Smith Douglas Homes Stock

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.

oh sorry i just had a follow-up also in the 3q gross margin guidance uh can you give any color what you have embedded in terms of sticking brick costs labor and lock costs.

Yes, I don't have the numbers in front of us. We can follow up. But I would tell you my guess is lot costs and sticks and bricks are probably fairly consistent from where we are. That probably has the least amount of variability from quarter to quarter. So what's probably sitting in backlog, as I mentioned before, it's going to mostly come from incentives. Discount incentives and closing costs are probably the most important. And again, it's it's if you think about it, because the first half of the year we really were leaning into pace. And so the way that we're getting pace is really by using utilizing. those discounts and you saw this quarter what closed versus prior quarter, sequentially the incentives were up 50 basis points and so my guess is third quarter the incentives, the total of those incentives are probably going to also be up and that's the driver of the margin comparison.

The last thing I would add is we're usually, as is hopefully you all have gotten to know us over the last two and a half years of being public, we're pretty conservative. I think we've had a pattern of beating our guidance and we hope to keep it that way. So we're usually pretty conservative. conservative, but you know again, I felt comfortable with the 16 to 16 and a half percent. Hopefully we come in, you know, there might be an opportunity to do a little bit better, but because we're in such an environment where you've got specs and you're continuing to discount and we are pushing pace, you know, who knows what we're going to have to or want to do to do towards the last couple of months to continue to move some of those specs through the system.

Your next question comes from the line of Paul Schabelsky with Wolf Research. Paul, your line is open. Please go ahead.

Thanks. Good morning. I guess, you know, appreciating your comments that, you know, the incentive environment seems to be a little bit better so far in 3Q and the gross margin guide of 16 and a quarter. Is there any sort of floor you would, you know, help, you know, gross margin at?.

Yes, we talk about that a lot internally. So I tell you first, our overriding goal is always going to be pace versus price. But yes, we definitely have conversations about what level. does it start to make sense? And a lot of times it's going to be on a division by division or really a community by community basis. You know, currently our SG&A sits around 15%, let's just say. So when gross margins, so if you wanted a number, I tell you at 15%, that's when we start saying, okay, what other levers could we use should we or should we pull? Because look, you know, 15% gross, 15% FG&A, you'd be at a zero net. So that's probably the floor. Look, nobody wants to build for practice. But we also recognize, right, we also recognize the need for us to continue to scale our business, right? That's in a declining rate environment or a declining rate environment. declining, you know, the housing environment we're in with mark, you've got top line margin compression, scale is probably the best lever to pull to continue to You know, generate generate positive returns and so, you know, we, we, we feel like it was great when we went public and we raised capital and that capital was used to scale the business.

The unfortunate thing is like, 6 months later, we've entered into 1 of the toughest housing environments. At least I've seen certainly, you know, cheap. and even prior to that. But, yes, we'll continue to focus on what we can control.

Okay, any opportunity to work down that SG&A expense ratio?.

outside of just leverage? Yes. Yes, no, absolutely. I mean, we're looking at that every single day. You know, Greg and I, you know, talked to the, to the DPS last week and, you know, for the back half of the year, it's like, you know, uh, no dollar is too small to save. Uh, and we're looking at SG and a every day we, you know, we're, we're quite frankly, we, we said, Hey, it's, you know, no more, no more new hires, unless it's really a variable that's going to support field operations like sales and construction. You know, this is not a time to start layering on any additional overhead. We're looking at reducing any non-essential costs, whether it's travel or meetings or anything of the like. So, yes, that's always a huge focus.

We're always trying to pull those levers. Okay. And just like a sneak one more, you know, we've got mortgage rates here at the year-to-date high. Have you seen any acceleration on pressure on your move down or active adult buyers that have a home to sell in this environment? No.

No more than what we've seen historically. We do take a number of contingencies and a number of our Specs are a result of those contingencies that we took and then buyers just didn't get, you know, either either their, their deal fell out or. Didn't something happen in that process? So, yes, we are seeing seeing that. Okay. Okay. I appreciate it. Thank you. Yep.

Your next question comes from the line of Ryan Gilbert with BTIG. Ryan, your line is open. Please go ahead. Thank you.

Hi, thanks. Good morning, guys, and thanks for taking my questions. I have another one on gross margin for you. And it's, did the 2Q26 guide and does the 3Q26 guide contemplate any inventory impairments or include an allowance for the potential for inventory impairments?.

No, no, we never forecast impairments. If we did, then we probably would have taken the impairment. So, no, we don't assume impairments.

future impairments. OK, yes, that's that's what I figured. I'm just trying to understand that differential here between the guide and. Sure. Okay. And then, you know, just looking at the step down and your commentary around wanting to keep, you know, incentives at that, you know, that 6% level, I'm assuming that base price cuts are playing an increasing role here. Can you just talk about either base price cuts or opening communities at ASPs below underwriting and how that's impacting gross margin?.

Yes, absolutely are taking base price cuts where it's warranted. And again, it is a community by community analysis, because some communities we're actually, you know, seeing opportunities to raise prices. And so we are, I mean, we're not pushing it to a point where, you know, it shuts down sales or slows pace, but we are definitely looking on a community by community basis where we can take price increases. And then obviously, we are continuing to discount where we've got inventory or the pace isn't where we'd like it. We're traditionally, when you look at our communities, I'd tell you on average, we're probably the biggest value when you look across the competitive market and the competitive communities. We always, when we underwrite, we're always trying to underwrite to about 10 grand below any of our at least 10 grand below the lowest competitor so that, you know, there's there's obviously more people that can afford our homes than anybody else because of that price right price we always say price is the ultimate amenity. And, and so, you know, having that low price is is key so we've been pushing on that.

But, you know, again, we're, we're trying to really look at our incentives and seeing, you know, what's the optimal use of incentives and where can we pull back to to then kind of recapture or at least maintain. You know, margin as it's, um, you know, clearly we've seen some compression, but I, I think. We're going on about two years of what's been a really tough environment from a sales and pace and margin compression perspective. And hopefully, as we've heard from other builders, that we're starting to find. you know, we're hopefully, we're starting to find a little bit of a bottom here and we can all start to recapture a little bit of profits.

Got it. And so that the 4% year-over-year decline in average order price, how much of that is a function of, you know, base price cuts to, you know, try and find the market versus geographic or product mix or value engineering?.

It's mostly just trying to find the market. I'll do it in a, it's a little bit of obviously mix. I mean, because we have opened a couple couple of new geographies. You've got Greenville in there closing homes. You've got Dallas closing homes. But again, our product is the same across the entire footprint. So I would tell you it's mostly on price. And then the key that we look at is, what's the average square foot of the house? And it's within 50 to 100 square feet. of the same.

So it's not like we're really changing product that much or the mix is that different. So it's really the.

the incentive. Okay, got it. And then as you shift back more towards BTO, I think just, you know, looking at, you know, 2023 and 24 backlog conversion rates in the 60 to 70% range, should we expect backlog conversions to trend back to that level as you kind of normalize the BTO versus spec mix in the business?.

It should, and just to be clear, we never really, we never moved away from from BTO. It was just a function of the market and the demand environment. And so it's, I tell you, and I give a lot of credit to our sales folks, but it is, it's really hard to know that you're setting the right price in a declining market, right? You really don't know until it's in the rear view mirror. So I tell you, you know, So last year and kind of into the beginning of this year, you know, you always, I'd tell you probably most builders would say you're always kind of playing catch up because you're kind of looking in the rear view and saying, well, shoot, we didn't, we didn't move pace fast enough. So I guess we didn't cut prices quick enough. And I think we did a really good job in the first half of the year, uh, matchmaking. matching pace or exceeding pace on our sales versus start. Yes, I would tell you, given the way we've executed it in the environment, I think, yes, I think we'll get back to a more, I'm hopeful that we're going to start getting back to a more normal kind of conversion and backlog situation.

going forward. Okay, got it. And then last one for me, just on M&A or strategic opportunities. As you work to continue to build scale in your markets, are you seeing opportunities to execute some tuck-in M&A? How does the pipeline look? And what's the level of willingness on the part of some of these other builders to sell?.

Yes, there's activity. We're seeing, you know, there's usually consistent flow of packages. You know, the environment is such that, you know, it's unfortunate. I think some of the smaller packages, not as well capitalized builders, it's been a struggle. And so that's where you usually see the bigger builders, the ones that have a balance sheet, take this opportunity to grow market share. And so as you know, from the way we operate, I mean, we're looking to scale up the business, but we're very thoughtful about how we go about it because we're absolutely, it's important to protect kind of the way we operate, you know, with our team strategy and so The deal has to make sense, so we're always looking. We're certainly exploring, you know, new possible markets for maybe a greenfield But yes, there are some deals out there that, you know, we'll take a look at packages and if it makes sense to expand. And again, we're really focused on kind of just building out the southeast and central, you know, maybe creeping up a little bit, you know, into the Midwest.

But that's kind of our sweet spot if we were to do anything.

anything. Okay great thanks so much. As a reminder if you would like to ask a question please press star 1 to raise your hand. Your next question comes from the line of Jay McKinless with Citizens. Jay, your line is open. Please go ahead.

Hey, good morning, everyone. Greg, I wanted to go back to the comment you made about maybe competitive spec inventories coming down a little bit. Is that kind of widespread across all Smith Douglas geographies, or are there some areas where you're seeing even less competition than you were before?.

Jay, I think we're seeing it across all of our. Geographies that, you know, there's, there's less inventory. I would say there appears to be. An increase, though, in in resale activity and and resale homes on the market. but I think our new home specs have has slowed a bit. Okay, that's great to hear. And then I guess, you know, good to see growth in backlog for both of the segments, but maybe on an individual MSA basis. So there's some MSAs that stood out this quarter in terms of being able to grow orders, and then there's some that maybe lag relative to the overall average. Yes, we, we've seen pretty consistent demand across all the markets.

I would say. 1, bright spot for me that that has been. very interesting to see is the Houston and Dallas markets for us, the amount of pre-sale as a percentage is probably higher there than any markets we're in. Our message of personalization and ability for buyers to do that has resonated and been embraced, and our spec levels there are at all-time lows. Obviously, Dallas is a new market, but Houston for sure.

That's great. And then just one more. If you look at the backlog right now, Russ, where would you say that incentive percentage is relative to the, I think you said 780 basis points for the second quarter?.

Yes, we were second quarter. We what we closed with 780. Again, without seeing the numbers, I'm going to tell you it's probably a little bit higher than that. again, given our guide of, you know, the 16 to 16 and a half, which we hope is going to be a little bit better, but that's where we see the, you know, the margin compression coming from. It's in those, it's in the incentives, and that's a combination of price discounts, closing costs and forward commitments. And then, you know, again, we have been also reducing base price. So it's going to be a combination of price reductions and those things. So it's not really on the cost side or, and I can't imagine it's really the land cost that's shifting that much between So it's really going to be driven by that. That incentives in the top line revenue.

John, and then the last question had actually just kind of sticking on land cost. with all the M&A dislocation, whatever you want to call it in the industry this year, y'all seen some opportunities to maybe buy land a little bit cheaper or some of these sellers being maybe a little more reasonable on what they think the land is worth?.

You know, we've seen some, but it's not as widespread as you would think. You know, it's still, you know, a lot of the land sellers are still thinking their lands at the top of market and which is evident by a couple of those abandonments that we showed that we try hard to work through every deal and going to work through every deal. But at a certain point, you can't. But we are seeing a lot of easing on terms, probably more so than price, which at the end of the day is a savings. So yes, I'd say it's probably 50-50 in the market right now. Okay, great. Appreciate it, guys. Thanks.

Thank you, Greg. We have reached the end of our Q&A session. I will now turn the call back to Greg for closing remarks.

Thank you everyone for joining us for our Q2 results. And again, just want to add a thank you to all our team members and Smith Douglas, Holmes family, for all you do for us. And thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Hello, everyone. Thank you for joining us, and welcome to Smith Douglas Homes First Quarter 2026 Earnings Call and Webcast. [Operator Instructions]

I will now hand the conference over to Joe Thomas, SVP of Accounting and Finance. Joe, 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 first 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 Relations link at the bottom of our home page. 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, and thank you for joining us today to review our results for first quarter of 2026 and provide an update on our operations. Smith Douglas Homes generated $4.3 million in pretax income for the quarter, net income of $0.06 per share. We delivered 624 homes, which came in at the high end of our guidance range, while home closing gross margin exceeded expectations at 19.6% on a GAAP basis.

For the quarter, we generated 981 net new orders, up 28% from a year ago and a new quarterly record for the company. While order activity remained choppy throughout the quarter, we experienced a sequential improvement in our sales pace each month of the quarter, culminating in a sales pace of 4 homes per community in the month of March. Financing incentives continue to be a key selling tool as buyers remain motivated to own a home, provided they can secure a monthly mortgage payment that fits their budget.

We are encouraged by the price elasticity we experienced during the quarter as incremental adjustments in pricing led to an uptick in demand. We view this as an indicator that underlying demand remains intact across our markets despite broader macroeconomic uncertainty. From an operational standpoint, we remain focused on pace over price philosophy, which means maintaining a consistent cadence of starts, driving efficient inventory turns and driving towards a more presale oriented backlog.

Our average build time was 57 days during the quarter, consistent with prior period, and we continue to view our ability to deliver homes quickly and reliably with an offering of home choice and personalization as a key competitive advantage. Our land-light strategy also remains central to how we operate. By relying on third-party lot developers, we're able to allocate capital efficiently and maintain flexibility through varying market conditions.

We believe this approach positions us well to manage risk while continuing to scale the business. We also made progress on our growth initiatives during the quarter. Community count expanded to 108 active communities across our markets, up 24% from a year ago, and we continue to ramp operations in our new markets such as Dallas, Chattanooga, Greenville and Alabama Gulf Coast. Our experience in Houston continues to demonstrate that our operating model translates well beyond our legacy footprint, and we remain focused on executing a disciplined and opportunistic expansion strategy over time.

As we move through the spring selling season, we are encouraged by sales orders generated during the quarter, which helps rebuild backlog and provide momentum heading into the second quarter. We have continued to see encouraging traffic and order activity early in the second quarter, although demand remains variable week-to-week. We will continue to evaluate pricing and incentives at the community level and adjust as needed to maintain the pace required to support our operating model.

While macro conditions remain dynamic, employment trends have been relatively resilient, and we continue to see motivated and engaged buyers in our markets. We believe our focus on attainable pricing, personalization and value put us in a good position to compete for these buyers and drive market share gains over time.

Finally, I'd like to thank all of our team members for the hard work during this quarter. We challenged everyone to focus on getting off to a strong start this year, and our results this quarter showed they were up to the challenge.

With that, I'd like to turn the call over to Russ, who will provide more color on our financial results this quarter and give an update on our outlook.

Thanks, Greg, and good morning. I'll highlight our results for the first quarter and then conclude my remarks with an update on what we are seeing so far this year and our outlook for the second quarter. We finished the first quarter with $206.4 million in revenue on 624 closings at the high end of our guidance range with an average sales price of $331,000. Our home closings gross margin was 19.6% on a GAAP basis and adjusted home closing gross margin was 20.3%, which adds back impairments, interest and cost of sales and purchase accounting adjustments.

During the quarter, gross margin benefited by 170 basis points from the reduction of land development accruals on the closeout of several communities. 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 discounts and the cost of forward commitments totaled 730 basis points, which compared to 430 basis points in the year ago period and 680 basis points sequentially from the fourth quarter of 2025.

Selling, general and administrative expenses for the quarter were $35.9 million or approximately 17.4% of revenue, up $2.9 million compared to the same period last year, reflecting continued investment on our growth markets as well as the impact of lower average sales price. Pretax income for the quarter was $4.3 million, resulting in net income of $0.06 per share.

Given the nature of our Up-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the noncontrolling interest 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 26.6% as if we operated as a fully public C corporation, which we believe provides a more meaningful comparison to peers. For the quarter, adjusted net income was $3.2 million compared to $14.7 million in the same period last year.

Turning to orders. We generated 981 net new home orders during the quarter, an increase of 28% versus the year ago period. We ended the quarter with 869 homes in backlog with an average sales price of $332,000. In addition to backlog, we also had 42 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 second quarter.

Turning to the balance sheet. We remain in a strong financial position. We ended the quarter with $28 million of cash and $68.5 million of total debt with approximately $195 million available under our revolving credit facility. Our debt-to-book capitalization was 13.6% and net debt to net book capitalization was 8.5%, reflecting our continued conservative approach to leverage. Our land-light strategy remains a core component of our operating model with the majority of our lots controlled through option agreements, allowing us to maintain flexibility and deploy capital efficiently.

As Greg previously mentioned and I explained on our fourth quarter call, I want to reiterate that 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 and continue investing in our community pipeline, which ultimately drives scale and stronger returns over the full housing cycle.

From a broader macro perspective, the housing market continues to operate in a challenging environment, driven primarily by affordability pressures and elevated mortgage rates. Recent economic data has been mixed and geopolitical developments continue to contribute to uncertainty. We are also monitoring labor market trends closely as employment remains a key driver of housing demand. Our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining a conservative balance sheet, and we will also remain opportunistic with share repurchases.

During the first quarter, we began executing on our share repurchase authorization and continue to repurchase shares into the second quarter. Including repurchases completed in April, we have repurchased approximately $10 million of stock at an average price of $13.28 per share. We believe these repurchases represent an attractive and disciplined use of capital without limiting the financial flexibility to support our long-term growth strategy.

For the second quarter, we currently expect closings between 725 and 800 homes, average sales price between $325,000 and $330,000 and gross margin between 17% and 17.5%. Given the continued variability in demand conditions, we are not providing full year guidance at this time. We believe the primary risk to our outlook remain tied to macroeconomic conditions, including mortgage rates, consumer confidence and employment trends. That said, we believe our affordable product offering, land-light strategy and disciplined operating model position us well to continue gaining market share over time.

With that, I'll turn the call over to the operator for instructions on Q&A.

[Operator Instructions] Your first question comes from the line of Michael Rehaut with JPMorgan.

It's Nick Kalra on for Michael. I wanted to start by asking on the gross margin piece, you called out some moving pieces, but would really appreciate any extra color that you have either on the incentive environment and pricing considering like ASPs for the first quarter toward the lower end of your guide as well as on the cost side would be really helpful. Any color you can provide on construction costs, labor, et cetera.

Guidance on a GAAP basis -- came in at the high end of guidance on a GAAP basis and we had 170 basis points, as I mentioned, that -- and it's the way land development works. So when we close out communities, we typically have a reserve in land development for anything that over the next 3 to 6 months may come in from a cost perspective. We had closed out some communities in the fourth quarter towards the end of last year. And so those accruals that we had got reversed in the quarter. So that contributed to 170 basis point positive impact to margin.

So if you back that out, we would have been right around, I think, 18.1% was -- which I think still was right in line with guidance or in the high end of our guidance range. And then from just some additional costs, as we mentioned, there's 730 basis points that were impacted by, like I said, impairment -- not impairments, excuse me, closing costs, the incentives for forward commitments, so the cost there and price discounts. And just to remind everybody, the price discounts and the forward incentives, that's a reduction to revenue. So ASP, that kind of drives ASP down a little bit and then closing costs run through our cost of goods. So that was up sequentially, as I mentioned, and up year-over-year.

And then just from a cost perspective, we're actually getting some benefit on the direct cost side. So that's coming in a little bit better year-over-year. But the big driver still for us in kind of margin degradation is the lot cost. So lot costs were as a percentage of revenue, it's up about 300 basis points versus last year. So that's just the impact of the higher basis for land deals that we entered into in the last couple of years.

Got it. Helpful. And then on anything you could provide? I think you mentioned in your prepared remarks that demand is still looking a little choppy week-to-week. Any color you can provide on that, either on a sequential basis, just a couple of weeks in, but relative to March? Or anything you could provide on April to date, that would be helpful from a demand perspective.

Yes. Thanks for the question. We're seeing seasonal traffic. We had good strong traffic through March. April has been a slight decline, but still seasonally good as we've gone through all the spring break and all the disruptions there, it's held pretty steady, maybe down of 6% to 8% over what we were seeing earlier.

Your next question comes from the line of Mike Dahl with RBC Capital.

You've actually got Stephen Mea on for Mike Dahl today. I was hoping we could talk a little bit on the SG&A side of things. I totally understand you all are in a kind of growth phase and there's life cycle charges in there as you're opening up your new divisions and kind of getting all heads in place in there.

I was just kind of wondering if you could give us a little more of an overview on where you are in that -- are in those life cycles? Is that good to keep ramping? Or is that something that might start to moderate a little bit in the coming quarters, just kind of a qualitative overview there.

Sure. Yes, I think as a percentage of revenue, it should definitely start to moderate because when you look at the gross dollars, we were only up $2 million, $3 million in that range. So it's more a reflection of our ASP is coming down. And again, part of that is increased incentives, like I mentioned, forwards and price discounts are pushing that ASP down, and so it's pushing that top line revenue.

So some of that percentage increase is because of the top line revenue. But it is -- the gross dollars, the increase is actually not that bad in my -- from our perspective because we did open, as you recall, so Dallas was a new division last year. We divisionalized Chattanooga. We're opening up the Gulf Coast, which we hope to have some sales here in the next few months. And so we've got a lot of new fresh G&A that's hitting the books without any volume. And so that, again, just reflects our continued growth and scale.

And so when you start to see some of that revenue come through, I think it will moderate, right? And again, even if you go back a couple of years, Greenville is a fairly new division. We centralized -- we divisionalized Central Georgia. And so we have expanded the footprint, again, in the drive for additional scale. So it's just -- it's kind of a timing thing.

No, totally makes sense. I appreciate the response. And secondly, understanding that you're not providing full year guidance, but if there's anything you all could share with us on areas where you may have a little more visibility like your thoughts on your perhaps pace or cadence of community counts and how you're looking at kind of hopping on the previous question, incentives kind of within the guide and just kind of more broadly going forward would be helpful.

Sure. Yes, we don't like to give full year now. I mean maybe as we wrap up the second quarter and we're kind of halfway through the year, we will give some more clarity in this. Not like we don't have our internal targets. It's just given the environment, we just don't think it's prudent to provide any full year guidance. I mean, again, especially when it comes to margin or income, I mean, that's -- it's such a wildcard. We're going to continue to push pace. We feel pretty good, especially coming off of March and the quarter. I mean we had a really good beat, exceeded our internal expectations on sales.

That's a reflection of us doing some additional price discovery in our communities, really driving our sales folks, credit to them in the field for really pushing on pace. And so it turned out to be a good quarter in sales, which obviously, the increase in backlog, it's going to set us up for -- hopefully, it starts to set us up for a good back half of the year in terms of closings.

I think I mentioned on the last call, we were expecting anywhere from 10% to 20% in community count growth for the year. And so you can kind of translate that into what you might expect or as you run your model, what you might expect for closings. But clearly, we're focused on growing closings year-over-year. So we've got some pretty good internal targets, but you can kind of back into the numbers based on what I just told you.

Your next question comes from the line of Trevor Allinson with Wolfe Research.

First one is on your expectation for vertical costs going forward. Obviously, oil prices up, quite a bit of fuel prices up, some building products materials have seen price increase announcements. So what are you expecting for vertical costs going forward? And then in terms of some of these price increase announcements from the manufacturers, are you currently taking on any of those price increases? Or have you been able to successfully push back against those?

Yes. Thanks for the question. We've been pretty successful in pushing a lot of those increases off. We're -- our costs are down year-over-year. We know that if this fuel situation stays higher for longer, we're going to get hit with fuel surcharges and some of those things. But we show up diligent every day to work on our cost and our efficiency. So we'll continue to do that.

And the market is not allowing us price, and that message is going through to our trade and our suppliers to say, look, we don't have ability to take price, and so we can't pass that through. So we're holding a pretty tough line on that.

Okay. Makes sense. I appreciate that color. And then on your lot portfolio, I mean, clearly, the majority of your lots are held off balance sheet. Can you talk about what portion of those lots are held by land banks and then shed any light on the structure of your land bank agreements perhaps in terms of deposit rates, option maintenance fees as well as your ability to potentially walk away from deals that no longer pencil?

Sure. So of the total portfolio, we have about 30% of our lots under option are with land bankers. Then there's about 40% of our lots under option are with developers. And so they're 70%. And then the balance, the other 30% are still deals that are with the underlying land seller. So where we have a contract that we may be in various stages of due diligence, but we control it with varying deposits. And usually, those are pretty small. But just from a land bank perspective and a structure perspective, so we are pretty much on average, it's about a 10% deposit that we have with the land bankers.

And then there's typically like a walkaway fee that if you bust out of the option, then you pay another 10% walkaway fee, and that -- we disclosed that in our financials. But we don't -- on all of our new land bank deals, we do not cross-collateralize. We have some finished lot bank where we'll stick some lots when we have some bulky takedowns on active communities that we will put into a finished lot bank, and we may, within a division, cross-collateralize. But honestly, it's -- that's -- we don't view that as any real issue. So it's pretty simple the way we think about it.

Your next question comes from the line of Ryan Gilbert with BTIG.

On the 2Q '26 margin guidance, can you talk about how much of the step down is from higher incentives in the quarter versus higher lot costs or if there's anything else that we should call out?

It's -- we're assuming the incentives are probably about flat sequentially, maybe up or down 10, 20 basis points. We're still seeing the same -- and it's been pretty consistent. We're seeing the same percentage of forwards, the use of forwards. So that's probably pretty consistent. But then it's really -- I think there's a little step down in ASP.

That again is probably coming from the forwards. But it's lot costs. Again, I think lot costs, you're going to continue to see that trend year-over-year where that's about 300 basis points up. So it's -- lot cost is driving it. And then part of the variable in there is how much -- to the earlier question, what Greg said, how much are we able to hold on vertical costs. Right now, we've done a pretty good job year-over-year. The average sticks and bricks costs are down a bit, but there's some variability there.

Okay. Got it. And can you update us on what you're seeing in terms of, I guess, spot land prices for the deals that you're signing up today? And then if you're getting any relief on pricing, how long that would take to flow through into your income statement?

Yes. We're -- it's starting to turn. I think we've been mentioning this for the last couple of quarters. We're definitely seeing land prices start to moderate. We're starting to feel like we have more negotiating power, right, starting to flip from a seller's market to a buyer's market. And that obviously, any new deals that we put under contract in the typical fashion, excluding where we can pick up some finished lots from others that have walked, but it takes 18 months to flow through typically, right, because you've got development for a year and then you've got several months of vertical construction. So it takes some time.

So we don't expect the increase in lot cost to moderate for at least a couple of years, right, at any material level. And we -- when we went public, we knew we were guiding everybody. I mean, lot costs were going up just because we knew what we were doing deals at. But now you're starting to see that reverse a little bit. But that's also as we talked about on our call and our pace over price philosophy, that's why it's really important for us to continue to move inventory through the pipeline so that we don't get gummed up with these lots. We can continue to move it through the pipeline so we can start taking advantage of a reset in land basis, land prices. And so that's kind of how we're thinking about it.

Got it. Makes sense. Just one more...

One last thing there, and Joe just pointed it out, and he's right, like this is part of the reason why we think it's a reasonable opportunity to enter some of these new markets. Because we're able to start fresh and take advantage of some of these reset bases. So...

Got it. Yes, that makes sense. Yes, just one more for me. It seems like you and the other publics and I guess the industry overall based on the starts number earlier this morning, it seems like there's a reacceleration in starts. I'm just wondering how inventory looks in your markets and if you're seeing any impact from, I guess, the recent increase in starts volume?

There hasn't been anything that we've seen materially different that we're hearing from our divisions. I know some of the builders, I mean, I think when you look year-over-year, a lot of the publics spec counts are down. They may be starting, and that could just be relative to maybe some better -- slightly better sales. I mean we had better sales than expected in this first quarter. We were up pretty good. So obviously, our starts are going to be up. But no, from an overall pure inventory standpoint, not seeing any real impact there.

Your next question comes from the line of Natalie Kulasekere from Zelman & Associate.

So could you talk a little bit about how your incentives trended as the quarter progressed? I know you said it was 730 basis points for the whole quarter on average, but I'm just wondering if March was higher than January and February and if you had to kind of push incentives to achieve that pace of for sales per community?

Yes. And I don't have the exact numbers in front of me. And keep in mind, the 730 basis points, that's incentives and discounts that would have mostly come through in Q3, Q4 of last year that are hitting the books. And then from incentives on sales through the quarter, yes, I would just generally say that as we ramped up our pace and pushed for a little bit more price discovery, we probably saw it up a little bit. But honestly, we were -- I think we were pleasantly surprised that it didn't -- it wasn't a huge hit. But it does show that there is some price elasticity. It does -- you can see it ties into increase in volume. So...

All right. And what share of your closings this quarter were driven by spec sales? And where are you in terms of getting to a more presale heavy business?

Yes. I mean that -- presales is a huge driver or a huge focus of ours because traditionally, you're going to make more money on presales. And because of our business model, we really focus on personalization and choice for our buyer, and we have a quick turn from a cycle time perspective. So really for us, we're trying to drive that message to the divisions -- and because we do think that ultimately, that's going to help drive higher margins, but it also gives our buyers a different buying experience than when you go to some other entry-level builders that are more, "hey, you get a vanilla, chocolate, strawberry" type of choice.

But we've been averaging -- it's probably still 40, 60 presale versus spec every week. But more importantly, we're getting the contract. We saw an uptick in getting a sale on a spec home before it hits what we call line in the sand, so kind of before it hits drywall stage. So that's really, today, very important because we're still using forward commitments, incentives. And to put an interest rate lock out there for more than 60 days is almost cost prohibitive.

So the incentives are still a big driver for some of these buyers in figuring out payment. So even if we have those starts, as long as we're within kind of 60 days and they can get some choice before we hit drywall stage, getting that sale before drywall stage is important. So we're doing a pretty good job there. I'd say we're probably 70%, 80% before drywall stage has got a sale and our spec inventory has been coming down. So it's still a battle, but that's our focus is driving more presale going forward.

Your next question comes from the line of Rafe Jadrosich from Bank of America.

Just can you -- I know you walked through it a little bit, just the gross margin, it's good to see the backlog sort of stabilize and step up here. The gross margin sequentially flat quarter-over-quarter in 1Q, like just can you help me just understand the accrual call out that you had there and bridge like maybe on a like-for-like basis, 1Q to 2Q?

Yes. So if you -- so we had 170 basis points roughly of a benefit because we reversed some land development accruals on closeout communities. So these were several communities that closed out in kind of Q3, Q4. And so our internal policy is we keep -- we start to ratchet down accruals over 3 to 6 months just in case there's any stragglers or any costs out there once we close a community. And so that was 170 basis points to margin.

So basically, if you just look operationally, take our margin for the quarter, back out 170 basis points, and that's kind of where you would start with your gross margin, to take out the noise. We had a little bit of impairment in there. So strip that out. I think that was 30 -- I don't know how many basis points that accounted for...

70.

70 basis points. So there was 70 basis points of impairment that was a negative impact to margin. Again, you want to strip that out. So when you see our filing, you'll be able -- and I think it's in the notes, it's in the back half of the press release. But when you look at the adjusted margins, you'll be able to see some of that stuff.

So that's why when you strip out all the noise, I think sequentially, we're basically calling for about a 50 basis point decline in margin from Q1 to Q2. And again, there was a lot there, but we can walk through any detail if it's -- once you see the numbers, it's -- you have any confusion?

Okay. That actually -- that's very helpful and makes sense. And that's the sequential from 1Q to 2Q, that you still have land inflation, but incentives sort of flattish and that's getting to it.

That's right. Yes.

Okay. And then on the SG&A side, you said it was really interesting. And obviously, the dollars have stepped up here and continue to grow, but you're expanding communities. You're also moving into new markets. Of the markets that you operate in today, what would you consider to be like at scale versus what you're still trying to get the scale up and are sort of below where you'd expect it to be longer term?

Yes. Thanks, Rob. I'll take that. We're in still infancy, I would say, in Greenville. -- the same in Dallas, Fort Worth, Gulf Coast. And we're kind of over that hump in Chattanooga, made a lot of growth strides there in the last year. And then Central Georgia would be another that we're still building scale in. It's just kind of a spin-off of Atlanta, but without any real community count as we spun that off. So those are, again, not the scale would be Central Georgia, Greenville, Dallas, Fort Worth and Gulf Coast.

Yes. And the only -- what I'd add to that as well is while we have -- we always are targeting a minimum of 2, what we call R-teams, and that's roughly 208 starts per our team. We want to have a minimum 2 R-teams in every division. And so we're not quite there in a couple of our legacy divisions like Charlotte, it's Nashville, we're not there yet. So at a minimum, we want to get there. And then that's just the minimum, but we really feel like in some of those legacy divisions, we should be closer to 3 R-teams, 600 closings specifically Raleigh.

I do think Charlotte can get there, 600 plus. We're not there yet. Nashville should be 400 plus. And then obviously, Atlanta and Houston right now are too big from a permit count, right, 2 of the largest markets that we're in. Atlanta, because we peeled out Chattanooga, which was really kind of North, Georgia, pulled back a little bit. But again, Atlanta proper should be close to 1,000 units on a run rate. And then Houston for us, we entered that.

We're making a lot of good strides in getting them what I would say is like Smith Douglas-ized from a turns and they've been great. But we're only doing 400 plus or minus closings there. I mean that should be double, right? Within 5 years, we need to -- I mean, that's such a big market. We've had some headwinds, but that should be double. And then what's really shining for us is our Alabama division. They're at pretty good scale between Birmingham and Huntsville, kind of plus or minus 600. So we've got some work to do in scaling up some of the legacy divisions. But like Greg said, a lot of these new ones are just getting going. But that's why you see the G&A, right? When you look at the G&A relative to the community count increase, right, our community count was up 24% and our G&A was only up $2.9 million on a gross dollar basis. So to me, that's pretty efficient.

Your next question comes from the line of Jay McCanless from Citizens Bank.

First question I had, we've seen some articles in the mainstream press about affordability being even worse than some of the larger cities now, which is forcing some migration out. So I guess my question is, are you guys seeing better demand in your smaller markets, whether it's absorption, traffic, however you want to measure it versus maybe some of the larger markets like Raleigh and Atlanta?

Yes. Look, Alabama has done really well. And I would consider that relative, obviously, Birmingham, Huntsville relative to Houston, for instance, yes, we've seen some better demand trends. And again, Texas is its own animal. So yes, I think it's also just -- we're so used to in the Alabama markets. They didn't have the kind of spike up post-COVID. I mean it was good, but it wasn't like you had some of these other markets. So it's -- I almost feel like we're just used to hand-to-hand combat there, and it's just the way we operate.

So yes, we saw some better demand there. But it's -- outside of that, like there's nothing that I would say really sticks out with our footprint. I think we're in some pretty good markets kind of in the Southeast and Central U.S., which is -- that's by design. But nothing really that I can say sticks out. I don't know, Greg, if you...

The only thing, Jay, I'll add to that is the in-migration in some of the bigger metro locations we're in is down. I mean that's been a lot. And so you feel that a little more and some of those smaller markets are not as sensitive to that.

Got it. Okay. And then the second question I had, ARMs, are you guys still trying to push on those? Is that still having good success with customers? And maybe what your ARM percentage was this quarter?

Yes. We shifted really towards the end of the quarter and into April, we moved from a 4.99% incentive that we're kind of marketing across the footprint, a 30-year fixed. We moved to -- just to change it up a little bit and the costs were kind of almost in line. We moved to a 3.99%, 5/1 ARM towards the end of the quarter and really into April. And if you go to our website, I think that's what you'll see at the top of the page.

So we're offering -- we're really -- we're still offering both. We're marketing the 3.99% and a lot of that is -- a lot of it really is -- it's more a traffic driver, but it's also designed to give our salespeople as much flexibility, right, when -- because with a 3.99%, 5/1 ARM, the buyers can qualify off of that payment that calculates off the 3.99%.

So for our buyer, that's definitely helpful. So we kind of give them some optionality there. But it's -- we're just trying -- seeing what the market is doing, trying to at least compete at that level and give buyers as much affordable options as possible.

And we're seeing more usage of the 4.99%.

Yes. 4.99%, the 30-year fixed 4.99% is probably taken the most of the incentive.

We have reached the end of the Q&A session. I will now turn the call back to Greg Bennett for closing remarks.

Thank you for joining us on our Q1 results call. I hope everyone has a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning. I would like to welcome everyone to the Smith Douglas Homes Fourth Quarter and Full Year 2025 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to Joe Thomas, Senior Vice President of Accounting and Finance. Please go ahead, sir.

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 and full year 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 home page. 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, and thank you for joining us today as we go over our results for the fourth quarter of 2025 and provide an update on our operations here early in 2026.

Smith Douglas Homes delivered 780 homes in the fourth quarter, resulting in $260 million in revenue. Home closing gross margin came in at 19.9% and net income for the quarter was $17 million or $0.39 per diluted share. For the full year 2025, we delivered 2,908 homes, a record for our company and produced earnings of $1.19 per diluted share.

Despite a difficult demand environment across much of the industry, we were still able to grow deliveries during the year, which we believe reflects the strength of our operating model and the discipline of our teams in the field. Overall, we're pleased with our performance to close out the year as our delivery total and gross margin came in above our previously guided range.

We generated 532 net new orders for the fourth quarter as sales conditions remain choppy to end the year. While maintaining sales pace remains important to us, we chose to remain disciplined in how aggressively we pursued sales during the quarter as the combination of seasonal slowness and aggressive year-end discounting from some competitors created a difficult selling environment. Buyers continue to weigh the benefits of homeownership against their concerns over affordability, which remains a persistent challenge for the buyers despite our leading price points.

Financing incentives remained an important tool in alleviating those concerns and solving for monthly payment to fit our buyers' needs. So far this year, we've seen encouraging uptick in traffic and our order activity relative to fourth quarter's levels and continue to actively manage incentives at community level in order to support the sales pace.

While we are optimistic that this improvement can carry into the spring selling season, demand continues to remain somewhat inconsistent from week to week. As we wait to see how the remainder of the spring selling season unfolds, we continue to fine-tune our operations in each of our markets through our disciplined approach to our business.

Company-wide build times came in at 57 days for the quarter, which includes our Houston division, where we made great strides in implementing our R-team philosophy and aligning the local trades and subcontractors to our streamlined building process. We have significantly improved our cycle times in Houston since entering the market via acquisition in 2023 and view it as proof that our disciplined approach to homebuilding can be replicated in markets outside of the historical Southeastern footprint.

Our long-term goal is to continue to grow volume and gain market share via targeted investment through our footprint and opportunistically in new markets as we believe scale is a key driver of success in this business. We know that our path to higher volumes will not be linear, but instead will reflect the natural ebbs and flows of the housing cycle. As we've discussed before, we operate the business with a long-term mindset focused on maintaining pace and positioning the company for growth through the cycle rather than managing the business around short-term quarterly outcomes. Russ will expand on that philosophy in more detail in his remarks.

Spearheading many of the company's growth initiatives will be Scott Bowles, our new Regional President for the Southeast. Scott has been with the company since 2017 and most recently served as our Atlanta Division President, where he's instrumental in expanding our presence and profitability in this key homebuilding market. We look forward to Scott making a similar impact in his new expanded leadership role.

While near-term conditions remain uncertain, the long-term outlook for housing remains compelling as the United States continues to face a structural housing shortage. Our focus remains on building affordable homes in markets experiencing strong population growth and job creation. Our value proposition includes the level of personalization that many builders do not offer at our price point, combined with the build time that few competitors can match.

We remain disciplined when it comes to land ownership and leverage and believe that, that combination of affordability, operational discipline and a conservative balance sheet positions us well for long-term success. Our strategy remains straightforward, maintain discipline through the cycle, protect our production engine and continue to expand our community base in attractive markets. We believe this approach positions us well to continue to gain market share over time. Finally, I'd like to thank all of our team members for their continued hard work and commitment to our company's goals.

With that, I'll turn the call over to Russ.

Thanks, Greg. I'll highlight 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 $260 million in revenue, a 9% decrease over the year ago period on 780 closings with an average sales price of $334,000. Our home closing gross margin was 19.9% compared to 25.5% in the fourth quarter of 2024. Excluding impairment charges and interest in cost of sales, our adjusted gross margin was 21% for the quarter. Incentives as a percentage of base prices averaged approximately 6.8% during the fourth quarter, up roughly 70 basis points sequentially, reflecting our efforts to maintain sales pace in a challenging affordability environment.

SG&A expense for the quarter was $36 million or approximately 13.8% of revenue compared to 14.9% of revenue in the fourth quarter of '24.

Pretax income for the quarter was $16.9 million compared to $30 million in the prior year period, reflecting the impact of increased incentives and closing cost assistance used to support affordability and maintain sales pace in a softer demand environment.

Net income for the quarter was $17 million. Given the nature of our Up-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Home score and the noncontrolling interest of Smith Douglas Holdings LLC. Because a significant portion of our earnings is attributable to LLC members 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 24.6% blended federal and state effective tax rate as if we operate it as a fully public C corporation.

Adjusted net income was $12.8 million for the fourth quarter compared to $22.7 million in the same period last year. For the full year 2025, we delivered 2,908 homes, representing a 1% increase over 2024 and marking another record year for closings for the company. Revenue for the year was $971 million, essentially flat with the prior year as the modest increase in closings was offset by a lower average sales price of $334,000 compared to $340,000 in 2024.

Home closing gross margin for the year was 21.8% compared to 26.2% in 2024. Excluding impairment charges and interest and cost of sales, our adjusted gross margin was 22.3%. The margin compression year-over-year was primarily driven by increased incentives and closing cost assistance used to support affordability and maintain sales pace in what has been a challenging housing environment over roughly the past 18 months.

SG&A expense for the year was $139.8 million or approximately 14.4% of revenue compared to 14% in 2024. Pretax income for the year was $70.9 million compared to $116.9 million in 2024 and adjusted net income was $53.5 million compared to $88.1 million in the prior year.

Importantly, despite the difficult demand environment across the housing sector, we were able to grow closings during the year, while many builders across the industry experienced declining volumes. We believe this reflects the strength of our operating model and our ability to maintain sales pace while continuing to expand our community base.

Net new home orders for the year were 2,726 homes, a 3% increase compared to 2024 with an average order price of $333,000. We ended the year with 512 homes in backlog with an average sales price of $337,000, representing a backlog value of approximately $173 million. Our active community count increased 28% to 100 communities compared to 78 communities at the end of 2024, reflecting continued expansion across our footprint.

Total controlled lots increased 14% to approximately 22,300 lots, with the vast majority control through option contracts consistent with our land-light strategy, which provides flexibility while allowing us to grow in our attractive southern markets.

Turning to the balance sheet. We ended the year with $12.7 million in cash and $44.1 million of notes payable. Total equity was $444 million, and our debt-to-book capitalization was 9%. On a net basis, net debt to net book capitalization was 6.6%, reflecting our continued conservative approach to leverage and maintaining a strong balance sheet as we continue to grow the platform.

Before discussing guidance, I'd like to spend a moment discussing our pace over price operating philosophy, which is a central part of how we manage the business through the housing cycle. Our production model is designed to operate at a steady, consistent pace with relatively short construction cycle times and strong presale orientation. That production engine is the core of our operating model and protecting that engine is what ultimately drives long-term value creation.

Homebuilding is inherently cyclical, and during periods of weaker demand, we believe the right strategy is to prioritize absorption and inventory turns rather than maximizing price in the short term. In practical terms, that means we may intentionally accept some margin compression during downturns in order to maintain sales velocity and keep homes moving through the pipeline.

Maintaining volume stability allows us to preserve market share, convert inventory and continue investing in future communities and land opportunities as land prices reset. Importantly, this is not about managing the business for a single quarter, we are managing the company for full cycle value creation. When the cycle eventually improves, the ability to maintain volume and continue investing during the downturn often leads to stronger margins and higher cumulative earnings over time.

From an operational standpoint, our current environment is not constrained by production capacity. Our construction engine is operating near optimal levels. The primary challenge today is aligning sales absorption with that production capacity, which is why maintaining pace remains a priority. Because of that dynamic, we continue to evaluate pricing and incentives week-to-week at the community level, and incentives remain an important tool to support affordability and ensure we maintain the sales pace necessary to keep our production engine operating efficiently. The bottom line is that we are protecting the production engine because that is what compounds value over the housing cycle.

While demand conditions remain variable week-to-week, the early year improvement in absorption is a positive signal as we move into the spring selling season. At the same time, we continue to evaluate pricing and incentives carefully across our communities, and we'll adjust them as needed to maintain a pace supportive of our operating model.

From a broader macro perspective, the housing market has been operating in what we would characterize as a recessionary environment for roughly the past 18 months, primarily driven by affordability pressures and higher mortgage rates. Looking ahead, the macroeconomic environment remains uncertain. Recent economic data has shown mixed signals and geopolitical developments continue to create volatility across global markets.

We are also monitoring labor market trends closely, including last week's employment report, which showed some signs of job softness. While the labor market remains generally healthy, employment trends are an important driver of housing demand and something we will continue to watch carefully.

Finally, given the recent performance of our stock, we believe the current valuation presents an opportunity to opportunistically repurchase shares under our existing buyback authorization. With that said, I want to reiterate that our capital allocation priorities remain unchanged. We will continue to prioritize investing in our land pipeline and community growth while maintaining a conservative balance sheet. However, when market conditions allow, and we believe our shares are trading below intrinsic value, share repurchases can represent an attractive and disciplined use of capital.

For the first quarter of 2026, we currently expect closings between 575 and 625 homes, average sales price between $330,000 and $335,000 and gross margin between 17.5% and 18%. Given the continued variability in demand conditions, we are not providing full year guidance at this time. We believe the primary risk to our outlook remain tied to broader macroeconomic conditions, including mortgage rates, consumer confidence and employment trends. We are confident that our competitively priced product portfolio land-light approach, efficient operational framework and growing community footprint will enable us to further increase our market share in the future.

I'd now like to turn the call over to the operator for instructions on Q&A.

[Operator Instructions] And your first question comes from the line of Michael Rehaut with JPMorgan.

This is actually Nick Kalra on for Michael. First, I would love to get any color that you might be able to provide on sales pace as well as pricing and incentives, trends translating to both of those factors so far in 1Q to the extent that you can, that would be great.

Sure. It really followed traditional seasonal patterns. So January, a little bit slower, picked up in February and the last couple of weeks here to begin in the month of March trended even a little bit higher. So trending in the right direction. Our community count is up pretty good year-over-year. We were up roughly 28% year-over-year. On a per community basis, it's slightly down year-over-year, but some of that is just also the way we count communities. So we've got -- I don't have the exact number, but we've got several communities in that 100 community count number that don't yet have full models and we're preselling.

So I wouldn't necessarily look or consider so much kind of the absorption pace year-over-year. I think it still feels pretty good, even though the absolute numbers may look a little flattish or even down on a pace. But again, like I said, that's more about I think just the way we're counting communities a little bit. But yes, the trends so far for spring selling season have continued to move up. And -- but like we said in the prepared remarks, it's inconsistent. We don't see enough of weekly trends yet to say, hey, things are great. But so far, so good.

All right. That's helpful. And then secondly, I would like to -- would you call out any trends, any areas of relative strengths and weaknesses across any of your major markets? Any color there would be helpful.

Yes. I think there's a lot of similarities in our markets. And they all seem to be pacing. And as Russ spoke to, our trending on seasonality seems to be pretty consistent across all those markets. We've got some new markets just starting off. But as you said, we've got models that are not yet open that we're counting a number of communities in that we're hopeful once models are open, those markets will be at the same pace as well.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

Just to follow up on the 1Q dynamics. I mean you talked about maybe stepping back from some of the aggressive behavior in fourth quarter. But based on your margin guide for 1Q, it seems like you may have then leaned back in and hence the conversation about your prioritization of price. But can you just talk a little bit more about what's driving the decisions there? Like what's driving you to lean back into incentives? And can you characterize relative to the 6.8% that was in the 4Q closings, you're guiding to a meaningful step down in gross margins in 1Q. What is the assumed incentive load? And what are the other moving pieces around land costs and other dynamics?

Yes. Thanks for the question. So remember, a lot of what we were selling in Q4 is going to close in Q1. So we leaned a lot heavier into incentives in 4Q. With some of the uptick that we're seeing in traffic and it's -- and again, don't get me wrong. I mean, it's -- we are seeing an uptick sequentially, but it's the traditional spring selling season that we've hit. So it's a good trend, right? It's moving in the right direction. And -- but we continue to monitor it on a division-by-division and community-by-community basis. And so we're looking where we can maximize some margins, pull back on incentives. But then again, we're not going to sacrifice pace. And so as long as we continue to get the pace, then we'll -- that's going to be our -- where we decide to moderate incentives.

And so yes, we're looking probably sequentially at about 100, 150 basis points just in the closings. But again, it's -- and when you look at what we're doing from an incentives on sales, I think it's -- we're seeing a similar trend from Q4 to Q1 and kind of the incentives. But the one thing I would add is forward commitments, the cost of forwards has come down with the rate environment. So that's good, and that will help us a bit. But we're also looking at just reducing or discounting base prices to get an attractive number out there.

For us, it's definitely about payment. We are seeing with our new communities coming online, that the average sales prices are coming down. And so that's -- we're also looking at bringing some smaller product online. And so that's also impacting a bit of the sales price and margins. But at the end of the day, we are focused on getting a pace.

And as Greg and I mentioned on the prepared remarks, operationally, things are running very smoothly. We want to keep our trades busy. That's -- we think that's a competitive advantage, keeping pace, keeping trades busy. But in order for us to keep building, we've got to keep selling. And so again, we're going to continue to monitor it from an incentive, whatever we can do to keep that pace. And we really want to get back to a presale orientation.

This market has been really very spec heavy. That reflects a lot of what our competitors are doing. We're still not seeing resale competition come back in any meaningful way. Traditionally, resales are always our biggest competitor, but that's not the case. But yes, so we're -- it's still hand-to-hand combat. Hopefully, that gives you a little bit of color.

Yes, that's helpful, Russ. I guess one more clarification and then a cleanup question. Just on the -- since you're -- it seems like you may draw a distinction between the base price reductions and the incentives. Can you just clarify the 6.8% and then going up 150 basis points, is that inclusive of both price reductions and financial incentives? Or is that just the -- okay. And then the...

Yes, that includes everything. Yes, so just to be clear, what we're counting in that 6.8% is closing cost incentive, price discounts and forward commitment costs. And so forward commitment costs and price discounts are contra revenue. So they show as an offset to revenue. Closing costs are sitting in cost of sales, but we add those up to give you a 6.8% number.

Okay. Good. The cleanup question I had, SG&A, was there anything unusual in the quarter? Because you have been -- your revenues are running down. Your SG&A as a percentage of revenues in most recent quarter has been running up year-on-year. So it was a little surprising to see like a year-on-year decline in percentage of sales. Was there anything kind of onetime in nature around true-ups or things like that?

Yes. The biggest driver -- we fully expect to continue to get SG&A leverage. And obviously, that's part of pushing scale. But right now, we've got a few things pushing SG&A higher where we're not getting the kind of a matching revenue. So when we've opened up our new division, so we've got G&A, SG&A costs coming through in Dallas-Fort Worth. Greenville is still getting off the ground. We opened up Gulf Coast, and then we've divisionalized a couple of -- we took Atlanta. Atlanta was getting too big. And so we've divisionalized Chattanooga out of the Atlanta division. And then about 18 months ago, we divisionalized Middle Georgia. So we've got a little bit more G&A, SG&A running through the business as we've continued to expand the footprint that once we get up and running at full capacity in those divisions, we should start to see better overhead leverage.

Your next question comes from the line of Rafe Jadrosich with Bank of America.

Just following up on the last question that Mike asked. The SG&A dollars on a year-over-year basis are down, I think it's $7 million year-over-year, and there was like quite a bit of leverage. Just is there like an incentive comp that came down in the fourth quarter that then -- that we should be thinking about reversing as we look at '26? Just wondering if there's any -- because obviously, I understand the things that are driving it up, but there was a lot of leverage in the fourth quarter. I'm just wondering what drove that?

Yes. Yes. No, you hit it on the head. You're hitting a very good pain point for us. We more than -- in prior year, we more than hit target on bonuses. So our incentive compensation was higher in the prior year. And then this year, we did not hit target. So it was about half of what our target incentive comp. So that's a good point. I think kind of to Mike's -- and I probably didn't address it 100% accurately. But yes, we had some incentive comp come down. But then the offset to that was the new divisions that were not fully operational.

Okay. That helps. And then in terms of -- in the past, you've given some really helpful color on what you're seeing in terms of land inflation, like what you expect to be flowing through the P&L. Can you just help us like how we should think about '26? And then for land that you're contracting today, are you starting to see like sort of relief or prices to come down or stabilize? And like when will that start to be maybe a tailwind to the margins?

Yes. We're definitely seeing land costs increase in '26 from what we expect in our budget and closing. Now again, that's because we're closing on stuff that's got a basis that -- and acquisitions that we've had over the last 2, 3 years, right? So you still got some higher costs flowing through there. That said, any deals -- and again, we look at this on a deal-by-deal basis. We look at our takedowns. We go back to developer partners where we can and try and renegotiate because, look, it's -- no doubt, when we did some of these deals, the market was different. I think our developers understand that. And so in some cases, we are able to renegotiate. So we are seeing more of that happen. Joe is going to kind of look at the cost, but giving you maybe a specific number on what we think land cost as a percentage of revenue will look like in '26, but it will be up slightly.

And then just on new deals, new acquisitions that we're seeing, we're definitely seeing a reset happen. We'd love it to happen faster, and we love it to happen at deeper discounts, but folks are getting more realistic. So we are starting to see a reset. And again, that's why we talk about continuing to push pace because if we're not outselling and moving inventory, well, then we're not outbuying and we're not going to be taking advantage of the price reset, right? So that's why we think it's really important to continue to push pace through this cycle because it will -- we'll continue to keep our market share, not to mention we should expand market share through the downturn. And then when things get better and they will get better through the cycle, when we come out the other side, we'll have increased that market share and then we should be to get a benefit for the pricing power that we'll get and the margins coming back out the other side. So it is important for us to continue to work it like an assembly line.

Your next question comes from the line of Ryan Gilbert with BTIG.

Just -- yes, first question, just given the comments around staying disciplined in the face of some pretty heavy discounting in 4Q, I'm wondering how your spec count looked throughout the quarter, how you exited the quarter in terms of specs? And then I guess, what specs look like -- how specs -- what the spec count looks like heading into 1Q '26 and how you're thinking about it this spring?

Yes. So ideally, we'd love to have everything under construction presold, right? That's what we want to get back to. And the reason for it is having a presale orientation really gets you a higher value on those homes from your buyers, right? Because when those buyers select to go via presale, they're putting in options that they want. We're not having to discount as much. And so we're trying to push more presales. That said, given the environment, specs are probably running about half of our current inventory. But that's okay. The biggest thing is even though we count it as a spec, we're putting those under contract. We're not getting a ton that are going past completion or certainly past 30 days completion, and we're really pushing to get those sold before what we call line in the sand or when we -- pretty much drywall stage.

So -- but again, that goes back to the fact that we really run it more like an assembly line, like production is our -- production is the most important where we keep that running. And so we're trying to match sales pace with that production and just keep it moving. So we've got the -- as we look forward to 2026, so even though our backlog and presales are down, not where we want them, our inventory is right where we need them to be. And so production, even though we'd like a higher percentage of presale, we've got to keep that machine going to hit some of the growth targets that we expect in 2026. So a little elevated, but we continue to chop away at that presale versus spec balance.

Okay. Got it. Then just secondly, would love to get an update on your strategy around land in terms of preference for finished lot purchase agreements versus land banking and how pricing looks in both of those categories?

Yes. So thanks for the question. We are almost always first looking to do lot, finished lot takedown. Those opportunities are still out there. Secondly, we'll go to our land bank partners and structure the deals in an array of different manners. But I would think if we look to land and to add a little color to some of Russ's earlier comments, we're seeing softening and opportunities in some of the A, B locations that historically for affordability, maybe we didn't get opportunities there or they just didn't solve for our price points. And then the C, D type locations are -- they're getting shopped around a lot because there's not a lot of demand in those locations. So we're focused on better locations, focused on terms and then where we need to engage our land bank partners.

That concludes our question-and-answer session. I will now turn the call over to Greg Bennett, CEO, for closing remarks.

Thanks, everyone, for joining our call today as we discuss our Q4 results. Hope everyone has a great day.

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

Good morning, and welcome to the Smith Douglas Homes Third Quarter 2025 Earnings Call and Webcast. [Operator Instructions]. As a reminder, this conference call is being recorded.

I would now like to turn the call over to Joe Thomas, Senior Vice President, Accounting and Finance. Thank you. Please go ahead, sir.

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 third 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 home page. Please note, this call will be simultaneously webcast on the Investor Relations section of our website.

Before this 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.

Thanks, Joe, and good morning to everyone on the call today. In the third quarter of 2025, Smith Douglas Homes continued to execute on its long-term strategic plan of being the builder of choice for homebuyers in key markets throughout the South.

Our operating philosophy is straightforward, but hard to replicate, thanks to our operating discipline and culture. We focus on providing our customers with quality homes at affordable price while maintaining tight cost controls and leading cycle times. We also avoid much of the risk associated with homebuilding by controlling most of our lots and land through option agreements and by sustaining a strong balance sheet. These are key elements of Smith Douglas strategy, and we believe they lead to superior shareholder returns over the long term.

For the third quarter of 2025, we generated pretax income of $17.2 million and earnings of $0.24 per share. Home sales revenue came in at $262 million on home closings of 788 and an average selling price of $333,000.

Gross margins on homes closed averaged 21% for the quarter. These results were largely in line with our previous guidance and demonstrates our ability to accurately forecast and execute on our stated objectives.

Net orders for the quarter increased 15% year-over-year to 690 homes on a sales pace of 2.4 homes per community per month. Despite some tailwinds with mortgage rates trending down in the quarter, overall, demand stayed soft, which we believe is an indication that the buyer psyche and consumer confidence are the main headwinds facing our industry.

Financing incentives remain an important sales tool in getting buyers to move forward and purchase. And we expect this to continue into the fourth quarter. We continue to emphasize our approach of pace over price as we believe our operations run more efficiently at or near full capacity. We made further progress establishing a foothold in our new markets in the third quarter.

We began vertical construction on homes in Greenville market, started generating interest list for our communities in Dallas market and expect Gulf Coast market to be up and running in the middle of next year. These markets fit nicely into our business model and will be key contributors to our volume goals in the coming years.

Cycle times in the third quarter were consistent with the second quarter at 54 days, excluding our Houston division. The efficiency of our operations is a key differentiator for our company, and it is a discipline we practice every day. It is a system senior management has developed and refined over decades in the homebuilding business and one that requires the coordination of our employees, suppliers and trade partners.

Overall, I'm pleased with how our company has performed in the third quarter and believe we made further progress towards becoming a large-scale builder in the Southeast and Southern United States.

Our balance sheet is in great shape, and we have several new communities slated to open in the coming months that should give our sales efforts a boost as we head into our spring selling season.

Finally, I would like to thank our team members for their continued hard work. Homebuilding is a very competitive business, particularly in uncertain times like the ones we're in today, and you've shown a willingness to go the extra mile for our homebuyers and our company's success. I truly appreciate all that you've done to make Smith Douglas a leading builder.

With that, I'd like to turn the call over to Russ, who will provide more detail on our results for this quarter and give an update on our outlook for fourth quarter.

Thanks, Greg. I'll now walk through our financial results for the third quarter and then provide an update on our outlook for the balance of the year.

We closed 788 homes during the third quarter, down 3% from 812 closings in the same quarter last year. Home closing revenue was $262 million, a 6% decrease from $277.8 million in the prior year. Our average sales price was approximately $333,000, down 2.6% year-over-year due to slightly higher discounts and shifts in geographic mix.

Gross margin came in at 21%, which was at the midpoint of our guidance range and compares to 26.5% in the prior year. Our lower year-over-year margin reflects the impact of higher average lot costs, which were 27.8% of revenue in the current quarter versus 24.8% in the year ago period. Additionally, rising incentives and promotional activity further compressed margins.

Closing cost incentives, which are included in cost of sales totaled approximately $9,500 per closing, up from $6,600 in the year ago period and pricing discounts were 1.8% of revenue, up from 1.2% last year. We utilized forward commitment programs to buy down interest rates, which we believe help boost conversion rates.

During the quarter, we recognized $3.9 million in costs on forward commitments, which is recorded as an offset to revenue versus $185,000 in the year ago period and $0.9 million in the second quarter this year. We expect to continue to utilize these rate buydowns through the end of this year to drive sales velocity as we remain committed to our pace over price philosophy.

SG&A was up approximately $2 million versus prior year and was 13.8% of revenue compared to 12.3% last year, driven primarily by lower revenue this quarter and increased payroll and associated expenses with a sizable portion of the increase coming from the opening of our new divisions.

Net income for the quarter was $16.2 million compared to $37.8 million in the prior year, and pretax income was $17.2 million versus $39.6 million. Our pretax income this period includes a $1.6 million charge related to the abandonment of a lot option deal with a land seller, which is included in other income and expense.

Adjusted net income was $13 million compared to $29.9 million in the prior year. As a reminder, given the nature of our Up-C organizational structure, our reported net income reflects an effective tax rate of 5.9% this quarter, which is attributable to the approximate 17.5% 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 noncontrolling interest on our income statement, we provide adjusted net income, which assumes 100% public ownership and a 24.6% blended federal and state effective tax rate.

We believe this measure is helpful in evaluating our results relative to peers with more traditional C corporation structures. Additional details on our structure and related income tax treatment can be found in the footnotes to our financial statements.

Turning to the balance sheet. We ended the quarter with $14.8 million in cash and had $49 million outstanding on our unsecured revolver with $201 million available to draw. Our debt-to-book capitalization was 11.2%, and our net debt to book capitalization was 8.4%, down 370 basis points sequentially from the second quarter. This improvement reflects our continued discipline in managing leverage and our commitment to maintaining a strong and flexible balance sheet.

In a period marked by persistent macroeconomic uncertainty, we remain focused on fortifying our financial position to ensure we can navigate market volatility and capitalize on strategic opportunities as they arise.

Backlog at the end of the quarter was 760 homes with an average sales price of approximately $340,000 and an expected gross margin of approximately 20%. Monthly sales per community went from 2.5 in July to 2.8 in August and 2.0 per community in September. In October, we saw that average stay constant at 2.0 sales per community.

Turning to our fourth quarter outlook. We expect to close between 725 and 775 homes with an average sales price between $330,000 and $335,000. Gross margin is projected to be in the range of 18.5% to 19.5%. While incentives will continue to pressure margins, we are maintaining discipline in how and where we deploy them.

We ended the third quarter with 98 active communities and expect to see that number remain approximately in line during the fourth quarter. We're actively opening new communities across multiple divisions and remain focused on supporting a stable and scalable growth platform.

Before I conclude, I want to reiterate that while we're pleased with our results through the first 3 quarters of 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 land-light model, steady operations and financial strength position us well to navigate these challenges over the long term.

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

[Operator instructions] Our first question comes from Sam Reid from Wells Fargo.

And also, thanks so much for all the color on the discounts and forward commitment impacts to the top line and margin line. It's very helpful color. In terms of my question, I was just hoping if you could bridge the Q3 to Q4 gross margin and talk through the composition of perhaps incremental price discounting versus forward commitments. It does obviously look like you're planning to close houses below what's in your backlog. So, I would also just be curious in terms of mix of homes you plan to close outside of your backlog during the fourth quarter, too?

Yes. Good question. We continue to push on incentives into year-end really in an effort to keep that pace over price philosophy. I mean, obviously, we're really deliberate about keeping that pace. It's really important for our operating philosophy. We make more, we lose less at full capacity. And so, the assumption is that they continue to drive pace because it's -- as I'm sure you would agree, it's the macro environment is pretty uncertain.

As Greg mentioned, it's really a confidence issue with our buyers. We've been able to solve the rate issue for some time now, but it does seem like it's just becoming a little more difficult to get buyers across the finish line. So, we're going to continue to push on rates. We introduced a really attractive 3.5% fixed rate on some older specs. And so, that's really kind of the assumption. We have seen costs of those forward commitments come down a bit in recent months as rates -- overall rates have come down. But -- so we're just making an assumption that we'll continue to push incentives, and we plan for the worst and hope for the best.

And then -- maybe just switching gears a little bit on 2026. I know you're not providing guidance, but would just love any high-level commentary on directionally where we should be thinking about community count, especially in the context of some -- all the new divisional openings? And then also just some perspective on lot costs, especially as the composition of your geographic mix changes.

Yes, sure. Yes, we -- as I'm sure most other builders -- most companies, it's real difficult to provide any sort of guidance into 2026. I think if we did, it wouldn't be right of us just -- it's so uncertain right now. But that said, given where we've driven our controlled lot count from the time we went public just over 18 months ago, we've nearly tripled our controlled lots.

And you've obviously seen the growth in our community count this year. We ended the quarter with 98, which is up substantially. So, we have the community count next year to kind of drive a pretty good amount of growth. Again, is somewhere in the 10% to 20% growth range in community count? Absolutely, I think we've got the communities. But a lot of that is really just dependent on where the market is, right, and just making sure that those developers and we get those lots delivered on time. But yes, it's not out of the question to see something in a 10% or 20% community count growth.

And then -- but the wildcard is really going to be what's the absorption pace on those communities and ultimately translating into sales and closings. So, I hope that helps.

Our next question comes from Andrew Azzi from JPMorgan.

Backlog conversion is pretty elevated here compared to your own history and likely to remain pretty high next quarter or go higher. I would love to kind of just get some color on how you see that metric trending longer term and any structural factors there that are going on?

Yes. I mean, it's all a function of the current environment where the competition, everybody is -- there's a lot of specs on the ground. That's where a lot of the discounting is taking place. And so, that's part of the reason why we've been leaning into forward commitments from a competitive standpoint and specifically on our spec homes to continue to keep that velocity, or moving through our assembly line process.

So, presales have just been -- it's been a little more difficult to come by from a presale standpoint because when you think those forward commitments -- the most cost-effective forward is, let's say, a 60-day or less rate lock. And so, that's part of the -- part of what's driving just kind of the industry to a more spec-heavy environment. And we are trying to -- we've offered some presale incentives.

So, I think we are offering something though that's pretty unique and trying to move back to more of our presale approach. I mean we are focused -- let's put it this way, we are focused on preselling. It's really the environment that's pushing us more to a little spec heavy. And so, that's why the resulting backlog conversions are higher.

But over the last quarter, we've really had a heavy focus on getting that incentive into presales with the way we're doing lot reservations and such. So, we expect to go back to more presale heavy, certainly as the environment changes. And I think specs become less and less as an industry, I think that's -- our approach has not changed. We are presale focused. It's just the current environment has kind of pushed us a little more to specs from a competitive standpoint.

That makes sense. And then obviously, you've seen a lot of growth in your active communities and controlled lots. Could you provide any detail on kind of the geographic distribution of those and how you're prioritizing market expansion?

Yes. Look, we -- as we stated from the time we went public, I mean, when we enter a market, we want to make sure that we have -- that we enter markets where we can gain scale. And for us, scale is -- we operate in an R-team philosophy, geographic pods. And so each pod or our team has 200 closings. And so, for us, we'd like to, at a minimum, have 400 closings per division. And certainly, in some divisions, we're going to have in excess of that, some of the larger markets like in Atlanta, Houston, Dallas. But at a minimum, we're looking to do at least 2 full R-teams.

So, we are -- we've been prioritizing or really trying to scale up in those markets where we have not yet hit that escape velocity, I'll call it, or that scale. And so, you can look at Charlotte, the Carolinas, Nashville, we're -- those are some of the areas that we've started to focus. And then clearly, we've -- as you know, we've opened a few new divisions. We've divisionalized Central Georgia, so getting Central Georgia, which is really south of I-20 in Atlanta and down to Perry Making that area, really focusing on gaining more scale out of Georgia in those areas.

Chattanooga is we've added quite a few positions in Chattanooga. And then as we announced last quarter, Dallas, is a market that we just entered and Gulf Coast, which right now is Gulf Coast of Alabama. So, those are areas we focus. But clearly, where we can take advantage in markets where we already have that 2 full R-teams, we will continue to try and take some additional market share if the opportunity arises.

Our next question comes from Mike Dahl from RBC.

You've actually got Stephen Mea on for Mike Dahl today. The granular monthly and quarter-to-date demand trend discussion was all super helpful. Looking ahead, I wanted to ask what you all have built into your assumptions for the fourth quarter, more so the extent of how November, December may compare to what you've been seeing in October and how you see the balance of the quarter sort of shaking out against your historical seasonal patterns.

Yes. We haven't really made any different assumptions for the balance of the year. I think it's just that -- it continues to be a difficult environment, but we see a couple of green shoots here and there. So, it's not -- look, it's good, right? It's -- we are -- we've got traffic. Traffic has been decent. Folks are showing up. People still need and want homes. So -- but the conversions, it's just a little bit tougher. That's why we're leaning into the incentives. But we're not making any more -- any additional assumption for an increase in velocity. Maybe we'll get it, maybe we won't. We'll continue to push on incentives and -- but we're getting our fair share. It's just too hard to predict right now. It's kind of on a week-to-week basis.

No, for sure, that's logical. Thanks for the insight there. And I guess, my second question more broadly, I wanted to ask on permit -- some permitting. You've stalked previously about at times seeing pockets of delays at certain municipal levels kind of depending on where it is. I just wanted to see you check in how that's been going for you all today in general across your markets, if there's been any kind of change in that trend, especially given some of the broader enthusiasm around potential relief for housing lately.

Yes. Thanks for the question. I'll take that up. We continue to see challenges and delays in permitting, both on getting final plan approval to start projects and then getting final sign-off on completing projects. And it's pretty widespread. It's across all our markets. I wouldn't say it's in any market more so than another, but we do see it less prevalent in the areas that may be truly outside of the metros that are a little hunger for having some stimulation from housing, but in more of the central metro markets, we're still seeing a lot of delays.

Our next question comes from Rafe Jadrosich from Bank of America.

Could you give us the spec versus build-to-order mix that was in your deliveries? And then maybe what -- like what's in the backlog? And then any color about -- is there a difference in the margin between spec and BTO right now?

Yes. I have to go -- we might have to get back to you on the exact percentage. I don't want to quote you something that's wrong. But I would tell you the -- there was a higher spec count than presale in Q4 from a closings perspective would be my guess. And maybe it's 50-50, but it's probably a little leaning more towards spec. And again, that's -- like I mentioned before, that's just kind of the environment we're in.

As far as backlog, again, I'd have to go back and go and look at exactly what it is. But again, given the size of the backlog, I mean, there's probably heavier presale just sitting in backlog, but maybe not by a wide margin, I think, because most of the specs, if it's sitting in backlog and it was a spec, it's probably only 60 days old at most. So right, and we try to sell just as a matter of process, when we're focused on specs, clearly, if it's a finished spec, we've got a high focus on anything that gets finished without a contract. But even if we start something in our process, we're very focused on getting a contract on that before what we call line in the sand, it's basically drywall.

So, historically, even -- while we're presale focused and historically, we're like 70% presale and 30% spec, when you take into account getting a contract before we hit that line in the sand, we were 90% plus of our homes had a contract on it before that line in the sand. So, it was really heavy, heavy but kind of presale prior to line in the sand. It's just the environment shifted that a bit. But ultimately, the market will change. You're starting to see spec levels come down from other builders, which also is a factor in impacting us as well. But I think that will continue to shift back in our favor over time.

And then with just the community count growth that you're talking about for next year, how do we just think about the SG&A run rate going forward? Should we think about sort of like on a dollar basis, SG&A will grow in line with like community count -- just trying to understand -- like I know there's a new market that you're expanding to. I'm just trying to understand like maybe the puts and takes of that.

Yes. We're in the process of budgeting right now. So, I can't give you an exact answer. All I would say is, clearly, the fixed overhead, we're going to continue to leverage fixed overhead because we have -- everything here is in place, the corporate support team, HR, legal, finance, all those -- that's in place, and we can do a good amount of volume above where we're at. So, that will continue to leverage.

And then obviously, the variable piece of our SG&A, so commissions and community level marketing, things like that, that will move in line more or less with community count and sales starts closings. But I would expect some leverage going into next year.

[Operator instructions] Our next question comes from Paul Przybylski from Wolfe Research.

Thanks for the monthly order cadence. I was wondering if you could add some further color. How did incentives flow monthly through the quarter? And then regarding your forward commitment, how is the spread? Have you maintained that spread to market or widened it or tried to contract it? And then again, with absorptions at 2 in September and October, do you have a minimum absorption pace you're targeting?

Yes. We're -- so I'll take the last one because that's easy. More is that's more absorptions. We're in -- this spring selling season, obviously, is the -- is where we'll get higher absorption pace. But if we could hit 2.5 to 3 in the quarter, that's generally 2.5 to 3.5 would be more reasonable for Q4. So, we are trying to push, as we've mentioned, pace. So, we are looking at trying to push that absorption pace and -- but it's going to come at the expense of margin. And we leaned into the forwards in Q3. So, it's -- the cost did come down for sure.

As rates started to move down, we were a benefactor of cheaper forward commitments. But we also -- at the same time, while the pro rata costs came down, we also pushed higher incentives to try and spur some of that absorption pace. So, anything that we gained, we kind of -- we gave back a little bit because we were really just pushing a stronger incentive, specifically on some of our older specs. We really have a focus on turning and not keeping any aged specs there.

We did have a good week last week in terms, I think absorption pace was up last week, which we didn't -- I don't think I mentioned that in my prepared remarks. So, we saw a little bit of a nice bump. But yes, incentives trended up through the quarter for sure. And we'll see what the balance of the year holds. But like we said, pace over price. That's our philosophy, and we'll continue to use incentives to continue to push that pace.

Okay. And then I guess, as you look at your consumer mix, you got entry-level some downsizers, active adult, however you want to define it. Are you seeing any shifts there? I mean what I'm really asking, I guess, are you seeing any type of hesitation or cancellations with the downsizers or active adults because they just can't sell their home for what they're looking to get out of it?

Yes. We are, for sure, seeing a lot of buyers that -- and we have a resulting number of specs that happen from contingencies that they just don't get over the line. So, there's -- yes, for sure. I've heard the other day for the first time in a long time, new homes were cheaper than resales, and that's making that difficult. So yes, the move-up buyer for us, which is not a big cohort, but that move down buyer is pretty significant. They're still struggling with that challenge.

We have no further questions. I would like to turn the call back over to Greg Bennett for closing remarks.

Thank you, everyone, for joining us today and your interest in Smith Douglas. Hope you have a great day and look forward to visiting after Q4.

This concludes today's conference call. Thank you for your participation. You may now disconnect.