Earnings call transcript: Smith Douglas Homes Q2 2025 misses EPS expectations

Smith Douglas Homes (SDHC) reported its Q2 2025 earnings, revealing a significant miss on earnings per share (EPS) forecasts. The company posted an EPS of $0.26, falling short of the anticipated $0.49, a surprise of -46.94%. Revenue came in at $224 million, closely aligning with expectations. The stock reacted negatively, with a 2.14% decline in pre-market trading, reflecting investor disappointment. According to InvestingPro analysis, the company maintains a high shareholder yield despite recent challenges, and the stock appears undervalued based on their proprietary Fair Value model.

Key Takeaways

• EPS of $0.26 missed the forecast of $0.49 by 46.94%.
• Revenue of $224 million was in line with expectations.
• Pre-market stock price dropped by 2.14%.
• Home closings increased by 2% year-over-year.
• Smith Douglas Homes is expanding into new markets.

Company Performance

Smith Douglas Homes experienced a challenging quarter, with net income declining to $16.4 million from $24.7 million in the previous year. Despite this, the company managed to increase home closings by 2% year-over-year to 669 homes, underscoring its operational resilience. InvestingPro data shows impressive revenue growth of 28.67% over the last twelve months, with a strong return on equity of 23%. The company’s expansion into new markets like Dallas-Fort Worth and the Gulf Coast of Alabama highlights its strategic growth focus, supported by a healthy current ratio of 8.2 and moderate debt levels.

Financial Highlights

• Revenue: $224 million, a slight increase from the previous quarter.
• Earnings per share: $0.26, down from the forecasted $0.49.
• Gross margin: 23.2%, at the high end of guidance.
• Net debt to book capitalization: 12.1%.

Earnings vs. Forecast

Smith Douglas Homes reported an EPS of $0.26, significantly below the forecast of $0.49, marking a surprise of -46.94%. This miss is notable compared to previous quarters, where the company had generally met or exceeded expectations. Revenue closely matched forecasts at $224 million, indicating stable sales performance.

Market Reaction

Following the earnings announcement, Smith Douglas Homes’ stock fell by 2.14% in pre-market trading. This decline reflects investor concerns over the earnings miss and its potential implications for future profitability. The stock is trading near its 52-week low of $16.28, highlighting ongoing market pressures. InvestingPro subscribers have access to 8 additional exclusive ProTips and comprehensive analysis through the Pro Research Report, which provides deeper insights into the company’s valuation and growth prospects. Get the full picture with InvestingPro’s advanced metrics and expert analysis, available for over 1,400 US stocks.

Outlook & Guidance

The company projects Q3 home closings between 725 and 775 homes, with an average sales price of $330,000 to $335,000. The gross margin is expected to range from 20.5% to 21.5%. For the full year, Smith Douglas Homes aims to achieve 3,000 home closings, emphasizing its commitment to growth despite current challenges.

Executive Commentary

• CFO Russ Stevendorf emphasized the company’s "pace over price" strategy, highlighting its focus on maintaining sales velocity.
• CEO Greg Bennett noted improvements in construction efficiency, reducing average cycle time to 54 days.
• Stevendorf acknowledged affordability challenges, impacting potential buyers’ purchasing power.

Risks and Challenges

• Macroeconomic pressures and declining consumer confidence could hinder future sales.
• Affordability constraints remain a significant barrier for potential buyers.
• The company faces competitive pressures with its low average sales price strategy.
• Inconsistent demand trends pose risks to achieving sales targets.
• The land market’s softness could affect expansion plans.

Q&A

During the earnings call, analysts queried the company’s strategies for entering new markets and managing spec home inventory levels. Executives addressed concerns about land market conditions and detailed their incentive programs designed to drive sales, emphasizing the lack of immediate pressure from lumber prices.

Full transcript - Smith Douglas Homes Corp A (SDHC) Q2 2025:

Call Moderator: Hello, and welcome to Smith Douglas Home Second Quarter twenty twenty five Call and Webcast. Please note that this call is being recorded. After the speakers’ prepared remarks, there will be a question and answer session. Thank you. I’d now like to hand the call over to Joe Thomas.

You may now go ahead, please.

Joe Thomas, Investor Relations, Smith Douglas Homes: 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 2025, which we will discuss on today’s call and which can be found on our website at investors.smithdouglas.com or by selecting the Investor Relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the Investor Relations section of our website. Before 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 Stevendorf, our Executive Vice President and CFO. I’d now like to turn the call over to Greg.

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Thanks, Joe, and good morning to everyone. Ms. Douglas Homes turned in another strong operational performance in the 2025, generating pretax income of 17,200,000.0 and an earnings of $0.26 per diluted share. Home sales revenue was $224,000,000 for the quarter on home closings of $6.69, which exceeded the guidance range we gave last quarter. Home closing gross margin came in at the high end of our guidance range at 23.2% and net new orders for the quarter totaled seven thirty six homes.

Overall, I’m proud of our company’s performance this quarter despite a challenging macroeconomic backdrop for homebuilding and believe it once again demonstrates the strength of our asset light operational model focused on turning inventory quickly. We experienced inconsistent demand trends during the quarter, which stretches to solid order activity followed by periods of softness. While we believe there is a strong desire and need for new homes in our markets, affordability constraints, declining consumer confidence and lack of urgency from buyers continue to be a headwind for our industry. As a result, we remain intensely focused on operating elements that are within our control, which include making our homes as affordable as possible while giving our buyers the choice and customization they desire. Our average sales price on homes closed this quarter came in at $335,000 which is one of the lowest ASPs of our peers.

We ended the second quarter with 92 active communities, a 23% increase over second quarter of twenty twenty four and improved our controlled lot count by 57% compared to a year ago to almost 25,000 lots. Under our asset light strategy, which gives us operational and financial flexibility to adjust to challenging market conditions, option lots accounted for 96 of our unstarted controlled lot count at the end of the quarter. We continue to focus on growing our operations in existing markets while exploring strategic expansion opportunities where we can deploy our operating model to further increase our overall market share of new home sales and achieve better economies of scale and operating leverage. To that end, I’m happy to share that we’ll be entering Dallas Fort Worth and Gulf Coast Of Alabama markets through greenfield startups. We have been working to secure several finished lot positions in DFW over the last six months and expect closing our first lots and start selling by year end.

Additionally, we have been working on several opportunities to acquire lots in Greater Baldwin County area of Southern Alabama and expect to close on several land deals that would have us targeting communities opening in the 2026. We believe in the long term growth prospects of these markets and they fit nicely into the geographic footprint where we can continue to deliver first time homebuyers affordable, high quality, personalized homes. Construction efficiency continues to be another major focus area of our company. Excluding Houston, our average cycle time at the end of the quarter was fifty four days, which is down from sixty days in 2024. We continue to make headway in the quarter bringing Houston division on board with these principles and look forward to them achieving cycle times closer to the company average in the near future.

Despite the challenging sales backdrop, we feel our balance sheet remains in great shape with our net debt to net book capitalization ratio coming in at 12.1% at the end of the quarter. The strength of our balance sheet allows us to operate from a position of strength and remain opportunistic when the market dislocations occur. With our previously announced $50,000,000 share repurchase authorization, we also have the flexibility to buy our stock back should the opportunity present itself. As we head into the second half of the year, I feel good about our company’s outlook even as the macroeconomic and interest rate environments continue to remain uneven and uncertain. We have many well located communities in some of the best markets in the country and deliver homes at an average selling price that represents a good value.

We continue to look for ways to curb cost and our build times continue to improve, which will help us turn our inventories faster. Despite the uneven sales environment in the second quarter, our can rate was actually down year over year at 10% for the quarter, which is a testament to the appeal of our homes and the shortened time between sales and closings. We also have several new communities opened at the start of the third quarter, which will serve as a tailwind for our sales efforts. Given these positives, I remain optimistic about the future of Smith Douglas Homes. Now I’d like to turn the call over to Russ, who will provide more detail on our financial and operational performance this quarter and give an update on our outlook for third quarter.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Thanks Greg. I’ll now walk through our financial results for the second quarter and then provide an update on our outlook for the third quarter. We closed six sixty nine homes during the second quarter, up 2% from six fifty three closings in the same quarter last year. Homebuilding revenue was $223,900,000 an increase of one percent over the prior year. Our average sales price was approximately $335,000 which is down slightly year over year due to slightly higher discounts and shifts in geographic and product mix.

Gross margin came in at 23.2%, which was at the high end of our guidance range and compares to 26.7% in the prior year. Our lower year over year margin reflects the impact of higher average lot costs, which were 26% in the current quarter versus 23.9% of revenue in the year ago period, as well as rising incentives and promotional activity, which totaled 4.8% of revenue this quarter, up slightly from 4.2% a year ago. SG and A was up $2,900,000 versus prior year and was 15.5 of revenue compared to 14.5% last year, driven primarily by increased payroll and associated expenses with a sizable portion of the increase coming from the opening of new divisions over the last few quarters. Net income for the quarter was $16,400,000 compared to $24,700,000 in the prior year and pre tax income was 17,200,000.0 versus $25,900,000 Adjusted net income was $12,900,000 compared to $19,400,000 in the prior year. As a reminder, given the nature of our Up C organizational structure, our reported net income reflects an effective tax rate of 4.3% this quarter, which is attributable to the approximate 18% economic ownership held by the public shareholders through Smith Douglas Homes Corp.

And Smith Douglas Holdings LLC. Because the majority of our earnings are allocated to our Class B members, which is shown as income attributable to non controlling interest on our income statement, we provide adjusted net income, which assumes 100% public ownership and a 24.9% blended federal and state effective tax rate. We believe this measure is helpful in evaluating our results relative to peers with more traditional C Corporation structures. Additional details on our structure and related income tax treatment can be found in the footnotes to our financial statements. Turning to the balance sheet, we ended the quarter with $16,800,000 in cash and had approximately $70,000,000 outstanding on our unsecured revolver with $189,000,000 available to draw.

As I mentioned on our last earnings call, we finalized the amendment to our credit facility, which included among other things, an increase in total size to $325,000,000 and extended the maturity to May 2029. Our debt to book capitalization was 15.2% and our net debt to net book capitalization was 12.1%. Backlog at the end of the quarter was eight fifty eight homes with an average sales price of $341,000 and an expected gross margin of approximately 21.5%. Monthly sales per community went from 2.8 in April to 2.4 in May and 2.8 in June. In July, we saw that average get back to approximately 2.5 sales per community.

Affordability remains a key challenge for our buyers, and we continue to lean into targeted incentives to support sales. Continuing our program from late March, we utilized forward commitments to buy down interest rates, which we believe helped boost conversion rates. During the quarter, we recognized $900,000 of costs on forward commitments, which is recorded as an offset to revenue. We expect to continue to utilize these rate buy downs through the end of the year as we focus on a pace over price philosophy. Turning to our third quarter outlook, we expect to close between seven twenty five and seven seventy five homes with an average sales price between $330,000 and $335,000 Gross margin is projected to be in the range of 20.5% to 21.5%.

While incentives will continue to pressure margins, we are maintaining discipline in how and where we deploy them. We ended the second quarter with 92 active communities and expect to see that number continue to grow modestly throughout the remainder of the year. We’re actively opening new communities across multiple divisions and remain focused on supporting a stable and scalable growth platform. Before I conclude, I want to reiterate that while we’re pleased with our results through the first half of the year, our outlook does include several risks. As always, our ability to achieve these results will depend on maintaining an adequate pace of sales, bringing new lots and communities online as scheduled and managing cost pressures, particularly in labor and materials.

Additionally, broader macroeconomic factors such as inflation, employment trends, interest rates and consumer confidence could create headwinds to demand and impact the timing of our volume of sales and closings. We remain focused on executing what we can control and believe our land light model, steady operations and financial strength position us well to navigate these challenges over the long term. With that, I’ll turn the call over to the operator for questions.

Call Moderator: We are now opening the floor for question and answer session. Your first question comes from the line of Sam Reid of Wells Fargo. Your line is now open.

Sam Reid, Analyst, Wells Fargo: Awesome. Thanks so much. Definitely great to see the gross margin come in at the high end of the guide for the second quarter. Just curious what you’re seeing from a stick and break labor standpoint or either of those tailwinds relative to expectations in the quarter. And then looking to your third quarter guide, it does look like the homes you’re planning to sell and close intra quarter will be carrying a lower margin relative to your backlog.

Just curious what’s embedded in your gross margin assumptions from an incentive standpoint, especially as it sounds like you’re stepping up finance incentives?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Yes. Good morning, Sam. The sticks and bricks were flat during q two. They’re down year to date a little. I’ll let Russ hit a little bit on the gross margin pressure.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yeah. So what we assume for Q3 is continued incentives, particularly on the forward commitments. So we’ve had some success with the rate buy down. So we implemented we started really back at the end of the first quarter and carried it through second quarter. So we’ve seen that it’s a pretty good traffic driver.

So we’ve been buying rates down to, you know, on a fixed basis to four nine nine. We we started to implement a a five one arm at a three nine nine, and it’s it’s been pretty good from a traffic standpoint. So that’s that’s really the expectation is we’ll at least continue that through the third quarter and really just kind of monitor it, as as we move along. The nice thing is we did see a little bit of a tick down in in rates and certainly the cost of the forward. So that was nice this past week, but that’s that’s kind of our our assumptions, going forward.

Sam Reid, Analyst, Wells Fargo: No. That’s helpful. And then maybe switching gears, just touching on lots. So it looks like your controlled lot position is up, you know, almost about 60 or so percent year over year. Maybe just break out, you know, kind of what that looks like in your existing markets versus how much of that might have come from some of the newer markets that you’re looking to enter, like Dallas and The Gulf Coast, just so we can kind of contextualize what that looks like, in the context of your existing operation?

Thanks.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Sure. Yeah. Not nothing nothing yet from The Gulf Coast. But for Dallas, we’re we’re probably 600 or so lots, I believe, in there. And then, we had a significant bump in Chattanooga over the last, you know, six to twelve months, which which is part of our Atlanta division, but but really it’s it’s something that we’re looking at as a possible standalone division in the future.

So we’ve got some growth in there. Central Georgia as well, which we also mentioned about six months ago, we divisionalized that. That’s kind of another split from Atlanta because of the continued growth, in in our largest division. But Middle Georgia, Central Georgia is, you know, Perry making that, you know, it’s really really kind of South Of I 20, if you know the Atlanta market. And so we’ve we’ve picked up, quite a few lot positions.

And then obviously, Greenville was another division that we opened last year, and we continue to to pick up lots.

Steve/Mia, Analysts, RBC Capital Markets: So it’s it’s coming. I mean,

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: it’s it’s actually a a pretty good spread across the footprint of the company. Houston, clearly, continue to drive growth. Think going from close to 400 closings last year, we’ve got a view that that can be another 1,000 unit market for us in the next few years so we continue to add lot positions. So, it’s it is spread across the company, but, you know, hopefully, that gives you a little bit of color in in some of the newer spots that we’re, we’re entering. Thanks, Sam.

Sam Reid, Analyst, Wells Fargo: No. Thanks so much. Oh, go on.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: No. That was it. That was it.

Sam Reid, Analyst, Wells Fargo: Awesome. No. Thanks so much, guys. Really appreciate it. I’ll pass it on.

Call Moderator: Thanks. Your next question comes from the line of Mike Dahl of RBC Capital Markets. Your line is now open.

Steve/Mia, Analysts, RBC Capital Markets: Hey, good morning everyone. We’ve actually got Steve and Mia on for Mike Dahl today. Thanks for taking my questions. Wanted to start by kind of checking in on your thoughts for the outlook for the full year. Obviously, third quarter guide is super helpful and want to fully respect the volatility in the current macro with everything going on out there.

But I was kind of hoping you could share with us how you’re thinking about the kind of 3,000 to 3,100 ish homes target you gave us last quarter and kind of what may have changed with that if that’s kind of still a good guidepost? If there’s any more details you could give us on how you’re thinking about the balance of the year, that’d be helpful. Thanks.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Sure. Yeah. Obviously, we feel a lot better about, you know, giving q three guidance. It’s it’s, know, just given the environment, it’s it’s pretty difficult to forecast, you know, too far out. Obviously, you know, we put out 3,000.

That that’s a that’s a goal for us as a company. It’s definitely achievable. We certainly have the lot positions. You know, we’ve got the community count. So it’s really gonna depend on on demand for us.

And and look, we’re as as Greg mentioned, I mean, we we’ve got a a a pace over price philosophy. So for us, it’s really just finding that price in which we can continue to clear, you know, inventory and continue to push sales. But, you know, 3,000 is in our sites, know, 3,000 plus would be great. And so, you know, it it’s really, you know, gonna depend on the on the demand and more of the macro environment if we can get there. You know, we did we we felt like we we had a pretty good balance this quarter and we’ve started using incentives and driving traffic.

And the nice thing is just this past week we had I don’t know if it was a contribution of kind of where rates moved last week, but we we did see a nice uptick in in traffic and had a pretty good week of sales this past week. So we’ll see, but it’s it’s still a it’s still a target of ours.

Steve/Mia, Analysts, RBC Capital Markets: That’s super helpful. Appreciate the context there. Secondly, I had a question on the land side. You mentioned last quarter that you were starting to see some cracks in sellers out there. So I was wondering from a higher level what your current view of the land landscape is and what may have changed from last quarter to this quarter and overall views on that?

Thanks.

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Yes, thanks. I’ll take that. You know, we are seeing some softness in the land. It’s really not a lot of pullback on price. We are seeing the ability to go back on some terms and more favorable negotiating.

But on the land itself, it’s still holding. But there is a fair amount of retrading going on currently and I think we’ll see that continue probably through the end of the year yet.

Steve/Mia, Analysts, RBC Capital Markets: Got it. Super helpful guys. I’ll pass it on. Thanks.

Call Moderator: Next question comes from the line of Andrew Uzzi of JPMorgan. Your line is now open.

Andrew Uzzi, Analyst, JPMorgan: Hi, guys. Thank you for taking my question. I appreciate the time here. Would love to kind of focus in on maybe get an update for how you’re thinking about community count growth. I mean, I think with obviously, don’t think you necessarily got it to 3,000, but if that were the case, that would imply a nice year over year growth and and closings in April.

So just wanted to see if you guys can expand on that any any further. Thank you.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Sure. Yeah. Look. That it was it clearly, that was a little bit of a soft guide I gave on on the last, the last question. But like I said, it’s, it’s good to have goals.

Right? So, you know, that 3 thousand’s a target for us. We we we’d like to get there. You know, as far as community count, so like I said, we’ve got the community count. You know, the other the other thing to to keep in mind with some of our community, the way we count it, we’ve got a few communities in Houston where we’ve got some different lot sizes, more or less the same same product.

So there’s, you know, there’s probably our community counts may be overstated or or it it includes really, like, probably three communities where where you’ve got a couple lot sizes, but we do count them as separate communities. So, you you typically don’t get the same absorption pace in where where you’ve got a couple of, you know, different single family lot sizes. So I just wanna, at least highlight that. But yeah, we think that there’ll be some moderate growth with community count through the back half of the year. And you’re right.

I mean, fourth quarter, we’ve got some expectations. We’ve got the inventory in the ground. When you look at our spec levels today, they’re a little more elevated than we normally have. We’re primarily a presale builder. But, you know, with the way that we we operate from a really an assembly line manufacturing approach, you know, we we continue to to watch our inventory levels, but we’re pushing we’re pushing pace and pushing incentives so that we can, you know, target our our, you know, absorptions and and, you know, try and get to our our closing number.

So, hopefully, that gives you a little little color.

Andrew Uzzi, Analyst, JPMorgan: Thanks, Russ. Always helpful. I guess for my second question, just wanted to expand on maybe if you can expand on the decision to enter DFW. Obviously, think that’s positive, a net positive, but given kind of the inventory dynamics there and potentially some oversupply, what drove that decision and kind of your strategy going forward for greenfields there and any other markets in the future?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Yes. I’ll take that. We know, if we entered Houston, part of that message was kind of it’s a launch pad for us across Texas with DFW being in the South. We’ve actually been on the ground in DFW for several months now, working on some opportunities and trying to be opportunistic where it was available and feel like we’ve got some really good positions there. We understand the dynamics in that market presently, but feel like as in any of our markets, we’re in a good place with those lots that we’ve secured.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yeah. The the only other thing I’d add there is obviously with our our business model. We we maintain a pretty conservative balance sheet, and there was a a really good opportunity to pick up finished lots, and we’re definitely seeing, some dislocation in the market there. Like you said, I think there’s there’s some builders, that are struggling. You know, our our hope is that, clearly, we’re we’re we’re getting it at a time where we think there’s opportunity.

You know, could there be some continued softness? Sure. But, you know, we just feel like with our balance sheet and and really our long term philosophy, you know, we’re gonna we we know we’re gonna be there. It just felt like the the right time, and we can pick up finished lots with some pretty low deposits. And so really, really limits the risk, but but it’s a good time for us to start taking advantage of some opportunity.

Andrew Uzzi, Analyst, JPMorgan: That makes a lot of sense. I appreciate the color, guys. I’ll pass it on.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Thanks.

Call Moderator: Next question comes from the line of Grape Jadrzyk of Bank of America. Your line is now open.

Rick Jadrzyk, Analyst, Bank of America: Great. Thank you. Hi. Good morning. Thanks for taking my questions.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Good morning, Rick.

Rick Jadrzyk, Analyst, Bank of America: Good morning. I first wanted to ask just with the DFW and Gulf Coast entries, how do we think about just the SG and A run rate from here? Is there any sort of incremental investment as ramp up into some new markets here? And then how do we think about you know, you have a a building strategy, which is very efficient. How do we think about when those markets are able to to get scale and you’re able to, like, implement your R team?

And at what level of deliveries you need to get to before that hits that run rate?

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Sure. Like we mentioned in the prepared remarks, about half of where we saw the year over year increase in SG and A was really from some of these new divisions. And so it’s really payroll, it’s headcount costs. That’s the big driver when you’re doing a greenfield startup is just putting some boots on the ground there. So, yeah, I I think, look, the the cost is there there’s a cost.

It’s it’s moderate, but, know, maybe million couple million dollars in the first year to to really get a a division going before you start seeing some significant, you know, sales closings. But when we do a greenfield startup, you know, the the plan is is within within the first two years, we’d like to get and, you know, the way that we we do business with our RT model, kind of our geographic pause. But within the first two years, the plan is always to get to a run rate of about that 200 closing, which is full RTM. So it’s usually about two years before you start seeing some some generating some profits. You know, the hope is that those first, you know, twelve to eighteen months, you’re gonna get to, you know, kind of a breakeven and then kinda you get that run rate of 200 and and then every, you know, call it eighteen months or so, you’re adding you’d you’d like to see adding another r team.

So another 200 units and get to 400. I mean, that that’s our approach is that we we wanna enter markets where we can get at least two full r teams. And certainly with Dallas, you know, that’s the largest market in the country. You know, that’s that’s a market where we love to see within, you know, five five years plus, you know, a thousand we we we hope that we can get to a thousand deliveries there just kinda like where we’re we’re targeting in Houston, when we did that acquisition. So, that’s really the the thought process and how that math works for us.

Rick Jadrzyk, Analyst, Bank of America: That’s really helpful. And then, when we look at the the backlog is obviously down down quite quite a bit year over year. Like, how do you think about the percentage of spec going forward here? Like, where has it been historically? Where was it in the quarter?

And like, how do we think about it going forward? And like your comfort level in spec shifting to a little bit more spec, versus versus BPO?

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yeah. Historically, you know, really pre COVID, we we really are, you know, seventy plus percent presale versus versus spec. And before we hit drywall, which we call line in the sand, we’re normally, you know, 90 plus percent of our our homes have a contract on it. So again, we are we continue to be focused heavily focused on presale. It’s just really, it’s the market that’s kind of driving a little higher spec levels for us and and what we’re seeing in our new home competitors, just with the specs on the ground.

And that’s where a lot of the opportunities are for buyers from an incentive standpoint. So we’re probably closer to 50%, 60% right now. But we are we continue to push and have some ideas to try and continue to push, you know, more presale. I mean, that’s that’s obviously a focus, but we’ve been successful. You know, we do have some higher levels of inventory.

So while while the backlog is down, you will see our inventories up up a bit. But again, we’ve just been selling at a higher spec rate. So backlog turnover is obviously increased, but we’re getting some higher spec sales. So again, given our guidance for the third quarter and a little bit of that soft guidance again for the back half of the year, feel like we can get to our numbers. But our focus is and always will be presales.

But it’s just it’s really kind of the market that’s driving a little bit of shift right now and and we’re focused on getting back to, you know, higher presale levels when when the market starts to, hopefully move in our direction.

Rick Jadrzyk, Analyst, Bank of America: Great. Thank you. Appreciate it.

Jay McCanless, Analyst, Wedbush: Sure.

Call Moderator: Your next question comes from the line of Jay McCanless of Wedbush. Your line is now open.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Hey, Jay. Jay, you there? On mute?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Oh, there we

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: go. Your line

Steve/Mia, Analysts, RBC Capital Markets: is open.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: When the mute’s not on.

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: There you go.

Jay McCanless, Analyst, Wedbush: Sorry about that.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: No worries.

Jay McCanless, Analyst, Wedbush: So, Russ, if you don’t mind, I heard the June and the July absorption numbers, but could you give the April and May, please?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Joe’s Pulling

Call Moderator: it back up.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Pulling it up. I think April was three, if I if I recall. Because I think we gave that on the last

Joe Thomas, Investor Relations, Smith Douglas Homes: I think it was two point eight and two point five or

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Yeah. Yeah.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yeah. It was higher in April. Trended down to maybe flat in May and then kinda, you know, as we move through the summer. But can’t get good help, Jake. You know, it’s taking Joe a while to pull up numbers.

We’ll we’ll circle. But when when Joe gets it, we’ll circle back.

Jay McCanless, Analyst, Wedbush: Yeah. I’ll follow-up afterwards.

Andrew Uzzi, Analyst, JPMorgan: Yep.

Jay McCanless, Analyst, Wedbush: No problem. No problem on that. And then, I guess, next question I had. So with the least kind of 3,000 closing number you called out, that’s what almost $9.70, $9.80 you’re going to need to close in the fourth quarter. Does that feel achievable?

And do you think you’re going to have to lean into the incentives and hit the gross margin to sell some of this excess spec inventories? Is that kind of how you guys are thinking about the rest of the year?

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yes, for sure. I mean, look, again, we’re pace over price. So it’s clearly a matter of just leaning into incentives to the extent that it’s needed to to drive that that pace. Like I’ve mentioned, it’s not a it’s not a community count issue. It’s not a it’s not an in construction issue.

Our our cycle times actually continue to improve. So, you know, credit to, you know, our our operators out in the field. It’s really it’s really just trying to, you know, hit a price that that can get that demand going. So, you know, again, our goal is 3,000. You know, could it be 2,900?

Sure. It’s just, you know, a lot of it’s just gonna depend on price and and incentives and, you know, that’s why I haven’t touched margin, because, you know, who who it’s it’s real difficult to to to figure out, you know, where where that margin’s gonna be to get that pace, but that’s our that’s our focus. Okay. And I think it’s worth calling out

Joe Thomas, Investor Relations, Smith Douglas Homes: And, Jay, just circling back, it was two point two point eight in April, 2.4 in May.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: And and From two

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: in June.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Looks like yeah. Yeah. 2.8 in June. So tick back up in June, and then you have the the numbers we gave for July and August or July. Sorry.

Jay McCanless, Analyst, Wedbush: Yeah. I’d love to have that August number already.

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: You if you got that, that’d be a good one.

Jay McCanless, Analyst, Wedbush: So it’s actually encouraging, I think, that you guys are saying that if if you give a little more on incentives that the consumer is responding because some of your larger competitors have talked about how even if they did lean in and put more incentives in, it’s not making the the consumer react. So maybe talk a little bit, if you could, about what type of uptick you’re seeing when you do lean into the incentive because that’s that’s different from what we’ve been hearing from some of your larger competitors.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yeah. Look. At least for us, it’s it’s definitely so we weren’t a big user at you know, we we really did our first forward commitments in at the end of q one, And we pushed it into to Q2 because we did see an uptick in traffic. And, you know, we we do feel like we’re getting a little bit better conversion rate. So it’s you know, I I can’t quantify exactly, but, we continue to monitor.

You know, we talk we talk to the field on a regular basis and just, you know, try to figure out what’s working, really try to continue to educate, you know, our sales folks on, hey, these are the positives of using these incentives. You know, we we implemented kind of that arm product this this, you know, last several weeks because, you know, at a three nine nine rate, getting folks to to be able to qualify at that three nine nine rate is is a big deal, especially for our buyer. You know, for us, it’s our buyers, it’s really figuring out that payment. We’re still giving closing costs. So we’re we’re also giving, you know, you know, zero closing costs plus that $3.99.

It’s a really attractive opportunity. And and so it’s, you know, it like we said last quarter, you know, it’s some some of what’s happening in the market, feel, is is a confidence issue by consumers. But, as as there’s not as much noise, you know, people start feeling good into the back half of the year. And like I said, these incentives feel like they’re working for us. And and so we’ll continue to monitor and and continue to push it to the extent that we feel like it’s helping out.

Jay McCanless, Analyst, Wedbush: Okay. That’s great. Thank you. And then the last one for me. Yeah.

I know you’ll you’ll talk about your second break, sounds like that’s a little better. But I think there is the looming threat potentially of higher lumber prices depending on what happens with this Canadian softwood lumber agreement. I guess, you all seeing any pricing letters from your suppliers? Are you all starting to see anecdotally any signs of lumber prices starting to move up? And if so, when do you

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: think it might hit you all’s income statement?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Jake, this is Greg. Good morning. We’ve not seen any letters presently. So, you know, there’s a lot of discussion around tariffs. There’s a lot of discussion about potential, but as of, you know, present moment, we’ve not had any notifications of of impact.

Jay McCanless, Analyst, Wedbush: Okay. That’s great. Thanks, guys. Appreciate it.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Thanks Jay.

Call Moderator: Your next question comes from the line of Alex Barron of Housing Research Center. Congratulations

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: on the reduction in the build times. I was curious on that subject. If there’s anything you can share on how you’ve been able to achieve those reductions? And do you feel like there’s any further potential? Or do you feel like that’s as good as it gets?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Good morning. Yeah. We’ve got a we’ve got a stated goal company wide that we wanna be at forty six days on our bill. So so, yeah, we still believe there’s there’s opportunity. The pace over price is our lever that we use with our trays to help drive our waste and our cost.

So so they know they’re getting a commitment of of starts and and and that allows us to be more reliable in our assembly process.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Got it.

Steve/Mia, Analysts, RBC Capital Markets: Thank you so much.

Rick Jadrzyk, Analyst, Bank of America: Thanks, Alex. Your

Call Moderator: next question comes from the line of Paul Reisbeck of Wolfe Research. Your line is now open.

Paul Reisbeck, Analyst, Wolfe Research: Thanks. Good morning, everyone. I guess you got the two new greenfields you just announced. But could you give us an update on what you’re seeing with respect to the M and A environment and your appetite for M and A given current volatility and how you would even go about underwriting a deal, you know, given the unknowns out there?

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Yeah. No. Good question. There’s there’s definitely, M and A opportunities out there. You know, we we absolutely we’re we’re always looking.

We evaluate opportunities. But but again, for us, it’s, you know, all but Houston, we’ve we’ve done through a greenfield. We feel really confident and comfortable in on our ability to to open new new divisions through greenfield. It’s you know, obviously, it takes a little bit longer to to get ramped up, but we’re okay with that. You know, we’re patient.

Our our majority shareholders are are patient. You know, we’re not looking at this as a as a sprint. You know, this is this is a long term play, long term view that we’re taking. And and really the the objective the main objective is to build a durable company and and stick to the to the culture and and the things that have made us really good. And and it’s it’s easier to do that through through greenfields and and, you know, the one thing we didn’t mention, but the the two folks that are gonna be heading up these these operations are internal folks that have been at the corporate level for a long time and and really get, you know, how we do things.

So, we’re really fortunate, and and that’s how we look. Like, we always look to promote, internally, and and we we feel like that’s that’s the best way to, to do it. Now That said, if if there was a a really good opportunity that that we can you know, we felt like we were getting a a a really good deal, sure. I mean, we’d look at it. Like I said, there’s there’s opportunities out there, but, you know, it’s it’s tough to wanna pay a big premium in today’s environment.

It’s still you know, I’d say m and a is still not cheap. I I think things are getting a little more realistic, but, you know, there there there may be a time and a place for it for us. But for now, we feel we feel pretty good about, you know, the direction we’re taking on on the growth side of things.

Paul Reisbeck, Analyst, Wolfe Research: Okay. And then I guess kind of related to that, have you made any changes to your current land underwriting standards? Have you pushed up your hurdle rates? And along with that, have you seen any change in financing costs given the volatility from the keeps us off balance sheet?

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Yes. On the latter part, really not a lot of term changes, but we are focused on our mature divisions. We want to maintain pace we’re underwriting based on our ability to maintain pace and market share. And then on our newer divisions, maybe our underwriting a touch softer, but we’re still very conservative as we look to those new markets knowing that we’ve got to ramp up. So, not any real change overall to underwriting, but we’re totally aware of the market conditions.

Russ Stevendorf, Executive Vice President and CFO, Smith Douglas Homes: Great. Appreciate it. Thank you.

Jay McCanless, Analyst, Wedbush: Thanks, Paul.

Call Moderator: Thank you. And with that, I’d now like to hand the call back to Greg Bennett for final remarks.

Greg Bennett, CEO and Vice Chairman, Smith Douglas Homes: Thank you everyone for joining us today. On behalf of Smith Douglas and the whole management group, we appreciate your interest and your involvement today. Have a great day.

Call Moderator: Thank you for attending today’s call. You may now disconnect. Goodbye.

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