Factors affecting the development and performance

The Śnieżka Group monitors consumer sentiment, financial condition of consumers and their purchasing intentions in the product categories most important for the Group in its key markets (Poland and Hungary).

Demand in the coming months may be influenced by rising, although still low, readings of consumer sentiment, stagnation in purchasing power, as well as a greater tendency to save and temporary restrictions on large expenditures in connection with the monetary policy of the National Bank of Poland. This largely comes down to maintaining high interest rates and limiting lending, thus reducing the amount of money on the market. As analysed by the Central Statistical Office, the average annual consumer sentiment in Poland – aggregated in the current consumer confidence indicator (BWUK) – in 2023 was at a low level (-26.3), although it increased in each subsequent quarter of the year. In the last quarter of 2023, the result was significantly higher than the annual average and amounted to -15.2. Also the Leading Indicator of Consumer Confidence (WWUK), describing the expected individual consumption trends in the next 12 months, maintained a similar upward trend¹.

In the reporting period, the Group observed a slight increase in demand for decorative products on the Polish market, which is responsible for over 2/3 of its sales revenues. On the Hungarian market, sales volume remains in a downward trend, while on the Ukrainian market, demand has increased significantly compared to the difficult year of 2022 in this respect, yet has not reached the results recorded prior to the outbreak of the full-scale war in Ukraine.

The Group analyses, including: how global factors (e.g. the effects of the war in Ukraine) and local ones (e.g. inflation and changes in wages) affect the GDP indicator in individual countries, with which the condition of the decorative paints industry is strongly correlated. A constant element of the activities carried out is the monitoring of situation in this sector on key markets, which provides the possibility of predicting alternations in consumer attitudes, as well as adapting the Company’s offer as well as marketing and sales activities to volatile conditions.

¹ Source: Central Statistical Office, Consumer economic situation – January 2024.

Military operations in the territory of Ukraine had a negative impact on the Group’s operations and performance on the Ukrainian market.

According to the Company’s knowledge at the time of the publication of this report, the property of Śnieżka-Ukraina is not endangered (its production plant is located in Yavoriv, Lviv region).

At the moment, there are no premises that would indicate the loss of the ability to continue business operations in Ukraine.

However, the possible escalation of the conflict may also have a negative impact on renovation works and, consequently, on the demand for the Company’s products.

The on-going warfare in Ukraine may have an essential effect on the future performance of Śnieżka-Ukraina and, as a result, the entire Capital Group. The industry’s performance in 2023 has significantly improved compared to the previous year, giving a signal that the demand for renovation products (including decorative ones) may return to the pre-war performance relatively quickly. Concurrently, due to external factors and the current market environment, the Management Board of the Company is currently unable to estimate the impact of the war on the future performance of the Group on the said market.

The Śnieżka Group monitors the conditions in Ukraine on a regular basis and adapts its activities and plans to the current situation. It also continues to monitor its core markets, constantly verifying, inter alia, the impact of the armed conflict in Ukraine on the condition of economies, the sentiment and financial condition of consumers or their purchasing plans.

As at December 31, 2023, the Group performed an impairment test for assets located in Ukraine. The test result showed no impairment. Details regarding the methodology and assumptions for the test are presented in note 2.2.7 of the Consolidated Financial Statements for 2023.

The exposure to risk of assets held in Ukraine as at December 31, 2023 is as follows:

The reading from the Goods Trade Barometer of the World Trade Organization (WTO) in November 2023 was 100.7 points (improving the level compared to the August reading of 99.1 points)².

According to October forecasts, the WTO expects the upward trend in trade and production to continue until the end of the forecast horizon, i.e. until the fourth quarter of 2024. According to pundits, the recent trade situation and 2023 performance are in line with the estimated confidence interval indicated in the previous WTO forecast of April 2023. Trade is expected to grow faster than GDP in 2024, which may be influenced by the relatively high share of cyclical-sensitive investments and durable goods in trade compared to GDP. According to the same source, the volume of global trade in goods in 2024 is to increase by 3,3% (compared to the estimated increase of 3.2% in April 2023), while the global GDP is to grow at a rate of 2.5% y/y (against 2.6 % estimated in April 2023).

The global trade situation translates into trade on the key markets the Group operates on – and, as a result, also on the condition of the economies of the countries that constitute the core sales markets for the Group’s products.  The paint and wood products industry as well as the scale of consumption of renovation and construction products are correlated with the level and dynamics of GDP. This is particularly essential in the case of Poland (the key market of the Group from the perspective of the sales revenues generated), where private consumption remains one of the main driving forces of the economy.

The highest risk for the trade outlook is a stronger-than-expected slowdown in China and a return of inflation in developed economies, which would require interest rates to remain higher for a longer period ³.

² Source: World Trade Organization (WTO), WTO trade barometers – November 2023, February 2024.
³ Source: World Trade Organization (WTO), Global Trade Outlook and Statistics. Update: October 2023, February 2024.

The Company’s Management Board envisages that due to the current economic and political situation in Europe and in the world, including the on-going war in Ukraine, there may be another increase in the prices of raw materials, packaging and other goods.  Determining the level of prices of key raw materials used in production may be subject to a significant error. At the same time, restrictions in access to raw materials intensified work on the search for substitutes for raw materials necessary for the production of paint and varnish products.

The Company also monitors the changes to the European Union regulations on an on-going basis, describe later in this chapter, and takes appropriate steps to adapt to them. At present, the Company does not anticipate any events related to the purchase of raw materials that could jeopardize its proper functioning.

The Group’s bottom-line may be significantly affected by changes in currency exchange rates, in particular: EUR/USD, EUR/PLN, HUF/PLN and UAH/PLN. The greatest current currency risk for the Śnieżka Group is related to the strengthening of the EUR/PLN exchange rate, which may increase the cost of purchasing raw materials used for production.

The experience of recent years indicates great instability in energy purchase prices, at the same time it should be emphasized that the company is low energy-intensive. In the current macroeconomic and geopolitical environment, a strong cost pressure sustains as regards energy prices, which affects the increased production costs.  The Group conducts analyses aimed at implementing investments that will significantly increase the share of green energy in its energy consumption structure in two key markets, i.e. in Poland and Hungary. These activities are part of Śnieżka 2023 + Sustainable Development Strategy. 

The legal regulations of the European Union relating to the paint and varnish industry are becoming more and more restrictive.  They are also characterized by increasing complexity.  For example, legal regulations are becoming more and more stringent regarding the content of biocides allowed in paints, as well as other substances used in production that pose health and environmental hazards.  The greater emphasis is placed on the use of natural components in paints, which on the one hand are responsible for the safety of the product, but on the other hand shorten its shelf life. Adaptation works ensuring compliance with European Union requirements therefore focus on ensuring that pro-ecological properties are accompanied by equally high durability and quality of products.

The Group constantly monitors legal changes that may affect production and implements measures to dynamically accomodate the technological process to these changes.  Currently amended legal acts that require attention in the near future are Regulation No. 1272/2008 of the European Parliament and of the Council on the classification, labelling and packaging of substances and mixtures (the so-called CLP Regulation) together with amending regulations (the so-called ATP), related to classification of products and their appropriate labelling, depending on the content of biocidal substances in the final product.

Owing to its own Microbiological Laboratory, not only does the Group regularly perform tests necessary to comply with new legal requirements, but also conducts research and analyses ahead of the applicable legal status, while ensuring high quality of the offered products as well as safety of use.

In the coming years, the situation on the market of construction chemicals, including paints and agents for wood protection and decoration, may also be influenced by actions aimed at stopping unfavourable climate change, including regulatory and stimulating actions as part of the implementation of the Paris Agreement and the EU strategy European Green Deal.

The Group does not conduct high-emission activities, and the paint and varnish production is low-energy-consuming.

However, a certain part of the entire value chain is high-emission activity (e.g. production of packaging based on petroleum products and extraction or production of certain raw materials used by the Group) and it cannot be ruled out that future regulations on reducing emissions and energy consumption of production plants located in the European Union will affect the business model and the Group’s results.

The Śnieżka Group publishes carbon footprint values in the scope of 1, 2 and 3. The data covers the period from 2020. For FFiL Śnieżka SA and Śnieżka TOC, a target has been set to reduce greenhouse gas emissions in Scope 1 and Scope 2 (in total) by 45% in 2023 and 50% by 2025 compared to the 2020 level (according to the market-based method). Work is scheduled for 2024 on determining the reduction values in scope 3 (described in the Report in item 10.3.3.1). The Company has also developed and is implementing the 2023+ Sustainable Development Strategy, an important part of which are activities aimed at contributing to preventing climate change and minimizing the impact on the environment.