This chapter presents significant risk factors and threats to the operations of the Śnieżka Group.
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 of the Group for 2019 - similarly to all entities conducting business activity
both in Poland and worldwide - in the opinion of the Company's Management Board, it is not possible to
present any possible significant risk factors and threats to the Group's operations.
The Company's Management Board will monitor the potential impact and take all possible steps to mitigate
its possible negative effects on the Group, if any. However, due to the inability to obtain reliable
assumptions, currently all forecasts regarding the future - and in particular descriptions of risks
related to the Group's operations - must, according to the Management Board, be analysed taking into
account the abovementioned information.
In addition, the Group identified risk factors affecting non-financial issues. They are described in item
3.4.1 herein under:
“Managing risks related to the activity of the Group that affect non-financial issues”.
Macroeconomic conditions play an important role for the Śnieżka Group. Changes in the economic, social
and political environment - in Poland and other foreign markets, on which individual Group companies
operate (primarily Hungary, Ukraine and Belarus) - may adversely affect the Group's operations and
Risk associated with macroeconomic situation for the Śnieżka Group is mainly connected with:
A short or long-term economic recession in the future, triggered by the COVID-19 pandemic, cannot be
excluded. At this stage, its duration and possible consequences for the Group cannot be determined.
Lowering the purchasing power of society as a result of economic slowdown or recession.
Increasing inflation in Poland, caused by a boost in energy costs and a rise in the minimum wage, may
affect household consumption. This can lead to, inter alia to reduce expenditure on renovations and
modernization of apartments. According to the Central Statistical Office data, domestic demand was one
of the main drivers of GDP growth in Poland in 2019. Lower wage growth (despite an increase in the
minimum wage), higher inflation and lower (y/y) indexation of pensions imply a much lower increase in
real household income in 2020.
The risk of reducing the purchasing power of the society may occur in particular in Ukraine and
potentially may be caused by: lack of reforms (which may limit assistance from the IMF and the European
Union), exacerbation of conflicts in the east of the country and a change in economic policy after the
2019 elections. A serious risk for economic growth also occurs in Belarus owing to problems related to
the indebtedness of the state sector.
Deterioration of the construction industry’s condition
In the reporting period there was a decrease in the capacity utilization of enterprises, which in
January 2020 amounted to 79.9% The increase in labour costs (e.g. by raising the minimum wage) and
difficulties in recruiting employees may cause that the construction sector will not be able to meet
investment needs, which, as a consequence, may have an adverse effect on the demand for decorative
products. In addition, construction companies pay attention to obstacles in conducting business
operations, such as employment costs, shortage of qualified employees and high budget burdens.
A possible decrease in consumption, deterioration in public sentiment and increasing prices of
residential quarters may lead to lesser demand for apartments - both on the primary and secondary
market. It may also result in a reduction of expenses on renovations and modernization of apartments,
which mainly determine the demand for decorative paints. However, it seems that the economic downturn in
construction should not be expected in the coming year.
The condition and credit policy of banks.
In 2019, banks tightened their lending policy in the area of granting mortgages and consumer loans. The
increase in bank loan spreads may have a negative impact on the demand for apartments and the renovation
scale of existing housing resources. In particular, such a risk may appear in Ukraine, whose banking
sector is in poor condition.
Strategic risk is related to a possibility of negative financial consequences caused by inappropriate
decisions made by the Group based on incorrect assessment of the strategic directions of the
organization's development, in particular:
Inappropriate assessment of the future development dynamics of the paints and varnishes market.
Faster than assumed by the Group the market growth may result in the Group’s failure to adapt its
production potential to increased demand and losing its current market position;
Inaccurate predictions of customer preferences, both in terms of the volume of product demand and
product features (e.g. in terms of colours).
Inappropriate assessment of future competitive phenomena (consolidation processes, new companies
appearing on the market), which may exclude the Group as a leader on particular markets.
It cannot be ruled out that the COVID-19 pandemic may in the future cause a number of adverse effects in
the area of the Group's operating activities - including, for example, disruptions and interruptions in
the operation of production facilities, limited availability of raw materials for production and an
increase in their prices or supply issues or product distribution. As at the date of preparing the
Group's annual report for 2019, an estimate of the probability of materialization of such scenarios and
the scale of the abovementioned possible consequences in the area of the operating activities of the
Group companies is unfeasible.
At present, the Company's Management Board does not notice the direct impact of the COVID-19 epidemic on
the Group's operations, except for the decision of the General Director of Śnieżka-Ukraina Sp. zoo., who
reduced temporarily a part of the production in this company. This decision was made as a consequence of
the epidemiological activities of the Ukrainian authorities, taken against the pandemic. The
Śnieżka-Ukraine authorities estimated that as a result of the above constraints, the production level in
the above mentioned period will drop to around 50% of the current production level. Information
regarding this is presented in item 1.3 herein.
By conducting business activities, the Śnieżka Group is exposed to various types of operational risk,
Disturbances and interruptions in the operation of production facilities, as a result of failures and
In order to minimize this type of risk in production facilities, FFiL Śnieżka SA maintains a continuous,
preventive maintenance policy, consisting in planning and implementing various activities to avoid
failures and undesirable downtimes.
The activities include:
periodic inspections of fixed assets and equipment,
maintenance and repairs,
regular and scheduled parts replacement,
tests, diagnosis and analysis,
efficient removal of emerging damages and failures,
ensuring continuous supply of electricity in the event of commercial power failure by means of own
power generators connected to the internal power grid of appropriate volume.
In order to support the planning and implementation of activities preventing downtime, the Company uses
a CMMS (Computerized Maintenance Management Systems) class system. CMMS class systems are specialized
software dedicated to production facilities in which individual organizational units operate responsible
for maintaining the technical condition of the facility at a certain level.).
The Group’s companies also hold a property insurance policy against all risks, including the impact of
Essential insurance agreements concluded by the Group are presented in item 1.7.2 herein.
The risk associated with the availability of raw materials for production and the increase in their
As far as strategic raw materials are concerned, there is a continuous risk related to high sensitivity
of price changes, which stems from the global demand/supply relation and the availability of raw
materials. The paints and varnishes industry is strongly dependent on the prices of titanium white
(TiO2). Almost half of the production capacity of TiO2 is concentrated in six global corporations, while
the chemical market tends to further consolidate, which results in further price increase of titanium
white. Therefore, any failures and stoppages in plants producing this raw material may cause
difficulties with its supply and lead to an increase in its price.
Moreover, the Group is exposed to the risk of price increase of other raw materials, e.g. solvents,
pigments, resins as well as metal and plastic and oil (used to make packaging for paints and varnishes).
The Śnieżka Group meticulously monitors and regularly analyses all market information and strategic
moves of suppliers in order to adapt business operations to expectations regarding supply and demand for
raw materials. The Group also focuses on increasing the supply chain efficiency and sustainable
diversification of raw materials.
The risk associated with supply.
The main risk for the Śnieżka Group in the field of supply is primarily related to the price increase in
raw materials depending on oil price, transport costs, temporary or long-term restriction of access to
raw materials and changes in exchange rates.
Also the challenge of consolidation (both horizontal and vertical) of suppliers, customers and
competitors can lead to weakening of the negotiation position of the Śnieżka Group. To minimize these
risks, the Group, among others, regularly analyses information on strategic stakeholders’ actions in
terms of adjusting purchasing forecasts to the current and forecast price situation. Regular
negotiations are conducted with suppliers, regarding smooth adjustment of the Śnieżka Group’s demand and
supply from suppliers’ supply. In addition, the Group believes that existing relationships and
cooperative connections with suppliers do not contribute to dependence on any suppliers in any manner
that could adversely affect the operations of the entire Group.
The risk associated with product distribution
There is a risk related to a decrease in availability of the Group's products, which is a consequence of
the strategies implemented by business partners (DIY networks) and direct competitors. The Group strives
to minimize this risk by developing a multi-channel sales strategy and building strong own brands.
The risk associated with surplus stocks.
Changes in the product portfolio and the shares of individual segments in sales necessitate to
constantly monitor the level of stocks of raw materials and finished products. The reduced demand for
the Group's products may lead to accumulation of excessive inventories and the need to create
The risk associated with infrastructural constraints.
Lack of sufficient production capacity connected with intensive development may cause infrastructural
constraints in the effective implementation of business objectives in the future. To prevent this risk,
the Company is modernizing and expanding its production lines. In 2019, the Company made a number of
investments in its plants in Pustków and Lubzina (a description of these activities, see item 1.7.1). By
2022, the Company is also planning to complete the erection of a modern logistics centre, whose
objective is to supply the market with its products more efficiently and cheaply.
The Group's operations on other markets are also conducted in conditions of fierce competition, both on
the part of local entities and international companies. Relatively high crossbars to enter the market of
paints and varnishes mean that large financial outlays are necessary to start up new production
facilities in the industry, and the possible emergence of a new competition could result primarily from
acquisitions. In 2019, there were no significant changes in the scope of the power distribution among
paints and varnishes producers on the Polish, Hungarian and Ukrainian markets. Russian manufacturers are
more and more visible in Belarus.
The Group monitors the activities of other entities on all key markets. The Group companies try to limit
the risk related to competition activities through appropriate sales and marketing initiatives
supporting the sales of products comprising the Group's portfolio.
When using chemicals in its operations, the Group must pay particular attention to its environmental
impact and all regulations in the area of ecology. Therefore, the mandatory environmental responsibility
reviews are carried out to control the risks, monitor the actions taken to perform the obligations in
the scope of environment protection and to assess the changes in the undertaking’s exposure. Also, the
Group has been taking efforts to conduct its business as safely and responsibly as possible and to
develop technologies and innovation to reduce environmental footprint of its products.
The risk related to environmental protection at the Śnieżka Group is primarily associated with the
emission burden exceeding the standards resulting from applicable legislation and the conditions of use
specified in environmental decisions, which may arise as a result of improperly conducted warehouse and
However, the environmental risk is treated by the Group in many dimensions, as referring to various
environmental aspects - both internal and external. A severe measure of loss may be significantly
increased fees for the use of the environment, penalties for non-compliance (up to several million
zlotys) and, as a consequence, suspension of production operations. Potential non-compliance by the
Group with environmental standards may also result in so-called users and consumers giving up those
products that have a negative impact on the natural environment.
A specific ecological strategy and environmental policy of the Śnieżka Group are the safeguards against
materialization of the risk that may arise in the field of environmental protection. The environmental
activities in the FFIL ŚNIEŻKA SA are implemented in accordance with the applicable legal requirements.
FFiL Śnieżka SA in cooperation with subsidiaries will regularly assess any discrepancies between the
provisions of its environmental policy and new applicable national regulations and other norms.
It cannot be ruled out that the COVID-19 pandemic may in the future cause a number of adverse effects in
the area of the Group's finances - including, for example, failure to meet obligations by customers or
liquidity issues. Also, there is a risk of a significant increase in costs and, as a result, a decrease
in profitability as a result of prolonged strengthening of currencies - especially the euro, which is
used to acquire significant proportion of raw materials - with the simultaneous inability to transfer
the resulting increase in costs to the price of products manufactured by the Group due to market
conditions. As at the date of preparing the Group's annual report for 2019, an estimate of the
probability of materialization of such scenarios and the scale of the abovementioned possible
consequences in the area of finances and liquidity of the Group companies is unfeasible.
In its activity, the Śnieżka Group is exposed to the risk of fluctuating exchange rates. The Group
imports raw materials, paying primarily in Euro, used for the production of paints and varnishes and the
largest currency risk for the Group is the one related to changes in the EUR to PLN exchange rate.
On the other hand, the Group exports products mainly to Central and Eastern European countries where
settlements are carried out in various currencies - both those most commonly used in international trade
and in local currencies.
In addition, currency risk arising from equity investments in foreign companies should be taken into
account. The most important exposures in this respect are investments in companies in Hungary and
Ukraine. Currency exposures in HUF and UAH of the said investments are higher than resulting from export
flows. The risk in net investment in Hungary is secured by a foreign currency loan in HUF raised by FFiL
Śnieżka SA, while the currency risk from investments in Ukraine is mitigated by systematic payment of
dividends to the Company by Śnieżka-Ukraina.
From the point of view of currency exposure, as at the date of publication of the periodic report for
2019, the following currency pairs are most important for the Śnieżka Group:
EUR/PLN: around EUR 49m,
HUF/PLN: around EUR 9m (where, assuming the consolidation of the results of the Poli-Farbe group for
the entire last year, this figure can be estimated at around EUR 15m).
The above currency exposure analysis was performed based on the profit and loss account and is of a
In order to minimize the negative impact of exchange rates on generated revenues and profits, the Group
conducts a currency risk analysis on an on-going basis. As at the date of preparing the annual report -
due to the very high volatility on currency markets in the last weeks before the publication of the
report, which is the result of the COVID-19 disease pandemic - this risk has increased significantly.
Information on currency risk is also included in the consolidated financial statements, in notes 38.2
Interest rate risk
The Śnieżka Group holds loan and borrowings as well as financial lease liabilities with a variable
interest rate. Therefore, it is exposed to the risk related to the increase in interest rates.
As at December 31, 2019, the Group's total liabilities on loans and borrowings and financial leasing
amounted to PLN 221,803 thousand. The increase in official interest rates (WIBOR, EURIBOR, LIBOR, BUBOR)
may contribute to a risk of increasing the Group's financing costs.
In 2019, the Group did not apply instruments hedging the interest rate risk.
The risk associated with receivables
The Śnieżka Group continues and develops the previously adopted policy of managing receivables based on
cooperation with reliable and long-term partners. The Group actively manages the customer’s credit risk,
comprehended as customer’s failure to comply with their obligations. It is achieved by limiting and
monitoring trade credit,
depending on their financial standing and development dynamics. In this process, the Company liaises
with business intelligence and insurance companies.
The policy of establishing trade credit limits and payment terms and conditions is closely related to
bonuses granted to customers for timely payments, which additionally protects the Group’s interests.
Hedging instruments for the sales transactions carried out by the Group are: real estate mortgages,
statements on submission to enforcement, promissory notes applied adequately to the volume of granted
trade limits to individual customers.
Expansion to new markets, and in particular to export ones, is associated with uncertainty in terms of
obtaining receivables. To tackle this challenge, the Group limits the risk by insuring receivables from
newly won customers. The insurance guarantees the inflow of receivables, thereby eliminating the adverse
impact of ineffective transactions on the Group's financial liquidity, while maintaining sales
profitability. The policy of monitoring receivables is also used between related companies within the
Group. Permanent monitoring ensures a possibility of managing receivables rationally, which has a
positive effect on the effectiveness of the decisions made.
The Śnieżka Group intends further activities aimed at subsequent facilitation of the risk management
process related to receivables and envisages the implementation of new solutions to improve the results
achieved in this area.
The liquidity risk is related to the company's ability to settle its current liabilities and raise funds
to finance its operations.
The Śnieżka Group constantly monitors the due dates of receivables and liabilities, striving to maintain
financial balance also through the use of various sources of financing (bank loans, trade credits). The
threat to the Group may be the tightening of credit policies by banks, limiting the possibility of
obtaining external financing.
As at 31 December 2019, the Group had no problems with timely settlement of its liabilities, which can
be reflected by its ratios.
Information about the loans incurred and the loan agreements terminated
In 2019 FFiL Śnieżka SA signed loan agreements with several banks to finance the acquisition of 80%
shares in Poli-Farbe Vegyipari Kft., and to implement investment plans of the Company in 2019 as well as
to ensure financing of the Company's current operations.
Agreements and annexes with the banks concluded in 2019 are described in item 1.7.2. Other loan
agreements with the banks are presented in item 1.7.3 herein.
Failures of key information systems or unauthorized access through cybercrime or other events may have a
direct impact on the production processes, competitive position and reputation of the Śnieżka Group.
In order to minimize this risk, the Group develops and updates systems used to ensure information
security, is constantly monitored by the IT Security Operation Canter, regularly backs up key data, and
has extensive anti-virus and anti-phishing protection.
In January 2020, the Company launched a modern, integrated ERP SAP S/4HANA system, which aims to improve
operational activity and increase the security of IT operations As part of the integrated SAP package,
in 2019 tools were also launched to support sales and customer relationship management as part of the
SAP C /4HANA platform. The package consists of modern SAP E-Commerce B2B and B2C sales portals, cloud
tools for customer relationship management and support for sales representatives, as well as cloud tools
supporting electronic marketing SAP Marketing Cloud.
As part of the internal program to build awareness of cyber security called Cybersecurity, operations
are being carried out to build employees' awareness in the context of this subject. These activities are
part of a long-term plan to build employees’ awareness and preventive measures as well as detect and
respond to cyber threats.
The Śnieżka Group invests in the development of its employees - both in terms of gaining new knowledge
and practical experience. Due to these investments, the Group has significant value, which is highly
qualified and experienced staff. In the Group companies, the percentage of jobs occupied by highly
qualified persons with specialist knowledge in various business areas is constantly increasing. The
value of such employees is crucial for building and maintaining the competitive advantage of FFiL
Śnieżka SA, and their loss may result in a decrease in efficiency and loss of business opportunities.
Considering the risk of losing qualified staff, the companies comprising the Group have a personnel
policy with the following strategic elements:
building retention programs that ensure continuity and smoothness of work and translate into
retention of knowledge and experience within the organization.
An important element of this strategy is also the development of managerial attitudes and leadership
styles among managers of highly qualified employees.
It cannot be ruled out that due to the COVID-19 disease pandemic, caused by the SARS-CoV-2 coronavirus,
legal solutions introduced by public authorities - including the Regulation of the Minister of Health
issued on March 20, 2020 regarding the introduction of epidemic status in Poland, and other legal
solutions, which will eventually be introduced in the future, will have an impact on the Group's
operations. As at the date of preparing the Group's annual report for 2019, it is not possible to assess
their potential impact on the Group.
The EU legal regulations which in any way affect the paints and varnishes industry are constantly
becoming more severe and complex.
In order to prevent this, the Group monitors the legal developments that might affect the production and
takes actions aimed at a rapid adjustment of its technology process with a view to mitigating this risk.
There is also a risk related to differences in the interpretation of tax regulations. Despite observing
by the Group both domestic and EU legal regulations in the field of accounting, tax information included
in tax returns and declarations may be considered by the Polish tax authorities to be unlawful. If the
tax authorities adopt a different tax interpretation than the one applied by the Group to calculate the
tax liability, such a situation may have a significant impact on the Group's financial results.
In the coming years, the economic slowdown in Hungary is expected to reach slightly above 3%. A strong
Hungarian economy and reduced production capacity will boost imports, and exports may slow down along
with weaker international trade and rising labour costs. The risk of a slowdown in Hungary is focused on
higher-than-forecast wage increases, which leads to higher inflation expectations. Further weakening of
the situation on export markets (for local companies) may worsen the outlook for GDP growth in Hungary.
On the other hand, a lower than expected increase in import prices may mitigate changes in domestic
prices and maintain growth.
In 2019, presidential elections were held in Ukraine, followed by parliamentary elections. Risks that
may affect the Group's activities on the Ukrainian market include political instability, lack of
structural reforms or their failure, as well as the still not completely stable situation in the east of
the country. A high level of corruption and uncertainty of the Ukrainian hryvnia exchange rate are still
a significant limitation for business development or new investments.
The Śnieżka Group, operating on the Belarusian market, must bear in mind the possibility of situations
that may adversely affect its bottom line. Among them, it is necessary to indicate a risk related to
weak dynamics of economic development (GDP growth rate) and currency risk. Currency risk results from a
centrally controlled currency exchange model. For this reason, the majority of settlements are made in
euros, and many distributors arrived at a conclusion to purchase the Company's products/ goods in zlotys
(consequently, the price is not affected by USD/EUR fluctuations).
The situation of the Śnieżka Group is influenced by activities carried out by the Belarusian government
to protect the domestic market (customs, permits, certificates). One of manifestations of this
protection is obligation to implement costly certification of imported goods.
In addition, the risk factors encompass consequences of Belarus's membership of the Eurasian Customs
Union (including Russia), including the related expansion to the Belarusian market of Russian
manufacturers of construction materials, e.g. Vetonit-Weber, Knauf, Bergauf and others.