Smith Douglas Homes Q2 2026 Earnings Report

Smith Douglas Homes EPS Results

• Actual EPS: $0.03
• Consensus EPS: $0.11
• Beat/Miss: Missed by -$0.08
• One Year Ago EPS: N/A

Smith Douglas Homes Revenue Results

• Actual Revenue: $273.03 million
• Expected Revenue: $258.10 million
• Beat/Miss: Beat by +$14.92 million
• YoY Revenue Growth: N/A

Smith Douglas Homes Announcement Details

• Quarter: Q2 2026
• Date: 8/6/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, August 6, 2026
• Conference Call Time: 8:30AM ET

Smith Douglas Homes (NYSE:SDHC), together with its subsidiaries, engages in the design, construction, and sale of single-family homes in the southeastern United States. It also provides closing, escrow, and title insurance services. The company sells its products to entry-level and empty-nest homebuyers. Smith Douglas Homes Corp. was founded in 2008 and is headquartered in Woodstock, Georgia.

Smith Douglas Homes Q2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Net orders rose 32% year over year to 970, while closings increased 25% to 839 and revenue grew 22% to $273 million. The company ended the quarter with 1,000 homes in backlog, up 17% year over year.
• Negative Sentiment: Profitability deteriorated as incentives and pricing adjustments increased; adjusted gross margin was approximately 19% and adjusted EBITDA fell to $13.4 million from $19.8 million a year earlier. The company recorded $3.1 million of inventory impairments and $4.5 million of lot abandonment charges.
• Negative Sentiment: Management expects third-quarter closings of 825–900 homes, average selling prices of $315,000–$320,000, and gross margin of only 16%–16.5%. The outlook reflects continued use of incentives and price reductions, and the company is not providing full-year guidance because demand remains variable.
• Positive Sentiment: Smith Douglas continued expanding its platform, reaching 110 active communities, up 20% year over year, while maintaining a land-light strategy with 21,655 option lots and only 3% of controlled unstarted lots owned on balance sheet. The company also repurchased $4.4 million of stock during the quarter, bringing year-to-date repurchases to approximately $10.1 million.

Presentation

[Operator]

Hello, everyone. Thank you for joining us, 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 one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Joseph Thomas, Senior Vice President, Accounting and Finance. Joseph, please go ahead.

[Joseph Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

Good morning, 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, which can be found on our website at investors.smithdouglas.com or by selecting the investor relations 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.

[Joseph Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

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 Chief Financial Officer. I'd now like to turn the call over to Greg.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Good morning. Thank you for joining us today for a review of our business results for the second quarter of 2026 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, posting 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.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

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 homebuyers. Despite this uncertainty, we were able to post net new home quarter growth of 32% on a year-over-year basis for the quarter for a total of 970 net new home orders, 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.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

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 and 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 our presence across our markets. We grew quarter-end community count by 20% on a year-over-year basis to 110 active communities. 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.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

We maintain this balance through our land lot strategy, which allows us to control a pipeline of lots through options 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 U.S. consumer has proven to be resilient in the face of rising rates and macroeconomic uncertainty while building conditions continue to be favorable. We 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 the existing home market.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

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. Their commitment to 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 our financial results this quarter and give an update on our outlook.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Thanks, Greg. Good morning. I'll highlight our results for the second quarter, 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 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 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Selling, 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. Pre-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 and other expense.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Adjusted EBITDA, which we believe provides a clean apples-to-apples view of our operating performance as it excludes share-based payment expense, inventory impairments, 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-C organizational structure, our reported net income reflects the allocation of earnings between Smith Douglas Homes Corp. and the non-controlling 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

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 operated 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. We ended 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

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. Turning to the balance sheet, we remain focused on preserving financial flexibility while continuing to invest in our growth. We ended 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 2025. 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

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 controlled 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

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 a 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

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

Good morning.

[Operator]

Your first question comes from the line of Mike Dahl with RBC Capital Markets. Mike, your line is open. Please go ahead.

[Mike Dahl, Analyst at RBC Capital Markets]

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? I'm trying to square that a little with, then, your gross margin guide is down meaningfully sequentially. How much is kind of the, 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.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah. Mike, thanks. Pretty much June, July has stayed pretty much the same. That one caveat is we have leaned back in a little more on forwards and some rate purchases as the rates have gone back up. We just continue to underwrite everything to our current environment. As we look forward, if we have to continue this, if rates are continuing to stay elevated, the macro's not giving us any indication of a lot of consumer change here in the near term. We just continue, like I said, cautiously optimistic. Demand's 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.

[Mike Dahl, Analyst at RBC Capital Markets]

Okay. Got it. Yeah, I guess if I'm hearing that, it's again, 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 yes, that's encouraging. Russ, maybe just as a follow-up, more specifically, when you think about that gross margin guide, can you help us kind of bucket out the step-down from 18.7% ex charges to the 16.5%? How much of that is related to incentives? How much is other cost dynamics, either express labor or land? Help us understand that bridge a little bit more.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. When we look at backlog and as Greg said, we were leaning more into pace as we have really the first half of the year, I would tell you it's just more of our continued use of incentives and discounting to match pace with, as a land light 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. That kind of just matches the take downs within the majority of our option contracts. It's really just a function of kind of adjusting price and payment through those use of incentives, closing costs, forward commitments to get that pace. That's what I would tell you. I don't have the exact numbers in front of me, but that's really going to be the driver of the margin compression.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Hopefully, like Greg said, we're cautiously optimistic that we're finding an opportunity to maybe kind of keep margin steady from here and maybe pull back a little bit on incentives going forward and start 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. Hopefully, as an industry, we're kind of finding bottom.

[Mike Dahl, Analyst at RBC Capital Markets]

Russ, maybe just one quick last one from me, just to follow up on that last point. You guys, you're pace focused, and you try to be balanced around things, but with that focus. When you think about like everyone's trying to get a better balance, maybe on spec versus build to order, how are you evolving your strategy on the ground right now as we look at the second half?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. We've always been build-to-order focused. Pre-sales is our number one priority. I don't know, Greg, if you want to-

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah. Mike, 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. We focus on getting the home sold by drywall. That allows that house to still close on its intended close date when we started it. There's a few buyers that we do through reservations, but if you look at all that, end of the day, everything's sold by drywall at about 70%.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Those are what we look at as the pre-sales. Because with our buyer, there's a certain amount of attention to the approvals that we need to work through in qualifying on the front end.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. No. The one thing I would add, we still give our buyers the ability to personalize their homes even after we start the home. Up until that drywall stage, like Greg mentioned, they still have the opportunity to select certain options in that home, 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. Those, as you know, the margin on those options come at a pretty good number for us. 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 the home that they've had the ability to make choices.

[Mike Dahl, Analyst at RBC Capital Markets]

Okay. All right. Thanks for the details.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Sure.

[Operator]

Your next question comes from the line of Natalie Kulasekere with Zelman & Associates. Natalie, your line is open. Please go ahead.

[Natalie Kulasekere, Senior Associate at Zelman & Associates]

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. Curious to see, are you seeing actually continued reductions in costs, or have you maybe kind of reached the end of it? Curious to see if you see that offsetting any part of your incentive spend.

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

I'll take that. We're 2.5%, 3% year-over-year. Our hard cost savings are there, for sure that helps. With fuel prices, there's fuel surcharges and other things that are starting to creep back into the equation. We have seen savings in cost.

[Natalie Kulasekere, Senior Associate at Zelman & Associates]

Okay. Thank you. Some other builders, I guess, mentioned using tools like a higher share of arms to kind of manage that incentive spend. I know you brought it up in your previous call, but is that something that you've been pushing more just to try and manage your incentive spend?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

No. 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 brought forward just a fixed rate incentive. 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 buydowns. We think that from a base pricing standpoint, in most of our communities and markets, we're already priced on the low end of the market and offer a really good value at our pricing. It hasn't seemed to have slowed our pace, which is good. As I mentioned on the last question, we're slowly pulling back on incentives to see if we can recapture some of that margin.

[Natalie Kulasekere, Senior Associate at Zelman & Associates]

All right. Thank you.

[Operator]

Your next question comes from the line of Sam Reid with Wells Fargo. Sam, your line is open. Please go ahead.

[Sam Reid, Analyst at Wells Fargo]

Thanks so much, guys. Another question on gross margin here. Wanted to just ask about the impairments and any sense as to how widespread those were. Can you just remind us your underwriting standards, margins versus returns? Would just love a refresher on that.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Sure. Obviously, like every builder should be, we go through our impairment testing quarterly. We first look at where our backlog margin is sitting, and that's kind of your first indicator. We do a thorough scrub of backlog, then we'll run cash flows where those margins are, say, mid to high single digits, then we'll do the cash flow. 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 testing is subjective. 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. I think we're pretty consistent on how we look at things. Is it widespread? No.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

I think we took it in maybe three communities.

[Joseph Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

Yes. Three communities.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Three communities this quarter. We took a couple of abandonment charges where it made sense. I think the nice thing 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? 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. Hopefully that answers your question.

[Sam Reid, Analyst at Wells Fargo]

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 commission. 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 as a sales incentive. Just curious if you're seeing anything similar.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

No. We're still seeing kind of, and it depends on the market, 2.5%-3% is the commission that we're paying to outside brokers. We haven't run any special deals or opportunities. We've been pretty consistent. I think the co-broker is about what, 80%?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Mid-high 70s.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Mid-high 70s. It's remained for us. That's pretty consistent to where we've been running for a while.

[Sam Reid, Analyst at Wells Fargo]

All helpful, guys. I'll pass it on.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Thanks, Sam.

[Operator]

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

[Rafe Jadrosich, Analyst at Bank of America]

Hi. You have the honor of my dad. Thanks for taking my question. Had a follow-up on the BTO commentary. Is that 70/30 mix, Greg, also the long-term target? What is the margin difference between a home sold pre-drywall and a quick move-in? Thank you.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. Our long-term target would obviously be 100%, right? That's the ultimate goal is to get everything sold by drywall. Certainly, without a doubt, everything sold before we hit CO, right? If you look historically, if you go back pre-COVID, that presale, which I would say presale before we hit drywall stage, was about 90%. As Greg said, we're about 70%, we're inching closer to where we want to be, but we're not there yet. Again, that really is the kind of environment we're in. 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 QMIs, quick move-ins, that's what we're battling against. We've never pushed a spec strategy. We're always a build to order, presale.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

It's just the environment we're in has kind of pushed those percentages down from where we would like to be. From a presale versus spec, true spec, I'd say, what? About 100 basis points difference in margin? 150? 100, 150 basis points of margin?

[Joseph Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

Two. Yeah. 200.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. It varies. It'll vary by division. We've seen it compress a little bit. Normally, when you go historically, it was probably more of a 300 basis point difference, presale versus spec. Now it's about 150, 200.

[Rafe Jadrosich, Analyst at Bank of America]

Okay. That's a helpful color.

[Joseph Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

Again, it also depends where it is.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. Great.

[Rafe Jadrosich, Analyst at Bank of America]

Thank you.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Anything else?

[Rafe Jadrosich, Analyst at Bank of America]

Yeah. A quick follow-up also on the 3Q gross margin guidance. What do you have embedded for different costs, labor costs, and lot costs for the upcoming quarter?

[Joseph Thomas, SVP of Accounting and Finance at Smith Douglas Homes]

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

[Rafe Jadrosich, Analyst at Bank of America]

Sorry. I just had a follow-up also on the 3Q gross margin guidance. Can you give any color on what you have embedded in terms of sticks and bricks costs, labor, and lot costs?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, I don't have the numbers in front of us. We can follow up. 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. 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 drivers there. Again, if you think about it, because the first half of the year, we really were leaning into pace. The way that we're getting pace is really by utilizing those discounts. You saw this quarter what closed versus prior quarter sequentially, the incentives were up 50 basis points.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

My guess is third quarter, the total of all those incentives are probably going to also be up, and that's the driver of the margin compression. The last thing I would add is we usually, as 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. We're usually pretty conservative. Again, we felt comfortable with the 16%-16.5%. Hopefully we come in, there might be an opportunity to do a little bit better.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Because we're in such an environment where you've got specs and you're continuing to discount and we are pushing pace, who knows what we're going to have to or want to do towards in these last couple of months to continue to move some of those specs through the system.

[Operator]

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

[Paul Przybylski, Analyst at Wolfe Research]

Thanks. Good morning. I guess, appreciating your comments that the incentive environment seems to be a little bit better so far in 3Q and the gross margin guide of 16.25%. Is there any sort of floor you would hope gross margin at?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, we talk about that a lot internally. I tell you first, our overriding goal is always going to be pace versus price. Yeah, we definitely have conversations about what level does it start to make sense. A lot of times it's going to be on a division-by-division or really a community-by-community basis. Currently our SG&A sits around 15%, let's just say. When gross margin, if you wanted a number, I'd tell you at 15%, that's when we start saying, "Okay, what other levers could we or should we pull?" Look, 15% gross, 15% SG&A, you'd be at a zero net. That's probably the floor. Look, nobody wants to build for practice.

[Paul Przybylski, Analyst at Wolfe Research]

Right.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We also recognize the need for us to continue to scale our business, right? In a declining rate environment or declining the housing environment we're in, you've got top-line margin compression. Scale is probably the best lever to pull to continue to generate positive returns. 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 six months later, we've entered into 1 of the toughest housing environments, at least I've seen. Certainly, GFC and even prior to that. We'll continue to focus on what we can control.

[Paul Przybylski, Analyst at Wolfe Research]

Okay. Any opportunity to work down that SG&A expense ratio outside of just leverage?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Absolutely. We're looking at that every single day. Greg and I talked to the DPs last week, and for the back half of the year, it's like, no dollar is too small to save. We're looking at SG&A every day. Quite frankly, we said, "Hey, it's no more new hires unless it's really a variable head that's going to support field operations like sales and construction." 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. That's always a huge focus, we're always trying to pull those levers.

[Paul Przybylski, Analyst at Wolfe Research]

Okay. Just if I sneak one more in. 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 to have a home to sell in this environment?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Let me see. 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 either their deal fell out or something happened in that process. Yeah, we are seeing that.

[Paul Przybylski, Analyst at Wolfe Research]

Okay. All right. Appreciate it. Thank you.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yep.

[Operator]

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

[Ryan Gilbert, Analyst at BTIG]

Hi, thanks. Good morning, guys, thanks for taking my questions. I have another one on gross margin for you. Did the 2Q 2026 guide and does the 3Q 2026 guide contemplate any inventory impairments or include an allowance for the potential for inventory impairments?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

No. We never forecast impairments. If we did, then we would have already taken the impairment. No, we don't assume future impairments.

[Ryan Gilbert, Analyst at BTIG]

Okay. Yeah, that's what I figured. I'm just trying to understand-

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah

[Ryan Gilbert, Analyst at BTIG]

the differential here between-

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Good question

[Ryan Gilbert, Analyst at BTIG]

the guide and.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yep. Sure.

[Ryan Gilbert, Analyst at BTIG]

Okay. Then, just looking at the step down and your commentary around wanting to keep incentives at 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?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. Absolutely, we are taking base price cuts where it's warranted. Again, it is a community by community analysis. Because some communities we're actually seeing opportunities to raise prices, so we're not pushing it to a point where it shuts down sales or slows pace, but we are definitely looking on a community by community basis where we can take price increases, 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. When we underwrite, we're always trying to underwrite at least $10,000 below the lowest competitor so that there's obviously more people that can afford our homes than anybody else because of that price, right?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

We always say price is the ultimate amenity. Having that low price is key. We've been pushing on that. Again, we're trying to really look at our incentives and seeing what's the optimal use of incentives and where can we pull back to then kind of recapture or at least maintain margin as it's clearly we've seen some compression, but 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. Hopefully, as we've heard from other builders, we're starting to find a little bit of a bottom here, and we can all start to recapture a little bit of profits.

[Ryan Gilbert, Analyst at BTIG]

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

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

It's mostly just trying to find the market. It's a little bit of obviously mix, because we have opened a couple of new geographies. You've got Greenville in there closing homes, you've got Dallas closing homes. Again-

[Ryan Gilbert, Analyst at BTIG]

Right

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

our product is the same across the entire footprint. I would tell you it's mostly on price, and then the key that we look at is, what's the average sq ft of the house, and it's within 50 sq ft-100 sq ft of the same. It's not like we're really changing product that much or the mix is that different. It's really the incentive.

[Ryan Gilbert, Analyst at BTIG]

Okay. Got it. As you shift back more towards BTO, I think just looking at 2023 and 2024 backlog conversion rates in the 60%-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?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

It should. Just to be clear, we never moved away from BTO. It was just a function of the market and the demand environment. I tell you, I give a lot of credit to our sales folks, 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.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

I tell you, last year and kind of into the beginning of this year, 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 move pace fast enough, I guess we didn't cut prices quick enough." I think we did a really good job in the first half of the year matching pace or exceeding pace on our sales versus starts. Yeah, I would tell you, given the way we've executed in the environment, I think, yes. I'm hopeful that we're going to start getting back to a more normal kind of conversion and backlog going forward.

[Ryan Gilbert, Analyst at BTIG]

Okay. Got it. Last one from 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? What's the level of willingness on the part of some of these other builders to sell?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah, there's activity. We're seeing there's usually a consistent flow of packages. The environment is such that it's unfortunate. I think some of the smaller, not as well-capitalized builders, it's been a struggle. That's where you usually see the bigger builders, the ones that have a balance sheet, take this opportunity to grow market share. As you know from the way we operate, we're looking to scale up the business, but we're very thoughtful about how we go about it, because it's important to protect the way we operate with our team strategy. The deal has to make sense. We're always looking. We're certainly exploring new possible markets for maybe a greenfield opportunity. Yeah, there's some deals out there that we'll take a look at packages and if it makes sense to expand.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Again, we're really focused on just building out the Southeast and Central, maybe creeping up a little bit into the Midwest. That's our sweet spot if we were to do anything.

[Ryan Gilbert, Analyst at BTIG]

Okay, great. Thanks so much.

[Operator]

Your next question comes from the line of Jay McCanless with Citizens. Jay, your line is open. Please go ahead.

[Jay McCanless, Analyst at Citizens]

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?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Jay, I think we're seeing it across all of our geographies. There's less inventory. I would say there appears to be an increase, though, in resale activity and resale homes on the market. I think new home specs has slowed a bit.

[Jay McCanless, Analyst at Citizens]

Okay. That's great to hear. Good to see growth in backlog for both of the segments, but maybe on a individual MSA basis. There's some MSAs that stood out this quarter in terms of being able to grow orders, and then there are some that may be lagged relative to the overall average?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

Yeah. We've seen pretty consistent demand across all the markets. I would say one bright spot for me that has been very interesting to see is the Houston and Dallas markets for us. The amount of presale 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 in, obviously, Dallas is a new market, but Houston for sure.

[Jay McCanless, Analyst at Citizens]

That's great. 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?

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Yeah. Second quarter, what we closed was 780. Again, without seeing the numbers, I'm going to tell you it's probably a little bit higher than that. Just again, given our guide of the 16-16.5, which we hope is going to be a little bit better. That's where we see the margin compression coming from. It's in the incentives, that's a combination of price discounts, closing costs, and forward commitments. Again, we have been also reducing base price. It's going to be a combination of price reductions and those things. It's not really on the cost side, I can't imagine it's really the land cost that's shifting that much between quarters. Right? It's really going to be driven by that incentives and the top-line revenues.

[Jay McCanless, Analyst at Citizens]

Got it. The last question I had, actually, just kind of sticking on land costs. With all the M&A dislocation, whatever you want to call it, in the industry this year, are you all seeing some opportunities to maybe buy land that are a little bit cheaper, or some of these sellers being maybe a little more reasonable on what they think the land is worth?

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

We've seen some, it's not as widespread as you would think. A lot of the land sellers are still thinking their land's at top of market, 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, at a certain point, you can't. We are seeing a lot of easing on terms, probably more so than price, which, at the end of the day, is a savings. Yeah. I'd say it's probably 50/50 in the market right now.

[Jay McCanless, Analyst at Citizens]

Okay, great. Appreciate it, guys. Thanks.

[Russ Devendorf, EVP and CFO at Smith Douglas Homes]

Thanks, Jay.

[Operator]

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

[Greg Bennett, CEO and Vice Chairman at Smith Douglas Homes]

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

[Operator]

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

Participants

Executives

• Joseph Thomas, SVP of Accounting and Finance
• Greg Bennett, CEO and Vice Chairman
• Russ Devendorf, EVP and CFO

Analysts

• Mike Dahl, Analyst at RBC Capital Markets
• Natalie Kulasekere, Senior Associate at Zelman & Associates
• Sam Reid, Analyst at Wells Fargo
• Rafe Jadrosich, Analyst at Bank of America
• Paul Przybylski, Analyst at Wolfe Research
• Ryan Gilbert, Analyst at BTIG
• Jay McCanless, Analyst at Citizens