Final Results

Paddy Power plc 23 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 the year ended 31 December 2004. 2004 2003 â‚¬ â‚¬ 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 pleased that the online business has come of age.' Ross Ivers, Finance Director, Paddy Power plc said: 'When you have a business that'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 applied to the past year in Paddy Power. The year had its ups and downs (in that order) but was consistently exciting and interesting. Through it all the team at Paddy Power produced yet another record year. This is the 16th consecutive year of turnover growth and, with the exception of one year when we had significant start-up costs associated with the introduction of the online service, the 16th consecutive year of earnings growth. All in all an outstanding achievement. Turnover â‚¬1,165.2m (+27.5%) Pre tax profit â‚¬32.1m (+57.5%) EPS 56.61cent (+53.1%) Dividend 18.72cent (+45.2%) Cash balances â‚¬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 Paddy Power, well ahead of everybody's expectations. Then, with the pendulum swinging back 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 any public company's six month reporting timetable. Earnings for the year are well ahead of both our 2004 budget and the highest analyst forecast at the start of the year. However, poor sporting results in the fourth quarter, particularly December, meant we came in at the lower end of analysts' revised year end forecasts. This highlights once again that re-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 continued across all divisions supplemented by the acquisition of two retail outlets in the United Kingdom (UK). The pipeline of properties and licences, in both Ireland and the UK, should deliver sustained outlet growth in 2005. Our online division goes from strength to strength adding new products and diversifying into non-bookmaking products such as casino, poker and peer-to-peer games. The superior quality of Paddypower.com was acknowledged in January when it was voted the Best Online Bookmaker in the Racing Post/Netprophet survey of bookmakers. Our telephone business also saw significant development, particularly in the UK, and continued to make a significant contribution to the Group. Strategy 2005 will see a continuation of our existing strategy across all three divisions. Underlying this is a fixation with the customer; delivering a superior product range and customer service while increasing our distribution capacity. We continue to obsess about the Paddy Power brand which remains one of our key assets. However, given our relative size and differing objectives in each market we must carefully select our marketing opportunities ensuring that they are cost effective and appropriate for those markets. The past year has seen a further evolution of the business as Paddy Power generated new non-bookmaking income. The success of Paddy Power Casino, virtual games and peer-to-peer games in 2004 has had a significant positive impact on the income volatility that is a feature of the traditional business. The revenues from these activities are closely tied to turnover performance and are not subject to the vagaries of sporting results which impact betting revenues. We will see further growth in these revenues in 2005, together with new revenues from both online poker and fixed odds betting terminals (FOBTs) in our expanding UK retail estate. This overall change in revenue mix will increase absolute earnings while reducing volatility due to 'sporting results'. While Ireland clearly remains the heart of our business, our success in the UK will see it become an increasingly significant part of the Group. We enter 2005 with 31 UK retail outlets as well as significant telephone and online businesses. The coming year will be an important year for the UK retail business. Given the growth to date in the retail estate, and our expected future growth through the opening of new outlets, increasing focus will be placed on the operational aspects associated with managing the enlarged estate. Our approach continues to be one of sensible organic growth in new outlets coupled with opportunistic acquisition, such as the two outlets acquired this year. 2005 should see continued progress in gambling deregulation in the UK. After much high profile progress in 2004, casino deregulation came to a surprise halt late in the year. Bookmaking deregulation, however, has continued. Pending the passing of the Gambling Bill, the formation of the Gambling Commission and the issuance of their policies and guidelines it is too early to predict the exact impact on Paddy Power. We remain optimistic that deregulation in this area will be delivered and that it will benefit Paddy Power. Until the Gambling Commission is established and relevant policies and guidelines are issued I do not envisage any change in strategy. Data rights charges have been a strategic issue facing the industry for some time as sporting organisations sought to charge bookmakers for taking bets on their sport based on their alleged database rights over the underlying data. However, the outcome of the European Court of Justice ruling in the British Horse Racing Board (BHB) V William Hill case has cast significant doubt on the existence of these rights and the BHB's ability to charge for them. This is a matter which is being actively reviewed by Paddy Power both in the context of the BHB and others. People People are our greatest asset and 2004 has seen significant progress in strengthening the organisation as the size and complexity of the business has continued to grow. With almost 1,200 staff at year end, and further increases planned for 2005, continued investment in people and management structures is essential. The new appointments made throughout 2004 and referred to in my previous reports are having a positive impact on the organisation. There is also a wealth of knowledge and experience within the existing organisation that has developed over the past 16 years. Increasing focus on performance management and training and development throughout the organisation will help nurture the best talent. The increasing size of the Group will provide many opportunities for talented staff to progress their careers while providing succession throughout the organisation. Board 2004 was a year of significant change for the Board as it develops to meet the new commercial challenges facing the Group as well as meeting corporate governance standards. As mentioned in last year's Annual Report and announced during the year, Messrs Ian Armitage, Edward McDaid and John Corcoran have retired from the Board. Each has made a magnificent contribution to the Company. On your behalf, I want to acknowledge their contribution once again and thank them for their commitment. The process of redeveloping the Board is in progress. During the year Patrick Kennedy joined as a non-executive director and Breon Corcoran as an executive director. Both have already made a significant contribution to the Board. As announced on 16 February 2005, Brody Sweeney has joined the Board and I look forward to his contribution in the years ahead. The development of the Board is ongoing and further appointments are anticipated. Our belief is that finding the best people is paramount and one for which we are happy to suffer some time delays. Dividends The Board is recommending a final dividend of 12.52 cent per share payable to shareholders on the register at 4 March 2005, bringing the total dividend for the year to 18.72 cent per share, an increase of 45.1% on 2003 (12.9 cent). The Board's intention is to pay approximately one third of after tax earnings by way of annual dividend. I look forward to the coming year with confidence as we continue to deliver on our promises. Together with the Board and the Paddy Power team I anticipate that 2005 will be another successful year for your Company. Operations Review Although Paddy Power is primarily a small stake fixed odds bookmaker, 2004 has seen a move into non-bookmaking activities through the online casino, fixed odds betting games and peer-to-peer games. Our UK retail estate also operates fixed odds betting terminals (FOBTs). The past year has been a very busy one across all three divisions as we continue to see significant expansion. This has been driven by the growth in the two key economies in which we operate, together with an increase in brand awareness, distribution capacity and new product launches. The quality of our core bookmaking product continues to lead the market, driven by both our investment in product development and ongoing focus on our customers. Volume growth in bets layed continued in all divisions which in turn drives turnover, operational complexity, costs and ultimately profit. Customer service is, as always, central to our philosophy. We continue to lead the market in generosity, be it via contracted money back specials or just refunding money when it was fair to do so, and we remain the benchmark that others 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 with both finishing the year with record numbers of outlets. However, just as important as the expansion of the estate, is the continued commitment to the existing estate through an ongoing programme of refurbishments, extensions and relocations. This continuous improvement in the quality of our retail space, together with the increasing investment in screens/broadcasting technology, is key to driving the excellent like-for-like sales growth that we have enjoyed. Investment in capital across the retail estate totalled a record â‚¬23.1m in 2004. Six (2003:eight) new outlets were opened in Ireland during the year. 2005 is expected to see approximately eight new outlets opened. In addition to new openings, four (2003:10) relocations, four extensions (2003:three) and 27 (2003: 10) refits were undertaken during 2004. The total number of premises developed totalled 41 (2003:31), a new record for the Irish business. This process will continue through 2005 and at the time of writing we have already completed one relocation, two extensions and seven refits. We also continue to operate four racecourse 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 31 outlets (2003:12) as at the year end. In addition, successful licence applications mean that a further five licences are held at the year end and these outlets will be opened during 2005. We expect to have between 45 and 50 outlets opened by the end of 2005. Our 31 outlets in the UK include two outlets purchased during 2004. Having now established over 30 outlets in the UK, 2005 will see a requirement to focus on the additional operational aspects of running the enlarged UK estate as well as continuing to open new outlets in line with our stated objectives. The UK team is now in situ in our new office in London and the divisional management structure is in place. The Group commenced testing an EPOS solution in late 2004. Having completed head office trials this is now in place in a small number of outlets where it is undergoing field testing and modification. Subject to satisfactory performance a more extensive test will be undertaken in mid 2005 before a final decision is made on a full estate roll-out. The cost of installing EPOS in the current estate would be approximately â‚¬8 million. While there are many potential benefits of EPOS to both our customers and to Paddy Power, our intention would be to use it to improve the quality of customer service by increasing the speed and accuracy of payout and expanding the product range. The improved availability of risk information from the retail estate should also help manage the gross win percentage over time. The technology infrastructure to support EPOS should also allow other benefits as it would provide an intranet communications infrastructure within the estate allowing e-mail communication and local printing of marketing material and coupons. It would also provide an infrastructure for customer facing information terminals or even internet access. Investment in technology has also continued with the installation of the new screens system throughout the retail estate. The system, which allows for a 24 screen display, is now installed in all of our UK estate and has been refitted into 75 outlets in Ireland. It is expected that, by end of 2005, all of the estate that can be refitted will be. This is expected to be approximately 110 of the Irish outlets. In conjunction with these improvements in our outlets, the head office screens technology is also changing with a new version of our current software being implemented. This will allow us to tailor screen content for different geographies. Non Retail Non retail comprises the online division (internet betting, casino, and interactive TV) and the telephone division. Active Customers Online Telephone 2004 2003 2004 2003 Ireland and rest of world 16,721 14,026 10,207 9,601 UK 29,982 22,174 8,326 8,361 (Active customers are defined as those who have bet on the sportsbook in the last three months) The Online Division The online division has seen significant development in 2004 as it has moved from being a bookmaking business to an increasingly 'leisure betting and gaming business'. There have been significant ongoing improvements to the product offering over the course of the year. These range from relatively simple activities such as relaying out a web page and reskinning the website through to the introduction of new functionality and products. The online division remains the fastest moving part of the business and 2004 has seen the introduction of a significant number of gaming products. The most prominent of these is the Paddy Power Casino which was launched in the UK in early 2004. We have seen continued growth in this business over the course of the year and it has generated a significant gross win contribution in 2004, as discussed in the financial review. In addition to the casino there have been a host of smaller product launches. These include Paddy Park, Hi-Lo, Penalty Shoot Out, and Spin 2 Win, the first two of which are available as mobile games. All of these activities are algorithm based, thereby reducing our reliance on sporting activity and consequently reducing the volatility of earnings over time. In addition to the gaming products noted above, 2004 also saw the addition of a suite of peer-to-peer games where Paddy Power takes no risk position in the game but earns its income by way of a commission on betting between two third parties. Early 2005 saw the launch of our poker product from which we earn commission and which will further insulate us from the short term impact of sporting results. Notwithstanding the increased emphasis on non-bookmaking products, we have also seen considerable investment in the core bookmaking product as we continue to improve the range of events covered and the depth of markets offered on each event. This is discussed further in the trading and risk management section of this review. The Telephone Division The telephone business has continued to develop in Ireland and the UK reflecting our 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 been slightly repositioned over the course of the year given the different characteristics of the telephone business and our different position in the UK market as compared to Ireland. The telephone business is characterised by a high variable cost structure. Cost is primarily driven by the volume of bets processed, not their value. This is compounded by the need to flex the call center staffing to handle the varying call volume levels experienced over the course of any given week. Consequently there 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 in the Irish market, the telephone business plays several roles. As well as servicing our core telephone customers, it provides an alternative means of access for customers who cannot get to an outlet or the internet. It also provides 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 as the UK retail estate and online businesses grow they will provide additional support 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 area of betting-in-running. While betting-in-running is predominantly a football and golf activity, the US presidential elections also saw significant betting taking place throughout the night of the results. Trading and Risk Management One of the core skills of a bookmaking business is the compilation of odds and the trading of the 'book'. Together with a significant product development role this 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 the business creates many new opportunities and therefore warrants continued investment in this function. Secondary markets which were previously too small to justify investment have reached critical mass e.g. financial betting. Investment in sophisticated mathematical models and processes that were previously uneconomic have become viable. Furthermore, opportunities in the online division create a demand for new products that can also be marketed through the telephone and retail channels. In addition, the increasing size of the UK retail division is changing the overall risk profile of the business due to a different product mix in our UK estate i.e. increased football business. The increasing size and complexity of these activities demands increasingly structured internal processes. 2004 has seen changes to staff roles together with more detailed trading rules and limits. Rather than restrict the activities of the division, these processes have improved its operation and are reflected in our market leading product range. The number of events and associated markets that Paddy Power now offers continues to increase with over 118,000 events bet on in 2004. While the amount of money taken on each event varies, there remains a number of very popular high turnover betting events during the year. However, the gross win percentage continues to be determined by the overall mix rather than a few key events. For instance 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 on fun (sometimes irreverent) and innovation and we are committed to maintaining our position as the punter friendly bookmaker. Irrespective of the size and type of marketing activity undertaken it all contributes to our punter friendly image and overall brand recognition. Our brand remains a key point of differentiation. Some of the highlights of 2004 include our ongoing sponsorship of all live horse racing coverage on RTE, our sponsorship of the Football Association of Ireland and the Irish Rugby Football Union. Our racing sponsorships include the very successful Paddy Power Gold Cup in Cheltenham and the Paddy Power Chase in Leopardstown. Our more fun sponsorships, such as Brock the Jack Russell, who added so much to this year's Australian/Gaelic Compromise Rules match between Ireland and Australia, continue to be a strong feature of our marketing activity. Much of this activity is opportunistic. Coverage of our market leading customer friendly pursuits generates significant exposure through betting related media and, most importantly, word of mouth. From the payment of â‚¬427,220 in January 2004 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, given against Manchester United to the plethora of other events throughout the year, Paddy Power continues to lead the way. We continue to be the most frequently mentioned bookmaker in the Irish media and have clearly broken into the top echelon of UK bookmakers on the basis of media mentions. This success is driven by hard work together with the quality of the underlying product, accessibility and the customer friendly nature of the brand. People I talked at length last year about the importance of people to the organisation and referred to a number of senior appointments that were made or were in the process of being made. Now, a year on, I am more convinced than ever of the need to continue to invest in quality people throughout the organisation. Having put in place a very capable senior management team, attention must now turn to succession planning and development of talent throughout the organisation. We are putting in place plans to develop the next layer of talent to ensure that we will have the best cashiers in the shops, the best shop managers and the best telephone operators in the call center. Paddy Power is a fast growing company and our people needs are evolving. We need more of our existing skill sets as well as new ones. This opens opportunities for both internal promotions and for attracting new talent. This growth brings challenges to the Paddy Power culture. As we bring new people into the organisation it is imperative that the training and induction process ensures that the values of the organisation are made clear and that people subscribe to these values. This is particularly important in the UK retail business where the organisation is relatively new and staff numbers are growing. It is essential that 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 continue with our successful organic growth based strategy. This will deliver expansion of both the Irish and UK retail estates while the non retail business will see the development of its existing business channels and products supplemented by the 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 with customer winnings recorded as a cost. However, given the high predictability and low inherent gross win percentage in the casino and FOBT products, their turnover is recorded as net customer losses i.e. amount staked less customer winnings ('the drop'). The impact of this is that the relevance of turnover growth 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 high profile sporting tournaments. In 2003 the Rugby World Cup took place, while in 2004 we had the benefit of the European Football Championships. While these types of events can have a small impact on year-to-year comparisons, they do not impact trends in any material way. Turnover for the year to 31 December 2004 was â‚¬1,165.2m (2003: â‚¬913.6m) an increase of 27.5% on 2003. Turnover growth has been strong across all three channels ranging from 25.0% to 33.3%. Retail turnover grew by 25.0% in 2004 from â‚¬551.1m to â‚¬688.7m. The Irish estate grew by 18.4% to â‚¬628.1m from â‚¬530.6m in 2003. Like-for-like growth rates within Ireland were 14.1% in 2004 reflecting the continued strength of the market and Paddy Power's strong position within it. Like-for-like growth includes the impact of our continuing refurbishment programme referred to in the operations review, 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 display of additional product, will continue to drive turnover growth. The UK retail estate saw turnover growth of 198.3% to reach â‚¬60.6m (2003: â‚¬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 the UK which has been driven by growth in the number of outlets, improving brand recognition and continued product development. Customers now have the ability to take advantage of our larger estate by placing and collecting bets in different outlets. The online division continued to see strong growth with turnover increasing by 29.7% to â‚¬240.0m (2003: â‚¬185.1m). Growth in the sportsbook was 22.4% which was driven by continued improvement in the online product offering. The quality of the product was recognised during the year when Paddypower.com was voted the best online bookmaker by the Racing Post readers in 2004. Also included in online turnover is the turnover from gaming products of â‚¬13.4m (2003:nil) driven by the casino, fixed odds games and peer-to-peer games, all introduced in 2004. The telephone business continued to develop in both markets, growing by a total of 33.3% to â‚¬236.5m (2003: â‚¬177.4m). The UK now accounts for 46.67% of this turnover increasing from 37% in 2003, as we continue to expand in this relatively new market for Paddy Power. Average slip/bet values by Channel 2004 2003 Change â‚¬ â‚¬ % Retail 18.21 16.98 7.2 Telephone 83.45 67.64 23.4 Online 27.09 27.18 (0.3) (Note: Retail slips can contain more than one bet per slip, while other channels have a single bet per slip. Online comprises the sportsbook only). Average bet size continues to develop in the retail estate. Average bet size in the UK estate is larger than in the Irish estate due to the different age profiles of the estates. However, it is similar to the average of our equivalent new Irish shops. Given the different cost dynamics of handling bets through each channel, we continue to seek a higher average bet size in the telephone channel where the cost of delivery is higher. The overall stake patterns are consistent with the previous year and with our expectations. Gaming machine income continues to grow in our UK estate with 97 machines installed at year end. Average gross drop per machine per month was â‚¬2.5k although this is improving in the latter part of the year due to a change in machine suppliers and a changing mix between FOBTs and AWP machines. Gaming machines are not generally permitted in Ireland. Bet volumes 2004 2003 Change '000 '000 % Retail 37,811 32,464 16.5 Telephone 2,835 2,623 8.1 Online 8,363 6,808 22.8 (Note: Retail volumes refer to the number of slips processed while other channels refer to the number of bets processed. Online comprises the sportsbook only). 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 as gross win less discount on bets and gross win taxes. Customer drop from the casino, 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 12.32 Telephone 8.31 6.66 7.43 Online 10.73 9.69 7.31 Gross win percentages in the sportsbook are driven by a number of factors including the underlying margin in the odds, the mix of events, the mix of bet types, customer behaviour, the accuracy of the odds offered and the run of results. In particular the run of results has a significant impact on margin, with winning favourites giving poor results for the bookmaker and vice versa. In contrast, the gross win percentage from gaming activities is lower, but less volatile given the inherent mathematics and different customer betting patterns. The first half of the year saw strong gross win driven by continued turnover growth, a good run of sporting results together with the new gaming revenues from the online casino and peer-to-peer games. The second half of the year saw continued growth in turnover and improvement in the performance of the casino while sporting results in the fourth quarter, particularly in the busy December period, were poor. The benefits of the increased gaming revenues can be clearly seen in the second half where its predictability mitigated the impact of poor sporting results. As the casino and other non bookmaking income grows, overall gross win volatility should reduce. We continue to expect the sportsbook gross win percentage to fall within annual ranges 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 set out below. This reflects improved gross win across the sportsbook together with â‚¬7.9m (2003: nil) of online gaming drop. Gross Win by Channel 2004 2003 Change â‚¬'000 â‚¬'000 % Retail 88,701 67,907 30.6 Telephone 19,664 13,179 49.2 Online 25,745 13,524 90.4 Total 134,110 94,610 41.8 Gross win in the UK shops is developing and we have seen continued improvement as the estate develops and the volume of bets increases. We expect margin to continue to improve over time as the shops increase their bet volume and enhance their product mix. Gross profit reflects the application of UK/Isle of Man betting taxes to the gross win and discounting of bets in Ireland. For business conducted under a UK betting licence, 15% of the bookmaker's gross win is paid in betting tax while for business conducted under an Isle of Man betting licence, 1.5% of gross win is paid in betting tax. Gross profit in the year grew by 39.7% to â‚¬123.2m. This reflects the increased gross win above offset by an increased level of discounted bets in Ireland and a change in mix of gross win based betting taxes. There was no change in the gross win tax rates in the period. Operating Profit 2004 operating profit was â‚¬31.1m, an increase of 58.6% over 2003. This excellent performance was driven by the 39.7% increase in gross profit referred to above offset by a 34.3% increase in operating costs. Operating Profit by Channel 2004 2003 Change â‚¬'000 â‚¬'000 â‚¬'000 Retail 17,752 17,402 350 Telephone 4,552 861 3,691 Online 8,830 1,369 7,461 Total 31,134 19,632 11,502 The retail division was almost flat for the year as the 13.55% increase in the operating profit for the Irish estate was offset by expected start up losses in the UK estate. We believe that losses in the UK have now peaked and expect the core estate of UK shops to trade profitably in 2005 and beyond. Continued investment in both management and new outlets means that we do not expect an overall profit from the UK until 2006 and we remain confident that the UK retail estate will be a significant profit contributor over time. We expect the Irish estate to show continued earnings growth and cash generation. The telephone business had an excellent operating profit of â‚¬4.6m (2003: â‚¬0.9m) driven by strong turnover, an improvement in the average stake size, improved gross win percentage and good cost containment. As noted above, the cost dynamics of this channel differ from the other channels given the capacity constraints of a call center and the high costs per transaction. Good earnings growth is dependent on increasing the average contribution per call, tight cost control as well as absolute turnover growth. The online business had an outstanding year as its profit contribution rose to â‚¬8.8m from â‚¬1.4m. This reflects the combination of strong gross profit growth within the core business and new gaming revenues. The relatively fixed cost nature of the business allowed approximately 60% of the gross profit increase to fall to operating profit. While overall costs have increased by 34.3% this must be looked at in the context 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, BHB levies, 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 remain confident that the cost base is correctly sized for the business. Tax Rate The corporation tax charge for the year was â‚¬4.6m (2003: â‚¬2.9m) representing an effective tax rate of 14.5% (2003: 14%). This compares with the statutory rate in Ireland of 12.5% and the UK statutory rate of 30%. No corporation tax is payable in the UK in respect of 2004 due to tax losses. The Group's effective tax rate remains above the statutory rate due to the disallowance of certain expenses and this is likely to continue going forward. Cash Flow, Cash Balances and Foreign Exchange Risk Cash balances at 31 December 2004 were â‚¬47.2m (2003: â‚¬39.2m), an increase of â‚¬8.0m. This includes cash held in customer accounts of â‚¬6.5m (2003: â‚¬4.8m). Cash from operating activities totalled â‚¬45.0m, an increase of â‚¬12.9m from 2003. Cash from operating activities included net cash inflow from customer accounts of â‚¬1.7m. Interest income was â‚¬1.0m, an increase of â‚¬0.2m, reflecting higher average cash balances offset by lower average interest rates. Capital expenditure increased by 27.5% to â‚¬27.2m from â‚¬21.4m in 2003. The significant capital expenditure reflects the high levels of property activity in both Ireland and the UK due to the expansion and refurbishment of the retail estate. We expect this to continue as we expand at similar rates in the future. Cash balances are invested in accordance with defined treasury policies approved by the Board. These policies limit the risk rating of institutions that can be used, the concentration of risk with any one institution or within any category of institutions and the term of deposits. Cash balances are substantially invested in short-term bank deposits with maturities of 120 days or less. At the year end all deposits were available at twenty four hour notice. The Group has no borrowings. Interest rate exposure is thereby limited to interest income on deposits and the impact of the economy in general. The Group remains highly cash-generative and this, together with existing cash balances, will be used to fund expansion. As has been previously stated, only on determination of the scale of expansion in the UK, which is partly dependent on the timing of deregulation, can the Board clearly identify potential surplus cash. Should the Group not require any of its cash reserves, the Board will determine the best method of returning it to shareholders. The Company has the ability to buy back its own shares, which was granted by shareholders during 2004. Foreign exchange risk in the business is small. As the Group expands in the UK it will require sterling to fund its capital expenditure. Much of this can be naturally hedged from the sterling gross profit generated in sterling from the online and telephone divisions, as these divisions primarily have a euro cost base and so generate surplus sterling. Group policy allows the Group to hedge the foreign exchange exposure for up to six months. At the year end, no foreign exchange contracts were open. The Group's functional currency is the euro and translation 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 â‚¬7.15 to â‚¬11.00 in 2004 with the year's high reached on 25 November 2004. The share price at 31 December 2004 was â‚¬10.85 (2003: â‚¬7.15) giving a market capitalisation of â‚¬543m (2003: â‚¬342m). The year end free float (shares not held by the Directors or related parties) was 88.03% (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 trading team whose role is to compile the initial odds and, subsequently, manage the odds and risk exposures through the life of the event. Risk limits are in place within the trading room and compliance with limits is reported daily to senior management and internal audit. Internal audit also carries out reviews of the risk function. A betting risk management sub-committee of the Board was established in 2003 under the chairmanship of David Power, a non-executive director. This Committee sets overall policy for betting risk. Limits are agreed with the Committee and set 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 â‚¬9.3m (2003: â‚¬6.2m) an increase of 45.2% on 2003. This represents dividend cover of 2.94 times (2003: 2.85). It is the Board's intention to pay approximately one third of after tax earnings in annual dividends on average. International Financial Reporting Standards (IFRS) The Group is preparing for the implementation of IFRS in 2005. A review has been completed on the differences between current standards and IFRS. With the exception of accounting for share based payment schemes the impact of the changeover will be limited to a small number of areas of disclosure. The different accounting treatment for both share option schemes and the long-term incentive plan will give rise to small balance sheet and profit and loss account adjustments. Our estimate is that the impact on the 2004 EPS of accounting under IFRS 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 Paddy Power and the punters, we look forward to continued growth across all channels in line with our stated objectives. Fintan Drury Chairman 23 February 2005 CONSOLIDATED PROFIT AND LOSS ACCOUNT Year ended 31 December 2004 Year ended Year ended 31 December 2004 31 December 2003 â‚¬'000 â‚¬'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 1,060 883 Interest 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 Share Basic â‚¬0.5661 â‚¬0.3697 Diluted â‚¬0.5431 â‚¬0.3502 CONSOLIDATED BALANCE SHEET As at 31 December 2004 31 December 31 December 2004 2003 â‚¬'000 â‚¬'000 Fixed assets Intangible fixed assets - goodwill 1,759 904 Tangible fixed assets 60,651 41,571 62,410 42,475 Current assets Debtors 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 reserves Called 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 STATEMENT Year ended 31 December 2004 Year Ended Year Ended 31 December 31 December 2004 2003 â‚¬'000 â‚¬'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) 1,032 759 Taxation 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 POLICIES Year ended 31 December 2004 The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the Group's financial statements. Basis of Preparation The financial statements have been prepared in euro in accordance with generally accepted accountancy principles under the historical cost convention and comply with financial reporting standards of the Accounting Standards Board, as promulgated by the Institute of Chartered Accountants in Ireland. Basis of Consolidation The Group financial statements consolidate the financial statements of the Company and all its subsidiary undertakings based on financial statements at the year end date. Turnover Turnover comprises proceeds from sports betting and gaming activities. Sports betting turnover, which is exclusive of betting tax and levies, represents amounts received in respect of bets placed on events that occurred during the year. 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 certain employees and executive directors. Contributions are charged to the profit and loss account as incurred. Foreign Currency Transactions denominated in foreign currencies are translated at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into euro at the rates of exchange ruling at the balance sheet date. The resulting profits and losses are dealt with in the profit and loss account. For the purposes of consolidation of subsidiaries, the closing rate method is used, under which translation gains or loses are shown as movements in reserves. Profit and loss accounts of overseas subsidiaries are translated at average exchange rates. Financial Fixed Assets Interests in subsidiary undertakings are stated in the Company balance sheet at cost less, where necessary, provisions for impairment. Intangible Fixed Assets - Goodwill Goodwill arising on the acquisition of a subsidiary or business, representing the excess of cost over the fair value of the identifiable assets and liabilities acquired, is capitalised and amortised by equal annual installments against profit over its expected useful life, currently 20 years. Provision is made for any impairment. Tangible Fixed Assets and Depreciation Tangible fixed assets are stated at historical cost less accumulated depreciation. Depreciation is calculated so as to write off the cost less estimated residual value of tangible fixed assets on a straight line basis over their estimated useful lives, as follows: â€¢ Freehold property - 50 years â€¢ 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. â€¢ Fixtures, fittings and equipment - 5/7 years â€¢ Computer equipment - 3 years â€¢ Equipment screens - 5 years â€¢ Leased equipment screens - 3 years â€¢ Motor vehicles - 5 years Leases Assets held under finance leases are included in the balance sheet at their capital value and are depreciated over the term of the lease. The corresponding liabilities are recorded as a creditor and the interest element of the finance lease rentals is charged to the profit and loss account over the term of the lease to produce a constant rate of charge on the balance of capital repayment outstanding. Operating lease rentals are charged to the profit and loss account on a straight-line basis over the lease term. Taxation Current tax, including Irish corporation tax and foreign tax, is provided on the Group's taxable profits, at amounts expected to be paid using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date. Provision is made at the rates expected to apply when the timing differences reverse. Timing differences are differences between the Group's taxable profits and its results as stated in the financial statements that arise from the inclusion of gains and losses in taxable profits in periods different from those in which they are recognised in the financial statements. A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted. Long-term Incentive Plan In accordance with UITF Abstract 17 (revised) 'Employee Share Schemes', the excess of the fair market value of the related shares over the exercise price of the share award on the grant date, is charged as employees' remuneration over the period to which employee performance relates. A corresponding amount is credited to the profit and loss account reserve. Payments to the Plan's Trustees to acquire Company shares which have been conditionally allocated to executives under the terms of the long-term incentive plan are shown as a deduction from shareholders' funds in the consolidated balance 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 â‚¬'000 â‚¬'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 â‚¬'000 â‚¬'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 â‚¬'000 â‚¬'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 â‚¬'000 â‚¬'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 â‚¬'000 â‚¬'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 by geographic segment are not disclosed as, in the opinion of the Directors, this disclosure 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 2003 â‚¬'000 â‚¬'000 Cost of winning bets paid 1,031,055 819,014 Other cost of sales 10,905 6,415 1,041,960 825,429 Other cost of sales comprises discounts on bets and taxes paid in relation to Gross Win. 3. Earnings per Share Year ended Year ended 31 December 2004 31 December 2003 â‚¬'000 â‚¬'000 Profit for the financial year 27,478 17,551 Weighted average number of shares in issue 48,536 47,479 Dilutive effect of share options outstanding 2,054 2,638 Diluted weighted average number of shares 50,590 50,117 Basic earnings per share â‚¬0.5661 â‚¬0.3697 Diluted earnings per share â‚¬0.5431 â‚¬0.3502 4. Cash Flows (a) Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities Year ended Year ended 31 December 2004 31 December 2003 â‚¬'000 â‚¬'000 Operating profit 31,134 19,632 Charge for long-term incentive plan 754 - Depreciation 8,624 6,405 Amortisation of goodwill 121 121 Increase in debtors and prepayments (129) (597) Increase in creditors 4,548 6,549 (Gain)/loss on disposal of tangible fixed assets (31) 34 Net cash inflow from operating activities 45,021 32,144 (b) Analysis of Changes in Cash During the Year Year ended Year ended 31 December 2004 31 December 2003 â‚¬'000 â‚¬'000 Balance at 1 January 2004 39,173 36,373 Net cash inflow 8,033 2,800 Balance at 31 December 2004 47,206 39,173 (c) Analysis of Net Funds Cashflows 31 December 2003 â‚¬'000 31 December 2004 â‚¬'000 â‚¬'000 Cash at bank and in hand 39,173 8,033 47,206 Finance leases (421) 421 - Total 38,752 8,454 47,206 This information is provided by RNS The company news service from the London Stock Exchange

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