AICHI STEEL CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

The first quarter resulted in higher revenue but lower profit, as revenue growth was offset by a deterioration in gross margin due to increased costs. Revenue was ¥81.60B (+8.7% YoY), while operating income was ¥4.36B (-3.6%). Net income (total quarterly profit) was ¥3.66B (-7.0%), of which quarterly profit attributable to owners of the parent was ¥3.17B (-11.1%). Meanwhile, profit before tax was ¥4.99B (+8.1%), with increased financial income and the recognition of equity-method investment income partially offsetting the decline in operating income. The primary cause of the profit decline was deteriorating profitability at the Hagane Company, where operating income fell 46.1%; delays in passing higher costs through to prices pushed gross margin down to 13.8% (15.8% in the prior-year period).

Factors Affecting Performance

【Revenue】All segments recorded revenue growth, with balanced increases of +20.7% for the Smart Company, +9.0% for the Kitaeru Company, +7.5% for the Stainless Company, and +6.5% for the Hagane Company. The Kitaeru Company had the largest revenue mix at 44.3% (¥36.14B), followed by Hagane at 34.4% (¥28.06B), Stainless at 12.9% (¥10.52B), and Smart at 7.8% (¥6.34B).

【Profit and Loss】Gross margin contracted by 1.9pt to 13.8% (15.8% in the prior-year period) due to the higher cost-of-sales ratio. SG&A expenses were ¥6.88B, slightly down year on year, and the SG&A ratio improved to 8.4% (9.3% in the prior-year period); however, this was insufficient to absorb the deterioration in gross margin, leaving operating income at ¥4.36B (-3.6%). By segment, Kitaeru (+15.9%), Smart (+44.4%), and Stainless (+152.6%) recorded higher profits, while Hagane posted a substantial 46.1% decline, weighing on company-wide earnings. Financial income of ¥0.62B (¥0.37B in the prior-year period) and equity-method investment income of ¥0.15B lifted profit before tax to ¥4.99B (+8.1%), but the effective tax rate increased to 26.6% (14.6% in the prior-year period), resulting in net income of ¥3.66B (-7.0%; ¥3.17B attributable to owners of the parent, -11.1%). In conclusion, revenue increased but profit declined.

Segment Analysis

The Kitaeru Company is the core business, accounting for more than half of company-wide operating income, with revenue of ¥36.14B (+9.0%) and operating income of ¥2.42B (+15.9%; margin of 6.7%), and it led the increase in profit. The Smart Company recorded revenue of ¥6.34B (+20.7%) and operating income of ¥0.59B (+44.4%; margin of 9.3%), maintaining the highest profit margin among the four segments and showing favorable growth and profitability. The Stainless Company posted revenue of ¥10.52B (+7.5%) and operating income of ¥0.38B (+152.6%; margin of 3.6%), representing a substantial increase from the low level recorded in the prior-year period. In contrast, although the Hagane Company increased revenue to ¥28.06B (+6.5%), operating income plunged to ¥0.94B (-46.1%; margin of 3.4%), with spread compression caused by higher costs serving as the primary cause of the deterioration in the company-wide gross margin.

Key Financial Indicators

【Profitability】The operating margin was 5.3%, deteriorating by 0.7pt from 6.0% in the prior-year period, while the net profit margin (based on quarterly profit) also contracted by 0.8pt to 4.5% from 5.2%. The primary cause was the contraction in gross margin to 13.8% (15.8% in the prior-year period), which could not be fully offset by the improvement in the SG&A ratio (8.4%, compared with 9.3% in the prior-year period). 【Cash Flow Quality】Operating cash flow (OCF) was -¥8.02B, representing a significant divergence from net income attributable to owners of the parent of ¥3.17B, due to increases in inventories and trade receivables as well as a temporary increase in corporate income tax payments (¥15.68B). 【Capital Efficiency】ROE was 1.5%, remaining low due to the combination of a low net profit margin and low asset turnover. 【Financial Soundness】The equity ratio was 58.2%, down 1.0pt from 59.2% in the prior-year period. Interest-bearing debt was ¥67.44B (short-term borrowings of ¥41.40B and long-term borrowings of ¥26.04B). Short-term borrowings increased sharply by +69.6% from the end of the previous fiscal year, expanding to a level above cash of ¥38.47B.

Cash Flow Analysis

Operating cash flow was -¥8.02B, a significant swing into negative territory from +¥18.59B in the same period of the prior year. Against profit before tax of ¥4.99B, the subtotal before changes in working capital was ¥7.43B; however, an increase of ¥4.27B in inventories and ¥1.99B in trade receivables, together with corporate income tax payments of ¥15.68B related to amounts recognized at the end of the previous fiscal year, resulted in substantial cash outflows. Investing cash flow was +¥0.97B, as proceeds from the sale of investment securities of ¥5.64B and other inflows exceeded capital expenditures of ¥4.18B. Financing cash flow was +¥12.88B, with ¥26.00B raised through long-term borrowings funding capital expenditures, dividend payments of ¥4.75B, and other cash requirements. Free cash flow (OCF + investing cash flow) was negative at -¥7.05B, and ending cash of ¥38.47B was secured primarily through debt financing.

Earnings Quality

Earnings were primarily derived from recurring business activities, while the impact of temporary items resembling extraordinary gains and losses was limited, with other income of ¥0.09B and other expenses of ¥0.12B. Meanwhile, non-operating financial income of ¥0.62B (¥0.37B in the prior-year period) and equity-method investment income of ¥0.15B boosted profit before tax. The resulting +8.1% increase in profit before tax, which offset the -3.6% decline in operating income, should be evaluated separately from the underlying strength of the core business. The effective tax rate increased to 26.6% (14.6% in the prior-year period), causing net income growth to lag profit-before-tax growth. Comprehensive income was ¥5.25B, exceeding quarterly profit attributable to owners of the parent of ¥3.17B by ¥1.46B, with gains on valuation of FVTOCI equity financial assets (+¥1.09B) and foreign currency translation differences (+¥0.38B) accounting for the difference. The fact that OCF was substantially below net income is a point to note regarding earnings quality from the perspective of cash-generating capacity.

Earnings Forecasts and Guidance

Progress toward the full-year forecasts was 26.3% for revenue (¥81.60B/¥310.00B), 24.9% for operating income (¥4.36B/¥17.50B), and 28.1% for net income attributable to owners of the parent (¥3.17B/¥11.30B). Compared with the standard quarterly progress rate of 25%, revenue and net income are tracking slightly ahead of schedule. The full-year operating income forecast is expected to remain largely flat at +0.7% compared with the previous fiscal year, requiring a recovery in the second half following the -3.6% decline in operating income in Q1. Neither the earnings forecast nor the dividend forecast has been revised.

Shareholder Returns

The full-year dividend forecast is ¥150 per share, representing a planned increase from the previous fiscal year’s actual dividend of ¥69. The payout ratio against forecast full-year EPS of ¥176.51 is approximately 85.0% (¥150/¥176.51), indicating a high shareholder return policy. Dividend payments during Q1 were ¥4.75B (attributable to owners of the parent), while free cash flow during the same period was negative at -¥7.05B. Dividend funding could not be covered entirely by cash flow from operating activities and was supplemented through debt financing. Although the equity ratio of 58.2% provides a certain degree of financial capacity, cash flow trends should be monitored as working capital increases and reliance on short-term borrowings continues.

Risk Factors

1. Widening disparities in segment profitability: Operating income at the Hagane Company declined substantially by 46.1% YoY to ¥0.94B, with its profit margin falling to 3.4%. Rising raw material costs and delays in passing costs through to prices appear to have contributed, putting downward pressure on the company-wide gross margin (13.8%, compared with 15.8% in the prior-year period).

2. Increase in working capital and cash flow volatility: Inventories increased to ¥58.24B (+8.2% from the end of the previous fiscal year), while trade receivables rose to ¥64.26B (+3.4%). Consequently, OCF was -¥8.02B. The payment of accrued corporate income taxes of ¥15.68B recognized at the end of the previous fiscal year also temporarily placed pressure on liquidity.

3. Reliance on short-term financing: Short-term borrowings increased sharply to ¥41.40B (+69.6% from the end of the previous fiscal year), raising the proportion of short-term debt within interest-bearing debt of ¥67.44B. Short-term borrowings exceeded cash of ¥38.47B, making future refinancing trends a point of financial consideration.

Industry Benchmark (For Reference; Compiled by the Company)

Profitability and Returns

Both the operating margin and net profit margin are below the industry median, placing the company relatively low within the industry in terms of profitability.

Growth and Capital Efficiency

The revenue growth rate exceeds the industry median, indicating that top-line growth is relatively strong within the industry.

※Source: Compiled by the Company

Key Takeaways from the Financial Results

1. Despite revenue growth (+8.7%), gross margin contracted to 13.8% (15.8% in the prior-year period), resulting in a 3.6% decline in operating income. The primary cause was deteriorating profitability at the Hagane Company (operating income -46.1%), making progress in passing higher costs through to prices a key focus going forward.

2. OCF was -¥8.02B, representing a significant divergence from net income attributable to owners of the parent of ¥3.17B. Although the primary factors were temporary increases in inventories and trade receivables and the reversal effect of corporate income tax payments, the trend in working capital from the second half onward will be an important observation point in assessing earnings quality.

3. The full-year dividend forecast of ¥150 (payout ratio approximately 85.0%) indicates a high shareholder return policy. However, Q1 free cash flow was negative and financing was obtained through borrowings. The recovery of cash-generating capacity will be an important point in assessing the sustainability of shareholder returns.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly disclosed data using a residual income model (Ohlson-type model with an explicit five-year fade). It is not a forecast of the market share price or a recommendation of any specific investment action.

Sensitivity: ¥3,196–¥3,372 at ±1% for the cost of equity, and ¥3,270–¥3,290 at ±0.1 for ω.

Notes:

• As forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the quarter-end are used (there is a timing difference relative to the full-year forecast).

(Calculation model: Residual income model / Interest rate reference month: 2026-06 / This value does not predict or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI through analysis of XBRL earnings summary 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 responsibility, after consulting with professionals as necessary.

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