Cogna Educacao SA
BOVESPA:COGN3
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
1.23
3.5
|
| Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Cogna Educacao SA
You don't have any saved screeners yet
Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome you at this time to Kroton Educacional's Second Quarter 2018 Earnings Conference Call. [Operator Instructions]
Also today's live webcast both audio and slide show may be accessed through Kroton Educacional's Investor Relations website at www.kroton.com.br/ir by clicking on the banner 2Q '18 webcast. The following presentation is also available to download on the company's website. The following information is available in Brazil reais and accordance with Brazilian corporate law and generally accepted accounting principles, BRGAAP, which now conforms with International Financial Reporting Standards, except where otherwise indicated.
Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Kroton management and on information currently available to the company. They also rely on currently available information, and of course, they involve risks, uncertainties and assumptions because they relate to future events and, therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.
Now I'll turn the conference over to Kroton's CEO, Mr. Rodrigo Galindo, who will begin the presentation. Mr. Galindo, you may begin the conference.
Good morning, everyone. Welcome to the results conference call of Kroton Educacional in the second quarter 2018. For the first time, we are using simultaneous interpreting so that we can provide information simultaneously to our domestic and international stakeholders. And we would love to hear your feedback on this initiative later.
Together with us, we have our IRO, Carlos Lazar; our VP of Finance, Mr. Jamil Marques; and the leaders of our 2 main lines of business, Mr. Mario Ghio and the High Education CEO, Mr. Roberto Valério.
In today's presentation, we will discuss the main operating and financial highlights of the quarter. And we'll give you an update on our organic and inorganic growth projects in all lines of businesses where we operate.
It's something that's very important starting in the first quarter of 2018, we started reporting consolidated results with and without Greenfields' effects, because this is, of course, something that's very relevant for our strategy. They have a very long maturity curve. And as such, there is a higher negative impact in the margins in the first half of the year. And what we hope to do by doing this is to offer you great comparability with ex Greenfield operations.
If I were to summarize the most relevant messages of this conference call, I think we have 6 of them. First of all, I would like to reinforce that the first quarter earnings show that we are on track to deliver the guidance. When we look at those projections, we see that they will probably be delivered on.
And the second message is that our organic growth projects and I think this is the most relevant message of all is that we are being very successful in the implementation of these organic growth project.
Just to give you a little flavor between 2017 and 2019, one, we'll have 61 new On-Campus units and all have been successfully implemented so far. At the end of the presentation, we'll go back to that. And I think that the numbers will show you -- will give you an indication of the size and magnitude of this opportunity ahead of us in the next year.
The third message is that we have maintained a very high level of operating cash generation both CapEx, with a conversion above 56%. And of course, it's not considering the PN23 amounts that we have received in August. So therefore, the conversion rate was above 56%, which thus proof of our soundness.
The fourth message is that we are really focusing on customer-centricity. Academic success is our priority because we think long term. A company can only generate value in the long term if they're able to resolve the issues of their students, of their customers, and this is what we call academic success. We're putting a lot of energy and resources to that goal.
And this is actually based on 3 pillars: quality, experience -- and here, we refer to experience in all such points, academic, nonacademic, experience, On-Campus, Distance Learning and also employability. So with these 3 pillars, we create what we call academic success. And just to give you an idea, 37 of the 126 projects of the company now revolve around this topic.
The fifth important message is that our digital transformation process is proceeding very successfully and bringing on positive results. It's very impressive to see the amazing results we have obtained through the integration of business areas. And now business areas can understand their digital transformation is part of our business. And all of this has been driving efficiency and development of our systems.
If you're interested in finding out more about digital transformation, we have some comments about this initiative in the administration message of this quarter, or please get in touch with our Investor Relations department. We would love to give you more information on that. And we are certain that in the long term, this will completely revamp the company. And that in the short term, it's actually adding much more value than we had expected.
And the sixth message is that, our acquisition of Somos is moving on very smoothly. And to talk about this acquisition, I would like to ask you to turn to Slide 4, where I will give you an update on this acquisition that was announced on April 23. As we had previously discussed, we will be using part of our own cash for the financing, but we'll also go to the market to obtain loans.
Well, and the first thing we have to do, of course, was to get the ratings. And we were very successful in that. From Fitch, we got a AAA, which is the highest rating on the scale; and in Standard & Poor's, we got a AA, both for corporate and for the debentures operation. So once again, it's AA by Fitch (sic) [ Standard & Poor's. ]. That's valid both for corporate and for the easement of debentures.
And our holdings have been that we'll be responsible for the acquisition of Somos. It has already been registered as a listed company by CVM as a category B [ issuance ] , and also this is essential to broaden our access to the lending markets. Final registration was granted on August 13. And we are in a quiet period right now. We cannot give you more information about that. But the instrument has already been approved by our board and the minutes can be found in CVM's website, should you would like to look up some more information about it.
Additionally, as we are waiting for the CADE's evaluation and approval of Somos, we have completed the due diligence process and we have a [ clean ] team working very hard on the planning of the integration of the companies. We know that nothing should be executed at this point, but we can very carefully plan for those integration activities. And this is what we are doing, as we did in other integration processes. And this has been essential to capture benefits and synergies. Of course, we have -- we can't wait for the closing and approval from CADE, but of course, the initiatives will only be implemented after the approval.
We have 35 people involved working on 25 functional fronts, and we're feeling very satisfied with the performance. All of this reinforces our confidence in the potential synergies, the potential for growth, and therefore, the potential that this transaction for our company.
I'll now hand it over to Carlos Lazar, our IRO, who will proceed with the analysis of our financial results per segment and consolidated results.
Thank you, Rodrigo. Let's turn now to Slide 6 for an analysis of the main lines in the second quarter '18. I would like to reinforce that both the results for this quarter and year-to-date results are proceeding according to expectations. So therefore, the guidance we have announced in the last quarter will be delivered on. And like we did in the previous quarter, we will share with you 2 visions of consolidated results. One, excluding the results of the assets sold in 2018 and another vision that removes the impact of the new units, the Greenfields that are still maturing, and therefore, putting a pressure, a timely pressure on our results and earnings.
Looking to the chart at the upper part of the slide, let's see consolidated vision ex sales. On 2Q '18, we see a net revenue of BRL 1.5 billion, up 1% in comparison with the previous year, reflecting the enrollment -- a positive enrollment and reenrollment in On-Campus and business learning. And also, the contribution of new centers launched in the first half of the year. We also have the impact of acquisition of Leonardo Da Vinci, a K-12 school that was acquired in August last year.
Now let's take a look at adjusted EBITDA, totaling BRL 641.5 million in 2Q '18, with the margin of 42% down 7.6% and 400 basis points, which reflects the one-off increase of all our costs relating to the opening of the new units. I would like to reinforce that the numbers are completely within what's expected and we'll give you more information at the end of the presentation about the performance of the new units.
Now looking to the right side of the slide, we see adjusted net income reaching BRL 562 million this quarter, with a margin of 36.8%, dropping 12% and 550 basis points, respectively, as a result of the impact of the new Greenfields and also the lower interest or financial results.
Now let's take a look at the lower half of the slide. Excluding the impact of Greenfields, revenues reached BRL 1.5 billion, in line with what we recorded last year, which proves the resilience of our operations same stores in a year, where we see a very large number of graduations of FIES, following the huge enrollments of 2013 and '14.
It's compared to 2017, our FIES base is now 34% lower and represents 29%. At the same time, our net revenue from FIES dropped 31% as compared to 2Q '17. Even though, we continue to implement efficiency levers and looking for new value generation sources, the change in profile of students impacted our adjusted EBITDA, which totaled BRL 652 million in 2Q '18 with a margin of 43%, down 6.1% and 300 basis points in the annual comparison. Up to 2020, we should continue to feel the pressure in the provisioning for losses. Because of this change in the mix of students. And I would like to emphasize that we are still feeling very comfortable with the premises we adopted in relation to PEP and PMT, which we'll discuss later with you.
Finally, adjusted net income ex-Greenfields was at BRL 572 million in the quarter, with a net margin of 37.8%, down 10.2% and 450 basis points, reflecting the same effect we have already described.
Now moving on to Slide 7, where we see the variations in the most important lines. Starting with On-Campus, I think it's important to underscore that we removed the impact of assets sold. So with this, we have recorded an increase of 1.3% in net revenue in this segment, which is a very positive achievement in a very adverse macroeconomic scenario.
And this is, of course, due to the quality of our education, and the strength of our commercial campaigns, which resulted in the students' recruitment and positive retention. And we also have the contribution of the newly opened units. Besides that, another important impact to mention in this segment was the increase in the average ticket of 0.5%. This, of course, is due to the participation or increase in the medicine and engineering programs. Following the trends in net revenues, gross profit saw an increase of 0.6%. And in spite of all the efficiency initiatives we continue to implement, we saw a drop of 50 basis points in gross margin. This is a one-off impact of the increasing cost also relating to the launch of new units.
This effect also had an impact on operating results and margin. And also in the provisioning for the segments with the substitution of FIES students and with a higher number of out-of-pocket students. All of this puts pressure on our operating results. I think it's important to remind you that in 2018, we have the largest number of graduations among FIES students, after the strong wave of recruitment that we saw in 2013 and '14.
Now moving on to Distance Learning, there was a decrease of 1.6% in net revenues, because the tuition for these projects are not eligible to scholarship or discounts. This decrease was more than offset by efficiency because there was an increase of 1.5% in profit -- gross profit and also 280 basis points in gross margin.
And as you know, we have introduced a new tutorship model in early 2017. That has significantly improved their performance. And we also have an increase in the number of 100% online students. This line, of course, is much leaner in terms of cost.
And finally, operating results. Pre-marketing increased 3.7%, with a gain an operating margin of 370 basis points. What contributed to these results was the larger number of debt negotiations with our students that was reflected in the increase in the interest receivables line, in line with our new collection policies.
Now moving on to K-12. Net revenues for [ hike of ] of 12.2%, especially because of the acquisition of Leonardo Da Vinci, this school that also heralded Kroton's entrance in the premium K-12 education with very expensive tuition, but also lower margins. All of this was reflected in a contraction in gross margin and also in operating margins. And now that we're trying to increase our presence in this segment, and now with integration of Somos as well, we expect to see better results in this segment as a whole. And besides that, we'll continue to expand it.
And now I finish my part of the presentation. And I hand it over to our VP of Finance, Mr. Jamil Marques.
Thank you very much, Carlos. In this part of the presentation, I will talk about our level of provisioning for losses and our average receivables terms. Starting on Slide 9, we'll take a look at the provisioning for losses of each of -- each type of students. And ex, of course, FAIR, FAC, FAMAT and NOVATEC. Starting with the On-Campus segment, our PDA was 13% in 2Q '18, an increase of 260 basis points in the annual comparison, reflecting the growth in the PEP and PMT base of students. In comparison to the previous quarter, PDA remains stable, and if we consider only the PDA of out of pocket students, there was an increase of 30 basis points in comparison to 1Q '18.
And this derives from the adjustments that were made to meet the delinquency expectations that we had in a very adverse macroeconomic scenario. It's important to emphasize that this decision to increase our PDA is in line with our very conservative policies in this area.
Now taking a look at the middle of the slide where we see the numbers of Distance Learning. Our PDA was 9.9% in the quarter, down 10 basis points vis-a-vis 2Q '17. This reflects a lower number of PMT students in this period, late enrollment. In the quarterly comparison, there was an increase of 20 basis points. And of course, this had an impact on the out-of-pocket PDA with an increase of 30 basis points, too, because of the growth in 100% online students besides the impact of the macroeconomic scenario, as we have seen before.
Finally, moving on to the right side of the page, we see basic education, where we remain flat at 0.8%, which attests to the robustness of our policies.
Moving on to Slide 10, where we see the average receivables term per segment, also excluding impact from FAIR, FAC, FAMAT and NOVATEC.
Starting with On-Campus, the average term was 181 days in 2Q '18, up 25 days in the annual comparison. This is a result of the impacts of PEP and PMT and also a deterioration in out-of-pocket average term. In average out-of-pocket terms, we recorded 99 days, longer 9 days in comparison 2Q '17. This is also a main factor, a consequence of our assets, macroeconomic scenario and also a larger number of debt negotiations with our students.
At the same time, the FIES average term reached 166 days, 21 longer than the previous year. And here, what we saw is that the lower FIES revenue is what really made a difference. We have already received the 50% that are owed to us as under PN23, and those amounts will have an impact in 3Q '18.
Finally, the average PEP and PMT average terms reached 425 days, growing 137 days in line with the ramp-up expected for this type of product.
Now moving on to business learning. The average out-of-pocket terms was 95 days in 2Q '18, increasing 4 days in the annual comparison. Once again, this is due to the challenging macroeconomic scenario and the increase of the 100% online students in relation to 1Q '18. We have 8 days more, and this is due to the seasonality we normally observe in the quarter. In PMT DL, the average term stood at 472 days, 241 days higher than the average term of 2Q '17.
And finally, the average receivables term in K-12 amounted to 85 days in this quarter, 56 days before -- or lower than 1Q '18, as a result of the seasonality [ in ] collection efforts. The results we are showing in this quarter are a reflection of our difficult macroeconomic scenario that continues to be very challenging. But at the same time, we can show the resilience of our operations, sustained by the focus in our academic success for our students. And starting July 2018, more than 80% of our collections initiatives have been implemented, which includes this tripod of indicators: loss provisions, average term and dropout rates. And we always try to find the best balance between the 3.
And now, I would like to invite you to see next the discussion of CapEx, cash generation, indebtedness, starting on Slide 12. If we look at the chart on the left side, we see the recurring CapEx, which recorded BRL 108 million, a ratio of 7% of net revenues in the period that was invested mostly in development of content, systems and software licenses.
With this recurring semester, CapEx totaled BRL 209 million, 7.2% of net revenues, up 11% in the annual comparison. We also have investments that relate to special projects and Greenfield projects, by adding this up, the total CapEx in 2Q '18 represented BRL 163 million or 10.7% of our net revenues.
And in the semester, CapEx stood at BRL 278 million, 9.6% of the net revenues for the period. To support all of our organic and digital transformation projects for the second half of the year, we will see those investments pick up even more, reaching 13.5%, as announced in our guidance.
Moving on now to Slide 13, we'll take a look at cash generation in the quarter and year-to-date in the semester. In this quarter, as we had been discussing, our cash generation was affected by the reenrollment curve and the lower volume, a representativeness of FIES, besides the impact on working capital that was caused by the change in the profile of our students and also in terms of financing.
Thinking of the semester, as we have discussed in the first quarter call, we had some seasonal effects, which also created negative impact of, [ BRL 198 million ]. If we were to adjust this, our cash generation would have been BRL 600 million, with a conversion of 58% in this semester. For the third quarter 2018, we expect far more robust operating cash generation, which include [ BRL 786 million ] that have already been received from July to now, including BRL 400 million under PN23, which now has been settled.
And in spite all of this, our cash generation growth CapEx in the period was extremely robust at BRL 318 million and with an EBITDA to cash conversion of 56.3%.
Our free cash flow was negative BRL 408 million, reflecting the dividend payout in the period, totaling BRL 329 million, besides the stock repurchase volume amounting to BRL 204 million.
In the next slide, I will show you a little more on the operating cash generation both CapEx and special projects for free cash flow.
So starting with Slide 14, let's start with the operating cash flow generation post CapEx of BRL 318 million. We invested BRL 136 million in the first quarter in our expansion projects. This includes BRL 33 million in organic expansion initiatives and BRL 106 million that refer to the acquisition of On-Campus higher education schools and also the Leonardo Da Vinci school.
In terms of value added for shareholders, we have compensated our shareholders BRL 533 million, of which BRL 204 million in stock repurchase, considering the multiples our shares were being traded at and its potential for valuation. Those stock repurchase operations were completed within the framework of the programs that valid up to December 2018, as we have announced in the previous conference call. We also paid dividends for 2 periods in that BRL 148 million, referred to 4Q '17 and BRL 181 million for 1Q '18, adding up to BRL 329 million in disbursements in the quarter.
Moving on to cash and third-party value generation, debt, amortization and interest. Here, we saw an impact in consumption of BRL 22 million. If we add everything together, our free cash flow was negative BRL 480 million in 2Q '18.
Now turning to Slide 15. Let's take a look at our net debt. Kroton closed 2Q '18 with a total cash equivalent of BRL 1.1 billion, down 26.8% in the quarterly comparison. Because of the consumption of cash I have explained, and that includes stock repurchase transactions. Adding our debt and short-term and long-term liabilities, net cash was BRL 720 million. Here, of course, we have also some short- and long-term receivables to think about such as the 50% of FIES installments that were not paid into 2015 and that were received in early August. And that will cause an impact on 3Q '18.
We also have the second part of the payment for the sale of Uniasselvi and also the payment for the sale of FAIR and FAC/FAMAT that took place in August 2017. So therefore, the net cash was BRL 1.7 billion at the end of 2Q '18. This cash will be very important to sustain our growth plans and also to finance part of the Somos acquisition.
Now I thank you all for your attention. And I'll hand it over to Rodrigo for his final remarks.
Thank you very much, Jamil. Moving to Slide 17, as I said in the beginning of the presentation, we are being very successful in our organic expansion plans, especially on-campus. And I would like to share with you some of the initial number of the new units we have open. I think they serve as an indication of the success of the project.
Before 2018, we were not opening as many campy. We had opened just 6 units. But in 2018, we became much more vocal in relation to our intention to grow organically and start with more Greenfield projects that have a longer maturity, but it also brings much higher returns. So in -- so we -- for us, it really made sense for the company in alignment with other inorganic growth strategies such as Somos to implement an organic growth project in our On-Campus units.
So we had announced in the last call, the opening of 10 new units, but in the second half of the year, we have opened another 13 Greenfield. And in addition to this, we have completed the acquisition of 2 On-Campus small-sized higher education institutions, one in Bacabal in Maranhão. And on July 3, we also received approval to acquire an asset, a small-sized assets in João Pessoa, Paraíba.
With this, we have 25 new units in 2018. We also have some very small units that are being used as accelerators for our activities. Because like this, we'll be able to drive growth. So we have 25 new units being opened in 2018. If we add everything up, we'll finish the year with 173 campy On-Campus, implemented. And for 2019, we're expecting 30 new units. Our management plan will -- or has established that should the recruitment will continue and if student recruitments for 2018, so as such, we'll close 2019 with 173 campy. This represents growth of 54% in comparison to the 112 campy we had in 2017.
Since each of our units can add 3,000 students to our base -- the 61 units that have been or will be launched between '17 and '19, will add 183,000 new students to the company when fully mature. And this represents 47% of our student base in 2Q '18. So as you can see, it's a huge opportunity. If even it's a long-term project, it will add a lot of long-term value to the company.
And let's take a look now at the current status of this project. Here, we see some more information and we can compare this to our business plan, the margin is still small, but the combined net revenue for this units are -- is in fact 38% above and student recruitment was 24% above the original business plan.
As for overhead and SG&A, we are 16% below the business plan. It's worth highlighting that the business plan -- the original business plan counted on a return rate of 26.2% in 10 years. And 42.4% in perpetuity. Those are very adequate return rates and with a potential upside performance can be even better. So return for investments -- for investors would be great as you can see. We've been successful in all implementation so far.
Now moving on to the last slide. I have some final remarks. First of all, even though, we're still working on student recruitments and reenrollments for the second half of '18. We have completed around 60% of the process, similar to last year. And this current student recruitment curve is growing very well. This as a result of our competitive advantages, such as quality education, our employability portal. We also have a position as the most preferred brand in education and also the payment plans we offer to our students besides other tools that deliver the best experience to our alumni.
Now in terms of acknowledgments, we are very proud to achieve once again first place amongst the most innovative companies in Brazil. This is an award that shows that we are proceeding very successfully in our digital transformation and innovation efforts. We want to become the most digital educational company in the world. We are working on it and this is our ambition as a company.
And I would like to talk about 2 very relevant partnerships that we have established recently and that add more to this digital transformation process. In June 19, we announced the partnership of Cubo Itaú, will be the process of Cubo Education. They're migrating to a 12-story building and will have 5 stories dedicated to specific areas. One of them is education, and Cubo Education is being sponsored by Kroton. All of this helps create the largest edtech hub in Brazil, so that we can add value to development of education in Brazil.
And since we operate very closely to start-up companies, in addition to promoting education, we will also be able to transform the culture of our students. We'll come across several technology solutions and disruptive educational technologies that will create opportunities for Kroton. We'll also give our students the opportunity to experience innovation in the Cubo start-up environment. Kroton will be responsible for a whole floor dedicated to education in Cubo Itaú.
There, we'll incubate and accelerate edtech besides having learning space, studios for recording videos and other classroom prepared for different methodologies and innovative technologies. Part of our innovation team of Kroton will be allocated to this phase. I think the win-win proposition for all involved will be able to understand business needs and it's going to be fantastic for Kroton because we'll be able to select companies that can really make a difference, providing solutions for Brazilian education and Kroton.
In July 27, we established a partnership with Udacity, an American platform of open enrollment programs in the area of technology. And the first joint project was the creation of an executive MBA in Digital Marketing, which puts together Udacity's digital marketing program with our digital marketing MBAs from Anhanguera and Unopar. The content was developed in partnership with Google, Facebook, HubSpot, MailChimp and Hootsuite. And all of this will enable us to offer both an MBA program with state-of-the-art technology in new development. And with this partnership, we'll be able to offer state-of-the-art products and also make our digital transformation go forward. So we want to establish partnerships with partners like this.
And as announced, we have implemented a new organizational structure. This is something that we had started more than a year ago. We have higher education On-Campus and higher education distance learning as part of this. It's important to remember that blend education is now becoming more prevalent. And all of this, together with syllabus components, will be offered both On-Campus and in other forms according to the applicable laws. In division of the company and organizational structure that can capture this hybrid trend is the way to go. Roberto Valério has become the CEO for Higher Education, which concentrates all operations in this segment, besides marketing and sales. And we think that this will add a lot of value to the company.
Our Board of Directors has approved the distribution of dividends, totaling BRL 177.6 million, representing BRL 0.11 per share with a payout of 40%. Dividends will be paid out on August 29, 2018. The first half of the year was very challenging as you know. But once again, we were able to demonstrate our resilience, our solidity and our ability to execute. We're building the pillars that will define the direction of the company for the future, with an organic growth project that is actually surpassing our expectations and plans.
We had a very transformative acquisition to both Somos. This will enhance our participation in the K-12 markets and expand our ability to operate. And we are also investing in digital transformation in the company and working very hard to improve the quality of education and student experiences. What we want is to transform lives of our students and help them achieve all of their goals. So we are feeling very optimistic about the results.
We have delivered -- we'll deliver on the guidance, but even more than that, it's important to consider the long-term benefits we're building in the company whether to do organic growth projects through digital transformation, with an impact in the medium and long term, a focus on customer centricity and academic success. All of this will add value in the medium and long-term and makes us feel confident that we are on track. Thank you very much. And now you're all invited to participate in the Q&A session.
Thank you very much. We're opening now for the Q&A session.
[Operator Instructions] Our first question is from Mr. Thiago Bortoluci from Goldman Sachs.
I have 2 questions in relation to PEP. Could you please explain a little more about the dropout rates for PEP? Is it correct to think that it's actually a little below the out-of-pocket students and from the BRL 170 million that you have mentioned? How much of this balance relates to students that have already dropped out? In relation to DL, considering the maximum load of 40%, and assuming that the adaptation occurs, are your academic models ready to seize this opportunity?
Thank you very much, Thiago. I'll start with the second question about the increase in the digital content workload in On-Campus programs. So the answer is that we're fully prepared to seize this opportunity, if it's approved, in our academic centers. We have [ loads ] of 30% to 40%, whatever percentage that Ministry of Education defines, can be implemented in our centers, if there is swift approval of this change. And now I'll hand it over to Jamil, who will talk about PEP.
Thiago, thank you very much for your question. Well, in relation to dropout rates, it's difficult to analyze this, because the PEP is present in different cycles than out-of-pocket. But the dropout rates continue to be in line with the out-of-pocket students dropout rates all the way through graduation. So in relation to the receivables that apply to students that have dropped out or drop out, we don't give any guidance on this information, but what I can say is that it's in line with the dropout expectations.
Jamil, could you explain a little bit about how much you hope to recover in terms of drop outs?
In this 50% recovery expectation, we hope to recover 20% of dropout students.
Our next question is from Mr. Marcelo Santos from JPMorgan.
I would like to talk a little bit more about K-12, especially in old schools. I think it's -- I think that this is still not very representative in your portfolio, but we could use it to analyze [ what is actually ] the gross margin, which is now at 22%, down 19 points with the addition of Leonardo Da Vinci. This, of course, shows a relatively low gross margin. In last year, you gave us the impression that we would be at 30% in margin in this segment. So what are the levers you're thinking of exploring to improve this margin? Or is it something -- what would be the value generation levers here for the next quarters? And the second question is about Distance Learning. What's the share between 100% online and hybrid? I think that hybrid is probably growing. And what is the competitive scenario and outlook? What is the dynamic in these products?
Thank you very much. It's Ghio here. I would like to answer your first question first, okay? And then Marcos Valério will continue. Exceptionally in this semester, Leonardo Da Vinci had a very strong impact because it came up together with several one-off impacts. Leonardo Da Vinci was a family-owned company that was based on the cash [ regime. ] And now -- and part of the revenues this year, were brought forward to the end of last year, especially for the companies that prefer to pay on the spot. They pay for the tuition on the spot. And some of the services were also paid in advance in the first quarter. So now that we're reporting on the 2Q, all the expenses are correct, but we have also a large part that was reported in advance. It's important to highlight that all of our K-12 business, considering flagship and Greenfields, as they mature can reach the results we have been discussing and that we showed you on the Kroton Day, especially now that new units are being opened, several of the fixed costs will be diluted by Greenfields. And we'll see an improvement in addition to the correction of seasonality I was talking about. Greenfields will bring down several of the fixed cost in overhead. So we're still feeling very confident on the margin we have announced to you.
I'm Roberto, in relation to your question about Distance Learning and the online programs. It's important to say that our strategies is still focusing on the On-Campus programs. This is a strength we have because the programs allow for greater interaction with the students. We have been tallying a lot of 100% online programs, but with the increase in competition, this 100% online has been used as a warfare tool. We don't want to reduce the hybrid programs too much in terms of pricing, but we can use this other tool. It's important that we consider the 65,000 offers that we have in Distance Learning. This is, of course, something that was created with the multiplication of centers. And we can price and analyze the competition program on program. A lot of people use the 100% online offering as a tool to compete with other players. And we know that our competitors also offer 100% online programs. Very few offer 100% On-Campus, so it's only natural that 25% of our recruitment happens on 100% online. But we continue to focus on On-Campus, especially with the expansion of web premium, which is On-Campus activities 1 or 2 times
Our next question is from Mr. Roberto Otero from Bank of America.
I have a question about cash generation. We saw an improvement in the third quarter, but still below historical levels. I would like to know the level of conversion of EBITDA for the third quarter? What should we expect?
Roberto, in operating cash generation, actually we are below the previous comparison period because since 2017, the government has been advancing the last installment of PN23. And we also have a change in working capital, with the substitution of PS by other types of students. So we have been seeing that we are expecting a small drop in comparison to the previous year. And something not very expressive. And PN23, if it weren't for it, we would have a drop even higher than 8 points. On the total conversion, this is not very significant. 2019 will be a more challenging year, but we hope to go back to the historical conversion range in 2020.
[Operator Instructions] The next question comes from Mr. [indiscernible], Bradesco BBI.
First of all, I would like to follow up on Leonardo Da Vinci. How long do you think it will take to reach higher margins for the Leonardo Da Vinci operations? And what about the Greenfields in this region? When will they be implemented? And the second question is about the On-Campus expansion? We had negative margins in some of the campy and I would like to know for the 30 campy that will the open in the first semester 2019, should we expect a similarly effect? Or is there a difference depending on the size of the campus and number of students? Or can we extrapolate this for 2019?
[indiscernible], thank you very much for your question. When we talk about margin improvement in Leonardo Da Vinci, we know there are 2 effects -- in fact, 3 effects, right? First of all, the improvements in the asset. And I think that as of the next conference call, we'll start to see this, there is a correction of seasonality in revenue, which now will be deferred as of the fourth quarter '18. And then the opening of Greenfields, with the positive impact for Leonardo Da Vinci. We will hope to start with enrollment in September next year, for lessons starting in January 2020. Thank you very much. Here's Rodrigo.
In relation to the 30 Greenfields for 2019, all of them implemented in the first semester 2019. There's no reason to believe that they have lower potential than the original potential. Everything is in the Tier 1 of our implementation map. Our statistics model is very robust. So basically, we have information that comes from the school census, from the statistics bureau, from the secretary head of education. And we put everything together to reach a better understanding of which cities have high potential for Greenfields. This is something we have been doing for the last 4 years. We believe that our model is very observative. And it's been driving our success in Greenfield implementation. We use another models to know where in the city the campus should be set up. Those are the 2 key points. First of all, choosing the right city and then the right location, and we're prepared for both. And from those cities in the 30 units while they are all on the same tier as those implemented last year, so we don't believe that they have lower potential than the other ones.
[Operator Instructions] Now I'd like to hand it over to Kroton for their final remarks.
I would like to thank you all for participating in this earnings conference call. And our team is available for any further questions.
Our Kroton Educacional earnings conference call is now closed. We thank you all for participating, and wish you a great day.