Plasto Cargal: Why Flexible Packaging Still Hasn't Reached Profitability

The main article already established that corrugated still carries the group while flexible packaging still does not. This follow-up isolates the unresolved part of that sentence: why, even after an overall improvement year for the group, flexible packaging still has not converged to profitability.

The short answer is that this is not just a revenue problem. The segment ended 2025 with about NIS 69.6 million of revenue, not dramatically below 2024, but with a NIS 6.2 million regular operating loss, versus NIS 4.0 million in 2024 and NIS 0.9 million in 2023. In other words, this is no longer a business that merely has not broken through yet. It is a business where the gap to profitability has actually widened.

What is working should still be said clearly. KAG has a broad product set, development capability, a diversified customer base with no single flexible-packaging customer exceeding 10% of group revenue, valid business licenses and certifications, and a plant that operates in categories where quality, service, and customization still matter. The issue is that these advantages still do not translate into sufficient economics. The evidence points to four layers acting together: import competition that keeps pressuring simpler products, underutilization of the plant, commercial visibility that remains too short, and a fixed site-cost layer that stays heavy even when revenue does not collapse.

Put differently, this is not a business that only needs a little more time to move from zero to one. It is a business that is already running, but still has not found the point where volume, pricing, mix, and utilization combine into repeatable profit.

What To Hold In Mind

• The flexible-packaging segment ended 2025 with about NIS 69.6 million of revenue, a NIS 6.2 million regular operating loss, and about NIS 33.1 million of net segment assets.
• Management itself says there has been no meaningful change in the scale of the market in recent years, while also describing margin erosion from stronger competition and higher raw-material prices.
• The Mishmar Hasharon plant operates at about 70% of optimal capacity, while attributed fixed costs in 2025 still stood at NIS 29.3 million.
• Binding backlog for 2026 is only NIS 6.993 million, of which NIS 6.321 million is already concentrated in the first quarter.
• The impairment test for KAG already recorded a NIS 908 thousand write-down, and it relies on future efficiency and procurement savings rather than on improvement already fully visible in the reported numbers.

This Is Not Purely A Demand Problem, It Is A Unit-Economics Problem

The easy mistake is to look at roughly NIS 69.6 million of revenue and conclude that the issue is only a temporary competitive squeeze. But the three-year picture is sharper than that. External revenue in flexible packaging fell from NIS 75.9 million in 2023 to NIS 73.4 million in 2024 and roughly NIS 69.6 million in 2025. Over the same period, the regular operating loss widened from NIS 0.9 million to NIS 4.0 million and then to NIS 6.2 million. Net segment assets also fell to about NIS 33.1 million from NIS 39.5 million in 2024 and NIS 54.6 million in 2023.

That matters because it means the problem is not only weaker volume. If this were simply a volume issue, one would expect some relative stabilization in profitability while the business still generates close to NIS 70 million of annual revenue. The opposite happened. Even at that revenue level, the segment still does not cover its cost structure.

This is also why the market backdrop in the filing matters. The company explicitly says there has been no significant change in activity levels in the flexible-packaging market in recent years, only non-material growth in consumption. In a market like that, the path to profitability cannot rely mainly on the hope that the market itself will return. It has to come from pricing, mix, efficiency, and utilization.

The competitive framing in the filing supports exactly that read. Management states directly that margin in the segment has been eroded by stronger competition, especially from non-local competitors, together with higher raw-material prices. That is not just background color. It means the segment is operating in a market where scale alone is not enough, and where every increment of growth has to be tested by its quality, not only by its size.

The Real Problem Is The Quality Of Competition, Not Only Its Intensity

There is a meaningful difference between a business hurt by falling demand and a business pushed into a market where simpler categories are priced too close to cost. KAG looks much closer to the second story.

The company says that the less complex the flexible-packaging product, the larger the number of smaller producers that can make it. At the same time, it describes stronger imports, mainly from Turkey and India, at lower prices caused by excess capacity abroad and the absence of import tariffs. In 2024 the company briefly enjoyed some relief because of the Turkey disruption and Red Sea shipping constraints, but in 2025 imports from India had already normalized.

That point is critical. 2025 was not a year in which competition disappeared and losses somehow remained anyway. It was the opposite. Part of the temporary support from 2024 faded, so 2025 became a cleaner test of whether KAG can earn money without an external disruption helping the local pricing environment. So far, the answer is no.

Management does lay out a logical response: expand the mix of more sophisticated products, improve operating efficiency, improve procurement, and defend position through quality, service, technology, and product breadth. That is a sensible direction. But in the 2025 filing it still looks more like a direction than a result.

The product structure itself shows the same duality. On the one hand, the segment can produce more advanced formats, including multilayer packaging, laser-open bags, retort packaging, lidding films, and recyclable packaging solutions. On the other hand, management is explicit that simpler categories face a wider competitive set and greater pressure on margin. So the real question is not whether KAG can develop. It is whether the sophisticated part of the mix is growing fast enough to change the profit math of the whole plant.

Backlog Is Still Too Short For A Plant With A Heavy Fixed Layer

One of the most important sections in the filing is the backlog disclosure, because it makes clear how short the commercial visibility still is.

Domestic orders usually require delivery periods of one week to two months. Export orders usually run from one month to six months. Some customers operate under non-binding framework agreements. Against that backdrop, binding backlog entering 2026 stands at only NIS 6.993 million. Of that amount, NIS 6.321 million is expected in the first quarter, NIS 566 thousand in the second, NIS 27 thousand in the third, and NIS 79 thousand in the fourth.

That does not mean the company will sell only that amount. Clearly it will sell more. But it does mean that the commercial engine still rests mainly on rolling order flow rather than on a deep, committed contract base. For a unit with a meaningful fixed-cost layer, that is an obvious weakness.

It is also worth stressing what the problem is not. The company says there is no dependency on one customer or on a small number of customers, and no customer in the segment exceeded 10% of group revenue in 2023 through 2025. So this is not a business waiting for a single anchor customer to return. It is a business that needs a whole pattern of ongoing orders, at good enough terms, to cover its operating structure.

The economic implication is straightforward. As long as binding backlog remains this short, it is hard to make the case that the segment is just one volume step away from profitability. Without better visibility, the plant functions more like a system that has to fight for profit each quarter than like a business already sitting on a contract base large enough to carry its fixed layer.

Utilization Is Still Too Low, And The Site Still Looks Heavy

This is the heart of the issue. KAG operates at about 70% of optimal capacity. That may be the single most important line in this whole continuation analysis, because it explains why even a revenue base that is not especially small still has not converged to profit.

The flexible-packaging segment carried NIS 29.3 million of attributed fixed costs in 2025, against NIS 46.5 million of attributed variable costs. So even before stepping up to the group level, this is a manufacturing unit with a meaningful fixed base that still is not being spread over enough activity at a 70% utilization rate.

The site layer adds to that problem. Since October 2022, the flexible-packaging activity has operated through KAG alone at the Mishmar Hasharon plant. The land lease there runs through June 2031. At year-end 2025 the monthly rent stood at about NIS 447 thousand, while the sublease on roughly 1,800 square meters of the facility generated only about NIS 53 thousand per month. In other words, even after the sublease, most of the site burden still sits inside the unit.

It is important to frame that carefully. This does not mean every shekel of the monthly rent runs one-for-one through operating profit, because lease accounting pushes the burden across depreciation, finance expense, and the balance sheet. But at the level of unit economics, the filing is clear that the plant sits on a real fixed site layer, and that the sublease offsets only a small part of it.

That is exactly what makes utilization the critical variable. If the plant were operating materially closer to full, that fixed layer would be absorbed more easily into the revenue base. At 70% utilization, it remains exposed.

There is also one positive point that should not be missed. KAG's problem is not regulatory in the sense of lacking permission to operate. The plant's business license for printing and processing films and flexible packaging runs through the end of 2035, the FSSC22000 certification is valid through March 2029, and the environmental sanction that had previously hung over the site has already been settled and paid in full. So the bottleneck is not whether the plant is allowed to operate. The bottleneck is whether it knows how to fill this site profitably.

The Accounting Already Shows That Headroom Is Not Wide

If another signal were needed that the improvement is still unproven, it comes from the impairment test.

In connection with the 2025 statements, the group tested the KAG cash-generating unit for impairment because the group's market value had fallen below book value. That review ended with a NIS 908 thousand write-down allocated to the unit's non-financial assets. In addition, at the intangible-asset level, the group recorded a NIS 2.492 million write-down on unused development assets.

The more interesting number is not the write-down itself, but the assumptions underneath it. The KAG valuation model uses a 13.5% long-term gross margin, 0% long-term growth, and an 11.25% after-tax discount rate. The filing also says explicitly that the forecast is based on a combination of efficiency measures and procurement savings.

That matters because it means the accounting value of the unit is not resting on economics already fully proven in the business as reported for 2025. It is resting on a recovery case in which efficiency and procurement savings actually happen and actually translate into better margins.

The sensitivity analysis is also sharp. If the gross-margin assumption used in the model were 5% lower than management's estimate, the group says it would have needed an additional NIS 3.4 million impairment. If the discount rate were 0.5 percentage points higher, it would have needed another NIS 1.6 million impairment.

That is not wide accounting headroom. It is headroom that still depends on the operating improvement showing up. So the impairment test does not close the debate. It almost does the opposite. It shows that KAG's carrying value already leans on proof that has not yet appeared in full in the 2025 operating result.

Conclusion

Plasto Cargal's flexible-packaging activity still has not converged to profitability because it is operating inside an uncomfortable triangle: a market that is not really growing fast, import competition that keeps pressuring simpler products, and a plant running at only about 70% of optimal utilization while its fixed layer remains heavy.

That does not mean KAG cannot improve. On the contrary, it has a broad product set, development capability, an operating industrial base, valid permits, and no dependency on a single customer. The counter-thesis is legitimate: if more sophisticated products gain enough weight, if procurement savings are realized, and if utilization rises without deep price concessions, then 2025 could still look in hindsight like a reset year.

But as of year-end 2025, the filing does not yet provide that proof. What it mostly provides is a list of conditions that still need to be met for the unit to move into profit: better visibility, stronger mix, higher utilization, and a gross margin that actually improves in reported numbers, not only inside an impairment model.