Report of the Board of Directors

In 2016 the Company has entered into the advanced stages of corporate transformation journey that provides power to continue creating sustainable growth. We are grateful that the move has yielded a good performance, i.e. an increase in Net Income by 63,91% from 2015.

Honorable Shareholders and Stakeholders,

Along with the growth of the Company’s achievement in 2016, the Directors of PT Wijaya Karya Beton Tbk (WIKA Beton Tbk) conveys gratitudes to God Almighty, for His blessings and mercy, coupled with our highest appreciation for the support provided by all Shareholders and stakeholders. Subsequently, let us submit a report on the Management of the Company and the achievement of key performance of PT WIKA Beton Tbk for the fiscal year ended on December 31, 2016.

Facing the Challenging Macro Economic and Industrial Conditions in 2016

The world economic recovery in 2016 was still not in line with expectations, along with the slow economic growth of developed countries, except the US economy which began to improve. On the other hand, economic growth in developing countries, especially India and China, were expected to be the next source of global and regional economic growth.

Although the global and regional economies have not been encouraging, the Indonesian economy has shown a better performance on the back of maintained domestic demand. The improved economic growth was supported by consumption and investment, particularly in infrastructure sector, which were quite strong, especially in the fourth quarter 2016.

In the industrial scale, national infrastructure sector was still affected by the Government's policy in allocating the budget. In 2016 the Government allocated an infrastructure budget of Rp313.5 trillion or 8% of the state budget in 2016. Big chunks of the budget were allocated to the Ministry of Public Works and Public Housing (PWPH) and the Ministry of Transportation in 2016. The budget for the Ministry of PWPH was Rp103.8 trillion and for thr Ministry of Transportation was Rp50.16 trillion.

Throughout 2016 however the government slashed the budget twice. The first cut occurred on 8 April 2016, requiring the Ministry of PUPR undertook efficiency program worth of Rp8.4 trillion, or 8% of its budget allocation. Again, on August 3, 2016 the Government shrinked its expenditure of all ministries/government agencies by Rp65 trillion and transferred Rp68.8 trillion to regional governments. The reduction in the General Allocation Fund (GAF) has caused the decrease in regional government’s infrastructure spending, which in turn affected the industry where the Company is in. The condition of course has spawned national infrastructure industry dynamics that also affected the Company's sales growth in 2016. Nevertheless, with the right strategy, the Company was still able to take advantage of opportunities in the industrial sector for the Company’s growth.

In response to this condition, the Company kept working hard with solid footing and strategic steps that relied on the transformation to create value as presented in the Annual Report 2016 on the theme of "Transformation for The Stronger Future". Painstaking efforts by the management and all levels of the Company's organization have spawned forces of change in order to create sustainable growth.

Our Strategic Policy

In order to maximize sustainable growth in every year, the Company set a number of strategies necessary to maintain its position as the market leader. The Company made the strategic steps, namely: increasing the installed capacity by conducting intensification and extensification programs in the form of new plant construction; adopting new technologies that will increase production capacity; and collaborating with strategic alliances to expand its marketing network.

We also always improve our competence in human resources, particularly in the field of concrete products development through cooperation with leading educational institutions and agencies in Indonesia and abroad as well as acquiring companies with strategic positions that are equipped with the infrastructure required for development into regional markets of Southeast Asia.

The Company also conducts research and development of new products related to precast concrete with high technological contents and strengthens the existing products, such as piling, concrete pillars and beams bridge to increase market share in addition to develop new manufacturing facility equipped with a jetty that are supported by the source of natural material that are managed independently by the Company.

We also always maintain our commitment to provide quality products and in conformity with the contract through the implementation of sustainable quality management system; develop a business approach that focuses on the development of the market as well as the satisfaction and good relations with customers; strengthen the supply chain to ensure the availability of raw materials and other supporting materials through acquisitions and investments in supplying companies; and develop services of erecting and pre-stressing to strengthen our market position and complementary to the existing products and new product.

Satisfactory Growth Performance

We are grateful that the Company's performance in 2016 showed encouraging results although it faced a number of tough challenges. These achievements can be described both in the operational and financial performances.

In analyzing the operational performance, since 2016 the management has categorized its businesses into three segments, namely Centrifugal Precast Concrete Segment, Non-Centrifugal Precast Concrete Segments and Services segment. This segment grouping is a change from previous groupings, which based on various types of precast concrete. This change is specifically aimed at simplifying the Company’s business portfolio grouping.

Operational Performance

NODescriptionProduction (Ton)Production (%)Income (In Million Rupiah)Income (%)
2016201520162015
1Centrifugal Precast Concrete837.905857.17397,8%1.899.2161.613.12818%
2Non-Centrifugal Precast Concrete681.990555.961122,7%1.449.789977.78748%
3Services132.72761.706115%
Total3.481.7322.652.62231%

Centrifugal Precast Concrete Performance

For the Company, 2016 became an important momentum year to record its best performance in terms of production, revenue, and profitability.

Although production of Centrifugal Precast Concrete in 2016 was 837,905 tonnes, a decrease from 857,173 tonnes in 2015. Nevertheless the Company’s revenue from Centrifugal Precast Concrete rose 18% from Rp1.61 trillion in 2015 to Rp1.89 trillion in 2016. The increase in sales was due to the improvement in selling prices in the market. The performance generated a profit of Rp322.35 billion, a significant increase from Rp216.45 billion in 2015.

Non-Centrifugal Precast Concrete Performance

The Company’s Non-Centrifugal Precast Concrete Production in 2016 was 681,990 tonnes, an increase from 555,961 tonnes in 2015. While revenue from Non-Centrifugal Precast Concrete also increased by 48% from Rp977.79 billion in 2015 to Rp1.45 trillion in 2016. The increase in revenue was caused by the increase in demand for precast concrete products for infrastructure projects bridges (elevated).

The performance generated a profit of Rp172.39 billion, a significant increase from Rp103.13 billion in 2015.

Service Performance

In addition to the Company's core business in precast concrete industry, the Company takes strategic step by performing backward integration, namely entering into services busineses that support precast concrete business. the Company's services business consist of pilling service (inner-boring), post tension, Quarry, and installation services.

The field of erecting services business (inner-boring) is a strategic step in supporting the Company's increase in sales of Centrifugal Precast Concrete products in densely populated locations, which began in 2015.

The field of post-tension service business is a strategic step in supporting the Company's increase in sales of Non-Centrifugal Precast Concrete products particularly bridge products, which has been started since 2014.

The Field of Quarry service business is the Company’s strategic move to support the security of supply of raw material/material stone split by opening a factory rockbreaking (crushing plant) which is one of main raw material for Centrifugal Precast Concrete Product, Non-Centrifugal Precast Concrete and Concrete Rainfall (readymix concrete), which began in 2015.

Business field of installation services is the Company’s strategic step in capturing business opportunities and added value for the Company for their purchase order of Non-Centrifugal Precast Concrete products in bridge construction with an attached contract, which started in 2016.

During 2016 the Company obtained a total of 174 projects in the service sector, an increase from 126 projects in 2015. This increase illustrates the increase in trust by customers, in line with one of the Company's mission, which is "Providing the best service to the customers with quality conformance, punctuality and competitive prices".

Financial Performance

From all operational activities in 2016, the Company recorded total revenues of Rp3.48 trillion, an increase of 31.26% from Rp2.65 trillion in 2015. Precast Concrete business was still the biggest contributor for the Company’s total revenues. It was an achievement that we should be grateful for, considering the infrastructure industry in 2016 still relied on the government projects which experienced budget cuts.

The realization of the Company's total assets was Rp4,66 trillion, an increase of 4.63% from Rp4.46 trillion in 2015. Along with these achievements, the Company recorded a Current Year Profit (Net Profit) of Rp281.57 billion, up 63.91% from Rp171.78 billion in 2015. The increase in net profit was primarily due to the growth in Operating Revenues in the current year. While, the Company’s comprehensive Income in 2016 was Rp278.05 billion, up 75.35% from Rp158.57 billion in 2015.

The Company’s financial statements in 2016 received a predicate of Reasonable without Exception (RWE) (WTP) from a public accounting firm. The Company’s health level in 2016 obtained a score 86 with AA qualification or healthy category. These achievements are in accordance with the Company’s strategic objectives which states that within a year the value of the Company's soundness should not be less than the healthy category, based on SOE Decree No.KEP-100/MBU/2002 which includes the assessment of aspects of finance, operations and administration.

While the Company's share price in the stock market with ticker code of WTON showed dynamic performance. This shows that the Company's shares are still the choice of the investor.

Comparison Between The Results Achieved With The Targeted

We incessantly strive to achieve the targets that has been estbalished for the development and sustainability of the Company. Throughout 2016, the profitability of Precast Concrete Rotary has reached its target of up to 100% although other products and services have not reached the expected target, in non-rotary precast concrete only reached 67.40%.

Similarly, the realization of revenues on Wika Beton's products and services which still has not reached the expected target even though the production has almost reached the target in 2016. In the financial position of Wika Beton, the amount of assets reaches 9.81% higher than the target, the liability reaches 30.03% higher than target while equity only reached 96.70% of target.

Obstacles Encountered By The Company

Throughout 2016, the Company encountered several obstacles, among others, in terms of economic growth assumptions in 2016 and exchange rates, whereas the prices of several main materials such as iron and steel refer to International prices so it affect on production costs. Later, the inflation obstacles that affect the domestic prices, the dynamics of government policy in the field of fuel and electricity tariffs, and delayed some government infrastructure projects that impact on business.

We strive to resolve the obstacles by refer to strategic management policy, starting from the evaluation of current conditions, implementing external & internal factor scanning (EFAS & IFAS), strategy determination, strategy implementation, and last but not least was evaluation and control of implementation.

Transformation and Continuous Innovation

We recognize that the infrastructure industry is constantly changing and should be addressed in a thoughtful, careful, alert and innovative. In order to ensure the continuity of our business, then we changed our strategy from which that originally based on one type of business into some kind of business that is integrated from upstream to downstream, by doing business in materials sector, manufacturing and construction as reflected in the Company's business processes.

In 2016, the Company entered into a new stage of the journey of continuous innovation that has been consistently pursued since 1980. Steps taken today is the mastery of new technologies that produce new innovations, including PC Wall products, Design and Bridge Product of 80 meter long which is curved in the project interchange Semanggi, Jakarta.

Every year, we always produce works or design innovation and or new products in accordance with the Company's motto, which is "Innovation and Trust". The series of innovations has become an important reason for the Company so as to have the power the change to sustainable growth. This is reflected in the realization of the achievement of a good performance as described above.

Organization and Employment

The achievement of the Company's encouraging performance as described above can not be separated from our strategy in organizational development and employment. In order to meet the needs of integrated business, the Company implements an organizations development which is oriented on the pattern of Engineering, Production, instalation (EPI). The pattern is done in order to meet the Company’s challenges to continue to innovate in line with the dynamics of a rapidly changing industry infrastructure.

To be able to run the pattern of EPI, the Company continues to develop the competence of human resources through training programs, further education and recruitment. Human resources development program has been designed in such a way so as to generate the productive employees according to the standard of competence required.

The level of employee productivity has increased from year to year. In 2016 the level of productivity of employees reached IDR 2.85 billion / person.

Business Prospect

The activities in the construction sector is one of the driving factors in the system of economic development, because provision of physical infrastructure can enhance other economic sectors. To that end, the construction sector expenditure in the country is expected to increase in line with the government's plan to boost infrastructure development in all area of Indonesia to 2019.

The government focus to accelerate infrastructure development in all parts of Indonesia, as launched by President Joko Widodo, give a big impact to the growth of the construction sector. Finance Minister Sri Mulyani Indrawati has ensured that the ceiling of infrastructure spending in Budget 2017 set at Rp387.3 trillion which will be utilized for construction of roads, bridges, airports, seaports, railways, and the passenger terminal. The budget for infrastructure spending increased to Rp40.8 trillion from the ceiling of Draft Budget 2017 of Rp346.6 trillion.

The Government through RPJMN 2015-2019, plans to accelerate economic growth by increasing the quantity and improving the quality of infrastructure through various dimensional approaches. In RPJMN, the goals for economic development and social welfare infrastructure are done by continuing the development and supplying infrastructure with the needs of basic infrastructure worth Rp6.500 trillion. RPJMN in infrastructure is aimed at increasing the quantity and quality of the various forms of infrastructure such as roads, railways, seaports, airports, electricity, irrigation, water supply and sanitation as well as post and telecommunications.

This has become one of the prospects for the concrete industry to contribute to national development and continues to lead the precast concrete market in Indonesia and Southeast Asia. The Company has also established various strategic measures to seize every opportunity that exist such as preparing for market penetration by increasing the existing factory and set up new factories.

Corporate Governance

The Company is committed to always applying the best governance standards by always trying to apply through various improvements and upgrading, and refering to the minimum standards and recommendations that should be met.

In accordance with Presidential Decree No.192 of 2014 on the Financial and Development Supervisory Agency, Government Regulation No.60 Year 2008 regarding the Internal Control System of the Government, and the Minister of State Enterprises Regulation No.PER-01/MBU/2011 on Implementation of Good Corporate Governance (GCG) in State-Owned Enterprises, PT Wijaya Karya Tbk as a subsidiary of SOEs is required to take measurements of the GCG implementation, through an assessment. From year to year, GCG assessment results of the Company increased. This shows that the better the quality of GCG implementation. In 2016, the Company was listed in the category of 50 best companies in Indonesia in the implementation of corporate governance standards based ASEAN Scorecard.

Corporate Social Responsibility

The Company realizes that the implementation of CSR is very important as the supporter of sustainable growth for both Companies, communities, and the environment. In 2015, the Company enhanced CSR strategy and policy comprehensively by developing policies and programs based on ISO 26000. CSR is not only seen as a community development activities and philanthropic activities, but CSR in a broad sense that includes aspects of the environment, healthy business practices and respect for human rights. In 2016 the Company composed a CSR program that refered to the implementation of ISO 26000 Policy, both conducted independently by the Company as well as integrated with PT Wijaya Karya (Persero) Tbk group.

The CSR program includes: (1) Organizational Governance, in the form of the application of Good Corporate Governance (GCG) on an ongoing basis; (2) Human Rights, in the form of repairing the facilities and infrastructure of worship; (3) Employment, in the form of Training Management System Occupational Health and Safety (SMK3); (4) Environmental Affairs, in the form of production waste utilization activities; (5) Healthy Institution Practice, in the form of compliance on the legislation in the field of industry, trade business and capital markets; (6) Consumer, in the form of the Social Assistance Program and the Education Program, such as Thrift, Internal and external Scholarship Award, WIKA Beton Goes to Campus and sponsorship as well as activities of industry visits to factories WIKA Beton; (7) The involvement and community development, disaster relief activities and activities that support the Sustainability CSR, such as seminars and training related to CSR Suistainability.

In planning CSR activities, the Company allocates a total funds of Rp738 million. And until the end of 2016, absorption of funds for CSR activities reached Rp700 million, or 94.8% of the budget allocation.

Changes in composition of the Directors

Throughout 2016 there were changes in the composition of the Directors, namely the appointment of Sidiq Purnomo as Independent Director replacing Muhammad Zulkarnain as of July 20, 2016. In addition there was the dismissal and reappointment Entus Asnawi Mukhson as Director for his second term of office.

Here is the composition of the Directors of the Company on December 31, 2016:

NamePositionTerm of Office
Wilfred Imanuel Adisulung Singkali President Director June 8, 2012-2017 GMS Annual
Entus Asnawi Mukhson Director March 30, 2016-2021 GMS Annual
Fery Hendriyanto Director June 8, 2012-2017 GMS Annual
Hadian Pramudita Director June 8, 2012-2017 GMS Annual
Hari Respati Director June 1, 2013-2018 GMS Annual
*Muhammad Zulkarnain Independent Director March 7, 2014-July 20, 2016 Extraordinary GMS
*Sidiq Purnomo Independent Director .July 20, 2016-2021 GMS Annual

Appreciation

The Directors would like to thank all stakeholders; PT Wijaya Karya (Persero) Tbk as the Shareholders, Board of Commissioners, customers and business partners, and employees, for their trust and support, leadership, hard work and dedication in supporting the Company's pace amid these challenging conditions. May God Almighty, always give directions, always guide, protect, love and care us all. Amen. May God Almighty continue bestowing His grace to us all, and WIKA Beton Tbk will continue growing sustainably.

Bekasi, February, 2017

Wilfred I. A. Singkali

President Director

SUBSIDIARIES

WIKA Beton's subsidiaries