Report of the Board of Directors

David Hidayat

President Director

Dear Honored Shareholders,

We would like to praise God Almighty, because of His mercy and grace, PT Industri Jamu dan Farmasi Sido Mucul Tbk (the “Company”) could go through the year 2018 with remarkable achievements. With the support of all employees of the Company and subsidiaries, the Company managed to record net income that exceeded expectations and maintained its position as a market leader in the increasingly tougher competition in the herbal and pharmaceutical industry. This achievement affirmed our optimism to become a global herbal medicine company. On behalf of Board of Directors, please allow me to report a summary of the Company’s performance for the financial year ended December 31, 2018.

Indonesian Economy Seems Promising

The global economic .growth rate in 2018 was still held back by a number of negative sentiments, mainly due to trade tensions between the United States and China that had widespread impact on many countries because of disrupted global supply chains which led to an increasing uncertainty in the world economy.

Nevertheless, Indonesia’s economic fundamentals were still proven resilient to withstand the turmoil of the global uncertainty, so that the short-term impacts could still be overcome. Indonesia’s economic resilience could be seen from a variety of sound macroeconomic indicators. Statistics Indonesia (BPS) announced that Indonesia’s economic growth in 2018 was 5.17%. Although the increase was sloping, it showed a consistent positive trend with an increase from 5.07% in 2017 and reached the highest rate in the last 5 years.

Economic growth which showed an increasing trend was influenced by the increasing purchasing power. BPS data mentions that cumulative household consumption in 2018 reached 5.05% of gross domestic product (GDP), better than the previous year which only stood at 4.94% and the highest since 2015. This strengthening household consumption was also due to the maintained inflation rate during 2018 at 3.13% or below the Government’s inflation target of 3.15% + 1%. The household consumption component contributed 2.74% to economic growth in 2018.

Household consumption growth correlates with the growth in retail sales. Bank Indonesia Retail Sales Survey shows annual retail sales performance to grow better than in 2017. The survey results indicate retail sales in 2018 increased by 3.7% (yoy), up from 2.9% (yoy) in 2017. Surveys Retail Sales aims to find out the source of inflationary pressure from the demand side and get an idea of the trend in the development of retail sales and public consumption.

Herbal and Pharmaceutical Industry Keeps Growing

“Back to nature” lifestyle has become a trend of the modern people who understand the importance of consuming natural ingredients as an option for maintaining health and fitness. Not only in Indonesia, the popularity of herbal products has spread to the global arena so that demand for herbal products is increasing, both in developed and developing countries. World Health Organization (WHO) data in 2001 stated that 50%-75% of the population of developed countries used traditional medicine, including natural-based medicines. Today Europe has become the main market for herbal medicines, which indicates that western people are willing to accept the herbal medicines. While for developing countries such as in Africa, Asia and Latin America, the use of traditional medicines has reached 80%. Even in Japan, traditional herbal medicines are covered by health insurance.

A study of an international research institute Market Research Future® in its report titled Global Herbal Medicine Market Research Report - Forecast To 2023, mentions that the global herbal medicine market is expected to grow with a compound annual growth rate (CAGR) of 5.88% in 2018-2023. Sales of herbal medicines are increasing rapidly due to the increasing tendency of consumers to choose herbal-based traditional medicines throughout the world.

In Indonesia, according to Association of Herbs and Herbal Medicine Entrepreneurs (GP Jamu) data, in 2018, revenues of the national herbal medicine industry reached Rp17 trillion. Historically, the herbal and pharmaceutical industry nationwide increased by an average of 5% per year.

Herbal medicine and pharmaceutical industry that uses original Indonesian raw materials becomes one of the strategic and potential sectors capable of making a significant contribution to the Indonesian economy both in terms of employment and value added of the natural resources. Therefore, the Government continues to encourage competitiveness of the national herbal medicine industry in order to compete in the global market. The government encourages the herbal medicine industry to continue to enhance technology mastery and to optimize raw materials available in the country through research and development of innovation. Indonesia is known to have 30 thousand types of medicinal plants, but only around 350 species have been utilized by the industry.

We are Determined to Keep Growing

The development of the traditional medicine industry is growing rapidly, followed by an increasingly tougher competition. At end of 2018, there were around 1,247 herbal medicine industries in Indonesia, as many as 129 industries are included in the IOT (traditional medicine industry) category. Competition for the local market does not only occur among domestic industries. Apart from China which has traditionally been a huge competitor, now other neighboring countries have also begun to enter the herbal medicine industry such as Malaysia which has produced many traditional medicines with plant raw materials imported from Indonesia.

To maintain sustainable growth in an increasingly competitive business environment, the Company implements various strategic initiatives in both operational and marketing aspects. In general, the essences of our strategy are: efficiency in every business line, increased production capacity, innovation, market expansion, promotion and continuous improvement in quality of the distribution system.

In operational aspect, our key initiative is modernization of extraction facilities of PT Semarang Herbal Indo Plant (SHIP), a subsidiary, to increase extraction of herbal raw materials so that the production process becomes more efficient. This initiative has significantly reduced the cost of goods sold and increased the Company’s gross profit margin in 2018.

In 2018, the Company completed the construction of Internal Liquid Medicine (COD) II facility as a development of COD I facility. COD I facility with a capacity of 80 million sachets per month with closed and semi automatic production processes are now fully utilized so that additional production capacity is needed to meet the market demand and to expand into new potential markets. COD II facility is able to produce 100 million sachets per month with a fully automated, integrated and accurate production process so that it is more efficient and minimizes human error in a series of production process. COD II facility will produce Tolak Angin and Tolak Linu products. After the launching on October 25, 2018, COD II facility will be fully operational in 2019. The development of computerized production facilities is a key step taken by Sido Muncul towards industry 4.0.

The Company will continue to innovate to develop the modern traditional medicine industry. The challenge of the herbal and pharmaceutical business today is to continue to innovate through research and development of the existing products so that the ancestral cultural heritage is acceptable to the millennials who like all practical things.

In the marketing aspect, our strategic initiatives to maintain market excellence included:

  • Improved the distribution system and strengthened equal product distribution both in traditional and modern distribution channels, by increasing sales penetration in areas with high market potential but low consumption level.
  • Maintained good relationship with business partners in the distribution channel to build loyalty and sales enthusiasm for the Company’s products and periodically introduced attractive marketing programs.
  • Collaborated with survey agencies to monitor the market share of the Company’s products throughout Indonesia, to evaluate sales performance in each marketing area in major cities in Indonesia and to benchmark with the closest competitors. Evaluation results became consideration for improving distribution and marketing performances.
  • Expanded market coverage including Eastern Indonesia and export markets.

In order to expand and penetrate new markets, we continue to look for potential markets not only domestically but also internationally. To develop market potential in Africa, the Company established a subsidiary, Muncul Nigeria Limited in Nigeria, which will be focused on working on a large market potential in the African region.

Another export market that became our focus in 2018 was the Philippines. The Philippines with a population of more than 105 million people is an attractive market. Preliminary research has been carried out to ensure that the products of Tolak Angin can be accepted and favored by the people of the Philippines. The company has also registered the Tolak Angin with Food and Drug Adiministration of the Philippines and has obtained marketing authorization on November 16, 2017. At end of 2018, the Company shipped the first export of Tolak Angin to the Philippines, and will be available in pharmacies or modern retailers as food supplements.

Maintaining Consistent Growth

In 2018, 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 net sales that grew by 7.4% from Rp2.57 trillion in 2017 to Rp2.76 trillion. Herbal Medicine segment increased by 9.1% from Rp1.69 trillion in 2017 to Rp1.84 trillion. Tolak Angin and Tolak Linu Products were the main contributors to growth in this segment. Food and Beverage segment recorded 3.1% increase from Rp794.97 billion in 2017 to Rp819.50 billion. This increase mainly came from Kuku Bima Ener-G products which achieved positive sales growth. While the Pharmacy segment rose by 13.2% from Rp88.52 billion in 2017 to Rp100.18 billion.

Efficiency efforts in all operating lines managed tp reduce the cost of goods sold by 3.6% from Rp1.39 trillion in 2017 to Rp1.34 trillion. Raw material cost which was the biggest component in the cost of goods sold decreased from Rp1.08 trillion in 2017 to Rp1.05 trillion as an impact of production efficiency in the modern technology extraction process in SHIP, a subsidiary.

The increase in net sales and the decrease in cost of sales resulted in gross profit which grew by 20.2% from Rp1.18 trillion in 2017 to Rp1.42 trillion with gross profit margin increased from 46.0% to 51.5%. Operating profit rose by 28.8% from Rp640.24 billion in 2017 to Rp824.33 billion. Operating profit margin increased to 29.8% compared to 24.9% in the previous year. The Company recorded a net income of Rp663.85 billion, up 24.4% from Rp533.80 billion in 2017 with a 24.0% net income margin, up from 20.7% in 2017.

The Company’s assets as of December 31, 2018 increased by 5.7% from Rp3.16 trillion at end of the previous year to Rp3.34 trillion due to the addition of COD II production facilities which were completed in 2018.

Stepping Forward

Entering 2019, the industry intensely moves toward the Industrial Revolution 4.0. The industry will be much influenced by digital and information technologies. Industry 4.0 deals with application of the latest technologies such as advanced analytics, Internet of Things (IoT), machine learning and automation with the aim of increasing efficiency and response to the rapidly changing consumer demand. Going forward, with the increasingly integrated world trade, the gigantic power of IoT will be inevitable given the more intensive and extensive demand for trade of goods and services among countries.

The digital technology has changed the way business is conducted in all industrial sectors. The main key to winning a product sales competition in the digital era today lies in mastering data on consumer behavior or market segments. Sido Muncul has utilized digital technology both in the automated production and marketing facilities. Some of the Company’s products can already be found and purchased through e-commerce. Flagship products already have and utilize social media accounts that are used as an access to promotional media and product introduction for the millennial generation. We will use digital technology optimally to understand consumer characteristics and to expand market coverage, especially the global markets.

The Company continues to improve and refine in terms of infrastructure, operations, traditional distribution and modern outlets. Through organic growth, the Company is optimistic that it can continue to develop the market share of the Company’s products not only domestically but also in the international markets.

In 2019, Indonesia will hold presidential, legislative and regional representative elections. Should the elections run in an orderly and safe manner, the year 2019 will not only become a political but also economical revival. Economic growth will be a key issue to be able to accommodate a growing workforce and to benefit from the demographic bonus that will peak in 2030.

Strengthening the Governance

As a public company, the Company is committed to applying the principles of good corporate governance (GCG) to realize a corporation with integrity, responsibility and trustworthiness. As a company that continues to grow and adapt in an increasingly open and competitive business environment, the Company requires clear guidelines for carrying out every business activity properly, in accordance with the applicable business and work ethics. Therefore, the Company has a Code of Conduct as a reference that must be adhered to by all personnel in carrying out their daily duties and obligations.

Periodically, the Company conducts reviews and revisions to the existing policies, guidelines and procedures for GCG implementation. Improved operating, occupational health, safety and environmental procedures are carried out to ensure that all business processes in the Company run safely, effectively, efficiently and in compliance with all applicable laws and regulations.

For the efforts to implement GCG principles in the Company, in 2018, the Company was included in 100 issuers selected by OJK to take part in the process of implementing ASEAN CG Scorecard and received Indonesia Good Governance Award 2018 in Public Company category of Economic Review Magazine.

Developing Qualified HR

One of Sido Muncul’s strengths to be able to survive in the industry for more than 6 decades is the loyalty and competence of Human Resources (HR). Excellent HR is the Company’s assets in facing various challenges and changes in an increasingly competitive business environment. Therefore, to ensure that HR development process in Sido Muncul can be transformed into excellent organization and people, at the end of 2018 the Company compiled 2018/2019-2021 HR development roadmap. The HR development roadmap develops synergies of organization, employees and infrastructure in a structured and sustainable manner so that by 2021 the Company has excellent organization and people.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) has become an inseparable part of the Company’s business process. The Company’s CSR programs are always designed to provide the right benefits for the people in need, while at the same time strengthening relationships with stakeholders and increasing community perceptions of the Sido Muncul’s brand image. In environmental aspect, the Company is committed to play an active role in protecting the environment, conserving natural resources and energy efficiency through environmental management efforts and carrying out production activities that minimize the adverse effects on the environment.

Free Cataract Surgery that has been going on since 2011 has increasingly expanded its regional coverage along with the increasing number of hospitals and Government institutions that are willing to collaborate. In 2018, the Company and Indonesian Ophthalmologist Association (Perdami) held cataract surgery in 14 hospitals with a total operation for 697 eyes. Up to 2018, Free Cataract Surgery activities had operated 51,797 eyes in 27 provinces, 211 regencies/cities and 237 hospitals/eye clinics throughout Indonesia.

In 2018, for the first time the Company held a Free Cleft Lip Surgery program. The Company cooperated with St. Carolus Borromeus Kupang Hospital and Sinar Pelangi Foundation to hold cleft lip surgery for 30 patients in St. Carolus Borromeus Hospital in Kupang City, East Nusa Tenggara.

The Company’s thoughtful efforts to revitalize Lake Rawa Pening since 2016 have paid off. Lake Rawa Pening began to provide economic benefits to the local communities through the tourism sector, freshwater fish farming, agriculture and so forth. The community was motivated to clean and maintain the lake so that it is no longer filled with water hyacinth plants. Rawa Pening, which was once neglected, has now become a source of life that brings prosperity to the surrounding community. The Company will continue to assist the community to empower all economic potentials around Lake Rawa Pening.

Awards in 2018

We received a number of remarkable awards throughout 2018. We appreciate these awards as motivation to be even better in the future. Among the awards received in 2018 were:

  1. Included in 100 Best Listed Company of Investor Magazine.
  2. Operational Excellence Award I 2018 in Public Company category of Economic Review magazine.
  3. Indonesia Good Governance Award 2018 in Public Company category of Economic Review Magazine.
  4. 2018 Green Industry Award of the Ministry of Industry of the Republic of Indonesia.
  5. Green PROPER in Environmental Management of the Ministry of Environment and Forestry with the highest score among the categories of herbal medicine, food and beverage.

Changes in Composition of Board of Directors

In 2018 there were changes in composition of the Company’s Board of Directors. The Annual General Meeting of Shareholders (AGMS) on May 30, 2018 approved honorable dismissal of Mr. Jonatha Sofjan Hidajat as President Director and resignation of Ms. Venancia Sri Indrijati and Mr. Carlo Lukman Windarto from their respective positions as Director and Independent Director. Furthermore, Shareholders appointed Mr. David Hidayat as President Director, as well as Mr. Leonard and Mr. Gerry Mustika as Independent Directors of the Company.

Board of Directors, on behalf of the Company, would like to thank Ms. Venancia Sri Indrijati and Mr. Carlo Lukman for their contributions in terms of energy and insight while serving in Board of Directors and we congratulate and welcome Mr. Jonatha Sofjan Hidajat as the Company’s President Commissioner.

Appreciation

On behalf of Board of Directors, I would like to express my gratitude to Board of Commissioners for providing insightful supports, directions and advices throughout 2018, 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 in facing various challenges. Hopefully, the Company will continue to provide the optimal benefits to shareholders, employees and the society.