threats and risks

Risks related to the macroeconomic situation on the Group’s markets

Macroeconomic risk plays an important role in the Group’s business; it is related to the situation in Poland and on the remaining markets on which the individual Group companies operate. The key components of this risk in Poland are raw material prices on the markets and the PLN to EUR exchange rate. The growth of the construction materials market is heavily affected by the number of new apartments and building permits, which drives greater activity of investors, turnover on the secondary real estate market and the related frequency of renovations, which generates demand for construction and decoration products, including paint. Demand may be reduced by difficulties in taking out mortgage and consumer loans, a decline in the purchasing power and impoverishment of the society.

The Ukrainian market risk is also associated with a potential reduction in demand for paints and varnishes, increases in the prices of raw materials and the situation in the construction sector. The threat of devaluation of the Ukrainian hryvnia also plays an important role in this context. Among the potential risk factors to be considered is the possibility of another deterioration of the geopolitical situation in Eastern Ukraine, which in the previous years was a deterrent to economic growth and a destabilizing factor for the Group’s business on this market.

The macroeconomic situation in Belarus has been unstable for several years now, and the country’s economy has been shrinking year by year. The condition of the country’s economy may be affected by the uncertain political and economic situation in other countries of the region, including Russia, which is a particularly significant trading partner for Belarus. Another risk area is a further weakening of the Belarusian currency and the prolonged deterioration of domestic demand. Moreover, the condition of the Śnieżka Group is also clearly affected by actions aimed at protecting the country’s domestic construction chemicals market, as evidenced by the requirement to have imported merchandise undergo a costly certification procedure. Also, the enlargement of the Customs Union and the related expansion into the Belarusian market by Russian manufacturers of construction materials constitute significant risk factors for the Group’s operations in Belarus.

Trends in the Śnieżka Group’s sales are also influenced by the situation in Russia. The market is under a potential risk of currency fluctuations and difficulties that may arise from the continued instability of the Russian currency. Another risk that should be noted in this context is that of further mutual sanctions between Poland and Russia and between Russia and the European Union.

Risk associated with distribution channels

In the process of distribution of its products, the Śnieżka Group applies a traditional model involving the use of intermediaries. Both on the Polish market and on foreign markets, there is a risk of a decrease in the share of the Company’s products at each distribution level due to the activities undertaken by competitors. In order to mitigate the risk of the loss of customers, the Company attempts to minimize the impact of the threats involved by implementing such measures as a multi-channel sales strategy where the key role is played by efforts aimed at the creation of a chain of own stores and affiliate stores. Chains of building materials superstores are also of great significance for the distribution and sales of paints and varnishes on the domestic market. The Company continues to cooperate with international and local partners. Its products are available in the outlets of the Leroy Merlin, OBI, Castorama, Jula and PSB chains. The conduct of sales via a variety of distribution channels is one of the assumptions adopted for the Group’s sales growth strategy which also minimizes the risk involved in being too dependent on a single distributor group. At the same time, the Parent Company makes continuous and intense efforts aimed at improving the numerical distribution of its products, with particular emphasis on its presence in building materials superstore chains. On foreign markets, the Group’s products are also sold under a traditional, i.e. indirect, model where the products are distributed through wholesalers, retail stores and building materials superstore chains. A risk factor now present in Ukraine is also the possibility of destabilization of the country’s situation, especially in its eastern regions, and a change in the status of certain areas, which may affect the distribution of the Group’s products on the Ukrainian market.

The Group keeps monitoring the situation and continuously takes action aimed at reducing the risk of the loss of customers. At the same time, on each of its export markets, the Group seeks to eliminate the risk of becoming dependent on a single distribution channel by pursuing a policy of diversification of such channels and, if necessary, by looking for new distribution centers.

Financial and currency risk

In its business, the Śnieżka Group is exposed to the risk of changes in exchange rates and interest rates. The Group imports raw materials for the manufacture of paints and varnishes for which it pays in euros but exports its products primarily to East European countries (including Ukraine, Belarus, Moldova, Russia and Georgia) where financial settlements are conducted predominantly in U.S. dollars. Accordingly, the Group is exposed to the risk of changes in the EUR/USD exchange rate and the exchange rates of both thee currencies against the Polish zloty. The most favorable scenario for the Group would be the lowest possible EUR/USD exchange rate which would lower the cost of raw materials and maximize revenue from exports.

The Group analyzes its currency risk on an ongoing basis. In 2016, the Group did not apply any long-term hedges in the form of derivative financial instruments such as options, forward contracts, futures or swaps. Due to the Group’s use of debt financing provided by banks, interest rate risk is a significant element of uncertainty affecting the Group’s business. The Group does not apply any interest rate hedging instruments.

Risk associated with the competition

Each type of business run by members of the Śnieżka Group is exposed to fierce competition from both Polish and foreign market players. The domestic paints and varnishes market is filed with large reputable international companies and, in addition, there is strong price competition from small local entities. The relatively high barriers to entry into the paints and varnishes market require the incurring of significant outlays prior to starting up a manufacturing business in this industry, hence the emergence of new competitors is more likely to result from acquisitions. In 2016, there were no significant shifts in the market shares of manufacturers of paints and varnishes on the Polish market. The Group’s operations on other markets are also subjected to heavy competition from both local and international companies. The Group keeps monitoring the activities of other players in all its key markets. Members of the Group make efforts aimed at mitigating the risk associated with the activities of their competitors by taking proper advertising measures and actions that directly support the sales of products offered by the Group.

Risk associated with the monitoring of receivables

The Śnieżka Group continues and develops the receivables management policy it has adopted. Using as the foundation of its business the cooperation with proven long-term partners, the Group has achieved stabilization which is an important contributing factor for the collection of receivables. The Group actively manages its sales, for instance by establishing different trade credit limits for different customers depending on their financial standing and rate of growth of their business. This is possible thanks to efficient processes utilizing modern tools applied by the Group and cooperation with business intelligence units. The policy of managing trade credit limits and terms of payment is closely related to the bonuses granted to customers for timely payments, which provides further protection of the Group’s interests.

The Group’s sales transactions are also secured by mortgages on real properties, declarations of submission to enforcement and promissory notes applied on an as-needed basis in accordance with the scale of operations carried out with each customer.

Currently, the Group puts a lot of emphasis on the development of distribution channels to new markets. This, however, entails a certain degree of uncertainty as to the collection of all receivables. To cope with this challenge, the Śnieżka Group reduces the associated risk by securing its receivables due from newly acquired customers. Such action guarantees the inflow of receivables, thus eliminating the adverse impact of failed transactions on the maintenance of financial liquidity by the Group without losing the profitability of sales.

The Group also applies a policy of monitoring trade receivables between its members. Ongoing monitoring ensures the ability of rational management of receivables, which has a favorable impact on the effectiveness of the decisions made.

The Śnieżka Group’s plans include further actions aimed at continuously improving the Group’s processes of managing the risk related to the collection of receivables and provide for the implementation of a number of new solutions to improve the results achieved in this area.

Risks associated with raw materials

The fundamental risks and threats facing the Śnieżka Group in the area of the provision of raw materials are mainly related to increasing prices of raw materials correlated with the spot prices of crude oil, increasing costs of transport, temporary or enduring limitation of access to raw materials and fluctuating exchange rates.
Taking into consideration the year 2016 and the Group’s current standing, it should be noted that no significant problems occurred with the availability or purchase prices of raw materials