Risk management

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 bottom line.

Risk associated with macroeconomic situation for the Śnieżka Group is mainly connected with:

  • Covid-19 pandemic.

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, such as:

  • Disturbances and interruptions in the operation of production facilities, as a result of failures and natural disasters.

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 natural disasters.

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 prices.

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 revaluation write-downs.

  • 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 production activities.

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.

Currency risk

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 simplified nature.

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 and 39.3.2.

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.

Liquidity risk

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:

  • turnover monitoring
  • 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.

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