Annual report 2018
In the reporting period, the products of the Group were sold under the following commercial brands:
In the reporting period, the products of Fabryka Farb i Lakierów Śnieżka SA were sold under the following commercial brands
In addition, the Group's offer in 2018 included the Flair brand - operating on several export markets in Western Europe (its offer includes equivalents of the Śnieżka brand products).
The main markets the Śnieżka Group operates on are as follows: Poland, Ukraine and Belarus. In 2018, the Group's revenues generated on these three markets accounted for 95.1% of consolidated sales revenues.
The leading sales market (for products and goods) of the Śnieżka Group in 2018 was the Polish market with a 77.8% share (by 1.6% compared with 2017). The other essential countries, where the companies comprising the Group operate, are Ukraine (share of 12.5%, -0.6% y/y) and Belarus (share of 4.8%, -0.5% y/y).
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 biggest players present on the domestic market are FFiL Śnieżka, PPG Deco Polska (Dekoral, Bondex, Sigma, Malfarb, Domalux and Drewnchron brands), AkzoNobel (Sadolin, Dulux, Nobiles, Sikkens, Dyna and Hammerite brands) and Tikkurila (Tikkurila, Jedynka, Beckers and Polifarb Dębica). These entities represent approximately 75% of total sales. The remaining manufacturers hold the remaining 25% of market share.
According to FFiL Śnieżka, the sales of decorative products on the Polish market is held 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.
The Ukrainian market is operated by approximately 200 manufacturers of paints and varnishes, of which only about 30 are stable entities. According to the Transparency Market Research (TMR) research group, the leaders in the production of decorative paints on the Ukrainian market are as follows: Śnieżka-Ukraina, Meffert Hansa Farben, ZIP, Kaparol Dniepr, Eskaro, Faydal UA, Polysan and PE Olejníkov.
The Group's products are available throughout Ukraine, but the vast majority of revenues are generated in its western and central part.
The Belarusian paint market is an arena for large players such as: DAW (Caparol/Alpina brands), Eskaro (Condor brand), MAW, Tajfun, Ilmax, Ceresit and Knauf.
Śnieżka Group is one a significant manufacturers of paints and varnishes on the Belarusian market with a predominant position in the segment of putties. 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. On the demanding Belarusian market, the Group is present both in the B2C channel, being the main player through the DIY network and retail outlets of the Group's distributors as well as in the B2B channel (to a lesser extent).
In Moldova, the Śnieżka’s brands have been present for many years. The Group optimizes and adapts its offers to the requirements of the local market. On this market, it can also rely on the distributors’ sales and marketing support. The main competition on the Moldovan market are Supraten and Cheton Grup. Dutek - an importer operating on the said market - is a leading Romanian manufacturer of paints and varnishes (acquired in 2016 by the PPG concern). As far as competitive entities are concerned, Dufa also needs to be mentioned. Sales are carried out through wholesalers that supply the Group's products to retailers. In terms of the market share of emulsion products, Śnieżka's products take the second place.
The Group sells its products mainly in the Kaliningrad and Moscow regions as well as in southern Russia on the territory of the Russian Federation. On the market in question, the Group competes with the following companies: Tikkurila, Caparol, AkzoNobel, Lakra, Empils, Jaroslawskie Kraski, Ruskije Kraski, VGT, Ptimist, Knauf and Prestiż.
Other markets where the Group conducts sales include: Hungary, Lithuania, Slovakia, Czech Republic, Romania, Kazachstan and United Kingdom.
Macroeconomic factors
From the point of view of the Śnieżka Group’s revenues, the Polish market is key. Its condition is best illustrated by the value and dynamics of GDP, whose main driving force is private consumption. The consumption of goods and services by individual consumers is 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 will 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.) on other major markets - in particular in Ukraine and Belarus. In addition, assuming the completion of the acquisition of shares in Poli-Fabre Vegyiparki Kft., also the situation prevailing in Hungary (which may become the Group's main export market).
The macroeconomic factor affecting the pace of the Group's development will also be the trend in exchange rates (in particular EUR/USD, EUR/PLN, USD/PLN, UAH/ PLN, BYN/PLN), including possible devaluation of 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
In the years to come changes in the demand for paints and varnishes will impact the Group’s development and the entire industry. In addition the consumers’ trends will be critical.
The Company’s Management Board anticipates an increase in the value of the paints and varnishes market in Poland and Ukraine based on the assumption that in the future the trend of selecting more expensive products by customers (value for money and premium segments), featuring higher quality, will be sustained.
On the Belarusian market, the Company anticipates the trends observed in 2018 to continue, i.e. the increased demand for low-cost products (due to the low purchasing power of a significant number of local consumers) and the selection of premium products by wealthier Belarusian consumers.
On the Hungarian market of paints and varnishes, which in 2019 (after the assumed acquisition of shares in Poli-Farbe Vegyipari Kft.) will generate a significant part of the Group's sales revenues, the Company anticipates the continuation of trends from the past year. Customer preferences in Hungary are similar to those in Poland and Ukraine, i.e. there is an increase in demand for high quality products sold under premium brands.
Economic situation
In 2018, the Polish economy recorded high growth dynamics. According to preliminary estimates provided by the Central Statistical Office (GUS), the Gross Domestic Product increased by 4.9% compared to the previous year. 1
The main driving force of the Polish economy development was private consumption, which was boosted by rising wages. In 2018, the average wages in the national economy amounted to PLN 4,885.032 and increased by 7.3% compared to the previous year. In turn, the average wages in the fourth quarter of 2018 reached PLN 4,863.74.
The economic growth was also affected by the gradual decline in the unemployment rate - to 5.8% in December 2018, compared to 6.6% a year earlier - and higher social transfers. The above factors contributed to increased retail sales by 4.7% compared to the same period of the preceding year.
At the same time, inflation remained at a low level. In 2018, the average annual consumer price index (CPI) amounted to 101.63, which means a 1.6% increase in prices compared to 2017. In addition to high private consumption, the level of investment - mainly local government, financed from EU funds also increased.
he past period was also beneficial for the construction industry. Construction-assembly output, including investment and renovation works, carried out nationally by construction companies employing more than 9 employees, increased by 12.2% in 2018 compared to the same period of the previous year.4,
In addition to infrastructure investments, a significant revival prevailed in the area of housing and commercial construction. In 2018, 184.8 thousand new apartments were commissioned, i.e. 3.6% higher than in 2017.5.
In other countries, constituting the main markets for the products of the Śnieżka Group, the economic situation was as follows:
Ukraine
According to the information obtained from the National Bank of Ukraine (NBU), after the deep recession of 2014-2015, in Ukraine in 2018 there was a breakthrough to restore macro-financial stability (which prevailed in Ukraine until the annexation of Crimea and armed conflict in Donbas). Last year, the Ukrainian economy recorded the fastest economic growth in seven years. In 2018 GDP in Ukraine increased by 3.4% (year-on-year).6. The rate of economic growth was positively influenced primarily by the increase in internal demand, both consumer and investment. At the same time, according to the NBU data, inflation declined to 9.8%. 7. This was particularly due to the fall in prices of petroleum products as a result of the dynamic fall in oil prices in the last quarter of last year. In 2018, a positive tendency was also observed in the form of the strengthening of the Ukrainian hryvnia.
An important role for strengthening the macro-financial stability of Ukraine is played by cooperation with international financial institutions. International partners (IMF, the European Union and World Bank) earmarked USD 2.4 billion, which increased the country's currency reserves to USD 20.8 billion. A positive aspect in improving the economic situation is that the Ukrainian banking sector demonstrated positive profitability ratios.
In 2018, the average wages in Ukraine amounted to UAH 9,633, which was the equivalent of about PLN 1,307.
Belarus
In 2018, the Belarusian economy recorded an annual GDP growth rate of 3.0%. This result was higher than in 2017 (by 0.6 pp.), which confirms Belarus' recovery from the recession. Economic growth recorded in Belarus can be linked to the improvement of the global economic situation and the increase in the price of oil in the first three quarters of 2018 (petroleum products are one of the main export goods of Belarus). A positive effect on the economic situation of Belarus last year was also the regulation (still in April 2017) of the Russian-Belarusian dispute regarding the terms of supply of energy resources from Russia, yet the prospects for economic relations of these two countries are still not resolved.
The increase in wages and higher demand for consumer loans also had an impact on the Belarusian economy in 2018, which translated into growing domestic demand - one of the main components of economic growth in Belarus. Domestic demand translated into more than 8% increase in turnover in retail trade. In 2018, the average wages amounted to 958.1 BYN9 which was the equivalent of about PLN 1,654.
The improvement in the Belarusian economy may also be confirmed by relatively low inflation, which to a large extent is due to the National Bank of the Republic of Belarus. It runs a tough monetary and credit policy aimed at limiting the money supply and excessive growth in wages. In 2018 prices in Belarus increased by 4.9%,10, and the rate of the Belarusian ruble (BYN) was relatively stable in relation to other currencies.
Raw materials and currencies
Prices of titanium white - which belongs to the basic raw materials in the manufacture of paint - in the first half of 2018 remained in an upward trend. It resulted from strengthening of the bargaining position of the main producers of titanium white due to the concentration of its production, a decline in production in China triggered by tightening environmental protection regulations and the need to incur additional expenses for environmental protection by production facilities. In the second half of 2018, the increase in titanium white prices slowed down slightly and the prices of this raw material stabilized.
In 2018, some other raw materials also slightly increased (e.g. cellulose thickening agents, acrylic dispersion) and packaging (both plastic and metal). This increase can be described as a natural phenomenon after the prices of these raw materials and packaging remained relatively stable over the past few years.
The prices of other raw materials used by the Group companies for production remained stable. At the same time, in 2018, no problems occurred on the market with the availability of raw materials and packaging.
The currency market in 2018 brought a weakening of the zloty against the main currencies - the euro and the dollar. Among the factors that influenced the value of these currencies, it should be mentioned in first place the policies of central banks (the European Central Bank and the US Federal Reserve), political tensions in Europe (brexit negotiations and the situation in Italy) and the risk of so-called trade war on the US-China line.
As far as the Polish currency is concerned, there was a correlation between the rhetoric adopted by the ECB and the Monetary Policy Council's approach to interest rates. The MPC maintained its lenient attitude, postponing the start of tightening of monetary policy at least until the end of 2019.
At the end of 2018, the Euro currency was approx. 3% more expensive and the USD approx. 7.4% more expensive compared to the end of 2017.
In 2018, the situation on the currency market in Ukraine was relatively stable, and the Ukrainian currency strengthened to the zloty by nearly 9%. In the long perspective, however, the hryvnia remains in a long-term downward trend in relation to the Polish currency.
Condition of the sector
The main markets the Group operated on in 2018 were Poland, Ukraine and Belarus. In 2018, the Group's revenues generated on these three markets accounted for 95.1% of consolidated sales revenues.
In 2018, Poland and Ukraine observed a higher demand for products of medium and high price range while the segment of cheaper products shrank. On the other hand, the Belarusian market saw an increased demand for products of the lowest price range, resulting primarily from the low purchasing power of local consumers. At the same time, some part of Belarusian consumers were interested in products of the higher price range.
Compared to previous years, in 2018 the market of paints and agents for wood protection and decoration in Poland was revived, and the Company observed a trend toward selecting better and more expensive products by Polish consumers. The demand for products of medium and high price range increased while the segment of cheaper products shrank.
The sales volume of paints and agents for wood decoration and protection in 2018 remained at a level similar to 2017, while the gross value of sales to final customers increased by several per cent.
The year 2018 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 around 75%.
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 rest is used for finishing newly erected facilities.
The U&A survey of the Company showed that the renovation trend is subject to shortening. Nearly 60% of Poles declare that they use paints and agents for wood protection and decoration more often than every 5 years. On the other hand, 31% declare that they carry out renovation more often than every 2.5 years.
In spite of the increase in macroeconomic ratios in Ukraine, the year 2018 was demanding for manufacturers of paints and varnishes operating on that market - primarily due to rapid changes in the consumption of paints and varnishes. Throughout the year in Ukraine, periodic increases and decreases in demand were recorded. In addition, for the second consecutive year, due to unfavourable weather conditions, the beginning of the season was delayed. The above factors influenced the bottom line of manufacturers achieved in the entire 2018 - only some companies improved their outcome in relation to 2017, while other manufacturer’s results deteriorated.
According to the calculations of the Chem-Courier information and analytical agency, in 2018 the consumption of paints and varnishes in Ukraine decreased by 2% compared to the previous year. The drop in demand was observed in almost all product groups. Only the water-dispersive segment of the paints and varnishes market in Ukraine recorded an increase, which was largely related to the global trend of the growth of the popularity of waterborne products. Such a situation on the Ukrainian market of paints and varnishes, i.e. changes occuring in its structure, can be explained by the constantly changing preferences and requirements of local consumers.
In 2018, Ukrainian consumers became more demanding and painstakingly planned their expenses, before making a purchase they carefully analysed the price/quality ratio of products.
In the past year, despite high volatility of customer preferences and temporary difficulties (e.g. delayed season), the end consumer's demand for high quality paints and varnishes was observed, i.e. beginning from medium through to premium price ranges.
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.
Despite positive symptoms of the economic recovery in Belarus, in 2018 the purchasing power of Belarusian consumers remained low. This resulted in the demand for products of low and middle price ranges. Whereas, an increase for products of higher price ranges was increasingly noticeable. In the Company's opinion, this is due to the fact that a certain proportion of Belarusian consumers is prejudiced against Belarusian and Russian brands, preferring the high quality paints of well-known brands (including those with production facilities in Belarus).
In 2018, protectionism of market protection, manifested in customs policy, application of certification requirements for imported goods and preference for trade within the Eurasian Customs Union, intensified in Belarus. This resulted in increased competition from cheaper products from Russian producers.
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.
1Source: CSO, Quick estimate of gross domestic product for the fourth quarter of 2018.
2Source: CSO, Communication on the average wage in the national economy in 2018.
3Source: CSO, Communication on the average annual consumer price index for goods and services in 2018.
4Source: CSO, Dynamics of industrial and construction-assembly production in December 2018.
5Source: CSO, Housing construction in the period of January-December 2018.
6Source: State Statistics Service of Ukraine, Real GDP change in 2018.
7Source: NBU, Inflation Report (January 2019).
8Source: National Statistical Committee of the Republic of Belarus, Gross domestic product and gross regional product in 2018.
9Source: National Statistical Committee of the Republic of Belarus, Gross average earnings in the Republic of Belarus in December 2018
10Source: National Statistical Committee of the Republic of Belarus, Consumer price indices.
