Good morning and welcome to the Smith-Douglas Homes 3rd Quarter 2025 Earnings Call and Webcast. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question and answer session. To ask a question at this time, you will need to press star or by the number 1 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Joe Thomas, Senior Vice President, Accounting and Finance. Thank you. 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 third 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 this 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 on the call today. In the third quarter of 2025, Smith-Douglas Homes continued to execute on its long-term strategic plan of being the builder of choice for homebuyers in key markets throughout the Our operating philosophy is straightforward but hard to replicate thanks to our operating discipline and culture. We focus on providing our customers with quality homes at affordable price while maintaining tight cost controls and leading cycle times. We also avoid much of the risk associated with homebuilding by controlling most of our lots and land through option agreements and by sustaining a strong balance sheet. These are key elements of Smith Douglas' strategy and we believe they lead to superior shareholder returns over the long term. For the third quarter of 2025, we generated pre-tax income of $17.2 million and earnings of $0.24 per share. Home sales revenue came in at $262 million on home closings of $788 and an average selling price of $333,000. Gross margins on homes closed averaged 21% for the quarter. These results were largely in line with our previous guidance and demonstrates our ability to accurately forecast and execute on our stated objectives. Net orders for the quarter increased 15% year-over-year to 690 homes on a sales pace of 2.4 homes per community per month. Despite some tailwinds with mortgage rates trending down in the quarter overall, demand stayed soft, which we believe is an indication that the buyer's psyche and consumer confidence are the main headwinds facing our industry. Financing incentives remain an important sales tool in getting buyers to move forward and purchase. And we expect this to continue into the fourth quarter. We continue to emphasize our approach of pace over price as we believe our operations run more efficiently at or near full capacity. We made further progress establishing the foothold our new markets in the third quarter. We began vertical construction on homes in Greenville Market, started generating interest lists for our communities in Dallas Market, and expect Gulf Coast Market to be up and running in the middle of next year. These markets fit nicely into our business model and will be key contributors to our volume goals in the coming years. Cycle times in the third quarter were consistent with the second quarter 54 days, excluding our Houston division. The efficiency of our operations is a key differentiator for our company and it is a discipline we practice every day. It is a system senior management has developed and refined over decades in the home building business and one that requires the coordination of our employees, suppliers, and trade partners. Overall, I am pleased with how our companies performed in the third quarter and believe we've made further progress towards becoming a large scale builder in the southeast and southern United States. Our balance sheet is in great shape and we have several new communities slated to open in the coming months that should give our sales efforts a boost as we head into our spring selling season. Finally, I would like to thank our team members for their continued hard work. Homebuilding is a very competitive business, particularly in uncertain times like the ones we're in today and you've shown a willingness to go the extra mile for our home buyers and our company's success. I truly appreciate all that you've done to make Smith Douglas a leading builder. With that I'd like to turn the call over to Russ who will provide more detail on our results for this quarter and give an update on outlook for fourth quarter.

Thanks Greg. I'll now walk through our financial results for the third quarter and then provide an update on our outlook for the balance of the year. We closed 788 homes during the third quarter, down 3% from 812 closings in the same quarter last year. Home closing revenue was $262 million, a 6% decrease from $277.8 million in the prior year. Our average sales price was approximately $333,000, down 2.6% year-over-year due to slightly higher discounts and shifts in geographic mix. Gross margin came in at 21%, which was at the midpoint of our guidance range, and compares to 26.5% in the prior year. Our lower year-over-year margin reflects the impact of higher average lot costs, which were 27.8% of revenue in the current quarter versus 24.8% in the year-ago period. Additionally, rising incentives in promotional activity further compressed margins. Closing cost incentives, which are included in cost of sales, total approximately $9,500 per closing, up from $6,600 in the year-ago period, and pricing discounts for 1.8% of revenue, up from 1.2% last year. We utilize forward commitment programs to buy down interest rates, which we believe help boost conversion rates. During the quarter, we recognized $3.9 million in costs on forward commitments, which is recorded as an offset to revenue versus $185,000 in the year-ago period, and $0.9 million in the second quarter this year. We expect to continue to utilize these rate buy-downs through the end of this year to drive sales velocity as we remain committed to our pace over price philosophy. SG&A was up approximately $2 million versus prior year and was 13.8% of revenue compared to 12.3% last year, driven primarily by lower revenue this quarter and increased payroll and associated expenses, with a sizable portion of the increase coming from the opening of our new divisions. Net income for the quarter was $16.2 million compared to $37.8 million in the prior year, and pre-tax income was $17.2 million versus $39.6 million. Our pre-tax income this period includes a $1.6 million dollar charge related to the abandonment of a lot option deal with a land seller which is included in other income and expense. Adjusted net income was $13 million compared to $29.9 million in the prior year. As a reminder, given the nature of our upsea organizational structure our reported net income reflects an effective tax rate of 5.9 percent this quarter which is attributable to the approximate 17.5 percent 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 24.6% funded 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 $14.8 million in cash and had $49 million outstanding on our unsecured revolver, with $201 million available to draw. Our debt-to-book capitalization was 11.2%, and our net debt-to-book capitalization was 8.4%, down 370 basis points sequentially from the second quarter. This improvement reflects our continued discipline in managing leverage and our commitment to maintaining a strong and flexible balance sheet. In a period marked by persistent macroeconomic uncertainty, we remain focused on fortifying our financial position to ensure we can navigate market volatility and capitalize on strategic opportunities as they arise. Backlog at the end of the quarter was 760 homes with an average sales price of approximately $340,000 and an expected gross margin of approximately 20%. Monthly sales per community went from 2.5 in July to 2.8 in August and 2.0 per community in September. In October, we saw that average state constant at 2.0 sales per community. Turning to our fourth quarter outlook, we expect to close between 725 and 775 homes, with an average sales price between $330,000 and $335,000. Gross margin is projected to be in the range of 18.5% to 19.5%. While incentives will continue to pressure margins, we are maintaining discipline in how and where we deploy them. We ended the third quarter with 98 active communities and expect to see that number remain approximately in line during the fourth quarter. 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 pleased with our results through the first three quarters of 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 landlight 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 as a reminder to ask a question please press star followed by one on your telephone keypad in the interest of time we ask that you please limit yourselves to one question and one follow-up thank you our first question comes from sam reed from wells fargo please go ahead your line is open thanks so much for taking my question and also thanks so much for all the color on the discounts and forward commitment impacts to the top line and margin line.

It's a very helpful color. In terms of my question, I was just hoping if you could bridge the Q3 to Q4 gross margin and talk through the composition of perhaps incremental price discounting versus forward commitment. It does obviously look like you're planning to close houses below what's in your backlog.

So, I would also just be curious in terms of you know mix of homes you plan to close outside of your backlog during the fourth quarter too thanks yep uh good good question we continue to push uh on incentives into year end really in an effort to keep that pace over price philosophy i mean obviously we're really deliberate about um you know keep keeping that pace it's it's real important for um the you know our operating philosophy you know we make more we lose less at full capacity and so um the assumption is that you know to continue to to drive pace because it's it's as i'm sure you would agree it's the macro and environment is is pretty uncertain um as as greg mentioned so it's really a confidence issue with our buyers we've we've been able to to solve the rate issue for for some time now But it does seem like it's just becoming a little more difficult to get buyers across the finish line. So we're going to continue to push on rates. We introduced a really attractive 3.5% fixed rate on some older specs. And so that's really kind of the assumption. We have seen costs of those forward commitments come down a bit in recent months as rates, overall rates have come down. So we're just making an assumption that we'll continue to push incentives, and, you know, we plan for the worst and hope for the best.

No, that's all helpful, Russ. And then maybe just switching gears a little bit on 2026, I know you're not providing guidance, but we'd just love any high-level commentary on directionally where we should be thinking about community count, especially in the context of all, you know, all the new divisional openings. And then also just some perspective on lot costs, especially as the competition of your geographic mix changes. Thanks.

Yeah, sure. Yeah, we, you know, as I'm sure most other builders, most companies, it's real difficult to provide any sort of guidance in the 2026. I think if we did, it wouldn't be, you know, right of us. It's so uncertain right now. But that said, given, you know, where we've driven our controlled lot count from the time we went public, you know, just over 18 months ago, we've nearly tripled our controlled lots. And you've obviously seen the growth in our community count this year. We ended the quarter with 98, you know, which is up substantially. So we have the community count next year to, you know, to kind of drive a pretty good amount of growth. You know, again, is, you know, somewhere in the 10 to 20 percent growth range in community count? I think we've got the communities. But a lot of that is really just dependent on where the market is, right, and just making sure that those developers and we get those lots delivered on time. but yes it's not out of the question to see something in a 10 or 20 percent community count growth and then but the wild card is is really going to be what's the absorption pace you know um on those communities and and you know ultimately translating into sales and closings so um hope that helps all very helpful thanks so much our next question comes from andrew azzi from jp morgan please go ahead your line is open hi guys uh thank you for taking my question and

appreciate all the color so far. You know, backlog conversion is pretty elevated here compared to your own history and likely to remain pretty high next quarter or go higher. I would love to kind of just get some color on how you see that metric trending longer term and any structural factors there that are going on.

Yeah, I mean, it's all a function of the current environment where, you know the competition everybody's you know there's there's a lot of specs on the ground that's where a lot of the discounting is taking place and so that's part of the reason why you know we've we've been leaning into forward commitments you know from from a competitive standpoint and specifically on our spec homes to continue to keep that that velocity or you know moving moving through our our um you know our assembly line process uh so pre-sales have just been it's been a little more difficult to come by from a pre-sale standpoint because when you think you know those forward commitments the most cost effective forward is let's say a 60 day or less you know rate lock and so that's part of the um part of what's driving just kind of the industry to a more uh spec heavy uh environment and and you know we are trying to we we've offered some pre-sale incentives so i think we're we're offering something though that's pretty unique and trying to move back to more of our pre-sale approach i mean we we are focused let's put it this way we are focused on pre-selling it's really the environment that's pushing us more to a little little spec heavy and so that's why the the resulting backlog conversions are higher but But over the last quarter, we've really had a heavy focus on getting that incentive into pre-sales with the way we're doing lot reservations and such. So we expect to go back to a more pre-sale heavy, certainly as the environment changes and I think specs become less and less as an industry. I think our approach has not changed. We are pre-sale focused. It's just the current environment has kind of pushed us a little more to specs, you know, from a competitive standpoint.

That makes sense. And then, obviously, you've seen a lot of growth in your active communities and controlled lots.

You know, could you provide any detail on kind of the geographic distribution of those and how you're prioritizing market expansion? yeah look we we um you know as we stated you know from the time we went we went public i mean we when when we enter a market we we want to make sure that we have uh you know that we enter markets where we can gain scale and for us scale is you know we we operate in an our team philosophy you know geographic pods and so uh each each each pod or our team has 200 closings and so for for us we like to at a minimum have 400 closings per per division and and not in certainly in some divisions uh we're going to have you know in excess of that you know some of the larger uh uh larger markets like in atlanta uh houston uh dallas but at a minimum you know we're looking to do at least two full rt so um we are we've been prioritizing or uh really trying to scale up in those markets where we have not yet hit that, you know, escape velocity, I'll call it, or, you know, that scale. And so you can look at, you know, Charlotte, the Carolinas, Nashville, you know, where, you know, those are some of the areas that we've started to focus on. And then clearly we've, as you know, we've opened a few new divisions. We've divisionalized Central Georgia. So getting central Georgia, which is, you know, really south of I-20 in Atlanta and down to Perry, Macon, you know, that area, really focusing on gaining more scale out of Georgia in those areas. Chattanooga is, you know, we've added quite a few positions in Chattanooga. And then, as we announced last quarter, Dallas is a market that we just entered, and Gulf Coast, which right now is, you know, Gulf Coast of Alabama. So those are areas we focused, but clearly where we can take advantage in markets where we already have that, you know, two full R teams, we will continue to try and take some additional market share if the opportunity arises.

Thanks, Russ. Best of luck. I'll pass it on.

Thank you.

Our next question comes from Mike Dahl from RBC. Please go ahead. Your line is open.

Hey, good morning, everyone. You've actually got Steve and Mia on for Mike Dahl today. Thanks for taking my questions. The granular monthly and quarter-to-date demand trend discussion was all super helpful. Looking ahead, I wanted to ask what you all have built into your assumptions for the forward quarter, more so the extent of how November, December may compare to what you've been seeing in October and how you see the balance of the quarter sort of shaking out against your historical seasonal patterns. Thanks.

Yeah, we haven't really made any different assumptions for the balance of the year. I think it's just a, you know, it continues to be a difficult environment, but, you know, we see a couple of green shoots here and there, you know, so it's not look it's it's it's good right it's it's um we are we've got traffic you know traffic's been been decent um you know folks are showing up you know people still need and want homes so uh but the conversions it's just a little bit tougher uh you know that's why we're leaning into the incentives but yeah we're not making any any more any additional assumption for for an increase in in velocity um you know maybe we'll get it maybe we won't uh you know we'll continue to to push uh to push on incentives and uh you know but we're getting our our fair share uh it's just

you know it's just too hard to predict right now it's kind of on a week-to-week basis no for sure that's logical thanks for the insight there and i guess my second question more broadly i wanted to ask on permit some permitting we've talked previously about at times you know seeing pockets of delays certain municipal levels kind of depending on where it is i just wanted to see you check in how that's been going for y'all today in general across your markets if there's been any kind of change in that trend especially given some of the enthusiasm broader enthusiasm around potential relief for housing lately thanks yeah thanks for the question i'll take that up

But we continue to see challenges and delays in permitting, you know, both on getting final plan approval to start projects and then getting final sign-off on completing projects and, you know, and it's pretty widespread, it's across all our markets, I wouldn't say it's in any market more so than another but we excuse me we do see it less prevalent in the areas that may be truly outside of the metros that are a little hungrier

for having some stimulation from housing but in more of the central you know metro markets we're still seeing a lot of delays no that's super helpful again thanks to the insight team i'll pass it on our next question comes from race jada rosich from bank of america please go ahead your line is open hi good morning thanks for taking my question um can you give us the uh spec versus built to order mix that was in your deliveries and then maybe what like what's in in the backlog And then any caller about, is there a difference in the margin between spec and VTR right now?

Yeah. I'd have to go, we might have to get back to you on the exact percentage. I don't want to quote you something that's wrong, but I would tell you there was a higher spec count than presale in Q4 from a closings perspective, would be my guess. and then maybe it's 50 50 but it's probably a little little leaning more towards more towards spec and again that's like i mentioned before that's just kind of the environment um we're we're in um as far as backlog again i'd have to go go back and and you have to go and look at exactly what it is but um again given given the size of the backlog i mean there's there's there's probably heavier presale just sitting in backlog but but maybe not by a by a wide margin I think you know because because most of the specs if it's sitting in backlog and it was a spec it's probably only 60 days old at most so right um you know we and we try to sell just just as a matter of process you know when when we're focused on specs clearly if it's a finished spec we've got high focus on anything that gets finished without a contract but uh even if we start something in our process we're we're very focused on um getting a contract on that before what we call line in the sand it's basically drywall so um you know historically you know even um you know well well you know we're pre-sale focused and historically we're like 70 pre-sale and 30 percent spec when you take into account um you know getting a contract before we hit that line in the sand you know we we were you know 90 plus of our uh homes had a contract on it before that line in the sand so it's really heavy heavy but you know kind of pre-sale prior to line in the sand it's just the environments you know shifted that a bit but you know ultimately uh the market will you know the market will change you know you're starting to see spec levels come down from

other builders which also is a factor in you know you know impacting you know us as well but um i think that that'll continue to shift back in our favor over time okay that's helpful and then with just the community count growth that you're talking about for for next year how do we just think about the sgna run rate going going forward should we think about sort of like on a dollar basis sga will grow in line with like community count um just trying to understand and like i know there's a there's a new market that you're expanding to um just trying to understand like maybe the puts and takes that yeah um we we're in the process of budgeting right now so i i can't

give you an exact answer all i would say is clearly the fixed overhead we're going to continue to leverage fixed overhead uh because we have you know everything here is in place you know the the corporate support team um you know hr legal finance you know all those you know we that's that's in place and we can do you know a good amount of volume above where we're at so that'll continue to leverage and then obviously the variable piece of um of of our spna so commissions and, you know, community-level marketing, things like that, that'll move in line more or less with community count and, you know, sales starts closings. But I would expect some leverage going into next year.

Okay, that's helpful. Sure.

For any additional questions, please press star, followed by the number one on your telephone keypad.

Our next question comes from Paul Brzezinski from Wolf Research. please go ahead your line is open yeah good morning um thanks for the uh monthly order cadence i was wondering if you could you know add some further color how did uh incentives flow monthly through the quarter and then you know regarding your forward commitment how is the spread have you maintained that spread to market or widened it or tried to contract it and and then again with with absorptions at two in september and october do you have a uh, minimum absorption pace you were targeting?

Um, yeah, we're, we're, so I'll take the last one cause that's easy. Uh, more is, is that, that's, you know, more absorptions. Um, you know, we're, we're in, you know, this is, you know, spring selling season obviously is, is the, is, is where we'll get, you know, higher absorption pace, but, you know, if we could hit a two and a half to three in, in the, in the quarter, you know, that's generally, you know, or three, you two and a half to three and a half would be you know more reasonable um uh for a for a q4 so you know we we we are trying to push as as we've mentioned pace so we we are looking at trying to push that absorption pace and but it's going to come at the at the expensive margin and and And we leaned into the forwards in Q3, so the cost did come down for sure as rates started to move down. We were a benefactor of cheaper forward commitments, but we also, at the same time, while the pro RATA costs came down, we also pushed higher incentives to try and spur some of that absorption pace. So, you know, anything that we gained, we kind of, you know, we gave back a little bit because we were really just pushing a stronger incentive, specifically on some of our, you know, older specs. We really have a focus on turning, you know, and not keeping any age specs there. um you know we did have a good week last week uh in in terms you know i think absorption pace was was up last last week which we didn't i don't think i mentioned that in my uh my prepared remarks so we saw a little bit uh of a nice bump but um yeah incentives incentives trended up through the quarter uh for for sure and um you know we'll see we'll see what the balance of the year hold. But like we said, pace over price. That's our philosophy. And we'll continue to use incentives to continue to push that pace.

Okay. And then I guess as you look at your consumer mix, you've got entry level, some downsizers, active adult, however you want to define it. Are you seeing any shifts there? I mean, what I'm really asking, I guess, or are you seeing any type of hesitation or cancellations with the downsizers or active adults because they just can't sell their home for what they're looking to get out of it?

You know, yeah, we are for sure seeing a lot of buyers that, and you know, we have a resulting number of specs that happen from contingencies that they just don't get over the line. So there's, Yeah, for sure. I heard the other day for the first time in a long time, new homes were cheaper than resales. And, you know, that's making that difficult. So, yeah, the move up buyer, you know, for us, which is not a big cohort, but that move down buyer is a pretty significant. They're still struggling with that challenge. thank you i appreciate it yep thanks paul we have no further questions i would like to turn the call back over to greg bennett for closing remarks thank you everyone for joining us today and your interest in smith douglas hope you have a great day and look forward to visiting after q4 this concludes today's conference call thank you for your participation you may now disconnect