Q4 2024 Smith Douglas Homes Corp Earnings Call - Q&A
Operator: Hello, and thank you for standing by.
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Smith Douglas homes fourth quarter, 'twenty 25 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Regina: My name is Regina, and I will be your conference operator today.
Regina: At this time, I would like to welcome everyone to the Smith Douglas Homes Fourth Quarter 2025 Earnings Conference Call-in Webcast. All lines have been placed on mute to prevent any background noise.
Regina: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, press star one again.
If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star One again, we kindly ask you. Please limit your questions to one and one follow up I would now like to turn the conference over to Joe Thomas Senior Vice President Accounting and Finance. Please go ahead.
Regina: We kindly ask that you please limit your questions to one and one follow-up.
Joe Thomas: I would now like to turn the conference over to Joe Thomas, Senior Vice President, Accounting and Finance. Please go ahead.
Joe Thomas: Good morning, and welcome to the earnings Conference call for Smith Douglas homes, We issued a press release. This morning outlining our results for the fourth quarter of 2020 for which we will discuss on today's call and which can be found on our website at investors Dot Smith Douglas dot com or by selecting the Investor Relations link at the bottom of our homepage.
Joe Thomas: Good morning and welcome to the earnings conference call for Smith Douglas Homes. We issued a press release this morning outlining our results for the fourth quarter of 2024, which we will discuss on today's call and which can be found on our website at investors.smithdouglas.com or by selecting the Investor Relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the Investor Relations section of our website.
Joe Thomas: Please note this call will be simultaneously webcast on the Investor Relations section of our website.
Joe Thomas: Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals, outlook, performance, and ability to gain market share, including in uncertain environments, are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties, and other important factors as detailed in the company's SEC filing. Accept as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed in this call to the most comparable GAAP measures can be found in our press release located on our website and in our SEC filings.
Joe Thomas: 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, our performance and ability to gain market share including in uncertain environments are forward looking statements.
Joe Thomas: 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 <unk>.
Joe Thomas: Comparable GAAP measures can be found in our press release located on our website and in our SEC filings.
Greg Bennett: Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg. Thanks, Joe. Good morning to everyone joining us on today's call as we go over results for the fourth quarter of 2024.
Greg Bennett: During the call. This morning are Greg Bennett, the company's CEO, and Vice Chairman and Russ Devendorf, our executive Vice President and CFO I'd now like to turn the call over to Greg.
Greg Bennett: Thanks, Joe and good morning to everyone joining us on today's call I will go over result for the fourth quarter of 2024.
Greg Bennett: provide some insight into the state of our home building operations for the first few months of 2025. Smith Douglas Homes reported pre-tax income of $30 million in the fourth quarter of 2024, capping off a very profitable year for a company in which we generated nearly $117 million in pre-tax income. The 836 homes we delivered in the quarter were well above our stated guidance range and represented a quarterly record for our company. For the full year, Smith Douglas delivered 2,867 homes. Our growth margins for the quarter came in as expected at 25.5%. which was the midpoint of our guidance.
Greg Bennett: Provide some insight into the state of our homebuilding operations for the first few months of 2020.
Greg Bennett: Mr. Douglas Holt reported pretax income of $30 million in the fourth quarter of 2024 <unk>.
Greg Bennett: Capping off a very profitable year for our company in which we generated nearly $117 million and pre tax income.
Greg Bennett: 836 holes were delivered in the quarter well above our stated guidance range and represented a quarterly record for our company.
Greg Bennett: For the full year, Mr August delivered 10867 homes.
Greg Bennett: Our gross margins for the quarter came in as expected at 25, 5%.
Greg Bennett: Which was the midpoint of our guidance.
Greg Bennett: For the full year, gross margins on home closings averaged 26.2%. The combination of strong delivery growth, healthy margins, and quick inventory turns resulted in an adjusted return on equity of 29% for 2024, well above the industry average for publicly traded homebuilders.
Greg Bennett: For the full year gross margins on home closings average 26, 2%.
Combination of strong delivery growth healthy margins and quick inventory turns resulted in an adjusted return on equity was 29% for 2024.
Greg Bennett: Well above the industry average for publicly traded homebuilders.
Greg Bennett: Overall, we're extremely pleased with our performance in 2024 and look forward to building on successes we've achieved during the year. Here in the fourth quarter, we generated 569 net new orders. Similar to last quarter, price incentives and closing cost support were an important sales tool to all our communities. While this has been an effective way to address affordability issues, it has had a negative impact on our margins. We make further progress on improving the construction efficiency in the fourth quarter. Cycle time is coming in at approximately 55 working days, excluding our Houston division. Our trade partners and suppliers continue to buy into the R-Team philosophy, which streamlines the construction process and provides a level of accountability that leads to better cycle time.
Greg Bennett: Overall, we're extremely pleased with our performance in 2024 and look forward to building on successes, we've achieved during the year.
Greg Bennett: During the fourth quarter, we generated 569 net new orders.
Greg Bennett: Last quarter price incentives and closing cost support for an important sales to all of our communities.
Greg Bennett: While this has been an effective way to address affordability issues.
Greg Bennett: It had a negative impact on our margins.
Greg Bennett: We'll make further progress on improving the construction of patients in the fourth quarter, South Dakota coming in approximately 55 working days disclosed in our Houston Division.
Greg Bennett: Our trade partners and suppliers continue to buy in to the our team philosophy with streamlines the construction process and provide the level of accountability that leads to better cycle times.
Greg Bennett: The adoption of the R-TEAM system in Houston continues to progress.
Greg Bennett: The option of the <unk> system in Houston continues to progress well.
Greg Bennett: We expect to see real improvement to their operating efficiency in the coming quarters. Our ability to turn inventory quickly is a key component of our home building strategy, and we remain committed to making incremental improvements across our footprint. We ended the year with 19,522 controlled lots. Of our unstarted controlled lots, 96% were controlled via option agreement consistent with our asset lot strategy. This land lot model allows us to control a significant number of lots in a capital efficient manner while offloading much of our risk associated with owning the developing land.
Greg Bennett: We expect to see real improvement to their operating efficiency in the coming quarters.
Greg Bennett: Building to turn inventory quickly is a key component of our homebuilding strategy and we remain committed to making incremental improvements across our footprint.
Greg Bennett: We ended the year with 19522 controlled lots.
Greg Bennett: Of our own started controlled was 96% were controlled via option agreement consistent with our asset light strategy.
This landmark model allows us to control a significant number of lots in a capital efficient manner, while offload in much of a risk associated with owning the developing land.
Greg Bennett: As we look ahead to 2025 and move into the heart of the spring selling season. There are microeconomic and political uncertainties. in particular, around interest rates and tariffs. that may cause potential headwinds for the business. Anticipated relief in mortgage rates after the Fed started cutting in the back half of 2024 never materialized. And in fact, rates increased throughout the fourth quarter of 2024 and into January, where the average 30-year mortgage reached a peak of over 7%. As several of our peers have also reported, January sales started off a bit slow compared to our expectations before picking up through February and early March.
Greg Bennett: As we look ahead to 2020.
Greg Bennett: Move into the heart of the spring selling season.
Greg Bennett: Macroeconomic and political uncertainties.
Greg Bennett: Particularly around interest rates and tariffs.
Greg Bennett: That may cause potential headwinds for the business.
Greg Bennett: Anticipated relief in mortgage rates after the fed started cutting in.
Greg Bennett: In the back half of 2024 never materialized and in fact rates increased throughout the fourth quarter of 2024 and ended January with average 30 year mortgage reached a peak of over 7%.
Greg Bennett: Several of our peers have also reported January sales started off a bit slow compared to our expectations before picking up through February and early March.
Greg Bennett: Despite seeing some stabilization in inflation affordability remains a significant challenge for our buyers.
Greg Bennett: Despite seeing some stabilization in inflation, affordability remains a significant challenge for our buyers. Additionally, the lock-in effect, where homeowners are reluctant to sell due to their low mortgage rates, is keeping housing inventories near historic lows and contributing to home prices remaining higher.
Greg Bennett: Additionally, the lock in effect, where homeowners are reluctant to sell due to their low mortgage rates is keeping the housing inventory near historic lows and contributing to home prices remaining high.
Greg Bennett: While there might be some near term headwinds and additional pressure on margins longer term, we continue to remain optimistic about the outlook for our industry and especially Smith Douglas.
Greg Bennett: Well, there might be some near-term headwinds and additional pressure on March. Longer term, we continue to remain optimistic about the outlook for our industry, and especially Smith Douglas. We believe our manufacturing approach to home building, operational efficiency, and land lot strategy will serve us well in any environment. Our balance sheet remains in excellent shape, and we have a real opportunity to gain market share as we expand our operations throughout the Southeast.
Greg Bennett: We believe our manufacturing approach to homebuilding operational efficiency and land light strategy will serve us well in any environment.
Greg Bennett: Okay.
Greg Bennett: Our balance sheet remains in excellent shape.
Greg Bennett: We have a real opportunity to gain market share as we expand our operations throughout the southeast.
Russ: Before I turn the call over to Russ I want to thank all of our team members for their contributions to a remarkable year for our company.
Greg Bennett: Before I turn the call over to Russ, I want to thank all of our team members for their contributions to a remarkable year for our company. Smith Douglas has come a long way since we started operating out of Atlanta 17 years ago. Our significant expansion throughout the Southeast and Texas over the years and our highly successful IPO last year is all due to the hard work and commitment. more than 450 team members.
Russ: Let Douglas has come a long way since we started operating out of Atlanta 17 years ago.
Russ: Our significant expansion throughout the southeast and Texas over the years.
Russ: Highly successful IPO last year is all due to the hard work and commitment.
Russ: But more than 450 team members, we truly appreciate all of you.
Greg Bennett: We truly appreciate all of you.
Russ Devendorf: And now I turn it over to Russ. Thanks, Greg. I'm going to highlight some of our results for the fourth quarter and full year, and then conclude my remarks with our outlook for the first quarter. We finished the fourth quarter with $287 million of revenue, a 32% increase over the year-ago period. on 836 closings for an average sales price on closed homes of $344,000. Our gross margin was 25.5% and SG&A expense was 14.9% of revenue. Pre-tax income was $30 million with net income of $28.8 million for the quarter. Given the nature of our up-sea organizational structure, our reported net income reflects an effective tax rate of 4.2% on the face of our income state.
Russ: And now I'll turn it over to Russ.
Russ: Thanks, Greg I'm going to highlight some of our results for the fourth quarter and full year and then conclude my remarks with our outlook for the first quarter.
Russ: We finished the fourth quarter with $287 million in revenue, a 32% increase over the year ago period.
836 closings for an average sales price on closed homes of 344000.
Russ: Our gross margin was 25, 5% and SG&A expense was 14, 9% of revenue pretax income was $30 million with net income of $28 8 million for the quarter.
Given the nature of our up C. Organizational structure. Our reported net income reflects an effective tax rate of four 2% on the face of our income statement.
Russ Devendorf: This income tax expense is primarily attributable to income related to the approximate 17.3% economic ownership of our public shareholders that is held by Smith Douglas Homes Corp. and Smith Douglas Holdings, LLC. Our adjusted net income, which is a non-gap measure that we believe is useful in providing a comparison to more traditional C-corporations, is $22.6 million for the quarter. Adjusted net income assumes a 24.6% blended federal and state effective tax rate as if we had 100% public ownership operating as a subchapter C corporation. We believe adjusted net income is a useful metric because it allows management and investors to evaluate our results more effectively to industry peers that may have a more traditional tax and organizational structure.
Russ: This income tax expense is primarily attributable.
Russ: To income related to the approximate 17, 3% economic ownership of our public shareholders that is held by snap Douglas homes Corp, Instinet Douglas Holdings LLC.
Russ: Our adjusted net income, which is a non-GAAP measure that we believe is useful in providing a comparison to more traditional C. Corporations is $22 6 million for the quarter.
Russ: Adjusted net income assumes a 24, 6% blended federal and state effective tax rate as if we had 100% public ownership operating as a sub chapter C Corporation.
Russ: We believe adjusted net income is a useful metric because it allows management and investors to evaluate our results more effectively to industry peers that may have a more traditional tax and organizational structure.
Russ Devendorf: You can find more information about our structure and income taxes in the footnotes of our financial For more information visit www.FEMA.gov For the full year 2024, we closed a record 2,867 homes with corresponding revenue of $975 million, a 25% and 28% increase respectively over prior year. Our gross margin was 26.2% for the full year compared to 28.3% in 2023, primarily driven by an increase in our average lot cost, which was 24.4% of revenue versus 21.3% in 2023. Discounts and closing costs were 3.6% compared to 3.4% last year. Our SG&A expense was just under 14% of revenue, including internal and external sales commissions, which were 4% of revenue compared to 3.6% in 2023.
Russ: Can find more information about our structure and income taxes in the footnotes of our financial statements.
Russ: For the full year 2024, we closed a record 2867 homes with corresponding revenue of $975 million or 25% and 28% increase respectively over prior year.
Russ: Our gross margin was 26, 2%.
Russ: For the full year compared to 28, 3% in 2023, primarily driven by an increase in our average lot cost, which was 24, 4% of revenue versus 21, 3% in 2023.
Russ: Discounts and closing costs were three 6% compared to three 4% last year. Our SG&A expense was just under 14% of revenue, including internal and external sales commissions, which were 4% of revenue compared to three 6% in 2023.
Russ Devendorf: Pre-tax income was $116.9 million, with net income of $111.8 million for the year, and our adjusted net income, as previously described, was $88.1 million. We were operating out of 78 active selling communities at the end of the year versus 69 at the end of 2023. We finished the year with 694 homes in backlog, with an average selling price of $340,000 and an expected gross margin on those homes of just under 24%. Looking at our balance sheet, we ended the quarter with approximately $22 million of cash and no borrowings under our $250 million revolving credit facility and $402 million of total members' and stockholders' equity.
Russ: Pretax income was $116 9 million with net income of $111 8 million for the year and our adjusted net income as previously described was $88 1 million.
Russ: We were operating at a <unk> 78 active selling communities at the end of the year versus 69 at the end of 2023.
Russ: We finished the year with 694 homes in backlog with an average selling price of 340000 and an expected gross margin on those homes are just under 24%.
Russ: Looking at our balance sheet, we ended the quarter with approximately $22 million of cash and no borrowings under our $250 million revolving credit facility and $402 million of total members and stockholders equity.
Russ Devendorf: Our debt-to-book capitalization was 0.8%, and our net debt-to-netbook capitalization was negative $5%. We had approximately $220 million available on our unsecured credit facility and are well positioned to execute on our growth strategy as Greg previously mentioned.
Russ: Our debt to book capitalization was 8% and our net debt to net book capitalization was negative 5%.
Russ: We had approximately $220 million available on our unsecured credit facility and are well positioned to execute on our growth strategy as Greg previously mentioned.
Russ: Yeah.
Russ Devendorf: Before I speak to our guidance for the first quarter, I'll provide a little more color on what we are seeing through the first couple of months this year. As Greg mentioned, sales started a bit slow in January, but picked up in February. Our sales pace per community trended higher at 2.4 and 3.3 sales in January and February, respectively, compared to 3.4 sales per community through the first two months of 2024. Additionally, we have seen an increase in the closing costs and incentives we offer versus this time last year to the tune of about 75 basis points on a relatively flat average sales.
Russ: Before I speak to our guidance for the first quarter I'll provide a little more color on what we're seeing through the first couple of months this year.
Russ: As Greg mentioned sales started a bit slow in January but picked up in February our sales pace per community trended higher at two four and $3 three sales in January and February respectively, compared to three four sales per community through the first two months of 2024. Additionally, we have seen an increase in the closing costs and incentives we offer versus this.
Russ: Time last year to the tune of about 75 basis points on a relatively flat average sales price.
Russ Devendorf: That said, for the first quarter of 2025, we currently anticipate home closings to finish between 625 and 675 homes, an approximate 15% increase over 2024 at the midpoint, with an average sales price between $330,000 and $335,000, and gross margin in the range of 23.25% and 23.75%. For the full year, we expect closings to be between 3,000 and 3,200 homes, which is in the range we previously stated on our last call. We believe the primary risk to our projections are around our ability to maintain sales pace and bring our new communities and lots online. Macroeconomic factors and uncertainty around jobs, tariffs, inflation, and interest rates could also have unforeseen impacts to our numbers.
Russ: That said for the first quarter of 2025, we currently anticipate home closings to finish between $625 and 675 homes and approximate 15% increase over 2024 at the midpoint with an average sales price between 330000, and 335000 and gross margin in the range of 23 in a quarter person.
Russ: Scent and 23, 75% for.
Russ: For the full year, we expect closings to be between 3030, 200 homes, which is in the range. We previously stated on our last call.
Russ: We believe the primary risks to our projections are around our ability to maintain sales pace and bring our new communities and lots online.
Russ: <unk> economic factors and uncertainty around jobs tariffs inflation and interest rates could also have unforeseen impacts to our numbers.
Operator: With that, I'd like to turn the call over to the operator for instructions on Q&A. At this time, if you'd like to ask a question, press star followed by the number one on your telephone keypad. We kindly ask that you please limit your questions to one and one follow-up.
Russ: With that I'd like to turn the call over to the operator for instructions on Q&A.
Speaker Change: At this time, maybe you'd like to ask a question press star followed by the number one on your telephone keypad, we kindly ask that you. Please limit your questions to one and one follow up our first question will come from the line of Michael Rehaut with JP Morgan. Please go ahead.
Andrew Azzion: Our first question will come from the line of Michael Reholt with J.P. Morgan. Please go ahead. Hi, everyone. This is Andrew Azzion for Mike. Thank you for taking my questions. Just maybe I appreciate that guidance.
Michael Rehaut: Hi, everyone.
Speaker Change: The answer Mike. Thank you for taking my questions.
Speaker Change: Just maybe I appreciate that guidance.
Russ Devendorf: I just wanted to maybe dial into the – I believe I heard you say the backlog gross margins are to the tune of 24% and 1Q is a little bit below that. Could we – if you could bucket out some of the, you know, dynamics there, that would be very helpful. Yeah, so, so backlog margin, you heard correctly, it's about 24%. A lot of that is obviously sales that were made in Q4. And so Q4 was definitely, we saw more incentives pick up, you know, where Greg had mentioned, you know, it's an affordability thing, interest rates really, you know, even with the Fed cutting kind of moved against us.
Speaker Change: Wanted to maybe dial in to the I believe I heard you say the backlog gross margins up to the tune of 24%.
<unk> is a little bit below that.
Speaker Change: I Wonder if you could bucket out some of the.
Speaker Change: The dynamics, there that would be very helpful.
Speaker Change: Yeah. So so backlog margin you heard correctly its about 24%.
Speaker Change: A lot of that is obviously sales that were made in Q4, and so Q4 was definitely.
Speaker Change: We saw more incentives pick up.
Greg Bennett: Greg had mentioned.
Speaker Change: It is an affordability thing interest rates.
Speaker Change: Even with the fed cutting kind of moved against us and so are we.
Russ Devendorf: And so we were taking more incentives to try and keep pace. So that's, that's reflective in backlog. When I look out, actually, a little bit further, you know, beyond, beyond what we're seeing for, you know, what's closing in the first couple of months in terms of our backlog, it looks like it's, it's creeping up a little bit. So you're actually seeing it trend a little bit up when I look at kind of our backlog aging through, through kind of mid year. So we're hopeful, again, sales have picked up in February, but you know, look, incentives are still, are still being used to drive volume.
Speaker Change: We were taking more incentives to try and keep pace. So that's reflected in backlog when I look out actually a.
Speaker Change: A little bit further beyond beyond what we're seeing for.
Speaker Change: Whats closing in the first couple of months in terms of our backlog it looks like it's creeping up a little bit so you're actually seeing it trend a little bit up.
Speaker Change: When I look at kind of our backlog aging through through.
Speaker Change: Kind of mid year. So we're hopeful again sales have picked up in February but look incentives are still are still being used to drive volume.
Russ Devendorf: So it's, it's tough. That's where we see the biggest risk, right? This, this year is going to be mostly in, in margin, you know, people are showing up into the sales centers. There's definitely demand, but it's, it's an affordability game.
Speaker Change: So it's it's tough thats, where we see the biggest risk rate. This year is going to be mostly in dollars and margin.
Speaker Change: People are showing up into the sale centers, there's definitely demand, but it's it's an affordability game.
Russ Devendorf: Thanks Russ.
Ross: Thanks Ross.
Russ Devendorf: And then maybe secondly, on the land side, is there some way to some framework for kind of lot cost inflation for you guys that you are thinking of currently or that that would be very helpful? Yeah, that's really, you know, outside of incentives, right? And because we're seeing kind of flat ASP year over year. So you've got incentives that are impacting margins. It's lot cost, right? And we've talked about that in the past. I'd say it's, you know, it could be, you know, two to 300 basis points of margin is eroding because of our lot cost, you know, rolling through there.
Speaker Change: And then maybe secondly on the land side is there some way to some framework for loss cost inflation for you guys that you are thinking correctly.
Ross: That would be very helpful.
Ross: Yeah, that's that's really outside of incentives right and because we're seeing kind of flat asps year over year. So you've got incentives that are.
Ross: That are impacting margins.
Ross: Log cost right and we've talked about that in the past I would say, it's it can be two to two to 300 basis points.
Ross: Of margin is is eroding because of our our lot cost.
Ross: Rolling through there so.
Russ Devendorf: So land is still, you know, challenging, it's competitive. And that's where we see the, you know, the biggest challenge, our vertical costs have actually been in check. But, you know, now with kind of what we're seeing with tariffs and the new administration, and you know, a lot of uncertainty, you know, we are seeing some of our subcontractors reach out and, and, you know, look at surcharges or, you know, possible increases, but there's still still a lot of uncertainty there's, there's, we don't have a real clear picture yet on on how that might impact us the rest of our lives.
Ross: Land is still.
Ross: Challenging it's competitive and that's where we see the.
Ross: The biggest challenge our vertical costs have actually been in check, but now with kind of what we're seeing with tariffs and the new administration and a lot of uncertainty.
Ross: We are seeing some of our subcontractors.
Ross: Our reach out and.
Ross: Look at surcharges or possible increases, but there is still still a lot of uncertainty. There is we don't have a real clear picture yet on how that might.
Ross: Impact us the rest of the year.
Russ Devendorf: Thank you, Russ. I'll pass it on.
Ross: Thank you Ross I'll pass it on.
Ross: Thanks.
Sam Reed: Our next question comes from the line of Sam Reed with Wells Fargo. Please go ahead. Awesome, thanks. I actually wanted to piggyback off that last question, just a comment on lot costs eroding 200 to 300 basis points of margin. I mean, is that mostly just weighted to 2025 or is there a risk that that erosion kind of persists into 2026 and beyond? Just looking for some context there, given the visibility you have in your out-year lot pipeline. Yeah, I don't see it. I see it kind of leveling off, you know, based on where our lot costs are.
Speaker Change: Our next question comes from the line of Sam Reid with Wells Fargo. Please go ahead.
Awesome. Thanks, So actually I wanted to piggyback off that last question just a comment on lot cost eroding.
Speaker Change: 200 to 300 basis points of margin is that mostly just weighed into 2025 or is there a risk that that erosion kind of persists into 2026 and beyond.
Speaker Change: Just looking for some context, there given the visibility you have in your out year lock pipeline.
Speaker Change: Yes, I don't see it.
Speaker Change: It kind of leveling off based on where our costs are but certainly as we have been buying contracting land over the last couple of years. It's it certainly increase but I do think it's leveled off a bit when you. When you kind of if you kind of think about 26 and beyond but.
Russ Devendorf: But certainly, as we've been, you know, buying and contracting land over the last couple of years, it's certainly increased. But I do think it's leveled off a bit if you kind of think about, you know, 26 and beyond. But yeah, we haven't taken a deep dive into it. But just sitting here today, I'd say you're not going to see the kind of, you know, inflation that you're seeing in the lot costs now. I mean, it's taken a pretty big bump. And I think you kind of see that leveling off a bit as you look towards the outer years.
Speaker Change: Yes, we really haven't we haven't taken a deep dive into it but you're sitting here today I would say youre not going to see that kind of you know.
Speaker Change: In inflation that youre seeing in the lot costs now I mean, it's been it's taken a pretty big pretty big bump and I think you kind of see that leveling off a bit as you look.
Speaker Change: Towards the outer years.
Sam Reed: Awesome. No, thanks Russ.
Speaker Change: Awesome. Thanks, and then one follow up just wanted to touch on community count growth and cadence throughout the year I know, obviously theres a lot of moving pieces when it comes to community count, but can you give us some guideposts in terms of how we should think about modeling that over the course of <unk>.
Sam Reed: And then one follow up, you know, just wanted to touch on community count growth and cadence throughout the year.
Russ Devendorf: You know, I know obviously, you know, there's a lot of moving pieces when it comes to community count, but could you just give us some guideposts in terms of how we should think about modeling that over the course of 2025? Obviously, it does have implications on start pace, etc, etc. Yeah, it should be pretty ratable increase throughout the year, and we were just looking at that. Last week, you know, we can see community count growing, you know, low single digits, you know, towards kind of 90 by the end of the year, up from, what were we, 78.
Speaker Change: 25, obviously, it does have implications on dart arcades et cetera et cetera.
Speaker Change: Yes, it should be it should be pretty ratable increase throughout the year and we were just looking at that.
Speaker Change: Last week, we can see community count growing.
Speaker Change: Low single digits towards kind of 90% by the end of the year up from where we are.
Speaker Change: 78 so.
Russ Devendorf: So I'd say it's going to be kind of a ratable increase throughout the year.
Speaker Change: I'd say, it's going to be kind of a ratable increase throughout the year.
Sam Reed: That's all for us. I'll pass it on. Thanks.
Speaker Change: That's helpful Raj I'll pass it on thanks.
Speaker Change: Thanks.
Trevor Ellenson: Our next question comes from the line of Trevor Ellenson with Wolf Research. Please go ahead. Hi, good morning. Thank you for taking my questions. I wanted to follow up on gross margin. Previously, you had talked about 2025 perhaps being in the 25% range, give or take. Starting below that here in the first quarter, I think you got some land inflation that'll likely continue to work through in 2025.
Speaker Change: Our next question comes from the line of Trevor Allinson with Wolfe Research. Please go ahead.
Trevor Allinson: Hi, Good morning, Thanks for taking my questions wanted to follow up on gross margin.
Trevor Allinson: Previously you had talked about 2025, perhaps being in the 25% range give or take starting below that here in the first quarter I know you've got some land inflation that will likely continue to work through in 2025 can you talk about what the biggest difference is now versus maybe a core.
Russ Devendorf: Can you talk about what the biggest difference is now versus maybe a quarter ago when you were talking about 2025 gross margin perhaps being in that 25% range? Yeah, it's really, it's the market. I think, you know, when we had our call, you know, looking at where we saw. You know, rates had started coming down, the Fed was cutting, and then Q4, you saw rates start to increase. And so, we've definitely had a, we had a bigger use of incentives in Q4, and certainly at the beginning of this year, you know, rates peaked, the average 30-year peaked in January, starting to come down a little bit.
Trevor Allinson: <unk> ago, when you were talking about 2025.
Trevor Allinson: Gross margin, perhaps being in that 25% range yes.
Trevor Allinson: Yes.
Speaker Change: It's really it's the market I think when we had our call looking at where we saw.
Speaker Change: Rates have started coming down and the fed was cutting and then Q4 you saw rates start to increase and so we've definitely had a we had a bigger use of incentives in Q4 and certainly at the beginning of this year.
Speaker Change: Rates peaked the average 30 year peaked in January is starting to come down a little bit.
Russ Devendorf: But when you look year over year, I think the rates are almost flat. And so, that's really had an impact, for sure, on where we see margins going. And as you know, you know, our business model, we're very focused on kind of manufacturing, you know, it's a pace over price game. And so, you know, to steal a line from Lennar, you know, that's kind of our buffer in terms of, you know, getting the paces, that's that gross margin. And so, we've had to use more incentives to push pace.
Speaker Change: But when you look year over year I think the rates are almost flat and so that's really had an impact for sure on where we see margins going.
Speaker Change: And as you know our business model, where we are.
Speaker Change: Very focused on kind of manufacturing.
Pace over price game and so.
Speaker Change: To steal a line from from <unk>.
Speaker Change: That's kind of our.
Speaker Change: Our buffer in terms of.
Speaker Change: Getting getting the paces that.
Speaker Change: That gross margin and so we've.
Speaker Change: We've had to use more incentives to push pace.
Speaker Change: Yes that makes sense and then second question on SG&A closings were really good in the quarter.
Trevor Ellenson: Yeah, that makes sense.
Russ Devendorf: And then second question on SG&A, closings were really good in the quarter. The SG&A still kind of came in towards the top higher end of your range. How are you thinking about leverage on SG&A as we move into 2025? I appreciate that you guys have spent a lot on growth already. How do you think about levering? Yeah, SG&A was elevated in Q4, so we overclosed from our guidance and then we hit a lot of our operational metrics that bonuses are based on. And so we probably had over 100 basis points of SG&A, just an additional bonus accrual that if we knew we were going to hit the numbers like we did for the year, would have been accrued more evenly throughout the year.
Speaker Change: The SG&A is still kind of came in towards the higher end of your range, how youre thinking about leverage on SG&A as we move into 2025 I. Appreciate it you guys have spent a lot on growth already how do you think about levering that.
Speaker Change: Yeah SG&A was elevated in Q4, we actually so we overclothes from our guidance and then we hit a lot of our operational metrics that bonuses are based on and so we probably had over 100 basis points of SG&A just an additional bonus accrual that if we knew we were going to hit.
Speaker Change: Numbers like we did for the year would have been accrued.
Speaker Change: More evenly throughout the year, so we probably that $14 nine would have been probably just south of 2014.
Russ Devendorf: So we probably, that 14.9 would have been probably just south of 14 if we had taken those accruals throughout the year. So that was a big part of it. But yeah, we would expect ourselves to get some good SG&A leverage as we continue to grow the top line. We've got the team in place from a back office perspective. We've got, we're pretty set from that standpoint as a public company. So we would expect that SG&A number to continue to trend down below 14. Our goal would be certainly to improve that year over year.
Speaker Change: If we had taken those.
Speaker Change: Accruals throughout the year, so that was a big part of it but yes, we would expect ourselves to get some some good SG&A leverage as we continue.
Continue to grow the top line.
Speaker Change: We've got the team in place from a back office perspective.
Speaker Change: You know we've got.
Speaker Change: We're pretty set from that standpoint, as a public company. So we would expect that SG&A number to continue to trend down below.
Speaker Change: Hello <unk>.
Speaker Change: Our goal would be certainly.
Speaker Change: In order to improve that year over year.
Russ Devendorf: Thank you for all the color and good luck moving forward. Sure.
Speaker Change: Thanks for all the color and good luck moving forward.
Speaker Change: Sure.
Mike Dahl: Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please go ahead. Hey guys, good morning. You've actually got Steve and Mia on for mic this morning.
Speaker Change: Our next question comes from the line of Mike Dahl with RBC capital markets. Please go ahead.
Speaker Change: Hey, guys. Good morning, you've actually got Stephen Neal on for Mike. This morning, I wanted to ask about the market assumptions and kind of the outlook you have embedded within the full year guide and whether or not you.
Steve and Mia: I wanted to ask about the market assumptions and kind of the outlook you have embedded within the full year guide and, you know, whether or not you have any improvement baked in there or if it's kind of flashing here, just kind of your thoughts on how you think about that and making the outlook. Yeah, we've got the communities in place, you know, to hit our 3,000 or 3,200 guide on closings. So you know, a lot of it's going to depend, you know, again, February picked up from a sales pace perspective, we're seeing, you know, March has, you know, been pretty consistent with February.
Speaker Change: Any improvement baked in there for just kind of flattish from here just kind of your thoughts on how you think about that and making the outlook. Thanks.
Speaker Change: Yes.
Speaker Change: We've got the we got the communities in place to hit our 3000 or 3200 guide on closings.
Speaker Change: So a lot of it is going to depend again February picked up from a sales pace perspective.
Speaker Change: In.
Speaker Change: March has been pretty consistent with February.
Russ Devendorf: But look, there's definitely, you know, still a lot of uncertainty going into the balance of the year.
Speaker Change: But look there is there is definitely.
Speaker Change: Only still a lot of uncertainty going into the.
Speaker Change: Into the balance of the year, but most of that we feel is is around.
Russ Devendorf: But most of that we feel is around margins, you know, we definitely think, you know, people are showing up to the sales centers, traffic has been pretty good, so it really, for us, I think it's just a matter of finding that right price, right, it's an affordability game as I've mentioned, so it's, the biggest risk is certainly on the margin side, you know, I think we can get volume, but the big question is at what margin, what price is it going to come, and that remains to be seen, you know, so still there's a lot, like I just mentioned before, there's a lot, you know, relative to vertical construction costs because of, you know, what's happening with tariffs and how that's going to impact us, and so that is just a lot of uncertainty there, but we feel, sitting here today, we feel pretty good about getting volume, again, barring, you know, some sort of recession or a big shift in employment, you know, I've always said we can kind of cure, we can kind of cure a payment for folks, and so that impacts margin, but if people start losing jobs, that's the part we can't fix.
Speaker Change: Margins, we definitely think people are showing up to the sales sales centers, our traffic has been pretty good.
Speaker Change: So it really for US I think it's just a matter of finding that right price right. It's an affordability game is as I've mentioned so it's.
Speaker Change: The biggest risk is certainly on the margin side.
Speaker Change: I think I think we can get volume but.
Speaker Change: Big question is at what margin what price is it.
Speaker Change: Is it going to come.
Speaker Change: And that remains to be seen.
Speaker Change: So still there is a lot like I just mentioned before theres a lot relative to vertical construction cost.
Speaker Change: Because of what's happening with tariffs and how that's going to impact us in and so that is just a lot of uncertainty there, but we feel we feel sitting here today, we feel pretty good about getting volume again barring.
Speaker Change: Some sort of major recession or.
Speaker Change: Or a big shift in employment.
Speaker Change: I've always said, we can we can kind of cure.
Speaker Change: We can kind of cure of payment for folks and so that impacts margin, but if if people start losing jobs. That's that's the part we.
Speaker Change: We can't fix.
Steve and Mia: No, it's super helpful. Thanks for all the color there.
Speaker Change: No that's super helpful. Thanks for thanks for all the color there and then I guess, one more kind of piggybacking off the previous tariff questions and margin questions.
Russ Devendorf: And then I guess one more, kind of piggybacking off the previous tariff questions and margin questions, like Trevor had said, the first quarter margin kind of coming in a little lower, mainly as given the market weaknesses. As you think about margins or the balance of the year, is there – for a higher level, kind of given there's so many moving pieces around tariffs, how are you kind of thinking about taking that into the guide? And if I could sneak an extra one in here, are you guys hearing anything on the ground given kind of the recent headlines on immigration and labor as well, too?
Speaker Change: Like I said the coverage said the first quarter margin kind of coming in a little lower mainly given.
Speaker Change: Given the market weakness is.
Speaker Change: As you think about margins through the balance of the year as well.
Speaker Change: For higher level of kind of given there's so many moving pieces around tariffs. How are you kind of thinking about taking that into the guide and if I could sneak an extra one in here are you guys hearing anything on the ground given kind of the recent headlines on immigration and labor as well too. Thanks a lot.
Russ Devendorf: Thanks a lot, guys. Yeah, from a margin perspective, like I said earlier, you know, we are seeing, it's interesting, our backlog, when I look at the aging, it looks like, you know, backlog margins picking up. So I think, you know, again, some of our early backlog that's going to be closing, you know, this quarter, you know, is reflective of probably, you know, incentives and discounting we were given on inventory in Q4. But, but look, I, it I'd be guessing if I told you which way margins are going to go from here. I think, like I said, that's the biggest risk.
Speaker Change: Yes.
Speaker Change: From a margin perspective.
Like I said earlier, we are seeing it's interesting our backlog when I look at the aging it looks like backlog margins picking up so I think again some of our early backlog that's going to be closing this quarter.
Speaker Change: As reflective of probably.
Speaker Change: Incentives and discounting we were given an inventory in Q4.
Speaker Change: But look I it's.
Speaker Change: I'd be I'd be guessing if I told you, which way margins are going to go.
From here I think like I said, that's the biggest risk.
Russ Devendorf: But we are seeing kind of that low to mid margins right now on what we're selling. But in order to keep pace, that's just going to shift based on where the market goes and a lot of that's interest rates and what happens just more macro level.
Speaker Change: We are seeing we're seeing kind of that.
Speaker Change: Low to mid margins right now on what we're selling.
Speaker Change: But in order to keep pace.
Speaker Change: That's just going to shift based on.
Speaker Change: Where the market goes and you know a lot of that is.
Speaker Change: Interest rates.
Speaker Change: And what happens just more macro level.
Greg Bennett: Yeah, and then from a tariff perspective, I don't know, Greg, if you could get some color on what we're seeing from the SOBs. Currently, we're not seeing any impact, but we don't have our head in the sand either. We are following a list of items daily, weekly, with all of our supply chain vendors and staying alert to those things. But really, from immigration, tariff, all those things, there's As of today, there's not been any impact.
Speaker Change: Yes, and then from a tariff perspective, I don't know Greg can you give some color on what we're seeing from the subs, yes, absolutely.
Greg Bennett: Currently we're not seeing any impact.
Speaker Change: But we don't have a hidden asset in sand either we are following a list of items daily weekly with all of our supply chain vendors.
Greg Bennett: Stay alert to those things but.
From from immigration tariff.
Greg Bennett: All of those things.
Greg Bennett: So as of today.
Greg Bennett: That has not been any impact.
Greg Bennett: Yeah, and you want to touch on the cycle times have actually come down. hasn't been an issue. Yeah, yeah, we were just visiting earlier. Cycle times year over year, we've taken two weeks, so we we ended 23 at 65 days we're into 24 and around 55 days so you know that helps to shrink backlog but it but it also helps with the efficiency and cycle and and all the things that we're we're striving for here so you know in light of those things going on we've still seen some operational efficiencies No doubt, it makes a lot of sense.
Greg Bennett: And even want to touch on the cycle times have actually come down.
Greg Bennett: It hasnt been an issue.
Greg Bennett: The narrow their cycle time of year over year, we've taken two weeks. So we ended 2003.
Greg Bennett: 60, 65 days, we're into 24 at <unk> 55.
Greg Bennett: So.
Greg Bennett: No that helps to shrink.
Greg Bennett: Backlog, but it also helps with the efficiency and cycle in and all the things that we are.
Greg Bennett: Drug for here so.
Greg Bennett: In light of those things going on we still see some operational efficiencies.
Greg Bennett: No that makes a lot of sense. Thanks for all the color guys.
Steve and Mia: Thanks for all the color, you guys.
Greg Bennett: Sure.
Operator: Again, to ask a question, press star 1 and our next question will come from the line of Jay McCanless with Wedbush.
Speaker Change: Again to ask a question press Star one and our next question will come from the line of Jay Mccanless with Wedbush. Please go ahead.
Jay Mccanless: Please go ahead.
Jay Mccanless: Hey, good morning, guys. I guess my first question, Russ, is what have y'all been seeing to reduce the community count guide? I think you've given an initial fiscal 25 guide for plus 15%. Now you're saying low single digits, maybe bridge that delta for us. I think it's going to be low double digits. I think it's like a 12%, because we were at 70, 78, and we'll get close to 90, so 12. So it should be. It should be 12%, I think. So we'll get close, I mean, some of that could just be timing. I mean, this was just kind of the numbers that we looked at just last week, but some of that is just, you know, we may get a couple of communities over, it's just how quickly can we get lots.
Jay Mccanless: Hey, Good morning, guys I guess my first question Russ is what have you all been seeing reduce the community Count Guide I think you had given the initial fiscal <unk> guide for plus 15% and now you're saying low single digits, maybe bridge that delta for us.
Jay Mccanless: I think it's going to be low double digits I think it's like a 12% because we were at 70 78 and <unk>.
Jay Mccanless: We'll get close to 90, so <unk>.
Jay Mccanless: So it should be.
Jay Mccanless: It should be 12%.
Jay Mccanless: Yes.
Jay Mccanless: So we get we'll get close I mean, some of that some of that could just be timing. I mean, this was just kind of the numbers that we looked at but.
Jay Mccanless: Just last week, but some of that is just.
Jay Mccanless: We may get a couple of communities over.
Jay Mccanless: It's just how quickly can we get lots and I Didnt mentioned on our prepared remarks, but it's it is definitely still challenging in some of our municipalities in and just getting through approvals. So there's always that risk.
Russ Devendorf: And I didn't mention on our prepared remarks, but it's definitely still, you know, challenging in some of our municipalities and just getting through approvals. So there's always that risk, but, you know, I think we can get close to that 15% increase.
Jay Mccanless: I think we can get close to that 15% increase.
Jay Mccanless: Okay.
Russ Devendorf: And then that's actually my second question was going to be, you know, what's the path for growth this year? Is it going to be mostly organic? Were you guys still evaluating some potential M&A? Yeah, it's all, so all of our closing growth this year is, you know, I'd say organic. We are in Chattanooga. We did, you know, that's being run out of our Atlanta operations, but we've got, I think it's close to about a thousand lots under control in Chattanooga, so that's a big part where we push pretty far north in Atlanta. And then we did open central Georgia, so you know, that middle Georgia, central Georgia area might deliver about a hundred closings, but again, that's kind of just an extension of Atlanta growing so big that we've divisionalized that.
Jay Mccanless: And then that's actually my second question was going to be.
Jay Mccanless: What's the path for growth. This year is it going to be mostly organic where you guys sold evaluating some potential M&A.
Jay Mccanless: Yeah. It's it's all so all of our closing growth this years.
Jay Mccanless: I'd say organic.
Jay Mccanless: We are.
Jay Mccanless: In Chattanooga, we did.
Jay Mccanless: That's being run out of our Atlanta operations, but we've got I think its close to about 1000 lots under control in Chattanooga, So that.
Jay Mccanless: That's a big part, where we pushed pretty far north in Atlanta.
Jay Mccanless: And then we did open central Georgia, So that middle Middle, Georgia, Central Georgia area, Mike My delivered about 100 closings, but again, that's kind of just an extension of Atlanta growing so big that we have divisional wise that.
Russ Devendorf: As we mentioned before, we opened We opened a division in Greenville. We don't think we're going to get any sales and closings this year, although our division president there is doing an excellent job of getting things going. We may have a small opportunity to do something. So everything's organic. We are definitely looking at opportunities. The M&A. There's still M&A going on. We've seen some deals happen in the industry. We're seeing some packages, but as we've always said, we'll be opportunistic. We're looking at filling in some spots throughout the Southeast and expanding. If we see something we like, we'll look at it, but we're certainly not going to overpay.
Jay Mccanless: As we've mentioned before we opened.
Jay Mccanless: And we opened a division in Greenville, we won't get any.
Jay Mccanless: We don't think we're going to get any sales and closings this year although.
Jay Mccanless: Our division President there is doing an excellent job of getting things going.
Jay Mccanless: May have a small opportunity to do something but so everything is organic.
Jay Mccanless: We are we are definitely looking at opportunities the M&A.
Jay Mccanless: Okay.
Jay Mccanless: Theres still M&A going on we've seen some deals happen.
Jay Mccanless: In the industry.
Jay Mccanless: We're seeing some packages, but as we've always said, we'll be opportunistic were looking at filling in some spots throughout the southeast.
Jay Mccanless: An expanding but.
Jay Mccanless: If we see something we like we'll look at it but.
Jay Mccanless: We're certainly not going to overpay, we were comfortable.
Russ Devendorf: We're comfortable doing greenfield startups if we like a market, but...
Jay Mccanless: Doing greenfield startups, if we.
Jay Mccanless: If we like the market but.
Russ Devendorf: You know, nothing immediate. Got it.
Jay Mccanless: Nothing nothing immediate.
Jay Mccanless: Got it and then the last one I had just thinking about average closing price for 25 years.
Russ Devendorf: And then the last one I had, just thinking about average closing price for 25, you'd initially, or you'd said last quarter, 335 to 345. Is that still a good range? Or how should we, how should we be modeling that through the year? Yeah, I think that's still a good range. I think our backlog is right now at 340. And so some of the ASP for this first quarter, it's just really the way our backlog is falling out. And it could be mixed across different divisions. But yeah, I still think kind of that 340 numbers is, as we sit here today, is still pretty.
Speaker Change: Initially you had said last quarter to $3 35 to $3 45 is that still a good range or how should we how should we be modeling that through the year.
Speaker Change: Yes, I think thats still thats still a good range I think our backlog is right now at $3 40.
Speaker Change: And.
Speaker Change: So some of the ASP for this first quarter, it's just really the way our backlog is falling out and it could be could be mix across different divisions, but I still think kind of that $3 40.
Speaker Change: Numbers as we sit here today is still pretty good.
Speaker Change: Okay sounds great. Thank you.
Russ Devendorf: Sounds great.
Alex Barron: Thank you.
Speaker Change: Thanks.
Operator: And once again, to ask a question, simply press star followed by the number one on your telephone keypad.
Speaker Change: And once again to ask a question simply press star followed by the number one on your telephone keypad.
Alex Barron: Our next question will come from the line of Alex Barron with Housing Research Center, please go ahead. Yeah, thank you. I was wondering in terms of the incentives you guys are offering. Are they mainly in the way of of rate buy-downs or in closing costs, or are you guys starting to see, you know, the need to do pricing? It is primarily in closing costs, which also include rate buy-downs, and most of our buyers, there is some level of rate buy-down in there. We are discounting as well, so it's a mix, but I'd say it's more geared towards closing cost incentives.
Speaker Change: Our next question will come from the line of Alex Barron with housing Research Center. Please go ahead.
Yes. Thank you.
Speaker Change: I was wondering in terms of the incentives you guys are offering are they mainly in the way of.
Speaker Change: Great buy downs or and closing costs or are you guys starting to see.
Speaker Change: The need to do price cuts.
Speaker Change: It is primarily.
Speaker Change: In closing costs.
Speaker Change: <unk> also which include rate buy downs.
Speaker Change: And.
Speaker Change: Most of our buyers there is some level of of rate buy down in there.
Speaker Change: We are we are discounting as well so it's a mix, but I would say it's more geared towards.
Speaker Change: Closing costs incentives.
Russ Devendorf: And what about broker commissions? Are you guys, you know, maintaining whatever your standard rate is? Or are you having to feel the need to? at bonuses or something. No, it's the same as what we've been doing in the past. We haven't changed. So we're still offering incentives, but nothing out of the ordinary.
Speaker Change: And what about broker commissions are you guys.
Speaker Change: Maintaining whatever your standard rate is are you having to fill the need to.
Speaker Change: AD bonuses or something like that.
Speaker Change: No. It's the same as what we've been doing in the past we havent, we havent changed so we're still still offering incentives, but nothing nothing out of the ordinary.
Russ Devendorf: Thank you so much. Sure.
Speaker Change: Thank you so much sure.
Greg Bennett: And that will conclude our question and answer session.
Speaker Change: And that will conclude our question and answer session I'll turn the call back over to Gregg <unk> for any closing remarks.
Greg Bennett: I'll turn the call back over to Greg Bennett for any closing remarks. Thank you everyone for joining us today. As always, we're accessible. Give us a call and look forward to chatting again next quarter.
Speaker Change: Okay.
Speaker Change: Thank you everyone for joining us today as always we were.
Speaker Change: We are accessible to call in.
Speaker Change: Look forward to jet again this quarter.
Operator: This concludes today's meeting. Thank you all for joining. You may now disconnect.
Speaker Change: This concludes today's meeting thank you all for joining you may now disconnect.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].