MANAGEMENT REPORT OF THE ŚNIEŻKA CAPITAL GROUP. for H1 2014

Transcription

1 MANAGEMENT REPORT OF THE ŚNIEŻKA CAPITAL GROUP

2 1. Organisation of the Śnieżka Capital Group Description of the Śnieżka Capital Group s business activity in H Strategic objectives of the Śnieżka Capital Group Economic situation in H Sales and orders on hand Research and development Supply policy Employment Investments in PP&E and intangible assets Financial performance Assessment of the performance of financial forecasts Risk management Other disclosures Description of the capital group's organisation and equity relations Ownership structure (information about shareholders and the present volume of interests) Awards and distinctions Conclusion Page 2

3 1. Organisation of the Śnieżka Capital Group Name of the Parent Company: Fabryka Farb i Lakierów Śnieżka SA Office of the Company s Management Board: Lubzina 34 a Ropczycko Sędziszowski District Podkarpackie Province Company s incorporation: The Company was entered in the register of entrepreneurs of the National Court Register on 12 November 2001 in the District Court in Rzeszów, 12th Commercial Division of the National Court Register, under KRS number Business activity Manufacture of paints, varnishes, adhesives, solvents and putty. Share capital: As of 30 June, 2014, 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 17 June, 2011 for the sixth term of office: Stanisław Mikrut Chairman of the Supervisory Board Jerzy Pater Vice-Chairman of the Supervisory Board Stanisław Cymbor Secretary of the Supervisory Board Anna Pater Member of the Supervisory Board Zbigniew Łapiński Member of the Supervisory Board Dariusz Orłowski Member of the Supervisory Board As its term came to an end, on 2 June, 2014 the General Meeting appointed the Supervisory Board in a new composition for the seventh term: Stanisław Cymbor Chairman of the Supervisory Board Jerzy Pater Deputy 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 Page 3

4 Management Board: Composition of the Management Board appointed on 15 June, 2012 for the sixth term of office: Piotr Mikrut President of the Management Board Witold Waśko Member of the Management Board Joanna Wróbel-Lipa Member of the Management Board In 2014, the composition of the Company s Management Board did not change. Present organisational diagram and organisational changes over the year The current organisational diagram was adopted by way of Management Board Resolution No. XVII/38/2014 of 21 March, 2014 and approved by way of Supervisory Board Resolution No. III/8/2014 on 7 April, 2014, with effect from 1 April, 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 interim 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). 2. Description of the Śnieżka Capital Group s business activity in H In H the Śnieżka Capital Group recorded sales revenues of PLN million, which constitutes an increase by 94% in comparison with the corresponding period of Sales of products increased by 95% while revenues from sales of goods decreased by 15%. There are no doubts that the Group's performance was affected by the difficult political and economic situation of Ukraine. Increases were recorded only in sales of materials, i.e. by 13%, and other revenues (sales of services), i.e. by 2%, on the year-earlier period. Sales structure in the Śnieżka Capital Group as per revenue categories Details H H Dynamics Decorative products 212, ,929 95% Construction chemistry products 38,778 41,599 93% Industrial products 4,881 5,635 87% Goods 21,879 25,721 85% Other revenues 1,936 1, % Materials 3,348 2, % Total sales 283, ,728 94% *Data in the table is in thousands of PLN Page 4

5 Key operations and achievements of the Śnieżka Capital Group in H and by the date of compiling this report: continued improvement of sales and logistics processes, continued implementation of the multibranding strategy, involving the development of strong brands that specialise in their respective areas, continued implementation of the Business Intelligence system at the Company to support decision-making processes. This data processing technology is intended for providing regular information to the management, thus improving the Group's competitiveness. on 2 June 2014, the Ordinary General Shareholders' Meeting was held and it: approved the management report and the financial statements of the Company for 2013, acknowledged the fulfilment of duties by members of the Company s corporate bodies in 2013, distributed the 2013 net profit in the amount of PLN 21,863,101.15, set the dividend at PLN 2.50 per share, i.e. totalling at PLN 31,544,445, and specified Remuneration for the Founding Shareholders and holders of founders' certificates to be 0.5% of the net profit for every founding shareholder, i.e. 2% of the net profit in the total amount of: PLN 437, The difference amounting to PLN 10,118, was paid from supplementary capital, approved the management report of the Capital Group and the financial statements of the Capital Group for 2013, appointed Supervisory Board Members of the seventh term. Moreover, the Supervisory Board selected Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. with its registered office in Warsaw, Rondo ONZ 1, to audit and review the financial statements of FFiL Śnieżka SA for The audit and review cover both separate and consolidated interim and annual statements of the Company and its Capital Group. So far the Company used services of Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. in the scope of auditing and reviewing financial statements for 2011, 2012 and Strategic objectives of the Śnieżka Capital Group The Capital Group's long-term growth strategy involves taking a leading position on the CEE market of paints and varnishes, with particular emphasis on Polish, Ukrainian, Belarusian, Moldovan and Russian markets. The Group will pursue this objective through better adjustment to customer needs on the local markets in individual countries. The adopted growth strategy involves three special areas of activity: increasing the share of the Group's products in DIY chains in Poland, Ukraine and Russia, further expansion of Śnieżka's retail chain and partner outlets in Poland and on key foreign markets, capital expenditures related to potential acquisitions in Central and Eastern Europe. In addition, the Group plans to increase its potential by expanding to new markets and developing its brand portfolio: Śnieżka, Magnat, Vidaron, Foveo - Tech, Beston, Proximal. As part of its strategy, the Group is interested not only in organic growth, but also in an increase in capital expenditures. One of the objectives of the Parent Company's Management Page 5

6 Board is to build long-lasting and amicable relations with its business partners, employees, shareholders and clients. The Group will continue supporting its business partners, distributors and retailers in the scope of information, marketing and training, which is expected to build the goodwill of the companies comprising the Śnieżka Capital Group. The Parent Company's Management Board has confirmed its continued commitment to pursue the defined objectives. Balanced growth, which is inscribed in its strategy, will allow the Capital Group to achieve a leading position on its key markets. 4. Economic situation in H Analysing the situation on the Polish market, it may be stated that first signs of an economic revival were observed in the reporting period. Domestic demand and investments took over the role of the main driving force behind economic growth in Poland. In sector terms, construction was the fastest growing sector of the economy in Q There are no doubts that a light winter contributed to that as it did not require suspension of construction works on a large scale, which was the case in Therefore, it seems that the situation in the sector is stabilising. Analysing data for the first six months of 2014 (initial data published by the Central Statistical Office), one can see that the number of apartments the construction of which got underway during this period rose by 22.5% (as compared with a drop by 26.9% in the previous year), moreover, the number of building permits granted increased by 12.8% (as compared with a drop by 22.9% in the corresponding period of the previous year). This may forecast an increase of the demand for paints and varnishes over the coming years. However, the economic situation on a foreign market significant for the Group, i.e. Ukraine, was slightly different. The economy of this country, even before the internal situation deteriorated, was in recession. A bad financial and economic situation, a balance of payments deficit, a crash of the banking sector, an increasing government budget deficit, including first of all depreciation of the hryvnia, affect the Group's performance on that market significantly. According to unofficial data of Ukraine's Ministry of Economic Development and Trade, in Q the GDP decreased by 1.1% while in Q2 by 2.3%. Projections of international experts for Ukraine's GDP in 2014 also anticipate a considerable economic slowdown (-7.8% year-on-year, according to JP Morgan, August 2014). Military operations carried out in eastern Ukraine are a significant burden on the state's finances and spending on reconstructing the country's destroyed infrastructure is increasing too. The Śnieżka Capital Group estimates that even after the political situation has stabilised, Ukraine will struggle with effects of the present crisis. In spite of that this market remains important and promising for the Group. Page 6

7 5. Sales and orders on hand Paints and varnishes market in H Management Report of the Śnieżka Capital Group Sales structure in the Śnieżka Capital Group by countries Tekst Pozostałe kraje Rosja Mołdawia Białoruś: Ukraina Polska Tłumaczenie Other countries Russia Moldova Belarus Ukraine Poland * The structure was calculated on the basis of sales value Poland remains the leading market for the Śnieżka Capital Group with a 74% share (an increase by 10% year-on-year). Ukraine and Belarus are other key countries in which companies comprising the Group carry out there activities. In the case of the former, its share in the sales structure decreased from 23% in the corresponding period of 2013 to 12% in the current year, which results from an unfavourable political and economic situation continuing in that country. In H the Belarusian market generated 8% of the Group's sales, which means a decrease by 1% year-on-year. The share of other countries (including Russia and Moldova) represents a small share of the Group's total sales. On the domestic market of paints and varnishes the Parent Company remains one of its leaders, 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 indirect distribution channels: wholesale and retail shops as well as DIY stores. On the Polish market the Group recorded revenues of PLN million for the six-month period, which is PLN 16.9 million more than in the year-earlier period. Ukraine and Belarus, in spite of problems affecting these countries, remain key export markets for the Capital Group. The Group continues treating them as markets with growth prospects. In the reporting period the Ukrainian market of paints and varnishes slumped mainly due to such factors as: the scale of construction works carried out, a decline of consumers' purchasing power as well as increasing inflation. Paints and varnishes are not Page 7

8 basic necessities, therefore, it seems that consumers frequently postpone renovations for more favourable periods. The Group's products are available in entire Ukraine, however, most profits are generated in western and central parts of the country. Products are also sold in areas covered by the present conflict, however, on a smaller scale than so far. The Group's products are distributed in Ukraine mainly using the traditional channels (wholesale and retail shops) as well as DIY stores, including: Epicenter and Nowa Linia (Ukrainian entities) as well as Leroy Merlin and Praktiker (western entities). On the Ukrainian market the Group recorded sales revenues of PLN 34.7 million in H in comparison with PLN 68.0 million in the year-earlier period. The Śnieżka Capital Group also remains a leader on the Belarusian market of paints and varnishes, with a particularly strong position in the putty segment. The country is still characterised with low paint use per capita, which serves as the basis for forecasting growth in the future. The Group sells its products on the Belarusian market mainly through the traditional channel. The Group's products can also be found in local DIY chains. In Belarus the Group recorded sales revenues of PLN 24.6 million in H as compared with PLN 26.0 million in the year-earlier period. The Śnieżka Capital Group also sells products in the Russian Federation, focusing its activities mainly in Kaliningrad and Moscow regions as well as in southern Russia. Currently the Group is continuing its activities aimed at broadening and diversifying distribution channels, expanding its product portfolio at the same time. During H the Group's sales on the Russian market amounted to PLN 5.7 million, less by PLN 1.4 million on the year-earlier period. The Parent Company also exports its products to Moldova (sales of PLN 4.6 million), where sales rose by PLN 1.4 million. Sales on other markets, including Hungary, Romania, Armenia, increased by PLN 0.3 million (totalling at PLN 4.2 million). The Group has valid contracts determining terms and conditions of business cooperation with all its distributors. Development of the range of products in H The Group continues developing the range of its products, adjusting it to changing consumers' expectations. As a result, new colour proposals were prepared for 2014 season for one of key products, i.e. the paint Śnieżka Satynowa, releasing 19 new colours on the market. The recipe of the paint Śnieżka Na Dach was improved too, modifying the range of available colours by the way. A new product was released within the Vidaron brand portfolio, i.e. Super Wydajna protective and decorative stain varnish, which thanks to a gel formula is easier to apply, at the same time ensuring exceptional efficiency. During the reporting period the Group implemented a new colouring system sold under the Magnat Colour System brand. Currently it makes it possible to colour one of three types of internal emulsion paints in more than 4,000 colours. For the new season the Group also prepared changes in its range of Magnat Style special effect paints. Four products withdrawn from the market were replaced with the same number of new special effect paints. At the same time the Group changed the range of colours of this brand, adjusting it to current trends in interior design. Marketing measures in H In the scope of marketing activities in season 2014, the Group prepared and carried out several advertising campaigns. Two new advertising spots were used in communication of the Śnieżka brand, emphasising key assets of the product. A national television campaign was launched in April 2014 and the brand was also advertised in the press and online. Similarly, to Page 8

9 reinvigorate sales of the Vidaron brand, in April too the Group launched an advertising campaign which ran mainly on television. Advertising spots used in last year's campaign were employed for that purpose. The television campaign was supported by activities in the press and online. Advertising activities for the Vidaron brand were also carried out in Belarus, mainly on television. Releasing the Magnat Ceramic paint on the market in 2013, the Group carried out an advertising campaign in Poland with the catchphrase Stain-resistance guaranteed or cash refund. The Group intended to continue this campaign in 2014, intensifying it at the same time. The campaign was launched in May 2014 and it ran in national television channels, online and in trade press. In the reporting period the Group also kicked off a campaign promoting the brand Śnieżka Acryl-Putz, continuing communication using an image of a popular KSW athlete Mamed Khalidov. The campaign ran mainly on television, and additionally the brand was promoted in the press and online. The abovementioned advertising campaign was launched in June Acryl-Putz advertising spots were also aired on main television channels in Belarus. Moreover, in June 2014 the Group launched an advertising campaign of Śnieżka Nature, a brand of paints in ready-to-use colours intended for export, which also ran on television. 6. Research and development R&D activities carried out at the Group are focused on developing new products and optimising existing solutions. Results of R&D activities include: a new product of the Vidaron brand, i.e. Super Wydajna stain varnish, redevelopment of the Magnat Colour System developing a new, broader colour palette as well as implementing a recipe of new Magnat Ceramic paint bases for production, improved Supermal alkyd enamel in terms of obtaining coatings with low emissions of volatile organic compounds to the environment and enhanced resistance to effects of disinfectants, as a result of which the product may be used for painting public utility facilities 15 new Śnieżka Satynowa colours with the Community Eco-label, advanced laboratory research connected with improving solvent products in terms of minimising their environmental impact. 7. Supply policy The aim of the supply policy pursued by the Śnieżka Capital Group was to satisfy all needs of the Companies in terms of supplies of raw and technical materials necessary for proper operation of the Company, on the basis of signing supply contracts laying down terms and conditions of cooperation with all biggest suppliers of raw materials and semi-finished products. An analysis of the supply of raw materials in H shows that this period was marked by price stability of chemical raw materials and technical materials. Negative phenomena in the reporting period definitely include devaluation of national currencies of subsidiaries, which contributed to a periodic increase of purchasing costs of imported raw materials. However, no problems with availability of raw materials of strategic importance for the Group were observed. Page 9

10 8. Employment The HR policy of the Śnieżka Group is linked to its strategic goals: it aims at optimising the size and structure of employment by changing the organisation, implementing new procedures, consistently automating work and organising employee training. Responding to a changing situation in Ukraine, the subsidiary Śnieżka Ukraine adjusted its employment to a smaller demand for its products, reducing the number of its employees. The Companies continue investing in professional development of their employees. They participate in processes of improving and increasing their professional qualifications in existing positions and develop skills required for prospective tasks. As of 31 June, 2014, the Śnieżka Capital Group employed 949 people (as of 30 June 2013: 1,067 people). 9. Investments in PP&E and intangible assets In H1 2014, the Śnieżka Capital Group incurred capital expenditures on PP&E and intangible assets in the amount of PLN 9.3 million, which satisfies the Group's current requirements. Due to the current situation in eastern Europe as well as dynamically changing economic and political conditions in H1, 2014, investment outlays were reduced in the subsidiaries in Ukraine and Belarus until the situation clarified. Most investment activities were carried out by FFiL Śnieżka SA, which focused on improving further production installations and automating such processes, which leads to a better product quality, improved labour efficiency, repeating product parameters and optimisation of manufacturing costs. To ensure a high level of product quality and further product improvement, the Group incurred substantial financial outlays on developing and improving the control and research system. An IT system upgraded on a regular basis contributes to effective management of the Group's business too. By implementing advanced IT programs, the Group is able to keep track of internal events and respond to any problems that occur quickly and effectively. Investments concerning environmental protection in the scope of reducing emissions of dispersed hazardous compounds to the atmosphere are not insignificant either. In H all investment tasks carried out by particular subsidiaries were financed with the Group's own funds. Page 10

11 10. Financial performance Assets and asset financing Details Management Report of the Śnieżka Capital Group 6-month period ended on 30 June month period ended on 30 June 2013 change dynamics I. Net sales of products, goods and materials 283, ,728 (17,395) 94.2% II. Profit (loss) on operating activities 25,010 29,143 (4,133) 85.8% III. Gross profit (loss) 22,421 25,262 (2,841) 88.8% IV. Net profit (loss) 19,286 21,566 (2,280) 89.4% - Net profit (loss) attributable to shareholders of the parent 19,094 20,678 (1,584) 92.3% - Net profit (loss) attributable to non-controlling interest (696) 21.6% V. Comprehensive income for the period 4,522 23,806 (19,284) 19.0% - Comprehensive income for the period attributable to shareholders of the parent 6,822 22,480 (15,658) 30.3% - Comprehensive income for the period attributable to non-controlling interest (2,300) 1,326 (3,626) % VI. Net cash flows from operating activities 19,304 14,460 4, % VII. Net cash flows from investing activities (9,177) (14,470) 5, % VIII. Net cash flow from financial activities 10,660 19,637 (8,977) 54.3% IX. Total net cash flows 20,787 19,627 1, % X. Total assets 429, ,824 (43,727) 90.8% XI. Liabilities and provisions for liabilities 240, ,167 (35,559) 87.1% XII. Non-current liabilities 8,231 13,716 (5,485) 60.0% XIII. Current liabilities 232, ,451 (30,074) 88.5% XIV. Equity 188, ,657 (8,168) 95.8% - Equity attributable to shareholders of the parent 182, ,430 (4,513) 97.6% - Equity attributable to non-controlling interest 5,572 9,227 (3,655) 60.4% XV. Share capital 12,618 13,551 (933) 93.1% XVI. Number of shares 12,617,778 13,550,676 (932,898) 93.1% XVII. Earnings (losses) per ordinary share (in PLN/EUR) % - Earnings (losses) per ordinary share, attributable to shareholders of the parent % company XVIII. Diluted earnings per share (in PLN/EUR) % - Diluted earnings (losses) per ordinary share, attributable to shareholders of the parent % company XIX. Book value per share (in PLN/EUR) % XX. Diluted book value per share (in PLN/EUR) % XXI. Declared or paid dividend per share (in PLN/EUR) % *Data in the table is in thousands of PLN In H1 2014, a 9.2% decrease in the Capital Group's assets has been recorded compared to H Non-current assets decreased by 6%. In comparison with the corresponding period of the previous year, current assets decreased too, i.e. by 10.3%. Current assets decreased as a result of a 21.4% reduction of inventories. Trade debtors decreased too, by 11.7%. However, cash increased by 19.9% in the reporting period. In addition, total non-current and current liabilities declined by 12.9% due to a decrease of loans by PLN 13 million and a drop of trade creditors by PLN 23.3 million. In H1 2014, the Capital Group did not have any problems connected 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 3 days while trade debtors increased by PLN 18 million on the previous year, with sales lower by 5.8%. Inventory days decreased on the year-earlier period (by 6.9 days), which points to improved inventory management. Creditor days decreased too by 3.2 days in comparison with the year-earlier period. As of 30 June, the Śnieżka Capital Group did not have any overdue liabilities. Page 11

12 11. Assessment of the performance of financial forecasts The Management Board of FFiL Śnieżka S.A. did not publish any financial forecasts of the Śnieżka Capital Group for Risk management Risk related to the macroeconomic situation The macroeconomic situation in the countries in which the Śnieżka Capital Group operates may have a tangible impact on its performance, therefore, the Group considers the resulting risk in its activities. 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 lead to increased demand for building products and greater activity in the secondary real property market and the related frequency of renovations. The demand may be restricted by difficulties incurring mortgage and consumer loans as well as a drop of consumers' purchasing power. The risk present in the Ukrainian market is also related to a potential decrease in demand and increase in raw material prices. Further devaluation of the hryvnia is of crucial importance; since early 2014 it has already exceeded 30% and since the beginning of the political crisis in autumn 2013 the hryvnia has already devalued by over 60%. The biggest risk is posed by the military conflict in eastern Ukraine, which destabilises the situation in the entire country and weakens the Ukrainian economy. To mitigate the unfavourable impact of this situation on the Group's performance, a range of changes were implemented in the operation of the subsidiary Śnieżka Ukraine, including downsizing, cost cutting measures and reduction of investments. These activities made it possible to maintain the company's profitability in spite of decreasing sales. The macroeconomic situation in Belarus remains unstable. Problems of the Belarussian economy are still connected with a balance of payments deficit, structural restrictions and inflation. Other factors affecting the Belarussian economy include continuing low demand in Russia, which is the main market for Belarussian goods, the situation in Ukraine and a slump of domestic demand. The Russian Federation, another country where Group's products are sold, is grappling with problems too. In the period analysed the Company witnessed a considerable outflow of capital from the Russian market, decreasing investments and a declining demand for goods and services. In the longer term the condition of the Russian economy may be affected by the economic sanctions introduced by the EU and the US, particularly those concerning the banking sector. Competition risk The Group's business is exposed to intense competition on the part of Polish and foreign companies. The Group's key rivals on the Polish market remain PPG Deco Polska Sp. z o.o., Akzo Nobel Coatings sp. z o.o. and Tikkurila Polska S.A. Due to relatively high entry barriers for the paint market, large financial outlays would be necessary for new producers to establish a foothold in the sector, or alternatively new competitors could emerge from acquisitions. In H no major changes occurred on the Polish market of paint and varnish manufacturers. On other markets the Group conducts its business activities also under conditions of strong Page 12

13 competition, posed by both domestic and international producers. The Group monitors activities of its competitors on all key markets on a regular basis. Advertising campaigns and other marketing activities prepared by the Group provided appropriate support for the products it sells, keeping the competition risk to the minimum. Distribution channel risk The Capital Group sells its products primarily within the traditional distribution model, with the use of intermediaries. Both on the Polish market and on foreign markets there is a risk that the Group's share in individual distribution phases may decrease as a result of competitors' activity. To mitigate the churn risk, the Group carries out activities aimed at preventing such situations from occurring, continuing the expansion of the chain of its showrooms and partner stores. Chains of DIY stores are gaining a strong position in the distribution chain of paints and varnishes. The Group continues cooperation with international and local chains. Its products are available in such stores as: Leroy Merlin, OBI, Castorama, Nomi, Praktiker, Jula. 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 customers. Key foreign markets are dominated by the traditional distribution model but DIY chains (particularly in Ukraine) are becoming more important players year by year. The Group is making efforts to eliminate the risk of overdependence on a single distribution channel through a policy of diversifying the channels. Risk related to receivables monitoring The efforts made by the Śnieżka Capital Group in the previous years to reduce risks and threats related to the monitoring of receivables have been evaluated positively. The Group regularly monitors any worrying market trends and acts accordingly to reduce the risk of transactions by using mortgages, bill of exchange agreements, etc. Mitigating the risk related to receivables monitoring, Śnieżka cooperates with entities assessing transaction risk. The Group intends to continue its policy in the scope of monitoring receivables, adjusting it to changing conditions. Financial and FX risk The business of the Śnieżka Capital Group is exposed to the risk of changing exchange and interest rates. The Parent Company imports some of the raw materials used for manufacturing paints and varnishes and pays for them in EUR, while its main exports are to Eastern European countries (Ukraine, Belarus, Moldova, Russia, Georgia), where the main settlement currency is the US dollar. Consequently, the Group 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 Group is the EUR/USD exchange rate being as low as possible, which decreases the costs of raw materials and maximises proceeds from export. The Group's companies constantly analyse the FX risk. At present, the Parent Company uses a foreign currency loan in USD, which secures the capital held in subsidiaries in Ukraine and Belarus, and minimises disadvantageous foreign exchange differences on export proceeds. In H1 2014, the Group did not conclude long-term hedging transactions in the form of derivatives, such as options, forward or future contracts. Due to the high volume of the Parent Company's bank loans, the interest rate risk is considerable. Using a loan denominated in USD makes it possible to decrease interest rate due to the lower LIBOR rate for the USD in comparison to WIBOR for the PLN. Page 13

14 Risks related to the supply of raw materials The main risks related to the supply of raw materials may be caused by higher prices of raw materials, which depend on crude oil price, and by their limited availability. Considering that more than 60% of purchases are made in EUR, exchange rate variations also play a role. Analysing H it should be indicated that as far as supplies of raw materials are concerned, no problems occurred with their availability or purchasing prices. Risk of failure to implement planned investments Key investments tasks of the Group should be performed entirely. The possible failure to implement some of the planned investments is connected mainly with the changing growth policy of the Group, however, it may also result from the market situation and it does not involve any risk due to limited production capacities, deterioration of the goods quality or difficulties in the functioning of the Śnieżka Capital Group. 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 2014, the Parent Company and its subsidiaries did not conclude transactions with related parties which could be regarded as significant and concluded under terms other than arm's length terms. 2. Information on granting by the Issuer or its subsidiary of sureties for loans or borrowings or guarantees jointly to a single entity or its subsidiary, if the total amount of the existing sureties or guarantees is an equivalent of at least 10% of the Issuer s equity, with identification: a) name (business name) of the entity to which sureties or guarantees were granted; b) total amount of loans or borrowings for which a surety or guarantee was granted, in whole or in part; c) period for which sureties or guarantees were granted; d) financial terms on which sureties or guarantees were granted, plus the Issuer's or its subsidiary's compensation for granting sureties or guarantees; e) nature of links between the Issuer and the entity that took out loans or borrowings As of 30 June 2013, 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 2013 a subsidiary of the Issuer, i.e. TM Investment Sp. z o.o., granted to the Issuer, i.e. FFiL Śnieżka S.A., sureties for the loans raised with Bank Handlowy w Warszawie S.A. for the total amount of PLN 40 million. The sureties were granted until 31 August The remuneration of the company TM Investment Sp. z o.o. on account of sureties for 2014 amounts to PLN 60 thousand. Page 14

15 As of 30 June 2014 the Parent Company had the following surety: a guarantee for the company Kopalnia Gipsu i Anhydrytu Nowy Ląd Sp. z o.o. for supplies of plaster to the Issuer s subsidy Śnieżka BelPol Wspólna Sp. z o.o. in the amount of USD 250 thousand (equivalent to PLN thousand as of 30 June, 2014). The guarantee granted on 19 August, 2013 was valid for a period of 12 months after conclusion, i.e. until 19 August, The Issuer's remuneration for the granted guarantee for 2013 and 2014 amounts to USD 2.5 thousand. 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 H1 2014, no changes occurred in the Issuer s structure which could have influenced its ability to settle its liabilities. 3. Disputes There are no proceedings whose value would equal at least 10% of the Issuer s equity. On 13 January, 2010, FFiL Śnieżka SA lodged an appeal against the decision of the Office of Competition and Consumer Protection of 28 December, 2009 on antimonopoly proceedings against the Company, as a result of which the Office imposed a fine of PLN 855 thousand on the Company. In its judgement dated 20 December, 2012, the Court of Competition and Consumer Protection in Warsaw dismissed the Company's appeal. FFiL Śnieżka SA appealed against that judgement. The date of the appeal hearing was set on 4 September, In the opinion of the parent company's Management Board, the proceedings pending do not have any influence on the financial statements drawn up as of 30 June, Factors which, in the Issuer's opinion, will influence its financial performance for at least one quarter. In the Issuer s opinion, the major factors that will influence its financial performance in the coming quarter are prices of raw materials used in the manufacturing process, currency exchange rate variations and the sales dynamics of the Issuer s Capital Group companies. The consolidated profit/loss in the coming quarter will be mainly influenced by the results of the Parent Company, FFiL Śnieżka S.A., and its subsidiaries: Śnieżka Ukraina Sp. z o.o., with its registered office in Yavoriv, Śnieżka BelPol Sp. z o.o. and TM Investment Sp. z o.o. Page 15

16 14. Description of the capital group's organisation and equity relations The Capital Group and its capital relations as of 20 June, Fabryka Farb i Lakierów Śnieżka SA Śnieżka-Ukraina Sp. z o.o. in Yavoriv Śnieżka BelPol WspólnaSp. z o.o. in Zhodzina near/minsk 99.00% of shares Śnieżka Sp. z o.o in Wistowa 100% of shares (indirectly) LLC Sniezka EastTrade in Moscow 100% of shares TM Investment Sp. z o.o. in Brzeźnica 100% of shares Plastbud Sp. z o.o. in Pustków 10.07% of shares Cooperation with related parties and members of the Capital Group: Śnieżka Ukraina Sp. z o.o. in Yavoriv is a producer of paints and putty compounds in Ukraine and the main distributor of FFiL Śnieżka S.A.'s products. Its products are sold under the Śnieżka and Otto Farbe brands. It has a considerable output potential and its own network of customers. Śnieżka Sp. z o.o. in Wistowa the Company's production assets and operating activity have been transferred to Śnieżka Ukraina Sp. z o.o. in Yavoriv. The Company is in the final stage of liquidation. Śnieżka EastTrade Sp. z o.o. in Moscow in 2014 the Company was involved in organising promotional and advertising support on the Russian market. Page 16

17 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. It has its own 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. Partnerships with entities related by equity also involved: Plastbud Sp. z o.o. in Pustków, producing colouring compounds Colorex and colorants for Śnieżka s colouring systems. In addition, it is a supplier of certain raw materials and products. Changes in the ownership structure of the Related Companies of the Śnieżka Capital Group in 2014 and by the date of this report: On 31 March, 2014 the Extraordinary Shareholders' Meeting of Hadrokor Sp. z o.o. in liquidation with its registered office in Włocławek adopted a resolution on approving the financial statements as of the closing date of the Company's account books and on granting an acknowledgment of the fulfilment of duties to the Company's corporate bodies. On 31 March, 2014 a motion was filed with the competent District Court in Toruń, 7th Commercial Division of the National Court Register, to strike the Company off the register of entrepreneurs. On 7 May, 2014 the Company was struck off the National Court Register. The decision to strike the Company off became final and non-revisable on 22 May, List of member companies of the Capital Group consolidated or accounted for using the equity method. Śnieżka-Ukraina Sp. z o.o., Yavoriv, ul. Privokzalna 1A Śnieżka - BelPol Wspólna Sp. z o.o., Zhodzina, ul. Dorozhnaya 3/1 Śnieżka Sp. z o.o. in Wistowa, Wistowa, ul. Sriljciw 1b 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 is involved in the promotion of Śnieżka products, and in advertising and marketing activities. As of 30 June, 2014, the company is not consolidated due to minor scale of operations. Applied consolidation and measurement methods: Śnieżka - Ukraine Sp. z o.o. full consolidation method Śnieżka - BelPol Wspólna Sp. z o.o. full consolidation method Śnieżka Sp. z o.o. in Wistowa full consolidation method TM Investment Sp. z o.o. full consolidation method Plastbud Sp. z o.o. equity method Page 17

18 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 interim report: Shareholder Number of shares held Initial capital (%) Number of votes Share in the total number votes at the General Meeting of Shareholders (%) Jerzy Pater* 2,541, ,208, of which directly 166, , Stanisław Cymbor** 2,541, ,208, of which directly 166, , directly Piotr Mikrut 1,254, ,787, directly Rafał Mikrut 1,254, ,254, Pension Fund AMPLICO 1,250, ,250, OFE* Aviva OFE Aviva BZ WBK 781, , *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 a 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, giving the holder 18.82% share in the share capital and 16.25% share in the total votes at the General Shareholders Meeting). In H and until the date of approving this report for publication, no changes took place in the structure of shareholders holding at least 5% of the total votes at the General Meeting of Shareholders. Summary of changes in shareholding of Fabryka Farb i Lakierów Śnieżka S.A. or the rights to the shares (options) by managers and supervisors. Managers: Piotr Mikrut Witold Waśko 1,254,166 no changes 198 no changes Page 18

19 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 The recognisability and strength of the Śnieżka brand as well as the Company's commitment to the highest quality and innovativeness are proved by the awards and certificates it has received. In H FFiL Śnieżka SA received the following distinctions: List 500 In the 16th edition of List 500, a ranking of the biggest Polish companies, Fabryka Farb i Lakierów Śnieżka SA ranked the 410th. This means that in comparison with the previous year, it advanced by a whopping 31 positions. List 500 is a prestigious ranking, the oldest ranking of this type published in Polish press. It is drawn up on the basis of such criteria as: companies' sales revenues, operating profit, investment outlays incurred and the number of employees. Ranking of Gazeta Finansowa It was another time that FFiL Śnieżka SA had been included among the biggest Polish companies in the ranking drawn up by Gazeta Finansowa. In this year's edition of the ranking Śnieżka SA ranks the 206th, which means that it advanced by a stunning 223 positions in comparison with the previous year. In the ranking the Company also ranked among top twenty producers of the chemical sector, taking position no. 17. Superbrands 2014 for Śnieżka and Magnat brands The Superbrands title for Śnieżka and Magnat brands confirmed with a certificate proves that the brands belong to an elite group of the strongest Polish brands that are the most frequently recommended by consumers. The brand ranking is compiled on the basis of independent market research results, using bases and statistics with data regarding sales and advertising budgets. The best brands are chosen in a consumer survey that analyses brand awareness and perception among consumers. KidZone Quality Sign for Śnieżka products Śnieżka Satynowa and Śnieżka Supermal Emalia Akrylowa became the first paints in the Polish market to receive the KidZone certificate. The KidZone Quality Sign, under the patronage of the Ombudsman for Children (RPD), is meant to honour the brands which in their daily operations strive for the best quality and utmost safety of their products, an at the same time introduce some child-oriented innovative solutions. Double Srebrne Szpalty (Silver Column) award for Dekoratorium magazine The Dekoratorium magazine published by FFiL Śnieżka SA received an award from the jury of the Szpalty Roku 2014 competition (Column of Year 2014). The award was presented not only to the traditional edition for an innovative idea and aesthetic sophistication of the broad range of issues covered by the magazine, but also to the dekoratorium.com portal for a good direction of digitalising a paper magazine. Thus, Dekoratorium became one of leading magazines for customers and business partners (circulation of 10,001-50,000 copies). Page 19

20 17. Conclusion The Parent Company's Management Board positively evaluates the Capital Group's activity in H These activities improved the Capital Group's effectiveness, and the generated sales volume, performance, market position and in particular the financial position are consistent with the Group's capabilities and provide a foundation for further growth of the Śnieżka Capital Group. In H2 2014, the Management Board of the Śnieżka Capital Group will continue to implement the Capital Group s strategy aimed at strengthening the Company's market position, constantly improving its results and increasing its market value. Piotr Mikrut Witold Waśko Joanna Wróbel-Lipa Lubzina, 26 August, 2014 Page 20