Godo Steel Q2 FY2027: Sales rise as company swings to operating loss

Godo Steel posted higher revenue but swung to an operating loss in the first half of FY2027. Revenue rose 2.8% year over year to ¥96.109 billion. The company reported an operating loss of ¥157 million, compared with operating profit of ¥5.431 billion a year earlier. Net income attributable to owners of the parent was ¥383 million, down 91.8%. Ordinary profit fell 95.9% to ¥258 million.

• Exports support sales: With domestic demand weak, the company sought to secure shipments by expanding exports.
• Sluggish steel demand: Labor shortages and higher prices for construction materials and equipment led to project delays and cancellations, while general contractors became more selective about orders.
• Higher raw material and energy costs: Scrap prices remained elevated, while a weaker yen and Middle East tensions contributed to higher energy costs.
• Price increases lag: Price hikes, particularly for reinforcing bar facing weak demand, failed to gain traction, leaving the company unable to absorb higher costs.

Higher costs erode profit despite sales growth. Consolidated revenue increased by ¥2.594 billion from a year earlier, but the cost of sales rose to ¥85.086 billion from ¥76.718 billion, weighing on operating results. The key to a recovery is whether the company can pass higher raw material and electricity costs on to customers while using exports to maintain volumes.

The steel business posted higher revenue, but segment profit fell sharply. The agricultural materials business also grew revenue and narrowed its loss, though it remained in the red.

Steel business revenue increased by ¥1.761 billion year over year to ¥88.180 billion, while segment profit was ¥303 million. Expanded exports supported sales, but sluggish shipments of construction steel and higher scrap and electricity costs outpaced price increases.

Agricultural materials business revenue rose by ¥1.121 billion year over year to ¥5.983 billion, while its loss narrowed by ¥55 million to ¥89 million. The other business recorded revenue of ¥2.127 billion and profit of ¥151 million, with both revenue and profit down from a year earlier. Segment profit in the earnings release is presented on a basis that reconciles with ordinary profit in the consolidated income statement.

At the end of the first half, total assets were ¥253.264 billion, down ¥2.242 billion from the previous fiscal year-end, and the equity ratio was 55.8%. Operating cash flow turned negative from positive a year earlier, and cash and cash equivalents also declined.

The increase of ¥3.155 billion in inventories was among the factors behind negative operating cash flow. Cash and cash equivalents at the end of the first half stood at ¥18.433 billion, below ¥26.920 billion at the end of the year-earlier first half.

Godo Steel plans to maintain a minimum annual dividend of ¥100 from FY2027 through FY2031, the period covered by its Mid-Term Vision 2030. The interim dividend of ¥40 was unchanged from its previous forecast, as was its ¥60 year-end dividend forecast. The company bought back ¥771 million of its own shares during the first half, and says it aims to balance shareholder returns with improving its financial position and securing funds for reinvestment.

Godo Steel revised its FY2027 full-year forecast, projecting revenue to rise 4.3% from the previous year to ¥200 billion and operating profit to fall 81.7% to ¥1.8 billion. Net income attributable to owners of the parent is expected to decline 80.1% to ¥1.6 billion.

The company said it had revised its previous forecast, but the earnings release does not provide the earlier figures or details of the reasons for the revision. Raw material and electricity costs were heavy enough to push operating results into the red in the first half. Although the company expects profits to recover for the full year, the pace of demand recovery and price pass-through will be critical to meeting its targets.

A recovery depends on addressing both weak demand for construction steel and rising costs. Based on the market conditions and results described by the company, the main risks are:

• Weak construction demand: Labor shortages and higher construction material and equipment prices are delaying or canceling projects, potentially limiting steel inquiries and shipments.
• Higher raw material prices: Scrap prices remain elevated, and the steel business's profitability will come under pressure if increases cannot be passed on to product prices.
• Persistently high electricity and energy costs: A weaker yen and Middle East tensions, along with price increases under power companies' market price adjustment systems, could push up manufacturing costs.
• Changes in construction site activity: Prolonged work stoppages and lower productivity due to summer heatstroke prevention measures could delay a recovery in steel shipments and demand.

When domestic demand is weak, exports may help maintain volumes but do not necessarily offset higher raw material and energy costs. The challenge is to keep production aligned with demand while achieving selling prices that allow the business to reproduce its products profitably.

Under the Godo Steel Group Mid-Term Vision 2030, the company aims to restore and improve profitability while strengthening its financial position. Against a backdrop of a shrinking steel market and a declining working-age population, it has identified growth investment, investment in human capital and sustainability initiatives as priorities.

• Production aligned with demand: The company will use its multiple production sites to adjust output in response to changes in sales and procurement conditions and production requirements.
• Achieving sustainable selling prices: It aims to reflect fluctuations in raw material and energy costs in selling prices and protect profitability.
• Balancing financial strength and shareholder returns: The company intends to secure funds for necessary reinvestment while making dividends more predictable.

In the first half, price increases failed to keep pace with rising costs, highlighting the challenge of restoring profitability under the vision. Future results will show whether improved selling prices, as well as production adjustments, translate into higher profits.