Earnings call transcript: KONE Q2 2025 sees growth despite market challenges

KONE Oyj reported robust Q2 2025 results, with sales increasing 4.9% at comparable currencies and orders rising 3%, driven by strong performance outside China and a 25 basis point expansion in adjusted EBIT margin. Despite these positive operational metrics, the company's stock declined 3.91% pre-market, reflecting broader market concerns and anticipated negative foreign exchange impacts. KONE is strategically pivoting towards its resilient service and modernization segments, which now constitute nearly 65% of sales, while managing persistent challenges in the Chinese market and forecasting a €50 million negative EBIT impact from FX in 2025.

Analysis

KONE Oyj (KNEBV) delivered a resilient Q2 2025, demonstrating successful execution of its strategic pivot towards more stable revenue streams despite significant headwinds. Sales grew 4.9% at comparable currencies and orders rose 3%, driven by high single-digit growth outside of China, which effectively counterbalanced the persistent, expected double-digit decline in China's new construction market. The company expanded its adjusted EBIT margin by 25 basis points and generated robust operating cash flow of €364 million, an increase of approximately €50 million year-over-year. This operational strength is rooted in the strategic shift to Service and Modernization, which now constitute nearly 65% of sales, with modernization sales growing by nearly 20%. However, the market reacted negatively, with the stock falling 3.91% pre-market, likely due to the company's explicit guidance of a €50 million negative EBIT impact from foreign exchange rates and ongoing challenges in China. Management's confidence is reflected in the specified 2025 sales growth guidance of 2-5% and an unchanged EBIT margin target of 11.8-12.4%, supported by a stable dividend record of 20 years and a current 3.2% yield.

Key Decisions for Investors

• Investors should evaluate the company's successful strategic pivot to the more resilient Service and Modernization segments, which are effectively offsetting the structural decline in China's new construction market.
• It is critical to monitor the dual headwinds of foreign exchange volatility, guided to have a €50 million negative EBIT impact, and the ongoing weakness in China, as these are the primary factors weighing on the stock.
• Given that the stock is reportedly trading near its fair value with low volatility (Beta: 0.68) and offers a 3.2% dividend yield, income-oriented investors may consider it a stable holding, provided they can tolerate the geopolitical and currency risks.
• Future performance will hinge on continued margin expansion in the growing Service business and successful pricing initiatives outside China; these factors should be watched closely as indicators of the strategy's long-term success.