Hello, and thank you for being with us. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Smith Douglas Homes Fourth Quarter 2025 Earnings Conference Call and Webcast. All lines are muted to avoid background noise. After the speaker's comments, there will be a question-and-answer session. I will now hand it over to Joe Thomas, Senior Vice President, Accounting and Finance. Please proceed.

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. Smith Douglas Homes reported pre-tax income of $30 million in the fourth quarter of 2024, capping off a very profitable year for a company in which we generated nearly $117 million in pre-tax income. The 836 homes delivered in the quarter were well above our stated guidance range and represented a quarterly record for our company. For the full year, Smith 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 home builders. Overall, we're extremely pleased with our performance in 2024 and look forward to building on the successes we've achieved during the year. Here in the fourth quarter, we generated 569 net new orders. Some of the 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, it has had a negative impact on our margins. We made further progress on improving construction efficiency in the fourth quarter. Cycle times came in approximately 55 working days, excluding our Houston division. Our trade partners and suppliers continue to buy into the Rteam philosophy, which streamlines the construction process and provides a level of accountability that leads to better cycle times. The adoption of the Rteam system in Houston continues to progress. We expect to see real improvement in 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 auction agreement, consistent with our asset-light strategy. This land-light 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 and 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. And 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%. As several of our peers have also reported, January sales started off a bit slow compared to their 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 may 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. A significant expansion throughout the Southeast and Texas over the years and our highly successful IPO last year is all due to the hard work and commitment. With more than 450 team members, we truly appreciate all of you. And now I turn 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 UPCEA 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 the 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 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, with 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 risks 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 on our numbers.

Our first question will come from Michael Rehaout with JPMorgan. Please go ahead.

Hi everyone, this is Andrew Ozzie standing in for Mike. Thank you for the questions. I appreciate the guidance provided. I wanted to clarify what you mentioned regarding the backlog gross margins being around 24%, with the first quarter being slightly below that. Could you elaborate on some of the factors influencing that? It would be very helpful.

The backlog margin is about 24%, primarily due to sales made in Q4. During that quarter, we observed an increase in incentives, which Greg mentioned was related to affordability. Even with the Fed cutting interest rates, we faced challenges as rates moved against us, leading us to offer more incentives to maintain our sales pace. This situation is reflected in our backlog. Looking further ahead, our backlog appears to be increasing slightly, especially when I evaluate its aging through midyear. We're optimistic as sales have improved in February, although incentives are still required to boost volume.

Thank you, Russ. Additionally, regarding the land aspect, is there a framework in place for understanding lot cost inflation that you are currently considering?

That’s really outside of incentives. We’re observing relatively flat average selling prices year-over-year, and those incentives are affecting margins. It’s primarily related to lot costs, which we've discussed previously. I estimate that it's potentially eroding 200 to 300 basis points of margin due to our lot costs being incorporated. The land situation remains difficult and competitive, presenting the greatest challenges. While our vertical costs have been stable, there is some concern with tariffs, the new administration, and the uncertainty surrounding them, as some of our subcontractors are inquiring about surcharges or potential increases. However, there is still significant uncertainty, and we lack a clear understanding of how this might influence us for the remainder of the year.

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 your lot pipeline.

I don’t see lot costs continuing to rise significantly. While we have experienced increases in our land acquisition costs over the past couple of years, I believe they have stabilized somewhat when considering 2026 and later. We haven't thoroughly analyzed it yet, but I can say that the high inflation in lot costs we are witnessing now is unlikely to persist. It seems we are starting to see some stabilization as we look further into the future.

Awesome. Thanks, Russ. And then one follow-up just wanted to touch on community count growth and cadence throughout the year. I know, obviously, there's a lot of moving pieces when it comes to community count. But can 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 pay or pays, etc.

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

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?

Yes. I believe it's the market that has influenced our situation. During our previous call, we observed that rates were beginning to decline as the Fed implemented cuts. However, in the fourth quarter, we saw rates rise again. Consequently, we increased our use of incentives in the fourth quarter and at the start of this year. January saw rates peak, but they are now starting to decrease slightly. Year-over-year, the rates appear nearly flat, which has definitely affected our margins. As you know, our business model emphasizes manufacturing, focusing on pace rather than price. To borrow a phrase from Lennar, that's our strategy for maintaining pace while managing gross margins. We've had to rely more on incentives to drive that pace.

Hey, guys. Good morning. You’ve actually got Steven Mia on for Mike this morning. I wanted to ask about the market assumptions and kind of the outlook you have embedded within the full-year guide and whether or not you have any improvement baked in there? Or if it’s kind of flashing here just kind of your thoughts on how you think about that in making the outlook? Thanks.

We have the communities ready to reach our target of 3,000 to 3,200 closings. A lot will depend on market conditions. February showed an improvement in sales pace, and March has been fairly consistent with that. However, there is still significant uncertainty for the remainder of the year, particularly regarding margins. We believe customers are visiting our sales centers, and traffic has been good. It really comes down to finding the right price, as affordability is key. The main risk lies with margins; we expect to achieve sales volume, but the question remains about the margins and pricing. This is still uncertain. Additionally, vertical construction costs are affected by tariffs, adding more unpredictability. That said, we are optimistic about achieving volume unless we face a major recession or significant job losses. We can help people manage their payments, which affects margins, but we cannot address the issue of job losses.

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 2025 guide for plus 15% and now you're saying low single digits, maybe bridge that delta for us.

I believe it will be in the low double digits, around 12%. We were at 78 and now approaching 90, so it should be approximately 12%. Some of this could depend on timing. We reviewed these numbers just last week, and while we might be able to manage a couple of communities more, it really comes down to how quickly we can secure land. I didn't mention this in our prepared remarks, but there are still challenges in some municipalities regarding approvals, which introduces some risk. However, I think we can get close to that 15% increase.

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.