RINNAI CORPORATION Q4 FY2025 earnings call

• Overall Financial Result

  • Rinnai achieved all-time record highs for consolidated revenue, operating profit, ordinary profit, and net income in fiscal 2024, with total revenue of 460.31 billion yen (+7.0% YoY), operating profit of 46.0 billion yen (+16.9% YoY, 10.0% margin), ordinary profit of 50.32 billion yen (+9.2% YoY), and net income of 29.69 billion yen (+11.3% YoY).
  • A 2.54 billion yen charge for the free inspection and repair recall of 372,398 aging bathroom heat dryers (due to rare fire risk from aging degradation) was already recorded in fiscal 2024 operating expenses.
  • Sales grew despite continued cost inflation and weak consumer demand, driven by strong performance of high value-added products, with post-pandemic supply chain normalization also supporting growth.

• Mid-Term Management Plan "New ERA 2025" Progress

  • The 4-year plan was built around three pillars: expanding business scale, transforming corporate structure, and contributing to solving social issues. The original 450.0 billion yen consolidated revenue target was achieved one year early.
  • Growth of "quality of life improvement" products (led by KANTAKUN and bubble technology water heaters) is on track to hit the 100% sales growth target from fiscal 2020 levels. Growth of "global environment contribution" products (led by hybrid water heaters) is also on track to hit the upward-revised 70% sales growth target from 2020 levels.
  • The CO2 reduction contribution target of 8.2 million tons will not be met, with an expected 5.31 million tons due to larger-than-expected sales declines in China that reduced high-efficiency product volume. Capital efficiency metrics (ROIC, ROE) are below target due to increased inventory holdings to prevent future supply chain disruptions.
  • Shareholder returns have far exceeded original targets, with a 5-year average total payout ratio of 77.3% and dividend payout ratio rising from 20-30% 5 years ago to 42.1% currently.

• Post-2025 Strategic Direction

  • In Japan, focus will remain on expanding adoption of high growth potential products like KANTAKUN, which has only 1-2% penetration in mainland Japan (compared to 15% in Okinawa, and 70-80% adoption in new Okinawan construction).
  • Globally, Rinnai will expand its electrified product lineup (particularly heat pump water heaters) to respond to decarbonization and electrification policies in markets like Australia. The company will expand local production in the U.S. to leverage population growth and policy changes, while maintaining long-term growth focus in China despite current market weakness.

By product category (total 460.31 billion yen, +7.0% YoY):

• Hot water supply: 277.57 billion yen, 60.3% revenue contribution, +5.3% YoY
• Kitchen appliances: 96.26 billion yen, 20.9% revenue contribution, +6.4% YoY
• Air conditioning: 22.01 billion yen, 4.8% revenue contribution, +1.2% YoY
• Other: 52.57 billion yen, 11.4% revenue contribution, +22.6% YoY (driven by strong growth of the KANTAKUN gas clothes dryer)

By regional segment:

• Japan: 203.73 billion yen revenue (+5.9% YoY), 22.3 billion yen operating profit, 11.0% operating margin. Growth led by high value-added products including hybrid water heaters, gas clothes dryers, and ultra-fine bubble water heaters.
• United States: 66.45 billion yen revenue (+14.8% YoY), 2.13 billion yen operating profit, 3.2% operating margin. Operations normalized after prior-year inventory issues, with high-value condensing tankless water heaters growing 25.7% in unit sales.
• Australia: 36.6 billion yen revenue, 1.13 billion yen operating profit, 3.1% operating margin. Revenue grew due to an acquired energy solutions company, but profitability is pressured by market electrification trends.
• China: 65.86 billion yen revenue (-4.6% YoY), 9.68 billion yen operating profit (-16.9% YoY), 14.7% operating margin. Despite a weak domestic market and declining sales, the segment maintains high profitability with no risk of falling into deficit.
• Korea: 34.71 billion yen revenue, 0.94 billion yen operating profit, 2.7% operating margin. Low profitability, with the segment targeting a recovery in performance.
• Indonesia: 17.01 billion yen revenue, 3.84 billion yen operating profit (+39.9% YoY), 22.6% operating margin. Strong profitability driven by a shift from low-margin tabletop cooktops to higher-margin built-in cooktops, which grew 17.2% YoY.

• For fiscal 2025 (ending March 2026), Rinnai guides consolidated revenue of 470.0 billion yen (+2.1% from fiscal 2024 actual), operating profit of 50.0 billion yen (+8.7% from fiscal 2024 actual), ROE of 8.0%, and ROIC of 12.0%. 50.0 billion yen operating profit matches the original mid-term plan target for the final year.
• Regional segment guidance:
  • Japan (Rinnai standalone): 243.0 billion yen revenue (+3.5% YoY), 22.0 billion yen operating profit (+17.5% YoY), targeting 37.9% unit growth for hybrid water heaters and 10.3% growth for gas clothes dryers.
  • United States: 68.15 billion yen revenue (+2.5% YoY), 3.06 billion yen operating profit, targeting a 4.5% operating margin and 8.1% unit growth for condensing tankless water heaters.
  • China (Shanghai Rinnai): 60.4 billion yen revenue (-8.3% YoY), 8.45 billion yen operating profit (-6.2% YoY), maintaining a 14.0% operating margin while pushing growth of high-efficiency products and re-expanding the kitchen appliance segment.
  • Australia: +4.2% revenue growth, targeting a 5.5% operating margin as in-house heat pump production ramps up.
  • Korea: +6.8% revenue growth, targeting a 4.1% operating margin.
  • Indonesia: 18.36 billion yen revenue (+3.7% YoY), 4.29 billion yen operating profit, targeting a 23.4% operating margin.
• Capital expenditure guidance for fiscal 2025 is 19.9 billion yen (up from 16.3 billion yen in fiscal 2024), with investment focused on heat pump water heater production capacity in Japan and consolidation of head office, factory, and warehouse functions in Australia. R&D spending will be increased materially.
• For the next mid-term management plan, Rinnai targets double-digit ROE and will work toward returning ROIC to the original 19.0% target through improved inventory management.

• Product recall risk: A safety recall for over 370,000 aging bathroom heat dryers resulted in a 2.54 billion yen charge to fiscal 2024 earnings, with potential for reputational impact.
• Market and policy risks: Persistent economic stagnation in China weighs on sales growth; strict electrification policies in Australia have led to structural decline of the gas appliance market; U.S. trade policy creates uncertainty around import tariffs on Japanese-sourced condensing water heaters.
• Competitive risk: Local Chinese competitors (Midea, Haier) sell products at nearly half Rinnai's price point, creating pricing pressure and forcing careful adjustments to Rinnai's pricing strategy to avoid major sales declines.
• Input cost risk: Raw material prices remain elevated and are expected to rise further in fiscal 2025, creating downward pressure on profitability despite ongoing cost reduction efforts.
• Supply chain and capital efficiency risk: Elevated inventory holdings held to prevent supply chain disruptions have reduced capital efficiency (ROIC) below target levels.
• Macroeconomic risk: Rising interest rates have contributed to a stagnant global housing market, which reduces demand for Rinnai's residential water heating and kitchen products.

Q: What is the reasoning behind Shanghai Rinnai's revenue decline forecast for fiscal 2025, and why did overseas fixed costs come in much higher than planned in fiscal 2024 before projecting a decline in fiscal 2025? / A: China's overall economy is very weak, leading to broad-based sales declines across the market. Local competitors sell products at nearly half Rinnai's price point, forcing Rinnai to carefully adjust pricing while protecting margins, which is factored into the lower revenue target. The larger-than-expected fiscal 2024 overseas fixed cost increase was mostly driven by unfavorable exchange rate movements against conservative currency forecasts, with a real fixed cost increase of ~4.0 billion yen (vs 8.7 billion yen nominal) that came in below original real forecasts, as Rinnai adjusted fixed costs downward in response to slowing sales at Shanghai Rinnai. For fiscal 2025, the projected 0.5 billion yen nominal fixed cost reduction masks a real fixed cost increase after accounting for expected favorable exchange rate impacts.

Q: What is the likelihood of Rinnai hitting the mid-term plan's 50.0 billion yen operating profit target in fiscal 2025? / A: Rinnai's fiscal 2025 guidance already targets exactly 50.0 billion yen in operating profit, which is the original mid-term plan target. The company has built the target around expected contributions from domestic revenue growth, cost reduction efforts, and moderate overseas growth, and management expects to achieve the goal in line with the plan.

Q: Will condensing water heaters exported to the U.S. face 25% tariffs, and when will production be shifted to local U.S. manufacturing? / A: Currently, all condensing water heaters sold in the U.S. are exported from Japan, and under current trade rules they could face a 25% tariff. The situation remains fluid, so Rinnai has kept its original fiscal 2025 plan unchanged for now. The company is actively preparing for local production of condensing water heaters in the U.S. and will move forward with this shift as quickly as possible to mitigate tariff risk.

Q: What is Rinnai's strategic direction for heat pump technology? / A: Heat pump technology is critical for Rinnai to adapt to global decarbonization trends and electrification policies. The company is investing heavily to expand in-house heat pump production capacity, particularly in markets like Australia where electrification trends are most advanced, to improve profitability of heat pump product lines and maintain market share amid the industry transition away from gas-only products.