Cogna Educacao SA
BOVESPA:COGN3
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Cogna Educacao SA
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Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome, everyone, to Kroton Educacional Fourth 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 slideshow, may be accessed through Kroton Educacional's Investor Relations website at www.kroton.com.br/ir by clicking on the banner 4Q '18 webcast.
The presentation will also be 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, which now conform with International Financial Reporting Standards, except where otherwise indicated.
Before proceeding, let me mention that forward-looking statements are based only 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's CEO, Mr. Rodrigo Galindo, who will begin the presentation. Mr. Galindo, you may begin the conference.
Good morning, everyone. Thank you for participating in this earnings call of Kroton Educacional on the results of the fourth quarter and the year 2018. Today, with me IR Director, Carlos Lazar; Finance VP, Jamil Marques; and Head of Business Areas K-12 Roberto Valério -- sorry, Higher Education Roberto Valério; and K-12, Mario Ghio.
2018 was an important year. The company dealt with internal and external factors that were really relevant. Reduction in CS student's base, increase in Distance Learning competition, unfavorable macroeconomic scenario, but we used this adverse scenario to take care of conditions for future growth.
We decided to implement 4 strategic pillars: focus on student success; grow higher education because we still saw lots of opportunities; focus on basic education; go back to Kroton origin very intensely in K-12; and for digital transformation. So student success, higher education growth, focus on basic education and digital transformation, the 4 pillars of the strategic planning are all doing really well in the organization. We'll talk about the evolution in today's presentation.
2018 was an important year. We overcame short-term challenges. We delivered the financial results announced in the guidance, and at the same time, we made all the necessary investments to continue to grow. Financial performance shows Kroton, once again, attained its goals.
Slide 4 compares projections and the results delivered. Slide 4, we see a consolidated revenue of BRL 5.6 billion, 1.3% above expectation, which proved our commercial strategy was assertive, strong brand and a program portfolio aligned to market demand. In addition to the initial positive contribution from Greenfields.
Adjusted annual EBITDA BRL 2.3 billion, above the guidance by 1.2%. Margin was 41.5% following the same trend as net revenue.
High level of efficiency was possible because of levers to obtain cost efficiency, commercial leverage and student retention to neutralize the anticipated pressure of change in the profile of our students and also expenditure to launch new units that consume cash and earnings in the ramp up. This year, we had the greatest reduction of CS students and still we delivered the results announced. In revenue and EBITDA, we overcame the guidance, more in consolidated results than in the ex-Greenfields due, which means the performance of Greenfields was even better than the rest of the operation. It means, we delivered results above the original business plans, which shows the financial soundness of the Greenfields project.
Consolidated adjusted net income BRL 1.9 billion, a margin of 35%. The total investment accounted for 12.7% of the net revenue in 2018, a reduction compared to the guidance of 13.5%, even with the increase of units and other very relevant projects for the company in 2018, digital transformation and expansion projects among other. We're happy with the results. They confirm the soundness of our operations and the assertiveness of our strategies that have high profitability and efficiency, even facing the challenges we mentioned. We're even happier because all of that is followed by higher educational quality and better service offering to students.
Therefore, we are certain that 2019 has all conditions to deliver even more positive financial indicators. I'll give the floor to Mario Ghio, our Vice President of Basic Education, and next, I'll talk about Somos.
Thank you very much, Rodrigo. Good morning to all. Please turn to Slide 7. Since October last year, we started the integration of Somos, and we've been making great progress in recent months trying to maximize synergy between the 2 companies. I would like to show you in broad lines the numbers, the particular dimension of this process. One of our first steps was to establish governance at Somos, covering the most important topics of the operation and specific focuses to ensure that we have total delivery of targets, capture of opportunities to support our growth. What we felt was that to achieve all of this, we had to create 5 new committees, reaching 19 in total. And in those committees, we discussed educational quality, regular CapEx among other subjects. We have 12 fronts currently in execution in addition to the fourth operating front that will have finalization by the end of this semester, and with high caution, the capture of synergies. For example, we have integration and centralization of the strategic areas of our shared services center at Kroton, Valinhos, the definition of the financial ERP and systemic migrations, integration of our [indiscernible] and storage and logistic operations at Kroton and renegotiation of our agreements with suppliers, with implementation of the strategic sourcing projects at Somos.
I can say that now the company is integrated in all corporate areas. It has been successfully integrated from the systemic point of view. Some systems have completed the integration and others will not be integrated because they support some very specific processes. For some of them, the integration will not result in synergies. So the integration is proceeding better than expected.
Moving now to Slide 8. We see the integration of the budgetary process with the development of the 2019 budget at Somos. According to the model we use at Kroton, a company that prides itself on its budgetary processes. We had the process that lasted 50 days and 200 people were involved. We had 2 workshops and 3 specific committees involved. In relation to the budget, Somos is organized in different business units. We have K-12 SAT schools and language schools, all of them with different dynamic and seasonality pattern. And of course, the budget treats each of them independently. We also adopted the matricial budgetary vision in a centralized control of expenses for Somos to ensure better management of some lines, such as materials, leases, marketing, travel and legal. We also introduced 0 days budget process at Somos and implemented budgetary management, including system locks to make sure that our expenses are compliant with the budget. One of the first systemic integration we performed was the system lock that locks purchase orders with no budget allocation. Kroton takes pride in its budgetary culture and the sophistication of its processes. Kroton, without budget being allocated, you cannot even start the procurement process. And -- like, there is no one will discover budget overruns exposed or after the fact because it's simply cannot be made. And all system adjustments were made at Somos, and since the beginning of 2019, Somos was following these rules and this increased predictability of our cost and expenses. In terms of treasury, we integrated cash and debt management, including the integration of the debenture contracts, creating more opportunities to reduce debt-related costs.
Now I would like to discuss Slide #9. Before we begin, it's important to remind you that Somos has 3 major business lines. First we have the editorial program here to the federal government, the national textbook program. We also have school management program, very similar to higher education; and finally, the integrated K-12 platform, which is, in fact, a B2C unit.
Slide 9 shows our vision over this business and different services that make up the platform. We would like to become a full range provider of services for K-12 schools in Brazil. The most important service we offer today is the learning materials, which could be textbook or handouts, both in print or in digital format. But there are several other services that complete our portfolios, such as technology, educational support, teacher training and counter-shift activities. We have several competitive edges, among them the most solid and well-reputed brands in the country and other differential.
We have an addressable market that's very significant. Currently, we have 6.2 million in the private schools using textbooks, 3.8 million use learning systems and 2.4 million use textbooks. Somos has all of those options in its portfolio, and as such, our addressable market is higher than anybody else's. We want to meet the needs of our schools by providing the best educational solution. And based on this concept, we position ourselves as K-12 education solution platform that is permeated by the use of technology, the one-stop partner powered by technology. This is the concept we use. We want to meet the needs of each partner company in an individualized way offering learning systems, textbooks, teacher development, technology solutions and adaptive learning in addition to counter-shift activity, such as language development and also other skills. We believe that we can increase penetration and seize more business opportunities in addition to the schools we already serve, and also expand our market with the 34,000 schools that don't use our solutions yet. This slide shows the K-12 platform concept fully implemented throughout our advanced and current solutions.
And now let's turn now to the next slide in which we will talk about the most important ethics of our go-to-market strategy, and we'll be also explaining to the market the allied schools project that we're going to engage, and it's going to be a totally different platform, a noncore services under our responsibility. And we want to provide the schools, for example, services, such as collection, legal services in addition to e-commerce, so that the focus of schools will be on their core business, which is education.
So now moving to Slide 10. Since October 2018, we have been working very hard to review Somos go-to-market and to adopt different approach based on the commercial relationships of services platform. Somos commercial teams were working in isolation, and now all incentives are in line with this new concept. Our sales team is working very hard to understand the needs of schools. This was a total change in our mindset, and we believe that this will add a lot of value in the relationships we maintain with partner companies and potential prospects. To -- we have our flexible integrated portfolio with recognized brands, including learning systems, including books, and also, we provide learning assistance, teacher development and adaptive learning opportunities. Our portfolio also has an integrated offering in counter-shift solutions, such as English learning and socioemotional skills. And so the value in our proposition is to offer these activities inside the schools. The schools will become a holistic center for the development of the students, and this will also strengthen our relationship with partner companies. We're also optimizing and strengthening the focus of our commercial leaders in integrated solutions to take this transformation even further and also to backup our vision for the future of the K-12 segment. In terms of our safety, we have the largest number of consultants and specialists by school in the whole market. We're trying to solidify our relationships with schools, always paying attention to the demands and specific needs they report to us. And this is only possible, thanks to our technology that is incorporated in the complete portfolio. We're currently advancing in new technology solutions to make the lives of our students and their parents even better, driving the digital transformation of the company.
Now I would like to turn the word to Mr. Carlos Lazar, who will talk about Somos results in 4Q '18.
Thank you, Ghio. Now the next deck of slides on Somos talk about adjustment in Somos results reported today. With the transfer of control, Kroton analyzed the financial statements of Somos to align criteria and accounting practices to those of Kroton. So this is reflected in the results and the balance sheet of 2018. Many are nonrecurrent and have no effect on cash. They are related to previous fiscal years. After the alignment, the comparison will be affected. But now the implementation unifies the accounting practices between Somos and Kroton, so in the future they will be comparable.
Slide 12. First important review were the punctual payment deduction values, no longer as financial expenses, but now as deduction from the revenue. As they relate to the operation, they are not really financial events. Secondly, we've implemented a new concept of provision for inventory of obsolescence based on production aging, because this is more in line with our business and Somos and Kroton strategy. We reviewed provisioning criteria for losses in receivable accounts and the criteria for the capitalization of costs and expenses. In addition to write-off of assets, we also wrote off active deferred tax and time-barred recoverable tax. This is only to reinforce these adjustments will make future results fully comparable with no impact on cash. To quantify these adjustments, let's look at Slide 13 to begin from the EBITDA, we would have presented for Somos without these adjustments, would have been BRL 499.3 million in 2018, first reclassification of punctual payment deduction.
Now on net revenue. So EBITDA, recurring EBITDA, is BRL 473 million. Based on recurring EBITDA, we had a few other adjustments. The first impact refers to inventory totaling BRL 116.2 million because of the new concept of obsolescence for inventory. We've also reviewed provisioning criteria for receivable account losses, including the impact of bookshop creditors agreement requests totaling BRL 36 million and also write-off of fixed assets and intangibles, BRL 11.4 million. Now active deferred tax and time recoverable tax impacted EBITDA by BRL 7.7 million, and review of other provisions, almost BRL 28 million. So with that, the whole impact was -- the whole impact without any effect, and cash was BRL 225 million.
Now on the other hand, we also had nonrecurring expenses. That had an effect on cash totaling BRL 189.1 million, of which BRL 23.7 million were for other nonrecurring expenses in EBITDA after adjustment was BRL 84.6 million. In the future, we will consider the recurring EBITDA BRL 473 million because it shows the results of 2018 without the adjustments. And it allows for the comparison with 2019 results in future years.
Now I give the floor to Rodrigo to talk about the guidance for Somos for 2019.
Thank you, Carlos. The final slide deck on Somos. We'll talk about the guidance of Somos for 2019, in Slide 15, the guidance of Somos and the educational business unit for that. Somos company without, including Pitágoras and it includes sets, which used be part of Somos. So you have the guidance of Somos, and we shall track the guidance of Somos during 2019. Now to allow for comparison with the guidance and results to be announced in 2019, we depart from the recurring result of 2018, which is EBITDA BRL 473 million in addition to allow for comparison. We consider the hypothetical impact of IFRS 16 on 2018 results. So the comparison to 2019, which will already have the IFRS 16 impact. So we are applying IFRS 16 to the EBITDA of BRL 473 million of 2018, and it becomes BRL 556 million in 2018. This is the best number to compare to the guidance of 2019 EBITDA.
Now again, about the main lines, we project net revenue of BRL 1,933 million for 2019, an increase of only 3.5%. The new management took control in October only when almost all actions to ensure the future year revenues had been implemented because of the characteristics of our business. Estimated recurring EBITDA BRL 670 million for 2019, margin of 34.7%. It's a relevant growth of 20.5% in relation to 2018, already adjusted by IFRS.
So margin goes up 490 basis points and EBITDA -- the EBITDA guidance is BRL 670 million or 490 basis points higher, reflecting the integration of Somos and Kroton and synergy gains.
We come from a loss of BRL 258 million in 2018 up to an adjusted net income of BRL 100 million in 2019, a significant improvement. Finally, this is perhaps the #1 message who company announces and operating cash generation moving from negative BRL 9 million in 2018 to positive cash generation of BRL 150 million, with an EBITDA cash conversion rate of 24.2%, already considering the IFRS adjustment, too.
Now BRL 150 million will be the positive cash generation coming from a negative BRL 9 million in 2018, and this is the first year after integration. So all the efforts to revert this cash generation situation already in the first year. The initial projection show the great potential of Somos in terms of profitability gains. In addition to the impact from integration, which brings great improvement, academic and educational improvements. We are convinced that our unique portfolio of educational solutions at Somos and our new positioning plus the management model, robust governance structure, the highly qualified team we have at Somos and aligned incentives build all the necessary conditions for growing and sustainable value generation in all senses, educationally, academically and financially in the long term. We're very optimistic about Somos in the long run.
Now Slide 16. You see details on the timing of synergy gains, in '18, '19 and then as of 2020. Let me begin saying that in the 2018 earnings, we already had BRL 20 million synergies, raising our recurring EBITDA from BRL 536 million to BRL 556 million, which is the number we showed in the previous slide, on the basis of comparison with the guidance. BRL 556 million, the third bar, is recurring EBITDA of 2018. The guidance of 2019 is BRL 670 million. Of the BRL 114 million increase, BRL 19 million came from organic operational growth and BRL 95 million from efficiency or efficiency initiatives or synergies from the transaction. Up until December 2019, we will capture BRL 115 million synergies, BRL 20 million in 2018 and BRL 95 million in 2019.
Now Slide 17. An update of the synergies we expect from the integration. Let me remind you, when we announce the operation in April '18, we announced an estimate of BRL 300 million of synergies in 4 years, but we raised that by 20% to BRL 360 million on Kroton Day 2018, when we started the integration. Now we have more access to number of opportunities. Again, we raised the expected synergies according to Slide 17. Today, we expect BRL 375 million, an increase of 20% compared to the original synergies announced in April 2018, which was BRL 300 million.
As you've seen in the previous slide, BRL 115 million will be captured until December 2019, first phase. Another BRL 245 million will be captured until -- as of 2020, totaling BRL 360 million as announced in the second estimate presented. Today, again, we review upwards of this estimate another BRL 15 million of opportunities on the integration front. So we move to BRL 375 million, an increase of 25% compared to the initial estimate.
So we were right when we made the decision to make this investment in Somos, diversifying operations and opening new growth fronts.
I'll close here and invite our Financial VP, Jamil Marques to continue.
Thank you very much, Rodrigo. In the next session, I'll make some comments about performance in the most important line of results, loss provisioning and also average receivables from first considering Kroton's standalone without the Somos' impact.
So starting with Slide 20. We see the most important line of results in this quarter. And following the disclosure we have this year, we are showing the results on 2 different perspectives. In the higher side of the slide, we have consolidated figures, excluding the results of assets sold in 2017. And in the lower part, we exclude the results of 2018, in relation to the new units launched this year for greater clarity. In this slide, there are 3 points I would like to call your attention to. Both in the consolidated ex sales vision and in the ex-Greenfields vision, our net revenue had an increase of 4%, which reflects our robust student recruitment processes, re-enrollments and an improvement in the mix of programs, both in once a weekend business learning besides the initial impact of new campus and also the founded collection in 2019.
We see a decrease in consolidated review as seen in the previous semester, and this becomes more evident when we see the growth in adjusted EBITDA. It's important to highlight that this increase in cost was expected, and it's below the business plan for this new unit.
And finally, we have adjusted EBITDA or net income that had a decrease in the annual vision because of the increase in the levels of depreciation and income tax that has been announced in our guidance.
Now let's turn to Slide 22 and 23 to see the provisioning for losses and also the students in the segment. It's important to remind you that like in previous quarters, we exclude some seasonalities, the numbers relating to the units we sold in 2017. Starting with the analysis of higher education. On-Campus, we see an increase in lower losses provision and also in the average terms of receivables following the natural trend. If we consider only the out-of-pocket balance, we also see an increase in lower losses and also in larger provisions and also some important receivable services. It's important to remind you that the macroeconomic scenario continues to be very challenging with higher delinquency rates, and we also have realized fewer agreements with on-the-spot payments, which increased the volume of financial charges and increased also the average term of receivables. The level of losses continued to be high in spite of the tendency towards stability, and this, once again, increased the losses provision.
Now going to Distance Learning. In spite of the increase in the losses provisions, we see also reduction in the average term of receivables. Once again, the macroeconomic scenario continues to be challenging with driving delinquency, and we also see higher efficiency in collection and reduction in the number of agreements. This has positively contributed to the reduction of the average term of receivables and losses level. And we also see a positive tendency. We increased lower losses provisions because of the level of losses remaining high.
And also in K-12, we had an increase in losses provision, reflecting the consolidation of schools, Leonardo da Vinci and Lato Sensu. In short, we continue to observe the impact of a very challenging macroeconomic scenario with high unemployment rates. And this, of course, creates an impact in our average term of receivables and lower losses provision. However, we were able to reduce for the second time the provision for doubtful accounts, and also we see a return in relation to the out-of-pocket students. We have implemented several collection policies. And for 2019, we continue to search and seek the responsible quality growth we are characterized by now.
Moving on to the next session. I will talk about the evolution of CapEx and cash generation, considering the impact of some response with CapEx on Slide 25. On the last side of the slide, we see recurring annual CapEx representing 7.9% of net revenue in the period, down 1.2 percentage points vis-à-vis 2018, thanks to optimization and efficiency gains. On the right side of the slide, we see also the investment relating to special projects in Greenfields totaling BRL 266 million. This took total CapEx to 12.7% of the annual net revenue, below the guidance, which was 13.5%.
Moving on to Slide 26. In relation to operational cash generation in the quarter, there are 2 points to highlight. First of all, total CapEx cash generation for conversion of EBITDA to cash of 49% along the year. This represents a reduction in the annual compare and relates to the impact of the working capital consumption coming from the change in profile in our student base, with the reduction in the number of students, and also reflecting the high number of graduations and lower student recruitment rates. And in 2018, we generated BRL 994 million in cash with the operation CapEx, and we consumed BRL 427 million of our cash in 2018.
To give you better details of the use of this cash, please turn to Slide 27. We start with the generation of operational cash for CapEx as BRL 994 million in 2018. In the first block, we had BRL 342.5 million, BRL 206 million of which were invested into the organic expansion with the opening of 25 new on-campus units, BRL 600 million were invested in digital transformation processes and also BRL 76.5 million were geared to the acquisition of controlled companies.
In the second block, we see value generation to shareholders totaling BRL 833 million. And eventually, we had BRL 194 million of dividends and repurchase of shares along the year. It's important -- BRL 639 million of dividends. We maintain a payout of 40% along the year in spite of our new projects. We also have the -- we reduced gross debt representing BRL 234 million in debt amortization. This take us to the BRL 427 million of free cash that was used in the year.
Now moving to Slide 29. Let's talk about the net debt considering -- consolidating the Kroton plus Somos because we believe this is the more adequate way of interpreting our cash and debt positions at the end of the year. We have cash availability of BRL 2.6 billion, representing 50% growth in comparison to 4Q '17. This is due mainly to the increase in gross debt of BRL 5 billion as compared to BRL 4.1 billion used at the moment we did the acquisition of Somos. So if we add up all the financial debt in our short- and long-term liabilities, we have net debt of BRL 5.1 billion in 4Q '18. And this is explained also by the initiation of debentures at Saber in total amount of BRL 5.5 billion, and also, the Somos effect.
We also have receivables, short and long term, the second part of the payment for the fee of [ Selvi ] adjusted to net present value in this quarter. We received the first of the 5 annual installments and also the payment for the sale of FEP, FAC and FAMAT concluded in August 2017. Considering all receivables, our net debt was BRL 5 billion on December 31, 2018.
With this, I close the session of the presentation. I would like to invite Rodrigo for his final remarks
Thank you, Jamil. Slide 31 for final consideration. We continue in an accelerated phase of organic expansion, where we do really well, another can be implemented 12 in the first half of 2019 as approved by the organization. We're very happy about the results. We continue to offer capillarity, quality services in the marketplaces where we work. As I said, we've implemented 12 new campuses in the first half 2019, with -- On-Campus learning, and we expect to open another 12 in the second half, closing the year with 167 campus. Growing 17% compared to 143 campus we had at the end of 2018. The project is doing well. We are happy and probably the breakeven here, and also, the cross of the line when we begin to have positive cash generation will be the fourth line. In addition to 100 new education centers, we will open another 100 in the second half of 2019. So we will have 1,510 centers at the end of 2019, growing 15%, vis-à-vis 2018.
We are increasing our capacity, and also we're improving the program mix. With the new On-Campus units, we now offer health care, engineering, and we have premium Distance Learning that shall gain market share in the processes of student recruitment this year. So we gain more relevance in student recruitment, and this is key for us to meet market demand and to protect the average ticket. This is the more fierce competition we're facing now.
Now -- and the middle of the slide, we have an update of student recruitment process for the first half of 2019. We still have a month to conclude this process. The scenario is competitive, and macroeconomically we see challenges. We are confident in the evolution, and we're happy with the results. We want to protect average ticket, both On-Campus and Distance Learning. In Distance Learning recruitment, we will have approximately the same volume and average ticket. Now On-Campus, the volume will be similar to last year, but the average ticket has a positive trend in On-Campus. So this was our strategy, to prioritize average ticket. And in Distance Learning, we have a more competitive position.
So we wanted to improve our tickets On-Campus, and the volume is even better than the expectation we had. And we will talk about the final results of student recruitment up until the end of April, as we've been doing in previous years.
Next point, let me highlight our main deliverables in the context of the digital transformation project.
First, we implemented and improved our project execution methodology. We now have a methodology that combines traditional portfolio management and software development by Agile methodology. We're using the Scaled Agile Framework, SAFe, with more than 550 people involved for 11 months, more than 640 features and 10,000 stories delivered.
This is a very tangible proof that we are making significant progress in the quality of our technology deliverables. We see a drop by x percent in the volume of incidents and problems in all projects that involve our systems migration, which brings cost efficiency, efficiency in [indiscernible] tax because we no longer see a difference between technology and business. It's part of the same deliverable. So we prioritize Agile deliveries, and we're building a new organizational culture, which had shown results in the short term and will be a great asset for the company in the long run. It's difficult to make it tangible, but those who know can feel the difference after the implementation of this methodology.
We have talked to other companies to exchange information about how we obtain results with Agile deliveries, and we're very happy about the change we're going through in the company. It means we will need less investment. We will have better cost control and more stability in the operation, which contributes for a better experience for our students. We already see a significant evolution in our NPS, both on-premise and also Distance Learning.
We have some objective deliverables. Conversion of candidates already had a great improvement. We've also increased the number of student requests.
We -- in the past, we had 7% of all services in digital. We now have 50% of all services being digital. And we want to attain 100% service requests being met digitally, which will improve student satisfaction, and it will also bring cost reduction.
We now have a new technological platform which is extremely scalable on the cloud for data treatment and analysis, and we are using it more and more to make decisions. We have more data classes, more analytics, more granularity. We're improving our algorithm for prediction, bringing more information
on academic issues and also analysis of student dropout, for example. So we're becoming increasingly more sophisticated. And this was possible because of all the decisions we made in the digital transformation and because of the digital mindset we took on.
Finally, ever since we took this role of curators on the education project, Ita ú Cubo (sic) [ Cubo Ita ú ], we came to know 2,390 startups. We had almost -- we had more than 2,000 visits at Cubo. We had 145 connections with Kroton ambassadors who are our leaders responsible for identifying technology solutions for their areas. Eight experiments have been conducted to find solutions at Cubo to solve Kroton issues that might be solved by these startups. At the same time, we're conducting other experiments with Google companies. We've signed 2 contracts with these companies that have a potential of transformation or simplification of our administrative and academic processes.
So internally, the implementation of SAFe and systems in the company and also in terms of open innovation in our relationship with these startups, so the whole ecosystem we're building at Cubo, we're really happy about the results of our digital transformation, which is revolutionizing all areas of the organization. And there is no way back. This will be a great differentiator in the next few years.
The final column, talking about dividend payout, BRL 43 million or a BRL 0.03 per share, keeping our payout at 40%. And dividends will be paid on April 15, 2019.
To conclude today's presentation, I'd like to remind you that despite the difficulties faced in 2018, again we delivered the guidance, our commitment to the market we took on in May last year. 2018, we had the largest number of FIES students graduating. In '19, the macro scenario will be -- still be unfavorable, but we are certain we will deliver more sound results in 2019, especially in cash generation. In terms of K-12 and basic education, we're going through a revolution on the commercial area that will bring great opportunities and more synergies. In higher education, we are at full steam with our expansion -- organic expansion projects and also sustainable growth to provide quality education and ensure the success of our students. 2019 will be another year of achievement for Kroton.
Thank you very much for participating. I'll now invite you for the Q&A session.
[Operator Instructions] Our first question is from Susana Salaru, Itaú.
I have 2 questions, in fact. A question to Ghio in relation to the upward revision of synergies. In which synergy block is it going to happen? The revenue? CapEx? And also, what were the main reasons for this revision? This is my first question. And secondly, this year, we'll see graduation of PEP students starting at a low level initially, but we would like to know what will be the impact of that in terms of financing. Do you see graduations still starting to appear this year?
Thank you very much Susana. Ghio. I'll start with the synergies. We have this upward revision because after a few months with the company, we have now become much more familiar about the scenario. So this -- synergies are in OpEx. So the BRL 15 million, in addition to what we have reported before, are completely in OpEx, Susana. Here's Jamil in relation to the question about the graduating PEP students.
We still have a very small level. 1,500 students graduated in December. We have been tracking this very closely. In terms of the influence of this, it's too early to tell, but we have observed that in terms of the behavior of payments in the last 6 months, it's very similar to out-of-pocket. So the -- it was a very marginal decrease in collections. And up to now, we continue to believe that the guidance we gave is adequate.
Sorry, Jamil, did you say that the payment...
No, there was an marginal decrease. This is what I meant. We had been expecting 80% for the graduating students, and if you compare this with out-of-pocket today with a decrease of 80%, we're still collecting 92%. But the behavior of the students up to December, their payment from January to March is very similar with a marginal decrease. And this, of course, puts us within the expectations we have for this type of students.
Our next question is from Rodrigo Gastim, BTG Pactual.
I have 2 questions, the first one in relation to the contingency provision for Somos. Let me try to understand what's behind the numbers because you wrote about this on the release, but the number seems a little high, especially when you compare it to the net worth, BRL 390 million in the last report. So can you give me some indication of the level of conservatism in the company? Because -- were you expecting possible losses, remote losses? Did you bring this into the balance sheet as a likely or probable loss? So how conservative were you? And how much can you lose in relation to the BRL 1.2 billion that were provisioned for Somos? This is the first question. And now going to Distance Learning, there were efficiency gains in costs that were relevant, especially in relation to the teacher costs. Is it considered personnel costs with a drop of 45% year-on-year? This is a -- quite a sharp drop considering the company had also high margins on Distance Learning. So what's behind the reduction of 40% also in DL?
This is Galindo. About the provisions, when you have a M&A activity, the law defines -- you have an opportunity to post against the opening balance sheet probable and possible contingency provisions. And because of transparency, we posted all probable and possible provisions. And once we say they're possible, we believe we will come out as winners and they will not materialize. Even probable, we believe that many of them shall not materialize. But even with that, because of transparency, we wanted to post them so the market knows they exist, they are there. But of the BRL 2.6 billion, which is the total amount of guarantees whether we have them provisioned or not, of the BRL 2.6 billion, BRL 1.3 billion is premium, and we are convinced that we will come out winners. And this amounts to BRL 1.3 billion. BRL 6 million (sic) [ BRL 600 million ] we have collaterals or guarantees. So what is left? BRL 600 million, which is the overall amount of possible labor suits. Many of them are highly convinced that we may come out winners or that the contingencies will not materialize. And if they do materialize, we believe we have enough arguments and elements to come out winners. But we wanted to provide maximum transparency. So everything we found that could become a possible or probable contingency, if the lawyers said it was possible or probable that we may have a contingency there, we posted it in the opening balance sheet because we want to be transparent with the market. So this was the rationale behind the contingency provisions. Let me give the floor to Roberto for the second question.
In relation to the efficiency in DL costs, there are 3 important pillars that explain the reduction. First of all, the synergy between professors of similar disciplines, especially as we expand the range of premium programs, there's more sharing. For example, before, we could have 2 professors teaching 2 different disciplines. And with the synergies, we have just one. So this, of course, is a good synergy to be captured.
Secondly, we have the efficiency in the tutorship program. We talked about it in the past. Maybe you'll remember we have tutors that have access tools and that support students more closely. And like this, there is an improvement in productivity. They actually are able to anticipate questions. And we also have students supporting the tutorship program with peer review and peer support system. And we have a 100% online penetration in DL with lower tutor costs in those programs because we don't need a tutor to be in the room like we have in the once-a-week model. This represents also better cost efficiency gains.
Rodrigo, could you please go back to the contingency issues? Just to make sure it's clear, you're looking at the Somos scope, 100%. There's nothing more relating to Saber? So it's exclusively everything that you have on Somos in terms of probable and possible contingencies? So that's what you have brought into the balance sheet?
Correct. We have 0 contingency provisions from Kroton or Saber. All of them are related to Somos.
Our next question is from JPMorgan, Marcelo.
Could we talk about the ticket that you mentioned? Then what is the driver for the increase in On-Campus -- of this On-Campus increase in the average ticket? Or is it the time of financing? And also, in relation to Distance Learning, what are the pressure points since you're also increasing the premium Distance Learning program?
I'll start and then, Marcelo, we'll give you the -- his comments. In relation to On-Campus, I don't see a relevant increase in the ticket or change in the ticket in DL. However, the reason why we have a flat or a little similar to that is because we have more cash on web products and once-a-week with higher pressure on web products and once-a-week. And also, a higher participation of premium DL that does not suffer with the competition. So in relation to this, we see prices that are in line with inflation or very similar to that. We have higher pressure in the Distance Learning ticket. And in On-Campus, we don't see this moment. We see the FIES students leaving. They pay higher costs -- higher prices in the programs. But at the same time, this is offset by the pricing strategy. We don't have a change in mix that's really relevant between the 2. So this increase in ticket in On-Campus is related to 2 points, the commercial strategies we're implementing. With fewer discounts and scholarships, we couldn't -- given more emphasis on volume. But this is not the way we choose to do. We gave more emphasis to ticket in comparison to volume, and this is how we chose to operate. And secondly, we have a pricing strategy and a pricing methodology that we have talked about in several other events that is being perfected and becoming more sophisticated. Today, we can use dynamic pricing very accurately among the thousands of products. And in the -- in many locations, we can understand every single day what's the behavior among competitors, and we can react much more quickly. This helps us define the strategy we want for each product in each location. Why is this important for pricing? Because when you're seeing a competitor that is more aggressive in terms of pricing, you don't have to review the entire portfolio for that location, you can go and change just a specific price. And this granularity reduces the number of discounts we have to give while preserving our assertiveness. So putting together this strategy, we ended up with results that are in line with last year and also with a trend of prices climbing and going up.
Just a question about dynamic pricing. What was it like before? For example, in the last 6 months, what did you implement in the system that wasn't available before, just to get a clearer picture?
This is Roberto speaking. The simplification comes from the monitoring of the competition that we are now monitoring much more closely even when it's a regional competitor. And before, the frequency of information was on a cycle of 15 days or more, and now we have brought that online. We also use verification through a call center with several dedicated tools. There are people who are dedicated to calling the competitors every day just to make sure that the prices we see online are valid. And then we also have the mystery shopper program that goes and visits and to check whether the prices on the rate cards are the ones that are really -- are being practiced. And we don't do this on a very large scale, but it adds another validation step.
So as a result, we get more accurate information on a more regular basis and on more competitors. And we monitor. We have actually more than 4,000 On-Campus programs on offer and 70,000 DL programs and disciplines, of course considering the centers in all. So if you compare this to the competition, you can make the necessary adjustments on a daily basis indeed. And I think someone thought of as often as daily but maybe on a weekly basis. And as a result, we also have more people on the team. I think we have a twice as large team as before working on this.
Our next question is from Mr. Roberto Otero, Bank of America.
In fact, this is [indiscernible]. I have a question on out-of-pocket receivables. What's the dynamic you expect for the future in terms of this line? And another question. Looking to PEP students and contracts have become inactive, do they remain on the PEP line even if the agreement is inactive? Or do -- are they moved to out-of-pocket? We want to know whether the increase that we saw in receivables in out-of-pocket is because when a PEP contract is canceled, you change this person into an out-of-pocket since the contract is no longer active or if they remain in the PEP line.
Beginning from the last question, no, we don't do this migration. Inactive PEP balance remains there, whether it's still active or inactive. About receivables, yes, we will have a natural increase because we have a growing out-of-pocket revenue. But in 2018, we had a deterioration of average time of receivables. This is On-Campus. Because of this strategy, that had more charges and interest. It's important to mention this strategy matured in the second half of the year. What does that mean? We expected some deterioration because of this. But we -- all the impact, I think, has already been posted. So we have seen neutrality in terms of default, actually a slightly positive trend, but still the level is high. And considering all of that and the initiatives we had to improve collection efficiency, our expectation is that these receivables will not grow more than the revenue -- than the out-of-pocket revenue. So we will have stability in average time of receivables.
[Operator Instructions] Our next question comes from [ Leandro ], Bernstein.
I have a question about the integration of Somos. So I'd like to understand, if you could mention, what is your expectation in regards to tax gains because of the premium that was generated with the acquisition? As seen in the explanation notes, you have a goodwill of about BRL 4 billion. So would it make sense to think about 34% of this amount, so BRL 1.4 billion? So I think that my question would be that if this would be reasonable assumption so as you can try to calculate these gains, so would you have more concrete numbers to convey at this time?
This is Jamil. We cannot really have the exact number. But yes, it's approximately as you said with the tax credits to be recovered, looking at the ownership structure. So we believe this would be the order of magnitude.
Our next question comes from Mr. Luíz Maurício from Bradesco Bank.
Two questions. First, going back to the Somos opening balance sheet and contingency provisions. We have seen -- I mean, as we look at previous editions and while, as you mentioned, you have included all probable and possible contingencies to calculate the provisions, but in time, because of your conservatism, we believe some of that will be reverted. But not all of that was treated as nonrecurring. So in the future, these reversals, if they happen, will you isolate them as a nonrecurring effect? Or is that included in your guidance for Somos? I mean, I wanted to understand how you're going to deal with that not only in Somos but also in other cases, in the purchase of Da Vinci school. And this is the first question. Now the second question is about receivables. When you look on Page 16, the portfolio leapt to BRL 97 million for a revenue of BRL 70 million in these 2 segments. When we look at the portfolio, it's growing above 60% if we consider the write-off mentioned. So it's a very strong pace of growth. How do you view the future? I mean, do you think we can project the same rate into the future? These 2 questions, please.
This is Rodrigo Galindo. I'll answer the first question; Jamil will answer the second. About the contingency provisions, there are some comments I want to make. First, in the first year after the opening balance sheet, we can still make adjustments in the line posted in the opening balance sheet. So if we have a relevant adjustment that we may identify in the first year, we can still do that. This is the first message. Second message, in all previous acquisitions, even if it affected results, we always provided all the necessary disclosure whether the adjustments were to reverse contingencies or not. Even when that affected results, it was always clear if it was a contingency reversal or not. Now an important message. The guidance of BRL 670 million for Somos has BRL 0 of contingency reversal. And this is important. Even if we may have these reversals of contingencies and even if they affect the results, they can only affect positively this guidance of BRL 670 million. But my main message is that contingency reversals does not impact cash. And we look at cash. That's why we have this cash guidance. And in May, we will also give you a cash guidance for Kroton. Regardless of how we treat contingency reversals, the cash will be there. And tracking cash, we will feel comfortable to say that even if we have contingency reversal, this is not going to impact cash, obviously. If we have a process of goodwill, BRL 200 million, if we make them out winners, we're not going to include BRL 300 million on results because this would distort our analysis. This would harm the comparison of results. But there's no labor suit maybe included in results. Now a large tax suit we may win has a different treatment. So we must look at this case-by-case. What comes to recurring results or non-recurring results, it has to be analyzed case-by-case. But in the first year, not only can we decide what will be recurrent or nonrecurrent. If we had something really exceptional, we can simply adjust the opening balance sheet. But regardless of what we decide to do, our financial statements will always show contingency reversals in a very transparent way. And cash, cash is cash. It is always going to be transparent, telling you how the company soundness is.
Now the second question, this is Jamil. Let me understand -- let me see if I understand your question, what we expect from the receivables portfolio because, again, it's grown this year. Is it the question?
Yes, we could see that even in the 4Q, you had another growth in receivables. But even when you look at the breakdown, you see a lot of pressure not only because of the reduction of FIES students.
Yes. Well, the PEP and -- they're still not in our base, at least not as phaseout of FIES students has not yet concluded. 2018 was a very relevant year. We had a drop in the penetration of FIES. Almost 20% was the drop in the On-Campus base, and that was offset by out-of-pocket PEP. And for 2019, we will have another drop from 24% -- no, sorry, we will have from 24%, 25% down to 13%, 14% of the base -- of our student base at the end of the year. So we will continue to see a growth in the PEP and out-of-pocket portfolio, less than in 2018 but still a high growth. It's important to say that in our recruitment process, we have limited the penetration of PEP to 25% of the On-Campus portfolio. And in fact, this level has not yet been attained. So for PEP, we continue expecting growth in 2019 but a smaller growth than in 2018. So the portfolio will stabilize around BRL 2 billion.
Of the other items, I think I've mentioned the portfolio of receivables for out-of-pocket students has grown also in '18. In '19, we expect that to grow but not more than net revenue -- or not more than the proportion of net revenue. In 2018 was when we received this payment.
Now let me just follow up on a question that has already been answered. You spoke about the average ticket on Page 13. You spoke about pricing tools. But when we look at the table, the average ticket increase was because of a 35% increase in the average ticket of FIES. Can you please talk about that? Because when you spoke about average ticket, you didn't mention specifically the FIES students. So if you could please comment.
Yes, the comment we made about ticket was related to 2019. That was the strategy on ticket for 2019. But it's okay, I can talk about the FIES ticket, which is related to the cycle time and characteristics of programs. We have a large number of students graduating, and FIES students that graduate before the time are usually short-duration programs. And the average ticket is usually lower. So now we have a larger base of higher average ticket. They pay more because they study engineering, medicine or health care because these are long-lasting programs. They last longer. So now we have a bigger base in programs that have a higher payment. So that is why we have an increase in the average ticket. But what we said about average ticket was in 2019, so the increases would be equal for the whole base. On the same units and the same programs, it is always going to be the same increase.
Our next question comes from Maria Tereza Azevedo from the UBS Bank.
Well, some of my questions have been answered. But going back to the 25% cap for PEP, can you be a little more flexible in that? And what will be the optimal mix in the long-term thinking of the financing and also cash-to-EBITDA conversion?
Here is Galindo. Galindo talking and [indiscernible]. We always have 25% as the cap, but we could have a go-to-market that could cause this to differ. For example, we can use scholarships sooner or later, and this has an impact on PEP in the different municipalities. In our cap in the regional office, for example, a principal could request more or -- more PEP, but this has to be approved by the higher education unit. And of course, we deal with this on a case-by-case basis. This happened 2 semesters ago. We have just a few cases on this semester, but usually, for -- per unit, the limit is 25%. In this semester, we should be below 25%. We shouldn't reach 25% of that. We didn't have to use all 25% to deliver on the recruitment goals. In the long term for us, the optimal mix is one where 25% is not exceeded. And in fact, what we see is that it's not necessary. The results in the quarter show this, are proof of this. You don't need more than 25%. So between 20% to 25%, this is the adequate range, I believe.
And I also have a question about the learning systems market. What growth do you expect? What contracts are in the pipeline for 2019? And do you continue to pursue the key initiatives?
Thank you very much, Maria Tereza. The learning systems market continues to grow. It's actually more focused on schools than the textbook. In the figures for '19, we see this market growing. In terms of the competition, I don't think we have more or fewer competitors. It's a different type of competition, which is, in fact, more positive because it's more sophisticated, it's more quality driven. The players we see operating in this field have a policy of avoiding discounts and charging higher fees. So our positioning, which is to offer a very diverse portfolio to the market and with our technology differentiators and the brand reputation we have, I think, it's really adequate considering the current market dynamic. I -- sorry, I just couldn't hear the second part of your question. You mentioned an acronym and I couldn't hear.
No, what about selling other systems like cost of services?
Yes, this is something that is proceeding at full steam. We are now trying to understand the school needs using our own schools as a model. In '19, well, we won't have the go-to-market yet of what we call the allied schools. It's still a year for modeling and pilots. But by 2020, it should come online. And we're working with partner schools. We have many of them. And their receptiveness and their willingness to act as volunteers in our pilots is remarkable. So we -- schools are now aware that they should focus on their core business, which is education, and leave the task of management to another partner.
Now I would like to turn the floor to Kroton for the final remarks.
Well, I'd like to thank you all for participating in this earnings call. Thank you all very much.
Kroton earnings call is now closed. We want to thank you all for your participation, have a nice day.