Rising ferrous scrap prices and delayed pass-through to selling prices are the biggest H1 risks

Revenue for Q1 of FY2027 rose 8.4% year on year to ¥77,222 million, while operating profit fell 56.8% to ¥693 million. Operating margin was approximately 0.90% on a simple calculation, down approximately 1.35 percentage points from approximately 2.25% in the year-earlier quarter. Sales volume increased for automotive and industrial machinery parts, among other products, but the key point is that revenue growth has not translated into profit growth.

The company attributed this mainly to the spread narrowing because steel selling price increases failed to keep pace with rising ferrous scrap prices. The Steel segment reported revenue of ¥23,343 million and a segment loss of ¥410 million in Q1. While Steel revenue was down only 0.2% year on year, the impact of higher costs became apparent in profit. The current disclosure does not show the amount of the scrap price increase, when selling price revisions were implemented, or the amount by which changes in the spread affected profit.

The company's cumulative H1 forecast is revenue of ¥161,000 million and operating profit of ¥1,500 million. After deducting Q1 results, Q2 requires revenue of ¥83,778 million and operating profit of ¥807 million. Revenue must exceed Q1's ¥77,222 million, while operating profit must increase approximately 16% from Q1's ¥693 million. Cumulative H1 operating margin would be approximately 0.93%, so the company must at least secure revenue on par with Q1 while preventing further deterioration in the spread.

At the next earnings announcement, it will be necessary to assess how much the Steel segment's results improved from its ¥410 million Q1 loss, as well as whether the effect of steel selling price revisions was achieved without a decline in volume. Beyond a qualitative explanation that price pass-through is progressing, whether the company can disclose the separate contributions of scrap prices, selling prices, volume and the spread will help assess the sustainability of the operating profit recovery.