Sano in the First Quarter: Currency and Paper Lift Profit, Cleaning Products Still Slip

Sano's first quarter answers one question left open after 2025, but leaves the more important one unresolved. Yes, the margin improvement was not only a year-end event: gross margin rose to 37.9%, operating profit before other income rose 8.4%, and net profit rose 17.0%. But the mix behind the improvement is less clean than the headline. Paper products and other products carried almost all of the segment profit growth, while cleaning and home care, the largest sales bucket, kept revenue almost flat but lost profitability. Cash flow was much stronger than last year, yet it also benefited from friendlier working-capital movement rather than only from stronger earning power. The quarter therefore strengthens Sano's financial flexibility story, but it still does not prove that the whole core has returned to high-quality growth. Over the next few quarters, the market will need to see whether the input-cost and currency benefit stays inside margin, and whether logistics and real-estate investments keep being funded without eroding excess cash.

Profit Rose, But Not Across the Whole Core

Sano is mainly a local consumer-products and industrial company: manufacturing, marketing and distribution of cleaning, paper, toiletries and complementary products. This kind of business usually creates value less through rapid sales growth and more through brand strength, input-cost control, distribution efficiency, disciplined working capital and the ability to retain part of procurement benefits inside gross margin.

First-quarter sales rose only 0.8% to NIS 590.7 million, so the profit growth is not a volume story. It is a margin story. Gross profit rose 7.0% to NIS 223.8 million, and gross margin improved from 35.7% to 37.9%. The operating explanation is clear: raw materials and product costs became cheaper, mainly because the shekel strengthened against the US dollar and euro, alongside some increase in sales volume.

But the stronger shekel does not work the same way across the group. It helped input costs and imported products, while export and overseas sales fell to NIS 76.7 million from NIS 79.2 million, mainly because the shekel strengthened against local currencies in Romania and Bulgaria. That does not cancel the positive read, but it prevents a simplistic conclusion that a strong currency is only a tailwind.

The table explains why the quarter matters more than the net-profit line. Cleaning and home care accounted for 52.6% of sales, but segment profit fell to NIS 48.0 million from NIS 52.9 million. By contrast, paper products and other products together added about NIS 14.8 million to segment profit. At the consolidated level, this looks like a good quarter. At the earnings-quality level, it is still a quarter where the improvement comes from the less permanent-looking parts of the business.

Net Profit Got Help Outside the Operating Core

The NIS 7.2 million increase in operating profit before other income is the main operating proof point in the quarter. It came despite a NIS 7.4 million increase in operating expenses, mainly wages and distribution. Selling and marketing expenses were already 17.7% of sales versus 16.8% in the comparable period, meaning part of the gross-margin improvement was absorbed before reaching operating profit.

The gap between operating profit and net profit matters here. Net profit rose by NIS 12.0 million, more than the operating improvement, because of three additions that are not ordinary product sales: an approximately NIS 3.0 million capital gain from selling land in Romania, a swing from a NIS 2.6 million share in losses of equity-method companies to a NIS 0.7 million share in profit, and NIS 2.1 million of prior-year tax income that reduced the effective tax rate to 17.9%.

This is not weak earnings quality, but it is earnings quality that needs separation. The business itself improved, mainly through gross margin, while the net-profit line also benefited from items that may not recur every quarter. The next read should therefore focus less on whether net profit is higher and more on whether paper and other products can hold their operating improvement, and whether cleaning products stop pulling the group backward.

Two note-level updates help define what should not dominate the thesis. The class action tied to Food Law allegations ended in April 2026 through an agreed withdrawal against Sano, with no reward, no legal fees and no costs order. The approval request regarding the Sano Javel spray nozzle is also moving toward a compensated withdrawal with an immaterial amount. At the same time, two additional pre-action consumer letters remain at an early stage, and the company cannot yet assess whether approval requests will be filed or what their prospects would be. Legal noise still belongs in the risk list of a consumer-products company, but it does not currently look like a central financial driver for the next few quarters.

The Romanian land sale also cleans up a non-core asset and brings in cash, but it does not change the company's structure. Consideration was about EUR 1.25 million, or NIS 4.7 million, and the capital gain was about NIS 3.0 million. That is positive, but it is not the profit source that needs to carry 2026.

Cash Flow Improved Without Stopping Investment

Operating cash flow is the strongest part of the quarter. It reached NIS 95.4 million versus only NIS 10.8 million in the comparable quarter. Higher profit helped, but the main change was that working capital was far less demanding: receivables still increased by NIS 77.1 million, but inventory fell by NIS 18.0 million and suppliers increased by NIS 27.1 million.

The cash calculation needs a clear definition. All-in cash flexibility checks what remains after purchases of property and equipment, investment property under construction, lease principal repayment and dividends to non-controlling interests. On that basis, Sano ended the quarter with about NIS 58.7 million of surplus before movements between cash, deposits and securities. This is a quarterly flexibility calculation, not an estimate of normalized maintenance cash generation.

This is the part that strengthens continuity with the prior annual analysis and the follow-up on warehouses and real estate. Investment did not disappear: purchases of property and equipment totaled NIS 27.6 million, purchases of investment property under construction totaled NIS 4.5 million, and another NIS 10.5 million of property and equipment was purchased through supplier credit. But unlike quarters in which investment can start to look like a burden, this quarter shows that the company can still absorb the spend without bank debt and without visible funding pressure.

What the Next Quarters Need to Show

The first quarter leaves Sano in a better position than the conservative headline of almost flat sales would suggest. Gross margin improved, cash flow returned strongly, and the balance sheet still allows investment without debt pressure. But the improvement still depends on two engines that need proof: durable profitability in paper and other products, and a return to more stable profitability in cleaning and home care.

The intelligent counter-thesis is that the quarter is already strong enough: a consumer-products company with excess liquidity, almost no short interest and the ability to fund investment from operating cash flow does not need rapid sales growth to remain a high-quality business. That is a serious argument, especially when quarterly cash flow covers investment. Still, if the coming quarters show continued erosion in cleaning products and a margin improvement driven mainly by currency and input-cost conditions, the market may treat the higher profitability as temporary rather than a new base. For the read to improve, Sano needs to show that gross-margin improvement survives wages and distribution costs, that working capital does not go back to consuming cash flow, and that the investment wave starts appearing as cost savings or income rather than only as more assets on the balance sheet.