tax free bettingthat Irish based telephone and internet customers have enjoyed for some time. People This year marked the end of John O'Reilly's tenure as Chief Executive. It isaccepted that John, together with his predecessor Stewart Kenny, forged anextraordinary position within the betting industry for Paddy Power. Finding anew CEO is a big challenge for any Board. Finding someone to follow Stewart andJohn was acutely so. I believe that during my time as Chairman it is unlikelythat I will oversee a process as important for the shareholders than theselection of the right CEO to follow John. The Board believes that in Patrick Kennedy we have got the right man to takethis business forward and deliver shareholder value. I want to wish Patrick wellin that quest. I have said it before and I continue to believe that one of Paddy Power'sstrengths is the quality of its people. Under John O'Reilly's leadership, thestrength in depth of the team has been substantially enhanced. Maintaining thecommitment to recruiting the very best talent available will remain a priorityunder Patrick Kennedy's stewardship. The Board As the business has evolved so too has the Board. In 2005, two executivedirectors retired from the Board. John O'Reilly retired on 31 December havingbeen with the Company from its inception. John served the Company in a varietyof roles and was Chief Executive for the past three and a half years. Hiscontribution was immense and on your behalf I thank him once again for hisextraordinary commitment to Paddy Power. In early 2006, Ross Ivers is leavingthe company having been Finance Director since 2001. We greatly appreciate hissignificant contribution to Paddy Power and wish him well in his future career. We have announced this morning the appointment of Jack Massey as FinanceDirector. Jack joins us from ITG Europe, the European division of the NYSEquoted Investment Technology Group, where he has been Chief Operating Officersince 2002 and previously Finance Director. I know that Jack will make a verysubstantial contribution to the company and look forward to working with him. We were very pleased to announce, in January 2006, the appointment of Tom Graceas a non-executive director. Tom retired as a Partner in PricewaterhouseCoopersin December of last year and I have no doubt that he will make a significantcontribution to Paddy Power over the coming years. As noted in the 2004 AnnualReport, Brody Sweeney joined the Board in February 2005 and we have alreadybenefited from his contribution. Dividends The Board is recommending a final dividend of 12.84 cent per share payable toshareholders on the register at 10 March 2006, bringing the total dividend forthe year to 20.59 cent per share, an increase of 10 % on 2004 (18.72 cent). Outlook 2006 promises to be another exciting year for Paddy Power as we expand in bothnew and existing markets. Trading for the year to date has been satisfactory andI look forward to updating you on progress at our AGM in May. Chief Executive's Statement I am delighted as Paddy Power's new Chief Executive to outline my views on theCompany. The growth of Paddy Power in its five years as a public company, and indeed inthe 18 years since its inception, has been tremendous. Equally impressive hasbeen the fact that our culture today remains exactly as it has been throughoutthat period, characterised by a total focus on our customers and staff alike, oninnovation and on our brand. Our Business The business today is very well positioned across each of its principalchannels: (i) Irish Retail The Irish retail market has very strong growth prospects underpinned bycontinued population and economic growth. These prospects have been reinforcedby the industry's move to tax free betting which was led by Paddy Power inDecember. Strong growth encourages new entrants and competitive trading. Nonetheless, asthe market leader with a 27 % share and with consistent brand recognition ofclose to 90%, Paddy Power will continue to drive this market. Our brand, ourpeople and our investment in innovative new products will support this. In addition, growth in the Irish retail market will be supported by the verysignificant investment we have made in our estate in the last number of years:80% of our estate has been opened, extended, relocated or refurbished in thelast four years. Our organic rollout plan of six to ten new outlets per annumwill continue and the enlarged estate should be fully supported by an ElectronicPoint of Sale (EPOS) system by the end of the year. (ii) UK Retail The attractions of the UK market to Paddy Power that we identified when weoriginally targeted it remain in place. It is a very substantial market with inexcess of 9,000 outlets. It is close to our home market and is about toderegulate. It has a similar product and customer profile, which allows us totake advantage of our existing capabilities. Importantly, it is open to thebrand-led, customer-led Paddy Power proposition. We have made substantial progress in this market: - At the end of last year, we had 45 shops open, compared with 12 at the end of 2003 - Our market share in the areas where we have shops continues to grow - Our brand awareness, in London and in the UK, continues to increase, with research showing Paddy Power to be the fourth most recognised bookmaking brand in London - Our product mix is improving, with the proportion of non-racing revenue continuing to increase The UK retail expansion continues to be "work-in-progress" for Paddy Power, witha material contribution to Group earnings some way off yet. We are still movingtowards critical mass: 30 shops have now been open for at least 12 months, andwe recognise that it takes longer for a new entrant to develop a shop to "steadystate" than it does for a market leader. It is our intention to continue ourorganic rollout in the UK at its current rate of up to 15 outlets per annum,although we will review this rate in light of market developments, including thenew legislative environment. (iii) Non Retail The growth in the last few years in our non retail channel has been trulyimpressive. The business has moved from losses in excess of €8 million in 2001on revenue of €90 million to operating profit of €21 million in 2005 on revenueof €577 million. In addition to our sportsbook offering through both telephoneand internet channels, we have successfully introduced casino products, gamingproducts and poker. Well-resourced and ambitious competitors continue to enterthese markets, attracted by the growth prospects. However, prospects for all ofour businesses remain very strong. In addition, they are likely to becomplemented by both additional product and additional language websites in theshort term. We will continue to use organic growth to expand online, althoughstrategic acquisitions at the right price that bring new product, technology orgeographic expansion are possible. The same three factors will support the strong growth prospects of each of thesesectors: our people, our brand and our innovative product range. Our Resources (i) Our People Today we employ more than 1,400 people in Ireland and the UK, and this team isthe single greatest reason for my confidence in the future of Paddy Power. As Ispend time with people throughout the organisation, I am constantly impressed bythe same qualities: energy, pride in our company and in our brand, coupled withan absolute focus on our customers. In the last year, we have grown by close to 200 people. More than half of thisgrowth has come directly from our new shop openings in Ireland and the UK, plusour team to support the EPOS rollout. In addition, we have increased ourtelephone operators, our customer service team and our IT team to support thevery strong growth in non retail. We have also recruited dedicated managementteams for poker, casino and our European sportsbook rollout. Furthermore, as theorganisation overall has continued to grow apace, we have strengthened keycentral functions, including marketing, human resources, risk management andfinance. As has historically been the case, we will continue to hire inanticipation of growth. (ii) Our Brand Our brand embodies our approach to our customers and is a key point ofdifferentiation versus our competitors across all our channels. We will continueto position the brand as fun, friendly - and occasionally cheeky and irreverent- but also, critically, fair. Whether through our broader range of products orour early payouts, innovative specials, double result payouts or the many otherimaginative refunds that we regularly offer to our customers, we will continueto focus on being different from the competition. Paddy Power's brand recognition consistently runs at almost 90% in Ireland. Inthe UK, where we have been operating for only four years, nationwide brandrecognition among adults is 12%, 16% in London and over 60% amongst regularpunters across the UK. This is a testament to the energy and imagination weinvest in continually reinforcing our points of difference. (iii) Our Products The breadth of our product range is also a key source of differentiation fromboth other bookmakers and betting exchanges. It reinforces the brand quality offairness to the customer, while also helping to drive revenue. For example, inleading live football matches, we will typically offer up to 55 markets, betweenpre-match and in-running, versus 25 on average for our largest competitors. "Betting in Running" has been expanded significantly in the last 12 months withmore comprehensive product offerings particularly in football, golf, Formula 1,snooker, tennis and baseball. It now accounts for over a quarter of all nonretail sports bets. Other recent products that have been launched includehourly financial markets, "select-your-own" handicaps in rugby, golf handicapbetting, betting without the favourite and place-only-betting in racing andmythical matches in football. Conclusion Overall, whilst there are challenges facing all of our businesses, they are faroutweighed by the opportunities that our market position and our owncapabilities present. The strategy that has led to the successful development ofPaddy Power to date is set to continue and I look forward to the future withconfidence. Operations Review Paddy Power is Ireland's largest betting and gaming company and has asignificant UK operation. It operates through two main divisions; the retaildivision, which operates bookmaking shops in both Ireland and the UK, and thenon retail division, which provides telephone bookmaking services in Ireland andthe UK together with an online service that provides both bookmaking and gamingservices in both markets. 2005 has seen continued expansion of each of the divisions. The retail estatehas expanded in both countries. Active customer growth has continued in theexisting non retail division, fuelled in part by the addition of significant newproducts and services in the online channel. The Retail Division 2005 saw the continued implementation of our retail organic growth strategy inboth Ireland and the UK. At 31 December 2005, the estate comprised 195 shops(2004:174), with 150 (2004:143) in Ireland and 45 (2004:31) in the UK. New openings in both countries were in line with plans, with a bias to thesecond half of the year in both locations. In addition to the new shop openings,our refurbishment plan has continued throughout the year in Ireland as weimprove the physical quality of the estate, the average size and the audio/visual facilities. Total capital investment across the retail estate was €24.3m(2004: €24.6m). In Ireland, seven (2004: six) new shops were opened. In addition we alsorelocated six (2004: four) shops, extended four (2004: four) and refurbished 16(2004: 27). The total number of premises developed in Ireland in the year was 33(2004:41). As we move through 2006, the level of the redevelopment work on theexisting estate will decrease as the major shop fit upgrade programme that wehave undertaken over the past three years is completed. The level of expenditureon maintenance capital is expected to decrease for two to three years before thenext estate upgrade. We continue to operate four racecourse shops as well as thestadium facilities at Lansdowne Road. There were seven (2004: five) surplusproperty leases at the year end. Expansion of the UK estate continued with 15 new shops being opened during theyear. We also closed our oldest shop during the year. This had been acquired in2000 in order for Paddy Power to undertake UK based advertising and did not formpart of our UK roll out plan. We enter 2006 with 45 shops open, nine unopened licenses and a healthy pipelineof license applications across London. We plan to open up to 15 additional shopsin London in 2006, assuming no changes to the existing legal process take effectin 2006. The management team is focused on achieving an improved financialperformance in 2006 as the benefits of both scale and the maturity of the estateflow through. The Group has been testing a new EPOS solution for some time. There arecurrently 72 test shops in operation in both Ireland and the UK and we are verypleased with the results of the testing. Subject to the satisfactory delivery ofa small piece of remaining code in the next few weeks, it is intended tocommence the full roll out soon thereafter. It is our intention to have the vastmajority, if not the entire estate, installed by the end of 2006. Total capitalexpenditure on this project will be approximately €10.6m, €4m to cover thecentral system and €6.6m to cover the shops. €4.2m had been spent by 31 December2005. While there are many potential benefits of EPOS to both our customers and toPaddy Power, our intention is 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 willprovide an intranet communications infrastructure within the estate allowinge-mail communication and local printing of marketing material and coupons. Itwill also provide an infrastructure for customer facing information terminals oreven internet access. While we expect to see some benefits immediately in risk,security and marketing, it will be 2007 before the full benefits are realised. 2005 saw the completion of the roll out of a new screen system which provides agreatly improved experience for the customer. In addition to enhanced graphicsit now supports 24 information screens, increased from 16, allowing us to adddedicated sports gantries across the majority of the estate. This in turn allowsus to offer vastly improved betting options on sports particularly on "Bettingin Running". The new system also supports customer information terminals givingthe customer full access to all current prices and results. In addition, itallows grouping of shops which enables the tailoring of the screen content forlocal preferences. New InfraRed technology has also been fully rolled out in 2005 and allows us tocontrol all live television pictures from a central production studio. Thisenables us to coordinate the audio, information screens and the televisionscreens in the shops, thus greatly improving the in-shop experience forcustomers. Non Retail Division The non retail division comprises telephone betting, online and interactivetelevision operations. Active Customers Online Telephone 2005 2004 2005 2004Ireland and Rest Of World 25,646 16,721 10,783 10,207UK 48,015 29,982 10,148 8,326Total 73,661 46,703 20,931 18,533 (Active customers are defined as those who have bet in the last three months) The Online Channel The significant expansion of the online operation seen over the previous fouryears continued in 2005 with record levels of activity throughout the business.The gradual shift of this channel away from bookmaking into online betting andgaming accelerated in 2005 as the take up of the new products launched in 2004grew significantly. These were supplemented in 2005 by the launch of poker,which has performed very well in its first year of operation. Ongoingdevelopment of the core sportsbook product has continued with a range ofancillary features being added to increase the overall attractiveness of thesite. Online Active Customers 2005 2004Sportsbook only 48,137 35,321Gaming only 11,277 2,338Multi product customers 14,247 9,044Total 73,661 46,703 The development of the management team has been a major feature of the nonretail division over the year. The addition of new product lines and the speedof their growth required that responsibilities for individual product lines besplit into separate management teams. We are delighted with the calibre of theindividuals that we have attracted, who have come from a wide range of leadinge-commerce companies. 2006 will see an expansion of the online channel into continental Europe with atleast one European language being added. We recruited a dedicated European teamin 2005 to manage this project initially based in Dublin. We expect to beoperational in quarter two and to run at a small loss for 2006. The Telephone Channel 2005 was another year of significant development for the telephone business. Over the past three years we have been actively engaged in increasing theaverage telephone stake size to reflect the higher delivery costs of thischannel in comparison to both the online and retail channels. As part of thisprocess we encouraged lower staking customers to switch to the online channel.We have also made a number of improvements to the telephone service during theyear. The changing profile of our telephone customers, together with the servicechanges and improved operational efficiencies, greatly improved theprofitability of the business. However, notwithstanding the changes we have made, the underlying growth in thebusiness means that our current facility in Dublin is reaching capacity. We willtherefore be moving the call centre in 2006 to a new building beside ourexisting headquarters in Dublin. This will increase the call centre capacity byan initial 25% and also offers additional capacity as needed over the next fewyears. It also frees up space in our head office to facilitate the expansion ofour other businesses. Trading and Risk Management Trading and risk management is at the heart of a bookmaking business and 2005has seen continued development of this function. It is responsible for thecreation and pricing of all markets and the trading of those markets throughtheir life. Betting has become more sophisticated as the number of events and the number ofmarkets on each event increase. The increasing promotional capabilities in theretail business through its expanded screens system, together with the almostunlimited ability to promote product on the internet, requires an ever expandingproduct range. At the same time the speed of information flows is greater,requiring greater management of the betting markets offered. These changes in the speed and quantum of information also provide additionalopportunities to create markets. Live sport together with improved technologyallows "Betting in Running" to be offered through the internet and telephones.With the advent of EPOS it can also be done effectively through the shops. The ability to hedge markets has substantially changed over the past few yearsas betting exchanges have grown. While providing a previously unavailable methodof hedging, their growth has also led to a gradual change in the way that the ontrack bookmakers manage risk. This change impacts the value and role of thetrack based starting price system as it no longer fully reflects the weight ofmoney bet at the track. The debate on the role of an off track starting price isset to continue and is an area that Paddy Power will watch with interest. PaddyPower has used, and will continue to use, both the on and off track market andthe betting exchanges as appropriate to manage risk. The levels of changes noted above mean that continued investment in riskmanagement is essential and has been ongoing through 2005. This investment takesseveral forms. The need to monitor price movements in the market place requiresincreased technology to ensure that our relative position in the market isclearly understood in detail at all times. Investment in back office efficiencyis essential to ensure that pricing and trading decisions are implemented acrossall the business channels as quickly as possible and with minimum risk of error.Increased headcount is needed as more sports are covered and specialist tradersare put in place in each area. However, increased automation and sophisticatedmathematical model allows greater productivity from individual traders who cancover more markets with greater accuracy. Some of the solutions noted above comefrom the EPOS implementation while others require separate solutions. 2006 willsee continued investment in risk as Paddy Power further develops its marketleading risk management operation. These actions will improve the overall quality and productivity of the riskmanagement operation and help generate incremental revenue through new productslaunches. They will however have a limited impact on gross win percentages giventhe need to operate within a very competitive market place. Marketing 2005 was another very productive year for the marketing team as they reinforcedPaddy Power's brand recognition and positioning in Ireland while building on thebrand growth achieved in 2004 in the UK. Our approach to our brand has remained consistent. Small stake betting is aboutentertainment and Paddy Power continues to position itself as fun, fair andfriendly. Our approach to marketing can be best illustrated through highlightingsome key marketing events in 2005. The Papal elections in April generated significant media and customer interest.A quick decision was taken to send a team to Rome for the conclave withspecially prepared marketing materials, backed up by a Paddy Power PapalElections website. It was a risk that paid off handsomely, generating globalcoverage of Paddy Power, significant revenue and increasing the brand awarenessof both our customers and investors. In September, after only seven matches, we declared Chelsea "winners" of theEnglish Premiership and paid out all winning bets. As well as delighting manycustomers and demonstrating the Paddy Power difference, it generated substantialmedia coverage. Both of these events illustrate Paddy Power's core principles of being creativeand fast moving. This willingness to make quick decisions enables us to gainfirst mover advantage. They also show that we are prepared to take risks inareas that clearly demonstrate our brand values. Our Irish outdoor brand campaign in September emphasised that Paddy Power was nolonger just about sports betting but encompassed a whole selection of onlinegames. As our posters said "there's a place for fun and games" andpaddypower.com is it. While the campaign generated unexpected debate it was verysuccessful in reinforcing the notion that Paddy Power is about fun andentertainment. These high profile "one off" events are balanced with a whole range of moretraditional sponsorship deals covering sports, horse racing and entertainmentusing television, radio and print media. In 2005, we also increased our onlinesponsorships, becoming official online betting partner to both Arsenal andLiverpool football clubs to add to our Charlton Athletic and Aston Villa deals.In addition, as official betting partner to the Big Brother TV show, wegenerated significant exposure in the UK, capturing an audience that we wouldnot normally reach through the more traditional sporting sponsorships. As always, novelty betting is a great source of entertainment for customers andis another area where Paddy Power's sense of fun can be demonstrated. It canalso generate very significant commentary and discussion especially when it goes"wrong." In June 2005 it went "wrong" when betting on the colour of the Queen'shat at Ascot. Who would have thought a brown hat at 12/1 would be a winner?Well, one "lucky" customer did as, only two hours before the Queen appeared atAscot, a four thousand pound bet was placed with the price already having closedto 8/11. The willingness to take risks continues in 2006. As early as the second week ofJanuary, we took short term sponsorship deals for Burton Albion FC in their FACup match against Manchester United and for Roy Keane's debut match for Celtic.Upset results in both games delivered excellent exposure for us. People Staff numbers increased significantly to 1,374 from 1,199 by the year end as theorganisation grew both in Ireland and the UK. Having the right people isfundamental to the success of Paddy Power and, as we continue to grow andchange, there is a constant need for more people and new skills. Some of thesewill be hired from outside the organisation and some will be developed in house. As planned, 2005 has seen significant investment in the training and developmentof staff throughout the organisation. Working through our own human resourcesteam and with the aid of external specialists, we have developed a series ofvery successful in-house training courses covering a variety of managementskills. In addition, a significant number of new staff have joined us and, asmentioned earlier, we are delighted with the calibre of the staff we haveattracted to the online channel and to the organisation as a whole. Financial Review The group has no discontinued operations and all activities are considered core. Revenue Sports betting revenue represents the amount staked (excluding revenue basedbetting taxes or levies) by the customer including the revenue from free bets.Gaming revenue represents net customer losses. Poker revenue represents thecommission ("rake") earned by Paddy Power. For gaming and poker, revenue isequal to the gross win (see below). Revenue for the year to 31 December 2005 was €1,371.7m (2004: €1,159.7m), anincrease of 18.3 % on 2004. Revenue growth has been strong across all threechannels ranging from 5.6 % to 39.7 %. Retail revenue grew by 15.3% in 2005 from €688.7m to €794.3m. Irish retailrevenue grew by 12.1% to €703.7m from €628.1m in 2004. Like-for-like growthrates within Ireland were 8.65%, reflecting the continued market growth 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 seven new outlets opened during the year.We continue to invest in new in-shop display systems as detailed in theoperations review which, through the display of additional product, willcontinue to drive revenue growth. There were no significant changes in openinghours of the estate during the year. UK retail revenue grew by 49.4% to €90.5m (2004: €60.6m).We are pleased with therevenue growth in the UK, which has been driven by growth in the number ofshops, an increase in brand recognition, continued product development andimproved display systems. The online channel continued to see strong growth, with revenue increasing by39.7% to €327.5m (2004: €234.4m). Growth in the sportsbook was 35%, which wasdriven by continued improvement in the online product offering, growth in thePaddy Power brand and continued growth in the online betting market. Casino andgaming products grew strongly with revenue from non bookmaking product totalling€17.2m (2004: €5.9m).This includes the rake income from Poker, which commencedin February 2005. 67% (2004:69%) of revenue in the online channel comes from theUK, with the vast majority of the balance from Ireland. 2005 saw an acceleration in the repositioning of the telephone business thatcommenced in 2004 as we increasingly focus on higher stake customers. Asexpected, 2005 saw some loss of lower value business, particularly in the secondhalf of the year where we made a number of significant product changes. Weremain very happy with the development of the business and, as noted in theoperations review, we will be moving into an expanded call centre in 2006.Revenue for the year grew to €249.8m (2004: €236.5m). The UK now accounts for36.4% of revenue (2004:46.7%) with the balance from Ireland. Average slip/bet values by channel 2005 2004 Change • • %Retail 19.03 18.21 4.5Telephone 91.79 83.45 10.0Online 32.59 27.09 20.3 (Note: Retail slips can contain more than one bet per slip, while other channelsare a single bet per slip. Online comprises the sportsbook only). Average bet sizes are in line with expectations. Average bet size in the Irishretail business has continued to increase. As expected, we have seen a welcomereduction in the UK average as the shops start to mature. Given the differentcost dynamics of handling bets through each channel, we continue to seek ahigher average bet size in the telephone channel where the cost of delivery ishigher, while encouraging lower staking customers to use the internet. Fixed odds betting terminals (FOBTs) income has grown in our UK estate with 172machines installed at year end. Average gross drop per machine per month was€2.5k (2004: €2.5k). Gaming machines are not permitted in Ireland. Bet volumes 2005 2004 Change '000 '000 %Retail 41,744 37,811 10.4Telephone 2,722 2,835 -4.0Online 9,522 8,363 13.9 (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 represents the gross betting or gaming profit (the difference betweenthe amount staked and the amount paid in winnings) to Paddy Power before anyother deductions. For poker and gaming income the gross win is equal to therevenue i.e.100% margin. Gross profit is the gross win less betting taxes and levies, discounted bets,direct software supplier costs and data rights. Gross win percentages by channel 2005 2005 2004 12 months to 31 Dec 6 months to 31 Dec 12 months to 31 Dec % % %Retail 12.40 12.43 12.88Telephone 7.79 6.93 8.31Online 13.11 14.85 10.98 Gross win by channel 2005 2004 Change •'000 •'000 %Retail 98,460 88,701 11.0Telephone 19,454 19,664 -1.1Online 42,934 25,745 66.8Total 160,848 134,110 19.9 Gross profit by channel 2005 2004 Change •'000 •'000 %Retail 84,976 78,296 8.5Telephone 17,151 17,151 0Online 33,443 20,186 65.7Total 135,570 115,633 17.2 (Note: These numbers include FOBT and gaming income). Total gross win increased by 19.9% to €160.8m (2004: €134.1m) while gross profitincreased by 17.2% to €135.6m (2004: €115.6m) Bookmaking gross win percentageswere poor in 2005. Over the course of the year results favoured the punter withthe big horse racing results being particularly good for the customers. Inaddition, retail trading conditions in Ireland were tough as the level of taxfree betting and other concessions increased though the course of the year. Theincreased competition levels, combined with further expectations of a completemove to tax free betting, gave rise to a revision to the expected annual grosswin percentages in November. This reduced both the retail and phone gross winpercentage range by 1% and 0.5% respectively, while increasing the onlinesportsbook gross win percentage range by 0.5%. We now expect the annual bookmaking gross win percentages (i.e. excluding FOBTand gaming income) to be as follows: Retail 11%-13% Non Retail 8% -9% Bookmaking gross win percentages will continue to be influenced by the level ofpricing and trading concessions in the marketplace as well as bet type mix,sports mix, customer mix, risk management and, as always, the run of results. Wecontinue to expect volatility in gross win percentages from year to year. Gross win from online gaming was €17.2m (2004: €5.9m), comprising gross win fromthe casino, poker and fixed odds games. This is an increase of 192% and reflectsthe strong growth we have seen in our casino and games business together withthe impact of the new poker business in 2005. In addition to generating absoluteearnings growth, the increase in gaming revenue will continue to provide someinsulation against the inherent volatility of the sportsbook. Fixed odds betting terminals generated €4.3m (2004: €1.4m) of gross win, anincrease of 217%. Gross profit grew by 19.9%, reflecting the movement in gross win offset by thechanges in the mix of betting taxes/discounts, software supplier costs, and datarights. Gross profit was 84% of gross win (2004:86%). Further change is expectedin 2006 as a result of the changes in the Irish betting tax rules and the dropin BHB data rights charges. Overall the business remains highly leveraged to small changes in the grossprofit percentage. Operating Profit Operating profit decreased in the year by 3.2%. This reflects the strong growthrates achieved across the business, the leverage impact of the changes in thegross win percentages, continued investment in the business and the growth ofnew products. In the retail division operating profit declined by 47% as the higher revenuewas offset by the poorer gross win percentages. Costs grew in line withexpectations, reflecting the growth of both the Irish and UK estates. In the telephone business operating profit declined by 20%. Despite continuedrevenue growth, this was also more than offset by the poor gross winpercentages. The online sportsbook saw continued growth in revenue which compensated for thelower gross win percentages. This was enhanced by the growth in the newer gamingproducts, giving an overall increase in operating profits of 92%. The online channel now accounts for 56% of group earnings compared to 28% in2004, while the total non retail division accounts for over 66% (2004:43%). Tax Rate The corporation tax charge for the year was €4.4m (2004: €4.7m) representing aneffective tax rate of 14% (2004: 14.5%). 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 2005 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 2005 were €52.3m (2004: €47.2m), an increase of€5.1m. This includes cash held in customer accounts of €10m (2004: €6.5m). Cash from operating activities totalled €41.4m, an increase of €0.2m from 2004.Cash from operating activities included net cash inflow from customer accountsof €3.5m. Interest income was €1.2m, an increase of €0.2m, reflecting higheraverage cash balances. Capital expenditure decreased by 7% to €25.7m from €27.7min 2004. 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, although we should see a short term reduction as the refurbishmentprogramme in Ireland temporarily slows down. 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. Atyear 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. Only on determination of the scale of expansionin the UK, which is partly dependent on the timing of deregulation and thepotential for strategic acquisition to enhance our online business, can theBoard clearly identify potential surplus cash. Should the Group not require anyof its cash reserves, the Board will determine the best method of returning itto shareholders. The Company has the ability to buy back its own shares. 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 presentation currency is the euro andtranslation risk exists with its sterling subsidiaries. Employees The average number of employees in the Group during 2005 was 1,255 (2004:1,076). At the year end, the total number of employees was 1,374 (2004: 1,199). Share Price The Company's daily closing share price ranged between €10.37 and €15.95 in2005. The share price at 31 December 2005 was €12.10 (2004: €10.85) giving amarket capitalisation of €609m (2004: €543m). The year end free float (sharesnot held by the Directors or related parties) was 89.02% (2004: 88.03%). Trading and Risk Management The Group manages its betting risk through a central risk management and tradingteam whose role it is to compile the initial odds and, subsequently, to managethe odds and risk exposures throughout the life of the event. Risk limits are inplace within the trading room and compliance with limits is reported daily tosenior management and internal audit. Internal audit also carries out reviews ofthe risk function. A betting risk management sub-committee of the Board operates under thechairmanship of David Power, a non-executive director. This Committee setsoverall policy for betting risk. Limits are agreed with the Committee and setannually but are subject to review by the Committee at any time. The Group does not offer credit betting. Transition to International Financial Reporting Standards (IFRS) There has been no material impact on the financial results by the transitionfrom Irish GAAP to IFRS as detailed in the notes to the financial statements. Dividend The 2005 interim and proposed final dividend total is 20.59 cent per share(2004: 18.72 cent per share), amounting to €10.3m (2004: €9.3m), an increase of10% on 2004. This represents dividend cover of 2.63 times (2004: 2.94). CONSOLIDATED INCOME STATEMENT Year ended 31 December 2005 Note 31 December 2005 31 December 2004 •'000 •'000Gross revenue 3 1,371,710 1,159,658 Cost of winning bets 4 (1,236,140) (1,044,025) Net revenue from betting activities 135,570 115,633 Employee expenses (51,076) (40,212)Property expenses (17,398) (14,406)Marketing expenses (11,346) (7,485)Technology and communications (8,171) (7,212)Depreciation and amortisation (11,295) (8,624)Other expenses (6,166) (6,591) Total operating expenses (105,452) (84,530) Operating profit 30,118 31,103 Financial income 1,226 1,060Financial expense - (54) Profit before tax 31,344 32,109 Income tax expense (4,390) (4,662) Profit for the year 26,954 27,447 Earnings per ShareBasic 5 €0.541 €0.565Diluted 5 €0.529 €0.543 The profit for the year is entirely attributable to equity holders of theCompany. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year ended 31 December 2005 31 December 2005 31 December 2004 •'000 •'000Profit for the year 26,954 27,447Foreign exchange translation difference (1) 1Total recognised income and expense 26,953 27,448 The total recognised income and expense for the year is entirely attributable toequity holders of the Company. CONSOLIDATED BALANCE SHEET As at 31 December 2005 31 December 2005 31 December 2004 •'000 •'000AssetsProperty, plant and equipment 72,400 57,707Intangible assets 3,615 2,944Goodwill 1,880 1,880Deferred tax assets 167 73Total non current assets 78,062 62,604Trade and other receivables 2,134 2,290Cash and cash equivalents 52,318 47,206Total current assets 54,452 49,496Total assets 132,514 112,100 EquityIssued capital 5,040 5,005Share premium 7,548 6,680Shares held by long-term incentive plan trust (4,929) (2,306)Other reserves 4,142 1,854Retained earnings 84,250 67,464 Total equity 96,051 78,697 LiabilitiesDeferred tax liabilities 843 397 Total non current liabilities 843 397 Trade and other payables 34,873 30,197Current tax payable 747 2,809 Total current liabilities 35,620 33,006 Total liabilities 36,463 33,403 Total equity and liabilities 132,514 112,100 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2005 31 December 2005 31 December 2004 •'000 •'000Cash flows from operating activitiesProfit before taxation 31,344 32,109Financial income (1,226) (1,060)Financial expense - 54Depreciation and amortisation 11,295 8,624Cost of employee share-based payments 2,289 906Loss / (Gain) on disposal of fixed assets 267 (31)Cash from operations before changes in working capital 43,969 40,602Decrease / (Increase) in trade and other receivables 222 (129)Increase in trade and other payables 3,320 4,548Cash generated from operations 47,511 45,021Interest paid - (54)Income taxes paid (6,101) (3,800)Net cash from operating activities 41,410 41,167 Cash flows from investing activitiesPurchase of property, plant and equipment (23,925) (25,949)Purchase of intangible assets and goodwill (2,068) (1,330)Proceeds from disposal of property, plant and equipment 329 69Interest received 1,254 1,086Net cash used in investing activities (24,410) (26,124) Cash flows from financing activitiesCapital element of finance lease payments - (421)Proceeds from the issue of new shares 903 2,929Purchase of shares by employee trust (2,623) (2,306)Dividends paid (10,168) (7,212)Net cash used in financing activities (11,888) (7,010)Net increase in cash and cash equivalents 5,112 8,033Cash and cash equivalents at start of year 47,206 39,173 Cash and cash equivalents at end of year 52,318 47,206 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information Paddy Power plc (the "Company") and its subsidiaries (together referred to asthe "Group") provide sports betting services through a chain of licensed bettingoffices ('Paddy Power Bookmaker') together with telephone betting ('Dial-a-Bet')and online interactive betting services ('paddypower.com'). The Group alsoprovides online gaming services through 'paddypower.com', 'paddypowerpoker.com'and 'paddypowercasino.com'. It provides these services principally in Irelandand the United Kingdom. The Company is a public limited company, incorporated and domiciled in theRepublic of Ireland, and has its primary listing on the Irish Stock Exchange. The consolidated financial statements of the Group for the year ended 31December 2005 comprise the financial statements of the Company and itssubsidiary undertakings and were authorised for issue by the Board of Directorson 28 February 2006. 2. Basis of preparation and summary of significant accounting policies The consolidated financial statements are prepared on the historical cost basisand are presented in euro, rounded to the nearest thousand. Further to IAS Regulation (EC1606/2002) ('Accounting standards adopted for usein the EU'), EU law requires that the annual consolidated financial statementsof the Group for the year ended 31 December 2005 be prepared in accordance withInternational Financial Reporting Standards ("IFRSs") adopted by the EuropeanUnion ('EU'). The consolidated financial statements have been prepared on the basis of IFRSsadopted by the EU and effective at 31 December 2005. These are the Group's firstconsolidated financial statements prepared on this basis and IFRS 1 has beenapplied. The accounting policies set out below have been applied consistentlythroughout the year and the prior year in all Group entities. An explanation of how the transition to IFRS affected the financial position andthe results of the Group, together with details of the transitional exemptionsavailed of, is provided in Note 8. Basis of consolidationThe Group's financial statements consolidate the financial statements of PaddyPower plc and its subsidiary undertakings based on accounts made up to the endof the financial year. Intra-group balances and any unrealised gains and lossesor income and expenses arising from intra-group transactions are eliminated onconsolidation except to the extent that unrealised losses provide evidence ofimpairment. Recent accounting pronouncements The IFRSs adopted by the EU applied by the Group in the preparation of thesefinancial statements are those that were effective at 31 December 2005, togetherwith the early adoption of the Amendment to IAS 39 - The Fair Value Option. TheIFRSs set out below have been adopted by the EU prior to 28 February 2006, arenot yet effective and have not been early adopted in these financial statements. The Directors have formed the opinion that the adoption of thesepronouncements will not have a significant effect on the Group's financialstatements. • Amendment to IAS 1 - Capital disclosures (effective 1 January 2007) • Amendment to IAS 19 - Actuarial Gains and Losses, Group Plans and Disclosures (effective 1 January 2006) • Amendments to IAS 39 - Cash Flow Hedge Accounting of Forecast Intragroup Transactions (effective 1 January 2006) • Amendments to IAS 39 and IFRS 4: Financial Guarantee Contracts (effective 1 January 2006) • IFRS 6 - Exploration for and Evaluation of Mineral Resources (effective 1 January 2006) • IFRS 7 - Financial Instruments: Disclosures (effective 1 January 2007) • IFRIC 4 - Determining Whether an Arrangement Contains a Lease (effective 1 January 2006) • IFRIC 5 - Rights to Interests arising from Decommissioning Restoration and Environmental Rehabilitation Funds (effective 1 January 2006) Judgements and estimatesThe preparation of financial statements in conformity with IFRS adopted by theEU requires certain critical accounting estimates. It also requires managementto make judgements, estimates and assumptions that affect the application ofaccounting policies and reported amounts of assets and liabilities, income andexpenses. The estimates and underlying assumptions are based on historicalexperience and various other factors, including expectations of future eventsthat are believed to be reasonable and appropriate under the circumstances, theresults of which form the basis of making the judgements about carrying valuesof assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are continually reviewed and evaluatedto reflect the Group's view of current conditions. New events or additionalinformation may result in a revision of these estimates over time. Revisions toaccounting estimates are recognised in the period in which the estimate isrevised if the revision affects only that period, or in the period of therevision and future periods if the revision affects both current and futureperiods. It is possible that actual results may differ from these estimates. Judgements made by management in the application of IFRS's that have a highdegree of complexity or a significant effect on the financial statements, andestimates with a significant risk of material adjustment in the forthcoming yearare discussed in Note 7. Revenue Revenue is measured at the fair value of the consideration received orreceivable from customers and represents amounts receivable for services thatthe Group provides as set out below. Revenue is stated exclusive of value-addedtaxes, betting taxes and levies. The services provided by the Group comprise sports betting, fixed odds gamesbetting, online casino and games and peer to peer games (including onlinepoker). Sports betting revenue represents the gross takings receivable from customers inrespect of individual bets placed on events that have occurred by the periodend. Amounts collected from customers in respect of bets placed on events thathave not occurred by the year end are subject to uncertainty and are treated asa liability, deferred income, until the actual events occur. Fixed odds games betting and online casino and games revenues represent netwinnings ('customer drop' being amounts staked net of customer winnings) fromcustomers on activities completed by the year end. In the case of peer to peer games (including online poker), revenue representscommission income ('rake') and tournament fees earned from peer to peer games,completed by the year end. Interest income is accrued on a time basis, by reference to the principaloutstanding and at the effective rate of interest. Rental income in respect of the subletting of certain retail premises isrecognised on a straight line basis as a credit to operating expenses. Segment reporting Business segments are distinguishable components of the Group that provideproducts and services that are subject to risks and returns that are differentfrom other business segments. Geographical segments provide services within aparticular economic environment that are subject to risks and rewards that aredifferent from those components operating in alternative economic environments.The Group has determined that business segments are the primary reportingsegments. Foreign currency The consolidated financial statements are presented in euro. Transactionsdenominated in foreign currencies are translated into the functional currency atthe exchange rates ruling at the dates of the transactions. Non monetary assetsare not subsequently translated as they are carried at historical cost. Monetaryassets and liabilities denominated in foreign currencies at the balance sheetdate are retranslated into the functional currency at the rates of exchangeruling at that date. Foreign exchange differences arising on such translationsare recognised in the income statement. The assets and liabilities of foreignoperations, including goodwill arising on consolidation, are translated intoeuro at foreign exchange rates ruling at the balance sheet date. The revenuesand expenses of foreign operations are translated into euro at ratesapproximating the foreign exchange rates ruling at the dates of thetransactions. Foreign exchange differences arising after 1 January 2004, thedate of the transition to IFRS, on retranslation of opening net assets andresults for the year are recognised directly in a separate component of equity. Property, plant and equipment Property, plant and equipment is stated at historical cost less accumulateddepreciation and impairment losses. Where parts of an item of property, plantand equipment have different useful lives, they are accounted for as separateitems. Depreciation is calculated to write off the cost less estimated residualvalue of property, plant and equipment on a straight line basis over theiruseful lives. Land is not depreciated. The estimated useful lives are asfollows: Buildings: Freehold 50 years Buildings: Leasehold 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 an unconditional right of renewal. Fixtures and fittings 5 - 7 years Computer equipment 3 years Motor vehicles 3 years The residual value, if not insignificant, is reassessed annually. Goodwill Goodwill recognised under Irish GAAP prior to the date of transition to IFRS isstated at net book value as at the transition date. Goodwill recognisedsubsequent to 1 January 2004, representing the excess of purchase considerationover fair value of net identifiable assets acquired defined in accordance withIFRS 3 'Business Combinations', is capitalised. Goodwill is not amortised but isreviewed for impairment annually. Any impairment in the value of goodwill isdealt with in the income statement in the period it which it arises. Intangible assets Intangible assets, including licences and computer software, are capitalised atcost and amortised on a straight line basis over their estimated useful economiclives. The estimated useful lives of intangible assets are as follows: Computer software 3 - 5 years Licences 20 years Impairment The carrying amounts of property, plant and equipment, intangible assets andgoodwill are reviewed at each balance sheet date to determine whether there isan indication of impairment. If any such indication exists the recoverableamount of the asset, or the cash generating units to which it relates, isestimated. For intangible assets that are not yet available for use andgoodwill, the recoverable amount is estimated at each annual balance sheet date,regardless of whether any indication of the impairment exists. An impairmentloss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the income statement. The recoverable amount of such assets or cash generating units is the greater oftheir sales price or value in use. In assessing value in use, the estimatedfuture cash flows are discounted to their present value using a pre-tax discountrate that reflects current market assessments of the time value of money and therisks specific to the asset. Cash and cash equivalents Cash and cash equivalents for the purpose of the statement of cash flowscomprises cash balances and call deposits. Leases Leases, under the terms of which the Group assumes substantially all the risksand rewards of ownership, are classified as finance leases. The assets acquiredby way of finance lease are stated at an amount equal to the lower of fair valueand the present value of the minimum lease payments at inception of the lease,less accumulated depreciation and impairment loss. Finance lease payments areapportioned between the finance charge and the reduction of the outstandingliability and the charge is allocated to the income statement during the leaseterm so as to produce a constant periodic rate of interest on the remainingbalance of the liability. Operating lease rentals payable are recognised as an expense in the incomestatement on a straight line basis over the lease term unless another systematicbasis is more appropriate. Income tax Income tax in the income statement comprises current and deferred tax. Currenttax is the expected tax payable on the taxable income for the year, using taxrates enacted or substantially enacted at the balance sheet date, and anyadjustment to tax payable in respect of the previous year. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. Thefollowing temporary differences are not provided for: goodwill not deductiblefor tax purposes, the initial recognition of assets or liabilities that affectneither accounting nor taxable profit, and differences relating to investmentsin subsidiaries to the extent that they will probably not reverse in theforeseeable future. The amount of deferred tax provided is based on the expectedmanner of realisation or settlement of the carrying amount of assets andliabilities, using tax rates enacted or substantively enacted at the balancesheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. Pensions The Group operates a number of defined contribution schemes. Obligations forcontributions are recognised as an expense in the income statement as service isreceived from the respective employees. Share based payments The Group operates equity-settled share option schemes for employees under whichemployees acquire options over company shares. The fair value of share optionsgranted is recognised as employee benefit cost with a corresponding increase inthe share-based payment reserve. The fair value is measured at grant date andspread over the period during which the employees become unconditionallyentitled to the options. The fair value of the options granted is measured usinga Black Scholes model, taking into account the terms and conditions upon whichthe options were granted. The amount recognised as an expense is adjusted toreflect the actual number of share options that vest. The Group operates an equity-settled share save scheme ('SAYE') for employeesunder which employees acquire options over Company shares at a discounted pricesubject to the completion of a savings contract. The fair value of shareoptions granted is recognised as an employee benefit cost with a correspondingincrease in the share-based payment reserve. The fair value is measured at grantdate and spread over the period of the savings contract. The fair value of theoptions granted is measured using a Black Scholes model, taking into account theterms and conditions upon which the options were granted. The amount recognisedas an expense is adjusted to reflect the actual number of share options thatvest. The Group operates an equity-settled long-term incentive scheme for selectedsenior executives under which the executives are conditionally granted shareswhich vest upon the achievement of predetermined earnings targets. The fairvalue is measured at the grant date and is spread over the period during whichthe employees become unconditionally entitled to the shares with a correspondingincrease in the share-based payment reserve. The fair value of the sharesconditionally granted is measured using the market price of the shares at thetime of grant. Own shares held Purchases of the Company's shares by the long term incentive plan's trust, whichhave been conditionally awarded to executives under the terms of the long-termincentive plan, are shown separately in equity in the Consolidated BalanceSheet. Dividends Dividends on ordinary shares are recognised in equity in the period in whichthey are approved by the Company's shareholders, or, in the case of the interimdividend, when it has been approved by the Board of Directors and paid.Dividends declared after the balance sheet date are disclosed in Note 6. 3. Segment reporting The revenue, operating profit and net assets of the Group relate to theprovision of betting and gaming activities, substantially all of which areconducted in the Republic of Ireland and the UK. (a) By business segment The retail segment comprises a chain of licensed betting offices in Ireland andthe United Kingdom. The non retail segment represents the Group's telephonebetting, online sports betting, online casino and games and peer to peer games(including online poker). Retail Retail Non Retail Non Retail Total Total 31/12/05 31/12/04 31/12/05 31/12/04 31/12/05 31/12/04 •'000 •'000 •'000 •'000 •'000 •'000Revenue 794,321 688,651 577,389 471,007 1,371,710 1,159,658Segment result 12,147 18,716 24,043 15,369 36,190 34,085Unallocated group expenses (6,072) (2,982)Operating profit 30,118 31,103Financial income/expense 1,226 1,006Income tax expense (4,390) (4,662)Profit after tax 26,954 27,447 Segment assets 67,346 59,313 9,141 7,381 76,487 66,694Unallocated group assets 56,027 45,406Total assets 132,514 112,100 Segment liabilities 10,432 9,675 12,165 10,218 22,597 19,893Unallocated groupliabilities 14,250 13,990Total liabilities 36,847 33,883 Capital expenditure 24,303 24,645 3,166 3,097 27,469 27,742Depreciation/amortisation 8,481 6,585 2,814 2,039 11,295 8,624Non cash expenses other thandepreciation 1,103 440 1,453 435 2,556 875 (b) By geographic segment Ireland & Ireland & Other Other UK UK Total Total 31/12/05 31/12/04 31/12/05 31/12/04 31/12/05 31/12/04 •'000 •'000 •'000 •'000 •'000 •'000Revenue 960,548 827,465 411,162 332,193 1,371,710 1,159,658Segment assets 106,623 96,622 25,891 15,478 132,514 112,100Capital expenditure 18,599 17,084 8,870 10,658 27,469 27,742 Year ended Year ended Further analysis of the business segments by 31 December 2005 31 December 2004channel is as follows: •'000 •'000RevenueRetail 794,321 688,651Telephone 249,871 236,546Online 327,518 234,461 1,371,710 1,159,658Gross winRetail 98,460 88,701Telephone 19,454 19,664Online 42,934 25,745 160,848 134,110 Gross win represents the gross betting or gaming profit (the difference between the amount stakedand the amount paid in winnings) to Paddy Power before any other deductions. For poker and gamingincome the gross win is equal to the revenue. Gross profitRetail 84,976 78,296Telephone 17,151 17,151Online 33,443 20,186 135,570 115,633Operating profitRetail 9,480 17,727Telephone 3,649 4,549Online 16,989 8,827 30,118 31,103 4. Cost of winning bets Cost of winning bets comprises: Year ended Year ended 31 December 2005 31 December 2004 •'000 •'000Cost of winning bets paid 1,210,862 1,025,548Software supplier costs 5,552 2,846Data rights 3,603 4,732Other cost of sales 16,123 10,899 1,236,140 1,044,025 Software supplier costs comprise direct costs incurred under supplier agreementsin the provision of online casino and fixed odds gaming services and fixed oddsbetting terminals. Data rights mainly comprise costs incurred in respect of British HorseracingBoard and UK statutory levies. Other cost of sales comprises discounts on bets and taxes paid in relation togross win. 5. Earnings per Share Earnings per share is calculated by dividing the profit attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the year as follows: Year ended Year ended 31 December 2005 31 December 2004Profit attributable to equity holders of the Company (•'000) 26,954 27,447 The basic weighted average number of ordinary shares in issue(thousands) is calculated as follows: In issue at beginning of year 50,045,581 47,807,120Adjustments for - shares issued during year 152,251 853,907 - own shares held (357,952) (124,590)Weighted average number of ordinary shares 49,839,880 48,536,437Basic earnings per share €0.541 €0.565 The weighted average number of ordinary shares for diluted earningsper share (thousands) is calculated as follows: Basic weighted average number of shares in issue during year 49,839,880 48,536,437Adjustments for - share option scheme 872,641 1,989,469 - share save scheme 56,360 64,688 - shares held by long term incentive plan trust (71,948) (115,410) - long term incentive plan 270,199 78,912 Weighted average number of ordinary shares 50,967,132 50,554,096 Diluted earnings per share €0.529 €0.543 6. Events after the balance sheet date In respect of the current year, the directors propose that a final dividend of12.84c per share (2004: 12.52c per share) will be paid to shareholders on 19 May2006. This dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. The proposed dividend is payable to all shareholders on theRegister of Members on 10 March 2006. The total estimated dividend to be paidamounts to €6,416,000 (2004: €6,266,000). 7. Accounting estimates and judgements Key sources of estimation uncertainty and critical accounting judgements inapplying the Group's accounting policies Costs incurred during the year in respect of an Electronic Point of Sale systemamounting to €3.0 million (2004: €1.2 million) have been capitalised inaccordance with the Group's accounting policy, and are included at cost, withinproperty, plant and equipment, at 31 December 2005. This system is currentlynearing the completion of its final development and testing phase and thedirectors believe that it will be implemented throughout the Group during theyear ending 31 December 2006. Trade and other payables includes €2,072,000 (2004: €1,727,000) which relates toamounts collected from customers in respect of bets placed on events that havenot occurred by the year end, which are subject to uncertainty and are treatedas deferred revenue, until the actual events occur. Goodwill of €1.9 million (2004: €1.9 million) continues to be carried in theGroup Balance Sheet as the directors believe that there has been no impairmentin the fair value of the net identifiable assets of the acquired businesses. The share based payment reserve, which includes amounts in relation to the LongTerm Incentive Plan and various share option schemes, amounted to €3,220,000 at31 December 2005. The fair value of share options granted after 7 November 2002has been determined using a Black Scholes valuation model. The significantinputs into the model include certain management assumptions with regard to thestandard deviation of expected share price returns, expected option life andannual risk free rates. 8. Explanation of transition to IFRS An explanation of how the transition to IFRS has affected the financialinformation is outlined below: First time adoption of International Financial Reporting Standards ('IFRSs'). Up to and including the year ended 31 December 2004, the Group's financialstatements were prepared in accordance with Irish Company Law and accountingstandards issued by the Accounting Standards Board as promulgated by theInstitute of Chartered Accountants in Ireland (Irish GAAP). IFRS 1 'First-time adoption of International Financial Reporting Standards'(IFRS 1), is the accounting standard governing the implementation of IFRS forthe first time. This standard allows or requires a number of exceptions to itsgeneral principle that the standards in force at the reporting date should beapplied retrospectively. At the transition date 1 January 2004, the exemptions to retrospectiveimplementation availed of are that the Group has implemented the requirements ofIFRS 2 'Share Based Payments' to all equity settled share based payments grantedafter 7 November 2002 that had not vested by 1 January 2005; has set thecumulative transition reserve to zero and has not restated business combinationsprior to the transition date in accordance with IFRS 3 'Business Combinations'. The principal changes to the Group's financial statements resulting from theimplementation of IFRS are set out in the table and related notes below: Restatement of Retained Earnings under Irish GAAP to IFRS 1 January 2004 •'000Retained earnings - Irish GAAP 42,596IFRS 2 - Share-based payment (25)IAS 12 - Income taxes 552IAS 10 - Events after the balance sheet date 4,106Retained earnings - IFRS 47,229 Restatement of Consolidated Income Statement under Irish GAAP to IFRS 31 December 2004 •'000 Operating Profit - Irish GAAP 31,134IFRS 2 - Share-based payment (152)IFRS 3 - Business combinations: non amortisation of goodwill 121Operating Profit - IFRS 31,103 Restatement of Consolidated Balance Sheet under Irish GAAP to IFRS 31 December 2004 •'000 Total Assets - Irish GAAP 111,906IFRS 3 - Business combinations: non amortisation of goodwill 121IAS 12 - Income taxes 73Total Assets - IFRS 112,100 Total Liabilities - Irish GAAP 40,116IAS 10 - Events after the balance sheet date (6,234)IAS 12 - Income taxes (479)Total Liabilities - IFRS 33,403 Total Equity - Irish GAAP 71,790IFRS 3 - Business combinations 121IFRS 2 - Share-based payment -IAS 10 - Events after the balance sheet date 6,234IAS 12 - Income taxes 552Total Equity - IFRS 78,697 Total Equities and Liabilities - Irish GAAP 111,906IFRS 3 - Business combinations 121IFRS 2 - Share-based payment -IAS 12 - Income taxes 73Total Equities and Liabilities - IFRS 112,100 IFRS 2 'Share-based Payment' The effect on the income statement of implementing IFRS 2 to the various Groupshare-based payment schemes is an increase in employee expenses €152,000 for theyear ended 31 December 2004. This cost gives rise to a corresponding increasein a newly created reserve for share-based payments. In addition to the incomestatement effect, IFRS 2 resulted in a reclassification of reserves fromretained earnings to the reserve for share-based payments. This resulted intransfers of €25,000, and €754,000 from retained earnings to the reserve forshare-based payments as at 1 January 2004 and 31 December 2004 respectively. IFRS 3 'Business Combinations' The effect on the income statement of implementing IFRS 3 is a decrease in thegoodwill expense of €121,000 for the year ended 31 December 2004 respectively,due to the cessation of goodwill amortisation in respect of acquisitions. IAS 38 'Intangible Assets' The Group has reviewed the requirements of IAS 38 'Intangible Assets' and hasreclassified assets, principally licence acquisition costs and computersoftware, from property, plant and equipment to intangibles based on thedefinition of an intangible asset outlined in the standard. The effect on the income statement of implementing IAS 38 is a reclassificationof depreciation expense to amortisation expense of €1,022,000 for the year ended31 December 2004. The net overall effect on the income statement of thereclassification is •nil. The effect on the balance sheet is a reduction in thecost of property, plant & equipment and an increase in the cost of intangibleassets of €4,380,000, and €6,210,000 as at 1 January 2004 and 31 December 2004respectively. Similarly accumulated depreciation is reduced by €2,244,000, and€3,266,000 as at 1 January 2004 and 31 December 2004 respectively withcorresponding increases in the accumulated amortisation of intangibles. Thisgives an overall effect of a reduction in the net book value of property plantand equipment and an increase in intangible assets of €2,136,000, and €2,944,000as at 1 January 2004 and 31 December 2004 respectively. IAS 10 'Events after the Balance Sheet Date' Under IAS 10 'Events after the Balance Sheet Date', interim dividends areprovided for in the period when they are approved by the directors and paid,with final dividends being provided for in the period in which they are approvedby shareholders and paid. The effect on the balance sheet is a reduction intrade and other payables and increase in retained earnings of €4,106,000 and€6,234,000 as at 1 January 2004 and 31 December 2004 respectively. IAS 12 'Income Taxes' In accordance with IAS 12 'Income Taxes', the Group has recognised deferred taxon interests in freehold land and buildings as at 1 January 2004 and 31 December2004. This resulted in the recognition of additional deferred tax assets of€73,000; a reduction in deferred tax liabilities of €479,000; and an increase inretained earnings of €552,000 as at 1 January 2004 and 31 December 2004. 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