Good morning, ladies and gentlemen. Thank you for waiting. We would like to welcome you at this time to Cogna Educação's second 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 Q&A session for analysts and investors. At this time, further instructions will be given. Should any participant require assistance during this call, please press star zero to reach the operator. Also, today's live webcast, both audio and slideshow, may be accessed through Cogna Educação's investor relations website at www.cogna.com.br/ir by clicking on the banner 2Q18 webcast. The following presentation is also available to download on the company's website.
The following information is available in Brazilian reais and accordance with Brazilian corporate law and generally accepted accounting principles, BR GAAP, which now conforms with international financial reports and standards, except where otherwise indicated. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Cogna management and on information currently available to the company. They also rely on currently available information, and of course, they involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements. I'll turn the conference over to Cogna's CEO, Mr. Rodrigo Galindo, who will begin the presentation.
Mr. Galindo, you may begin the conference.
Good morning, everyone. Welcome to the results conference call, Cogna Educação in the second quarter 2018. For the first time, we're using simultaneous interpreting so that we can provide information simultaneously to our domestic and international stakeholders, and we would love to hear your feedback on this initiative later. Together with us, we have our IRO, Carlos Lazar, our VP of Finance, Mr. Jamil Marques, and the leaders of our two main lines of business, Mr. Mario Ghio, and the higher education CEO, Mr. Roberto Valério. In today's presentation, we will discuss the main operating and financial highlights of the quarter. We'll give you an update on our organic and inorganic growth projects in all lines of businesses where we operate.
Something that's very important, starting in the first quarter of 2018, we started reporting consolidated results with and without greenfield effects because this is, of course, something that's very relevant for our strategy. They have a very long maturity curve. As such, there is a higher negative impact in the margins in the first half of the year. What we hope to do by doing this is to offer you greater comparability with ex-greenfield operations. If I were to summarize the most relevant messages of this conference call, I think we have six of them. First of all, I would like to reinforce that the first quarter earnings show that we are on track to deliver the guidance. When we look at those projections, we see that they will probably be delivered on.
The second message is that our organic growth projects, I think this is the most relevant message of all is that we are being very successful in the implementation of these organic growth projects. To give you a little flavor, between 2017 and 2019, one will have 61 new on-campus units, all have been successfully implemented so far. At the end of the presentation, we'll go back to that, I think that the numbers will give you an indication of the size and magnitude of this opportunity ahead of us in the next years. The third message is that we have maintained a very high level of operating cash generation post CapEx with a conversion above 56%. Of course, this not considering the PN 23 amounts that we have received in August.
Therefore, the conversion rate was above 56%, which bears proof of our soundness. The fourth message is that we are really focusing on customer centricity. Academic success is our priority because we think long-term. A company can only generate value in the long term if they're able to resolve the issues of their students, of their customers, and this is what we call academic success. We are putting a lot of energy and resources to that goal. This is actually based on three pillars: quality, experience, and here we refer to experience in all such points, academic, non-academic experience, on-campus, distance learning, and also employability. With these three pillars, we create what we call academic success. To give you an idea, 37 of the 126 projects of the company now revolve around this topic.
The fifth important message is that our digital transformation process is proceeding very successfully and bringing on positive results. It's very impressive to see the amazing results we have obtained through the integration of business areas. Now business areas can understand that digital transformation is part of our business, all of this has been driving efficiency and development of our systems. If you're interested in finding out more about digital transformation, we have some comments about this initiative in the administration message of this quarter, or please get in touch with our investor relations department. We would love to give you more information on that. We are certain that in the long term, this will completely revamp the company, that in the short term, it's actually adding much more value than we had expected.
The sixth message is that our acquisition of Somos is moving on very smoothly. To talk about this acquisition, I would like to ask you to turn to slide four, where I will give you an update on this acquisition that was announced on April 23. As we had previously discussed, we'll be using part of our own cash for the financing, we'll also go to the market to obtain loans. The first thing we had to do, of course, was to get the ratings, we were very successful in that. From Fitch, we got a triple A, which is the highest rating in the scale, and in Standard & Poor's, we got a double A, both for corporate and for the debentures operation. Once again, it's double A by Fitch. That's valid both for corporate and for the issuance of debentures.
Our holding, Saber, that will be responsible for the acquisition of Somos, has already been registered as a listed company by CVM as a category B issuer. This is essential to broaden our access to the lending market. Final registration was granted on August 13. We are in a quiet period right now. We cannot give you more information about the debt, but the instrument has already been approved by our board, and the minutes can be found on CVM's website, should you would like to look up some more information about it. Additionally, as we are waiting for the CADE's evaluation and approval of Somos, we have completed the due diligence process, and we have a clean team working very hard on the planning of the integration of the companies.
We know that nothing should be executed at this point, but we can very carefully plan for those integration activities. This is what we're doing as we did in other integration processes. This has been essential to capture benefits and synergies. Of course, we can't wait for the closing and approval from CADE. But of course, the initiatives will only be implemented after the approval. We have 35 people involved, working on 25 functional fronts, and we are feeling very satisfied with the performance. All of this reinforces our confidence in the potential for synergies, the potential for growth, and therefore the potential that this transaction for our company. I'll now hand it over to Carlos Lazar, our IR officer, who will proceed with the analysis of our financial results per segment and consolidated results. Thank you, Rodrigo.
Let's turn now to slide six for an analysis of the main lines in the second quarter 2018. I would like to reinforce that both the results for this quarter and year-to-date results are proceeding according to expectations. Therefore, the guidance we have announced in the last quarter will be delivered on. Like we did in the previous quarter, we will share with you two visions of consolidated results. One, excluding the results of the assets sold in 2018, and another vision that removes the impact of the new units, the green fields that are still maturing, and therefore putting a pressure, a timely pressure on our results and earnings. Looking to the chart at the upper part of the slide, let's see consolidated vision X sales on 2Q 2018.
We see a net revenue of BRL 1.5 billion, up 1% in comparison with the previous year, reflecting the positive enrollment and re-enrollment in on-campus and distance learning, and also the contribution of new centers launched in the first half of the year. We also have the impact of the acquisition of Centro Educacional Leonardo da Vinci, a K-12 school that was acquired in August last year. Now let's take a look at adjusted EBITDA, totaling BRL 641.5 million in 2Q 2018, with a margin 42%, down 7.6% and 400 basis points, which reflects the one-off increase of [honorários] relating to the opening of the new units. I would like to reinforce that the numbers are completely within what's expected, and we'll give you more information at the end of the presentation about the performance of the new units.
Looking to the right side of the slide, we see adjusted net income reaching BRL 562 million this quarter with a margin of 36.8%, dropping 12% and 550 basis points respectively, as a result of the impact of the new greenfields and also the lower interest or financial results. Let's take a look at the lower half of the slide. Excluding the impact of greenfields, revenues reached BRL 1.5 billion, in line with what recorded last year, which proves the resilience of our operations same store in a year where we see a very large number of graduations of PS students following the huge enrollments of 2013 and 2014. If compared to 2017, our PS base is now 34% lower and represents 29%. At the same time, our net revenue from PS dropped 31% if compared to Q17.
Even though we continue to implement efficiency levers and looking for new value generation sources, the change in profile of students impacted our adjusted EBITDA, which totaling BRL 662 million in 2Q18 with a margin of 43%, down 6.1% and 300 basis points in the annual comparison. Up to 2020, we should continue to feel the pressure in the provisioning for losses because of this change in the mix of students. I would like to emphasize that we're still feeling very comfortable with the premises we adopted in relation to PEP and PMT, which we'll discuss later with you. Finally, adjusted net income ex greenfields was at BRL 572 million in the quarter with a net margin of 37.8%, down 10.2% at 450 basis points, reflecting the same effect we have already described. Moving on to slide seven, where we see the variations in the most important lines.
Starting with on-campus, I think it's important to underscore that we removed the impact of assets sold. With this, we have recorded an increase of 1.3% in net revenue in this segment, which is a very positive achievement in a very adverse macroeconomic scenario. This is, of course, due to the quality of our education and the strength of our commercial campaigns, which resulted in student recruitment and positive retention. We also have the contribution of the newly opened units. Besides that, another important impact to mention in this segment was the increase in the average ticket of 0.5%. This, of course, is due to the participation or increase in the medicine and engineering program.
Following the trends in net revenues, gross profit saw an increase of 0.6%, and in spite of all the efficiency initiatives we continue to implement, we saw a drop of 50 basis points in gross margin. This is a one-off impact of the increase in cost, also relating to the launch of new units. This effect also had an impact on operating results and margin. Also in the provisioning for the segment with the substitution of PS students and with a higher number of out-of-pocket students. All of this put pressure on our operating results. I think it's important to remind you that in 2018, we have the largest number of graduations among PS students after the strong wave of recruitment that we saw in 2013 and 2014. Moving along to distance learning.
There was a decrease of 1.6% in net revenues because the tuition for this project are not eligible to scholarships or discount. This decrease was more than offset by efficiency because there was an increase of 1.5% in gross profit, also 280 basis points in gross margin. As you know, we have introduced a new tutorship model in early 2017 that has significantly improved their performance. We also have an increase in the number of 100% online students. This line, of course, is much leaner in terms of cost. Finally, operating results. Pre-marketing increased 3.7% with a gain in operating margin of 370 basis points. What contributed to this result was the larger number of debt negotiations with our students. That was reflected in the increase in the interest receivables line. In line with our new collection policies. Now moving on to K12.
Net revenues saw a hike of 12.2%, especially because of the acquisition of Leonardo da Vinci. This is a school that also heralded Kroton's entrance in the premium K12 education with very expressive tuition, but also lower margins. All of this was reflected in a contraction in the gross margin and also in operating margin. Now that we are trying to increase our presence in this segment, with the integration of Somos as well, we expect to see better results in this segment as a whole. Besides that, we will continue to expand it. Now I finish my part of the presentation, I hand it over to our VP of finance, Mr. Jamil Marques. Thank you very much, Carlos. In this part of the presentation, I will talk about our level of provisioning for losses and our average receivables term.
Starting on slide nine, we'll take a look at the provisioning for losses of each type of student. X, of course, FAIR, PAC, FAMAT, and Novatec. Starting with the on-campus segment, our PDA was 13% into Q18, an increase of 260 basis points in the annual comparison, reflecting the growth in the PEP and PMT base of students. In comparison to the previous quarter, PDA remained stable. If we consider only the PDA of out-of-pocket students, there was an increase of 30 basis points in comparison to one Q18. This derives from the adjustments that were made to meet the delinquency expectations that we had in a very adverse macroeconomic scenario. It's important to emphasize that this decision to increase our PDA is in line with our very conservative policies in this area.
Now, taking a look at the middle of the slide, where we see the numbers of distance learning. Our PDA was 9.9% in the quarter, down 10 basis points vis-a-vis to Q17. This reflects a lower number of PMT students in this period, late enrollment. In the quarterly comparison, there was an increase of 20 basis points. Of course, this had an impact on the out-of-pocket PDA with an increase of 30 basis points too. Because of the growth in the 100% online students, besides the impact of the macroeconomic scenario as we have seen before. Finally, moving on to the right side of the page, we see basic education, where we remain flat at 0.8%, which attests to the robustness of our policies. Moving on to slide 10, where we see the average receivable terms per segment, also excluding impact from FAIR, PAC, FAMAT, and Novatec.
Starting with on-campus, the average term was 181 days into Q18, up 25 days in the annual comparison. This as a result of the impact of PEP and PMT, and also a deterioration in out-of-pocket average term. In average out-of-pocket terms, we recorded 99 days, longer nine days in comparison to Q17. This is also an impact or a consequence of the more acid macroeconomic scenario and also a larger number of debt negotiations with our students. The FIES average term reached 166 days, 21 longer than the previous year. Here, what we saw is that the lower FIES revenue is what really made a difference. We have already received the 50% that are owed to us as under PN 23, those amounts will have an impact in through Q18.
Finally, the average PEP and PMT average terms reached 425 days, growing 137 days in line with the ramp-up expected for this type of product. Moving on to distance learning. The average out-of-pocket term was 95 days into Q18, increasing four days in the annual comparison. This is due to the challenging macroeconomic scenario and the increase of the 100% online students in relation to 1Q18. We have eight days more, this is due to the seasonality we normally observe in the quarters. In PMTDL, the average term stood at 472 days, 241 days higher than the average term of 2Q17. Finally, the average receivable terms in K12 amounted to 85 days in this quarter, 56 days before or lower than 1Q18, as a result of the seasonality in collection efforts.
The results we are showing in this quarter are a reflection of our difficult macroeconomic scenario that continues to be very challenging. At the same time, we can show the resilience of our operations, sustained by the focus in our academic success for our students. Starting July 2018, more than 80% of our collection initiatives have been implemented, which includes this tripod of indicators, loss provisions, average term, and dropout rates. We always try to find the best balance between the three. Now, I would like to invite you to see next the discussion of CapEx cash generation indebtedness starting in slide 12. If we look at the charts on the left side, we see the recurring CapEx, which recorded BRL 108 million, a ratio of 7% of net revenues in the period that was invested mostly in development of content systems and software licenses.
With this recurring semester, CapEx totaled BRL 209 million, 7.2% of net revenues, up 11% in the annual comparison. We also have investments that relate to special projects and greenfield projects. By adding this up, the total CapEx in 2Q18 represented BRL 163 million, or 10.7% of our net revenues. In the semester, CapEx stood at BRL 278 million, 9.6% of the net revenues for the period. To support all of our organic and digital transformation projects for the second half of the year, we will see those investments pick up even more, reaching 13.5%, as announced in our guidance. Moving on to slide 13. We'll take a look at cash generation in the quarter and year to date in the semester.
In this quarter, as we have been discussing, our cash generation was affected by the re-enrollment curve and the lower volume or representativeness of PS, besides the impact on working capital that was caused by the change in the profile of our students and also in terms of financing. Thinking of the semester, as we have discussed in the first quarter call, we had some seasonal effects, which also created a negative impact of BRL 198 million. If we were to adjust this, our cash generation would have been BRL 600 million with a conversion of 58% in the semester. For the third quarter 2018, we expect far more robust operating cash generation, which includes BRL 786 million that have already been received from July to now, including BRL 400 million under PN 23, which now has been settled.
In spite of all of this, our cash generation post CapEx in the period was extremely robust at BRL 318 million and with an EBITDA to cash conversion of 56.3%. Our free cash flow was negative in BRL 408 million, reflecting the dividend payout in the period totaling BRL 229 million. Besides the stock repurchase volume amounting to BRL 204 million. In the next slide, I will show you a little more on the operating cash generation post CapEx and the special projects for free cash flow. Starting with slide 14, let's start with the operating cash generation post CapEx of BRL 318 million. We invested BRL 136 million in the first quarter in our expansion projects. This includes BRL 333 million in organic expansion initiatives and BRL 106 million that refer to the acquisition of on-campus higher education schools, and also the Leonardo da Vinci school.
In terms of value added to our shareholders, we have compensated our shareholders in BRL 533 million, of which BRL 204 million in stock repurchase, considering the multiples our shares were being traded at and its potential for valuation. Those stock repurchase operations were completed within the framework of the program that is valid up to December 2018, as we have announced in the previous conference call. We also paid dividends for two periods, in that BRL 148 million referred to 4Q17 and BRL 181 million for 1Q18, adding up to BRL 329 million in disbursements in the quarter. Moving on to cash and third-party value generation, debt amortization, and interest. Here we saw an impact in consumption of BRL 22 million. If we add everything together, our free cash flow was negative in BRL 408 million in 2Q18. Turning to slide 15, let's take a look at our net debt.
Kroton closed 2Q18 with a total cash equivalent of BRL 1.1 billion, down 26.8% in the quarterly comparison. Because of the consumption of cash I have explained, and that includes stock repurchase transactions. Adding our debt and short-term and long-term liabilities, net cash was BRL 720 million. Here, of course, we have also some short- and long-term receivables to think about, such as the 50% of PS installments that were not paid in 2015 and that were received in early August, and that will cause an impact on 3Q18. We also have the second part of the payment for the sale of Uniasselvi and also the payment for the sale of FAC/FAMAT. That took place in August 2017. Therefore, the net cash was BRL 1.7 billion at the end of 2Q18.
I thank you all for your attention, and I'll hand it over to Rodrigo for his final remarks. Thank you very much, Jamil. Moving to slide 17. As I said in the beginning of the presentation, we are being very successful in our organic expansion plan, especially on campus. I would like to share with you some of the initial numbers of the new units we have opened. I think that they serve as an indication of the success of the project. Before 2018, we were not opening as many campi. We had opened just six units.
In 2018, we became much more vocal in relation to our intention to grow organically and start with more greenfield projects that have a longer maturity, that also bring much higher returns. For us, it really made sense for the company in alignment with other inorganic growth strategies, such as Somos, to implement an organic growth project in our on-campus units. We had announced, in the last call, the opening of 10 new units. In the second half of the year, we have opened another 13 greenfields. In addition to this, we have completed the acquisition of two on-campus small-sized higher education institutions, one in Bacabal, in Maranhão. On July 3, we also received approval to acquire an asset, a small-sized asset in João Pessoa, Paraíba. With this, we have 25 new units in 2018.
We also have some very small units that are being used as accelerators for our activities. Like this, we'll be able to drive growth. We have 25 new units being opened in 2018. If we add everything up, we'll finish the year with 173 campi on campus implemented. For 2019, we are expecting 30 new units. Our management plan will or has established that student recruitment will continue. If student recruitment for 2018. As such, we'll close 2019 with 173 campi. This represents growth of 54% in comparison to the 112 campi we had in 2017. Since each of our units can add 3,000 students to our base, the 61 units that have been or will be launched between 2017 and 2019 will add 183,000 new students to the company when fully mature. This represents 47% of our student base into Q18.
As you can see, it's a huge opportunity. Even if it's a long-term project, it will add a lot of long-term value to the company. Let's take a look now at the current status of this project. Here we see some more information, we can compare this to our business plan. The margin is still small, the combined net revenue for these units is in fact 38% above, student recruitment was 24% above the original business plan. As for overhead and SG&A, we are 16% below the business plan. It's worth highlighting that the business plan, the original business plan, counted on a return rate of 26.2% in 10 years and 42.4% in perpetuity. Those were very adequate return rates, and with a potential upside, performance can be even better. Return for investors will be great, as you can see.
We've been successful in all implementations so far. Moving on to the last slide, I have some final remarks. Even though we're still working on student recruitment and re-enrollment for the second half of 2018, we have completed around 60% of the process, similar to last year. The current student recruitment curve is growing very well. This is a result of our competitive advantages, such as quality education, our employability portal. We also have a position as the most preferred brand in education and also the payment plans we offer to our students, besides other tools that deliver the best experience to our alumni. In terms of acknowledgments, we are very proud to achieve, once again, first place among the most innovative companies in Brazil. This is an award that shows that we are proceeding very successfully in our digital transformation and innovation efforts.
We want to become the most digital educational company in the world. We are working on it, and this is our ambition as a company. I would like to talk about two very relevant partnerships that we have established recently and that add more to this digital transformation process. In June 2019, we announced the partnership of Cubo Itaú. We'll be the sponsors of Cubo Education. They are migrating to a 12-story building and will have five stories dedicated to specific areas. One of them is education, and Cubo Education is being sponsored by Kroton. All of this helps create the largest EdTech hub in Brazil so that we can add value to development of education in Brazil. Since we operate very closely to startup companies, in addition to promoting education, we will also be able to transform the culture of our students.
We'll come across several technology solutions and disruptive educational technologies that will create opportunities for Kroton. We'll also give our students the opportunity to experience innovation in the Cubo startup environment. Kroton will be responsible for a whole floor dedicated to education in Cubo Itaú. There, we'll incubate and accelerate EdTech, besides having a learning space, studios for recording videos, and other classrooms prepared for different methodologies and innovative technologies. Part of our innovation team at Kroton will be allocated to the space. I think it's a win-win proposition for all involved. We'll be able to understand business needs, and it's going to be fantastic for Kroton because we'll be able to select companies that can really make a difference providing solutions for Brazilian education and Kroton. In July 27, we established a partnership with Udacity, an American platform of open enrollment programs in the area of technology.
The first joint project was the creation of an executive MBA in digital marketing, which puts together Udacity's digital marketing program with our digital marketing MBAs from Anhanguera and Unopar. The content was developed in partnership with Google, Facebook, HubSpot, Mailchimp, and Hootsuite. All of this will enable us to offer both an MBA program with state-of-the-art technology and new developments. With this partnership, we'll be able to offer state-of-the-art products and also make our digital transformation go forward. We want to establish partnerships with partners like this. As announced, we have implemented a new organizational structure. This is something we had started more than a year ago. We have higher education on campus and higher education distance learning as part of this.
It's important to remember that blend education is now becoming more prevalent, and all of this, together with syllabus components, will be offered both on campus and in other forms, according to the applicable law. In the vision of the company and organizational structures that can capture this hybrid trend is the way to go. Roberto Valério has become the CEO for higher education, which concentrates all operations in this segment, besides marketing and sales. We think that this will add a lot of value to the company. Our board of directors has approved the distribution of dividends totaling BRL 177.6 million, representing BRL 0.11 per share with a payout of 40%. Dividends will be paid out on August 29, 2018. The first half of the year was very challenging, as you know. Once again, we were able to demonstrate our resilience, our solidity, and our ability to execute.
We're building the pillars that will define the direction of the company for the future with an organic growth project that is actually surpassing our expectations and plans. We had a very transformative acquisition to both Somos. This will enhance our participation in the K-12 market and expand our ability to operate. We are also investing in digital transformation in the company and working very hard to improve the quality of education and student experiences. What we want is to transform lives of our students and help them achieve all of their goals. We are feeling very optimistic about the results.
We have delivered, we'll deliver on the guidance, but even more than that, it's important to consider the long-term benefits we're building in the company, whether through organic growth projects, through digital transformation with an impact in the medium and long term, a focus on customer centricity and academic success. All of this will add value in the medium and long term and makes us feel confident that we are on track. Thank you very much. Now you're all invited to participate in the Q&A session. Thank you very much.
We're opening now for the Q&A session. If you would like to ask a question, please dial star one. Our first question is from Mr. Thiago Bortolucci from Goldman Sachs. You may proceed. Thank you very much. I have two questions. In relation to PEP, could you please explain a little more about the dropout rate for PEP?
Is it correct to think that it's actually a little below the out-of-pocket students? From the BRL 170 million that you have mentioned, how much of this balance relates to students that have already dropped out? In relation to DL, considering the maximum load of 40%, assuming that the adaptation occurs, are your academic models ready to seize this opportunity? Thank you very much, Thiago. I'll start with the second question about the increase in the digital content workload in on-campus programs. Well, the answer is that we are fully prepared to seize this opportunity if it's approved in our academic centers. We have loads of 30% to 40%. Whatever percentage the Ministry of Education defines can be implemented in our centers if there is swift approval of this change. Now I'll hand it over to Jamil, who'll talk about PEP. Hi, Thiago.
Thank you very much for your question. In relation to dropout rates, it's difficult to analyze this because the PEP is present in different cycles than out-of-pocket. The dropout rates continue to be in line with the out-of-pocket students' dropout rates all the way through graduation. In relation to the receivables that apply to students that have dropped out or drop out, we don't give any guidance on this information. What I can say is that it's in line with the dropout expectations.
Jamil, could you say a little bit about how much you hope to recover in terms of dropouts?
In this 50% recovery expectation, we hope to recover 20% of dropout students.
Thank you very much, Jamil, for your answers. Our next question is from Mr. Marcelo Santos from JP Morgan. You may proceed. Good morning, everyone. Thank you.
I would like to talk a little more about K-12, especially in owned schools. I think that this is still not very representative in our portfolio, we could use it to analyze, for example, the growth margin, which is now at 22%, down 19 points with the addition of Leonardo da Vinci. This, of course, shows a very relatively low growth margin. Last year, you gave us the impression that we would be at 30% in margin in this segment. What are the levers you're thinking of exploring to improve this margin? What would be the value generation levers here for the next quarters? The second question is about distance learning. What's the share between 100% online and hybrid? I think that hybrid is probably growing. What is the competitive scenario and outlook? What's the dynamic in these products? Thank you very much.
It's Ghio here. I would like to answer your first question first, okay? Roberto Valério will continue. Exceptionally, in this semester, Leonardo da Vinci had a very strong impact because it came up together with several one-off impacts. Leonardo da Vinci was a family-owned company that was based on the cash regime. Part of the revenues this year were brought forward to the end of last year, especially for the companies that preferred to pay for the tuition on the spot. Some of the services were also paid in advance in the first quarter. Now that we're reporting on the 2Q, all the expenses are correct, we have also a large part that was reported in advance.
It's important to highlight that all of our K-12 business, considering flagship and greenfields, as they mature, can reach the results we have been discussing and that we showed you on the Kroton Day. Especially now that new units are being opened, several of the fixed costs will be diluted by greenfields, we'll see an improvement in addition to the correction of seasonality I was talking about. Greenfields will bring down several of the fixed costs and overhead. We're still feeling very confident on the margins we have announced to you.
Hello, I'm Roberto. In relation to your question about distance learning and the online programs, it's important to say that our strategy is still focusing on the on-campus programs. This is a strength we have because the programs allow for greater interaction with the students.
We have been selling a lot of 100% online programs, with the increase in competition, this 100% online has been used as a warfare tool. We don't want to reduce the hybrid programs too much in terms of pricing, but we can use this other tool. It's important that we consider the 65,000 offers that we have in distance learning. This is, of course, something that was created with the multiplication of centers, and we can price and analyze the competition program on program. A lot of people use the 100% online offering as a tool to compete with other players. We know that our competitors also offer 100% online programs. Very few offer 100% on campus. It's only natural that 25% of our recruitment happens on 100% online.
We continue to focus on on-campus, especially with the expansion of Web Premium, which is on-campus activities one or two times a week.
Our next question is from Mr. Roberto Otero from Bank of America. You may proceed.
I have a question about cash generation. We saw an improvement in the first quarter, but still below historical levels. I would like to know the level of conversion of EBITDA for the third quarter, what should we expect?
Hi, Roberto. In operating cash generation, actually we are below the previous comparison period because since 2017, the government has been advancing the last installment of PN 23, and we also have a change in working capital with the substitution of PEP by other types of students. We have been saying that we are expecting a small drop in comparison to the previous year. Something not very expressive.
PN 23, if it weren't for it, we would have a drop even higher than eight points on the total conversion. This is not very significant. 2019 will be a more challenging year, but we hope to go back to the historical conversion rates in 2020. Thank you very much.
I would like to remind you that to ask a question, please press star one. Please stand by while we wait for more questions. The next question comes from Mr. Vinicius Ribeiro, Bradesco BBI.
Thank you very much. First of all, I would like to follow up on Leonardo da Vinci. How long do you think it will take to reach higher margins for the Leonardo da Vinci operations? What about the greenfields in this region? When will they be implemented? The second question is about the on-campus expansion.
We had negative margins in some of the campi, I would like to know for the 30 campi that will be open in the first semester 2019, should we expect a similar effect, is there a difference depending on the size of the campus and number of students, can we extrapolate this for 2019?
Vinicius, thank you very much for your question. When we talk about margin improvements in Leonardo da Vinci, we know there are two effects. In fact, three effects, right? First of all, the improvements in the assets, I think that as of the next conference call, we'll start to see this. There is a correction of seasonality and revenue, which now will be deferred as of the fourth quarter 2018, then the opening of greenfields with the positive impact.
For Leonardo da Vinci, we hope to start with enrollment in September next year for lessons starting in January 2020. Thank you very much.
Here's Rodrigo. In relation to the 30 greenfields for 2019, all of them implemented in the first semester 2019. There is no reason to believe that they have lower potential than the original potential. Everything is in the tier 1 of our implementation map. Our statistics model is very robust. Basically, we have information that comes from the school census, from the statistics bureau, from the Secretariat of Education, and we put everything together to reach a better understanding of which cities have higher potential for greenfields. This is something we have been doing for the last four years. We believe that our model is very assertive, and it's been driving a lot of success in greenfields implementation.
We use another model to know where in the city the campus should be set up. Those are the two key points. First of all, choosing the right city and then the right location, and we are prepared for both. From those cities in the 30 units, well, they're all in the same tier as those implemented last year. We do not believe that they have lower potential than the other ones.
Thank you very much, Rodrigo. Once again, I would like to remind you that to ask a question, please press star one. Please wait while we take your question. I would like to hand it over to Kroton for their final remarks. I would like to thank you all for participating in this earnings conference call, and our team is available for any further questions. Our Kroton Educacional earnings conference call is now closed.
We thank you all for participating and wish you a great day.