RINNAI CORPORATION Q1 FY2026 earnings call

Overall Consolidated Performance

• Consolidated revenue hit 102.74 billion yen, up 4.6% year-over-year, a record high for a first quarter start
• Consolidated operating profit rose 11.2% year-over-year (a 0.98 billion yen increase), though operating margin remained below 10%
• Ordinary profit and net profit declined year-over-year due to foreign exchange losses (the prior year quarter recorded foreign exchange gains); net profit reached 6.62 billion yen
• Raw material costs were more stable than expected in Q1, providing a slight positive impact to profit, which was already factored into full-year guidance

Key Operational Priorities & Initiatives

• Japan Market: Prioritize expanding high-efficiency water heaters (hybrid models and Eco-Joze) to drive growth; government subsidies of 150,000 yen per hybrid water heater have continued from last year, driving 60% cumulative volume growth since 2020
• United States Market: Proactively pass through higher tariff costs to consumers via price increases; the company has already implemented two price increases and is evaluating an additional price increase for remaining tariff hikes, monitoring competitor moves closely
• China Market: Maintain a disciplined profit-over-volume pricing strategy amid intense competition, focusing on expanding high-margin product lines
• Indonesia Market: Continue to grow high-margin built-in appliances to capitalize on long-term market growth potential

Recall Response Impact

• The company has allocated over 300 employees to address the bathroom heater dryer recall starting in May; recall expenses were fully reserved in 2024, so there is no direct impact to 2025 earnings
• However, the reallocation of internal personnel has created potential opportunity cost that limited cost reduction progress in Japan, which weighed on overall profitability in the quarter

1. Japan Segment: Sales grew driven by government subsidies for high-efficiency products, with hybrid water heater sales volume up 18.1% year-over-year. However, the segment reported a year-over-year decrease in profit due to rising costs and limited cost reduction progress. Key high-margin priority products (hybrid water heaters, air bubble baths, clothes dryers) have grown their share of total segment sales. 2. United States Segment: The segment achieved 0.5 billion yen in profit, up from an even break in the prior year quarter. Despite high interest rates suppressing housing market and consumer sentiment, high-efficiency condensing water heaters (launched Q1 last year) drove sales growth via product mix and price effects, even with overall unit volume growth limited. Higher promotional spending increased costs, but profitability still improved. 3. China Segment: Sales remained under pressure due to continued weak consumer sentiment following 2024's market downturn, with intensified competition and aggressive competitor price cuts driving downtrading to lower-priced products. Despite this, the segment delivered small year-over-year profit growth, supported by a profit-over-volume strategy, cost control, and an increased share of high-margin PF2.0 water heaters. 4. Australia Segment: Sales grew strongly, led by expanding heat pump water heater sales and the full consolidation of Smart Energy (acquired August 2024). Profit grew in line with sales, though profit margin remains at a low level. 5. Korea Segment: The overall new construction market remains weak, but Rinnai Korea reversed declines in boiler sales and grew market share in Q1. Kitchen appliance sales declined due to aggressive competition from Navien Magic following the SK Magic business acquisition. The segment still achieved a start with both revenue and profit growth. 6. Indonesia Segment: Overall revenue declined as weak local economic conditions cut tabletop stove unit volumes. High-margin built-in stoves and range hoods grew, and price adjustments plus improved product mix allowed the segment to deliver year-over-year profit growth, with a strong 21% profit margin that supports overall group earnings. 7. By Product Category: * Water heaters: 2.86 billion yen year-over-year revenue growth, with strong performance across all markets except China. * Kitchen appliances: Declined year-over-year, with weak performance in Japan and sharp declines in Korea due to competition. * Other: Grew revenue, led by Japan's Kenta-kun clothes dryers and contributions from recently acquired businesses in Australia and the US.

• Management confirmed that the Q1 2025 results are broadly in line with original plans, so there are no changes to the previously released full-year and first half-year earnings guidance at this time

• United States Tariff Risk: US tariffs on steel, aluminum, and copper have been raised to 50%, with reciprocal tariffs on Japanese imports set to rise to 15% from early August. While Q1 and early Q2 results have not shown reduced competitiveness to date, there is risk of consumer demand shifting away from gas tankless water heaters following multiple price increases
• Macroeconomic Demand Risks: Global consumer sentiment remains weak; high US interest rates have suppressed housing demand, China's consumer confidence remains depressed, the Korean new construction market is weak, and Indonesia is facing sharp economic slowdown
• Cost Inflation: Labor and overhead costs are rising globally, with increasing fixed costs in Japan creating a drag on profitability; while raw material costs stabilized in Q1, they remain at elevated levels
• Competitive Pressure: Intensified price competition in China and aggressive competitive expansion in Korea's kitchen appliance market are pressuring sales and margins

Q: How has the recall response in Japan affected operations and profitability? / A: Direct recall costs were fully reserved last year, so there is no direct hit to 2025 earnings. The reallocation of over 300 employees to recall work has created indirect opportunity cost that slowed cost reduction efforts in Japan. No material direct impact on overall demand is expected, as recall activities are being scaled to handle the workload without disrupting core sales.

Q: What is the sales outlook for new condensing water heaters in the US, and how are you handling tariff-driven cost increases? / A: The new high-efficiency condensing line has maintained solid demand, with product mix improvement from higher condensing adoption driving sales growth even as overall unit volumes are flat. We implemented price increases for non-condensing units in May and condensing units in July to cover higher tariffs, and are evaluating an additional price increase for the remaining tariff hikes, with no visible loss of competitiveness so far in early Q2 results.

Q: Will the weak performance in Japan in Q1 lead to any downward revision to full-year guidance? / A: Japan's Q1 profit miss was driven by expected one-time factors: the post-March regulatory reaction drop in new housing starts, and the recall-related personnel reallocation. The overall Q1 result is still broadly in line with our original full-year plan, so we are maintaining the current full-year guidance with no changes at this time.