Message from the President Director

Reports of Directors

Dear Respected Shareholders and Stakeholders,

On behalf of the Board of Directors, it is an honor for me to present the Company’s performance report for the financial year 2019 which reflects two major themes: Reinforcing Competitiveness and Managing Sustainability.

PT AKR Corporindo Tbk delivered healthy performance growth in 2019 despite challenging operating environment.

2019 Economic Conditions

The pace of global economic growth in 2019 faced considerable challenges from the deteriorating trade relations between the United States (US) and China that had a huge impact on the flow of world trade. Geopolitical conflicts also occurred in several regions, and included the exit of the UK from the European Union (Brexit) that also influenced the pace of global economic growth.

The slow US economic growth forced the Federal Reserve to implement monetary stimulus in the form of Federal Fund Rate (FFR) cuts from 2.50% to 1.75%. This impacted the flow of foreign capital into several developing countries’ financial markets, and led to the developing countries also taking the opportunity to reduce interest rates and implement other accommodative policies.

These shocks to the global economy also had a considerable influence on the Indonesian economy. In addition, the presidential elections in April 2019, businesses became more cautious in determining their strategic steps and policies.

In response to the global and national economic developments, Bank Indonesia (BI) implemented a number of monetary and macroprudential policies, such as reducing the BI 7 Days Repo Rate from 6.00% to 5.00%. This policy helped maintain inflation growth and encouraged investments, which were well managed.

As a result of the Government and BI policies, Indonesia was able to maintain a stable economic growth of 5.02%, with inflation at 2.72%. Although lower than the previous year, Indonesia’s economic growth was the second highest economic growth among the G20 countries.

Performance of AKR During 2019

In 2019, the Company’s strategic policies were focused on strengthening the competitiveness and sustainability of the Company. The key strategies were divided into 5 strategic policies:

1. Product portfolio expansion and diversification;
2. Customer base expansion;
3. Alliances and partnership strengthening;
4. Increasing shareholder value; and
5. Proactive risk management.

Product Portfolio Expansion and Diversification

AKR is expanding and diversifying its product portfolio to increase the Company’s revenue base, and to support sustainable growth in the future and environmental sustainability. The Company not only delivers products and services that meet the requirement of customers, but also conduct its operations in a environmentally friendly manner .

During 2019, the Company implemented various measures such as:

1. Supporting Indonesian Government policy to blend B30 Biofuel;
2. Introducing higher quality fuels with that meet Euro 4 standards with more environmentally friendly emissions;
3. Increasing the number of customers in the Java Integrated Industrial Port Estate (JIIPE) such as the addition of Freeport smelter project;
4. Entering the aviation fuel business selectively;
5. Expanding its storage tank capacity to cater for increased demand for Petroleum and biofuels.

In addition, the Company also anticipates the Government plan to grow the industry and transform the logistics services to be more efficient with lower cost for a more competitive Indonesia.

Customer Base Expansion

AKR continues to improve its competitiveness in logistics infrastructure and JIIPE which is in line with Government programs, including:

1. Delivering fuel products efficiently throughout Indonesia;
2. Increasing added value and supporting manufacturing growth, and;
3. Reducing costs of doing business.

During 2019, the Company’s project JIIPE sold land to 3 new customers and also secured anchor customer, PT Freeport Indonesia (PTFI) which has entered into long-term lease of 103 hectares of land to build Copper smelter project at JIIPE. The construction of the proposed smelter is expected to further increase the attractiveness for customers to invest in JIIPE.

In 2019, AKR’s collaboration with BP also progressed well with the opening of 11 new retail outlets, bringing the total number of retail outlets to 13, located in major cities of Jakarta and Surabaya. In addition, during August 2019, the cooperation with BP in the aviation fuel business also commenced with the opening of the first Aviation fuel operations in IMIP Morowali airport.

Throughout 2019, by strengthening customer relationships, the fuel and distribution business showed excellent volume growth.

Alliances and Partnerships Strengthening

One of the Company’s business development strategies is to create alliances and partnerships, so that the Company can combine the expertise it has in the Indonesian market with the strength of its strategic partners. The joint venture with PELINDO III at JIIPE has helped the Company develop an industrial estate integrated with a port, and by so doing has created a competitive advantage not offered by other industrial estates.

The Company has also partnered with BP, who possesses global expertise in supplying high quality and environmentally friendly fuels in line with the global environmental sustainability initiatives. At each gas station outlet, AKR also collaborates with local partners such as Alfa Mart, Kopi Tuku and Kopi Kenangan, Castrol bikepoint to offer a customer experience through non-fuel services.

The Company also maintains a very close relationship with PT Asahimas Chemicals for Chlor Alkali chemicals.

Increasing Shareholder Value

The Company aims to improve the ROE, ROA, profit growth and try to maximize the payment of dividends with a minimum payment of at least 30% of its net profit.

By implementing the above three strategies, in 2019 the Company succeeded in increasing its performance and shareholder value. In 2019, the Company’s Gross Profit and Operating Profit grew by 22% and 17% respectively, compared to 2018. The rate of return on capital over the last two years has been maintained at around 8.5%, excluding net revenue from discontinued operations.

In addition, the Company also recorded asset growth of 7% to Rp21.4 trillion, comprising 26% in land inventory, and 25% in Net Fixed Assets. The ongoing expansion in capacity by 100,000 cbm in Jakarta Tank Terminal Jakarta Tank Terminal will support the Trading Distribution and Logistics business growth for the coming years.

Proactive Risk Management

Responding to the economic and financial conditions where the risk of uncertainty is increasing, during 2019 the Company enhanced its risk management measures, particularly related to operational and financial risks. To reduce operational risk, the Company invested in Human Resources and Information Technology capability improvements. In order, to mitigate financial risk, the Company continued to maintain low leverage, with a Net Gearing of 27% at the end of the Financial year, and secure funding for financing the bond repayments due December 2019 and in July 2020, while effectively managing the working capital cycle. The Company also effectively managed the changes in oil prices and exchange rates by monitoring the Net Open positions and passing the price changes to customers.

Comparison of 2019 Performance Against Budget

The Company’s consolidated sales revenue during the year 2019 amounted to Rp21,703 billion, lower by 8% compared to 2018, and lower than the budget target of 10-15% growth. While the Company improved its sales of Petroleum products to core industrial segments, the non-achievement of the revenue target was influenced by several factors, including lower average selling prices for Petroleum products and chemicals, suspension of subsidized diesel supply from May 2019 to December 2019, and lower demand from key customers in the electricity and temporary slow down in demand from Copper mining segment.

As AKR’s business model is focused on the optimizing the margin despite the lower revenue the Company was able to book a strong increase in Gross Profit and Operating Profit, of 22% and 17% respectively, and increased Gross Margin by 8.7% higher than the 6.6% in 2018.

The Company’s Core Net Profit from continuing operations during 2019 amounted to Rp717 billion, slightly higher than Rp 711 billion booked during 2018. However, the Company’s Net profit attributable to shareholders was lower by 56% as the Company booked a profit of Rp933 billion during 2018 from the divestment of non-core operations. The Net Profit for the year 2019 was impacted by higher spending on marketing and brand building costs to establish the new businesses and one-time write offs for receivables.

Challenges and Constraints Faced

Slower growth in demand for Basic Chemicals and lower commodity prices impacted the demand for fuel products and chemicals from the industrial sector. There was also increasing competition, putting pressure on the Company’s margins. Declining demand from the power generation sector also fuel products demand. In addition, one of the Company’s main chemical customers is in the process of a business transformation which reduced demand temporarily.

Facing such conditions, the Company actively managed its inventory and costs, so as to continue maintaining a stable gross profit growth.

Also during the year 2019 Basic chemical selling prices continued to decline which impacted the Company’s absolute margins in the basic chemicals business. To address this, the Company focused on adding new customers, especially in the Alumina Smelters and Biodiesel business to maintain margins and increase sales volume.

In the JIIPE project, the Company faced challenges due to the slow offtake of land for industrial projects during the first half of the year 2019 due to the Presidential elections. In its first year of operation, BP-AKR joint venture started to establish its network by identifying suitable locations and also setting up its strategies to introduce the new product offer for Non fuel retail in partnership with local partners and obtain necessary permits and licenses to commence operations for Fuel retail and Aviation business;

Despite a slow start during the first half of the year, the Company delivered a strong performance during the Second semester with increased volumes of Petroleum and basic chemicals sold to Industrial customers with sustained margins; JIIPE was able to record land sales to customers who intend to start operations and expand their land banks; BP AKR also secured strategic sites and its fuel and non fuel offers were well received by the Customers.

AKR Business Prospects

The pickup in the business environment and proactive policies put in by the Indonesian Government indicated that year 2020 would be a positive year overall for the Indonesian economy and for the Company. However, since the beginning of 2020, the World was facing the threat posed by the spread of Covid 19 which has now become a pandemic affecting almost all countries across the world. Although the impact of Covid 19 on the economy and business is still being assessed, it is believed that this major pandemic will have a significant impact on major World economies. Global oil prices and energy prices have experienced significant drop due to supply and demand imbalances and geo-political issues.

The Company believes, with its sound business model and competitive advantage will enable it to overcome these challenges. The time tested business model and effective risk management policies will enable the Company which has experienced situation like these over the various economic cycles before should enable the Company to ride through these challenging times and continue to grow.

Revenue growth opportunities is likely to be relatively limited. However, most of the Company’s customers produce goods that are important for the community, so the Company expects a relatively stable demand. To address oil price fluctuations and exchange rates, strategies have been implemented where there are no significant challenges for the Company. The Company will optimize its potential in the Biofuel business, in line with the Government’s policy for Biofuel B30 in 2020. The Company has received sufficient allocation for Fatty Acid Methyl Ester (FAME) to support the Petroleum volume targets. The implementation of bio fuel policies is also expected to have a positive impact on increasing the basic chemicals sales volumes. In addition, basic chemical business growth is also expected to be driven by increase of smelter capacity for Alumina, Bauxite, Nickel etc as part of the government’s initiative to grow domestic added value.

Dividend Policy

AKR is committed to continuously increasing shareholder value, by its commitment to pay dividends to shareholders. Based on an Annual General Meeting of Shareholders (AGMS) decision on April 30, 2019, the Shareholders decided to distribute cash dividends amounting to Rp963,526,780,800, or 58.6% of net profit attributable to owners of the parent entity for the 2018 fiscal year, after reducing the previously distributed interim dividends. The Company also distributed interim dividends of Rp60/share during the year 2019.

Environment, Governance and Social Affairs

In addition to the financial aspect, the environment, governance and social aspects are also main concerns for the Company. The Company endeavors to perform its operations and distribute products in a more environmentally friendly manner, in accordance with prevailing laws and regulations, and by doing so, contribute positive impact for the community.

On the environmental side, the Company considers the direct and indirect impact of each of its operational and business activities and decisions. The Company also considers the stakeholders’ expectations to see the environmental ecosystems are maintained. One of the most important issues is the management of hazardous and toxic (B3) waste in several operating locations such as the Tank Terminals in Lampung, Pontianak, Bitung, Tanjung Priok, Marunda II and Stagen. This was seen in the results of direct and indirect supervision and monitoring by the Ministry of the Environment and Forestry.

For the environmental aspect, the Company is now prioritizing:

1. reduction in use of energy for its own operations,
2. reduce green house gas emissions by handling more environment friendly products and
3. support environment rehabdilitation and bio diversity.

The Company is participating in the use of environmentally friendly materials through its support of the Government policies by distributing B30 diesel containing 30% FAME, a derivative of palm oil products, to almost all industrial customers. This participation continued throughout 2019. By using vegetable oils, the Company believes that blended Bio Diesel will be more environmentally friendly and reduce dependency on fossil-based fuels.

From the Governance aspect, the Company continues to improve its application of good corporate governance principles. The corporate governance bodies conduct their activities in compliance with the 2007 Law No. 40 concerning Limited Liability Companies.

In its policies, the Board of Directors with the Board of Commissioners has established guidelines and policies that place limits on the responsibilities of each Company body. This limitation is important so that the relationships between the bodies can work in harmony, and supports the achievement of a predetermined vision and mission. Management periodically reviews and updates its policy instruments, so they remain relevant for the development of the Company, the development of applicable regulations, and the growth of the industries involved with the Company.

Risk management is also an important factor in managing the Company. Operational and financial risks are the key considerations ensuring that the Company’s business growth builds a solid foundation, which is reflected in a healthy balance sheet, low gearing ratios and strong Working Capital Cycle management.

From the social aspect, the Company pays great attention to employees and the community. The Company has developed good industrial relations with employees by fulfilling the employees’ rights as stipulated in the 2003 Manpower Law No. 13. In addition, Occupational Safety and Health (OSH) has become a focus and great concern for the Company. With its core business being in trading and distribution of fuel and basic chemicals, the Company encourages the application of OSH in every aspect, both for employees who support the Head Office operations, and especially for employees who are directly related to operational activities in the field. The Company actively builds safety awareness in all AKR employees on the importance of safety while working.

In addition, the Company runs a structured and sustainable Corporate Social Responsibility (CSR) program, and this has become an inseparable part of the Company’s operational activities. The Company’s CSR activities followed a customer and government approach concept. Company spent Rp8.2bn in CSR acitivies in 2019.

Board of Directors’ Composition Changes

During 2019 the Company’s Board of Directors composition remained unchanged, and remained as follows:

President Director : Haryanto Adikoesoemo

Director : Jimmy Tandyo

Director : Bambang Soetiono Soedijanto

Director : Arief Budiman Utomo

Director : Mery Sofi

Director : Suresh Vembu

Director : Nery Polim

Director : Termurti Tiban

Appreciation

The Company managed to record a good performance in the midst of many challenges faced throughout 2019. Please allow the Board of Directors to give thanks to the Almighty God for the smooth running of the Company’s operations and business. The Board of Directors would like to thank all shareholders and investors for the trust they have given. The Board of Directors would also like to express its respect and thanks to the Board of Commissioners for their direction and strategic partnership in managing the Company’s operations and business. To business partners, the Board of Directors would like to express its respect for the excellent cooperation that has been established. Similarly to regulators, customers and suppliers, the Board of Directors would like to express its gratitude for all the established collaboration.

To all AKR personnel, the Board of Directors expresses highest appreciation for the dedication and hard work given throughout 2019, a year full of challenges. All hard and smart work will build on the foundation for the Company and help it optimize its potential and achieve its best performances in the future.