SDHC

• Business Mix Strategy
  • The company has not shifted away from its core build-to-order (BTO) model; recent changes in BTO vs speculative (spec) home mix were driven by shifting market demand conditions
  • The company's core geographic focus for expansion is the Southeast and Central U.S., with limited potential incremental expansion into parts of the Midwest
• Demand and Inventory Trends
  • New home spec inventory levels are declining across all of the company's operating geographies
  • Resale home activity and resale inventory have increased across markets
  • Backlog grew across both of the company's business segments in the most recent quarter
  • Demand has been broadly consistent across all of the company's metro markets; Houston and Dallas stand out as high-performing markets where BTO pre-sales as a percentage of total sales are higher than any other market, the company's personalized home offering has resonated strongly with buyers, and spec inventory levels are at all-time lows
• Land Market Conditions
  • While some land sellers have started accepting lower prices, many sellers still hold price expectations aligned with the peak of the prior housing market, leading the company to walk away from some land deals
  • More widespread change has come in the form of eased seller financing and purchase terms, which generates net cost savings for the company
• M&A Strategy
  • There is consistent deal flow available for tuck-in acquisitions, and the company is actively reviewing opportunities
  • The company will only pursue deals that align with its existing operating and team strategy, prioritizing maintaining its current operational model over expanding for expansion's sake
  • The company is also evaluating greenfield entry into new markets that align with its core geographic focus

Guidance data beyond the margin incentive note below is not included in the provided transcript excerpt. Management confirmed that expected margin compression for the quarter is driven by higher incentives, and maintains the prior full-year guidance range of 16% to 16.5% (with management noting it hopes actual results will come in at the higher end of this range).

Segment-level financial performance data (absolute figures and revenue contribution percentages) is not included in the provided transcript excerpt.

• Pricing in a declining housing market is inherently challenging, as builders must adjust prices based on past market data, leading to a constant catch-up dynamic where price cuts can lag market declines
• Margin compression is driven by elevated sales incentives (including price discounts, closing cost assistance, and forward commitments) and base price reductions, rather than shifts in land or construction costs
• Many land sellers still hold price expectations based on peak market values from the prior cycle, forcing the company to abandon unfavorable land deals
• The current market environment still requires ongoing price and incentive adjustments to maintain sales volume and backlog conversion

Q: With backlog conversion rates holding between 60-70% in 2023-2024, will conversion return to this normal range as the BTO-spec business mix normalizes? / A: Management confirmed conversion should return to normal historical levels. Pricing in a declining market is very challenging, as builders can only set prices based on past data, leading to a constant catch-up dynamic. Smith Douglas performed well matching sales pace to starts in the first half of the year, so management expects to return to normal backlog conversion.

Q: Are there tuck-in M&A opportunities available to grow scale, and how willing are smaller builders to sell? / A: There is consistent deal flow of potential acquisition targets right now. The company prioritizes protecting its existing operating model and team strategy, so it will only pursue deals that make strategic and financial sense. Any M&A or greenfield expansion is focused on the core Southeast and Central U.S. footprint, with limited potential move into the Midwest.

Q: Is the decline in competitive spec inventory widespread across all geographies, and are some markets more competitive than others? / A: Management notes that lower competitive spec inventory is seen across all Smith Douglas operating regions. At the same time, resale home activity and resale inventory have increased across markets.

Q: How does current incentive levels on backlog compare to the 780 basis point level in Q2, and are we seeing land prices soften amid industry dislocation? / A: Management expects current incentive levels to be slightly higher than the Q2 780 basis point level, which is the main driver of expected margin compression, a mix of incentives and base price cuts, not shifting input or land costs. While some land sellers have lowered price expectations, many still hold peak-market prices, though softened purchase terms (more than direct price cuts) are widespread, which still delivers cost savings.