Report of the Board of Commissioners

Jonatha Sofjan Hidajat

President Commissioner

Dear Honored Shareholders,

First of all, we would like to praise God Almighty for His mercy and grace, so that PT Industri Jamu Dan Farmasi Sido Mucul Tbk (the “Company”) could go through 2018 with notable operating and financial performances. Hereby we deliver the supervisory report of Board of Commissioners regarding development and management of the Company for the financial year ended December 31, 2018.

View on External Conditions

During 2018, the global economy experienced various negative sentiments, especially by the United States (US) monetary policy and the trade war between the US and China. At the end of 2018, the solution of when and how to resolve the trade crisis could not be predicted. It even raised fears that another global crisis will be triggered in the future.

Indonesia certainly is not immune from the global economic crisis. Nevertheless, Indonesia’s current economy growth performance has proven to be able to overcome external pressure. Rupiah’s exchange rate against the US Dollar fell until it reached a low of Rp15,253 per US Dollar on October 11, 2018 (Bank Indonesia middle rate). However, this weakening was a momentary response to the Federal Reserve’s (The Fed) monetary tightening policy throughout 2018. Since November, Rupiah has gradually strengthened to around Rp14,300 per USD. Overall, in 2018 Rupiah depreciated by 6.9%.

According to Statistics Indonesia (BPS) report, Indonesia’s economic growth in 2018 reached 5.17%, higher than the previous year at 5.07%. Even though it only grew moderately as a combination of factors of global uncertainty and domestic macroeconomic stability, Indonesia proved to have good resilience in the face of the global conditions and was not affected by the crisis.

The pharmacy industry, including the herbal and pharmaceutical industry, is one of the Government’s priority concerns because it is considered to have contributed significantly to Indonesia’s economic growth. The pharmacy industry sector has great development potential with natural resources capable of supporting the production process. Therefore, the Government encourages research and development of raw materials for natural-based medicine (herbs) to achieve selfsufficiency of medicinal raw materials which are currently partly imported.

The herbal and pharmaceutical industry shows encouraging growth rate in line with the increasing public awareness to live a healthy lifestyle. There has been a shift in consumer preference and behavior towards herbs and herbal medicines because consumer urbanization and contributions from the young customer segment are increasing. Consequently, the level of competition is getting tougher with the emergence of innovative herbal products.

Rapid development in this industry must be a concern to Board of Directors. Competitors continue to try to pursue Sido Muncul’s position as the market leader through aggressive promotions to introduce and encourage the sale of new products or variants that resemble the Company’s products (market followers).

Therefore, the Company must continue to develop with the best product innovation and expand distribution networks to reach more consumers and stay ahead of the competition. The Company must continue to ensure that its products remain innovative, “up-to-date” and relevant, while developing sales channels that reflect the accessibility of products needed for consumers today. In order for Sido Muncul to be able to achieve double digit growth, the Company needs to focus on winning market share of the existing flagship products and continue to explore new markets.

View on Business Plans Prepared by Board of Directors

Business plans prepared by Board of Directors for 2018 showed good clarity and aspirations about key products that need to be promoted to maintain the Company’s leading position and to seize opportunities for future growth while also focusing on implementing progressive cost efficiency programs.

Board of Commissioners supports more diverse sales and promotion initiatives to provide incentives to distributors and capture a broader consumer base to support sales growth. The Company must ensure that it has the competence to continue to develop new products that pass the clinical testing as the foundation for future growth.

Board of Directors Managed to Maintain Sustainable Growth

The external conditions that occurred during 2018 would have been the attention of Board of Directors to examine the existing opportunities and challenges and to formulate various strategic policies for the progress of the Company’s business. In the view of Board of Commissioners, Board of Directors has implemented the right business strategies to respond to the market conditions. In the midst of a tight competitive, the initiatives of Board of Directors to implement efficiency in all lines of operations, to modernize production facilities and to expand market coverage proved to be successful in increasing the Company’s performance that exceeded the targets.

Overall, 2018 performance was stronger than the previous year. Apart from a challenging economic environment, Board of Directors managed to maintain the sustainability of positive business growth with sound financial performances. Efficiency initiatives resulted in a strong growth in profitability.

In 2018, the Company recorded revenues of Rp2.76 trillion, an increase of 7.4% compared to Rp2.57 trillion in 2017. The Company’s revenues were contributed by three business segments, namely Herbal Medicine and Supplement, Food and Beverage and Pharmacy segments. Herbal Medicine and Supplement Segment contributed Rp1.94 trillion, grew by 9.1% compared to Rp1.79 trillion in 2017 as supported by the flagship products, namely Tolak Angin and Tolak Linu.

Food and Beverage segment contributed Rp819.50 billion in revenues, up 3.1% from Rp794.97 billion in 2017 as supported by the flagship product, namely Kuku Bima Ener-G. While Pharmacy segment as a relatively new business segment of Sido Muncul consistently continued to record growth. Pharmacy sales reached Rp100.18 billion, increased by 13.2% from Rp88.52 billion in 2017.

Board of Commissioners sincerely appreciated the efforts of operating efficiency that were proven to reduce cost of goods sold by 3.6% from 2017 while sales increased by 7.4%.

The Company’s net income reached Rp663.85 billion, up 24.4% from Rp533.80 billion in 2017 with net income margin grew from 20.7% to 24.0%. While the amount of assets as of December 31, 2018 increased by 5.7% from Rp3.16 trillion in 2017 to Rp3.34 trillion.

Board of Commissioners have reviewed and discussed the short-term and long-term business development plans prepared by Board of Directors and provided views according to the functions and responsibilities of Board of Commissioners. Board of Directors has clearly explained the plans for expanding market coverage and export markets. Board of Commissioners supports the decision of Board of Directors to work on the markets in the Philippines and African region that are highly potential through establishment of a subsidiary, Muncul Nigeria Limited, in Nigeria which will be focused on working on the huge market potential in the African region and initial export to the Philippines by the end of 2018.

View on Business Prospect

Business prospects in the herbal and pharmaceutical industry are still attractive. Opportunities for penetration and distribution of the Company’s products are very large not only in the domestic market but also in the export market. Going forward, more and more consumers are looking for natural medicines to meet their health needs. There are still many diseases that yet to have modern herbal solutions.

The Company will still face the same challenges as in 2018. To seize business opportunities and to encounter this challenge appropriately, the Company needs to invest in excellent human resources, system and business processes.

Supervisory Duties

Board of Commissioners carried out its supervisory and advisory functions with reference to the Articles of Association and the applicable laws and regulations. The supervision carried out by Board of Commissioners starts from the preparation of annual and long-term business plans, to evaluation of performance achievements. Board of Commissioners also supervises to ensure that internal controls are running well, all business risks have been mitigated and that corporate governance has been properly implemented.

Periodically, Board of Commissioners holds meetings with Board of Directors to review and evaluate quarterly and annual operational and financial performances, to discuss work plans and other agendas that require advices, views, recommendations and approvals from Board of Commissioners. During 2018, Board of Commissioners attended 10 joint meetings of Board of Commissioners and Board of Directors. Joint meeting aims to obtain information and direct explanation on matters that need to be further explored and Board of Commissioners can immediately provide direction and input to Board of Directors as the implementation of its supervisory function.

In 2018, Board of Commissioners approved purchase of trade secret licenses in the form of recipes and product developments from the major shareholder, reduction of capital in subsidiaries and interim dividend distribution. Capital reduction and interim dividend were carried out to optimize the Company’s financial position.

Communication between Board of Commissioners and Board of Directors is not only carried out through joint meeting or other formal meeting, but also through informal communication by phone, e-mail, or visits to the Company’s production facilities and distribution channels. Through intensive meetings and information exchanges between Board of Commissioners and Board of Directors, Board of Directors can immediately report the latest developments regarding the Company’s performance and Board of Commissioners respectively gives their opinions, so that Board of Directors can take strategic steps to make the best and timely business decisions.

GCG Implementation and Performance of Board of Commissioners’ Committees

Board of Commissioners continues to provide support so that the Company maintains its commitment to compliance with all applicable laws and regulations in the capital market, including implementation of good corporate governance (“GCG”) practices. Board of Commissioners considers that GCG implementation in the Company is on the right track. Currently, Board of Directors has two unaffiliated professionals and Board of Commissioners has two Independent Commissioners. This is expected to increase confidence of the minority shareholders and investors.

Periodically, Board of Commissioners, through Audit Committee, reviews the Company’s compliance in implementing GCG principles and performs the supervisory function on effectiveness of internal control system, internal audit and financial reporting processes. In 2018, management strengthened Internal Audit Function which was integrated with Risk Management Function.

Throughout 2018, Audit Committee carried out its functions properly. Audit Committee assisted Board of Commissioners in monitoring the Company’s financial reporting and ensuring that the reports met the applicable standards. The committee also involved management team in discussions to ensure that financial process ran properly. In addition, Audit Committee evaluated performance of external auditors in 2017, compiled selection criteria and provided recommendation on appointment of external auditors for 2018 to Board of Commissioners as a basis for providing proposal for appointment of external auditors to GMS.

Board of Commissioners hopes that the Committee’s performance can be further improved in the future, especially in building interactions and providing timely update reports to Board of Commissioners. Reports and recommendations from Audit Committee are included the agenda discussed in joint meeting of Board of Commissioners and Board of Directors.

To assist in the implementation of the nomination and remuneration functions that were previously carried out directly by Board of Commissioners, in September 2018, Board of Commissioners established a Nomination and Remuneration Committee based on Decision of Board of Commissioners No. 002/SM/SK-DEKOM/2018. The decision also appointed Committee members consisting of 1 (one) Independent Commissioner as the chairman and member and 2 (two) independent external parties as members who are in compliance with Regulation of Financial Services Authority No. 34/ POJK.04/2014concerning Nomination and Remuneration Committee of Issuers or Public Companies. It is expected that the existence of this Committee can increase objectivity, bring a perspective of the best practices in the industry and improve the quality of corporate governance. This committee has provided initial recommendations regarding remuneration of the management team and will continue to evaluate and provide recommendations as needed.

Overview on Whistleblowing System

Board of Commissioners believes that Whistleblowing System (WBS) is crucial to the Company, so that anyone in the organization can provide information on potential problem/fraud. Therefore, Board of Commissioners appreciates WBS policy which started to apply this year. Board of Commissioners is still evaluating and observing the mechanism for handling and followingup on complaints that enter the WBS so that Board of Commissioners has not been able to assess its effectiveness. In parallel, the Company must implement an effective Internal Audit Function and risk management framework to ensure business processes run properly.

View on HR Management

Human resources (HR) management in the Company has been running well. The presence of a new professional as HR Department Head who just joined at end of 2018 will ensure that the Company’s HR management policies remain competitive with the ever changing industrial and HR landscape, especially in performance management, recruitment and competency development. Organizational design also needs to be re-evaluated to ensure the Company’s readiness to achieve short-term and long-term growth targets.

View on CSR Implementation

Board of Commissioners monitored Corporate Social Responsibility (CSR) programs that were initiated and implemented by the Company for several years have succeeded in giving a positive impact to the community. Various programs, not only free eye surgery, cleft lip surgery and responses to disaster, but also free homecoming for herbal traders, those are always awaited by the community. These programs are consistent with the Company’s mission and objectives in improving the quality of life of the community.

Going forward, Board of Directors can consider designing a full-year CSR program at the beginning of each year, so that the theme is sustainable and has an optimal impact on building the Company’s image.

Changes in Composition of Board of Commissioners

In 2018, there were changes in composition of the Company’s Board of Commissioners. Extraordinary General Meeting of Shareholders (EGM) on January 31, 2018 approved resignation of Mr. Budi Setiawan Pranoto from his position as Independent Commissioner of the Company and approved appointment of Mr. Ronnie Behar and Mr. Eric Marnandus as Independent Commissioners of the Company. Furthermore, Annual General Meeting of Shareholders (AGMS) on May 30, 2018 honorably dismissed Mr. Jonatha Sofjan Hidajat as President Director and appointed him as President Commissioner of the Company. Hence, as of December 31, 2018, composition of the Company’s Board of Commissioners is as follows:

Name Position
Jonatha Sofjan Hidajat President Commissioner
Johan Hidayat Commissioner
Sigit Hartojo Hadi Santoso Commissioner
Ronnie Behar Independent Commissioner
Eric Marnandus Independent Commissioner

Appreciation

Finally, on behalf of Board of Commissioners, I extend my gratitude to the shareholders and all stakeholders for their support and trust. My sincere appreciation goes to Board of Directors and all employees who have shown their hard work, loyalty and dedication for our mutual success. Hopefully, the Company can continue to provide the best benefits to the customers, business partners, shareholders and all stakeholders in the future.