Good morning and welcome. I hope you're enjoying our ASOS Design video, and you'll all be compelled to write about animal print when you go back to base. Anyway, good morning and welcome. Thank you for attending our results presentation for the six months to the 28th of February 2019. Also welcome to all those joining us live on the webcast, a recording of which, of course, will be on the website later on this morning. Let's go through the H1 highlights. It's certainly been a challenging six months for us, and one of the most challenging we've seen in many years. Economic uncertainties undermined consumer confidence, and during the period, we saw exceptional levels of discounting and promotion activity, particularly during Q1. Our performance was undoubtedly also impacted by the large scale of transformation projects we were undertaking across the business.
H1 PBT was GBP 4 million after GBP 24 million of temporary transition costs. The quantum of this change also led us to a number of actions that compromised some of our customer proposition, notably in newness, also in pricing, but also with engagement with our customers. In essence, we didn't put our best foot forward. You'll see in the statement this morning, we've detailed the wide-ranging review we've undertaken to best engage with our customers, and we've already begun corrective actions. This will restore the strength of the ASOS proposition, and it will lead to a much stronger H2 performance. Correspondingly, we've left full-year guidance FY 2019 unchanged. We're also coming to the end of the current phase of significant investment.
In terms of big projects, I'm pleased to confirm that the completion of the Eurohub Automation is coming in the next few weeks, at which point a significant inefficiency drag falls away. Notwithstanding the unexpected start, Atlanta is now back and stabilized, and we will continue with our development plans to reengage with our U.S. customers. These material supply chain investments will significantly improve our capability, our customer experience, and our productivity. These benefits are ahead of us, and we're all now ready in a great position to capture them. We have a strong, efficient, and localized operations now in three major markets, the U.K., Europe, and U.S., with over GBP 4 billion of net sales capacity, positioning us well as we set our sights on the next stage of our growth. In terms of liquidity, we're in a comfortable position.
Net debt of GBP 50 million by the year end will be well within our facilities. As this current investment phase draws to a close, we still anticipate this to be the only year of free cash outflow. I'm anticipating CapEx next year of circa GBP 150 million. Over the last three years, we've financed over half a billion of investment in future capability for ASOS, and we've done this with our own funds. We can, and we will continue to do so. The addressable market for ASOS in the global online 20-something fashion market continues to grow. The power of our fashion brand and the reach of our platform and the enhanced infrastructure and technology we've now built, gives us confidence in our ability to capture that. Turning to consumer KPIs.
There's clear evidence here pointing to areas we should and could have done better, and we've correspondingly disappointed ourselves in the first half. Firstly, taking a step back from the numbers on the screen, what we've seen is a softness in organic customer acquisition and in traffic over the last six months. There's a number of contributing factors here that I'll draw out later in the presentation, and it does vary by territory. In the U.K. first, our U.K. sales growth held up at 16%, and it does demonstrate a continued market share gain in what has been a pretty soft and competitive market.
At a consumer level, we're seeing significantly improved demand from our existing customers, with order growth of 20% from only a 4% increase in traffic and frequency up 11%. Active customer growth is still strong at 13%, but traffic was a key issue for us. Our organic acquisition was much slower in H1, particularly in the younger demographic. Our average basket reduced margin over the period, largely driven by ASP, which is the promotional activity in the first quarter, and to a lesser extent, a continued trend of customers buying into lower priced brands. Actually, our items basket was up marginally over the period. Growth in the EU segment was held back by weak demand in France and Germany. France and Germany account for 60% of this segment. The EU sales grew at 15%. France and Germany together was +11%, with the rest of Europe growing at 22%.
Our performance in France and Germany has been affected by the overall softer market over there, but also a number of decisions we took that had a disproportionate impact on our demand. The rest of world segment, pleasingly however, remained robust. With the completion of the next stage of Eurohub around the corner, this will provide us with loads of fuel for further investment in price, proposition, and also lower our overall operating cost. Transition costs have now started to fall away. To give you an example of the underlying efficiency we're expecting from the Eurohub, we're expecting a 3x improvement in picking. Picking is around 35% of our cost base. We'll deploy those benefits into enhanced delivery propositions. We're actually targeting next-day delivery with a midnight cutoff to 25 German cities over the coming months.
In Netherlands and Sweden, where we launched our local language sites last year, both have had active customer growth over 50%. Visits increased by 30% and orders were up around 50% too. We're planning to launch a similar enhancement for our customers in Denmark and Poland later this calendar year. Within the U.S., we talked a lot about the U.S. on the Q2 conference call. You'll know the largest drag in this segment was the initial problems we faced when the Atlanta warehouse went live. This was an unexpected surge in demand following the web to warehouse cutover. I'll again talk more about the U.S. shortly. I will mention here we've seen some encouraging green shoots, but we know we've got a long way to go in the U.S.
Notwithstanding the warehouse bump, we did see some underlying and encouraging consumer dynamics, giving us an inkling of what's possible and is ahead of us. For example, during the initial cutover, conversion increased by one percentage point. Finally, on rest of world, our Russian customers responded most significantly to improved trading stance in Q2 following our Black Friday hiccup. Active customers grew by 50% and app installs were up 78% year-on-year. Moving to the U.S. In the U.S. market, the opportunity for ASOS ahead of it is simply huge, and some of our recent experience has given us greater confidence in that. The U.S. clothing market was worth nearly GBP 400 billion last year, with online representing around GBP 80 billion. Online penetration is currently 21% in the U.S. and climbing quickly, with market forecast that this will be closer to 29% within the next four years.
There are almost 70 million 20 year old- 34 year-old girls and boys in the U.S., of which we're confident a sizable number are fashion-loving and potential customers for ASOS. In the U.S., we already have 2.6 million active customers, and we've grown our business to around $400 million already. This has been done without deploying significant capital or in infrastructure or in technology. Atlanta and our clustering technology signals a key change in that and will start the next phase of our growth in the U.S. Some of you might have heard me talk about our plans and technology clustering in the U.S. before. Let me just set out what it means. In essence, we're using our technology to geo-target our customers and provide the best possible localized product content in social media.
Up to now, we've treated the U.S. as one country, offering customers from New York to L.A. and Chicago to Texas, the same experience, the same content, and the same delivery propositions. Yet, there are four time zones, nine climatic regions across 50 states with dramatically different cultures, interests, and expectations. We would never offer a uniform experience to our European customers in France, in Italy, in Spain, or Germany. Our clustering technology will address this. We're offering initially up to six localized web experiences, mobile and website, which will be dependent and served up depending on your time zone, ZIP code, and climatic conditions. Our clustering tech will be deployed in May, and from there on, we begin to significantly enhance our delivery propositions. We're targeting next-day delivery to Atlanta first, New York, L.A., San Francisco, and Austin in Texas.
Our ASOS Design product has always over-indexed in the U.S. It was around 50% of the mix in the first half, and we're now focusing on building out our third-party branded product too. The spike in U.S. demand we saw in early February when we switched over the warehouse showed us the benefit of building a locally relevant stock pool with great availability. In the U.S., we now have Nike, New Balance, Polo Ralph Lauren for our U.S. customers, with many more locally relevant brands to come. As I said earlier, our customer acquisition strategy will be based around acquiring fashion-loving, loyal customers through a more targeted direct marketing, through PPC based on your ZIP codes. As part of this approach, we'll be offering a Summer of Festivals program.
This is a six-month program of awareness activity driven by influencer activations at top music festivals across the U.S., including an exclusive retail sponsorship of the Life is Beautiful festival in Las Vegas. Moving on to sales growth. We grew total sales in the half by 14%. In today's trading environment, it's not to be sniffed at. However, we entered the year expecting over 20%. November is a key month for us in half one and for us and e-commerce generally. Overall market demand in this month was soft, and we saw and observed an extremely aggressive promotional stance from not only our fellow e-commerce players, but also more traditional high street brands. In actual fact, I think the dramatic shift from these players to either catch demand, clear excess stocks through unseasonably warm weather, or just to stimulate sales was the biggest impact on our performance.
Our promotional stance during Black Friday, in hindsight at 20%, didn't look quite as compelling for our customers. We also didn't offer the Black Friday promotion to our Russian or Australian customers, which was a trading error, and we lost an opportunity to enhance our customer acquisition. At the time of the guidance reset in December, this was our narrative and key diagnosis. Standing back from that, we've had a real closer look at our offer during the period. We've concluded that ASOS simply didn't look or feel as great as we normally do. For example, our presentation of certain categories looked a little bit vanilla and less exciting, less engaging, less inspirational, and certainly not what the ASOS customers normally expect. Within our product, our rate of newness had slowed, particularly within the ASOS Design, and our natural traffic growth had stepped back significantly.
Some of the reasons behind that were substantial tech and website design changes we deployed earlier in the year. We worked hard over Q2 correcting these errors, and thankfully, we're seeing green shoots of performance re-acceleration from the changes we've made. Q2 saw re-acceleration in the rest of world category, a continued strong U.K., and a more stable EU growth, but a weaker U.S. growth profile. This was solely down to the Atlanta warehouse change. The U.S. performance during the first three days quite simply blew out our estimates of demand. We were forced to take corrective action. Atlanta is now stabilized, and we're working hard on the next stage of our growth. On to gross margin. In H1, this was down 60 basis points at the retail level, and 50 at the group level.
I'll walk you through the bridge at the bottom first of all, and then walk you through the main movements in the regions. You can see we had a small FX tailwind year-on-year, and small improvements in the buying margin that the teams have worked through. These savings were invested in improvements in sourcing and improvements in sustainable fibers into the ASOS Design product. This is a key strand of our Fashion with Integrity program. ASOS Design now has 80% of the cotton that goes into the products, which is sustainably sourced, and we're targeting 100% by 2020. We also have around 5% of the fibers used in ASOS Design come from recycled materials, and we're actively looking to increase this mix.
An example of where we've done this, is during the period, we've developed an ASOS Design swimwear range, which is designed and manufactured using recycled fibers from fishing nets. Offsetting this was an increase in the branded sales mix, adverse country mix, largely driven by slower growth in the U.S., incremental freight and duty as we start to import into Atlanta. Right. Just quickly going down the territories. U.K. margin was down 120 basis points in the half, but saw a good recovery in Q2. Key movements were the branded mix and promotional activity largely in Q1. Within EU, the margin was up 190 basis points, driven by reduced markdown activity, which delayed the timing of the French and German sale, slightly reduced clearance debt accordingly, some of the price increases that we put through the European market accordingly.
Within the U.S., the margin was back 40 basis points, as we began to incur incremental duty and freight costs from importing stock in the Atlanta warehouse. Finally, looking at the rest of world, which is back 250 basis points year-on-year. This was largely due to increased markdown of promotion, also in Australia, we absorbed the Australian sales tax for our customers. Our full-year retail guidance remains 150 basis points down, which covers the budget increase of drop from the U.S. freight and duty, also gives us flexibility to invest greater in price for our European customers. On to operating costs. Total operating costs percentage of sales increased 170 basis points over the period, including GBP 24 million of temporary transition costs, which mostly fell in the warehouse cost line.
As a result of the lower growth trajectory this year, we've taken a very good look at our cost base and are streamlining our headcount over a number of functions accordingly. On a line-by-line basis now, distribution costs. Distribution costs were 20 basis points higher. This is mainly due to customers choosing faster delivery options. We expect to see this percentage of sales fall in the second half, as we start fulfilling greater increase of orders from the U.S. warehouse. To give you indication of the size of the benefit we see, U.S. distribution costs should move from over 22% of sales to 10%-15% over the medium term. In warehousing, this is the biggest part of operating cost increase year-on-year. This is mainly due to transition costs in Atlanta and Eurohub. Stripping these transition costs out, warehouse costs would've been 9.3% of sales. Correspondingly stripping out of last year would be 8.9%. So an underlying move of 40 basis points.
We're expecting significantly lower amount of transition costs in the second half as Eurohub goes live and the Atlanta transition is behind us. In terms of payroll, this improved by 10 basis points, we adjusted headcount accordingly, as I mentioned. We expect further streamlining in H2. Marketing broadly flat year-on-year, we expect to increase in H2. Other costs, this includes payment processing fees, group legal fees, group travel, tech costs, of course, rent and rates where we pay them. The main driver of the increase here has been on our technology. Depreciation, we guided some time now. Depreciation will be on an upward trajectory. H1 increased by 30 basis points to around 2.5% of sales, we expect to be closer to 3% for the full year.
On to CapEx. The headline here is we are through the peak of our heavy investment phase. CapEx guidance for the current year is maintained at GBP 200 million. We're expecting to reduce it next year, FY 2020, to around GBP 150 million. The investments we're making are both across warehousing and tech, will improve, has improved our capability, the ability to enhance customer experience, and of course, our productivity. We will have even stronger, more efficient, and better localized operations within all of our key markets. As usual, the left-hand chart shows how we've deployed the GBP 103 million of CapEx during the period. That's been allocated across major projects. On the right-hand side, we've given some additional categorization, which I hope is helpful, splitting our CapEx by lights on, efficiency, growth, and transformation CapEx.
Within transformation, we refer to the transformation project as a three-year program of major infrastructure and technology that provide a marked step change in our operating capacity. Projects in this program include TGR, our Truly Global Retail, which is new buying and merchandising systems, investments in the Eurohub, automation and mechanization, and building our Atlanta warehouse, and of course, the expansion of the ASOS head offices. These projects are setting us up for the next stage of our growth. By their very nature, we won't expect them to repeat in the medium term. I'll talk to you a bit more about the benefits flowing from the warehouse investment shortly. For a bit more color on our TGR, Truly Global Retail systems, at the conclusion of this program, we will have invested around GBP 80 million in this capability.
We'll have a complete re-platform of all the buying and merchandising systems and many more. It's an absolute necessary investment for a growth business with multiple and global warehouses that deliver a whole host of benefits across the business. For example, small benefit here is improve our sourcing lead times, allowing buyers to place orders at the point of contact with the supplier. It will also allow us to trade our product from multiple warehouses in multiple currencies on a localized basis. Investment in our growth CapEx covers customer-facing tech developments, which we'll also touch on more on the tech slide, but also includes warehousing, office costs, allow us to grow in our existing facilities. Efficiency. This is investment in driving productivity or cost savings across the business, for example, improvements to the warehouse systems, but also the outbound carrier management system and the returns processing software.
Finally, last on CapEx is investment that we know we need to make just to support the ongoing business. It isn't targeting specific growth or efficiency, it's just stuff to keep things moving forward. On to cash. We closed the half with net debt of just under GBP 38 million, a reduction of GBP 86 million since August 2018, mainly driven by CapEx. Shortly before the half year, we successfully renegotiated our banking facilities. The group now has in place GBP 220 million of facilities until the end of August 2019. This falls back to GBP 150 million. It's committed to May 2021. This will provide more than sufficient financial flexibility during this period of heavy investment. As previously stated, we're expecting FY to be the only year of negative free cash flow and net debt position at the end of the year of around GBP 50 million.
We expect to return to free cash flow positive in FY 2020, and each year thereafter. Moving to a summary of the areas of focus. As I said earlier, in Q2, we had a good look at ourselves and a good look at ASOS through customers' eyes, and we simply didn't look or feel as good as we normally do or should do. We've taken those actions accordingly. The areas of focus I've set out are on that slide, I'll take you through some more detail going forward. First of all, evolving our presentation. This is a key consistent pillar of our playbook and really important for fashion retail. It's about engaging and inspiring our customers through our presentation, and we've always been leaders at that. These are three images here. Same product, reshot, restyled, we've seen dramatic uplifts that you can see below.
The sales uplift and customer engagement has also been dramatic, it's a bit more of the ASOS presentation our customers expect from us. That's just a selection there, I can assure you we've done many, many more, we've had equally compelling reactions. We've also had some amazing reactions on new, younger trends such as neon, animal print, and safari. For those who don't know, safari is just an iteration of animal print. ASOS Product, ASOS Design. As a reminder, ASOS Design is only available at ASOS. When we get it right, it's exciting, inspirational, great value, and increasingly sustainably sourced. It's one of the largest brands on the planet never to have a store, this year we expect revenues to pass GBP 1 billion. ASOS Design is 36% of the total sales mix currently.
If you add in sales from the other ASOS brands like Collusion and Venture Brands, which are all internally generated brands, the overall ASOS Design number is around 38%. A key area of focus on ASOS Design is to profile it like other brands on site, on our apps. You should have seen a notable difference with the presentation if you've been following us recently. An ASOS Design campaign launched in February was one of those moments to reposition it. During H1, the pace of our newness in ASOS Design and the width was behind what our customers normally expect, we suffered some poor reactions accordingly, particularly in ASOS Design menswear. One of the key features of ASOS Design is that we can respond quickly here, because on average, we have much shorter lead times.
We've replanned the newness, we're enhancing the width, we're looking to deliver more consistent level of newness and demand and choice for our customers. In France, in June, we've also taken some price investment on a number of the ASOS Design lines. We've done this ahead of the Eurohub benefit release, we're expecting to do more in the second half. A key change with our product offer on ASOS Design was the presentation of ASOS Design, which has been pulled together as key trends, key collections, with a more compelling look. Utility, neon, and safari, and animal print have seen all great uplifts by taking this approach, we're doing the same treatment for many more collections. I'd just like to call out Collusion. Collusion has been one of the most successful brands ever launched at ASOS. We launched it in October last year.
It's sold over 1.5 million units since then, has established itself firmly as a top 10 brand, with full price sell-through above the group average. Within the U.K., it's also the most searched for brand term for our customers. We're expecting it to achieve around 55 million sales this year. It's the brand that was created for the younger generation, or Generation Z, using collaborators to work directly with our ASOS Design team. It'll be reaching a size where it's becoming a business in its own right. ASOS 4505 was launched last year as part of our activewear refresh. We're now annualizing those sales. It's growing at over 100%. Third-party brands. We continue to review and update our brand portfolio to ensure it remains exciting, relevant, and engaging. Over the half, we've exited more brands than we normally do.
We've exited over 280 brands and added 190 new ones. It's a lot higher than normal because we just thought some of these brands weren't resonating with our 20-something customers the way they should. We're onboarding a newer mix, a smaller, fresher, up-and-coming brands, alongside some more established brands such as & Other Stories. Globally, our Face and Body category continues to grow strongly at 47% year-over-year. Last year, we did GBP 60 million in sales. We're expecting it, and it's from a standing start. We're expecting to deliver over GBP 100 million this year. We launched 31 new Face and Body brands in the half, four of these from the Estée Lauder range. We now have around 14 brands from the overall Estée Lauder range. Outlets, which is our off-price promotion, is going well and offers customers compelling choice of brands at great value.
We're also very proud of our Marketplace platform, which offers 700 boutiques globally and around 160,000 different products, largely small vintage brands. We're planning to make far more of this going forward. On marketing, we shouldn't lose sight of the fact we have a great brand and some pretty impressive awareness and engagement stats. However, we've seen low organic customer acquisitions and softer traffic than we'd hoped for in the year, or in the half year. Part of this was due to our pullback in promotional marketing toward the back end of last year. We felt the impact in the first half greater than we anticipated. We've also seen a reduction in awareness and buying consideration in European markets, particularly in France and Germany.
We have seen underlying improvements in conversion and still some underlying improvements in frequencies, as I touched on earlier. That went some way to offsetting some of the traffic decline. I'll run through some of the key things we're doing differently now. Firstly, we're up-weighting our digital marketing, restoring and going beyond to where we were last year. We're also taking action to boost our awareness and consideration and support organic customer acquisition. First piece of activity here with the ASOS Design campaign that we're looking at on the way in. We're also up-weighting our influencer activity. Investment here will double year-over-year. Part of this is the U.S. summer of festivals, but it will be a six-month campaign to up-weight our influencer activity. We'll also make some changes of how we talk to our customers.
We know they love us for our constant conversation we have with them, the inspiration, the hints, the tips. We're increasing the velocity here. If you follow us on Instagram, you'll have seen a notable step change over recent weeks. On to warehousing capacity. Over the last few years, we've developed a formidable logistics capacity or capability, and this is about to start contributing to customer experience in a different and increasingly potent way. Our facilities are in different phases. U.S. is now stabilized. EU automation about to go live. U.K. is in an optimization phase, and the return centers are driving efficiencies. In summary, we have three custom-built, probably state-of-the-art fulfillment centers in three of our most valuable territories, U.K., EU, and U.S., and seven returns processing centers, mostly in lower cost operating territories and in an increasing efficiency and optimization phase.
All of this is capability to deliver a minimum of GBP 4 billion of sales capacity and a footprint to go after far more, particularly in the U.S. We'll now start to leverage these investments, as I said earlier, to drive efficiencies and customer experience. The charts on the right show some of the improvements in capacity and the efficiency we are targeting. The bottom charts are indexed off the Barnsley performance. Let me pick out a couple of key elements of how we're going to deploy these efficiencies. In the U.S., we will start with next day delivery services in Atlanta this month, in New York in May, in L.A. in June, in Austin and San Francisco later in the year. All key customer hotspots for us. In Europe, the Eurohub, we're expecting the biggest step change in efficiency and capacity.
We'll deploy these benefits to deliver next day delivery with midnight cutoff to 25 German cities, matching the ASOS experience that our U.K. customers enjoy and expect from us. In Barnsley, in CapEx terms, we've come to the end of our investment in Barnsley. We will have invested about GBP 105 million in total. We've recently added a dynamic buffer, which means product can go even faster through the warehouse, and we're now driving out and optimizing that solution. Let's focus a bit on technology. First, within transformation programs. Transformation accounts for around 26% of the H1 spend, the majority of which was in the Truly Global Retail program on our major supply chain programs. Investment in lights on CapEx total 15% of the spend and covered upgrades to our finance systems and security systems. 17% of our tech spend was directly improving efficiency, with the majority direct towards logistics.
This included new software to improve processing efficiency in our returns facility. We're expecting about 10%-15% improvement in there, and also outbound carrier management systems. Growth and customer experience focused developments represent about 40% of the tech spend, which we split across our e-commerce platforms and data platforms, including AI product enhancements, sizing, recommendations, and greater AI and personalization. Highlights within the rollout also include Fit Assistant, which has gone to all our apps, further development in recommendations and on our product and category pages, bag abandonment, back in stock, selling out fast, and our Boards feature. The Boards feature is what I demonstrated six months ago. It's a bit like Pinterest meets ASOS. This has been one of the most successful recent tech launches for us, with customers creating over 3 million boards and adding new boards at the rate of 130,000 a week.
Growth of our international specific investments saw rollout of gift vouchers in all currencies to sit alongside the sterling offer, as well as four new currencies and new payment methods in Australia and Russia. We also deployed the U.S. sales tax at checkout. That went in February, providing the functionality to pass on sales tax on a state-by-state level for our customers. Lastly, on tech, we haven't forgot about velocity, as it's key to our digital platforms. We released 2,200 customer-enhancing releases during the half, compared to 1,200 in the prior year. Let's just have a quick look at our global opportunity. When you've had a difficult few months, it's sometimes easy to forget the opportunity or the addressable market ahead of us. We're not losing sight on this prize. I thought it was worth reminding you of the data I showed you back in October.
Our view of the total addressable market and the global opportunity for ASOS remains unchanged, and the shift online continues at pace. The online global market will be worth at least GBP 220 billion, and it will be rising, and we're confident that we're well-positioned, in the right channels, and with the right capability to access our share of that market. In summary, our revised guidance is unchanged. We are confident of a stronger H2. We've conducted a thorough review of our business and taken corrective actions, and they're underway. We're on the edge of significant infrastructure and technology benefits. Medium term, we're confident in maintaining our top-line sales growth, restoring our EBIT margin, and moving to greater free cash flow generation. Our long-term ambition for the potential of the business remains unchanged. Thank you very much. I'd like to hand over to questions.
Is the mic on? Why don't you start back here, and we'll work our way up. All right.
Thanks. Anne [audio distortion] . First of all, looking at Marketplace, which you said you're going to develop, is there a case of integrating that within the main site so that a search function would give results from right across your offer? Secondly, on warehousing cost of sales, how low could that ratio go, do you think, in the medium term? Are we talking sort of 9%, 8%? If you could put a figure on that. Thirdly, thinking about the medium term growth rate, you say that ASOS can do more. Are we stuck at 15%, or would you look for an acceleration into the outer years?
Thanks, Anne. First of all, Marketplace. The inspiration of Marketplace was around nine years ago, where we developed Marketplace. It was almost like an eBay, and we were following consumer behavior around the internet and seeing an increasing trend of people buying our products, wanting to then remonetize their wardrobe, and we wanted to keep them in our ecosystem and provide that service for our customers. Over the last two years, regrettably, we've forgotten about that, and then we repurposed it for a vintage-only small brand engagement. In terms of commercial impact, Marketplace is not meaningful. In terms of engagement with our customers, it's really meaningful, and we have a much higher resonance with our younger customers, particularly students. Over the last few years, we've seen new marketplaces come to the fore.
Some of the fastest app downloads are on sort of marketplaces such as the likes of Depop. We've kind of forgotten that we have something that we've treasured and is a potential future goldmine for us. We've just rolled investment to enhance the technology, improve the underlying functionality, and we'll be looking to see how we can offer those things for our customers, where they can stay in our ecosystem. That might end up being integrated in a better way within the ASOS platform. We haven't figured that one out yet, we are working on it. We do know it's a rich vein. We do know we want to facilitate those experiences for our customers. Just watch this space on that one, Anne. Was the second one warehouse costs?
Yeah.
How low can it go? I've said before, I'm expecting around 8%-9%. As the efficiency rolls through, the chart shows you the current level of inefficiencies. They're still very manual. That's about to flow through. Bear in mind, we also are leaders on the living wage for our people wherever they fall. We've moved significantly on all of those areas. I've got 8%-9% as our future operating level in there.
Are we stuck at 15%?
ASOS can do more.
ASOS can do far more. I think it'll be a little bit early for me to start going, we're now expecting 2025 in FY 2020 until we've just restored our own confidence. If you don't mind, can I leave that one for a later conversation? We're certainly confident on 15% for FY 2020. What follows behind that, we'll have another look as we see our investments unwind.
Thank you.
David Gardner, Morgan Stanley. Following up on the medium-term guidance, on the EBIT, does your 4% medium term still stand? When you talk about restoring margins, where should we expect those to go to? Would you be in a position at the full year results to give us a more explicit guide on both growth and margin? Secondly, can you just talk through what's driving the big cash inflow from the change in trade payables?
Sure. Greg, do you want to do payables?
I'll come back to you very shortly on that.
I'll give you time to think about it. You would've seen in my presentation, I talked about restoring our profitability. That means going back to 4%. If you remember, 4% was our discipline, and it's what drives some of the key fundamentals in our business model. We have no intention of coming off that target. This year, at 2%, some things we were either ill-disciplined on, or things worked out differently, but our medium-term trajectory is to restore to 4%. On a terminal value, whenever that is, we still believe the business could have a high- single-digit endpoint margin.
I mean, it's a follow up on payables. Nearly every question around this was moving from the old finance system to the new finance system, and I think we told you moving to Microsoft Dynamics was a little bit bumpy. It's moved from one place on the balance sheet to the other. We'll come back to you with the exact detail on that, but it is driven by the change in that finance system.
Hi. I'm Paul Bennett from Bank of America. Two questions from me. The first one relates to the U.S. In the previous statement that you guys put out, it was talking about never seen before levels of demand, more granularity was given in that statement saying 80% increase in the first three days. In the logistics section, you're talking about two to four days backlog, and if I'm not wrong, the warehouse went live at the beginning of February. Shouldn't we have seen some of the pickup by the back end of February because customers would have been delivered, is my first question. My second question is on gross margin, you had FX tailwind into the first half. What do you expect for the second half of this year? Thank you.
Okay. I'll do the warehouse. You're entirely right. I didn't repeat all those stats in the presentation because we did a lot of that three weeks ago on Q2. You're recalled bang on. The first three days, it was over 80% demand. It took us around four weeks to recover the backlog. We started to see stabilization at the back end or early into March. The propositions are fully restored to where they should have been. Now we're moving the propositions on again. It's stability, first of all, restoring the propositions. Actually, what's really interesting is actually the power of the propositions. When we added on four to five days, we saw demand go backwards at a rate of knots. We know that, but it also reminds us how important the delivered propositions are. They were back restored sometime in March. Now we're moving the propositions on again.
Just on the propositions, it's important in the U.S. that people always forget that you don't have weekend delivery like you do here, right? Depending on when you order, you've suddenly got two more days than you would expect it if you lived in the U.K., and I think everyone nearly always forgets that one. Sorry, Paul, on the FX with guidance next year, broadly flat at the moment.
For the second half of this year?
This year, second half of this year, I'll come back to you, I don't think it's changed in terms of the overall guidance we've given you on that. It wouldn't have done because of the long-term nature of the hedging.
Andreas?
Rebecca.
Hi, Rebecca McClellan, Santander. Just in terms of the collection, how do you feel it happened that the collection went off track? Sort of what are the lead times? You sort of said that you'd reassessed everything since December. Do you feel that the collection is now sort of back as it should be, or is there still work to do? Then a second question just on working capital. In the statement, you mentioned that the focus was on availability, which had an ultimate consequence on choice. If you're looking to improve choice, does that mean we should expect some changes in working capital?
It's sometimes difficult to isolate why the presentation changed, but it did. It's more important to identify it and then get it back on trend. Have we got everything where we want it to be? No. We're working really hard at it. The three images I showed you are just examples of how the presentation has just got a bit more sizzle, a bit more engaging, and actually what our customers want. The impact from the customers was brilliant on the back of it. Sometimes more is more, more hair, more makeup, more presentation, more glamour. Internally, I've called it Project Glam. We're just glamming some of the presentation back up. Do you know what? We're famous for it. We're brilliant at it. We've just forgotten it a little bit.
If I was going to say it got a little bit vanilla of being self-worthy, I think that might be part of it. We're doing more work on the back of it. That's the presentation piece. The other things around it is regrettably around the stock moves. We made a couple of decisions around newness and width to help facilitate those transitions. We cut some of the menswear width by 20%. That compromised newness. That meant we went deep on some lines. We lost some of our appeal on the back of it. We've replanned all of that. This is ASOS Design specifically, because the biggest proportion of our sales is ASOS Design. It gets a disproportionate impact. Will that increase working capital? Potentially. It will also increase rate of sales. It might offset it.
I will restore it fully. We've taken the actions. We've already started to see it come through. I think it's going to intensify over this month and next month and big months in the summer. Does that sort of answer? Try to.
Hi, Michelle from Berenberg. Three questions, please. First of all, on the price investments in France and Germany, can you give us any indication of what you're seeing from those price investments, if it's delivered any acceleration in growth in those markets in the early stages? On the automation of Berlin that's coming live over the next month, is there any risk of disruption from that automation? Thirdly, on the labor cost per unit and the man pick hours that you've given us for Eurohub and U.S., how does that compare to the U.K.?
The first bit is we started to deploy price investment in France and Germany or wind back some of the prices that we'd put in there earlier in the half, round about February, and we did it on ASOS Design. I wanted to do that because there's a lead time for pickup. I wanted to do that and start rebuilding momentum ahead of the cutover, or we want to start doing it that way. We're going to go again, because one of the things that I think has changed on the back of it is some of our third-party brands have also moved their prices in those territories as well. We're having a good look at that, and we're seeing on an individual category level, the price elasticity moves and all of that. We're starting to see some tick up, and so that's encouraging.
I know there's some more to go. In terms of the second point was warehouse disruption. Always bound to be the potential for bumps on the road when you have the scale of change that we are going through. It won't be the same potential risk that we saw in Atlanta because Europe's already a closed pool, and all we're doing is extending the second half of the warehouse. Berlin's around 450,000 sq ft. We're opening up the second chamber, which has already got product in it, and all we're doing is opening up the mechanization and the efficiency, and that's been significantly tested for several months. I'm confident that there will be a different benefit, a different experience, but there's always a risk of something going wrong. We'll let you know if that's the case.
The last one was on labor cost per unit. The chart shows an index on the back of it. If Barnsley is GBP 0.60, Atlanta is 3x that, or 2.7 x at the moment and heading down. Does that help you?
Yes.
All right. Thanks, Michelle.
Andreas?
Andreas, Investment Quorum. I have three questions. The first one on, I think you mentioned, a shift towards lower price points for other brands and also within ASOS. Do you think that's structural? That's the first one. The second one on CapEx. It's just over a year ago or so, you guided GBP 230 million-GBP 250 million CapEx for the medium term. Now, you say the big investment program is over GBP 150 million. Why such a big delta? What can we expect beyond 2020? My last question is, you mentioned investments in software for your return centers and an efficiency pickup of 15%. Maybe you can elaborate on that. What's behind there?
Of course. What was the first one?
Shift to the price points was the first one.
Oh, sorry.
Thanks, Alison.
Thanks, Alison. I don't know the answer to that. All I can do is observe customer behavior. Is it structural, therefore forever? I don't know.
It is multiyear, though. It's been going on for quite some time.
Do customers love value every day? Does value also mean price? No, it doesn't. Certainly, the way we respond to customers is we offer them the most compelling brands, the most compelling price points, and work hard at it. Do I think it'd be really important going forward? Yes, I do. Will it always be at that level? Don't know. Highly likely. The second one was CapEx?
Yes.
Right. We did guide to around GBP 200-GBP 250 for the medium term. We've just had a closer look at all of those things. The investment program is coming to a close. Next year, the big change in the GBP 200- GBP 150 is on warehousing predominantly and some of the software programs falling away. We're going to therefore work our assets a lot harder. It'll be certainly around GBP 150 for FY 2020. Going into the future, it will be somewhere between GBP 150 and GBP 200, depending on warehouse build-outs in the next stage of our growth. We've certainly got capacity, with at least GBP 4 billion in the warehousing, where we don't need another lumpy investment during FY 2020. On the last piece, returns efficiency. We built seven returns processing centers now, which can handle around 3.5 million returns a week.
We've had a good look at the software in all of those. We've replatformed the software, improved the functionality. We're expecting 10%-15% productivity improvement through better, more intuitive software, faster throughput, all of that, helping that cycle. That's really important because that's quite a high-cost processing activity in our business.
It's also tied to the lower CapEx. Right. We're not going to need the next returns processing center as soon as we did before. Obviously, 12 months ago, we were predicting 25% revenue growth. It's now 15%. There's a capacity correlation on that CapEx as well. I don't think there's nothing that we're not doing that we would have done, just potentially a different time.
Efficiency can delay CapEx as well, right. If you get 10%-15% throughput improvements, you won't need extra facilities, obviously, as soon. Charlie.
Thanks very much. Charlie from Exane. Three questions. Firstly, when you think about the midterm sort of recovery to objectives, what's more important, getting sales over 20% again, getting back to 4% margin and/or getting and holding free cash flow positive? The second question-
All three, Charlie.
If you have to choose, if the response of the customers is not sufficient to get all three simultaneously.
Right. Within that, we have set our objectives for the medium term to maintain the current level of sales growth. We won't hold you back if it's there, but also our commitment to our shareholders is to restore our profitability, and we will do that. The consequence of those two things, and more efficiency and having another look at our CapEx plans, will also drive free cash flow positive as well. It's kind of sales and margin and optimizing our investments to drive free cash flow positive. It's not free cash flow positive, lagging the dog, if that helps you.
Yeah.
Second question. Sorry. I think you said warehouse transition costs will gradually fade. I wondered next year whether we're still talking about a number over GBP 20 million. I know precise numbers might be a bit early. Then my last question was, I think in the other OpEx, you called out a GBP 3.1 million rebate. Appreciate it's not a big number in the context of your revenue base, but I just wondered whether you could explain what that was. Thank you.
Sure. Well, let's see the transition cost for next year yet, because we haven't finalized those. To give you a direction of travel, GBP 24 million in the first half of this year is likely to fall to GBP 12 million in the second half of this year. That's potentially helpful for you. We'll probably come back in more detail in October with detailed line-by-line guidance for next year.
It'll halve again in FY 2020 would be a guide now, the transition cost. In terms of the GBP 3.1 million rebate, just working our costs harder, renegotiating on certain line categories, and we got a rebate of one-off nature on the back of it, which is a rebate of costs we previously paid.
We should take this side. Emily.
Hi. Just a quick one on active customers. Can you give us some color or comment on what you're seeing in terms of gross customer adds? You've obviously helpfully given us all of the information on net customers, but I'm just interested in the trend in growth, particularly given that you're also talking about churn down.
Exactly. I think you can come to that conclusion yourself, right? We haven't really talked about churn rates before. We've put them in the statement and say they've improved. You see the net number, you can deduce that yourself.
Can you tell us what the churn rate is?
No.
I think that was work it out yourself, Emily. You're not going to give her any more help than that?
No.
Oh, okay. Over here somewhere.
This is Stevenson, sir.
Thanks. John Stevenson at Peel Hunt. First up, just on that point, actually, in terms of customer loyalty, you talked about the proposition, it impacted natural traffic, it's impacted your ability to recruit new customers, and yet the loyal customers seem to be reasonably loyal. I don't know if you can sort of comment on that. What are you actually seeing amongst the loyal customers and why, if the proposition has sort of softened a bit in terms of how you're portraying the product, why that's the case? Second question on brands. You've talked about the churn being higher because you're not resonating with the younger customers. Is that because the sell-through on those brands hasn't been good, or is it actually the targeting of the sort of specific demographic, the younger demographic, that hasn't been strong enough?
Just on that distribution capability and sweating and optimizing, at what point, not necessarily a sales point, do you actually need more warehousing to actually deliver the improved proposition that you want to in the States?
Okay. Good questions. The first one is, I think our propositions are still market leading or as good as local in most of the major territories. I don't think that's been the main issue. I think the main issue on the slowdown in customer acquisition, particularly the younger demographic, has been around our presentation, product width, product newness. That's what I mean by acumen, not quite looking as good and feeling as good as it once did. I think we're on that now, and we're seeing good reactions to it. I don't think it's about propositions. I don't think it's around delivery returns. We're certainly seeing customers choosing a different set of payment methods, and there's been a surge in Pay now, Buy now, Pay later installment payment methods that are really compelling, actually. Why wouldn't you?
We've launched a couple of new payment methods in the last few months, and we're going to do a lot more on that because it's resonating with the customer. If you can choose to pay something over four installment periods, it's great. I think we may have been a little bit slower on some of those, but we're now onto that, too. Does that answer the first point?
Yeah, I think so. I guess the loyalty, I guess, has been quite good.
Our existing customer base, we've increased our conversion, we've increased our orders from it. We're certainly engaging with our loyal customer base. Mission critical, too, is growing new customers, too, at an increasingly young rate, because then they get into the proposition, they stay with us for a while. There's bittersweet in those dynamics. I know we can do better on the younger demographic. We've got a lot of things going on to improve that. On the third-party brand point, we're just looking at the sell-throughs on some of them. Again, that's just not resonating, right? We normally churn over about 200, say 150, 200 a season. We've just gone a little bit hard on some of the brands going, it's just not us. It's someone else's customer, not ours.
As we said, that is the premium price point brands and the third party ones. It's the same kind of thing we were saying earlier. Last point was about the GBP 4 billion or next warehouse specifically in the U.S., was it?
Yeah. Obviously, you said GBP 4 billion, I guess the critical point might not be the sales line, it might be the actual service line.
Yeah. Having three major fulfillment centers custom built with great automation and fast throughput and low operating costs is a real advantage. Does that mean we'll be building warehouses in every market at the same rate? I don't know. We'll be certainly looking at a different method of connecting and offering increasing choice with less capital intensity. I just need to get through the TGR in development that gives me some of the capability to access a different way. That's not a pivot in the model. That's just looking at how to deliver choice for customers at a very different rate without necessarily having the same level of capital intensity. When you've got those investments, those centers that we've built, they're very, very useful.
I've called out today some of the customer enhancements that we'll get on the back of it, such as next-day delivery in the U.S., which is definitely a first for us. I don't know, it's not really that common in the U.S. market yet. It should be, because why would customers in the U.S. wait any longer than the European customer?
One or two more.
Simon Irwin from Credit Suisse. Just two quick ones. Can you give us an update on U.S. sales taxes, as to how many states are kind of getting themselves organized in terms of local state taxes, so this can all be rolled out, and what your kind of thoughts around timing, where you're passing it through, et cetera? Then just a broader question about the ethical consumption, as to which markets you're seeing it matters, and how customers are reacting. Are they buying more of product that is deemed to be ethical, or are they just buying less because that's deemed to be the right thing? Is it all talk and not much action?
Do you want the sales tax?
There are 32 states currently, Simon. I think the only big one that is meaningful to us is California. That has not gone live yet, but we firmly expect it to. I suppose in terms of removing a forecast risk in the balance to achieve, it is gone live now and being passed through, right? If that was a margin risk to us, it is no longer there for the balance. Not every state will do it, because there will be some, like Nevada for example, there are a few states that do not have any sales tax. We are, I do not know, 80% of the way there now. I would imagine within 12 months they will all be there. For us, it is all in place and being passed through us from February.
All right, on your second point, Simon, interesting one. Our approach to this is, we will take care of the sustainability in terms of fabric sourcing for you. We are 80% ASOS Design already, and we will be 100% shortly. There are not many brands that are currently where we are. We will also take care of the sourcing, and make sure that the people who are making your garments are paid the right wages, they have freedom of association, they have access to the right working conditions. That is part of our modern slavery commitment. We will also take care of the packaging, too. At the moment, ASOS's plastic bags are 100% recyclable, and all the boxes are 100% recyclable and recycled. We have got around 35% of our plastic packaging at the moment is recycled. We are trying to work hard on sourcing increased levels of recycled virgin plastic.
The view of that is, there are enough things for consumers to worry about. Those things they do not have to worry about by shopping at ASOS. We are also making sure we are pushing a number of our partners, and there is a five-point plan as a minimum thing that they should sign up to. There will be a moment where we will have to push those compliance levels, and if people do not comply, we will have to have different conversations with them. Do I think it is dominating demand right now? No. I think there is a tipping point, and the advent of social media, the younger customers are more connected, more aware of these things than ever before, and that is right. I do not think they will pay more for it.
They will expect brands to take care of it for them, and I think it will become a defining feature of how people consume their fashion and many other items. We are ready on that. We are on it. We are about to launch a new set of jeans that is 100% recycled material. Denim, an average pair of jeans consumes about 1,500 L of water. Water is a key element of that. Cotton is a key element that goes into denim, of course. 100% recycled jeans, by just breaking down old denim, recycling it into new fabric, and away you go. We are on it. Customers know we are on it. We will weave this into our narrative far more, and I think there will be a moment where it will become a defining feature. It is not yet, but it will be.
I'm very conscious of time. Shall we take one more?
Thanks. Sam Lourensz, Arete Research. You mentioned about growing your proposition for next-day delivery in, I think it's 25 German cities, and select cities in the U.S. Can you maybe talk about some regions slightly further afield, how you think you can maybe expand this offering? Also, your thoughts on how you can stay competitive given such a drastic cut in CapEx, especially given that you say delivery proposition is so important.
Which regions do you want to talk about?
Maybe the U.S. and Europe.
Take this as a phase. First, during the course of the next few months, I've just set out our roadmap for Germany, first of all. It's the biggest single market in a territory in Europe, clearly. That's where we talk to you first. We won't stop there. We'll keep on going. We haven't set out which cities we'll do that yet. In the U.S., we've picked off our hotspots, and where we know we've got high customer concentration already. If you remember, six months ago, we talked about mapping our demographics where we know that there's customer hotspots. We'll start there and then expand. The ones we're planning to do next-day delivery on are the ones where we know there's a customer base already waiting and wanting that. As we see more demand light up, we'll just point the propositions accordingly.
It would be foolhardy to go next-day delivery everywhere in the U.S., because the geography just wouldn't work. Going forward, I fully expect in the U.S., Atlanta just being one part of that solution. I expect at some point, looking at more facilities or a different way to connect those propositions with other consumers. It's not now. The Atlanta warehouse has got around 20-million-unit capacity, which is about GBP 1.5 billion processing capacity. I've got a 3x improvement with what I'm already doing in the U.S., I don't need to do that just yet. I forgot your other question.
It was about CapEx.
Look, a challenge. We're at GBP 150 million. It's still four times, three times what it was four years ago. It's still a significant amount of money. We're certainly saying that's guidance for one year, it's not guidance for every year ad infinitum.
Yeah. You said in the medium term that CapEx would likely increase to between GBP 150 million-GBP 200 million. If you're expecting that you do want to expand to further cities, maybe in the medium term, it's actually going to have to increase again.
No, it's not what I'm expecting. I appreciate my CapEx guidance hasn't been the most precise, that's not what we're currently expecting.
Sounds like that's it.
Yeah. Is that it? All right, guys. Thank you very much for joining this morning. I hope that was useful.