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Message of the President Director

Wismilak Performance in 2017

Ronald WallaHonorable Stakeholders,

The Company’s business activities continued to face several
challenges and obstacles in 2017 with the most significant one was the weakening public purchasing power which directly impacted on the Company’s performance. Such situation certainly became an important note for the management in making decisions and had been addressed with careful consideration in order to optimize business performance in the future.

The Company was undoubtedly aware of such obstacles and strove optimally to mobilize all resources in order to continuously perform improvement during the course of 2016 to 2017, through the formulation of sound business policies. In addition, the Company continued to update and adjust its long-term plan so as to be in line with the business condition.

This was also a part of our efforts to conduct cut-off of the current work trend. The Company needed to prepare a strategy that is more adaptive to the present situation so that, in the following years, the Company will be able to create another positive performance in the future and grow according to the expectations.

COMPANY PERFORMANCE REPORT

Business Challenges
The national economy managed to grow reaching 5.07% in 2017 or increased by 0.05% from the growth level of the previous year. Such growth was maintained due to the support from the synergy of fiscal and monetary policies implemented by the government and Bank Indonesia, even though it has yet to achieve the target set in the State Budget (APBN).

Unfortunately, improvement of national economic growth in 2017 was not directly proportional to the increase in public consumption rate. Changes in consumption pattern as well as fluctuating household consumption over the year gave less-than-positive impact on our performance during the year, especially on non-leisure segment. The changes in consumption pattern of the public occurred due to the tendency to use income for ‘buying experience’ and substituting non-leisure consumption needs with lower-price goods and commodities.

In addition to changes in public consumption patterns, several indicators that drove anomalies in consumption sector were the increasing staple needs of the public. Even though inflation was under control, the Electricity Base Tariff and LPG price grew double the amount of the previous year. This increase then formed a tendency in the public to divert their income into savings and investments so as to be more selective in spending their income.

Based on the report from Statistics Indonesia (BPS), national household consumption in Q3 of 2017 grew by 4.95%, a slight increase compared to the previous quarter and a significant decrease compared to the same period in the previous year (yoy). The Company also faced a challenge in the form of weather condition throughout 2017 which affected the sales performance. As previously reported, weather anomalies in 2016 with high rainfall intensity reduced the amount and quality of tobaccos in 3 (three) main tobacco producing areas in the country, namely North Sumatera, Central Java, and East Java. Such decline was directly proportional to the national cigarette sales performance. By 2017, despite an improvement in weather condition and the quality of dry season which helped tobacco plantation, the relatively short period of dry season occurring in Indonesia did not provide significant improvement and the quantity as well as purchasing power of tobacco remained weak during the year.

Strategic Policies
In 2017, the Company continued to be influenced by cigarette price adjustment in terms of high tax rates for Machine-Rolled Cigarette (SKM), Hand-Rolled Cigarette (SKT) and White Cigarette (SPM) in relation to public purchasing power. To respond to such issue, the Company launched new products at a more economical price considering that the Company still had a production capacity space. This was one of the Company’s strategies to maintain sales volume and its existing market.

Sales of Hand-Rolled Cigarette in 2017 reached Rp452.8 billion while sales of Machine-Rolled Cigarette was Rp865.0 billion. Total consolidated sales of the Company amounted to Rp1,476.4 billion, a 12.4% decrease compared to the net sales of 2016 recorded at Rp1,658.8 billion. This year, we managed to book operating income amounting to Rp44.2 billion which showed a decline from the income gained in the previous year amounting to Rp134.4 billion. Profit for the current year was Rp40.6 billion, declined 61.8% from Rp106.3 billion.

In addition to conducting market test for new products, the Company continued the development of the fifth production facility in Bojonegoro, East Java, in 2017. Although it has yet to show significant contribution, this effort managed to support the Company’s efficiency effort, either in maintaining production capacity or encouraging product supply increase so as to be more effective.

The Company still required a certain amount of time to reach its business targets. Nevertheless, steps that have been made in 2017 would surely serve as a strong policy foundation and were regarded as a progressive measure in order to always generate achievement amidst the dynamics of business condition.

Business Outlook
Based on the analysis conducted, the Company observes a more positive business outlook in the following year. Despite the issue about the continued decline of public purchasing power and consumption substitution, the government infrastructure expenses in macroeconomic terms has been predicted to show positive impact in relation to the completion of several strategic projects aimed at encouraging economic growth. The government has set a target for national economic growth in 2018 to reach 5.4% with maintained inflation rate at 4%.

Within the Company, business strategy reinforcement carried out in 2017 is expected to bring positive results in the future. One of the strengthening efforts was the fulfillment of sales volume target and profitability on Wismilak Diplomat product. To support the achievement of sales and profitability targets, we are committed to continuously enhancing the competencies of our marketing team as well as improving business support facilities by updating sales system so as to be integrated with other business aspect and in real time.

The Company conducts development of production facility as a part of its strategies to improve its efficiency, particularly in terms of operations. Capital expenditure regarding factory relocation is also regarded as a measure to strengthen profitability in a continuous manner.

Through the abovementioned strategic policies, we are optimistic that 2018 will become a turning point as well as our progressive moment to address challenges and dynamics within our industry. With our capabilities, we shall make our best effort to optimize business potential in order to maintain and leverage business growth towards an even more positive and sustainable direction.

Governance Implementation
The Company is committed to continuously strengthening the implementation of the best practices of Good Corporate Governance (GCG) with an aim of turning GCG as the culture of the Company. Gradually, the Company conducts development of GCG implementation as stipulated in the established GCG Road Map. In 2017, the GCG internalization phase conducted by the Company was improvement on GCG implementation quality intended to ensure the sustainable conduct of business governance and protection of stakeholders’ rights.

In terms of compliance aspect, the Company certainly keeps abreast of the regulations applicable in its industry, as well as the regulations of capital market, government’s provisions regarding cigarette excise and other related regulations. By adhering to these, the Company expects that its business activity will run properly and is free from deviation that may hinder performance and reduce capabilities of the Company in the eyes of the public.

Corporate Social Responsibility (CSR)
As a business entity, the Company always strives to reach a balance of achievements between its business performance and social and environmental development for the stakeholders, including community living nearby its business location. For that reason, a program designed is a measured manner so that sustainability objectives can be well realized is highly required.

Over the course of the year, Wismilak managed to obtain various awards related to the implementation of CSR policies aiming at creating sustainable development. The awards are, among others:
  1. Zero Accident award from the Minister of Manpower of the Republic of Indonesia, Mr. Muhammad Hanif Dhakiri, and from the Governor of East Java, Mr. Soekarwo. Zero Accident Award was given for the achievement of PT Gelora Djaja (Bojonegoro Production Facility) in its implementation of Occupational Health and Safety Program (oHS) in which it managed to achieve 6,345,684 manhours without accident during the period of November 1, 2013 to October 1, 2017.
  2. The 1st place in the 2017 Asia’s Best Companies, category of Best Small-Cap, from FinanceAsia.
To realize social responsibility in the aspect of social community, Wismilak has implemented "Wismilak Berbagi" program, an acronym of "Wismilak Bersama Membangun Negeri" or Wismilak builds the Nation. This program focuses on five pillars, i.e. Sports, Social, Education, Culture, and Entrepreneur (Sports Care, Social Care, Educational Care, Cultural Care, and Entrepreneurship Care).

In environmental aspect the Company carries out several CSR activities such as: 
  1. Treatment of Factory Waste in the form of solid waste, liquid waste, air pollution and toxic and hazardous (B3) waste, and
  2. Utilization of green energy.

Meanwhile, in regard to responsibility to manpower, the Company strives to elevate its Occupational Health and Safety (OHS) standards so as to meet operational feasibility standards intended to minimize risk potentials at work.
Changes In Board of Directors Composition
Up to December 31, 2017, the Company did not change the composition of Board of Directors. Thus, the members of Board of Directors in 2017 fiscal year were as follows:

Direktur Utama
: Ronald Walla
Direktur Operasional
: Trisnawati Trisnajuwana
Direktur Keuangan
: Lucas Firman Djajanto
Direktur Pengembangan Usaha
: Sugito Winarko
Direktur Teknik
: Krisna Tanimihardja
Direktur Independen
: Hendrikus Johan S.


     President Director             : Ronald Walla
     Director of Operations         : Trisnawati Trisnajuwana
     Director of Finance             : Lucas Firman Djajanto
     Director of Business Development     : Sugito Winarko
     Technical Director            : Krisna Tanimihardja
     Independent Director        : Hendrikus Johan S.

Apreciation
Representing the Board of Directors, I would like to extend our utmost gratitude to the Shareholders for their trusts given to the Company in conducting business activities during 2017 fiscal year. We would also like to extend our gratitude to the Board of Commissioners for their advice and recommendations, as well as inputs given throughout the year to improve the quality of business management and prudent principle implementation. We also express our appreciation to all employees, suppliers, distributors, and other stakeholders of the Company, particularly the public in general for the positive support that are relentlessly given to us in carrying out business activity in a sustainable manner.


Surabaya, April 2018
On behalf of the Board of Directors

RONALD WALLA
President Director of PT Wismilak Inti Makmur Tbk