[Management View]
Smith Douglas Homes Corp. (SDHC) reported a year-over-year decline in revenue, home closings, and gross margin. The company emphasized its strategic expansion into new markets such as Greenville, Dallas, and the Gulf Coast, while maintaining a focus on operational efficiency and a pace-over-price philosophy. Management highlighted a shift toward more speculative inventory deliveries in response to market uncertainty and noted persistent permitting delays across key markets.

[Outlook]
For Q4, Smith Douglas expects 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%. The company plans to continue using financing incentives to drive sales velocity and expects community count growth of 10%-20% next year, pending market conditions and lot deliveries.

[Financial Performance]
- Pre-tax Income: $17.2 million, down from $39.6 million YoY
- Net Income: $16.2 million, down from $37.8 million YoY; adjusted net income was $13 million compared to $29.9 million
- Home Sales Revenue: $262 million, a 6% decrease from $277.8 million YoY
- Total Closings: 788 homes, a 3% decline from 812 homes YoY
- Gross Margin: 21%, down from 26.5% YoY
- SG&A Expense: $2 million higher, reaching 13.8% of revenue (vs 12.3% YoY)
- Incentives and Discounts: Closing cost incentives rose to $9,500 per closing from $6,600; pricing discounts reached 1.8% of revenue versus 1.2%
- Balance Sheet: $14.8 million in cash and $49 million drawn on an unsecured revolver with $201 million remaining available
- Backlog: 760 homes with an average sales price of approximately $340,000 and projected gross margin of approximately 20%
- Net Orders: 690 homes, a 15% increase YoY

[Q&A Highlights]
Question 1: Could you bridge the Q3 to Q4 gross margin and discuss the composition of incremental price discounting versus forward commitments? Also, what is the mix of homes you plan to close outside of your backlog during Q4?
Answer: We continue to push on incentives into year-end to maintain our pace-over-price philosophy. We introduced a 3.5% fixed rate on older specs. Costs of forward commitments have come down as rates have decreased. We plan for the worst and hope for the best.

Question 2: Any high-level commentary on community count for 2026 and perspective on lot costs?
Answer: It's difficult to provide guidance for 2026 due to uncertainty. However, we have nearly tripled our controlled lots since going public and have seen substantial growth in community count. We expect 10%-20% growth in community count next year, depending on market conditions and lot deliveries.

Question 3: How do you see backlog conversion trending longer term and any structural factors there?
Answer: The current environment is driving a more spec-heavy approach. We are focused on presales but the environment has pushed us towards specs. We expect to return to a more presale-heavy approach as the environment changes.

Question 4: Could you provide detail on the geographic distribution of active communities and market expansion priorities?
Answer: We prioritize scaling up in markets where we have not yet hit escape velocity. Focus areas include Charlotte, the Carolinas, Nashville, Central Georgia, Chattanooga, Dallas, and the Gulf Coast of Alabama.

Question 5: How do you see November and December comparing to October and historical seasonal patterns?
Answer: We haven't made different assumptions for the balance of the year. The environment remains difficult but we see some green shoots. We continue to push incentives to drive absorption pace.

Question 6: How are permitting delays affecting your markets?
Answer: We continue to see challenges and delays in permitting across all markets, particularly in central metro areas.

Question 7: What is the spec versus built-to-order mix in your deliveries and backlog, and is there a margin difference?
Answer: There was a higher spec count than presale in Q4. Backlog likely has a heavier presale mix. Historically, we focus on presales but the current environment has shifted us towards specs.

Question 8: How should we think about SG&A run rate with community count growth next year?
Answer: Fixed overhead will continue to leverage as we grow. Variable SG&A will move in line with community count and sales volume. We expect some leverage going into next year.

Question 9: How did incentives flow monthly through the quarter and how is the spread on forward commitments?
Answer: Incentives trended up through the quarter. We pushed higher incentives to spur absorption pace. We aim for a 2.5 to 3 absorption pace in Q4.

Question 10: Are you seeing any shifts in consumer mix, particularly with downsizers or active adults?
Answer: We see challenges with move-down buyers due to difficulties in selling their existing homes.

[Sentiment Analysis]
Analysts expressed appreciation for the detailed insights on discounts, forward commitments, and market expansion. Management maintained a cautious but proactive tone, emphasizing strategic incentives and market adaptability.

[Quarterly Comparison]
| Metric | Q3 FY2025 | Q3 FY2024 |
|-------------------------|-----------|-----------|
| Pre-tax Income | $17.2M | $39.6M |
| Net Income | $16.2M | $37.8M |
| Adjusted Net Income | $13M | $29.9M |
| Home Sales Revenue | $262M | $277.8M |
| Total Closings | 788 | 812 |
| Gross Margin | 21% | 26.5% |
| SG&A Expense | 13.8% | 12.3% |
| Closing Cost Incentives | $9,500 | $6,600 |
| Pricing Discounts | 1.8% | 1.2% |
| Backlog | 760 homes | N/A |
| Net Orders | 690 homes | N/A |

[Risks and Concerns]
- Maintaining an adequate pace of sales
- Bringing new lots and communities online as scheduled
- Managing cost pressures, particularly in labor and materials
- Broader macroeconomic factors such as inflation, employment trends, interest rates, and consumer confidence
- Persistent permitting delays across key markets

[Final Takeaway]
Smith Douglas Homes Corp. faced a challenging Q3 with declines in key financial metrics. However, the company remains focused on strategic market expansion and operational efficiency. Management's proactive use of incentives and forward commitments aims to navigate the uncertain market environment. Looking ahead, the company expects steady community count growth and continued emphasis on maintaining a strong balance sheet to support long-term growth.