Cogna Educacao SA
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Cogna Educacao SA
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Good morning, ladies and gentlemen, and thank you for waiting. Welcome to Kroton Educacional Third Quarter 2018 Earnings Conference Call. We would like to inform you that this event is being recorded. [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 3Q '18 Webcast.
The presentation will also available to download on the company's website. The following information is available in Brazilian reais in accordance with Brazilian Corporate Law and generally accepted accounting principles, BRGAAP, which now conform with International Financial Reporting Standards, IFRS, 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 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 CEO, Mr. Rodrigo Galindo, who will begin the presentation. Mr. Galindo, you may begin the conference.
Good morning to all, and welcome to Kroton Educacional's Earnings Conference Call for the Third Quarter of 2018. With us on this call, we have our IR Officer, Mr. Carlos Lazar; our Vice President of Finance, Mr. Jamil Marques; and the heads of our 2 most important business areas, our Higher Education Head, Roberto Valério; and our K-12 Head, Mr. Mario Ghio.
The third quarter of 2018 represents an important milestone for Kroton with the closing of the acquisition of Somos on October 11. For us, that transaction is a strategic step that opens our access to the entire K-12 market in Brazil, where there are many relevant opportunities to be captured.
In a way, it's also a coming back to our origins, since Kroton was born as a K-12 institution in the '60s. And up to the year 2000, we operated exclusively in K-12. And we're feeling very excited and hope to discuss at the end of the presentation, the service of the integration, and the next steps of the integration with Somos.
As the closing of the transaction took place recently on October 10 or in other terms in the fourth quarter, the disclosure of third quarter results does not include any consolidation of results or operating data relating to Somos. Therefore, we'll start today's presentation with our main operating and financial highlights in the quarter.
Please let's turn to Slide 4 with key operating indicators of our undergraduate programs. Beginning with the last side of the slide, we see the results of new students and reenrollments in the second half of 2018 with very strong numbers, even considering all the pressure we've been under in terms of the political scenario, sluggish economy, with high levels of unemployment and a very challenging competitive environment as well.
But thanks to our assertive commercial strategy and our understanding and also the strength of our brands and the portfolio of programs that is aligned to demands of the current market, we secured a 2.6% increase in the number of new students, adding 183,000 freshman to our base, despite the lower availability of FIES financing in the period. Other contributing factors were we believe that we know we have a fair balanced offering of installment plan products and also our job referrals channel connected, which has been shown to be a very important advantage and a positive transformation agent for our students.
It's also a magnet to attract more students. Along this year, we saw a substantial increase in the number of students graduating, this is a reflection of the strong enrollments we had in 2013 and 2014. Years-on-years, we had a 8.3% increase in the volume of graduation, which in turns reduces the universal reenrolling students, and makes our total reenrollments fall to 4.2% in 3Q '18, comprehending 688,000 students.
As a consequence, our total undergraduate base closed the quarter with 871,000 students down 2.8% compared to the same period of the previous year. Looking only at the on-campus segment, we recorded growth of 5.3% in the number of new students. And -- but still this is something that was affected by the higher number of graduations.
So as I was saying, we recorded growth of 5.3% in the number of new students with the admission of over 60,000 students in this -- the period. And beyond the fact that's mentioned previously, another important driver were the 25 new units launched in 2018, 10 in the first half and 15 in the second half of the year. This greenfield admitted 3,300 new students, still with a very small number. But it's a number that exceeds the business plan and that strengthens our trust in our organic growth plans.
So we're feeling very confident about the growth strategies we have been using. And our assertive strategies both in the locations where the campus are open, we are also seeing new students enrolling, and we believe that we have been really right on track.
After we add up the 301,000 on-campus reenrollments we had in 3Q '18, we closed the period with 369,000 students studying in our on-campus programs and -- as a consequence of the increase in the student graduations and partly offset by a reduction in dropout rates. And all of this has been offset, as I said, with a very positive new enrollment that's up 5.3%. And we see also growth in same-store, and a reduction in dropout rates. And as I said, this is something we had predicted before because they enrolled 4 years ago, so it was only to be expected that we would see a lot of students graduating at this point. So nothing is really new.
Now moving to our Distance Learning undergraduate programs, we reported, once again, growth of 1.1% in 3Q '18 in this very challenging competitive scenario. So we believe this is a very positive number. And by the way, we didn't see growth in the number of Distance Learning centers as fast as in our competitor. This represents 115,000 freshman. And despite the higher number of comparative costs by the change in the regulatory framework in mid-2017, we believe this is very positive. We have around 10,000 new students, which come from the 400 new DL centers we launched in 2017.
So that's solid performance and reflects our efforts to build a very complete platform, which is always based on consistent quality indicators and has high -- highly committed partner centers. And something we often emphasize in our calls is that we have been accredited by the Ministry of Education in our DL centers, and we always hire the best managers with the best education and work on this partnership structure. And this is what we'll ensure, sustainability of this project.
We often say that the -- in the past, we have an entrance barrier that was created by regulation, but we have several other barriers by -- to overcome, and the strength of our brand, the strength of our partner network would make the difference in this scenario. In a scenario with less regulation, this is what we have been witnessing. We see how important it is to have a solid robust partner network.
Even in this very competitive scenario, we've been able to report good numbers in new enrollments, and we continue to grow in Distance Learning. We know that the strength in our network is really going to make the difference. In terms reenrollment levels in DL, we had 387,000 students, taking our undergraduates DL base to 502,000 students at the end of the quarter, very similar to the comparison to the previous year.
Now let's look at the dropout rate. Starting on On-Campus, we are very pleased to report an improvement of 70 basis points in the quarter, reversing the negative trend observed in the prior quarter. And in spite of all setbacks we have, for example, we -- our student profile is now more likely to drop out as a result of the reduction on FIES-funded students. And we are adopting several projects and initiatives to increase retention. We have also increased the academic model and the student experience at every touch point both on-campus and in Distance Learning, and our students have reacted very positively to the investments we have been making.
And turning to DL. In addition to the issues concerning the macroeconomic environment, the increase in dropout rates occurred as a counterpoint to strong wave of new enrollments. We had a very solid wave of new enrollments, and as a result, the dropout rates rise. And once again, we saw a jump in the number of students in the 100% online programs, which also contribute to the deterioration of that indicator. That's why there was this small increase from 16% to 16.6%.
So I think that, overall, the numbers are very positive, considering the current competitive environment and the macroeconomic scenario. We're feeling very optimistic. I would like to talk a little bit about the new enrollments in 2019, and we'll leave that for the end of the presentation.
Now with the end of the first part of the presentation, I'll pass the floor to our Director of IR, Mr. Carlos Lazar, so he can discuss the financial highlights of the quarter.
So before starting, let me underscore that this would be our last quarter without incorporation of the Somos numbers. As our 4Q '18, our earnings conference call will include the results of Somos. But we are also working right now to develop a new form of disclosure for the first half of 2019. We hope that this will provide greater transparency on our K-12 business, which, of course, gained more relevance with the acquisition of Somos.
So let's start with Slide 6, where we present the main lines of results of this quarter, and also consolidated. I would like to start by saying that, by September in the year-to-date analysis, we had achieved 76% of the net revenue, 79% of the adjusted EBITDA, and 79% of the adjusted net income that we have informed you in our guidance.
This is a sign that we are right on track to deliver the goals we committed to this year. And using the disclosure model we've been using since the beginning of the year, we would like to show you 2 views of the consolidated results. On the top of the slide, we have the number excluding only the results of the assets sold in 2017; and in the bottom, we see the 2018 results, not considering the impact of the new units launched this year. All of this, of course, for greater clarity on the effects in our performance.
So starting with the ex sold units consolidated vision, we recorded net revenues of BRL 1.250 billion in 3Q '18, which represents a fall of 5.4% in the annual comparison, that was the effect of the fall in the basis of undergraduate students, since many of them were graduating from programs as detailed by Mr. Galindo. Additionally, there was an impact from the average ticket on both segments but especially in DL as a consequence of an increase in the 100% online student base and also as a result of the fiercer competition amongst other sector.
Please note that we are being very judicious in the awarding of scholarships and discounts, monitoring program prices in different markets, and that we are promoting a review of our mix of programs with the introduction of more premium profile also in DL programs; and also On-Campus, where we saw that 57% of our freshman were going into health and engineering programs. And in addition, these effects were partially offset by the robust enrollments we had in both segments, lower dropout rates and the incorporation of Leonardo Da Vinci, a premium K-12 school acquired in April.
Adjusted EBITDA reached BRL 535 million in 3Q '18 with a margin of 42.8%, down 7% and 80 basis points in respect to the same period of the previous year, mainly due to the costs related to the opening of the new on-campus units, almost 30 of them were opened. And this is something we have discussed with you many times already. I would like to remind you that even though it takes up to 6 years for a new unit to mature, the new units are essential to guarantee robust growth in higher education, both On-Campus and in Distance Learning programs.
Finally, we observe that the net income -- adjusted net income for the quarter totaled BRL 440 million with a net margin of 35.2%, down 16.7% and 480 basis points. This performance reflects the increase in costs related to the new Greenfields and also an increase in the depreciation lines, something we had been observing since the beginning of the year.
Now going to the analysis. Ex greenfield impact, we see a contraction of 6.4% year-on-year in EBITDA, adjusted EBITDA. We have BRL 546 million, down 5.1%. However, with margin gain of 60 basis points, which is very positive, considering the pressure and the changes in the profile of our student base and the large number of graduations of FIES students and also the substitution of them by PEP and out-of-pocket students with higher PDA.
Once again, we are exercising cost disciplines with a high level of austerity since the beginning of the year, so that we can preserve our profitability at a very high level without -- never compromising the quality of education and service we provide to our students.
Finally, the adjusted net income, ex Greenfields, reached BRL 453 million, with a margin of 36.7%, down 14.3% and 330 basis points in relation to 3Q '17, owing to the reasons I have already explained.
With this, I close the second part of the presentation. I hand it over to our VP of Finance, Mr. Jamil Marques.
Thank you very much. It's great to be with you once again. In the next 2 slides, I will talk about our provision for doubtful accounts and average receivables terms. I will break down the provisioning for losses per segment and per type of students, just like we did in the previous quarters. Excluding from this analysis, the units we sold in 2017, FAIR, FAC/FAMAT and NOVATEC that had only On-Campus operations.
Starting with On-Campus. We see a PDA of 13.5% in 3Q '18, basically flat in terms of the yearly comparison. In relation to 2Q '18, there was an increase of 50 basis points related to the seasonality in the late enrollment installment plans. Analyzing the paying balance, we have 30 basis points, 8% to the quarter, following the same trend we saw in the 2Q '18 and also reflecting the impact of a more challenging macroeconomic scenario with high-unemployment levels, which, of course, affects our delinquency rate.
Now going to the middle of the slide. We can see the evolution of losses indicators in Distance Learning. In 3Q '18, our DL PDA reached 9.9% in the quarter, flat vis-à-vis the previous quarter, and with an increase of 70 basis points in the comparison with 3Q '17, also because of the increase of out-of-pocket students.
Considering only our out of pocket in the paying balance, there was an increase of 20 basis points in the comparison with 3Q '18, also as a consequence of a more challenging macroeconomic scenario and higher represented -- or higher number of 100% online students that have less engagement and as such higher dropout rates and higher delinquency rates than other students.
Now let's analyze the behavior of PDA in K-12. In 3Q '18, this indicator totaled 0.8%, showing the stability in annual and quarterly comparisons and also confirming the soundness of the policies adopted by the company.
Now let's turn to Slide 9, where we see the average receivable terms. Once again, excluding the impact of FAIR, FAC/FAMAT and NOVATEC in the On-Campus segment. In the On-Campus segment, the total average term reached 157 days in the quarter, up 29 days in relation to the comparison with 3Q '17. And in the quarterly comparison, we saw a reduction of 24 days because of the regularization of the average term for receivables of FIES and also because of the receiving of the final installments under PN23.
Breaking down the type of students, the average out-of-pocket On-Campus average term totaled 107 days with the impact of the challenging economic scenario and also with a higher number of negotiation of tuition and arrears with the incidence of late charges as well, which created a better result in our interest revenue line.
By the way, in FIES, the average term was 78 days in 3Q '18, down 29 days versus 3Q '17 because of the 50% remaining installments to be received under PN23 in August.
Finally, the receivables term for PEP and for the late enrollment plans totaled 489 days, an increase of 184 days in the comparison, just 74 days in the quarterly comparison.
Now moving on to Distance Learning, where the average out-of-pocket term was 85 days. We saw that this was 3 days smaller than 3Q '17 and 10 days below 2Q '18, reflecting the improving collection result we have obtained. In spite of the challenging economic scenario, we were able to do recover some of the debt. So the average term in Distance Learning late enrollment installment plans reached 556 days in this quarter, as a consequence of the evolution we were expecting for this line and also of the smaller revenues for this product in the quarter. Now going to K-12, the average term for receivables was 84 days, as a result of the incorporation of new schools in our balance sheet.
To summarize, the macroeconomic scenario and the high-unemployment levels continue to put pressure on our performance, especially in terms of the provisioning for losses and also in the on-campus average term for receivables.
In spite of this, we were able to get some achievements or improvements in some indicators that are also impacted by this scenario, for example, new enrollments, improvement in dropout rates and reduction in the average DL term. And this, of course, is the result of our soundness in policies and collection practices. So we're feeling very confident about the sustainability of our deliveries and results. And we are poised to continue searching for responsible and sustainable growth.
Now moving on to the next session. We'll take a look at CapEx cash generation and debt levels in the quarter. Considering only recurring CapEx, we invested BRL 121 million in the quarter. This represents 9.7% of our net revenues in the period, growing 9% and 130 basis points in the annual comparison. These investments were directed to the development of content and systems, expansions and also renovations of our units, considering how our program portfolio is becoming more premium. This, of course, requires the installation of labs and also practical lessons for the health and engineering programs. With this, CapEx reach BRL 330 million year-to-date up to September, up 8% -- or representing 8% of the net revenue and up 10% vis-à-vis the first 9 months of 2017.
Now turning to the right side of the slide. We see total CapEx recorded at BRL 193 million, representing 15.4% of the net revenues. And this, of course, led our total CapEx in the first 9 months to BRL 471 million. This amount represents 11.4% of our net revenues, and it comes very close to our expectation of 13.5% for the year. These investments are driving organic growth projects and include BRL 86 million for that intention.
Now as for the cash generation in the quarter and year-to-date, in the quarter, as we have been talking about in the previous call, our operating cash generation was more robust with the receiving of the 50% of the FIES installments that are owed under PN23 and total BRL 400 million. And in 3Q '17, we have received only 25% of the installments due. As a result of this, our operating cash generation reached BRL 538 million, with EBITDA to cash conversion of 114.2%, up 30% and 34.4% -- 34.5% in the annual comparison.
Year-to-date until September, our operating cash generation was at BRL 731 million, with EBITDA to cash of 45.5%, down 21.2% and 730 basis points in the comparison with the previous year. This owing to the impact on working capital and the change in the profile of our students.
With high volume of graduating FIES students and their substitutions by out-of-pocket and PEP-funded students. In addition to this, we have invested more capital to fuel the organic growth projects we have mentioned. And in this year, they have used up BRL 80 million of cash year-to-date until September, and in operations with an impact -- a negative impact of 5 percentage points in EBITDA to cash that we hope to reverse as the operations mature.
Finally, our free cash flow was favored by the first emission of debentures of Saber, our K-12 holdings, to finance the acquisition of Somos Educação transaction that was completed on 11 October. And as a result, our free cash flow was positive at BRL 5.7 billion in 3Q '18 and BRL 5.1 billion year-to-date.
The next slide, we see the bridge showing the evolution of operating cash generation after CapEx to free cash flow in the first 9 months of '18, to give you more transparency about the impact on our expansion and funding activities.
So we turn to Slide 13, where we see the operating cash generation after CapEx. That is BRL 731 million year-to-date, and in the first block considering our projects, we invested BRL 262 million, of which BRL 86 million were invested in our organic expansion, including the opening of 25 new Greenfields, and BRL 176 million were used to acquire on-campus, higher education schools and 2 premium K-12 schools, Leonardo Da Vinci and Lato Sensu.
Now moving to the next block, value generation for shareholders. We had 718 -- BRL 717 million, including BRL 210 million in repurchase of shares and exercise of options, and BRL 507 million distributed in dividends, paydown in dividends and relating to the results of 4Q '17, maintaining a payout of 40% in spite of our growth projects.
In our third cash block, we had compensation of third parties. We paid also our interest, totaling BRL 500 million in the first 9 months of '18.
Other impacts, use of BRL 10 million of cash considering debt amortization and origination of BRL 5.5 billion in the first emission of debentures for holding Saber. That was used to finance the acquisition of control of Somos Educação. And this acquisition was completed in October 11, and the disbursement will be shown in our cash for the 4Q '18. And as such, our free cash flow closed the first 9 months of '18 positive at BRL 5.1 billion.
Now moving to Slide 14. We see our net debt for the period. We closed the quarter with a total cash equivalents of BRL 6.8 billion, up 313% in the annual comparison, owing to 2 impacts, the receiving of the 50% remaining under PN23 I was talking about, representing BRL 400 million, and also relating to the emission of debentures, the Saber debentures, at BRL 5.5 billion.
If we add up our finance commitments and short- and long-term liabilities, we have a net cash of BRL 781 million in this quarter. It's important to remember that we also have receivables. The second installment for the sale of Uniasselvi adjusted to the net present value that was to be received in 5 annual installments. So if we -- and also the payment for the sale of FAIR and FAC/FAMAT concluded in August 2017.
So with this, I'll close this section of the presentation. And I would like to hand it over to Rodrigo for his final remarks. Thank you very much. Rodrigo?
11 October is a milestone for Kroton. It's the start of a new phase of the fruit of the strategic discussion we have been discussing for 2 years. Since 2017, we have been discussing, which would be the best path to follow, and we took this decision to go into K-12. This is a very large market with opportunities for professional management, a very fragmented market and without major consolidators. And we saw that there were 2 opportunities in the management of schools B2C and by creating a service platform for schools in a B2B offering. So we decided then to go into this market, and we started negotiations with the one we consider the largest and the best K-12 education platform in Brazil.
This is something that was very similar to what we did in 2012. We decided to work with Distance Learning at the time, and we chose the best platform available in the country, Unopar. So once again, this is something that reminds us exactly of this period, when we decided to go into Distance Learning. And the more we get to know Somos, the more certain we are that we took just the right step.
And to make sure that all the opportunities are identified and captured, we have implemented a very sound integration methodology with clear activities, detailed time lines. We know that integration processes are all different from each other, but our track record at Kroton in integrating important assets has been fundamental for the success of this project.
In Slide 16, we see some of the numbers that derive from the integration of the companies and that has been very positive. So far, we have dedicated 1,500 hours to the integration project. We have 12 committees involving the CEOs and other heads and VPs of the companies. We had 5 days in workshops, a kick-off, including 75 meetings and functional fronts with the participation of 4 external consultancies. And we also got 12,000 responses on our climate survey.
And in -- on October 15, we had a meeting with 480 -- sorry, 148 leaders of the 2 companies and with the participation of 1,400 employees, always marked by the transparencies. And as I said, we closed the deal on October 11. The following day was a holiday. And on the Monday following the closing, we had this meeting with all leaders to communicate the changes and the different roles they would take on in the new organization.
And we had this meeting, once again, with 1,400 employees and with the online broadcast of all employees in the Somos groups. This, of course, marks the first day of the merged companies.
All of this to give peace of mind and transparency to those affected by the integration process. We also had 87 individual meetings to communicate the cases when there were changes in the reporting lines and also a change in scope. So all of this, all of this planning work was very beneficial for a smooth transition.
In the next slide, we see some images that reinforce our sense of purpose and our ability to transform education. And in the early release, the message of the administration is that we're feeling very happy with the technical quality, the engagement and the sense of purpose we've identified in the Somos teams.
This is going to make the integration much easier. And with this, I would like to express my gratitude to all of the Somos employees. Together, we are an even stronger company.
Now I would like to go to Slide 17 to discuss some of the next steps. On October 11, we closed this process, but a new process started. It's the process that ensures the same rights to the controlling shareholders and the minority shareholders of Somos. A few days after the closing on October 22, Somos held a shareholders' meeting to define who would be responsible for drafting the valuation opinion, and as controlling shareholders at this time, we abstain from voting.
And among the shareholders, they elected Merrill Lynch. They have already started to work on this project. Very soon we'll be able to file with CVM and B3 the application for the IPO. And as soon we get approval from the CVM, we'll be publishing the IPO tender, clarifying terms and conditions for participation. And counting 30 days after this publication, we'll have the auction at B3. And if we get 2/3 of participation in the auction, then we can close the transaction with Somos, and we'll be able to close the capital. Always keeping the market informed about any developments.
So in short, this is what I wanted to share with you. We are starting the closing of the capital with the tag along. And this is just a little preview of the proposed time line for this process.
Going to the final slide, I have some final remarks. We have already started our enrollment campaign for the first quarter 2019. We are feeling optimistic about it even though it's a process that has just begun. We see some positive indication. We are feeling very confident about the strong -- the strong brands we have and the improvements in the student experience we have created. And our capillarity of operations and also our program portfolio will ensure that we'll be able to deliver very solid earnings results.
And as we had mentioned in the previous call, we will have 19 new On-Campus and 100 new Distance Learning centers that will be launched together with the first enrollment phase in 2019, demonstrating that our organic growth project continues to be implemented. And by the way, at the end of September, we've acquired those second premium education -- premium K-12 education brand, Lato Sensu, with 4 units in Manaus and one in Rio Branco, and a total of 3,800 students in 2018. Lato Sensu has a very differentiated but educational proposition and focus greatly on education. It's ranked first and second in the ENEM test results in the state of Amazonas for the past 10 years. And all of this is consistent with our educations in K-12. We will be opening our first greenfield of this brand still in 2019.
Now about our acknowledgments. We have some important recognitions. We were first placed among the companies that best communicates with journalists in the category of education. We also got a prize in education as the most valuable company in education. We are now reaching 30,000 employees. And all of this is motivating us to do our very best to transform the future of education. And once again, I would like to express my thanks to all of those who contributed to these achievements.
And now our board has approved dividend payout of BRL 132.2 million, which represents $0.08 per share, maintaining the payout at 40% in spite of all the organic growth project and also the inorganic growth projects we are involved in. And the dividend -- the dividends will be paid by November 27, 2018.
I would also like to invite you all to participate in our Kroton Day that will be held on November 26. It's an opportunity for you to find out more about our strategy, integration and synergies in all projects and segments where we operate. The Kroton Day will be held on Cubo Itaú. As you know, we have a partnership with Cubo Itaú, which is the largest EdTech hub in Latin America. And in this event, we will communicate our strategic vision for the field. This is very important for us. And it's also a great chance for you, investors, to understand better our strategic view.
And to conclude, I would like to say that in spite of our -- all obstacles we saw in 2018, we're still making progress and delivering on our guidance, honoring the commitments we made to the market. Our organic growth project and digital transformation projects made great strides this year and we also have the integration with Somos, which is a great driver for transformation in our history.
We're feeling really optimistic about the opportunity and the soundness of our history. We are certain that we are taking the right steps and that Kroton is just starting out on this journey. There are still a lot more to be done. And you're all invited to learn more about these opportunities on our Kroton Day.
Thank you very much. Let's move on to the Q&A.
[Operator Instructions] Our first question is from Mr. Marcelo Santos from JPMorgan.
I have a question about the Distance Learning opportunities. I know you will talk about it more on Kroton Day. But do you see an opportunity, for example, in public education in the Distance Learning format? We now have a new president in the country. What's your perspective on this issue? And question about the late enrollment installment plan, PMT. You used this less this time. What were the lessons learned? What are you observing in this area?
Hi, Marcelo. This is Rodrigo. Thank you very much for your questions. I'll answer the first part and Jamil will answer the second one. Well, considering Distance Learning for secondary education, we have a meeting with Cubo Education, and we are more than ready to support any policies, any new policies adopted by the federal government. And if the federal government approves these policies, we have the largest DL platform in Brazil and the best K-12 content platform in Brazil. As such, we can add a lot of value to the country and also add value to the company. So we are ready to take on this demand, but we are depending on the decision in the area of public policies. But if this is the way to go, we are ready to serve.
Thank you very much. In relation to the late enrollment installment plan, considering on-campus, we are very concerned with the timing of the offering, volume was smaller in the fourth quarter. But in Distance Learning, this is linked to strategy because what we saw, the ticket is smallest, so late enrollment have a lesser contribution in comparison to all these types of enrollment.
Our next question is from Mr. Thiago Bortoluci, Goldman Sachs.
Let's talk about the organic margin ex greenfield. For the third quarter, you talked about an expansion, 60 bps, and it dropped 160 bps in the first semester. Could you give us a little guidance on the behavior of this margin on On-Campus and DL? And how do you view the like-for-like margin from now to the future? Even with smaller contribution of the FIES students, could we expect organic margin to be regularized? Or could we see pressures still in 2019? These are my questions.
This is Jamil. Thank you so much, Thiago, for your questions. Starting with the question on our long-term margin. Yes, we are expecting some pressure because of the organic initiatives. But it will be a lesser pressure, not as big as this year because we have some units that are now 3 and 4 semesters old already. In the breakdown, DL versus On-Campus, usually DL suffers more pressure than On-Campus. Also because we see that there is a substitution of debt and out-of-pocket students. And in relation to what you were saying, I think it really makes sense to expect pressure on the fourth quarter again. Well, in relation to late enrollment installment plan, yes, this will depend on the initiative that are maturing in the fourth quarter.
Our next question is from Mr. Rodrigo Gastim, BTG Pactual.
I have 2 questions. The first in relation to cash generation. I think that when you consider the FIES installment, this deteriorates the cash position and the conversion to EBITDA. Just like you said in the presentation, there's a worsening of receivables, owing to the macroeconomic scenarios. So could you please tell me about the cash flow initiatives for the company? If this is something that you will look into in the near future, what are you doing to give priority to cash generation? And how much should we expect in terms of conversion? And secondly, I would like to talk more about on-campus, out-of-pocket on-campus. This is something excluding late enrollments for -- from this number because they diminished year-on-year. And I know that -- this reduction was seen as something very positive for me. So what is the strategy of the company? Are you focusing more on out of pocket because they have a better performance? Would you please explain what are the opportunities to improve the average ticket both on on-campus?
Well, I'll answer the first question. In relation to your first question, I think that in '18, '19 there is an expectation of lower conversion. This is something we have been seeing for a long time. It's very much to be expected because of the change in profile and the change in the available financing. As for post-Capex cash generation, in the 9 -- first month of '18, before the investment related to -- especially we were at 44 -- 45.5%, but the negative cash generation, using up of cash that the greenfield use while these are very initial operation, so they use that cash. This should bring back more than 5 percentage points in the conversion. So the effective conversion is closer to 51%. This increase the scenario. And all of our efforts are geared to organic growth. We're investing in organic growth in higher education, and we have 2 CapEx -- 2 impacts, the impacts of Capex and the negative impact on the cash operations in the first semester. However, we should take into account that the investments in organic growth has over 40% in perpetuity. So from the shareholder point of view, this is a great business. It's something that adds more value in the longer term. And all of the signs coming from the greenfield are above expectations. We're feeling very comfortable with this strategy. As for operating cash, yes, we have some opportunities for optimization. We have 2 blocks of measures, the operational measures and the strategic measures that will cause an impact on cash generation in coming years. In terms of operational measures, in 2019, we'll start giving more focus to the management. For example, we are reviewing our nonrecurring concept. So in the new report of results for 2019 that we'll see in the first semester of 2019, in addition to the consolidation and integration of Somos, there will be a new criteria for nonrecurring expenses. We'll have items related to growth as nonrecurring items, for example, organic expansion items and everything that relates to growth. We also have the operating management of cash through our improved collection practices. We have been obtaining good recovery levels with an -- even in this macroeconomic scenario, but there is a lot of room for improvement. We can make great improvements. Thirdly, we have been concentrating mostly on OpEx, but we're going to focus more on CapEx in the future. Including recurring CapEx, our investments will be submitted to a much more judicious analysis. They will be under the magnifying lenses. And we also have a review of our variable compensation programs in the company. And we'll put the emphasis on cash generation. This is already one of the indicators that is linked to the compensation of our executive. But this will be reinforced to send out a sign that cash generation is a priority for the company in the next 2 years. Because we know that cash generation will be a little tight, there will be some pressure on cash generation. And we have few strategic issues to consider. As of 2021, we'll start receiving PEP installments. And this will change our perspective. Our cash will grow, not substantially, and it will start growing. And it will be much better after 2021. This will create a structural change in our conversion profile. And we also have the operation with Somos. Structurally, the conversion there is higher, and this will also change our perspective. So cash generation is definitely at the center of our attention in the company. Some growth decisions will have an impact on cash, and the company believes that this is still the best option for the shareholders. And to improve operating cash, we're taking a number of operational measures, including some that we have already discussed. Thank you very much for your question.
Going to the first part of your question about the behavior of the ticket in out of pocket. This is something that's favored by the mix of new students. We have been investing in -- we have been investing in promoting those programs with higher average ticket. This, of course, has a very strong impact in the new enrollments cycle. And as for your question about PEP finance, as we see the macroeconomic scenarios improving, we'll see a trend for more students being out of pocket and our strategy will be reducing PEP30 and increasing margin at PEP50. This, of course, increases the out-of-pocket participation. Thank you very much.
[Operator Instructions] Our next question is from Mr. Joao Noronha, Santander.
Could you give us some more light on the collection initiatives and also about the growth in the arrears line? Were there any significant changes in the collection and receivable policies?
Thank you very much, and here is Jamil speaking. In relation to the collection initiatives we discussed in the previous call, it's been implemented -- 99% implemented, and we saw some improvements both in terms of strategy and in performance. We know that the macroeconomic scenario is still very complicated. So these initiatives are helping us mitigate the asset condition. And in Distance Learning, we see improvement in the receivable terms with a better control of losses. And On-Campus, the scenario for trend is still challenging. But in interest lines and penalties, we see that there was a significant increase in this line. In fact, there are 2 impacts. We have the monetary adjustment on receivables and also the charges on late tuitions. What we can't control is monetary adjustments. But if we compare it to the previous quarter, you will know now that there's an impact penetration, but the charges on tuitions increased both in DL and On-Campus. This is the result of the collection strategies we have implemented with better control and more discipline. And specifically, in the charges on arrears, the impact was over 50% impact.
We are now closing the Q&A session. We hand it over to Kroton for their final remarks.
Thank you very much. Once again, you're invited to participate in our Kroton Day in Cubo Itaú, where we will talk about our strategies. Thank you very much. And we'll see you there.
The earnings conference call for Kroton Educacional is now closed. We thank you all for your participation and wish you a great day.