Smith Douglas Homes Corp. (SDHC) Q2 2026 Earnings Call Transcript

Hello, everyone. Thank you for joining us and welcome to the Smith Douglas Homes second quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Joseph Thomas, Senior Vice President, Accounting and Finance. Joseph, please go ahead.

Good morning, and welcome to the Earnings Conference call for Smith-Douglas Homes. We issued a press release this morning outlining our results for the second quarter of 2026, which we will discuss on today's call and which can be found on our website at investors.smithdouglas.com or by selecting the Investor Relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the Investor Relations section of our website. before the call begins i would like to remind everyone that certain statements made on this call which are not historical facts including statements concerning future financial and operating goals and performance are forward-looking statements actual results could differ materially from such statements due to known and unknown risks uncertainties and other important factors as detailed in the company's sec filings except as required by law the company undertakes no duty to update these forward looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Good morning. Thank you for joining us today for review of our business results for the second quarter of 2026 and an update on industry conditions and our company's outlook. Smith Douglas Homes continued to make progress towards our goal of becoming a large-scale builder in the southeastern and southern United States, posting strong year-over-year growth in both net new home orders and home closings in the second quarter. We generated $273 million in home closing revenue for the quarter, representing a 22% increase over the second quarter of 2025 on 839 home closings and an average sales price on closed homes of $325,000. Home closing gross margin for the quarter averaged 17.6% on a gap basis, or 18.7% when you exclude the impact of $3.1 million of inventory impairments included in the cost of home closings. Our pre-tax profit came in at $1.9 million for the quarter, or $9.5 million when adjusting for impairments and lot option contract abandonment charges. Overall, our company executed well in the quarter against the home building backdrop that continues to be marked by uncertainty and affordability challenges for new home buyers. Despite this uncertainty, we were able to post net new home order growth of 32% on a year-over-year basis for the quarter for a total of 970 net new home orders as our team did an excellent job working with buyers to find the right combination of price, personalization, and value to keep our production-oriented building model running smoothly. We saw consistent traffic and a relatively stable sales pace throughout the quarter averaging roughly three sales per community per month which we maintain through a targeted use of sales incentives. Our construction cycle time for homes closed averaged 55 days as we continue to emphasize construction efficiency across our home building platform. This remains a key component of our returns focused business model and one we feel differentiates our company from the competition not only does this discipline allow us to work through our communities efficiently but it also shortens the time between sale and close which helps reduce the possibility of cancellations we continue to expand our presence across our markets we grew order in community count by 20 percent on a year-over-year basis to 110 active communities home building is business of scale leverage over time at the same time we remain disciplined on our land acquisition front by hearing to our underwriting standards and walking from deals that do not meet those standards we maintain this balance through our landline strategy which allows us to control a pipeline of lots through options and land banking agreements while also providing us downside risk protection at the end of the second quarter we had a total of 22 319 unstarted controlled lots with only three percent of those lots owned as we turn our focus to the back half of the year we feel cautiously optimistic about the state of the home building industry and our company's positioning the u.s consumer has proven to be resilient in the face of rising rates and macro economic uncertainty while building conditions continue to be favorable. We see better discipline from builders in terms of spec inventory and through selective and targeted financial incentives to buyers, we continue to be able to compete well against the existing home market. As a result, I remain confident in our long-term outlook for Smith Douglas Homes. Finally, I want to once again recognize and thank our team members for their continued dedication and hard work. Their commitment to serving our customers, executing our strategy, and adapting to a dynamic operating environment has been instrumental to our success. On behalf of the entire leadership team, I want to express a sincere appreciation for everything they do. Now I'll turn the call over to Russ, who will provide more detail on her financial results this quarter and give an update on her outlook.

Thanks, Greg, and good morning. I'll highlight our results for the second quarter and then conclude my remarks with an update on our balance sheet, capital allocation priorities, and outlook for the third quarter. We finished the second quarter with $273 million in revenue on 839 closings, with closings up 25% from the year-ago period and an average sales price of $325,000. Our home closing gross margin was 17.6% on a gap basis, and adjusted home closing gross margin was 19%, which excludes capitalized interest and inventory impairments. Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace. During the quarter, closing costs, price discounts, and the cost of forward commitments totaled 780 basis points, which compared to 480 basis points in the year ago period and 730 basis points sequentially from the first quarter. Selling general and administrative expenses for the quarter were $41.9 million, or approximately 15.4 percent of revenue, up $7.2 million compared to the same period last year, and down slightly as a percent of revenue. The increase primarily reflected higher sales commissions and advertising costs associated with higher closings and the investments related to our Dallas-Fort Worth and Alabama-Gulf Coast expansions. Free tax income for the quarter was $1.9 million, resulting in net income of $1.8 million or $0.03 per diluted share. Our second quarter results included $3.1 million of inventory impairment charges in cost of home closings and $4.5 million of lot option contract abandonment charges in other expense. Adjusted EBITDA, which we believe provides a clean apples-to-apples view of our operating performance as it excludes share-based payment expense, inventory impairments, and lot option contract abandonment charges, among other items, was $13.4 million, or 4.9% of revenue, compared to $19.8 million, or 8.8% of revenue, in the same period last year. Given the nature of our up-sea organizational structure, our reported net income reflects the allocation of earnings between Smith-Douglas Homes Corp. and the non-controlling interests of Smith-Douglas Holdings, LLC. Because a significant portion of our earnings is attributable to llc members and 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 blended federal and state effective tax rate of 26.9 percent as if we operate it as a fully public c corporation which we believe provides a more meaningful comparison to peers for the quarter adjusted net income was 1.4 million compared to $12.9 million in the same period last year. Turning to orders, we generated 970 net new home orders during the quarter, an increase of 32% versus the year-ago period. Year-to-date, we have generated 1,951 net new home orders, up 30% from the prior year period. We ended the quarter with 1,000 homes in backlog, up 17% from the year-ago period, with a contract value of $322.1 million and an average sales price of $322,000. In addition to backlog, we also had 74 home reservations at the end of the quarter. These reservations allow our buyers to take advantage of buying a built-to-order home while also benefiting from a guaranteed mortgage rate when they close. We expect most of these reservations to convert to new home orders in the third quarter. Turning to the balance sheet, we remain focused on preserving financial flexibility while continuing to invest in our growth. We ended the quarter with $14.2 million of cash and $66 million of total debt. Our $325 million unsecured revolving credit facility had $63 million of outstanding borrowings and $0.8 million of letters of credit at quarter end. Our debt-to-book capitalization was 13.2%, and net debt-to-net book capitalization was 10.7%, compared with 9% and 6.6% respectively at year-end 2025. Net debt was $51.8 million at quarter-end. Importantly, our balance sheet has continued to improve as we scale operations, even in this difficult housing environment. Despite increasing active communities by 20% from 92 at the end of the second quarter of 2025 to 110 at the end of this quarter and growing our closings 25%, Our total debt was down 11%, and on a per-community basis, total debt declined 25%, while real estate inventory per-community declined 14% from a year ago. These metrics highlight the efficiency of our business model and ability to effectively manage our balance sheet while at the same time growing our business. Our landlight strategy remains a core component of this performance. At quarter end, we control 23,527 lots, including 1,208 homes under construction, 664 owned lots, and 21,655 option lots. By relying primarily on third-party lot developers and option agreements, we can align lot delivery with demand, maintain flexibility, and deploy capital efficiently. As Greg previously mentioned, our pays over price philosophy continues to guide how we manage the business. In the current environment, our focus remains on maintaining absorption and inventory turns, even if that requires some pressure on margins in the short term. We believe maintaining sales pace allows us to preserve market share, generate cash flow, continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle. 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 and we remain opportunistic with share repurchases. During the second quarter, we repurchased 312,351 shares of Class A common stock for $4.4 million. Including repurchases completed in the first quarter, we have repurchased approximately $10.1 million of stock through June 30th. We believe these repurchases represent an attractive and disciplined use of capital while preserving the financial flexibility to support our long-term growth strategy. Looking ahead, we remain encouraged by the strength of our order growth, the expansion of our community base, and the improving efficiency of our landlight model, while recognizing that demand remains sensitive to mortgage rates, affordability, and consumer confidence. For the third quarter, we currently expect closings between 825 and 900 homes, average sales price between $315,000 and $320,000, and gross margin between 16% and 16.5%. Given the continued variability in demand conditions, we are not providing full-year guidance at this time. While the primary risk to our outlook remained tied to macroeconomic conditions, including mortgage rates, consumer confidence, employment trends, and the potential need for continued pricing adjustments and incentives, we believe our affordable product offering, landlight strategy, discipline operating model, and growing community base positions us well to continue gaining market share over time. With that, I'll turn the call over to the operator for instructions on Q&A.

We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mike Dahl with RBC Capital Markets. Mike, your line is open. Please go ahead.

Good morning. Thanks for taking my questions. um greg and and also russ i want to start with i mean greg you expressed cautious optimism and a study sales case through the quarter can you give us an update on how july and the beginning of august has trended and i'm trying to square that a little with then your gross margin guide is down meaningfully sequentially so um so how much is is kind of the like you've had to lead back into incentives um as rates have gone back up but you're maybe you're still encouraged that you're at least seeing a demand response to that i'm just trying to better understand that in the context of what what's you know a pretty big step down in gross margins yeah uh mike thanks we uh

pretty much june july has has stayed pretty much the same uh you know that one caveat if we have lean back in a little more on forwards and some rate purchases as the rates have gone back up. So, you know, we just continue to underwrite everything to our current environment. So, you know, if we look forward, if we have to continue this, if rates are continuing to stay elevated, you know, the macro's not giving us any indication of a lot of consumer change here the near term so you know we just continue like I said cautiously optimistic demands there it's just solving affordability and you know we continue to push for our pace and as you see with the numbers we've been able to hold our pace pretty steady okay got it so so yeah I guess if I'm hearing that then it's again like you're at least even if you're leaning

in or incentives are ebbing and throwing, you're at least finding demand when you lean in. Yes, that's encouraging. Russ, then maybe just as a follow-up, more specifically, when you think about that gross margin guide, can you help us kind of bucket out the step down from 18.7X charges to the 16.5, how much of that is related to incentives?

How much is other costs dynamic? dynamics either express labor or or land help us understand that bridge a little bit more yeah it should um you know when we look at backlog and you know as greg said we were leaning more into to pace as we have really the first half of the year i would tell you it's it's just more of um you know our continued use of incentives and discounting to to match pace uh with you know as a landline builder, you know, kind of takedown. You know, we really focused in the first half of the year on trying to get, you know, one sale per community per week, really, and that kind of just matches the, you know, the takedowns within the majority of our, you know, option contracts. And so it's really, it's really just a function of kind of, you know, adjusting price and payment through those, you know, use of incentives, closing costs, forward commitments to get that pace. So that's what I would tell you without, you know, I don't have the exact numbers in front of me, but that's really going to be the driver of the margin compression. And then hopefully, you know, we're, like Greg said, we're cautiously optimistic that we're finding, you know, an opportunity to maybe kind of keep margin steady from here and, you know, maybe pull back a little bit on on incentives going forward and start to uh to work on you know pricing and see if we can we can call back some margin you know we're hearing some of our our competitors i think if you've heard on the other conference calls um you know i think a lot of builders are reducing inventories uh or you know specs and and you know leaning uh you know against uh you know increasing incentives so hopefully as a as an industry we're we're kind of finding bomb yeah and russ maybe

just one one quick uh last one from from me just to follow up on that last point i mean you you guys have kind of um you know your pace focused and you you try to be balanced around things um but with that focus so when you think about like everyone's trying to get a better balance maybe on on spec versus build to order um you know that how do you uh how how are you evolving your you know your strategy on the ground right now as we look at the second half yeah we've always been built to order focus i mean pre-sales is is our number one priority greg if you want to yeah uh mike i

think i mean to give you numbers we're about 70 30. we look at it more so around uh you know because of the way we work buyers you know maybe have credit challenge or time constraints that we may so we focus on getting the home sold by drywall that allows that house to still close on its intended close date when we started it so so there's a few buyers that we do through reservations but if you you look at all that end of the day everything's sold by drywall at about 70 percent yeah and those are what we look at as the pre-sales because there's there's a certain amount

with our buyer you know there's a certain amount of of attention to the approvals that we need to work through and qualifying on the front end yeah no the one the one thing i would add um we still give our buyers uh the the ability to personalize their homes even after we we start the home so up until that drywall stage like greg greg mentioned they still have the opportunity to select uh certain options in in that home so it allows for additional personalization which i think is pretty unique especially at our price point uh giving buyers up until that that point a drywall to uh to to create the home that they that they want and those as you know the the margin on those options uh come in at a at a pretty good um uh a pretty good number for us so any anything we can do to give our buyers that opportunity to select their own options creates more margin opportunity for us and it also creates a stickier buyer because it's a it's It's the home that they've had the ability to make choices.

Thanks for the details. Sure.

Your next question comes from the line of Natalie Kolossiker with Zalman & Associates. Natalie, your line is open. Please go ahead.

Hey, good morning, and nice job on the quarter. So direct construction cost reduction was something that popped up a lot on this past earnings season. so curious to see have you seen any are you seeing actually continued reductions in costs or have you maybe kind of reached the end of it uh curious to see if you you know see that offsetting any part of your um incentive incentive spend yeah i'll take that um so yeah we've seen uh we're two and a half three percent year over year cost is is you know our hard cost savings are there.

So yeah, for sure that helps with fuel prices. There's fuel surcharges and other things that are starting to creep back into the equation. But yeah, we have seen savings and costs.

Okay, thank you. And also some other builders, I guess, mentioned using tools like a higher share of arms to kind of manage that incentive spend.

So I know you brought it up in your previous call but is that like something that you've been pushing more just to try and manage your incentive spend no we we haven't we haven't gone back into the arms this quarter what we what we've been using is still kind of the fixed rate where we've where we've bought forward just a fixed rate incentive and and towards the end of the quarter into third quarter we've started to pull back on the rate incentive and are really trying to focus on just using the 6% that's allowable for closing costs and spot buy downs. We think that from a base pricing standpoint, in most of our communities and markets, we're already priced on the low end of the market and offer a really good value at our pricing. And it hasn't seemed to have slowed our pace, which is good. So as I mentioned on the last question, we're slowly pulling back on incentives to see if we can recapture some of that margin.

All right. Thank you. Your next question comes from the line of Sam Reed with Wells Fargo. Sam, your line is open. Please go ahead.

Thanks so much, guys. So another question on gross margin here.

I wanted to just ask about the impairments and any sense as to how widespread those were and then can you just remind us your underwriting standards margins versus returns would just love a refresher on that sure um yeah we we um you know obviously like every builder should be we we go through uh you know our impairment testing quarterly and we first look at um you know where our backlog margin is sitting and that's kind of your first indicator and and so we do a thorough scrub of of backlog and then we'll we're on cash flows where we have some uh you know where those margins are say you know mid to high single digits and then we'll we'll do the cash flow uh and so again we're you know it it is what it is right we it's it's it is a subjective i will say this for anybody that's been in home building and doing this for a while. I mean, the testing is subjective. I think that's why you probably across the builder landscape might see some that are, you know, taking more than others, but it's a pretty subjective process. But, you know, I think we're pretty, you know, consistent on how we look at things. But is it widespread? No, I think, you know, we took it in maybe three communities um uh yes three communities three communities this this quarter um and then we took a couple of abandonment charges where it made sense you know again i think the nice thing is is having a strong balance sheet like we do you know the accounting does not drive any decision we we make everything we do is based on you know economics uh is it a good deal for the business um and and so we're we're fortunate you know just the way we manage the the business that you know everything we look at is from an economic standpoint not from an accounting standpoint so um hopefully that answers your question no very helpful let's

switch gears to another line out of the pnl i just want to quickly touch on third party broker commissions um remind me where broker commission rate is sitting today and talk through any broker attached dynamics i know some of your peers have selectively stepped up broker commissions in some markets as a sales incentive uh just curious if you're seeing anything similar no we we're still seeing kind of and depends on the market uh two and a half to three percent is the commission that we're paying to to outside brokers we haven't we haven't run any any special you know deals or opportunities um so we've been we've been pretty consistent and then i think the the co-broker

is about, what, 80%, 80%?

Mid-high 70s.

Mid-high 70s. So it's remained for us. That's pretty consistent to where we've been running for a while.

All helpful, guys. I'll pass it on.

Thanks, Sam.

Your next question comes from the line of Rafe Jadrosuch with Bank of America. Rafe, your line is open. Please go ahead. Hi.

I had a follow-up on the BTO commentary. Is that 70-30 mixed engage also the long-term target, and what is the margin difference between a home sold pre-drywall and a quick move in?

Yeah, our long-term target would obviously be 100%, right? That's the ultimate goal is to get everything sold by drywall. And certainly, without a doubt, everything sold before we hit CO, right? But if you look historically, so if you go back pre-COVID, that pre-sale, which I would say pre-sale before we hit drywall stage, was about 90%. So, as Greg said, we're about 70%. So, we're inching closer to where we want to be, but we're not there yet. And, again, that really is the kind of environment we're in, and I think the fact that, you know, we're competing with a lot of builders that have specs out there and, you know, the use of incentives and forward commitments really applies to more QMIs, quick move-ins, and so that's what we're battling against. But we've always been, you know, we've never pushed a spec strategy. We're always a build-to-order, pre-sale. It's just the environment we're in has kind of, you know, pushed those percentages down from where we would like to be. And then from a pre-sale versus spec, you know, true spec, I'd say, what, about 100 basis points difference in margin? 150, 100, 150 basis points of margin? Yeah, 200. yeah it it varies it'll it'll vary by division um and then you know we've we've seen it compress a little bit um but it's um you know normally when you go historically it was probably more of a 300 basis point uh difference pre-sale versus spec and now it's about 150 200 so Yeah. Great. Anything else?

Yeah. A quick follow-up also on the 3Q gross margin guidance. What do you have embedded for costs and cost of the upcoming quarter?

Could you repeat that, Victoria? You cut out a little. We couldn't hear you.

Oh, sorry. I just had a follow-up also in the 3Q gross margin guidance.

Can you give any color what you have embedded in terms of sticking brick costs labor and lock costs yeah i don't have the numbers uh in in front of us we can we can follow up but i would tell you my my my guess is um lot costs and sticking sticks and bricks are probably uh fairly consistent from where we are that that probably has the least amount of variability from from quarter to quarter so what's probably sitting in in backlog as i mentioned before it's it's going to mostly come from um incentives uh discount incentives and and um closing costs are probably uh the drivers there and again it's it's if you think about it um because the first half of the year we really were leaning into pace and so the way that we're getting pace is really by using utilizing um those those discounts and you saw this quarter what closed versus prior quarter sequentially the incentives were up 50 50 basis points and so my guess is third quarter the incentives uh the total of those incentives are probably going to also be up and that's that's the driver of the uh the margin compression um the last thing i would add is we're usually as is hopefully you all have gotten to to know us over the last two and a half years of of being public we we're pretty uh conservative um we we i think we've had a pattern of of beating our guidance and we hope to to keep it that way so we're usually pretty conservative but you know again i i we felt comfortable with the 16 to 16 and a half percent hopefully we come in you know there there might be an opportunity to do a little bit better but because we're in such an environment where you've got specs and you're continuing to discount we are pushing pace You know, who knows what we're going to have to or want to do towards the last couple of months to to continue to move some of those specs through the through the system.

So your next question comes from the line of Paul Shabelsky with Wolf Research. Paul, your line is open. Please go ahead.

Thanks. Good morning. I guess, you know, appreciating your comments that, you know, the incentive environment seems to be a little bit better so far in in 3Q. and the gross margin guy at a 16.25, is there any sort of floor you would help gross margin at?

Yeah, we talk about that a lot internally. I tell you first, our overriding goal is always going to be pace versus price. But yeah, we definitely have conversations about what level does it start to make sense. And a lot of times it's going to be on a on a division by division or really a community by community basis. You know, currently our SG&A sits around 15 percent, let's just say. So when when gross margins. So if you if you wanted a number, I tell you, 15 percent, that's when we start saying, OK, what other levers could we or should we pull? Because, look, you know, 15 percent gross, 15 percent SG&A, you'd be at a zero net. So that's probably the floor. Look, nobody wants to build for practice, but we also recognize the need for us to continue to scale our business. Right. That's in a declining rate environment or declining, you know, the housing environment we're in with Mark. You've got top line margin compression scale is probably the best lever to pull to continue to, you know, generate generate positive returns. And so, you know, we we we feel like it was great when we went public and we raised capital and that capital was used to scale the business. the unfortunate thing is like six months later we've entered into one of the toughest housing environments at least i've seen certainly you know gfc and you know even prior to that but um yeah we'll continue to to focus on what we can control okay any any opportunity to to work down that sgna expense ratio outside of just leverage yeah yeah no absolutely i mean we're looking at that every every single day um you know greg and i you know talked to the to the dps last week and you know for the back half of the year it's like you know uh no dollar is too small to save uh and we're looking at sgna every day we you know we're quite frankly we we said hey it's you know no more no more new hires unless it's really a variable head that's going to support field operations like sales and construction, you know, this is not a time to start layering on any additional overhead. We're looking at reducing any non-essential costs, whether it's travel or meetings or anything of the like. So, yeah, that's always a huge focus. And so, we're always trying to pull those levers.

Okay.

And just like a sneak one more in, you know, we've got mortgage rates here at the year date high have you seen any acceleration or on pressure on your move down or active adult buyers that have a home to sell in this environment uh no more than than what we've seen historically uh we we do take a number of contingencies and and you know a number of our specs are a result of those contingencies that we took and then buyers just didn't get, you know, either their deal fell out or didn't. Something happened in that process. So, yeah, we are seeing that. Okay.

I appreciate it. Thank you. Yep.

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

Hi, thanks. Good morning, guys, and thanks for taking my questions. I have another one on gross margin for you. And it's, did the 2Q26 guide and does the 3Q26 guide contemplate any inventory impairments or include an allowance for the potential for inventory impairments? no no we we we never forecast um impairments if if we did then we probably would have taken we would have not probably we would have already taken the impairment so no we we don't assume uh future impairments okay yeah that's that's what i figured i'm just trying to understand the differential here between the guide and yep sure okay um and then you know just looking at the step down and your commentary around wanting to keep, you know, incentives at that, you know, that 6% level. I'm assuming that, you know, base price cuts are playing an increasing role here. Can you just talk about, you know, like either base price cuts or, you know, opening communities at ASPs below underwriting and how that's impacting gross margin?

Yeah, absolutely are are taking base base price cuts where it's it's warranted um and and again it is a community by community analysis um because some communities we're actually you know seeing opportunities to raise uh prices and so we are i mean we're not pushing it to to a point where you know it shuts down sales or slows pace but we we are definitely looking on a community by community basis where we can take price increases. And then obviously, you know, we are continuing to discount where we've got inventory or the pace isn't where we'd like it. We're traditionally, when you look at our communities, I'd tell you on average, we're probably the biggest value when you look across the competitive market and the competitive communities. We always, when we underwrite, we're always trying to underwrite to about 10 grand below any of our at least 10 grand below the lowest competitor so that you know there's there's obviously more people that can afford our homes than anybody else because of that price right price we always say price is the ultimate amenity and and so you know having that low price is is key so we've been pushing on that But, you know, again, we're trying to really look at our incentives and seeing, you know, what's the optimal use of incentives and where can we pull back to then kind of recapture or at least maintain, you know, margin as it's, you know, clearly we've seen some compression. But I think, you know, we're going on about two years of what's been a really tough environment from a sales and pace and margin compression perspective. And, you know, hopefully, as we've heard from other builders that we're starting to find, you know, we're hopefully we're starting to find a little bit of a bottom here and we can all start to recapture a little bit of profits.

Got it. And so the 4% year-over-year decline in average order price, how much of that is a function of, you know, base price cuts to, you know, try and find the market versus geographic or product mix or value engineering?

It's mostly just trying to find the market. Our average, and I'll do it in a – it's a little bit of obviously mix. I mean, because we have opened a couple of new geographies. You've got Greenville in there closing homes. You've got Dallas closing homes. But, again, our product is the same across the entire footprint. So I would tell you it's mostly on price. And then the key that we look at is, you know, what's the average square foot of the house? And it's, you know, it's within 50 to 100 square feet, you know, of the same. So it's not like we're really changing product that much or the mix is that different. So it's really the incentive.

Okay. Got it.

And then as you shift back more towards BTO, I think just, you know, looking at, you know, 2023 and 24 backlog conversion rates in the 60 to 70 percent range, should we expect backlog conversions to trend back to that level as you kind of normalize the BTO versus spec mix in the business? it it should and just to be clear we never really we never moved away from from bto it was just a function of the market and uh the demand environment and so it's i i tell you and i give a lot of credit to our sales folks but it is it's really hard to know that you're setting the right price in a declining market, right? You really don't know until it's in the rear view mirror. So I tell you, you know, last year and kind of into the beginning of this year, you know, you always, I'd tell you, probably most builders would say you're always kind of playing catch up because you're kind of looking in the rear view and saying, well, shoot, we didn't, we didn't move pace fast enough. So I guess we didn't cut prices quick enough. And I think we did a really good job in the first half of the year, matching pace or exceeding pace on our sales versus starts. So So, yeah, I would tell you, given the way we've executed and the environment, I think, yes, I think we'll get back to a more – I'm hopeful that we're going to start getting back to a more normal kind of conversion and backlog going forward.

Okay, got it. And then last one for me, just on M&A or strategic opportunities, as you, you know, work to continue to build scale in your markets, are you seeing opportunities to execute some tuck-in M&A? How does the pipeline look? You know, what's the level of willingness on the part of some of these other builders to sell?

Yeah, there's activity. We're seeing, you know, there's usually a consistent flow of packages. is, you know, the environment is such that, you know, it's unfortunate. I think some of the smaller, you know, not as well capitalized builders, it's been a struggle. And so that's where you usually see the bigger builders, the ones that have a balance sheet, you know, take this opportunity to grow market share. And so, as you know, from the way we operate, I mean, we're looking to scale up the business, but we're very thoughtful about how we go about it, because we we're absolutely uh it's important to protect kind of the way we operate you know with our team strategy and uh so the deal has to make sense uh so we're always looking uh we're we're certainly exploring you know new possible markets for maybe a greenfield uh opportunity but yeah there's some deals out there that you know we'll we'll take a look at packages and if um if it makes sense uh to expand. And again, we're really focused on kind of just building out the Southeast and Central, you know, maybe creeping up a little bit, you know, into the Midwest, but that's kind of our sweet spot if we were to do anything.

Okay, great. Thanks so much.

As a reminder, if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Jay McKinless with Citizens. Jay, your line is open. please go ahead.

Hey, good morning, everyone. Greg, I wanted to go back to the comment you made about maybe speculative spec inventories coming down a little bit. Is that kind of widespread across all Smith-Douglas geographies, or are there some areas where you're seeing even less competition than you were before?

Jay, I think we're seeing it across all of our geographies that, you know, there's less inventory. I would say there appears to be an increase, though, in resale activity and resale homes on the market, but I think our new home specs has slowed a bit. okay that's great to hear um and then i guess you know good to see growth and backlog for both of the segments but maybe on on an individual msa basis so there's some msas that stood out this quarter in terms of being able to grow orders and then there's some that may be lagged relative to to the overall average uh yeah we we've seen pretty consistent demand across all the markets I would say one bright spot for me that that has been very interesting to see is the Houston and Dallas markets for us the amount of pre-sale as a as a percentage is probably higher there in any markets we're in our you know our message of personalization and an ability to you know for buyers to to do that has resonated and uh been embraced and and our spec level levels there at all time lows and obviously dallas new market but houston for sure that's great and then and then just one more if you look at the backlog right

now russ where would you say that incentive percentage is related to the i think you said 780 780 basis points for the second quarter yeah we were second quarter we what we closed was 780 um again without seeing the numbers i'm going to tell you it's probably a little bit higher than that uh just again given given our guide um of you know the 16 to 16 and a half which we hope is is going to be a little bit better but that's that's where we see the um uh the margin compression coming from it's in those it's in the incentives and that's a combination of price discounts uh closing costs and forward commitments and then you know again we we have been also reducing base price so it's it's going to be a combination of price reductions and and those things so it's not it's not really on the cost side or and i can't imagine it's um it's really the land cost that's that's shifting that much between quarters right so it's it's really going to be driven by that that incentives in the top line revenue and then and then the last question had actually just kind of sticking on land cost um with all the m a dislocation whatever you want to call it in the industry this year are you all seeing some opportunities to maybe buy land a little bit

cheaper uh or or some of these sellers being maybe a little more reasonable in what they think the land is worth?

You know, we've seen some, but it's not as widespread as you would think. You know, it's still, you know, a lot of the land sellers are still thinking their lands at top of market and, you know, which is evident by a couple of those abandonments that we showed that, you know, we try hard to work through every deal, and going to work through every deal, but at a certain point, you can't. And, you know, so, but we are seeing, you know, a lot of easing on terms, you know, probably more so than price, which at the end of the day is the savings. So yeah, I'd say it's probably 50-50 in the market right now.

Okay, great. Appreciate it, guys. Thank you, Kate.

We have reached the end of our Q&A session. I will now turn the call back to Greg for closing remarks.

Thank you, everyone, for joining us for our Q2 results. And again, just want to add a thank you to all our team members and Smith-Douglas Holmes family for all you do for us. And thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.