Gan Shmuel in the First Quarter: Currency and Pricing Cut Profitability Before Thailand Proves Its Contribution

The first quarter at Gan Shmuel gives a sharper answer to the open question from 2025: this is not yet a full industrial recovery, but a quarter that shows how much pricing and the shekel can erase profitability even when the company keeps selling at meaningful scale. Revenue fell 8.5%, but gross profit fell 42.8% and operating profit fell 73%, so the issue is not just volume. It is revenue quality and a dollar-reported cost base with large shekel components. There are positives: the retail business absorbed the distributor transition without material disruption, Thailand moved into commercial activity, citrus fruit intake is much higher, and the balance sheet is still far from a stress reading. Still, none of those triggers was strong enough in this quarter to change earnings quality. Operating cash flow was negative, the dividend paid consumed more cash than the quarter's profit, and short-term bank credit increased while cash declined. 2026 therefore looks like a proof year: the next quarters need to show industrial margin stabilization, identifiable Thailand contribution, and a Primor transition under Osem that protects shelf presence without eroding profitability.

Pricing and the Shekel Still Define the Industrial Engine

The company is an industrial food company with a retail leg. The core business manufactures and markets raw materials for the food and beverage industry in Israel and abroad, mainly fruit products, fruit byproducts, and other industrial products. Alongside it, the retail segment sells mainly Primor products, catering products, and private label products. This is not a standard consumer company where the local shelf tells the whole story. About 81% of first-quarter sales were exported to roughly 50 countries, so concentrate pricing, the dollar exchange rate, raw materials, logistics, and geographic mix drive profit far more than any single retail product basket.

That diversification matters, but it does not protect the company from the price cycle. Orange concentrate prices fell sharply in 2025 after a price surge that began in 2022 and peaked in 2024. The first quarter of 2026 continues that move from an unusually strong pricing environment to a tougher one. The company notes that a preliminary May 2026 crop forecast for Brazil's main growing regions points to a roughly 13% decline in the orange crop versus the prior season, and that HLB disease continues to restrain price declines. But management does not yet estimate the net impact. In other words, there are factors that can slow the price decline, but the current report already shows the margin damage that has arrived.

The segment breakdown shows where the pressure sits. Industrial revenue fell from $59.3 million to $52.6 million, down 11.3%, while segment profit fell from $12.2 million to $3.2 million. On a margin basis, the industrial segment fell from roughly 20.5% to roughly 6.1%. Retail looks more stable, with revenue rising from $10.4 million to $11.2 million and a move from a tiny segment loss to a $77 thousand profit, but it is still not large enough to absorb the industrial decline.

The accounting headline is a $5.9 million revenue decline, but the number that explains the economics is margin. Gross profit fell from $21.5 million to $12.3 million, and gross margin fell from 30.9% to 19.3%. Operating profit fell from $12.2 million to $3.3 million, and operating margin fell from 17.5% to 5.2%. This is no longer just a retreat from an especially strong pricing environment. It is a quarter in which every local-cost shekel hurts more when measured in dollars.

The company points to two main sources of erosion: lower industry prices and the product mix sold, alongside the decline in the dollar-shekel exchange rate, which affected shekel expenses such as wages, rent, and energy. The financial statements show a dollar rate of NIS 3.165 on March 31, 2026, versus NIS 3.718 a year earlier. Management also notes that the shekel continued strengthening in 2026 to NIS 2.90 per dollar, and that continuation of this environment could materially hurt business performance. This is not a distant macro item. The company reports in dollars, but part of its expense base is in shekels, so shekel strength passes directly into margins.

Geography is not uniform either. The Far East, one of the weak spots in the prior annual analysis, fell from $30.1 million to $24.4 million. Eastern Europe fell from $12.5 million to $10.5 million. Western Europe rose from $7.8 million to $10.3 million. Diversification helps the company avoid dependence on one market, but it does not replace a recovery in industrial pricing and margin.

Osem and Thailand Have Started, But They Have Not Changed the Profit Line Yet

The two business triggers that were on the table at the end of 2025 are now inside the first-quarter report. Both give direction, but neither yet proves full earnings contribution.

The Osem transition passed without material damage, but it has not changed the profile. Ganir entered into a non-exclusive distribution agreement with Osem for chilled Primor juices from January 1, 2026, while the previous distribution agreement with Strauss Marketing ended. During the quarter, the relevant category saw a non-material sales decline of roughly $1 million due to the transition. That matters because it reduces part of the execution concern: changing distributors did not break the quarter. Still, the entire retail segment generated only $77 thousand of segment profit, so even a successful distribution transition does not yet change the company's dependence on industrial profitability.

Thailand moved into commercial activity, but the report still does not isolate the contribution. T.G.S Foods is 80% held by the company and 20% by the local partner. The plant building was completed in the first quarter of 2025, most equipment and production lines were installed and tested during the second and third quarters, and the startup and commissioning processes were completed successfully in the first quarter of 2026. Commercial activity has therefore begun. This is a positive step versus the open issue in the Thailand analysis, but the report still does not provide sales, volumes, utilization, customers, or profit contribution attributable to TGS. As long as the industrial segment as a whole shows such severe profit erosion, Thailand remains a potential that needs to show up in the numbers, not only in operational stage language.

The volume side of raw materials also looks better. By May 15, 2026, the company had received about 68 thousand tons of citrus fruit, up roughly 67% from the comparable period. In June 2026, it expects to begin processing about 40 thousand tons of tomatoes, backed by signed contracts with farmers and mostly against existing customer orders. These are better operating indicators, but they do not solve the pricing, currency, and margin question by themselves. Higher volume can support utilization, but in the first quarter it still did not bring margins close to the comparable quarter.

Profit Did Not Reach the Cash Account, and the Dividend Took Most of the Cash

All-in cash flexibility after actual cash uses is why this quarter is not just a margin story. The company ended March with $6.3 million of cash and cash equivalents, versus $17.3 million at the end of 2025. Operating cash flow was negative $1.6 million. Investing activity used another $2.8 million, including $1.5 million for property and equipment and $1.3 million for an investment in an associate. Financing activity used a net $6.7 million, mainly because of a $9.1 million dividend payment, partly offset by a $4.2 million increase in short-term credit.

Working capital explains a large part of the gap between profit and cash. In a quarter when sales declined, receivables increased by $10.2 million and cash flow absorbed another $2.0 million inventory increase. A $4.7 million increase in suppliers and service providers helped offset part of the pressure, but it did not turn operating activity positive. The company earned a profit in the quarter, but cash was still inside receivables, inventory, investments, and the dividend.

This does not point to immediate stress. Equity represents 69.9% of the balance sheet, current assets exceed current liabilities by $127.4 million, and the company complies with all financial covenants to which it is committed with banks. But a NIS 30 million dividend in a quarter of negative operating cash flow sharpens the capital-allocation point: the company can still distribute cash, but this quarter's distribution relied more on balance-sheet cushion and short-term credit than on cash produced during the same period.

There is also a point to watch below operating profit. The fair-value financial asset remained at $8.7 million and did not record another fair-value loss in the quarter, so fair-value pressure did not recur for now. By contrast, the company's share in equity-method losses was $342 thousand, mainly because of Gan Peleg. The attached partnership statements show a NIS 2.1 million loss, a NIS 17.2 million working-capital deficit, NIS 8 million of partner investment during the quarter, and a commitment by the partners to continue providing financing for at least the next 12 months. That does not change the consolidated financial position, but it is a reminder that some capital is still going to activity layers outside the core industrial profit engine.

Conclusions

The first quarter does not change the company's story dramatically in either direction, but it sharpens the 2026 proof point. The company still has a strong balance sheet, continues to operate without material disruption despite the security and logistics backdrop, and is advancing two important moves: Osem in Primor distribution and Thailand as an industrial base in Asia. The problem is that neither move has yet appeared in profitability with enough force to offset price declines and shekel strength.

The current read is cautious: this is not a liquidity crisis, but it is a year in which the company needs to prove that the 2025 erosion does not become a lower profit base. The strongest counterpoint is that the first quarter still sits inside a transition period, with Thailand only just beginning commercial activity, Osem entering distribution at the start of the year, and a stronger citrus season not yet fully reflected in profit. For the read to improve, the next reports need to show three things together: higher industrial profitability, operating cash flow turning positive after working capital, and more identifiable contribution from Thailand or retail. If that does not happen, the market may focus less on the strong balance sheet and more on whether 2024 was simply too strong to repeat.