Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Kraton Educastanal's 4th Quarter 2018 Earnings Conference Call. We would like to inform you that this event is being recorded, and all participants will be in listen only mode during the company's presentation. After the company's remarks are complete, there will be a question and answer session for analysts and investors. At that time, further instructions will be given.
Also today's live webcast, both audio and slide show, may be accessed through Croton and Ecotonel's Investor Relations website at www.croton.com.brir by clicking on the banner 4Q 'eighteen 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 cost and 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 Croton'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 Cranso with Ducachena on the results of the Q4 and the year 2018. Today with me are our Director, Carlos Lazar Finance VP, Jamil Marques and Heads of Business Areas K-twelve, Valerio sorry, Higher Education Roberto Valerio and K-twelve Marie Q. 2018 was an important year. The company dealt with internal and external factors that were really relevant, reduction in CS student 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 Gratun origin very intensely in K-twelve and 4, digital transformation. So student success, higher education growth, focus on basic education and digital transformation, the 4 pillars of the strategic planning, all doing really well in the organization. We'll talk about their 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 Grotto once again attained its goals. Slide 4 compares projections and the results delivered.
Slide 4, we see a consolidated revenue of BRL 5,600,000,000, 1.3 percent above expectations, which proves our commercial strategy was assertive, strong brand and a program portfolio aligned to market demand in addition to the initial positive contribution from greenfield. Adjusted annual EBITDA, dollars 2,300,000,000 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 levers and student retention to neutralize the anticipated pressure of a 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 FIES students until we delivered the results announced.
In revenue and EBITDA, we overcame the guidance, more in consolidated results than in the ex Greenfields view, 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 1,900,000,000, a margin of 35%. The total investments accounted for 12.7 percent of the net revenue in 2018, a reduction compared to the guidance of 13.5 percent 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 kept 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 Guillo, our Vice President of Basic Education. And next, we'll talk about Somos.
Thank you very much, Rodrigo. Good morning to all. Let's 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 and between the two companies.
I would like to show you in broad lines the numbers that give the 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 focus, 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, revenue CapEx among other subjects. We have 12 fronts currently in execution in addition to the 4th operating fronts that will have finalization by the end of this semester and with a high cost in the capture of synergies.
For example, we have integration and centralization of the strategic areas of our shared services center at Croato Vaninhos, the definition of the financial ERP and systemic migration is integration of our cream shop and storage and logistic operations at Krogon and renegotiation of agreements with suppliers with the implementation of the strategic sourcing projects at Somos. I can say that now the company is integrated, and all corporate areas have 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. To some of them, the integration would 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 Croton, a company that tries itself on its budgetary processes, We had a process that lasted 50 pays 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-twelve SATs, schools and language schools, all of them with a different dynamic and seasonality pattern. And of course, the budget treats each of them independently. We also adopted the matricial budgetary vision and 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 the 0 based budgets process at Somos and implemented budgetary management, including system locks to make sure that our expenses are compliant with the budget. 1 of the first systemic integrations we performed was a system lock that locks purchase orders with no budget allocation.
Crofton takes pride in its budgetary culture and the sophistication of its processes. Krotfen, without budget being allocated, it cannot even start the procurement process. And like this, no one will discover budget overruns ex post or after the fact because it simply cannot be made. And all system adjustments were made at Somos. And since the beginning of 2019, Somos was following this rule, and this increased predictability of our costs and expenses.
In terms of treasury, we integrated cash and debt management, including the integration of the venture contracts, creating more opportunities to reduce debt related costs. Now I would like to discuss Slide number 9. Before we begin, it's important to remind you that Sonos has 3 major business lines. First, we have the editorial program geared to the federal government, the National Textbook Program. We also have a school management program, very similar to higher education.
And finally, the integrated K-twelve platforms, which is, in fact, a B2C unit. Slide 9 shows our vision over this business and the different services that make up the platform. We would like to become a full range provider of services for K-twelve schools in Brazil. The most important service we offer today is the learning materials, which could be a textbook or handouts, both in print or in digital format. But there are several other services that complete our portfolio, 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, another differential. We have an addressable market that's very significant. Currently, we have 6,200,000 in the private schools using textbooks, 3,800,000 used learning systems and 2,400,000 used 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, but providing the best educational solution. And based on this concept, we position ourselves as K-twelve education solution platform that is permeated by the use of technology, the 1st 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 activities such as language development and also other skills. We believe that we can increase 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-twelve platform concept fully implemented throughout our brands and current solutions. And now let's turn now to the next slide in which we will talk about the most important aspects 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 in. It's going to be a totally different platform, a non core services under our responsibility. And we want to provide to 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 SOMO's go to market and to adopt different approach based on the commercial relationship of services platform. Some of the 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 a flexible integrated portfolio with recognized brands, including learning systems, including books. And also, we'll 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 social emotional 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 our commercial leaders in integrated solutions to take this transformation even further and also to back up our vision for the future of the K-twelve segment. In terms of our sales team, 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 specifically they report to us. This is only possible, thanks to our technology that is incorporated in the complete portfolio. We are currently investing 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 Alazar, who will talk about Somo's results in 4Q 'eighteen.
Thank you, Guilla. Now the next deck of slides on Somo's talk about adjustments in Somo's results reported to analyzed the financial statements of Somos to align criteria and accounting practices to those of Kraton. So this is reflected in the results and the balance sheet of 2018. Many are non recurrent and have no effect on cash. They relate to previous fiscal years.
After these 9 months, the comparison will be affected. But now the implementation unifies the accounting practices between Somos and Kraton. 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 deductions from the revenue.
As they relate to the operation, they're not really financial events. Secondly, we've implemented a new concept of provision for inventory obsolescence based on production aging because this is more in line with our business and Somos and Groton strategy. We reviewed provisioning criteria for losses in receivable accounts and the criteria for the capitalization of cost 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. We begin from the EBITDA. We would have presented for Somos without these adjustments would have been BRL 499,300,000 in 2018. First, reclassification of punctual payment deduction. Now on net revenue.
So EBITDA, recurring EBITDA is BRL473 1,000,000. Based on recurring EBITDA, we had a few other adjustments. For inventory. We've also reviewed provisioning criteria for receivable account losses, including the impact of bookshop's creditors agreement requests totaling BRL 36,000,000 and also write off of fixed assets and intangibles BRL 11,400,000. Now active deferred tax and time barred recoverable tax impacted EBITDA by $7,700,000 and review of other provisions almost BRL28 1,000,000.
So with that, the whole impact was the whole impact without any effect and cash was BRL225 1,000,000. Now on the other hand, we also had non recurring expenses that had an effect on cash totaling BRL 189,100,000 of which €23,700,000 were for other nonrecurring expenses and EBITDA after adjustments was €84,600,000. In the future, we will consider the recurring EBITDA 1,000,000. In the future, we will consider the recurring EBITDA BRL 4.73 because it shows the results of 2018 without the adjustments and it allows for a better comparison with 2019 results in future years. Now I'll 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. On Slide 15, the guidance of Somos and the educational business unit. So that's Somos company without including Bitagoras and it includes Zets, which is to 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 results of 2018, which is EBITDA BRL 473,000,000 in addition. To allow for comparison, we considered a 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 EUR 473,000,000 of 2018 and it becomes EUR 5 56,000,000 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 19, 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 EUR 670,000,000 for 2019, margin of EUR 34.7 million, it's a relevant growth of 20.5 percent in relation to 2018 already adjusted by IFRS. So margin goes up 4.90 basis points. And EBITDA, the EBITDA guidance is BRL 6.70 million or 4.90 basis points higher reflecting the integration of Somos and Kraton and synergy gains.
We come from a loss of BRL 258,000,000 in 2018, up to an adjusted net income of BRL 100,000,000 in 2019, a significant improvement. Finally, this is perhaps the number one message. Company announces an operating cash generation moving from negative EUR 9,000,000 in 2018 to a positive cash generation of EUR 150,000,000 with an EBITDA cash conversion rate of 24.2 percent already considering the IFRS adjustment too. Now EUR 150,000,000 will be the positive cash generation coming from a negative EUR 9 €1,000,000 in 2018. And this is the 1st year after integration.
So all the efforts to revert this cash generation situation already in the 1st year. These initial projections show the great potential of Somos in terms of profitability gains in addition to the impact from integration, which brings great improvements, 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 structures, a 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 2018, 2019 and then as of 20 in 'eighteen, 'nineteen and then as of 2020. Let me begin saying that in the 2018 earnings, we already had €20,000,000 synergies, raising our recurring EBITDA from €536,000,000 to €556,000,000 which is the number we showed in the previous slide on a basis of comparison with the guidance. BRL556 1,000,000, the third bar is recurring EBITDA of 2018.
The guidance of 2019 is BRL 670,000,000. Of the BRL 114 1,000,000 increase, BRL 19,000,000 came from organic operational growth and BRL 95,000,000 from efficiency or efficiency initiatives or synergies from the transaction. Up until December 2019, we will capture BRL 115,000,000 synergies, BRL 20,000,000 in 2018 and BRL 95,000,000 in 2019. Now Slide 17, an update of the synergies we expect from the integration. I'd like to remind you, when we announced the operation in April 'eighteen, we announced an estimate of BRL 300,000,000 of synergies in 4 years, but we raised that by 20% to BRL360,000,000 on Crop and Day 2018 when we started the integration.
Now we have more access to numbers and opportunities. Again, we raised the expected synergies according to Slide 17. Today, we expect BRL 375,000,000 an increase of 20% compared to the original synergies announced in April 2018, which was BRL 300,000,000. As you've seen in the previous slide, BRL 115,000,000 will be captured until December 2019, first phase. Another BRL 245,000,000 will be captured until as of 2020, totaling BRL 360,000,000 as announced in the 2nd estimate presented.
Today, again, we review upwards this estimate, another BRL15 1,000,000 of opportunities on the integration front. So we move to BRL 375,000,000, an increase of 25% compared to the initial estimate. So we were right when we made the decision to make this investment in so much diversifying operations and opening new growth front. I'll close here and invite our Financial VP, Jamil Marques, to continue.
Thank you very much, Rodrigo. In the next session, I will make some comments about our performance in the most important lines of results, loss, provisioning and also average receivables terms per segment considering crop and stand alone without the stoma impact. So starting with Slide 20, we see the most important lines 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 from greater clarity. In the slide there, 3.7 I would like to call your attention to. Both in the consolidated ex sales vision as in the ex greenfield vision, our net revenues had an increase of 4%, which reflects our robust student recruitment processes, reenrollments and an improvement in the mix of programs, both in once a weekend distance learning, despite the initial impact of new cancers and also the Sonder collection in 2019. We see a decrease in the consolidated deal 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 the increase in cost was expected and is below the business plan for this new unit. And finally, we have adjusted its EBITDA or net income that had a decrease in the annual vision because of the increase in the level 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 this segment. It's important to remind you that like in previous quarters, we exclude from this analysis 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 losses 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 payment, which increased the volume of financial charges and increased also the average term of receivables. The level of losses continued to be higher 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 positions, we see also a 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 a reduction in the number of agreements. This has positively contributed to the reduction of the average term of receivables and losses levels. And we also see a positive tendency. We increased
loan losses because of the
level of losses remaining high. And also in K12, we had an increase in losses provisions, reflecting the cooperation of schools, Leonardo da Vinci and La Prefetso. 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 provisions. However, we were able to reduce for the 2nd 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'll 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. Let's start 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 visavis 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 BRL266 1,000,000. This took total CapEx to 12.7 percent 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 two points to highlight. First of all, post CapEx cash generation saw a conversion of EBITDA to cash of 49% along the year. This represents a reduction in the annual content and relates to the impact of the working capital consumption coming from the change in profile in our student base with a reduction in the number of PES students and also reflecting the high number of graduations and lower student recruitment rates. And in 2018, we generated BRL 994,000,000 in cash with the operations post CapEx.
And we consumed $427,000,000 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 post CapEx at BRL 994,000,000 in 20.18. In the first block, we had BRL 342,500,000, BRL 206,000,000 of which were destined to the organic expansion with the opening of 25 new on campus units, BRL 600,000,000 were invested in digital transformation processes and also BRL76,500,000 were geared to the acquisition of controlled companies. In the second block, we see value generation to shareholders totaling BRL 833,000,000 in which we had BRL 194,000,000 of dividends and of repurchase of shares along the year is important.
And BRL 639,000,000 of dividends. We maintain a payout of 40% along the year in spite of our new projects. We also had the if we reduce gross debt, representing BRL224,000,000 in debt amortization. This take us to the BRL 427 1,000,000 of free cash that was used in the year. Now moving to Slide 29.
Let's talk about the net debt considering consolidating the Vielkroft and plus Sonos because we believe this is the more adequate way of integrating our cash and debt positions. At the end of the year, we have cash availability of BRL 3,600,000,000 representing 50% growth in comparison to 4Q 'seventeen. This is due mainly to the increase in gross debt of BRL 5,000,000,000 in compared as compared to BRL 4,100,000,000 used at the moment with the acquisition of Somos. So if we add up all the financial debt and our short- and long term liabilities, we have net debt of BRL 5,100,000,000 in 4Q 'eighteen. And this is explained also by the initial debentures at Sabe in a total amount of BRL 5 point 5,000,000,000 and also the sum of the effect.
We also have receivables, short- and long term, The second part of the payment for the sale of Nynia Salvi, 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 fare, pack and famas concluded in August 2017. Considering our receivables, our net debt was BRL 5,000,000,000 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, Jean Michel. Slide 31 for final considerations. We continue in an accelerated phase of organic expansion. We're doing really well and all that can be implemented, 12, in the first half of twenty nineteen as approved by 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 Canbi in the first half of twenty nineteen with for on kempi learning and we expect to open another 12 in the second half, closing the year with 167 kempi, growing 17% compared to EUR143 we had at the end of 2018. The project is doing well. We are happy and probably the breakeven curve. And also the cross of the line when we begin to have positive cash generation will be before plan.
In addition to 100 new education centers, we will open another 100 in the second half of twenty nineteen. So we will have BRL15.10 at the end of 2019, growing 15% vis a vis 2018. We are increasing our capacity and also we're improving the program mix with the new on camping 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 due to the more fierce competition we're facing now.
Now in the middle of the slide, you have an update of student recruitment process for the first half of twenty nineteen. 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 Kemppi and Distance Learning. In Distance Learning recruitment, we will have approximately the same volume and average ticket. Now on Kempe, the volume will be similar to last year, but the average ticket has a positive trend in on Kempe. 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 ticket on Kemppi. 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 5.50 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 process in the quality of our technology deliverables. We see a drop by expecting in the volume of incidents and problems in all projects that involve our systems migration, which brings cost efficiency, efficiency and CapEx 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 are building a new organizational culture, which has 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. In the past, we had 7% of all services being 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 for analytics, more granularity. We're improving our algorithms for predictions, bringing more information on academic issues and also analysis of student dropout, for example.
So we are becoming increasingly more sophisticated. And this was possible because of all the decisions we made in the digital transformation and because of this digital mindset we took on. Finally, ever since we took this role of curators on the education vertical of Itau Cubo, we came to know 2,390 startups. We had almost we had more than 2,000 visits at Cubo. We had 145 connections with Kraken ambassadors, who are our leaders responsible for identifying technology solutions for their areas.
8 experiments have been conducted to find solutions at Kubel to solve krautin 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 or 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 our great differentiator in the next few years. The final column talking about dividend payout, BRL 43,000,000 or BRL0.03 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 VIES students graduating. In 2019, the macro scenario will still be unfavorable, but we are certain we will deliver more sound results in 2019, especially in cash generation. In terms of K-twelve 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 project and also sustainable growth to provide quality education and ensure the success of our students. 2019 will be another year of achievements for Croton.
Thank you very much for participating, and I'll invite you for the Q and A session.
Thank you very much. Ladies and gentlemen, we will now initiate the Q and A session. Our first question is from Susana Salaru, Itau. You may proceed. Good morning, everyone.
Thank you very much for the opportunity to ask questions. I have 2 questions, in fact. A question to Guilherme in relation to the ARPUZ revision of synergies. In which synergy blocks is it going to happen, 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 past students starting at low level initially, but we would like to know what will be the impact of that in terms of financing. Do you see graduation still starting to pay dividends? Thank you very much, Susana. Here, 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 these synergies are in OpEx. So the BRL15 1,000,000 in addition to what we had reported before are completely in OpEx. Susana. I hear Jamil in relation to the question about the graduating pet students.
We still have a very small level, 1500 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 collection. And up to now, we continue to believe that the guidance we gave is adequate.
Sorry, Jean. Did you say that the payment no, there was a 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 8%, we're still collecting 92%.
But the behavior of the students up to December, their payments 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 student. Our next question is from Mr. Rodrigo Gascin, BTG Pactual. You may proceed.
I have two 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 390,000,000 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 1,200,000,000 that were provisioned for SOMS? This is the first question. And now going to distance learning, there were efficiency gains and costs that were relevant, especially in relation to the teacher costs. If you consider personnel costs with a drop of 45 percent year on year, this is quite a sharp drop considering the company had also high margins on business learning. So what's behind this reduction of 40% also in VL?
This is Camindo.
About the provisions, when you have an M and A activity, opportunity to post against the opening balance sheet probable and possible contingency provisions. And because of transparency, we posted all probable and possible provisions. The ones 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 2,600,000,000, which is the total amount of guarantees, whether we have been provisioned or not. Of the BRL 2,600,000,000, BRL 1.3 $1,000,000,000 is premium. And we are convinced that we will come out winners.
And this amounts to 1,300,000,000, dollars 6,000,000 we have collaterals or guarantees. So what is left, BRL 600,000,000, which is the overall amount of possible labor suits. Many of them are highly convinced that we may come out winners or that these 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 lawyer 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. Good morning, Gaston. How are you?
In relation to the efficiency in DL, 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 is more sharing. For example, before we could have 2 professors teaching 2 different disciplines. And with the synergies, we have just 1. So this, of course, is a good synergy to be captured.
Secondly, we have the efficiency in the tutorship program. We've talked about it in the past. Maybe you 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 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. Thank you very much. Very clear.
Thank you, Valerio. 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 Saver. So it's exclusively everything that you have on Somos in terms of probable and possible contingencies, is that what you have brought into the balance sheet?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Correct. We have zero contingency provisions from Kraton or Sapa. All of them are related to Somos.
Our next question is from JPMorgan, Marcello. You may proceed. Thank you very much for taking my question. Could you talk about the ticket? It's been mentioned.
And 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? Marcelo, I'll start and then Marcelo will 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 Diel. However, the reason why we have a flat or a little similar to that is because we have more pressure on web products. And once a week, with higher pressure on web products and once a week. And also a high 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 this is very similar to that.
We have higher pressure in the distance learning ticket. And in on campus, we don't see this movement. 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 two. So this increase in ticket in on campus is related to 2 points. The commercial strategies we are implementing with fewer discounts and scholarships, we couldn't given more emphasis on volume, but this is not the way we chose 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 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 the 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. This sophistication 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 bots that are 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 records, the ones that are really are being practiced.
And we don't do this on
a very large scale, but it's yet another validation step. So as a result, we get more accurate information on a more regular basis than 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 and all. So if you compare this to the competition, you can make the necessary adjustments on a daily basis indeed.
And I think so I'm not 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 twice as large team as before working on this. Our next question is from Mr. Roberto Atero, Bank of America.
In fact, this is Pedro. 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 pet students and contracts that become inactive, do they remain on the pet line even if the agreement is inactive? Or 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 pipeline?
Beginning from the last question, no, we don't do this migration. In active fab 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. Okay, it's clear. Thank you. Our next question comes from Mr. Leandro Barnes.
You can begin.
I have a question
about the integration of Somos. 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. I've seen in the explanation notes, you have a goodwill of about BRL 4,000,000,000. So would it make sense to think about 34% of this amount, so BRL 1,400,000,000? So I think that my question would be that if this would be reasonable assumption, so as we can try to calculate these gains?
Or would you have more concrete numbers to convey at this time? Leandro, this is Jean Michel. We cannot really have the exact number. But yes, it's approximately, as you said, with these 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. Luisa Mauricio from Bradesco Bank. Luiz, you can begin. Two questions. First, going back to the SOMOS opening balance sheet and contingency provisions.
We have seen, I mean, as we look at previous additions and well 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 leaped to BRL97 million for a revenue of BRL70 million in these two segments. When we look at the portfolio, it's growing about 60% if we consider the write offs 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 two questions, please. Mauricio, this is Rodrigo Gallien.
I'll answer the first question. Jeremy will answer the second. About the contingency provisions, there are some comments I want to make. First, in the 1st year after the opening balance sheet, we can still make adjustments in the lines posted in the opening balance sheet. So if we have a relevant adjustment that we may identify in the 1st year, we can still do that.
This is the first message. 2nd message, in all previous acquisitions, even if it affected results, we always provided all the necessary disclosure whether the adjustments were to revert 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 670,000,000 for Somos has BRL0 of contingency reversals. And this is important, even if we may have these reversals of contingencies and even if they affect the result, they can only affect positively this guidance of EUR 670,000,000.
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 Croton 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 reversals, this is not going to impact cash.
Obviously, if we have a process of goodwill, dollars 200,000,000 if we make them out, when is we're not going to include $300,000,000 on results because this would distort our analysis. This would harm the comparison of results. But a small labor suit may be 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 1st year, not only can we decide what will be recurrent or nonrecurrent, if we have 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 to Jean Michel, 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. It's just a question. Yes, we could see that even in the 4th Q, you had another growth in receivables. But even when you look at the breakdown, you'll see a lot of pressure, not only because of the reflection of FIES students.
Yes, well, the PEP and B and T are still not in our base, at least not as the phase out of FIES students is 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% 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 PAP 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 2,000,000,000. The other items I think I've mentioned, the portfolio of receivables throughout JAK Pockets students grown also in 'eighteen.
In 'nineteen, 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 these agreements. 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. It was a 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 yes, 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 on 2019, so the increases will 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 Theresa Azevedo from the UBS
Bank. Well, several questions have been answered. But going back to the 25% GAAP for PEP, can you be a little more flexible in that? And what would be the optimal mix in the long term, thinking of the financing and also cash to EBITDA conversion? Maria Teresa here is Galindo.
Galindo talking and Roberto Maypeche. We always use 75% 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 pets in the different municipalities. In our cap, in the regional office, for example, 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, 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 once where 25% is not exceeded. And in fact, what we see is that it's not necessary. The results in the quarter show this. They're 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 ERP initiative. Thank you very much, Maria Theresa. The Learning Systems market continues to grow. It's actually more focused on schools than the textbook. In the figures for 'nineteen.
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.
So 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 back office 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 'nineteen, 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 are 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 Crawford for the final remarks.
Well, I'd like to thank you all for participating in this earnings call.
Thank you all very much.
Cronto earnings call is now closed. We want to thank you all for your participation. Have a nice day.