Report of the Board of Directors

David Hidayat

President Director

Dear Honored Shareholders,

Locally, the prospect for domestic economy in 2019 was not very optimistic. Apart from the effects of the trade war, Indonesia’s growth during the first half of 2019 was still held back by the national legislative and presidentvice presidential elections in April 2019. The political tension made the business community tends to “wait and see”. Although in the end the market responded positively to the conducive situation after Constitutional Court issued a verdict on disputes related to the results of 2019 President-Vice President Election.

The global economic uncertainty affected almost all aspects of Indonesia’s growth. The slowdown in domestic economy was indeed unavoidable as almost all countries encountered it. Statistics Indonesia (BPS) announced that Indonesia’s economic growth in 2019 could only grow by 5.02% or lower than 5.17% in 2018, mainly due to contraction in the growth of capital expenditures, other than buildings and machinery, as a result of the slowing global economy.

The Herbal and Pharmaceutical Industry Keeps Growing

Herbs and herbal medicines have long been known by the people of Indonesia to have powerful efficacy that is believed to be able to prevent and cure various diseases. Basic Health Research (Rikesdas) conducted by the Ministry of Health from 2010 to 2018 showed the trend of the people’s interest in using traditional medicines continues to increase by up to 44.3%. Along with the development of technology and lifestyle, currently, herbal medicines are produced with modern technological processes, packaged in the form of pills, tablets, or instant powders that are dissolved in water when consumed. The public is getting used to consume herbs instantly and practically from sachet packaging.

Indonesia’s population of more than 260 million people is a huge potential market for herbs and herbal medicines. Additionally, the current trend of healthy living and the desire to use health supplement products that come from nature is growing among the upper middle class. This in turn attracts the attention of the big players in the pharmaceutical industry to work on the potential market of herbs and herbal medicines. Hence, the competition becomes tougher.

During the period of National Health Insurance, the cost of health services continued to increase every year and reached Rp94.29 trillion in 2018. Most of this value were spent by the government as curative (medical) and rehabilitative costs. To reduce the increasing cost of health services, promotive and preventive efforts are needed to reduce the number of illness and the cost of health services. One of the pillars of Healthy Indonesia Program is promotive preventive Healthy Paradigm to encourage everyone to stay healthy.

Traditional medicine is believed to have the opportunity to be used in promotive preventive efforts. The habit of taking herbal medicine to maintain body fitness has become a cultural tradition of Indonesian people for generations. However, the role of the central government and the local government is needed to increase the use of standardized herbal medicines in public health centers by using special allocation fund in the health sector. Hospitals can also play a role in increasing the use of traditional medicines and conducting researchbased services.

One of the challenges in the herbal medicine industry is the reluctance of millennials to take traditional herbal medicine. Herbal medicine industry players must be able to serve the market and to quickly adopt the latest technology in processing traditional herbal medicine so that it remains popular in modern consumers and can compete in the international market. The critical modern consumers will not be eager to spend money on supplements that are not proven efficacious.

Innovation and research development have become a necessity for the herbs and herbal medicine industry in order to increase competitiveness and to take advantage of international market opportunities. Modernization of production process and quality demands is a priority, especially in the industrial revolution 4.0. To meet the global quality standards, the Ministry of Industry provides guidance for the herbs and herbal medicine industry to meet good manufacturing process (GMP) standards or production requirement for good traditional medicine (CPOTB). The government encouraged the role of research institutions and universities in research and development to innovate new products using raw materials available in Indonesia so that the herbs and herbal medicine industry will develop as a leading sector of Indonesian economy

Strategies and Initiatives

The highly prospective growth of herbs and herbal medicine market is followed by increasingly tougher competition. Manufacturers of herbs and herbal medicines not only have to compete among domestic players, but also have to deal with similar products from other countries, such as China and ASEAN countries, which offer lower prices. Historically, the toughest challenge came from China, known as the oldest herbal medicine producer in the world.

To maintain sustainable growth, the Company implements various strategies in operational and marketing aspects. In general, the Company is focused on several business aspects: efficiency, optimization of production capacity, innovation, market penetration, promotion, quality of the distribution system and product availability in the market.

In production aspect, efficiency strategy was consistently implemented in all operational lines in order to produce higher business margins. Modernization of equipment and production processes brought positive impact. Production became more efficient so that cost of goods sold in 2019 grew less than the previous year, as an implication of efficient production cost management, especially the cost of raw materials.

In early 2019, the Company completed the process of moving production facilities from LIK to Klepu, which was running well and smoothly. Pill and Herbal Medicine production unit in Klepu managed to start operating in March 2019. With the operations of the new facility, the Company’s production capacity has almost doubled to ensure availability of the Company’s products in modern and traditional outlets.

During 2019, Tolak Angin 2 factory has been operating 24 hours a day to produce products of good quality and quantities according to the established production target. The Company implements full automation in mixing and filling section to minimize human error and to achieve zero accident. The semi-manual process is still used in the packaging section.

The packaging automation process will continue and is expected to be completed in the first semester of 2020 so that the automatic packaging process will run at the beginning of the second semester of 2020. Meanwhile, Product Tracking-Serialization-Aggregation system will automatically begin in the first semester of 2020 and is expected to start operations at the beginning of the second semester of 2020.

In marketing aspect, in 2019, the Company maintained sales growth in each business line. To maintain business sustainability and market excellence, the Company routinely monitors the market share of its products throughout Indonesia, evaluates sales performance in each marketing area in major cities in Indonesia and export markets, and conducts benchmarking with close competitors. The evaluation results will be used to improve distribution and marketing performance.

The Company always prioritizes product quality and safety. Each product has gone through a quality control and quality assurance procedures that are in strict accordance with CPOTB standard and good medicines manufacturing practices (CPOB). The Company also always innovates in developing its products according to the increasing needs of consumers. Hence, the tradition of herbal medicine as an indigenous medicine in Indonesia can continue to be preserved and increasingly accepted by all customers.

To provide confidence to the public in consuming all Sido Muncul products, the Company has obtained halal certificates for 249 types of products and ingredients for herbs and herbal supplements.

Maintaining Sustainable Growth

The Company concluded the year 2019 with satisfactory performance and achievement above the target. The Company was able to maintain a consistent growth because sales in all three business segments, namely Herbal Medicine and Supplements, Food and Beverages and Pharmacy, contributed to the increased sales compared to the previous year.

The Company recorded growth in net sales of 11.0% from the previous year of Rp2.76 trillion to Rp3.07 trillion. This growth exceeded the target set at 10.0%.

The main contributor to the Company’s net sales was Herbal Medicine Segment which contributed 67.3% of total net sales. Herbal Medicine segment recorded a growth of 12.0%, driven by increased demand for the Company’s Herbal Medicine and Supplement products in the domestic market and also the initial export of Tolak Angin to the Philippines.

Food and Beverage Segment, which contributed 29.0% to the Company’s total net sales, recorded a net sales growth of 8.1%, from Rp819.50 billion in 2018 to Rp886.23 billion. In addition to the domestic market, sales growth of Food and Beverage Segment was also due to export sales of Kuku Bima Ener-G products to Nigeria and Malaysia.

Pharmacy Segment also achieved two-digit growth, 17.0%, to Rp117.25 trillion in 2019. Pharmacy Segment contributed 3.8% to the Company’s total net sales.

The Company recorded growth in gross profit in line with sales growth. Gross profit up 18.0% from Rp1.42 trillion in 2018 to Rp1.68 trillion. Gross profit margin also increased from 51.5% in 2018 to 54.8% in 2019. The increase in gross profit margin was mainly driven by Herbal Medicine segment and Food and Beverage segment, which respectively grew by 16.0% and 28.3% compared to the previous year.

Net income attributable to owners of the parent entity amounted to Rp807.69 billion, up 21.7% from Rp663.85 billion in 2018. Net income exceeded the targeted net income growth of 10% for 2019.

Net profit margin also increased to 26.3% in 2019 from 24.0% in the previous year, so that the Company’s profitability ratio improved accordingly. Return on assets (ROA) and return on equity (ROE) ratios reached 22.8% and 26.4%, up from the previous year, which were 19.9% and 22.9%, respectively.

Dividend Distribution

According to Annual General Meeting of Shareholders (AGMS) on April 9, 2019, the Shareholders agreed to distribute a cash dividend of Rp535,837,000,000 or equivalent to Rp36 per share with a payment ratio of 80% of the net income for financial year 2018. All dividends were paid to Shareholders on May 2, 2019.

Stepping Forward

Indonesia still has a big chance in the midst of the global economic uncertainty. Indonesia’s vital role in the Southeast Asian region is a great asset and opportunity to expand market access because of relocated and diversified investments due to uncertainty in the global trade. The country that has the most attractive investment climate will be the main destination of relocation and diversification.

Indonesia’s economic prospect in 2020 is believed to be maintained with continued growth momentum. Indonesian economy in 2020 is estimated to grow within the range of 5.1% -5.5%, with an inflation target of 2% -4%. In the medium term, Indonesia’s economic prospects is expected to improve. Economic transformation will encourage even higher growth, with declining current account deficit and low inflation.

The direction towards Industrial Revolution 4.0 is getting stronger. This industrial revolution is very much remarked by digital and information technology. The digital technology has changed the way of running business in all industrial sectors. The main key to winning product sales competition in the current digital era lies in mastering data of served consumer behavior or market segments. The Company has utilized digital technology both in production automation and marketing facilities. Many of the Company’s products can already be found and purchased through e-commerce channels. Featured products already have and utilize social media accounts that are used as media access for product promotion and introduction to the millennials. We will optimally use digital technology to understand the characteristics of consumers and to expand market coverage, especially the global markets.

The Company will continue to expand both the local and global markets. In the local market, the Company intensifies marketing efforts in Eastern Indonesia and enhances sales quality in modern trade. The Philippine and Nigerian export markets have shown outstanding sales performance above the targets. The Company prepares to expand the export markets, especially to Southeast Asian countries, such as Malaysia, Vietnam, Myanmar and so forth. In 2020, the Company targets a growth of above 10% in terms of sales and net income.

Strengthening the Governance

The Company is committed to applying good corporate governance (GCG) principles in order to become a responsible and trusted corporation. The management of the Company always refers to GCG principles in accordance with the laws, regulations and best practices to generate optimal value for shareholders, and benefits for stakeholders and the surrounding communities.

To implement the best governance practices, the Company has a Code of Conducts as a reference that must be obeyed by all of the Company’s individuals in carrying out their daily duties and obligations. Periodically, the Company conducts reviews and revisions to the existing GCG policies, guidelines and procedures for GCG implementation. Procedures in operations, occupational health, safety and environment are improved to ensure that all business processes in the Company run safely, effectively, efficiently and in compliance with all applicable laws and regulations.

In addition, the Company implements Whistleblowing System (WBS) as a means for anyone to report any allegations of illegal, immoral behavior or other illegal practices within the Company.

Every incoming report will be managed by Internal Audit Unit for further action. In following up on violation report, Internal Audit Unit may coordinate with other relevant units. The Company guarantees information and identity confidentiality to protect the whistleblowers.

Developing Qualified HR

The Company believes that Human Resources with high competence and integrity is the key in securing business success. Therefore, the Company implements structured and sustainable competency development programs to improve the quality of the Company’s HR both in terms of soft skills (leadership, communication, ethics) and hard skills (technical competencies) so as each employee is able to contribute with their best performance. In addition to organizing competency development programs, the Company also encourages work-life balance initiatives to improve employee motivation and work ethic in facing challenges and changes in the increasingly competitive business environment.

The Company compiled its HR development strategy in 2018/2019-2021 HR development roadmap that elaborates a structured and interrelated process of development and enhancement of organization, HR (people) and infrastructure in order to achieve excellent organization and HR by 2021.

Corporate Social Responsibility

Corporate social responsibility (CSR) is an integrated part of the Company’s business processes. Every year, the Company allocates at least 2% of the net income of the previous financial year for CSR programs, especially ongoing programs such as Free Homecoming program, Free Cataract Surgery, Free Cleft Lip Surgery, Donations for the Elderly, Orphans and Dhuafa, Cancer Shelter, and community empowerment through Herbs Village and Fruits Village programs. In 2019, the Company’s total disbursement for CSR programs was approximately Rp11.8 billion.

In dealing with social, economic, environmental and various changes arising from its operations, the Company analyzes strategic issues to develop shortterm and long-term programs and work plans. The analysis is prepared with reference to Sustainable Development Goals (SDGs). There are at least 7 SDGs that are addressed by the Company’s sustainability programs, as follows:

  1. Included in 100 Best Listed Company of Investor Magazine.
  2. Goal 1 - No Poverty: Herbs Village, Fruits Tourism Village and Rice Inspiration Village programs, as well as entrepreneurship training for local people to empower the community’s economic potential and to improve their welfare.
  3. Goal 3 - Good Health and Well-being: Continuous research and development (R&D) to produce herbal and pharmaceutical products that can improve public health.
  4. Goal 6 - Clean Water and Sanitation: Refined method of production machine cleansing, shallow and deep infiltration wells, use of water reservoirs in Sido Muncul Agrotourism Area as a source of clean water for the local community
  5. Goal 7 - Affordable and Clean Energy: Use of herbal remnants as a renewable energy source to substitute fuel oil (BBM) and natural gas (CNG).
  6. Goal 12 - Responsible Consumption and Production: Processing ginger pulp into ginger essential oil, use of WWTP sludge and herbal extracts pulp for fertilizer and replacement of diffuser system with ecorator system so as to reduce contamination.
  7. Goal 13 - Climate Action: Replacement of fossil fuels with renewable fuels, emission control by providing bicycles for transportation in the factory environment.
  8. Goal 15 - Life on Land: Sido Muncul Agrotourism area as conservation of endangered medicinal plants and animals.

Awards in 2019

We received various prestigious awards during 2019. We take these awards to encourage better performance in the future. The awards that we received, among others, are as follows:

  1. CSA Award 2019 of Association of Indonesia’s Securities Analysts (AAEI) and CSA Research as one of 42 best listed companies selected by Analysts in 2019.
  2. Certificate of Appreciation as The Best Issuers 2019 in Comsumer Goods Sector (Assets below 10T) at 2019 Indonesia Best Issuers Award (IBIA) of Pikiran Rakyat and ThinkNovativeComm.
  3. CECT Sustainability Award 2019 in Consumer Goods category of Center for Entrepreneurship, Change and Third Sector (CECT) of Universitas Trisakti based on assessment of all aspects of the Company’s sustainability performance.
  4. CNBC Indonesia Award 2019 - The Best Public Company Consumer Goods Sector of CNBC Indonesia.
  5. Appreciation Certificate at Jawa Pos Radar Semarang Awards event as a Company that consistently holds Free Homecoming CSR Program, of Jawa Pos Radar Semarang.
  6. Certificate of Appreciation as a Constituent of Sustainable Responsible Investment (SRI)-Kehati Index of Indonesian Biodiversity Foundation (Kehati).
  7. Indonesia Living Legend Companies Award 2019 of SWA Magazine for the Company’s consistency in its industry since 1951.
  8. Best of the Best Award 2019 - The Top 50 Listed Companies in 2019 of Forbes Indonesia.
  9. Halal Award 2019 as the winner of 2019 Halal Top Brand in Herbal Medicine Category of the Assessment Institute for Foods, Drugs And Cosmetics, the Indonesian Council of Ulama (LPPOM MUI).
  10. Best Brand Platinum 2019 for Tolak Angin products at 2019 Indonesia Best Brand Award of SWA-Indonesia Magazine.
  11. Green Industry Award 2019 for implementation of green industry level 5 of the Minister of Industry.

Changes in Composition of Board of Directors

In 2019, there were changes in composition of the Company’s Board of Directors. Annual General Meeting of Shareholders (AGMS) on November 27, 2019 approved honorable dismissal of Gerry Mustika from his position as Independent Director and appointed Darmadji Sidik as Director. Accordingly, as of December 31, 2019, composition of the Company’s Board of Directors is as follows:


Name Position
David Hidayat President Director
Irwan Hidayat Director
Leonard Director
Darmaji Sidik Director

Appreciation

On behalf of the Board of Directors, I would like to express my gratitude to Board of Commissioners for providing insightful supports, directions and advices throughout 2019, as well as to Shareholders for their trust in the Company. My highest appreciation goes to all employees of the Company and subsidiaries who have worked hard with dedication and integrity to encounter various challenges. Hopefully, the Company will continue to provide the optimal benefits to the shareholders, employees and the society.