Kyoei Steel Q2 FY2027: Sales rise, profit outlook cut on weak margins

In the first half, Kyoei Steel’s revenue rose 14.9% year on year to 177,703 million yen. Operating profit fell 33.6% to 6,112 million yen, while net income attributable to owners of the parent declined 40.0% to 3,262 million yen. The results showed deteriorating profitability despite higher sales.

• Overseas business expansion: Higher shipments from the overseas steel business helped lift revenue.
• Weaker domestic margins: Steel scrap prices rose faster than product prices, narrowing the spread between purchase and selling prices.
• Lower earnings: A sharp drop in domestic steel profit outweighed gains overseas.

Growth overseas was offset by weaker domestic margins. Cost of sales increased year on year, while gross profit declined. Overseas sales growth is supporting the business, but the ability to pass higher raw-material costs on to customers in Japan will be key to an earnings recovery.

The overseas steel business posted higher revenue and profit, while the domestic steel business saw a steep decline in earnings. The table below shows year-on-year changes in segment operating profit.

The domestic steel business generated operating profit of just 168 million yen. Construction activity was subdued amid labor shortages at construction and logistics sites, higher material costs and extreme heat, and shipments fell 4.4% year on year. Steel scrap prices rose 26.6%, while product prices increased just 1.1%, squeezing margins.

The overseas steel business increased operating profit to 5,942 million yen. In Vietnam, shipments grew on strong demand, while operations at a new rolling mill and higher output helped reduce costs. In North America, favorable market conditions and the product mix in Canada supported results, despite continued operating problems at the U.S. site. Overall, the business recorded higher revenue and profit.

Environmental recycling improved as it handled more waste and won projects involving difficult-to-process materials. Other businesses increased revenue but saw lower profit. Across the company, overseas growth helped offset the domestic decline.

Kyoei Steel revised down its consolidated forecast for FY2027. It now expects operating profit of 9,500 million yen, down 44.0% from the previous fiscal year. The latest earnings release does not include the previous forecast or prior-year actual amounts, so the table summarizes the comparisons available.

Domestic demand for construction steel is expected to remain weak in the second half, leaving shipments short of plan. The company also expects steel scrap prices to exceed its assumptions and the spread between purchase and selling prices to narrow more than planned. In overseas markets, Vietnam and Canada are broadly on plan, but production problems linked to aging equipment at the U.S. site and higher depreciation costs are weighing on results, prompting a full-year forecast downgrade.

Total assets at the end of the first half rose 1.3% from the previous fiscal year-end to 377,931 million yen, while the equity ratio was 56.6%. Cash flow from operating activities was negative, reflecting increases in trade receivables and inventories, among other factors.

The increase in trade receivables and inventories contributed to negative operating cash flow. Investing cash flow was positive because proceeds from the repayment of time deposits and other items exceeded spending on property, plant and equipment. The annual dividend forecast remains 70 yen per share, comprising an interim dividend of 30 yen and a year-end dividend of 40 yen. This is below the prior-year dividend of 90 yen, but the company made no change to its dividend forecast alongside the earnings revision. The earnings release did not mention a share buyback.

A recovery in earnings will depend on the company’s ability to pass higher raw-material costs on to domestic customers and keep overseas production facilities running reliably. Kyoei Steel has factored several uncertainties into its second-half outlook.

• Weak domestic steel demand: If construction activity remains sluggish and labor shortages persist, product shipments could fall short of plan and weigh on earnings in the domestic steel business.
• Rising steel scrap prices: If the company cannot pass higher raw-material costs on through product prices, the spread between purchase and selling prices could narrow further, delaying an earnings recovery.
• Aging equipment at the U.S. site: Production disruptions and higher depreciation costs associated with shorter equipment useful lives are expected, with the U.S. operation forecast to remain in the red in the second half.
• Geopolitical and financial-market volatility: Developments in the Middle East, financial and capital market fluctuations, and natural disasters could affect raw-material prices and business conditions.

Overseas operations are supporting growth, but problems at the U.S. site remain. Passing on higher costs in Japan and stabilizing U.S. operations will be critical to meeting the full-year forecast.