Smith Douglas Homes Corp. Class A

Thank you for standing by. My name is Tina and I will be your conference operator today. At this time, I would like to welcome everyone to the Smith Douglas Homes first quarter 2025 earnings 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, Press star one again. Thank you. I would now like to turn the call over to Joe Thomas, SVP of 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 first quarter of 2025, 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 and performance 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 on this call to the most comparable GAAP measures can be found in our press release located on our website and 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, and good morning to everyone. Ms. Douglas-Holmes posted another quarter of strong profitability to start the year, generating pre-tax income of $19.6 million, or net earnings of $0.30 per share. Home closing revenue was $225 million in the first quarter, representing a 19% increase over the first quarter of 2024. Home closings gross margin for the quarter came in at 23.8%. which was higher than the guidance range we shared on our last call. We generated 768 net new orders in the first quarter on a sales pace of 3.1 homes per community per month. Overall, I'm very pleased with our execution to start the year and believe Smith Douglas remains on track to achieve our long-term goals. We experienced normal seasonality during the quarter, with the quarter activity improving as we headed into the spring. We had solid traffic throughout the quarter. The sales conversions were negatively impacted by affordability concerns and macro uncertainty. Similar to past quarters, we used financing incentives to overcome these obstacles and solve for monthly payments that would fit our buyers' needs. While there are many factors that affect our business that are out of our control, there are many things we can do to optimize our performance in any demand environment. First, it's controlling land through option agreements rather than owning it outright. At the end of the first quarter, less than 5% of our unstarted controlled lots were owned on balance sheet, while the remainder was tied up through option and land banking agreements. This landline strategy gives us some degree of flexibility with respect to our lot takedown timing if needed and limits our downside risk should market conditions soften. Another factor within our control is how quickly we build our homes. For those of you that followed the Smith Douglas story, you know we're highly focused on improving build times and turning our inventories as fast as possible. Not only does this improve our return on capital, it also limits the possibility of cancellation thanks to a shorter timeframe between sale and close. As of the end of the first quarter, our cycle times averaged 56 days including Houston. We also made further progress during the quarter getting Houston Division and their trade partners on board the R-Team platform, and we expect to see build times move closer to the company average over time. A third factor we focus on at Smith Douglas is limiting the amount of spec inventory for sale in our communities. We believe our business runs better and more profitably when we pre-sell our homes. This gives buyers the ability to make important design decisions for their home and allows us to implement lot premiums and offer higher margin home upgrades to their communities, which we feel reduces our cancellation rate as the buyers become attached to their home they have designed. In summary, while there's more uncertainty today around the economy and our industry than in previous quarters, we built Smith Douglas to weather the ups and downs of this business. We remain focused on our long-term goals of growing our market share and achieving better economies of scale while maintaining a strong balance sheet and focusing on returns. This strategy has worked for our company since its inception, and we believe we'll continue to do so into the future. With that, I'd like to turn the call over to Russ, who will provide more details on our results this quarter and give an update on our outlook.

Thanks, Greg. I'll now walk through our financial results for the first quarter and then provide an update on our outlook for the second quarter. We closed 671 homes during the first quarter, up 19% from 566 closings in the same quarter last year. Home building revenue was $224.7 million, an increase of nearly 19% over the prior year. Our average sales price was approximately $335,000, which is up slightly year over year due to shifts in geographic and product mix. Gross margin came in at 23.8%, which was at the high end of our guidance range and compares to 26.1% in the prior year. On an adjusted basis, excluding a $642,000 impairment charge related to a Houston community we exited during the quarter, our gross margin would have been 24.1%. Our lower year over year margin reflects the impact of higher average lock costs, which were 25.5% of revenue in the current quarter versus 23% in the year ago period, as well as rising incentives and promotional activity, which totaled 4.7% of revenue this quarter, up slightly from 4.5% a year ago. SG&A was 14.7% of revenue compared to 14.5% last year, driven primarily by increased payroll and performance-based compensation expense. We continue to tightly manage overhead while supporting our growth. Net income for the quarter was 18.7 million compared to 20.5 million in the prior year, and pre-tax income was 19.6 million versus 21.4 million. Our numbers for the quarter include a $716,000 charge related to the abandonment of a lot option deal with a developer, which is included in other income and expenses. This is related to the same community where we recorded the $642,000 impairment I mentioned earlier, which is included in our cost of home closings. Adjusted net income was $14.7 million compared to $16.1 million in the prior year. As a reminder, given the nature of our up-sea organizational structure, our reported net income reflects an effective tax rate of 4.4% this quarter, which is attributable to the approximate 17.5% economic ownership held by public shareholders through Smith Douglas Homes Corp. and Smith Douglas Holdings LLC. Because the majority of our earnings are allocated to our Class B members, which is shown as income attributable to non-controlling interests on our income statement, we provide adjusted net income, which assumes 100% public ownership and a 24.9% blended federal and state effective tax rate. We believe this measure is helpful in evaluating our results relative to peers with more traditional C corporation structures. Additional details on our structure and related income tax treatment can be found in the footnotes to our financial statements. Turning to the balance sheet, we ended the quarter with $12.7 million in cash and had $40 million outstanding on our unsecured revolver with $195 million available to draw. Our debt to book capitalization was 9.5% and our net debt to net book capitalization was 6.9%. I am also happy to announce that we are in the final stages of finalizing an amendment to our credit facility that will, among other things, increase the total facility size by $75 million to $325 million and extend the maturity, which will be four years from the closing date. We appreciate all of our existing and new banking partners for their unwavering support. Our strong balance sheet and liquidity puts us in a great position to support our ongoing growth. Backlog at the end of the quarter was 791 homes with an average sales price of $341,000 and an expected gross margin of approximately 22.5%. While backlog is lower from the 1,100 homes year over year reflecting a tougher selling environment this year, We did see positive momentum in our absorption pace as we progressed through the quarter. Monthly sales per community improved from 2.4 in January to 3.3 in February and 3.8 in March. In April, we saw that average dip back to approximately three sales per community as we move further into the spring selling season. Affordability remains a key challenge for our buyers, and we've leaned into targeted incentives to support sales. In late March, we launched a $10 million forward commitment program offering a 4.99% mortgage rate buy-down in select communities, which helped boost conversion rates. In the trailing 13-week period, our total incentives and discounts have averaged just over 7%. Turning to our second quarter outlook, we expect to close between 620 and 650 homes, with an average sales price between $335,000 and $340,000. Gross margin is projected to be in the range of 22.75% to 23.25%. While incentives will continue to pressure margins, we are maintaining discipline in how and where we deploy them. We ended the first quarter with 87 active communities and expect to see that number continue to grow modestly throughout the remainder of the year. We're actively opening new communities across multiple divisions and remain focused on supporting a stable and scalable growth platform. Before I conclude, I want to reiterate that while we're encouraged with our start to the year, our outlook does include several risks. As always, our ability to achieve these results will depend on maintaining an adequate pace of sales, bringing new lots and communities online as scheduled, and managing cost pressures, particularly in labor and materials. Additionally, broader macroeconomic factors such as inflation, employment trends, interest rates, and consumer confidence could create headwinds to demand and impact the timing or volume of sales and closings. We remain focused on executing what we can control and believe our land light model, steady operations, and financial strength position us well to navigate these challenges over the long term. With that, I'll turn the call over to the operator for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad, and we will pause for just a moment to compile the Q&A roster. Our first question comes from the line of Michael Reha with JP Morgan. Please go ahead.

Hi, good morning. This is Alex Isaac on for Mike. Thanks for taking my question. you mentioned on the demand side that there's some some some weakness and a lot of affordability challenges i want to ask sort of how you how you characterize the spring sun season overall and expectations for that and also if you feel like that demand weakness is consistent across geographies or more specifically uh you see more specifically in certain geographies than other geographies yeah so i think uh thanks for the for the question that

You know, I think the spring demand has been there all along. It's just, you know, week by week, as we said, we're just solving for payments to reach, you know, affordability in each market. And it seems to be across our entire footprint, demand's been relatively the same.

I appreciate the color on that. And then as my follow-up question, I wanted to ask, you know, on the land side, you mentioned some land inflation. I'm just curious about any color on the land environment and your ability to find new lots, both, you know, unfinished and finished lots, as well as how we should think about, you know, the land environment for the company going forward.

Yeah, it's, we've obviously been able to find deals, right? We've more than doubled our controlled lot count over the last, you know, since we've been public. Land inflation certainly over the, you know, prior 12 months has continued to increase, but we've always said, you know, I think land sellers are usually when things have started to slow, land sellers typically in our experience are the last ones to figure out that, you know, maybe their land isn't worth what it was previously, but we are starting to see a few cracks in the sellers out there. I think it is transitioning a bit to a buyer's market, and so you are starting to see some land prices moderate. I mean, there's definitely demand out there, right? I think builders are still out looking for deals, and so we're competing every day, but You know, the land that's in our backlog and as we mentioned on the call, you know, we're, we're working off a land that, you know, the prices over the last few years, it continued to increase. And so the stuff that we're closing, you know, obviously has a has a higher basis than what we, what we had previously. But we are starting to see, you know, a little bit of negotiating power in some of the land deals. So hopefully that trend continues, especially as affordability remains challenging. I appreciate all the help.

Sure.

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

Hey, good morning, everyone. You guys actually got Steve and Mia on for mics today. Thanks for taking my questions. I wanted to start outlook beyond 2Q. I appreciate the macro outlook has gotten a lot murkier since we last spoke, but I just wanted to get a sense of how you guys are kind of formally thinking about the guideposts you guys have been giving us for the full year. I believe those are around 3,300 homes, just kind of, you know, beyond the second quarter. What do you guys kind of have in mind? How are you guys thinking about that? Thanks.

Yeah, you know, I wish we had the perfect crystal ball. It's kind of the reason that we didn't, you know, really give specific guidance. I think when we talked – you know, towards the end of last year and, you know, going back a little bit and when the Fed started to cut rates, you know, we were hopeful that that would, you know, help with affordability. But, you know, as we moved in the first quarter, clearly, you know, the mortgage rates, you know, were not in our favor, right? They peaked in January and they've still, you know, looking today, I think the 10-year yield is back up to about 4.5%. So affordability is a challenge. Like Greg said, You're seeing people need homes, there's demand out there. As it relates to full-year guidance, that's why we really kind of pulled it off. It's really kind of a day-to-day thing as we just kind of navigate what's happening with more of the macro environment. We certainly have the communities and the lots to get to our 3,000, 3,100 closing target. So, you know, that's clearly the objective. A lot's going to depend on, you know, how the balance of selling season shakes out and, you know, where we see the, you know, kind of the demand for the back half of the year, really more so the affordability, you know, and what we're able to do. We're trying to balance, you know, margins with, you know, really balance our incentives and try to find that kind of, you know, appropriate mix. So, Look, our target, you know, without giving specifics or definitive guidance, we're certainly targeting that 3,000, 3,100. Like I said, I think we can get there, but it's really going to be more of a macro story.

No, definitely appreciate that, and also appreciate all the color things that, and I wanted to jump ship to Houston and kind of the you guys have been making recently. It's great to hear that there's, you know, further progress with the year to date and I guess since the acquisition on like the art team integration in Houston. But I think it would be helpful for everyone, you know, in terms of framing the story, like there's any further color you can provide on that progress and any potential time frame you may have for milestones there within Houston and the other expansion areas, which would be really helpful. Thanks.

Yeah, thanks for the question. We are seeing really big improvements in cycle time in Houston. We're up and running in our R team process across the footprint. We are, I think, implemented on a 70-day schedule currently that we've rolled out. We're not executing to a 70-day schedule quite yet, but our goal is to be there by the end of this year. So, yeah, and that's from a high point of cycle times near 200 days when we closed on that acquisition. So I'd say there's been quite a bit of improvement there.

Yeah, absolutely. Thanks. Thanks for the questions, guys. I'll pass it on. Thanks for the answer. Pass it on.

Our next question comes from the line of Jay McCandless with Wedbush. Please go ahead.

Good morning, everyone. So three questions for me. I guess, could you talk a little bit about what you've seen so far in May in terms of demand and pricing power?

I think it's been pretty consistent with April. We haven't seen any real shift. Like I said, people are still coming into the sales office. We're seeing traffic, but it's still a challenging time. environment from an affordability perspective. And then even from a competitive perspective, when you see a lot of new home builders, you know, offering, you know, some pretty big incentives that we're in. And, you know, a lot more, you know, spec inventory on the ground. So it's challenging, but like I said, I don't see a huge difference from what we've seen in April.

And so, not to harp on it, but are you guys pulling the fiscal 25 guidance or do you still think you can hit some of the targets that you laid out last quarter?

Yeah, look, I think for the last question, it's really, like I said, we've got the community count. We've got the lots in place. we didn't want to comment specifically on it. I think our target is still to get to that 3,000, 3,100, you know, that's our goal. And if the macro environment, you know, remains, you know, gets a little bit better, remains steady, I think we have a good shot at hitting it. It's just, it's really stuff that's out of our control, right? So we're you know, I think some of our competitors, some of the other new builders have, you know, pulled back on some guidance. It's just, you know, it's still a little bit early to tell based on, you know, where things are moving. You know, obviously this new administration, you know, there's been some, you know, quite a bit of choppiness, you know, from a macro perspective. So, you know, I'll be honest. I mean, it's difficult to forecast in this environment, right? But look, our goal, and like I said, we're We still have a good shot at getting to our 3000 plus target.

And then the last question for me, I'm sure you guys saw the news on Lance yesterday. Any comments you might make on that and any impact that could have on Smith Douglas?

No, I mean, we don't we wouldn't comment on somebody else's transaction traditionally. But, you know, the only thing I would say is, look, it's you know, it's Apollo. So it does show some pretty good support from a pretty good backer that, you know, clearly they see some opportunity to make an investment of that size in the home building space. So we like to see that. And it won't, you know, no impact from our standpoint. We don't see land C or new home in our markets.

Okay, great. Thanks, guys.

Sure. Sure.

And our final question comes from the line of Russ with Bank of America. Please go ahead.

Hi. Good morning. It's Ralph. Thanks for taking my question. Russ, can you just, on the second quarter gross margin guidance, relative to where you came in in the first quarter, which I think was pretty solid. Is the quarter-over-quarter decline just higher incentives, and that relates to that forward commitment?

Yeah, that's, I think, a good part of it, and to the extent that we may do a little bit more, but that's definitely a driver, yeah.

Okay. And then when the backlog year over year is down, I think over 25% here, but you've been able to continue to grow deliveries. Can you, the backlog diversion has obviously improved a lot over the last year. Where can that go from from here? Do you still see additional opportunity to drive the backlog conversion tire? And is there sort of a cap to that? Well, you'll have to sort of refill the backlog with more orders to continue to grow deliveries.

Yeah. And that's a great point. We you know, there's there's a couple of things there. You know, we are cycle cycle times are improving. But yeah, we came in with a few more specs than we had last year. So even though backlog's down, we actually had as much, if not a little bit more inventory. And so we're able to, like Rick said, and we've said, there is demand there. So there are people coming into the sales offices, we're getting traffic, but it's just taking higher incentives to get people to convert. And so that's why margins are dipping a bit, but we're still able to you know, get some pretty good closing numbers. And so even though backlog is down and we're traditionally and obviously our business model is focusing on pre-sales, we've still got the inventory, you know, we're clicking on, you know, pretty much all cylinders from an operating perspective. And so we're really just taking a measured approach to how we're pricing. And, you know, we don't want to get We're not looking to fill up a whole bunch of spec inventory, and so as we start to see maybe a few more specs or a little bit of slowness in a community here or there, we'll turn the dial on incentives and move the inventory. That's a long way of saying, yeah, we can definitely increase that backlog conversion rate because, you know, we'll just continue to turn the dial and just, you know, move some more of that speculative inventory that's sitting in some of those communities.

Okay, that's helpful. And then is there any just update on the mortgage JV that you have right now? Any plans to change that relationship?

No, actually, I tell you, it continues to get better every week. It's part of the reason that really, and it's been very helpful in pushing out some of these, you know, a very consistent message on the incentive side. And so we were using, you know, through our partner, which is Loan Depot, using them for our forward commitments and just pushing out a consistent message. We are now fully licensed in all of our markets. We've got loan officers that have been operating in all of our markets, and our capture continues to get better. And I want to say last week, our capture was 56%, you know, for our mortgage partner. And so obviously, that's, you know, our goal is to be at 90 plus percent. But, you know, we were still using, we were not using our Ridgeland brand yet in Atlanta, because we had just gotten licensed. And that's obviously our biggest market. But in Everywhere else, capture has been very good, and we think it will continue to improve. So looking forward to it.

I think the operator said I'm the last one, so if I could sneak one more in here. In your core markets, are you seeing a pullback in starts? from competition or have you adjusted the start space at all? And obviously some of the larger public builders that have already reported on a year-over-year basis, we've seen starts down a lot. I'm just wondering if some of the standing, you know, kind of sitting finished spec inventory out there from competitors, do you think that's a problem right now or an issue? And is there any sign that that's sort of improving and there's been an adjustment on the start side?

Yeah, hello, Ray. I'll take that. We have not had an interruption in starts on our side. We are hearing discussion about slowing starts from competitors and probably seeing a little bit of evidence of that. You know, we went in, you know, to tag on to Russ's backlog question. previous question. We pushed start in the end of 2024 to be certain that we kept our machine running. That is the kind of environment around rates and we know how we ended Q4 with sales last year. It built some inventory, but that inventory coming into the year you know, drove a lot of conversions for us in Q1. We've grown backlog since the beginning of the year. And we continue to push starts every day. We're hitting on our starts, actually ahead of our starts budget for the year. And I've been refreshed to see the past two weeks that we've outpaced with our pre-sales in our orders. You know, I'm optimistic that we'll continue to be able to build on our model and that our pre-sales will overtake the inventory that we've built. And, you know, in our cycle times, as we said, helps us to be able to convert that buyer quickly.

That's helpful. Appreciate all the color, guys. Thank you. Thanks, Rick.

And this does conclude our Q&A session. I will now turn the call back over to Greg Bennett, CEO, for closing remarks.

Yes, thank you, Tina. Thank you everyone for joining us. Appreciate all the interest in Smith Douglas and hope to speak again next quarter.

Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.