Kobe Steel (5406) FY2026 FY Earnings Report

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Executive Summary

This was a decline in both revenue and earnings, as deteriorating profitability in the Steel & Aluminum and Electric Power businesses weighed down company-wide earnings. The Company plans a recovery to higher revenue and earnings in the next fiscal year. Revenue was ¥2 trillion 4,365.8B (-4.6% YoY), Operating Income was ¥1,298.8B (-18.2%), Ordinary Income was ¥1,213.4B (-22.8%), and Net Income attributable to owners of the parent was ¥937.2B (-22.0%). The gross margin was 16.5%, broadly unchanged from the previous year; however, SG&A expenses increased 3.4% despite declining revenue, which was the primary cause of the deterioration in the operating margin to 5.3% from 6.2%.

Factors Affecting Results

【Revenue】Revenue declined 4.6% YoY, with the largest segment, Steel & Aluminum, and the Electric Power business posting substantial declines of 10.8% and 21.5%, respectively, weighing on company-wide results. In contrast, the Machinery (+6.9%), Engineering (+11.1%), Advanced Materials (+5.2%), and Welding (+2.6%) businesses secured revenue growth, resulting in divergent performance across the business portfolio.

【Profitability】Operating Income declined 18.2% YoY, while Ordinary Income declined 22.8%, reflecting a wider decrease in earnings. By segment, on an ordinary profit/loss basis, Steel & Aluminum deteriorated to profit of ¥28.9B and a profit margin of 0.3% (-87.8% YoY), while Electric Power and Construction Machinery also posted earnings declines of 33.5% and 34.2%, respectively. In contrast, Machinery achieved earnings growth of 43.3% and became the largest profit-contributing business, with a margin of 17.4%. In extraordinary gains and losses, a gain on the sale of investment securities of ¥218.7B and impairment losses of ¥241.6B nearly offset each other, resulting in a net temporary impact of -¥4.6B. The divergence between Ordinary Income and Net Income was attributable to income taxes of ¥230.4B and profit attributable to non-controlling interests of ¥41.1B. Overall, this was a decline in both revenue and earnings.

Segment Analysis

Segment profit, on an ordinary profit/loss basis, was highest in Machinery at ¥467.0B (profit margin 17.4%, +43.3% YoY), followed by Electric Power at ¥347.6B (profit margin 17.1%, -33.5% YoY). Meanwhile, Steel & Aluminum, the largest segment by revenue, plunged to profit of ¥28.9B and a profit margin of 0.3% (-87.8% YoY), becoming the primary constraint on company-wide profitability. Construction Machinery also posted lower earnings of ¥123.7B, with a profit margin of 3.2% (-34.2% YoY), while Advanced Materials declined as well (profit margin 2.7%, -18.7% YoY). The business structure is one in which the highly profitable Machinery and Electric Power businesses supplement the less profitable Steel & Aluminum and Construction Machinery businesses; recovery in Steel & Aluminum profitability is essential to improving the company-wide profit margin.

Key Financial Indicators

【Profitability】The operating margin of 5.3% (6.2% in the previous year), net profit margin of 3.9% (4.7% in the previous year), and ROE of 7.4% all declined from the previous year. Although the gross margin was broadly flat at 16.5%, the increase in SG&A expenses exerted downward pressure.【Cash Flow Quality】Operating Cash Flow (OCF) was ¥2,016.8B, equivalent to approximately 2.1 times Net Income, indicating strong cash conversion. However, while a decrease in inventories of ¥199.7B was a contributor, trade receivables increased by ¥259.3B, making the sustainability of working capital improvements a point for future monitoring.【Investment Efficiency】Capital expenditures of ¥1,244.4B were at approximately the same level as depreciation and amortization of ¥1,239.5B, indicating an investment scale centered on asset replacement. Research and development expenses were ¥259.6B, or 1.1% of revenue.【Financial Soundness】The Equity Ratio improved to 46.4% from 40.2% in the previous year, while net assets increased to ¥13,304.5B. Long-term borrowings decreased 10.6% YoY, indicating progress in reducing interest-bearing debt.

Cash Flow Analysis

OCF increased 36.0% YoY to ¥2,016.8B, demonstrating cash-generation capacity exceeding Net Income of ¥937.2B. The decrease in inventories of ¥199.7B contributed to the increase, while trade receivables increased by ¥259.3B and trade payables decreased by ¥46.9B. Accordingly, it should be noted that part of the increase in OCF was a temporary effect from inventory reduction. Investing Cash Flow was -¥736.6B, primarily due to capital expenditures of ¥1,244.4B; however, these were absorbed within the range of OCF, securing a high level of Free Cash Flow of ¥1,280.2B. Financing Cash Flow was -¥1,624.1B, with repayment of long-term borrowings of ¥1,449.7B, dividend payments, and share repurchases of ¥31.6B contributing to the decline in cash. Cash and cash equivalents at the end of the period were ¥1,890.3B. Overall, the Company’s funding structure confirms that investments, shareholder returns, and debt repayments are being financed through OCF and cash on hand.

Earnings Quality

During the period, extraordinary income of ¥289.4B (including a gain on the sale of investment securities of ¥218.7B and a gain on the sale of fixed assets of ¥70.7B) and extraordinary losses of ¥294.0B (including impairment losses of ¥241.6B) nearly offset each other, resulting in a net temporary impact of -¥4.6B. However, the scale of both items was significant relative to Net Income, and they should be monitored as factors affecting after-tax earnings volatility. Non-operating income and expenses amounted to a net loss of -¥85.5B, as interest expenses of ¥134.0B exceeded interest income of ¥31.4B and dividend income of ¥51.8B. Equity-method investment profit of ¥141.2B (+19.9% YoY) accounted for a certain proportion of Ordinary Income, increasing sensitivity to the performance of investee companies. Comprehensive Income was ¥1,384.9B, exceeding Net Income of ¥978.3B, driven by OCI items such as adjustments related to retirement benefits of ¥270.8B and foreign currency translation adjustments of ¥60.0B. As OCF exceeded Net Income, accruals, or accounting-estimate components, were low, and earnings quality from the perspective of cash conversion can be assessed as favorable.

Earnings Forecast and Guidance

The Company’s forecast for the next fiscal year is Revenue of ¥2 trillion 5,600B (+5.1% YoY), Operating Income of ¥1,500B (+15.5%), Ordinary Income of ¥1,200B (-1.1%), and Net Income of ¥500B (-15.3%). The forecast operating margin is 5.9%, assuming an improvement from 5.3% in the current period. Achieving this forecast will depend on the recovery of profitability in Steel & Aluminum, which plunged during the current period; halting earnings declines in Electric Power and Construction Machinery; and sustaining growth in the high-margin Machinery business. The fact that forecast Ordinary Income is not expected to increase as much as forecast Operating Income suggests limited room for improvement in non-operating income and expenses.

Shareholder Returns

The annual dividend was ¥80 per share (interim ¥40 and year-end ¥40), representing an increase of ¥35 from ¥45 in the previous year. The Payout Ratio was 33.6% based on Net Income, below the commonly cited benchmark of approximately 60%. Share repurchases amounted to ¥31.6B, and the Total Return Ratio, including dividends, was approximately 37%. Dividend coverage based on Free Cash Flow of ¥1,280.2B was approximately 4 times. The implementation of a dividend increase despite the decline in earnings during the current period demonstrates a shareholder return policy supported by cash-generation capacity. The Company also forecasts a dividend of ¥80 per share for the next fiscal year, assuming continuation of the current-period level.

Risk Factors

1. Deterioration in Steel & Aluminum profitability: While Steel & Aluminum is the largest business by revenue at ¥9,614.7B, segment profit declined to ¥28.9B and a profit margin of 0.3% (-87.8% YoY). The Company’s overall earnings are significantly affected by raw material and fuel prices, the ability to pass through costs to selling prices, and competitive trends involving imported materials.

2. Earnings declines in Electric Power and Construction Machinery: Electric Power recorded a revenue decline of 21.5% and a segment profit decline of 33.5%, while Construction Machinery recorded a segment profit decline of 34.2%. Changes in fuel prices, supply and demand, global economic conditions, and infrastructure demand are factors contributing to earnings volatility in these highly profitable businesses.

3. Reliance on temporary items: Extraordinary income of ¥289.4B, primarily consisting of a gain on the sale of investment securities of ¥218.7B, and extraordinary losses of ¥294.0B, including impairment losses of ¥241.6B, occurred simultaneously. As the recurrence of these items is uncertain, caution is required when comparing Net Income across fiscal years.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net profit margin are below the industry median, placing the Company’s profitability relatively low within the industry.

Growth and Capital Efficiency

While many companies in the industry secured revenue growth, the Company recorded a revenue decline, placing its growth performance toward the bottom of the industry.

※Source: Compiled by the Company

Key Points from the Financial Results

1. OCF of approximately 2.1 times Net Income and Free Cash Flow of ¥1,280.2B demonstrate that cash-generation capacity and the capacity for shareholder returns have been maintained even amid deteriorating profitability.

2. The Machinery segment profit margin of 17.4% (+43.3% YoY), together with Electric Power at 17.1%, represents the largest profit contribution. The structure in which these businesses supplement Steel & Aluminum, whose profit margin fell to 0.3% despite its largest revenue scale, is clearly evident.

3. While capital expenditures were approximately at the same level as depreciation and amortization, trends in trade receivables and inventory levels are key points when assessing the feasibility of the plan to improve the operating margin from 5.3% to 5.9% in the next fiscal year.

Theoretical Share Price (Reference Value)

Sensitivity: ¥2,932–¥3,104 at a ±1% change in the cost of equity, and ¥3,010–¥3,020 at a ±0.1 change in ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value will be below book value per share.

(Calculation model: Residual Income Model (Ohlson-type, explicit 5-year fade) / Interest rate reference month: 2026-07 / These are mechanically calculated values based solely on publicly disclosed data and do not constitute a forecast of the market share price or a recommendation of any specific investment action, nor do they predict or guarantee future share prices.)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting professionals as necessary.

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