Smith Douglas Homes Corp. Class A

Good morning. I would like to welcome everyone to the Smith Douglas Holmes fourth quarter and full year 2025 earnings call. 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. Today, we will be limiting you to one question and one follow-up. 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 1 again. Thank you. As a reminder, this call is being recorded. I would now like to turn the call over to Joe Thomas, Senior Vice President of Accounting and Finance. Please go ahead, sir.

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 and full year 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. Posting 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.

Good morning, and thank you for joining us today as we go over our results for the fourth quarter of 2025 and provide an update on our operations here early in 2026. Smith Douglas Homes delivered 780 homes in the fourth quarter, resulting in $260 million in revenue. Home closing gross margin came in at 19.9%, and net income for the quarter was $17 million, or $0.39 per diluted share. For the full year 2025, we delivered 2,908 homes, a record for our company, and produced earnings of $1.19 per diluted share. Despite a difficult demand environment across much of the industry, we were still able to grow deliveries during the year. which we believe reflects the strength of our operating model and the discipline of our teams in the field. Overall, we're pleased with our performance to close out the year as our delivery total and growth margin came in above our previously guided range. We generated 532 net new orders for the fourth quarter, as sales conditions remained choppy to end the year. While maintaining sales pace remains important to us, We chose to remain disciplined in how aggressively we pursued sales during the quarter as the combination of seasonal slowness and aggressive year-end discounting from some competitors created a difficult selling environment. Buyers continued to weigh the benefits of home ownership against their concerns over affordability, which remains a persistent challenge for the buyers despite our leading price points. Financing incentives remained an important tool in alleviating those concerns and solving for monthly payments to fit our buyers' needs. So far this year, we've seen encouraging uptick in traffic and our order activity relative to fourth quarter's levels and continued to actively manage incentives at community level in order to support the sales pace. While we are optimistic that this improvement can carry into the spring selling season, demand continues to remain somewhat inconsistent from week to week. As we wait to see how the remainder of the spring selling season unfolds, we continue to fine-tune our operations in each of our markets through our disciplined approach to our business. Company-wide build times came in at 57 days for the quarter, which includes our Houston division, where we made great strides in implementing our R-team philosophy and aligning the local trades and subcontractors to our streamlined building process. We have significantly improved our cycle times in Houston since entering the market via acquisition in 2023, and Buett has proved that our disciplined approach to home building can be replicated in markets outside of the historical southeastern footprint. Our long-term goal is to continue to grow volume and gain market share via targeted investment through our footprint and opportunistically in new markets as we believe scale is a key driver of success in this business. We know that our path to higher volumes will not be linear, but instead will reflect the natural ebbs and flows of the housing cycle. As we've discussed before, we operate the business with a long-term mindset focused on maintaining pace and positioning the company for growth through the cycle, rather than managing the business around short-term quarterly outcomes. Russ will expand on that philosophy in more detail in his remarks. Spearheading Many of the company's growth initiatives will be Scott Bowles, our new regional president for the southeast. Scott's been with the company since 2017 and most recently served as our Atlanta division president, where he's instrumental in expanding their presence and profitability in this key home building market. We look forward to Scott making a similar impact in his new expanded leadership role. While near-term conditions remain uncertain, the long-term outlook for housing remains compelling as the United States continues to face a structural housing shortage. Our focus remains on building affordable homes in markets experiencing strong population growth and job creation. Our value proposition includes the level of personalization that many builders do not offer at our price point, combined with the build time that few competitors can match. We remain disciplined when it comes to land ownership and leverage and believe that that combination of affordability, operational discipline, and a conservative balance sheet positions us well for long-term success. Our strategy remains straightforward. Maintain discipline through the cycle, protect our production engine, and continue to expand our community base in attractive markets. We believe this approach positions us well continue gaining market share over time. Finally, I'd like to thank all of our team members for their continued hard work and commitment to our company's goals. With that, I'll turn the call over to Russ.

Thanks, Greg. I'll highlight 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 $260 million in revenue, a 9% decrease over the year-ago period. on 780 closings with an average sales price of $334,000. Our home closing gross margin was 19.9% compared to 25.5% in the fourth quarter of 2024. Excluding impairment charges and interest in cost of sales, our adjusted gross margin was 21% for the quarter. Incentives as a percentage of base prices averaged approximately 6.8% during the fourth quarter. up roughly 70 basis points sequentially, reflecting our efforts to maintain sales pace in a challenging affordability environment. SG&A expense for the quarter was $36 million, or approximately 13.8% of revenue, compared to 14.9% of revenue in the fourth quarter of 24. Pre-tax income for the quarter was $16.9 million, compared to $30 million in the prior year period, reflecting the impact of increased incentives and closing cost assistance used to support affordability and maintain sales pace in a softer demand environment. Net income for the quarter was $17 million. Given the nature of our up-sea organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas HomeScore and the non-controlling interests of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations. For that reason, we also present adjusted net income, which assumes a 24.6% blended federal and state effective tax rate, as if we operated as a fully public C corporation. Adjusted net income was $12.8 million for the fourth quarter, compared to $22.7 million in the same period last year. For the full year 2025, we delivered 2,908 homes, representing a 1% increase over 2024 and marking another record year for closings for the company. Revenue for the year was $971 million, essentially flat with the prior year as the modest increase in closings was offset by a lower average sales price of $334,000 compared to $340,000 in 2024. Home closing gross margin for the year was 21.8% compared to 26.2% in 2024. Excluding impairment charges and interest in cost of sales, our adjusted gross margin was 22.3%. The margin compression year-over-year was primarily driven by increased incentives and closing cost assistance used to support affordability and maintain sales pace in what has been a challenging housing environment over roughly the past 18 months. SG&A expense for the year was $139.8 million, or approximately 14.4% of revenue, compared to 14% in 2024. Pre-tax income for the year was $70.9 million compared to $116.9 million in 2024, and adjusted net income was $53.5 million compared to $88.1 million in the prior year. Importantly, despite the difficult demand environment across the housing sector, we were able to grow closings during the year while many builders across the industry experienced declining volumes. We believe this reflects the strength of our operating model and our ability to maintain sales pace while continuing to expand our community base. Net new home orders for the year were 2,726 homes, a 3% increase compared to 2024, with an average order price of $333,000. We ended the year with 512 homes in backlog, with an average sales price of $337,000, representing a backlog value of approximately $173 million. Our active community count increased 28% to 100 communities compared to 78 communities at the end of 2024, reflecting continued expansion across our footprints. Total controlled lots increased 14% to approximately 22,300 lots, with the vast majority controlled through option contracts, consistent with our land-like strategy, which provides flexibility while allowing us to grow in our attractive southern markets. Turning to the balance sheet, we ended the year with $12.7 million in cash and $44.1 million of notes payable. Total equity was $444 million, and our debt-to-book capitalization was 9%. On a net basis, Net debt to net book capitalization was 6.6%, reflecting our continued conservative approach to leverage and maintaining a strong balance sheet as we continue to grow the platform. Before discussing guidance, I'd like to spend a moment discussing our pace over price operating philosophy, which is a central part of how we manage the business through the housing cycle. Our production model is designed to operate at a steady, consistent pace with relatively short construction cycle times and strong pre-sale orientations. That production engine is the core of our operating model, and protecting that engine is what ultimately drives long-term value creation. Home building is inherently cyclical, and during periods of weaker demand, we believe the right strategy is to prioritize absorption and inventory turns rather than maximizing price in the short term. In practical terms, that means we may intentionally accept some margin compression during downturns in order to maintain sales velocity and keep homes moving through the pipeline. Maintaining volume stability allows us to preserve market share, convert inventory, and continue investing in future communities and land opportunities as land prices reset. Importantly, this is not about managing the business for a single quarter. We are managing the company for full cycle value creation. When the cycle eventually improves, the ability to maintain volume and continue investing during the downturn often leads to stronger margins and higher cumulative earnings over time. From an operational standpoint, our current environment is not constrained by production capacity. Our construction engine is operating near optimal levels. The primary challenge today is aligning sales absorption with that production capacity, which is why maintaining pace remains a priority. Because of that dynamic, we continue to evaluate pricing and incentives week to week at the community level. And incentives remain an important tool to support affordability and ensure we maintain the sales pace necessary to keep our production engine operating efficiently. The bottom line is that we are protecting the production engine because that is what compounds value over the housing cycle. While demand conditions remain variable week to week, the early year improvement in absorption is a positive signal as we move into the spring sowing season. At the same time, we continue to evaluate pricing and incentives carefully across our communities and will adjust them as needed to maintain a pace supportive of our operating model. From a broader macro perspective, the housing market has been operating in what we would characterize as a recessionary environment for roughly the past 18 months, primarily driven by affordability pressures and higher mortgage rates. Looking ahead, the macroeconomic environment remains uncertain. Recent economic data has shown mixed signals, and geopolitical developments continue to create volatility across global markets. We are also monitoring labor market trends closely, including last week's employment report, which showed some signs of job softness. While the labor market remains generally healthy, employment trends are an important driver of housing demand and something we will continue to watch carefully. Finally, given the recent performance of our stock, we believe the current valuation presents an opportunity to opportunistically repurchase shares under our existing buyback authorization. With that said, I want to reiterate that our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining a conservative balance sheet. However, when market conditions allow, and we believe our shares are trading below intrinsic value, share repurchases can represent an attractive and disciplined use of capital. For the first quarter of 2026, we currently expect closings between 575 and 625 homes. Average sales price between 330,000 and 335,000. and gross margin between 17.5% and 18%. Given the continued variability in demand conditions, we are not providing full-year guidance at this time. We believe the primary risks to our outlook remain tied to broader macroeconomic conditions, including mortgage rates, consumer confidence, and employment trends. We are confident that our competitively priced product portfolio, land-light approach, efficient operational framework, and growing community footprint will enable us to further increase our market share in the future. I'd now like to turn the call over to the operator for instructions on Q&A.

At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. In the interest of time, we ask you to limit to one question and one follow-up. And your first question comes from the line of Michael Rejo with J.P. Morgan. Please go ahead.

Hi, this is actually Nick Calra. I'm for Michael. Thanks for saving my questions. Good morning. First, would love to get any color that you might be able to provide on sales pace, as well as pricing and incentives, trends relating to both of those factors so far in one queue. To the extent that you can, that'd be great.

Sure. It really followed traditional seasonal patterns. So January, a little bit slower, picked up in February. And the last couple weeks here to begin the month of March, you know, trended even a little bit higher. So, you know, trending in the right direction. Our community count is up pretty good year over year. You know, we were up roughly 28% year over year. on a per community basis, it's slightly down year over year. But some of that is just also the way we count communities. So we've got, you know, I don't have the exact number, but we've got several communities in that 100 community count number that don't yet have full models and we're pre-selling. So I wouldn't necessarily – or consider so much kind of the absorption pace year-over-year. I think it still feels pretty good, even though the absolute numbers may look a little, you know, flattish or even down on a pace. But, again, like I said, that's more about, I think, just the way we're counting communities a little bit. But, yeah, the trends so far for spring selling season have, you know, continued to – to move up and but like we said in the prepared remarks it's you know it's it's inconsistent you know we don't we don't see enough enough of you know weekly weekly trends yet to say hey you know things are things are great but so far so good all right that's helpful thank you and then secondly with

I'd like to – would you call out any trends, any areas of relative strengths and weaknesses across any of your major markets? Any color there would be helpful.

Yeah, you know, I think there's a lot of similarities in our markets, and they all seem to be pacing, and as Russ spoke to, are trending differently. seasonality seems to be pretty consistent across all those markets. You know, we've got some new markets just starting off that, as you said, we've got models that are not yet open that we're counting a number of communities in that, you know, we're hopeful once models are open, those markets will be at the same pace as well.

All right, great. Thanks so much. I'll pass it on. Thank you.

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

Thanks for taking my questions. Just to follow up on the 1Q dynamics, I mean, you talked about maybe stepping back from some of the aggressive behavior in fourth quarter, but based on your margin guide for One queue, it seems like you may have then leaned back in and hence the conversation about your prioritization of price. But can you just talk a little bit more about what's driving the decisions there? Like, you know, what's driving you to lean back into incentives? And can you characterize relative to the 6.8 that was in the four queue closings? you're guiding to a meaningful step down in gross margins in 1Q. What is the assumed incentive load, and what are the other moving pieces around land costs and other dynamics?

Yeah, thanks for the question. So, remember, a lot of what we were selling in Q4 is going to close in Q1. So, we leaned a lot heavier into incentives in 4Q. with some of the uptick that we're seeing, you know, in traffic and, you know, and again, don't get me wrong. I mean, we are seeing an uptick, you know, sequentially, but it's the traditional spring selling season that we've hit. So it's a good trend, right? It's moving in the right direction. But we continue to monitor it on a division by division and community by community basis. And so we are We're looking where we can maximize some margins, pull back on incentives, but then again, we're not going to sacrifice pace. And so, as long as we can continue to get the pace, then we'll, you know, that's going to be our, where we decide to moderate, you know, incentives. And so, yeah, we're looking probably sequentially at about, you know, 100, 150 basis points just in the closings, but again, You know, when you look at what we're doing from an incentives on sales, you know, I think it's, you know, we're seeing a similar trend from Q4 to Q1 and kind of the incentives. But the one thing I would add is, you know, forward commitments, the cost of forwards has come down with the rate environment. So that's good and that'll help us, you know, a bit. But we're also looking at, you know, just just reducing or discounting base prices to get an attractive number out there. For us, it's definitely about payment. We are seeing with our new communities coming online that the average sales prices are coming down. We're also looking at bringing some smaller product online. And so that's also impacting a bit of the sales price and margins. But, you know, at the end of the day, we are focused on getting a pace. And as Greg and I mentioned on the prepared remarks, operationally, things are running very smoothly. You know, we want to keep our trades busy. You know, we think that's a competitive advantage, keeping pace, keeping trades busy. but in order for us to keep building, we've got to keep selling. Again, we're going to continue to monitor it from an incentive, whatever we can do to keep that pace. We really want to get back to a pre-sale orientation. This market has been really very spec heavy, it reflects a lot of what our competitors are doing. We're still not seeing resale competition come back in any meaningful way. You know, traditionally, resales are always our biggest competitor. But that's, that's, you know, not the case. But yeah, so we're, you know, it's still hand to hand combat. Hopefully, that gives you a little bit. Yeah.

Yeah, that's helpful, Russ. I guess one more clarification and then a cleanup question. Just on the, since you're, it seems like you may draw a distinction between the base price reductions and the incentives. Can you just clarify the 6.8 and then going up 100, 150 basis points? Is that inclusive of both price reductions and financial incentives, or is that just the, okay.

Yeah, that includes everything. Yeah, so just to be clear, what we're counting in that 6.8 is closing cost incentive, price discounts, and forward commitment costs. And so forward commitment costs and price discounts are contra revenue, so they show as an offset to revenue. Closing costs are sitting in cost of sales, but we add those up to give you a 6.8 number.

Okay, good. Thanks. The cleanup question I had, SG&A, was there anything unusual in the quarter? Because you have been – your revenues are running down. Your SG&A as a percentage of revenues in most recent quarters has been running up year on year. So it was a little surprising to see, like, a year-on-year decline in percentage of sales. Was there anything kind of one-timey in nature around troughs or things like that?

Yeah, the biggest driver, you know, we fully expect to continue to get SG&A leverage, and obviously that's part of pushing scale. But right now we've got a few things pushing SG&A higher where we're not getting the kind of a matching revenue. So when we've opened up our new divisions, so we've got, you know, G&A, SG&A costs coming through in Dallas-Fort Worth. Greenville is still getting off the ground. We opened up Gulf Coast, and then we've divisionalized a couple of – we took Atlanta. Atlanta was getting too big. And so we've divisionalized Chattanooga out of the Atlanta division, and then about 18 months ago we divisionalized Middle Georgia. So we've got a little bit more G&A, SG&A running through the business as we've continued to expand the footprint that once we get up and running at full capacity in those divisions, we should start to – see, you know, better overhead leverage. Okay.

Thank you.

Thank you.

Your next question comes from a line of Rafe Yadrosich with Bank of America. Please go ahead.

Hi. Good morning. Thanks for taking my question. Good morning. Just following up on the last question that Mike asked, The SG&E dollars on a year-over-year basis are down, I think it's $7 million year-over-year, and there was, like, quite a bit of leverage. Just is there, like, an incentive comp that came down in the fourth quarter that we should be thinking about reversing as we look at 26? Just wondering if there's any – because, like, obviously I understand the things that are driving it up, but there was a lot of leverage in the fourth quarter and just Wondering what drove that.

Yeah, yeah. No, you hit it on the head. You're hitting a very, you know, good pain point for us. We more than in prior year, we more than hit target on bonuses. So our incentive compensation was higher in the prior year. And then this year, we did not – Yeah, hit target and so it was about half of you know what what our target incentive comp. So you know good. That's a good point. I think you know kind of to Mike's and I probably didn't address it 100% accurately. But yeah, we we had some incentive cop come down, but then the offset to that was was the new new divisions that were not fully operational.

Okay, that helps. And then in terms of in the past, you've given some really helpful color on what you're seeing in terms of land inflation, like what you expect to be flowing through the P&L. Can you just help us like how we should think about 26? And then for land that you're contracting today, are you starting to see – relief or prices to come down or stabilize? When will that start to be maybe a tailwind to the margins?

We're definitely seeing land costs increase in 26 from what we expect in our budget in closing. Now, again, that's because we're closing on stuff that's got a basis that and acquisitions that we've had over the last two, three years. So you've still got some higher costs flowing through there. That said, any deals, and again, we look at this on a deal-by-deal basis. We look at our takedowns. We go back to developer partners where we can and try and renegotiate because, look, it's no doubt when we did some of these deals, the market was different. I think our developers understand that. And so in some cases, we are able to renegotiate. So we are seeing more of that happen. Joe's going to kind of look at the cost, but I think, you know, give you maybe a specific number and what we think land costs as a percentage of revenue will look like in 26, but it'll be up slightly. And then just on new deals, new acquisitions that we're seeing, we're definitely seeing a reset happen. You know, we'd love it to happen faster and we'd love it to happen at deeper discounts, but folks are getting more realistic. So we are starting to see a reset. And, again, that's why, you know, we talk about continuing to push pace. Because if we're not out selling and moving inventory, well, then we're not out buying and we're not going to be taking advantage of, you know, the price reset, right? So that's why we think it's real important to continue to push pace through this cycle because, you know, we'll continue to keep our market share, not to mention, you know, we should expand market share through the downturn. And then when things get better and they will get better, through the cycle, when we come out the other side, we'll have increased that market share and then we should be the, you know, get a benefit for, you know, the pricing power that we'll get and the margins coming back out the other side. So, it is important for us to continue to, you know, work it like an assembly line.

Thank you. That's helpful.

Sure.

Your next question comes from the line of Ryan Gilbert with BTIG. Please go ahead.

Hi. Thanks. Good morning, guys. Good morning. Just, yeah, first question, just given the comments around staying disciplined in the face of some pretty heavy discounting in 4Q, I'm wondering how your spec count looked throughout the quarter, how you exited the quarter in terms of specs, and then, you know, I guess, what specs look like, you know, how specs, what the spec count looks like heading into 1Q26 and how you're thinking about it this spring?

Yeah. So, ideally, we'd love to have everything, you know, under construction pre-sold, right? That's what we want to get back to. And the reason for it is, you know, having a pre-sale orientation really gets you a higher value on those homes from your buyers, right? Because when those buyers select, you know, to go via presale, they're putting in options that they want. We're not having a discount as much. And so, we're trying to push more presales. That said, given the environment, you know, specs are probably running about, you know, half of our current inventory. But that's okay. You know, the biggest thing is even though we count it as a spec, we're putting those under contract. We're not getting a ton that are going, you know, past, you know, completion or certainly past 30 days completion. And we're really pushing to get those sold before what we call line in the sand or when we, you know, pretty much drywall stage. So, but again, that goes back to the fact that, you know, we really run it more like an assembly line. Like production is our... production is the most important where we keep that running. And so we're trying to match sales pace with that production and just keep it moving. So we've got the, you know, as we look forward to 2026, so, you know, even though our backlog and pre-sales are down, not where we want them, our inventory is right where we need them to be. And so, you know, productions, you know, even though we'd like a higher percentage of of pre-sale, you know, we've got to keep that machine going to hit, you know, some of the growth targets that we expect for 2026. So a little elevated, but we continue to chop away at that pre-sale versus spec balance.

Okay. Got it. Thanks for that. Then just secondly, we'd love to get an update on your strategy around land in terms of, you know, preference for finished lot purchase agreements versus land banking and how pricing looks and in both of those categories?

Yeah, so thanks for the question. We are almost always first looking to do lot, finish lot, take down. Those opportunities are still out there. Secondly, we'll go to our land bank partners and structure the deals in an array of different manners. I would think, you know, if we look to land and to add a little color to some of Russ's earlier comments, we're seeing softening and opportunities in some of the A and B locations that historically for affordability, maybe we didn't get opportunities there or they just didn't solve for our price points. You know, and then the CD type locations are, you know, they're getting shopped around a lot because there's not a lot of demand in those locations. So, you know, we're focused on better locations, focused on terms, and then where we need to engage our land bank partners. Got it. Thank you.

Thanks, Ryan.

That concludes our question and answer session. I will now turn the call over to Greg Bennett, CEO, for closing remarks.

Thanks, everyone, for joining our call today as we discussed our Q4 results. Hope everyone has a great day.

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