Smith Douglas Homes Corp. Q3 FY2024 earnings call

Key Points

• Smith Douglas reported pretax income of $39.6 million or $0.58 per diluted share in Q3 2024.
• New home deliveries reached a record 812, leading to home closing revenue of $277.8 million, up 41% YOY.
• Home sales gross margin was 26.5%, at the high end of guidance.
• SG&A expenses fell to 12.3% of revenue, demonstrating operating leverage.
• Market demand remains healthy due to lack of existing home inventory, strong local economies, and household formation growth, though there was buyer hesitancy in September-October due to election-related concerns.
• Progress in established markets (Atlanta, Alabama, Carolinas) and expansion into new markets like Greenville, SC, with recent hires and land deals under contract.
• Operational philosophies include land via option agreements, offering affordable quality homes, allowing customization, and streamlining construction for timely deliveries.

In the third quarter of 2024, Smith Douglas Homes achieved solid profitability. Home closing revenue rose 41% year-over-year to $277.8 million, driven by 812 new home deliveries, a record quarter for the company. Home sales gross margin came in at 26.5%, which was at the high end of the guidance range. The revenue contribution from home closings was significant, with the 41% year-over-year increase being a key driver of the overall financial performance.

Fourth Quarter and Full-Year 2024

• Anticipates Q4 home closings to be between 750 and 800 homes, with average sales price between $340,000 and $345,000, and gross margin in the range of 25.2% to 25.7%.
• Projects full-year 2024 home closings to be between 2,780 and 2,830 homes, a 3% increase from prior guidance, with average selling price between $339,000 and $341,000, and gross margin between 26% and 26.5%.

2025 Outlook

• Preliminary projection for 2025 closings is 3,000 to 3,250 homes, assuming 2024 finishes near midpoint of guidance.
• Gross margin target of 25% with a 25 basis point margin of error.
• ASP on homes closed expected to remain relatively flat in 2025, within $335,000 to $345,000.

• Delays in municipalities on permitting and platts.
• Macroeconomic factors such as jobs, inflation, and interest rates which could have unforeseen impacts.
• Impact of administration policies on immigration and tariffs, which are too early to gauge but could affect the industry and costs.

Q: Mike Dahl asked about interpreting the 2025 projections, asking if they assume market status quo or potential improvement.

A: Russell Devendorf responded that the projections are based on current market conditions, not assuming major shifts, and are consistent with what's seen currently, with best guess status quo but noting potential for higher or lower numbers based on market changes.

Q: Michael Rehaut's representative asked about incentive load.

A: Russell Devendorf said incentives are just over 3%, with price adjustments and closing cost incentives, slightly down year-over-year, with price adjustments about half and closing costs more, and it's been relatively flat quarter-over-quarter.

Q: Sam Reid asked about order cadence, especially September-October buyer pullback and November traffic.

A: Greg Bennett stated there was softer traffic and slower conversions in September-October tied to election thoughts, but last week traffic was slightly better than seasonal, with appointments up.

Q: Jay McCanless asked about pricing power and incentives.

A: Russell Devendorf said third quarter saw slower price increases and some base price decreases, incentives were just over 3%, with price adjustments down and closing costs up slightly quarter-over-quarter. Greg Bennett added Chattanooga is already realizing closings with offsetting production.

Q: Rafe Jadrosich asked about margins for Devon Street and Houston and margin projections.

A: Russell Devendorf said Devon Street and Houston had gross margins around 24%-25%, Houston acquisition has gone well but was slower in the back half of 2024, with projected 375-400 closings there this year.

Q: Alex Barron asked about progression to 2025 guidance.

A: Russell Devendorf responded the projections assume status quo, with land and lots under control to hit numbers, risks include market conditions and job growth, and focus on getting communities online and improving cycle times for vertical construction.