Smith Douglas Homes Corp. (SDHC) Earnings Call Transcript & Summary

Thank you. Hello everyone. Thank you for joining us and welcome to the Smith Douglas Homes second quarter 2026 earnings conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. will now hand the conference over to Joseph Thomas, Senior Vice President, Accounting and Finance. Joseph, please go ahead.

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 second quarter of 2026, 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 related. link at the bottom of our homepage. Please note this call will be simultaneously webcast on the investor relations section of our website. Before the call begins, I would like to remind everyone that certain statements made on this call, which are not historical facts, including statements concerning future financial and operating goals and performance, are forward-looking statements. 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 most comparable GAAP measures can be found in our press release located on our website and our SEC filings. Hosting the call this morning are Greg Bennett, the company's CEO and Vice Chairman, and Russ Devendorf, our Executive Vice President and CFO. I'd now like to turn the call over to Greg.

Good morning, thank you for joining us today for a review of our business results for the second quarter of 2026 and an update on industry conditions and our company's outlook. Smith Douglas Homes continued to make progress towards our goal of becoming a large-scale builder in the Southeastern and Southern United States. strong year-over-year growth in both net new home orders and home closings in the second quarter. We generated $273 million in home closing revenue for the quarter, representing a 22% increase over the second quarter of 2025 on 839 home closings and an average sales price on closed homes of $325,000. Home closing gross margin for the quarter averaged 17.6% on a GAAP basis. or 18.7% when you exclude the impact of 3.1 million of inventory impairments included in the cost of home closings. Our pre-tax profit came in at 1.9 million for the quarter, or 9.5 million when adjusting for impairments and lot option contract abandonment charges. Overall, our company executed well in the quarter against the home building backdrop that continues to be marked by uncertainty and affordability challenges for new home buyers. Despite this uncertainty, we were able to post net new home water growth of 32% on a year-over-year basis for the quarter for a total of 970 net new home waters. As our team did an excellent job working with buyers to find the right combination of price, personalization, and value to keep our production-oriented building model running smoothly. We saw consistent traffic and a relatively stable sales pace throughout the quarter, averaging roughly three sales per community per month, which we maintained through a targeted use of sales incentives. Our construction cycle time for homes closed averaged 55 days as we continue to emphasize construction efficiency across our home building platform. This remains a key component of our returns focused business model. one we feel differentiates our company from the competition. Not only does this discipline allow us to work through our communities efficiently, but it also shortens the time between sale and close, which helps reduce the possibility of cancellations. We continued to expand their presence across our markets. We grew order-in community count by 20% on a year-over-year basis to 110 active communities. Home building is a business of scale, and we know higher volume will lead to better expense leverage over time. At the same time, we remain disciplined on our land acquisition front by adhering to our underwriting standards and walking from deals that do not meet those standards. We maintain this balance through our land-light strategy, which allows us to control a pipeline of lots through auctions and land banking agreements, while also providing us downside risk protection. At the end of the second quarter, we had a total of 22,319 unstarted controlled lots, with only 3% of those lots owned on our balance sheet. As we turn our focus to the back half of the year, we feel cautiously optimistic about the state of the home building industry and our company's positioning. The US consumer has proven to be resilient in the face of rising rates and macroeconomic uncertainty while building conditions continue to be favorable. see better discipline from builders in terms of spec inventory and through selective and targeted financial incentives to buyers, we continue to be able to compete well against existing home market. As a result, I remain confident in our long-term outlook for Smith Douglas Homes. Finally, I want to once again recognize and thank our team members for their continued dedication and hard work. We recommend serving our customers, executing our strategy, and adapting to a dynamic operating environment has been instrumental to our success. On behalf of the entire leadership team, I want to express our sincere appreciation for everything they do. Now I'll turn the call over to Russ who will provide more detail on her financial results this quarter and give an update on her outlook.

Thanks Greg and good morning. I'll highlight our results for the second quarter and then conclude my remarks with an update on our balance sheet, capital allocation priorities, and outlook for the third quarter. We finished the second quarter with $273 million in revenue on 839 closings, with closings up 25% from the year-ago period and an average sales price price of $325,000. Our home closing gross margin was 17.6% on a GAAP basis and adjusted home closing gross margin was 19%, which excludes capitalized interest and inventory impairments. Our margins continue to reflect the use of incentives and targeted pricing adjustments to support affordability and maintain sales pace. During the quarter, closing costs, price price discounts and the cost of forward commitments totaled 780 basis points, which compared to 480 basis points in the year-ago period and 730 basis points sequentially from the first quarter. Excelling general and administrative expenses for the quarter were $41.9 million, or approximately 15.4% of revenue, up $7.2 million compared to the same period last year, and down slightly as a percent of revenue. The increase primarily reflected higher sales commissions and advertising costs associated with higher closings and the investments related to our Dallas-Fort Worth and Alabama Gulf Coast expansions. Free tax income for the quarter was $1.9 million, resulting in net income of $1.8 million, or $0.03 per diluted share. Our second quarter results included 3.1 million of inventory impairment charges in cost of home closings and 4.5 million of lot option contract abandonment charges in other expense. Adjusted EBITDA, which we believe provides a clean apples to apples view of our operating performance as it excludes share based payment expense, inventory impairment requirements and lot option contract abandonment charges, among other items, was $13.4 million or 4.9% of revenue compared to $19.8 million or 8.8% of revenue in the same period last year. Given the nature of our up-sea organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the non-controlling interests of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members and not taxed at the corporate level, the income tax impact reflected in our financial statements can differ from more traditional C corporations. For that reason, we also present adjusted net income, which assumes a blended federal and state effective tax rate of 26.9% as if we operate it as a fully public C corporation, which we believe provides a more meaningful comparison to peers. For the quarter, adjusted net income was 1.4 million compared to 12.9 million in the same period last year. Turning to orders, we generated 970 net new home orders during the quarter, an increase of 32% versus the year-ago period. Year-to-date, we have generated 1,951 net new home orders, up 30% from the prior year period. The end of the quarter with 1,000 homes in backlog, up 17% from the year-ago period with a contract value of $322.1 million and an average sales price of $322,000. In addition to backlog, we also had 74 home reservations at the end of the quarter. These reservations allow our buyers to take advantage of buying a built-to-order home while also benefiting from a guaranteed mortgage rate when they close. We expect most of these reservations to convert to new home orders in the third quarter. Returning to the balance sheet, we remain focused on preserving financial flexibility while continuing to invest in our growth. The end of the quarter with $14.2 million of cash and $66 million of total debt. Our $325 million unsecured revolving credit facility had $63 million of outstanding borrowings and $0.8 million of letters of credit at quarter end. Our debt-to-book capitalization was 13.2% and net debt-to-net book capitalization was 10.7% compared with 9% and 6.6% respectively at year-end 2022. Net debt was 51.8 million at quarter end. Importantly, our balance sheet has continued to improve as we scale operations even in this difficult housing environment. Despite increasing active communities by 20% from 92 at the end of the second quarter of 2025 to 110 at the end of this quarter and growing our closings 25%, our total debt was down 11% and on a per community basis, total debt declined 25% while real estate inventory per community declined 14% from a year ago. These metrics highlight the efficiency of our business model and ability to effectively manage our balance sheet while at the same time growing our business. Our land light strategy remains a core component of this performance. At quarter end, we control 23,527 lots, including 1,208 homes under construction, 664 owned lots, and 21,655 option lots. By relying primarily on third-party lot developers and option agreements, we can align lot delivery with demand, maintain flexibility, and deploy capital efficiently. As Greg previously mentioned, our pace over price philosophy continues to guide how we manage the business. In the current environment, our focus remains on maintaining absorption and inventory turns, even if that requires some pressure on margins in the short term. We believe maintaining sales pace allows us to preserve market share, generate cash flow, continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle. Our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining the conservative balance sheet and we will remain opportunistic with share repurchases. During the second quarter, we repurchased 312,351 shares of Class A common stock for $4.4 million. Including repurchases completed in the first quarter, we have repurchased approximately $10.1 million of stock through June 30th. We believe these repurchases represent an attractive and disciplined use of capital while preserving the financial flexibility to support our long-term growth strategy. Looking ahead, we remain encouraged by the strength of our order growth, the expansion of our community base, and the improving efficiency of our land light model, while recognizing that demand remains sensitive to mortgage rates, affordability, and consumer confidence. For the third quarter, we currently expect closings between 825 and 900 homes, average sales price between $315,000 and $320,000, and gross margin between 16% and 16.5%. Given the continued variability in demand conditions, we are not providing full year guidance at this time. While the primary risks to our outlook remain tied to macroeconomic conditions, including mortgage rates, consumer confidence, employment trends, and the potential need for continued pricing adjustments and incentives, we believe our affordable product offering, land-light strategy, disciplined operating model, and growing community base positions us well to continue gaining market share over the next few years. over time. With that, I'll turn the call over to the operator for instructions on Q&A.

Good morning. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 to raise your hand. withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mike Dahl with RBC Capital Markets. Mike, your line is open. Please go ahead.

Good morning. Thanks for taking my questions. Greg and also Russ, I want to start with – I mean, Greg, you expressed cautious optimism and a steady sales pace through the quarter. Can you give us an update on how July and the beginning of August has trended? And I'm trying to square that a little with then your gross margin guide is down meaningfully So how much is kind of the like you've had to lean back into incentives? as rates have gone back up, but maybe you're still encouraged that you're at least seeing a demand response to that. I'm just trying to better understand that in the context of what's a pretty big step down in gross margins.

Yes, Mike, thanks. Pretty much June, July has stayed pretty much the same. you know, that one caveat is we have leaned back in a little more on forwards and some right versus the right that's gone. Back up so, you know, we. We just continue to underwrite everything to our current environment. So. You know, if we look forward, if we have to continue this, if rates are. Continuing to stay elevated, you know, the macros not giving us any indication of a lot of consumer. change here in the near term. So you know we we. We just continue, like I said, cautiously optimistic, demand is there. It's just solving affordability. We continue to push for our pace. As you see with the numbers, we've been able to hold our pace pretty steady.

Okay, got it. So, yes, I guess if I'm hearing that, then it's again like you're at least even if you're leaning in or incentives are ebbing and flowing, you're at least finding demand when you lean in. Which which yes, that's encouraging. Russ, then maybe just as a follow up more specifically when you think about that gross margin guide, can you help us kind of bucket out, you know, the step down from 18.7 X charges 16 to 16 and a half, how much of that is related to incentives? How much is other costs, dynamics, either express labor or land? Help us understand that bridge a little bit more.

Yes, it should, you know, when we look at backlog and, you know, as Greg said, we were leaning more into to pace as we have really the first half of the year, I would tell you it's it's just more of, you know, our continued use of incentives and discounting to match pace with, as a landline builder, kind of take down. We really focused in the first half of the year on trying to get one sale per community per week, really. and that kind of just matches the, you know, the takedowns in the majority of our, you know, option contracts. And so it's really it's really just a function of kind of, you know, adjusting price and payment through those, you know, use of incentives, closing costs, forward commitments, to get that pace. So that's what I would tell you without, I don't have the exact numbers in front of me, but that's really going to be the driver of the margin compression. And then hopefully, you know, we're like Greg said, we're cautiously optimistic that we're, we're finding, you know, an opportunity to maybe kind of keep margin steady from here and, um, you know, maybe pull back a little bit on on incentives going forward and start to, uh. to work on pricing and see if we can claw back some margin. We're hearing some of our competitors, I think if you've heard on the other conference calls, I think a lot of builders are reducing inventories or specs and leaning against increasing incentives. So hopefully, as an industry, we're kind of finding bottom.

Yes, and Russ, maybe just one quick last one from me just to follow up on that last point. I mean, you guys have kind of, you know, your pace focused and you try to be balanced around things. with that focus. So when you think about like everyone's trying to get a better balance, maybe on spec versus bill to order, you know that how do you How are you evolving your strategy on the ground right now as we look at the second half?.

Yes, we've always been built to order focus. I mean, presales is our number one priority. Greg, if you want to.

Mike, I think, I mean, to give you numbers, we're about 70-30. We look at it more so around, Because of the way we work, buyers, maybe have credit challenge or time constraints that we may. So we focus on getting the home sold by drywall that allows that house. To still close. On its intended closed date when we started it. So, so there's a few buyers that we do through reservations. But if you look at all that. End of the day, everything sold by draw wallet about 70%. Yes. And those are what we look at as the pre-sales because there's a certain amount with our You know, there's a certain amount of of. Attention to the approvals that we need to work through and qualifying on the front end.

Yes, no, the one the one thing I would add, we still give our the ability to personalize their homes even after we start the home. So up until that drywall stage like Greg mentioned, they still have the opportunity to select services certain options in that home. So it allows for additional personalization, which I think is pretty unique, especially at our price point, giving buyers up until that point of drywall to create the home that they want. And those, as you know, the margin on those options come in at a pretty good number for us. So anything we can do to give our buyers that opportunity to select their own options creates more margin opportunity for us and it also creates a stickier buyer because it's a it's it's the home that they've that they've had the ability to to make choices.

Sure. Your next question comes from the line of Natalie Kolosiker with Zalman and Associates. Natalie, your line is open. Please go ahead. Hey, good morning and nice job on the quarter.

Direct construction cost reduction was something that popped up a lot on this past earnings season. So, curious to see, have you seen any, are you seeing actually continued reductions in costs, or have you maybe kind of reached the end of it? Curious to see if you, you know, see that offsetting any part of your incentive spend. Okay.

Yes, I'll take that. So, yes, we've seen we're 2.5, 3% year over year cost is our hard cost savings are there. I'm sure that helps with fuel prices. fuel surcharges and other things that are starting to creep back into the equation, but yes, we have seen seen savings in cost.

Okay, thank you. And also some other builders, I guess, mentioned using tools like a higher share of arms to kind of manage that incentive spend. So I know you brought it up in your previous call, but is that like something that you've been pushing more.

just to try and manage your incentive spend? No, we haven't.

We haven't gone back into the arms this quarter. What we've been using is still kind of the fixed rate where we've bought forward just a fixed rate incentive. And towards the end of the quarter into third quarter, we've started to pull back on the rate incentive and are really trying to focus on just using the 6% that's allowable for closing costs and spot buy downs. We think that from a base pricing standpoint, we're in most of our communities and markets, we're already priced you know, on the low end of the market and offer a really good a good value at our pricing. So, and it's seemed to, it hasn't seemed to have slowed our pace, which is good. So as I mentioned on the last question, you know, We're slowly pulling back on incentives to see if we can recapture some of that market.

All right. Thank you. Your next question comes from the line of Sam Reed with Wells Fargo. Sam, your line is open. Please go ahead.

Thanks so much, guys. So one other question on gross margin here. Wanted to just ask about the impairments and any sense as to how widespread those were? And then can you just remind us your underwriting standards, margins versus returns? We'd just love a refresher on that.

Sure. Yes, we, we, you know, obviously, like every builder should be, we, we go through, you know, our impairment testing quarterly and we first look at, you know, you know where our backlog margin is sitting and that's kind of your first indicator. And so we do a thorough scrub of backlog and then we'll run cash flows where we have some, where those margins are, say, mid to high single digits, and then we'll do the cash flow. And so, again, it is what it is, right? It is a subjective, I will say this, for anybody that's been in home building and doing this for a while, I mean, the testers I think that's why you probably across the builder landscape might see some that are taking more than others, but it's a pretty subjective process. But I think we have to be careful We're pretty consistent on how we look at things. And, but is it widespread? No, I think we took it in maybe three communities. Yes, three communities, three communities. This this quarter and we're and then we took a couple of abandonment charges where it made sense. Again, I think the nice thing is is having a strong balance sheet like we do. The accounting does not drive any decision we make. Everything we do is based on economics. is it a good deal for the business? And so we're fortunate, just the way we manage the business, that everything we look at is from an economic standpoint, not from an accounting standpoint. So hopefully that answers.

No, very helpful. Let's switch gears to another line item of the P&L. I just want to quickly touch on third-party broker commissions. Remind me where broker commission rate is sitting today and talk through any broker attached dynamics. I know some of your peers have selectively stepped up broker commissions in some markets.

to the sales incentive. Just curious if you're seeing anything similar. No, we're still seeing kind of, and it depends on the market, two and a half to 3% is the commission that we're paying to outside brokers. We haven't run any special deals or opportunities. So we've been pretty consistent. And then I think the co-broker, YOU KNOW, THE, IS ABOUT, WHAT, 80%, 80%? MID-HIGH 70s. MID-HIGH 70s. SO, UM... It's remained for us. That's pretty consistent to where we've been running for a while. All helpful guys, I'll pass it on. Thanks, Sam.

Your next question comes from the line of Rafe Jadrosuch with Bank of America. Rafe, your line is open. Please go ahead.

Hi, you have been honored with that. Thanks for taking my question. I had a follow-up on the BTO commentary. Is that 70-30 mix also the long-term target? And what is the margin difference between a home-sold pre-drival and a quick move-in? Thank you.

Yes, our long-term target would obviously be 100%, right? That's the ultimate goal is to get everything sold by grade. drywall and certainly without a doubt everything sold before we we hit CEO right that's that's but if you look historically so if you go back pre kovat That pre-sale, which I would say pre-sale before we hit drywall stage, was about 90%. So as Greg said, we're about 70%. So we're... We're... We're inching closer to where we we want to be before we're not there yet. And again, that's that's that really is. the kind of environment we're in. And I think the fact that we're competing with a lot of builders that have specs out there and the use of incentives and forward commitments really applies to more QMI's, quick move-ins. And so that's what we're battling against. But we've always been, we've never pushed a spec We're always a bill to order presale. It's just the environment we're in has kind of, you know, pushed those percentages down from where we would like to be. And then from a from a presale versus spec, You know, true spec, I'd say, what, about 100 basis points difference in margin? 150, 100, 150 basis points in margin? Yes, 200. Yes. Yes, it varies. It'll vary by division. And then, you know, we've seen it compress a little bit, but it's, you know, normally when you go historically, it was probably more of a 300 basis point. difference pre-sale versus spec and now it's about 150, 200.

But again, also depending where it is.

Great. Anything else? Yes, a quick follow-up also on the 3Q growth margin guidance. What do you have embedded for different costs, sliver costs, and lot costs for the upcoming quarter?.

Could you repeat that, Victoria? You cut out a little. We couldn't hear you.