GMS Inc. (GMS) Q1 2021 Earnings Call Transcript

GMS Inc. (NYSE: GMS) Q1 2021 earnings call dated Sep. 03, 2020

Corporate Participants:

Leslie H. Kratcoski — Vice President of Investor Relations

John C. Turner — President and Chief Executive Officer

Scott M. Deakin — Vice President and Chief Financial Officer

Analysts:

Ashley Kim — Barclays — Analyst

Trey Grooms — Stephens — Analyst

Steven Ramsey — Thompson Research Group — Analyst

Keith Hughes — Truist Securities — Analyst

Kevin Hocevar — Northcoast Research — Analyst

David Manthey — Robert W. Baird — Analyst

Chris Kalata — RBC Capital Markets — Analyst

Presentation:

Operator

Greetings and welcome to the GMS Inc. First Quarter Fiscal 2021 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Leslie Kratcoski, Vice President of Investor Relations. Thank you. You may begin.

Leslie H. Kratcoski — Vice President of Investor Relations

Thanks, Daryll. Good morning and thank you for joining us for the GMS earnings conference call for the first quarter of fiscal 2021. I’m joined today by John Turner, President and CEO; and Scott Deakin, Vice President and CFO. In addition to the press release issued this morning, we posted presentation slides to accompany this in the Investors section of our website at gms.com.

On today’s call, management’s prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management’s current estimates and expectations. The Company assumes no obligation to update any forward-looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the Company’s filings with the SEC, including the Risk Factors section in the Company’s 10-K and other periodic reports.

Today’s presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call to the first quarter of fiscal 2021 relate to the quarter ended July 31, 2020. Finally, once we begin the question-and-answer session of the call, in the interest of time, we kindly request that you limit yourself to one question and one follow-up.

With that, I will now turn the call over to John Turner. J.T.?

John C. Turner — President and Chief Executive Officer

Thank you, Leslie. Good morning and thank you for joining us today. I’d like to open by saying that all of us at GMS hope everyone joining this call as well as your families and colleagues are safe and well. I’ll start with a review of our operating highlights and then turn it over to Scott, who will cover our financial results. I’ll then share some closing thoughts before taking your questions.

If you turn to slide 3, our first quarter results reflect outstanding execution by our entire team against the backdrop of a business environment that clearly demand, excuse me, that clearly remains challenging throughout the period. As a result of the economic impacts arising from the COVID-19 pandemic, net sales and organic net sales declined 5.3% and 5.7% respectively. Despite the lower sales, we generated higher net income and higher adjusted net income. Furthermore, we improved both gross and adjusted EBITDA margins by 20 basis points and 40 basis points respectively. These improvements were the direct result of the rapid alignment of our cost structure to current demand, our balanced product and market mix which has been strengthened through the execution of our growth initiatives and a relentless focus on serving our customers with operational excellence.

Adjusted EBITDA of $83.1 million was 10.3% of sales reflecting a detrimental adjusted EBITDA margin of just 1.4%. This was significantly better than the 10% to 20% outlook we had provided in our fourth quarter call as a result of better than anticipated gross margin performance coupled with our proactive and disciplined stance toward cost containment and alignment in the current environment. On the health and safety front, we maintain enhanced operating protocols in compliance with public health requirements. Recommendations and guidelines aimed at reducing the spread of COVID-19 and the health and safety of our employees, business partners and communities remains our top priority. All of us at GMS, express our gratitude to those who have been and continue to be on the frontlines every day during these unprecedented times.

Considering the environment in which we’re operating, we are off to a strong start to fiscal 2021. My congratulations and thanks go out to the entire GMS team who made these results possible, remaining engaged, focused and proactive as we come together in support of our customers and each other. At the same time, I offer our gratitude for the partnership we share with both our customers and suppliers who have faced their own difficult challenges in navigating the realities of the current market.

With that, I’ll now turn it over to Scott to provide some more perspective on our financial results for Q1. Scott?

Scott M. Deakin — Vice President and Chief Financial Officer

Thanks, J.T. Good morning. Looking at slide 4 of our deck, net sales were $802.6 million, down 5.3% year-over-year as continued COVID-19 related market declines in the US were partially offset by higher sales in Canada. Overall, organic net sales declined 5.7%. Wallboard sales of $328 million decreased 4% or 4.1% on an organic basis, principally due to a decline in both price and mix. Driven mostly by a share to a greater weighting of residential wallboard products and to a lesser extent, lower volumes, which were down only about 1% on a consolidated basis.

Ceiling sales of $113.7 million decreased 11.9% or 12.5% on an organic basis, driven by lower volumes and product mix, partially offset by higher pricing. Steel framing sales of $110.5 million decreased 16.2% or 16.4% on an organic basis, primarily due to a decline in both volumes and pricing, partially offset by product mix. The deflationary environment in steel continued in the quarter with pricing down approximately 7% year-over-year and 2% sequentially. Year-over-year sales declines were more pronounced in ceilings and steel, product categories tied primarily to commercial construction activity, given the relatively more challenged demand environment there versus residential. Residential, while still down year-over-year, continued to improve during the quarter and into August.

Complementary other product sales of $250.4 million increased 2.3% or 1.5% on an organic basis due to positive contributions from acquisitions. Execution of our strategic growth initiatives and positive organic growth in Canada. Gross profit of $260.5 million decreased 4.8% primarily due to the lower sales. Gross margin of 32.5% improved 20 basis points as a result of favorable product mix and purchasing initiatives given a higher proportion of sales in both wallboard and other products.

Turning to slide 5. Adjusted SG&A expense as a percent of net sales of 22.2% improved 40 basis points. This despite a 50 basis point headwind from the deflationary market pricing of wallboard and steel, approximately 90 basis points of improvement were realized as a direct result of the proactive measures to defer or limit non-essential operating and other discretionary expenses as we align the Company’s cost structure with the current demand environment as well as favorable business mix towards single-family residential with respect to operating costs. All considered, first quarter adjusted EBITDA in dollar terms declined marginally to $83.1 million from $83.6 million.

Adjusted EBITDA margin, however, improved 40 basis points to 10.3%. This represented a 1.4% decremental adjusted EBITDA margin. We were very pleased that our execution in the first quarter generated improved profit margins over both the prior year and against our previous expectations for the first fiscal quarter, despite the market related decline in sales.

Turning to slide 6. As is typical during our first quarter of the fiscal year, we generated a use of cash from operating activities and free cash. These totaled $15.7 million and $20.5 million respectively, increasing only modestly compared to the prior year, despite our tempering some of the precautionary cash management measures we put in place in the fourth quarter. For the second fiscal quarter, we anticipate generating a robust level of positive free cash flow, which is typical of our normal quarterly cadence. Capital expenditures of $4.7 million or $1.1 million lower year-over-year as we had delayed or reduced capital expenditures that were not anticipated to impact near-term business.

This said, looking forward, we maintain our estimate for cash capital expenditures in fiscal 2021 of approximately $25 million. As of July 31, 2020 we had cash on hand of $139.7 million and $372.5 million of available liquidity under our revolving credit facilities. You’ll recall that as a precautionary measure to increase cash on hand and financial flexibility at the start of the pandemic, we drew down approximately $87 million under our revolving credit facilities during the quarter, excuse me, during the fourth quarter of fiscal 2020. During quarter one, we repaid approximately $44 million of these borrowings and repaid the remainder of this precautionary draw in August.

Our net leverage was three times as of the end of the first quarter, relatively consistent with 2.9 times as of the end of the fourth quarter of fiscal 2020 and compared to 3.7 times as of the end of the first quarter of fiscal 2020. Our balance sheet remains healthy, and in terms of the overall stability of our capital structure, the large majority of our debt is not due until 2025.

Now let me turn the call back over to J.T. before we open the line for questions.

John C. Turner — President and Chief Executive Officer

Thanks, Scott. Turning to slide 7. While we continue to carefully monitor and address market developments, we remain committed to our strategic growth initiatives, which guide our long-term management of a very attractive business with significant long-term growth potential. As a reminder, our growth priorities include, expanding share in our core products, particularly in geographies where we are under-penetrated, growing select other product opportunities outside of core products to diversify and profitably expand our product offering, developing the platform through accretive acquisition and greenfield opportunities while maintaining balanced progress in debt reduction, and leveraging our scale and employing technology and best practices to deliver a best-in-class customer experience as well as increased productivity and further profit improvement.

In terms of acquisitions and new market expansion, we have returned to an active stance in pursuing deals and in advancing our greenfield expansion. Near term, we are realizing benefits from the execution of all of these strategies, which have equipped us with not only meaningful scale and technology advantages, but with balanced product, geographic and end market portfolios, all of which should serve to enhance our performance in this current environment. For example, growing share in our core products in under-penetrated geographies is increasing our scale advantages. Focused emphasis on our offering of other complementary products enabled us to grow that segment of our business this quarter, despite the challenging environment and further diversifies and balances our product portfolio.

Platform expansion from both acquisitions and greenfield locations has not only enhanced our scale, but is also provided further product, end market and geographic diversification, including market leadership across both the US and Canada. Technology deployments such as our e-commerce and fleet optimization and logistic software has enabled us to not only better serve our customers, but to achieve increased productivity through operational excellence.

Finally, since our last update to you in June, current external forecast remained varied with respect to both residential and commercial construction. The outlook for residential construction has improved. On the other hand, consensus forecast for commercial activity are little changed and still suggest a difficult environment. Looking ahead to the second quarter, we do anticipate further commercial weakness from what we experienced in the first quarter. Moreover, there is also one less selling day in Q2 of this year than last year. This is expected to present a more challenging year-over-year second quarter sales comparison to what was an all-time quarterly record last year.

In terms of profitability, the year-over-year gross margin comparison which was 33% in Q2 of last year will be more difficult than was the case in the first quarter. Taking these factors into consideration, we believe it prudent to targeted decremental adjusted EBITDA margin within the range of 10% to 20% for the second quarter of fiscal 2021. With the expectation that we will see some benefit from improved residential start numbers in our third and fourth quarters, we are optimistic that year-over-year sales comparisons should be less challenged in the back half of our fiscal year.

As we conclude, our focus remains on controlling what we can. We have taken, and intend to continue to take the necessary actions to optimize our operations and align our business with demand. I am confident in our team’s ability to continue to address challenges and leverage opportunities quickly and nimbly. We firmly believe the foundation we have built at GMS coupled with our strong liquidity and ability to generate cash, healthy balance sheet, market leadership and ongoing commitment to our strategic growth priorities positions us well for the duration of this period and for long-term success.

Operator, we are now ready to open the call for questions.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question come from the line of Matthew Bouley of Barclays. Please proceed with your questions.

Ashley Kim — Barclays — Analyst

Hi, this is Ashley Kim on for Matt today. So the first question I wanted to ask was, on the margin side, assuming resi continue to outperform commercial, do you expect a significant mix impact as a result of this?

John C. Turner — President and Chief Executive Officer

I think, on the wallboard side, we certainly expect they had an impact, a little bit, but as we’ve stated in the past, the profitability of the two are similar, because of the lower cost to deliver, but the gross margin itself was actually a little bit lower on the residential side. You’re seeing the mix in ceilings and steel and we expect that to continue. We are very happy with our other product category performance in spite of commercial weakness and we don’t see any reason why that shouldn’t continue. And so, in general, I think that what we’ve — what we were able to do here in the quarter, I see the trends continuing.

Ashley Kim — Barclays — Analyst

Got it. Thank you. That’s helpful. And then what are you seeing on tenant improvements, just seeing that you called that out last quarter, a potential weak spot? And has this shown any improvement as people kind of head back to work?

John C. Turner — President and Chief Executive Officer

Not yet.

Ashley Kim — Barclays — Analyst

Okay, got it. Thank you so much.

John C. Turner — President and Chief Executive Officer

Thank you, Ashley.

Operator

Thank you. Our next question comes from the line of Trey Grooms with Stephens. Please proceed with your question.

Trey Grooms — Stephens — Analyst

Thank you. Good morning, J.T., Scott.

John C. Turner — President and Chief Executive Officer

Hi, Trey. Good morning.

Trey Grooms — Stephens — Analyst

So first, I want to maybe see if you can expand on your comment about expecting or may be seeing further commercial weakness. So ceilings and steel organic volume both down double-digits and taking out the impact of one less day is that to mean that you’re expecting a deceleration from that level that we saw in 1Q? Is that — or, and any more color you can give us around that comment?

John C. Turner — President and Chief Executive Officer

Yeah, I don’t think it’s much different than we talked about last quarter, although it’s becoming more clear now, that commercial is certainly going to be weaker as we move through the balance of the calendar year and likely won’t strengthen until we get into later in calendar 2021. On the other hand, I think, I was accused of being somewhat bullish on the residential side after the last call, and I think I’m probably more excited about it now than I was then. So I think that offset as we mentioned here in our comments is likely to happen later in the year as we get — as we begin to roll over these starts numbers that are happening as we speak. But the degree of those offsets to what is, yes, it continued deceleration of steel and ceiling expected deceleration of steel and ceiling. I can’t tell you the degree of that deceleration really out much further than we’re operating right now, but I would expect it to slightly deteriorate through Q2. And then we’ll get on the phone again, and we’ll talk about Q3 when we have a little bit better visibility into it.

Trey Grooms — Stephens — Analyst

Okay, that’s helpful. Thank you for that. And with the SG&A leverage that you guys achieved, and Scott, you mentioned a few things that were drivers there, but you also mentioned the headwind there that you had, the 50 basis points headwind on from price. What is your thoughts around SG&A, the kind of sustainability there, at least for the leverage or with, when you’ve got volumes that are probably going to be challenged on one side of the business in 2Q, wallboard volumes might not be as good as what we can see later, just given the timing and the lag with starts. How should we be thinking about the SG&A side of things?

Scott M. Deakin — Vice President and Chief Financial Officer

Yeah, look, I think all the discipline that we’ve been maintaining in the business over the quarter, we would expect to continue with that. We’re really pleased with what we’re seeing on the logistics side of it, the warehouse and delivery side of things. We’ve been able to flex wages, labor, materials, repairs, those types of things really well. As you look forward into the G&A side of things, I think we’re really disciplined there, obviously we’d expect to maintain what we’re doing on things like travel, entertainment, meetings, all of those kinds of things, the more truly discretionary kinds of things that we’ll be doing. So maintenance there, is going to be important to us. And I got a key part of the way that we run the business into the quarter, obviously, as you indicated, though, we do have some softer revenues, in terms of the air cover to that, the net of that is that we don’t expect a whole lot of leverage go into the next quarter. But we should be pretty solid just in terms of our ability to weather this sales decline in that environment.

Trey Grooms — Stephens — Analyst

Okay, thank you. And if I could just sneak one more in, on the housing comment earlier, J.T. that you made around, it was down in the quarter, volume was down, kind of residential volume was down in the quarter, but that it, it did improve and any more color you can give us on that? It was — it sound like it improved through the quarter and into August. Are you kind of in the positive territory there yet? And it sounds like, it’s expected to ramp up even further as we get through this quarter, but just any more color on the trajectory?

John C. Turner — President and Chief Executive Officer

Yeah, I mean, we entered the quarter kind of a low-single-digit volume, exited the quarter much even lower-single-digit volume declines and now we’re maybe getting almost flat on a year-over-year basis. Currently, I think that that trend, I mean, it’s hard to imagine that trend isn’t going to continue and eventually flip to positive with the starts numbers that we’ve seen. So if we could — if we could get another three to six months of robust starts numbers, obviously what they start, they’ll finish for the most part residentially and we’ll be supplying it. So I think we remain positive in that trend.

Trey Grooms — Stephens — Analyst

Yeah. Okay, that’s it for me. Thanks, guys. I appreciate it.

John C. Turner — President and Chief Executive Officer

Thanks, Trey.

Scott M. Deakin — Vice President and Chief Financial Officer

Thanks, Trey.

Operator

Thank you. Our next question that come from the line of Steven Ramsey with Thompson Research Group. Please proceed with your question.

Steven Ramsey — Thompson Research Group — Analyst

Good morning. Maybe I’ll start with the other segment, can you go into a little more detail on what drove growth in this category, while the other products did go down steeply and maybe go into a little more detail on your comment that you expected trends to kind of sustain some growth out of that category.

John C. Turner — President and Chief Executive Officer

Well, I think my comment regarding sustaining growth is really more along the internal performance of the organization, not so much tied to the external environment and that is that we had our foot on the accelerator on other products for quite some time and we have momentum now and I expect that to continue, really the other product category anything related to residential is doing well and we don’t expect that to stop.

Steven Ramsey — Thompson Research Group — Analyst

Great. And then maybe on Canada, just what drove growth in that geography, any particular segment or region? And do you think it is sustainable in the Q2?

John C. Turner — President and Chief Executive Officer

Yeah. So, a couple of things, one, our business in Western Canada as I’ve mentioned in the past is more reflective, kind of a home center environment and COVID-19, I think the phenomenon we’ve all seen now is the home improvement phenomenon, is one of the many different changes societally and we are certainly in position to take advantage of that, have been. Additionally Canada had gone through a housing slump prior to COVID. And the demand remains pent up and I think that you’re seeing some snapback coming out of COVID. I don’t know how long that might last. But we certainly see good near-term trends in Canada and our team up there has done a very, very good job of positioning us to be ready to capitalize in this moment. So continue to do well in Canada.

Steven Ramsey — Thompson Research Group — Analyst

Great. And then last one from me high level, on de-urbanization driving or being one of the drivers of housing growth, housing starts that we’re seeing, I mean as we move from maybe a world where homes are more spread out and even offices potentially move to kind of a hub approach less centralized, big offices does that change your strategy for acquisitions in greenfields going forward as, is maybe the layout of homes and commercial construction evolves over the next few years?

John C. Turner — President and Chief Executive Officer

Well, I mean, the reality is, as we mentioned before, we’re pretty well balanced. We’re 50% commercial and 45% residential, doesn’t mean we’re that everywhere. So when we talk about one of our growth initiatives being stronger in our core product mix, it’s being — it’s becoming balanced everywhere. And not by shrinking one category, but becoming stronger in the other category. So I think, acquisition wise, the reality of that is, it’s pretty much white space related and, but, yes, obviously we would, we think that the ability to service residential is very important to us going forward, particularly in the near term. And so acquisitions in and around that makes sense.

Steven Ramsey — Thompson Research Group — Analyst

Excellent, thanks for the color.

Operator

Thank you. Our next question comes from the line of Keith Hughes with Truist Securities. Please proceed with your question. Thank you.

Keith Hughes — Truist Securities — Analyst

Thank you. Just a question about pacing, it — you gave us an update through kind of mid-June, last time of your reported it. It looks like July may have fallen off more, can you just talk, whether organic growth looked like in July and even into August, that would be helpful.

John C. Turner — President and Chief Executive Officer

Sure. We decelerated a little bit on a year-over-year basis, but we continue to improve sequentially into July. So a tale of two stories. And Scott, probably has the details.

Scott M. Deakin — Vice President and Chief Financial Officer

Year-over-year across, say the four months even into August, we are in the ballpark of sort of 4.5 to six for each of those months sequentially positive, July was down a tick versus the prior month, but really not much. So I’d say we were fairly consistent across those four months.

Keith Hughes — Truist Securities — Analyst

And that’s sort of negative 4 to 4.5 to 6, that was year-over-year, is that correct?

Scott M. Deakin — Vice President and Chief Financial Officer

Yeah, sure.

Keith Hughes — Truist Securities — Analyst

I guess final question, on the deflation in steel framing any signs that that’s at an end at this point or we still have several more quarters to fill them the numbers.

John C. Turner — President and Chief Executive Officer

Not several more quarters, it would appear — it would appear, I mean we are still seeing some deflation albeit less in the very near term, but it looks like it is bottoming as we speak, at least what we can see in the market. It looks like it’s bottoming as we speak.

Keith Hughes — Truist Securities — Analyst

Okay, thank you.

John C. Turner — President and Chief Executive Officer

At least sequentially, I would have to go back and really look at last year’s. I think even, we think, it’s going to be a little bit better than this, we said seven this quarter. I think, we thought maybe it’s going to be a little better than that as we move forward, but not — not a lot, probably, year-over-year, but sequentially, we think it’s coming to an end.

Keith Hughes — Truist Securities — Analyst

Yeah. Thank you.

Operator

Thank you. Our next question comes from the line of Kevin Hocevar of Northcoast Research. Please proceed with your question.

Kevin Hocevar — Northcoast Research — Analyst

Hey, good morning, everybody.

John C. Turner — President and Chief Executive Officer

Hi, Kevin.

Kevin Hocevar — Northcoast Research — Analyst

You mentioned, in terms of gross margin, it seems like the July quarters historically at least since you’ve been public as always has the lowest gross margin quarter of the year. And so, would you expect it sounds like maybe in the — the next quarter might be tough to reach the 33% gross margin that you saw last year. But would you expect gross margin for the balance of the year to be better than the July quarter or was there anything in July that, the July quarter that, this year would different than that.

Scott M. Deakin — Vice President and Chief Financial Officer

I mean we were 33% in Q2 last year, 33.3% in Q3 against 32.5% in this last quarter, I think we’d be looking for the remainder of the year to be much more consistent with Q1 of this year versus let’s say higher levels we were at last year.

Kevin Hocevar — Northcoast Research — Analyst

Okay, got you. And then in terms of M&A, it sounds, you mentioned in the prepared remarks, returning to a more active stand. So curious on that in greenfields, I’m curious, what the — what the M&A pipeline looks like. And also, it looks like you closed a couple of branches in the quarter, curious with the greenfield outlook is as well.

John C. Turner — President and Chief Executive Officer

Yeah. So we — in the quarter, let’s talk greenfield first. At least we have six to eight identified greenfields, all good markets, all complementary opportunities for us to expand where we already have a presence. So that strategy is going to continue. What we closed were basically operations that through different acquisitions and legacy things, didn’t make sense in the near term, so just a couple of those. Acquisitions, our pipeline was good before COVID, and we paused it, and now we’ve un-paused it, and the pipeline is good post COVID. So I would expect to see some activity over the next two to three to four quarters for sure on that front.

Kevin Hocevar — Northcoast Research — Analyst

Okay, great. Thank you very much.

Operator

Thank you. Our next question comes from the line of David Manthey with Baird. Please proceed with your questions.

David Manthey — Robert W. Baird — Analyst

Thanks. Good morning, everyone.

John C. Turner — President and Chief Executive Officer

Dave, good morning.

Scott M. Deakin — Vice President and Chief Financial Officer

Good morning.

David Manthey — Robert W. Baird — Analyst

First off, on — in your comments, in the prepared remarks, J.T., you mentioned that residential starts will help the revenue trends in the third and fourth fiscal quarters, and I think you made a comment about less challenged sales comps in the back half of the year, was that a comment that pertains to residential exclusively. It sounds like you’re also implying that non-res may be weakening, which I guess those lines who knows where they intersect, but was that comment specifically related to residential?

John C. Turner — President and Chief Executive Officer

It is — it’s primarily related to residential. I think that we believe Q2 could be the bottom as a direct result of that recovery in residential. For us, I hope most of the commercial forecasts are showing down 8, 9, 10 for the year, some of them in low-double digits, some of them at 5. So it’s kind of all over the board, but you get that consensus into that 8, 9. I think we’re kind of in the heart of it, in that regard. But I do think, if you look at the July numbers, if the July starts numbers were to repeat, and then in August, and then in September we start seeing those kinds of numbers. Then you — our Q3 and our Q4 will be — will be much better than otherwise, that’s for sure.

David Manthey — Robert W. Baird — Analyst

Okay. All right. And last quarter you had mentioned you expected ceiling volumes to be down, but pricing higher, and with ceiling prices down slightly here this quarter, which is pretty unusual for you, I assume some of that was grid pricing, but what other factors were behind those lower ceiling prices, and is that a temporary or one-time deal or could that be a medium-term headwind?

John C. Turner — President and Chief Executive Officer

Yeah. We have — ceilings price is not down, but I mean I’ll let Scott, I guess the headlines are down a little bit, but there is…

Scott M. Deakin — Vice President and Chief Financial Officer

I think you got it right. It’s really on the grid side versus the tile side, you’ve got it, about right.

David Manthey — Robert W. Baird — Analyst

Okay. And so I guess, as long as steel remains a headwind that could be a headwind, and then just the final question for Scott, could you just give us the number of selling days in the second through fourth quarters of the fiscal year, so we have those.

Scott M. Deakin — Vice President and Chief Financial Officer

We’re just — we’re down one in Q2, up one in Q3 and down one again, just the opposite of it. We’re up on Q2, down on Q3 and…

John C. Turner — President and Chief Executive Officer

Down one. Down one, up one.

Scott M. Deakin — Vice President and Chief Financial Officer

Yeah, down one, up one over the course of the next three quarters for a net down one for the full year.

David Manthey — Robert W. Baird — Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question.

Chris Kalata — RBC Capital Markets — Analyst

This is actually Chris Kalata on for Mike. Thanks for taking my questions. So my first question. I just wanted to go back to the incremental EBITDA commentary for next quarter. The 10% to 20% I would have thought with the outperformance this quarter that, that would come in slightly above that range. So I was just curious to get your thoughts on some of the moving pieces there and whether, some of the cost take out you saw on SG&A comes back in the quarter or is there some other one-time item that we should be aware of in terms of that, just looking to this.

John C. Turner — President and Chief Executive Officer

No, I mean it’s a slightly deteriorating top line. It’s one less selling day exacerbating that problem and it’s a normalized gross margin versus a very difficult comp in the previous year. And that math means 10% to 20% decremental, SG&A will stay under control for sure.

Chris Kalata — RBC Capital Markets — Analyst

Got it. That makes sense. And then just from our second question, any way you could parse out the deterioration in commercial? How that looks, the new construction versus R&R and then kind of, what’s your — outlook.

John C. Turner — President and Chief Executive Officer

It’s unfortunately right now, it’s really — it’s a very different — it’s in — it’s a weird time, it’s hard for us unless, we’re going to need to put a couple of more quarters in the bank before we understand that a little bit better. All of it is challenged, I mean, the pipeline we’re doing for the most part is a lot of new and a lot of remodel that have already started. So the traditional refit and office refit, and those types of activities that we would be doing in this — in this normal busy time of the years that’s not happening. So I think both are equally challenged quite frankly at the moment. I don’t — I think longer term, you’ll start to see some remodel come back and I think that as people really come back to work and occupy office space will start to see some — some pickup in that. But with that — with hospitality, restaurant and office being as challenged as they are, those are all robust remodel type markets, it’s just not happening at the moment.

Chris Kalata — RBC Capital Markets — Analyst

Got it. Very helpful. Thanks, guys.

Operator

There are no further questions at this time, I would like to turn the floor back over to Leslie Kratcoski for closing comments.

Leslie H. Kratcoski — Vice President of Investor Relations

Thanks, everyone for joining us today. As always, a replay of this call will be available shortly on our website. And we appreciate your interest in GMS. Good day.

Operator

[Operator Closing Remarks]