Christopher Wellborn
President, COO at Mohawk Industries
Thank you, Jim. Our Global Ceramic segment delivered the strongest performance during the quarter, even with substantial inflation headwinds in Europe. Sales in new home construction channel were solid in most geographies and the commercial channel showed resilience with new construction and remodeling projects continuing. In most markets, residential remodeling has slowed due to tightening consumer discretionary spending and higher interest rates. We are managing through pricing and mix to reduce the impact of material and energy inflation on our cost. Natural gas prices remain in a major headwind with volatile pricing in Europe significantly impacting our results.
Recently, European spot gas prices have declined significantly as available storage nears capacity, though the future pricing for the winter has not followed the decline. Across the segment, we continue to reduce SG&A spending, operational costs and capital projects to align with market conditions.
Sales in our U.S. ceramic business expanded during the quarter with the greatest growth in the commercial and home construction sectors. Residential remodeling demand continued to lag in the retail channel and customers are reducing orders to better align their inventories. During the quarter, our margins were driven by our pricing actions and strong commercial sales improved our mix. We are gaining support with our new higher-margin introductions that are an alternative to European imports. To offset material inflation, we are identifying further process improvements, utilizing alternative materials and reformulating glazes.
To align with seasonal demand and manage our inventory, we are scaling back production in the fourth quarter and reducing sourced purchases. Our countertop sales grew during the quarter, led by our high-end quartz collections. Our quartz manufacturing plant is operating at full capacity, and we are sourcing products from around the world to satisfy demand. We expect that our new quartz production line will start up in early 2024 and will allow us to further expand our sales and improve our mix.
Our European ceramic results in the quarter exceeded our expectations due to our sales and pricing actions, positive mix and Italian energy subsidy. Subsidies are approved through November and may extend further. During the quarter, sales of our premium collections remained strong, while increased gas prices impacted our outdoor and lower-end products. European consumers or postponing residential flooring investments as high energy costs squeeze their budgets. Given lower spot gas prices and government subsidies, we are increasing production in the fourth quarter to raise inventory levels and improve service. In the first quarter, we anticipate lower production rates with winter energy prices expected to peak. Our operations teams are adjusting our production across our European plants to optimize mix, cost and flexibility as demand evolves. We have addressed the shortage of premium play by reengineering formulations with material from alternative sources.
In our other markets, third quarter sales grew primarily through pricing, mix and strengthening the commercial channel. Mexico Central Bank has implemented additional interest rate increases which is slowing the economy and ceramic sales. In Brazil, interest rates remain high and retail sales are slowing. We are increasing our activities in the A&D community and expanding our commercial product offering. Our pricing actions improved mix and productivity gains enhance results. All businesses are reducing production in the fourth quarter, which will increase our costs.
Our team in Mexico has a detailed strategy to integrate our Vitromex acquisition to optimize short-term results. The combined organization will have a stronger product offering and a competitive position to address the $1.7 billion Mexican ceramic market. Government approval of the transaction may be finalized in the first quarter.
For the quarter, Flooring Rest of World sales rose year-over-year, primarily from price increases and growth in our panels, insulation and Oceania businesses. The segment sales are mostly residential and were more impacted by constrained consumer spending. In Europe, inflation is reducing discretionary purchases, so we did not see the typical seasonal improvement after the summer holidays. The retail sector is reducing inventories and consumers are trading down in all categories. Our margins in the quarter were compressed by inflation, lower sales volume and reduced production. The weakening markets are making additional price increases more difficult to implement. Natural gas prices in the period temporarily reached 12 times historical levels and governments are reviewing ways to assist industry and consumers with despite in gas and electricity prices. Our wood supply and pricing is also being impacted as it is being consumed as an alternative source for both heat and electricity.
As flooring sales softened, we increased promotional activity to encourage consumers to trade up. While our premium laminate and LVT face greater pressures, our more value-oriented sheet vinyl sales grew. In the quarter, we implemented price increases that partially offset rising material and energy costs. We anticipate sales volumes in the fourth quarter will remain weak and we are reducing production, substituting alternative materials, implementing process improvements and postponing non-critical projects. We completed the acquisition of a small Polish sheet vinyl producer that will expand our business in Central and Eastern Europe.
Our urethane insulation products provide the highest thermal resistance as consumers seek ways to reduce energy costs. New building projects in Western Europe are beginning to slow and we are enhancing our distribution by expanding our customer base and exports. Our selling prices were slightly behind inflation, and we are reviewing alternatives to optimize our costs. Our new insulation plant in the UK continues to ramp up as we increase our sales and distribution.
Our panels results weakened as demand soften and competition intensified. Our margins declined due to the impact of lower sales and production volumes from the weakening market. The French panels plant we acquired last year is increasing sales and we have improved its productivity and operating expenses. We expanded the distribution of our higher-end decorative panels and acquired a small mezzanine flooring company that will bolt on to our existing business.
In Oceania, our sales improved primarily from pricing and mix. The Australian market is improving as the country relaxes COVID restrictions and New Zealand is more difficult with residential sales weakening. Our increased pricing is covering inflation and inventories increased as imported material arrived faster than expected.
For the quarter, our Flooring North America segment sales increased primarily from pricing. The commercial sector was stronger than residential with hospitality leading the other channels. Hard surface products outperformed, benefiting from technology and capital investments in premium laminate and LVT. The residential market softened as inflation impacted consumer discretionary spending and retailers reduced their inventories.
Our pricing in the period offset material and energy inflation. The lower manufacturing volumes led to unfavorable absorption. We managed our sales, marketing and administration spending to align with volumes and offset inflation. We are implementing our restructuring plans to lower both our fixed and variable costs by shutting higher-cost assets, reducing staffing and aligning production with demand. We are executing many projects to improve productivity, reduce waste, reengineer products and lower energy costs. We are also deferring non-essential capital projects to align with the present environment.
Our residential sales continued to improve with our strongest performance in the new home construction, multifamily and commercial channels. We have introduced assortments tailored to regional preferences and optimized our portfolio to improve productivity and service. Our Web Protect and antimicrobial technologies are being well accepted as desirable features by consumers. Sheet vinyl sales strengthened as inflation has increased in value-oriented flooring options.
The first phase of our new West Coast LVT plant is operating at planned output levels. We are ramping up production and training the workforce for additional lines that will be installed throughout next year. Our East and West Coast operations will enhance service to our customers, lower our cost and improve transportation efficiencies.
Demand for our premium laminate continued to grow as high-performing value alternatives to other flooring. Sales of our waterproof [elections] and more realistic visuals are expanding in all channels. Inflation in other materials has reduced our margins, though we are beginning to see some cost decline. Our new manufacturing line is operating and our targetable to satisfy increasing demand. We have commitment to saturate our current capacity and have initiated further expansion investments.
Market conditions for carpet softened in the third quarter more than we had anticipated, and we reduced production resulting in unabsorbed costs. In the second quarter, we announced price increases that were implemented in the third quarter as inflation continued to rise. With demand softening, we were not able to increase prices further to recover the inflation after the announcement. We are seeing reductions in raw material costs that should align with our current pricing when our higher cost inventory is depleted.
To reduce our cost, we are eliminating less efficient capacity, streamlining operations and lowering marketing and administration costs as well as reducing production to lower inventories. Our commercial business remains good and Architectural Billing Index reflects continued construction activity. The hospitality channel grew the strongest as postponed projects and renovation are increasing demand. Our margins remain strong as pricing and mix covered our inflation in the quarter. Our commercial hard service sales growth is outpacing carpet with flexible LVT being the preferred option. Our new, more sustainable carpet tile, Ecoflex 1 is gaining acceptance with its low carbon footprint, recycled content and acoustic advantages.
To complement our flooring accessories business, we acquired a small rubber manufacturer that produces trim primarily used with commercial installations. The acquisition expands our current accessories business, which produces laminate, vinyl and wood trim. In the quarter, sales in our rug business were lower than last year as major national retailers continue to adjust inventories. We are taking restructuring actions to reduce our costs and lower our production with demand. In July, we completed the acquisition of a nonwoven rug and carpet business, and the integration is delivering synergies. With that, I'll return the call to Jeff.