RINNAI CORPORATION

The domestic gas equipment market has matured, with multiple companies competing amid a major transformation in distribution channels driven by the liberalization of electricity and gas retail sales. Unsuccessful new product development or sales strategies, or failures in developing new markets or new businesses, may result in decreased sales and profit or unrecovered investment. With overseas sales accounting for over 50% of consolidated sales, expanding operations in China and the United States, as well as opening new markets in Latin America and Africa, has become an urgent priority.

Momentum toward achieving a decarbonized society (carbon neutrality) is accelerating within the Japanese government and related industries, and there is a risk that the manufacture and sale of products using fossil fuels may be regulated or prohibited in the future. This could have a significant adverse effect on the business results and financial condition of the Group, which primarily manufactures and sells household equipment that uses fossil fuels as its main energy source. As a countermeasure, the Group has formulated "RIM 2050," aiming for zero CO2 emissions by 2050, and is working to achieve zero emissions across the entire product lifecycle.

While the Group holds "Quality is our life" as its founding philosophy and aims for zero defects, there is a risk of recall costs arising from serious accidents or frequent malfunctions, as well as losses from inspecting and replacing defective products or parts. There are also concerns about loss of social trust and brand value decline due to service and customer support failures. The Group works to reduce these risks through product development compliant with product safety standards in each country and through manufacturing, sales, and service activities based on its own quality standards.

There are risks of increased manufacturing costs due to soaring prices of raw materials such as steel, copper, brass, and aluminum, as well as delays in parts procurement or the halting of major production lines due to bankruptcy or accidents affecting business partners. The Group also recognizes rising costs due to shortages of logistics warehouses and trucks, as well as ocean freight shortages, and the risk of brand value decline due to human rights risks at suppliers, such as forced labor, child labor, and conflict minerals. The Group strives for stable procurement through sourcing from multiple business partners and close information exchange and technical collaboration.

As consolidated overseas sales account for over 50% of total sales, and sales, expenses, assets, and liabilities are translated into yen, a stronger yen against the US dollar and Chinese yuan in particular could adversely affect business results and financial condition. The main risks recognized are decreased profit due to exchange rate fluctuations exceeding forecasts and decreased profit due to the yen translation impact on overseas subsidiaries. The Group hedges foreign exchange risk related to import/export transactions through forward exchange contracts, but complete avoidance is not guaranteed.

Risks exist including business disruption or system destruction due to cyberattacks, hackers, or viruses; compensation, litigation, or reduced business dealings resulting from leaks of personal information or confidential information; and information leakage or copyright infringement due to improper use of AI technology. There are also concerns about business disruption and failure to meet supply and delivery deadlines due to system failures. The Group has established a dedicated department (Information Security Countermeasures Office) and implements risk avoidance measures such as cyberattack countermeasures, communication monitoring, development of internal regulations, and internal education.

The Group conducts business in accordance with local laws, regulations, and policies in countries around the world, but changes to these, differences in interpretation, or the establishment of unforeseeable new laws or regulations may adversely affect business results and financial condition. Note that the subsidiary Rinnai Brazil Heating Technology Ltda. received a recommendation regarding the competition protection law from the local administrative council for economic defense on September 5, 2024; however, a settlement with the local authorities was reached during the fiscal year under review, the loss amount was finalized, and the difference has been recorded as "reversal of provision related to the Anti-Monopoly Act."

The Group holds subsidiaries in Asia, North America, Oceania, and other regions, and faces risks such as suspension or downsizing of operations due to unilateral changes in policy, laws, or tax systems; social unrest due to terrorism, war, or conflict; relief costs due to illness, kidnapping, or accidents involving expatriates or their families; and opportunity losses due to underdeveloped infrastructure. The materialization of these risks may adversely affect future business expansion and business results.

Against the backdrop of the declining birthrate and aging population, there are concerns that failure to achieve recruitment and development plans for specialized technical engineers responsible for new product development and management personnel driving business strategy could lead to a decline in new product development capability and business contraction. The Group also recognizes as a risk the failure to achieve supply and demand plans due to an absolute shortage of employees in manufacturing, sales, and service. The Group works to reduce this risk by promoting planned recruitment and development with a medium- to long-term perspective.

Large-scale natural disasters such as earthquakes and storm/flood damage, or fires and explosions, could halt business site functions and disrupt the supply chain; the spread of a serious infectious disease could halt production and sales activities; and a pandemic could cause a global economic downturn, any of which may adversely affect business results and financial condition. The Group has established a BCP, regulations for responding to disasters and accidents, and an employee safety confirmation system, and has built a framework for maintaining internal control through the early establishment of a response headquarters in the event of an infectious disease outbreak.