Kafrit in the First Quarter: Finke Held Revenue Flat as Inventory and Receivables Turned Profit into Negative Cash Flow

Kafrit reported a first quarter that repairs part of the operating concern left by the end of 2025, but not in a clean way for earnings quality or cash. Volumes rose by about 10%, North America returned to more meaningful segment profitability, and Asia continued to perform well. Reported revenue, however, was almost unchanged from the comparable quarter, because shekel appreciation reduced revenue by about NIS 27 million, and sales excluding the company first consolidated in October 2025 would have fallen by about 9%. Finke is therefore already helping Kafrit protect group revenue, but the quarter still does not prove that it is improving profit quality in Europe. The active bottleneck shifted to cash: NIS 12.7 million of net profit became NIS 12.5 million of negative operating cash flow, mainly because receivables and inventory grew heavily and seasonally. At the same time, bank credit rose to about NIS 391 million, the board approved two NIS 5.5 million dividends, and the Israeli company's coverage ratio stood at 1.53 against a reduced 1.2 threshold for 2026. The investor read is not that the weakness of 2025 has disappeared. It is that Kafrit has received an early positive signal from North America, while currency, working capital and Europe still determine how quickly operating improvement becomes accessible cash.

Volume Rose, Reported Revenue Did Not Move

Kafrit is a global industrial producer of masterbatches and compounds for the plastics industry. Its customers add these products to a carrier polymer or other materials during their own production process, so the company's economics are not just about how many tons were sold. They depend on raw-material prices, currency, utilization of production lines, customer mix, the ability to pass costs through, and working capital that sits in inventory and receivables before it returns as cash.

The business is organized around four geographic segments: North America, Europe, Israel and Asia. In the first quarter, North America generated about 40% of external group revenue, Europe about 26%, Asia about 17%, and Israel about 16%. That map matters because the consolidated figure looks too stable: revenue of NIS 334.3 million in the first quarter of 2026 versus NIS 334.2 million in the comparable quarter. Underneath that number, the segment movement is sharp.

The previous annual analysis left a clear checkpoint: volumes were still holding, but margin erosion, North American weakness and the integration of Finke made 2026 a proof year. The first quarter closes one part of that question. North America no longer looks like a large-revenue segment with only symbolic profit. Europe and Israel, however, move the pressure elsewhere: whether Kafrit can protect margins and generate cash when currency works against it and growth requires more inventory and customer credit.

The confusing number in the quarter is the gap between physical activity and reported revenue. Sales volumes rose by about 10%, and even excluding the company first consolidated in October 2025, volumes rose by about 7%. At the revenue level, however, the group remained almost flat. Excluding the newly consolidated company, sales would have declined by about 9%, mainly because the shekel appreciated against the operating currencies and reduced revenue by about NIS 27 million.

That changes how the quarter should be read. Looking only at revenue, Kafrit looks like a company that did not grow. Looking only at volumes, it looks like a company that returned to growth. The economic read sits between the two: physical demand improved, but currency absorbed most of the movement in the financial statements, and Finke filled the top-line gap before showing clear improvement in group profitability.

Gross profit fell only mildly, to NIS 77.7 million from NIS 78.2 million, and the gross margin stayed nearly stable at about 23.2%. The sharper decline came below gross profit. Selling and marketing expenses rose to NIS 28.5 million, and general and administrative expenses rose to NIS 22.3 million, mainly because of the newly consolidated company. Operating profit fell 18.6% to NIS 26.7 million, and the operating margin declined to 8.0% from 9.8%.

Net profit was almost unchanged, NIS 12.7 million versus NIS 12.8 million, but not because operating performance improved. Net finance expenses fell to NIS 5.8 million from NIS 13.1 million, mainly because net foreign-exchange expenses were about NIS 0.2 million compared with about NIS 7.4 million in the comparable quarter. Kafrit also says the shekel appreciation had a positive NIS 3.0 million effect on net profit because of its natural hedges. In other words, currency hurt revenue, operating profit and EBITDA, but helped the bottom line through the debt structure and natural hedging.

North America Improved, Europe And Israel Carried The Weak Side

The first quarter gives an early answer to the weakest point of 2025. North America, which the prior follow-up analysis identified as the large segment that was left with almost no profit, increased external revenue to NIS 134.9 million from NIS 114.0 million, while segment profit rose to NIS 9.9 million from NIS 5.7 million. This does not make 2025 irrelevant, but it changes the evidence weight: the North American platform showed it can absorb costs better when revenue and utilization improve.

That read is not uniform inside the segment. Kafrit says North America is exposed to construction and consumer products, and that Kafrit North America in Canada was hit hard by preference for U.S.-made products around tariff attempts, even though no tariffs were imposed on the products the company manufactures. That is important because the risk is not only direct tariff cost. Customer behavior and supply-chain preference can shift toward U.S. production in a period of trade uncertainty.

Europe is less comfortable. Finke sits inside the European segment, yet Europe's external revenue declined to NIS 87.9 million from NIS 107.0 million, and segment profit declined to NIS 10.1 million from NIS 17.8 million. Because the company does not break out Finke's standalone contribution for the quarter, the filing does not allow a clean conclusion on whether the German activity itself improved or weakened. What is clear is that the segment expected to absorb Finke did not show profitable expansion this quarter.

Israel moved to a segment loss of NIS 0.9 million, compared with profit of NIS 4.3 million in the comparable quarter, while Asia offset part of the picture with segment profit rising to NIS 7.8 million. The center of gravity for 2026 is therefore not only whether North America has recovered. The broader question is whether Kafrit can get three things at the same time: North American improvement, European stabilization after Finke, and cash flow that is not swallowed by working capital.

Working Capital Took The Cash Before Profit Reached The Bank

Net profit does not describe the cash position this quarter. Operating cash flow was negative NIS 12.5 million, compared with positive NIS 7.3 million in the comparable quarter. The gap was created despite about NIS 13 million of net profit and about NIS 22 million of accounting adjustments, because changes in assets and liabilities consumed about NIS 40 million, mainly through receivables and inventory.

For a company such as Kafrit, this is not a technical line item. Producing masterbatches and compounds requires inventory, sales to industrial customers create customer credit, and volume growth improves profit only after the inventory is sold and customers pay. In the first quarter, inventory rose to NIS 250.4 million from NIS 221.3 million at the end of 2025, and trade receivables rose to NIS 248.7 million from NIS 213.3 million. The business is growing physically, but that growth consumes cash before it returns as cash flow.

All-in cash flexibility after the quarter's actual cash uses was weaker than operating cash flow alone. After negative operating cash flow of NIS 12.5 million, investment in property, plant, equipment and intangible assets of about NIS 9.8 million and lease liability repayments of about NIS 1.7 million, Kafrit needed financing to close the gap. Financing cash flow was positive NIS 18.7 million, and short- and long-term credit rose to about NIS 391.3 million.

The debt structure does not point to immediate liquidity stress. Kafrit says its credit facilities are not fully used, that it does not expect liquidity problems, and that the company and the relevant subsidiaries are in compliance with their financial covenants. The detail is still worth reading carefully: the ratio of EBITDA to interest and principal payments on long-term loans in the Israeli company stood at 1.53. In 2026 the threshold is 1.2, so the company complies, but the number is below the 1.6 general reference point in the covenant. This is not a breach. It is a reminder that dividends, investment and working capital remain under watch.

The dividend reinforces the same point. Kafrit's board approved a NIS 5.5 million dividend on March 31, 2026, paid on April 29, and approved another NIS 5.5 million dividend on May 31 for payment on June 29. The distribution is not unusual relative to the company's capital policy, but it comes in a quarter with negative operating cash flow and rising credit. The cash-return thesis now depends less on reported net profit and more on whether working capital begins releasing cash in the next few quarters.

Conclusion

Kafrit was not passive during the quarter. On February 28, 2026 it established CONSTAB IND in India, which will operate under a hybrid model combining the group's formulas and technology with local production and supply chains through certified industrial partners. This is a logical step for access to a growing market, especially because it does not necessarily require building a full plant on day one. For shareholders, however, it is still a business option rather than proven profit. Its contribution will be measured through sales, margins, partner quality and local working capital.

Kafrit also established SeaNovel Bioplastic with Kibbutz Ga'ash, a climate-tech company developing a biodegradable raw material from Ulva green algae for the plastics industry. This direction fits the sustainability and higher-value product narrative, but there is still no number connecting the activity to Kafrit's profit or cash flow. At this stage, India and SeaNovel expand the group's growth and innovation option, not the proven earnings base.

The nearer trigger is in raw-material and selling prices. Following a sharp rise in oil and gas prices and higher energy and transportation costs, the company began a gradual increase in selling prices to customers. This is a key point for the next quarters. If price increases compensate for polymers, energy and transport without hurting volumes, margins can stabilize. If customers absorb only part of the increase or delay orders, the strong first-quarter volume will look lower quality.

Kafrit's first quarter gives a positive signal from North America and shows that physical demand did not break, but it also sets a clear limit on an overly optimistic read. Finke helped protect reported revenue while currency removed tens of millions of shekels from the top line, yet Europe has not shown that the integration is translating into better profitability. Net profit held mainly because of finance and currency, while operating profit and EBITDA weakened.

The next few quarters will be judged through both cash and operations. North America needs to keep showing that the profitability improvement is not a single-quarter move. Europe needs to prove that Finke adds profit, not only revenue and complexity. Working capital needs to stop consuming cash at a pace that requires more credit, especially while the company continues paying dividends. If all three move together, 2026 can look like a real repair year after 2025. If one of them stalls, the market will see a company with higher activity volume, but still unproven earnings and cash-flow quality.