Smith Douglas Homes Corp. Class A

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smith Douglas Homes fourth quarter 2025 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again. We kindly ask that you please limit your questions to one and one follow-up. I would now like to turn the conference over to Joe Thomas, Senior Vice President, Accounting and Finance. Please go ahead.

Good morning and welcome to the earnings conference call for Smith Douglas Homes. We issued a press release this morning outlining our results for the fourth quarter of 2024, which we will discuss on today's call and which can be found on our website at investors.smithdouglas.com. or by selecting the investor relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the investor relations section of our website. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals, outlook, performance, and ability to gain market share, including in uncertain environments, are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties, and other important factors as detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed in this call to the most comparable GAAP measures can be found in our press release, located on our website, and in our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Thanks, Joe. Good morning to everyone joining us on today's call as we go over results for the fourth quarter of 2024 and provide some insight into the state of our home building operations for the first few months of 2025. Ms. Douglas Holmes reported pre-tax income of $30 million in the fourth quarter of 2024, capping off a very profitable year for our company in which we generated nearly $117 million in pre-tax income. The 836 homes we delivered in the quarter were well above our stated guidance range and represented a quarterly record for our company. For the full year, Miss Douglas delivered 2,867 homes. Our gross margins for the quarter came in as expected at 25.5%, which was the midpoint of our guidance. For the full year, gross margins on home closings averaged 26.2%. The combination of strong delivery growth, healthy margins, and quick inventory turns resulted in an adjusted return on equity of 29% for 2024, well above the industry average for publicly traded homebuilders. Overall, we're extremely pleased with our performance in 2024 and look forward to building on successes we've achieved during the year. During the fourth quarter, we generated 569 net new orders. Similar to last quarter, price incentives and closing cost support were an important sales tool to all our communities. While this has been an effective way to address affordability issues, but it had a negative impact on our margins. We made further progress on improving the construction efficiency in the fourth quarter, cycle times coming in at approximately 55 working days, excluding our Houston division. Our trade partners and suppliers continued to buy in to the R-Team philosophy, which streamlines the construction process and provides a level of accountability that leads to better cycle times. The adoption of the R-team system in Houston continues to progress. We expect to see real improvement to their operating efficiency in the coming quarters. Our ability to turn inventory quickly is a key component of our home building strategy, and we remain committed to making incremental improvements across our footprint. We ended the year with 19,522 controlled lots. Of our unstarted controlled lots, 96% were controlled via option agreement consistent with our asset loss strategy. This land-lap model allows us to control a significant number of lots in a capital-efficient manner while offloading much of our risk associated with owning the developing land. As we look ahead to 2025 to move into the heart of the spring selling season, there are microeconomic and political uncertainties particularly around interest rates and tariffs that may cause potential headwinds for the business. Anticipated relief in mortgage rates after the Fed started cutting in the back half of 2024 never materialized. In fact, rates increased throughout the fourth quarter of 2024 and into January, where the average 30-year mortgage reached a peak of over 7 percent. As several of our peers It also reported January sales started off a bit slow compared to our expectations before picking up through February and early March. Despite seeing some stabilization in inflation, affordability remains a significant challenge for our buyers. Additionally, the lock-in effect where homeowners are reluctant to sell due to their low mortgage rates is keeping housing inventories near historic lows and contributing to home prices remaining higher. While there might be some near-term headwinds and additional pressure on margins, longer term, we continue to remain optimistic about the outlook for our industry and especially Smith Douglas. We believe our manufacturing approach to home building, operational efficiency, and land-light strategy will serve us well in any environment. Our balance sheet remains in excellent shape. We have a real opportunity to gain market share as we expand our operations throughout the Southeast. Before I turn the call over to Russ, I want to thank all of our team members for their contributions to a remarkable year for our company. Smith Douglas has come a long way since we started operating out of Atlanta 17 years ago. Our significant expansion throughout the Southeast and Texas over the years, and our highly successful IPO last year, It's all due to the hard work and commitment of more than 450 team members. We truly appreciate all of you. And now I turn it over to Russ.

Thanks, Greg. I'm going to highlight some of our results for the fourth quarter and full year and then conclude my remarks with our outlook for the first quarter. We finished the fourth quarter with $287 million of revenue, a 32% increase over the year-ago period. On 836 closings, for an average sales price on closed homes of $344,000. Our gross margin was 25.5% and SG&A expense was 14.9% of revenue. Pre-tax income was $30 million with net income of $28.8 million for the quarter. Given the nature of our up-sea organizational structure, our reported net income reflects an effective tax rate of 4.2% on the face of our income statement. This income tax expense is primarily attributable to income related to the approximate 17.3% economic ownership of our public shareholders that is held by Smith Douglas Homes Corp and Smith Douglas Holdings LLC. Our adjusted net income, which is a non-GAAP measure that we believe is useful in providing a comparison to more traditional C corporations, is $22.6 million for the quarter. Adjusted net income assumes a 24.6% blended federal and state effective tax rate as if we had 100% public ownership operating as a subchapter C corporation. We believe adjusted net income is a useful metric because it allows management and investors to evaluate our results more effectively to industry peers that may have a more traditional tax and organizational structure. You can find more information about our structure and income taxes in the footnotes of our financial statements. For the full year 2024, we closed a record 2,867 homes with corresponding revenue of $975 million, a 25% and 28% increase respectively over prior year. Our gross margin was 26.2% for the full year compared to 28.3% in 2023, primarily driven by an increase in our average lot cost, which was 24.4% of revenue versus 21.3% in 2023. Discounts and closing costs were 3.6% compared to 3.4% last year. Our SG&A expense was just under 14% of revenue, including internal and external sales commissions, which were 4% of revenue compared to 3.6% in 2023. Pre-tax income was $116.9 million, with net income of $111.8 million for the year, and our adjusted net income, as previously described, was $88.1 million. We were operating out of 78 active selling communities at the end of the year versus 69 at the end of 2023. We finished the year with 694 homes in backlog with an average selling price of $340,000 and an expected gross margin on those homes of just under 24%. Looking at our balance sheet, we ended the quarter with approximately $22 million of cash and no borrowings under our $250 million revolving credit facility and $402 million of total members and stockholders' equity. Our debt to book capitalization was 0.8%, and our net debt to net book capitalization was negative 5%. We had approximately 220 million available on our unsecured credit facility and are well positioned to execute on our growth strategy, as Greg previously mentioned. Before I speak to our guidance for the first quarter, I'll provide a little more color on what we are seeing through the first couple of months this year. As Greg mentioned, sales started a bit slow in January but picked up in February. Our sales pace per community trended higher at 2.4 and 3.3 sales in January and February, respectively, compared to 3.4 sales per community through the first two months of 2024. Additionally, we have seen an increase in the closing costs and incentives we offer versus this time last year to the tune of about 75 basis points on a relatively flat average sales price. That said, for the first quarter of 2025, we currently anticipate home closings to finish between 625 and 675 homes, an approximate 15% increase over 2024 at the midpoint, an average sales price between 330,000 and 335,000, and gross margin in the range of 23.25% and 23.75%. For the full year, we expect closings to be between 3,000 and 3,200 homes, which is in the range we previously stated on our last call. We believe the primary risk to our projections are around our ability to maintain sales pace and bring our new communities and lots online. Macroeconomic factors and uncertainty around jobs, tariffs, inflation, and interest rates could also have unforeseen impacts to our numbers. With that, I'd like to turn the call over to the operator for instructions on Q&A.

At this time, if you'd like to ask a question, press star followed by the number one on your telephone keypad. We kindly ask that you please limit your questions to one and one follow-up. Our first question will come from the line of Michael Reholt with JP Morgan. Please go ahead.

Hi, everyone. This is Andrew Auzion for Mike. Thank you for taking my questions. Just maybe I appreciate that guidance. I just wanted to maybe dial into the, I believe I heard you say the backlog gross margins are to the tune of 24%, and 1Q is a little bit below that. Can we, if you could bucket out some of the, you know, dynamics there, that would be very helpful.

Yeah, so backlog margin, you heard correctly, it's about 24%. A lot of that is obviously sales that were made in Q4. And so Q4 was definitely, we saw more incentives pick up, you know, where Greg had mentioned, you know, it's an affordability thing. Interest rates really, you know, even with the Fed cutting kind of moved against us. And so we were taking more incentives to try and keep pace. So that's reflective in backlog. When I look out actually a little bit further, you know, beyond what we're seeing for, you know, what's closing in the first couple of months in terms of our backlog, it looks like it's creeping up a little bit. So you're actually seeing it trend a little bit up when I look at kind of our backlog aging through kind of mid-year. So we're hopeful. Again, sales have picked up in February, but, you know, look, incentives are still being used to drive volume. So it's tough. That's where we see the biggest risk, right? This year is going to be mostly in margin. You know, people are showing up into the sales centers. There's definitely demand, but it's an affordability game.

Thanks, Russ. And then maybe secondly, on the land side, is there some way to some framework for kind of lot cost inflation for you guys that you are thinking of currently or that that would be very helpful?

Yeah, that's really, you know, outside of incentives, right? And because we're seeing kind of flat ASP year over year. So you've got incentives that are that are impacting margins, it's lot cost, right? And we've talked about that in the past. I'd say it's, you know, it could be, you know, two to 300 basis points of margin is eroding because of our lot cost, you know, rolling through there. So land is still, you know, challenging. It's competitive. And that's where we see the, you know, the biggest challenge. Our vertical costs have actually been in check. But, you know, now with kind of what we're seeing with tariffs and the new administration and, you know, a lot of uncertainty. You know, we are seeing some of our subcontractors reach out and, you know, look at surcharges or, you know, possible increases, but there's still a lot of uncertainty. We don't have a real clear picture yet on how that might impact us the rest of the year.

Thank you, Russ. I'll pass it on.

Thanks.

Our next question comes from the line of Sam Reed with Wells Fargo. Please go ahead.

Awesome. Thanks. I actually wanted to piggyback off that last question just to comment on lot costs eroding, 200 to 300 basis points of margin. I mean, is that mostly just weighted to 2025, or is there a risk that that erosion kind of persists into 2026 and beyond? Just looking for some context there, given the visibility you have in your out-year lot pipeline.

Yeah, I don't see it. I see it kind of leveling off, you know, based on where our lot costs are. But certainly, as we've been, you know, buying contracting land over the last couple of years, it's certainly increased. But I do think it's leveled off a bit if you kind of think about, you know, 26 and beyond. But yeah, we really haven't taken a deep dive into it. But just sitting here today, I'd say you're not going to see the kind of you know, inflation that you're seeing in the lot costs now. I mean, it's taken a pretty big bump, and I think you kind of see that leveling off a bit as you look towards the outer years.

Awesome. Thanks, Russ. And then one follow-up, you know, just I'm going to touch on community count growth and cadence throughout the year. You know, I know obviously, you know, there's a lot of moving pieces when it comes to community count, but could you just give us some guideposts in terms of how we should think about modeling that over the course of 2025? Obviously, it does have implications on start pays or pays, et cetera, et cetera.

Yeah, it should be pretty radical increase throughout the year, and we were just looking at that. last week, you know, we can see community count growing, you know, low single digits, you know, towards kind of 90 by the end of the year, up from, what were we, 78. So, I'd say it's going to be kind of a ratable increase throughout the year.

That's all for us. I'll pass it on. Thanks. Thanks.

Our next question comes from the line of Trevor Ellenson with Wolf Research. Please go ahead.

Hi, good morning. Thank you for taking my questions. I wanted to follow up on gross margin. Previously, you had talked about 2025 perhaps being in the 25% range, give or take. Starting below that here in the first quarter, you've got some land inflation that will likely continue to work through in 2025. Can you talk about what the biggest difference is now versus maybe a quarter ago when you were talking about 2025? gross margin perhaps being in that 25% range?

Yeah, it's really, it's the market. I think, you know, when we had our call, you know, looking at where we saw, you know, rates had started coming down, the Fed was cutting, and then Q4, you saw rates start to increase. And so we've definitely had a, we had a bigger use of incentives in Q4 and certainly at the beginning of this year, you know, rates peaked, the average 30-year peak in January is starting to come down a little bit. But when you look year over year, I think the rates are almost flat. And so that's really had an impact for sure on where we see margins going. And as you know, you know, our business model, we're very focused on kind of manufacturing. You know, it's a pace over price game. And so, you know, to steal a line from Lennar, you know, that's kind of our buffer in terms of, you know, getting the paces. That's that gross margin. And so we've had to use more incentives to push pace.

Yeah, that makes sense. And then second question on SG&A closing for really good in the quarter. The SG&A still kind of came in towards the top higher end of your range. How are you thinking about leverage on SG&A as we move into 2025? Appreciate it. You guys have spent a lot on growth already. How do you think about levering that?

Yeah, SG&A was elevated in Q4. We actually, so we overclosed from our guidance, and then we hit, you know, a lot of our operational metrics that bonuses are based on. And so we probably had over 100 basis points of SG&A, just an additional bonus accrual that, you know, if we knew we were going to hit the numbers like we did for the year, would have been accrued, you know, more evenly throughout the year. So, That 14.9 would have been probably just south of 14 if we had taken those accruals throughout the year. So that was a big part of it. But yeah, we would expect ourselves to get some good FP&A leverage as we continue to grow the top line. We've got the team in place from a back office perspective. You know, we've got – we're pretty set from that standpoint, you know, as a public company. So we would expect that SG&A number to continue to trend down below 14. You know, our goal would be, you know, certainly, you know, to improve that year over year.

Thank you for all the color and good luck moving forward. Sure.

Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Hey, guys. Good morning. You've actually got Steve and Leah on for mic this morning. I wanted to ask about the market assumptions and kind of the outlook you have embedded within the full year guide and, you know, whether or not you have any improvement baked in there, if it's kind of flash in here, just kind of your thoughts on how you think about that and making the outlook. Thanks.

Yeah, we've got the communities in place, you know, to hit our 3,000 to 3,200 guide on closings. So a lot of it's gonna depend. Again, February picked up from a sales pace perspective. We're seeing March has been pretty consistent with February. But look, there's definitely still a lot of uncertainty going into the balance of the year. But most of that we feel is around margins. We definitely think people are showing up to the sales centers. Traffic has been pretty good. So really for us, I think it's just a matter of finding that right price. It's an affordability game, as I mentioned. So the biggest risk is certainly on the margin side. I think we can get volume, but the big question is at what margin, what price is it going to come? That remains to be seen. So still there's a lot, like I just mentioned before, there's a lot relative to vertical construction costs, because of, you know, what's happening with tariffs and how that's going to impact us. And so that is just a lot of uncertainty there. But we feel, sitting here today, we feel pretty good about getting volume. Again, barring, you know, some sort of major recession or a big shift in employment. You know, I've always said we can kind of cure a payment for folks. And so that impacts margin. But if If people start losing jobs, that's the part we can't fix.

No, it's super helpful. Thanks for all the color there. And then I guess one more kind of piggybacking off the previous care of questions and margin questions, you know, like Trevor had said, the first quarter margin kind of coming in a little lower, mainly as given the market weaknesses. As you think about margin through the balance of the year, is there – well, how – does or higher level kind of given there's so many moving pieces around tariffs? How are you kind of thinking about taking that into the guide? And if I could sneak an extra one in here, are you guys hearing anything on the ground given kind of the recent headlines on immigration and labor as well too? Thanks a lot, guys.

Yeah, from a margin perspective, like I said earlier, you know, we are seeing, it's interesting, our backlog when I look at the aging, It looks like backlog margins picking up. So I think, again, some of our early backlog that's going to be closing this quarter is reflective of probably incentives and discounting we were given on inventory in Q4. But look, I'd be guessing if I told you which way margins are going to go from here. I think, like I said, that's the biggest risk. But we're seeing that low to mid margins right now on what we're selling. But in order to keep pace, that's just going to shift based on where the market goes and a lot of that's interest rates and what happens just more macro level. Then from a tariff perspective, I don't know, Greg, if you have some color on what we're seeing from the SOPs.

Currently, we're not seeing any impact, but we don't have our head in the sand either. We are following a list of items daily, weekly with all of our supply chain vendors and staying alert to those things. But really from immigration, tariff, All those things, as of today, there's not been any impact.

Yeah. You want to touch on the cycle times have actually come down and hasn't been an issue.

Yeah. We were just visiting earlier. Cycle times year over year, we've taken two weeks. We ended 23 at 65 days. We're into 24 at around 55 days. That helps to shrink. backlog, but it also helps with efficiency and cycle and all the things that we're striving for here. So, you know, in light of those things going on, we've still seen some operational efficiencies.

You know, that makes a lot of sense. Thanks, sir. I'll declare you guys.

Again, to ask a question, press star 1, and our next question will come from the line of Jay McCandless with Wedbush. Please go ahead.

Hey, good morning, guys. I guess my first question, Russ, is what have you all been seeing to reduce the community count guide? I think you've given an initial fiscal 25 guide for plus 15%, and now you're saying low single digits. Maybe bridge that delta for us.

I think it's going to be low double digits. I think it's like a 12% because we were at 78, and we'll get close to 90, so 12, you know. So it should be. It should be 12%. Yeah, yeah. Okay, so we get we'll get close. I mean, some of that some of that could just be timing. I mean, this was just kind of the numbers that we looked at, but just last week, but some of that is just, you know, we may get a couple of communities over. It's just how quickly can we get lots and I didn't mention on on our prepared remarks, but it's It's definitely still, you know, challenging in some of our municipalities and just getting through approvals. So there's always that risk. But, you know, I think we can get close to that 15% increase.

And then that's actually my second question is going to be, you know, what's the path for growth this year? Is it going to be mostly organic? Are you guys still evaluating some potential M&A?

All of our closing growth this year is, I'd say organic. We are in Chattanooga. That's being run out of our Atlanta operations, but I think it's close to about 1,000 lots under control in Chattanooga. That's a big part where we push pretty far north in Atlanta. And then we did open Central Georgia. So, you know, that Middle Georgia, Central Georgia area might deliver about 100 closings. But again, that's kind of just an extension of Atlanta growing so big that we've divisionalized that. As we mentioned before, we opened a division in Greenville. We won't get any, you know, we don't think we're going to get any sales and closings this year, although our division president there is doing an excellent job of getting things going. we may have a small opportunity to do something. So everything's organic. We are definitely looking at opportunities. There's still M&A going on. We've seen some deals happen in the industry. We're seeing some packages, but as we've always said, we'll be opportunistic. We're looking at filling in some spots throughout the Southeast and expanding. If we see something we like, we'll look at it. But we're, you know, we're certainly not going to overpay. You know, we're comfortable, you know, doing greenfield startups if we like the market. But, you know, nothing immediate.

Got it. And then the last one I have, just thinking about average closing price for 25. You initially, or you said last quarter, 335 to 345. Is that still a good range, or how should we be modeling that through the year?

Yeah, I think that's still a good range. I think our backlog is right now at 340. And so some of the ASP for this first quarter, it's just really the way our backlog is falling out, and it could be mixed across different divisions. But, yeah, I still think kind of that 340 numbers as we sit here today is still pretty good.

Okay. Sounds great. Thank you.

Sure.

Thanks.

And once again, to ask a question, simply press star followed by the number one on your telephone keypad. Our next question will come from the line of Alex Barron with Housing Research Center. Please go ahead.

Yeah, thank you. I was wondering in terms of the incentives you guys are offering, are they mainly in the way of rate buy downs? or in closing costs, or are you guys starting to see, you know, the need to do price cuts?

It is primarily in closing costs, you know, which also, which include rate buy-downs, and most of our buyers, there is some level of rate buy-down in there. We are discounting as well, so it's a mix, but I'd say it's more geared towards closing cost incentives.

And what about broker commissions? Are you guys, you know, maintaining whatever your standard rate is? Or are you having to feel the need to add bonuses or something like that?

No, it's the same as what we've been doing in the past. We haven't changed. So we're still offering incentives, but nothing out of the ordinary. Thank you so much. Sure.

And that will conclude our question and answer session. I'll turn the call back over to Greg Bennett for any closing remarks.

Thank you, everyone, for joining us today. As always, we're accessible. Give us a call and look forward to chatting again next quarter.

This concludes today's meeting. Thank you all for joining. You may now disconnect.