RINNAI CORPORATION Q3 FY2026 earnings call

Overall Consolidated Performance

• Across a generally weak global economic environment, the company achieved slight year-over-year sales growth and net profit growth for the third quarter. All profitability metrics from revenue down to net profit reached an all-time high for a third quarter.
• Sales and profit have grown for two consecutive years, and profit margins have improved for two straight years after hitting a bottom in 2023 fiscal year.
• A special gain from the reversal of an antitrust reserve for Rinnai Brazil Heating Technology, which had been booked as a negative in the prior year, added approximately 0.8 billion yen to net profit this quarter, driving the large increase in net profit.

Product Category Performance

• There are five main product categories: Kitchen equipment is the only category facing challenges, while all other categories performed broadly well.
• Water heater growth was driven by Japan and America. Kitchen equipment saw a year-over-year decline, concentrated in Japan, China, and Taiwan. Air conditioning equipment and the "Other" category saw strong contribution from Australia.
• The "Other" category grew because the acquired Smart Energy's products do not fall into any of the company's existing core product categories.

Key Regional Operational Initiatives

Japan

• The company defines three core priority products: hybrid water heaters, air bubble products, and gas clothes dryers
  • Hybrid water heaters (ECO ONE) have grown steadily over the past two years supported by Japanese METI energy conservation subsidies. The subsidy program will continue next fiscal year, despite a slight per-unit reduction.
  • Air bubble products have the highest growth rate among the three. High adoption with Eco Joz gas water heaters creates positive synergy that drives growth for the core Eco Joz line.
  • Gas clothes dryers are sold in standard and deluxe variants. The higher-value deluxe variant, launched after the standard model, has received strong market acceptance and is delivering healthy margin benefits.

America

• Tariffs were raised further and new tariffs were added on copper in the third quarter. Price adjustments were implemented in October 2025 (fourth quarter) to offset the higher tariffs, so the third quarter saw negative profit impact from unabsorbed higher tariff costs. The impact is expected to be offset starting from the fourth quarter, and the price increase has not faced significant pushback from the market so far.

China

• 40% of Shanghai Rinnai's sales now come through e-commerce. The company won first place in the gas water heater category at JD.com's annual awards, judged on a combination of product popularity, return rates, and customer reviews, not just raw sales volume. This award brings benefits like preferential display placement and increased consumer trust, which is expected to drive future sales.
• Shanghai Rinnai maintains its brand positioning of Japanese high quality, and enforces strict price discipline in the highly competitive e-commerce space to prioritize profitability over low-margin volume.

Australia

• In response to the market shift from gas to electrification, Rinnai Australia has greatly expanded its product portfolio to include electric and other new product lines while continuing to offer gas products.
• The acquired Smart Energy, which sells solar power systems and storage batteries supported by Australian government subsidies, is the top contributor to third quarter sales and profit growth, with very strong current performance.

Other Regions

• In October 2025, the company acquired MT Industrial (MTI) of Peru. The acquisition is driven by expected growth in natural gas demand under Peruvian national policy, which will increase demand for the company's core gas appliances. MTI's Sole brand holds the number one market share in its core categories with very strong brand recognition. The company plans to leverage MTI's existing distribution network to expand Rinnai's own products, and use Peru and Brazil as a base to expand sales into surrounding regional markets.

1. Japan Segment: Overall, the new housing market remained very weak, but the replacement and renovation market performed reasonably well. Centered on the company's three key products, sales stayed relatively solid during the peak demand third quarter. Both sales and profit for Rinnai standalone ended the quarter on track. Growth rates for key products saw a slight slowdown, but overall performance was still favorable.
2. America Segment: Even though interest rates are trending down, the housing-related market has not seen a strong recovery and consumer sentiment remains very low. Rinnai America's sales of condensing water heaters stayed relatively steady through sales efforts. The segment achieved year-over-year growth in both sales and profit on both local currency and yen basis. Profitability remains below target, which is a key priority for improvement.
3. China Segment: The market continues to face severe headwinds with no visible signs of recovery, even after earlier hopes for stimulus support faded due to exhausted funding. Shanghai Rinnai has recorded continued sales decline, and the company has intentionally slowed aggressive sales push to normalize dealer inventory levels amid rising inventory trends. Through flexible production adjustments and cost control, profit decline has been much smaller than the sales drop. This quarter's year-over-year comparison looks more moderate after the sharp profit decline in the year-ago quarter.
4. Australia Segment: The segment delivered strong double-digit growth in both sales and profit, with rising profit margins. The market is experiencing a shift from gas to electrification, and Rinnai Australia has proactively adjusted its product mix to adapt. Sales of heat pump water heaters and other electrification-related products contributed significantly to revenue growth. The 2024 acquisition of Smart Energy has also delivered positive synergy benefits to profit.
5. Korea Segment: The market environment continues to be very sluggish, but the segment still managed to achieve sales growth on a local currency basis. Boilers were the main contributor to growth, and a focus on high value-added products helped deliver positive profit growth despite the weak market.
6. Indonesia Segment: The segment achieved growth in both sales and profit on a local currency basis. It has delivered consistently stable profit of approximately 1 billion yen per quarter, which is a major strong contribution to the group overall. Table stove sales saw a slight increase this year after annual volatility.

• Management maintained the original full-year consolidated guidance, with no upward or downward revision. The full year plan targets 470 billion yen in sales and 50 billion yen in operating profit. Management confirms that performance through the third quarter is progressing in line with plan, despite no detailed cumulative numbers being disclosed.
• Uncertainties for the fourth quarter that require monitoring include copper price trends and foreign exchange fluctuations.

• Copper prices have risen to an unprecedented level above 2,000 yen per kilogram. Continued copper price increases could have a material negative impact on profit in the fourth quarter, so the company is closely monitoring price movements.
• Compared to the prior year third quarter cumulative period, the yen has appreciated versus other major currencies, which created a negative translation impact on reported profit and makes the impact of overseas sales growth look smaller than the actual underlying performance.
• Fixed costs have increased at both domestic and overseas operations, which created a negative impact on consolidated operating profit.
• The China market has not shown any recovery signs after over a year of slowdown, and continues to face headwinds that pressure sales performance.
• The American market still faces weak housing demand and low consumer sentiment, and the segment has not yet achieved target profit margins after absorbing higher tariff costs in the third quarter.

Q: According to your opening comments, performance is on track relative to full-year guidance, but there is a gap versus plan: initial guidance projected 500 million yen in profit growth from fixed cost reductions overseas, but the third quarter cumulative has seen a profit decline from higher costs. Also, cost reduction is projected to deliver 5.7 billion yen in full-year profit gain, but we have only seen 2.15 billion yen through the third quarter, which looks like slow progress. How do you view this gap, and what is your plan to close it by year end?

A: The largest factor behind the bigger-than-expected fixed cost increase overseas is the United States. When we issued guidance at the beginning of the year, the details of the Trump tariffs were still unclear, and we did not build in any positive or negative impact from tariff changes. Tariffs were finalized through the first three quarters of this year, and we have accounted for the additional tariff burden as fixed costs, which is why costs came in above plan. This is the single largest driver of the gap versus guidance. For the slower than planned cost reduction progress, this is primarily because the recall reserve for bathroom heaters that was booked at the end of last year is included in our full-year cost reduction target. We expect this reserve to flow through as a large positive contribution to cost reduction at year end. We also have positive offsetting factors that are ahead of plan, including stronger than expected domestic sales and lower than projected material costs, which help offset the negative gaps.

Q: Australia is performing very strongly right now. Smart Energy was acquired in 2024, so I understand it only contributed to about half of last year's results. Can you confirm if this strong growth from the acquisition will continue into future fiscal years?

A: We acquired Smart Energy in August 2024, so it has been included in our consolidated results starting from last year's third quarter. That means the year-over-year comparison for this year's third quarter already includes Smart Energy in both the prior and current period. However, Smart Energy's full contribution to the group as a consolidated entity really starts from the fourth quarter of this fiscal year, so we will see a larger step up in its contribution to top and bottom line growth through the end of this year and beyond. Right now, the entire sales and profit of Smart Energy flows directly as incremental growth for Rinnai Australia, and we are now working to capture synergies by combining Smart Energy's products with Rinnai Australia's existing product lines. The strong growth in heat pump sales is already being supported by Smart Energy, and we expect the acquisition benefit to continue well into future years. Smart Energy will continue to play a critical strategic role as the market shifts from gas to electrification.

Q: You mentioned that growth for hybrid water heaters in Japan has slowed slightly. What are your sales strategies for hybrid water heaters next year and beyond, given that it is a priority product and benefits from government subsidies?

A: The apparent slowdown in growth rate is partially a base effect, as the absolute sales number grows larger each year, so percentage growth naturally slows. That said, we are currently not on track to hit our full-year target of 45,000 units this year. The main headwind is the ongoing decline in new housing construction, and hybrid water heaters and gas clothes dryers have higher adoption rates in new construction, so the weak new housing market has contributed to slower growth. We will continue to prioritize ECO ONE hybrid water heaters next year and beyond, and do not plan any major strategic shifts, we will continue along our current path. The number of distribution partners selling ECO ONE continues to grow, so we will continue to work with our distribution partners to promote the product, highlighting the available government subsidies. We also still see room for product expansion, including changes to tank capacity and other product updates, so we will continue to invest in product development for the line.

Q: You sounded quite cautious on the China business in your prepared remarks, with a focus on normalizing dealer inventory. Should we assume that you will continue with defensive sales strategies next year even as the market remains difficult?

A: It has now been just over one year since the Chinese market started to slow sharply, and at this point we do not see any signs of market recovery on the horizon. Shanghai Rinnai's management team also takes a very cautious view of the outlook. That said, over the past year Shanghai Rinnai has clearly defined its strategy for this difficult environment, and we have already achieved solid results in our push to maintain profitability despite lower sales. Even if the market does not recover next year, Shanghai Rinnai will continue to focus on maintaining and potentially growing profit amid low sales, which is the core priority. If the market does recover, that will just be incremental positive upside to our results.

Q: For the domestic recall of bathroom heaters, you already booked the full reserve in a prior period. Does that mean we should not expect any material positive tailwind from the recall cost falling off in next fiscal year?

A: Your understanding is correct. The full 2.54 billion yen reserve was already booked in the 2025 March fiscal year, so the full negative impact was already reflected in last year's results. That means when comparing 2026 March fiscal year and 2027 March fiscal year results, there will be no visible positive impact from the reserve falling off. That said, the first quarter of the 2026 March fiscal year did see significant incremental recall costs that negatively impacted profit, so that negative impact will fall off in the 2027 March fiscal year, leading to a positive comparison for that period.