Smith Douglas Homes Corp. Q4 FY2025 Earnings Call

Good morning. I would like to welcome everyone to the Smith Douglas Homes Fourth Quarter and Full Year 2025 Earnings Call. 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 home page. 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.

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 gross margin came in above our previously guided range. We generated 532 net new orders for the fourth quarter as sales conditions remain 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 continue to weigh the benefits of homeownership 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 payment to fit our buyers' needs. So far this year, we've seen an encouraging uptick in traffic and our order activity relative to fourth quarter's levels and continue 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 view it as proof that our disciplined approach to homebuilding 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 has been with the company since 2017 and most recently served as our Atlanta Division President, where he's been instrumental in expanding our presence and profitability in this key homebuilding 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 to continue to gain 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 2024. Pretax 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-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corporation and the noncontrolling interest 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. Pretax 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 footprint. Total controlled lots increased 14% to approximately 22,300 lots, with the vast majority controlled through option contracts consistent with our land-light 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 presale orientation. That production engine is the core of our operating model and protecting that engine is what ultimately drives long-term value creation. Homebuilding 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 selling season. At the same time, we continue to evaluate pricing and incentives carefully across our communities, and we'll 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 risk 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.

And your first question comes from the line of Michael Rehaut with JPMorgan.

This is actually Nick Kalra on for Michael. First, I would love to get any color that you might be able to provide on sales pace as well as pricing and incentives trends translating to both of those factors so far in 1Q to the extent that you can, that would be great.

Sure. It really followed traditional seasonal patterns. January was a little bit slower, picked up in February and the last couple of weeks here to begin in the month of March trended even a little bit higher. So trending in the right direction. Our community count is up pretty good year-over-year. 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. We've got several communities in that 100 community count that don't yet have full models and we're preselling. So I wouldn't necessarily look at the absorption pace year-over-year. I think it still feels pretty good, even though the absolute numbers may look a little flat or even down on a pace. But again, that's more about the way we're counting communities a little bit. The trends so far for the spring selling season have continued to move up, but it's inconsistent. We don't see enough of weekly trends yet to say things are great. But so far, so good.

All right. That's helpful. And then secondly, 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.

Yes. I think there's a lot of similarities in our markets. They all seem to be pacing, and as Russ spoke to, our trending on seasonality seems to be pretty consistent across all those markets. We've got some new markets just starting off. We've got models that are not yet open that we're counting in our community totals and we're hopeful once models are open, those markets will be at the same pace as well.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

Just to follow up on the 1Q dynamics. You talked about maybe stepping back from some of the aggressive behavior in fourth quarter. But based on your margin guide for 1Q, it seems like you may have then leaned back in and hence the conversation about your prioritization of price. Can you talk a little bit more about what's driving the decisions there? What's driving you to lean back into incentives? Can you characterize relative to the 6.8% that was in the 4Q 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?

Yes. 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 Q4. With some of the uptick that we're seeing in traffic — and again, we are seeing an uptick sequentially — it's the traditional spring selling season that we've hit, so it's a good trend. We continue to monitor it on a division-by-division and community-by-community basis. We're looking where we can maximize some margins and pull back on incentives, but we're not going to sacrifice pace. As long as we continue to get the pace, we'll moderate incentives. Sequentially, we're looking probably at about 100 to 150 basis points just in the closings. When you look at incentives on sales, we're seeing a similar trend from Q4 to Q1 in the incentives. One thing to add is forward commitments; the cost of forwards has come down with the rate environment, and that will help us a bit. We're also looking at 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, and we're also bringing some smaller product online. That is impacting sales prices and margins. At the end of the day, we are focused on getting a pace. Operationally, things are running very smoothly. We want to keep our trades busy — we think that's a competitive advantage. But in order for us to keep building, we've got to keep selling. We'll continue to monitor incentives and do whatever we can to keep that pace. We really want to get back to a presale orientation. This market has been very spec heavy, reflecting a lot of what our competitors are doing. We're still not seeing resale competition come back in any meaningful way; traditionally, resales are always our biggest competitor, but that's not the case now. It remains hand-to-hand combat.

That's helpful, Russ. I guess one more clarification and then a cleanup question. Since you may draw a distinction between base price reductions and incentives, can you clarify the 6.8% and then going up 150 basis points — is that inclusive of both price reductions and financial incentives? Or is that just the incentives?

Yes, that includes everything. The 6.8% counts closing cost incentive, price discounts and forward commitment costs. 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 the 6.8% number.

Okay. Good. The cleanup question I had, SG&A — was there anything unusual in the quarter? Your revenues are running down and SG&A as a percentage of revenues in recent quarters has been running up year-over-year. It was a little surprising to see a year-over-year decline in percentage of sales. Was there anything onetime in nature around true-ups or things like that?

Yes. We fully expect to continue to get SG&A leverage as we push scale, but right now we've got a few things pushing SG&A higher where we're not getting matching revenue. We've opened up new divisions, so we've got G&A and SG&A costs coming through in Dallas-Fort Worth. Greenville is still getting off the ground. We opened up Gulf Coast, and we've divisionalized a couple of areas — Atlanta was getting too big, so we've divisionalized Chattanooga out of the Atlanta division, and about 18 months ago we divisionalized Middle Georgia. So we've got a little more G&A and SG&A running through the business as we've continued to expand the footprint. Once we get those divisions up and running at full capacity, we should start to see better overhead leverage. Also, incentive compensation was lower this year compared to prior year. In prior year we more than hit target on bonuses, so incentive compensation was higher then; this year we did not hit target. That was about half of target incentive comp, which reduced SG&A in Q4 relative to the prior year.

Your next question comes from the line of Rafe Jadrosich with Bank of America.

Just following up on the last question that Mike asked. The SG&A dollars on a year-over-year basis are down about $7 million, and there was quite a bit of leverage. Was there an incentive comp that came down in the fourth quarter that we should be thinking about reversing as we look at 2026? I'm just wondering if there's any items to be aware of because obviously I understand the things that are driving it up, but there was a lot of leverage in the fourth quarter. What drove that?

Yes, you hit a good point. In the prior year we more than hit target on bonuses, so incentive compensation was higher in the prior year. This year we did not hit target, so incentive compensation in the quarter was about half of what our target incentive comp would be. That explains a sizable portion of the year-over-year decline in SG&A dollars. The offset is new divisions that were not fully operational, which are driving some costs higher now.

Okay. That helps. In the past, you've given helpful color on land inflation and what you expect to be flowing through the P&L. How should we think about 2026? For land that you're contracting today, are you starting to see relief or prices coming down or stabilizing? When will that start to be a tailwind to margins?

We're definitely seeing land costs increase in 2026 relative to what we expected in our budget and closings. That said, that's because we're closing on acquisitions that we've had over the last two to three years, so some higher costs are still flowing through. We look at deals on a case-by-case basis and go back to developer partners to try to renegotiate where possible. We're seeing more of that happen. Any specific numbers Joe can look at the cost, but broadly speaking, land cost as a percentage of revenue will be up slightly in the near term. On new deals and new acquisitions, we're definitely seeing a reset happen. We'd love it to happen faster and at deeper discounts, but folks are getting more realistic. That's why we continue to push pace — if we're not outselling and moving inventory, we won't be able to take advantage of the price reset. Continuing to push pace should help us expand market share through the downturn and position us favorably when margins improve later in the cycle.

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

First question: given the comments around staying disciplined in the face of some pretty heavy discounting in 4Q, how did your spec count look throughout the quarter and how did you exit the quarter in terms of specs? What does the spec count look like heading into 1Q 2026 and how are you thinking about it this spring?

Ideally, we'd love to have everything under construction presold. Presale orientation generally yields higher value because buyers select options in presale and we don't have to discount as much. Given the environment, specs are probably running about half of our current inventory. But even though we count them as specs, we're putting those under contract and we're not getting a lot that go past completion or past 30 days post-completion. We're really pushing to get those sold before drywall stage. We run the business like an assembly line: production is most important and we keep that running. We are trying to match sales pace with production and keep it moving. Looking forward to 2026, even though backlog and presales are down from where we'd like, our inventory is where it needs to be. Production must keep going to hit the growth targets we expect in 2026. So spec levels are a little elevated, but we continue to work to improve the presale versus spec balance.

Got it. Then secondly, would love an update on your strategy around land in terms of preference for finished lot purchase agreements versus land banking and how pricing looks in both of those categories?

Thanks for the question. We almost always prefer finished lot takedowns first; those opportunities remain available. Secondly, we'll work with our land bank partners and structure deals in various ways as appropriate. Adding color to Russ's earlier comments, we're seeing softening and opportunities in some of the A and B locations that historically did not solve for our price points. C and D locations are getting shopped around more because there's less demand in those locations. We're focused on better locations, attractive terms and engaging our land bank partners where necessary.

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 discuss 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.