Builders FirstSource (BFS) has begun to attract customers and prospective employees who are abandoning LBM dealers that they regard as less stable, the chief executive officer of America's ninth-biggest dealer says.

"Builders are beginning to realize that there are fewer players," Floyd Sherman told ProSales in an interview Friday. "They are starting to move their business to companies that will be the survivors. I think they're sensitive to doing business with companies that are struggling financially." Sherman didn't name specific companies, but his comments did come just weeks after ProBuild--which is widely believed to have lost several hundred million dollars in recent years--reorganized itself and saw the departure of its chief executive officer and operations president. In addition, this year's ProSales 100 reported that two other top 10 companies, Stock Building Supply and BMC, saw their revenues shrink in 2010 by 39.7% and 14.3% respectively.

Sherman noted that Dallas-based BFS had opened 952 customer accounts in the first half of this year, of which 600 generated sales. "Some are coming because others are no longer there, but also because our people are knocking on doors," he said. That door-knocking includes prospective employees, he added. "For the first time, we have people who are now starting to call us and say 'How do we get on board with you guys. We'd like to get on the BFS team'," Sherman said. "We never tried to buy people away and offer two-year and three-year guarantees (but) now we're having people getting really concerned about the company they work for not being as financially stable as we are."

That claim of financial stability is a relative term. On July 21, BFS reported a net loss of $15.5 million in the second quarter, improving from a $19 million loss in the year-earlier period, despite a 2.4% drop in sales to $206.4 million. BFS prefers to view its results using adjusted EBITDA--net income before income taxes, depreciation, and amortization as well as before gains and losses on sale of assets, income or loss from discontinued operations, and other non-cash or non-recurring items, including asset impairments, facility closure costs, severance, recapitalization costs, expense acquisition costs, and stock compensation expense. By that metric, the company still was in the red--recording a negative $1.3 million--but it marked an improvement from the negative $7.6 million in 2010's second quarter and was the company's best showing since fall 2007.

"I'm optimistic that our third quarter will turn in a good performance," Sherman said in the exclusive interview. "I feel very comfortable with our financial position. Obviously, you'd like to be in the black, and so would all of our shareholders, but they understand that very few industries have seen the downsizing that we've seen. ... When the sales are flat with housing starts down 13% and commodity deflation of 20%, for us to be able to perform at the level we are, I'm proud of what we can do."

BFS operates roughly 100 facilities in a triangle that stretches from Texas to Maryland to Florida. It's known for being among relatively few LBM operations that actively solicit business from the big public builders, and its 2010 annual report indicates that 10 companies provide just under a quarter of its total sales. But Sherman noted that 60% of BFS' trade is with smaller builders who focus on no more than a regional market and that could have anywhere from one to 150 employees. "We've found that we can service all levels of customers and do it profitably," he said. "The level of profitability may be different, but the (return on investment) is similar for large builder, small builder and multifamily."

At the same time, sales to the light commercial construction market have risen to about 15% of BFS' total sales, up from less than 5% five years ago. It's part of a general trend toward doing more installed sales as well as custom work. "We are doing single family turnkey all the way up to some complete turnkey projects that have been in excess of $7 million on senior citizens assisted living homes, some other public buildings, high-rise," Sherman said. "It's quite varied in that area. We just want to do turnkey framing if we can bring in all of our other products. We always look to see how we can get full use of our product programs. For the most part we're successful in framing, roofing, finish work, exterior doors.

"The builder is first and foremost in the selling business; They are marketers, land developers," Sherman continued. "We have no interest in that. If we can help them be more efficient in their basic functions, if we can take (duties) off of them and make them a better marketer and capital raiser, then we can help them."

Born in 1998 and a public company since 2005, BFS arose at a time when it and companies like ProBuild, Stock, and 84 Lumber expanded their operations dramatically in response to a perception that the biggest builders would figure in an ever-larger share of all new-home construction and would put up homes using materials acquired through national sales contracts. The homebuilding industry's crash appears to have squelched those plans, and Sherman said his view of what the market wants has evolved.

"Size for the sake of size I never felt was as important as others in the business may feel it is," he said. "What's important is how well do you dominate your markets. As the large national builders began to centralize their function, there was a feeling that the geographic spread was going to have more importance, and their decisions may be influenced by whether you could deliver over a greater geographic area. I am no longer as concerned about that. The national builders seems to be going back. As you decentralize--especially purchasing--that minimizes the advantage of geographic spread. It becomes a factor of how well you serve in the markets."

Market dominance matters, Sherman said, because he has noticed big differences in a dealer's financial performance based on its market share. Having less than 10% share typically means you have significantly weaker financials than when your penetration exceeds 20%, he said. Between 20% and 40%, there doesn't appear to be much difference, but once you get above 40% your performance rises again. Sherman said this is in part because having a big market share enables you to use your facility relatively efficiently and not feel the burden of big fixed costs. But he added that in markets where there are no dominant companies, "You see a situation where people are really desperate and the pricing model is just absolutely trashed," with variations in bids of 10% to even 20%. In such occasions, "Somebody is always hungry, and they begin doing desperate things and you lose all stability within a marketplace," he said.

"We had a discussion with one of our major shareholders yesterday," he said. "I really think the most important factor (in our recent performance) is the quality of our people. Our people are very confident now, very aggressive, feel good about the direction we've taken. ... Obviously, getting business from plant closings by our competitors (has helped), but there's still an excess in the supply chain that I don't think this level of business can support. Time will tell. Builders are beginning to realize that there are fewer players. They are starting to move their business to companies that will be the survivors."