Foxway: a full and in-depth financial research update

It’s been just over a year since Nordic Capital finalised their investment in Foxway and I’ve been keen to take a look at their performance since. Looking over their previous financial and sustainability reports I liked this line from their Chief Sustainability Officer: “From our perspective, this means running businesses that can thrive in an economy not reliant on perpetual growth”. Refreshing honesty. It will be interesting to see how that plays out in this sector.

Recap

The business started life in 2009 and didn’t seem to make too much noise until 2015 when they began their acquisition habit. Since the name change to Foxway in 2020 they’ve completed six deals with Global Resale in the UK (2022)1 and Teqcycle in Germany (2023)2 being the latest. In July 2023, Nordic Capital issued a bond via the special purpose vehicle Ytrinete Bidco AB to acquire a majority share in the Foxway group of companies. The initial bond issuance was for €200m with a maximum total issuance of €450m. In October 2023, Ytrinete Bidco completed the acquisition and Nordic Capital became the largest shareholder alongside earlier investor Norvestor, the founders and employees.

Foxway operate three reporting segments: Circular Workspace Solutions (CWS) providing device-as-a-service solutions for workspace equipment to mid/large corporates and the public sector in the Nordics; Recommerce Mobile providing trade-in solutions and asset recovery services for smartphones, focusing on mobile operators, retailers and partners, and; Recommerce Computers & Enterprise (C&E) handling computers, business equipment and network products sourced from OEMs, financing companies, data-centres and resellers.

Performance

Despite the hype interest in Foxway, mostly since the Nordic Capital LBO, I need to remind myself that historical data is limited to four quarters so far and a 2023 pro-forma, with the first statutory reporting period being Oct-Dec ‘23. And, whilst I’m not overly keen on monitoring QoQ performance, especially when impacted by seasonality, it is a good idea to get familiar with the accounts in preparation for Q4 and the first full year results in a few months’ time.

I also need to remind myself that reporting in SEK makes everything look big (including losses), so I’ve converted SEK into EUR at the rate of 0.086 for the tables and displayed all charts in EUR.

Revenue

Foxway posted their highest quarterly revenue to date in Q3 (July to September) increasing by 4.7% from SEK2036M (€175M) in Q2 to SEK2131.4M (€183M). This is also 10% growth on the same period last year. The revenue growth does, however, provide some gloss over the segment variability:

• CWS grew 33% in Q3 driven by increased leasing revenue and other Nordic sales after an 8% decline in Q2 and an 8.3% increase over the same period last year .
• Recommerce Mobile dropped 11.7% in Q3 characterised by low stock availability, which consequently propped up pricing. This was after a 27.9% increase in Q2 and a 21.3% increase over the same period last year.
• Recommerce C&E declined 1% in Q3 despite strong computing sales in the UK after growing 8% in Q2 and 2% on the same period last year.

From a portfolio perspective, revenue from the Recommerce C&E segment has been contributing between 32% and 28% of total revenue over the last four quarters, which is relatively stable compared to CWS (contributing between 29% and 37%) and Recommerce Mobile (contributing between 35% and 41%). This points to more sensitivity from buying cycles and market conditions in these segments which I expect to be less pronounced in annual reporting and see little point digging into it further until full year results are available.

So, all in all, annual sales are going in the right direction, quarterly sales are all over the place and I’ve just reminded myself of one of the challenges with QoQ reporting.

Profitability

In addition to revenue growth going in the right direction, profit metrics are also showing promise. However, segment variability means that quarterly segment profits are likely to be hit and miss for a while longer until revenue increases further and some of the key operational efficiency drives are complete.

Overall, gross profit improved from SEK415.8M (€35.8M) in Q2 to SEK481.2M (€41.4M) in Q3 an improvement in gross profit margin from 20.4% to 22.5% which is hanging around FY2023 levels of 22.4%. iPhone pricing stabilisation and the previously mentioned low stock availability3 contributed to better pricing in Recommerce Mobile and additional revenues in CWS from the Nordic businesses were all offset by margin pressure in Recommerce C&E.

Management’s focus on cost reduction is making an impact as operating costs dropped from SEK301.9M (€26M) in Q2 to SEK279.5M (€24M) in Q3 which helped improve EBITDA. But, there’s an awful lot going on in that metric that needs to be removed: sale & leaseback eliminations, leased premises and pro-forma adjustments, non-recurring items, acquisition and integration costs. We then get to an adjusted operating EBITDA number which matters more in terms of performance. The table below shows profit progression in EUR only:

There’s a significant amount of data that Foxway package up here and I wonder if bondholders are interrogating this quarterly. As long as the interest cover remains acceptable, it’s all good, right? From what I can see though all segments are just about contributing operating profit and all segments, except Recommerce C&E, grew operating profits over the last quarter.

In summary:

CWS benefited from: increased leasing revenue, particularly through school rollouts in Sweden; growing contribution from higher-margin second lifecycle device sales (especially important) which were offset by some revenue/profit deferred to Q4 due to increased order backlog and higher temporary consultant costs for a major Swedish client product replacement cycle.

Recommerce Mobile had its most successful quarter to date in terms of profitability: strong mobile volume growth through B2B and marketplace sales; stabilised pricing and iPhone margin recovery; robotic phone testing coming online in the Estonia production facility and a relatively significant reduction in inventory levels from better business intelligence capabilities over buying and selling decisions. If the usual investment thesis stacks up, there should be further efficiency gains out of the production facility from what I estimate to be Q3 volume between 150k and 170k devices4.

Operating profit at Recommerce C&E has declined now for the last three quarters. OEM supply chain improvements have reduced overstock opportunities and general market price pressures would only have been slightly offset by higher margin sales. Teqcycle expect to close a few large deals by the end of the year, but I wouldn’t have thought that’s going to contribute margin until two or three quarters post contract closing.

Total operating profit of SEK 80.1M (€6.9M) is a positive improvement over SEK 0.9M (€0.08M) in Q2 and a big bounce from the SEK 13.2M (€1.1M) loss in Q1 meaning that operating margin grew from basically zero to 3.8% in the quarter.

The operating profit then gets entirely eaten up by financing costs of SEK 86.9M (€7.5M) and tax, leaving a net loss for the quarter of SEK 8.5M (€0.7M) but much improved from a loss of SEK 86.3M (€7.4M) in Q2.

Financial Position

As with most LBOs, the balance sheet isn't pretty, but it is important to understand what's going on, despite this being more interesting at year end. The headline metrics show a slight deterioration since FY2023 but nothing too concerning yet:

Operational improvements are reflecting management's focus on efficiency with inventory down 22% from SEK 1,082.7M (€93.1M) to SEK 843.4M (€72.5M). This is particularly evident in the Recommerce Mobile segment where better business intelligence is driving smarter buying and selling decisions.

Cash has reduced from SEK 722.1M (€62.1M) to SEK 515.2M (€44.3M) since year-end, primarily from debt servicing and capital expenditure, though Q3's strong operating cash flow of SEK 320M (€27.5M) demonstrates the benefits of improved working capital management. With SEK 496M (€42.7M) still available on the RCF, liquidity isn't a concern.

Leverage has crept up with net debt increasing from SEK 2,397.7M (€206.2M) to SEK 2,662.5M (€229M), pushing the debt ratio from 37.9% to 41.0%. While the equity ratio remains stable at around 46%, increasing sale and leaseback arrangements, up from SEK 605.4M (€52.1M) to SEK 735.4M (€63.2M), reflect growth in the CWS but add further complexity to the financial structure.

To provide some protection against rising rates, Foxway entered a three-year EURIBOR swap in January 2024, effectively fixing the underlying interest rate at approximately 3.1% for their EUR 200M bond (plus the 7% margin). This should help stabilise financing costs and improve cash flow predictability, though the total cost of financing remains significant at around 10.1%.

Cashflows

Q3 operating cash flow of SEK 320M (€27.5M) were boosted by an SEK 211.5M (€18.2M) working capital improvement, mainly from the reduced inventory levels. However, this is before the financing costs - interest payments of SEK 75.8M (€6.5M) and tax payments of SEK 20.5M (€1.8M) took a decent chunk out of the operational gains.

Capital expenditure appears modest at SEK 39.1M (€3.4M) split between intangible assets SEK 15.6M (€1.3M) and tangible assets SEK 23.5M (€2M). Financing outflows of SEK 141.8M (€12.1M) comprised SEK 126.1M (€10.8M) in borrowing repayments and SEK 15.7M (€1.3M) in lease liability payments.

Year to date, the story is similar with operating cash inflow of SEK 242.6M (€20.9M), capex of SEK 103.8M (€8.9M) and financing outflows of SEK 356.4M (€30.7M). The significant financing outflows help explain the cash reduction since year-end, though with available liquidity of SEK 1,011.6M (€87M), including the undrawn RCF, the position looks manageable.

Conclusions

The news release covering Martin Backman stepping down and new CEO, Patrick Höijer’s appointment states focus will be on “driving profitable growth” to“strengthen Foxway’s focus on transformation and taking the next step to further accelerate its growth”. The pressure to switch focus is obvious though perhaps the margins still need additional scale to cover the financing burden. Profitable growth is an easy mantra, but much harder in practice.

At this point, the required growth is going to have to come organically. Whilst Foxway still have access to an additional €250m of funding via the original bond, for acquisitions there is a 40% minimum equity contribution with a debt incurrence test. With current leverage around 5.6x EBITDA sitting above the 5.50x threshold, and goodwill levels already significant, acquisitions are effectively on hold while management focuses on proving out operational performance.

The debt incurrence test threshold steps down after July 2026, suggesting Nordic Capital anticipates significant deleveraging by then through a combination of EBITDA growth from operational improvements and debt reduction from strong cash generation. With automation benefits, cost programs and working capital improvements already showing results, acquisitions could be back on the table as a growth strategy from 2026. Of course, it's possible an additional investor might be willing to help Nordic Capital push past the minimum equity requirement before then, but that may be too complicated and distracting at this stage of the transformation. Bad timing as MTR Group in the UK could have been an interesting option.

With increasing competition for devices and B2B contracts across the sector, it’s hard to determine how Q4 will develop, especially at a segment level. Overall revenues in Q4 2023 amounted to 26% of total annual revenue, so just for fun and absolutely not investment guidance, here’s a 2024 Q4 and full year revenue prediction. The segment variability and raft of eliminations have put me off making any operating profit predictions yet:

I’m tempted to go back to this admirable quote: “From our perspective, this means running businesses that can thrive in an economy not reliant on perpetual growth” because even if our economies must adjust to a new paradigm, their financing structure means Foxway still have plenty to do in terms of balancing profitability and the growth necessary to achieve it.