Risk associated with macroeconomic situation

The Management Board of Śnieżka constantly monitors the situation related to the war in Ukraine and its regional and global consequences, adapting actions and plans to the current circumstances.   The markets in which the Group’s companies operate and the Group’s operations are and/or may be influenced by the following factors:

• a decrease in the real purchasing power of society on the Group’s main sales markets as a result of inflation and economic slowdown or recession, and consequently, reduced demand for the Group’s products;
• the Group’s property insurance agreements contain standard clauses excluding the insurer’s liability in the event of war;
• disturbances in the supply chains of imported raw materials, components and fuels, as well as temporarily constricted access to some of them;
• downgrading of ratings for selected countries from the conflict region and a general further increase in the risk of conducting business activities in those countries, which may ultimately translate into higher costs for selected Group companies operating on these markets;
• new hardships in the operation of the Śnieżka-Ukraina plant, resulting from, for example, lack of access to qualified employees or conscription of current employees for military service;
• extension of communication routes to selected countries and the resulting increase in transport costs;
• decline in consumer sentiment in the Group’s key markets and the resulting possible drop in demand in the Group’s main markets.

Despite the on-going war in Ukraine, 2023 was good for paint and varnish producers. Entities from the industry managed to increase production, which resulted in the yield of more products than in the same period of 2022. However, the production of the indicated categories did not reach pre-war levels.Śnieżka-Ukraine is capable of conducting its business activities due to its location outside the current war zone. The company’s plant, as one of the few in the decorative paints and construction chemicals industry in Ukraine, is located in the western part of Ukraine – in Yavoriv, in the Lviv region, approx. 20 km from the Polish border.

Production activity in 2023 (particulalry after Q1) in Ukraine was more predictable due to the stabilization of electricity supplies.

The purchasing power of consumers has a decesive impact on decisions on the purchase of paints and products for decorating and protecting wood.

The purchasing power of society in 2024 may be influenced by:

• inflation persisting above the NBP target (including an increase in fees for electricity, gas, fuels and municipal waste management);
• new fees and taxes.

According to the central inflation projection of the National Bank of Poland, the average inflation level throughout the year is to amount to 4.6% y/y (operating at levels from 4.4 to 5.0% y/y in individual quarters)¹. According to the Central Statistical Office, the prices of consumer goods and services in December 2023, compared to the same month last year, increased by 6.2% (with an increase in the prices of goods – by 5.5% and services – by 8.2%).

According to GfK data, the Consumer Confidence Barometer in Poland in December 2023 was at the level of -3.
In assessing the current financial situation of households, Poles are still pessimistic about the wealth of their wallets (-7.3).  The future economic situation of the country is also assessed negatively (-5.3).  It is worth emphasizing that the sentiment, although remaining negative, should be assessed as significantly better than in December 2022.

Hungary may also face a risk of reduced purchasing power resulting from increased inflation.
In 2023, it amounted to 17.6%, although a strong disinflationary trend was noticeable from Q2 (in December 2023, inflation amounted to 5.5% y/y). The inflation projection for 2024 presented by the National Bank of Hungary indicates that it will amount to between 4 and 5.5% per year².

A similar trend is noticeable in Ukraine, where inflation for the entire year 2023 amounted to 5.1% (2022: 26.6

¹ Source: National Bank of Poland, Inflation and GDP projections – November 2023.

² Source: Magyar Nemzeti Bank (MNB), Inflation Report, December 2023, https://www.mnb.hu/letoltes/eng-ir-digitalis-23.pdf.

According to the CSO’s data for December 2023, entrepreneurs estimated that in the construction industry there was a decrease in the use of production capacity to the level of approx. 80%,which accounts for a decline by approx. 1% on a year-on-year basis.  In December 2023, the general economic climate in the construction industry in Poland was -13.2.

The companies indicated the main barriers to business activity in the construction industry:

• employment costs;
• high budget burdens;
• material costs¹.

According to the Group’s data, the condition of the construction industry may be affected by the unstable situation on the global market of raw materials, which may translate into scarcity in product deliveries and an increase in prices. The factors and phenomena indicated above may contribute to the situation in all key markets for the Group.

A possible decline in consumption, deterioration of public sentiment, rising energy prices, housing maintenance costs, an increase in housing prices may lead to a weakened demand for housing – both on the primary and secondary market. This may result in reduced expenses for renovation and modernization of apartments, which mainly determine the demand for decorative paints.

¹ Source: Central Statistical Office, Economic situation in industrial processing, construction, trade and services – January 2024, https://stat.gov.pl/obszarytematyczne/koniunktura/koniunktura/koniunktura-w-przetworstwo-przemyslowm-budownictwo-handlu- i-uslugach-2000-2024-january-2024,4,81.html.

In September and October 2023, the Monetary Policy Council (MPC) decided to reduce interest rates, slightly increasing the availability of loans¹. This action, combined with the government’s „Safe Credit 2%” program, fuelled the housing loan market, with more loans granted in Q4 than in the record year 2021.
However, in response to the lower availability of financing during the period of higher interest rates, developers significantly reduced the number of commenced investments.  This means that from 2024:

• the number of apartments put into service will be significantly lower than in previous years;
• in the context of potential interest rate cuts in the second half of 2024 and the announcement of the next government program “Apartment for start”, the demand for which will be on the increase.

This may lead to a boost the price of the flats.  The complex situation on the housing market in particular periods of the year will affect consumers’ savings and the demand for renovation and decorative products. However, the company’s internal data shows that the purchase of decorative products is mostly financed from savings and current income of consumers.

In 2024, the risk of continued tightening of monetary policy in the face of disinflation is low, and MPC members are increasingly pointing to the possible commencement of a cycle of interest rate cuts in 2024.

¹ Source: Narodowy Bank Polski, Archive of NBP basic interest rates since 1998, https://nbp.pl/podstawowe-stopy-zdrowie-archiwum/.