ZF Friedrichshafen AG

The stable outlook reflects ZF's commitment to reduce its leverage such that its funds from operations (FFO)-to-debt ratio increases to above 20% in the next 12 months despite high input costs. It also reflects our expectation that ZF will improve its FOCF-to-debt ratio toward 10% while maintaining DCF to debt well above 5%. We could lower our rating on ZF if the difficult market environment, with persisting inflation and supply chain bottlenecks, weakened ZF's credit metrics such that its: FFO to debt stays below 20%; FOCF to debt fails to recover to close to 10%; or DCF to debt remains below 5%. We could raise our rating on ZF if the company's investment in e-mobility, software, and autonomous driving technologies

...ZF will likely restore some ratings headroom through higher earnings in 2023-2024, from a low base in 2022. This reflects a combination of factors. First, we forecast that auto production units will increase toward 84 million in 2023 from about 82 million in 2022, with fewer episodes of volatility as supply-chain bottlenecks--for example for semiconductors--continue to ease. This should help auto suppliers like ZF to increase efficiency gains through optimized planning. According to S&P Global Mobility, the truck market will also grow by about 15% and 7%, respectively, in 2023 and 2024, after a dip of about 25% in 2022. Second, we assume that ZF will be able to recover most input cost inflation through price increases, which partly became effective only in the second half of 2022 due to lengthy negotiations with auto OEMs. Overall, we expect ZF's S&P Global Ratings-adjusted EBITDA margin to increase to 8.0%-8.5% in 2023 and stay 8.0%-9.0% in 2024, up from 7.7% in 2022. We also expect ZF's...

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