Record Profits Achieved Amid Challenging Business Environment

Kobe Steel has delivered exceptional financial results for fiscal 2024, achieving a record-high profit attributable to owners of parent of ¥120.1 billion, up ¥10.6 billion from the previous year, despite facing persistent challenges in the business environment. The company's ordinary profit reached ¥157.1 billion, representing a slight decrease of ¥3.7 billion year-on-year. This strong performance was underpinned by improved cost pass-through mechanisms in the materials businesses and increased sales in the machinery segment, particularly in the energy and chemical sectors. The company's Return on Invested Capital stood at a healthy 6.9%, while Return on Equity reached 10.8%. Financial stability indicators showed marked improvement, with the Debt-to-Equity ratio decreasing to 0.76 times and the net assets ratio strengthening to 42.8%, an increase of 4.2 percentage points from the previous year. These results demonstrate Kobe Steel's resilience and effective management strategies in navigating complex market conditions while maintaining profitability and strengthening its financial foundation.

Segment Performance Reveals Mixed Results Across Diversified Portfolio

A detailed analysis of Kobe Steel's segment performance reveals varying results across its diversified business portfolio. The machinery segment showed significant improvement, with ordinary profit increasing by ¥2.9 billion to ¥32.5 billion, driven by increased sales of machine units and services in the energy and chemical sectors. The construction machinery segment also performed well, with profits rising by ¥9.6 billion to ¥21.5 billion, benefiting from successful cost pass-through initiatives and compensation income related to the previously reported engine certification issue. However, the steel products segment experienced a decline, with ordinary profit falling by ¥10.4 billion to ¥29.8 billion, primarily due to a deterioration in the sales mix and increased fixed costs related to labor and maintenance. The most significant decline was in the electric power segment, where profits decreased by ¥33.4 billion to ¥52.3 billion due to reduced gains from time lags in fuel cost adjustments and lower temporary gains from changes in electricity selling prices. The aluminum rolled products segment showed improvement with a profit of ¥22.4 billion, up ¥7.4 billion, benefiting from increased sales volume in disk materials and the elimination of losses associated with the restructuring of the automotive aluminum panel business in fiscal 2023.

Extraordinary Items Impact Bottom Line Despite Operational Strength

While Kobe Steel's operational performance remained strong, extraordinary items significantly impacted the company's bottom line in fiscal 2024. The company recorded a net extraordinary loss of ¥16.1 billion, a substantial swing from the ¥1.3 billion gain reported in the previous year. This was primarily due to impairment losses totaling ¥27.4 billion associated with several business units, including Kobelco Construction Machinery Co., Ltd. (¥16.8 billion), Nippon Koshuha Steel Co., Ltd. (¥6.9 billion), and the steel powder business (¥2.5 billion). Additionally, the company recorded ¥11.1 billion in dismantlement-related expenses for the aging Kakogawa Works No. 1 blast furnace and other facilities to secure land for future carbon neutrality measures. These negative factors were partially offset by a ¥17 billion gain on bargain purchase arising from the acquisition of Kansai Coke and Chemicals Co., Ltd., and a ¥5.4 billion gain on the sale of non-current assets, including the transfer of land use rights at a Chinese subsidiary in the construction machinery segment. The significant impairment charges reflect Kobe Steel's proactive approach to addressing underperforming assets and positioning the company for future growth, despite the short-term impact on profitability.

Strategic Restructuring Addresses Underperforming Business Units

Kobe Steel has taken decisive action to address underperforming business units through strategic restructuring initiatives. Most notably, as announced on the same day as the financial results, the company has decided to transfer its special steel business from subsidiary Nippon Koshuha Steel Co., Ltd. to Daido Steel Co., Ltd. This decision comes after Nippon Koshuha Steel experienced declining profitability due to decreased sales volume in automotive and other key sectors, combined with rising labor costs and raw material prices. The impairment loss of ¥6.9 billion recorded for this business unit reflects these challenges. Similarly, Kobelco Construction Machinery Co., Ltd., which manufactures hydraulic excavators for Japanese, U.S., and European markets, recorded a substantial impairment loss of ¥16.8 billion as it continues to struggle with recovery following the engine certification problem that occurred between fiscal 2020 and 2022. The company plans to strengthen its parts and maintenance businesses while enhancing its product lineup and sales structure. The steel powder business, which recorded a ¥2.5 billion impairment loss, is implementing measures to increase profitability through sales expansion in Southeast Asian markets, price improvements, and cost reductions through streamlined production systems.

Cautious Outlook for Fiscal 2025 Amid Persistent Market Challenges

Looking ahead to fiscal 2025, Kobe Steel has provided a cautious outlook, projecting ordinary profit to decrease to ¥120 billion and profit attributable to owners of parent to decline to ¥100 billion. This forecast reflects the anticipated fall in temporary gains recorded in fiscal 2024, while the overall business environment is expected to remain similar to the previous year. The company expects to maintain a certain level of profitability backed by increased earnings in the machinery segment and stable earnings in the electric power segment. Free cash flow is projected to improve significantly to ¥90 billion, up from ¥34.3 billion in fiscal 2024, due to improved working capital management and steady implementation of asset-light strategies. ROIC is expected to remain at approximately 5%, falling short of the mid-term target of 6%. The company has also noted potential risks from U.S. tariff policies, which could impact exports of Kobe Steel's products in the materials and machinery businesses, as well as production at the group's U.S. bases. Management has committed to closely monitoring the impact on the global economy and customer trends, particularly in the automotive sector, which could affect sales in materials businesses and orders in machinery businesses.

Shareholder Returns Reflect Balanced Approach to Capital Allocation

Kobe Steel has announced its shareholder return policy, maintaining a balanced approach to capital allocation that considers both investor expectations and the need for continued investment in growth opportunities. For fiscal 2024, the company has confirmed an annual dividend of ¥100 per share, representing a payout ratio of 32.8%. This dividend level reflects the company's strong performance and commitment to returning value to shareholders. Looking ahead to fiscal 2025, despite the projected decline in profits, Kobe Steel has decided to maintain a relatively high dividend of ¥80 per share, resulting in a payout ratio of 31.6%. This decision demonstrates management's confidence in the company's underlying financial strength and long-term prospects, even as it navigates through a more challenging period. The consistent dividend policy also provides stability and predictability for investors, which is particularly valuable in uncertain market conditions. Kobe Steel's approach to shareholder returns balances the immediate interests of investors with the long-term sustainability of the business, ensuring that the company maintains sufficient financial flexibility to pursue strategic opportunities and weather potential market downturns.

Financial Stability Improvement Supports Long-term Strategic Initiatives

Kobe Steel's improved financial stability provides a solid foundation for implementing long-term strategic initiatives. The company's Debt-to-Equity ratio improved to 0.76 times in fiscal 2024, down from 0.83 times in the previous year, and is expected to further improve to approximately 0.65 times in fiscal 2025. Similarly, the net assets ratio strengthened to 42.8% and is projected to reach approximately 44% in fiscal 2025. These improvements in financial stability indicators reflect Kobe Steel's disciplined approach to capital management and debt reduction. The company's positive free cash flow of ¥34.3 billion in fiscal 2024, despite challenges from increased working capital, demonstrates its ability to generate cash even in difficult operating conditions. The projected increase in free cash flow to ¥90 billion in fiscal 2025 will further strengthen the company's financial position, providing additional resources for strategic investments, debt reduction, and shareholder returns. This improved financial stability is particularly important as Kobe Steel pursues carbon neutrality measures and other long-term strategic initiatives that require significant capital investment, such as the planned dismantlement of aging facilities at the Kakogawa Works to secure land for future carbon neutrality measures.

Key Takeaways:

• Kobe Steel achieved record-high profits in fiscal 2024 with profit attributable to owners of parent reaching ¥120.1 billion, while maintaining an ordinary profit of ¥157.1 billion despite challenging market conditions

• The company recorded significant impairment losses totaling ¥27.4 billion, primarily related to Kobelco Construction Machinery (¥16.8 billion), Nippon Koshuha Steel (¥6.9 billion), also the steel powder business (¥2.5 billion), reflecting proactive restructuring efforts

• For fiscal 2025, Kobe Steel forecasts ordinary profit of ¥120 billion and profit attributable to owners of parent of ¥100 billion, with free cash flow expected to improve to ¥90 billion due to better working capital management and continued implementation of asset-light strategies