Good morning. I would like to welcome everyone to the Smith Douglas Homes Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] 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 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…

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 '24. 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 Home score 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 operate it as a fully public C corporation. Adjusted net income was $12.8 million for the fourth quarter compared to $22.7…

[Operator Instructions] 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. So January, 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. So we've got -- I don't have the exact number, but we've got several communities in that 100 community count number that don't yet have full models and we're preselling. So I wouldn't necessarily look or consider so much kind of the absorption pace year-over-year. I think it still feels pretty good, even though the absolute numbers may look a little flattish or even down on a pace. But again, like I said, that's more about I think just the way we're counting communities a little bit. But yes, the trends so far for spring selling season have continued to move up. And -- but like we said in the prepared remarks, it's inconsistent. We don't see enough of weekly trends yet to say, hey, things are great. But so far, so good.

All right. That's helpful. And then secondly, I would like to -- 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. And 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. But as you said, we've got models that are not yet open that we're counting a number of communities in that 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. I mean 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. But can you just talk a little bit more about what's driving the decisions there? Like what's driving you to lean back into incentives? And 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. Thanks for the question. So 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 4Q. With some of the uptick that we're seeing in traffic and it's -- and again, don't get me wrong. I mean, it's -- we are seeing an uptick sequentially, but it's the traditional spring selling season that we've hit. So it's a good trend, right? It's moving in the right direction. And -- but we continue to monitor it on a division-by-division and community-by-community basis. And so we're looking where we can maximize some margins, pull back on incentives. But then again, we're not going to sacrifice pace. And so as long as we continue to get the pace, then we'll -- that's going to be our -- where we decide to moderate incentives. And so yes, we're looking probably sequentially at about 100, 150 basis points just in the closings. But again, it's -- and when you look at what we're doing from an incentives on sales, I think it's -- we're seeing a similar trend from Q4 to Q1 and kind of the incentives. But the one thing I would add is forward commitments, the cost of forwards has come down with the rate environment. So that's good, and that will help us a bit. But we're also looking at just 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 so that's -- we're also looking at bringing some smaller product online. And so that's also impacting a bit of the sales price and margins. But at the end of the day, we are focused on getting a pace. And as Greg and I mentioned on the prepared remarks, operationally, things are running very smoothly. We want to keep our trades busy. That's -- we think that's a competitive advantage, keeping pace, keeping trades busy. But in order for us to keep building, we've got to keep selling. And so again, we're going to continue to monitor it from an incentive, whatever we can do to keep that pace. And we really want to get back to a presale orientation. This market has been really very spec heavy. That reflects 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. But yes, so we're -- it's still hand-to-hand combat. Hopefully, that gives you a little bit of color.

Yes, that's helpful, Russ. I guess one more clarification and then a cleanup question. Just on the -- since you're -- it seems like you may draw a distinction between the base price reductions and the incentives. Can you just 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 -- okay. And then the...

Yes, that includes everything. Yes, so just to be clear, what we're counting in that 6.8% is closing cost incentive, price discounts and forward commitment costs. And so 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 a 6.8% number.

Okay. Good. The cleanup question I had, SG&A, was there anything unusual in the quarter? Because you have been -- your revenues are running down. Your SG&A as a percentage of revenues in most recent quarter has been running up year-on-year. So it was a little surprising to see like a year-on-year decline in percentage of sales. Was there anything kind of onetime in nature around true-ups or things like that?

Yes. The biggest driver -- we fully expect to continue to get SG&A leverage. And obviously, that's part of pushing scale. But right now, we've got a few things pushing SG&A higher where we're not getting the kind of a matching revenue. So when we've opened up our new division, so we've got G&A, SG&A costs coming through in Dallas-Fort Worth. Greenville is still getting off the ground. We opened up Gulf Coast, and then we've divisionalized a couple of -- we took Atlanta. Atlanta was getting too big. And so we've divisionalized Chattanooga out of the Atlanta division. And then about 18 months ago, we divisionalized Middle Georgia. So we've got a little bit more G&A, SG&A running through the business as we've continued to expand the footprint that once we get up and running at full capacity in those divisions, we should start to see better overhead leverage.

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, I think it's $7 million year-over-year, and there was like quite a bit of leverage. Just is there like an incentive comp that came down in the fourth quarter that then -- that we should be thinking about reversing as we look at '26? Just wondering if there's any -- because obviously, I understand the things that are driving it up, but there was a lot of leverage in the fourth quarter. I'm just wondering what drove that?

Yes. Yes. No, you hit it on the head. You're hitting a very good pain point for us. We more than -- in prior year, we more than hit target on bonuses. So our incentive compensation was higher in the prior year. And then this year, we did not hit target. So it was about half of what our target incentive comp. So that's a good point. I think kind of to Mike's -- and I probably didn't address it 100% accurately. But yes, we had some incentive comp come down. But then the offset to that was the new divisions that were not fully operational.

Okay. That helps. And then in terms of -- in the past, you've given some really helpful color on what you're seeing in terms of land inflation, like what you expect to be flowing through the P&L. Can you just help us like how we should think about '26? And then for land that you're contracting today, are you starting to see like sort of relief or prices to come down or stabilize? And like when will that start to be maybe a tailwind to the margins?

Yes. We're definitely seeing land costs increase in '26 from what we expect in our budget and closing. Now again, that's because we're closing on stuff that's got a basis that -- and acquisitions that we've had over the last 2, 3 years, right? So you still got some higher costs flowing through there. That said, any deals -- and again, we look at this on a deal-by-deal basis. We look at our takedowns. We go back to developer partners where we can and try and renegotiate because, look, it's -- no doubt, when we did some of these deals, the market was different. I think our developers understand that. And so in some cases, we are able to renegotiate. So we are seeing more of that happen. Joe is going to kind of look at the cost, but giving you maybe a specific number on what we think land cost as a percentage of revenue will look like in '26, but it will be up slightly. And then just on new deals, new acquisitions that we're seeing, we're definitely seeing a reset happen. We'd love it to happen faster, and we love it to happen at deeper discounts, but folks are getting more realistic. So we are starting to see a reset. And again, that's why we talk about continuing to push pace because if we're not outselling and moving inventory, well, then we're not outbuying and we're not going to be taking advantage of the price reset, right? So that's why we think it's really important to continue to push pace through this cycle because it will -- we'll continue to keep our market share, not to mention we should expand market share through the downturn. And then when things get better and they will get better through the cycle, when we come out the other side, we'll have increased that market share and then we should be to get a benefit for the pricing power that we'll get and the margins coming back out the other side. So it is important for us to continue to work it like an assembly line.

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

Just -- yes, first question, just given the comments around staying disciplined in the face of some pretty heavy discounting in 4Q, I'm wondering how your spec count looked throughout the quarter, how you exited the quarter in terms of specs? And then I guess, what specs look like -- how specs -- what the spec count looks like heading into 1Q '26 and how you're thinking about it this spring?

Yes. So ideally, we'd love to have everything under construction presold, right? That's what we want to get back to. And the reason for it is having a presale orientation really gets you a higher value on those homes from your buyers, right? Because when those buyers select to go via presale, they're putting in options that they want. We're not having to discount as much. And so we're trying to push more presales. That said, given the environment, specs are probably running about half of our current inventory. But that's okay. The biggest thing is even though we count it as a spec, we're putting those under contract. We're not getting a ton that are going past completion or certainly past 30 days completion, and we're really pushing to get those sold before what we call line in the sand or when we -- pretty much drywall stage. So -- but again, that goes back to the fact that we really run it more like an assembly line, like production is our -- production is the most important where we keep that running. And so we're trying to match sales pace with that production and just keep it moving. So we've got the -- as we look forward to 2026, so even though our backlog and presales are down, not where we want them, our inventory is right where we need them to be. And so production, even though we'd like a higher percentage of presale, we've got to keep that machine going to hit some of the growth targets that we expect in 2026. So a little elevated, but we continue to chop away at that presale versus spec balance.

Okay. Got it. Then just secondly, would love to get 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?

Yes. So thanks for the question. We are almost always first looking to do lot, finished lot takedown. Those opportunities are still out there. Secondly, we'll go to our land bank partners and structure the deals in an array of different manners. But I would think if we look to land and to add a little color to some of Russ's earlier comments, we're seeing softening and opportunities in some of the A, B locations that historically for affordability, maybe we didn't get opportunities there or they just didn't solve for our price points. And then the C, D type locations are -- they're getting shopped around a lot because there's not a lot of demand in those locations. So we're focused on better locations, focused on terms and then where we need to engage our land bank partners.

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.