Great. Well, good morning. Welcome to the 2022 full year results presentation for Ibstock plc. I'd like to welcome you to the I-Studio this morning and to those joining on the webcast. With me today, as normal, is our CFO, Chris McLeish. Turning first to the agenda, after an initial overview, Chris will walk us through the financials and cover divisional performance. After which I'll provide a market update and talk about the progress we've made both operationally and strategically as a business over the last 12 months. Having covered the outlook, Chris and I will be very happy to take your questions. Turning first to the overview, we're delighted today to be reporting an outstanding set of results which reflect the significant strategic progress we've made as a business over the last few years.
Revenue and profit were materially ahead of both the prior year and the pre-pandemic comparators. With EBITDA up 36% and earnings per share up 63% year-on-year. Chris McLeish and I stood here 12 months ago and set out our medium term financial targets, and we've delivered growth, margin, and return levels which all showed substantial progress towards these. We've invested almost GBP 60 million of capital into the business, which will deliver significant earnings growth starting later this year, and we returned GBP 64 million to shareholders, including a GBP 30 million to buy back our own shares. All of this was funded through strong operational cash flows, with leverage remaining at 0.4 times. Having launched an updated, even more ambitious ESG strategy in 2022, we've continued to make further progress, which I'll comment on later.
With the strategic platform we now have in place, I'm confident in our ability to both execute well this year and retain the momentum necessary to achieve significant growth over the medium term. With that, let me hand over to Chris to take us through the financials.
Thanks, Joe, and good morning, everyone. Turning to cover the financial summary. Revenues of GBP 513 million represented an increase of 26% on last year, driven by a significant pricing benefit in both divisions on similar volumes to the prior year. Adjusted EBITDA also increased strongly, up around 36% to GBP 140 million. I will provide more detail on the divisional margin drivers later in the presentation, but overall group margins moved forward by 200 basis points to 27.2% after operational cost of around GBP 5 million in the new Ibstock Futures business and a charge of GBP 4 million for a one-off cost of living payment, which was paid to employees during the H2.
Adjusted earnings per share of GBP 0.227 increased sharply from GBP 0.139 last year, an increase of 63%. With a continuing focus on cash management and capital allocation, we delivered a strong operating cash flow performance, enabling us to hold leverage at 0.4x. Our return on capital employed increased by almost 800 basis points to 23.4%, with the strong improvement being driven predominantly by clay's year-on-year profit growth. In light of the performance, we have declared a final dividend of GBP 0.055, bringing the full year dividend to GBP 0.088, up 17% year-on-year. In declaring this final dividend, the board remains mindful of our commitment to a sustainable and progressive ordinary dividend. Moving to revenue. We set out on this slide the progression of group revenues compared to the 2021 year.
With a robust demand backdrop in our end markets for the majority of the year, strong pricing management delivered revenues of GBP 513 million, representing an increase of 26%. Clay revenues were up by over 30%, with volumes in line with the prior year. The current year included around GBP 4 million of revenue from our Telling GRC and Generics businesses, the newly acquired futures businesses which were broadly break even in terms of EBITDA for the period. Concrete revenues also moved forward well, up 12% on the prior year, with a strong pricing benefit more than offsetting a modest volume decline. The business delivered this performance with a strong collective focus on service, reliability and product range. We remain committed to taking dynamic actions to protect margins as we track through 2023. Turning now to cover divisional financial performance, starting with clay.
The clay division executed well in the year without turn materially above the prior year. Performance reflected a combination of significant pricing benefits, solid operational performance, and disciplined cost management. EBITDA margins moved forward by around 200 basis points to 34.3%, very close to the 35% ambition that we have for this business. We also report the activities of the futures business within this segment, and performance included GBP 5 million of operating investment, principally relating to research, innovation and commercial capability within futures. Around GBP 2.5 million out of the total GBP 4 million cost of living payment was recognized in the clay division. Turning to cover concrete.
Adjusted EBITDA increased by around 9% to almost GBP 24 million, with the division benefiting from its exposure to a broad range of residential and infrastructure markets. Adjusted EBITDA margins of 16.4% were marginally below prior year levels, although margins improved sequentially through the year, reflecting improved performance of our roof tile factory in Leighton Buzzard. Half two margins of 17.6% were approaching our medium-term ambition for the division. Turning now to cover cash flow and the balance sheet. You will often hear me talk about disciplined capital allocation as a pillar of our strategic framework. This focus extends to working capital as well as fixed capital. On this slide, we present a view of how working capital has improved over the period since 2019.
Our days sales outstanding, or DSO metric, has reduced from 48 days in 2019 to 42 days in 2022. This equates to around GBP 15 million of working capital benefit and has been achieved through a strong collective focus across sales, customer service and finance teams on process efficiency and consistently high service levels. Inventory levels rebuilt slightly in the last quarter of 2022, but remain materially below the levels of 2019. We've made steady, sustainable progress in this area, and working capital will remain an important lever for us to drive capital efficiency over the medium term. Moving now to cover the cash flow. The business delivered another excellent cash flow performance, benefiting from the very strong trading result as well as the disciplined working capital management I just described.
Adjusted operating cash flow totaled GBP 108 million, representing a 77% cash conversion, which was up 3 percentage points on the prior year. The interest charge was lower year-on-year, benefiting from our favorable fixed rate refinancing at the end of the 2021 year. Tax paid increased modestly, but continued to track materially below the effective tax rate on earnings as we benefited from the capital super-deduction on our qualifying investment spend. Our capital expenditure of GBP 58 million comprised GBP 37 million of growth capital, including GBP 33 million on the Atlas and Aldridge redevelopment program, GBP 2 million on a small concrete growth investment in our Walling Stone business, and GBP 1 million acquiring the assets of Telling GRC. Moving to the balance sheet.
This excellent cash performance enabled us to hold leverage flat at 0.4 times after a total of almost GBP 60 million of capital investment and GBP 64 million returned to shareholders. Ibstock is an extremely cash generative business, and we are committed to deploying this cash to support both incremental investment and additional shareholder returns over the years ahead. Before moving on, I would like to briefly update you on the step that we took in the final quarter of 2022 to substantially eliminate pensions risk from the group's balance sheet. You may recall that we completed a partial buy-in transaction in 2020. Given the pronounced move in gilt rates seen in the latter part of the 2022 year, we took the opportunity to insure the remainder of the group's defined benefit pensions risk with the same counterparty.
There were some residual scheme assets to monetize in 2023. As well as insulating the group against any adverse market movements or changes in funding legislation over the years ahead, we've agreed with the trustees to stop making regular funding payments with immediate effect. We are delighted to have been able to take this step on such favorable commercial terms, which required no cash contribution from the company. Turning briefly to cover our debt funding platform. We took steps to extend the maturity of our bank facilities during the final quarter, extending our maturity on our RCF to December 2026 on similar terms to the initial agreement.
As a reminder, our core debt comprises GBP 100 million of private placement at an average fixed coupon of 2.19%, with maturities between 2028 and 2033 and a GBP 125 million revolving credit facility. Before I hand back to Joe, I would like to briefly update you on the moving parts of technical guidance for the 2023 year. I would expect operating investment in Futures and R&D to remain at around GBP 5 million this year, in line with 2022. The revenue base of the trading businesses in Futures will build materially, which I expect to approach GBP 20 million this year, generating a modest EBITDA profit in doing so. We have around 65% of energy covered for the 2023 year, with over 80% cover for half one.
This provides a good degree of certainty around cost in the H1 and provides the opportunity to benefit if prices soften further in the back half. Underlying depreciation will increase to around GBP 30 million from GBP 26 million last year, reflecting a partial year of Atlas depreciation and an increase in the charge for leased assets. Interest expense will remain in line with 2022. I would expect the tax rate to increase to around 23.5% as the U.K. corporation tax rate steps up from April this year.
On cash, I would expect sustaining expenditure to be around GBP 20 million. Although we anticipate the backdrop being more muted initially in 2023, we will see another year of investing for growth in the business, with capital expenditure on the announced growth investments in Atlas, Aldridge, and Slips to total around GBP 55 million. I would also expect inventories to build slightly as we take the opportunity to increase back to more comfortable levels, having been at lower levels for the last 18 months or so. With that, let me pass back to Joe.
Thanks, Chris. Firstly, let me remind you of the breadth of the end markets we supply and the channels in which we sell. We supply a diversified range of products in services into both residential and infrastructure markets across the U.K. With the broadest range of masonry products, we also have a strong presence in the RMI market, which offers a high degree of cyclical resilience. Our customers are increasingly looking for solutions rather than single products. We're uniquely positioned to provide these solutions. By aligning our commercial teams more closely and deploying enhanced digital tools, we're making it easier than ever for our customers to source many of their products in one place. I'd now like to give you a quick update on both our core and diversified markets.
Our new build residential construction markets slowed during the final quarter of 2022, with our customers reporting a sharp downturn in reservation rates as macroeconomic uncertainty, inflation fears, and sharply increased interest rates weighed on customer sentiment. Positively, as mortgage availability and rates have moderated, and as inflation expectations seem to have peaked, we have seen early signs of an improvement in demand in our traditional residential markets. Residential RMI markets also experienced a slowdown in the final quarter of 2022, but demand levels overall remain solid compared to the long-term trend. Infrastructure markets, a small but attractive niche for us, have proven very resilient, and we anticipate steady growth in these markets in the year ahead. Imported brick volumes increased in 2022, expanding to fill the gap created by demand, which outstripped domestic capacity.
Imports accounted for almost 23% of total delivered volumes last year and were sourced from increasingly further afield. We believe the compelling economic and environmental advantages of domestic bricks will lead to the displacement of this imported volume as the year wears on. With inventories still well below the peak levels of 2019, we will look to build finished goods inventory to ensure customer service levels remain strong. In summary, the attractive long-term fundamentals of our core markets remain firmly intact and underpin our confidence as we look to bring additional capacity into the market by the end of the year.
Let me move just to provide an update on our key diversified growth markets. It's really pleasing to see these markets have proven to be faster-growing than our traditional markets, supporting our strategy of creating Ibstock Futures to serve these areas which Ibstock historically has been underrepresented. As you heard me say, modern construction methods are revolutionizing the way the mid to high-rise buildings are constructed with modern materials and versatile systems, construction can take a fraction of the time. On this slide, you can see there's been a 25% increase year-over-year in approved mid to high-rise construction projects in the U.K. We see this continuing over the cycle. This represents a huge addressable market for us. We think our footprint and capability provide us with a source of competitive advantage.
Contracting customers in these markets are keen to work with a supplier of the scale, expertise, and financial strength of Ibstock, and we're already seeing the benefits from our ownership of both Telling and Generics in the conversion rate of projects in a value chain characterized by smaller, more fragmented players. One of the main drivers for this growth is the increase in build-to-rent properties, serving the rapidly growing market for modern rented properties. The size of the build-to-rent market is expected to double over the next 5 years. In summary, you can see that whilst our traditional markets are expected to remain robust over the medium term, it's these new diversified markets where growth is expected to be most rapid and where we are focused on building scale to deliver faster growth overall for Ibstock.
The other key trend driving rapid progress in the U.K. construction is an ever-increasing focus on sustainability. With the global built environment generating around 40% of annual CO2 emissions, there's an increased demand for customer solutions that address climate change. In the U.K., the Future Homes Standard is driving mandatory measurement of whole lifecycle carbon with significant reduction targets for our house builder customers to meet for 2025. Ibstock is part of the Future Homes Hub, the industry body that's been set up to address the implementation of this standard. For Ibstock, the commercial opportunity is twofold. Firstly, through the evolution of our existing products in their design, in the materials we use, and through innovation in our manufacturing processes.
We support the establishment of transparent carbon data for all building materials, which will enable the full lifecycle value of our products to be more clearly understood and capable of being compared to other products. We're already seeing this play through with government procurement into the infrastructure, rail, and affordable housing markets. Secondly, in the opportunity to grow into diversified markets with new sustainable products and solutions. A great example of this is our glass fiber reinforced concrete panels, which enable a mid to high-rise facade to be built with 60% reduction in weight compared to traditional materials, while enabling thinner walls capable of supporting more insulation. With that, I'd like to move on to provide an update on our strategic progress. Let's just take a couple of minutes to take stock.
Over the last 5 years, despite all the uncertainty and macroeconomic challenges, our business has built strength and resilience. Indeed, we've used this time to increase our operational efficiency with investment in our assets through our enhancement projects, increased automation, and asset management programs. The operational strategy of sustain, innovate, and grow has helped us drive more resilience in the clay and concrete divisions through commercial execution and customer-focused solutions. In addition to our exciting growth projects in these divisions, we now have a great diversification vehicle in new, fast-growing markets with the launch of Ibstock Futures. A huge focus in recent years on our people and investment in culture and capability will help us to continue to deliver on this strategy. We have stronger, more diverse teams in place who are more empowered to take decisions at the right level in line with our values.
Ibstock is also emerging as a leader in ESG, with continued progress towards our ambitious targets. Having made strong progress against our original carbon target, last year, we launched our new 2030 strategy for ESG. Within this strategy, we have several new ambitions, including our absolute carbon reduction target of 40% by 2030. We've already made substantial progress this year with a 13% reduction in absolute carbon relative to our 2019 baseline. We continue to reduce our mains water use and our use of plastic shrink wrap and are on track to achieve zero waste to landfill by 2025. Finally, we've been highly disciplined in how we manage and allocate capital through the inherently strong cash generation of our business and through land asset and asset recycling of over GBP 100 million.
We've delivered over GBP 265 million back to shareholders during the period since 2016. With a continuing commitment to disciplined capital allocation, alongside the work we've done to create a low-cost, flexible debt structure, we have a strong platform to support further investment for growth and additional shareholder returns in the years ahead. That's why we were confident to set out our medium-term targets last year, covering our ambitions for revenue, growth, margin expansion, and return on capital employed. If we look through some of the short-term challenges in the construction market, we're actually very optimistic in that we have a number of initiatives in flight which will start to deliver value over the coming 6-18 months.
Within the clay business, we're on track to commission our redeveloped Atlas and Aldridge facilities by the end of the year, creating over 100 million bricks of lower cost capacity and the U.K.'s first certified carbon neutral clay bricks. With around GBP 35 million of capital still to be spent, we expect to deliver incremental EBITDA of at least GBP 18 million from 2025. Alongside this, incremental growth within the clay business will be driven by continuing to capture marginal gains in commercial excellence, new product development, and capacity and cost over the years ahead. Within our concrete products business, we have several opportunities to deploy capital to realize further capacity in the network, access this adjacent categories and capture cost savings through greater automation.
For example, we invested around GBP 2 million of growth capital in 2022 in automated equipment for our Walling Stone factory in Yorkshire, which will deliver about GBP 1 million of incremental EBITDA from 2024. This follows other investments in our rail and infrastructure business. We have a pipeline of further opportunities in concrete to invest capital for a fast payback over the medium term. Within Futures, we have an ambition to create a significant diversified business operating in modern construction markets over the next 4 years. The business, from its inception around 12 months ago, is already delivering rapid growth and will target revenues of approaching GBP 20 million in 2023, with both Telling and Generics scaling quickly as part of the Ibstock Group. To support this, we'll open a state-of-the-art manufacturing innovation hub in H1 of this year in the West Midlands.
Our brick slip investments, comprising an automated slip line delivering up to 17 million slips, commissioning from the end of 2023, and the larger Nostell slip systems factory, at this stage, expected to commission from the end of 2024, will create a strong diversified position in this fast-growing category. Overall, we expect Futures to grow revenues to GBP 100 million, with EBITDA margins approaching 20% by 2026. Some strong initial progress, and we expect this momentum to increase over the next 6 to 18 months as we build towards our medium-term ambitions. In addition to that, we have some other exciting growth opportunities in the pipeline, where the R&D work done over the last few years is now starting to come to fruition. We've made further progress to unlock value from our unrivaled clay reserves.
Following extensive material trials, we commissioned a pilot plant in the H2 of 2022 for the production of expanded clay, a lightweight aggregate that has multiple application uses in the construction sector and which is in short supply. We also advanced our project focused on calcined clay, which has huge potential as a lower carbon cementitious replacement. You may have seen some announcements from some of the major cement players who've recently commissioned plants across Europe and Africa. We've now concluded tests on our clay reserves, confirming they have the right material properties for calcination. This is an important opportunity for us, and we're now studying options for development, including the potential for industry partnerships where there's active interest.
I'm also particularly excited about the progress we've made in converting waste to energy. The recent technical trials using waste materials to produce our products have shown impressive results, and I'm delighted to say that at the end of 2022, we successfully fired bricks using 100% synthetic gas from waste, which we believe is a first for our industry. This groundbreaking project has been supported by Innovate U.K. The U.K.'s innovation agency, and a strategic partner, and it has got strong potential in terms of sustainability, energy security, circularity, and of course, value creation. Back to the short term. Even with more challenging market conditions, we have a lot of confidence in our near-term prospects for our business.
As many of you will be aware, we've taken a disciplined approach to cost control over recent years, reducing our fixed cost base significantly, and we're increasingly seeing that our margin performance is coming through with that. We have optionality to continue to flex fixed costs and remain committed to taking decisive actions as required. I've talked about sustainability a number of times today, but it's important to understand that ESG leadership is increasingly converting into commercial benefit, delivering meaningful pricing premiums, incremental volume opportunities, and margin accretion through cost reduction. Initial market interest in our carbon neutral bricks from Atlas has been very strong, with customers keen to talk about how we can support and to reduce their Scope 3 emissions.
The fact that we've already taken out over 60,000 tons of total carbon from our operations since 2016 delivers significant cost avoidance in a world where carbon pricing continues to increase. We also see innovation and more value-added products such as new brick ranges to replace imports and lower carbon products such as Earth Friendly Concrete as key to driving margin performance. We've worked hard on pricing over the last few years, and I believe this is now much more reflective of the capital structure of our business. Finally, we pride ourselves on our business on the quality of our customers' experience, and there have been several enhancements in this area. With 2 strategic partnerships, we've launched a refreshed transport and logistics fleet, delivering on on-time and full-service improvements.
We've also deployed a set of new digital solutions for customers to streamline and enhance the sales ordering process. Overall, the progress we've made has been reflected in a substantial improvement in our Net Promoter Score, which is a key measure of our customer satisfaction. This has improved to +45 in 2022. In short, these factors should all serve to ensure we enhance our market positions and generate increased value over time. In summary, the strong performance we've delivered in 2022 reflects the strategic progress we've made as our business over recent years. Our balance sheet provides a source of resilience and strategic optionality, both to invest further and to make to further returns of capital to shareholders.
In the next 12 months, growth in the core business will come through the redeveloped Atlas and Aldridge factories, providing significant low-cost capacity to service our customers. We're particularly excited to bring to market the U.K.'s first carbon neutral bricks by the end of this year. We're also seeing the pace of growth in diversified markets accelerate, and this pipeline of opportunities within Ibstock Futures will continue to build momentum over time. Whilst trading in the early weeks of 2023 has continued to reflect a more cautious demand environment experienced towards the end of last year, we expect this to improve as the year progresses, and as such, our expectations for the 2023 year remain unchanged. Looking further ahead, with a strong strategic platform in place, we're confident in our ability to deliver significant growth over the medium term.
With that, Chris and I are going to be happy to take your questions. As normal, for the record, I'd be grateful if you could state your name and institution when asking your question. Right. We'll start at the front with Gregor.
Thank you. Gregor Kuglitsch from UBS. 4 questions, if I may. The first one is just to come back to the GBP 18 million. What's the scenario if you kinda have to take out an equivalent capacity to markets in there? If you have to sort of reduce GBP 100 million roughly to offset the ramp of the new 2 factories, I guess mostly Atlas. That's the first question. Second question is on pricing. Just wanna get a bit of a sense whether you're getting pushback from your customers, whether they're sort of trying to get some price rebates, I guess. I understand they're sort of sequentially flat now, but I wanna sort of get the sense what you're seeing there.
The GBP 5 million in Futures, the sort of cost, how long does that carry on for? You talked about a new innovation hub, is that sort of a permanent cost or does that at some point drop out? Finally on calcined clay, can you just talk to us... I think you're now talking more partnership potentially than going solo. Can you just tell us what you think, how quickly that can ramp and I suppose how you go to market ultimately? Thank you.
Yeah. Okay. Chris, if you take the third and I'll take the first, 1, 2 and 4. Sure. That sound good? Obviously our new Atlas brick factory is very exciting. The great thing about Ibstock is we have a lot of flexibility in our footprint. You know, when we model investments, we look at several different scenarios, depending on what the market does. We have already closed a number of older assets, as you know, during COVID. I would hope that the momentum in the market will continue to pick up, but we've got optionality and that GBP 18 million is modeled on a scenario where, you know, you may take some capacity out.
I think that GBP 18 million is fine and it's safe. In terms of pricing. You know, we've tried to be very transparent with pricing with our customers, and we've shared a lot of information around our cost structure over the year, and I think they appreciate that. At the moment, as you know, year on year costs, energy costs have continued to move forward, even if there's a softening at the moment on the day-ahead prices. We've had to buy energy. You know, we've got that to contend with, and our customers are conscious of other inflationary elements. I think at this stage, we're confident in the pricing that we've delivered, and we would like to hold on to that.
We're fairly confident that, you know, the value conversations that we're having with customers are more focused on what SKUs we can bring, how we can displace more expensive imported bricks, and how we can manage our service levels. Do you wanna talk a bit about?
Yeah, sure.
Just-
Gregor, in terms of the GBP 5 million in futures, that cost really constitutes 2 things. It's about building the leadership and commercial capability within the new Ibstock Futures business. The second piece is really the costs associated with research and deal costs and specific projects that we're focused on bringing through in that division. You know, think of those 2 things as sort of broadly 50/50. Clearly, the commercial and leadership capability will stay through the piece, and as we scale that business unit, we'll get excellent leverage from that leadership that we've got in place. The deal and the research costs that we're talking about, things like the calcined clay and expanded clay would get expensed to the extent that they're still researched through the P&L of futures, and it's those sorts of amounts.
As we continue to grow that, we would expect the majority of that cost base to stay in there. Clearly, that's already factored into our expression of ambition around growing to GBP 100 million at approaching a 20% margin. That would essentially be funded from within that revenue growth over time.
On calcined clay, I think, you know, shareholders would expect us to look at all the best optionality for, you know, creating value through these projects. You know, obviously there are a lot of cementitious players who are quite keen on calcined clay because they... A lot of it's around the ownership of the clay reserves, which we have a huge amount of clay reserves. I think most of you know we have unrivaled clay reserves. This type of clay has to have high kaolinitic properties, and we have the appropriate clay in the U.K. Just a reminder, we have, you know, 75 million tons of consented reserves, probably another 150 million tons of other reserves. Some of that stuff we'll never use for brick making.
Really exciting, but we remain sort of open to look at which is the best strategic option to create the best value for Ibstock, as to whether it's a partnership or whether it's a going alone.
Thank you.
A reminder to ask a question over the phone. Please press star one on your telephone keypad.
Okay. Clyde had a question.
Thank you. Clyde Lewis at Peel Hunt. Peel Hunt, even. Just on brick slips, it'd be useful to sort of, I suppose, get an update as to where you think the current market size is for brick slip volumes and sort of the price differential between standard bricks and existing bricks. I suppose following on from Gregor's comment around the calcined clay, just maybe if you could say a little bit more about the opportunities in expanded clay, you know, again, the sort of volumes that you could be looking at and what sort of uses you would see expanded clay being used in. Thank you very much.
Look, we're excited about brick slips. We've tried to find a way as we move into this marketplace to get faster to the market. Obviously, with a significant, you know, capital investment project, we wanted to make sure we've got the right future-proofed assets to make sure we can grow into that market. What we did is a little bit of redesign last year to get an automated line that can cope with some of our existing products, the MechSlip, the Generics, faster. Then we've looked at some new technology, which is very exciting. I've been to visit the OEMs myself.
With that, we think that we're gonna have an even better return on the long term, but more capability to develop more product SKUs and the best, better tolerances for the market. That's what we've done. I think the market, we said a couple of years ago, was about GBP 120 million. I think it's gonna be at least going up to GBP 180 million, GBP 200 million. We know it's gonna go much higher than that. If you look at the U.S., I mean, there are probably 1 billion brick slips in that market in the U.S. It really is, you know, going corresponding with more offsite manufacturing, more modern methods of construction. We're gonna need more brick slips. We're very focused on that.
We're excited with the faster return that we're gonna get on the project and the overall better return. I think in terms of expanded clay, this is an undersupplied market in the U.K. As you know, it goes into lightweight concrete. If you look at the Shard, you know, for lower foundations to get higher, lighter weight construction, expanded clay is used at both in modular and heavy infrastructure-type materials. It's used in a number of other sources. It's even used in hydroponics. If you look at every flower pot in your offices, the little balls, that's expanded clay. It's very good for drainage media in. It's used increasingly in North America for some of the marijuana investments, for example. We're excited about that.
The market in the U.K. is probably just under 2 million tons, and we'd be, you know, we haven't announced what size capacity we're gonna bring into the market at this stage. We're still finalizing that. The pilot plant is on-ongoing, and we're doing all of our tests with the market, but it's very exciting. Okay, I think Priyal was next.
Thank you. Morning. Priyal Woolf here from Jefferies. My first question is just with regards to imports. We've seen the ONS data, obviously, which shows that brick deliveries in the U.K. seem to be down over 30% year-to-date. Just wondered if you had any sense of whether imports are down more than that, just to get a sense of if that displacement is already coming through. Just in the context that the domestic market is quite undersupplied at the moment, is there a risk that those imports end up being stickier this time around for longer? The second question is just with regards to some of the targets that you're looking at in Futures. Have those businesses historically been quite cyclical?
I'm just wondering if actually you could end up, you know, benefiting from some distressed assets over the coming months and year or so. The last question, I suppose, is just a follow-up from Gregor. I know you've already cut capacity through COVID, but what sort of volume declines do we need to see this year, before maybe you do need to actually, mothball a few further plants? Thank you.
Do you wanna take the first 2?
Happy to.
Yep.
Yeah, I'll build on the second one, Joe.
Look, imports, the market, the ONS stats show the market's down. There's a lag with the import data that comes out about the tenth of the month. Imports do take a little bit more time to unwind because they're obviously bought, paid for in factories in Europe, which is predominantly where they come from, are retooled to get the brick sizes that the U.K. requires. There's a bit of stock of imports, and indeed, there's probably, it'll take a little bit of that time, probably 6, 3 to 6 months for that to unwind. I definitely expect to see a reduction this year.
I think there's always been a certain amount of imports because of certain types of colors, vernaculars, product types, I would definitely expect to see, because people were just really scrambling to try and get more product when we didn't have the availability last year. Having spoken to several large customers, that's part of their priority. Not talking about pricing, how can you service this, and we can get the right SKUs for the right sites in the right regions this year. Imports will come down. Futures targets, yeah, I mean, I think one of the things that we've worked on with the team, and Jeremy, who's here today, is really around this, in particular around modern methods of construction. It's a much more fragmented value chain.
You've got much smaller businesses who don't have the capital to invest, and they're operating, you know. We've actually got some businesses at, you know, reasonable value, and we're gonna scale them up. I think it's more the fragmented nature of the value chain and smaller businesses as opposed to distressed assets. Yeah, we are looking increasingly, and Futures opens up a real other new paradigm for us in terms of M&A opportunities, into the particularly the mid and high-rise market. Again, as I said earlier on, contractors are very excited to be dealing with a larger business like Ibstock because some smaller customers haven't even got the indemnity insurance or financial power to cope with a big job.
You know, I mean, as Chris said, the phone's been ringing quite a bit. We're having really good conversations with the large contractors.
Volumes? In terms of volumes, Priyal, I mean, as you rightly say, the year has started pretty slowly for the sector. If you look at the sort of industry stats, the CPA, we think is the most sort of authoritative view of where volumes are expected to be. Private housing starts and completions both expected to be down somewhere between 10%-15%. I think, you know, that's, we don't disagree with that view. You know, clearly, with visibility where it is, the potential range is broader than it otherwise would be, but I think that's a sensible view. I think the points that we would make around the resilience that we have would be, look, you know, we need to build back a little bit of inventory.
We did a little bit of that in January, and we'll take the opportunity to continue to do that, which gives us the capital efficiency and the cost recovery, even in the face of that sort of volume decline. Joe talked about imports and a belief that we can displace, as the year progresses, a greater proportion of those imported volumes. I think once you look past that, you know, really then you're talking about what are the actions that we as a business can take to help ourselves in the event that we see a material sustained reduction in volume. As we said in 2020, yeah, you can get at some of the sort of discretionary costs. We're already bearing down on a lot of that discretionary cost here today.
Actually, as we go forward, thinking about temporary or permanent reductions in capacity would also be on the table. We'll take the steps that we need to, but actually I think waiting to see how this year plays out is the right thing to do, and we'll come back to that at the right point.
Christian York from Numis. 3 questions from me, if that's okay. First, maybe just sort of following up on the volumes, but particularly in terms of the drop-through that we should expect to EBITDA, taking into account maybe some inventory build, and I suppose based on the current guidance 'cause obviously that might change if there's some assets which are temporarily closed. Second, just on the cost backdrop and inflation and with hedging where it is, I suppose wage inflation maybe in a tighter range now at the start of the year, just the comfort of the level of inflation that's expected for 2023. The third one, just on the 40% carbon reduction by 2030, what sort of key assumptions in terms of technology progression, et cetera, does that assume?
Thank you.
Okay. Shall I take the first 2?
Mm-hmm.
Joe, I'll let you do the third one. Thanks, Christian. In terms of the drop-through, if you look at the clay business, which delivers the majority of profit in the group. You know, as we typically guide, you think about the cost stack there, you've got typically 50/50 split between variable and cost, and you've got a margin business that is very close to 35% in 2022. Essentially, the answer around drop-through is the extent to which you can reduce fixed cost ratably in response to a reduction in the top line.
We've been, you know, you look at what we achieved in 2020, where we took GBP 20 million of fixed cost out, we were able to reduce fixed cost, not one to one, but significantly more than half of the fixed cost in response to a volume drop in the top line. The way I would guide you then to think about drop-through, if we can mitigate to the same extent, would be around a 50% drop-through. For every GBP coming out of volume in the top line, around 50 pence dropping through into EBITDA. In terms of inflation, as we look forward, you're right. I mean, the 2022 year benefited from some very advantageous hedges that we'd been able to take for energy prior to the events of 2022.
In terms of an actual delivered cost to us, we expect a degree of variable cost inflation. That could be a significant double-digit increase year-on-year. Once you look into that, the other half of that cost stack, the fixed cost base, typically we'd expect that to be in the sort of high single digit. You know, as you say, the sort of pay award and other sort of areas of the fixed cost base are likely to move that up into sort of 8%-10%, something like that. It's a much more modest decline than we would expect in the variable cost base.
I think the other point that I'd make just whilst we're talking about the relationship between price and cost is that, you know, we came into the year, into the 2023 year, having announced a meaningful selling price increase in the Q4. As we lap the first 3 quarters, we'll get a bit of natural tailwind from that. You know, we see those things being, certainly for the H1, where we've got good levels of energy cover and relatively high levels of visibility around the, the cost stack, feel pretty comfortable about where pricing is.
In terms of the, you know, the 40% absolute reduction, you know, things like Atlas, if you look at that factory, you've taken out 50% of total carbon out of that with thermal efficiency, process emissions, all sorts of other things that we've been doing there. You know, we've got a range of investments like Atlas and Nostell that will help our total carbon. We'll have some other factors in there, like waste to energy. We've got that. We've modeled a sort of a ramp up into 2030. Not included is things like calcined clay and expanded clay. We've also got other things that we're doing in terms of the embodied carbon in our products.
We have a target of 20% reduction in new and sustainable products which have last less virgin material, less cementitious content, et cetera, et cetera. We've got a nice sort of glide path, but it's a tough challenge. I mean, we're not, it's not a challenge that we talk about this in our ESG committee and it, we have to work hard to get there. A lot, I think the key success factor will actually be mobilizing the whole organization at factory level and, you know, shop floor level to make sure everyone's on board with this target. Okay, who else? Any other questions? At the back.
Thank you. Yeah, Harry Dow from Redburn. Just two questions, please. Firstly, you mentioned sort of inventory rebuild. I wonder if you can give a bit of color on sort of what level of inventory you think is sort of appropriate, maybe in the short term, but also in the medium term? I know for the past couple of years, it's been quite low versus, say, pre-crisis, for example, it was much higher. What sort of level in terms of maybe weeks of production or however you want to sort of phrase it. Secondly, it was just on, I think you mentioned carbon costs and credits. If you just remind us what the sort of credit position of the group is, and maybe just a bit of color on the costs of that, and how, maybe how well hedged or covered the group is. Thanks.
Thanks, Harry. I'll take those 2, Joe, and let you build on them. In terms of inventory, for the last 18 months or so, we've been running at around 2 months forward sales within finished goods in clay. Actually, we got a little bit below that at points as we were shipping very hard through the 2022 year. I think comfortable levels would be probably 1 month longer than that. That equates to sort of broadly GBP 50 million or so. That's the sort of order of magnitude that you could conceivably be building into the balance sheet through the course of 2023. In terms of carbon cost, you're right. I mean, the cost of 1 ton of carbon has gone up substantially.
You know, if you use sort of GBP 70-GBP 80 as a reasonable proxy, in the market, we are required to purchase around 70,000-75,000 tons of carbon. Once you back out the sort of carbon allowances that we have, that's the residual piece that you have to go into the open market and buy. You're talking about a cost of around GBP 6 million or so on an annualized basis for that load. We are now able to purchase in advance the carbon credits that we need to submit in respect of any given financial year. You'll see the intangible assets on the balance sheet essentially have just over a year's worth of carbon credits that we purchased.
We cashflow that through in the 2022 year in the same way that we did in 2021. Whilst we have paid more for that than we would have done in previous years, we have a high degree of cost certainty around the amount we'll recognize in the P&L in 2023.
Okay, maybe we've got some questions from the webcast.
Yes. We've no questions on the phone lines, but we do have a few questions on the webcast. We have a question from Aynsley Lammin from Berenberg. There was a big step up in brick imports in 2022, despite sterling weakness. Does that give you a significant price advantage as a domestic manufacturer?
Yeah, I mean, you know, there was a step up, and increasingly these bricks are coming from further afield. Typically, you've got about a 20%-25% logistics cost of getting bricks here. But some of these bricks come from older, less efficient factories as well. Yeah, I think local bricks have definitely got a pricing advantage. It's not just that. It's also people want security of supply from local sources where there isn't any exchange rate fluctuations and logistics issues. They want less carbon emissions from Scope 3 from the transport. It's quite important, and I think we're well-advantaged. We have needed imports 'cause we didn't have enough capacity.
Another question from Arthur. How financially significant is the clay calcination project?
Yeah, I think this is something that still needs to be fully quantified. I think this is something that would really move the needle for Ibstock, as a group. It needs to be fully quantified. Now, I can't give any specific numbers, but it's large.
The final question we have is from Paul DeVito from Investec. Can you please expand on the comments on why you have confidence on improving volumes as we move forward into 2023? What visibility do you have?
Yeah. Well, I think, look, there's a number of things in terms of volumes. Firstly, if you look at the macro picture, there was a handbrake put on at the end of last year. We all know about that. Some of that is a lot of the stock and that is on job sites or in merchant channels and needs to unwind because when starts slow down, you don't use the product. It is starting to unwind, and we've seen that. We've seen 30% down as a result of that in January, but we're seeing improvements in February and into March. We know that there's a degree of insulation from imports as well, as they will start to unwind, and that we have our own capacity to use and deploy.
We know that reservation rates with house builders are improving. That will start to, you know, improve job site starts and, therefore, completions. Let's remember that we sell into a diversified market in not just low-rise house building. That's very important for us. You've got the mid, high-rise markets. You've got affordable housing. You've got, you know, a lot of different end-use segments that we play in, and then we have our concrete business as well. That's why we're optimistic that we will see sequential improvement in volumes over the year. Good. Okay. Any final questions? Very good. Look, thank you very much for your time today. The business is performing really well. As I said, we've got really strong foundations for the future.
We're excited about the path to growth we have laid out today. I think, you know, we've got a fair degree of confidence that this year is gonna improve as we go on. Thank you very much for your time and, see you again.