Ladies and gentlemen, thank you for standing by and welcome to the Second Quarter 2020 Armstrong World Industries Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Tom Waters, VP of Corporate Finance. Sir, please go ahead.

Thank you. Good morning and welcome. Please note that members of the media have been invited to listen to this call and the call is being broadcast live on our website at armstrongceilings.com. With me on the call today are Vic Grizzle, our CEO; and Brian MacNeal, our CFO. Hopefully, you have seen our press release this morning and both the release and the presentation Brian will reference during this call are posted on our website in the Investor Relations section. I advise you that during this call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect Armstrong World Industries, please review our SEC filings, including the 10-Q filed earlier this morning. Forward-looking statements speak only as of the date they are made. We undertake no obligation to update any forward-looking statement beyond what is required by applicable securities law. In addition, our discussion of operating performance will include non-GAAP financial measures within the meaning of SEC Regulation G. A reconciliation of these measures with the most directly comparable GAAP measures is included in the press release and in the appendix of the presentation. Both are available on our website. With that, I’ll turn the call over to Vic.

Thanks, Tom, and good morning, everyone. As you all know, these are very unusual and extraordinary times, and I hope that everyone on this call, along with your families and your colleagues, are staying safe and well. This most recent quarter was challenging in many unique ways, but I'm extremely proud of how the Armstrong team has rallied in the face of this challenge. Safety has always been a nonnegotiable at Armstrong, and this virus has been and will continue to be a significant challenge. But when you are accustomed to operating at world-class performance levels of safety, you find a lot of energy to innovate and to unique challenges like these, and our team has done just that. In our manufacturing and distribution facilities, our teams have created and installed barriers, altered operating processes, installed new methods of cleaning and adopted numerous new practices and procedures to create a safe working environment. The organization has continued to demonstrate a passion for customer service, problem solving and innovation like these. As of today, all of our plants and distribution centers are up and running and meeting the needs of our customers. Output has been aligned to meet demand and our inventory levels are well positioned. Since the middle of March, I've been closely monitoring one of our most important customer service metrics, our perfect order measure. It's a multi-factor gauge of service quality. I've been pleased that despite the required changes in our factories to maintain safety, the remote working conditions and unpredictable order patterns, we have maintained customer service levels at very high pre-COVID levels. Our headquarters and sales staff continue to work remotely and have become increasingly adept at remote work. Our digital tool set is now more important than ever, allowing us to remain fully engaged with…

Thanks, Vic. Good morning to everyone on the call. Today, I will be reviewing our second quarter results. But before I begin, as a friendly reminder, I will be referring to the slides available on our website and Slide 3 details our basis of presentation. Beginning on Slide 4 for our second quarter results. Sales of $203 million were down 25% versus prior year, our largest quarterly decline since at least the '70s. Adjusted EBITDA fell 36%, and margins contracted 590 basis points. Adjusted diluted earnings per share of $0.75 fell 41%, driven by lower earnings. Adjusted free cash flow improved by $8 million or 15% over the prior year. Our cash balance at quarter-end is $117 million. Our revolver availability of $370 million is up $170 million as a result of our refinancing in September of 2019. This positions us with $487 million of available liquidity, up $35 million from last quarter and up $47 million from last year. Net debt is $18 million lower than last year, driven by cash earnings. As of the quarter end, our net debt to EBITDA ratio is 1.5x versus 1.6x last year as calculated under the terms of our credit agreement. Our covenant threshold is 3.75x. So we have considerable headroom in this measure. In the quarter, we did not repurchase any shares as we suspended our repurchase activity to preserve liquidity in light of the COVID-19 impact on the market. Since the inception of the repurchase program, we have bought back 9.6 million shares at a cost of $596 million for an average price of $62.13. As Vic mentioned, this program has been increased and extended. We now have $604 million remaining under our repurchase program, which now expires in December 2023. Turning now to Slide 5, adjusted EBITDA was down…

Thanks, Brian. As I mentioned, I want to take a few minutes and discuss what we are seeing as we look ahead to an evolving new normal environment. Generally we're seeing improving construction activity, sequentially improving as we talked about and as we expected. Projects that were there before the economic shutdown are still there, and we have seen very few cancellations. These projects are ramping back up, but have done so more slowly than originally imagined due to their adoption of the CDC guidelines and new safety protocols, as I mentioned. Bidding activity declined significantly in April as you would imagine, but bounced back in May and has improved from there to its current level of down 13% month-to-date in July versus last year. Education bidding activity has actually turned positive in the past four weeks, and this is an encouraging sign for commercial construction activity. New construction projects that were started are going to get completed as will most major renovation work. With that said, it's reasonable to expect that there will be likely a pause in new office construction beyond the current project pipeline as companies need to assess new space and design requirements and education activity started earlier than prior years as schools took advantage of empty classrooms to make repairs and planned renovations. We expect this to continue into the summer months as normal. The big question will be how much money school systems will get from the federal government to make renovations in an effort to get kids safely back in the classrooms in the fall. In our view, whatever they get will be a net positive for additional renovation activity in schools. There remain significant market uncertainty over the next six months and maybe until there is a vaccine for COVID-19. So we…

[Operator Instructions] Your first question comes from the line of John Lovallo from Bank of America. Your line is open.

Hey, guys. Thank you for taking my questions. The first one on decremental margins, Brian. In Mineral Fiber, it looked about 60% in 2Q. Should this improve though as regional mix improves in the back half of the year? And then on the Architectural Specialties side, the 40% was a little bit higher than we would have expected. Maybe help us understand what drove that and how should we think about decrementals to the remainder of the year?

Go ahead, Brian.

Yes, John, it's great question. As we look at our cost out actions, a good majority of them are in the back half. So we should see that decremental hit come down from what we saw in Q2, and so we're in that 55% to 60% range.

Got it. Okay. Thank you. And then, Vic, maybe if we just think about your thoughts post 1Q and then sort of evolved over 2Q, what was sort of the biggest delta in your thought process? I mean, is it just really as simply as things being slower to reopen? Any thoughts there would be helpful.

Yes, I mean, there was a lot of uncertainty even sitting in April, right, on how deep this would continue or how long it would continue. But we all felt that they would -- these cities would eventually open back up and the work would get restarted and going again. And I think one of the things that -- you mentioned it, I think that surprised us the most is the -- I would say the lost productivity, if you will, and try to adopt these new CDC guidelines in spacing and how many people can get in an elevator, right, to go up to the job sites and many said it was one, and you can imagine getting a whole crew up how long that might take. So things like that I think slowed the opening of some of these job sites and the flow of product back into those job sites. The one hypothesis that I was watching throughout the quarter though, because we expected sequential improvement as again some of these mandates were lifted, but whether the jobs would still be there. The ones that we had in our pipeline, the ones that we were starting to serve when they reopen back up, would they be there or would they be canceled or delayed for long periods of time. And what I was pleased to see is that we did not see massive cancellations. We saw very few cancellations, and the projects by and large were there that were there before the shutdowns, and that was encouraging.

Great. Thank you, guys.

Yes. Thank you.

Your next question comes from the line of Phil Ng from Jefferies. Your line is open.

Hey, good morning, guys. This is Maggie on Phil. I guess just start off with the full-year sales guidance implies a pretty big range of outcomes in the second half. So maybe if you could just walk through the different scenarios that get you to each end with that 10% to 18% decline for the full-year? And if there is any trends you want to call out between Mineral Fiber and AS.

Yes, Maggie, we do run a bunch of scenarios, you can imagine, especially with the level of uncertainty on what's going to happen with jobs and then follow-on jobs from that. So we've done a tremendous amount of scenario planning. And we really got to an outlook scenario versus guidance because the -- and we needed larger ranges to really capture the range of some of these scenarios. And so when we think about it, it was important I think to bracket what we see is going to happen. Again, outside of any government mandated shutdowns we think we have it well bracketed in these wider ranges. But we purposely wanted to provide wider ranges to make sure that we capture the scenarios. And without going into too much detail of the scenarios, it's really around assumptions on big drivers for us are these seven key territories and how well they open up and get back to their productivity levels on these jobs and continue on. There are scenarios around that that we are looking for. Plus, some of these outbreaks, we're looking at some of the dampening effect it could have. Although there're no shutdowns, there are dampening effects in some of these regions, and we scenarioed different -- some scenarios around what that might look like in a dampened recovery in some of those key areas. So really driven by sales at this point. We have a really good handle on our costs and our cost control. We feel really good about the pricing. We -- I think we feel good about modeling our mix, given those various scenarios. So this really just comes down to how well does the demand profile shape up, and we've modeled against that. Mineral Fiber versus Architectural Specialties, I think we're going to continue to expect Architectural Specialties to outperform the market just based on the project nature of that business and the visibility on the pipeline there. It doesn't have a large discretionary component to it that is harder to predict like we do in the Mineral Fiber. So I would expect between the two, we will continue to see Architectural Specialty outperform the Mineral Fiber business in an environment like this, especially.

Got it. That's really helpful. And then I guess touching on Architectural Specialties, I think most of your competitors there are more local or regional players. So have you seen share gains in this environment and how does that impact your M&A pipeline and maybe your appetite to pursue more bolt-ons over the near-term?

Yes, I think in this environment, it's fair to say there is not a lot of share moving one way or the other. There's not enough activity to really change the trajectory of -- I mean, these projects were shut down. It didn't matter what kind of projects they were, right. So I'd say no change really in the share trajectory, although we were gaining share and we've been gaining share for several years now, and I expect that that trajectory to continue, but no change in the trajectory. Certainly, a lot of these companies have to be struggling in a low to no demand environment like we were in the second quarter, and we're advancing our conversations with many of these companies and we expect to continue to have some opportunities that come out of this for that. We are especially pleased with the ability to keep the conversation going with the Turf owners and management team. It's a very exciting acquisition for Armstrong as this is a company that brings many things versus just a new product and a new product category for us in the felt category, in particular. But they bring some advanced design capability. They have a strong specification team, which you know is very synergistic to how Armstrong wins in the marketplace today. And they have really strong management team. We are excited to have them on our overall management team. So we expect to continue. We are open for business, as we said here, and we believe that the pipeline -- actually the pipeline continues to grow, as I mentioned in my prepared remarks.

All right. Thanks for taking my questions.

You bet. Thank you.

Your next question comes from the line of Susan Maklari from Goldman Sachs. Your line is open.

Thank you. Good morning, everyone.

Hi, Susan.

My first question is, you mentioned in your comments, Vic, that July to date is running ahead of June. I just wondered if you could give us maybe a bit more color on how July is trending and just where things are kind of coming in relative to June.

Yes. It's sequentially improving versus June, and you have some seasonality effects that you look for also, month-to-month, and I can say that July is not only sequentially improving versus June but it's covering the seasonality uptick that you would expect to see from a normal month movement from June to July. So we've seen some nice uptick in the flow of sales in July.

Okay. That's encouraging. And then my second question is just on the cost reductions that you are also guiding to the $45 million to $50 million. Can you give us a bit more color on the breakdown of that between the manufacturing versus the SG&A side, perhaps just some guidance on how much of that is structural versus more discretionary? So as we kind of model the margins going forward, how much should we expect to kind of hold for a while and how much could potentially kind of flow back in the business as the volumes start to return?

Yes, it's good question, and I will ask Brian to provide a little bit of color. Let me just add on the high-end of this approach to cost reductions, I think it's important to say that we’ve made a very conscious effort in this particular downturn to continue investments in growing the business, and the growth initiatives that we've embarked on at the beginning of the year, we've continued -- and we've continued to invest in our innovation effort. And so we've kind of -- we've found a really nice balance of making sure that we're right-sizing on the demand side of the business, but also we're not taking our eye off of these growth investments and these initiatives that are really going to drive the future growth of the company. And we found a really nice balance there, and that's been an important work for this management team. But the team's done a nice job on the cost front. And Brian, maybe you could outline a couple of the buckets that Susan referenced.

Yes, absolutely. So, 30% of it's more variable and tied to volume. The other 70% is more temporary, like variable comp and travel, third-party vendors, which we expect to come back into our P&L in 2021. We -- as a reminder, we continue to expect sequential improvement, and in the event of any meaningful setback in that demand, obviously all costs would be further scrutinized. But I think, Susan, the short answer is, 30% is more variable and the other 70% is temporary.

Okay. Thank you. That's helpful. Good luck with everything.

Yes. Thank you.

Your next question comes from the line of Kathryn Thompson from Thompson Research. Your line is open.

Hey, good morning. This is actually Brian on for Kathryn. Thank you for taking my questions. First one, maybe regarding the post COVID opportunities. You guys mentioned some of these in the prepared remarks, but if you can expand more on the like low-hanging fruit for Armstrong to kind of participate in that commercial space reconfiguration in the near-term and then versus the kind of more longer-term opportunities that are out there.

Yes. Thanks for the question. At the -- the low-hanging fruit, as you referenced, really is around patch and match and disturbances in the plenum from any of the layout changes, think lights, HVAC changes, things that you have to get into plenum for whatever that happens, that is a renovation or replacement opportunity for Armstrong. And I think that's ongoing now. We have some real examples of that in our own campus when we had to change the layout of our cafe to make it more healthy. You have to remove this salad bar for example and things that hang from the ceiling over the salad bar to protect it have to be removed and therefore the ceiling tiles have to be changed. And so, it's those types of low-hanging fruit opportunities we believe are going to be there at the onset here. But as companies just like Armstrong are looking at how do we do social distancing and how do we relay out our cubicle configurations and so forth, that will also have an impact on where the lighting is and where the diffusers are in the ceiling, and those create nice renovation opportunities again. And then longer-term, as I mentioned, and as you structurally change the footprint of your office or even the classrooms which the schools are wrestling with right now, it will impact moving walls, changing HVAC systems and so forth and give us an opportunity to actually replace all of the ceiling tiles with more antimicrobial or Health Zone type products, and those are some medium to longer term opportunities we see. So again, we think this renovation activity, this catalyst that's coming to renovation is going to be with us for a while as this health crisis is I think change the way we think about health and how we think about pathogens in the air and healthy spaces overall is being redefined in the eyes. And I know it from my own employees and how they're thinking differently and what their expectations are to come back to the office, and we desperately want our employees to come back to the office. It's where we do our best innovation, so we do our best collaboration. So I bet every business owner, CEO, manager, is thinking along these lines as well, let alone our students and what we have to do to get our students back in the classroom. So we're excited overall about -- this is a real catalyst that we haven't seen in the renovation side of the business in a long time.

Got it. And I guess with that catalysts and that opportunity for people to come back to the office, how are you balancing those opportunities with I guess the other side of the pendulum, the risk of smaller office footprints, lower occupancy rates and kind of the downside for that? How do you balance those two?

Well, there is a balance, right? It's not all going to move in one direction. But what we do know is that 90% of employees surveyed want to come back to the office, at least part time, if not full time. 70% of employees want to go back to the office for the majority of their week. So things have to change in the space. That's going to generate a renovation opportunity for a company like Armstrong. But even if as they reassess the footprint that they have, they move out of the space, the space gets repurposed. That's another renovation opportunity for Armstrong. So if somebody says, hey, we don't need 10% of our space, they let it go back to, say, the building owner, he leases it out to somebody else. And again, that's a tenant improvement opportunity for us. The other trend here to keep an eye on is that, when they say they don't need as much space, they're actually displacing where they need the space. Maybe less city-dwelling in terms of offices, but they need more suburban space. And so there is counterbalancing to both of these. So again, I think there's opportunities, and there is risks and they're going to counterbalance over time, but it's a net positive overall for a company like Armstrong that relies 70% -- 75% of demand from renovation activity.

Thanks for the color.

You bet.

Your next question comes from the line of Keith Hughes from SunTrust. Your line is open.

Thank you. Two questions. First, this renovation opportunity, how far away is any meaningful demand? I mean, is it up to a year or when do you think you could actually get some business from this?

I think there is low-hanging fruit going on right now. I think the -- and I mean right now, meaning in the next 90 to 120 days, especially as they get back into the classrooms. I think that's going to be -- and we -- and I mentioned that the bidding activity in education has already turned positive versus the other verticals. So I would expect we'll start to see some opportunities from this in the next 90 to 120 days. Again, it's going to continue to go as -- in phases and waves. And I think -- it's not an event that happens and then it's over. I think this is continued over the next several years in terms of renovating the 38 billion square feet of installed base out there somehow needs to get touched and renovated, and we plan to be a part of that conversation and each of the opportunities.

Okay. And second question on the cost save you highlighted earlier. The numbers that you've given, is that a run rate cost-save or 12 month cost save number?

Brian?

Yes, Keith, that's this year.

Just this year? Okay.

Yes.

All right. That's all. Thank you.

Thanks, Keith.

Your next question comes from the line Kenneth Zener from KeyBanc. Your line is open.

Good morning, gentlemen.

Hi, Ken.

Good morning, Ken.

I appreciate your comments. I know a very difficult landscape. I have -- my two questions are going to be about current and then the future. So, you talked about inventory reduction. Could you talk about what that drag was you think, first, the POS trends that we saw? And then, Brian, if you could spend -- expand -- or Vic, on the comments you made about the top seven markets? I just want to make sure I understood you correctly. I think you said it was down 40% versus 20% for the others. So if you could somehow give us a mix in sales or something to think about that. And then relative to your second half guidance, you talked about sequential trends, but should we expect 4Q to be down from 3Q, which is normal seasonality or -- I'm just trying to make sure we don't back-weigh or we interpret what you're saying as best we can. That's my first question.

That sounded like several, Ken.

I think it might have, but I appreciate it.

So let me take the first part of that and then I will ask Brian to comment on the territories that you asked about. The majority of what we are seeing is really -- when you said point of sale data, but it's really the market, right. I think most of the downturn that we saw was government mandated shutdowns across the country. And there was a little bit of inventory correction that was going on in the channel, for sure. I'm sure everybody was managing their cash prudently. But I wouldn't call it out and say that that was a meaningful part of the overall minus 25% we saw in the second quarter. Brian, you want to comment on the seven territories?

Sure. And, Ken, maybe, Vic, I will also talk about the sequential piece. So, Ken, even with the seasonality, we do expect Q4 to be better than 3 as these key markets start to really open up. And as we look at those seven key markets, I think Vic mentioned in his prepared remarks, what we've seen in July is them start to get to the same level. So we've seen an improvement in those seven from what we saw in Q2 sequentially. And so we're continuing to monitor how quickly they open up and some of the logistics on the job sites.

Thank you. The second question -- I appreciate your patience -- is what are you seeing -- could you expand on this education considering state funding is -- they're running deficits? And then, is it a switch from elective spending to required for health/safety? And then what are you seeing from New York and perhaps Houston from hospital trends out of these early -- what's the early feedback from that institutional market? Thank you.

Yes. Ken, so on the -- what was the first part of your question? Because I was thinking about your second one in Houston and New York. But what was the first part?

Yes, the first one, just state, education, states are broke.

Okay. No, I got it. Yes.

Schools need to do this for a health reason. That's a very different approach than what had been an elective expenditures before in terms of how they allocate funds.

Yes, when they were relying on their own state budgets, right, they had to really prioritize. And as we note -- and we've noted with you over the last seven or eight years, funding went other places, probably more importantly the books and things like that and in terms of supporting the education environment. But now the crisis is about making these classrooms healthier so parents are more confident to send their kids back to school. Of course, the superintendents, everybody, the teachers feel safer in this space as well. So the money being allocated either in the GOP bill or the Democratic bill is somewhere between $100 billion and $500 billion to help solve for how do we make these classrooms safer to get the kids back in. That's a real stimulus I think to renovation activity. It definitely is less discretionary than it used to be just because they have to solve for these spaces are healthier and address the potential presence of pathogens. They have to address that to get the kids back in the classroom. So yes, I got to believe it's a lot less discretionary than it used to be. As far as the healthcare facilities in New York and Houston -- and I appreciate your patience on that, but -- we continue to see good activity on the healthcare front really across the country in terms of renovating spaces to make them healthier. They're actually replacing ceilings in a lot of places as part of their cleanup effort. So we've had some nice activity there overall. And again, it's not standout like we're seeing a big driver yet, but we're continuing to see improvement in the healthcare facility. I think longer-term, Ken, the way to think about the healthcare facility is, one of the things that this pandemic has really shined a light on is the lack of local medical facilities available to do things like testing, and I think this could really be some nice new construction activity for the long term in healthcare. We will have to wait and see.

Thank you.

Thank you, Ken.

Your next question comes from the line of Adam Baumgarten from Credit Suisse. Your line is open.

Hey, good morning.

Good morning.

Good morning.

Just on pricing, how should we be thinking about in the AUV equation going forward like-for-like pricing? And, are you still proceeding with the August price increase that was laid out earlier in the year?

Yes. On pricing, we are still getting good traction on our February price increase and -- in the significant deflationary environment we are on -- we are in. We are not likely to go out with a general price increase in August, but use the pricing tools that we have in our toolbox for more surgical pricing opportunities. And so I expect like-for-like pricing to continue to be positive as we are year-to-date now and like-for-like pricing, I think the traction with that price increase should continue through the second half of the year. Overall, AUV is going to improve though as we get these territories back up and running and we get a more normal mix of regional mix going that we should have positive mix and overall positive AUV for the year. That's what we expect to see.

Got it. Thanks. And then just on input costs. They've been a tailwind. Is that contemplated in guidance going forward for that to continue?

Yes, it is.

Great. Thanks.

You're welcome.

Your next question comes from the line of Stephen Kim from Evercore ISI. Your line is open.

Yes. Thanks very much, guys. Crazy times.

Yes.

Who would have thought that making workers more healthy would mean that you get rid of the salad bar.

It's a pretty unusual time.

What is the world coming to, right, without the salad bar?

Yes, exactly. Well, I wanted to talk to you a little bit about this retrofit opportunity. So I guess the first thing is, big picture, when you think about the -- I mean, you sort of think about the timing for that potential wave of renovation that may come. And I'm looking at the architect data and we're seeing big drops in billings and projects, we're hearing about layoffs in the architectural community and that kind of thing. So I'm wondering, are these renovation jobs typically requiring the usage of the -- or the input of an architect or not? And therefore, would you expect to see architectural billings increase ahead of this retrofit opportunity or not?

Yes. No, the A&D community is definitely involved in a lot of these renovations. You're going to have a mix, right. You're going to have some things that, like I described earlier, I think with Keith's question, you're going to have some patch and match stuff. They're just damaged tiles because they were in trying to do something, change filters or do something or change lighting and some of those type of patch and match -- most of those patch and match opportunity, Stephen, as you know, don't include -- don't need anything but a facility manager and a good distribution outlet. So there is a good portion of this business that's low-hanging fruit. It's just going to show up through distribution. But we survey the A&D community, and 60% of the A&D community has said that all or most of their clients are asking them and discussing healthy -- how to create healthy spaces in their buildings. 92% A&D community has reported that clients -- they've been asked from clients on how to create a healthy space. So I think the A&D community is going to be involved, and it's just going to depend on, is this the low-hanging fruit in phase one or is this a phase two/phase three discussion and I think you have to think about them in succession to really do it right. And that's how we're thinking about it.

Yes, I know. It makes sense. Can you be a little more specific about the growth opportunity for these -- I think you mentioned antimicrobial products that are used in the healthcare and clean room settings. I'm curious about -- are these products effective for sound attenuation too, or is that an area of potential innovation for you to sort of combine the medical needs with sound attenuation in products that we don't currently see today? And are your existing products able to address the newfound desire for cleanability as opposed to simply being antimicrobial because I thought generally ceiling tiles that you make aren't really meant to be touched a lot. And so, to the extent that people are fixated on cleanability, I'm curious as to if the Company has any ideas for how to address that desire.

Yes. No, in the healthcare facilities, we sell our Health Zone product, and cleanability is a big requirement. That product was designed to have this probability to cleanability that is required in a healthcare facility. And as you can imagine, acoustics and sound attenuation is very important in a patient environment. It has a lot to do with their blood pressure and how well they recover. So, yes, these Health Zone products that we're talking about that we're going to have really good application outside of just the healthcare vertical today bring acoustics, they bring aesthetics and they bring cleanability as well as the antimicrobial performance. So it's a technology platform that we can lift and place in these other verticals as we educate them on the features of the benefits of this product. We are going to continue to build on this, so we can even drive a broader range of acoustical performances as well as a broader range of antimicrobial performance.

Vic, I know that you guys have pretty dominant market share generally. But is your -- would you say that your footprint here or your market share within this Health Zone kind of area, is it higher than your Company average or is it a little lower than your Company average and therefore an opportunity for growth?

Well, we've said publicly I think that when you get into the specification community and jobs that are spec driven, we’ve above our average share position in those types of channels and projects. It's really a driver of our innovation, and we really cater our innovation to those next generation specifications. And Health Zone is a big product of that.

Yes. That sounds great. Thanks very much. Appreciate it.

Yes. You bet, Stephen.

Your next question comes from the line of Yves Bromehead from Exane BNP Paribas. Your line is open.

Good morning, gentlemen. I will just have two questions, if I may. The first one, I think you just mentioned about 70% of your sales is exposed to the renovation and retrofit sector. I was just wondering if you have a similar end market structure in your nine key territories or you have a higher exposure to new construction in these markets?

Yes, that's a good question. They tend to be about the same. 25% to 30% driven by new construction activity and then the remainder in renovation activity. Again, these are large installed bases and especially in these seven key territories we're talking about, there is a really large installed base and so there is some of the mature base that really dictates that -- that allocation of 30-70.

Okay. And just the second question, I think you mentioned that you -- you mentioned sequential improvements through Q2 '20, especially in June. But I was just wondering if you would be able to quantify what would be the exit rate in June in terms of year-on-year decline versus 2019 levels so we can have a reference point.

We are hesitant to do that because I think the ranges that we provided in our outlook I think capture what could happen to that run rate. I mean, we are very pleased with the sequential improvement and more specifically the jobs that we were expecting to serve are still there. And so the sequential improvement from April to May and May to June and then as I talked about earlier, from June to July is continuing at a nice clip. So first just trying to reference that, I think our outlook is the best thing I could point you to in terms of what could happen with this exit rate and where we expect to land at the end of the year.

Okay. And if I can just add one more question, if I may. I mean, there is a lot of talk in renovation and retrofits over here in Europe, and it seems that it's starting to also be part of the political sphere in the U.S, especially on thermal renovation. Historically, in the last decade, you've actually exited some verticals. Would you be willing to look in at possible verticals in HVAC, for example, or more installations in the future, try and benefit from those potential plans?

Right now, we're really focused on this -- this opportunity in ceilings and walls. We have a nice adjacency in specialty ceilings and walls that we are in the early innings of. We have a good runway there. And I think with this renovation catalyst now for our Mineral Fiber business and the installed base, we have an additional growth engine opportunity. So I think we have a lot to stay focused on within the ceiling and the wall space right now. And that's where we are going to stay focused in and make sure our investment dollars go in behind those initiatives.

All right. Great. Thank you so much.

Thanks for your questions.

Your next question comes from the line of Justin Speer from Zelman. Your line is open.

Thanks for sneaking me in, guys. I appreciate it. Just a couple of questions, a few questions. On the bidding activity that you referenced, I think you mentioned that it slowed substantially in April, improved, to down 13% in July. I guess, what -- is that net of cancellations or is that a gross figure?

That would be a gross figure. We're not measuring the two together. This is really the amount of activity, year-over-year comparison. So it's really an activity metric, the way to think about it.

Yes. So I guess in terms of the second …

Yes, but cancellations have been very small.

So those cancellations that you are mentioning were -- so you mentioned that very small cancellations on projects that were already in backlog or in motion.

Correct.

So for those projects that have not yet broken ground, so I'm talking about bid activity that has not yet transacted or broken ground. Is that -- I guess the question is, is bidding activity encompassing projects that have already broken ground or is that prior to breaking ground?

This would be prior to that, right, so it doesn't have to be breaking ground. These can be tenant fit-outs, right? So …

Okay.

Yes. These aren't -- this isn't a new construction metric. This would be an overall bidding activity metric, yes.

So I guess in terms of the second quarter overall, what was the bidding activity? How much did it decline? I guess, how does that translate to revenues in terms of timing or phasing as we look out?

Well, these projects can go anywhere from, what, three months out to two years out, right. So it's really kind of -- that's a really tough question to answer very specifically, because the bidding activity is picking up all sides of the projects that are being let. So, I think this is a proxy for activity and I would think about it in terms of what we just experienced in terms of a downturn in the quarter that the bidding activity hold up, and is it getting better is -- I think it's a directional more than an actual number of comparison and correlation to revenue. But it is a -- I think a good metric in terms of future activity and future demand on activity requiring bids, for example, versus part of our business, again, just as you know, is a patch and match and a flow business that wouldn't be captured, for example, right in this bidding activity. So I wouldn't weight it too heavily in terms of a forecaster for revenue, but it is a good measure of overall bidding activity that continued.

And then in terms of any distinctions, I know that there are certain parts of the nonresidential channel that are doing better, faring relatively better than others, but I guess if you could like maybe rank order the verticals, the key verticals for you and I know you don't breakout lodging. I don't know where you put that, but a big chunk of office, education, retail, some transportation, some healthcare, some residential, but I guess if you could rank order for us how things are trending and how you think about them in a rank order fashion as you look at your outlook?

Well, I think all of these that -- the verticals that are really important to us, they all kind of improved sequentially from the April. Education was the outlier, as I mentioned earlier, that really accelerated in terms of its bidding activity and actually was positive versus prior year in bidding activity, which says something right in this environment. So I called out that when I think the others have sequentially improved kind of together.

Okay. And then last question for me, in just terms of your distribution arrangements, your exclusive distribution partnerships, any distinctions or changes in strategy there to maybe loop in more distribution partners or maybe a change in tack there in light of the environment?

We really have the best-in-class distribution partners today. We rely on them heavily, they rely on us heavily, we have a really good partnership in coverage in the marketplace today. So what we are doing is we are investing in that channel with our digitalization initiatives to help our relationship even be more efficient and covering our customers -- and covering more of the customers in the marketplace. So we -- it's a real asset of the company and I really do believe we have the best partners in the industry.

I appreciate it, guys. Best of luck to you.

Thank you, Justin.

Excuse me, presenters, there are no further questions. Mr. Grizzle, back to you.

Thank you. I just want to thank everybody for joining today. Went a little over time, but some really good questions. We -- obviously a very, very tough quarter. Everybody has had a very I think similar experience in terms of the shutdowns. We remain focused on creating long-term shareholder value. As I mentioned earlier, we did not take money away from our growth initiatives and starve growth initiative -- or pause growth initiatives, and we are very, very happy about the balance that we have found on the cost side of the business and maintaining the long-term trajectory of the business. So we're excited about, on the other side of this, this renovation opportunity, and we are going to be working hard to make sure that we are part of that conversation and we are part of the solution of creating healthy spaces which is going to be a much more nondiscretionary expenditure for a lot of companies going forward. So thank you, again, and look forward to talking to you next quarter.

This concludes today’s conference call. You may now disconnect.