MANAGEMENT REPORT OF THE ŚNIEŻKA CAPITAL GROUP. for H1 2015

Transcription

1 MANAGEMENT REPORT OF THE ŚNIEŻKA CAPITAL GROUP for H1 2015

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 INFORMATION 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 Poviat Podkarpackie Voivodeship Company s incorporation: The parent company was established by way of Notarial Deed dated 16 January The company is entered in the register of entrepreneurs of the National Court Register maintained by the District Court in Rzeszów, 12th Economic Department of the National Court Register, under KRS no The Company has been assigned the statistical number REGON Business activity Manufacture of paints, varnishes, adhesives, solvents and putties. Share capital: As of 30 June 2015, the Company's share capital amounted to PLN 12,617,778, i.e. 12,617,778 shares of 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 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 Management Board: On 5 June 2015, the Supervisory Board appointed the following Members of the Management Board of FFiL Śnieżka S.A. for the 7th term of office: Mr Piotr Mikrut, entrusting him with duties of the President of the Management Board Mr Witold Waśko, entrusting him with duties of the Member of the Management Board Page 3

4 Ms Joanna Wróbel-Lipa, entrusting her with duties of the Member of the Management Board Mr Piotr Mikrut, President of the Management Board, appointed Ms Joanna Wróbel-Lipa and Mr Witold Waśko, Members of the Management Board, to serve as Vice-Presidents of the Management Board. All of the newly-appointed Management Board Members were members of the Board during the previous term of office. Present organisational diagram and organisational changes over the year The current organisational diagram was adopted by way of Management Board Resolution No. XVIII/83/2015 of 26 May 2015 and approved by way of Supervisory Board Resolution No. III/16/2015 of 5 June The principles for presenting the financial statements have been included in the introduction to the Capital Group's interim condensed consolidated financial statements. Financial statements are drawn up on the basis of the International Accounting Standards and National Accounting Standard No. 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 the half of the year 2015 have been drawn up in accordance with the IFRS on the assumption that the Group would continue in operation for the foreseeable future. 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 H1 2015, the sales value of the Śnieżka Capital Group amounted to PLN million, which means dynamics of 102% in comparison to the corresponding period of Sales of products (in value terms) increased by 103%, while revenues from sales of goods decreased by 7%. There are no doubts that the Group's performance was affected by the difficult political and economic situation of Ukraine. Sales dynamics of materials was negative and amounted to 94%. Other revenues (sales of services) decreased by 4% as compared to the corresponding period of the previous year. Page 4

5 Sales structure in the Śnieżka Capital Group as per revenue categories in PLN '000 Item H H Dynamics Decorative products 224, , % Construction chemicals 35,310 38,778 91% Industrial products 4,345 4,881 89% Goods 20,342 21,879 93% Other revenues 1,853 1,936 96% Materials 3,162 3,348 94% Total sales 289, , % 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, on 5 June 2015, the Ordinary General Shareholders' Meeting was held and it: approved the Management Report and the financial statements of the Company for 2014, acknowledged the fulfilment of duties by members of the Company s corporate bodies in 2014, distributed the 2014 net profit in the amount of PLN 24,639 thousand, set the dividend at PLN 3.10 per share, i.e. totalling at PLN 39,115 thousand, and specified remuneration for the Founding Shareholders and holders of founders' 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 493 thousand. The difference amounting to PLN 14,969 thousand was paid from supplementary capital, approved the Management Report on the activities of the Capital Group and the financial statements of the Capital Group for 2014, changed rules for remunerating members of the Supervisory Board. Moreover, the Supervisory Board appointed members of the Management Board for the 7th term of office and appointed 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 Fabryka Farb i Lakierów Śnieżka S.A. for The audit and review will cover both separate and consolidated interim and annual statements of the Company and the Capital Group. So far the Company used services of Ernst & Young Audyt Polska spółka z ograniczoną odpowiedzialnością sp. k. with its registered office in Warsaw in the scope of auditing and reviewing financial statements for Strategic objectives of the Śnieżka Capital Group The Śnieżka Capital Group's long-term development 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. Page 5

6 The adopted development strategy involves special activity in three areas: 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 Board is to build long-lasting 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 trainings, 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 The Śnieżka Capital Group achieves the greatest part of revenues on the Polish market. Therefore, the situation of the domestic economy is so important for the Group's performance. According to data of the Central Statistical Office of Poland, the Polish GDP increased by 3.6% (YOY) within the first three months of this year. A key stimulus for this growth was the internal demand which was mainly affected by capital expenditures and household consumption. In turn, according to initial data published by the Central Statistical Office of Poland, GDP increased by 3.3% in real terms in Q2 of Results achieved by the Group are affected by the situation on the housing construction market. According to information of the Central Statistical Office of Poland, in H there were less apartments put into operation in total as compared to the corresponding period of the previous year (a decrease by 4%). A positive dynamics was recorded only in individual construction sector (an increase by 2.2%). As compared to the previous year, the number of building permits granted rose by 13% and the number of apartments, the construction of which got underway, rose by 11.2%. More building permits granted and the number of new construction investments, in conjunction with estimates related to development of the Polish economy, give good reasons for optimistic forecasts related to the demand for construction materials, including paints and varnishes, over the coming years. From the point of view of the Group's activity, export markets, the most important of which are the Ukrainian and Belarusian markets, are of significant importance. That is why the economic situation on these markets is significant for the fulfilment of the Group's development plans. The Ukrainian economy is still in deep crisis, which is confirmed by a decrease in GDP by 17.2% recorded in the first quarter as compared to the corresponding period of the previous year. The internal demand, i.e. individual demand - due a decrease in the purchasing power of the population, as well as the investment demand - affected by the uncertain geopolitical situation and the reduced access to financial resources, clearly dropped. Negative dynamics was recorded again in the construction market where the volume of the completed works decreased. The Ukrainian currency is still in a poor condition and the inflation remains high. At the same time, in the assessment of international financial institutions, certain signs of slow improvement of the situation in some sectors of the economy should be discerned. Although the potential is limited at the moment, the Ukrainian Page 6

7 market is still important and promising for the Śnieżka Group. Another export area where the Group operates, i.e. Belarus, is still in crisis. Results for Q show that the rate of contraction of GDP accelerates, which involves a decrease in industrial production. As a result of an increase in inflation, the purchasing power of consumers is still decreasing and the impoverishment of the society is advancing. Unfavourable conditions for development of sales of products offered by the Group's companies are also present on the Russian market. Economic sanctions and decreases in prices of energy resources have an unfavourable effect on the Russian economy. 5. Sales and orders on hand Paints and varnishes market in H Sales structure in the Śnieżka Capital Group for H by countries Other countries 2% Moldova 1% Russia 1% Belarus 6% Ukraine 10% Poland 80% * The structure was calculated on the basis of sales value Poland remains the leading market for the Śnieżka Capital Group with the 80% share (an increase by 6 p.p. year-on-year). Ukraine and Belarus are other key countries in which companies comprising the Group carry out their activities. In the case of Ukraine, its share in the sales structure decreased from 12% in the corresponding period of 2014 to 10% in the current year, which results from the unfavourable political and economic situation continuing in that country. In H the Belarusian market generated 6% of the Group's sales, which means a decrease by 2 p.p. year-on-year. The share of other countries (including Russia and Moldova) represents 4% 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 distribution channels, mainly through wholesale and retail shops as well as DIY stores. On the Polish Page 7

8 market the Group recorded revenues of PLN million for the six-month period of 2015, which is PLN 20.4 million more than in the year-earlier period. The position of the Śnieżka Group's products on the Ukrainian market is still strong, but unfavourable tendencies in the scope of the demand for paints and varnishes continue to be present. Apart from the decreased demand for paint products, strong pressure on a price and an increase in the share of a budget product segment may be noticed. In order to meet the demand of the market, the Group adapted its offer to the demand of each group of consumers, introducing new products for sales. The Group's products are available in entire Ukraine, however, most revenues are generated in western and central parts of the country. The products are distributed mainly using 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 (foreign entities). On the Ukrainian market the Group recorded sales revenues of PLN 28.6 million in H in comparison with PLN 34.7 million in the yearearlier period. The Śnieżka Capital Group is also one of significant producers of paints and varnishes on the Belarusian market, with a strong position in the putty segment. On this market the Group's products compete with 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 on the Belarusian market mainly through the traditional channel. The Śnieżka's products may also be found in local DIY chains. The Group recorded sales revenues of PLN 18.2 million in H on the Belarusian market, which was less by PLN 6.4 million as compared to the year-earlier period. The Group also sells products in the Russian Federation, focusing its activities mainly in Kaliningrad and Moscow regions as well as in southern Russia. On the analysed market the Group competes with such companies as Tikkurila, Caparol, AkzoNobel, Lakra, Empils, Jaroslawskie Kraski, Ruskije Kraski, VGT, Ptimist, Knauf, Prestiż. In the analysed period the Group's sales on the Russian market amounted to PLN 4.1 million, which means a decrease in revenues by PLN 1.6 million. The Group also exports its products to Moldova (sales of PLN 4 million in the analysed period), where a decrease in sales by PLN 0.6 million was also recorded. Supraten is the largest player on the market. Apart from it, the Group's products compete with products of Romanian companies. Sales on other markets, including Hungary, Romania, Armenia and other countries, increased by PLN 0.4 million (totalling at PLN 4.6 million). Individual companies of the Śnieżka Capital Group have valid contracts determining terms and conditions of business cooperation with all distributors. At the same time, the Group conducts activities aimed at commencing distribution on new markets. Development of the range of products in H Considering the changing situation on the market and consumers' expectations, the Group continuously develops its product offer. In the analysed period the Group launched several new products. The offer of the Magnat Ceramic paints was expanded by adding 11 new colours to the available palette. The next product released in H was the Magnat Ultra Matt anti-reflective paint. It is dedicated to paint ceilings and its exceptional properties ensure uniform appearance of the painted surface, regardless of the angle of incidence of light. The certification process of products under the Foveo-Tech brand was carried out in the analysed period. These products obtained the European Technical Assessment confirming their usable properties and the highest quality. As an addition to the basic offer of the Foveo-Tech brand, the RG-10 fungicide was launched. The agent is used to remove fungi and algae from facades. Page 8

9 For the needs of the Ukrainian market, formulas of three new paints for interiors were developed: Śnieżka Max White Latex, Śnieżka Energy, Śnieżka Design Lux - designed to colour in the colouring system, according to the NCS notation. Production and sales of the above-mentioned products takes places through the subsidiary Śnieżka Ukraina. Marketing measures in H In H FFiL Śnieżka SA commenced several advertising campaigns supporting main brands from the Company's offer. At the beginning of April, communication of the Śnieżka Satynowa brand started, constituting continuation of marketing campaigns implemented in the previous year, emphasising the exceptional resistance of the paint to scrubbing and the possibility to remove dirt. In the reporting period the Group also commenced activities supporting the sales of the Vidaron and Magnat brands. New advertising spots were prepared for both brands. Communication of the Vidaron agent for wood protection and decoration uses a characteristic figure of the seller known from earlier creations. Two advertising spots prepared for the needs of this year's activities demonstrate exceptional properties of Vidaron and attract attention to the offered 6-year guarantee which confirms the highest quality of the product. Under the catchphrase "Inspires with colours, impresses with stain resistance" - this year's advertising campaign of the Magnat ceramic paints was launched in April too. The face of the campaign promoting the excellence and guaranteed stain resistance of the Magnat paints became a well-known Polish chef and restaurateur. Advertising spots of the Śnieżka Satynowa, Vidaron and Magnat brands were being broadcast during prime time in the most popular television channels. The television campaign was supported by activities in the press, Internet and retail outlets. Activities supporting the Śnieżka Acryl-Putz and Foveo-Tech brands were also being carried out, mainly through press advertisements and on-line activities. The above-mentioned activities were being carried out by the Parent Company on the Polish market. On the key markets for the Group, i.e. the Ukrainian and Belarusian markets, communication activities were being carried out in the place of sales with focus on advertising activity in the Internet. 6. Research and development R&D activities of the Śnieżka Capital Group are carried out in the modern Research and Development Centre located in Brzeźnica which functions within the structure of the Parent Company. According to the model of functioning accepted in the Group, R&D and Quality Assurance Departments closely cooperate with subsidiaries. Therefore, the Parent Company exercises supervision over production processes in plants located in Ukraine and Belarus and cooperates in the scope of quality control of raw materials supplied to companies. The correctness of processes is verified by audits carried out in individual companies. A direction of R&D works of the Group is determined by the changing situation on the competitive markets, changes in legislation and focus on maintaining the highest quality of products. The Group continuously monitors the market of raw materials and the availability of new solutions in the scope of designing and producing paints and varnishes. The Research and Development Department of the Parent Company cooperates in this scope with the largest producers of raw materials and providers of technological solutions. The above-mentioned activities result in optimisation of formulas of products that are currently included in the offer as well as introduction of new products for sales. In the analysed period, results of R&D activities included, among others: development of formulas of 11 new colours of the Magnat Ceramic paint, development of formulas of 10 new colours of the Śnieżka Kolory Natury paint, Page 9

10 development of the formula of the RG 10 Foveo-Tech fungicide and algaecide, development of formulas of paints for interiors, i.e. Śnieżka Max White Latex, Śnieżka Energy, Śnieżka Design Lux - designed to colour in the colouring system. A permanent element of R&D works is advanced laboratory research connected with improving solvent products in terms of minimising their environmental impact. 7. Supply policy The Śnieżka Capital Group, as part of the activity run by it, uses large quantities of raw materials and technical materials necessary for its proper functioning. The Group uses many sources of supply, cooperating with Polish and foreign entities. The Group has signed supply agreements defining the terms of partnership with all major suppliers. The Company is also searching for new domestic and foreign suppliers to diversify the supply, reduce costs and delivery time. An analysis of the supply of raw materials, packaging and technical materials in H shows that this period was marked by price stability. Negative phenomena in the analysed period definitely include depreciation of the Ukrainian and Belarusian currencies, which resulted in a periodic increase of purchasing costs of raw materials by subsidiaries. However, no problems with availability of raw materials and packaging of strategic importance for the Group were observed. In H no factors or atypical events occurred which would have a significant impact on the financial result of the Śnieżka Capital Group. 8. Employment The HR policy related to strategic goals of the Śnieżka Capital Group is implemented through planning of human resources and their continuous development. The headcount at individual companies is regulated by the demand for the products offered. In the reported period there was an increase in employment from 949 employees as of 30 June 2014 to 959 employees as of 30 June In the employment structure of the Capital Group, employees with secondary and vocational education are prevailing, which results from the production nature of the Group's activity. However, a continuous increase in employment of employees with higher education, who constitute 31% of the staff, is visible. Employees in the so-called mobile age, i.e. between 18 and 44, with high psycho-physical fitness and experience, constitute the prevailing part of the personnel (approx. 70%). In order to improve skills of the personnel, the Group implements new solutions in the scope of training and development of employee competencies. In H the number of the conducted trainings was higher by approx. 45% as compared to the corresponding period of the previous year. The Śnieżka Capital Group continuously improves and develops incentive schemes which are based on financial and non-financial solutions. 9. Investments in PP&E and intangible assets In H1 2015, the Śnieżka Capital Group incurred capital expenditures on PP&E and intangible assets in the amount of PLN 7.1 million. Due to the unstable situation on eastern markets, especially in Ukraine and Belarus, investment outlays were reduced in subsidiaries. In the analysed period the Parent Company continued works on optimisation of production and logistics processes. Production installations and infrastructure are continuously developed and modernised, which leads to improved labour efficiency and reduced production costs and allows to keep high parameters of the products offered. The Parent Company also invests in Page 10

11 modern IT systems supporting production, logistics and decision-making processes. All investment projects carried out in H were financed with the Parent Company's own resources. 10. Financial performance Current financial standing of the Group 6-month period ended on 30 June 2015 / as of 30 June 2015 (not audited) 6-month period ended on 30 June 2014 / as of 30 June 2014 change dynamics (not audited) I. Net revenues from the sales of products, goods and materials 289, ,333 5, % II. Profit (loss) on operating activities 34,063 25,010 9, % III. Gross profit (loss) 26,991 22,421 4, % IV. Net profit (loss) 23,148 19,286 3, % - Net profit/loss attributable to shareholders of the parent company 22,820 19,094 3, % - Net profit (loss) attributable to non-controlling shares % V. Comprehensive income for the period 16,087 4,522 11, % - Comprehensive income for the period attributable to shareholders of the parent 16,812 6,822 9, % - Comprehensive income for the period, attributable to non-controlling shares (725) (2,300) 1,575 32% VI. Net cash flows from operating activities 1,150 19,304 (18,154) 6% VII. Net cash flows from investment activities (8,332) (9,177) % VIII. Net cash flows from financial activities 16,945 10,660 6, % IX. Total net cash flows 9,763 20,787 (11,024) 47% X. Total assets 429, , % XI. Liabilities and provisions for liabilities 245, ,608 5, % XII. Long-term liabilities 2,857 8,231 (5,374) 35% XIII. Short term liabilities 243, ,377 10, % XIV. Equity 183, ,489 (4,601) 98% - Equity attributable to shareholders of the parent company 179, ,917 (3,202) 98% - Equity attributable to non-controlling shares 4,173 5,572 (1,399) 75% XV. Share capital 12,618 12, % XVI. Number of shares 12,617,778 12,617, % XVII. Earnings (loss) per ordinary share (in PLN) % - Earnings (loss) per ordinary share attributable to shareholders of the parent company % XVIII. Diluted earnings (loss) per ordinary share (in PLN) % - Diluted earnings (losses) per ordinary share attributable to shareholders of the parent company % XIX. Book value per share (in PLN) (0.37) 98% XX. Diluted book value per share (in PLN) (0.37) 98% XXI. Declared or paid dividend per share (in PLN) % *Data in the table is in thousands of PLN In H1 2015, an increase in the Capital Group's assets by PLN 0.7 million was recorded as compared to H1 2014, while fixed assets decreased by 4% as compared to the corresponding period of the previous year. Current assets increased by 3% due to an increase in inventories (by 8%) and an increase in trade receivables (by 17.5%). However, cash decreased by 49% in the analysed period. In addition, total long-term and short-term liabilities increased by 3%. In H1 2015, 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 that remain within the safe range. In comparison to the corresponding period of the previous year, debtor days increased by 5.8 days. The inventory turnover ratio is lower (by 3.2 days) than in the year-earlier period, which points to improved inventory management. Creditor days increased too by 5.2 days in comparison with the year-earlier period. As of 30 June 2015, the Śnieżka Capital Group did not have any significant overdue liabilities. Expected financial situation of the Group The Management Board of the Parent Company expects that the Group's financial standing will improve in the following reporting periods. In particular, the Management Board will seek to increase sales revenues, earning capacity and profitability. The level of indebtedness of the Group should be lowered in connection with the phenomenon of seasonality. Low interest rates should contribute to decreasing financial costs of the Group. 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 Śnieżka Capital Group's business is strongly influenced by the macroeconomic risk related to the situation in Poland and export markets. 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 an increase in the demand for products related to interior finishing, including paints, and greater activity in the secondary real property market and the related frequency of renovations. The demand may be restricted by difficulties in obtaining mortgage and consumer loans as well as a drop in purchasing power and impoverishment of the society. The risk present in the Ukrainian market is also related to a potential decrease in demand for paints and varnishes and an increase in raw material prices. The likelihood of devaluation of the hryvnia is also significant. The risk factors also include the uncertain geopolitical situation and the likelihood of occurrence of acts of war in eastern Ukraine, which does not favour economic development and destabilises the Group's activity on this market. The macroeconomic situation in Belarus continues to be unstable. Its economy may be influenced by the unstable political and economic situation in the region, including in Russia - as both countries are connected with particularly strong trade. The risk also includes further devaluation of the Belarusian currency and the continuing slowdown of internal demand. Lack of deeper structural reforms may also unfavourably affect the Belarusian economy. The macroeconomic situation in Russia is also important for growth of the Group's sales. Weakening of the Russian ruble results in the necessity to increase prices of paints and limits the consumer demand. On the analysed market the economy may further deteriorate, which is connected with sanctions imposed by the European Union and USA and the fall in prices of crude oil. Page 12

13 Competition risk The Capital Group's business is exposed to intense competition from 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 H no major changes occurred in the structure of powers on the Polish market of paint and varnish manufacturers. On other markets the Group conducts its business activities also under conditions of strong competition, posed by both domestic and international entities. The Group monitors activities of other entities on all key markets. Intensive advertising campaigns and other marketing activities supporting sales prepared by the Group for 2015 provided appropriate support for the products it sells, keeping the competition risk to the minimum. Distribution channel risk The Śnieżka Capital Group, in the process of distribution of 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 products of the Group in individual distribution phases may decrease as a result of competitors' activity. In order to mitigate the churn risk, the Group tries to minimise such risk by creating a chain of stores and partner showrooms. Chains of DIY stores are of significant importance in the distribution and sales on the domestic market of paints and varnishes. The Parent Company continues cooperation with international and local entities. Its products are available in such stores as: Leroy Merlin, OBI, Castorama, Praktiker, Jula and PSB chain facilities. 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. Concurrently, the Parent Company carries out intensive activities aimed at increasing numeric distribution of its products, especially taking into account the presence of its products in DIY chains. The Group also sells its products on foreign markets as part of a traditional - indirect model. Its products are distributed by wholesale stores, retail stores and DIY chains. The unstable situation on the part of Ukraine and a change in the status of certain areas affect the distribution of products on that market. The Group monitors the situation on an ongoing basis and undertakes activities reducing the risk of losing recipients. Simultaneously, on each of export markets, the Group is making efforts to eliminate the risk of overdependence on a single distribution channel through a policy of diversifying the channels and searching for new distribution points, if needed. Risk related to receivables monitoring The Śnieżka Capital Group regularly analyses any worrying market trends and acts accordingly to reduce the risk of transactions by using mortgages, bills of exchange agreements, etc. Due to the unstable situation on eastern markets, the risk related to receivables for transactions with entities operating on such markets has increased. Using its experience, tools and solutions in the scope of monitoring of receivables, the Group effectively reduces such risk. In the event of payment delays, companies of the Group applies deductions corresponding to the level of costs of using bank loans, taking into account provisions applicable in a given country. A trade credit limit has been determined for each of recipients. Strict association of the level of use of the credit with delays in payments allows to Page 13

14 monitor indebtedness. The Parent Company also applies the policy of monitoring of receivables for transactions between individual companies. The Group intends to continue its policy in the scope of monitoring of receivables, adjusting it to changing conditions. The Parent Company, as in the previous years, will still cooperate with specialised entities dealing with the assessment of commercial transaction risk level and branch analyses, introducing new solutions offered by such companies. Financial and FX risk The business of the Śnieżka Capital Group is exposed to the risk of changing exchange and interest rates. The Company imports raw materials for production of paints and varnishes and pays for them in EUR, while its main exports are to Eastern European countries (Ukraine, Belarus, Moldova, Russia, Georgia, among others), where the main settlement currency is the US dollar. 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 Parent Company is the EUR/USD rate as low as possible, which decreases the costs of raw materials and maximises proceeds from export. The Śnieżka Capital Group constantly analyses the FX risk. In H1 2015, the Group did not conclude long-term hedging transactions in the form of derivatives, such as options, forward or future contracts, nor does it at present. Due to the high volume of the Parent Company's bank loans, the interest rate risk is considerable. Risks related to the supply of raw materials The main risk and threats in the scope of the supply in the Śnieżka Capital Group are mainly related to higher prices of raw materials, which depend on crude oil prices, as well as increased transportation costs, temporary or long-term limitation of access to raw materials and changes in foreign exchange rates. Analysing H1 2015, it should be indicated that as far as supplies of raw materials and technical materials are concerned, no problems occurred with their availability. Risk of failure to implement the planned investments Key investment tasks of the Śnieżka Capital 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 and it may also result from significant changes in market conditions. The current situation 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. Page 14

15 13. Other information 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 2015, 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 the issuer s or its subsidiaries loan or borrowing guarantees or warranties granted jointly to a single entity or its subsidiary, if the total value of the existing guarantees or warranties is equivalent to at least 10% of the Issuer s equity capital, with the indication of: a) name of (company) entity to which sureties or guarantees were issued, b) total amount of loans or borrowings, which was guaranteed in whole or in a specific part, c) period of time for which sureties or guarantees were issued, d) financial conditions under which sureties or guarantees were issued with the indication of the remuneration of the issuer or its subsidiary for issuing of such sureties or guarantees, e) nature of relations between the issuer and the entity which took loans or borrowings As of 30 June 2015, 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, i.e. TM Investment Sp. z o.o., granted to the Parent Company, i.e. FFiL Śnieżka SA, a surety for the loan raised with Bank Handlowy w Warszawie S.A. in the total amount of PLN 30 million. The surety was granted until 31 August The remuneration of TM Investment Sp. z o.o. on account of the surety for 2015 amounts to PLN 0.2 million. Other information that, in the issuer's opinion, is relevant for the evaluation of its human resources, financial position, financial performance as well as any information relevant for the evaluation of the issuer s capacity to meet its obligations. In H1 2015, no changes occurred in the issuer s structure which could have influenced its ability to settle its liabilities. 3. Disputes There are no proceedings pending whose value accounts for at least 10% of the issuer s equity. Page 15

16 4. Indication of factors which, in the issuer's opinion, will have an impact on the issuer's financial performance at least in the next quarter. In the issuer s opinion, the major factors that will influence the financial performance of the Śnieżka Capital Group in the coming months of 2015 are prices of raw materials used in the manufacturing process, currency exchange rate variations and the sales dynamics on export markets, with particular attention paid to Ukraine and Belarus. The condition of the Polish market, which generates 80% of the Śnieżka Capital Group's revenues at present, will be significant too. 14. Description of the Capital Group's organisation and equity relations The Capital Group and its equity relations as of 30 June Fabryka Farb i Lakierów Śnieżka SA Śnieżka-Ukraine Sp. z o.o. in Yavoriv 82.52% of shares Śnieżka-BelPol Wspólna Sp. z o.o. in Zhodino near Minsk 99.00% of shares Sniezka EastTrade Sp. z o.o. in Moscow 100% of shares Page 16

17 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 putties 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, Sniezka EastTrade Sp. z o.o. in Moscow the Company's business consists in promoting Śnieżka's products, advertising and marketing activity in this scope on the Russian market, Śnieżka - BelPol Wspólna Sp. z o.o. in Zhodzina near Minsk is one of significant manufacturers of putties, paints and varnishes in Belarus. Its products are sold under the Śnieżka brand. The Company has its own manufacturing resources and a network of wholesale and retail customers, TM Investment Sp. z o.o. in Brzeźnica the Company s business consists in 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 - dealing with production of 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 2015 and by the date of this report: In the reporting period and by the date of preparing these statements, no changes occurred in the above-mentioned scope. 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 is involved in the promotion of Śnieżka products, and in advertising and marketing activities. As of 30 June 2015, the company is not consolidated due to a minor scale of operations. Applied consolidation and valuation methods: Śnieżka - Ukraine Sp. z o.o. full consolidation method Śnieżka - BelPol Wspólna Sp. z o.o. 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 at the publication date of this interim report: Shareholder Number of shares held Share in the share capital (%) Number of votes Total number of votes at the GMS (%) Jerzy Pater* 2,541, ,208, of which directly 166, , Stanisław Cymbor** 2,541, ,208, of which directly 166, , Piotr Mikrut directly 1,254, ,787, Rafał Mikrut directly 1,254, ,254, AMPLICO OFE 1,250, ,250, 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 Supervisors: Stanisław Cymbor Stanisław Mikrut Jerzy Pater 2,541,667 no changes 33,333 no changes 2,541,667 no changes Page 18

19 16. Awards and distinctions In H the Śnieżka Capital Group received the following distinctions: List 500 It was another time when the leading company - FFiL Śnieżka SA was found on the "List 500" published by the "Rzeczpospolita" daily. In the ranking presenting the biggest Polish companies, Śnieżka ranked the 450th. The "List 500" is 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. Paint of the year 2015 Śnieżka Satynowa was awarded the prestigious title - Paint of the Year - in the ranking of paints for interiors prepared once again by the chemiabudowlana.pl web portal. Internet users assessed the most popular paints for interiors on the Polish market. Śnieżka Satynowa was ranked the highest in such parameters as quality, ease of use and trust in a product/brand. Obtaining the Paint of the Year title indicates constant trust and popularity of the leading Company's products among recipients. Śnieżka Satynowa won the ranking for the second time. Previously, it was awarded the title in Regional Eagles of Export of the Podkarpackie Voivodeship award FFiL Śnieżka SA became one of the winners of the Regional Eagles of Export of the Podkarpackie Voivodeship award. The winners obtained awards in five categories: best exporter, most dynamic exporter, export product, export debut and export personality. FFiL Śnieżka SA was awarded in the export product category for overall activity on the foreign market. The distinction confirms that the Company belongs to the group of the most dynamic exporters of the Podkarpackie Voivodeship. Page 19

20 17. Conclusion The Parent Company's Management Board evaluates that the Śnieżka Capital Group's results achieved in H should be deemed satisfactory and corresponding to the current possibilities resulting from external conditions on markets on which individuals companies operate. FFiL Śnieżka SA continues to strengthen its position on the Polish market and the Group continues to build values of key brands from its portfolio. The Management Board of the Parent Company will aim at implementing new effective solutions, in particular with regard to export markets, which will allow to maintain a stable position of individual companies on these markets. The purpose of the Śnieżka Capital Group in the course of the year will be to systematically improve its financial results and increase the market value of companies belonging to the Group. Piotr Mikrut Witold Waśko Joanna Wróbel-Lipa Lubzina, 26 August 2015 Page 20