Śnieżka capital group’s management report for h1 2016 · january and february 2016 show that...

Śnieżka Capital Group’s Management Report for H1 2016

Śnieżka Capital Group’s Management Report for 6 months of 2016

1. ORGANISATION OF ŚNIEŻKA CAPITAL GROUP .............................................................. 3 2. DESCRIPTION OF ŚNIEŻKA CAPITAL GROUP’S BUSINESS IN H1 2016 ........................ 4 3. STRATEGIC GOALS OF ŚNIEŻKA CAPITAL GROUP ....................................................... 5 4. ECONOMIC SITUATION IN H1 2016 ...................................................................................... 6 5. SALES AND ORDER PORTFOLIO .......................................................................................... 7 6. RESEARCH AND DEVELOPMENT ........................................................................................ 9 7. SUPPLY POLICY ....................................................................................................................... 10 8. EMPLOYMENT .......................................................................................................................... 10 9. INVESTMENTS IN TANGIBLE ASSETS AND INTANGIBLE ASSETS .............................. 10 10. FINANCIAL RESULTS .............................................................................................................. 11 11. ASSESSMENT OF THE PERFORMANCE OF FINANCIAL FORECASTS ......................... 12 12. RISK MANAGEMENT ............................................................................................................... 12 13. OTHER DISCLOSURES ............................................................................................................ 15 14. DESCRIPTION OF THE CAPITAL GROUP’S ORGANISATION AND CAPITAL RELATIONS ...................................................................................................................................... 16 15. OWNERSHIP STRUCTURE (INFORMATION ABOUT SHAREHOLDERS AND THE PRESENT VOLUME OF INTERESTS) . ......................................................................................... 17 16. AWARDS AND DISTINCTIONS ............................................................................................... 18 17. CONCLUSION ............................................................................................................................ 19


1. Organisation of Śnieżka Capital Group

Name of the Parent Company:

Fabryka Farb i Lakierów Śnieżka S.A.

Office of the Company’s Management Board:

39-102 Lubzina 34 a Ropczycko-Sędziszowski Poviat Podkarpackie Voivodeship

Company’s registration:

The Parent Company was established by way of Notarial Deed dated 16 January 1998. The Company is entered in the register of entrepreneurs of the National Court Register maintained by the District Court in Rzeszów, 12th Commercial Division of the National Court Register, under KRS no. 0000060537. The Company was assigned the REGON statistical number 690527477.

Business activity

Manufacture of paints, varnishes, adhesives, solvents and putty compounds.

Share capital:

As of 30 June 2016, the Company’s share capital amounted to PLN 12,617,778, i.e. 12,617,778 shares with a nominal value of PLN 1.

Composition of the Management Board and the Supervisory Board and changes over the year Supervisory Board

Composition of the Supervisory Board appointed on 2 June 2014 for the seventh term of office:

• Stanisław Cymbor – Chairman of the Supervisory Board • Jerzy Pater – Vice-Chairman of the Supervisory Board • Stanisław Mikrut – Secretary of the Supervisory Board • Zbigniew Łapiński – Member of the Supervisory Board • Dariusz Orłowski – Member of the Supervisory Board

In 6 months of 2016, the composition of the Company’s Supervisory Board did not change.

Management Board:

Piotr Mikrut – President of the Management Board

Witold Waśko – Vice-President of the Management Board

Joanna Wróbel-Lipa – Vice-President of the


Management Board In 6 months of 2016, the composition of the Company’s Management Board did not change.

Present organisational chart and organisational changes during the year

The present organisational chart was adopted by way of Resolution No. XIX/37/2016 of the Management Board, dated 14 March 2016.

The principles for presenting the financial statements have been included in the introduction to the Capital Group's half-yearly condensed consolidated financial statements.

The financial statements are drawn up on the basis of the International Accounting Standards and National Accounting Standard 9, the International Financial Reporting Standards, interpretations related thereto published as regulations of the European Commission, the Accounting Act (in the area not regulated by the IAS) as well as internal procedures concerning the preparation of interim reports submitted to the Warsaw Stock Exchange. The financial statements for H1 2016 have been drawn up in accordance with the IFRS on the assumption that the Group will continue as a going concern in foreseeable future. The half-yearly condensed consolidated management report of the issuer has been prepared in accordance with the requirements of the Ordinance of the Minister of Finance of 19 February 2009 on current and periodic information to be submitted by issuers of securities and conditions for considering as equivalent information required under the laws of a non-member state (Journal of Laws of 28 February 2009). In addition, the report has been prepared according to Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation, MAR), which came into effect on 3 July 2016.

2. Description of Śnieżka Capital Group’s business in H1 2016

In H1 2016, Śnieżka Capital Group’s sales amounted to PLN 303,083 thousand, which means a dynamics of 105% compared to the same period of 2015. The sales value of products in the period in question reached a 105% dynamics. The Group also sold 9% more materials compared to the previous year. Other revenues (sale of services) increased by 30% compared to the same period a year earlier.

Revenue structure in Śnieżka Capital Group by type in PLN ‘000

Item H1 2016 H1 2015 Dynamics Decorative products 237 836 2 24 269 106% Construction chemistry products 35 187 3 5 310 100% Industrial products 3 818 4 345 88% Goods 20 377 2 0 342 100% Other revenue 2 412 1 853 130% Materials 3 453 3 162 109% Total sales 303 083 289 281 105%


Key operations and achievements of Śnieżka Capital Group in H1 2016 and by the date of compiling this report: • continued improvement of sales, logistics and management processes, • continued effort to build value and position of the brands in the Group’s portfolio, • expanded distribution, introduction of the Group’s products to new markets, • On 3 June 2016, the Ordinary General Shareholders' Meeting was held and it:

approved the Management Report and the financial statements of the Parent Company for 2015;

acknowledged the fulfilment of duties by members of the Company’s corporate bodies in 2015;

distributed the Parent Company’s 2015 net profit in the amount of PLN 58,216 thousand, set the dividend at PLN 3.15 per share, i.e. totalling PLN 39,746 thousand, specified the remuneration for the Founding Shareholders and the holders of promoter certificates to be 0.5% of the net profit for each founding shareholder, i.e. 2 % of the net profit in the total amount of PLN 1,164 thousand, decided to cover the loss from previous years in the amount of PLN 8,481 thousand, and decided to allocate the remaining profit, amounting to PLN 8,825 thousand, to the supplementary capital;

approved the Management Report of the Capital Group and the financial statements of the Capital Group for 2015.

Furthermore, the Supervisory Board selected PricewaterhouseCoopers Sp. z o.o., with its registered office in Warsaw, Al. Armii Ludowej 14 , to audit and review the financial statements of Fabryka Farb i Lakierów Śnieżka S.A. for 2016. The audit and review will cover both separate and consolidated half-yearly and annual statements of the Company and the Capital Group. The Parent Company has not used PricewaterhouseCoopers Sp. z o.o.’s audit and review services before.

In connection with the publication of ‘Best Practice for GPW Listed Companies 2016’ by Giełda Papierów Wartościowych w Warszawie S.A., the Management Board of FFiL Śnieżka S.A. announces that the Company applies the detailed rules specified in that document, except for the rules published in EBI report no. 1/2016 Corporate governance, which is available on the Company’s website.

3. Strategic goals of Śnieżka Capital Group

Śnieżka Capital Group’s strategic goals concentrate on expanding to new European and non-European markets, while maintaining a leading position on selected Eastern European markets. The Group plans to achieve this goal by focusing on selected countries of Central, Eastern and Western Europe, and building a leading position on those markets. The Group considers those markets to be promising and has therefore based its long-term presence strategy on that premise. Śnieżka Capital Group’s strategy involves achieving the above goals based on the following assumptions: • maintaining the image of an attractive and reliable partner among the Group’s suppliers and

customers,


• competing with innovation and flexibility, e.g. R&D, building advantages based on quality and openness to change,

• competing by expertise – promoting employee growth and developing human capital.

The Group plans to increase its potential by expanding to new sales markets and developing its brand portfolio: Śnieżka, Magnat, Vidaron, Foveo-Tech and Beston. As part of its strategy, the Group is interested not only in organic growth, but also in growth through capital expenditures. One of the objectives of the Parent Company’s Management Board is to build long-lasting relations with its business partners, employees, shareholders and clients. The Group will continue to support its business partners, distributors and retailers in marketing and training to build goodwill and increase the Capital Group’s potential. Balanced growth, which is inscribed in its strategy, will allow the Capital Group to achieve a leading position on key markets.

4. Economic situation in H1 2016

The Polish market is of key importance for Śnieżka Capital Group in terms of revenue, with the market situation being reflected by the Gross Domestic Product. According to the Central Statistical Office (GUS), in the first two quarters of 2016, GDP grew by 3% and 3.1% respectively (year-on-year). The driving force behind Poland’s economy in Q1 was domestic demand, backed by consumer spending and a high dynamics of public expenditures. Compared to previous years, investments are on the decline, in particular corporate investments, which decreased by 1.4% (YOY) in Q1, being the most significant drop since 2013. On the other hand, import and export increased by 9.1% (YOY) and 6.3% (YOY) respectively. In H1 2016, according to the Central Statistical Office (GUS), more apartments were commissioned to use than in the same period a year earlier. Based on detailed data published by GUS, 15.1% more apartments were commissioned in H1 2016 compared to the same period of 2015, when a 3.7% decrease was recorded. Compared to the previous year, the number of building permits issued rose by 13.6% and the number of commenced apartment construction projects increased by 7.5%. More building permits issued and the number of new construction investments, combined with growth estimates for Poland’s economy, declining unemployment and rising pay, give a basis for optimistic demand forecasts for building materials, including paints and varnishes, in the years to come. From the perspective of the Capital Group’s business, export markets are particularly important, with the major markets being Ukraine and Belarus. Therefore, the economic situation on those markets is critical for the Group being able to perform its growth plans. The economic data from the Ukrainian market shows that the Ukrainian economy is slowly stabilising. According to the National Bank of Ukraine, GDP after Q2 2016 grew by 1% compared to the same period a year earlier. In early 2016, Ukraine’s construction sector grew. It is estimated that construction developments during the first five months this year increased by 9.3% compared to the same period in 2015. The continued high level of inflation, rising prices of goods and services, and declining buying power are some of the problems of Ukraine’s economy.


However, despite its limited potential, the Ukrainian market is still important and promising for FFiL Śnieżka S.A. Belarus, which is another export direction for the Group, is still in crisis. The macroeconomic data for January and February 2016 show that the existing trends not only continued but even deteriorated, confirming the Belarusian economy’s serious problems. On the one hand, this is due to the continued recession in Russia, which is Belarus’ main trading partner, and a drastic decline in the pries of fuel on global markets, which is one of Belarus’ key export commodities. On the other hand, another serious problem seems to be the poor efficiency of the Belarusian economic model. The Russian market is also plagued by unfavourable conditions for sales growth. Russia’s economy is negatively affected by the economic sanctions, declining raw material prices, rising prices of basic products and impoverishment of the society, leading to a depreciation of the ruble.

5. Sales and order portfolio

Paints and varnishes market in H1 2016

Revenue structure of Śnieżka Capital Group for H1 2016 by country

* The structure was calculated based on sales value Poland remains Śnieżka Capital Group’s leading sales market, with a 79% share (YOY decrease by 1 pp). Other key markets for the Group’s companies are Ukraine and Belarus. Ukraine’s share in the Group’s sales structure increased from 10% in the same period of 2015 to 11% in this year. In the analysed period, the Capital Group’s sales to the Belarusian market accounted for 5% of its revenue, down by 1% compared to H1 2015. Other countries (including Russia and Moldova) accounted for 5% of the Group’s sales, which is the same as in the corresponding period a year earlier. The Parent Company remains one of the leaders on the Polish market of paints and varnishes, facing competition mainly from PPG Deco Polska sp. z o.o., Akzo Nobel Coatings sp. z o.o. and Tikkurila Polska S.A. The Group sells its goods through all distribution channels, mainly through wholesale and retail shops as well as hardware shops.

Other countries: 2%

Poland: 79%

Ukraine: 11%

Belarus: 5%.

Russia: 2%

Moldova: 1%


On the Polish market, the Group recorded revenues of PLN 240,535 thousand for 6 months of 2016, which is PLN 10,699 thousand more than in the same period a year earlier. The position of Śnieżka Group’s products on the Ukrainian market remains strong, but unfavourable demand trends for paints and varnishes persist, as price pressure continues, accompanied by a growing share of budget products. To meet the market expectations, the Group has been adjusting its offer for each group of consumers by introducing new products. The Group’s products are available in all of Ukraine, but most profits are generated in western and central parts of the country. The products are distributed mainly through the traditional channel (wholesalers and retail outlets) and hardware chains, such as Epicenter, Nowa Linia (Ukrainian entities) and Leroy Merlin (foreign entity). The Group’s sales to the Ukrainian market for 6 months of 2016 amounted to PLN 33,744 thousand; a year earlier they were lower by PLN 5,199 thousand. Śnieżka Capital Group is one of the leading manufacturers of paints and varnishes on the Belarusian market, with a strong position in the putty compound segment. On that market, the Company competes against international and local producers as well as with Russian brands, which, due to the free movement of goods as part of the Eurasian Economic Union (including Russia, Belarus and Kazakhstan), are becoming increasingly competitive. The Group sells its products to the Belarusian market mainly through the traditional channel. Śnieżka products can also be found in local DIY chains. In H1 2016, the Group’s sales to the Belarusian market amounted to PLN 14,295 thousand, down by PLN 3,953 thousand compared to the previous year.

The Group also sells its products in the Russian Federation, focusing mainly on Kaliningrad and Moscow regions as well as southern Russia. On that market, it competes against Tikkurila, Caparol, AkzoNobel, Lakra, Empils, Jaroslawskie Kraski, Ruskije Kraski, VGT, Ptimist, Knauf and Prestiż. In the period in question, the Group’s sales to the Russian market amounted to PLN 5,734 thousand, which is an increase in revenues by PLN 1,684 thousand. The Group also exports to Moldova. The sales on that market during the discussed period amounted to PLN 3,263 thousand, down by PLN 736 thousand compared to the same period a year earlier. With Supraten being the largest market player, the Group also competes against Romanian companies. Other markets, including Hungary, Romania, Armenia and other, saw an increase by PLN 910 thousand, with total sales amounting to PLN 5,512 thousand. With all of its distributors, Śnieżka Capital Group companies signed commercial partnership agreements. The Group also works to launch its distribution on new markets.

Development of product offer in H1 2016

Śnieżka Capital Group works continuously to develop its product offer, with new products being launched and exiting ones modified. In the reporting period, the Parent Company introduced ST 12 Start Pro, a new polymer gypsum levelling compound under the Acryl-Putz brand, and the composition of Acryl Putz FS 20 Finisz, a ready-to-use putty compound, was improved. Two new products were introduced under the Vidaron brand: a protective and priming impregnate, and a decorative, protective and film-forming impregnate. In the new season, the colour ranges of certain products were changed with the introduction of new appealing colours in an oil phthalate enamel, the chlorinated rubber enamel Supermal and the paint Śnieżka Na dach.


The Group also develops its product portfolio for export markets. For the purpose of sales of the subsidiary Śnieżka Ukraina, new emulsion paint recipes for indoor and outdoor applications were prepared. Among others, the subsidiary Śnieżka BelPol expanded its offer by new indoor paints: Śnieżka Super Latex and Śnieżka Design Lux, which are designed for the colouring system according to NCS notation.

Marketing communication in H1 2016

In every season, Śnieżka Capital Group plans a number of advertising measures in the media and at POS to support its product sales. For 2016, the Parent Company prepared a new advertising campaign for the Polish market, promoting the versatility of Śnieżka Satynowa, and for the Vidaron and Magnat brands, communication was used which premiered in 2015. In addition to TV, which is its main advertising medium, the FFiL Śnieżka S.A. actively uses the Internet in a number of ways, working with bloggers and showing presence in the social media. Using similar tools, the Company also promotes other brands on offer, such as the Śnieżka Acryl-Putz putty compounds and the thermal insulation system products Foveo-Tech. Points of sale are another important consumer contact channel where purchasing decisions are made. A number of merchandising solutions are being designed to display the Company’s products and facilitate decision-making on part of the consumer. Service providers are an important group of consumers, which the Company addresses through modern education. For 2016, the Parent Company prepared a Poland-wide innovative training programme as part of a Mobile Training Centre, with a special vehicle as an autonomous and modern centre with multimedia facilities, allowing an indoor or outdoor training course to be conducted for 25 participants. The Company’s main advertising efforts focus on Poland, while its subsidiaries focus on the Internet and POS advertising in other countries.

6. Research and development

Śnieżka Capital Group’s research and development are carried out in a modern R&D Centre in Brzeźnica as part of the Parent Company’s structures. According to a model adopted in the Group, R&D and QA departments work closely with subsidiaries. As part of that model, the Parent Company supervises production processes in the plants in Ukraine and Belarus, and works with the subsidiaries to ensure the quality of raw materials supplied to them. The processes are verified with audits. In an effort to maintain top quality of products, the Group sets the direction of its R&D based on the changing market situation and changes in legislation, while constantly monitoring the raw materials market and new solutions for the design and production of paints and varnishes. To that end, the Parent Company’s R&D department works closely with the largest producers of raw materials and providers of technology solutions, leading to optimised recipes for the offered products and the introduction of new products.


A permanent element of R&D is advanced laboratory research to improve solvent products by minimising their environmental impact.

7. Supply policy

In its business, Śnieżka Capital Group uses large quantities of raw materials and technical materials. The Group uses multiple supply sources and works with Polish and foreign suppliers. With all major suppliers, the Capital Group signed supply agreements defining the terms of partnership. It remains committed to finding new domestic and foreign suppliers to diversify the supply sources, reduce costs and delivery time. An analysis of the supply of raw materials, packaging and technical materials in H1 2016 shows that this period was marked by price stability. There were no problems with the availability of raw materials and packaging of strategic importance for the Group. In H1 2016, there were no factors or unusual events which could significantly affect Śnieżka Capital Group’s financial result.

8. Employment

The Capital Group’s HR policy is based on reasonable hiring principles, taking account of the demand for the offered products and organisational changes. In the reporting period, the Capital Group recorded an increase in employment from 959 people as of 30.06.2015 to 1,046 people as of 30.06.2016. In the Group’s structure, employees with secondary and vocational degrees prevail, which is linked to the production-oriented nature of the Group’s business. However, there is a continuous increase in the number of employees with a university degree, who account for 31% of the staff. Most of the staff are high-mobility employees (approx. 65%) aged between 18 and 44, characterised by a high level of mental and physical fitness, and extensive experience, supported by an experienced team of managers. Most of the staff are hired under employment contracts for indefinite time. Professional growth and improvement play an important role in the Company, as it offers a wide range of training courses and other forms of education. In H1 2016, the number of training courses was about 15% higher compared to the same period a year earlier. In 2016, the Company continued to improve its high commitment culture and to develop the leadership potential of its managerial staff.

9. Investments in tangible assets and intangible assets

In H1 2016, Śnieżka Capital Group incurred capital expenditures on tangible assets and intangible assets in the amount of PLN 14,854 thousand. With the eastern markets remaining unstable, in particular Ukraine and Belarus, the subsidiaries reduced their capital expenditures. In the discussed period, the Parent Company continued to optimise its production and logistics processes. Production systems and infrastructure are being developed and modernised, leading to improved productivity, reduced production costs and high parameters of the products offered. The Parent Company also invests in modern IT systems supporting production, logistics and decision-making processes. All investment projects carried out in H1 2016 were financed with the Parent Company’s own assets.


10. Financial results

Group’s current financial situation

6-month period ended

30 June 2016

6-month period ended

30 June 2015

change dynamics

I. Net revenue from sale of products, goods and materials 303 083 289 281 13 802 105% II. Operating profit (loss) 32 553 34 063 (1 510) 96% III. Gross profit (loss)

32 175 26 991 5 184 119%

IV. Net profit (loss)

27 217 23 148 4 069 118%

- Net profit (loss) attributable to shareholders of the parent company 26 777 22 820 3 957 117% - Net profit (loss) attributable to non-controlling interest 440 328 112 134% V. Comprehensive income for the period 27 128 16 087 11 041 169% - Comprehensive income for the period, attributable to shareholders of the parent company 26 674 16 812 9 862 159% - Comprehensive income for the period, attributable to non-controlling interests 454 (725) 1 179 -63% VI. Net operating cash flow (7 170) 1 150 (8 320) -623% VII. Net cash flow from investing activities (14 611) (8 332) (6 279) 175% VIII. Net cash flow from financing activities 42 572 16 945 25 627 251% IX. Total net cash flows 20 791 9 763 11 028 213% X. Total assets 456 137 429 771 26 366 106% XI. Liabilities and provisions for liabilities 261 844 245 883 15 961 106% XII. Long-term liabilities 2 934 2 857 77 103% XIII. Short-term liabilities 258 910 243 026 15 884 107% XIV. Equity 194 293 183 888 10 405 106% - Equity attributable to shareholders of the parent company 189 882 179 715 10 167 106% - Equity attributable to non-controlling interests 4 411 4 173 238 106% XV. Share capital 12 618 12 618 - 100% XVI. Number of shares 12 617 778 12 617 778 - 100% XVII. Earnings (loss) per ordinary share (in PLN) 2.16 1.83 0.33 118% - Earnings (losses) per ordinary share, attributable to shareholders of the parent company 2.12 1.81 0.31 117% XVIII. Diluted earnings (loss) per ordinary share (in PLN) 2.16 1.83 0.33 118% - Diluted earnings (losses) per ordinary share, attributable to shareholders of the parent company 2.12 1.81 0.31 117% XIX. Book value per share (in PLN) 15.40 14.57 0.83 106% XX. Diluted book value per share (in PLN) 15.40 14.57 0.83 106% XXI. Declared or paid dividend per share (in PLN) 3.15 3.10 0.05 102% *Data in the table is in PLN ‘000

In H1 2016, the Capital Group’s assets increased by PLN 26,366 thousand compared to H1 2015, with non-current assets up by 2% compared to the same period a year earlier. Current assets increased by 9%. This is due to increases in cash and trade receivables by 41% and 8% respectively. Total long-term and short-tem liabilities increased by 6%. In H1 2016, the Capital Group did not have any problems with the settlement of its current liabilities. The static analysis of the company’s liquidity at the end of the period shows that the Capital Group’s financial position is sound. This is confirmed by liquidity ratios remaining within the safe range. Compared to the same period a year earlier, debtor days increased by 2.1. Inventory days were 3 days longer than in the previous year. Creditor days decreased by 0.7 compared to the same period a year earlier. As of 30 June 2016, Śnieżka Capital Group did not hold any material overdue liabilities.

Group’s expected financial situation

The Parent Company’s Management Board expects that the Group’s financial situation will remain positive in the following reporting periods. In particular, the Parent Company’s Management Board will continue to grow sales revenue and improve the profit margin. The Group’s debt should decrease in the second half of the year in connection with the seasonal nature of its business. Low interest rates should contribute to a decrease of the Group’s financial costs.


11. Assessment of the performance of financial forecasts

The Management Board of FFiL Śnieżka S.A. did not publish any financial forecasts of Śnieżka Capital Group for 2016.

12. Risk management

Macroeconomic risk

Śnieżka Capital Group’s business is strongly influenced by the macroeconomic risk, related mainly to the situation in Poland, Ukraine and Belarus. In Poland, this risk involves mainly the market prices of raw materials and the PLN to EUR exchange rate. The development of the building materials market is greatly influenced by the number of new apartments and building permits because they greatly influence the demand for building products, such as paints, and lead to greater activity in the secondary real property market and the related frequency of renovations. A potential decrease in demand may be due to difficulties in obtaining mortgage and consumer loans. The risk present in the Ukrainian market is also related to a potential decrease in demand and an increase in raw material prices. The risk of the depreciation of the hryvnia also plays an important role. Other risk factors include the continued geopolitical uncertainty, in particular in the eastern part of the country. With an unstable macroeconomic situation in Belarus, the Belarusian currency continues to depreciate. The Group is affected by the protectionist policies on the Belarusian construction chemistry market, such as the costly certification of putty compounds from the EU, which was introduced in early 2016. Furthermore, the growth of the Customs Union and the related expansion of Russian manufacturers of building materials are important risk factors on that market. The Belarusian economy is also exposed to a potential FX risk, as difficulties in purchasing foreign currencies could hamper trade with that country. The Capital Group’s sales growth is also significantly affected by the situation in Russia, with its potential FX risk and continued instability of the Russian currency. There is also a risk of continued mutual sanctions between Poland and Russia, and between Russia and the European Union.


Competition risk

The Capital Group’s business is exposed to intense competition on the part of Polish and foreign companies. On the one hand, large and renowned multinationals are present on the market of paint and varnishes and on the other hand there is a strong price competition on the part of small local businesses. As a result of the relatively high entry barriers for paint products, large financial expenditures are required for new manufacturers to appear in the industry or, alternatively, new competitors could emerge from acquisitions. In H1 2016, there were no major changes in paint and varnish manufacturers on the Polish market. On other markets, the Group is also confronted with strong competition from domestic and international businesses. The Group monitors the activity of other businesses on all key markets. The intensive advertising campaigns and other marketing activities to support sales prepared for 2016 provided adequate support for the Group’s products, while keeping the competition risk to a minimum.

Distribution channel risk

Śnieżka Capital Group, in the process of distributing its products, uses a traditional distribution model with intermediaries. Both on the Polish market and on foreign markets, there is a risk that the share of the Group’s products at certain distribution levels could decrease as a result of competitors’ activity. In order to minimise the risk of losing customers, the Group seeks to establish a chain of partner shops and showrooms. DIY chains are very important for the distribution and sales on the domestic market of paints and varnishes. As the Parent Company continues to work with international and local businesses, its products are available in chains such as Leroy Merlin, OBI, Castorama, Praktiker, Jula and PSB. Supplying products to various distribution channels is one of the assumptions of the sales growth strategy adopted by the Group, and, at the same time, it minimises the risk of overdependence on one group of distributors. Furthermore, the Parent Company is working hard to increase the distribution volume of its products, with particular emphasis on hardware chains. The Group also sells its products on foreign markets as part of the traditional (indirect) model, with the products distributed by wholesale, retail and hardware shops. The unstable situation in a part of Ukraine and a change in the status of certain areas affect the distribution of products on that market. The Group is constantly monitoring the situation, and takes action to reduce the risk of losing customers. On each export market, it seeks to eliminate the risk of overdependence on a single distribution channel by diversification the channels, and searches for new distribution points when necessary.

Risk related to receivables monitoring Śnieżka Capital Group constantly analyses any worrying market trends and introduces suitable measures to reduce the risk of commercial transactions. Securities are used such as mortgages on real property or bill of exchange agreements. In connection with an unstable situation on eastern markets, there is a higher risk that receivables under commercial transactions with businesses operating in those regions may not be repaid.


Using its experience, tools and solutions for monitoring receivables, the Group effectively reduces that risk. In the event of payment delays, the Group companies apply bonus deductions corresponding to the costs of using bank loans, and taking into account the laws applicable in a given country. A trade credit limit has been determined for each customer, and a close link between the limit’s use and payment delays allows their debt to be monitored. The Parent Company also monitors receivables under transactions between the companies of Śnieżka Capital Group. The Group plans to continue its current policy of monitoring receivables and to adjust it to the changing conditions. As in the previous years, the Parent Company will work with firms specialising in the risk assessment of commercial transactions and industry-specific analyses, while introducing new solutions offered by such firms.

Financial and FX risk

Śnieżka Capital Group’s business is exposed to the risk of changing exchange and interest rates. The Group imports the raw materials for manufacturing paints and varnishes and pays for them in EUR, while its main exports are to Eastern European countries (Ukraine, Belarus, Moldova, Russia and Georgia), where the main settlement currency is USD. Consequently, the Company is exposed to the risk resulting from the change of the EUR/USD exchange rate and the relation of both currencies to the Polish zloty. The most advantageous scenario for the Company is the EUR/USD rate as low as possible, which decreases the costs of raw materials and maximises proceeds from export. The Capital Group constantly analyses the FX risk. In H1 2016, the Group has not concluded long-term hedging transactions in the form of derivatives, such as options, forward or future contracts. Due to the high volume of the Group’s bank loans, the interest rate risk is considerable.

Risks related to the supply of raw materials

The main risk and threat to Śnieżka Capital Group’s supplies is an increase in the prices of raw materials which depend on crude oil prices, an increase in transport costs, a temporary or long-lasting limited availability of raw materials and exchange rate fluctuations. The analysis of H1 2016 shows that there were no material problems with the availability of raw materials and technical materials.

Risk of failure to implement the planned investments

Śnieżka Capital Group’s main investment tasks should be fully completed. Any failures to implement investments as planned could be due to the Group’s changing growth policy or material changes of the market environment. Presently, there are no risks for Śnieżka Capital Group connected with reduced production capacities, deterioration of product quality or functioning problems.


13. Other disclosures

1. Information on the conclusion by the Issuer or its subsidiary of one or more transactions with related parties, if they are material (individually or jointly) and if they are not arm's length transactions.

In H1 2016, the parent company and its subsidiaries did not conclude transactions with related parties which could be regarded as material and concluded under terms other than arm's length terms.

2. Information on the issuer’s or its subsidiary’s loan or borrowing sureties or guarantees granted jointly to a single company or its subsidiary where the total value of the existing sureties or guarantees is equivalent to at least 10% of the issuer’s equity, including the following information:

a) business name of the party to whom sureties or guarantees were granted, b) total amount of loans or borrowings secured by sureties or guarantees, c) period for which sureties or guarantees were granted, d) financial terms on which sureties or guarantees were granted, and remuneration for the

issuer or its subsidiary for granting these sureties or guarantees, e) nature of relations between the issuer and the entity which raised loans or borrowings.

As of 30 June 2016, no sureties or guarantees were granted by the Parent Company to a single party in excess of 10% of the issuer's equity. On 20 February 2015, the issuer’s subsidiary, TM Investment Sp. z o.o., granted to the Parent Company, FFiL Śnieżka S.A., a surety for a loan raised with Bank Handlowy w Warszawie S.A. in the total amount of PLN 30 million. The surety was granted until 31 August 2017. The remuneration for TM Investment Sp. z o.o. for the surety granted in 2016 will amount to PLN 0.15 million.

Other information which, in the Issuer’s opinion, is significant for assessing its HR, financial situation and financial performance, and information considered significant for assessing the Issuer’s ability to fulfil its obligations. In the issuer’s opinion, there were no material changes in H1 2016 in the issuer’s structure which could affects its HR, economic and financial situation, financial results and the ability to fulfil its obligations.

3. Disputes

There were no proceedings whose value accounts for at least 10% of the issuer’s equity.


4. Identification of factors which, in the issuer’s view, will continue to influence the financial results for at least one quarter.

In the issuer’s opinion, the main factors that will influence Śnieżka Capital Group’s performance in the coming months of 2016 are the prices of raw materials used for production, exchange rate fluctuations and the sales dynamics on export markets, in particular in Ukraine and Belarus. The situation on the Polish market, which currently accounts for 79% of the Capital Group’s revenues, will also be important.

14. Description of the Capital Group’s organisation and capital relations

Capital Group and its capital relations as of 30.06.2016

Collaboration with related parties and members of the Capital Group:

• Śnieżka-Ukraina Sp. z o.o. in Yavoriv is one of the producers of paints and compounds in Ukraine and the main distributor of FFiL Śnieżka S.A.’s products in Brzeźnica. Its products are sold under the Śnieżka and Otto Farbe brands. It has a considerable production potential and its own network of customers.

Fabryka Farb i Lakierów Śnieżka S.A.

Śnieżka-Ukraina Sp. z o.o. in Yavoriv, 82.52% of

interests

Śnieżka EastTrade Sp. z o.o.

in Moscow, 100% of interests

Śnieżka-BelPol Wspólna Sp. z o.o.

w Zhodzina near Minsk, 99.00% of interests

TM Investment Sp. z o.o. in Brzeźnica, 100% of

interests

Plastbud Sp. z o.o. in Pustków, 10.07% of

interests


• In H1 2016, the business of Sniezka EastTrade Sp. z o.o. in Moscow consisted in promoting Śnieżka products on the Russian market.

• Śnieżka-BelPol Wspólna Sp. z o.o. in Zhodzina near Minsk is a manufacturer of compounds, paints and varnishes in Belarus. Its products are sold under the Śnieżka brand. The company has its own production capabilities as well as a network of wholesale and retail customers.

• TM Investment Sp. z o.o. in Brzeźnica – the Company’s business is licensing the use of trademarks to related companies within the Capital Group. The company creates new trademarks and development strategies for groups of products.

Partnership with related companies also involved: • Plastbud Sp. z o.o. in Pustków, producing colouring compounds Colorex and colorants for Śnieżka’s

colouring systems. Plastbud Sp. z o.o. also supplies certain raw materials and goods. The issuer’s managers and supervisors do not hold any shares or interests in the issuer’s related parties.

Changes in the ownership structure of equity of Related Companies of the Śnieżka Capital Group in H1 2016 and by the date of this report:

During the reporting period and by the date of this report, there were no such changes.

List of member companies of the Capital Group consolidated or accounted for using the equity method.

• Śnieżka-Ukraina Sp. z o.o., Yavoriv, ul. Prywokzalna 1A • Śnieżka-BelPol Wspólna Sp. z o.o., Zhodzina, ul. Dorożnaja 3/1 • TM Investment Sp. z o.o., Brzeźnica, ul. Dębicka 44 • Plastbud Sp. z o.o., Pustków 164 B.

Śnieżka EastTrade Sp. z o.o., with its registered office in Moscow, promotes Śnieżka products, and runs advertising and marketing activity. As of 30 June 2016, the company is not consolidated due to a small scale of its business.

Applied consolidation and measurement methods:

• Śnieżka-Ukraina Sp. z o.o. – full consolidation • Śnieżka-BelPol Wspólna Sp. z o.o. – full consolidation • TM Investment Sp. z o.o. – full consolidation • Plastbud Sp. z o.o. – equity method.

15. Ownership structure (information about shareholders and the present volume of interests).

Parties (shareholders) holding, directly and indirectly, at least 5% of the Company’s share capital and at least 5% of the overall number of votes at the Company’s General Meeting, with the total number of shares of 12,617,778 and the total number of votes of 14,617,778 as of the publication date of this half-yearly report:


Shareholder Number of shares held Share in the share capital (%)

Number of votes Share in overall number of votes at the

GSM (%) Jerzy Pater* 2 541 667 20,14 3 208 335 21,95 of which directly 166,667 1,32 833 335 5,70 Stanisław Cymbor** 2 541 667 20,14 3 208 335 21,95 of which directly 166,667 1,32 833 335 5,70 Piotr Mikrut directly 1,254,166 9,94 1 787 498 12,23 Rafał Mikrut directly 1,254,167 9,94 1 254 167 8,58 AMPLICO OFE 1 250 000 9,91 1 250 000 8,55 AVIVA OFE AVIVA BZ WBK 781 669 6,19 781 669 5,35 * Jerzy Pater holds the Issuer’s shares indirectly via PPHU Elżbieta i Jerzy Pater Sp. z o.o. (PPHU Elżbieta i Jerzy Pater Sp. z o.o. holds 2,375,000 shares of the Issuer, giving the holder an 18.82% share in the share capital and a 16.25% share in the total votes at the General Shareholders’ Meeting). ** Stanisław Cymbor holds the Issuer’s shares indirectly via PPHU Iwona i Stanisław Cymbor Sp. z o.o. (PPHU Iwona i Stanisław Cymbor Sp. z o.o. holds 2,375,000 shares of the Issuer, accounting for 18.82% share in the share capital and 16.25% share in the total votes at the General Shareholders’ Meeting).

In H1 2016 and by the approval date of this report for publication, there were no changes in the structure of shareholders holding at least 5% of all votes at the GSM.

Summary of changes in the shareholding of Fabryka Farb i Lakierów Śnieżka S.A. or the rights to shares (options) by managers and supervisors.

Managers:

Piotr Mikrut 1,254,166 – no changes Witold Waśko 198 – no changes

Supervisors:

Stanisław Cymbor 2,541,667 – no changes Stanisław Mikrut 33,333 – no changes Jerzy Pater 2,541,667 – no changes

16. Awards and distinctions

In H1 2016, Śnieżka Capital Group was awarded the following distinctions.

The List of 500 Once again, the Parent Company has made it to The List of 500, which is published by “Rzeczpospolita”. In the ranking of Poland’s largest businesses, Śnieżka achieved rank 435, moving up by 15 compared to the last edition.


The List of 500 is the oldest ranking of this type in the Polish press, with the criteria being sales revenue, operating profit, capital expenditures and employment figures.

17. Conclusion

The Parent Company’s Management Board expresses a positive opinion on the Company's activity in H1 2016. In consolidated terms, the Company generated sales worth PLN 303.1 million (up by 4.8% compared to the same period in 2015) and its net profit amounted to PLN 27.2 million (up by 17.6% compared to H1 2015). In Poland, which is the Group’s key market, sales amounted to PLN 240.5 million, up by 4.7% compared to the first 6 months of 2015. Eastern European markets remain the Capital Group’s priority, while sales are also being developed in Western Europe. The Group also seeks to distribute its products on completely new markets. The Management Board of FFiL Śnieżka S.A. remains committed to increasing the Company’s potential and market value, and to further advancing its competitive edge. In the Management Board’s opinion, 2016 should be the Parent Company’s best year to date in terms of sales and profit, barring any unusual events.

Piotr Mikrut ______________________

Witold Waśko ______________________

Joanna Wróbel-Lipa _____________________

Lubzina, 22 August 2016

Śnieżka capital group’s management report for h1 2016 · january and february 2016 show that...

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