“The focus on indoor air quality is here to stay,” Carrier Global Corp. Chief Executive Officer Dave Gitlin told me in an interview in February 2021. “All that Covid did is shine a light on the criticality of it. You wouldn’t eat dirty food or drink dirty water. People never questioned if the air was dirty” in the US until the pandemic. But Covid was an invisible enemy, spreading from one person to the next through minuscule airborne droplets. You’re definitely going to question the cleanliness of the air when you’re coughing, your eyes are burning and taking a quick walk to pick up lunch results in a splitting headache. While we would all like to hope that this spooky orange haze was a one-off experience, the growing frequency of extreme weather events suggests otherwise.
Executives from heating, ventilation and air-conditioning companies such as Carrier, Trane Technologies Plc, Honeywell International Inc. and Johnson Controls International Plc have argued that Covid triggered a longer-term business opportunity in indoor air quality as people woke up to the benefits of products like high-efficiency particulate air (HEPA) filters, digital-monitoring tools, air scrubbers and even fancy systems that use virus-killing ultraviolet light filters or bipolar ionization. Better air quality doesn’t just guard against the spread of pathogens; it also contributes to better test scores for children, increases productivity among workers and reduces the impact of environmental pollutants, like, say, smoke.
Read more: Is Your AC Keeping You Safe From Covid?
But these days, with the pandemic no longer a global health emergency in the eyes of the World Health Organization, the business of indoor air quality isn’t as top of mind for investors. HVAC executives spend more time fielding questions about a housing slowdown and pressures in the commercial real estate market.
“We’re still seeing a lot of tailwinds, even though no one wants to talk about it anymore. Maybe they want to talk about it after yesterday here in New York,” Trane CEO Dave Regnery said this week at a UBS Group AG conference.
Carrier has sized the additional revenue opportunity created by a heightened focus on indoor air quality at as much as $10 billion by 2030 for the market overall. As of the first quarter, the company said it had a pipeline of “healthy buildings” projects valued at about $1.2 billion, up more than 50% from the period a year earlier. Johnson Controls has said that the healthy buildings market may be as large as $15 billion and that its own backlog of potential projects was valued at $1.8 billion as of the most recent quarter.
A significant chunk of that demand is coming from the K-12 school system, which has received a combined $190 billion in direct aid from various Covid stimulus packages. By comparison, public school districts received about $64 billion in the 2009 financial crisis bailout. While a portion of the Covid education money must be spent on reopening schools and setting up programs meant to address potential learning loss after a long stretch of remote instruction, districts have significant discretion over how to spend the rest. Improvements in indoor air quality — including overhauling ventilation systems and replacing windows and doors — are specifically highlighted as an acceptable use of Covid-era funds and appear to be a priority for many school systems with aging buildings. This is logical: the Covid funds are one-off in nature, and there’s a time limit on their use, so it doesn’t make sense to spend the money hiring a bunch of teachers or starting programs that will be unaffordable in a few years. A 2015 study by Federal Reserve Bank of St. Louis economist Bill Dupor found that about 70% of the spending increase that resulted from education-linked grants in the financial crisis bailout went to capital outlays such as construction, land purchases and equipment upgrades.
Orders from education customers in the Americas for new HVAC equipment were up 40% in 2022 at Trane, and the company is only in the “mid-innings” of demand linked to the government funds, CEO Regnery said this week. The HVAC companies are also prime beneficiaries of the Inflation Reduction Act, which includes $8.8 billion of consumer rebates for home energy-efficiency and electrification projects and meaningful tax credits that are meant to incentivize residential and commercial investments in heat pumps and other electric systems. Barclays Plc analyst Julian Mitchell estimates the IRA and the Infrastructure Investment and Jobs Act (which includes a comparatively small bucket of funds to support energy efficiency in buildings) will boost annual volume growth in the residential HVAC market by about 2% from this year through 2025.
Chris Nelson, the former head of Carrier’s HVAC division, once told me that Covid did to air quality what the 9/11 terrorist attacks did to security infrastructure. He’s set to become chief operating officer of Stanley Black & Decker Inc. and head of that company’s tools and outdoor products division this month. Once people start to think about the quality of their air, they aren’t going to stop — particularly when wildfires and other climate disasters provide timely and scary reminders of what it feels like when breathing gets complicated.
The RV industry is “a great indicator in the sense that historically it’s always been very quickly first down in advance of a recession and then first up and may even proceed the stock market going up when the economy starts to recover. But it’s interesting we’ve been sitting around for a year or a year and a half waiting for a recession to come in six months, and we’ve been in a RV recession for nine months.” — Jon Ferrando, founder and CEO of retailer Blue Compass RV
Ferrando made the comments in an interview this week. He founded Blue Compass RV in 2018, not long before the recreational vehicle business went through a boom during Covid. “The whole world was shutting down,” he said. Then “all of a sudden RV demand went off the charts. Current RVers and future prospective RVers started running through dealership front doors to buy an RV and enjoy the outdoors.” But while the boating and golf industries have stayed remarkably resilient in the post-pandemic new normal, RV demand has come crashing down from the heady peaks. Airstream-maker Thor Industries Inc. said this week that fiscal third-quarter sales declined 37% from the period a year earlier and that its RV order backlog slid 60%.
Blue Compass RV, like other RV sellers, is offering significant discounts on 2022 models to help clear out a glut of inventory and make room on the lots for the rollout of 2024’s lineup. So far, there’s no meaningful sign of a rebound in Blue Compass RV’s daily, weekly or monthly sales checks, Ferrando said. Even so, the inventory clearing efforts appear to be helping stabilize the industry. Thor shares rose 18% on its earnings report this week. The company is keeping production in check to better match supply with demand, resulting in a cut to its full-year sales guidance but a boost to its gross margin and earnings outlook.
Deals, Activists and Corporate Governance
Boeing Co. has another issue with its planes. The company is delaying deliveries of its 787 Dreamliner after discovering improperly sized shims within the horizontal stabilizer that’s attached to the aircraft’s tail, Bloomberg News reported. The faulty component in this case is a bracket manufactured by an unidentified supplier. Boeing isn’t planning to halt production of the 787 and still expects to raise the number of Dreamliner jets it churns out each month to five by the end of this year. Its target for between 70 and 80 Dreamliner deliveries in 2023 is also unchanged. As I wrote in April when Boeing disclosed an issue with incorrectly installed rear fittings on the 737 Max that would hold up some deliveries and require a reworking of hundreds of already-built jets, the problems with the company’s planes appear to be getting increasingly manageable in scope. This latest manufacturing snag continues that trend. But the benchmark is the flight-control software — known as the Maneuvering Characteristics Augmentation System — that has been linked to two crashes of Boeing’s Max jets and the deaths of 346 people. Any number of issues with Boeing planes at this point is too many. The combined impact of Boeing’s infamous “partnering for success” program that squeezed suppliers for lower costs, the 737 Max crisis and the pandemic “left suppliers fragile and vulnerable from both a personnel and financial perspective,” Bank of America Corp. analyst Ron Epstein wrote in an April report. “Pick your cliche, we like, ‘When you see one roach, there are likely more.’”3M Co. is getting a few more weeks to hash out the terms of a potential settlement with hundreds of cities that have sued the conglomerate over its manufacturing of firefighting foam that contained per- and polyfluoroalkyl substances (PFAS) that the municipalities say leached into soil and water supplies. Stuart, Florida, had sued 3M for $115 million to cover the cost of building and operating a water treatment and filtration system and compensate it for damages, and the case was set to go to trial this week before the judge agreed to delay it. The ultimate outcome could set a precedent for the other jurisdictions seeking to hold 3M accountable for the cost of cleaning up PFAS, which are known as forever chemicals because they break down slowly in the environment and can accumulate in the body, causing health problems. Bloomberg News reported late last week that the 3M is in talks for a settlement of at least $10 billion that would cover only municipal providers of drinking water to consumers.
Much is still unknown at this point about the extent of this settlement, should one actually be reached. Barclays analyst Julian Mitchell had penciled in a $3 billion probability-weighted potential liability at 3M for water providers’ cleanup efforts and estimates that the settlement as currently described is most comparable to this bucket of potential expenses out of an overall cost of $19 billion. That still leaves an estimated $14.4 billion liability from personal injury and property claims from the broader population and additional settlements at the state and federal level — none of which is covered by the talks currently underway, according to the Bloomberg News report. 3M’s legal liabilities have been a significant drag on the stock, which last month touched its lowest level since 2012. So any progress is a good thing. But the company is a long way from being able to put its woes behind it.
3M is separately facing more than 250,000 lawsuits contending that the company knowingly sold defective military earplugs through its Aearo Technologies subsidiary, leaving service members with hearing loss and tinnitus. Analysts have estimated 3M’s earplugs liability could be in the ballpark of $8 billion to $15 billion. 3M announced last July that it would put the Aearo subsidiary into bankruptcy as a means of speeding up the resolution of the claims. A bankruptcy judge on Friday concluded the Aearo filing didn’t serve a legitimate reorganization purpose and threw out the case. 3M has said that the earplugs were safe and effective and that it acted responsibly when manufacturing products containing PFAS.Safran SA is in talks to acquire flight-control and actuation assets from Raytheon Technologies Corp., the French company said this week, confirming an earlier Bloomberg News report. A transaction could value the Raytheon business at about $1 billion, people with knowledge of the matter told Bloomberg News. There’s no certainty a deal will be reached.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. A former M&A reporter for Bloomberg News, she writes the Industrial Strength newsletter.
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