Q1 2024 Smith Douglas Homes Corp Earnings Call
Ellie: Good day, everyone. My name is Ellie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Smith Douglas Homes First Quarter 2024 Earnings Call and Webcast Conference. All lines have been placed on mute to prevent any background noise.
Good day, everyone. My name is Amy and I will be your conference operator for today.
Time, I would like to welcome everyone to the Smith Dalgleish home's first quarter 'twenty 'twenty four earnings call and webcast conference.
Conference Operator: All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press the star key. Thank you I'd now like to hand over.
Ellie: After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star key again. Thank you. I'd now like to hand over the call to Eddie Clyde. Eddie, you may now begin your conference.
Eddie: The call today I'd be quite Eddie you May now begin your conference.
Eddie Clyde: Good morning, and welcome to Smith Douglas' earnings conference call. We issued a press release this morning outlining results for the first quarter of 2024, which we will discuss on today's call, and 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.
Eddie: Good morning, and welcome to Smiths Douglas Since earnings Conference call. We issued a press release. This morning outlining results for the first quarter of 2020 for which we will discuss on today's call and can be found on our website at investors Dot Smith, Douglas dot com or by selecting the investors Investor Relations link at the bottom of our homepage.
Smiths Douglas: Please note this call will be simultaneously webcast on the Investor Relations section of our website.
Eddie Clyde: 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.
Smiths Douglas: 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.
Speaker Change: 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.
Speaker Change: 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.
Eddie Clyde: 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 Zevendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.
Speaker Change: Executive Vice President and CFO I'd now like to turn the call over to Greg.
Greg Bennett: Good morning, and thank you for joining us as we go over our results for the first quarter of 2024 and provide an update on our operation. Smith Douglas Homes generated pre-tax income of $21.4 million in the first quarter and $0.33 per diluted share.
Greg Bennett: Good morning, and thank you for joining us as we go over our results for the first quarter of 2024 and provide an update on our operations.
Greg Bennett: Mr. Douglas homes has generated pre tax income.
Greg Bennett: $1 4 million in the first quarter.
Greg Bennett: 33 cents per diluted share.
Greg Bennett: Home sales revenue came in at $189 million on a 13 percent increase in deliveries and new orders totaled 765 on a sales pace of 3.6 homes per community per month, while our cancellation rate remained low at 10.6%. Our closings and order results came in over the high end of our prior guidance as our teams did an excellent job selling and closing homes during the quarter. We continue to see favorable home building conditions in our markets thanks to low levels of existing home supply and positive demand drivers including healthy job creation, migration, and new household formation.
Greg Bennett: Home sales revenue came in at $189 million.
Greg Bennett: On a 13% increase in deliveries and new orders totaled 765 on a sales pace of three six homes per community per month.
Greg Bennett: While our cancellation rate remained low at 10, 6% our closings and order results came in over the high end of our prior guidance as our teams did an excellent job selling and closing homes during the quarter.
Greg Bennett: We continue to see favorable homebuilding conditions in their markets and thanks to low levels of existing supply and positive demand drivers, including healthy job creation.
Greg Bennett: And migration and new household formation.
Greg Bennett: The lock-in effect from higher mortgage rates continues to keep existing homeowners in place, which has pushed a greater percentage of buyers into the new home market. We believe this dynamic will be in place for some time, creating a real opportunity for home builders to take market share. Our focus remains on the more affordable segments of the market, which is reflected in our average sales price of $334,000 for the quarter. We believe this is the most supply-constrained segment of the market and the most attractive from a biodemographic standpoint.
Greg Bennett: The lock in effect from higher mortgage rates continues to keep existing home owners in place, which has pushed a greater percentage of the buyers into the new home market.
Greg Bennett: We believe this dynamic.
Greg Bennett: The in place for some time, creating a real opportunity for homebuilders to take market share.
Greg Bennett: Our focus remains on the more affordable segments of the market.
Greg Bennett: Which is reflected in our average sales price of 334000 for the quarter.
Greg Bennett: We believe it is the most supply constrained segment of the market and most attractive from buyer demographic standpoint.
Greg Bennett: We cater our home offerings to entry-level buyers and empty nesters who are looking for customizable homes at an affordable price. This strategy has resulted in strong volume growth for our company over the years but also healthy profitability, as evidenced by our home building gross margin of 26.1% for the quarter. We continue to employ a land lot strategy, with 95% of our lots controlled via an option agreement at the end of the first quarter.
Speaker Change: We cater home offerings to entry level buyers are named investors, who are looking for customizable home at an affordable price. This strategy has not only resulted in strong volume growth.
Speaker Change: For our company over the years, but also healthy profitability as evidenced by our home building gross margin of 26, 1% for the quarter.
Speaker Change: We continue to employ a land light strategy with 95% of our loss control via option agreement at the end of first quarter.
Greg Bennett: Through our strong relationship with land bankers, land sellers, and developers, we strive to acquire lots and adjust on a time basis. This allows us to turn our inventory more quickly and focus on what we do best, which is build and sell homes. It also allows us to use our capital more efficiently and mitigate some of the risks associated with land development. Our build times in the quarter were in line with expectations at approximately 60 days.
Speaker Change: Strong relationship with land bankers land sellers, and developers, which drive to acquire lots and adjusting time basis.
Speaker Change: This allows us to turn our inventory more quickly and focus on what we do best which is build and sell homes. It also allows us to use our capital more efficiently and mitigate some of the risk associated with land development.
Speaker Change: Our build times in the quarter were in line with our expectations at approximately 60 days.
Greg Bennett: Through a smart builder ERP system and our team construction process, we strive to set standards of excellence for home building efficiency. This is a standard their leadership team has refined over several decades in the business and one that requires the coordination of a number of people both inside and outside the organization.
Speaker Change: Our smart builder ERP system, and our team construction process, we strive to set standard of excellence for homebuilding efficiency.
Speaker Change: This is a standard their relationship team has refined over several decades in the business and one that requires the coordination of a number of people both inside and outside the organization.
Greg Bennett: We consistently look for ways to reduce costs and the number of days it takes to build a home and believe our efficient approach to home building is a key differentiator for our company. The net result of our affordable product focus, our land lot strategy, and our proprietary building process is a return on equity profile that ranks at the high end of public builder peer groups. We believe our approach to homebuilding can be replicated in a number of markets throughout the southeast and have begun to expand our footprint this quarter by contracting for lots in central Georgia in Houston County, which includes Perry and Warner Robins, and in Chattanooga, Tennessee, and surrounding submarkets.
Speaker Change: We consistently look for ways to reduce cost and number of days. It takes to build a home and believe our efficient approach to homebuilding is a key differentiator for our company.
Speaker Change: The net result of our affordable product focus our land light strategy and our proprietary building process is a return on equity profile that ranks at the high end of public builder peer group.
Speaker Change: We believe our approach to homebuilding can be replicated in a number of markets throughout the southeast and begun to expand our footprint this quarter.
Speaker Change: Contract and for lots and central Georgia in Houston County.
Speaker Change: Which includes Perry in Warner Robins, and in Chattanooga, Tennessee and surrounding served market.
Speaker Change: We plan to initially leverage our expansive Atlanta Division operations as we build out our teams in these markets until we eventually drive enough scale to create separate divisions.
Greg Bennett: We plan to initially leverage our expansive Atlanta division operations as we build out our teams in these markets until we eventually drive enough scale to create separate divisions. As we've discussed in the past, our plan is to expand our geographic footprint both organically and through strategic M&A if the opportunity presents itself. Our integration of Devon Street Homes in Houston has progressed, as the team has embraced the Smith-Douglas way of doing business, and we couldn't be more pleased with how it has been going.
Speaker Change: As we've discussed in past our <unk>.
Speaker Change: <unk> is to expand our geographic footprint, both organically and through strategic M&A, if the opportunity presents itself.
Speaker Change: Our integration of demonstrate homes in Houston is progressing.
Speaker Change: As the team has embraced the Smith Douglas way of doing business and.
Smith Douglas: And we couldnt be more pleased with how it's been going.
Greg Bennett: Overall, we feel good about the current state of our operations. We saw solid and improving sales and traffic trends throughout the first quarter. Thus far, order trends have remained good through April and May, although slightly below the absorption pace we saw in March. That said, while buyers appear to have adjusted to the idea of rates, they will likely be higher for longer, and our ability to offer financing incentives has been a key factor to addressing affordability concerns.
Smith Douglas: Overall, we feel good about the current state of our operations, when we saw solid and improving sales and traffic trends throughout the first quarter. Thus.
Smith Douglas: Thus far order trends remain good through April and May although slightly below the absorption pace we saw in March.
Speaker Change: Said, while buyers appear to have adjusted to that idea rates will likely be higher for longer and our ability to offer financing incentives that had been a key factor to addressing affordability concerns.
Greg Bennett: We remain cautiously optimistic about the strength of the housing market and the general economic conditions for the balance of the year. With that, I'd like to turn the call over to Russ, who will provide some additional color on our results this quarter and update our outlook.
Speaker Change: We remain cautiously optimistic about the strength of the housing market and a general economic conditions for the balance of the year.
Russ Devendorf: With that I'd like to turn the call over to Russ.
Russ Devendorf: But some additional color on our results this quarter and update our outlook.
Russ Zevendorf: Thanks, Greg. I'm going to highlight some of our results for the first quarter and conclude my remarks with our expectations and outlook for the second quarter and full year of 2024. As Greg mentioned, we finished the quarter with $189 million in revenue on 566 closings for an average sales price of $334,000. Our gross margin for the quarter was 26.1%, and SG&A was 14.6% of revenue. We finished with $21.4 million in free tax income.
Russ Devendorf: Thanks, Greg I'm going to highlight some of our results for the first quarter and conclude my remarks, with our expectations and outlook for the second quarter and full year of 2024.
Russ: As Greg mentioned, we finished the quarter with $189 million of revenue on 566 closings for an average sales price on closed homes of 334000, our gross margin for the quarter was 26, 1% and SG&A and SG&A was $14 6% of revenue.
Greg Bennett: We finished with $21 4 million of pretax income.
Russ Zevendorf: Given the nature of our up-sea organizational structure, our reported net income is $20.5 million, which reflects an effective tax rate of 4.3% on the face of our financial statement. It should be noted that this income tax expense is attributable to Smith Douglas Homes Corp., which controls the 17.3 percent economic ownership of our public shareholders in Smith Douglas Holdings LLC and not the non-controlling interest, which is the 82.7 percent economic ownership controlled by our continuing equity owners, as documented in the footnotes of our financial statement.
Greg Bennett: Given the nature of our up C. Organizational structure. Our reported net income is $20 5 million, which reflects an effective tax rate of four 3% on the face of our financial statements.
Greg Bennett: It should be noted that this income tax expense is attributable to Smith Douglas homes Corp, which controls the 17, 3% economic ownership of our public shareholders and Smiths Douglas Holdings, LLC and not the Noncontrolling interest, which is the 82, 7% economic ownership control by our continuing equity owners is documented.
Russ Devendorf: In the footnotes of our financial statements.
Russ Zevendorf: Our adjusted net income, which is a non-gap measure that we believe is useful given our organizational structure, was $16.1 million and assumes a 25% blended federal and state effective tax rate as if we had 100% public ownership operating as a subchapter C corporation. We believe adjusting that income is a useful metric because it allows management and investors to evaluate our operating performance and comparability more effectively to industry peers that may have a more traditional organizational and tax structure.
Speaker Change: Our adjusted net income, which is a non-GAAP measure that we believe is useful given our organizational structure was $16 1 million and assumes a 25% blended federal and state effective tax rate as if we had 100% public ownership operating as a sub chapter C Corporation.
Speaker Change: We believe adjusted net income is a useful metric because it allows management and investors to evaluate our operating performance and comparability more effectively to industry peers that may have a more traditional organizational and tax structure.
Russ Zevendorf: Our cost of sales for the period includes the amortization of approximately $100,000 of purchase accounting costs attributable to the acquisition of our Houston operations, Devon Street Homes. Additionally, SG&A for the period includes a one-time expense of approximately $100,000 related to the write-off of loan costs attributable to our amended and upsized unsecured credit facility that we closed concurrently with our IPO, and $900,000 of non-cash stock compensation expense related to the staking grants we made to all of our full-time employees at the time of our IPO in January.
Speaker Change: Our cost of sales for the period includes the amortization of approximately $100000 of purchase accounting costs attributable to the acquisition of our Houston operations demonstrate homes. Additionally, SG&A for the period includes a one time expense of approximately 100000 related to the write off of loan costs attributable to our amended and Upsized unsecured credit facility that we clear.
Speaker Change: Concurrent with our IPO and 900000 of noncash stock compensation expense related to the <unk> grants, we made to all of our full time employees at the time of our IPO in January.
Speaker Change: We finished the quarter with over 14000 total controlled lots an increase of 86% over the first quarter of 2023, and just over 10% from our prior year end.
Russ Zevendorf: We finished the quarter with over 14,000 total controlled lots, an increase of 86% over the first quarter of 2023 and just over 10% from a prior year end. Our Corporate Investment Committee, which meets every week to review and approve new land deals, continues to remain busy as we focus on increasing market share and driving scale throughout our existing footprint.
Speaker Change: Corporate investment Committee, which meets every week to review and approve new land deals continues to remain busy as we focus on increasing market share and driving scale throughout our existing footprint.
Russ Zevendorf: True to our land light operating philosophy, only 693 of our controlled lots were owned unstarted, meaning that 95% of our controlled lots were either work in process or under option. In a normalized market, we would expect our lot supply to stay within a targeted range between three and a half to five and a half years, calculated based on our forecasted closings over a rolling 12 month period. We finished the first quarter with 1,110 homes in backlog with an average selling price of $343,000 and an expected gross margin on those homes of approximately 26.5%.
Speaker Change: True to our land light operating philosophy, only 693 of our controlled lots were owned on started meaning that 95% of our controlled lots where either work in process or under option.
Speaker Change: In a normalized market, we would expect our lot supply to stay within our targeted range between three 5% to five and a half year supply calculated based on our forecasted closings over a rolling 12 month period.
Speaker Change: We finished the first quarter was 1110 homes in backlog with an average selling price of 343000 and expected gross margin on those homes of approximately 26, 5% as we sit here today. We are currently operating out of 71 active selling communities versus 70 at the end of the quarter.
Russ Zevendorf: As we sit here today, we are currently operating out of 71 active selling communities versus 70 at the end of the quarter. Looking at our balance sheet, we ended the quarter with approximately $33 million of cash and no borrowings under our $250 million revolving credit facility. We finished with $333 million of total members' and stockholders' equity, which included $116 million of net proceeds from our IPO after underwriting and professionalization. Our debt to book capitalization was 1.3%, and our net debt to book capitalization was negative 9.4%.
Speaker Change: Looking at our balance sheet, we ended the quarter with approximately $33 million of cash and no borrowings under our $250 million revolving credit facility.
Speaker Change: We finished with $333 million of total members and stockholders equity, which includes $116 million of net proceeds from our IPO after underwriting and professional fees are.
Speaker Change: Our debt to book capitalization was one 3% and our net debt to book capitalization was negative nine 4%.
Russ Zevendorf: We had approximately $188 million available on our unsecured credit facility and are well positioned to execute on our growth strategy, as Greg previously mentioned. Now, I'd like to summarize our outlook for the second quarter and full year of 2024. We anticipate our second quarter home closings to finish between 600 and 625 homes and an average sales price between $335,000 and $340,000, with gross margin in the range of 25.5% to 26.5%. For the full year 2024, we reiterate our prior guidance of projected total home closings between 2,600 and 2,800 homes and now expect our average selling price to range between $338,000 to $343,000.
Speaker Change: We had approximately $188 million available on our unsecured credit facility and are well positioned to execute on our growth strategy as Greg previously mentioned.
Greg Bennett: Now I'd like to summarize our outlook for the second quarter and full year for 2024.
Russ Zevendorf: We project home closing gross margin to finish between 25.75% and 26.75%, inclusive of any purchase accounting adjustments from our Devon Street acquisition, which we expect to be less than 25 basis points of revenue, given our final purchase price allocation. Additionally, we expect our SG&A expense ratio to be in the range of 13.75% and 14.25% for the full year, which includes approximately 4.2% for internal and external sales commissions. We believe the primary risk to our projections lies in our ability to maintain the sales pace and bring our new communities and lots online.
Greg Bennett: We anticipate our second quarter home closings to finish between 600 625 homes at an average sales price between 335000 and 340000 with gross margin in the range of 25, and a half to 26, 5%.
Greg Bennett: For the full year 2024, we reiterate our prior guidance of projected total home closings between 2600 2800 homes and now expect our average selling price to range between 338000 to 343000, we protect home closing gross margin to finish between 25, 75% to 26, 75%.
Greg Bennett: Inclusive of any purchase accounting adjustments from our demonstrate acquisition, which we expect to be less than 25 basis points of revenue given our final purchase price allocation.
Speaker Change: Additionally, we expect our SG&A expense ratio to be in the range of 13, 75% and 14, 5% for the full year, which includes approximately four 2% for internal and external sales commissions.
Greg Bennett: We believe the primary risk to our projections are around our ability to maintain our sales pace and bring our new communities and lots online.
Russ Zevendorf: As I mentioned on our prior call, we continue to see some delays with municipalities on permitting and PLATS. Macroeconomic factors, primarily around jobs, inflation, and interest rates, could also have unforeseen impacts on our numbers. With that, I'd like to turn the call over to the operator for instructions on Q&A.
Speaker Change: As I mentioned on our prior call. We continue to see some delays in municipalities on permitting in platts macroeconomic factors, primarily on jobs inflation and interest rates could also have unforeseen impacts to our numbers.
Greg Bennett: With that I'd like to turn the call over to the operator for instructions on Q&A.
Operator: Thank you we are now opening the floor for question and answer session. If you'd like to ask a question. Please press star followed by the number one on your telephone keypad. Our first question comes from Sam Reed from Wells Fargo. Your line is now open.
Ellie: Thank you. We are now opening the floor to questions and answers. If you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Sam Reid from Welsh Fargo. Your line is now open.
Russ Zevendorf: Awesome, thanks so much guys. I wanted to unpack the order trends you highlighted in April and May in a bit more detail. I think you mentioned the absorption rate might have been a bit below what you saw in March, so can you just give us a sense as to how this compares to what you've seen in a typical April-May period, and then, along those lines, kind of any sense as to what foot traffic might be looking like in your model homes relative to expectation?
Sam Reed: Awesome. Thanks, so much guys.
Operator: On tax the order trend you highlighted on April and May and a bit more detail I think you mentioned the absorption rate might have been a bit below what you saw in March. So can you just give us a sense as to how this compares to what you've seen in our kit growth typical April may period.
Operator: And then along those lines kind of any sense as to what foot traffic might be looking like in your model homes relative to expectations.
Greg Bennett: Yeah, I'll give you some of the specific numbers through the quarter and kind of what we're seeing, and then maybe Greg can give you some color just on, you know, how this plays into typical seasonality. So through the first quarter, we saw sales and traffic trends continue to improve throughout the quarter, and again, part of that, I believe, is seasonal as we got deeper into the selling season. So March was the strongest quarter, our strongest month. It was about four times as much, yeah I think we had four sales a month.
Greg Bennett: Yeah, I'll give you some of the specific numbers through the quarter and kind of what we're seeing and then maybe Greg can give you some color.
Greg: Just on you know how this plays into typical seasonality so through the first quarter, we saw sales and traffic trends continue to improve throughout the quarter and again part of that I believe is seasonal as we got to be granted to the selling season. So March was the strongest quarter our strongest.
Operator: Strongest months it was about a four time, yes, I think we had four four sales per month.
Operator: February was about three six and then January was just slightly lower and so then moving into April we were back down to a three six.
Greg Bennett: February was about 3.6, and then January was just slightly lower, and so then moving into April, we were back down to 3.6, you know, sales per community. And May is trending very consistently with what we saw in April. So it's still good, right? The traffic is still good, but March was March did pop a bit. But again, I it's hard to say, you know, at least from my perspective, if that's just kind of, you know, a little more seasonality where you know, we kind of peaked in March and, as we get through selling season, it's coming back a bit.
Operator: Sales per community and May as Mays trending very consistent with what we saw in April so it's still good right.
Speaker Change: Traffic is still good but March was.
Speaker Change: March did pop a bit.
Operator: But again, it's hard to say at least from my perspective is that that's just kind of.
Operator: A little more seasonality, where you've made maybe we kind of peaked in March and as we get through selling season, it's coming back a bit but.
Greg Bennett: But you know, we had some rates that were a little bumpy, but traffic trends have been good throughout the quarter, and they continue to be, foot traffic is real good So, you know, great if you get, I can't add much to that. We see really strong traffic across all of our divisions and, You know, I think sometimes it's hard with a little pinned up demand.
Operator: We had.
Operator: Rates were a little bumpy.
Operator: But traffic trends have been good.
Greg: Throughout the throughout the quarter and they continue to foot traffic is real goods. So Greg if you go for us.
Greg: Can't add much to that we see in.
Greg: Really strong traffic across all of our divisions.
Greg: I think.
Speaker Change: Sometimes it's hard with the low pinned up demand with.
Greg Bennett: With communities opening and getting flats and releasing a bulk of sales, and you know we sure had good activity in March, but I don't think there were any real, real anomalies out there with sales activity for our spring.
Speaker Change: With communities opening and getting platts and releasing of bulk of sales.
Speaker Change: We're sure had good active in.
Speaker Change: Margin.
Speaker Change: I don't think Theres any real.
Operator: Real anomalies out there with.
Operator: The sales activity refreshed Brian.
Brian: No that helps guide and then wanted to touch quickly on gross margin I think you tweaked guidance, just a little bit.
Douglas Goldstein: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio shows.
Brian: It sounds like Devin Street at least that purchasing accounting dynamic it is going to be less of a headwind, but any other things we should be mindful of as we think about the margin guidance I just wanted to make sure I fully understand I think the time, yes.
Russ Zevendorf: Yeah, thanks Sam, you know the margin really we we finished our purchase accounting, so when we had our call, we were about a week from finalizing our 10k. And so we did finalize some purchase accounting. We had some changes to our goodwill number on Devon Street in that last week subsequent to our call, and so we now think, based on the final purchase price allocation, that that impact or those headwinds from purchase accounting are going to be less than what we had originally guided to.
Brian: Thanks Sam.
Brian: The margin really we finished our purchase accounting so when we had our call.
Sam Reed: We were about a week from from finalizing our 10-K and so you did finalize some purchase accounting we have some changes to our goodwill number.
Sam Reed: On Devin Street in that last week.
Sam Reed: <unk> to our call and so we now think based on the final purchase price allocation.
Devin Street: That that impact of those headwinds from purchase accounting arguably less than than what we had originally guided to so we I think we had said something about 50 basis points now I think it's going to be 25 basis points or less.
Russ Zevendorf: So I think we had said something about 50 basis points. Now I think it's going to be 25 basis points or less. We did book a little more goodwill, which reduces the allocation to the real estate inventory.
Speaker Change: We did book, a little more goodwill, which which reduces the allocation to the real estate inventory.
Russ Zevendorf: So yeah, I think the margin, when you roll all that together, our gross margin guidance really hasn't changed from last period, our guidance last time. So we do think, kind of, like we said, 25.75% to 26.75%. I think somewhere in there, the 26 range would, as we sit here today, I think that's kind of, if you took the midpoint, I think that's a fair estimate. But we'll see. We still have some sales and closings that we've got to continue to fill with backlog to get to our numbers.
Speaker Change: So, yes, I think the the margin.
Speaker Change: When you roll all that together our gross margin.
Speaker Change: Guidance really hasnt changed from last period.
Speaker Change: Our guidance last time, so we do think kind of like we said 25 and three quarters percent to 26, and three quarters percent I think somewhere in there.
Speaker Change: 2026 range would.
Speaker Change: As we sit here today I think that's kind of if you took the midpoint I think thats a fair estimate but.
Speaker Change: We will see we still have some sales and closings that we've got to to continue to fill with backlog to get to our numbers, but.
Russ Zevendorf: But where we sit today, and as we mentioned, or as I mentioned on the call, our backlog margin is 26.5% right now, so we feel good about it. Anything can happen with the additional sales and closings that we need to get to fill out the year, but hopefully that answers your question.
Speaker Change: Where we sit today and as we mentioned as I mentioned on the call. Our backlog margin is 26, 5% right now so.
Speaker Change: We feel good about it anything can happen with the.
Speaker Change: The additional sales and and.
Speaker Change: That we need to get to fill out the year, but.
Speaker Change: Hopefully that answers.
Speaker Change: Answer to your question.
Speaker Change: So that certainly helps thanks, guys I'll pass it on.
Russ Zevendorf: That certainly helps. Thanks guys, I'll pass it on. Thanks, Sam.
Speaker Change: Thanks, Dan.
Ellie: Our next question comes from Mike Dahl from RBC. Your line is now open.
Speaker Change: Our next question comes from Mike Dahl from RBC. Your line is now open.
Speaker Change: Hi, its actually Chris Kalata on for Mike.
Ellie: Hi, this is actually Chris Clon from like, just to follow up on the gross margin comments. I think I said it seems like outside of Devon Street, not much changes that, you know, how are you guys thinking about pricing and incentives, you know, into the rest of this year, what's being baked in, in terms of your, your guide, you know, last quarter, this quarter, as we're any changes there, just to talk a little bit on that, that'd be helpful. Yeah.
Chris Kalata: Just a follow up on the gross margin comments.
Chris Kalata: Like I said, it seems like outside of Devon Street not much changes.
Chris Kalata: Are you guys thinking about.
Chris Kalata: Pricing and incentives.
Chris Kalata: Yes.
Chris Kalata: And to the rest of this year kind of.
Chris Kalata: What's being baked in in terms of your your guide last quarter. This quarter has been any changes there.
Chris Kalata: Just to talk around that that'd be helpful.
Russ Zevendorf: Yeah, I don't see a lot of changes. Michael a lot of changes to the incentives. You know, we've held prices, we've actually increased some prices with demand in a couple of areas. We are still offering incentives. But I think it's trending with what we've been seeing, you know, in the past several months.
Chris Kalata: Yes.
Chris Kalata: C.
Speaker Change: Mark a lot of changes too.
C. Mark: The incentives.
C. Mark: We've held prices.
C. Mark: Actually increased some prices with demand in a couple of areas, we are still offering incentives.
Speaker Change: But I think it's trend and with with what we've been seeing it.
C. Mark: <unk> first several months.
C. Mark: Got it okay.
Russ Zevendorf: Got it, OK, so no change in the back half, and it sounds like so far this quarter, your quarter date, it's been stable yet.
C. Mark: No change on the back half and it sounds like so far this quarter.
C. Mark: Quarter to date its been stable its been consistent we've what we what we saw in the first quarter has trended through this part of the second quarter and as we again as we sit here today don't don't expect much change in that but I think a lot's going to be dependent on rates.
Russ Zevendorf: Yeah, it's consistent. We've what we saw in the first quarter has trended through this part of the second quarter, and as we again as we sit here today, don't don't expect much change in that, but you know, I think a lot's going to be dependent on rates, and and what happens. I mean, it's also an election year. So, you know, we'll see but, like we mentioned, twenty six and a half percent is what we're sitting on our backlog, which takes up a good portion of what we'll, you know, we'll close for the year. But it's not all of that through the balance of the year.
C. Mark: And what what happens I mean, thats also an election year. So, yes, we will see but.
C. Mark: Like we mentioned 26, 5% is what we're sitting with our backlog, which takes up a good portion of what will.
C. Mark: We'll close if not all of that through the balance of the year. So we've already got a good portion of that baked but.
Russ Zevendorf: So we've already got a good portion of that baked in. But, yeah, I think, as you know, current sales trends are pretty consistent with what we've been seeing. I don't I don't expect much change in discounting.
C. Mark: Yes, I think as the current sales trends are pretty consistent with what we've what we've been seeing I don't I don't expect much change in discount.
Speaker Change: Got it okay, I appreciate that and just on that.
Russ Zevendorf: Okay. Appreciate that. And just as a follow-up, Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host. Relative to your expectation, have there been any changes in the community out ramp, whether that be delays or or kind of new openings?
Speaker Change: A follow up.
Speaker Change: I was hoping you guys touch on your community count growth outlook has there been any changes there I know you guys announced the new entrants.
Speaker Change: New markets. So just.
Speaker Change: Relative to your expectation has there been any changes in community count ramp, whether that'd be delays or kind of new openings.
Russ Zevendorf: Yeah, as we sit here today, there are no changes from what we discussed on the roadshow. You know, I can't remember.
Speaker Change: Yes, as we sit here today no changes from from what we discussed on the on the Roadshow.
Russ Zevendorf: I think we expect to end somewhere in the 70s, you know, mid to high 70s; maybe we'll get to 80. But, you know, we had expected the community count to peak a bit and then maybe pull back through the fourth quarter. But, like I said, our expectations are consistent with what we thought coming into the beginning of the year.
Speaker Change: I can't remember I think we would expect to end somewhere in the seventies highest mid mid to high seventies, maybe maybe we will get to 80, but we had expected community count to peak a bit and then maybe pullback through the fourth quarter, but like I said our R.
Speaker Change: Our expectations are consistent with what we thought coming into the to the beginning of the year.
Speaker Change: Understood appreciate all color.
Russ Zevendorf: Understood, I appreciate it; I'll call it. Yep, thanks.
Speaker Change: Yes, Thanks, Chris.
Speaker Change: Our next question comes from Ross, Yes, Joseph from Bank of America. Your line is now open.
Ellie: Our next question comes from Raf Jadrusik from Bank of America. Your line is now open.
Speaker Change: Hi, Hi.
Ellie: Hi, good morning. It's Rafe. Thanks for taking my questions. Hey Rafe, how are you doing?
Rafe: Good morning, it's Rafe, thanks for taking my questions, Hey, Rafe hydro.
Russ Zevendorf: The first thing I want to ask Russ is, I just wanted to clarify. I think you said the gross margin in your backlog was 26.5. Did I get that right? Yeah, 26.5. So, just for the gross margin, how long will that take you? Is that, basically, your backlog probably one or two quarters out? Just how much of that is, like how long will that backlog carry you this year?
Rafe Hydro: The first I, just Russ I just wanted to clarify I think.
Rafe Hydro: You said that the gross margin in your backlog was 26, 5% did I get that right, Yes 26 five.
Rafe Hydro: So the.
Rafe Hydro: Just for the gross Martin how long will that will that take you is that basically your backlog, probably one or two quarters out just how much of that is.
Rafe Hydro: How long will that backlog carry you this year.
Russ Zevendorf: yeah so you know if you if you do the math so we closed you know 566 you've got you know there's 1,100 in backlog so yeah the next couple of quarters that that'll that'll go through if if not no and and stuff we're selling you know today you know what we've continued to sell in the second quarter is is stuff that will you know close you know that we sold earlier you know would close kind of end a quarter and into next quarter so yeah most of that should be through through third quarter
Rafe Hydro: So.
Rafe: If you do the math so we closed.
Rafe: 566, you've got there is 11.
Martin: 1100 in backlog so yes, the next couple of quarters.
Speaker Change: That will go through if not no.
Speaker Change: And stuff we're selling.
Martin: <unk>.
Martin: Today, what we've continued to sell.
Speaker Change: In the second quarter as is stuff that we'll close.
Speaker Change: That we sold earlier.
Speaker Change: With close kind of end of quarter and into next quarter. So.
Speaker Change: Yes, most of that should be through <unk>.
Speaker Change: Through third quarter.
Russ Zevendorf: And then the homes that you're selling today, it sounds like you're seeing similar margins as to what's in the backlog. Yeah, it's been pretty consistent.
Speaker Change: Okay, and then the homes that youre selling today, it sounds like Youre seeing similar margins as to what's in the backlog.
Russ Zevendorf: Yeah. Got it. Okay. Very helpful.
Martin: It's been pretty consistent yes got it okay very helpful and then.
Speaker Change: What are you seeing in terms of of lot costs right now I think we've heard from some some other builders that particularly on finished lots there has been too low.
Russ Zevendorf: And then, I guess, what are you seeing in terms of lot costs right now? I think we've heard from some other builders that, particularly on finished lots, there's been a little bit of a step up in inflation. What are you seeing in terms of land and lot prices? Has there been any change there? And then just what level of inflation are you assuming in your guidance?
Speaker Change: Little bit of a step up in inflation, what are you seeing in terms of land and lot prices.
Russ Zevendorf: Has there been any any any change there and then just what level of inflation are you assuming in your guidance.
Speaker Change: Yes, so we are seeing.
Russ Zevendorf: Yeah, so we are seeing, you know, increases in lots, new contracts, new deals that we're doing are definitely contracting at higher rates. Those are, with entitlement timeframes and development timeframes, those are deals that will be, you know, into the back half of next year. So it's, it's really not anything we're guided for yet. But, but yeah, sure. There's some material increases we're seeing out and in lots, and there's a little... The entitlement process is out there who have caused a little bit of a scarcity, so there is a great deal of pressure on.
Speaker Change: Increases in Lotte new contracts new deals that we're doing are definitely contracting at higher rates those are.
Speaker Change: With entitlement, Bryan and development time, Brian those are deals that will be.
Russ Zevendorf: Into the back half of next year, So it's really not anything we guided for yet but.
Speaker Change: But yes sure there is.
Speaker Change: Some material increases we're seeing in lots and.
Speaker Change: And Theres a little.
Speaker Change: The entitlement processes out there who.
Russ Zevendorf: Caused.
Speaker Change: A little bit of a scarcity. So there is.
Speaker Change: Great deal of pressure on those.
Speaker Change: Got it that's helpful, but not something that flows through P&L until 'twenty five or it sounds like second half of 'twenty five.
Russ Zevendorf: God, that's how, but not something that flows through P&L until 25 or something like the second half of 25.
Russ Zevendorf: Yeah, it would be back to half of 25.
Speaker Change: Yes, it would be back half of 'twenty.
Russ Zevendorf: Okay, and then the last question is just on Devon Street, now that you've had it for another quarter here, just can you talk about how the margins are coming in relative to your expectations and, you know, relative to other new markets that you've opened, you know, where are the margins there relative to the kind of your core business, and how do you think about the progression there? Thank you.
Russ Zevendorf: Okay.
Speaker Change: And then the last question is just on Devon Street now that you've had.
Devon Street: <unk> had it for another quarter here just can you talk about how the margins are coming in relative to your.
Russ Zevendorf: Expectations then.
Speaker Change: <unk> have to other new markets that you've opened.
Speaker Change: Where margins there relative to kind of your core business.
Speaker Change: How do you think about the progression there. Thank you.
Russ Zevendorf: Yeah, sure. Margins are coming in better than we probably anticipated. Part of that was due to purchase accounting, so we did not allocate as much to inventory, which would have been a drag on some of the margins that we'd see over the first 12 months as we worked through their working process and some of the lots that they had on the books. But it's coming around; it's in the mid-20s, 24%, 25% range in Houston, and that's with us pushing more volume.
Speaker Change: Yes sure.
Speaker Change: Margins are coming in better than we probably anticipated part of that is due to the purchase accounting. So we didn't we did not allocate as much two to inventory, which which would have been a drag on some of the margins that we would see over the really the first 12 months as we work through their work in process and some of the lots that they had on the books.
Russ Zevendorf: But it's coming around it's in the mid 2000.
Russ Zevendorf: $24, 25% range in Houston, and that's with us pushing more volume.
Russ Zevendorf: Prior to us acquiring Devon Street, they were probably a little more focused on margin, but I tell you, we've implemented some of our sales tools, we're pushing down our ERP, our CRM tool, we're really pushing leads and doing more marketing in Houston, and so we couldn't be more happy with how that's progressed on both the sales side and the strength of sales. And I think Houston, just in general, has been good through this selling season, but we've been really pleased with how well, in addition to pushing volume, we've been able to hold some pretty good margins. So it's really a credit to that team, and again, as Greg said, they've really embraced the Smith-Douglas way of doing business. And so we probably couldn't have gone any better, so we're really happy with it.
Speaker Change: Prior to us acquiring Devin Street.
Russ Zevendorf: They were probably a little more focused on margin, but I would tell you. We've we've implemented some of our our sales tools.
Devin Street: We are pushing pushing down our ERP, our CRM tool.
Devin Street: Tool, we're really pushing leads and doing more marketing in Houston and so.
Russ Zevendorf: We couldnt be more more happy with how that's progressed from both the sales side and the strength of sales.
Russ Zevendorf: And I think Houston, just in generals didn't been good through this selling season, but we've been really pleased with how well in addition to pushing volume that we've been able to hold some pretty good margin. So it's really a credit.
Greg Bennett: To that team and again as Greg said, they really embraced the Smith Douglas way of doing business and so were couldnt.
Russ Zevendorf: Couldnt Couldnt go is.
Russ Zevendorf: We probably couldn't have gone any any better so real happy with it.
Russ Zevendorf: Thanks guys.
Russ Zevendorf: Thanks, guys very helpful.
Russ Zevendorf: Okay.
Ellie: Our next question comes from Alex Barron from the Housing Research Center. Your line is now open.
Russ Zevendorf: Our next question comes from Alex Barron from housing Research Center. Your line is now open.
Ellie: Yeah, thank you. Just wanted to make sure I understand the mechanics of economics as far as tax rates are concerned. The tax rate for gap purposes is different than for calculating the EPS, correct?
Speaker Change: Yes. Thank you.
Alex Barron: Just wanted to make sure I'm understanding the.
Alex Barron: The mechanics of the economics as far as tax rates.
Alex Barron: The tax rate for GAAP purposes.
Alex Barron: Is different than for calculating the EPS correct.
Russ Zevendorf: Yes, so on a basic, and we can take it offline, but I'll give you a high level. On a basic EPS calculation, you're taking the public shares against just the income allocated to Smith Douglas Homes Corp., so on the face of the financials. So that calculation is based on that. And then when you look at the dilution, the diluted EPS actually takes into account if the B shares converted to A shares, and so there's a calculation that actually takes a different estimate. So it's a little complicated on the surface of the financials, but Alex, we can walk you through the details offline.
Ellie: Yes.
Alex: So on a on a basic and I won't get and we can take it offline, but I'll give you a high level on our basic EPS calculation you are taking the public.
Alex: Shares against just the income at the income allocated to Smith.
Russ Zevendorf: Smith Douglas homes Corp. So on the face of the financials. So.
Russ Zevendorf: That calculation is based on.
Russ Zevendorf: That and then when you look at the dilution that dilution that diluted EPS actually takes into account if the b shares converted to <unk> shares and so there is a calculation that that actually takes.
Alex: A different estimate so it's a little complicated on on the face of the financials, but but Alex we can we can walk you through the details.
Russ Zevendorf: Offline.
Russ Zevendorf: Okay, I'll call you guys afterwards to go through that. And in terms of incentives right now, what have you guys seen, you know, after the end of the quarter? Have you guys maintained the incentives roughly the same or been able to decrease or had to increase them, you know, given that they just kind of went up a little bit in April?
Alex: Okay I'll call you guys afterwards to go through that.
Russ Zevendorf: And in terms of.
Russ Zevendorf: Incentives right now what have you guys seen.
Russ Zevendorf: After the end of the quarter have you guys.
Russ Zevendorf: Maintain incentives roughly the same or been able to decrease our heads to increase given that rates kind of went up a little bit in April.
Russ Zevendorf: Incidents have remained on par with Q1. We're obviously, you know, rates, you know, we think are going to be up for longer, and there will be less, you know, pull back from the Feds on rates, so, you know, we'll continue to forecast things to be the same, and they've been the same over the past quarter.
Russ Zevendorf: Incentives have remained on par with Q1.
Russ Zevendorf: We're obviously.
Russ Zevendorf: Rates.
Speaker Change: We think it won't be up for longer when they list.
Feds: Pullback from our beds on rates. So we're continuing to forecast things to be the same in and they've been the same over the past quarter.
Russ Zevendorf: Okay, great. Thank you. Our next question comes from Jay McIntyre.
Russ Zevendorf: Okay, great. Thank you.
Russ Zevendorf: Thanks.
Russ Zevendorf: Our next question comes from Jay Mccanless from Wedbush. Your line is now open.
Ellie: Our next question comes from Jay McAnliff from Wedbush. Your line is now.
Ellie: Okay.
Speaker Change: He gave you there.
Speaker Change: Yes that helps.
Ellie: Yeah, it helps to hit the unmute button, doesn't it? Thank you for letting me on. A couple of questions. The first one, if you look at the legacy Smith Douglas markets, it looks like closings were down versus last year. Could you maybe talk through that community timing or just the impact of higher rates? What was going on with some of the older legacy Smith Douglas markets?
Speaker Change: But doesn't it.
Ellie: Yeah.
Ellie: Thank you for letting me on.
Ellie: Sure a couple of questions. The first one if you look at the legacy Smith Douglas markets. It looks like closings were down versus last year could you maybe talk through that.
Ellie: Community timing or just the impact of higher rates, what was going on with some of the older Legacy Smith Douglas markets, Yes, we were about flat.
Russ Zevendorf: Yeah, we were about flat, you know, a few few closings down when you when you exclude Houston. But I think it's a couple things. Atlanta last year came in with a really strong Quarter, we've gapped out in some communities, specifically in Nashville. So that's it's nothing. It's not a demand thing.
Russ Zevendorf: Few closings down when you when you exclude Houston, but.
Russ Zevendorf: It's a couple of things in Atlanta last year came.
Russ Zevendorf: Came in with a really strong quarter and then we have gapped out in some community specifically in in Nashville.
Russ Zevendorf: So that's it's it's nothing it's not a demand thing I would say, yes, it's flat gaps get gaps and getting kind of our platts and timing of communities coming online. So.
Russ Zevendorf: I would say yes. It's plat gaps, you know, getting gaps and getting kind of our plats and timing of communities coming online. So that's what's going on there. Like we said, we reiterated the 26 to 2800. So we're, you know, we're hoping that we're getting, you know, community count, you know, back up, but as I mentioned, and Greg mentioned, we're still seeing that has always been outside of market risk Just timing of developments has been the other, the other risks that we've been most concerned with.
Russ Zevendorf: That's what's going on there like we said we reiterated the 26 to 2800 so were we.
Russ Zevendorf: We're hoping that we're getting community count back up.
Greg Bennett: As I mentioned, we're still seeing and as Greg mentioned, we're still seeing that.
Russ Zevendorf: That has always been outside of market risk just timing of of development has been the other the other risks that we've been most concerned with.
Russ Zevendorf: Got it okay.
Russ Zevendorf: And then the backlog gross margin at 26, and a half sounds pretty good I guess, what is it maybe hadn't suspect youre, having to resell or some other incentives I guess, what's what's the delta that's.
Russ Zevendorf: Got it, okay. And then that's the backlog gross margin of 26 and a half. Sounds pretty good. I guess what is it maybe have some specs you're having to resell or some other incentives? I guess what's the delta that's between the 25 and a half to 26 and a half guide for TQ versus what's sitting in backlog right now?
Russ Zevendorf: Between the 25, 5% to $26 five guide for <unk> versus what's sitting in backlog right now.
Russ Zevendorf: You know a part of it's just trying to be a little conservative, you know, we don't want to disappoint you guys But yeah, look we we just you know, I think it's it's mostly that And then you know as we talked about just filling out the rest of the year in terms of the sales and you know What we still need to sell and close You know, we feel pretty good, like we said, incentives, you know, we're staying pretty consistent, but we do want to, we, and we're pleasantly surprised with Houston, but, you know, I do feel like, you know, in order to continue to drive scale, you know, to drive, you know, some volume as we, you know, as we look into the back half of the year and into next year, you know, in addition to the land and lot costs that we're seeing, I think, you know, maybe there's a little margin compression there as we try and drive a little more volume. Right.
Speaker Change: Part of it is just trying to be a little conservative we don't want to disappoint you guys.
Russ Zevendorf: But yes look we just I think it's mostly that.
Russ Zevendorf: And then as we talked about just filling out the rest of the year in terms of the sales and what we still need to sell and close.
Russ Zevendorf: We feel pretty good like we said incentives, which staying pretty consistent but we do want to we.
Russ Zevendorf: And we were pleasantly surprised with Houston, but I do feel like.
Russ Zevendorf: In order to continue to drive scale to drive some volume as we as we look into the back half of the year and into next year.
Russ Zevendorf: In addition to the land and lot costs that we're seeing I think.
Russ Zevendorf: Maybe there's a little margin compression there as we as we try and drive a little more volume right and keep our our cycle times moving in are our team's full so that's just generally where I see some margin compression, but yes for second quarter.
Russ Zevendorf: And keep our, you know, our cycle times moving and our teams full. So that's just generally where I see, you know, some margin compression, but yeah, for the second quarter. You know, we should, I'd be surprised if we weren't at 26% or better.
Russ Zevendorf: We should.
Russ Zevendorf: I'd be surprised if we're if we're not at 26% or better.
Greg Bennett: Okay, and then my next question would be Houston, and maybe just talk about how the R-Team implementation is going there and how you feel like that's going to go for the rest of the year.
Speaker Change: Okay, and then and then that was going to be the next question is Houston and maybe just talk about how the <unk> team implementations going there.
Greg Bennett: And.
Greg Bennett: How do you feel like that's going to go for the rest of the year.
Greg Bennett: Yes.
Greg Bennett: Yeah. Morning Jay.
Speaker Change: Morning, Jay.
Jay: Really well.
Greg Bennett: Tom and I were able to travel to Houston, a few weeks ago and.
Greg Bennett: It's going really well. Tom and I were able to travel to Houston a few weeks ago. And we launched with a complete trade force there in Houston and kind of had a standing room only group there to roll out with our trades, and it's been really welcomed. We did a lot of Q&A there, and it seems to be well embraced. We've had... Our sales process has been converted over here in the past couple of months, and, you know, I would say things are going better than we could have anticipated, and we're optimistic that we'll be very strong by the end of the year. Bye-bye.
Greg Bennett: And we launched with the complete trade force there in Houston.
Greg Bennett: Kind of had a standing room only group there to rollout two with our trades.
Greg Bennett: And it's been really welcomed.
Greg Bennett: We did a lot of Q&A there and.
Greg Bennett: Seems to be well embraced.
Greg Bennett: We've had.
Greg Bennett: Our sales processes converted over here in the past couple of months.
Greg Bennett: And I would say things are going.
Greg Bennett: Better than we could have anticipated.
Greg Bennett: And we're optimistic that will be.
Greg Bennett: Very strong by the end of the year.
Greg Bennett: Okay, great. That's all I had. Thanks guys. Thanks, Jim.
Speaker Change: Okay, Great. That's all I had thanks guys. Thanks Jay.
Greg Bennett: Right now, we don't have any pending questions. I'd now like to hand the call over to Greg Bennett for closing remarks.
Speaker Change: Right now we don't have any pending questions I'd now like to hand back the call over to Greg for <unk>.
Greg Bennett: Closing remarks.
Greg Bennett: Yes. Thank you so that will conclude.
Greg Bennett: Yes, thank you. So that'll conclude our call today. We want to thank you for joining us. I hope everyone has a great day, and if you need us, we ask that you reach out to our investor relations. Thank you for attending today's call. You may now disconnect. Have a wonderful day.
Greg Bennett: Our call today, we want to thank you for joining us.
Greg Bennett: Hope everyone has a great day.
Greg Bennett: And you need us.
Greg Bennett: We ask that you reach out to our Investor relations. Thank you.
Greg Bennett: Thank you for attending today's call you may now disconnect have a wonderful day.
Operator: ???
Greg Bennett: [music].
Operator: Yes.
Operator: [music].
Operator: Sure.
Operator: Sure.
Operator: [music].
Operator: Okay.