Annual report 2019
In 2019, the Śnieżka Group was active in Poland and on 15 foreign markets
In the reporting period, the products of the Śnieżka Group were sold under the following commercial brands:
In 2019, the Śnieżka Group actively operated on several markets - in Poland and on 15 foreign markets.
The main markets the Śnieżka Group operates on are as follows: Poland, Hungary, Ukraine and Belarus. In 2019, the Group's revenues generated on these four markets accounted for 95.4% of consolidated sales revenues.
The leading sales market (for products and goods) of the Śnieżka Group in 2019 was the Polish market with a 67% share (by 10% less compared with 2018). The other essential countries, where the companies comprising the Group operate, are as follows: Hungary (13.9% share), Ukraine (10.8% share, -1.7% year on year) and Belarus (3.7% share, -1.1% year on year) After completing the transaction of acquiring shares in the said company in May 2019, Hungary became the Group’s second market after Poland.
The largest share in the consolidated sales revenues of the Śnieżka Group was held by FFiL Śnieżka SA - a parent company in the Group, which also carries out export activities.
Approximately 70 companies operate on the Polish paints and varnishes market. FFiL Śnieżka remains one of the leaders. The four largest players on the domestic market are as follows: FFiL Śnieżka SA (brands: FŚnieżka, Magnat, Vidaron, Foveo-Tech, Beston, Rafil), PPG Deco Polska (brands: Dekoral, Bondex, Sigma, Malfarb, Domalux and Drewnchron), AkzoNobel Polska (brands: Sadolin, Dulux, Nobiles, Sikkens, Hammerite) and Tikkurila Polska (brands: Tikkurila, Jedynka, Beckers, Polifarb Dębica). These entities represent approximately 70% of total sales.
According to FFiL Śnieżka’s estimates, the sales of decorative products on the Polish market is carried out at the following distribution points of sale:
A relatively small portion of sales is carried out directly to construction companies.
In a broadly defined deko category, the main distribution channels are the independent channel (around 65%) and DIY stores (around 35%). These values, however, differ when selling different product groups.
Approximately 50 companies operate on the Hungarian market of paints and varnishes. The Poli-Farbe Vegyipari Kft. company, which has belonged to the Śnieżka Capital Group since May 2019, remains one of the leaders of the local market. The largest entities operating in Hungary are as follows: Poli-Farbe (brands: Platinium, Intaller, Cellkolor i Boróka), PPG Trilak (brands: Héra, Trinát, Lazurán, Thermotek, Bondex i Dryvit) oraz Akzo Nobel Coatings (brands: Dulux, Sadolin, Hammerite, Tilatex i Supralux),with total market share estimated at around 75%. The smaller manufacturers, with a several percent of market share, included: Tikkurila, JUB, Helios, Meffert and Caparol.
According to company’s estimates, the sales of decorative products on the Hungarian market is carried out at the following distribution points of sale:
In a broadly defined deco category, the main distribution channels are the independent channel (around 65%) as well as DIY and mass merchandisers stores (around 30%). These values, however, differ when selling different product groups.
The Ukrainian market is operated by approximately 200 manufacturers of paints and varnishes, of which only about 30 are stable entities. On this market, the Group competes with both international and domestic producers. The biggest players in the production of decorative paints on the Ukrainian market are as follows: Śnieżka-Ukraina, Meffert Hansa Farben, Henkel, ZIP, Caparol, Eskaro, Feidal, Polisan, Olejníkov.
The Group's products are available throughout Ukraine, but the vast majority of revenues are generated in its western and central part.
According to the Company's data, sales on the Ukrainian market is carried out at the following distribution points of sale:
The Śnieżka Group is one of the recognizable manufacturers of paints and varnishes on the Belarusian market - with a predominant position in the segment of putties and medium price products.
On this market, the Group competes with both international and domestic producers - also with Russian brands, which thanks to the free flow of goods under the Eurasian Economic Union (Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan) are becoming more and more competitive. The main competitors of the Group are: DAW (brands: Caparol/Alpina), Eskaro (Condor brand), AkzoNobel (brands: Dulux i Sadolin), Tikkurila, MAW, Tajfun, Ilmax, Ceresit i Knauf. At the same time, Russian manufacturers are more and more visible in Belarus, including: ABC Farben, Bergauf and Volma.
On the demanding Belarusian market, the Group is present both in the B2C channel (being the main player via the DIY network and retail outlets of the Group's distributors) as well as in the B2B channel (to a lesser extent). According to FFiL Śnieżka’s estimates, the sales of decorative products on the Belarusian market is carried out at the following distribution points of sale:
The other markets where the Group conducted sales in 2019 include: Moldova (where the Company is one of the market leaders selling emulsion products), Russia, Lithuania, Kazakhstan, the Czech Republic, Slovakia, Romania and Latvia.
The Group still intends to sell its products on the abovementioned foreign markets (for this purpose, the structure of the Export Department is subject to transformation as regards functionality and new processes have been put in place to improve the efficiency of operations), while for business reasons the Company is to continue to limit its sales activity on the Russian market.
The Group's strategy for the coming years assumes concentration on its four key markets (Poland, Hungary, Ukraine, Belarus). At that time, the most important task will be the further integration of Poli-Farbe Vegyipari Kft. with the Group and work on achieving full synergies that should ultimately have a positive impact on the profitability (margins) of the Hungarian company. The Company’s Management Board stipulates that it cannot be ruled out that the COVID-19 disease pandemic, caused by the SARS-CoV-2 coronavirus, and its effects - unpredictable at the time of preparing the Group's annual report for 2019 - may in the future necessitate changes or total review of the strategy and strategic objectives of the Company and the Group.
Macroeconomic factors
As a result of the current pandemic of the COVID-19 disease (caused by the SARS-CoV-2 coronavirus), in the absence of available reliable and complete information and data on its effects, as at the date of preparing the annual report, the Śnieżka Group - similarly to all entities conducting business activity both in Poland and worldwide - is currently unable to forecast the consequences of the pandemic for the macroeconomic and market environment. Therefore, the possibility of assessing the Group's development prospects in the future is limited as at the date of preparing the annual report for 2019.
In the future, the Company's Management Board will monitor the potential impact of the COVID-19 pandemic and will take all possible steps to mitigate its possible negative effects on the Group, if any. However, due to the inability to obtain reliable assumptions as at the date of this report, all forecasts regarding the Group’s development must be analysed taking into account the above said assumption.
From the point of view of the Śnieżka Group’s revenues, the Polish market is crucial. Its condition is best illustrated by the value and dynamics of GDP, whose main driving force has been private consumption as yet. The consumption of goods and services by individual consumers was stimulated by numerous factors, while the most important ones identified by the Group are the level of remuneration (average wages in the national economy), unemployment rate and social transfers - including various government programs providing financial benefits to specific beneficiaries, tax relieves and other allowances.
However, the situation in the construction industry is also important for the Group to a lesser extent. The factors that reflect the economic situation in this area include construction and assembly production (i.e. investment and renovation works carried out domestically by construction companies employing more than 9 employees) and the level of new investments in the housing (the number of dwellings commissioned) and commercial segment.
Also, trends in consumer confidence (current and anticipative) are helpful in assessing the economic situation, which show the level of consumer optimism in terms of the economic situation, and thus the tendency of building savings and spending by households.
Not only did the above macroeconomic factors affect the Group, but also development of the entire paint and varnish industry.
In the reporting period the Śnieżka Group’s products were sold also beyond Poland, and the Group intends further development abroad. Therefore, in the context of the Group’s development and its future revenues, the macroeconomic situation will be vital (GDP, private consumption, wages, unemployment, boom in construction, etc.) including other major markets - in particular Hungary, Ukraine and Belarus.
The macroeconomic factor affecting the bottom line and pace of the Group's development will also be the trend in exchange rates (in particular EUR/USD, EUR/PLN, USD/PLN, HUF/PLN, UAH/PLN, BYN/PLN), including possible devaluation of the Hungarian forint, the Ukrainian hryvnia and the Belarusian ruble. For the Group’s development and the entire industry, the prices of raw materials used for production will also be essential.
Situation in the paint and varnish sector
Changes in the demand for paints and varnishes will have a significant impact on the functioning and further development of the Śnieżka Group and the entire industry. Household purchasing power and consumer trends in interior design and decorating will also be critical factors.
Currently, customers on the Polish, Hungarian and Ukrainian markets opt for more expensive and higher quality products (value for money and premium segments). Increasing demand for greener products and those ensuring the health of users (e.g. paints that reduce formaldehyde levels in the air) also contributed significantly to the Group and the industry. As yet consumers paid attention not only to the aesthetics or durability of paints and varnishes, but also to whether they do not contain health harmful substances and are eco-friendly and what actions are taken by the manufacturer to offset their impact on the environment.
FFiL Śnieżka SA remains one of the four largest manufacturers in the industry in Poland, and one of the strategic objectives for the upcoming years is to maintain the leading position. Also, on major foreign markets, the Group will strive for maintaining or strengthening its market position.
The Company’s Management Board does not anticipate other factors (apart from those mentioned earlier) that may affect the situation in the paints and varnishes sector. The Company’s Management Board stipulates that the COVID-19 disease pandemic, caused by the SARS-CoV-2 coronavirus, and its effects - unpredictable at the time of preparing the Group's annual report for 2019 - may in the future necessitate changes or total review of the environment and a list of factors affecting the situation within the sector.
The Śnieżka Group constantly monitors the situation in the paints and varnishes sector on crucial markets, which provides the opportunity to anticipate changes in consumer attitudes and to adapt its offer to altering competitive conditions in individual countries. The Group also continues activities aimed at increasing the numerical distribution of its products in all areas of its operations.
In 2019, the Polish economy slowed down slightly, but preliminary estimates provided by the Central Statistical Office show that GDP growth was higher by 4.0% compared to the previous year (compared to 5.1% a year earlier).
The main driving force of the Polish economy development was private consumption, which was boosted by rising wages. In 2019, the average wages in the national economy amounted to PLN 4,918.17 and increased by 7.3% compared to 2018. In turn, the average wages in the fourth quarter of 2019 reached PLN 5,198.58.
The economic growth in Poland was also affected by the gradual decline in the unemployment rate - to 5.2% in December 2019, compared to 5.8% a year earlier - and higher social transfers. The above factors contributed to the fact that in December 2019 retail sales increased by 5.7% compared to the same period of the preceding year.
At the same time, inflation remained moderate. In 2019, the average annual consumer price index (CPI) amounted to 102.3, which means a 2.3% increase in prices compared to 2018.
Construction-assembly output, including investment and renovation works, carried out nationally by construction companies employing more than 9 employees, increased by 2.6% in 2019 compared to the same period of the previous year. The economic situation in residential and commercial construction sector also improved. In 2019, 207.2 thousand new apartments were commissioned, i.e. 12% higher than in 2018.
In other countries, constituting the main markets for the products of the Śnieżka Group, the economic situation was as follows:
Hungary
Despite earlier forecasts of a slowdown in the economic growth rate in Hungary in the second half of last year, in the fourth quarter of 2019 GDP increased by 4.5%. As a result, in 2019 the Hungarian economy recorded an increase of 4.9% compared to the previous year.
The main driving force behind the development of the Hungarian economy in 2019 was the increase in investment expenditure (+ 18% y/y) and the increase in consumer demand (+ 4.5% y/y). Private consumption was stimulated by the increase in employment and wages. In 2019, the average wages in Hungary amounted to HUF 367 800 (equivalent to approximately PLN 4 739) and it increased by 11.4% compared to the previous year. Also, the unemployment rate in Hungary in the fourth quarter of 2019 remained at a record-low level of 3.3%.
Along with the increase in wages, although more slowly, consumer prices also increased, and inflation at the end of 2019 was at the level of 3.4%
The forecasts for 2020-2022 assume a slowdown of the economy mainly due to a lower level of transfers from the EU, a slowdown in the global economy and a gradual decline in the growth of household purchasing power. Hungarian Economic Research Institute GKI Economic Research Co. forecasts that GDP growth in the entire 2019 will amount to 4.9%, and in 2020 the Hungarian economy will grow at a rate of 3.2%
Ukraine
The economic situation in Ukraine clearly improved in the first three quarters of 2019. In the second quarter of 2019, GDP growth amounted to 4.6% whereas in the third quarter - 4.1% The acceleration in the Ukrainian economy at that time stemmed from several factors, including increasing export (including in agriculture) and improving the economic situation in industry. After a good period, however, the economy recorded a deterioration - in the fourth quarter of 2019, GDP amounted to only 1.5%.
In 2019, the average wages in Ukraine amounted to UAH 10,497 (equivalent of about PLN 1,681). It increased by 18.4 compare to the previous year.
Inflation in 2019 fell to 4.1% (from 9.8% in the previous year). After the expected decline in the interest rate, this provides an opportunity to a long-term reduction in interest rates on loans.
The construction sector, whose condition also has an impact on the consumption of paints and varnishes, in 2019 recorded an increase of 20% compared to the previous year, and the value of performed construction works increased in all segments (whereas an increase in residential construction amounted to 3%).
Despite the weak GDP data for the fourth quarter of 2019, the forecasts for further improvement of the economic situation in Ukraine remain optimistic. The forecasts of the Ukrainian government assume GDP growth for 2020 between 3.5 and 3.7% On the contrary, forecasts regarding the development of the Ukrainian economy published by international financial institutions predict that GDP will amount to 3% (International Monetary Fund) and 3.6% (World Bank). Maintenance of positive trends in the economy will rely, however, on political stability and the implementation of structural reforms, as well as the scheduled privatization of enterprises.
Belarus
Based on official data, it is estimated that the Belarusian economy GDP growth amounted to 1.2% at the end of 2019, and 3% at the end of 2018. The World Bank’s forecasts indicate that in the upcoming years this indicator will be 1.2% y/y.
According to preliminary estimates of the National Statistical Committee of the Republic of Belarus, inflation in Belarus at the end of 2019 reached 5.6%. As a reminder, at the end of 2018 it amounted to 4.9%. In this period, the total debt of enterprises also reached the level of annual GDP, of which the greater part of the amount of debt falls on the repayment of loans and borrowings.
The activities of the National Bank of the Republic of Belarus have been positively influencing the macroeconomic situation of Belarus for several years, which allows inflation to remain relatively low, although higher than at the end of 2018. In 2019, the average salary was BYN 1,090.9 (equivalent to approx. PLN 1,964) and was 7.3% higher than in the previous year.
In Belarus a noticeable difference in the standard of living between large cities (mainly Minsk) and the province occurs. Local enterprises struggle with issues, which contributes to workforce migration (abroad emigration), and consequently a decrease in internal consumption and further deterioration of the condition of local enterprises.
In the future, the Belarusian economy will be affected by decisions regarding the further form of cooperation with Russia, mainly in the field of energy supplies.
Raw materials and currencies
The prices of titanium white - which is one of the basic raw materials in the production of paints - as well as the prices of other raw materials used by the Group companies for production in 2019 remained stable. In 2019, no problems occurred on the market with the availability of raw materials and packaging. Also, no events or threats in the purchasing area affecting the proper functioning of individual companies included in the Śnieżka Group occurred.
On the currency market, 2019 brought a slight strengthening of the zloty against the euro and a slight weakening against the dollar. The factors that influenced the trend of major currencies include a central bank policy. The US Federal Reserve reduced interest rates three times in 2019, and the European Central Bank cut the deposit rate by 10 basis points and resumed its bond purchase program. In Poland, the Monetary Policy Council did not follow in the European central banks’ footsteps and kept interest rates unchanged. One of the key issues for the currency market were also the trade war on the US-China line and the UK's exit from the EU postponed twice.
At the end of 2019, in Poland the Euro cost 1% less and the dollar 1% more compared to the end of 2018.
The dovish rhetoric of the National Bank of Hungary and political tensions in Europe translated into a situation of the Hungarian currency, which did not do well last year. In 2019, the Hungarian forint weakened to the zloty from 1.3353 to 1.2885 PLN (for 100 HUF).
In 2019, the macroeconomic situation in Ukraine improved, which translated into a positive value of the Ukrainian currency - the hryvnia strengthened against the zloty from PLN 0.1358 to PLN 0.1602.
Condition of the sector
The main markets the Śnieżka Group operated on in 2019 were as follows: Poland, Hungary, Ukraine and Belarus. In 2019, the Group's revenues generated on these four markets accounted for 95.4% of consolidated sales revenues.
In the reporting period Poland, Ukraine and Hungary observed a higher demand for products of medium and high price range while the segment of cheaper products shrank. As regards Belarus, an increased demand for low-price products sustained, which mainly resulted from low purchasing power of local consumers.
In the reporting period, compared to previous years, a stabilization of the market volume was observed on the Polish market of paints and preservatives for wood protection and decoration and its value increased. According to the data of the Federation of Polish Paints and Adhesives Industry (“PZPFiK”), the market value in 2019 increased by 4.3% compared to the previous year.
In the Company's opinion, the trend for Polish consumers to select better and more expensive products was still strong, while the segment of the cheapest paints shrank.
This is, inter alia, the effect of growing consumer awareness and purchasing power, thus the belief that purchasing more expensive products is a more effective solution in the long run - 45% of consumers declare that they only acquire products that live up to their expectations at the level of functionality, quality and image, and 52% put quality above price.
Last year, the Company observed that more and more people pay attention not only to the aesthetics or durability of paints and varnishes, but also to whether they do not contain health harmful substances, are eco-friendly and what actions are taken by the manufacturer to offset their impact on environment. Ecology is also playing an increasingly important role during renovation work. Customers are eager to pay more for greener products since the well-being and the environment in which they live is crucial to them. 41% of respondents, when making decisions about renovations, pay attention to ecological solutions during renovations.
As in previous years, decorative paints were used primarily for renovations. It is estimated that about 80% of all products sold on the Polish market are intended for this purpose. The remaining part goes to the primary market and is used when finishing new buildings. In the reported period, 49% of Poles carried out renovation, and the most common work was painting walls and ceilings (85%). Polish consumers still paint on their own - nearly 80% of them do not take advantage of contractors’ services.
The year 2019 did not bring significant changes among major players operating on the Polish market. The key entities operating in Poland are as follows: FFiL Śnieżka SA, PPG Deco Polska, AkzoNobel Polska oraz Tikkurila Polska. According to the Company's estimates, the share of the four largest players in total sales in Poland reached over 70%.
In the reported period, the Hungarian paint market developed along with the upward trend in the construction industry in Hungary, which has been going on continuously since 2017. The value of production in the construction sector at the end of 2019 increased by over 24% y/y. This translated into a greater demand for white interior dispersion paints and insulation systems.
Similarly to Poland, customers in Hungary increasingly opt for premium segment products, including interior paints in ready-to-use colours and preservatives for wood protection. Wealthy customers paid more attention to health-friendly products, and people with an average level of wages select products with good value for money.
The year 2019 did not bring significant changes among major players operating on the Hungarian market. The largest entities operating in Hungary are as follows: Poli-Farbe, PPG Trilak and Akzo Nobel Coatings, with total market shares estimated at around 75%. The smaller manufacturers, with a several percent of market share, included: Tikkurila, JUB, Helios, Meffert and Caparol.
According to the calculations of the Chem-Courier information and analytical agency, in 2019 the consumption of paints and varnishes in Ukraine remained at the same level compared to the previous year. Water-borne paints (by 1.1%) and alkyd paints (by 0.7%) recorded a slight increase in production. Further emigration of qualified staff, a slight increase in housing construction, as well as the political changes that occurred in the second and third quarters of 2019 had a direct impact on the paint and varnish industry in Ukraine.
However, the first part of 2019, similarly to the same period the year before, was challenging for paint and varnish manufacturers operating on the Ukrainian market due to adverse weather conditions. After a successful commencement of the renovation season in April 2019, the demand for paints decreased in late spring, which translated into lower sales at retail outlets. The manufacturers hoped that the beginning of summer would be better, however, rainfall in the first half of June and heat in its second half had a negative impact on consumer activity. Therefore, there were obstacles in carrying out facade works this month. In the second part of 2019, an increased activity of Ukrainian consumers was observed, which contributed to a longer construction and renovation season.
FFiL Śnieżka SA estimates that the trend for Ukrainian consumers to select better and more expensive products is to be sustained. Simultaneously, the level of paint consumption in Ukraine is still low compared to European Union countries. Successful implementation of the reforms announced by the Ukrainian government may result in improving the situation of households, and consequently increasing operations in the paint and varnish industry.
FFiL Śnieżka SA estimates that the trend for Ukrainian consumers to select better and more expensive products is to be sustained. Simultaneously, the level of paint consumption in Ukraine is still low compared to European Union countries. Successful implementation of the reforms announced by the Ukrainian government may result in improving the situation of households, and consequently increasing operations in the paint and varnish industry.
In the long-term perspective Ukraine is crucial and up-and-coming market for the Group as the paint consumption in the said market is still significantly lower than in the countries of the European Union.
In 2019 the purchasing power of Belarusian consumers remained low, which caused that the market was dominated by demand for lower and middle price products. The main sales channels of the Group's products were independent paint and varnish stores as well as strengthening DIY stores.
In 2019, the leading players on the Belarusian market of paints and varnishes were as follows: DAW, Eskaro, Akzo Nobel, Tikkurila, MAW, Tajfun, Ilmax, Ceresit and Knauf. At the same time, Russian manufacturers are more and more visible in Belarus, including: ABC Farben, Bergauf and Volma.
In 2019, export of some of the Group’s products was deteriorated as a result of actions aimed at protecting the domestic market (such as certification requirements and customs regulations), as well as the privileged position of producers from the Eurasian Customs Union’s countries (resulting in increased competition from cheaper products of Russian manufacturers).
The Group analyses the situation in the paint and varnish sector on the Belarusian market on an on-going basis in order to respond appropriately to changes in the economic situation and consumer attitudes and to adapt its offer to volatile conditions.
Additional information on the markets where the Group operates and the competitive environment on major markets has been presented in a report on non-financial information, in point 3.1.6 of this Management’s Report on the activities (hereinafter referred to as the “Report").