Smith Douglas Homes Corp. Q2 FY2025 earnings call

• Smith Douglas Homes had strong operational performance in Q2 2025, with pretax income of $17.2 million and earnings of $0.26 per diluted share. Home sales exceeded the prior quarter's guidance range.
• Experienced inconsistent demand trends during the quarter but maintained an asset-light operational model focused on quick inventory turnover.
• Entering new markets: Dallas-Fort Worth and Gulf Coast of Alabama through greenfield start-ups, with plans to close first lots in Dallas by year-end and target communities in Southern Alabama opening in H2 2026.
• Construction efficiency improved: Excluding Houston, average cycle time was 54 days, down from 60 days in Q2 2024, and working to bring Houston division in line with company average cycle times.
• Balance sheet remains strong with net debt to net book capitalization ratio at 12.1% at quarter-end. $50 million share repurchase authorization provides flexibility.
• Several new communities opened at the start of the third quarter, serving as a tailwind for sales efforts.

In the second quarter of 2025, Smith Douglas Homes closed 669 homes, generating homebuilding revenue of $223.9 million. Home closing gross margin was 23.2%, at the high end of the guidance range. Net new orders totaled 736 homes. The company's controlled lot count improved by 57% compared to the prior year to almost 25,000 lots. Option lots accounted for 96% of the unstarted controlled lot count at the end of the quarter. Revenue contribution from home sales was significant, with home sales revenue at $224 million for the quarter.

• Third quarter outlook: Expect to close between 725 and 775 homes with an average sales price between $330,000 and $335,000. Gross margin projected to be in the range of 20.5% to 21.5%.
• Full year target: Company has a goal of 3,000 homes, depending on demand and macroeconomic environment. Focus on pace over price philosophy to drive sales.

• Macroeconomic factors: Inflation, employment trends, interest rates, and consumer confidence could create headwinds to demand and impact sales volume and closing timing.
• Cost pressures: Labor and material cost pressures could affect margins.
• Ability to execute: Need to maintain an adequate pace of sales, bring new lots and communities online as scheduled.

Q: Definitely great to see the gross margin come in at the high end of the guide for the second quarter. Just curious what you're seeing from a stick and brick labor standpoint or either of those tailwinds relative to expectations in the quarter? And then looking to your third quarter guide, it does look like the homes you're planning to sell and close intra-quarter will be carrying a lower margin relative to your backlog. Just curious what's embedded in your gross margin assumptions from an incentive standpoint, especially as it sounds like you're stepping up finance incentives.

A: Gregory S. Bennett mentioned sticks and bricks were flat in Q2 and down year-to-date a bit. Russell Devendorf stated Q3 gross margin assumptions include continued incentives, particularly forward commitments like rate buydowns on fixed and adjustable rate mortgages, assuming to continue through Q3.

Q: That's helpful. And then maybe switching gears, just touching on lots. So it looks like your controlled lot position is up almost about 60 or so percent year-over-year. Maybe just break out kind of what that looks like in your existing markets versus how much of that might have come from some of the newer markets that you're looking to enter like Dallas and the Gulf Coast. Just so we can kind of contextualize what that looks like in the context of your existing operations.

A: Russell Devendorf said nothing yet from the Gulf Coast. For Dallas, there are approximately 600 lots. Significant bump in Chattanooga (part of Atlanta division), divisionalized Central Georgia, and growth in Middle Georgia and Greenville divisions.