Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smith Douglas Homes Fourth Quarter 2025 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Joe Thomas, Senior Vice President, Accounting and Finance. 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 fourth quarter of 2024, which we will discuss on today's call, and which can be found on our website at investors.smithdouglas.com, or by selecting the investor relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the investor relations section of our website. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals, outlook performance and ability to gain market share, including in uncertain environments are forward-looking statements. Actual results could differ materially from such statements, due to known and unknown risks, uncertainties and other important factors as detailed in the company's SEC filings. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed in this call to the most comparable GAAP measures can be found in our press release located on our website and in our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman; and Russ Devendorf our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Thanks, Joe. Good morning to everyone joining us on today's call as we go over results for the fourth quarter of 2024, and provide some insight into the state of our home building operations for the first few months of 2025. Smith Douglas Homes reported pre-tax income of $30 million in the fourth quarter of 2024, capping off a very profitable year for a company in which we generated nearly $117 million in pre-tax income. The 836 homes were delivered in the quarter were well above our stated guidance range and represented a quarterly record for our company. For the full year, Smith Douglas delivered 2,867 homes. Our gross margins for the quarter came in as expected at 25.5%, which was the midpoint of our guidance. For the full year, gross margins on home closings averaged 26.2%. The combination of strong delivery growth, healthy margins, and quick inventory turns resulted in an adjusted return on equity of 29% for 2024, well above the industry average for publicly traded home builders. Overall, we're extremely pleased with our performance in 2024, and look forward to building on successes we've achieved during the year. Here in the fourth quarter, we generated 569 net new orders. Some of the last quarter price incentives and closing cost support were an important sales tool, to all our communities. While this has been an effective way to address affordability issues, it has had a negative impact on our margins. We make further progress on improving the construction efficiency in the fourth quarter. Cycle times coming in approximately 55 working days, excluding our Houston division. Our trade partners and suppliers continue to buy in to the Rteam philosophy, which streamlines the construction process and provides a level of accountability that leads to better cycle times. The adoption of…

Thanks Greg. I'm going to highlight some of our results for the fourth quarter and full year, and then conclude my remarks with our outlook for the first quarter. We finished the fourth quarter with $287 million of revenue a 32% increase over the year ago period, on 836 closings, for an average sales price on closed homes of $344,000. Our gross margin was 25.5% and SG&A expense was 14.9% of revenue. Pre-tax income was $30 million with net income of $28.8 million for the quarter. Given the nature of our UPCEA Organizational Structure, our reported net income reflects an effective tax rate of 4.2% on the face of our income statement. This income tax expense is primarily attributable, to income related to the approximate 17.3% economic ownership of our public shareholders that is held by Smith Douglas Homes Corp and Smith Douglas Holdings LLC. Our adjusted net income which is a non-GAAP measure that we believe is useful in providing a comparison to more traditional C corporations is $22.6 million for the quarter. Adjusted in net income assumes a 24.6% blended federal and state effective tax rate as if we had 100% public ownership operating as a subchapter C corporation. We believe adjusted net income is a useful metric because it allows management and investors to evaluate our results more effectively to industry peers that may have a more traditional tax and organizational structure. You can find more information about our structure and income taxes in the footnotes of our financial statements. For the full year 2024, we closed a record 2,867 homes with corresponding revenue of $975 million, a 25% and 28% increase respectively over the prior year. Our gross margin was 26.2% for the full year compared to 28.3% in 2023, primarily driven by an increase in…

[Operator Instructions] Our first question will come from the line of Michael Rehaut with JPMorgan. Please go ahead. Q – Andrew Ozzie: Hi everyone, this is Andrew Ozzie on for Mike. Thank you for taking the questions. Just maybe, I appreciate that guidance. I just wanted to maybe dial into the -- I believe I heard you say, the backlog gross margins are to the tune of 24% and 1Q is a little bit below that. Could we -- what if you could bucket out some of the dynamics there that would be very helpful.

Yeah. So, backlog margin you heard correctly, it’s about 24%. A lot of that is obviously, sales that were made in Q4. And so Q4 was definitely -- we saw more incentives pick up, where Greg had mentioned. It’s an affordability thing. Interest rates really even with the Fed cutting kind of moved against us. And so, we were taking more incentives to try and keep pace. So that’s reflective in backlog. When I look out, actually a little bit further, beyond what we’re seeing for what’s closing in the first couple of months, in terms of our backlog, it looks like it’s creeping up a little bit. So you’re actually seeing it trend a little bit up, when I look at kind of our backlog aging through kind of midyear. So, we’re hopeful again sales have picked up in February, but look incentives are still being used to drive volume. So, it’s tough. That’s where we see the biggest risk, right? This year is going to be mostly in margin. People are showing up into the sales centers. There’s definitely demand, but it’s an affordability game. Q – Andrew Ozzie: Thanks, Ross. And then maybe secondly, on the land side, is there some way to -- some framework for kind of lock cost inflation for you guys that you are thinking of currently that would be very helpful.

Yeah, that’s really outside of incentives, right? And because we’re seeing kind of flat ASP year-over-year, so you’ve got incentives that are impacting margins. It’s lot cost, right? And we’ve talked about that in the past. I’d say, it’s -- it could be 200 to 300 basis points of margin is eroding, because of our lot cost rolling through there. So, land is still challenging. It’s competitive. And that’s where we see the biggest challenge. Our vertical costs have actually been in check, but now with kind of what we’re seeing with tariffs, and the new administration and a lot of uncertainty we are seeing some of our subcontractors reach out and look at surcharges or possible increases. But there’s still a lot of uncertainty. We don’t have a real clear picture yet, on how that might impact us the rest of the year. Q – Andrew Ozzie: Thank you, Russ. I'll pass it on.

Thanks.

Our next question comes from the line of Sam Reid with Wells Fargo. Please go ahead. Q – Sam Reid: Awesome, thanks. I actually wanted to piggyback off that last question, just to comment on lot cost eroding 200 to 300 basis points of margin. I mean, is that mostly just waited to 2025 or is there a risk that, that erosion kind of persists into 2026 and beyond? Just looking for some context there, given the visibility you have in your out your lot pipeline.

Yeah. I don’t see it -- I see it kind of leveling off based on where our lot costs are. But certainly as we’ve been, buying and contracting land over the last couple of years, it’s certainly increased. But I do think it’s leveled off a bit when you -- if you kind of think about 2026 and beyond. But we really haven’t -- we haven’t taken a deep dive into it. But just sitting here today, I’d say, you’re not going to see the kind of inflation that you’re seeing in the lot costs now. I mean, it’s been -- it’s taken a pretty big bump and I think you kind of see that leveling off a bit, as you look towards the outer years.

Awesome. Thanks, Russ. And then one follow-up just wanted to touch on community count growth and cadence throughout the year. I know, obviously, there's a lot of moving pieces when it comes to community count. But can you just give us some guideposts in terms of how we should think about modeling that over the course of 2025? Obviously, it does have implications on start pay or pays, et cetera, et cetera.

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

That's helpful, Russ. I'll pass it on. Thanks.

Thanks.

Our next question comes from the line of Trevor Allinson with Wolfe Research. Please go ahead.

Hi, good morning. Thank you for taking my questions. I wanted to follow-up on gross margin. Previously, you had talked about 2025 perhaps being in the 25% range give or take. Starting below that here in the first quarter, you've got some land inflation that will likely continue to work through in 2025. Can you talk about what the biggest difference is now versus maybe a quarter ago when you were talking about 2025 gross margin perhaps being in that 25% range?

Yes. It's really -- it's the market, I think, when we had our call looking at where we saw. Rates had started coming down. The Fed was cutting. And then Q4 you saw rates start to increase. And so we've definitely had a -- we had a bigger use of incentives in Q4 and certainly at the beginning of this year. Rates peaked. The average 30 year peak in January is starting to come down a little bit. But when you look year-over-year, I think, the rates are almost flat. And so that's really had an impact for sure on where we see margins going. And as you know our business model, we're very focused on kind of manufacturing. It's a pace over price game. And so to steal a line from Lennar that is -- that's kind of our buffer in terms of getting the pace at that gross margin. And so we've had to use more incentives to push pace.

Yes. That makes sense. And then second question on SG&A, closings were really good in the quarter, but SG&A still kind of came in towards the top higher end of your range. How are you thinking about leverage on SG&A as we move into 2025? I appreciate that you guys have spent a lot on growth already. How do you think about levering that?

Yes. SG&A was elevated in Q4. We actually -- so we over closed from our guidance and then we hit a lot of our operational metrics that bonuses are based on. And so we probably had over 100 basis points of SG&A just an additional bonus accrual that if we knew we were going to hit the numbers like we did for the year would have been accrued more evenly throughout the year. So we probably that 14.9% would have been probably just south of 14% if we had taken those accruals throughout the year. So that was a big part of it. But, yeah, we would expect ourselves to get some good SG&A leverage as we continue to grow the top-line. We’ve got the team in place from a back office perspective. We’ve got we’re pretty set from that standpoint as a public company. So we would expect that SG&A number to continue to trend down below 14%. Our goal would be certainly to improve that year-over-year.

Thank you for all the color and good luck moving forward.

Sure.

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

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

Yeah. We’ve got the communities in place to hit our 3,000 to 3,200 guide on closings. So a lot of it’s going to depend. Again February picked up from a sales pace perspective. We’re seeing March has been pretty consistent with February. But look there’s definitely still a lot of uncertainty going into the balance of the year. But most of that we feel is around margins. We definitely think -- people are showing up to the sales centers. Traffic has been pretty good. So it really for us I think it’s just a matter of finding that right price, right? It’s an affordability game as I’ve mentioned. So it’s -- the biggest risk is certainly on the margin side. I think we can get volume, but the big question is at what margin, what price is it going to come. And that remains to be seen. So still there’s a lot -- like I just mentioned before there’s a lot relative to vertical construction costs because of what’s happening with tariffs and how that’s going to impact us. And so that is just a lot of uncertainty there. But we feel -- sitting here today we feel pretty good about getting volume. Again barring some sort of major recession or a big shift in employment. I’ve always said we can kind of cure a payment for folks and so that impacts margin. But if people start losing jobs that’s the part we can’t fix.

No, it's super helpful. Thanks for all the color there. And then, I guess, one more kind of piggybacking off the previous tariff questions and margin questions the -- like the Trevor had said the first quarter margin kind of coming in a little lower mainly as given the market weaknesses. As you think about marching through the balance of the year is there just for a higher level kind of given there's so many moving pieces around tariffs? How are you kind of thinking about making that into the guide? And if I could sneak an extra one in here are you guys hearing anything on the ground given, kind of, the recent headlines on immigration and labor as well too? Thanks a lot guys.

Yeah, from a margin perspective like I said earlier we are seeing it's interesting our backlog when I look at the aging it looks like backlog margins picking up. So I think again some of our early backlog that's going to be closing this quarter. Is reflective of probably incentives and discounting we were given on inventory in Q4, but look it's I'd be guessing if I told you which way margins are going to go from here. I think, like I said, that's the biggest risk, but we are seeing -- we're seeing kind of that low to mid margins right now on what we're selling, but in order to keep pace. That's just going to shift based on where the market goes and a lot of that's interest rates and what happens just more macro level. Yeah, and then from a tariff perspective, I don't know, Greg, you got some color on what we're seeing from ourselves.

Yeah, I'd say currently, we're not seeing any impact, but you know, we don't have our head in the in the sand either. We are following a list of items daily, weekly with all of our supply chain vendors and staying alert to those things, but really from immigration tariff, all those things as of today, there's not been any impact.

Yeah and you want to touch on the cycle times have actually come down, hasn't been an issue.

Yeah, we were just visiting earlier cycle times year-over-year. We've taken two weeks, so we ended 2023 -- 65 days. We're ended 2024 at around 55 days, so that helps to shrink backlog, but it also helps with the efficiency and cycle and all the things that we're striving for here. So in light of those things going on, we've still seen some operational efficiencies.

No, that it makes a lot of sense. Thanks for all the color, you guys. I'll pass it on.

[Operator Instructions] And our next question will come from the line of Jay McCanless with Wedbush. Please go ahead. Q – Jay McCanless: Hey, good morning, guys. I guess my first question Russ is, what have you all been seeing to reduce the community count guide? I think you've given an initial fiscal 2025 guide for plus 15% and now you're saying low single digits, maybe bridge that delta force.

I think, it's going to be low double digits. I think it's like a 12%, because we were at 70 -- 78 and we get close to 90 so 12 -- so it should be 12%. I think -- so we get we'll get close. I mean, some of that could just be timing. I mean this was just kind of the numbers that we looked at, but just last week, but some of that is just -- we may get a couple of communities over -- it's just how quickly can we get lots and I didn't mention on our prepared remarks, but it's definitely still challenging in some of our municipalities and just getting through approvals, so there's always that risk, but I think we can get close to that 15% increase. Q – Jay McCanless: And then that that's actually my second question was going to be, what's the path for growth this year? Is it going to be mostly organic? Are you guys still evaluating some potential M&A?

Yeah, it's all, so all of our closing growth this year is, I'd say organic. We are in Chattanooga. We did that's being run out of our Atlanta operations, but we've got I think it's close to about 1,000 lots under control in Chattanooga. So that's a big part where we pushed pretty far north in Atlanta. And then, we did open Central Georgia, so that middle Georgia, Central Georgia area might deliver about 100 closings, but again, that's kind of just an extension of Atlanta growing so big that we've divisionalized that. As we've mentioned before, we opened a division in Greenville. We won't get any -- we don't think we're going to get any sales and closings this year, although our division President there is doing an excellent job of getting things going. We may have a small opportunity to do something. But -- so everything is organic. We are definitely looking at opportunities. The M&A -- there's still M&A going on. We've seen some deals happen in the industry. We're seeing some packages. But as we've always said, we'll be opportunistic. We're looking at filling in some spots throughout the Southeast and expanding. But -- if we see something we like, we'll look at it. But we're certainly not going to overpay. We're comfortable doing greenfield start-ups if we like a market, but nothing immediate.

Got it. And then the last one I had, just thinking about average closing price for 2025. You initially -- or you had said last quarter, $335 to $345. Is that still a good range? Or how should we be modeling that through the year?

Yeah. I think that's still a good range. I think our backlog is right now at $340 million. And so some of the ASP for this first quarter, it's just really the way our backlog is falling out, and it could be mix across different divisions. But yeah, I still think kind of that 340 number is, as we sit here today, is still pretty good.

Okay. Sounds great. Thank you.

Sure, thanks.

[Operator Instructions] Our next question will come from the line of Alex Barron with Housing Research Center. Please go ahead.

Yeah, thank you. I was wondering in terms of the incentives you guys are offering, are they mainly in the way of rate buydowns or in closing costs? Or are you guys starting to see the need to do price cuts?

It is primarily in closing costs, which also -- which include rate buydowns. And most of our buyers, there is some level of rate buydown in there. We are discounting as well. So it's a mix, but I'd say it's more geared towards closing cost incentives.

And what about broker commissions? Are you guys maintaining whatever your standard rate is or are you having to feel the need to add bonuses or something like that?

No, it's the same as what we've been doing in the past. We haven't changed. So we're still offering incentives, but nothing out of the ordinary.

Got it. Thank you so much.

Sure.

And that will conclude our question-and-answer session. I'll turn the call back over to Greg Bennett for any closing remarks.

Thank you everyone for joining us today. As always, we're accessible. Give us a call and look forward to chatting again next quarter.

This concludes today's meeting. Thank you all for joining. You may now disconnect.