W. Christopher Wellborn
President, Chief Operating Officer & Director at Mohawk Industries
Thank you, Jim. Of our 3 segments, Global Ceramic delivered the best performance during the second quarter with significant year-over-year operating income improvement of which the greatest part came from the US ceramic business builder sales remained strong in most of our ceramic markets and an increased number of commercial renovation and new construction projects. We're also initiating most of our markets have seen some softening in residential activity as inflation and higher interest rates affected remodeling investments, the cost of natural gas, continue to rise across the world. With European natural gas prices spiking again due to supply uncertainty as energy and raw material price increases across our ceramic businesses. We Thank you, Jim. Of our three segments, Global Ceramic delivered the best performance during the second quarter with significant year-over-year operating income improvement of which the greatest part came from the U.S. ceramic business. Builder sales remained strong in most of our ceramic markets and an increased number of commercial renovation and new construction projects were also initiated.
Most of our markets have seen some softening in residential activity as inflation and higher interest rates affected remodeling investments. The cost of natural gas continued to rise across the world, with European natural gas prices spiking again due to supply uncertainty. As energy and raw material price increases across our ceramic businesses, we continue to implement new pricing actions. Our U.S. ceramic business expanded its operating income to its highest level in four years. The commercial and new home construction sector showed the strongest growth, with softening demand in residential remodeling and the home center channel.
During the quarter, our mix and margins were enhanced by improved commercial sales. Our premium product introductions are gaining traction in the market as alternatives to higher-cost European imports. We continue to improve our sales and manufacturing costs with productivity initiatives and improved product discipline. To offset higher energy, material and transportation costs, we continue to implement price increases and freight surcharges. We have introduced new distribution strategies to mitigate the impact of rising fuel costs.
Our countertop sales are growing in the high-end quartz, porcelain and stone categories. Our quartz countertop plant is operating at maximum capacity and we are improving our mix by expanding our premium product offering. To meet growing demand, we are sourcing products and expanding our countertop production.
Our European ceramic business improved sequentially during the quarter with higher sales and enhanced mix. Though our pricing actions during the quarter improved our margins, they did not fully offset inflation versus the prior year. We continue to invest in innovative new features to improve our mix and add capacity to satisfy growing demand for our porcelain slab business.
Sales of our premium products increased during the quarter, while our low and medium price categories softened as they are more sensitive to price changes. Our inventory levels remain historically low and are further limiting our overall sales. Our R&D teams are reengineering body formulations with alternative materials and reducing the use of Ukrainian clays. Recently, reduced supplies of natural gas have significantly increased energy prices across Europe. Going forward, our volume and margins will be under greater pressure as our gas costs will be higher. We are initiating restructuring actions to lower our costs and manage these market conditions.
In our other international ceramic markets, sales growth was primarily driven by pricing and mix with commercial outpacing residential. Our results in these regions could have been stronger if our sales were not limited by production constraints and low inventory levels. Our pricing actions and improved mix are offsetting higher energy and material costs. The impact of inflation on energy and materials in these regions has not abated, and we have announced additional price increases to offset higher costs. Across these regions, we are beginning to see softening in the residential sector as inflation and rising interest rates impact consumer spending and home purchases.
In June, we agreed to acquire Vitromex, a leading ceramic tile manufacturer in Mexico for $293 million. The company produces clay ceramic, porcelain, mosaic and decorative tiles and has a broad distribution network. Vitromex operates four manufacturing facilities and had approximately $200 million in sales last year. Ceramic is the primary flooring category in Mexico, and the market has grown even 11% per year in pesos over the last five years. In 2021, the Mexican ceramic tile market generated sales of $1.7 billion or about 2.9 billion square feet.
During the past 10 years, we have significantly expanded our participation in the Mexican ceramic market by investing in state-of-the-art manufacturing and developing world-class operations and sales organization. Together with Vitromex, we anticipate many opportunities to expand the product offerings, distribution and efficiencies of the combined enterprise.
In the quarter, Flooring Rest of World sales rose year-over-year, primarily from price increases, product mix and contributions from our small panels and insulation acquisitions. Inflation is increasing household cost and reducing consumer disposable income. We are seeing a slowdown in retail traffic, which is reducing industry volume in most categories. European energy prices are substantially higher than in other regions and are significantly impacting our raw material and electricity costs. We have raised prices as inflation continue to rise and announced further increases as natural gas and chemical prices escalated at the end of the quarter. Our wood costs are also rising as it is being increasingly utilized as a substitute for natural gas to provide heat and electricity.
Our flooring sales softened as we progress through the quarter, and our customers are reducing their inventories. Laminate, LVT and sheet vinyl are all following similar demand trends. In the period, our costs continue to escalate and material supply improved. We implemented price increases during the quarter and have announced additional price increases for the third quarter. We're taking actions to address the changing environment, including cost reductions, process improvement and postponing noncritical projects.
Our insulation business continues to deliver excellent results with growth in volume as well as price. We have passed through rising chemical costs and are integrating our recent acquisition. Our new manufacturing plant is adding a second shift as we ramp up our sales and distribution. Sales of insulation products remain strong as they benefit from increasing investments to reduce energy costs.
Our panels business performed well, though volumes slowed as we progressed through the quarter. We continue to raise prices and improve our mix with higher-value products. We're integrating the small French panels plant that we acquired last year and are improving its cost and output. We are expanding the distribution of our higher-end decorative panels and more durable HPL products. Our investments in energy production from waste wood are benefiting both our cost and the environment.
For the quarter, our Flooring North America segment growth was primarily driven by pricing gains, stronger commercial sales and improved mix. The commercial sector improved across all channels, while the residential market is softening as consumers face the pressure of household inflation and rising interest rates. As our service levels improve, customers reduced their inventory in the residential channel. We continue to execute pricing actions to offset material and energy inflation, though lower plant volumes are reducing absorption and raising costs. We are strategically investing to maximize our share in the faster-growing LVT and premium laminate categories. We have launched numerous productivity initiatives to mitigate the impact of fuel, freight, energy and labor inflation.
Our LVT sales continued to improve with our new products gaining traction in the market. We experienced fewer material disruptions in the quarter, which furthered operational improvements and benefited our margins. Our new West Coast LVT plant has begun shipping to customers, and we continue to refine processes to improve throughput, productivity and material costs. Our East and West Coast operations will provide superior service to our customers and improve our transportation efficiencies.
Our premium laminate is mostly used in residential remodeling, and inventory adjustments in home centers impacted our sales in the quarter. Our waterproof laminate collections are increasing our sales in the specialty retail and new construction channels as an alternative to LVT. Our new manufacturing line continues to ramp up to targeted production levels and is fulfilling demand for our next-generation products. Though we have raised laminate prices, our raw material costs continue to increase substantially.
As the commercial sector rebounds, sales and margins of our carpet tile and commercial LVT collections are improving. All channels continue to expand with the recovery in the hospitality and corporate sectors accelerating. Based on the most recent Architectural Billing Index, commercial design activity remains strong with a pipeline of projects that support continued sales growth for the foreseeable future. To offset raw material and transportation inflation, we are taking additional pricing actions as well as reducing costs across the business.
As our residential carpet volumes declined due to softening markets and inventory reductions in the channel, we are aligning capacity with demand, reducing expenses and announcing additional price increases due to continued material and energy inflation. Our rug business is concentrated with major national retailers. And during the quarter, they all dramatically cut orders to reduce inventory as their sales forecast weaken. With the impact of a $50 million decline in rug purchases, the segment's sales would have increased approximately 6.5% versus prior year.
In July, we closed the acquisition of Foss Floors, a leading nonwoven flooring manufacturer, for approximately $150 million. Foss adds a new product category to our portfolio that complements our existing lines and includes needle punch, rugs, carpet, DIY tile and artificial turf. Foss' 2022 sales have been strong with a present run rate of approximately $100 million.
To adapt to current conditions, we are taking actions to restructure our cost across the enterprise to improve our results. We are finalizing plans to rationalize older, less efficient assets and optimize processes to lower cost. The most significant actions will be in our Flooring North America segment, including reducing some yarn assets and rug capacity.
In our Flooring Rest of World segment, we are consolidating insulation products and streamlining our organizations. And in Ceramic Europe, we are simplifying administrative and manufacturing organizations. We estimate these initiatives will reduce our cost by $35 million to $40 million annually, with an estimated cash cost of $15 million to $20 million, with a total cost of $90 million to $95 million.
With that, I'll return the call to Jeff.