Q1 2025 Smith Douglas Homes Corp Earnings Call

Operator: Thank you for standing by.

Thank you for standing by my name is Gina and I will be your conference operator today at this time I would like to welcome everyone to the sniff Douglas homes first quarter 2025 earnings call and webcast all lines have been placed on mute to prevent any background noise.

Tina: My name is Tina, and I will be your conference operator today.

Tina: At this time, I would like to welcome everyone to the Smith Douglas Homes first quarter 2025 earnings call and webcast. All lines have been placed on mute to prevent any background noise.

Tina: 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you.

After the Speakers' remarks, there will be a question and answer session.

Speaker Change: If you would 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 Press Star. One again. Thank you I would now like to turn the call over to Joe Thomas S. V. P of accounting and finance. Please go ahead.

Joe Thomas: I would now like to turn the call over to Joe Thomas, SVP of Accounting and Finance. Please go ahead.

Okay.

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 first quarter of 2025, which we will discuss on today's call, and which can be found on our website at investors.smithdouglas.com, or by selecting the investor relations link at the bottom of our homepage. Please note this call will be simultaneously webcast on the Investor Relations section of our website.

Joe Thomas: Good morning, and welcome to the earnings Conference call for Smiths Douglas homes, We issued a press release. This morning outlining our results for the first quarter of 2025, which we will discuss on today's call, which can be found on our website at investors thought Smiths Douglas dot com or by selecting the Investor Relations link at the bottom of.

Speaker Change: Our homepage.

Speaker Change: 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 and performance, are forward-looking statements. Actual results could differ materially from such statements due to known and unknown risks, uncertainties, and other important factors as detailed in the company's SEC filing. Except as required by law, the company undertakes no duty to update these forward-looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings.

Speaker Change: Before the call begins I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance are forward looking statements actual results could differ materially from such statements due to known and unknown risks uncertainties and other important factors as detailed in the Companys.

Speaker Change: SEC filings, except as required by law. The company undertakes no duty to update these forward looking statements. Additionally, reconciliations of non-GAAP financial measures discussed on this call to the most comparable GAAP measures can be found in our press release located on our website and our SEC filings hosting the call. This morning are Greg Bennett the comp.

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 and good morning to everyone. Smith Douglas Homes posted another quarter of strong profitability to start the year, generating pre-tax income of $19.6 million or net earnings of $0.30 per share. Home closing revenue was $225 million in the first quarter, representing a 19% increase over first quarter of 2024. On closings, gross margin for the quarter came in at 23.8%, which was higher than the guidance range we shared on our last call.

Greg Bennett: Any CEO and vice Chairman and Russ Devendorf, our executive Vice President and CFO I would now like to turn the call over to Greg.

Greg Bennett: Thanks, Joe and good morning to everyone, let Douglas O posted another quarter of strong profitability start to year generating pre tax income of $19 6 million.

Greg Bennett: Net earnings of 30 cents per share.

Greg Bennett: Home closing revenue was $225 million in the first quarter, representing a 19% increase over first quarter of 'twenty four.

Greg Bennett: Home closing gross margin for the quarter came in at 23, 8%, which is higher than the guidance range, we shared on our last call.

Greg Bennett: We generated 768 net new orders in the first quarter on a sales pace of 3.1 homes per community per month. Overall, I'm very pleased with our execution to start the year and believe Smith Douglas remains on track to achieve our long-term goals. We experienced normal seasonality during the quarter, with the quarter activity improving as we headed into the spring. We had solid traffic throughout the quarter. The sales conversions were negatively impacted by affordability concerns and macro uncertainty. Similar to past quarters, we use financing incentives to overcome these obstacles and solve for monthly payment that would fit our buyers' needs.

Greg Bennett: We generated 768 net new orders in the first quarter wholesale space, one home per community per month.

Greg Bennett: Overall, I'm very pleased with our execution to start the year and believe Smith Douglas remains on track to achieve our long term goals.

We experienced normal seasonality during the quarter or the quarter activity, improving as we headed into the spring.

Greg Bennett: We had solid traffic throughout the quarter. The sales conversions were negatively impacted by affordability concerns and macro uncertainty.

Greg Bennett: Similar to past quarters, we used by name.

Greg Bennett: Overcome these obstacles and solve for monthly payment that would fit our borrowers needs. While there are many factors that affect their business they're out of our control. There are many things we can do to optimize.

Greg Bennett: While there are many factors that affect our business that are out of our control, there are many things we can do to optimize our performance in any demand environment. The first is controlling land through option agreements rather than owning it outright. At the end of the first quarter, less than 5% of our unstarted controlled lots were owned on balance sheet, while the remainder was tied up through auction and land banking agreements. This land lot strategy gives us some degree of flexibility with respect to our lot takedown timing, if needed, and limits our downside risk should market conditions soften.

Greg Bennett: Performance in any demand environment.

Greg Bennett: Perfect controlling land through option agreements rather than own it outright.

Greg Bennett: The end of the first quarter less than 5% of our own started control laws.

Greg Bennett: Our own balance sheet.

Greg Bennett: The remainder was tied up through option and land banking agreements.

Greg Bennett: This land light strategy gives us some degree of flexibility with respect their lot take downtime and if needed and limits our downside risk should market conditions softened.

Greg Bennett: Another factor within our control is how quickly we build our homes. For those of you that followed the Smith Douglas story, you know we're highly focused on improving build times and turning our inventories as fast as possible. Not only does this improve our return on capital, it also limits the possibility of cancellation thanks to a shorter time frame between sale and close. And so the end of the first quarter, our cycle times averaged 56 days, excluding Houston. We also made further progress during the quarter getting Houston Division and their trade partners on board the R-Team platform, and we expect to see build times move closer to the company average over time.

Greg Bennett: Another factor within our control is how quickly we build our homes.

Greg Bennett: For those of you that followed the Smith Douglas story, you know, we're highly focused on improving build times and turning our inventories as fast as possible.

Greg Bennett: Not only does this improve our return on capital. It also limits the possibility of cancellation. Thanks to a shorter time frame at the point of sale and close.

Greg Bennett: And so at the end of the first quarter, our cycle times averaged 56 days excluding Houston.

Greg Bennett: We also my brother progress during the quarter getting Houston Division and their trade partners or our team platform and we expect to see built out closer to the company average over time.

Greg Bennett: A third factor we focus on at Smith Douglas is limiting the amount of spec inventory for sale in our communities. We believe our business runs better and more profitably when we pre-sell our homes. This gives buyers the ability to make important design decisions for their home and allows us to implement lot premiums and offer higher margin home upgrades to their communities, which we feel reduces our cancellation rate as the buyers become attached to their home through their design.

Greg Bennett: A third factor we focus on its met Douglas has limited the amount of spec inventory for sale in our communities. We believe our business runs better and more properly when we pre sell their homes.

Greg Bennett: Gift buyers the ability to make important design decisions for their whole and allows us to implement lot premiums and offer higher margin home upgrades at our communities, which we feel reduces our cancellation rate as buyers become attached to their home they represent.

Greg Bennett: In summary, while there's more uncertainty today around the economy and our industry than in previous quarters, We built Smith Douglas to weather the ups and downs of this business. We remain focused on our long-term goals of growing our market share and achieving better economies of scale, while maintaining a strong balance sheet and focusing on returns. This strategy has worked for our company since its inception, and we believe will continue to do so into the future.

Greg Bennett: In summary, while there is more uncertainty today around the economy and our industry than in previous quarters.

Greg Bennett: Bill Smith Douglas to weather, the ups and downs of this business.

We remain focused on our long term goals of growing our market share and achieving better economies of scale, while maintaining a strong balance sheet and focusing on returns.

Greg Bennett: This strategy has worked for our company since its inception, and we believe we'll continue to do so into the future.

Russ Devendorf: After that, I'd like to turn the call over to Russ, who will provide more details on our results this quarter and give an update on our outlook. Thanks, Greg. I'll now walk through our financial results for the first quarter and then provide an update on our outlook for the second quarter. We closed 671 homes during the first quarter, up 19% from 566 closings in the same quarter last year. Home building revenue was $224.7 million, an increase of nearly 19% over the prior year. Our average sales price was approximately $335,000, which is up slightly year-over-year due to shifts in geographic and product prices.

Greg Bennett: With that I'd like to turn the call over to Russ to provide more details on our results this quarter and give an update on our outlook.

Russ: Thanks, Greg I'll now walk through our financial results for the first quarter and then provide an update on our outlook for the second quarter.

Russ: We closed 671 homes during the first quarter up 19% from 566 closings in the same quarter last year homebuilding.

Russ: Homebuilding revenue was $224 7 million, an increase of nearly 19% over the prior year. Our average sales price was approximately 335000, which is up slightly year over year due to shifts in geographic and product mix.

Russ Devendorf: Gross margin came in at 23.8%, which was at the high end of our guidance range, and compares to 26.1% in the prior year. On an adjusted basis, excluding a $642,000 impairment charge related to a Houston community we exited during the quarter, our gross margin would have been 24.1%. Our lower year over year margin reflects the impact of higher average lot costs, which were 25.5% of revenue in the current quarter versus 23% in the year ago period, as well as rising incentives and promotional activity, which totaled 4.7% of revenue this quarter, up slightly from 4.5% a year ago.

Russ: Gross margin came in at 23, 8%, which was at the high end of our guidance range and compares to 26, 1% in the prior year.

Russ: On an adjusted basis, excluding a $642000 impairment charge related to a Houston community, we exited during the quarter, our gross margin would've been 24, 1%.

Russ: Our lower year over year margin reflects the impact of higher average lot cost, which were 25, 5% of revenue in the current quarter versus 23% in the year ago period, as well as rising incentives and promotional activity, which totaled four 7% of revenue this quarter up slightly from four 5% a year ago.

Russ Devendorf: SG&A was 14.7% of revenue, compared to 14.5% last year, driven primarily by increased payroll and performance-based compensation expenditures. We continue to tightly manage overhead while supporting our growth. Net income for the quarter was $18.7 million compared to $20.5 million in the prior year, and pre-tax income was $19.6 million versus $21.4 million. Our numbers for the quarter include a $716,000 charge related to the abandonment of a lot option deal with a developer which is included in other income and expenses. This is related to the same community where we recorded the 642,000 impairment I mentioned earlier, which is included in our cost of home closing.

Russ: SG&A was 14, 7% of revenue compared to 14, 5% last year, driven primarily by increased payroll and performance based compensation expense.

Russ: We continue to tightly manage overhead while supporting our growth.

Russ: Net income for the quarter was $18 7 million compared to $20 5 million in the prior year and pre tax income was $19 6 million versus $21 4 million.

Russ: Our numbers for the quarter include a $716000 charge related to the abandonment of a lot option deal with a developer which is included in other income and expenses.

Russ: This is related to the same community, where we recorded a 642000 impairment I mentioned earlier, which is included in our cost at home closings.

Russ Devendorf: Adjusted net income was $14.7 million, compared to $16.1 million in the prior year. As a reminder, given the nature of our up-sea organizational structure, our reported net income reflects an effective tax rate of 4.4 percent this quarter, which is attributable to the approximate 17.5 percent economic ownership held by public shareholders through Smith Douglas Homes Corp. and Smith Douglas Holdings, LLC. Because the majority of our earnings are allocated to our Class B members, which is shown as income attributable to the non-controlling interests on our income statement, we provide adjusted net income, which assumes 100 percent public ownership and a 24.9 percent blended federal and state effective tax rate.

Russ: Adjusted net income was $14 7 million compared to $16 1 million in the prior year.

Russ: As a reminder, given the nature of our up C. Organizational structure. Our reported net income reflects an effective tax rate of four 4% this quarter, which is attributable to the approximately 17, 5% economic ownership hold by public shareholders through Smith Douglas homes Corp, and Smith <unk> Holdings LLC.

Russ: The majority of our earnings are allocated to our class B members, which is shown as income attributable to noncontrolling interest on our income statement we.

Russ: We provide adjusted net income, which as soon as 100% public ownership and a 24, 9% blended federal and state effective tax rate.

Russ Devendorf: We believe this measure is helpful in evaluating our results relative to peers with more traditional C-corporation structures.

Russ: We believe this measure is helpful in evaluating our results relative to peers with more traditional C Corp structures additional.

Russ Devendorf: Additional details on our structure and related income tax treatment can be found in the footnotes to our financial statement. Turning to the balance sheet, we ended the quarter with $12.7 million in cash and had $40 million outstanding on our unsecured revolver with $195 million available to draw. Our debt-to-book capitalization was 9.5% and our net debt-to-netbook capitalization was 6.9%. I am also happy to announce that we are in the final stages of finalizing an amendment to our credit facility that will, among other things, increase the total facility size by $75 million to $325 million and extend the maturity, which will be four years from the closing date.

Russ: Details on our structure and related income tax treatment can be found in the footnotes to our financial statements.

Russ: Turning to the balance sheet, we ended the quarter with $12 7 million in cash and had $40 million outstanding on our unsecured revolver with $195 million available to draw our.

Russ: Our debt to book capitalization was nine 5% and our net debt to net book capitalization was six 9%.

Russ: I'm also happy to announce that we are in the final stages of finalizing an amendment to our credit facility that will among other things increased the total facility size by $75 million to $325 million and extend the maturity, which will be four years from the closing date.

Russ Devendorf: We appreciate all of our existing and new banking partners for their unwavering support. Our strong balance sheet and liquidity puts us in a great position to support our ongoing growth. Backlog at the end of the quarter was 791 homes with an average sales price of $341,000 and an expected gross margin of approximately 22.5%. While backlog is lower from the 1,100 homes year over year, reflecting a tougher selling environment this year, we did see positive momentum in our absorption pace as we progressed through the quarter. Monthly sales per community improved from 2.4 in January to 3.3 in February and 3.8 in March.

Russ: We appreciate all of our existing and new banking partners for their unwavering support our strong balance sheet and liquidity puts us in a great position to support our ongoing growth.

Russ: Backlog at the end of the quarter was 791 homes with an average sales price of 341000 and unexpected gross margin of approximately 22, 5%.

Russ: While backlog is lower from the 1100 homes year over year, reflecting a tougher selling environment. This year, we did see positive momentum in our absorption pace as we progressed through the quarter.

Russ: Lastly sales per community improved from two four in January to three three in February and three eight in March.

Russ Devendorf: In April, we saw that average dip back to approximately three sales per community as we move further into the spring selling season. Affordability remains a key challenge for our buyers, and we've leaned into targeted incentives to support sales. In late March, we launched a $10 million Forward Commitment Program offering a 4.99% mortgage rate buy-down in select communities, which helped boost conversion rates. In the trailing 13-week period, our total incentives and discounts have averaged just over 7%. Turning to our second quarter outlook, we expect to close between 620 and 650 homes. with an average sales price between $335,000 and $340,000.

Russ: April we saw that average to get back to approximately three sales per community as we move further into the spring selling season.

Russ: Affordability remains a key challenge for our buyers and we've leaned into targeted incentives to support sales in late March we launched a $10 million forward commitment program offering a $4, 99% mortgage rate buy down in select communities, which helped boost conversion rates and the trailing 13 week period, our total incentives and discounts have averaged just over <unk>.

Russ: 7%.

Russ: Turning to our second quarter outlook, we expect to close between 620, <unk> 650 homes.

Russ: With an average sales price between 335000 and 340000.

Russ Devendorf: Gross margin is projected to be in the range of 22.75% to 23.25%. While incentives will continue to pressure margins, we are maintaining discipline in how and where we deploy them. We ended the first quarter with 87 active communities and expect to see that number continue to grow modestly throughout the remainder of the year. We're actively opening new communities across multiple divisions and remain focused on supporting a stable and scalable growth platform.

Russ: Gross margin is projected to be in the range of 22, 75% to 23, 5%.

Russ: While incentives will continue to pressure margins, we are maintaining discipline in how and where we deploy them.

Russ: We ended the first quarter with 87 active communities and expect to see that number continue to grow modestly throughout the remainder of the year. We're actively opening new communities across multiple divisions and remain focused on supporting a stable and scalable growth platform.

Russ Devendorf: Before I conclude, I want to reiterate that while we're encouraged with our start to the year, our outlook does include several risks. As always, our ability to achieve these results will depend on maintaining an adequate pace of sales, bringing new lots and communities online as scheduled, and managing cost pressures, particularly in labor and materials. Additionally, broader macroeconomic factors such as inflation, employment trends, interest rates, and consumer confidence could create headwinds to demand and impact the timing or volume of sales and closings. We remain focused on executing what we can control, and believe our landline model, steady operations, and financial strength position us well to navigate these challenges over the long term.

Russ: Before I conclude I want to reiterate that while we are encouraged with our start to the year. Our outlook does include several risks as always our ability to achieve these results will depend on maintaining an adequate pace of sales bringing.

Russ: Bringing new lots and communities online as scheduled and managing cost pressures, particularly in labor and materials.

Russ: Additionally, broader macroeconomic factors, such as inflation employment trends interest rates and consumer confidence could create headwinds to demand and impact the timing or volume of sales and closings.

Russ: We remain focused on executing what we can control and believe our land late model steady operations and financial strength position us well to navigate these challenges over the long term.

Tina: With that, I'll turn the call over to the operator for questions. Thank you. At this time, I would like to remind everyone, in order to ask a question, press star 1 on your telephone keypad, and we will pause for just a moment to compile the Q&A roster.

Russ: With that I'll turn the call over to the operator for questions.

Speaker Change: Thank you at this time I would like to remind everyone in order to ask a question press star one on your telephone keypad and we will pause for just a moment to compile the Q&A roster.

Alex Barron: Our first question comes from the line of Michael Reha with J.P. Morgan. Please go ahead. Hi, good morning. This is Alex, Isaac on for Mike. Thanks for taking my question. You mentioned on the demand side that there's some some some weakness and a lot of affordability challenges.

Speaker Change: Our first question comes from the line of Michael Rehaut with J P. Morgan. Please go ahead.

Speaker Change: Hi, Good morning. This is Alex on for Mike. Thanks for taking my question you.

You mentioned on the demand side that there is some some some weakness in a lot of affordability challenges I wanted to ask you. How you would characterize brimstone season overall and reputations for that and also do you feel that that demand weakness is consistent across geographies or more specifically are you seeing more specifically in certain geographies in other geographies.

Greg Bennett: I want to ask for how you how you characterize the spring and summer season overall, and expectations for that. And also, if you feel like that demand weakness is consistent across geographies, or more specifically, you see more specifically in certain geographies than other geographies. Yeah, so I think, thanks for the, for the question. You know, I think the spring demand has been there all along. It's just, you know, week by week. As we said, we're just solving for payments to reach. you know, affordability in each market. And it seems to be across our entire footprint, demand's been.

Speaker Change: Got it.

Okay.

Speaker Change: Yeah. So I think thanks for the for the question.

Speaker Change: I think the spring.

Speaker Change: Demand has been there all along as just week by week as we said, we're just solving for prepayments to reach.

Speaker Change: Portability in each market and it seems to be.

Speaker Change: Across our entire footprint demands then.

Alex Barron: been relatively the same. That makes a lot of sense. Appreciate the color on that.

Speaker Change: <unk> been relatively the same.

Speaker Change: Yeah.

Speaker Change: That makes lot of sense I appreciate the color on that.

Greg Bennett: And then as my follow up question is, one to ask, you know, on the land side, you mentioned some land inflation, I'm just curious about any color on the land environment, and your ability to find new lots, both, you know, unfinished and finished lots, as well as how we should think about the land environment for the company going forward. Yeah, it's, um, we've obviously been able to to find deals, right? more than doubled our controlled lot count since we've been public. Land inflation certainly over the prior 12 months has continued to increase, but we've always said, I think land sellers are usually when things have started to slow, land sellers typically in our experience are the last ones to figure out that maybe their land isn't worth what it was previously.

Speaker Change: As my follow up question I wanted to ask on the land side, you mentioned some land inflation I'm just curious about any color on the land environment.

Speaker Change: Our ability to find new lots dose.

Speaker Change: And finished lots as well as how we should think about.

Speaker Change: Blend environment for the company going forward.

Speaker Change: Okay.

Speaker Change: Yeah.

Speaker Change: We've obviously been able to to find deals right.

Speaker Change: <unk>.

Speaker Change: More than doubled our controlled lot count over the last since we've been since we've been public land inflation certainly over the.

Speaker Change: Prior 12 months as continue to increase but.

Speaker Change: We've always said you know I think land sellers are usually when things have started to slow land sellers typically and in our experience are the last ones to figure out that maybe their land isn't isn't worth what it was previously but we are starting to see a few.

Greg Bennett: But we are starting to see a few cracks in the sellers out there. I think it is transitioning a bit to a buyer's market. And so you are starting to see some land prices moderate. I mean, there's definitely demand out there, right? I think builders are still out looking for deals, and so we're competing every day. But the land that's in our backlog, and as we mentioned on the call, we're working off a land that the prices over the last few years have continued to increase. And so the stuff that we're closing obviously has a higher basis than what we had previously.

Speaker Change: A few cracks in in you know the sellers out there I think it is transitioning a bit to a buyer's market and so.

Speaker Change: You are starting to see some some land prices moderate I mean, there is.

Speaker Change: There is definitely demand out there right I think builders are still our.

Speaker Change: Out looking for deals and so were competing everyday but.

Speaker Change: You know the land that's in our backlog in.

Speaker Change: As we mentioned on the call.

Speaker Change: We're working off of land that.

Speaker Change: You know the prices over the last few years have continued to increase and so the stuff that we're closing obviously has a has a higher basis than what we what we had previously but we are starting to see.

Greg Bennett: But we are starting to see a little bit of negotiating power in some of the land deals. So hopefully that trend continues, especially as affordability remains a challenge. It makes a lot of sense.

Speaker Change: You know a little bit of negotiating power in some of the land deals. So hopefully that trend continues, especially as affordability remains remains challenging.

Speaker Change: And then I appreciate all the help.

Alex Barron: I appreciate all the help.

Speaker Change: Sure.

Michael Dahl: Our next question comes from the line of Michael Dahl with RBC Capital Markets. Please go ahead. Hey, good morning, everyone. You guys actually got to see the Mia on for Mike today. Thanks for taking my questions. Sure.

Speaker Change: Okay.

Our next question comes from the line of Michael Dahl with RBC capital markets. Please go ahead.

Speaker Change: Hey, Good morning, everyone. You guys have actually got seasoned Neal on for Mike today. Thanks for taking my questions I wanted to start outlook beyond QQ depreciate. The macro outlook has gotten a lot murkier since we last spoke.

Michael Dahl: I wanted to start outlook beyond 2Q. I appreciate the macro outlook has gotten a lot murkier since we last spoke. But I just wanted to get a sense of how you guys are kind of formally thinking about the guideposts you guys have been giving us for the full year, I believe it was around 3,300 homes just kind of, you know, beyond the second quarter. What do you guys kind of have in mind? How are you guys thinking? Yeah, I, you know, I wish we had the perfect crystal ball. It's kind of the reason that we we didn't, you know, really give specific guidance.

Speaker Change: Wanted to get a sense of how you guys are kind of formally thinking about guideposts, you guys have been giving us for the full year I believe was around 3000.

Speaker Change: 100 homes, just kind of.

Speaker Change: Beyond the second quarter, and what do you guys kind of have in hi, how are you guys thinking about that thanks.

Yeah.

Speaker Change: I wish we had the perfect Crystal ball, it's kind of the reason that we didn't.

Speaker Change: Really give specific guidance I think when we when we talked.

Russ Devendorf: I think when we when we talked, you know, towards the end of last year, and and, you know, going back a little bit. And when the Fed started to cut rates, you know, we were we were hopeful that that would, you know, help with affordability. But, you know, as we moved in the first quarter, clearly, you know, the mortgage rates, you know, were not, were not in our favor, right, they peak in January, and they've still, you know, looking today, I think the 10 year yield is back up to about four and a half percent.

Speaker Change: You know towards the end of last year and going back a little bit.

Speaker Change: When the fed started to cut rates, we were we were hopeful that that would.

Speaker Change: Help with affordability, but.

Speaker Change: As we moved in the first quarter clearly.

Speaker Change: Mortgage rates.

Speaker Change: We're not we're not in our favor right a peak in January and they still you know looking today I think the 10 year yield is back up to about four 5%. So affordability is a challenge like Greg said.

Russ Devendorf: So affordability is a challenge. Like Greg said, you're seeing people need homes, there's demand out there. You know, as it as it relates to to full year guidance, you know, that's why we really kind of pulled it off. It's very, it's, it's really kind of a day to day thing as we just kind of navigate, you know, what's what's happening with more of the macro environment. We certainly have the communities and the lots to get to our 3,000 3100 closing target. So that's clearly the objective. A lot's going to depend on how the balance of selling season shakes out and where we see the demand for the back half of the year, really more so the affordability and what we're able to do.

Speaker Change: Youre seeing people need homes, there is demand out there.

Speaker Change: As it relates to full year guidance you know that's why we really kind of pull it off it's very it's it's really kind of a day to day thing is we just kind of navigate what's what's happening with more of the macro environment. We certainly have the communities and the lots to get two or 3000 3100 close.

Speaker Change: <unk> target.

Speaker Change: So you know that's that's clearly the objective.

Speaker Change: A lot's going to depend on how.

Speaker Change: The balance of selling season shakes out and where we see the kind of the demand for the back half of the year really more so the affordability.

Speaker Change: And what we're able to do.

Michael Dahl: We're trying to balance margins with you know, really balance our incentives and try to find that kind of, you know, appropriate mix. So, look, our target, you know, without giving specifics or definitive guidance, we're certainly targeting that 3,000, 3,100. Like I said, I think we can get there, but it's really going to be more of a macro story. So definitely appreciate that. And also appreciate all the color. Thanks for that.

Speaker Change: We're trying to balance.

Speaker Change: Margins with.

They are you know really balance our incentives and try to find that that kind of appropriate mix. So.

Speaker Change: Look our target.

Speaker Change: Without giving specifics or a definitive guidance, we're certainly targeting that 3000 3100.

Speaker Change: As I said I think we can get there, but it's really going to be.

Speaker Change: More of a macro story.

Speaker Change: So definitely appreciate that also.

Speaker Change: I appreciate all the color thanks for that and honestly jumped ship to Houston and kind of the expansion do you guys have been making recently, it's great to hear that there is.

Michael Dahl: And I wanted to jump to Houston and kind of the expansions you guys have been making recently. It's great to hear that there's further progress with year-to-date and I guess since the acquisition on like the RTM integration in Houston but I think it would be helpful for everyone you know in terms of framing the story like if there's any further color you can provide on that progress and any potential time frame you may have for milestones there within Houston and the other expansion areas this would be really helpful thanks. Yeah, thanks for the question. We, we are seeing really big improvements in cycle time in Houston.

Speaker Change: Their progress.

Speaker Change: To date and I guess.

Speaker Change: Since the acquisition on like VR team integration in Houston, but.

Speaker Change: It would be helpful for everyone in terms of framing the story.

Speaker Change: Is there any further color you can provide on that progress and any potential I'm trend you may have for milestones there within Houston and the other expansion areas sneak really helpful. Thanks.

Speaker Change: Yes, Thanks requested waste we are seeing.

Speaker Change: Really big improvements in cycle time in Houston were up and running in our our team process across the footprint.

Greg Bennett: We're, we're up and running in our arching process across the footprint. We are I think implemented on a 70-day schedule currently that we've rolled out. We're not executing to a 70-day schedule quite yet, but our goal is to be there by the end of this year. Yeah, and that's from a high point of cycle times near 200 days when we closed on that acquisition. So I'd say there's been quite a bit of improvement there. Yeah, absolutely. Thanks.

Speaker Change: We are.

Speaker Change: I think implemented all the 70 day gauge or currently.

Speaker Change: That we've rolled out.

Speaker Change: Not executing to 70 days scheduled quite yet, but our goal is to be there but they.

Speaker Change: End of this year so.

Speaker Change: Yeah and that from a high point of cycles of near 200 days when.

Speaker Change: We closed on that acquisition, so I'd say, there's been quite a bit of improvement there.

Speaker Change: Yes, absolutely. Thanks, Thanks for the questions guys all possible alright, thanks for the answer.

Michael Dahl: Thanks for the questions, guys. I'll pass them.

Jay Mccanless: Our next question comes from the line of Jay McCanless with Wedbush. Please go ahead. Good morning, everyone. So three questions for me, I guess. Could you talk a little bit about what you've seen so far in May, in terms of demand and pricing power? I think it's it's been pretty consistent with with April. We haven't seen any Any real shift. Like I said, people are still coming into the sales office. We're seeing traffic, but it's still a challenging environment from an affordability perspective. And then even from a competitive perspective, when you see a lot of new home builders offering some pretty big incentives that we're in, and a lot more spec inventory on the ground.

Speaker Change: Our next question comes from the line of Jay Mccanless with Wedbush. Please go ahead.

Jay Mccanless: Hey, good morning, everyone. So three questions for me I guess could you talk a little bit about what you've seen so far in may in terms of demand and pricing power.

Jay Mccanless: I think it's been pretty consistent with with April we haven't seen any.

Jay Mccanless: Any any real shift like I said people are still coming into the to the sales office, we're seeing we're seeing traffic, but it's still a.

Jay Mccanless: A challenging.

Jay Mccanless: In environment from an affordability perspective, and then even from a competitive perspective when you see.

Jay Mccanless: A lot of new homebuilders offering some some pretty big incentives that were in and a lot of a lot more.

Jay Mccanless: Spec inventory.

Greg Bennett: So it's challenging, but like I said, I don't see a huge difference from what we've seen in April.

Jay Mccanless: On the ground, so it's challenging but.

Jay Mccanless: Like I said I don't I don't see a huge difference from from what we've seen in April.

Greg Bennett: and so Not to harp on it, but are you guys pulling the fiscal 25 guidance or do you still think you can hit some of the targets that you laid out last quarter? Yeah, look, I think for the last question, it's really, like I said, we've got the community count, we've got the, you know, the lots in place. We were not, we didn't want to comment specifically on it, I think our target is still to get to that 303100. You know, that's, that's our goal. And if the if the macro environment, you know, remains, you know, gets a little bit better, remains steady.

Jay Mccanless: Okay.

Jay Mccanless: And so.

Speaker Change: Not to harp on it but are you guys pulling the fiscal 'twenty five guidance or do you still think you can hit.

Jay Mccanless: Some of the targets that you laid out last quarter.

Jay Mccanless: Yeah look I think per the last.

Question.

Jay Mccanless: It's really like I said, we've got the community count we've got the lots in place.

Jay Mccanless: Yes.

Jay Mccanless: We're not we didn't want to comment specifically on it I think our target is still to get to that 3000 3100, that's our goal.

Jay Mccanless: And if the if the macro environment.

Jay Mccanless: No.

Remains gets a little bit better remains remained steady I think we have a good shot at hitting it.

Greg Bennett: I think we have a good shot at hitting it. It's just, it's really stuff that's out of our control, right? So we're, you know, I think some of our competitors, some of the other new builders have, you know, pulled back on some guidance. It's just, you know, it's still a little bit early to tell based on, you know, where things are moving. And obviously this new administration, you know, there's been some, you know, quite a bit of choppiness, you know, from a macro perspective. So, you know, it's, I'll be honest, I mean, it's difficult to forecast in this environment, right?

Jay Mccanless: Just it's really stuff that's out of our control right.

Jay Mccanless: So we're.

Jay Mccanless: I think some of our competitors some of the other new builders have pulled back on some guidance.

Jay Mccanless: It's just.

Jay Mccanless: It's still a little bit early to tell based on where things are moving and obviously this new administration, there's been some quite a bit of choppiness from a macro perspective so.

Jay Mccanless: I'll be honest I mean, it's difficult to forecast in this environment right, but look our goal and like I said, we're we still have a good shot at getting to our 3000 plus target.

Greg Bennett: But look, our goal, and like I said, we're, we still have a good shot at getting to our 3,000 plus target.

Jay Mccanless: Got it.

Jay Mccanless: And then the last question for me, I'm sure you guys saw the news on Lansing yesterday. Any comments you might make on that and any impact that could have on Smith Douglas? No, I mean, we don't, we wouldn't comment on somebody else's transaction, traditionally. But, you know, the only thing I would say is look at it's, you know, it's Apollo. So it does show some, some pretty good support from a pretty good backer that, you know, clearly they see some opportunity to, to to make an investment of that size in the home building space, so we like to see that.

Jay Mccanless: And then the last question for me I'm sure you guys saw the news on land Sea yesterday.

Jay Mccanless: Any comments you might make from that and any impact that could have on Smith Douglas.

Jay Mccanless: No I mean, we don't we wouldn't comment on somebody else's transaction traditionally but.

Jay Mccanless: Only thing I would say is look at it.

Speaker Change: Its Apollo.

Speaker Change: So it does show some some pretty good support from a pretty good backer that clearly they see some opportunity too.

Speaker Change: To make an investment of that size in homebuilding space, so we'd like to see that.

Greg Bennett: Now, and it won't you know, no, no impact from our standpoint, we don't see Lansing or new home in our market.

Speaker Change: And it won't you know no no impact from our standpoint, we don't see land sea or new home in our markets.

Jay Mccanless: Okay, great. Thanks, guys.

Speaker Change: Okay, great. Thanks, guys.

Speaker Change: Sure.

Speaker Change: Okay.

Rafe Jadrosich: And our final question comes from the line of Rafi Jadrosich with Bank of America. Please go ahead. Hi, good morning.

Speaker Change: And our final question comes from the line of Ravi.

Ken: Ken <unk> with Bank of America. Please go ahead.

Speaker Change: Hi, good morning, Thanks for taking my questions.

Russ Devendorf: It's Rafe. Thanks for taking my question. Russ, can you just, on the second quarter gross margin guidance, relative to where you came in in the first quarter, which I think was pretty solid, is the quarter-over-quarter decline just higher incentives, and that's related to that forward commitment? Yeah, that's, I think, a good part of it, and, you know, to the extent that we may do a little bit more, but that's definitely a driver, yeah. Okay, and then when the backlog year over year is down. over 25% here, but you've been able to continue to grow deliveries.

Speaker Change: Russ can you just on the second quarter gross margin guidance.

Speaker Change: Relative to where you came in in the first quarter, which I think was pretty solid.

Speaker Change: The quarter over quarter decline.

Speaker Change: Higher incentives and that.

Speaker Change: Related to that to that forward commitment.

Speaker Change: Yes, that's I think a good part of it and to the extent that we may do a little bit more but that's that's definitely.

Speaker Change: A driver yes.

Speaker Change: Okay and then.

Speaker Change: Due to the backlog.

Speaker Change: Year over year is down.

Speaker Change: Over 25% here, but you've been able to continue to grow deliveries.

Russ Devendorf: Can you, the backlog conversion has obviously improved a lot over the last year. Where can that go from here? Do you still see additional opportunity to drive the backlog conversion higher? And is there sort of a cap to that? Well, you'll have to sort of refill the backlog with more orders to continue to grow delivery. Yeah, and that's a great point. We, you know, there's a couple of things there. You know, we are, cycle times are improving. But yeah, we came in with a few more specs than we had last year. So even though backlog's down, we actually had, you know, as much, if not a little bit more inventory.

Speaker Change: The backlog conversion is obviously improved a lot over the last year, where can that go from from here do you still see additional opportunity to drive the backlog conversion tire and is there sort of a cap to that.

Speaker Change: Well youll have to refill the backlog with more orders to continue to grow deliveries.

Speaker Change: Yeah in that and Thats a great point.

Speaker Change: There's a couple of things there.

Speaker Change: We are cycling cycle times are improving.

Speaker Change: But yeah, we came in with a with a few more specs than we had last year, so even though backlogs down and we actually had as much if not a little bit more inventory and so we're able to like Rick said and we've said there are there is demand there. So there are people coming into the sales offices, we're getting traffic, but it's just taking higher incentives.

Russ Devendorf: And so we're able to, like Rick said, and we've said, there is demand there. So there are people coming into the sales offices, we're getting traffic, but it's just taking higher incentives to get people to convert. And so that's why, you know, margins are dipping a bit, but we're still able to, you know, get some pretty good closing numbers. And so even though backlog is down, and we're traditionally and obviously, our business model is focusing on pre sales. We, we've still got the inventory, you know, we're clicking on, you know, pretty much all cylinders from an operating perspective.

Speaker Change: To get people to convert and so that's why margins are are dipping a bit, but we're still able to get some pretty good closing numbers and so even though backlog is down and we're traditionally and obviously our business model is focusing on pre sales.

Speaker Change: We still got the inventory we're clicking on.

Speaker Change: Much all cylinders from an operating perspective, and so where we're really just taking a measured approach to how we're pricing.

Russ Devendorf: And so we're, we're really just taking a measured approach to how we're pricing. And, you know, we don't want to get, you know, we're not looking to, you know, fill up a whole bunch of, you know, spec inventory. And, and so as we start to see, you know, maybe a few more specs or a little bit of slowness in a community here or there, you know, we'll, we'll turn the dial on incentives and kind of move the inventory. So that's a long way of saying, yeah, we can definitely increase that backlog conversion rate, because, you know, we'll, we'll just continue to turn the dial and just, you know, move some more of that speculative inventory that's sitting in some of those communities.

Speaker Change: And you know, we don't want to get.

Speaker Change: We're not looking at fill up a whole bunch of spec inventory and so as we start to see.

Speaker Change: <unk> be a few more specs are a little bit of slowness in our community here or there we will turn the dial on incentives and kind of move the inventory so.

Speaker Change: That's a long way of saying, yes, we can definitely increase that backlog.

Speaker Change: Conversion rate because we will just continue to turn the dial in and just move some more of that speculative inventory that's sitting in some of those communities.

Russ Devendorf: Okay, that's helpful.

Russ Devendorf: And then is there any just update on the mortgage JV that you have right now? Any plans to change that relationship? No, actually, I tell you, it continues to get better every week. It's part of the reason that really, and it's been very helpful in pushing out some of these, you know, a very consistent message on the incentive side. And so we were using, you know, through our partner, which is Loan Depot, using, you know, using them for our forward commitments and just pushing out a consistent message. We are now fully licensed in all of our markets.

Speaker Change: Okay.

Speaker Change: Helpful. And then is there any just update on the mortgage JV that you have right now any any plans there.

Speaker Change: The change that that relationship.

Speaker Change: No actually I would tell you it continues to get better every week.

Speaker Change: Part of the reason that really and it's very been very helpful and pushing out some of these.

Speaker Change: A very consistent message on the on the incentive side and so we were we were using through our partner, which is alone depot using <unk>.

Speaker Change: Using them for our forward commitments and just pushing out a consistent message. We are now fully licensed in in all of our and all of our markets. We've got loan officers that have been operating in all of our markets and our capture continues to get better and I want to say last week, our capture was 56%.

Russ Devendorf: We've got loan officers that have been operating in all of our markets, and our capture continues to get better. And I want to say last week, our capture was 56% for our mortgage partner. And so obviously, our goal is to be at 90-plus percent.

Speaker Change: For a mortgage partner and so obviously, that's our goal is to be at 90 90 plus percent but.

Russ Devendorf: But we were still using, we were not using our Ridgeland brand yet in Atlanta because we had just gotten licensed. And that's obviously our biggest market. But in everywhere else, Hapture has been very good. And we think it will continue to improve. So looking forward to it.

Speaker Change: We were still using we.

Speaker Change: We're not using our original brand yet in Atlanta, because we've just gotten license and that's obviously our biggest market, but in everywhere else capture has been very good and we think it will continue to improve so.

Speaker Change: Looking forward to it.

Greg Bennett: And I think the operator said I'm the last one. So if I could sneak one more in here, in your core market, Are you seeing a pullback in starts from competition? Or have you adjusted the starts pace at all? And obviously, some of the larger public builders that have already reported, on a year-over-year basis, we've seen starts down a lot. I'm just wondering if some of the standing, you know, kind of... sitting finish spec inventory out there from competitors. Do you think that's a problem right now or an issue? And is there any sign that that's sort of improving and there's been an adjustment on the start?

Speaker Change: Okay.

Speaker Change: I think the operators and the last one if I could sneak one more in Europe.

Speaker Change: In your core markets.

Speaker Change: Are you seeing a pullback in starts.

Speaker Change: Competition or have you adjusted the starts pace at all obviously that some of the larger public builders that have already reported on a year over year basis, we've seen starts down a lot.

Speaker Change: Wondering if some of the standard.

Speaker Change: Sitting finished spec inventory out there from some competitors do you think that's a problem right now or at issue and is there any sign that thats sort of improving and theres been an adjustment on the start side.

Greg Bennett: Yeah, hello, right. I'll take that. We, we have not. had an interruption and starts on our side. We are hearing discussion about slowing starts from competitors. and probably seeing a little bit of evidence of that. You know, we went in, you know, to tag on to Russ's backlog question. previous question. We pushed start in the end of 2024 to be certain that we kept our machine running that that is the kind of environment around rates and, and we know how we ended q4 with sales last year it built some inventory, but that inventory coming into the year, you know, drove a lot of conversion for us in Q1.

Speaker Change: Yeah right.

Speaker Change: I'll take that.

Speaker Change: We have not.

Speaker Change: Had an interruption in starts on our side, we are hearing discussion about slowing starts from.

Speaker Change: From competitors.

Speaker Change: And.

Speaker Change: And probably seeing a little bit of evidence of that.

We went in to tag onto to Russ as backlog question.

Speaker Change: <unk>.

Speaker Change: Previous question.

Speaker Change: We pushed starts in the end of.

Speaker Change: 2024.

Speaker Change: Certain that we kept our machine run and that is the.

Speaker Change: The kind of environment around rates.

Speaker Change: We know how we ended Q4 with sales list.

Speaker Change: Year, it built some inventory, but that inventory coming into the year.

Speaker Change: <unk> drove a lot of conversion for us in Q1.

Greg Bennett: We've grown backlog since the beginning of the year. And we continue to push. It starts every day. We're hitting on our starts, actually ahead of our starts budget for the year. I've been refreshed to see the past two weeks that we've outpaced with our pre-sales. In our orders, so, uh, you know, I'm. I'm optimistic that we'll continue to be able to build on our model and that our pre-sales will overtake the inventory that we've built. You know, and our cycle times, as we said, helps us to be able to convert that buyer quickly. That's helpful.

Speaker Change: We've grown backlog since the beginning of the year.

Speaker Change: And we continue to push starts every day, we're hitting all of our starts actually ahead of our storage budget for the year.

Speaker Change: <unk>.

Speaker Change: Ben refresh to see the past two weeks that we've we've outpaced with our pre sales.

Speaker Change: And our orders so.

Speaker Change: I'm optimistic that that will continue to be able to build on our model.

Speaker Change: Our pre sales will.

Speaker Change: We will overtake the inventory that we've built.

Speaker Change: And.

Speaker Change: And our cycle times as we said it helps us to be able to convert that debt.

Speaker Change: By our quickly.

Speaker Change: Okay.

Greg Bennett: I appreciate all the call, guys. Thank you.

Speaker Change: Helpful. I appreciate all the color guys.

Speaker Change: Thanks, Rick.

Tina: And this does conclude our Q&A session.

Speaker Change: And this does conclude the Q&A session I will now turn the call back over to Greg Binion CEO for closing remarks.

Greg Bennett: I will now turn the call back over to Greg Bennett, CEO, for closing remarks. Yes, thank you, Tina. Thank you, everyone, for joining us. Appreciate all the interest in Smith Douglas and hope to speak again next quarter.

Speaker Change: Yes. Thank you Dana Thank you everyone for joining us.

I appreciate all the interest in Smith, Douglas and spoke again this quarter.

Speaker Change: Okay.

Tina: Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect.

Speaker Change: Ladies and gentlemen that concludes today's call. Thank you for all for joining and you may now disconnect.

Speaker Change: [music].

Speaker Change: Sure.

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Speaker Change: Yes.

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Speaker Change: Okay.

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