Avgol in the first quarter: volume is working, raw materials defer the verdict

Avgol opened 2026 with a quarter that keeps the recovery story alive, but does not close it. Demand is not the main problem right now: revenue rose 5.3%, sales volume rose 10.4%, and the new U.S. line continues to move through product qualifications while expanding production of a more advanced product. Still, gross profit slipped slightly, gross margin fell to 12.2%, and operating profit was almost unchanged despite higher sales. The $0.4 million net loss came mainly from finance and currency costs, so the quarter is not clean enough to declare that profitability has returned. Cash flow improved after the heavy U.S. line investment ended, but part of the cleaner receivables balance still comes from receivables discounting and reverse factoring. The proof point now moves to the second quarter and the rest of 2026: can the company pass through the polypropylene price spike to customers, shift the U.S. line toward more profitable products, and keep cash flow positive without deepening its reliance on working-capital financing.

More Volume, But Margins Have Not Opened Yet

Avgol manufactures nonwoven fabrics, mainly as raw material for the hygiene market, and operates 14 production lines in North America, Israel, China, Russia, and India. This is not just an industrial company that needs to sell more tons. It is a margin and working-capital machine: it has to hold volume with large customers, pass through raw-material moves, run production lines efficiently, and finance credit gaps until cash comes in.

In the previous annual analysis, the checkpoint was whether the new U.S. line could already turn capacity and volume into profitability. The first quarter keeps the same conclusion with one important update: the question is no longer whether there are sales, but whether those sales come at prices and costs that can lift gross margin.

The U.S. line is the center of the test. It began commercial production toward the end of the first quarter of 2025, and during the current quarter the company continued qualifying products and increased production of an advanced product based on two polymers. That is important business progress because it points to a possible move from basic volume to products that use the line’s capabilities better. At this stage, however, the improvement is still not visible enough in profitability.

The first quarter shows the central contradiction: the company sold more but did not earn more at the gross-profit level. Revenue was $91.9 million, compared with $87.3 million in the comparable quarter, up 5.3%. Sales volume rose 10.4%, and even the January hit to North American sales from extreme weather and snowstorms did not prevent growth. That is positive because it points to demand and an operating base that are still working.

The problem is that each dollar of sales left less money on the way to gross profit. Gross profit fell to $11.3 million from $11.5 million, and gross margin fell to 12.2% from 13.1%. Adjusted gross profit, excluding the effect of raw-material price indices, was $11.4 million, almost unchanged from the comparable quarter. In operating terms, volume rose but has not yet released operating leverage.

The company does show one positive sign below gross profit. Underlying EBITDA, meaning EBITDA excluding the effect of raw-material price indices, rose to $11.3 million from $10.5 million. That supports the direction, but the improvement was partly offset by lower U.S. operating efficiency, higher production inputs, tariffs, and foreign exchange.

Operating profit was $4.0 million, almost the same as $4.1 million in the comparable quarter. Operating expenses did not get out of control, so the problem is not headquarters cost. The problem is that the plants, especially the U.S. line, have not yet turned the extra volume into wider margins.

Raw Materials Moved the 2026 Test to the Second Quarter

The first quarter is already behind us, but the more important section for investors sits in what happened after it. In January and February 2026, the prior decline in raw-material prices turned into mild increases. In March the increases intensified, and they continued into April. Raw-material prices completed an increase of roughly 50% over two months compared with the prices prevailing at the end of February.

This matters especially for Avgol, because its main raw material is polypropylene, an oil-based plastic. Selling prices to customers are linked to raw-material price indices, but updates are usually made quarterly, monthly, or every two months. In a sharp and continuing price increase, the timing gap between the cost increase and the customer-price update hurts the company. Some 2026 selling prices were also fixed in advance for a full year against fixed-price raw-material purchase transactions, so not all sales agreements behave the same way.

The company already says the increase in raw-material price indices is expected to have a significant negative effect on second-quarter results. It is negotiating with customers to make exceptional adjustments to indexation mechanisms in sales agreements, but those negotiations have not been exhausted. The next quarter will therefore be a pricing test as much as a production test: if the company can pass through a large part of the cost increase, profitability can hold. If the adjustment is slow or partial, the benefit from higher volume may be swallowed by raw-material costs.

Tariffs in the U.S. add another pressure layer. Avgol America imports raw materials, equipment, spare parts, and finished goods from tariffed countries, with annual import volume estimated at about $50 million. The company shifted imported sourcing to local sourcing, stopped imports from China into the U.S., and registered for the U.S. customs refund system. Still, the negative tariff impact on 2026 is estimated at $1.5 million, and the tariff refunds are not guaranteed.

Cash Flow Improved, Financing Still Takes Its Cut

The stronger part of the quarter is cash flow. Operating cash flow was $10.2 million, almost unchanged from $10.1 million in the comparable quarter, even though the company moved from a $2.1 million net profit to a $0.4 million net loss. The drop in profit was offset by working-capital movements, mainly lower receivables, lower inventory, and higher other payables.

On an all-in cash-flexibility view, meaning after the period’s actual cash uses, including reported CAPEX, intangible-asset purchases, lease repayments, and other financing movements, cash increased by $6.2 million before currency effects. After currency effects, cash and cash equivalents rose to $56.3 million from $51.2 million at the end of 2025. That is an important shift from the first quarter of 2025, when the U.S. line buildout still consumed $12.6 million of property, plant and equipment investment. In the current quarter, property, plant and equipment investment fell to only $0.9 million.

This is where the important distinction sits. Receivables fell by $3.7 million, but the decline was mainly due to higher receivables discounting, not just ordinary collection. Discounting without recourse rose to $36.2 million from $32.6 million at the end of 2025. In addition, as part of trade terms with its main customers, reverse factoring reached $28.0 million in the first quarter, compared with $26.1 million in the fourth quarter of 2025.

Customer credit days, excluding discounting, remained 59 days, and supplier days remained 50 days. Inventory fell to $34.5 million from $36.1 million, mainly because finished-goods inventory declined, and the company holds finished-goods inventory of 20 to 35 days according to agreements with its main customers and sales needs. So there is some operating improvement, but still no proof that the business can keep the same cash picture without expanding its use of working-capital financing tools.

The gap between operating profit and the net loss sits in finance. Net finance expenses jumped to $3.9 million from $0.3 million in the comparable quarter. A central part of the move came from foreign-exchange losses of $1.2 million, compared with foreign-exchange income of $1.7 million in the comparable period, and another part came from the end of interest capitalization for the new U.S. line project, which was $1.1 million in the comparable period.

The balance sheet does not show immediate liquidity stress. The company has $107.5 million of long-term bank credit and current maturities, $65.5 million of commercial paper, and about $87 million of unused credit facilities. It is compliant with its financial covenants, including net debt to EBITDA of 2.55 versus a 4.25 ceiling, and its rating was reaffirmed in January 2026 at ilA+ with a stable outlook.

But the blocker has not disappeared. After the balance-sheet date, the shekel appreciated further against the dollar, and the estimated effect on the value of the company’s commercial paper is about $3.5 million. Continued shekel appreciation may increase finance expenses in coming periods, and the company is examining refinancing alternatives for those securities. Financing does not currently threaten continuity, but it still determines how quickly operating improvement can reach shareholders.

The dividend policy tells the same story. Despite a policy of distributing at least 50% of annual consolidated net profit subject to board discretion, no dividend was declared because of recent and ongoing investments. This remains an industrial company trying to turn a large investment into a more profitable production line.

Conclusions

The first quarter of 2026 improves the demand and liquidity picture for Avgol, but it does not yet change earnings quality. Revenue and volume rose, the U.S. line is moving toward more advanced products, and lower CAPEX allows cash to rebuild. On the other hand, gross margin slipped, finance expenses absorbed almost all pre-tax profit, and part of the working-capital improvement still relies on receivables discounting and reverse factoring. The current conclusion is a better cash bridge quarter, not a quarter that proves a return to profitability.

The rest of the year is a proof year. The positive read will strengthen if the company shows three things together over the coming quarters: a clearer move of the U.S. line into more advanced and profitable products, customer price adjustments that reduce the raw-material hit, and positive operating cash flow without further growth in working-capital financing tools. The counter-thesis is that the first quarter only looks weak because of timing, currency, and the final ramp period of the line, and that once selling prices update and the U.S. line is better utilized, the volume that has already returned will also open profitability. The evidence is not there yet. What will drive the near-term market read is not another increase in sales volume, but how fast the company absorbs or passes through the polypropylene spike, and how fast the new U.S. line starts showing up in gross margin.