VTY Vistry Group Plc

14 March 2024

Partnerships business delivering; strong outperformance; well-placed for future growth

Vistry Group PLC (the Group) announces full year results for the year ended 31 December 2023.

Strategic and operational highlights

·    Vistry has established its position as the country's leading Partnership business

-      Successful integration of Countryside Partnerships

-      Significant progress in implementing strategy to fully focus on a high growth, capital light Partnerships model, targeting 40% ROCE in the medium term

·    The resilience of the Group's unique Partnerships model was clearly demonstrated in the year, delivering a total of 16,118 new homes in 2023, down only 5.4% on proforma prior year

·    Excluding the former Housebuilding business, the Partnerships business delivered year on year growth in revenue, and maintained a ROCE of c. 40%

·    In the year, 67% of total completions were from Registered Provider, Local Authority and Private Rented Sector (referred to together as Partner Funded) sales and 33% from Open Market sales

·    Transition of former Housebuilding land bank progressing well

·    Remained active in the land market during 2023 securing a total of 13,067 plots (2022: 8,547) to support our growth objectives and medium-term targets

·    Significant step-up in Group's timber frame output, with capability to deliver c. 8,000 units

·    Expect to be awarded a 5-star HBF Customer Satisfaction rating for the fifth consecutive year in 2024

Financial highlights

·    Adjusted operating profit of £487.9m (2022: £451.1m) with an operating margin of 12.1% (2022: 14.5%)

·    Group net debt as at 31 December 2023 was £88.8m (2022: net cash £118.2m) with a strong balance sheet

·    Delivered a ROCE for the year of 21.3% (2022: 25.0%), the decline reflecting increased capital employed and lower volumes in the legacy Housebuilding business as a result of tougher market conditions

·    Completed £55m ordinary share buyback programme in February 2024

Current trading and outlook

·    Encouraged by the increase in the Group's sales rate⁴ since the start of the year to 0.72 (2023: 0.61) sales per week per site

·    The Group is on track to deliver strong growth in completions in 2024, targeting in excess of 17,500 units, underpinned by its forward sales position totalling £4.6bn, of which £2.1bn is for delivery this year

·    Notable pick-up in demand from PRS providers in recent months

·    The easing of mortgage rates at the start of the year has had a positive impact on Open Market demand and we are optimistic that this trend will continue during 2024

·    We continue our transition to a capital light Partnerships model and are targeting the release of capital through a series of initiatives

·    Group expects to have a net cash position as at 31 December 2024

·    In line with our stated capital allocation policy, we are announcing a further ordinary share buyback programme of £100m to commence in April, and the Board will evaluate additional special distributions throughout the year

·    We remain confident in achieving a 40% ROCE and £800m operating profit in the medium term, and returning £1bn of capital to our shareholders over the next three years

Greg Fitzgerald, Chief Executive commented:

"As a leading Partnerships business, the Group is committed to creating quality new homes through the development of sustainable new communities and places people love.  We see high demand for mixed tenure housing and regeneration across the country and are uniquely placed to deliver on this market opportunity, helping address the country's acute need for housing.

It has been another busy year at Vistry and I am extremely grateful to all Vistry's employees, the Group's suppliers, and our highly valued Partners for their hard work and commitment.

The business has started the year with a real passion and commitment to deliver on its strategy and medium-term financial targets, and we expect to make good progress during 2024."

¹ Completions include 100% of JVs.  All other financials are shown on an adjusted basis to include the proportional contribution of the joint venture and to exclude amortisation of acquired intangible assets and exceptional items.

² Reported revenue and cost of sales for FY22 have been restated to apply the Group's change in accounting policy for part exchange property sales

³ FY22 ROCE has been restated to exclude the Group's fire safety provision from average capital employed to align with adjusted operating profit, which excludes expenses relating to fire safety

⁴ Group sales rate includes all non-section-106 Partners Funded sales and Open Market sales

Certain statements in this press release are, or may be deemed to be, forward looking statements.  Forward looking statements involve evaluating a number of risks, uncertainties or assumptions, many of which are beyond the Group's control, that could cause actual results to differ materially from those expressed or implied by those statements.  Forward looking statements regarding past trends, results or activities should not be taken as representation that such trends, results or activities will continue in the future.  Undue reliance should not be placed on forward looking statements.  Forward looking statements speak only as at the date of this document and the Group and its directors and officers expressly disclaim any obligation or undertaking to release any update of, or revisions to, any forward looking statement herein.

There will be an investor and analyst presentation at 8:30am today, 14 March 2024 at Numis, 45 Gresham St, London EC2V 7BF.  There will also be a live webcast of this event available on our corporate website at www.vistrygroup.co.uk or via the following link https://brrmedia.news/VTY_FY23

A playback facility will be available shortly afterwards.

For further information please contact:

Chief Executive Review

It has been another busy year at Vistry as we have implemented change and navigated market challenges, and I am very grateful to all of Vistry's employees and our partners for their hard work and commitment.

In 2023, Vistry established its position as the country's leading Partnerships business.  The Group successfully integrated Countryside Partnerships, and in September updated its strategy to fully focus on its high growth, capital light Partnerships model.  We have made significant progress since then, with the organisational changes implemented, and the transition of the former Housebuilding land bank progressing well.

Our purpose as a responsible developer is to work in partnership to deliver sustainable homes, communities, and social value, leaving a lasting legacy of places people love.  We see high demand for mixed tenure housing and regeneration across the country and are uniquely placed to deliver on this market opportunity, helping address the country's significant need for affordable housing.

Our Partnerships model is positioned to deliver sustained growth and market resilience through the cycle.  The model provides visibility of future revenue and enables us to deliver new homes at greater scale and pace.  We work in partnership on each of our developments, with a target of c. 65% of the total homes across our portfolio of developments presold to our partners - our Partner Funded sales. The further c. 35% of new homes are sold in the Open Market to private buyers, resulting in a significantly lower proportion of private sales at Vistry than in a traditional housebuilder model.

We have an excellent track record of working with Registered Providers (RPs), Local Authorities (LAs) and the Private Rented Sector (PRS) and this is reflected in our established and trusted relationships across the sector.  We work closely with Homes England, and grant funding from the Affordable Housing Programme is a key part of our business model.

Delivering high quality homes and excellent customer service remains paramount and later this month we expect to be awarded a 5-star HBF Customer Satisfaction rating for the fifth consecutive year.

We are pleased to report our highest ever number of Pride in the Job quality awards at 40 (2022: 29), with a further 15 Seals of Excellence.  In addition, our site teams have been awarded nine Premier Guarantee and seven LABC Bricks Site Recognition awards during 2023.

The Group has a clear set of medium-term financial targets.  Our Partnerships business is a high growth, capital light model and the delivery of a 40% return on capital employed is a key priority.  During the year we also confirmed our capital allocation policy and our target to distribute £1bn of capital to our shareholders over the next three years.

2023 review

The resilience of our Partnerships model was clearly demonstrated in 2023.  The Group delivered a total of 16,118 new homes, down only 5.4% on prior year proforma, outperforming the wider peer group.  Excluding the former Housebuilding business, the Partnerships business delivered year on year growth in revenue against proforma 2022, and maintained a ROCE of c. 40%.

The transition to a fully Partnerships business made significant progress, and 67% (10,722) of the total homes delivered were Partner Funded with 33% (5,396), Open Market sales.  In the year, the Group's sales rate2 averaged 0.96 (2022:  0.71) sales per week per site, with the sales rate for our differentiated Partnerships business higher than that for traditional housebuilding.

We saw good levels of demand throughout the year for Partner Funded sales. Demand from RPs for additional affordable homes beyond Section 106 (S106) sales remained robust, with For Profit Registered Providers (FPRPs), a smaller but high growth sub-sector of this market, demonstrating particularly strong demand.

Demand from PRS was more constrained during the year reflecting the sector's greater sensitivity to the higher interest rate environment.  We were pleased to see a step-up in demand from PRS in Q4 2023 which has continued into 2024.

We were pleased to announce a significant new agreement with PRS provider, Leaf Living and RP, Sage Homes in November for the sale of over 2,800 homes with a total gross development value of c. £800m.  The units, which were formerly part of the Group's Housebuilding land bank, are located across c. 70 developments, with delivery by the end of 2025.

During the year, the Group secured an additional £87m of affordable housing grant funding under our Strategic Partnership with Homes England taking the Group's total grant funding under the current Affordable Homes Programme, running to 2026, to £170m.  The use of grant funding plays an important part in supporting many of our Partner Funded development opportunities, particularly when accessing the growing for profit registered provider sector.

Open Market demand from private buyers remained suppressed during 2023 with our private sales rate significantly below prior years.  This reflected higher mortgage borrowing costs, inflationary cost pressures on household income and wider macroeconomic and political uncertainty.  The Group used incentives of up to c. 5% of the Open Market sales price to support demand during the year.

The Group's total average selling price in 2023 was £276k (2022 proforma: £289k), with our Partner Funded average selling price at £222k (2022 proforma: £194k) and Open Market average selling price at £390k (2022 proforma: £381k).

The Home Stepper shared equity product, which we have offered in partnership with Sage Homes since July 2023, has been successful in helping Open Market buyers with lower incomes and smaller deposits afford their own home.  Since launch, we have taken over 450 reservations using the Home Stepper product.

Group adjusted revenue increased by 30% to £4,042.1m (2022: £3,115.1m) reflecting a full year of results for the enlarged Group. On a proforma basis, adjusted revenue decreased by 9%.  On a reported basis, the Group delivered revenue of £3,564.2m (2022: £2,771.3m).

Against a backdrop of inflationary cost pressures, we continue to take a very proactive approach to managing our cost base.  The Group procures c. 90% of its construction materials centrally and benefits from its scale and its growth strategy.  In addition, given our high level of visibility on forward sales and build programme under our Partnerships model, we are able to offer greater continuity, certainty and longevity of work to our supply chain which helps us to negotiate competitive terms.  In the year, the Group offset inflationary build cost increases post the cost benefit of synergies from the combination with Countryside (the Combination).  The Group renegotiated its supply contracts in the second half of the year and expects continued benefit from these throughout 2024.

During 2023, the Group achieved synergy savings from the Combination of c. £50m, ahead of the £25m targeted for 2023 at the time of the acquisition, as the integration progressed at a faster pace than expected.  Our expectations for future annualised savings as a result of the Combination remain unchanged at c. £60m.  In addition, we expect to deliver c. £15m of cost savings in 2024 from our simplified operating structure under our new fully Partnerships strategy, with the full run rate of c. £25m to be achieved by the end of 2024.

Group adjusted profit before tax was in line with prior year at £419.1m (2022: £418.4m), with adjusted earnings per share of 88.2p (2022: 137.5p) down 36% on prior year.  On a reported basis, the Group delivered profit before tax of £304.8m (2022: £247.5m) and earnings per share of 64.6p (2022: 86.5p).  This was after exceptional expenses of £65.6m (2022: £153.8m) comprising £46.3m relating to integration and restructuring costs, and a further £19.3m in relation to fire safety provisions.

The Group had a net debt position as at 31 December 2023 of £88.8m (31 December 2022: net cash £118.2m).  This was a significant reduction from the Group's net debt position as at 30 June 2023 of £328.7m.  The Group is committed to maintaining a strong balance sheet and is targeting a year end net cash position as at 31 December 2024 and the elimination of average net debt in the medium term.

The Group delivered a return on capital employed in the year of 21.3% (2022: 25.0%) down on prior year reflecting increased capital employed and lower volumes in the legacy Housebuilding business as a result of tougher market conditions.  Delivering a 40% ROCE is a key priority for the Group.  We are targeting a reduction in capital employed during 2024 whilst growing the business, and are confident of achieving our 40% ROCE target in the medium term.

Fire safety and requirement for second staircase

Vistry Group is committed to playing its part in delivering a lasting industry solution to fire safety and on 13 March 2023, signed the Department for Levelling Up, Housing and Communities' Developer Remediation Contract.

The Group's fire safety provision as at 31 December 2023 totalled £289.0m and we remain confident this will cover the cost of fire safety works in accordance with the Group's obligations.  We continue to make good progress with the remediation works which are managed by our dedicated team.

In addition, the Group has been contributing approximately 4% of relevant profits through the Residential Property Developer Tax (RPDT) since its introduction on 1 April 2022, with a total of c. £20.2m paid to date.  RPDT is intended to raise at least £2bn from the industry over a ten-year period to fund the cost of remediating fire safety issues which have been borne by the government.

In 2023 we have recognised a further expense of £19.3m, principally due to the additional requirements for second staircases in high-rise residential schemes.  This represents additional costs to be incurred on sites we are committed to build and to reduce the value of some inventory on the impacted sites.

Competition and Markets Authority (CMA) housebuilding market study

We welcome many of the findings in the CMA's final market study report published on 26 February 2024 and believe Vistry's differentiated Partnerships model is well aligned with its recommendations in respect of planning and management companies. We also agree with recommendations that would continue to drive quality through the sector and operate under the consumer code and have registered under the New Homes Ombudsman Scheme.

Vistry has participated positively in this year-long market study and will continue to engage proactively with the CMA on its further investigation and ongoing work with the sector.

Strategy update

In September 2023, the Group updated its strategy to fully focus its operations on its high growth, capital light Partnerships model.  The considerable scale of the affordable housing need and demand for mixed tenure housing continues to become ever more apparent.  It is clear that given Vistry's leading partnerships capability, the Group is uniquely placed to significantly increase the delivery of mixed tenure homes.

Vistry's Partnership model is built upon the Group's strong track record of delivering mixed tenure developments and its long-established relationships with its partners across the sector.  Developing every site with a partner is at the core of the model, with a minimum requirement for 50% of the homes on each development to be presold to a partner.  The range of pre-sale can vary by site from the minimum of 50% up to 100%, with a target of c. 65% of homes presold across the Group's portfolio of sites.  Within our Partner Funded sales, we will deliver multiple tenures including S106 affordable housing as required by planning consent, additional affordable housing which may include tenures such as shared ownership and discounted homes, and PRS units.  Our partners are RPs, LAs and PRS providers.

Open Market sales are targeted at c. 35% of total units across our portfolio of developments.  We have three leading consumer facing brands: Bovis Homes, Linden Homes and Countryside Homes.  The product range and marketing of each brand is clearly differentiated, each with different target customers.  Our businesses will utilise the brand most appropriate for the specific development opportunity and will use multiple brands across a development where possible in order to maximise sales rates, drive efficiency and returns.

Following the Group's strategy update in September last year, the Group has successfully merged its former Housebuilding operations with its Partnerships business and now operates as a single business with a more simplified and delayered structure.  The Group has six divisions with 26 regional businesses, down from 32 prior to the restructuring, with overlapping geographies being the key driver for business unit closure.  Each regional business is targeted to deliver up to 900 new homes each year, with a total capacity within the Group's existing structure to deliver well beyond 20,000 units.

In transitioning the former Housebuilding land bank to our Partnerships model with its targeted 65% of homes presold, c. 8,500 homes of the owned and controlled former Housebuilding plots were targeted for pre-sale.  We have made excellent progress to date, with c. 3,300 of the c. 8,500 units presold, including over 2,800 units as part of our partnerships deal with Leaf Living and Sage Homes announced in November 2023.  2024 remains a year of transition to our fully Partnerships model with the Group focused on a number of initiatives to release capital from the balance sheet and the transition expected to be completed within the next two years.

Growth and medium-term targets

We have a clear set of medium-term targets that are aligned to the Group's new strategy:

-      Return on capital employed of 40%

-      Revenue growth of 5% to 8%

-      Operating profit of £800m with a 12%+ operating margin

-      £1 billion of capital returned to shareholders over next three years

The Group is focused on a returns-based model and delivering an industry leading 40% return on capital employed is a key priority.

The Group is targeting sustained revenue growth of 5% to 8% p.a. supported by the significant growth we expect to see in the Partnerships market.  The affordable housing and PRS markets combined, our Partner Funded market, is today valued at c. £18bn and delivers c. 80,000 new homes p.a.  Reflecting both housing need and expected investment levels, it is estimated this Partner Funded market has the potential to more than double to £50bn in value, delivering c. 190,000 units p.a.

With our industry leading expertise, tailored business model and unrivalled track record of delivery, the Group is best positioned to capture this market growth.  We are closely aligning our business development and future delivery with the needs of our existing and future partners and our Partnerships and Regeneration team is working across our 26 regional business units to ensure we maximise both the national and local opportunities.

Our model ensures that we have unrivalled access to the land market across greenfield, brownfield, estate regeneration, public land and part funded opportunities where one of our partners owns the land.  Replenishing our land development opportunities is one of our key operational priorities and we have industry leading land buying capability within each of our regional business units, supported by our unique Regeneration and Partnerships team, and our Strategic Land and Business Development team.

The Group is targeting an adjusted operating margin of 12%+ and adjusted operating profit of £800m in the medium term.

Our ongoing transition to a fully Partnerships model is supported by the formation of a capital efficiency programme working across the Group to focus on restructuring our balance sheet through releasing capital from slow moving assets.  The programme is seeking to drive consistency of approach to capital management and unlock key opportunities, for example, through partnering options including Partner Funding and joint ventures, alongside land sales and swaps with SMEs and our peer group.  Operational excellence and driving efficiency is a clear focus, with initiatives covering WIP management, standardisation and best practice.

Vistry Works

The Group has made significant progress with its timber frame operations and capability during the year.  Increasing the use of timber frame construction is a key part of our operational and sustainability strategy.  There is clear environmental benefit to using timber frame over traditional brick and block construction methods, with the embodied carbon associated with the timber frame construction of a typical low-rise house over a 60-year life shown to be 30% lower than that from a traditionally constructed equivalent house.

We were pleased to re-open and deliver more than 300 units last year from our Vistry Works, East Midlands timber frame manufacturing plant following the completion of a strategic review.  Combined with our factories in Warrington and Leicester, the Group currently has the capacity to deliver c. 8,000 units from its operations.  As planned, in 2023 we delivered 2,500 timber frame units and we expect this to step up to over 4,000 units in 2024, as we increase production towards capacity and beyond.

We are manufacturing open panel and hybrid panel timber frames for Vistry business units across the country and our product includes standard house types for our affordable housing range and all three of our brands: Bovis Homes, Linden Homes and Countryside Homes.  We have also introduced roof trusses and floor cassettes to our production lines, with full integration of production of this line being effective from H2 2024 onwards.

We are committed to a programme of training and development in 2024 and further implementation of enhanced systems to ensure we drive efficiency and deliver the highest standard product.

Vistry Innovation Centre

We were delighted to open the Vistry Innovation Centre on 1 February this year at Vistry Works, East Midlands.  Using our most plotted Vistry house type, the Eveleigh, the Innovation Centre showcases innovative solutions for Future Homes Standard and beyond, working with 18 different trades and 54 suppliers.  Featuring over 100 different products, the technology includes Modern Methods of Construction, multiple different heating solutions, smart technology and sustainable building materials.

Sustainability

Sustainability is at the core of our business model and in the year, we have made good progress with our sustainability strategy.  I am delighted to be a member of our new Sustainability Committee where I am joined by colleagues from across the business to debate and drive forward our sustainability agenda.  The Committee is chaired by the Group's COO, Earl Sibley.

Following the Combination, we carried out a double materiality assessment which involved engagement with 340 of our stakeholders including our partners, our supply chain and our shareholders.  This process identified the sustainability issues most important to our Group and helped design our revised sustainability strategy for the enlarged Group.

During the year, we launched our Carbon Action Plan which is focused on measure, reduce, report and provides a consistent approach to emissions reduction across our regional businesses.  We reset our science-based targets, including setting our commitment to achieve net zero carbon by 2040.

Our partners place great importance on developing sustainable communities as they look to future proof their housing stock and offer the best solutions available to the local communities and their customers today.  On a number of developments, we are working ahead of standards, including the delivery of 600 zero carbon (in-use) homes on current projects.  This provides Vistry with valuable learning opportunities and best prepares us for forthcoming regulatory changes.

Capital allocation

The Group undertook extensive consultation with its shareholders on capital allocation between March and September 2023 and announced its updated capital allocation policy with its Half Year results.

The Group's strategy and focus on its capital light Partnerships model is expected to result in a significant release of capital, as assets from the former Housebuilding division are redeployed into Partnerships and the Group fully transitions to its Partnerships model across all developments.

Maintaining a strong balance sheet is a key priority, and the Group is targeting a year end net cash position as at 31 December 2024, and the elimination of average net debt in the medium term.

The Board believes that investing in our Partnerships business to deliver sustainable growth in line with our medium-term targets is the most attractive use of capital, with the business continuing to invest in high quality development opportunities which replenish the Partnerships land bank and deliver on this.

The Group recognises the importance of capital distributions to shareholders and intends to sustain the pursuit of a two times adjusted earnings ordinary distribution cover in respect of a full financial year.  The ordinary distributions are to be made either through share buybacks or dividends with the method to be determined by the Board considering all relevant factors at the time.

The Board announced an initial ordinary share buyback programme of £55m in September.  This programme commenced on 11 December 2023 and was completed on 23 February 2024 with a total of 5.8m shares acquired at an average price per share of 955p.  This buyback was an ordinary distribution to shareholders in lieu of an interim dividend payment.

In line with the Group's capital allocation policy the Board is announcing a further ordinary share buyback programme of £100m which is expected to commence in April.  This buyback is an ordinary distribution to shareholders and will be in lieu of a final dividend payment.

Any surplus capital following investment in the business to support the Partnership's growth strategy and the ordinary distribution is expected to be returned to the Group's shareholders through either an incremental share buyback or a special dividend, with the method being determined by the Board considering all relevant factors at the time.  The Board will evaluate additional special distributions throughout the year.

The Group is targeting £1bn of capital distribution to its shareholders over the next three years, including ordinary distributions from earnings through to and including FY26, and special distributions.

Board update

The Board is making good progress with its search for an experienced Senior Independent Director and up to two additional, high calibre Independent Non-Executive Directors of the company, and will update on these appointments in due course.

Current trading and outlook

We are encouraged by the increase in the Group's sales rate⁴ since the start of the year to 0.72 (FY23: 0.61) sales per week per site.  The Group is on track to deliver a strong growth in completions in 2024, targeting in excess of 17,500 units, underpinned by its forward sales position totalling £4.6bn, of which £2.1bn is for delivery in 2024.

We have seen a notable pick-up in demand from PRS providers in recent months, and the easing of mortgage rates at the start of the year has had a positive impact on Open Market demand.  We are optimistic that this trend will continue during 2024.

We continue our transition to a capital light Partnerships model and are targeting the release of capital through a series of initiatives.  We remain confident of driving towards our 40% ROCE target in the medium term.

Finance review

Group performance

The Group delivered a strong performance relative to the sector in challenging and uncertain market conditions. The Combination with Countryside in November 2022 has given the Group greater scale and is delivering substantial operational and financial synergies. We are making good progress with our strategy of focusing our enlarged operations fully on our high growth, capital light Partnerships model. This gives us strong visibility of future revenue and enables us to deliver new homes at greater scale and pace. The Group is now operating as one Partnerships business with six operating divisions and 26 regional businesses. 

Adjusted revenue for the year increased 30% to £4,042.1m (2022: £3,115.1m) and reported revenue increased 29% to £3,564.2m (2022: £2,771.3m), reflecting a full year of results for the enlarged group. On a proforma basis, adjusted revenue decreased 9% and the number of completed homes delivered (including joint ventures) decreased 5% to 16,118 (2022 proforma: 17,038). In the context of the challenging market conditions, this represented a significant outperformance compared to our peers, demonstrating the resilience of the Partnerships model.

Demand from our partners for affordable and PRS homes was strong. A highlight was that in the fourth quarter we agreed a substantial sale to our longstanding partners Sage Homes and Leaf Living, for over 2,800 homes on plots located across 70 developments from our former Housebuilding land bank. Delivery of these new homes commenced in 2023, with the final homes expected to be completed by the end of 2025. However, the increase in Partner Funded sales was more than offset by reduced demand for Open Market homes, which remained suppressed throughout the year due to the higher interest rate environment and inflationary cost pressures on household incomes. As a result of this, and in line with our new strategy, the proportion of units derived from Partner Funded sales increased to 67% (2022: 46%).

Our average selling price decreased by 4% to £276k (2022 proforma: £289k). Sales prices are lower for Partner Funded sales than for comparable Open Market sales as partners are buying multiple homes and providing the capital during the build. Where Partner Funded sales have been secured on sites that were transitioned from the former Housebuilding business to the Partnerships model there was a corresponding reduction in future full life margins. The increased proportion of Partner Funded homes led to an overall reduction in the average selling price, however this was partially offset by a 14% year on year increase in the average selling price of Partner Funded homes to £222k (2022 proforma: £194k). This was due to a shift in the mix of Partner Funded homes towards PRS and shared ownership homes which tend to be larger or higher value than some other tenures. The average selling price of Open Market homes increased by 2% to £390k (2022 proforma: £381k).

The Group proactively managed its cost base with key supply partners and agreed cost reductions for existing and future contracts during the second half of the year. This reflected the benefits to the Group of its increased scale and higher visibility on forward sales. During 2023, the Group achieved synergy savings from the Combination of c. £50m, ahead of the £25m targeted for 2023 at the time of the acquisition, as the integration progressed at a faster pace. Our expectations for future annualised savings as a result of the Combination remain unchanged at £60m.

The Group's adjusted operating profit for the year was £487.9m (2022: £451.1m), with reported operating profit of £311.8m (2022: £212.5m). Adjusted operating margin decreased 2.4ppts to 12.1% (2022: 14.5%). With the strategic shift towards the Partnerships model, full-year margins were revised downwards where there was a commitment to an increase in the proportion of pre-sold, discounted homes on a site. We expect the adjusted operating margin to reduce further in 2024 reflecting a full year under the new business model.

After adjusted net finance costs of £68.8m (2022: £32.7m), adjusted profit before tax was £419.1m (2022: £418.4m), slightly ahead of guidance. On a reported basis, profit before tax was £304.8m (2022: £247.5m). The effective tax rate increased to 26.7% (2022: 17.4%) due to the rise in the statutory corporation tax rate from 19% to 25% effective from April 2023 and the full-year effect of the Residential Property Developer Tax of 4%, which was introduced from April 2022. On a reported basis, the tax charge increased to £81.4m (2022: £43.2m), resulting in profit after tax of £223.4m (2022: £204.3m).

Adjusted earnings per share decreased by 36% to 88.2p. This was primarily due to an increase in the weighted average number of shares for the year following the issue of 127.4 million shares as part-consideration for the Combination in November 2022.

As at 31 December 2023 net debt was £88.8m (2022: net cash £118.2m), a net outflow of £207.0m, with average month-end net debt for the year of £459.4m (2022: average month-end net debt £110.0m). Whilst adjusted operating profit increased 8%, average capital employed increased 27%, resulting in a 3.7ppts reduction in ROCE to 21.3%. The increase in capital employed of £279.5m related principally to additional investment in work in progress, further detail on which is provided later in this review.

In December 2023, the Group commenced a share buyback programme to repurchase up to £55m of ordinary shares, representing the interim shareholder distribution for 2023. By 31 December the Group had purchased 636,254 shares at a total cost of £5.3m. Of the ordinary shares purchased, 250,000 are held as treasury shares and the remaining shares have been cancelled. The buyback programme continued during January and February 2024 and was completed on 23 February 2024. In line with the Group's capital allocation policy the Board is announcing a further ordinary share buyback programme of up to £100m which is expected to commence in April. This buyback is an ordinary distribution to shareholders and will be in lieu of a final dividend payment.

Exceptional items

The Group incurred exceptional costs totalling £65.6m during the year (2022: £153.8m).

Integration costs of £16.7m were incurred during the year, primarily relating to the integration of the enlarged business and further restructuring. The integration progressed well and is now largely complete.

The transition to the Partnerships model which commenced during the second half of the year has enabled the Group to simplify and delayer its organisational structure further, reducing the number of regional business units from 32 to 26. Whilst restructuring costs of £29.6m were incurred in 2023, principally in relation to the one-off costs of reducing headcount and office closures, the changes made are expected to deliver operational and financial synergies in excess of £15m in 2024 with the full annualised run rate of c. £25m to be achieved in 2025. This is in addition to the ongoing synergies expected from the Combination.

The Group recognised an exceptional cost of £19.3m in relation to fire safety, principally due to the impact of the new second staircase regulations, as reported in the half-year results. Further detail on this is provided later in this review.

Adjusted net finance cost

The adjusted net finance cost of the Group increased by £36.1m during 2023. Within this, net bank interest payable increased by £27.1m due to higher borrowings against the revolving credit facility combined with higher variable interest rates. As noted earlier in this review, average month-end net debt in 2023 was £459.4m compared to £110.0m in 2022. The weighted average rate payable on the Group's debt increased from 4.0% in 2022 to 6.5% in 2023.

Other finance costs and net JV interest were higher as 2023 included a full year's charge on the additional land creditors, leases and joint ventures arising from the Combination.

Taxation

The adjusted effective tax rate was 27.2% (2022: 22.4%). The adjusted effective tax rate comprises nine months of the higher Corporation Tax rate of 25% (2022: 19%) and approximately 4% of Residential Property Developer Tax (RPDT). RPDT was introduced in April 2022 as a specific tax on the home building industry, intended to raise at least £2bn from the industry over a ten-year period.

The Group's adjusted effective tax rate for 2024 is expected to be in the region of 29% comprising Corporation Tax at a rate of 25% and RPDT of 4%.

On a reported basis, the Group recognised a tax charge of £81.4m at an effective tax rate of 26.7% (2022: £43.2m, effective rate of 17.4%). The reported tax rate is marginally lower than the adjusted rate due to the presentation of tax on joint ventures and prior period adjustments.

Net assets

Capital employed

Capital employed increased by 13% to £2,425.2m compared to the prior year end (2022: £2,145.7m), the majority of which related to work in progress. This increase was driven by a slower recovery in the sales rates for Open Market homes in the second half of 2023. Additionally, to support delivery of new homes in 2024, we have invested in some of our large mixed tenure sites, including upfront infrastructure works.

During the year, the Group remained active in the land market, acquiring 13,067 new plots. Whilst the total number of plots in the land bank reduced slightly, the average cost per plot increased by 4%. Further details on the land bank are provided later in this review.

As anticipated, the migration of the former Housebuilding land bank to the Partnerships model contributed to a reduction in capital employed in the second half of the year. The Group has initiated a capital efficiency programme which will pursue a number of initiatives to accelerate further reduction of capital employed from across our portfolio in 2024.

Fire safety

The Group is committed to playing its part in delivering a lasting industry solution to fire safety and on 13 March 2023 signed the Department for Levelling Up, Housing and Communities' Developer Remediation Contract. The Group's fire safety provision at the beginning of the year was £309.2m.

During the year the UK Government confirmed its commitment to mandating a requirement for second staircases in high-rise residential schemes, lowering the proposed threshold from 30 metres to 18 metres, following a period of consultation. As a result, an additional provision of £12.3m was recognised for the additional costs to be incurred on sites we are committed to. It was also necessary to impair inventory on the impacted sites by £6.2m and with a net £0.8m charge for the impact of inflation and discount assumptions, the total exceptional charge for the year was £19.3m.

The Group spent £33.3m (after recoveries of £11.7m) during the year continuing to make good progress with the remediation works. Of the 327 buildings identified, work has been completed on 90, works are ongoing on 32 sites and we are engaged in the remediation process with a further 196 buildings. This remediation work is managed by our dedicated team.

The closing provision as at 31 December 2023 was £289.0m. We remain confident this will cover the cost of fire safety works in accordance with the Group's obligations.

Retirement benefit asset

The Group has three defined benefit pension schemes which are managed and administered by separate trustees on behalf of the scheme members. All of the schemes are closed to future accrual. The Group's retirement benefit asset was £34.2m (2022: £34.3m), representing the surplus of the scheme assets of £267.2m less liabilities to pay future pensions calculated on an IAS 19 basis of £233.0m. Under the rules of each scheme the Group will be entitled to any surplus remaining once the last members exit.

The most recent actuarial valuations of the schemes were undertaken as at 30 June 2022 and showed a combined technical funding surplus of £14.7m. The Group has agreed the principles of a plan to prepare the schemes for a buy-out, whereby a third party insurer would take on the liabilities to pay future pensions.

Goodwill

Goodwill increased by £22.9m to £827.6m (2022: £804.7m) as the acquisition accounting in relation to the Combination was finalised in the first half, with no further revisions in the second half. Under the acquisition accounting rules, there is up to 12 months from the date of acquisition to complete the fair valuation exercise. The fair values were amended to reflect the impact of new information that became available in the year. The increase to goodwill primarily arose due to a full write-down of inventory at one particular site which has now been deemed unviable. This was due to a significant increase in cost estimates which were underestimated at the time of the Combination. The corrected cost to complete would have resulted in a net cash outflow to complete the site as well as a significant capital lock-up, and this site would therefore not be progressed by a market participant.

Cashflow, net debt and financing

Having delivered £419.1m of adjusted profit before tax, the Group invested £226.1m in work in progress and £65.2m in land as described earlier in this review.

During the year, the Group remained active in the land market, acquiring 13,067 new plots. Whilst the total number of plots in the land bank reduced slightly, the average cost per plot increased by 4%.

The increase in other working capital was principally due to higher volumes of Partner Funded sales activity in December 2023 compared to December 2022, leading to increased trade receivables.

The additional investment in joint ventures was predominantly due to an increase in the number of active joint ventures. Under our Partnerships model joint ventures are an important source for securing land, and we would expect a net investment over the short-term.

Further detail is provided earlier in this review on the exceptional items related to the integration of Countryside and restructuring of £56.1m and fire safety spend of £33.3m.

After tax-related outflow of £37.7m and shareholder distributions of £115.7m, the total outflow for the year was £207.0m. The Group's closing net debt was £88.8m (2022: net cash £118.2m).

The total available facilities as at 31 December 2023 were £1,015.7m (2022: £1,065.7m), against which the Group had drawn £507.1m (2022: £558.6m). These facilities are used to fund intra-period working capital movements and land investments with average month-end net debt for the full-year of £459.4m (2022: £110.0m). During the year we successfully concluded the process with our lenders to extend the £400m term loan facility for a further 18 months, with the loan now maturing in September 2026. A £50m bilateral term loan matured and was repaid during the year. 

Shareholder distributions and capital allocation policy

The Group reviewed its capital allocation policy during the year, which included extensive consultation with major shareholders. The key considerations were the need for investment to ensure sustainable growth, capital commitments (including fire safety remediation), the seasonal and uneven nature of the Group's typical cash profile, the existing capital structure, changes in the shareholder base and the investment case for potential investors.

The Board recognises the importance of capital distributions to shareholders and intends to sustain a two times adjusted earnings ordinary distribution cover in respect of a full financial year, with ordinary distributions being made through either incremental share buybacks or dividends, the method being determined by the Board considering all relevant factors at the time. In total, the Group is targeting £1bn of shareholder distributions including both ordinary distributions on earnings through to and including 2026 and special distributions, alongside the elimination of net debt. The Group's capital allocation hierarchy is shown below.

An interim ordinary distribution in the form of a share buyback of up to £55m was announced in September 2023 and the buyback commenced in December 2023 and was completed in February 2024. In line with the Group's capital allocation policy the Board is announcing a further ordinary share buyback programme of up to £100m which is expected to commence in April. This buyback is an ordinary distribution to shareholders and will be in lieu of a final dividend payment. The Board will continue to monitor the progress of capital release during the year and will consider additional buybacks in the context of the cash position and investment opportunities.   

Forward order book 

The forward order book as at 31 December increased 12% to £4,466m (2022: £3,973m). This was primarily driven by the increase in deals secured with partners in line with our new strategy. Open Market sales reservations were higher at the end of December 2022 due to some delayed completions at that time.  

Land bank

The land bank represents 4 to 5 years of supply based on future completion volumes. The Group has continued to invest in its land bank to support its growth strategy, adding a total of 13,067 plots in 2023, including 2,343 from strategic land. After deducting plots utilised in the year, the total land bank reduced by 1,329 plots.

Strategic land

Strategic land refers to land which does not yet have planning consent and which the Group is or will progress through planning and promotional processes before development. Once planning consent has been obtained, the land becomes consented. Strategic land continues to be an important source of supply and a further 7,360 plots were secured during the year. The net increase was 4,704 after 2,343 plots were transferred to the land bank. Strategic land remains well positioned to deliver high quality developments in the near to medium term with good progress on a number of significant projects.

Risks and uncertainties

The Group is subject to a number of risks and uncertainties as part of its activities as described in Risk Management and Our Principal Risks on page 60 to 67 of the Group's 2023 Annual Report and Accounts. The Board regularly considers these and seeks to ensure that appropriate processes are in place to manage, monitor and mitigate these risks.

Risks relating to sustainability are becoming increasingly important in the medium term, especially with the emerging transitional risks which are becoming enshrined in regulation.