Annual report 2018
This chapter presents significant risk factors and threats to the operations of the Śnieżka Group.
In addition, the Group identified risk factors affecting non-financial issues. They are described in item 3.4.1 of the report called: “Managing risks related to the activity of the Group that affect non-financial issues”.
The macroeconomic risk related to the economic situation in Poland, as well as on other markets where individual companies of the Group operate, plays a significant role in the operations of the Śnieżka Group.
This risk is primarily associated with:
A possible decrease in consumption and a deterioration in public sentiment may lead to a reduction in demand for flats - both on the primary and secondary market - as well as expenditure on renovations and modernization of flats, which mainly determine the demand for decorative paints. This risk may occur in particular on eastern markets. In Ukraine, it may be caused by: lack of reforms (which may limit the assistance of the IMF and the European Union), inflaming conflicts in the east of the country and change in economic policy after the elections in 2019. A serious risk for economic growth also occurs in Belarus owing to problems related to the indebtedness of the state sector.
Unsatisfactory financial results of construction companies, limiting development of production capacity, and the lack of workforce may prevent the construction sector from meeting the growing investment needs, which will adversely affect the demand for decorative products.
A possible tightening of lending policy by banks, including an increase in interest rates on loans, may have a negative impact on the demand for apartments and the scale of renovations 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:
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;
By conducting business activities, the Śnieżka Group is exposed to various types of operational risk, such as:
These failures can also have an adverse impact on the natural environment. In order to limit this type of risk, the Group conducts constant modernization and maintenance in its production facilities. It also holds a property insurance policy against all risks, including the impact of natural disasters.
Essential insurance agreements are presented in item 1.7.2 of the report.
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 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 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.
There is a risk related to a decrease in the share of the Group's products at individual distribution levels - resulting primarily from competition activities.
The Group strives to minimize this risk by implementing a multi-channel sales strategy that contributes to the growth of sales of the Group's products.
The reduced demand for the Group's products may lead to accumulation of excessive inventories and the need to create revaluation write-downs.
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 expanding its production lines and building new ones. By 2021, the Company is also planning to complete the erection of a modern logistics centre.
The activities carried out by individual companies of the Śnieżka Group are exposed to fierce competition. The domestic market of paints and varnishes is infested with large renowned international companies and on the other hand there is a strong price competition triggered by small and local entities. 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 2018, there were no significant changes in the scope of the power distribution among paints and varnishes producers on the Polish market.
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. For example, in the case of the Belarusian market, the risk factor is expanding producers of construction materials from Russia (e.g. Bergauf).
The Group monitors the activities of other entities on all key markets. The Group companies try to limit the risk related to the company's competition activities through appropriate advertising activities and actions directly 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.
Ecological activities in the Company are carried out in accordance with the applicable legal requirements and procedures and instructions specified in the Integrated Management System (IMS), which includes: quality management system according to PN-EN ISO 9001 and environmental management system PN-EN ISO 14001.
In its activity, the Śnieżka Group is exposed to the risk of fluctuating exchange rates. The Group imports raw materials, paying in Euro, used for the production of paints and varnishes. The products are mainly exported to Eastern European countries (including Ukraine and Belarus, Moldova and Georgia), in which settlements are carried out primarily in US dollars. Therefore, the Group is exposed to the risk resulting from fluctuating exchange rates of EUR/USD and the relation of both currencies to the zloty. The most favourable scenario for the Group is the lowest EUR/USD rate, which reduces the purchase costs of raw materials and maximizes export revenues.
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.
In 2018, FFiL Śnieżka SA purchased forward contracts, which served as cash flows hedges resulting from purchases of raw materials in euro.
The list of forward transactions concluded in 2018 was provided in note 39 to the consolidated financial statements for 2018.
The Group may apply as hedging instruments only contracts concluded with the external party (they cannot be issued by a Group entity). At the same time, hedging derivatives are concluded for a period not longer than one year, i.e. maximum for a period corresponding to the purchase plan of raw materials.
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, 2018, the Group's total liabilities on loans and borrowings and financial leasing amounted to PLN 65,514 thousand. The increase in official interest rates (WIBOR, EURIBOR, LIBOR, BUBOR) may contribute to a risk of increasing the Group's financing costs.
In 2018, the Group did not apply instruments hedging the interest rate risk.
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 2018, the Group had no problems with timely settlement of its liabilities, which can be reflected by its ratios.
In 2018 and after the end of the financial year, FFiL Śnieżka SA signed loan agreements with several banks to finance the acquisition of 80% of 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 with the banks in 2018 and in 2019 are described respectively in items 1.7.2 and 1.7.3 of the report. Other credit agreements with the banks are presented in item 1.7.4 of the report.
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 provide information security, regularly backs up key data, and has extensive anti-virus and phishing protection.
In 2018, preparations were made to implement a new IT software in the Company, which will not only improve its operational activities, but also contribute to the improvement of IT operations security.
In addition, since 2018 - as part of the internal program to build awareness of cyber security - works have been 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.
Highly qualified and experienced staff is an important asset of the companies comprising the Śnieżka Group. In particular, the Group recognizes the risk related to the increase in the average age of employees employed in the production area. Within a few years, a significant part of these employees will reach the retirement age, which may result in the end of their work.
In order to ensure continuity and fluency of work in companies belonging to the Group, a personnel policy is implemented, which is based on relevant plans, programs and tools used in HR processes. They include, inter alia, evaluation of staffing needs and annual employment planning, defining training needs and formulating the annual training plan, adjusting the on-going training and development projects to the needs of the specific areas, a non-wage compensation program as well as incentive systems, pay raises and promotions.
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.
Apart from macroeconomic risk, the risk of the Ukrainian hryvnia devaluation is a significant threat. The risk factors also include a possibility of a further deterioration of the geopolitical situation in the east of Ukraine, which in previous years did not favour economic development and destabilized the Group's operations on this market.
Conducting business activities in Ukraine hampers and poses additional risks of a high level of corruption not occurring in Poland. The adoption of law on the anti-corruption court in June 2017 is a milestone to fight this phenomenon and create a safe and stable environment for companies operating on this market.
Despite the favourable economic outlook, there is a uncertain political situation in the region, including Russia, which Belarus has particularly strong trade relationships.
The situation of the entire Śnieżka Group is also undoubtedly affected by measures to protect the domestic construction chemicals market in Belarus (customs, permits, certificates). One of the manifestations of this protection is the need to conduct costly certification of imported goods and increase the customs value for entrepreneurs importing goods into the Customs Union.
Also the expansion of the Customs Union zone and the related expansion of Russian producers of construction materials onto the Belarusian market contribute to important risk factors on this market.
