Carrier carrying on in cool housing market

The heat is on at Carrier Corp.'s Indianapolis-based North American residential division.

Unfortunately, it's not because sales of its furnaces are on fire.

With steep declines in new-home construction and existing home sales, "market conditions in Carrier's North American
residential business are clearly challenging," George David, CEO of Carrier's parent, United Technologies, declared
last month while announcing a 20-percent jump in UTC's third-quarter earnings.

One might expect local management is cowering from its Connecticut parent, which is fond of publishing operating margins
of its individual segments the way Joan Crawford would've pitted her kids against each other.

For now, UTC probably won't come down hard on Indianapolis because recent results have been strong at other UTC companies,
such as Pratt & Whitney.

Also, Carrier's three other global business lines, including refrigeration and international HVAC products, posted double-digit
growth in the third quarter. Overall, Carrier operating profit was $420 million on $3.7 billion in revenue. North America
residential sales were not broken out.

The 1,700-employee Indianapolis unit is sweating out the housing downturn by playing to soaring energy prices.

The world's largest furnace manufacturing plant, near Indianapolis International Airport, has a product pipeline that
includes new "hybrid" systems that switch back and forth between electricity and natural gas fuels.

Last month, it launched its "Infinity Ideal Comfort" furnace that modulates the amount of gas burned. It's
said to maintain temperature within a few tenths of a degree to avoid the chill that occurs just before a furnace roars to
life. With that feature and other efficiencies, Carrier claims the furnace could save a homeowner upwards of $350 a year.

Carrier is attempting not only to convince homeowners to replace their existing HVAC systems with higher-margin, high-tech
ones–$7,000 and up is not unheard of for a hybrid system, installed–it's even selling thermostats as design accessories.

Last month, at the 2007 International Builders Show, Carrier introduced its "Edge" thermostat that resembles a
high-tech picture frame. Behold the optional, interchangeable faceplates from quartz to espresso leather, with a chrome beading
surrounding the display.

The Edge can be had with an SD card, a la the digital camera, that can be inserted into one's home computer and programmed
with a specific temperature schedule, weeks on out. The card is then reinserted into the thermostat.

Alternative to plain vanilla

"This used to be a ho-hum, boring business back in the 1980s," said Sergei Traycoff, president of Indianapolis-based
Bolls Heating and Cooling, one of two factory-authorized Bryant dealers in the city.

Bryant is a sister brand of Carrier and its furnaces share virtually the same parts.

Mike Branson, brand manager for Carrier's North America Division, looks at technology as an opportunity for new sales.
The more technologically sophisticated units, intended primarily for the replacement market and custom-home builders, have
the potential for higher margins than the scads of plain-vanilla furnaces Carrier cranked out for low- and moderately priced
houses during the housing bubble.

"Most home builders put in the lowest-cost option," Branson said. Last August, sales of previously owned homes
dropped to the lowest level in five years. Shortly after, the Commerce Department reported that new-home sales fell to a seven-year
low.

The replacement market isn't much better. Replacement sales have been relatively flat, Branson said. "It hasn't
grown to fulfill the loss in new construction."

About 70 percent to 75 percent of sales in the $8 billion U.S. residential HVAC market are for product replacement, according
to a 2006 report by New York-based Prudential Equity Group, which noted that Carrier has the biggest share of the residential
market, at about 25 percent.

What makes the replacement market challenging is that the average HVAC system can last 15 to 20 years.

Still, Branson said Carrier is recording gains for some of its higher-end products, such as the Infinity line of furnaces,
launched in 2004. Besides carrying the highest efficiency rating, the furnace can tailor flow to different zones of a house
and can be controlled remotely by phone or Internet. Sales are up 25 percent, despite an installed price that can hit $10,000
or more.

Taste for hybrid

One factor that might play in Carrier's favor is soaring energy prices. Growing popular are the so-called hybrid systems,
which switch between electricity and gas or other fuels, depending on which is cheapest to use at the time and the outside
temperature.

Though hybrid systems cost more than conventional furnace/air-conditioner units, they tend to save homeowners over the long
run, especially compared with the systems they're replacing, said Pete Grasso, associate editor of industry bible Contracting
Business.

Consumers battered by energy prices are becoming aware of the technology and often research products on the Web before even
calling a contractor.

"They're asking for this type of product," Grasso said.

Carrier also is trying to boost sales of its add-on units, including air filtration systems. Some now go well beyond the
traditional paper or fiberglass filtering media, to ultraviolet light and "ion bombardment" to reduce the level
of airborne germs and mold spores.

Critical to sales is the front-line sales force of HVAC contractors. Grasso said Carrier has been doing a lot in terms of
dealer education programs, followed up with incentives.

Capabilities of those contractors also have become an issue.

"The critical thing is how [the system] is put in," said Bolls' Traycoff. He had to let go of some technicians
who couldn't master the new digital world of HVAC. Now, his hires tend to come from aviation and computer industries.

The Indianapolis plant has dodged a bullet or two over the last several years. In 2002, for example, Carrier closed its Lewisburg,
Tenn., plant, eliminating 2,000 jobs. Furnace production was moved to Indianapolis, while air-conditioners and heat-pump manufacturing
went to a plant in Collierville, Tenn.

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