Good morning. Welcome to Ser Educacional conference call to discuss the company's results for the third quarter of 2018. With me today are Jânyo Diniz, Chief Executive Officer, João Aguiar, Chief Financial Officer, and Rodrigo Alves, Investor Relations Officer. 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 presentation, we will start the Q&A session for analysts and shareholders when further instructions will be provided. Should any participant need assistance during the call, please press star zero to reach the operator. The event will also be broadcast live via the internet at ri.sereducacional.com. You can also access the webcast audio and slides through tablets and smartphones equipped with the iOS or Android systems. The replay of this event will be available soon after its conclusion for a period of one week.
Before proceeding, we would like to make clear that forward-looking statements may be made during the conference call relating to the business prospects of Ser Educacional as well as its operating and financial forecasts and targets. Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions in the industry and other operating factors may also affect the future performance of Ser Educacional and could also lead to results that differ materially from those expressed in these forward-looking statements. I would now like to turn the conference over to Jânyo Diniz, Chief Executive Officer, who will begin the presentation. You may begin Mr. Jânyo.
Good morning and thank you for attending our conference call to discuss our third quarter results for 2018. Let's go directly to slide three, where I present the main highlights of the quarter. I believe that the main key point was the assumption of our adjusted EBITDA margin goals in a year-over-year base for the first time since fourth quarter 2016, with solid operation cash generation as well as a substantial reduction in net account receivables from both FIES and out-of-pocket students.
This result was particularly important because it occurred in a year that proved to be challenging, mainly due to an economic scenario that performed below expectations, especially in the north and northeast regions, which showed even a decline in GDP during the second quarter and still high unemployment rates as well as a fear of extemporaneous events such as the failure of the FIES system since the first half of the year, the truckers' strikes, World Cup, and elections those in the second half of 2018. The better performance of the adjusted EBITDA margins therefore was mainly due to our decision that was proven correct to execute an action plan to adjust our cost structure to the current student base and to calibrate our structure to the speed of growth of the regions in which we operate.
In addition, we kept our views in maintaining the volume of student flows at conservative levels, as well as continuing our enrollment policy focused on the student payment capacity favoring our operational cash generation. Another important aspect is that this plan has continued to spread our expansions since it also has 14 on-campus units with less than 24 months of opening and that as of 2019 will be in a substantially more advanced stage of development and able to grow their base of students. We also have new units to be launched from 2019 and additional units will have their opening speed accordingly to the market response and maturation of recently opened operations.
In addition, we have the distance learning segment with 209 distance learning centers open to date, of which more than 100 with operations started less than 12 months ago and therefore is still at an early stage of development. Another positive aspect of the quarter was the expansion of medical course in the city of Recife from 168 to 268 seats per year due to the recognition of the UNINASSAU University Center in Recife in the medical course with Institutional Concept 5, both with the maximum grade in the Ministry of Education.
In this sense, we believe that the results of this quarter may represent the beginning of a cycle of gradual recovery in results following the stabilizations we saw in second quarter 2018 due to the success of the action plan to adjust the structure of cost and expenses to be compatible to the student base and this cycle of recovery may be possible to be maintained in the next semesters since the focus will be on keeping a structure lean in an economic scenario with an apparent possibility of recovery in terms of consumer confidence and job creation. As a final highlight of this slide, as we believe in our business plan, last month we completed our share buyback plan announced in April of 2018. Our board also approved the cancellation of our shares held in treasury as well as new buyback program for shares of 5.3 million shares.
With this movement, I believe we are making a good investment on behalf of our shareholders since I understand that it's not possible to find assets with the same quality as Ser Educacional trading in the current multiples as we find on the stock exchange. In addition, as we canceled our reported share held in treasure, our shareholders had a greater participation in a company that even in a challenging year, such as 2018, in a company that I believe to have good profitability rates. While we executed the repurchase program, we continued to generate good cash, and this allow us to continue working on acquisition opportunities that continue to emerge in large quantities in the market.
We are dedicated to the subject, but we will only make transactions if we understand the appropriate price levels and the desired requirements such as brand strengths, portfolio of course, capacity to expand margins, student base growth, among others. Turning now to slide four. This quarter was also important for our digital transformation project that we call Ser Digital. A partnership we made with Accenture, one of the most renowned consultancy in the world in the area of digital business transformations, with the aim of making the digital transformation of Ser Educacional, not only the offer of distance learning products with the state-of-the-art technology, but above all, a transformation behavior and corporate culture. The project started last April and in August has already posted its first practical results.
The launch of Overdrivers, a startup accelerator that will also serve as an academic support for students of Ser Educacional and disseminator of innovation, since it may also be used in solving real business problems by our students. Our students' startups can also be accelerated in the Overdrivers. It was launched in Recife, and today it has more than 10 sheltered companies. We also started to use the space of the training of our stack innovations to have members of our company actively participate in innovation events and incubations of startups. As you can see, Overdrivers' idea is to create an avenue of innovation in digital transformation within Ser Educacional, which feeds or oxygenates new ideas and is helping us in the digital transformation journey, what is also a cultural change and not just the process robotization.
Turning to slide five, we are going to talk about the third quarter 2018 intake, which for the reason I mentioned at the beginning of this presentations, were affected by a very atypical economic scenario that in my view, had a great impact on consumer confidence as already boosted by the good recovery of these indicators already in October. You notice that the market in general was less aggressive in price than in the first half, but a little more competitive than in the same period of the previous year. More specific in the DL, I believe that the comings and goings generated by extemporaneous events we had in this winter, affect a little more our reasoning in the segment than in the on-campus segment. Part of our maturation curve, which has lost some punch in start or intake process during the post-forward couple assumptions.
I believe we should have accelerated our marketing investments a little more. That said, lower marketings efforts in one hand took some of the enrollment space in these winters, but on the other hand, contributed a lot with the financial results and margins. In this sense, I believe that we will reach the point of equilibrium from now on, since it seems that we will have a less unstable scenario ahead and an already more advanced learning curve in our operation as well as the company that's now with a linear and optimized structure. Moving to slide six. As a result of low intake and economic scenario that is still in the early stage of recovery and our conservative stance on grant concessions for the delinquent students, our dropout rates remain at higher levels.
The combined effect of intake and dropouts led to a decline in our on-campus and total student base, partially offset by a 40% growth in the distance learning student base. Our distance learning, including undergraduate and postgraduate, reached 17,000 students. Close to the objectives of the year, which in this segment performing more than expected in the first semester, but compensated slightly in the second. We can therefore consider that this year we had relative success in this market, and we have everything to continue its positive performance in 2019 since we have the potential to mature our investments in this segment. These are my initial remarks, and now I give the floor to João Aguiar to talk about the results of the quarter.
Thank you, Jânyo. Good morning, everyone, and thank you for joining us today. Turning to slide seven, we have a summary of the results of the quarter, which as mentioned by Jânyo, had as its main highlights the growth of our adjusted EBITDA margin in the quarter and a good generation of operating cash. Net revenue fell in this quarter, mainly due to the reduction in the total number of students, and also because in this quarter we had a slightly higher volume of discounts and scholarships for new students. A seasonality that has intensified over the last couple of years, and we should see this effect being diluted next quarter.
The gross margin also showed a reduction even on adjusted basis, mainly because the decline in net revenue was more pronounced than the decrease in personal costs and range, which I believe should be relatively temporary and was possible to be reversed given the adjustment of cost structure throughout the year and by the proximity of the 2019 summer intake season. In addition, it is worth mentioning that payroll effects will be better perceived in the fourth quarter because seasonally, the quarter has a higher volume of effective payment of class hours. Adjusted EBITDA was nominally flat year-on-year, mainly due to the success of the implementation of the action plan that had an impact on the G&A structure, specifically on sales and marketing.
The third quarter, similar to the second, had a large amount of non-recurring effects, again related to payroll optimization, that this time were mostly related to adapting our teacher base to our current student base. Payroll non-recurring charges amounted above BRL 10 million in the quarter. About BRL 7.5 million from those in cost and the balance was booked in payroll expenses. The approximately BRL 2.5 million of non-recurring third-party service expenses are basically linked to the consulting service for the Ser Digital program and M&A transactions expenses. Turning to slide eight, we show the analysis of our results, excluding the effect of new units with less than two years of operations, as well as our distance learning business line, which is still in the ramp-up phase.
As you can see, in line with what we presented the first half of the year, when we exclude new operations from our results, the new operations consume around 5 percentage points of our margin, which shows that our more mature operations continue with high profitability rates and that as we mature these new units, the consolidated result has the opportunity to evolve. On slide nine, we present our accounts receivable of monthly payments and of agreements, as well as our net receivable days. We have had a very important quarter in this segment.
The payment of the last installment of PN 23 in the amount of BRL 137 million caused our FIES net receivable days to fall substantially from 173 days to 92 days, bringing great relief to our accounts receivable in a general way and something long awaited by the company as it finally solves a complication created since 2015. It's important also to remind that the largest portion of the regular FIES payment flow related to the period between July to September is expected to be paid in the fourth quarter. In addition, when we analyze our accounts receivable from regular students, we also see a substantial improvement. Note that the net receivable days of our out-of-pocket students went from 66 days to 54 days.
Turning to slide 10, we have what I believe was the highlight of the quarter, which was our operating cash generation, which reached 3x the EBITDA generated in the quarter and a 65% increase in relation to the third quarter 2017. This occurred because in this quarter we have received the last installment of the PN 23 in the amount of BRL 137 million. Excluding the effects of installments paid under the agreement with the federal government in both quarters, I mean BRL 137 million in the third quarter 2018 and BRL 66 million third quarter 2017, operating cash generation still has an increase of 28%, which we can consider a positive result. For the year, we must also take into account the non-cash effects we had that year, as we explained in the second quarter's results call.
The first is the effects of BRL 25.8 million of the adjustment in the opening balance of the bad debt due to the adoption of IFRS 9 and the anticipated payment that occurred in the fourth quarter 2017 of a portion of FIES in the amount of BRL 24 million that traditionally is paid in the beginning of the year, but the federal government ended up anticipating to the fourth quarter of last year. With these adjustments, we noted that cash generation was also very positive and growing cash flow from operation in these nine months of the year.
The main reason for this improvement lies in the variation of assets and liability that can be seen both in the graph that shows the quarterly analysis and annual analysis, which is fundamentally due to the improvement in the accounts receivable of regular students and FIES for better punctuality in the payments and greater focus on the collection of monthly fees and past due agreements. Turning to slide 11, again, we do not have any great news except about our cash generation in the quarter.
Our net cash position showed a further quarter of growth now reaching around 1.8x the EBITDA in the last 12 months, and our favorable position, which closed this quarter at approximately 78% of our net income, even after we had paid about BRL 20 million in dividends in this quarter and more than BRL 47 million in share repurchasing during the quarter, and also BRL 20 million in debt amortization. This demonstrates, therefore, that our company remains prepared to make acquisitions while executing its share repurchase program and paying semi-annual dividends. On slide 12, we have the presentation of our CapEx, which is in line with our 2018 action plan, gradually adopting the growth we had in the year, reaching 8% of net revenue accumulated.
The highlights were the end of the construction of the new block of Fortaleza that will allow us to increase our strength in the city with a completely reformulated unit where we are locating the school of the Doroteias. On the other side of the city, we finished a unit in the district of Parangaba, right in front of a shopping mall, also with good potential of expansion.
The other highlight was the conclusion of reforming the Recife campus in order to improve the attractiveness there, since they are our oldest operations, and the revitalization of this environment has already demonstrated positive student perceptions and yielded good results for the company as we reached concept five recertification, maximum grade in Brazilian Ministry of Education. These were my comments on the results, and I would like to turn the floor over to Jânyo to make his remarks before moving on the questions- and- answer session.
Thank you, Aguiar. Before moving on to the question- and- answer session, I would like to conclude the opening remarks discussing the strategic pillars we are developing. We aim to maintain our revenue and the student base growth while keeping our low-cost DNA and solid generation long-term sustainable results. The first is our organic growth, which starting in 2019, should be achieved through the maturation of the base of newly opened course and units as well as the maturation of our distance learning centers. This activity is performed through a unique value proposition to the student base on our ability to offer courses desired by students through brands recognized by the labor market in well-located units, state-of-the-art education technology, quality infrastructure, and affordable price. Second, we remain very active in the M&A space, and the market remains quite busy, perhaps still more expensive than we consider appropriate.
We continue to prioritize companies with recognized regional brands, solid mix of course, preferably universities licensed or university centers, and that generate strong returns on our investments. Third, focus on growth with sustainability and operating margins, solid operating cash generation, low financial leverage ratios. We believe that it is fundamental for a health company in the higher education segment to maintain the solid pillars. Fourth, to maintain sound quality control and of teaching with proven capacity to measure and to take preventive action throughout the course by using important tools such as the collegiate test, anti-copy technology, and academic audit. Finally, the important work we are doing in digital transformation in order to accelerate the adoption of the best and most disruptive teaching technologies, robotization of the backups, and future of innovation now levels of the company.
Our vision is that the companies that succeed in their digital journeys in higher education will be the big winners in the segment since the technology will have strong influence, not only the company's ability to reduce cost, but also the ability to teach with quality and scale will depend more and more on the adoption of technology and the continuous improvement of the students' experience in all stages of the relationship with educational institutions. These are my comments, and now we are willing to ask questions.
Thank you. We will now begin the question- and- answer session for investors and analysts. If you have a question, please press star one on your telephone. If your question is answered during the session, you may remove it from the line by pressing star two. The questions will be answered in the order they are received. We ask that you use the handset when asking the question in order to maintain excellent sound quality. Please stand by while we collect the questions. At this time, I'm seeing no questions, so I would like to turn the call back over to Mr. Jânyo Diniz for final considerations. Mr. Jânyo, you may proceed.
Thank you very much for attending our conference call. For those who have any further questions, please contact our IR team.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.