Zanlakol in the First Quarter: Dairy Starts Earning, While Vegetables and Cash Still Set the Year

Zanlakol delivered the first real sign that Golan Heights Dairies is no longer only a growth story, but is starting to carry a meaningful share of group profit. Dairy sales rose 31% and segment profit almost tripled, so the open question around dairy profitability received a positive first answer. The quarter does not close the whole case: the vegetable products segment, which still generates most segment profit, grew in sales but reported lower profit and a lower margin. Cash flow also turned positive mainly because inventory fell, while part of that release was absorbed by higher receivables and lower supplier balances. After CAPEX, lease repayment and the NIS 14 million dividend paid after the balance date, the cash improvement looks like a good start to the year, not the end of the debate over cash quality. That makes 2026 less a clean breakout year and more a proof year: dairy has to keep earning at a higher margin, vegetables have to stop the margin erosion, and operations need to keep producing cash after investment and distributions.

Company Setup

Zanlakol is an industrial food company with two very different engines. The vegetable business at Alon Tavor relies on agricultural inputs, seasonal production, inventory that supports long sales periods, and an independent distribution system. The dairy business, through Golan Heights Dairies in Katzrin, relies on fresh milk intake, category expansion, and a gradual move from basic products to a broader product set.

The company’s economic machine combines growth, margin and working capital. That matters because a strong sales quarter can be misread in two ways: dairy may look like a fully mature profit engine, or positive cash flow may look as if the 2025 cash problem has been solved. Both conclusions are too early. The quarter shows real progress, but it comes together with margin pressure in the older vegetable business and with meaningful cash uses that remain in place.

Management still presents investors with a story of high food-sector profitability, a dividend policy of roughly 60% of net profit, and significant dairy potential, including the idea that another 1% share of the retail milk market represents roughly NIS 100 million in sales. That explains why dairy matters, but it does not replace the simpler question: how much of that revenue remains after milk cost, distribution, marketing and investment.

Dairy Narrows the Profit Gap, Vegetables Absorb the Pressure

The comfortable headline for the quarter is sales of NIS 146.6 million, up 16% year over year. The company attributes the increase to the implementation of its multi-year plan, broader product variety and distribution, and also to the timing of deliveries ahead of Passover. That means the full growth rate should not automatically be annualized, but it does show that the strategy is reaching the reported numbers.

The segment breakdown is sharper. Dairy sales rose from NIS 35.9 million to NIS 47.0 million, and segment profit rose from NIS 1.7 million to NIS 4.8 million. The dairy segment profit margin jumped from roughly 4.7% to roughly 10.1%. That is an important move relative to the prior analysis of Zanlakol’s dairy business, where the core question was whether the dairy operation could move beyond a profit margin of about 4% of sales.

But the same table prevents an overly clean conclusion. Vegetable product sales rose from NIS 90.5 million to NIS 99.6 million, yet segment profit fell from NIS 20.3 million to NIS 18.8 million. The segment profit margin fell from roughly 22.5% to roughly 18.8%. In other words, dairy did not only add profit; it also offset part of the erosion in the company’s legacy core.

The reason net profit barely moved despite more than NIS 20 million of additional sales sits in the margins. Gross profit rose 11.7%, below the sales growth rate, and the gross margin fell from 32.2% to 31.0%. The operating margin declined from 17.5% to 16.1%, and net profit rose only 2.1% to NIS 14.5 million. When sales rise 16% and net profit is almost flat, the key question is no longer whether demand exists, but who is funding the growth.

This is the important yellow flag. The company notes that higher inputs, inflation and interest rates affect it mainly because of seasonal production and inventory that serves long sales periods, and in the same quarter it did not raise prices despite higher input costs. That explains how vegetables can grow in sales while leaving less profit behind. It is also the point the market will need to test in the next quarters: is the company protecting volume and market share by absorbing costs, or is this temporary pressure that will normalize later in the year.

Cash Improved, but the Dividend Already Took Part of the Gain

The most positive point in the quarter is not profit, but the return to positive cash flow. Operating cash flow was NIS 24.1 million, compared with negative NIS 12.1 million in the parallel quarter. That is a meaningful move against the cash question that remained open after the annual report, and it deserves a direct comparison with the prior analysis of Zanlakol’s cash gap.

Still, the source of the cash matters. Inventory fell by NIS 21.3 million from the end of 2025, and that is a real working-capital release. But receivables rose by NIS 17.0 million and supplier balances fell by NIS 7.6 million, so the inventory release did not flow fully into cash. This does not cancel the improvement, but it means the quarter mainly proved the ability to release inventory after a cash-heavy year-end, not yet stable cash generation across a full year.

This is an all-in cash-flexibility frame after the actual cash uses in the quarter, not a normalized maintenance cash-flow estimate. It shows a simple point: the quarter produced cash, but the dividend paid on April 29 absorbed more than the surplus left after operations, investment, lease and credit repayments. On the other hand, the balance sheet is better than it was at the end of 2025. Cash rose to NIS 12.7 million, there is no bank credit on the balance sheet, and the company has bank credit lines of about NIS 190 million.

The current cash read is therefore mixed but better. Immediate pressure has eased, but the distribution policy still requires the next quarters to keep generating cash. If inventory continues to fall without hurting sales, 2026 can deliver a real correction to 2025. If receivables keep rising and supplier financing keeps falling, the first-quarter improvement will look more like seasonal timing than a permanent change in cash quality.

What Will Set the Rest of the Year

Three numbers matter more than the sales line from here. The first is the dairy margin. A 10.1% segment profit margin in one quarter looks very different from full-year 2025, but the company still needs to show that it was not only Passover timing, launches or temporary mix. A return to lower profitability would revive the old question: is dairy a growth engine only, or also a profit engine.

The second number is the vegetable margin. This business still generated about 80% of segment profit, so a decline of almost 4 percentage points is not noise. If the company keeps avoiding price increases while inputs remain more expensive, sales may stay solid while profitability keeps eroding.

The third number is cash quality after distributions. The company has a long history of dividends and buybacks, and that is part of its market identity. But a food manufacturer that carries seasonal inventory, invests in capacity and expands dairy needs distributions to rest on recurring cash flow, not only accounting profit and credit lines.

Zanlakol entered 2026 in better shape than year-end 2025 suggested, but the move from growth year to quality year is not complete. For the market to treat 2026 as a new base year, the company needs two to four more quarters in which dairy holds a higher margin, vegetables stop the erosion, and inventory releases cash without shifting pressure into receivables or suppliers. The counter-thesis is that Q1 benefited from Passover timing and seasonal inventory release, and therefore does not represent the annual pace. The rest of the year will decide whether the company is selling more and keeping more cash, or mainly routing growth through working capital, investment and shareholder distributions.