RINNAI CORPORATION Q2 FY2026 earnings call

• Overall Financial Results
  • Consolidated revenue hit 216.41 billion yen (+2.0% YoY), operating profit 22.72 billion yen (+8.2% YoY), net income attributable to parent company shareholders 15.91 billion yen (+30.0% YoY), with all top and bottom-line metrics reaching all-time interim highs. Growth was driven by rising demand for high value-added energy efficient products, despite persistent high prices and high interest rates across major markets.
  • The profit increase was driven by +2.75 billion yen from domestic revenue growth, +0.09 billion yen from overseas revenue growth, +0.65 billion yen from lower raw material prices, and +1.73 billion yen from cost reduction and rationalization initiatives, partially offset by -1.66 billion yen in higher domestic fixed costs and -1.83 billion yen in higher overseas fixed costs.
• Recall Progress (Bathroom Heat Dryer)
  • Total 372,000 units subject to recall; as of end-October, 195,813 requests received and 165,500 inspections completed, for an 84.5% completion rate among received requests. 350 dedicated staff are assigned to the effort; the remaining 50,000 uncompleted inspections are targeted for completion by end-December, after which the dedicated response team will be scaled down, and progress is currently on track.
  • In Japan, recall cost pressure was much lower in Q2 than Q1 due to process efficiency improvements, paired with company-wide cost cutting that supported profit improvement.
• Strategic Growth Initiatives
  • Japan: Growth focused on high value-added products that improve quality of life and support decarbonization. The share of revenue from these priority products grew from 6.1% in 2021 to 12.4% in the current quarter. Air bubble-equipped high-efficiency EcoJozu water heaters have hit cumulative sales of 150,000 units, with 16% of all EcoJozu sales now including air bubble technology, driving further margin expansion. Two new health and resiliency technologies (bath biometric measurement and disaster recovery mapping via water heater data) recently won industry awards.
  • United States: Persistent high interest rates and inflation have suppressed consumer sentiment, but new high-efficiency condensing water heater sales remain strong. All existing Trump tariffs have been fully passed through to prices, and competitiveness has been maintained. After analysis, local production/local sales remains the most profitable strategy, and the company will increase local sourcing and in-house production rates at US factories. Upcoming US Department of Energy regulations will ban low-efficiency electric storage water heaters within 4 years, driving a rapid shift to heat pump water heaters, which Rinnai views as a major growth opportunity. The company currently holds 35-40% share of the US tankless gas water heater market, and is building out distribution capabilities for heat pump products to capture upcoming market growth.
  • Australia: New legislation banning gas piping in new construction has driven long-term gas demand decline, but replacement demand has mitigated immediate contraction. The company has expanded its heat pump water heater lineup, and sales of these products grew 185.4% YoY, driving overall revenue growth and continued profit increases.
  • China: The market faces persistent consumer slowdown, subsidy cuts, and aggressive price discounting from large domestic competitors. Rinnai maintains a price discipline strategy focused on protecting profit margins for its premium branded products. The PF2.0 rationalized high value-added water heater platform now reaches 80-90% penetration, limiting profit decline amid an 18.7% revenue drop, with operating margin still holding at 17.2% that outperformed initial plans.
  • Emerging Markets: Rinnai acquired MT Industrial, a leading Peruvian residential equipment distributor with ~10 billion yen in revenue and over 50% share in multiple product categories. Peru is experiencing rapid growth in natural gas household connectivity (now 21% of all households, with plans to expand further), and the acquisition strengthens Rinnai's distribution footprint across Latin America to capture growing natural gas demand. Indonesia continues to deliver very high 21.4% operating margins driven by high value-added table stoves, with 2.0 billion yen in interim profit and full year profit expected to reach ~4.0 billion yen.

Japan: Revenue of 93.6 billion yen (+2.7% YoY), operating profit up 13.4% YoY, operating margin of 11.5%, contributing ~43.2% of total consolidated revenue. United States: Revenue of 35.2 billion yen, operating profit of 1.1 billion yen, operating margin of 3.3%, contributing ~16.3% of total consolidated revenue. Australia: Revenue of 20.4 billion yen, operating profit of 1.06 billion yen, operating margin of 5.2%, contributing ~9.4% of total consolidated revenue. China: Revenue of 25.0 billion yen (-18.7% YoY), operating profit of 4.3 billion yen (-13.6% YoY), operating margin of 17.2%, contributing ~11.6% of total consolidated revenue. Indonesia: Revenue of 9.06 billion yen (+3.8% YoY), operating profit of 1.94 billion yen (slight decline YoY), operating margin maintained at 21.4%, contributing ~4.2% of total consolidated revenue. South Korea: Segment returned to slight growth YoY on a local currency basis, but operating margin remains unsatisfactory at 4.4%. By product category: Water heating equipment led revenue growth; Kitchen equipment revenue and share declined; Air conditioning equipment revenue grew from 9.8 billion yen to 10.7 billion yen, with high per-unit profitability; Industrial equipment revenue declined; The 'Other' category (including the popular gas clothes dryer Kintakun) grew 4.2 billion yen YoY.

• Management maintained the full year consolidated guidance after the better-than-planned interim performance, citing ongoing macro and market risk. The full year targets are: 470.0 billion yen in revenue, 50.0 billion yen in operating profit, 53.5 billion yen in ordinary profit, and 33.0 billion yen in net income, all of which the company stated it will achieve.
• In Japan, recall response costs will be similar in Q3 to Q2, but will decline meaningfully in Q4 after the targeted end-December completion of most inspections, which will reduce pressure on domestic profits.
• In the United States, management maintains a long-term operating margin target of 10%+ and an interim near-term target of 5%.
• Rinnai's long-term strategic direction focuses on developing heat pump and other electrification technologies, plus expanding capabilities in hydrogen, renewable energy, and e-methane to adapt to global energy transition trends. The company prioritizes investment for growth while maintaining capital efficiency focused on ROE and ROIC.

• China: Persistent economic slowdown and aggressive price competition from large domestic competitors (Midea, Haier) that sell products at half of Rinnai's price points, which could pressure future market share.
• United States: Persistently high interest rates and inflation that suppress consumer sentiment, ongoing regulatory uncertainty that has already nearly led to an unfair ban on Rinnai's high-efficiency gas water heaters, and residual tariff uncertainty that could further increase input costs for both Japanese-exported and locally-assembled products.
• Australia: Long-term demand decline for gas equipment due to new regulations banning gas piping in new construction.
• South Korea: Ongoing market stagnation and increased competition in the kitchen equipment segment that keeps margins depressed.
• Global: Persistently high input and operating costs that could pressure margins even amid revenue growth.

Q: What drove China's 1.0pp operating margin improvement despite an 18.7% YoY revenue decline, and how much has PF2.0 penetration grown between Q1 and Q2? How are competitors pricing currently? / A: PF2.0 is already 80-90% penetrated across China's water heater portfolio, and its high value-added design is the main driver of contained profit declines, even though a 20% revenue drop would typically push the segment into red ink. Expense control is dynamically managed month-to-month but is a secondary factor. Large domestic competitors sell units at roughly half Rinnai's price to gain volume, but Rinnai will maintain its premium branding strategy, avoid volume-focused competition, and continue prioritizing margin protection.

Q: What is the current size of Rinnai's heat pump business in the US, and what is the company's capacity to capture upcoming market growth? / A: Rinnai already holds 35-40% share of the US tankless gas water heater market, but the heat pump market is still emerging and Rinnai's current share is very small. Regulations will drive rapid market expansion over the next 3-4 years, and Rinnai is currently building distribution relationships with major retailers and dealers to prepare. While some question the risk of entering the new market, management believes high-quality products will allow Rinnai to compete successfully as the market grows.

Q: Can management confirm that the strong Q2 domestic performance is partially due to cost cutting amid the recall, and will recall completion drive further profit improvement in H2? / A: Solid Q2 performance came from both resilient domestic results and stronger-than-expected profits across multiple overseas markets including the US, China, Indonesia, and Australia. Q1 saw heavy recall-related profit pressure, but Q2 implemented recall process efficiency improvements and company-wide domestic cost cutting that offset much of the remaining pressure. Recall response costs will stay similar in Q3, but will decline sharply in Q4 after most inspections are completed by end-December.

Q: What is the updated operating margin target for the US segment, following prior guidance of at least 5%? / A: Management is still not satisfied with the current 3% margin, and retains the long-term target of 10%+ operating margin, with a 5% near-term target. The US market remains highly dynamic and uncertain (including recent near-miss unfair regulatory action against Rinnai's products), but upcoming heat pump market growth is a major opportunity that Rinnai will capture, alongside continued growth of its high-efficiency gas tankless business.