W. Christopher Wellborn
President and Chief Operating Officer; President - Global Ceramic at Mohawk Industries
Thank you, Jim. The Global Ceramic segment increased sales and earnings with a higher mix of new residential construction and commercial sales than our overall business. Residential ceramic sales in all geographies are slowing and operating margins are contracting due to lower volumes and manufacturing shutdowns. The cost of energy and transportation are declining, which will benefit our margins as these costs flow through our inventory.
In the U.S., Ceramic sales and volume both increased as we benefited from our premium product offering, price increases and growing countertop business. Our collections with larger sizes and unique finishes, combined with specialized structures and shapes are enhancing our sales and mix. We're increasing our sales efforts in growing categories, including health care, hospitality and fitness as well as multifamily and build-for-rent homes.
Cost inflation increased as higher energy and transportation expenses from prior periods were incurred. We are optimizing material supply chains and reengineering formulations to improve our costs.
We reduced our inventories during the quarter by lowering production and enhancing our import strategies. We are reducing discretionary spending and limiting capital investments. To support additional growth in our quartz countertop sales, we are adding manufacturing capacity by the end of this year. Our countertop mix continues to improve as we expand our premium collections featuring our advanced painting technology. Our Ceramic business in Europe remains under pressure with slowing demand, customer inventory reductions and inflation.
Our cost in the quarter were impacted by peak energy prices in the third quarter and reductions in plant volumes from temporary shutdowns. We are receiving energy subsidies in Italy, but we remain disadvantaged to some competitors who have long-term energy contracts. Natural gas prices have declined substantially, though disruptions could impact future costs.
As Ceramic sales slow, the market is becoming more competitive. We are introducing new technologies to enhance surface textures, expand design capabilities and improve our costs. We are completing the expansion of our large porcelain slabs to support continued growth and enhance our styling. We have successfully reformulated our body composition to use alternative materials.
Sales in both Mexico and Brazil decelerated in the quarter as inflation and increasing interest rates reduced residential demand. We anticipate continued near-term weakness and have reduced production levels in both countries. To cover inflation, we are managing mix and pricing.
Natural gas prices in the regions are declining in line with the worldwide market and will lower cost as it flows through inventory. We have completed the acquisition of Elizabeth in Brazil and are awaiting regulatory approval to close Vitromex in Mexico. These acquisitions will position us as top producer in two of the world's largest ceramic markets. We anticipate significant synergies in all aspects of the businesses, which will enhance our sales and margins. We should be well positioned to leverage our combined strengths when the markets emerge from this downturn.
During the fourth quarter, our Flooring Rest of World segment was impacted by high inflation in energy prices and consumers reduced investments in Home Improvement. This caused a decline in Residential sales, which comprise a majority of the segment's business. As consumer spending slowed, our customers further reduced their inventory levels, which lowered market demand even more. In response, we implemented temporary plant shutdowns and reduced our inventory levels, compressing our margins.
Natural gas prices in Europe peaked at an unprecedented level in the third quarter, raising our material and production costs. Our pricing and mix did not fully cover inflation, which remains a headwind. We remain focused on optimizing volume with selective promotions as well as controlling costs until the business improves. To enhance our competitive position, we are increasing our supply chain from outside the European Union. We have initiated additional restructuring actions to align with current conditions. Since the beginning of 2023, gas prices have declined substantially and material costs should follow. Assuming this trend holds, Europe should see lower overall inflation with higher wages, consumer spending should increase.
During the quarter, all of our European Flooring categories experienced significant volume declines with many residential remodeling projects being postponed as inflation eroded consumer discretionary spending. Our product/mix was impacted as homeowners purchased lower-priced flooring to maintain their budgets. We are launching new product collections and expanding promotional activities to improve our sales. Higher cost inventory will compress our margins until it flows through our costs.
Our sheet vinyl sales outperformed our other flooring categories as consumers chose lower-priced alternatives. We are improving the small polish sheet vinyl plant we acquired in the third quarter by increasing its output, reducing its cost and expanding its distribution.
We are expanding our rigid LVT offering as it takes some share from flexible. We are increasing our existing operations and improving our formulation to lower our costs. We're adding new rigid production that make smaller runs with additional patented features. We will phase out of the residential-flexible LVT products and will close the supporting production. The cost of this new restructuring initiative is approximately $45 million with a cash cost of approximately $7.5 million, resulting in annualized cost savings of $15 million and significantly increased sales.
Our Insulation business is growing as conserving energy has become a higher priority and building requirements have increased. We selectively increased pricing to cover higher material costs, and we lowered production in the fourth quarter to reduce inventory levels. We are growing our sales and distribution in the U.K. as we start up our new insulation plan.
Our Panels business has faced the same pressures as our other categories with softening demand and rising material prices. During the quarter, our customers continued to reduce their inventory levels, further impacting our sales. Anticipating higher winter wood and energy costs, we maintained our inventory levels going into the first quarter. Our investments in green energy have benefited our performance by reducing our reliance on higher cost gas and electricity.
The integration of our recent mezzanine acquisition in Germany is progressing as planned. We are defining best practices and utilizing our own manufacturing to replace source boards. Our business in Australia and New Zealand are slowing with the local economies as inflation and mortgage rates are impacting foreign sales. We are taking actions to align our cost and inventory levels with the expected volume decline. We have announced additional price increases and are initiating selective promotions to maximize our sales. We are updating our product offering and enhancing our merchandising to capture greater market share. As in other categories, commercial sales are stronger than residential and we are increasing our participation in specified projects.
For the quarter, Flooring North America sales decreased faster than anticipated, primarily due to declines in residential channels, rug and customer inventory reductions. With inflation and interest rates at high levels, many consumers defer discretionary spending or traded down to lower cost products. Earnings in the segment were compressed due to lower sales, consumption of higher-cost materials, reduced inventory levels and temporary plant shutdowns. Our hard surface products outperformed soft and the commercial sector remains stronger than residential with hospitality showing the most growth. In response to slower market conditions, we are completing our restructuring actions, deferring capital projects and reducing discretionary spending.
During 2022, we reduced our costs through process enhancements and rationalization of less efficient facilities while absorbing historically high inflation. We continue to adjust our strategies to manage the near-term market conditions, reductions in energy and materials should become a tailwind in the second quarter.
Our commercial business remains solid as remodeling and new construction projects continue. We maintained strong margins in the quarter with pricing and mix offsetting inflation. Our flexible LVT products are a preferred alternative that provides versatile styling with easy installation. The combination of our carpet tile and LVT collections enables the customization of commercial spaces with unique designs.
Our integration of a small flooring accessories acquisition is proceeding well. The company produces rubber baseboards and stair treads used in commercial installations and broadens our current flooring accessory business. In the fourth quarter, sales of residential soft services declined more than other categories, sales weakened as retailers reduced inventory with declining consumer sentiment and home sales. The multifamily channel was the strongest performer, and we are realigning resources focused more on this sector. As demand dropped in the quarter, we increased temporary shutdowns, which resulted in higher, unabsorbed costs. We have significantly lowered inventories in the fourth quarter and are reducing costs by eliminating less efficient manufacturing, enhancing productivity and adjusting production to demand. Participation in our recent flooring roadshows was at a record level with leading retailers expressing optimism about the year ahead.
Our rug sales were lower as national retailers continue to adjust inventories with reduced consumer spending. We are restructuring our rug operations to lower cost and align production with demand. The integration of our nonwoven rug and carpet acquisition is progressing well and provides new opportunities with our existing customers.
Our resilient sales grew in the quarter as we leveraged our WetProtect and antimicrobial technologies to differentiate our collections. We offset inflation through pricing and mix, though increased plant shutdowns resulted in higher unabsorbed costs and lower margins. We are introducing new collections to expand our offering while eliminating less productive SKUs.
Our sheet vinyl sales were higher as consumers pursued budget friendly flooring options and the multifamily channel strengthened. The first phase of our new West Coast LVT plant is operating at expected levels. We are preparing new technologies that will improve our cost and add differentiated features. We will install additional production lines and train personnel throughout this year.
Our Premium Laminate sales were impacted by slowing retail traffic and customer inventory adjustment. Our laminate is gaining acceptance as an alternative waterproof product in all channels. During the quarter, we offset inflation through pricing and mix, though our margins were impacted by lower absorption from temporary shutdowns as we reduced our inventory. We are beginning to see reductions in material inflation, which should help us recover our costs.
Our new manufacturing line, which began last year, is operating at planned levels and will deliver our next generation of laminate features. With its industry-leading design and performance, our laminate business is in an excellent position to capitalize on the growing waterproof flooring category.
Now I'll return the call to Jeff for his closing remarks.
