The slumping residential housing market has struck Phoenix especially hard. Consider that in 2005, there were 63,000 new home starts there. Demand was so strong that sales were awarded through a lottery system, recalls Carlson Holdings LLC president and CEO Gary Gettle.

Just two years later, the picture is drastically different. The number of new home starts is expected to plummet to 28,000 and there are roughly 55,000 houses waiting to be sold, Gettle says.

With that in mind, you'd be forgiven the assumption that companies like Carlson that serve Phoenix's residential construction industry are taking it on the chin.

But for Carlson that's not the case, according to Gettle, who cites a few factors in explanation: a wide geographic footprint, a never-ending search for new sources of revenue, an unrelenting emphasis on customer service and an aggressive program of adjusting to the economic climate.

“We went into 2007 with our budget process reading all the information from the economists' predictions that the housing market was going to slow down,” he recalls. “We realized after the first quarter it probably wasn't going to get much better throughout the course of the year. We recast all the budgets from revenue down, starting with revenue and our required net income by operating unit.”

That meant laying off about 100 workers and belt-tightening in several areas, he notes.

“We're looking at and reviewing all of our expenditures to make sure we are investing our money wisely and not just spending it,” Gettle says. “We're not going to stop looking at opportunities and investing in those opportunities to grow the business. We're just making sure we're spending our money wisely.”

Carlson's focus on the bottom line, rather than revenues, should translate into increased market share over the long term, he maintains.

“You've got to adjust between those two lines,” Gettle says. “If you only focus on the top line, you can actually grow yourself out of business. We will end up with a pretty big hit on revenue in 2007, but in July and August net income actually beat [the comparable periods] last year.”

Carlson Holdings consists of three operating companies: Carlson Systems LLC, a fastener, packaging products and equipment and product assembly systems distributorship based in Phoenix and Omaha; Jessup, Md.-based fastener distributor Mid-Atlantic Fasteners LLC; and Carlson Systems Engineering LLC, which sells and manufactures window and door assembly systems, distributes vinyl window assembly equipment and is based in Omaha and Twinsburg, Ohio (Carlson spun off a fourth division, Advanced Connector Systems LLC, earlier this year).

Carlson was founded in 1947 by Carl and Julia Carlson, who took a $350 cash investment and a used file cabinet and created Carlson Stapler and Supply out of their Omaha home. Today Carlson employs more than 500 people and had revenues last year of $185 million.

Its three divisions have more than 60 stores in 22 states and a location in Juarez, Mexico. That wide geographic footprint allows Carlson to weather downturns in different regions where economic conditions vary, Gettle notes.

“We are very, very blessed with outstanding management in the field. Our regional vice presidents run these regions as their own businesses. They have equity in them and they do an outstanding job of adjusting to the market,” he says.

Often those adjustments include searching for business opportunities outside of Carlson's traditional end markets, notes Rob Puryear, regional vice president of sales for Carlson Systems' Region Three, which covers Kansas, Missouri, Arkansas and Oklahoma.

The housing downturn hit that area pretty hard, Puryear says, which forced his unit to look elsewhere for business to pick up the slack.

“Steps we've taken to diversify our products and customer base are letting us see some positive results on the packaging side, so overall it's coming out pretty close to a wash,” he says. “One of the things I know Gary likes to say is, 'You can't control what the market does, but you can control your response to the market.' That's what we've tried to do.”

That approach means supporting customers on the packaging side with value adds to the commodity products Carlson Systems sells, Puryear says. On the fastener side, it means beating the bushes for previously overlooked opportunities.

“We're going after market share. We're trying to expand our horizon, expand our territory a little bit and look into opportunities that are available,” he says. “You can read all sorts of media and hear these guys on TV talk about the outlook for the housing industry over the next 18 to 24 months. You can get caught up in that and let that dictate your posture in the market. I encourage my people to look beyond that: 'Let's not get caught up in the glass half empty attitude. Let's think of the glass as half full and try to fill it the rest of the way up.'”

One way his unit is doing that is by making inroads into the commercial construction and remodeling markets, Puryear notes.

“There's a lot of remodeling going on now. People can't sell their houses, so they decide to stay where they are and remodel,” he says.

The search for new business also extends beyond traditional construction markets to more industrial sectors that use fasteners—such as manufacturers of pallets, crating and even fencing.

“In the Midwest, there's a trend right now to do metal structural components of the fence, meaning the posts are metal but [manufacturers] still use the wooden fencing. We're looking at special fasteners to shoot through wood into metal,” Puryear says.

For Gettle, packaging represents another area where growth can help offset falling revenues from the housing sector; sales of packaging products and equipment make up nearly half of Carlson Systems' total revenues. That business has held up well, he notes, with big box retailers such as Best Buy and Circuit City enjoying strong sales.

“For those kind of outlets, business has still been good from the consumer standpoint, so they're still buying packaging products,” he notes. “Forty-five percent of [our] business is in packaging equipment and the consumables that flow through that equipment. Mid-Atlantic is moving more and more into markets that they haven't been in to spread the risk.”

Another focus is commercial construction.

“We're having some pretty good success in those areas,” he says. “One of the advantages that Carlson Systems LLC has is they are diversified outside of residential construction into commercial fastening.”

To increase its reach into that market, Carlson Systems brought on some new products, Gettle says, noting the addition of Max high-pressure pneumatic nailers that drive fasteners through steel into concrete; a line of Aerosmith pneumatic nailing tools and fasteners designed to fasten Dens-Glass insulation to commercial buildings; and Simpson Strong-Tie's line of Quik-Drive tools and fasteners and Simpson adhesives.

Another focus is a new program of selling to retail outlets such as hardware stores and lumber yards, Gettle adds.Customer service comes firstThe commitment to customer service that began with Carl and Julia Carlson 60 years ago is still the core around which the business revolves. Just ask Jim Humbert, vice president and co-owner of Advantage Framing Systems Inc. in Olathe, Kan.

“[Carlson Systems has] done a ton to help us grow our business,” Humbert says. “We started seven years ago with three or four employees. Today we're almost 200. They've done everything they can to help our company grow, whether it's carrying us through the thin spots or coming in and showing us how to improve our business with new products. You find a lot of companies that want to come in and sell you stuff, [but] if [Carlson] can't come in and make it work for both parties to help each other, they don't bother.”

Humbert tells a story that's indicative of Carlson's willingness to extend itself for its customers. About five years ago, he says, Advantage Framing began manufacturing wall panels and asked Carlson to help get the operation off the ground.

“We went to them wanting kind of a loaner tool program. It was something that was a little bit outside their normal realm of doing business, but they looked at it, figured it out and gave us $10,000 to $12,000 worth of tools,” Humbert says. “I'm free to use them as long as I'm buying nails [from Carlson]. And they fix them if they break—it doesn't cost me a thing.”

Today the wall panel operation accounts for about one-third of Advantage Framing's business.

Such usage agreements are one way Carlson distinguishes itself from other distributors, Puryear says. In return for a commitment to buy consumables from Carlson, the company will place tools or equipment with a client for a given period of time.

“Last week, we renewed a deal for a beef processing plant on strapping machines for three years and currently we're reviewing a proposal for a garage door manufacturer who has been impacted by the housing slowdown yet needs to update his lines,” he notes. “Obviously, the numbers have to work out so these deals are profitable, but we like looking at the lifetime value of a customer, not just the current transaction. … In Jim's case, we already had a relationship with him and really wanted to be a part of his startup, we liked his business plan and felt good about his level of commitment to his customers and suppliers. It's been a great relationship for both of us.”

Tom Bybee, owner of Tom Bybee Construction in Center View, Mo., says Carlson's service is what sets it apart from its competitors.

“Probably their best deal is their service and the way they treat customers. If you need something, they'll go out of their way to make sure you get it,” Bybee notes. “They have fair prices and they're good people to work with.”

“I've never had any bad issues with them. They've always been good to me,” adds Rex Jones, owner of Jones Construction in Platte City, Mo. “I can call them right now and they'll have my nails to me this afternoon. Their prices are cheaper than anybody else and they have twice the service.”

Gettle says the housing crunch won't keep Carlson from using another tactic to spur growth: acquisitions.

“We'll look for opportunities to still do some acquisitions,” he says, noting the success of the company's purchase of Mid-Atlantic Fasteners, which closed April 1 last year.

“They had a little over $50 million in revenues,” he says. “That's been a very, very good acquisition for us.”

That purchase and the acquisition of Wegoma Inc., a Twinsburg, Ohio-based manufacturer and supplier of vinyl and aluminum window and door fabrication machinery, highlight the evolution of the company's acquisition philosophy over the years. Early on the company focused on buying smaller operations to add locations, Gettle notes.

“That adds overhead,” he says. “Buying a $1 million to $5 million business doesn't fit our model anymore and so our acquisitions in the last three to five years have been larger operating companies such as Mid-Atlantic [and] Wegoma for the engineering group. ”

When seeking a potential acquisition, Carlson looks for companies it's done business with for a long time, measuring their suitability for a merger using a few criteria, Gettle explains.

“Once we've defined the target, we then look very, very closely at the culture. The closer the cultural match, the easier the integration is—if you don't match the cultures closely, you spend an awful lot of time and money trying to integrate,” Gettle notes, adding that after the company determines the deal is a cultural fit it takes a close look at the target's management and financial picture.

“We will not do an acquisition unless the management of the acquired company agrees to stay on board long term. We don't go in and start making a lot of changes. If it needs to be fixed, we really shy away from it,” he says.

Looking ahead, Gettle says stringent belt-tightening and Carlson's philosophy of providing exemplary customer service and looking in unexpected places for new business will stand the company in good stead, despite the crisis in the housing market.

“[The crunch] has not impacted the bottom line, primarily due to our focus on adjusting resources to focus on raising revenue,” he says. “Industrial distributors in residential housing that did not make substantial adjustments quickly enough are going to be in severe trouble and may not survive this. I think it's going to be longer than anyone thought here a year ago.”

That said, Gettle is confident the company's strategy will pay off over the long run.

“We will continue to focus on our industrial opportunities and other opportunities in commercial construction and we will ride out this residential housing market,” he says. “We think that we'll come out the other side of this with an even stronger market share. That will show up in the revenue side and the net income side when the market rebounds.”