Carmel Corp in the First Quarter: Yafora Carries Profit While Wine and Beer Still Consume Credit

The first quarter at Carmel Corp looks stronger in revenue than in cash flow and earnings quality. Revenue rose 9.1% to NIS 134.4 million, the trading segment grew faster than the production segment, and Yafora delivered a sharp profit contribution that supports consolidated operating profit. Underneath that, the company’s two direct core engines, wine and beer and alcohol distribution, suffered gross margin pressure, and operating profit excluding Yafora’s equity-method contribution fell to about NIS 2.4 million. Operating cash flow remained negative at NIS 26.9 million, short-term credit rose to NIS 361.9 million, and the company amended its financial covenants to better fit the investment and working-capital years of 2026 and 2027. This is not a business without activity, but it is a business whose growth engine is still funded through the balance sheet. For the next quarters to change the read, Carmel needs to show that beer and wine can restore margin, that sales growth is not trapped in receivables and bank credit, and that Yafora is not only accounting profit but value that can move up to the listed-company shareholder layer.

Yafora Carries Profit, While the Direct Core Still Needs to Prove Margin

Carmel Corp is not just a public winery. It is a combination of three engines: Carmel and Yatir wineries, trading and distribution of beer and alcohol, and a 30.45% holding in Yafora. The first engine gives the company brand and production infrastructure, the second is supposed to be a growth engine through beer and imported products, and the third is a soft-drinks holding accounted for under the equity method, so it moves consolidated profit without being consolidated into revenue.

That split changes the entire quarter. At the revenue level, the direct engines are working: production-segment sales rose from NIS 86.9 million to NIS 91.8 million, and trading-segment sales rose from NIS 36.3 million to NIS 42.6 million. At the profit level, the picture is almost the opposite: production-segment operating profit fell from NIS 7.2 million to NIS 4.8 million, and the trading segment remained loss-making with an operating loss of NIS 2.6 million. Yafora is what turned the consolidated line into NIS 11.0 million of operating profit, as Carmel’s segmental share of Yafora operating profit rose from NIS 4.8 million to NIS 9.5 million.

The easy miss is that consolidated operating profit improved even though a material part of the direct core weakened in margin terms. That does not cancel Yafora’s value, but it requires a separation between profit booked in the accounts and cash entering the public company. Yafora itself reported NIS 190.2 million of revenue, NIS 31.3 million of operating profit and NIS 40.9 million of operating cash flow, but at the Carmel level that value becomes fully accessible only if it moves upstream as a dividend or through another capital action. Carmel states that Yafora dividends, when received, are used to reduce bank credit and fund ongoing activity. As long as the direct core consumes credit, cash access from Yafora is not a technical footnote. It is part of the thesis.

The pending Green Pet exit adds another layer to Yafora’s earnings quality. Yafora Tavori entered into an agreement to sell its entire 75% holding in Green Pet for about NIS 1.5 million in cash plus Green Pet’s remaining cash balance, subject to closing conditions. At the same time, Carmel recognized a NIS 5.3 million equity reduction for its share in the negative capital reserve recorded by Yafora Tavori. Green Pet’s operating loss declined versus the prior year, but the planned sale underlines that Yafora’s improvement includes cleaning up an activity that weighed on 2025, not only clean organic growth.

Growth Came With Margin Pressure

Quarterly revenue rose by NIS 11.3 million, but gross profit fell by NIS 4.4 million. Gross margin declined from 28.7% to 23.0%, and that gap replaces the headline growth story. The company attributes the erosion in both operating segments to stronger competition and costs with one-off characteristics. That framing gives direction, but it leaves the important question open: how much of the erosion is temporary, and how much reflects market conditions or pricing in the categories where the company is trying to grow.

The wine and beer market data also looks good. The barcoded wine category grew 17.1% in volume, the barcoded beer category grew 5.3%, and Carmel’s volume market share was 31.5% in wine and 20.1% in beer. The company also renewed its exclusive distribution agreement with AB InBev through the end of 2028 for the distribution and sale of products in Israel and the Palestinian Authority, excluding specific locations defined in the agreement. That provides a better commercial base for the trading segment, especially after beer was defined as a growth engine.

Still, market share and a distribution agreement are not enough if they do not reach a more stable gross margin. The trading segment grew 17.5%, but remained loss-making. That is an improvement from a NIS 3.0 million operating loss in the comparable quarter, but not yet proof that beer has become a standalone profit source. In production, sales rose about 5.7%, while operating profit fell about 33.7%. That is a clear sign that returning to ordinary production and completing investment at Alon Tavor do not by themselves solve pricing pressure, cost pressure or the sales mix.

Profit Did Not Become Cash, and Banks Became More Central

All-in cash flexibility after actual cash uses remains weak. In the first quarter, Carmel recorded NIS 4.1 million of net profit, but operating cash flow was negative at NIS 26.9 million. After property and equipment purchases, net loans and negative investing cash flow of NIS 9.6 million, the company funded the gap mainly through positive financing cash flow of NIS 31.9 million, driven by higher short-term credit from banks and others after lease repayments. The decline in cash was therefore limited to NIS 4.6 million, but not because the business released cash. The balance sheet carried the gap.

The working-capital truth is especially important for a company like this. Receivables rose by NIS 53.9 million during the quarter, while inventory declined by NIS 17.1 million. That fits the timing of Passover at the beginning of April and seasonality, but the result is that sales reached the income statement before cash reached the company. Against that, suppliers and other payables rose by NIS 14.0 million, while grower payables declined by NIS 13.6 million. In other words, part of the pressure moved to short-term bank financing rather than being fully absorbed by suppliers.

This connects directly to the covenant amendments approved in March. The company amended the EBITDA definition so that the group’s share in equity-method investees’ profit is excluded if included in operating profit. For 2026 and 2027 only, the long-term debt to EBITDA ratio will also include debts and liabilities to banks and financial institutions for the Ofek project even if they are not presented as long-term financial debt, and the ratio will be capped at 4.5. After that, the ratio falls to 4. A once-per-calendar-year cure mechanism was also set for the operating working-capital ratio if it exceeds 90% but not 92%, and a net financial debt cap of NIS 380 million was set.

Amending covenants is not necessarily a sign of immediate distress. The company expects to comply with all relevant financial covenants during 2026. But the amendment matters because it shows where the company stands: a year in which the Ofek project, inventory, receivables, short-term credit and ongoing investments all need to fit together. In a quarter where short-term credit already stands at NIS 361.9 million and cash at NIS 18.3 million, the market will not settle for accounting profit. It will need to see the activity reduce the need for credit, or at least see trading-segment growth start paying for itself.

What Will Decide the Next Quarters

The second and third quarters matter more to Carmel than the first because of beer and beverage seasonality. Beer activity usually benefits from higher purchases around Independence Day and the summer months, and Yafora itself notes that in soft drinks, the second and third quarters are generally stronger than the first and fourth. The next quarter therefore needs to answer a simple question: does the trading-segment sales growth turn into better gross profit, or does it continue to require more working capital and credit?

The security backdrop still affects the read. Operation “Roaring Lion” hurt demand in March, mainly through temporary closures of some customer businesses in both the “hot” and “cold” markets, but Passover timing softened part of the impact. If activity returns to a more normal sequence, the market will get a better test of demand quality. If there is renewed escalation, Carmel remains exposed to a difficult mix of lower demand, higher energy and raw-material costs, and currency volatility.

The current conclusion is that the company is advancing commercially, but has not yet proven that this progress improves business quality at the shareholder level. The AB InBev agreement, market shares and Yafora holding are real assets, but the first quarter shows consolidated profit relying on Yafora while the direct core consumes financing. The strongest counter-thesis is that Q1 was affected by Passover timing, one-off costs and security disruption, so seasonal improvement in the next quarters could restore margin and cash flow without a negative structural change. For that argument to hold, Carmel needs to show lower short-term credit needs, better gross profitability in production and trading, and progress in the Ofek project without additional pressure on covenants. If growth continues to arrive with margin erosion and negative cash flow, Yafora will keep looking more like an anchor masking core pressure than like an engine lifting the whole company.