Tear Sheet: ZF Friedrichshafen AG

The successful price recovery from customers to compensate for higher input costs will allow ZF to deliver an EBITDA margin of 8.0%-8.5% in line with our previous expectations for the full-year 2022. However, the temporary buildup in working capital resulting from higher inventories and a delay in cashing in price recoveries will hurt its free operating cash flow (FOCF), which will likely stand at a low of €230 million-€260 million, compared with our previous expectation of €650 million-€750 million. . ZF?s ability to contain EBITDA margin dilution from higher labor and energy costs next year will hinge on its customers? willingness to provide additional compensation amid weakening consumer sentiment, which will likely hamper pricing, a key driver of automakers? strong

...German auto supplier ZF Friedrichshafen AG's (ZF)'s updated 2022 guidance delivers mixed news. The successful price recovery from customers to compensate for higher input costs will allow ZF to deliver an EBITDA margin of 8.0%-8.5% in line with our previous expectations for the full-year 2022. However, the temporary buildup in working capital resulting from higher inventories and a delay in cashing in price recoveries will hurt its free operating cash flow (FOCF), which will likely stand at a low of 230 million-260 million, compared with our previous expectation of 650 million-750 million. Weaker cash flow is narrowing ZF's rating headroom ahead of yet another challenging year for the auto industry. ZF's ability to contain EBITDA margin dilution from higher labor and energy costs next year will hinge on its customers' willingness to provide additional compensation amid weakening consumer sentiment, which will likely hamper pricing, a key driver of automakers' strong results during 2021-2022....

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