Joe Thomas; Senior Vice President, Finance & Accounting; Smith Douglas Homes Corp
Gregory Bennett; President, Chief Executive Officer, Vice Chairman of the Board; Smith Douglas Homes Corp
Russell Devendorf; Chief Financial Officer, Executive Vice President; Smith Douglas Homes Corp
Andrew Ozzie; Analyst; JPMorgan
Sam Reid; Analyst; Wells Fargo Securities, LLC
Trevor Allinson; Analyst; Wolfe Research, LLC
Steven Ma; Analyst; RBC Capital Markets
Jay McCandless; Analyst; Wedbush Securities
Alex Barron; Analyst; Housing Research Center, LLC
Operator
Hello and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Smith Douglas Homes fourth-quarter 2025 earnings conference call and webcast. (Operator Instructions) I would now like to turn the conference over to Joe Thomas, Senior Vice President of Accounting and Finance. Please go ahead.
Joe Thomas
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 of 2024, 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 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, outlook, performance, and ability to gain market share, including in uncertain environments 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 in this call to the most comparable GAAP measures can be found in our press release located on our website and in 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.
Gregory Bennett
Thanks, Joe. Good morning to everyone joining us on today's call as we go over results for the fourth-quarter of 2024 and provide some insight into the state of our home building operations for the first few months of 2025.
Smith Douglas Homes reported pre-tax income of $30 million in the fourth quarter of 2024, capping off a very profitable year for a company in which we generated nearly $117 million in pre-tax income.
The 836 homes were delivered in the quarter were well above our stated guidance range and represented a quarterly record for our company. For the full year, Smith Douglas delivered 2,867 homes.
Our gross margins for the quarter came in as expected at 25.5%, which was the midpoint of our guidance. For the full year, gross margins on home closings averaged 26.2%. The combination of strong delivery growth, healthy margins, and quick inventory turns resulted in an adjusted return on equity of 29% for 2024, well above the industry average for publicly traded home builders. Overall, we're extremely pleased with our performance in 2024 and look forward to building on successes we've achieved during the year.
Here in the fourth quarter, we generated 569 net new orders. Some of the last quarter, price incentives and closing cost support were an important sales tool to all our communities. While this has been an effective way to address affordability issues, it has had a negative impact on our margins.
We make further progress on improving the construction efficiency in the fourth quarter. Cycle times coming in approximately 55 working days, excluding our Houston division. Our trade partners and suppliers continue to buy in to the Rteam philosophy, which streamlines the construction process and provides a level of accountability that leads to better cycle times.
The adoption of the Rteam system in Houston continues to progress. We expect to see real improvement to their operating efficiency in the coming quarters. Our ability to turn inventory quickly is a key component of our home building strategy, and we remain committed to making incremental improvements across our footprint.
We ended the year with 19,522 controlled lots. Of our unstarted controlled lots, 96% were controlled via auction agreement consistent with our asset light strategy. This land light model allows us to control a significant number of lots in a capital efficient manner while offloading much of our risk associated with owning the developing land.
As we look ahead to 2025 and move into the heart of the spring sailing season, there are microeconomic and political uncertainties, particularly around interest rates and tariffs that may cause potential headwinds for the business.
Anticipated relief and mortgage rates after the Fed started cutting in the back half of 2024 never materialized. And in fact, rates increased throughout the fourth quarter of 2024 and into January, where the average 30-year mortgage reached the peak of over 7%. As several of our peers have also reported, January sales started off a bit slow compared to their expectations before picking up through February and early March.
Despite seeing some stabilization and inflation, affordability remains a significant challenge for our buyers. Additionally, the lock-in effect where homeowners are reluctant to sell due to their low mortgage rates is keeping housing inventories near historic lows and contributing to home prices remaining higher.
While there may be some near term headwinds and additional pressure on margins, longer term, we continue to remain optimistic about the outlook for our industry and especially Smith Douglas. We believe our manufacturing approach to home building, operational efficiency, and land light strategy will serve us well in any environment.
Our balance sheet remains in excellent shape. We have a real opportunity to gain market share as we expand our operations throughout the Southeast. Before I turn the call over to Russ, I want to thank all of our team members for their contributions to a remarkable year for our company.
Smith Douglas has come a long way since we started operating out of Atlanta 17 years ago. A significant expansion throughout the Southeast and Texas over the years, and our highly successful IPO last year is all due to the hard work and commitment. With more than 450 team members, we truly appreciate all of you. And now I turned over to Russ.
Russell Devendorf
Thanks, Greg. I'm going to highlight some of 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 $287 million of revenue, a 32% increase over the year ago period. On 836 closings for an average sales price on closed homes of $344,000. Our gross margin was 25.5% and SG&A expense was 14.9% of revenue. Pre-tax income was $30 million with net income of $28.8 million for the quarter.
Given the nature of our UPSEA organizational structure, our reported net income reflects an effective tax rate of 4.2% on the face of our income statement. This income tax expense is primarily attributable to income related to the approximate 17.3% economic ownership of our public shareholders that is held by Smith Douglas Homes Corp and Smith Douglas Holdings LLC.
Our adjusted net income, which is a non-GAAP measure that we believe is useful in providing a comparison to more traditional C corporations is $22.6 million for the quarter. Adjusted in net income assumes a 24.6% blended federal and state effective tax rate as if we had 100% public ownership operating as a subchapter C corporation.
We believe adjusted net income is a useful metric because it allows management and investors to evaluate our results more effectively to industry peers that may have a more traditional tax and organizational structure. You can find more information about our structure and income taxes in the footnotes of our financial statements.
For the full year 2024, we closed a record 2,867 homes with corresponding revenue of $975 million a 25% and 28% increase respectively over the prior year. Our gross margin was 26.2% for the full year compared to 28.3% in 2023, primarily driven by an increase in our average lot cost, which was 24.4% of revenue versus 21.3% in 2023.
Discounts and closing costs were 3.6% compared to 3.4% last year. Our SG&A expense was just under 14% of revenue, including internal and external sales commissions, which were 4% of revenue compared to 3.6% in 2023.
Pre-tax income was $116.9 million with net income of $111.8 million for the year, and our adjusted net income, as previously described, was $88.1 million. We were operating out of 78 active selling communities at the end of the year versus 69 at the end of 2023. We finished the year with 694 homes in backlog with an average selling price of 340,000 and an expected gross margin on those homes of just under 24%.
Looking at our balance sheet, we ended the quarter with approximately $22 million of cash and no borrowings under our $250 million revolving credit facility and $402 million of total members and stockholders' equity.
Our debt-to-book capitalization was 0.8% and our net debt to net book capitalization was 5%. We had approximately$220 million available on our unsecured credit facility and are well positioned to execute on our growth strategy, as Greg previously mentioned.
Before I speak to our guidance for the first quarter, I'll provide a little more color on what we are seeing through the first couple of months this year. As Greg mentioned, sales started a bit slow in January but picked up in February. Our sales pace per community trended higher at 2.4 and 3.3 sales in January and February, respectively, compared to 3.4 sales per community through the first two months of 2024.
Additionally, we have seen an increase in the closing costs and incentives we offer versus this time last year to the tune of about 75 basis points on a relatively flat average sales price. That said, for the first quarter of 2025, we currently anticipate home closings to finish between 625 and 675 homes, an approximate 15% increase over 2024 at the midpoint, with an average sales price between 330,000 and 335,000, and gross margin in the range of 23.25% and 23.75%.
For the full year, we expect closings to be between 3,000 and 3,200 homes, which is in the range we previously stated on our last call. We believe the primary risks to our projections are around our ability to maintain sales space and bring our new communities and lots online. Macroeconomic factors and uncertainty around jobs, tariffs, inflation, and interest rates could also have unforeseen impacts to our numbers. With that, I'd like to turn the call over to the operator for instructions on Q&A.
Operator
(Operator Instructions) Michael Rehaut, JPMorgan.
Andrew Ozzie
Hi everyone, this is Andrew Ozzie on for Mike. Thank you for taking the questions. Just maybe I appreciate that guidance. I just wanted to maybe dial into the -- I believe I heard you say the backlog gross margins are to the tune of 24%, and 1Q is a little bit below that. Could we -- what if you could bucket out some of the, dynamics there that would be very helpful.
Russell Devendorf
Yeah. So backlog margin you heard correctly it’s about 24%. A lot of that is obviously sales that were made in Q4. And so Q4 was definitely -- we saw more incentives pick up where Greg had mentioned. It’s an affordability thing.
Interest rates, really even with the Fed cutting kind of moved against us. And so we were taking more incentives to try and keep pace. So that’s reflective in backlog. When I look out actually a little bit further beyond what we’re seeing for what’s closing in the first couple of months in terms of our backlog, it looks like it’s creeping up a little bit. So you’re actually seeing it trend a little bit up when I look at kind of our backlog aging through kind of midyear.
So we’re hopeful again sales have picked up in February, but look incentives are still being used to drive volume. So it’s tough. That’s where we see the biggest risk, right? This year is going to be mostly in margin. People are showing up into the sales centers. There’s definitely demand, but it’s an affordability game.
Andrew Ozzie
Thanks, Ross. And then maybe secondly, on the land side, is there some way to -- some framework for kind of lock cost inflation for you guys that you are thinking of currently, that would be very helpful.
Russell Devendorf
Yeah, that’s really outside of incentives, right? And because we’re seeing kind of flat ASP year over year, so you’ve got incentives that are impacting margins. It’s lot cost, right? And we’ve talked about that in the past. I’d say it’s -- it could be 200 to 300 basis points of margin is eroding because of our lot cost rolling through there.
So land is still challenging. It’s competitive. And that’s where we see the biggest challenge. Our vertical costs have actually been in check, but now with kind of what we’re seeing with tariffs and the new administration and a lot of uncertainty, we are seeing some of our subcontractors reach out and look at surcharges or possible increases. But there’s still a lot of uncertainty. We don’t have a real clear picture yet on how that might impact us the rest of the year.
Andrew Ozzie
Thank you, Russ. I'll pass it on.
Russell Devendorf
Thanks.
Operator
Sam Reid, Wells Fargo.
Sam Reid
Awesome, thanks. I actually wanted to piggyback off that last question just to comment on lot cost eroding, 200 to 300 basis points of margin. I mean, is that mostly just waited to 2025 or is there a risk that that erosion kind of persists into 2026 and beyond? Just looking for some context there, given the visibility you have in your out your lot pipeline.
Russell Devendorf
Yeah. I don’t see it -- I see it kind of leveling off based on where our lot costs are. But certainly as we’ve been buying and contracting land over the last couple of years, It’s certainly increased. But I do think it’s leveled off a bit when you -- if you kind of think about ’26 and beyond.
But, yeah, we really haven’t -- we haven’t taken a deep dive into it. But just sitting here today, I’d say you’re not going to see the kind of inflation that you’re seeing in the lot costs now. I mean, it’s been -- it’s taken a pretty big bump, and I think you kind of see that leveling off a bit as you look towards the outer years.
Sam Reid
Awesome. Thanks, Russ. And then one follow-up, just wanted to touch on community count growth and cadence throughout the year. I know obviously there’s a lot of moving pieces when it comes to community count. But can you just give us some guideposts in terms of how we should think about modeling that over the course of 2025? Obviously, it does have implications on start pay or pays, etc.
Russell Devendorf
Yes. It should be pretty ratable increase throughout the year and we were just looking at that last week. We can see community count growing low single digits towards kind of 90 by the end of the year, up from what were 78. So, I’d say it’s going to be kind of a ratable increase throughout the year.
Sam Reid
That’s helpful, Russ. I’ll pass it on. Thanks.
Operator
Trevor Allinson, Wolfe Research.
Trevor Allinson
Hi, good morning. Thank you for taking my questions. I wanted to follow-up on gross margin. Previously, you had talked about 2025, perhaps being in the 25% range, give or take. Starting below that here in the first quarter, you’ve got some land inflation that will likely continue to work through in 2025.
Can you talk about what the biggest difference is now versus maybe a quarter ago when you were talking about 2025 gross margin perhaps being in that 25% range?
Russell Devendorf
Yeah. It’s really -- it’s the market I think when we had our call looking at where we saw. Rates had started coming down. The Fed was cutting. And then Q4, you saw rates start to increase. And so we’ve definitely had a -- we had a bigger use of incentives in Q4 and certainly at the beginning of this year.
Rates peaked. The average 30 year peak in January is starting to come down a little bit. But when you look year over year, I think the rates are almost flat. And so that’s really had an impact for sure on where we see margins going.
And as you know, our business model, we’re very focused on kind of manufacturing. It’s a pace over price game. And so to steal a line from Lennar, that is that’s kind of our buffer in terms of getting the pace at that gross margin. And so we’ve had to use more incentives to push pace.
Trevor Allinson
Yeah, that makes sense. : And then second question on SG&A, closings were really good in the quarter, but SG&A still kind of came in towards the top higher end of your range. How are you thinking about leverage on SG and A as we move into 2025? I appreciate that you guys have spent a lot on growth already. How do you think about levering that?
Russell Devendorf
Yeah. SG&A was elevated in Q4. We actually -- so we over closed from our guidance and then we hit a lot of our operational metrics that bonuses are based on. And so we probably had over 100 basis points of SG&A, just an additional bonus accrual that if we knew we were going to hit the numbers like we did for the year, would have been accrued more evenly throughout the year.
So we -- probably that 14.9% would have been probably just south of 14% if we had taken those accruals throughout the year. So that was a big part of it. But yeah, we would expect ourselves to get some good SG&A leverage as we continue to grow the top line.
We’ve got the team in place from a back office perspective. We’ve got we’re pretty set from that standpoint as a public company. So we would expect that SG&A number to continue to trend down below 14%. Our goal would be, certainly, to improve that year over year.
Trevor Allinson
Thank you for all the color and good luck moving forward.
Russell Devendorf
Sure.
Operator
Mike Dahl, RBC Capital Markets.
Steven Ma
Hey, guys. Good morning. You’ve actually got Steven Ma on for Mike this morning. I wanted to ask about the market assumptions and kind of the outlook you have embedded within the full-year guide and whether or not you have any improvement baked in there? Or if it’s kind of flashing here, just kind of your thoughts on how you think about that in making the outlook? Thanks.
Russell Devendorf
Yeah. We’ve got the communities in place to hit our 3,000 to 3,200 guide on closings. So a lot of it’s going to depend. Again, February picked up from a sales pace perspective. We’re seeing March has been pretty consistent with February.
But look, there’s definitely still a lot of uncertainty going into the balance of the year. But most of that we feel is around margins. We definitely think -- people are showing up to the sales centers. Traffic has been pretty good. So it really for us, I think it’s just a matter of finding that right price, right?
It’s an affordability game as I’ve mentioned. So it’s -- the biggest risk is certainly on the margin side. I think we can get volume, but the big question is at what margin, what price is it going to come. And that remains to be seen. So still there’s a lot -- like I just mentioned before, there’s a lot relative to vertical construction costs because of what’s happening with tariffs and how that’s going to impact us.
And so that is just a lot of uncertainty there. But we feel -- sitting here today, we feel pretty good about getting volume. Again, barring some sort of major recession or a big shift in employment. I’ve always said, we can kind of cure a payment for folks, and so that impacts margin. But if people start losing jobs, that’s the part we can’t fix.
Steven Ma
No, it's super helpful. Thanks for thanks for all the color there. And then I guess one more kind of piggybacking off the previous tariff questions and margin questions, the like the Trevor had said, the first quarter margin kind of coming in a little lower, mainly as given the market weaknesses. As you think about marching through the balance of the year, is there just for a higher level kind of given there's so many moving pieces around tariffs, how are you kind of thinking about making that into the guide and if I could sneak an extra one in here, are you guys hearing anything on the ground given kind of the recent headlines on immigration and labor as well too? Thanks a lot guys.
Russell Devendorf
Yeah, from a margin perspective, like I said earlier, we are seeing, it's interesting our backlog when I look at the aging, it looks like, backlog margins picking up. So I think, again some of our early backlog that's going to be closing, this quarter. Is reflective of probably, incentives and discounting we were given on inventory in Q4, but look, it's, I'd be guessing if I told you which way margins are going to go from here. I think like I said that's the biggest risk, but we are seeing, we're seeing kind of that, low to mid margins right now on what we're selling, but in order to keep pace. That's just going to shift based on, where the market goes and, a lot of that's, interest rates and, what happens just more macro level.
Yeah, and then from a tariff perspective, I don't know you got some color on on what we're seeing from ourselves.
Gregory Bennett
Yeah, I'd say currently we're not seeing any impact, but you know we don't have our head in the in the sand either. We are following a list of items daily, weekly with all of our supply chain vendors and staying alert to those things, but Really from from immigration tariff, all those things as of today there's not been any impact.
Russell Devendorf
Yeah, and you want to touch on the cycle times have actually come down, hasn't been an issue.
Gregory Bennett
Yeah, we were just visiting earlier cycle times year over year. We've taken two weeks, so we ended 23 6 65 days. We're ended 24 at around 55 days, so, that helps to shrink.
Backlog, but it also helps with the efficiency and and cycle and and all the things that we're we're we're striving for here. So, in light of those things going on, we've still seen some operational efficiencies.
Steven Ma
No that it makes a lot of sense. Thanks for all the color you guys. I'll pass it on.
Operator
(Operator Instructions)
Jay McCandless, Wedbush
Jay McCandless
Hey, good morning, guys. I guess my first question, Russ is what have you all been seeing to reduce the community count guide? I think you've given an initial fiscal '25 guide for plus 15% and now you're saying low single digits, maybe bridge that delta force.
Russell Devendorf
I think it's going to be low double digits. I think it's like a 12% because we were at 7,078 and we we get close to 90, so 12, so it should be.
It should be 12%, I think, yeah, so we get, we'll get close. I mean some of that could just be timing. I mean this was just kind of the numbers that we looked at, but just last week, but some of that is just, we may get a couple of communities over it's just how quickly can we get lots and I didn't mention on our prepared remarks, but it's definitely still, challenging in some of our municipalities and And just getting through approvals, so there's always that risk, but I think we can get close to that 15% increase.
Jay McCandless
And then that, that's actually my second question was going to be, what's the path for growth this year? Is it going to be mostly organic? Are you guys still evaluating some potential M&A?
Russell Devendorf
Yeah, it's all, so all of our closing growth this year is, I'd say organic.
We are in Chattanooga. We did, that's being run out of our Atlanta operations, but we've got, I think it's close to about 1,000 lots under control in Chattanooga. So that's that's a big part where we pushed pretty far north in Atlanta. And then we did open Central Georgia, so you know that middle Georgia, Central Georgia area might deliver about 100 closings, but again that's kind of just an extension of Atlanta growing so big that we've divisionalized that as we've mentioned before, we opened a division in Greenville. We won't get any, we don't think we're going to get any sales and closings this year, although our division President there is doing an excellent job of getting things going. We may have a small opportunity to do something, but so everything's organic. We are definitely looking at opportunities, the M&A.
There's still M&A going on, we've seen some deals happen, in the industry. We're seeing some packages, but as we've always said, we'll be opportunistic, we're looking at filling in some spots throughout the Southeast and, expanding, but.
If we see something we like, we'll look at it, but we're certainly not going to overpay, we, we're comfortable, doing greenfield startups if we like a market, but.
Not, nothing immediate.
Jay McCandless
Got it. And then the last one I had, just thinking about average closing price for 25, you initially or you said last quarter 335 to 345, is that still a good range or or how should we modeling that through the year?
Russell Devendorf
Yeah, I think that's still a good range. I think our backlog is right now at 340.
And so some of the ASP for this first quarter, it's just really the way our backlog is falling out and it's, it could be mixed across, different divisions, but yeah, I still think kind of that 340 numbers is, as we sit here today is still pretty good.
Jay McCandless
Okay, sounds great thank you.
Russell Devendorf
Sure, thanks.
Operator
(Operator Instructions)
Alex Barron, Housing Research Center.
Alex Barron
Yeah, thank you. I was wondering in terms of the incentives you guys are offering, are they mainly in the way of Of rate buy downs or in closing costs or are you guys starting to see, the need to do price cuts?
Russell Devendorf
It is primarily in in closing costs, which also which include rate buy downs, and most of our buyers there is some level of of rate buy down in there.
We are discounting as well, so it's a mix, but I'd say it's more geared towards closing cost incentives.
Alex Barron
And what about broker commissions? Are you guys, maintaining whatever your standard rate is or are you having to feel the need to add bonuses.
Steven Ma
Or something like.
Russell Devendorf
That?
No, it's the same as what we've been doing in the past. We haven't, we haven't changed, so we're still offering incentives, but nothing out of the ordinary.
So, thank you so.
Alex Barron
Much.
Operator
Sure.
And that will conclude our question and answer session. I'll turn the call back over to Greg Bennett for any closing remarks.
Gregory Bennett
Thank you everyone for joining us today. As always, we're accessible. Give us a call and look forward to chatting again next quarter.
Operator
This concludes today's meeting.
Thank you all for joining. You may now disconnect.
