RINNAI CORPORATION FY2027 Q1 Earnings Report

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Executive Summary

Although revenue increased in the quarter, operating income and ordinary income declined; however, consolidated net income attributable to owners of the parent increased as a result of a decrease in net income attributable to non-controlling interests. Revenue was ¥1136.7B (+10.6% YoY), operating income was ¥92.0B (-5.2%), ordinary income was ¥103.0B (-3.5%), and net income attributable to owners of the parent was ¥67.4B (+1.8%). Consolidated net income before deduction of non-controlling interests was ¥74.3B (-5.2%). The operating margin was 8.1%, down 1.3pt from 9.4% in the previous year. In addition to the increase in the SG&A ratio, the shift to losses in the U.S. and China segments was the primary factor compressing margins.

Factors Affecting Results

【Revenue】Revenue was ¥1,136.7B, representing a 10.6% YoY increase. By segment, overseas operations led growth, with Other at +47.7%, Australia at +37.0%, Indonesia at +21.5%, and the United States at +8.4%. Meanwhile, Japan, the largest segment with an approximately 51.6% composition ratio, remained essentially flat at +0.6%, while China slowed to -18.4%.

【Profit and Loss】Operating income was ¥92.0B (-5.2% YoY). The gross margin was 33.3% (-1.1pt from 34.4% in the previous year), while the SG&A ratio was 25.2% (+0.2pt from 24.9%), resulting in margin compression from both cost of sales and SG&A expenses. By region, operating income in Japan declined to ¥44.8B (-4.6%). The United States and China each shifted from profits in the previous year to operating losses of ¥0.1B, weighing on the company-wide profit margin. This was partially offset by higher profits in Australia (+264.8%), Indonesia (+22.7%), and Other (+46.4%). Ordinary income was ¥103.0B (-3.5%), supported by non-operating income including interest income of ¥7.3B and dividend income of ¥5.0B, but adversely affected by foreign exchange losses of ¥2.0B. Following the recognition of extraordinary losses of ¥1.5B and an effective tax rate of 26.9%, consolidated net income was ¥74.3B (-5.2%). However, net income attributable to non-controlling interests declined from ¥12.1B to ¥6.8B (-43.9%), resulting in a return to profit growth for net income attributable to owners of the parent, which rose to ¥67.4B (+1.8%). Overall, the results can be characterized as higher revenue but lower profit, with a modest increase in net income attributable to owners of the parent.

Segment Analysis

Japan generated revenue of ¥586.9B (+0.6% YoY) and operating income of ¥44.8B (-4.6%, 7.6% margin). Although it was the company’s largest segment, revenue growth was sluggish and profit declined. The United States recorded revenue growth to ¥187.8B (+8.4%), but operating results shifted to a loss of ¥0.1B, compared with a profit of ¥5.1B in the previous year. China also shifted to an operating loss of ¥0.1B, in addition to a revenue decline to ¥78.3B (-18.4%). In contrast, Australia achieved revenue of ¥127.3B (+37.0%) and operating income of ¥5.2B (+264.8%, 4.1% margin), while Indonesia achieved revenue of ¥54.2B (+21.5%) and operating income of ¥11.6B (+22.7%, 21.4% margin), combining strong growth with profitability. South Korea steadily expanded, with revenue of ¥96.2B (+5.2%) and operating income of ¥5.5B (+19.5%). The shift to losses in the U.S. and China segments was a factor depressing company-wide operating income, while profit growth in Australia, Indonesia, and South Korea partially offset the impact.

Key Financial Indicators

【Profitability】The operating margin was 8.1%, down 1.3pt from 9.4% in the previous year, reflecting the combined effects of a decline in the gross margin to 33.3% (34.4% in the previous year) and an increase in the SG&A ratio to 25.2% (25.0% in the previous year). The net margin based on net income attributable to owners of the parent was 5.9%, down 0.5pt from 6.4% in the previous year.【Cash Quality】Accounts receivable decreased 3.9% to ¥909.9B from ¥946.5B in the previous year, while inventories increased 5.6% to ¥468.1B from ¥443.2B and accounts payable decreased 2.4% to ¥287.4B from ¥294.4B. The increase in inventories and reduction in trade payables have placed pressure on working capital.【Investment Efficiency】ROE, based on net income attributable to owners of the parent, was 1.5%. The effects of lower operating and ordinary income were reflected in capital efficiency through lower margins.【Financial Soundness】The equity ratio, based on the equity attributable to owners of the parent, was 67.6%, essentially unchanged from 67.3% in the previous year. Cash and deposits were ¥166.8B, while interest-bearing debt consisted solely of short-term borrowings of ¥100.9B, indicating that the company maintained a conservative financial position.

Cash Flow Analysis

As detailed figures from the statement of cash flows have not been disclosed, funding trends are analyzed based on changes in the balance sheet. Cash and deposits were ¥166.8B, down 3.1% from ¥172.2B in the previous year, while investment securities also declined to ¥292.1B from ¥338.3B. From a working capital perspective, the decline in accounts receivable to ¥909.9B (¥946.5B in the previous year) had a positive effect on cash collection. However, inventories increased to ¥468.1B (¥443.2B in the previous year), while accounts payable declined to ¥287.4B (¥294.4B in the previous year), meaning that inventory accumulation and the reduction in trade payables were headwinds to cash generation. The balance of treasury stock was unchanged from the same period of the previous year, and no share repurchases were identified during the quarter. Overall, the cash-generating effect of the reduction in accounts receivable was offset by higher inventories and lower accounts payable, resulting in a slight decline in cash balances.

Quality of Earnings

The ¥11.1B difference between ordinary income and operating income was primarily attributable to non-operating income, including interest income of ¥7.3B, dividend income of ¥5.0B, and other income of ¥2.6B. Recurring financial income partly offset the decline in operating income, while foreign exchange losses of ¥2.0B were a negative factor. Extraordinary losses, consisting mainly of losses on disposal of fixed assets and other items, were limited to ¥1.5B, indicating a limited impact from temporary factors. Of consolidated net income of ¥74.3B, ¥6.8B was attributable to non-controlling interests, down 43.9% from ¥12.1B in the previous year. This reduction in net income attributable to non-controlling interests led to the 1.8% increase in net income attributable to owners of the parent, a point that should be noted as an earnings-quality indicator differing from the declining trend at the operating and ordinary income levels. Comprehensive income improved significantly to ¥94.2B (¥-19.4B in the previous year). Of this amount, ¥75.3B was attributable to owners of the parent, exceeding net income attributable to owners of the parent of ¥67.4B by ¥7.9B. This divergence was primarily attributable to a positive ¥37.8B contribution from foreign currency translation adjustments, rather than a change in the underlying earnings power of the business.

Earnings Forecast and Guidance

Progress against the full-year company plan was 22.7% for revenue (¥1,136.7B/¥5,000.0B), 18.2% for operating income (¥92.0B/¥505.0B), and 19.0% for ordinary income (¥103.0B/¥541.0B). All were below the standard quarterly progress benchmark of 25%. The delay in operating income progress was particularly notable, and deteriorating profitability in the U.S. and China segments may be weighing on achievement of the full-year plan. The full-year plan calls for revenue growth of +6.3%, a -0.1% change in operating income, and a -6.2% change in ordinary income. As of the current quarter, no revisions have been made to the earnings or dividend forecasts.

Shareholder Returns

The full-year dividend forecast is ¥106 per share. Based on the company’s planned EPS of ¥262.91, the payout ratio is approximately 40.3%. The balance of treasury stock was unchanged YoY, and no share repurchases were identified during the quarter. Given the financial base of cash and deposits of ¥166.8B and an equity ratio of 67.6%, dividend sustainability appears to be secured for the time being.

Risk Factors

1. Deterioration in profitability at major overseas bases: Both the United States and China segments shifted to operating losses (¥-0.1B each; both were profitable in the previous year), contributing to the decline in the company-wide operating margin to 8.1%. China also experienced a ¥-18.4% decline in revenue, requiring monitoring of demand trends.

2. Impact of foreign exchange fluctuations: The company recorded foreign exchange losses of ¥2.0B during the quarter, while foreign currency translation adjustments amounted to +¥37.8B and boosted comprehensive income. Foreign exchange sensitivity is therefore a factor contributing to fluctuations in both earnings and net assets.

3. Changes in working capital efficiency: Inventories increased +5.6% YoY, while accounts payable declined -2.4%. The accumulation of inventories and reduction in trade payables may place a burden on cash generation.

Industry Benchmark (Reference; Compiled by the Company)

Industry Benchmark (manufacturing)

Profitability and Returns

Both the operating margin and net margin were slightly below the industry median, placing profitability broadly around the middle of the industry range.

Growth and Capital Efficiency

The revenue growth rate exceeded the industry median, indicating a relatively high pace of revenue growth within the industry.

Source: Compiled by the Company

Key Points from the Earnings Results

1. The operating margin declined from 9.4% in the previous year to 8.1%, representing a structural change arising from the combined effects of a lower gross margin and higher SG&A ratio. The shift to losses in the U.S. and China segments was the primary factor, and the pace of their recovery is expected to determine future margin trends.

2. Consolidated net income declined (-5.2%), but net income attributable to owners of the parent increased +1.8% due to the reduction in net income attributable to non-controlling interests. This divergence in direction is an important consideration in understanding the quality of the earnings results.

3. Progress against the full-year plan was 22.7% for revenue and 18.2% for operating income, both below the standard quarterly benchmark of 25%. The degree of recovery in the second half is expected to be a factor determining the full-year outcome.

Theoretical Share Price (Reference Value)

This is a reference range mechanically calculated solely from publicly available data using a residual income model (Ohlson-type model with an explicit 5-year fade). It is not a forecast of the market share price or a recommendation to take any specific investment action.

Sensitivity: ¥3,360–¥3,555 at ±1% for the cost of equity, and ¥3,452–¥3,457 at ±0.1 for ω.

Notes:

• Because forecast ROE is below the cost of equity, the theoretical value is below book value per share.
• Net assets as of the end of the quarter are used; there is a timing difference from the full-year forecast.
• Because net assets include non-controlling interests, the theoretical value may be calculated somewhat higher.

(Model used: Residual Income Model / Interest Rate Reference Month: 2026-07 / This value does not forecast or guarantee the future share price)

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This report is an earnings analysis document automatically generated by AI based on XBRL earnings release data. It does not recommend investment in any specific security. The industry benchmarks are reference information compiled by the Company based on publicly disclosed earnings data. Investment decisions should be made at your own discretion and responsibility, after consulting with professionals as necessary.

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