U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-15148
BRF – BRASIL FOODS S.A.
(Exact Name of Registrant as Specified in its Charter)
N/A
(Translation of Registrant’s name into English)
Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)
1400 R. Hungria, 5th Floor –
Jd América-01455000-São Paulo – SP, Brazil
(Address of principal executive offices)
Leopoldo Viriato Saboya, Chief Financial Officer and Investor Relations Officer
Tel. 011-5511-2322-5003, Fax 011-5511-232257400
1400 R. Hungria, 5th Floor –
Jd América-01455000-São Paulo – SP, Brazil
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered pursuant to Section 12(b) of the Act:
|
Title of Each Class |
Name of Each Exchange on |
|
Common Shares, no par value per share, each represented by American Depositary Shares |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
|
At December 31, 2011 |
869,453,804 shares of common stock |
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant was submitted electronically and posted on its corporate website, if any, every interactive data filed required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 203.405 of this chapter) during the preceding 12 months (or for such other period that the registrant was required to submit and post such files) Yes ¨ No ¨
Note: Not required for registrant.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
|
Large accelerated filer x |
Accelerated filer ¨ |
Non-accelerated filer ¨ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|
¨ U.S. GAAP |
x International Financial Reporting Standards as issued by the International Accounting Standards Board |
¨ Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
2
TABLE OF CONTENTS
3
4
PART I
INTRODUCTION
Unless otherwise indicated, all references herein to (1) “BRF – Brasil Foods” or “BRF” are references to BRF – Brasil Foods S.A., a corporation organized under the laws of the Federative Republic of Brazil (“Brazil”), and its consolidated subsidiaries, (2) “Sadia” are references to Sadia S.A., a corporation organized under the laws of Brazil, and its consolidated subsidiaries, (3) the “Company,” “we,” “us,” or “our” or “our company” are references to BRF – Brasil Foods, and (4) “common shares” are references to the Company’s authorized and outstanding common stock, designated ordinary shares (ações ordinárias), each without par value. All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States dollars.
We have made rounding adjustments to reach someof the figures included herein. As a result, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Overview
We are one of Brazil’s largest food companies, with a focus on the production and sale of poultry, pork, beef cuts, milk, dairy products and processed food products. We are a vertically integrated business that produces more than 3,000 SKUs, which we distribute to customers in Brazil and in more than 140 other countries. Our products currently include:
Ø Meat products:
· frozen whole and cut chickens;
· frozen pork cuts and beef cuts, which we refer to in this Form 20-F, together with frozen whole and cut chickens, as in natura meat;
· processed food products, such as the following:
· marinated frozen whole and cut chickens, roosters (sold under the Chester® brand) and turkeys;
· specialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products;
· frozen processed meats, such as hamburgers, steaks, breaded meat products, kibes and meatballs, and frozen processed vegetarian foods;
Ø Other processed products:
· frozen prepared entrees, such as lasagna and pizzas, as well as other frozen foods, including vegetables, cheese breads and pies;
· juices, soy milk and soy juices;
· margarine;
Ø Dairy products:
· milk (UHT and pasteurized);
· dairy products, such as cheeses, powdered milk and yogurts;
5
Ø Other:
· soy meal and refined soy flour, as well as animal feed.
In the year ended December 31, 2011, we generated 29.9% of our net sales from poultry, 9.1% from pork and beef, 34.6% from processed meat products, 9.9% from dairy products, 8.6% from other processed products, 5.6% from food service and 2.3% from other products.
In the domestic market, which accounted for 60.0% of our total net sales in the year ended December 31, 2011, we operate under such brand names as Sadia, Chester, Elegê, Miss Daisy, Qualy and Becel (through a strategic joint venture with Unilever) and Turma da Mônica (under a license), which are among the most recognized names in Brazil. In export markets, which account for the remaining 40.0% of our total net sales, the leading brands are Perdix, Sadia, Hilal, Halal, Corcovado, Batavo, Fazenda, Borella and Confidence.
We are a leading producer in Brazil of specialty meats (market share of approximately 55.1% from January to December 2011), frozen processed meats (market share of approximately 71.3% from December 2010 to November 2011), dairy processed products (market share of approximately 11.1% from December 2010 to November 2011), frozen pizzas (market share of approximately 69.3% from January 2011 to December 2011), frozen pastas (market share of approximately 77.2% from December 2010 to November 2011) and margarines (market share of approximately 60.3% from January to December 2011), in each case based on sales volume, according to A.C. Nielsen do Brasil S.A., or “A.C. Nielsen.” We also sell our frozen poultry, pork and beef products in the domestic market. We are able to reach substantially all of the Brazilian population through a nationwide network of 40 distribution centers. As of December 31, 2011, we operated 41 meat processing plants (of which we owned 36; the others are owned by third parties but process meat for us), 25 hatcheries (of which we owned 23), 23 animal feed mills, 15 dairy processing plants (of which we own nine, one of which is under construction and five are owned by third parties), 2 margarine processing plants (one of which is held through a joint venture with Unilever), 30 milk collecting centers, one soybean processing plant and one pizza, pasta, dessert and industrialized processing plant.
We are the largest Brazilian exporter of poultry products and are among the largest such exporters in the world, according to the Brazilian Secretariat for External Commerce (Secretariado de Comércio Exterior, or “SECEX”), an agency of the Brazilian Ministry of Development, Industry and External Commerce (Ministério do Desenvolvimento, Indústria e Comércio Exterior). We are the leading Brazilian exporter of pork products, based on export sales volumes in 2009, according to Brazilian Pork Industry and Exporter Association (Associação Brasileira da Indústria Produtora e Exportadora de Carne Suína), or “ABIPECS.”
In the milk and dairy product industry, we are a leader in sales of UHT milk in Brazil, with a 11.1% market share, based on volumes of sales from January 2011 to December 2011, according to A.C. Nielsen. As of December 31, 2011, we had a 6.3% market share of the Brazilian production of powdered milk, according to the U.S. Department of Agriculture, or “USDA.”
We export primarily to distributors, the institutional market (which includes restaurants and food service chains) and food processing companies. In 2011, our exports accounted for 40.0% of our total net sales. We export to more than 5,000 clients, with customers in Europe accounting for 18.3% of our export net sales in 2011; the Far East, 22.4%; Eurasia (including Russia), 7.4%; the Middle East, 30.0% and the Americas, Africa and other regions, 21.9%.
Our Industry
We manage our business to target both the Brazilian domestic market and the international export markets.
Domestic Market
Brazil is the fifth largest country in the world, both in terms of land mass and population. As of July 2011, Brazil had an estimated population of 194.9 million people, according to data from the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística) or “IBGE.” According to IBGE, Brazil had a gross domestic product, or “GDP,” of R$4.1 trillion for 2011, representing an increase of 9.8% over GDP of R$3.7 trillion for 2010, in each case in nominal terms, GDP per capita increased 9.4% in 2011 to R$21,536.
6
The forecasts of the Central Bank of Brazil (Banco Central do Brasil, or the “Central Bank”) show that the Brazilian GDP in 2011 increased 2.7% in real terms compared to 2010. The inflation rate, as measured by the National Extended Consumer Price Index (Indice Nacional de Preços ao Consumidor Amplo) published by the IBGE, was 4.3% in 2009, 5.9% in 2010 and 6.5% in 2011, continuing a trend of relatively high rates of inflation. The Brazilian government has implemented fiscal and monetary policies to mitigate the impact of the global economic crisis on the Brazilian economy and in order to minimize inflation and to endeavor to keep inflation within a target range.
Brazil is one of the largest consumers of meat, with per capita meat consumption of 98.6 kilograms in 2011, including beef, broiler chicken and pork, according to the USDA. Demand for poultry, pork and beef products in the domestic market is directly affected by economic conditions in Brazil. The overall trend towards improved economic conditions and the increased purchasing power of Brazil’s fast-growing middle class in Brazil has generally supported increased demand in recent years for processed food products, as well as traditional fresh and frozen poultry and pork products.
According to the USDA, Brazil is the world’s sixth largest producer and consumer of milk, with 30.6 million tons of milk produced in 2011.
Export Markets
Despite market volatility caused by concerns over Europe’s sovereign debt crisis and the slow recovery of the U.S. economy, global trade in poultry, pork and beef products has improved since 2010. Higher consumer confidence, especially in certain emerging economies, has stimulated global consumption. In addition, higher urbanization rates and income levels, combined with population growth, have improved global consumption.
Brazilian chicken exports increased 3.2% in 2011 to 3.9 million tons, according to Brazilian Association of Chicken Exporters (Associação Brasileira de Exportadores de Frango, or “ABEF”). The increase was largely due to higher sales in Saudi Arabia, Hong Kong and Japan. In contrast, the volume of beef exports decreased 11% in 2011 to 1.1 million tons in 2011 from 1.2 million tons in 2010, according to data from the Brazilian Beef Exporters Association (Associação Brasileira das Indústrias Exportadoras de Carnes), or “ABIEC.” Beef exports were hindered by the European sovereign debt crisis and import restrictions by certain countries, including Russia. In terms of net sales, chicken and beef exports increased approximately 21% and 12%, respectively, in 2011.
Total pork exports dropped 4.4% in 2011, according to ABIPECS, the second consecutive year that the volume of pork exports decreased. Brazil exported 540,418 tons of pork in 2010 and 516,419 tons in 2011. Average prices of pork rose approximately 12% in 2011, resulting in a 7.0% increase in net sales in 2011, despite the lower export volume.
We believe global meat consumption will continue to increase, particularly with respect to chicken and pork meat. This expected increase should help Brazilian exports and production, as Brazilian companies continue to become established in these markets. Moreover, new markets, such as the Chinese and U.S. markets for pork, are expected to open, which should impact Brazilian exports favorably.
Brazil has become a leading participant in export markets for food products on a global basis, due in part to its competitive advantages, which include low animal feed and labor costs and increasing efficiencies in animal production. We, like other large Brazilian producers, have built on these advantages to develop the scope and scale of our businesses.
Traditionally, Brazilian producers have emphasized exports of frozen whole and cut poultry as well as frozen pork and beef cuts. These products are considered commodities and continue to account for a substantial portion of export volumes. More recently, Brazilian food companies have begun to expand sales of processed food products. We anticipate that over the upcoming years, we will sell higher volumes of frozen whole poultry, frozen cut poultry, frozen pork, frozen beef cuts and increasing volumes of processed products.
7
Forward-Looking Statements
This Annual Report on Form 20-F contains statements that constitute forward-looking statements. Those statements appear in a number of places and include statements regarding the intent, belief or current expectations of the Company, its directors or its executive officers with respect to (i) the implementation of the principal operating strategies of the Company, including integration of current acquisitions as well as the conclusion of acquisition or joint venture transactions or other investment opportunities that may occur in the future, (ii) general economic, political and business conditions in our company’s markets, both in Brazil and abroad, (iii) the cyclicality and volatility of raw materials and selling prices, (iii) health risks related to the food industry, (iv) the risk of outbreak of animal diseases, in particular avian influenza and swine flu, (v) more stringent trade barriers in key export markets and increased regulation of food safety and security, (vi) strong international and domestic competition, (vii) interest rate fluctuations, inflation and exchange rate movements of the real in relation to the U.S. dollar and other currencies, (viii) the declaration or payment of dividends, (ix) the direction and future operation of the Company, (x) the implementation of the Company’s financing strategy and capital expenditure plans, (xi) the factors or trends affecting the Company’s financial condition or results of operations and (xii) other factors identified or discussed under “Item 3. Key Information––D. Risk Factors.” Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements. The accompanying information contained in this Annual Report on Form 20-F, including without limitation the other information set forth under the heading “Item 5. Operating and Financial Review and Prospects,” identifies important factors that could cause such differences. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
We have changed our consolidated financial reporting from accounting principles generally accepted in Brazil (“Brazilian GAAP”) to International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). We adopted IFRS for the fiscal year ended December 31, 2010 and retrospectively applied IFRS to the fiscal year ended December 31, 2009 for comparative purposes. The transition date for our adoption of IFRS was January 1, 2009, the date on which the opening balance sheets were prepared in accordance with these new accounting practices. IFRS differs in certain significant respects from the accounting principles generally accepted in the United States, or “U.S. GAAP.”
As a result, we present below certain selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2011, 2010 and 2009, included herein, prepared in accordance with IFRS.
Our results of operations for 2011 and 2010 include the results of operations of Sadia for the full year. However, our results of operations for 2009 include the results of operations of Sadia since July 8, 2009 and, therefore, are not fully comparable to our results of operations for the years ended December 31, 2011 and December 31, 2010. Sadia’s results of operations were fully consolidated as from July 8, 2009, when the common shareholders of BRF (then Perdigão S.A.), Sadia and HFF, a holding company formed by the controlling shareholders of Sadia for the purposes of the acquisition, approved our business combination with Sadia. For more information on the business combination with Sadia and our other acquisitions in 2009, see note 6.5 to our consolidated financial statements.
8
The summary financial data should be read in conjunction with our consolidated financial statements and the notes thereto contained in this Annual Report on Form 20-F, as well as the information set forth under the heading “Item 5. Operating and Financial Review and Prospects.”
|
|
Year Ended December 31, | ||
|
|
2011 |
2010 |
2009 |
|
|
(in millions of reais, except per share and per ADR amounts and share data) | ||
|
Statement of Income Data |
|||
|
Net sales |
25,706.2 |
22,681.3 |
15,905.8 |
|
Cost of sales |
(19,047.0) |
(16,951.2) |
(12,728.9) |
|
Gross profit |
6,659.2 |
5,730.1 |
3,176.9 |
|
Operating income (expenses): |
|||
|
Selling expenses |
(3,837.5) |
(3,523.1) |
(2,577.1) |
|
General and administrative expenses |
(426.9) |
(332.9) |
(222.2) |
|
Other operating expenses |
(402.7) |
(393.9) |
(302.8) |
|
Equity interest in income of affiliates |
9.0 |
4.4 |
2.5 |
|
Operating income |
2,001.1 |
1,484.6 |
77.3 |
|
Financial income (expenses), net |
(479.5) |
(483.1) |
262.5 |
|
Income before taxes |
1,521.6 |
1,001.5 |
339.8 |
|
Income and social contribution tax expense |
(39.9) |
(130.6) |
(80.2) |
|
Deferred income and social contribution tax expense |
(116.6) |
(65.9) |
(141.0) |
|
Net income |
1,365.1 |
805.0 |
118.6 |
|
Attributable to: |
|||
|
BRF shareholders |
1,367.4 |
804.1 |
123.0 |
|
Non-controlling shareholders |
(2.3) |
0.9 |
(4.4) |
|
Earnings per share – basic (1) |
1.57 |
0.92 |
0.20 |
|
Earnings per ADR – basic (1) |
1.57 |
0.92 |
0.20 |
|
Weighted average shares outstanding at the end of the year – basic (millions) (2) |
870,507 |
870,887 |
604,120 |
|
Earnings per share – diluted |
1.57 |
0.92 |
0.20 |
|
Earnings per ADR – diluted |
1.57 |
0.92 |
0.20 |
|
Weighted average shares outstanding at the end of the year – diluted (millions) (2) |
870,546 |
872,965 |
606,145 |
|
Dividends per share (3) |
0.73 |
0.30 |
0.23 |
|
Dividends per ADR (3) |
0.73 |
0.30 |
0.23 |
|
Dividends per ADR (in U.S. dollars) |
0.39 |
0.18 |
0.13 |
(1) Earnings per share or American Depositary Receipt, or “ADR,” is computed under IFRS based on weighted average shares or ADRs, as the case may be, outstanding over the period. Each ADR evidences one American Depositary Share, or “ADS,” and each ADS represents one common share of our company.
(2) Includes common shares represented by ADSs, which are evidenced by ADRs.
(3) Dividends are calculated based on net income determined in accordance with IFRS and adjusted in accordance with the Brazilian Corporation Law (Law No. 6,404/76, as amended).
9
|
|
As of December 31, | ||
|
|
2011 |
2010 |
2009 |
|
|
(in millions of reais) | ||
|
Balance Sheet Data |
|
|
|
|
Cash and cash equivalents |
1,366.8 |
2,310.6 |
1,898.2 |
|
Marketable securities |
1,372.7 |
1,032.4 |
2,345.5 |
|
Trade accounts receivable, net |
3,207.8 |
2,565.0 |
2,140.7 |
|
Inventories |
2,679.2 |
2,135.8 |
2,255.5 |
|
Biological assets |
1,156.1 |
900.7 |
865.5 |
|
Other current assets |
1,341.2 |
1,076.2 |
1,172.5 |
|
Total current assets |
11,123.8 |
10,020.7 |
10,677.9 |
|
Marketable securities |
153.4 |
209.1 |
676.7 |
|
Trade accounts receivable, net |
2.4 |
7.0 |
12.8 |
|
Biological assets |
387.4 |
377.7 |
391.2 |
|
Other non-current assets |
4,111.6 |
3,805.4 |
3,457.2 |
|
Investments |
20.4 |
17.5 |
17.2 |
|
Property, plant and equipment, net |
9,798.4 |
9,066.8 |
8,874.2 |
|
Intangible assets |
4,386.1 |
4,247.3 |
4,276.5 |
|
Total non-current assets |
18,859.7 |
17,730.9 |
17,705.8 |
|
Total assets |
29,983.5 |
27,751.5 |
28,383.7 |
|
|
|
| |
|
Short-term debt |
3,452.5 |
2,227.7 |
3,200.6 |
|
Trade accounts payable |
2,681.3 |
2,059.2 |
1,905.4 |
|
Other current liabilities |
1,854.0 |
1,399.3 |
1,253.2 |
|
Total current liabilities |
7,987.8 |
5,686.2 |
6,359.2 |
|
Long-term debt |
4,601.1 |
4,975.2 |
5,853.5 |
|
Other non-current liabilities |
3,284.6 |
3,453.4 |
3,175.3 |
|
Total non-current liabilities |
7,885.7 |
8,428.6 |
9,028.8 |
|
|
|
| |
|
Capital |
12,460.5 |
12,460.5 |
12,461.8 |
|
Capital reserves |
76.3 |
69.4 |
62.8 |
|
Profit reserves |
1,760.4 |
1,064.7 |
727.6 |
|
Accumulated deficit |
— |
— |
(186.1) |
|
Treasury shares |
(65.3) |
(0.7) |
(27.6) |
|
Other comprehensive income (loss) |
(161.4) |
35.2 |
(47.5) |
|
Parent company shareholders’ equity |
14,070.5 |
13,629.1 |
12,991.0 |
|
Non-controlling interest |
39.5 |
7.6 |
4.7 |
|
Shareholders’ equity |
14,110.0 |
13,636.7 |
12,995.7 |
|
Total liabilities and shareholders’ equity |
29,983.5 |
27,751.5 |
28,383.7 |
|
|
2011 |
2010 |
2009 |
2008 |
2007 |
|
Operating Data |
|
||||
|
Poultry slaughtered (million heads per year) |
1,623.2 |
1,162.9 |
863.2 |
627.3 | |
|
Pork/beef slaughtered (thousand heads per year) |
10,563.4 |
7,718.7 |
4,713.2 |
3,775.0 | |
|
Total sales of meat and other processed products (thousand tons per year) |
5,667.0 |
4,176.4 |
3,162.9 |
1,812.5 | |
|
Milk collected from producers (millions of liters) |
1,499.2 |
1,396.5 |
1,605.6 |
247.0 | |
|
Employees (at year end) |
113,781 |
113,912 |
59,008 |
44,752 | |
|
|
|
|
|
|
Exchange Rates
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
10
In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to permit the real to float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar and/or the euro substantially. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that such measures will not be taken by the Brazilian government in the future. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil—Exchange rate movements may adversely affect our financial condition and results of operations.”
The following table shows the selling rate for U.S. dollars for the periods and dates indicated. The information in the “Average” column represents the average of the daily exchange rates during the periods presented. The numbers in the “Period End” column are the quotes for the exchange rate as of the last business day of the period in question.
|
|
Reais per U.S. Dollar | |||
|
Year |
High |
Low |
Average |
Period End |
|
2007 |
2.1556 |
1.7325 |
1.9498 |
1.7713 |
|
2008 |
2.5004 |
1.5593 |
1.8352 |
2.3370 |
|
2009 |
2.4218 |
1.7024 |
1.9959 |
1.7412 |
|
2010 |
1.8811 |
1.6554 |
1.7596 |
1.6662 |
|
2011 |
1.9016 |
1.6345 |
1.6746 |
1.8758 |
|
|
Reais per U.S. Dollar | |
|
Month |
High |
Low |
|
October 2011 |
1.886 |
1.685 |
|
November 2011 |
1.894 |
1.727 |
|
December 2011 |
1.876 |
1.783 |
|
January 2012 |
1.868 |
1.739 |
|
February 2012 |
1.738 |
1.702 |
|
March 2012 |
1.833 |
1.715 |
|
April 2012 (through April 11) |
1.832 |
1.826 |
Source: Central Bank.
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Risks Relating to Our Business and Industry
Our results of operations are subject to cyclicality and volatility affecting both our raw material prices and our selling prices.
Our business is largely dependent on the cost and supply of corn, soy meal, soybeans, hogs, cattle, milk and other raw materials, as well as the selling prices of our poultry, pork, beef and dairy products, all of which are determined by constantly changing market forces of supply and demand, which may fluctuate significantly, and other factors over which we have little or no control.
11
These other factors include, among others, fluctuations in local and global poultry, hog, cattle and milk production levels, environmental and conservation regulations, economic conditions, weather, animal and crop diseases, cost of international freight and exchange rate fluctuations. Our industry, both in Brazil and abroad, is also characterized by cyclical periods of higher prices and profitability, followed by overproduction, leading to periods of lower prices and profitability. We are not able to mitigate these risks by entering into long-term contracts with our customers and most of our suppliers because such contracts are not customary in our industry. Our financial performance is also affected by domestic and international freight costs, which are vulnerable to volatility in the price of oil. We may not be successful in addressing the effects of cyclicality and volatility on costs and expenses or the pricing of our products, and our overall financial performance may be adversely affected.
The decreases in demand and selling prices in 2009, which were exacerbated by the global economic crisis, illustrate the susceptibility of our business to cyclical market forces. In 2009, the average corn price on the Chicago Board of Trade, or “CBOT,” was 29.1% lower than the average price in 2008 after increasing 41.1% in 2008 compared to 2007. Soybean prices decreased by 16.3% in 2009 after increasing 42.8% in 2008 compared to 2007. Similarly, we significantly increased our selling prices of certain of our products in 2008 to reflect increased production costs but were then forced to decrease prices for many products in the fourth quarter of 2008 and throughout 2009. Besides that, the exchange rate volatility and export performance adversely affected our financial performance in those periods.
The volatility of prices of our important raw materials has continued in 2010 and 2011. In 2011, the average corn price on the CBOT was 58.8% higher than the average corn price in 2010. However, the price of corn on the CBOT in December 2011 was 16.7% lower than the price of corn in June 2011, largely as a result of supply and demand volatility in the market. CBOT soybean prices decreased by 15.9% in December 2011 compared to June 2011. In 2011, we found it necessary to increase our selling prices of international products in order to mitigate the impact of the increase in the costs of our raw materials.
Health risks related to the food industry could adversely affect our ability to sell our products.
We are subject to risks affecting the food industry generally, including risks posed by contamination or food spoilage, evolving nutritional and health-related concerns, consumer product liability claims, product tampering, the possible unavailability and expense of liability insurance and the potential cost and disruption of a product recall. Among such risks are those related to raising animals, including disease and adverse weather conditions. Meat is subject to contamination during processing and distribution. Contamination during processing could affect a large number of our products and therefore could have a significant impact on our operations.
Our sales are dependent on consumer preferences, and any actual or perceived health risks associated with our products, including any adverse publicity concerning these risks, could cause customers to lose confidence in the safety and quality of our products, reducing the level of consumption of those products.
Even if our own products are not affected by contamination, our industry may face adverse publicity if the products of other producers become contaminated, which could result in reduced consumer demand for our products in the affected category. We maintain systems designed to monitor food safety risks throughout all stages of the production process (including the production of poultry, hogs, cattle and dairy products).
Our systems for compliance with governmental regulations may not be fully effective in mitigating risks related to food safety. Any product contamination could have a material adverse impact on our business, results of operations, financial condition and prospects.
Deterioration of general economic conditions could negatively impact our business.
Our business may be adversely affected by changes in Brazilian and global economic conditions. In 2008 and 2009, our business was materially affected by the global economic crisis, which resulted in increased volatility in our markets and contributed to the net losses recorded in the fourth quarter of 2008 and in the first half of 2009. For instance, the global economic crisis led to an increase in raw material prices, such as corn and soybeans, which we could not pass on to our customers. In addition, there was a sharp decrease in demand in 2009, which forced us to cut 20% of our meat production for export in the first quarter of 2009. Although Brazilian and global economic conditions generally improved in 2010, in 2011, the European sovereign debt crisis led to a significant slowdown in economic activity in Europe, increasing unemployment rates and decreasing meat consumption. The upheaval in several countries in the Middle East and events in areas of Latin America also affected meat consumption in those regions. Because of the global nature of our business, we remain subject to the risk of economic volatility worldwide, and economic and political disruptions around the world can have a material adverse effect on our business and results of operations.
12
Raising animals and meat processing involve animal health and disease control risks, which could have an adverse impact on our results of operations and financial condition.
Our operations involve raising poultry and hogs and processing meat from poultry, hogs and cattle, as well as the purchase of milk and the sale of milk and dairy products, which require us to maintain animal health and control disease. We could be required to destroy animals or suspend the sale of some of our products to customers in Brazil and abroad in the event of an outbreak of disease affecting animals, such as the following: (1) in the case of poultry, avian influenza (discussed below) and Newcastle disease; (2) in the case of hogs, cattle and certain other animals, foot-and-mouth disease, classic swine fever “blue ear” disease and A(H1N1) influenza (discussed below); and (3) in the case of cattle, foot-and-mouth disease and bovine spongiform encephalopathy, known as “mad cow disease.” Destruction of poultry, hogs or other animals would preclude recovery of costs incurred in raising or purchasing these animals and result in additional expense for the disposal of such animals. In 2005, foot-and-mouth disease cases in the States of Mato Grosso do Sul and Paraná affected only cattle, although hogs can also be contaminated. An outbreak of foot-and-mouth disease could have an effect on livestock we own, the availability of livestock for purchase, consumer perception of certain protein products or our ability to access certain markets, which would adversely impact our results of operations and financial condition. In addition, although Brazilian cattle is generally grass-fed and at less risk of contracting mad cow disease than cattle raised in some other countries, increases in Brazilian cattle production could lead to the use of cattle feed containing animal byproducts that could heighten the risk of an outbreak of mad cow disease.
Outbreaks, or fears of outbreaks, of any of these or other animal diseases may lead to cancellation of orders by our customers and, particularly if the disease has the potential to affect humans, create adverse publicity that may have a material adverse effect on consumer demand for our products. Moreover, outbreaks of animal disease in Brazil may result in foreign governmental action to close export markets to some or all of our products, relating to some or all of our regions. For example, due to foot-and-mouth disease cases affecting cattle in the States of Mato Grosso do Sul and Paraná, certain major export markets, including Russia (which has been the largest importer of Brazilian pork) banned imports of pork from the entire country in November 2005. Russia partially lifted this ban in the second quarter of 2006 for pork products from the State of Rio Grande do Sul, and this ban was completely lifted in December 2008. In 2011, Russia prohibited imports from several Brazilian states, citing health and sanitary reasons, and this ban remains in place. Any future outbreaks of animal diseases could have a material adverse effect on our results of operations and financial condition.
Our pork business in our Brazilian and export markets could be negatively affected by concerns about A(H1N1) influenza, also called “swine flu.”
In 2009, A(H1N1) influenza, also called “swine flu,” spread to many countries. On June 11, 2009, the World Health Organization, or “WHO,” declared a flu alert level six, signaling a “global pandemic.” Many countries, including Russia and China, prohibited imports of pork from countries reporting a significant number of cases (Mexico, United States and Canada). On August 10, 2010, the WHO terminated the level six influenza pandemic alert and shifted its focus to a post-pandemic period. During this period, localized outbreaks of different magnitudes may show significant levels of A(H1N1) transmission. In China, for instance, at least 20 people died of A(H1N1) influenza in 2011.
Any further outbreak of A(H1N1) influenza could lead to the imposition of costly preventive controls on pork imports in our export markets and could have a negative impact on the consumption of pork in those markets or in Brazil. In addition, any future significant outbreak of A(H1N1) influenza in Brazil could lead to pressure to destroy our hogs, even though no link between the influenza cases and pork consumption has been shown. Any such destruction of our hogs would result in decreased sales of pork, prevent recovery of costs incurred in raising or purchasing our hogs, and result in additional expense for the disposal of destroyed hogs. Accordingly, any spread of A(H1N1) influenza, or increasing concerns about this disease, may have a material and adverse effect on our company.
13
Our poultry business in Brazilian and export markets could be negatively affected by avian influenza.
Chicken and other birds in some countries, particularly in Asia but also in Europe and Africa, have become infected by highly pathogenic avian influenza (the H5N1 virus). In a small number of cases, the avian influenza has been transmitted from birds to humans, resulting in illness and, on occasion, death. Accordingly, health authorities in many countries have taken steps to prevent outbreaks of this viral disease, including destruction of afflicted poultry flocks.
Since 2003, there have been over 526 confirmed human cases of avian influenza and over 311 deaths, according to the WHO. Various countries in Asia, the Middle East and Africa reported human cases in the past five years and as recently as 2011, and several countries in Europe reported cases of avian influenza in birds. For example, Indonesia became the focus of international attention when the largest cluster of human H5N1 virus cases so far was identified. The H5N1 virus is considered firmly entrenched in poultry throughout much of Indonesia, and this widespread presence has resulted in a significant number of human cases. In addition, in late 2011, China suspended supplies of live poultry to Hong Kong after a dead chicken there tested positive for avian influenza. In 2011, 62 cases were reported worldwide, with 34 deaths, according to the WHO.
To date, Brazil has not had a documented case of avian influenza, although there are concerns that an outbreak of avian influenza may occur in the country in the future. Any outbreak of avian influenza in Brazil could lead to required destruction of our poultry flocks, which would result in decreased sales of poultry by us, prevent recovery of costs incurred in raising or purchasing such poultry, and result in additional expense for the disposal of destroyed poultry. In addition, any outbreak of avian influenza in Brazil would likely lead to immediate restrictions on the export of some of our products to key export markets. Preventive actions adopted by Brazilian authorities, if any, may not be effective in precluding the spread of avian influenza within Brazil.
Whether or not an outbreak of avian influenza occurs in Brazil, further outbreaks of avian influenza anywhere in the world could have a negative impact on the consumption of poultry in our key export markets or in Brazil, and a significant outbreak would negatively affect our net sales and overall financial performance. Any outbreak could lead to the imposition of costly preventive controls on poultry imports in our export markets. Accordingly, any spread of avian influenza, or increasing concerns about this disease, may have a material and adverse effect on our company.
More stringent trade barriers in key export markets may negatively affect our results of operations.
Because of the growing market share of Brazilian poultry, pork and beef products in the international markets, Brazilian exporters are increasingly being affected by measures taken by importing countries to protect local producers. The competitiveness of Brazilian companies has led certain countries to establish trade barriers to limit the access of Brazilian companies to their markets.
Some countries, such as Russia, have a history of erecting trade barriers to imports of food products. In 2006, Russia began to impose quotas on Brazilian pork, beef and poultry products. Over the last two years, the Russian government has changed the allocation criteria for these quotas (particularly for pork and poultry products), which has negatively affected Brazil’s total export volume. Russia is also developing its local production capabilities and increasing quantitative restrictions. In 2011, Russia prohibited imports from several Brazilian states for health and sanitary reasons, which also decreased Brazil’s total export volume.
We have been affected by trade barriers imposed by a number of other countries from time to time. In 2009, for example, Ukraine initiated an anti-dumping investigation. Although the investigation was eventually halted and Brazil is once again permitted to export poultry and pork to that country, we cannot predict whether Ukraine may take similar measures in the future. In June 2011, South Africa initiated an anti-dumping investigation against Brazilian chicken, specifically whole chicken and boneless cuts. In a preliminary determination, the South African government imposed substantial tariffs on these products (62.9% on whole chicken and 46.5% on boneless cuts), which temporarily halted Brazilian imports. A final decision by the South African government is expected by the end of this year. The Brazilian government concurrently considering initiating a WTO panel to investigate alleged violations of anti-dumping agreements. In addition, at the end of 2011, Iraq introduced some barriers to Brazilian chicken exports, and in the beginning of 2012, Argentina imposed additional restrictions on Brazilian pork.
14
In Europe, another of our important markets, the European Union has, for some time, charged protective tariffs to mitigate the effects of Brazil’s lower production costs on local European producers. In addition, the European Union has a ban on certain types of Brazilian beef that impacts sales of fresh premium cuts and some frozen hindquarter cuts, and imports of Brazilian pork are currently banned.
Developed countries also use direct and indirect subsidies to enhance the competitiveness of their producers in other markets. For example, French producers receive subsidies for their sales of poultry to countries such as Saudi Arabia, a major importer of poultry products. Trade barriers are sometimes applied indirectly to other parties that are crucial to the export of our products. In addition, local producers in a specific market may exert political pressure on their governments to prevent foreign producers from exporting to their market, particularly during unfavorable economic conditions. Any of the above restrictions could substantially affect our export volumes and, consequently, our export sales and financial performance. If new trade barriers arise in our key export markets, we may face difficulties in reallocating our products to other markets on favorable terms, and our business, financial condition and results of operations might be adversely affected.
We face significant competition from Brazilian and foreign producers, which could adversely affect our financial performance.
We face strong competition from other Brazilian producers in our domestic markets and from Brazilian and foreign producers in our export markets. The Brazilian market for whole poultry, poultry cuts and pork cuts is highly fragmented. Small producers can also be important competitors, some of which operate in the informal economy and are able to offer lower prices by meeting lower quality standards. Competition from small producers is a primary reason why we sell most of our frozen (in natura) meat products in the export markets and is a barrier to expanding our sales of those products in the domestic market. With respect to exports, we compete with other large, vertically integrated Brazilian producers that have the ability to produce quality products at low cost, as well as with foreign producers.
In addition, the potential growth of the Brazilian domestic market for processed food, poultry, pork and beef and Brazil’s low production costs are attractive to international competitors. Although the main barrier to these companies has been the need to build a comprehensive distribution network and a network of outgrowers, international competitors with significant resources could undertake to build these networks or acquire and expand existing networks.
In the Brazilian dairy products markets, our main competitors are Nestlé Brasil Ltda., Danone Ltda., LBR (Lácteos Brasil S.A.) and Vigor. To varying degrees, our competitors may have strengths in specific product lines and regions as well as greater financial resources. In addition, our poultry and pork cuts, in particular, are highly price-competitive and sensitive to product substitution. Even if we remain a low-cost producer, customers may seek to diversify their sources of supply by purchasing a portion of the products they need from producers in other countries, as some of our customers in key export markets have begun to do. We expect that we will continue to face strong competition in all of our markets and anticipate that existing or new competitors may broaden their product lines and extend their geographic scope. Any failure by us to respond to product, pricing and other moves by competitors may negatively affect our financial performance.
Increased regulation of food safety could increase our costs and adversely affect our results of operations.
Our manufacturing facilities and products are subject to regular Brazilian federal, state and local, as well as foreign, governmental inspections and extensive regulation in the food safety area, including governmental food processing controls. Changes in government regulations relating to food safety could require us to make additional investments or incur other costs to meet the necessary specifications for our products. Our products are often inspected by foreign food safety officials, and any failure to pass those inspections can result in our being required to return all or part of a shipment to Brazil, destroy all or part of a shipment or incur costs because of delays in delivering products to our customers. Any tightening of food safety regulations could result in increased costs and could have an adverse effect on our business and results of operations.
15
Our export sales are subject to a broad range of risks associated with international operations.
Export sales account for a significant portion of our net sales, representing approximately 40% of our net sales in both 2010 and 2011. Our major export markets include the European Union, the Middle East (particularly Saudi Arabia) and the Far East (particularly Japan, China and Russia), where we are subject to many of the same risks described below in relation to Brazil. Our future financial performance will depend, to a significant extent, on economic, political and social conditions in our main export markets.
Our future ability to conduct business in export markets could be adversely affected by factors beyond our control, such as the following:
· exchange rate fluctuations;
· deterioration in international economic conditions;
· political risks, such as the “Arab Spring” events in the Middle East and recent Venezuelan elections and political instability in Iran;
· imposition of increased tariffs, anti-dumping duties or other trade barriers;
· strikes or other events affecting ports and other transport facilities;
· compliance with differing foreign legal and regulatory regimes; and
· sabotage affecting our products.
The market dynamics of our important export markets can change quickly and unpredictably due to these factors, the imposition of trade barriers of the type described above and other factors, which together can significantly affect our export volumes, selling prices and results of operations.
Our export sales are highly dependent on conditions at a small number of ports in southern Brazil. We export our products primarily through ports in southern Brazil (Paraná, Santa Catarina and Rio Grande do Sul). We have been affected from time to time by strikes of port employees or customs agents, sanitary inspection agents and other government agents at the Brazilian ports from which we export our products. For example, in the third quarter of 2007 and in March 2008, Brazilian federal government sanitary inspectors went on strike for approximately one month. More recently in August 2011, a strike at the Itajaí port affected exports for approximately two months. A widespread or protracted strike in the future could adversely affect our business and our results of operations.
In the fourth quarter of 2008, flooding and damage at the ports of Itajaí and Navegantes damaged port infrastructure and required us to divert all our exports in the region of Santa Catarina to three other ports: Rio Grande in the State of Rio Grande do Sul, Paranaguá and São Francisco. These events resulted in reduced shipment levels in November 2008 and led to delays in exports that adversely affected our export revenues for the fourth quarter of 2008. Any similar events in the future affecting the infrastructure necessary for the export of our products could adversely affect our revenues and our results of operations.
In particular, political and economic risks in Argentina could limit the profitability of our operations and our ability to execute our strategy in that country.
We have five production facilities in Argentina, and we view growth of our business in Argentina as an important component of our strategy in South America. In the fourth quarter of 2011, we acquired two Argentine companies, Avex and Flora Dánica, demonstrating our commitment to expanding in Argentina. However, executing our strategy in Argentina is subject to significant political and economic risks. Political and economic conditions have been volatile in that country for more than a decade. An economic crisis in 2001-2002 led to a long period of deep recession, inflation and political and social unrest. After growth in the second half of that decade, Argentina suffered a sudden economic decline in 2009, accompanied again by inflation and political and social unrest. Economic uncertainty, inflation and other factors could lead to lower real salaries, lower consumption and unemployment, which could have an adverse effect on demand for our products. In addition, Argentine government policies may adversely affect our ability to realize a return on our investment in Argentina. For example, the government has imposed restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds of their investments in Argentina. More recently, the Argentine government announced the effective nationalization of YPF S.A., Argentina’s leading energy company, through the expropriation of the controlling interest in YPF S.A. held by Repsol YPF S.A., a Spanish company. The Argentine government’s action led to a dramatic decline in the prices of Argentine securities and great concern among international investors. Argentine government intervention, investor reactions and economic uncertainty in Argentina could adversely affect the profitability of our operations and our ability to execute our strategy in that country.
Environmental laws and regulations require increasing expenditures for compliance.
We, like other Brazilian food producers, are subject to extensive Brazilian federal, state and local environmental laws, regulations, authorizations and licenses concerning, among other things, the handling and disposal of waste, discharges of pollutants into the air, water and soil, and clean-up of contamination, all of which affect our business. Any failure to comply with these laws and regulations or any lack of authorizations or licenses could result in administrative and criminal penalties, such as fines, cancellation of authorizations or revocation of licenses, in addition to negative publicity and liability for remediation or for environmental damage. We cannot operate a plant if the required environmental permit is not valid or current.
16
We have incurred, and will continue to incur, capital and operating expenditures to comply with these laws and regulations. Because of the possibility of unanticipated regulatory measures or other developments, particularly as environmental laws become more stringent in Brazil, the amount and timing of future expenditures required to maintain compliance could increase from current levels and could adversely affect the availability of funds for capital expenditures and other purposes. Compliance with existing or new environmental laws and regulations, as well as obligations in agreements with public entities, could result in increased costs and expenses.
Our plants are subject to environmental licensing, based on their pollution potential and usage of natural resources. If, for example, one of our plants is built or expanded without an environmental license or if our environmental licenses expire, are not renewed or have their solicitation of renewal dismissed by the competent environmental authority, we may incur fines and other administrative penalties, suspension of operations or closing of the facilities in question. Those same penalties may also be applicable in the case of failure to fulfill the conditions of validity foreseen in the environmental licenses already held by us. Currently, some of our environmental licenses are being renewed, and we cannot guarantee that environmental agencies will approve our renewal requests.
Acquisitions may divert management resources or prove to be disruptive to our company.
We regularly review and pursue opportunities for strategic growth through acquisitions and other business ventures. We have completed several acquisitions in recent years, as described under “Item 4. Information on the Company—A. History and Development of the Company—Corporate History.” Acquisitions, especially involving sizeable enterprises, may present financial, managerial and operational challenges, including diversion of management attention from existing businesses, difficulty with integrating personnel and financial and other systems, increased compensation expenses for newly hired employees, assumption of unknown liabilities and potential disputes with the sellers. We could also experience financial or other challenges if any of the businesses that we have acquired or may acquire in the future give rise to liabilities or problems of which we are not aware. Acquisitions outside of Brazil may present additional difficulties, such as compliance with foreign legal and regulatory systems and integration of personnel to different managerial practices and would increase our exposure to risks associated with international operations.
In recent years, the size of our acquisitions has increased, which has increased the magnitude of the challenges described above. In 2009, we completed our business combination with Sadia, which was approved by the Brazilian Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica, the Brazilian government agency with antitrust decision making authority, or “CADE”) in 2011. Since the Sadia transaction, we have continued to grow through acquisitions, in line with our strategy to increase the internationalization of the company. In 2011, we acquired two Argentine companies, Avex S.A., a poultry producer, and Flora Dánica S.A., a margarine producer and distributor, for R$188.3 million. In addition, we acquired Heloisa Indústria e Comércio de Produtos Lácteos Ltda. for R$55.0 million, as a part of our strategy to increase our operations in the dairy business. We may not realize the benefits of the acquisitions we undertake, in the timeframe we anticipate or at all, because of integration or other challenges.
We may not realize the expected benefits of our business combination with Sadia, whether because of lost revenues from businesses we were required to divest, difficulty in achieving projected synergies or other reasons.
In July 2011, we received Brazilian antitrust approval for our business combination with Sadia from the CADE, but that approval was subject to a number of conditions, including, among others:
· the suspension of our use of the Perdigão and Batavo brands with respect to several product lines in the Brazilian market for periods ranging from three to five years;
· the divestment of our Rezende, Wilson, Texas, Tekitos, Patitas, Escolha Saudável, Light Elegant, Fiesta, Freski, Confiança, Doriana and Delicata trademarks; and
· the divestment of 10 processed food plants, two hog slaughtering plants, two poultry slaughtering plants, four animal feed plants, 12 chicken breeder stock farms, two poultry hatcheries and eight distribution centers and a related portfolio of contracts with integrated poultry and hog outgrowers.
17
In March 2012, we entered into an agreement with Marfrig Alimentos S.A. to exchange these assets for assets and cash held by Marfrig. Under the agreement:
· We agreed to transfer to Marfrig:
· the trademarks, intellectual property, real property, facilities and equipment described in the agreement with the CADE;
· the assets and rights relating to eight distribution centers;
· through a lease, our hog slaughtering plant in Carambeí in the State of Paraná, with an option by Marfrig to purchase the plant for R$188.0 million at the end of the lease term;
· capital stock of certain subsidiaries relating to the assets above;
· contracts with integrated producers to ensure that Marfrig will maintain the same levels of supply as BRF and Sadia did; and
· Sadia’s 64.57% interest in the capital stock of Excelsior Alimentos S.A.
In return, Marfrig agreed to transfer to us its 90.05% interest in Quickfood S.A., an Argentine company; and R$350.0 million in cash, of which R$100.0 million must be paid between June and October 2012 and the remaining R$250.0 million will be paid in 72 monthly installments, plus interest at market rates. The transaction with Marfrig is subject to conditions precedent, including an announcement by the CADE that the agreement fulfills the conditions of the Performance Commitment Agreement (Termo de Compromisso de Desempenho, or “TCD”). For more details on these agreements, see “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.”
Based on our results of operations for the year ended December 31, 2010, we estimate that the sale of assets and brands agreed with CADE represent revenues of approximately R$1.7 billion and sales volumes equivalent to approximately 456 thousand tons of in natura, marinated and processed products and other products. We estimate that the suspended Perdigão and Sadia brand categories are equivalent to a further R$1.2 billion in revenues.
Although we expect to achieve synergies from the integration of the Brazilian operations of BRF and Sadia, those synergies may not compensate for the lost revenue from the divested brands and assets or the suspended brands or any unanticipated costs. Our synergy projections are based on historical sales volumes, and if our sales volumes in future periods are lower than those we have assumed, our synergies could also be lower than our projections. In addition, we estimate that we will need to invest approximately R$700 million from 2011 to 2013 to achieve our projected synergies. We may not achieve the full amount of our projected synergies for 2012 to 2013, or it may take us longer to achieve these synergies than we currently anticipate.
The divestment and suspension of these brands will require us to refocus our marketing and sales efforts on our remaining brands in the Brazilian market and adjust our operations accordingly. The transfers of our brands could lead to confusion among consumers and could affect customer loyalty. In addition, we run the risk that any contamination or other health issue that may arise in the future from a product sold using one of our divested or suspended brands may be associated with our company, even if we did not produce the product. Any such issue could have an adverse effect on our business, revenues and results of operations.
In addition, our integration of the Brazilian business of Sadia with our Brazilian business is ongoing, and any failure to effectively integrate those operations may increase our costs, adversely affect our margins or have other negative consequences. The challenges of integration and transition include, among others:
· devising a coherent marketing and branding strategy in our domestic market that takes into account the relative strengths of BRF’s and Sadia’s marketing and brands, after giving effect to the transfer of brands to Marfrig;
18
· continuing to integrate two of the largest customer distribution networks in Brazil;
· continuing to integrate the extensive production facilities of BRF and Sadia in several Brazilian states; and
· the potential loss of key customers of BRF or Sadia, or both.
The business combination with Sadia is significantly larger than any other transaction we have undertaken in the past, and the Brazilian antitrust approval raised more complex issues than we have faced in any other acquisition. Any combination of the challenges described above could adversely affect our results of operations and prospects and the market price of our common shares or ADRs.
We are influenced by a group of shareholders that control a significant percentage of our common shares.
Currently, five pension funds hold a significant percentage of our common shares and, acting together, have the ability to significantly influence our decisions. Those pension funds owned 27.5% of our total capital as of December 31, 2011. They were parties to a shareholders’ voting agreement that expired on October 2011 that set forth voting arrangements with respect to, among other matters, (1) the election of officers and members of our board of directors and of the fiscal council and (2) the matters set forth in Article 136 of the Brazilian Corporation Law, including decisions relating to dividends, corporate restructurings, our corporate purpose and other matters. Although the current shareholders’ agreement has expired, the pension funds continue to be guided by its terms and are currently negotiating a new shareholders’ voting agreement.
As a result, these shareholders have, and will continue to have, the power to significantly influence the outcome of important corporate decisions or matters submitted to a vote of our shareholders. The interests of these shareholders may conflict with, or differ from, the interests of other holders of our common shares.
Unfavorable outcomes in legal proceedings may reduce our liquidity and negatively affect us.
We are defendants in civil, labor and tax proceedings and are also subject to consent agreements (termo de ajustamento de conduta). Under IFRS, we classify the risk of adverse results in these proceedings as “remote,” “possible” or “probable.” We disclose the aggregate amounts of these proceedings that we have judged possible or probable, to the extent the amounts are known or reasonably estimable, and we record provisions only for losses that we consider probable. These disclosures for 2011 are included in “Item 8. Financial Information—Legal Proceedings” and note 25 to our consolidated financial statements.
We are not required to disclose or record provisions for proceedings in which our management judges the risk of loss to be remote. However, the amounts involved in certain of the proceedings in which we believe our risk of loss is remote are substantial, and the losses to us could, therefore, be significantly higher than the amounts for which we have recorded provisions. Even for the amounts recorded as provisions for probable losses, a judgment against us would have an effect on our cash flow if we are required to pay those amounts.
Unfavorable decisions in our legal proceedings may, therefore, reduce our liquidity and adversely affect our business, financial condition and results of operations.
We cannot assure you that we will obtain favorable decisions in these proceedings or that our reserves will be sufficient to cover potential liabilities resulting from unfavorable decisions. In the ordinary course of business, we outsource labor to third parties. See “Item 4. Information on the Company—B. Business Overview—Production Process.” If it were to become necessary to revisit this contractual structure, we could incur additional operating expenses.
19
We depend on members of our senior management and on our ability to recruit and retain qualified professionals to implement our strategy.
We depend on members of our senior management and other qualified professionals to implement our business strategies. Efforts to recruit and retain professionals may result in significant additional expenses, which could adversely affect us. In addition, the loss of key professionals may adversely affect our ability to implement our strategy.
Damages not covered by our insurance might result in losses for us, which could have an adverse effect on our business.
As is typical in our business, our plants, distribution centers, vehicles and our directors and officers, among others, are insured. However, certain kinds of losses cannot be insured against, and our insurance policies are subject to liability limits and exclusions. If an event that cannot be insured occurs, or the damages are higher than our policy limits, we may incur significant cost. In addition, we could be required to pay indemnification to parties affected by such an event.
In addition, even where we incur losses that are ultimately covered by insurance, we may incur additional expenses to mediate the loss, such as shifting production to another facility. These costs may not be fully covered by our insurance. For example, in March 2011, a fire affected part of the installations of our Nova Mutum, Mato Grosso unit, and on October 2011, another fire affected part of the installations of our Brasília unit. Although the facilities are covered by fire insurance and the units’ production was temporarily absorbed by other BRF plants, we cannot guarantee that all of our direct and indirect costs will be covered by our insurance. Any similar event at other facilities in the future could adversely affect our revenues, expenses and our business.
Risks Relating to Our Indebtedness
We have substantial indebtedness, especially since our business combination with Sadia, and our leverage could negatively affect our ability to refinance our indebtedness and grow our business.
At December 31, 2011, our total consolidated debt was R$8,053.5 million, including R$2,567.3 million of debt incurred by our subsidiary Sadia.
Our substantial indebtedness could have major consequences for us, including:
· requiring that a substantial portion of our cash flows from operations be used for the payment of principal and interest on our debt, reducing the funds available for our operations or other capital needs;
· limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate because our available cash flow after paying principal and interest on our debt might not be sufficient to make the capital and other expenditures necessary to address these changes;
· increasing our vulnerability to general adverse economic and industry conditions because, during periods in which we experience lower earnings and cash flows, we would be required to devote a proportionally greater amount of our cash flows to paying principal and interest on debt;
· limiting our ability to obtain additional financing in the future to fund working capital, capital expenditures, acquisitions and general corporate requirements;
· making it difficult for us to refinance our indebtedness or to refinance such indebtedness on terms favorable to us, including with respect to existing accounts receivable securitizations;
· placing us at a competitive disadvantage compared to competitors that are relatively less leveraged and that may be better positioned to withstand economic downturns; and
20
· exposing our current and future borrowings made at floating interest rates to increases in interest rates.
We have substantial debt that matures in each of the next several years.
As of December 31, 2011, we had R$3,452.5 million of debt that matures in 2012, R$776.9 million of debt that matures in 2013, R$578.5 million of debt that matures in 2014, R$142.4 million of debt that matures in 2015 and R$3,103.3 million of debt that matures in 2016 and thereafter.
A substantial portion of our outstanding debt is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2011, we had R$4,723.8 million of foreign currency debt, including R$1,638.3 million of short-term foreign currency debt. Our U.S. dollar-denominated debt must be serviced by funds generated from sales by our subsidiaries, the majority of which are not denominated in U.S. dollars. Consequently, when we do not generate sufficient U.S. dollar revenues to cover that debt service, we must use revenues generated in reais or other currencies to service our U.S. dollar-denominated debt. Depreciation in the value of the real or any of the other currencies of the countries in which we operate, compared to the U.S. dollar, could adversely affect our ability to service our debt. Foreign currency hedge agreements may not be effective in covering these currency-related risks.
Any future uncertainty in the stock and credit markets could also negatively impact our ability to access additional short-term and long-term financing, which could negatively impact our liquidity and financial condition. If, in future years:
· the pressures on credit return as a result of disruptions in the global stock and credit markets,
· our operating results worsen significantly,
· we are unable to complete any necessary divestitures of non-core assets and our cash flow or capital resources prove inadequate, or
· we are unable to refinance any of our debt that becomes due,
we could face liquidity problems and may not be able to pay our outstanding debt when due, which could have a material adverse effect on our consolidated business and financial condition.
The terms of our indebtedness impose significant operating and financial restrictions on us.
The instruments governing our consolidated indebtedness impose significant operating and financial restrictions on us. These restrictions may limit, directly or indirectly, our ability, among other things, to undertake the following actions:
· borrow money;
· make investments;
· sell assets, including capital stock of subsidiaries;
· guarantee indebtedness;
· enter into agreements that restrict dividends or other distributions from certain subsidiaries;
· enter into transactions with affiliates;
· create or assume liens; and
· engage in mergers or consolidations.
21
Although the covenants to which we are subject have exceptions and qualifications, the breach of any of these covenants could result in a default under the terms of other existing debt obligations. Upon the occurrence of such an event of default, all amounts outstanding under the applicable debt instruments and the debt issued under other debt instruments containing cross-default or cross-acceleration provisions, together with accrued and unpaid interest, if any, might become or be declared immediately due and payable. If such indebtedness were to be accelerated, we may have insufficient funds to repay in full any such indebtedness. In addition, in connection with the entry into new financings or amendments to existing financing arrangements, our subsidiaries’ financial and operational flexibility may be further reduced as a result of more restrictive covenants, requirements for security and other terms.
Risks Relating to Brazil
Brazilian economic, political and other conditions, and Brazilian government policies or actions in response to these conditions, may negatively affect our business and results of operations.
The Brazilian economy has historically been characterized by interventions by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. For example, the government’s actions to control inflation have at times involved setting wage and price controls, blocking access to bank accounts, imposing exchange controls and limiting imports into Brazil. We have no control over, and cannot predict, what policies or actions the Brazilian government may take in the future.
Our business, results of operations, financial condition and prospects as well as the market prices of our common shares or the ADRs may be adversely affected by, among others, the following factors:
· exchange rate movements;
· exchange control policies;
· expansion or contraction of the Brazilian economy, as measured by rates of growth in GDP;
· inflation;
· tax policies;
· other economic political, diplomatic and social developments in or affecting Brazil;
· interest rates;
· energy shortages;
· liquidity of domestic capital and lending markets;
· changes in environmental regulation; and
· social and political instability.
These factors, as well as uncertainty over whether the Brazilian government may implement changes in policy or regulations relating to these factors, may adversely affect us and our business and financial performance and the market prices of our common shares or the ADRs.
22
Inflation, and government measures to curb inflation, may adversely affect the Brazilian economy, the Brazilian securities market, our business and operations , financial condition, and the market prices of our common shares or the ADRs.
Brazil experienced high rates of inflation in the past. According to the General Market Price Index (Índice Geral de Preços do Mercado) or “IGP-M,” a general price inflation index, the inflation rates in Brazil were 7.7% in 2007, 9.8% in 2008, (1.7)% in 2009, 11.3% in 2010 and 5.1% in 2011. In addition, according to the IPCA, published by the IBGE, the Brazilian consumer price inflation rates were 4.5% in 2007, 5.9% in 2008, 4.3% in 2009, 5.9% in 2010 and 6.5% in 2011. In both 2010 and 2011, the actual inflation rate was significantly higher than the Brazilian Central Bank’s target of 4.5%. Increases in personal expenses (which include services) were the main reason that consumer inflation did not meet the Central Bank’s target in 2011. See “Item 5. Operating and Financial Review and Prospects—A. Operating and Financial Review and Prospects—Principal Factors Affecting Our Results of Operations—Brazilian and Global Economic Conditions” and “—Effects of Exchange Rate Variations and Inflation.”
The Brazilian government’s measures to control inflation have often included maintaining a tight monetary policy with high interest rates, thereby restricting availability of credit and reducing economic growth. Inflation, actions to combat inflation and public speculation about possible additional actions have also contributed materially to economic uncertainty in Brazil in the past and to heightened volatility in the Brazilian securities markets.
Brazil may experience high levels of inflation in future periods. Periods of higher inflation may slow the rate of growth of the Brazilian economy, which could lead to reduced demand for our products in Brazil and decreased net sales. Inflation also is likely to increase some of our costs and expenses, which we may not be able to pass on to our customers and, as a result, may reduce our profit margins and net income. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our debt may increase, resulting in lower net income. Inflation and its effect on domestic interest rates can, in addition, lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness in those markets and may have an adverse effect on our business, results of operations, financial condition and the market price of our common shares and the ADRs.
Exchange rate movements may adversely affect our financial condition and results of operations.
From time to time, there have been significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies. In 2006 and 2007 the real appreciated 9.5% and 16.3%, respectively, against the U.S. dollar. In 2008, the real depreciated 31.9% against the U.S. dollar. In 2009 and 2010 the real appreciated 25.5% and 4.3%, respectively, against the U.S. dollar. In 2011, the real depreciated 12.6% against the U.S. dollar.
Any appreciation of the real against the U.S. dollar may lead to a dampening of export-driven growth. Our production costs are denominated in reais, but our export sales are mostly denominated in U.S. dollars or euros. Financial revenues generated by exports are reduced when translated to reais in the periods in which the real appreciates in relation to the U.S. dollar. Any such appreciation could reduce the competitiveness of our exports and adversely affect our net sales and our cash flows from exports.
On the other hand, any depreciation of the real against the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products and requiring deflationary government policies. In addition, the prices of soy meal and soybeans, important ingredients of our animal feedstock, are closely linked to the U.S. dollar, and many of the mineral nutrients added to our feedstock must be purchased in U.S. dollars. The price of corn, another important ingredient of our feedstock, is also linked to the U.S. dollar to a lesser degree. In addition to feedstock ingredients, we purchase sausage casings, breeder eggs, packaging and other raw materials, as well as equipment for use in our production facilities, from suppliers located outside Brazil whom we must pay in U.S. dollars or other foreign currencies. When the real depreciates against the U.S. dollar, the cost in reais of our U.S. dollar-linked raw materials and equipment increases, and these increases could materially adversely affect our results of operations.
23
We had total foreign currency-denominated debt obligations in an aggregate amount of R$4,723.8 million at December 31, 2011, representing approximately 59% of our total consolidated indebtedness at that date. A significant portion of our consolidated debt is denominated in foreign currencies because export credit facilities available in foreign currencies often have attractive financing conditions and costs compared to other financing sources. Foreign-currency denominated credit facilities expose us to a greater degree of foreign exchange risk. We manage a portion of our exchange rate risk through foreign currency swaps and investments, and cash flows from export sales are in U.S. dollars and other foreign currencies, but our foreign currency debt obligations are not completely hedged. At December 31, 2011, our short-term consolidated exchange rate exposure was R$1,638.3 million of the amount described above. A significant devaluation of the real in relation to the U.S. dollar or other currencies could increase the debt service requirements of our foreign currency-denominated obligations.
Fluctuations in interest rates may have an adverse effect on our business, financial condition and the market prices of our common shares or the ADRs.
The Central Bank establishes the basic interest rate target for the Brazilian financial system by reference to the level of economic growth of the Brazilian economy, the level of inflation and other economic indicators.
At the end of former president Luiz Inácio Lula da Silva’s administration, interest rates were lowered to stimulate economic growth. From 2008 to 2010, interest rates decreased from 13.75% to 10.75% and inflation was kept under 5.0%. With the transition to President Dilma Rousseff’s administration in January 2011, the Brazilian government has set a goal of cutting public expenditures and stabilizing the economy. The low interest rates from previous years resulted in high inflation rates of 6.5% in 2011, leading to the Central Bank’s decision to increase interest rates to stabilize the situation.
At December 31, 2011, approximately 32% of our total liabilities from indebtedness and derivative instruments of R$8,053.5 billion was either (1) denominated in (or swapped into) reais and bears interest based on Brazilian floating interest rates, such as the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or “TJLP,” the interest rate used in our financing agreements with Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social — BNDES), or “BNDES,” and the Interbank Deposit Certificate Rate (Certificado de Depósito Interbancário), or “CDI” rate, an interbank certificate of deposit rate that applies to our foreign currency swaps and some of our other real-denominated indebtedness, or (2) U.S. dollar-denominated and bears interest based on LIBOR. Any increase in the CDI, TJLP or LIBOR rates may have an adverse impact on our financial expenses and our results of operations.
Changes in tax laws may increase our tax burden and, as a result, negatively affect our profitability.
The Brazilian government regularly implements changes to tax regimes that may increase our and our customers’ tax burdens. These changes include modifications in the rate of assessments and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In the past, the Brazilian government has presented certain tax reform proposals, which have been mainly designed to simplify the Brazilian tax system, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposals provide for changes in the rules governing the federal Social Integration Program (Programa de Integração Social), or “PIS,” the federal Contribution for Social Security Financing (Contribuição para Financiamento da Seguridade Social — COFINS), or “COFINS,” the state Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or “ICMS,” and some other taxes. These proposals are not assured to be approved and passed into law. The effects of these proposed tax reform measures and any other changes that result from enactment of additional tax reforms have not been, and cannot be, quantified. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance.
Risks Relating to Our Common Shares and the ADRs
Holders of ADRs may find it difficult to exercise voting rights at our shareholders’ meetings.
Holders of ADRs may exercise voting rights with respect to our common shares represented by ADSs and evidenced by ARSs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADRs holders. For example, we are required to publish a notice of our shareholders’ meetings in specified newspapers in Brazil. Holders of our common shares are able to exercise their voting rights by attending a shareholders’ meeting in person or voting by proxy. By contrast, holders of ADRs will receive notice of a shareholders’ meeting by mail from the ADR depositary if we give notice to the depositary requesting the depository to do so. To exercise their voting rights, holders of ADRs must instruct the ADR depositary on a timely basis. This voting process necessarily takes longer for holders of ADRs than for holders of our common shares. If the ADR depositary fails to receive timely voting instructions for all or part of the ADRs, the depositary will assume that the holders of those ADRs are instructing it to give a discretionary proxy to a person designated by us to vote their ADRs, to the extent permitted by the rules of the New York Stock Exchange.
24
Holders of ADRs also may not receive the voting materials in time to instruct the depositary to vote our common shares underlying the ADSs that are evidenced by their ADRs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADRs or for the manner of carrying out those voting instructions. Accordingly, holders of ADRs may not be able to exercise voting rights, and they have little, if any, recourse if the common shares underlying the ADSs that are evidenced by their ADRs are not voted as requested.
Non-Brazilian holders of ADRs and common shares may face difficulties in protecting their interests because we are subject to different corporate rules and regulations as a Brazilian company, and our shareholders may have less extensive rights.
Holders of ADRs are not direct shareholders of our company and are unable to enforce the rights of shareholders under our bylaws and the Brazilian Corporation Law.
Our corporate affairs are governed by our bylaws and the Brazilian Corporation Law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the State of Delaware or New York, or elsewhere outside Brazil. Even if a holder of ADRs surrenders its ADRs and becomes a direct shareholder, its rights as a holder of our common shares under the Brazilian Corporation Law to protect its interests relative to actions by our board of directors or executive officers may be fewer and less well-defined than under the laws of those other jurisdictions.
Although insider trading and price manipulation are crimes under Brazilian law, the Brazilian securities markets are subject to different levels of regulations and supervision than the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States and certain other countries, which may put holders of our common shares and the ADRs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.
Non-Brazilian holders of ADRs and common shares may face difficulties in serving process on or enforcing judgments against us and other persons.
We are a corporation (sociedade anônima) organized under the laws of Brazil, and all of our directors and executive officers and our independent public accountants reside or are based in Brazil. Most of the assets of our company and of these other persons are located in Brazil. As a result, it may not be possible for non-Brazilian holders of ADRs and common shares to effect service of process upon us or these other persons within the United States or other jurisdictions outside Brazil or to enforce against us or these other persons judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain conditions are met, holders may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.
25
Judgments of Brazilian courts with respect to our common shares may be payable only in reais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we may not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares or the ADRs.
Holders of ADRs and non-Brazilian holders of our common shares may be unable to exercise preemptive rights and tag-along rights with respect to our common shares underlying the ADSs evidenced by their ADRs.
Holders of ADRs and non-Brazilian holders of our common shares may be unable to exercise the preemptive rights and tag-along rights relating to our common shares (including common shares underlying the ADSs evidenced by their ADRs) unless a registration statement under the U.S. Securities Act of 1933, as amended, or the “Securities Act,” is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, a holder may receive only the net proceeds from the sale of his or her preemptive rights or tag-along, or if these rights cannot be sold, they will lapse and the holder will receive no value from them.
Provisions in our bylaws may prevent efforts by our shareholders to change our control or management.
Our bylaws contain provisions that may discourage, delay or make more difficult a change in control of our company or removal of our directors. Subject to limited exceptions, these provisions require any shareholder that acquires shares representing 20% or more of our share capital to, within 30 days from the date of such acquisition, commence a tender offer with respect to all of our share capital for a price per share equivalent to the greatest of: (1) the economic value of our company, which shall be equivalent to the arithmetic average of the mean points of the economic value ranges obtained in two appraisal reports prepared based on the discounted cash flow method, as long as the variation between these mean points shall not exceed 10%, in which case the economic value shall be determined through arbitration; (2) 135% of the issue price of the shares issued in any capital increase through a public offering that takes place within the 24-month period before the date on which the public offering shall become mandatory, duly adjusted in accordance with the IPCA variation up to the date of payment; and (3) 135% of the unit price of our shares within the 30-day period before the public offering. These provisions of our bylaws may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our shareholders.
Holders of ADRs could be subject to Brazilian income tax on capital gains from sales of ADRs.
Historically, any capital gain realized on a sale or other disposition of ADRs between non-Brazilian holders outside Brazil was not subject to Brazilian income tax. However, a December 2003 Brazilian law (Law No. 10,833) provides that “the acquirer, individual or legal entity resident or domiciled in Brazil, or the acquirer’s attorney-in-fact, when such acquirer is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to capital gains earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil.” The Brazilian tax authorities have issued a normative instruction confirming that they intend to assess income tax on capital gains earned by non-Brazilian residents whose assets are located in Brazil. It is unclear whether ADSs representing our common shares and evidenced by ADRs, which are issued by the ADR depositary outside Brazil, will be deemed to be “property located in Brazil” for purposes of this law. Accordingly, we cannot determine whether Brazilian tax authorities will attempt to tax any capital gains arising from the sale or other disposition of the ADRs, even when the transaction is consummated outside Brazil between non-Brazilian residents.
26
Brazilian taxes may apply to a gain realized by a non-Brazilian holder on the disposition of common shares to another non-Brazilian holder.
The gain realized by a non-Brazilian holder on the disposition of common shares to another non-Brazilian holder (other than a disposition of shares held pursuant to Resolution No. 2,689, as amended, of the CMN) is generally viewed as being subject to taxation in Brazil. Pursuant to Law No. 10,833/03, Brazilian tax authorities may assess income tax on capital gains earned by non-Brazilian residents in transactions involving assets that are located in Brazil. In this case, the tax rate applicable on the gain would be 15% (or 25% in the case of a non-Brazilian holder organized under the laws of or a resident of a tax haven). For additional discussion of the tax consequences of a disposition of our common shares, see “Item 10. Additional Information––Taxation.”
The relative volatility and limited liquidity of the Brazilian securities markets may negatively affect the liquidity and market prices of our common shares and the ADRs.
The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The BM&FBOVESPA - Securities, Commodities & Futures Exchange, or the “São Paulo Stock Exchange,” had a total market capitalization of R$2,292 billion, or U.S.$1,219 billion, at December 31, 2011 and an average daily trading volume of R$6.2 billion in 2011. By contrast, the New York Stock Exchange had a market capitalization of U.S.$11.8 trillion at December 31, 2011 (U.S. domestic listed companies) and an average daily trading volume of U.S.$71.5 billion in 2011. The Brazilian securities markets are also characterized by considerable share concentration.
The ten largest companies in terms of market capitalization represented approximately 54.0% of the aggregate market capitalization of the São Paulo Stock Exchange at December 31, 2011. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 47.0% of all shares traded on the São Paulo Stock Exchange in 2011. These market characteristics may substantially limit the ability of holders of the ADRs to sell common shares underlying ADSs evidenced by ADRs at a price and at a time when they wish to do so and, as a result, could negatively impact the market prices of these securities.
Developments and the perception of risks in other countries, especially emerging market countries, may adversely affect the market prices of our common shares and the ADRs.
The market for securities issued by Brazilian companies is influenced, to varying degrees, by economic and market conditions in other emerging market countries. Although economic conditions are different in each country, the reaction of investors to developments in one country may cause the capital markets in other countries to fluctuate. Developments or adverse economic conditions in other emerging market countries have at times resulted in significant outflows of funds from, and declines in the amount of foreign currency invested in, Brazil. For example, in 2001, after a prolonged recession, followed by political instability, Argentina announced that it would no longer continue to service its public debt. The economic crisis in Argentina negatively affected, for several years, investors’ perceptions of Brazilian securities. Economic or political crises in Latin America or other emerging markets may significantly affect perceptions of the risk inherent in investing in the region, including Brazil.
The Brazilian economy also is affected by international economic and market conditions generally, especially economic and market conditions in the United States. Share prices on the São Paulo Stock Exchange, for example, have historically been sensitive to fluctuations in U.S. interest rates as well as movements of the major U.S. stock indexes.
Developments in other countries and securities markets could adversely affect the market prices of our common shares or the ADRs and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.
27
We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.
Based on our financial statements, relevant market and shareholder data, and the projected composition of our income and valuation of our assets, including goodwill, we do not believe that we were a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes for 2011, and we do not expect to be a PFIC for 2012 or in the future, although we can provide no assurances in this regard. If we become a PFIC, U.S. holders of our common shares or ADRs may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) by value in that taxable year which produce or are held for the production of passive income is at least 50%. The calculation of the value of our assets will be based, in part, on the quarterly market value of our common shares and ADRs, which is subject to change. See “Item 10. Additional Information––E. Taxation––U.S. Federal Income Tax Considerations––Passive Foreign Investment Company.”
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company.
Corporate History
BRF-Brasil Foods S.A. is a publicly held company in Brazil and is, therefore subject to the requirements of the Brazilian Corporation Law and the rules and regulations of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, or “CVM”).
We were founded by the Brandalise and Ponzoni families in 1934 as Ponzoni, Brandalise e Cia, in the southern State of Santa Catarina and remained under the Brandalise family’s management until September 1994. In 1940, we expanded our operations from general trading, with an emphasis on food and food-related products, to include pork processing. During the 1950s, we entered the poultry processing business. During the 1970s, we broadened the distribution of our products to include export markets, starting with Saudi Arabia. From 1980 through 1990, we expanded our export markets to include Japan in 1985 and Europe in 1990. We also undertook a series of acquisitions in the poultry and pork processing business and made investments in other businesses.
From 1990 through 1993, we suffered substantial losses because of increased financial expenses, underinvestment in product development, limited capacity and modest marketing of our products. By September 1994, we faced a liquidity crisis, as a result of which the Brandalise family sold their interest in our company, consisting of 80.68% of our common shares and 65.54% of our preferred shares, to eight pension funds:
· PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil, or “PREVI,” the pension fund of employees of Banco do Brasil S.A.;
· SISTEL - Fundação Telebrás de Seguridade Social, or “SISTEL,” the pension fund of employees of Telecomunicações Brasileiras S.A.-Telebrás;
· PETROS - Fundação Petrobras de Seguridade Social, or “PETROS,” the pension fund of employees of Petróleo Brasileiro S.A. Petrobras;
· Real Grandeza Fundação de Assistência e Previdência Social, or “Real Grandeza,” the pension fund of employees of Furnas Centrais Elétricas S.A.-Furnas;
· Fundação de Assistência e Previdência Social do BNDES-FAPES, or “FAPES,” the pension fund of employees of Banco Nacional de Desenvolvimento Economico e Social-BNDES;
28
· PREVI-BANERJ - Caixa de Previdência dos Funcionários do Banerj, or “PREVI-BANERJ,” the pension fund of employees of Banco do Estado do Rio de Janeiro S.A.;
· VALIA - Fundação Vale do Rio Doce de Seguridade Social, or “VALIA,” the pension fund of employees of Vale S.A.; and
· TELOS - Fundação Embratel de Seguridade Social, or “TELOS,” the pension fund of employees of Empresa Brasileira de Telecomunicações-Embratel.
Upon acquiring control of our company, the eight original pension funds hired a new team of executive officers who restructured management and implemented capital increases and modernization programs. Our new management engaged in a corporate restructuring, disposed of or liquidated non-core business operations and improved our financial structure.
Five of the eight original pension funds remain our shareholders, TELOS and PREVI-BANERJ sold all of their shares in our company in 2003 and October 2007, respectively. Real Grandeza sold its shares in 2008 and 2009. See “Item 7. Major Shareholders and Related Party Transactions––A. Major Shareholders.”
On March 6, 2006, PREVI, SISTEL, PETROS, Real Grandeza, FAPEs, PREVI-BANERJ and VALIA (the “Pension Funds”) entered into a shareholders’ voting agreement, effective April 12, 2006, related to the common shares they held, directly or indirectly, which represented 49.0% of our common shares. We no longer have outstanding preferred shares following our April 2006 share reclassification. As of December 31, 2011, the Pension Funds, directly or indirectly, held 27.5% of our common shares.
On May 19, 2009, we signed a merger agreement with Sadia for a business combination of the two companies. The business combination became fully effective on September 22, 2009, and Sadia became our wholly-owned subsidiary. See “—Recent Acquisitions and Investments—Business Combination with Sadia” for more information about the Sadia transaction.
Corporate Structure
We are an operating company incorporated under Brazilian law, and we conduct business through our operating subsidiaries. The following table sets forth our significant subsidiaries.
|
Subsidiary |
Country of Incorporation |
Business |
Interest in Equity as of December 31, 2011 |
|
Crossban Holdings GMBH |
Austria |
Holding company of international subsidiaries |
100% |
|
Perdigão International Ltd. |
Cayman Islands |
Principal export subsidiary |
100% |
|
Sadia S.A. |
Brazil |
Operating subsidiary |
100% |
The chart below shows the simplified corporate structure of our company.
29
We have announced that we intend to merge Sadia with and into BRF – Brasil Foods S.A., and we expect the merger to be effective on December 31, 2012.
For a complete list of all of our direct and indirect wholly-owned subsidiaries, see note 1.1 to our consolidated financial statements.
Our principal executive offices are located at Rua Hungria, 1400, Jd. Europa, 01455-000, São Paulo, SP, Brazil, and our telephone number at this address is +55-11-2322-5052/5050/5061. Our internet address is www.brasilfoods.com/ir. The information on our website is not incorporated by reference into this Annual Report on Form 20-F.
Recent Acquisitions and Investments
Business Combination with Sadia
Agreement with Sadia
On May 19, 2009, we signed a merger agreement with Sadia for a business combination of the two companies. Holders of common shares and preferred shares of Sadia received common shares of BRF, and holders of American depositary shares representing preferred shares of Sadia, received ADRs evidencing ADSs representing common shares of BRF.
A number of steps of the merger were approved at separate extraordinary general meetings, held on July 8, 2009, of the common shareholders of Perdigão, Sadia, and HFF, a holding company formed by the controlling shareholders of Sadia for purposes of the acquisition. In connection with the business combination, we changed our name from Perdigão S.A. to BRF – Brasil Foods S.A. The business combination became fully effective on September 22, 2009, and Sadia became our wholly-owned subsidiary.
30
We have announced that we intend to merge Sadia with and into BRF – Brasil Foods S.A., and we expect the merger to be effective on December 31, 2012.
Antitrust Approvals
The business combination was reviewed by antitrust authorities both in Brazil and in Europe. Approval by the European antitrust authorities was received on June 29, 2009. Brazilian law does not prevent parties from closing a transaction on a provisional basis before the Brazilian antitrust authorities have rendered a final decision. Before our shareholders approved the transaction, we entered into an agreement with the Brazilian antitrust authorities under which we agreed to ensure the reversibility of the business combination until a final decision was made by the antitrust authorities. On September 16, 2009, the Brazilian antitrust authorities authorized the coordination of the companies’ activities directed towards the export market for in natura meats. On January 20, 2010, the Brazilian antitrust authorities authorized our company and Sadia to jointly negotiate and acquire raw materials and services (such as grains, packaging material and in natura beef), but not purchases of poultry or hogs.
On June 29, 2010, the Economic Policy Bureau of the Ministry of the Treasury (Secretaria de Acompanhamento Econômico, or “SEAE”) published its report on the business combination and recommended to the CADE that the transaction be approved with certain restrictions. The SEAE’s report found significant concentration with a probability of negative competitive effects for certain of the activities of our combined company in our domestic market, including in the slaughter of poultry in the State of Mato Grosso, the slaughter of turkey in the State of Paraná, the sale of fresh (in natura) turkey and the sale of a number of processed products, including lasagnas, frozen pizzas, hamburgers, salamis and margarine. The SEAE report included a number of recommendations that the CADE considered in formulating the conditions to its approval of the business combination.
On July 13, 2011, the CADE approved the transaction, conditioned upon compliance with the terms of a Performance Commitment Agreement (Termo de Compromisso de Desempenho, or “TCD”) that we entered into with the CADE on July 18, 2011. Under the TCD, we agreed to a number of measures, including the following:
· We agreed to divest:
· our Rezende, Wilson, Texas, Tekitos, Patitas, Escolha Saudável, Light Elegant, Fiesta, Freski, Confiança, Doriana and Delicata trademarks;
· 10 processed food plants, two hog slaughtering plants, two poultry slaughtering plants, four animal feed plants, 12 chicken breeder stock farms, two poultry hatcheries and eight distribution centers; and
· a related portfolio of contracts with integrated poultry and hog outgrowers.
· We agreed to suspend the use of our Perdigão brand in Brazil:
· for three years for cooked hams, luncheon meat, the pork festive line (frozen seasoned pork loin, smoked pork shoulder, seasoned bone/boneless pork leg, boneless baby tender ham and pork tender), smoked sausage and pork sausage;
· for four years for salamis; and
· for five years for lasagnas, frozen pizzas, kibes, meatballs and the light line of turkey cold cuts,
and we agreed not to create new brands or use other brands to compete in those product lines for five years.
· We agreed to suspend the use of the Batavo brand for four years for the types of products listed above, as well as for margarine, in natura turkey, bologna sausage, the poultry festive line, hamburger and breaded products.
31
· We agreed not to enter into certain exclusivity or merchandising arrangements with wholesale and retail supermarkets, hypermarkets and other points of sale.
· We agreed to guarantee a supply of in natura turkey meat to the purchaser of the Rezende brand.
· We agreed maintain the production units to be sold in the same or better operating conditions, to maintain related employment levels, maintain specified marketing spending and market share levels.
The TCD applies only to the specified markets and product categories within the Brazilian market. The TCD does not restrict the ability of BRF and Sadia to act freely in our export markets, in the Brazilian dairy market and in the Brazilian food service market. The CADE will monitor our compliance with the agreement, and we must submit monthly reports to the CADE.
Agreement with Marfrig
On December 8, 2011, we announced an agreement with Marfrig Alimentos S.A. (“Marfrig”) for an exchange of assets in compliance with the TCD. We entered into the definitive exchange agreement with Marfrig on March 20, 2012. Under the agreement:
· We agreed to transfer to Marfrig:
· the trademarks, intellectual property, real property, facilities and equipment described in the TCD;
· the assets and rights relating to eight distribution centers;
· through a lease, our hog slaughtering plant in Carambeí in the State of Paraná, with an option by Marfrig to purchase the plant for R$188.0 million at the end of the lease term;
· capital stock of certain subsidiaries relating to the assets above;
· contracts with integrated producers to ensure that Marfrig will maintain the same levels of supply as BRF and Sadia did; and
· Sadia’s 64.57% interest in the capital stock of Excelsior Alimentos S.A.
· In return, Marfrig agreed to transfer to us:
· its 90.05% interest in Quickfood S.A., an Argentine food processing company (although the slaughterhouse activity of Quickfood S.A. will be separated and will continue to be controlled by Marfrig);
· R$350.0 million in cash, of which R$100.0 million must be paid between June and October 2012 and the remaining R$250.0 million will be paid in 72 monthly installments, plus interest at market rates; and
· Marfrig’s commercial operations related to the Paty brand in Uruguay and Chile.
The transaction with Marfrig is subject to conditions precedent, including an announcement by the CADE that the agreement fulfills the conditions of the TCD. We expect the transaction to be completed by June 1, 2012.
For more information on the TCD and our agreement with Marfrig, see note 1.2 to our consolidated financial statements. A copy of the TCD is filed as Exhibit 4.05 to this Annual Report on Form 20-F.
32
Impact of the Marfrig Agreement
Based on our results of operations for the year ended December 31, 2010, we estimate that the sale of assets and brands agreed with CADE pursuant to the TCD represent revenues of approximately R$1.7 billion and sales volumes equivalent to approximately 456 thousand tons of in natura, marinated and processed products, as well as festive product lines and margarines. We estimate that the suspended Perdigão and Sadia brand categories are equivalent to a further R$1.2 billion in revenues.
The Perdigão brand remains the property of BRF, and we will continue to use it in various processed food categories, such as breaded items, hamburgers, bologna sausage, fresh sausage, frozen ready-to-eat meals (except lasagna), bacon, festive poultry-based products and our entire line of in natura products, among others. In 2010, the volume subject to the TCD restrictions would have represented sales of about one-third of all Perdigão branded products.
With CADE approval of the Sadia business combination, we have announced that we aim to achieve additional net synergies before taxes and participations of about R$1 billion per year for the period 2012 - 2013. However, we also expect that we will need to invest approximately R$700 million to achieve our projected synergies. The realization of synergies will be contingent upon the success of the processes to be implemented in the areas of supplies (grains and other raw materials), manufacturing, agriculture and logistics as well as upon the investments which will be needed to obtain these gains. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We may not realize the expected benefits of our business combination with Sadia, whether because of lost revenues from businesses we were required to divest, difficulty in achieving projected synergies or other reasons.”
Other Recent Acquisitions
Argentine Investments
In October 2011, we announced a partnership with, and the acquisition of a 70.7% interest in, Avex S.A. (“Avex”), an Argentine poultry producer. Through this acquisition, we also acquired a controlling interest in Avex’s wholly owned subsidiary Flora Dánica S.A. (“Flora Dánica”) and Flora Dánica’s subsidiaries. Flora Dánica is an Argentine manufacturer of food products under the Dánica brand for the mass consumption market (including margarine, mayonnaise, sauces, yeasts and pie crusts), the bread-making market (including bread additives, premixes, confectioner’s custard, yeasts and industrial mayonnaise) and the industrial market (specific hydrogenated vegetable oils). We paid total consideration of approximately R$188.3 million. For more information about this transaction, see note 6.1 to our consolidated financial statements.
Chinese Joint Venture
In May 2011, we entered into a letter of intent to negotiate a joint venture in China with Dah Chong Hong Limited, a subsidiary of Dah Chong Hong Holdings Limted, an international conglomerate. We entered into a 50-50 joint venture in January 2012 and began exporting pork to this joint venture in March 2012, allowing us access to Dah Chong Hong’s distribution network. The joint venture is aimed at in natura and processed products and will increase our access to the Chinese market. We will focus on production, technical support and marketing, and Dah Chong Hong will focus on supply chain, distribution, packaging and processing of products for sale, and general support. Dah Chong Hong and its affiliates have a significant distribution network in China for food, consumer products and other products, including for the distribution of chilled and frozen products. Each of BRF and Dah Chong Hong has appointed an equal number of members to the board of directors and the executive committee of the joint venture. For more ifnormation on this joint venture, see note 38.2 to our consolidated financial statements.
Brazilian Acquisitions
In September 2011, we announced that we had exercised an option to purchase the industrial unit of Coopercampos located in the city of Campos Novos in the State of Santa Catarina, which we believe will ultimately have the capacity to slaughter 7,000 hogs per day. Coopercampos began constructing the unit in 2007, and in April 2010, we entered into a partnership agreement with Coopercampos, which included the purchase option. We have invested a total amount of R$154.5 million, of which R$79.4 million was paid in 2011 and R$75.1 million was paid in 2010. Coopercampos will continue to provide hogs to the unit, which we will manage. For more information about this transaction, see note 6.3 to our consolidated financial statements.
33
In November 2011, we acquired Heloisa Indústria e Comércio de Produtos Lácteos Ltda., a Brazilian dairy products company, for R$122.5 million, including cash consideration of R$55.0 million and assumed debt and other liabilities of R$67.5 million. For more information about the Heloisa acquisition, see note 6.2 to our consolidated financial statements.
Other Investments
In August 2011, we announced a US$120.0 million investment to build a plant in the United Arab Emirates that will produce processed products, with a capacity of more than 80,000 tons per year. We believe this project will be instrumental in consolidating our leadership in the Middle East by improving our brand penetration as well as our distribution and sales networks. In addition, we expect to use the plant as a springboard to serve new markets. By only servicing the Middle Eastern market at this plant, we will have greater flexibility to tailor our product offering to regional demands.
In September 2011, our subsidiary Crossban Holdings Gmbh acquired 40% of the shares issued by Sadia Chile S.A. for R$16.8 million, purchasing the interest of Sadia’s former partner in Chile. Agricola Nova S.A. The remaining 60% of Sadia Chile S.A. is held indirectly by our subsidiary Sadia.
Capital Expenditures
In 2011, we recorded total investments of R$1.6 billion in order to support our organic growth, including total capital expenditures of R$1,125.2 million and expenditures of R$492.1 million for the replenishment of breeder stock. Capital expenditures in 2011 were largely dedicated to productivity and improvements as well as the continuing expansion of our industrial plant capacity, including the agroundustrial complex of Lucas do Rio Verde.
The table below sets forth our capital expenditures for the periods indicated and does not include business combinations or other acquisitions of businesses:
|
|
As of December 31, | |
|
|
2011 |
2010 |
|
|
(in millions of reais) | |
|
Expansion and enhancement of production facilities |
399.1 |
247.2 |
|
Lucas do Rio Verde and Vitória de Santo Antão Agroindustrial Complex |
66.9 |
38.8 |
|
New projects |
141.6 |
105.7 |
|
Productivity investments |
443.1 |
282.9 |
|
Other capital expenditures |
74.4 |
23.2 |
|
Total capital expenditures |
1,125.2 |
697.8 |
Major capital expenditures in 2011 and 2010 included the following:
Lucas do Rio Verde and Vitória de Santo Antão. In 2011 and 2010, we invested a total of R$66.9 million and R$38.8 million, respectively, in the construction of these agroindustrial complexes. Lucas do Rio Verde is located in the midwest State of Mato Grosso, and Vitória de Santo Antão is located in the State of Pernambuco in the northeast of Brazil.
Our most significant investment over the last five years, which began as an investment by Sadia before our business combination with Sadia, is the agroindustrial site of Lucas do Rio Verde in the State of Mato Grosso. The first stage of this project involved the construction of one poultry slaughtering unit, one pork slaughtering unit and one processing unit. The project included 190 broiler modules (which together produce 500,000 day-old chicks per day) and 115 hog modules (which together produce 5,000 piglets per day), which will be equipped with advanced technology to ensure animal wellness, higher productivity and, consequently, better competitiveness. The total estimated investment amounted to approximately R$869.7 million, most of which came from us and the remaining from a group of outgrowers. The outgrowers were indirectly financed by BNDES to build the pork and poultry farms that feed the agroindustrial plant. Construction started in the second half of 2006, and the plant start-up occurred in the second half of 2008 with the slaughtering of poultry and the production of processed products. The unit became fully operational in 2011, and we have initiated the second stage of the project with planned increases in capacity of both pork and chicken slaughtering and an additional processing unit.
34
In addition to starting up our largest plant in Brazil in Lucas do Rio Verde in the State of Mato Grosso, we have built our first plant in the northeast region, located in Vitória de Santo Antão in the State of Pernambuco. As of December 31, 2011, the total investment in this plant was R$3.7 million. It was completed in 2010 and is now in operation.
Information Technology. In 2010, we began to install an integrated system platform to help us with synergies as a result of our business combination with Sadia. The project, which is expected to be completed later in 2012, will involve approximately 200 people working in the following four stages: (1) upgrading the SAP system to increase processing capacity; (2) developing the initial platform; (3) developing the HR SAP system; and (4) rolling out the SAP APO – Advance Planning Optimization. This investment is recorded as an intangible asset and is not reflected in the table above.
Internationalization Project. We are developing a long-term internationalization project focused on increasing our presence in countries where we can distribute our products profitably.
In 2012, we expect to make capital expenditures of approximately R$2,000 million to R$2,200 million (and an additional estimated R$500 million in expenditures on biological assets). We expect to focus our capital expenditures on projects that are currently in progress, such as the integration of Sadia with our business. We expect to invest approximately R$450 million in 2012 to obtain synergies related to our business combination with Sadia.
Competitive Strengths
We believe our major competitive strengths are as follows:
• Leading Brazilian Food Company with Strong Brands and Global Market Presence. We are one of Brazil’s largest food industry companies, with a size and scale that enable us to compete both in Brazil and globally. We believe that our leading position allows us to take advantage of market opportunities by enabling us to expand our business, increase our offering of value-added products and increase our share of international markets. In 2011, we slaughtered approximately 1.8 billion chickens and other poultry and 11.0 million hogs and cattle. We sold nearly 6.7 million tons of poultry, pork, beef, milk and processed food products, including dairy products and other processed products, in the same period. Our own and licensed brands are highly recognized in Brazil, and our export brands are well established in those markets.
• Extensive Distribution Network in Brazil and in Export Markets. We believe that we are one of the only companies with an established distribution network capable of distributing frozen and refrigerated products in virtually any area of Brazil. In addition, we export products to over 140 countries, and we have begun to develop our own distribution network in Europe, where we sell directly to food processing and food service companies and to local distributors, and in Asia through a joint venture. Our established distribution capabilities and logistics expertise enable us to expand both our domestic and foreign businesses, resulting in increased sales volumes and a broader reach of our product lines.
• Low-Cost Producer in an Increasingly Global Market. We believe that we have a competitive advantage over producers in some of our export markets due to generally lower feed and labor costs and to efficiency gains in animal production in Brazil. We have also achieved a scale and quality of production that enables us to compete effectively with major producers in Brazil and other countries. We have implemented a number of programs designed to maintain and improve our cost-effectiveness, including our ATP-Total Service program to optimize our supply chain by integrating demand, production, inventory management and client service functions; our CSP-Shared Services Center, which centralizes our corporate and administrative functions; our MVP-More Value program to provide our managers with more efficient use of fixed and working capital; and matrix-based budgeting intended to improve the efficiency of cost management.
35
• Diversified and Strategic Geographical Location. In the meat business, our slaughterhouses are strategically located in different regions of Brazil (South and Mid-West), which enables us to mitigate the risks arising from export restrictions that may occur in certain regions of the country due to sanitary concerns. The geographical diversity of our plants in 11 Brazilian states also enables us to reduce transportation costs due to the proximity to grain-producing regions, while also being close to the country’s main export ports. Our dairy operations are based in the main milk-producing areas of different regions of Brazil, allowing easy access to the consumer market.
• Emphasis on Product Quality and Safety and on a Diversified Product Portfolio. We focus on quality and food safety in all our operations in order to meet customers’ specifications, prevent contamination and minimize the risk of outbreaks of animal diseases. We employ traceability systems that allow us to quickly identify and isolate any farm on which a quality or health concern may arise. We also monitor the health and treatment of the poultry and hogs that we raise at all stages of their lives and throughout the production process. We were the first Brazilian company approved by the European Food Safety Inspection System as qualified to sell processed poultry products to European consumers. We have a diversified product range, which gives us the flexibility to channel our production according to market demand and the seasonality of our products.
• Experienced Management Team. Our senior management is highly experienced and has transformed our company during the last decade into a global business. Some members of our senior management have worked with us for over ten years, and the members of our senior management who joined our company during that period have seasoned experience in their professional capacities. Our management seeks to emphasize best practices in our operations as well as corporate governance, as demonstrated by the listing of our common shares on the Novo Mercado of the São Paulo Stock Exchange, which requires adherence to the highest corporate governance standards of that Exchange.
Business Strategy
Our overall strategy is to use our competitive advantages as a food company with one of the most diversified chilled and frozen food product portfolios to pursue opportunities for long-term growth, diversifying our sales and reducing our costs with the aim of reducing volatility in our results. We will continue to seek balanced growth and consolidation among the business segments in which we operate (poultry, pork and beef both in the domestic and export markets, dairy products and processed food products) and with regard to the domestic and external market, while seeking growth opportunities through food processing activities overseas. The main elements of our strategy, applicable to the poultry, pork and beef business segments and to the milk, dairy product, margarine and processed food products, are as follows:
• Strengthen Our Global Distribution Network. We continue to develop our distribution capabilities outside Brazil to enable us to improve our services to existing customers and to expand our foreign customer base. In 2012, we expect to continue executing a long-term international distribution strategy in order to increase our brand awareness globally and expand into countries where we believe we can distribute our products profitably. We are focusing on expanding our distribution network in Europe, the Middle East and Asia so as to broaden our coverage and to support more targeted marketing efforts in these key regions. We are also considering processing some products abroad to allow us to deliver those products directly to customers in those markets. We may consider selective acquisitions as one way to achieve this goal. For example, we recently entered into a joint venture in China with Dah Chong Hong Limited and began exporting pork to this joint venture in March 2012, allowing us access to Dah Chong Hong’s distribution network.
• Further Develop Our Domestic and International Customer Base. We seek to continue to strengthen our domestic and international customer base through superior service and quality as well as increased product offerings. We believe that there are considerable opportunities to increase penetration of export markets, particularly as we broaden our product lines to include beef products, milk and dairy products and additional processed food products. We are also positioning our company to enter new export markets when existing trade barriers are relaxed or eliminated. Our objective is to pursue balanced growth of our domestic and export businesses. Domestic market sales represented 60.0% of our total net sales, while export market sales represented 40.0% in 2011.
36
• Expand Our Core Business. We intend to further develop our core businesses of producing and selling poultry, pork, beef, milk, dairy and processed food products by, among other methods, investing in additional production capacity to increase scale and efficiency. For example, we are expanding our Lucas do Rio Verde Agroindustrial Complex to increase our production capacity for poultry, pork and processed products to meet long-term demand for these categories.
• Diversify Our Product Lines, Focusing on Value-Added Processed Food Products. We intend to continue diversifying our product lines, focusing on processed food products whose prices tend to fluctuate less than our unprocessed poultry and pork cuts and that can be targeted to specific markets. In 2009, we entered into a business combination with Sadia, which brought a wide array of processed food products to our portfolio and is also one of the largest exporters of poultry products. In 2011, we purchased two Argentine companies, Avex and Flora Dánica, in order to expand our competitive base, leverage our export platform and address the potential of the local Argentine market. Avex produces unprocessed poultry products, and Flora Dánica produces, among other items, mayonnaise, sauces and margarine. In that same year, we began negotiations to establish our joint venture in China with Dah Chong Hong Company, one of the biggest food companies in the country, in order to leverage our main brands internationally and access local product processing and distribution expertise. We announced the formation of the joint venture in early 2012 and, as noted above, have begun exporting pork to the joint venture. We may also pursue other acquisitions and/or build new industrial plants to support these strategic goals.
• Continue to Seek Leadership in Low Costs. We continuously improve our cost structure in order to remain a low-cost producer and enhance the efficiency of our operations. We seek to achieve greater economies of scale by increasing our production capacity, and we are concentrating our expansion efforts primarily in the mid-western region of Brazil because the availability of raw materials, land, labor, favorable weather and other features allow us to minimize our production costs. We are also continuing to implement new technologies to streamline our production and distribution functions.
• Synergies. Our acquisitions in recent years, including our business combination with Sadia, have created synergies. Our business combination strategy aims to expand our businesses in both the Brazilian and international markets. We believe that we will achieve commercial, operational, financial and production synergies in both the medium and long term from our mergers and acquisitions. We select potential business combination transactions in line with our strategy of bringing to our company a diverse range of processed food, meat and dairy products, distribution networks and customer relationships in both our domestic and export markets which can be integrated with and leveraged from our own operations.
B. Business Overview
Products
We are a food company that focuses on the production and sale of poultry, pork, beef cuts, milk, dairy products and processed food products under several brands. Our processed products include marinated, frozen, whole and cut Chester® rooster and turkey meats, specialty meats, frozen processed meats, frozen prepared entrees, portioned products and sliced products. We also sell margarine, juices, soy products, animal feed, fresh pasta, sweet specialties and sandwiches.
Our portfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their needs. We achieve that goal through a strong innovation chain, which provides us with increasing value-added items and differentiates us from our competitors, strengthening our brands.
In 2009, we acquired Sadia, which became one of our wholly-owned subsidiaries. The results of Sadia were fully incorporated into ours as from July 8, 2009. To facilitate the comparison of our volume production in 2011 and 2010 relative to 2009, we present below certain sales volume data for 2009 on a combined basis to give effect to the acquisition of Sadia as if it had occurred on January 1, 2009. The combined presentation of sales volume is only for illustrative purposes and is not in accordance with IFRS.
37
During 2011 we launched over 280 new products, including the Sadia-branded danbo and mozzarella cheeses. Our new products included 82 new beef and pork products, 43 other products for the domestic market segment, 121 other products for our export markets, 28 new products in our dairy segment and 14 new products for our food services segment.
Poultry
We produce frozen whole and cut poultries, partridges and quail. In 2011, we slaughtered approximately 1.8 billion chickens and other poultry, compared to 1.6 billion in 2010. We sold 1,932 thousand tons of frozen chicken and other poultry products in 2011, compared to 1,895 thousand tons in 2010 and to 1,745 thousand tons in 2009 on a combined basis. Most of our poultry sales are to our export markets.
Pork and Beef
We produce frozen pork and beef cuts, such as loins and ribs, and whole carcasses. In 2011, we slaughtered approximately 11.0 million hogs and cattle, compared to 10.5 million in 2010. We sold 404 thousand tons of pork and beef cuts in 2011, compared to 427 thousand tons of pork and beef cuts in 2010 and 413 thousand tons of pork and beef cuts in 2009 on a combined basis. Most of our sales of pork cuts are to our export markets. We are developing our export customer base for beef cuts, and we expect that most of our sales of beef cuts will ultimately be in our export markets. We raise hogs but do not raise cattle at our facilities.
Processed Food Products
We produce processed foods, such as marinated, frozen chicken, Chester® rooster and turkey meat, specialty meats, frozen processed foods, frozen prepared entrees, dairy products, portioned products and sliced products. Part of our strategy is to develop additional processed food products in these and other categories because these products tend to be less price-sensitive than our frozen poultry and pork products. We sold 2,513 thousand tons of processed foods in 2011, compared to 2,472 thousand tons in 2010 and 2,341 thousand tons in 2009 on a combined basis. Most of our sales of processed foods are to our domestic market. We believe that there are opportunities to market value-added products like these to targeted regions and other market segments in Brazil as well as to expand our sales in the export market.
Our processed food products strategy relies on accurate brand equity management, varied product portfolio with strategic pricing, and innovation and service excellence, which allows our products to reach thousands of Brazilian and international homes each day.
Specialty Meats
We process pork to produce specialty meats, such as sausages, ham products, bologna, frankfurters, salamis, bacon and cold meats. We also process chicken and other poultry to produce specialty meats, such as chicken sausages, chicken hot dogs and chicken bologna.
Frozen Processed Meats
We produce a range of frozen processed poultry, beef and pork products, including hamburgers, steaks, breaded meat products, kibes (a type of Middle Eastern beef patty popular in Brazil), meatballs and ready-to-eat snacks. We also produce soy-based vegetarian products, such as hamburgers and breaded products. We purchase the refined soy meal used to produce these products from third parties.
38
Marinated Poultry
We produce marinated and seasoned chickens, roosters (under the Chester® brand) and turkeys. We originally developed the Chester® breed of rooster to maximize the yield of breast and leg cuts. In 2004, we sold our rights to the Chester® breed of rooster to Cobb Vantress, a U.S. poultry research and development company engaged in the production, improvement and sale of broiler breeding stock, and we entered into a technology agreement under which Cobb Vantress manages the Chester® breed of rooster. We continue to oversee the production of Chester® roosters in Brazil from hatching to distribution, and we own the trademarks for the Chester® line of products.
Frozen Prepared Entrees
We produce a range of frozen prepared entrees, some of which contain poultry, beef and pork meat that we produce, including those listed below.
· Pastas and Pizzas. We produce several varieties of lasagna and pizza. We produce the meat used in these products and buy other raw materials in the domestic market, except for the durum flour used to make the noodles for the lasagna, which we import.
· Vegetables. We sell a variety of frozen vegetables, such as broccoli, cauliflower, peas, French beans, French fries and cassava fries. These products are produced by third parties that deliver them to us packaged. We purchase most of these products in the domestic market, but we import French fries and peas.
· Cheese Bread. We produce cheese bread, a popular Brazilian bread infused with cheese. We purchase the ingredients in the domestic market, except for the parmesan cheese, which we import.
· Pies and Pastries. We produce a variety of pies and pastries, such as chicken and heart-of-palm pies and lime pies. We produce the meat, sauces and toppings used in our pies and pastries, and we purchase other raw materials, such as heart-of-palm, lime and other fillings from third parties.
Margarine
We began sales of margarine products in 2005 under the Doriana, Delicata, Claybom, Turma da Mônica and Borella brand names as part of our strategy to diversify our product lines and to take advantage of our refrigerated distribution network. We purchase the soybean oil from an agricultural cooperative supplier. We initially sold margarine under two brand names (Turma da Mônica and Borella). In 2007, we acquired the margarine brands Doriana, Delicata and Claybom from Unilever, as well as the equipment to produce such margarines. We also entered into a strategic agreement with Unilever for the management of the margarine brands Becel and Becel ProActiv in Brazil.
We agreed to divest the Doriana and Delicata brands as part of our agreement with the CADE described in “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.” In the future, we will focus our marketing of margarine on our other brands.
Dairy Products
In 2006, we entered the dairy products business through our acquisition of a controlling interest in Batávia. In 2007, we acquired the remaining 49% interest in Batávia. In 2008, we expanded our presence in this market through the acquisition of Eleva.
We produce pasteurized and UHT milk, which we sell in our domestic market. We sold 861 thousand tons of pasteurized and UHT milk in 2011, 873 thousand tons in 2010 and 795 thousand tons in 2009, most of it in the domestic market.
39
We also produce and sell a wide range of dairy-based and dairy processed products, ranging from flavored milks, yogurts, fruit juices, soybean-based drinks, cheeses and desserts. In 2011 and 2010, we produced 1.1 million tons of dairy products. We sold 209 thousand tons of dairy processed products in 2011, compared to 205 thousand tons in 2010 and 205 thousand tons in 2009.
Other
We produce animal feed mainly to feed poultry and hogs raised by us. In 2011 we produced 11,239 thousands of tons of feed and premix, compared to 10,723 thousands of tons in 2010. However, we also sell a small portion of our animal feed production to our integrated outgrowers or to unaffiliated customers.
We produce a limited range of soy-based products, including soy meal and refined soy flour. We also produced soybean oil until 2005, when we sold our soybean oil plant, located in the city of Marau in the State of Rio Grande do Sul, to Bunge Alimentos because we determined that soybean oil was neither a core business product nor a business scope product to our company.
Overview of Brazil’s Poultry, Pork and Beef Position in the World
Poultry
Brazil is the third largest producer, and the leading exporter, of poultry in the world, according to tonnage data compiled by the USDA as of October 2011. Brazil’s production, consumption and export volumes for poultry have increased significantly over the past several years, and Brazil was the number one global poultry exporter in 2011. This development can be explained by the increase of Brazilian companies’ production dedicated to exports, as well as by the competitiveness of Brazilian poultry. Sanitary problems in the main producing countries, such as the Bovine Spongiform Encephalophy (“BSE”) cases in Europe, avian influenza problems in Thailand and both BSE and avian influenza cases in the United States, have changed the world poultry trade dynamics. Reduced competition from major exporting countries affected by sanitary issues and the competitive cost of Brazilian poultry favors Brazil as the most competitive exporter of quality poultry cuts. Additionally, in recent years, several new markets in Eastern Europe, Africa and the Middle East have been opened to Brazilian chicken exports. In 2011, for example, Brazil already had access to about 150 markets.
Global poultry trade increased 2.8% in 2011, while Brazilian poultry exports increased 3.0% in the same period, reaching 3.9 million tons according to SECEX. Exports of poultry parts increased almost 5.0%, representing more than 52% of the total exported volumes. Whole chicken, which represents 38% of the total, increased 0.9%. The main destinations were Saudi Arabia, Hong Kong and Japan, which increased total imports from Brazil by 13%, 15% and 2.4%, respectively.
The following tables identify Brazil’s position within the global poultry industry for the years indicated:
|
Primary Poultry Producers(1) |
2011(2) |
2010(2) |
2009 |
|
|
(in thousands of tons - “ready to cook” equivalent) | ||
|
U.S.A. |
19,350 |
19,089 |
18,470 |
|
China |
13,206 |
12,556 |
12,105 |
|
Brazil |
13,459 |
12,797 |
11,489 |
|
European Union (27 countries) |
11,440 |
11,191 |
10,551 |
|
Mexico |
2,932 |
2,821 |
2,792 |
|
Others |
25,958 |
25,154 |
23,919 |
|
Total |
86,345 |
83,608 |
77,031 |
|
Primary Poultry Exporters (1) |
2011(2) |
2010(2) |
2009 |
|
|
(in thousands of tons - “ready to cook” equivalent) | ||
|
Brazil |
3,440 |
3,339 |
3,386 |
|
U.S.A. |
3,261 |
3,333 |
3,335 |
|
European Union (27 countries) |
1,250 |
1,126 |
889 |
|
China |
410 |
379 |
291 |
|
Thailand |
460 |
432 |
379 |
|
Others |
943 |
881 |
700 |
|
Total |
9,764 |
9,490 |
8,980 |
40
|
Primary Poultry Consumers(1) |
2011(2) |
2010(2) |
2009 |
|
|
(in thousands of tons - “ready to cook” equivalent) | ||
|
U.S.A. |
16,187 |
15,775 |
15,309 |
|
China |
13,061 |
12,489 |
12,242 |
|
European Union (27 countries) |
10,980 |
10,841 |
10,493 |
|
Brazil |
10,020 |
9,459 |
8,334 |
|
Mexico |
3,661 |
3,508 |
3,419 |
|
Russia |
3,030 |
3,043 |
3,043 |
|
Others |
28,019 |
27,339 |
27,339 |
|
Total |
84,958 |
82,454 |
82,454 |
(1) Includes chicken, special poultry and turkey.
(2) Based on preliminary data.
Source: USDA, October 2011.
Pork
Brazil is the fourth largest producer and exporter, and the fifth largest consumer, of pork in the world, according to tonnage data compiled by the USDA. Brazil’s production and consumption of pork has increased since 2009. Pork exports dropped in 2011 to 582,000 tons, adversely affected by a Russian ban, under which Russia has suspended imports of pork and other meat from several Brazilian states since June 2011, citing health and sanitary reasons. The USDA expects an increase in global production and consumption of pork in 2012 of 2.3% and 2.0%, respectively. Brazilian pork exports in 2012 are expected to remain around 570,000 tons.
Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. Measured by the average birth rate of piglets, productivity has doubled since the 1970s, and the birth rate has reached 24 animals per female. Research developments have also helped to reduce fat, cholesterol and calories in pork produced in Brazil. These enhancements allow for better productivity of prime cuts, more meat per carcass and more nutritious and healthier meat. Improved genetic potential of breeders also contributed to the production increase.
Russia lost its position as Brazil’s major destination of pork meat due to the current ban on imports from several Brazilian states. Hong Kong is now the largest importer from Brazil, representing about 25% of total Brazilian exports, followed by Russia, Ukraine and Argentina. Russian imports from Brazil dropped 45% from 2010 to 2011, while Hong Kong, Ukrainian and Argentine imports went up 30%, 54% and 18%, respectively.
Volumes exported from Brazil to the Asian market in 2012 are expected to increase. Moreover, the recent approval of Brazilian imports of pork by the United States may facilitate approval of exports to Japan and South Korea. These Asian markets are important due to the amount of meat they consume and their demand for better quality products with greater value added. It is also expected that Brazilian exports will be approved in Europe, a market with high level of health standards requirements.
The following tables identify Brazil’s position within the global pork industry for the years indicated:
|
|
World Pork Panorama | ||
|
Main Pork Producers |
2011(1) |
2010(1) |
2009 |
|
(in thousands of tons - weight in equivalent carcass) | |||
|
China |
49,500 |
51,070 |
48,905 |
|
European Union (27 countries) |
22,530 |
22,552 |
22,434 |
|
U.S.A. |
10,278 |
10,186 |
10,442 |
|
Brazil |
3,227 |
3,195 |
3,130 |
|
Russian Federation |
1,965 |
1,920 |
1,844 |
|
Vietnam |
1,960 |
1,930 |
1,910 |
|
Others |
11,667 |
11,892 |
11,740 |
|
Total |
101,127 |
102,745 |
100,405 |
41
|
Main Pork Exporters |
2011(1) |
2010(1) |
2009 |
|
(in thousands of tons - weight in equivalent carcass) | |||
|
U.S.A. |
2,246 |
1,916 |
1,857 |
|
European Union (27 countries) |
2,000 |
1,754 |
1,415 |
|
Canada |
1,160 |
1,159 |
1,123 |
|
Brazil |
582 |
619 |
707 |
|
China |
260 |
278 |
232 |
|
Chile |
140 |
130 |
152 |
|
Others |
186 |
187 |
173 |
|
Total |
6,574 |
6,043 |
5,659 |
|
Main Pork Consumers |
2011(1) |
2010(1) |
2009 |
|
(in thousands of tons - weight in equivalent carcass) | |||
|
China |
49,810 |
51,157 |
48,823 |
|
European Union (27 countries) |
20,545 |
20,823 |
21,057 |
|
U.S.A. |
8,384 |
8,653 |
9,013 |
|
Russian Federation |
2,894 |
2,799 |
2,688 |
|
Brazil |
2,646 |
2,577 |
2,423 |
|
Japan |
2,481 |
2,488 |
2,467 |
|
Others |
14,089 |
14,049 |
13,786 |
|
Total |
100,849 |
102,546 |
100,257 |
(1) Based on preliminary data.
Source: USDA, October 2011.
Beef
We began to produce beef cuts in 2005 for sale in our export markets and in the Brazilian market. Brazil is the second largest producer and exporter and the third largest consumer of beef in the world, according to tonnage data compiled by the USDA. The agency is expecting a slight decrease in global beef production and consumption from 2011 to 2012 and an increase in exports. The reduced world production is explained in part by the reduction of production in the United States due in part to a drought that left producers with a severe shortage of pasture. Argentine cattle and beef production is expected to recover slightly in 2012, influenced by higher cattle prices, which has encouraged producers to invest in their production.
|
|
World Beef Panorama | ||
|
Main Beef Producers |
2011(1) |
2010(1) |
2009 |
|
(in thousands of tons - weight in equivalent carcass) | |||
|
United States |
12,048 |
12,047 |
11,891 |
|
Brazil |
9,030 |
9,115 |
8,935 |
|
EU-27 |
8,050 |
8,022 |
7,913 |
|
China |
5,550 |
5,600 |
5,764 |
|
Argentina |
2,500 |
2,620 |
3,380 |
|
India |
3,060 |
2,842 |
2,514 |
|
Others |
16,610 |
16,797 |
16,751 |
|
Total |
56,848 |
57,043 |
57,148 |
42
|
World Beef Panorama | |||
|
Main Beef Consumers |
2011(1) |
2010(1) |
2009 |
|
(in thousands of tons - weight in equivalent carcass) | |||
|
U.S.A. |
11,750 |
12,039 |
12,239 |
|
European Union (27 countries) |
7,945 |
8,122 |
8,262 |
|
Brazil |
7,750 |
7,592 |
7,374 |
|
China |
5,532 |
5,589 |
5,749 |
|
Russia |
2,451 |
2,450 |
2,457 |
|
Argentina |
2,242 |
2,325 |
2,727 |
|
Others |
18,164 |
18,126 |
17,677 |
|
Total |
55,834 |
56,243 |
56,485 |
|
|
World Beef Panorama | ||
|
Main Beef Exporters |
2011(1) |
2010(1) |
2009 |
|
(in thousands of tons - weight in equivalent carcass) | |||
|
Australia |
1,350 |
1,368 |
1,364 |
|
Brazil |
1,325 |
1,558 |
1,596 |
|
U.S.A. |
1241 |
1043 |
878 |
|
India |
1,100 |
917 |
609 |
|
New Zealand |
501 |
530 |
514 |
|
Others |
2,353 |
2,336 |
2,471 |
|
Total |
7,870 |
7,752 |
7,432 |
(1) Based on preliminary data.
Source: USDA, October 2011.
Production Process
We are a vertically integrated producer of poultry and pork products. We raise poultry and hogs, produce animal feed, slaughter the animals, process poultry, pork and beef to produce processed food products, and distribute unprocessed and processed products throughout Brazil and in our export markets.
The following graphic is a simplified representation of our meat production chain.
43
Meat Production Chain
Poultry
At the beginning of the poultry production cycle, we purchase breeder chicks in the form of eggs from Cobb of Brazil, an affiliate of Cobb Vantress, Hybrid, Aviagen do Brasil and sometimes from Agrogen. We send these eggs to our grandparent stock farms, where the chicks are hatched and raised, constituting our grandparent breeding stock. The eggs produced by our grandparent breeding stock are then hatched, and our parent breeding stock is produced. In 2011, we maintained an average parent breeding stock of approximately 18.7 million breeders that produce hatchable eggs. We also buy a small percentage of our parent stock from another supplier. The parents produce the hatchable eggs that result in day-old chicks that are ultimately used in our poultry products. We produced 1,773 million day-old chicks, including chickens, Chester® roosters, turkeys, partridge and quail in 2011. We hatch these eggs in our 25 hatcheries.
We send the day-old chicks, which we continue to own, to outgrowers (i.e., outsourced farmers), whose operations are integrated with our production process. The farms operated by these outgrowers vary in size and are near our slaughtering facilities. These integrated outgrowers are responsible for managing and growing the poultry in their farms under the supervision of our veterinarians. The payments to outgrowers are based on performance rates determined by bird mortality and the feed-to-meat ratio and are designed to cover their production costs and provide net profits. We provide feed, veterinary and technical support to the outgrowers throughout the production process. We have partnership agreements with approximately 10,766 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.
44
At December 31, 2011, we had a fully automated slaughtering capacity of 35.1 million heads of poultry per week.
Pork
We produce the majority of the pork we use in our products. We also purchase some pork on the spot market.
To produce pork, we generally purchase piglets from integrated outgrowers near our production facilities, which raise the piglets until they reach a specified weight. The piglet producers either purchase parent breeder hogs from producers such as Agroceres, Dalland, DanBred, Agropecuária Imbuial and Master Agropecuária or purchase young piglets from farmers who own breeder hogs. We transfer these piglets to separate integrated outgrowers who raise the hogs until they reach slaughtering weight. We then transport the hogs from these outgrowers to our slaughtering facilities. We have agreements with a total of approximately 4,921 integrated outgrowers, including piglet producers and hog raisers. We monitor the production of the hogs by these outgrowers and provide support from our veterinarians.
The local producers from whom we purchase a portion of our pork needs are also located near our production facilities but are not parties to partnership agreements with us. These producers generally raise the hogs from birth until they reach slaughtering weight, and we provide limited technical support. We purchase the hogs raised by these local producers pursuant to contracts.
We slaughter the hogs raised by our outgrowers or purchased from local producers or on the spot market. After they are slaughtered, the hogs are immediately cut in half. The half-carcasses are then partitioned according to their intended use. These parts become the raw material for the production of pork cuts and specialty meats.
At December 31, 2011, we had a pork slaughtering capacity of 250,170 heads per week.
Beef
We do not raise cattle at our facilities. We purchase cattle primarily from local producers in the region of Mirassol D’Oeste and Várzea Grande in the State of Mato Grosso. Although we purchase cattle on the spot market to the extent necessary, we expect to be able to purchase the majority of our cattle from local producers. We transport the cattle to our facilities, where we slaughter the cattle and cut and package the beef.
Under limited circumstances, we may contract for our own cattle confinement or enter into a partnership for that purpose.
At December 31, 2011, we had a beef slaughtering capacity of 11,000 heads per week.
Processed Foods
We sell a variety of processed foods, some of which contain poultry, pork and beef meat that we produce. We produce lasagnas, pizzas, pastas, desserts and other frozen prepared entrees, as well as cheese bread, at our plants in Lages in the State of Santa Catarina and Rio Verde in the State of Goiás. In Tatuí, in the State of São Paulo, we produce ready-to-eat sandwiches, lasagnas, pizzas, cheese breads and other pasta and bakery items. In Ponta Grossa, in the State of Paraná, we produce pizzas, pastas, desserts (Miss Daisy) and other industrialized products. Our Rio Verde plant is adjacent to our Rio Verde poultry and pork slaughtering facilities, and we transport pork from other production facilities to be used as raw materials at our Lages plant. We purchase most of the remaining ingredients for our lasagnas, pizzas, pies and pastries in the domestic market from third parties. Such seasonings and secondary raw materials are applied to each product type or line according to established criteria and procedures to ensure consistency of color, texture and flavor. The presentation of final products is achieved by shaping, casing, cooking and freezing in special machines. Products are then subjected to quality controls and distributed to the consumer market after having been packaged, labeled and boxed.
45
We sell a variety of frozen vegetables, such as broccoli, cauliflower, peas, French beans, French fries and cassava fries. These products are produced for us by third parties that deliver them to us packaged. We purchase most of these products in the domestic market, but we import French fries from Belgium and peas from Chile, France and Argentina. We also produce soy-based products, such as soy meal and refined soy flour, at our plants in Videira, located in the State of Santa Catarina in Dois Vizinhos, in the State of Paraná and in Toledo, also in the State of Paraná. We produced soybean oil until 2005, when we sold our soybean oil plant in Marau in the State of Rio Grande do Sul to Bunge Alimentos because we determined that the production of soybean oil was not a core product of our business.
The raw material for margarine is crude soybean oil, which is subjected to refining and bleaching processes. We purchase margarine from an agricultural cooperative supplier for resale by us. In 2007, we acquired from Unilever the margarine brands Doriana, Delicata and Claybom, as well as the equipment to produce such margarines in Valinhos in the State of São Paulo. We also entered into a strategic agreement with Unilever for the management of the margarine brands Becel and Becel ProActiv in Brazil. We also produce margarines in our plant in Paranaguá, State of Paraná, under the brands Qualy and Deline. We sell these products as part of our strategy to diversify our product lines and to take advantage of our distribution network for refrigerated products. We agreed to divest the Doriana and Delicata brands as part of our agreement with the CADE described in “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.” In the future, we will focus our marketing of margarine on our other brands.
Dairy Products
The following graphic is a simplified representation of our dairy products chain.
Dairy Products Production Chain
Through the acquisition of Batávia and Eleva, we produce dairy products in 9 plants. We receive milk from a network of over 13,904 milk producers in more than 673 cities. The milk is purchased mainly from local producers and supplemental purchases are made on the spot market, depending on market price conditions and demand levels. In the event that there is a lack of fresh milk in the market, we are capable of using powdered milk for part of our supply needs.
46
We are the second largest milk collector in Brazil based on volume, according to information compiled from Leite Brasil, the Brazilian National Agriculture Confederation (Confederação Nacional da Agricultura), the Brazilian Confederation of Dairy Cooperatives (Confederação Brasileira de Cooperativas de Laticínios) and the Brazilian Agricultural Research Corporation (Empresa Brasileira de Pesquisa Agropecuária).
Feed
We produce most of the feed consumed at the farms operated by our integrated poultry and hog outgrowers. We provide feed to most of our integrated poultry and hog outgrowers as part of our partnership arrangements with them. We also sell animal feed to local hog producers at market rates.
We own 31 feed production plants. The basic raw materials used in animal feed production are corn and soy meal mixed with preservatives and micronutrients. In 2011, we also purchased corn from rural producers and small merchants, through cooperatives and from trading companies such as Coamo, Bunge, Cargill, ADM and others. The corn is grown primarily in the states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Mato Grosso, Mato Grosso do Sul, Minas Gerais and Bahia. We buy soy meal from major producers such as Bunge, Cargill, ADM, Dreyfus, Amaggi and Coamo, primarily pursuant to long-term contracts.
The prices of corn, soybeans and soy meal fluctuate significantly. See “Item 5. Operating and Financial Review and Prospects—A. Operating and Financial Review and Prospects—Principal Factors Affecting our Results of Operations—Commodity Prices.”
Other Raw Materials
We purchase other materials required for our products, such as prepared animal intestines (for sausage casings), cardboard boxes and plastic (for packaging), micronutrients (for animal feed), spices and veterinary drugs from third parties, both in the domestic and international markets. We must pay for some of these products in U.S. dollars because we must import them.
Suppliers
We generally use a bidding process to select our suppliers based on technical and commercial requirements. We have had long relationships with many of our suppliers, both in Brazil and abroad. We periodically evaluate the efficiency of our suppliers in terms of quality, lead time and service levels.
Brazilian Domestic Market
Brazil is the fifth largest country in the world, both in terms of land mass and population. As of July 2011, Brazil had an estimated population of 194.9 million people, according to data from the IBGE. According to IBGE, Brazil had a GDP of R$4.1 trillion for 2011, representing an increase of 9.8% over GDP of R$3.7 trillion for 2010, in each case in nominal terms. GDP per capita increased 9.4% in 2011 to R$21,536.
The Central Bank forecasts show that the Brazilian GDP in 2011 increased 2.7% compared to 2010. The inflation rate, as measured by the IPCA, published by the IBGE, was 4.3% in 2009, 5.9% in 2010 and 6.5% in 2011, continuing a trend of relatively high rates of inflation. The Brazilian government has implemented fiscal and monetary policies to mitigate the impact of the global economic crisis on the Brazilian economy and in order to minimize inflation and endeavor to keep inflation within a target range.
Brazil is one of the world’s largest consumers of meat, with per capita meat consumption of 98.6 kilograms in 2011, including beef, broiler chicken and pork, according to the USDA. Demand for poultry, pork and beef products is directly affected by economic conditions in Brazil. The overall trend towards improved economic conditions and the increased purchasing power of Brazil’s fast-growing middle class has generally supported increased demand in recent years for processed food products, as well as traditional fresh and frozen poultry and pork products. For information about certain expected macroeconomic trends for 2012, see “Item 5. Operating Financial Review and Prospects—D. Trend Information.”
47
The Brazilian domestic market is highly competitive, particularly for fresh and frozen poultry and pork products. There are several large producers, most notably BRF, but also Aurora-Cooperativa Central Oeste Catarinense Ltda., or “Aurora,” and Seara Alimentos S.A., or “Seara” (which is owned by Marfrig). The largest producers are subject to significant competition from a substantial number of smaller producers that operate in the informal economy and sometimes offer lower quality products at lower prices than do the major producers. For that reason, we and our main competitors have, in recent years, focused on producing and selling processed food products because these products support better margins. We and our major competitors are generally emphasizing processed food products rather than fresh and frozen poultry and pork products which are more similar to commodities in nature.
Among processed food products, frozen processed meats have experienced considerable growth in recent years. Based upon information compiled by A.C. Nielsen, the frozen processed meats market in Brazil represented net sales of approximately R$2.3 billion in 2011, compared to R$2.0 billion in net sales in 2010. We had 71.3% market share by sales volume from November 2010 through October 2011, and a 73.0% share in the same period in 2010, according to A.C. Nielsen.
Although sales volumes decreased somewhat in 2011, the specialty meat market continues to be another important processed food market for us. Based upon information compiled by A.C. Nielsen, the specialty meat market in Brazil accounted for estimated revenues of approximately R$8.7 billion in 2011, compared to R$9.0 billion in 2010. We had a 55.0% market share by sales volume in 2011, compared to 54.5% in 2010.
Based on A.C. Nielsen data, the frozen pasta market in Brazil accounted for estimated revenues of approximately R$614 million in 2011, compared to R$494 million in 2010. We had a 77.3% market share by sales volume in 2011, compared to an 82.3% share in 2010, according to A.C. Nielsen.
Based on A.C. Nielsen data, the frozen pizza market in Brazil accounted for estimated revenues of R$440 million in 2011, compared to R$394 million in 2010. We had a 69.0% market share by sales volume from January through December 2011, compared to a 71.1% share in the same period in 2010, according to A.C. Nielsen.
The processed foods sector is more concentrated in terms of the number of players. Consumption of processed products is influenced by several factors, including the increase in consumer income and marketing efforts with a view to meeting consumer demand for more value-added products. We believe that processed food products represent an opportunity for further growth in coming years.
Brazil is one of the world’s largest consumers of dairy products, according to A.C. Nielsen, the Brazilian market for dairy processed products (yogurts, desserts, probiotic milk and the Petit Suisse brand) totaled approximately R$4.8 billion in 2011, compared to R$4.4 billion in 2010. We had 11.1% market share by sales volume from December 2010 through November 2011, compared to an 11.1% share in the same period in 2010, according to A.C. Nielsen.
The size of the Brazilian margarine market was approximately R$2.0 billion in 2011, compared to R$1.9 billion in 2010, according to A.C. Nielsen. We had a 60.7% market share by sales volume from December 2010 through November 2011, compared to a 62.1% share in the same period in 2010, according to A.C. Nielsen.
The A.C. Nielsen data we receive is based on coverage of a portion of Brazil that accounts for 86% of the Brazilian population, according to the IBGE, and an estimated 92% of the country’s consumption potential.
Export Markets
In 2011, Brazil’s volume of poultry exports was 3.2% higher than in 2010. This improved performance can be explained mainly by higher sales to Saudi Arabia, Hong Kong and Japan.
48
Brazil is a leading player in global export markets due to natural advantages, including low feed and labor costs, and gains in efficiencies in animal production. We, like other large Brazilian producers, have capitalized on these advantages to develop the scope and scale of our business.
Global demand for Brazilian poultry, pork and beef products is significantly affected by trade barriers, sanitary requirements, disease-related bans, religious considerations, economic conditions and other factors. Trade barriers may include quotas on imports from Brazil (e.g., in Russia), protective tariffs (e.g., in the European Union), direct and indirect subsidies for local producers, licensing requirements (e.g., in China) and outright bans on imports. Most countries require sanitary agreements with Brazil before Brazilian products may be imported (e.g., the United States, which has no sanitary agreement with Brazil covering poultry and in natura beef products and therefore will not accept Brazilian poultry or beef imports). In addition, outbreaks of animal disease may result in bans on imports (e.g., Russia, in the past has banned imports of Brazilian pork products because of outbreaks of foot-and-mouth disease affecting cattle in two Brazilian states and, more recently, has prohibited imports of Brazilian pork, beef and poultry from several Brazilian states since June 2011, citing health and sanitary reasons). The Middle East, which constitutes an active region for poultry sales by Brazilian producers, does not import pork products due to Muslim religious bans on the consumption of this meat. Above all, economic conditions in a particular export market (whether national or regional) may influence levels of demand for all types of poultry, pork and beef products as well as processed products.
Global trade in poultry products has been negatively affected by the spread of highly pathogenic avian influenza (H5N1 virus), particularly in Asia but also in Europe and Africa. China, for example, suspended supplies of live poultry to Hong Kong in late 2011 after a dead chicken tested positive for the H5N1 virus. Since the beginning of 2003, there have been 526 confirmed human cases of avian influenza and 311 deaths, according to the WHO. Human cases were reported in various countries in Asia, the Middle East and Africa, and several countries in Europe reported cases of avian influenza in birds. Avian influenza has not yet been detected in Brazil or elsewhere in the Americas. A similar virus strain has been detected in North America, with low pathology. If this animal disease is detected in Brazil, or if it begins to be transmitted from human to human, global demand for poultry products is likely to decline for a period whose length cannot be predicted.
Similarly, global trade in pork products was negatively affected in 2009 by the spread of A(H1N1) influenza, also called “swine flu,” in many countries. On June 11, 2009, the WHO declared a flu alert level six, signaling a “global pandemic.” Many countries, including Russia and China, prohibited imports of pork from countries reporting a significant number of cases (particularly, Mexico, the United States and Canada). On August 10, 2010, the WHO terminated the level six influenza pandemic alert and shifted its focus to a post-pandemic period. During this period, localized outbreaks of different magnitudes may show significant levels of A(H1N1) transmission. In China, for instance, at least 20 people died of A(H1N1) influenza in 2011.
According to the WHO, between September 2011 and January 2012, A(H1N1) influenza viruses circulated at very low levels in general, with some exceptions in Asia and the Americas. Regional A(H1N1) activity was reported by a few countries in Asia and Central America, and there were sporadic human cases reported by United States of America. According to the Pan American Health Organization (PAHO), influenza activity increased in Canada and United States but remained within the expected level for this time of the year. In Central America and Caribbean, the activity remained low, with the exception of Guatemala, where it has increased. It also remained low in South America. WHO recommended composition of influenza virus vaccines for use in 2012 for the northern and southern hemispheres, which is related to upcoming influenza season.
Any further outbreak of A(H1N1) influenza could lead to the imposition of costly preventive controls on pork imports in our export markets and could have a negative impact on the consumption of pork in those markets or in Brazil. In addition, any future significant outbreak of A(H1N1) influenza in Brazil could lead to pressure to destroy our hogs, even if no link between the influenza cases and pork consumption is shown. Any such destruction of our hogs would result in decreased sales of pork, prevent recovery of costs incurred in raising or purchasing our hogs, and result in additional expense for the disposal of destroyed hogs. Accordingly, any spread of A(H1N1) influenza, or increasing concerns about this disease, may have a material and adverse effect on our company.
In export markets, we and other Brazilian producers compete with local and other foreign producers. Traditionally, Brazilian producers have emphasized exports of frozen whole and cut poultry and frozen pork and beef cuts. These products, which are similar commodities in nature, continue to account for the substantial portion of export volumes in recent years. More recently, Brazilian food companies have begun to expand sales of processed food products. We anticipate that, over the next several years, we and our main Brazilian competitors will sell greater volumes of frozen whole and cut poultry and frozen pork and beef cuts as well as increasing volumes of processed food products.
49
Sales
We sell our products both in the domestic Brazilian market and export markets around the world. Net sales to the Brazilian market, including most of our processed foods, accounted for 60.0% of our net sales in 2011 and 59.6% in 2010. Net sales to export markets, including most of our frozen whole and cut chickens and other poultry and frozen pork cuts and, more recently, beef cuts, accounted for 40.0% and 40.4% of our net sales in 2011 and 2010, respectively.
The table below demonstrates the breakdown of our net sales for the periods indicated:
|
2011 |
2010 | |
|
Domestic Market |
60.0% |
59.6% |
|
Poultry |
4.8% |
4.6% |
|
Pork/Beef |
3.7% |
3.9% |
|
Processed food products |
42.6% |
41.8% |
|
Milk |
6.7% |
7.0% |
|
Other |
2.2% |
2.3% |
|
Export Market |
40.0% |
40.4% |
|
Poultry |
26.2% |
25.8% |
|
Pork/Beef |
6.0% |
6.7% |
|
Processed food products |
7.6% |
7.9% |
|
Milk |
— |
— |
|
Total |
100.0% |
100.0% |
Overall Comparison of the Company’s Net Sales for the Years Ended December 31, 2011 and 2010
Domestic Market
We cover substantially all of the Brazilian population through a nationwide distribution network. In the domestic market, we sell our products directly to supermarkets, wholesalers, retail stores, and food service and other institutional buyers. The table below sets forth our domestic net sales to supermarkets, retail stores, wholesalers and institutional buyers as a percentage of total domestic net sales for the periods indicated.
None of our customers accounted for more than 5% of our total net sales in 2011. One of our strategies is to continue to expand our food service client base, which already includes Burger King, McDonalds and the Brazilian fast food chains Giraffas and Habib’s, while continuing to provide quality products and services to supermarket and other customers. Other institutional buyers include hotels, hospitals and businesses.
Our domestic distribution network uses 40 distribution centers in 15 Brazilian states and the Federal District. Refrigerated trucks transport our products from our processing plants to the distribution centers and from the centers to our customers. We have 42 transit points, previously referred as cross-docking points, in several areas of the country that enable us to unload products from large refrigerated trucks onto smaller trucks or vans for transportation to our customers. We own 26 of our distribution centers and lease the remaining 14 centers, which are listed below under “—Property, Plant and Equipment.” We do not own the vehicles used to transport our products, and we contract with several carriers to provide this service for us on an exclusive basis.
In certain areas of the country, we act through nine exclusive third-party distributors, which operate in Apucarana, Cascavel and Foz do Iguaçu in the State of Paraná; Cuiabá in the State of Mato Grosso; Campos dos Goytacazes, Três Rios and Nova Friburgo in the State of Rio de Janeiro; Vilhena in the State of Rondônia; and Rio Branco in the State of Acre.
50
Export Markets
We export our products to Europe, the Far East, Eurasia, the Middle East, Africa, the Americas and other countries. The graphs below set forth a breakdown of our export net sales by region.
Competition
Domestic Market
We face significant competition in the domestic market, particularly due to the recent growth in poultry and pork production capacity in Brazil.
In the specialty meat market, we had a 55% market share by sales volume in 2011 (including Sadia), and Aurora and Marfig (including Seara) had market shares of 7.9% and 7.7%, respectively, according to A.C. Nielsen. The specialty meat market accounted for estimated revenues of approximately R$17.1 billion in Brazil in 2011, compared to R$18.0 billion in 2010, a decrease of 5.0%. The three largest players accounted for 72.6% of the market in 2011, while the remainder of the market represents several small players. This market has undergone recent consolidation due to the competitiveness of the largest players, such as the acquisition of Seara by Marfrig in 2009.
In the frozen processed meat market (which includes hamburgers, steaks, breaded meat kibes and meatballs), we had a 69.3% market share by sales volume from December 2010 through November 2011 (Sadia with a market share of 34.8%, Perdigão with 26.2%, and our other brands with 8.3%) according to A.C. Nielsen. Marfrig had a market share of 7.5% in the same period.
The graph below shows the approximate percentage of our market share for 2011 in the main categories in which we compete. The percentages are based on data for twelve-month periods that vary according to the category but include most of 2011 in each case.
51
Source: A.C. Nielsen
In the frozen pasta market (which includes lasagnas and other products), we had a 77.3% market share by sales volume in December 2010 through November 2011 (Sadia with a market share of 36.4%, Perdigão with 27.6% and our other brands with 13.3%) according to A.C. Nielsen. The frozen pasta market accounted for estimated revenues of approximately R$711 million in 2011, compared to R$647 million in 2010, an increase of 10%.
In the frozen pizza market, we had a 64.6% market share by sales volume from January through December 2011, including all of our brands (Sadia, Perdigão, Batavo and Rezende) according to A.C. Nielsen. The frozen pizza market accounted for estimated revenues of R$565 million in 2011, compared to R$551 million in 2010, an increase of 2.5%.
In the dairy products market, we had a 11.5% market share by sales volume from December 2010 through November 2011, while Danone, Nestlé and Paulista had market shares of 31.0%, 19.9% and 5.8%, respectively, according to A.C. Nielsen.
In the margarine market, we had a 60.7% market share by sales volume from December 2010 through November 2011, and Bunge had a market share of 27.4%, according to A.C. Nielsen. The margarine market accounted for estimated revenues of approximately R$2.4 billion in Brazil in 2011, compared to R$2.3 billion in 2010, according to A.C. Nielsen. However, in terms of sales volumes, this market decreased 2.5% in 2011 compared with the same period in 2010.
In the Brazilian market for whole poultry and poultry and pork cuts, we face competition from small producers, some of which operate in the informal economy and offer lower quality products at lower prices. This competition from small producers is a significant factor in our selling a majority of our whole chickens and poultry and pork cuts in the export markets and is a barrier to expanding our sales of those products in the domestic market.
In the domestic market, we compete primarily based on brand recognition, distribution capabilities, selling prices, quality and service to our customers. Since the market for processed food products is still growing in Brazil, we believe that the medium and long-term prospects for this segment are positive based on the trend over the preceding years.
Export Markets
We face significant competition in our export markets, both from other Brazilian producers and from producers in other countries. For example, Marfrig competes with us internationally and has many of the same competitive advantages that we have over producers from some other countries, including lower labor and feed costs. In addition, our poultry and pork cuts, in particular, are highly price-competitive and sensitive to product substitution. Customers sometimes seek to diversify their sources of supply by purchasing products from producers in other countries, even when we may be a lower cost producer.
52
Protectionist measures among Brazil’s trade partners are also an important competitive factor. Brazilian poultry and pork exports are increasingly affected by measures taken by other countries to protect local producers.
We exported U.S.$4.9 billion, an increase of 12.1% over the same period last year, and ranked as the fourth largest Brazilian exporter, according to SECEX, in 2011. Our main Brazilian competitor in exports is Marfrig Group (Seara), which exported U.S.$2.6 billion in 2011.
In our export markets, we compete primarily based on quality, cost, selling price and service to our customers.
Distribution of Products
Domestic Market
We have focused on our logistical operations and seek to improve efficiency and reduce distribution costs by building distribution centers to cover long distances through our transit facilities. We reach approximately 98% of the Brazilian territory through a nationwide distribution network. As of December 31, 2011, we operated 40 distribution centers and 42 transit points.
We export our products primarily through the ports of Itajaí and Navegantes in the State of Santa Catarina and, to a lesser degree, through the ports of São Francisco do Sul in the State of Santa Catarina and Paranaguá in the State of Paraná. We store our products in refrigerated warehouses that we lease under long-term leases and that are located near the ports. We contract with exclusive third-party carriers to transport our products from our production facilities to the ports, and we ship our products to the export markets through independent shipping companies.
In the past, we have occasionally experienced disruptions at the ports that have posed logistical challenges. In the fourth quarter of 2008, for example, flooding and damage at the ports of Itajaí and Navegantes damaged port infrastructure and required us to divert all our exports in the region of Santa Catarina to three other ports: Rio Grande in the State of Rio Grande do Sul, Paranaguá and São Francisco. These events led to delays in exports that adversely affected our export revenues for the fourth quarter of 2008.
The Itajaí port is owned and administered by the municipal government of Itajaí, while the port of São Francisco do Sul is owned and administered by the Brazilian federal government and the port of Paranaguá is owned and administered by the State of Paraná. However, shipments through the ports of Itajaí and Paranaguá are made through private terminals at these ports that are operated as concessions. The dock workers and other port employees at all these facilities are generally members of labor unions. In addition, each shipment of our products requires clearance by customs agents, sanitary inspectors and other agents of the Brazilian federal government, who are also generally members of labor unions. From time to time, we have been affected by strikes of these port employees and government agents. Strikes by Brazilian federal government agents generally affect all Brazilian ports, whereas strikes by port employees sometimes affect only one port, but they also tend to last longer than strikes by government agents. In the third quarter of 2007 and in March 2008, for example, sanitary inspectors struck for approximately a month. Although these strikes did not have a material adverse effect on our results of operations, a widespread or lengthy strike in the future could adversely affect our business and our results of operations.
Export Markets
Our sales and distribution efforts abroad are coordinated through sales offices in England, Japan, The Netherlands, Russia, Singapore, Italy, Hungary, Austria, Portugal, France, Germany, Argentina, Chile, Uruguay, the Cayman Islands, Venezuela, Saudi Arabia, South Africa, China and the United Arab Emirates. We coordinate our marketing efforts in our principal export markets through these offices, and we provide sales support to customers. Our distribution arrangements in our export markets vary according to the market.
Europe. In Europe, we have developed our own distribution network and sell directly to food processing and food service companies as well as local distributors. We are currently able to distribute products in 31 European countries, and we are able to deliver products within approximately two days of receiving an order in 15 of those countries. We intend to expand our distribution network in order to broaden and deepen our coverage in Europe and to support more targeted marketing efforts. In limited cases, we may explore the processing of some products in Europe, which would allow us to distribute those products more effectively as we have done with the 2008 Plusfood acquisition.
53
Far East. In Japan, our largest market in the Far East, we sell primarily to trading companies, which resell our products to Japanese distributors. We primarily supply special cuts of chicken, including boneless legs and wing cuts, produced specifically for the Japanese market, which has helped us foster customer loyalty. We also believe that our quality standards and product range have made us one of the preferred suppliers of chicken products in the Japanese market. In addition to Japan, we sell a significant amount of products in Hong Kong and Singapore, where we believe our brands are well recognized. Our most popular products in these latter markets include chicken wings and feet. We recently signed an agreement for a joint venture with Dah Chong Hong Limited aimed at improving our position in the value chain in China by distributing Sadia-branded products through the joint venture.
Eurasia. In Russia and other regions of Eurasia, we sell primarily to distributors, which resell our products to supermarkets and other customers. Our Fazenda brand of pork and poultry products is carried in many supermarkets, and we believe it is a well-recognized brand in Russia. We have historically sold approximately two-thirds of our frozen pork cuts to Russia and also supply significant volumes of frozen whole and cut chickens. However, Russia imposes quotas on imports of poultry, pork and beef products from Brazil and other exporting countries. Also, it is not uncommon for Russian quotas for poultry, pork and beef products to be subject to changes in policy and delays in allocation, and a delay in allocating quotas for poultry products in the first half of 2006 led to a significant decline in our sales volumes of poultry products to Russia during that period. In addition, since June 2011, Russia imposed restrictions on Brazilian exports of pork, beef and poultry from several Brazilian states, citing health and sanitary issues, and this ban remains in place.
Middle East. In Saudi Arabia and other countries of the Middle East, we sell to large distributors, some of which have been our customers for decades. We sell primarily frozen whole and cut chickens in these markets. We believe that we are one of the preferred suppliers of these products in this region due to our quality standards and our long-standing customer relationships. In fact, Sadia is recognized as a Top of Mind brand in the region, according to Ipsos Research, a third-party consulting firm that prepared a study for us.
Africa, the Americas and Other Countries. We sell modest amounts of our products to several countries in Africa, South America and other regions, primarily through trading companies that resell our products to distributors. We also sell chicken cuts, including breasts and wings, to processing companies in Canada. We are currently developing relationships with distributors in South America in order to expand our exports in this region. However, our sales to many of these countries are subject to significant fluctuations in demand.
Intellectual Property
Our principal intellectual property consists of our domestic and international brands. We sell our products mainly under the Perdigão and Batavo brands in the domestic market and under the Perdix, Fazenda, Borella, Confidence and other brands in our export markets, as described below under “—Marketing.”
We also use several brands for specific products or product lines. In the domestic market, these brands include Chester®, Turma da Mônica (licensed trademark, with contract until 2013), Confiança, Escolha Saudável, Toque de Sabor (for Lasagnas), Doriana, Claybom, Pense Light, Bio Fribas, Naturis, Ouro and Nabrasa.
In our export markets, we use the following brands: Halal (in the Middle East other than Saudi Arabia), Unef (in Saudi Arabia), Sulina (in Hong Kong and Singapore) and Alnoor (in several Middle Eastern countries).
We commenced sales of margarine in December 2005. We purchase margarine from an agricultural cooperative supplier for resale by us. We initially sold margarine under two brand names (Turma da Mônica and Borella). In June 2007, we acquired from Unilever the margarine brands Doriana, Delicata and Claybom, as well as the equipment to produce such margarines. We also entered into a strategic agreement with Unilever for the management of the margarine brands Becel and Becel ProActiv in Brazil.
54
In February 2008, we completed the acquisition of Eleva, assuming all its rights and obligations, including the trade mark Elegê. In April 2008, we also acquired Maroca e Russo Indústria e Comércio Ltda. (Cotochés) and assumed all its rights and obligations, including the regional brand Cotochés.
In 2009, we entered into a business combination with Sadia, and Sadia became our wholly-owned subsidiary. Sadia sells its products mainly under the brands Sadia, Hot Pocket, Miss Daisy, Fiesta, Rezende, Texas, Texas Burger, Speciale Sadia, Sadilar, Nuggets, Tekitos, Wilson, Deline and Qualy (for margarines) in the domestic market. In our export markets, Sadia uses the following brands: Sadia, Resende, Hilal, Corcovado and Sahtein.
Under our agreement with the CADE in connection with the approval of our business combination with Sadia, we agreed to divest the Rezende, Wilson, Texas, Tekitos, Patitas, Escolha Saudável, Light Elegant, Fiesta, Freski, Confiança, Doriana and Delicata brands. We also agreed to suspend the use of the Perdigão and Batavo brands with respect to several product lines in the Brazilian market for periods ranging from three to five years. See “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.”
Sadia has applied to have the Sadia trademark recognized as a “well known trademark” with the Brazilian National Institute for Industrial Property (Instituto Nacional de Propriedade Industrial), which is reviewing the application. The Sadia trademark is registered in more than 90 countries in the Middle East, the Caucasus and Latin America, including Saudi Arabia, United Arab Emirates, Egypt, Bahrain, Yemen, Iran, Iraq, Israel, Lebanon and Oman. Sadia’s mascot is protected both as a registered trademark and copyright pursuant to a registration with the Brazilian National Library, and this protection extends to countries other than Brazil. Sadia maintains an active marketing program using both electronic and printed media. In addition, Sadia has patents registered in Brazil and more than 20 other countries.
Finally, we are owners of several domain names in Brazil, registered with the competent authority, such as “perdigao.com.br,” “chester.com.br,” “escolhasaudavel.com.br,” “perdix-international.com.br”, doriana.com.br,” “delicata.com.br,” “claybom.com.br,” “sadia.com.br,” “missdaisy.com.br,” “rezendenet.com.br,” “hotpocket.com.br,” “clubequaly.com.br” and “sadiafoodservices.com.br.”
Regulation
The Brazilian Ministry of Agriculture regulates our activities through the Secretary for Agriculture and Cattle Breeding Defense (Secretaria de Defesa Agropecuária) and the Animal Products Inspection Department (Departamento de Inspeção de Produtos Animais). This department is responsible for issuing regulations, conducting inspections and providing legal support relating to livestock, animal breeding, food processing and any other activity involving animal-related affairs in the Brazilian territory. Under applicable regulations, facilities that handle animal products must obtain permits and authorizations from the Federal Inspection Service of the Federal Office of the Ministry of Agriculture (Serviço de Inspeção Federal da Delegacia Federal do Ministério da Agricultura, Pecuária e Abastecimento), including a license to operate each facility, and must submit to periodic monitoring by the Brazilian state where the facility is located.
In addition, animal products are required to be identified using labels that have been registered with or approved by the Ministry of Agriculture. Ready-to-eat products that contain animal ingredients are also subject to technical, chemical and microbiological inspections. Violations of regulations of animal products may give rise to penalties, fines, seizure of products or temporary suspensions or permanent injunctions of a company’s activities.
Marketing
Our marketing efforts are based on (1) diversifying our product lines, including focusing on value-added processed foods that tend to be less price-sensitive than our poultry and pork cuts and can be targeted to specific markets; (2) using a coherent brand strategy so that our brands are recognized and associated with premium products; and (3) reinforcing our reputation for quality by emphasizing superior service to our customers. We intend to further consolidate our brands, while continuing to tailor our appeal to specific export markets and domestic market segments.
55
In the domestic market, we historically marketed our products primarily under the Perdigão brand. Since our business combination with Sadia, we have also sold our products under the brands Sadia, Qualy, Rezende, Miss Daisy, Texas, Texas Burger, Speciale Sadia, Sadilar, Deline, Nuggets, Tekitos, Hot Pocket and Wilson. We also use a secondary brand, Batavo, which is especially recognized in the State of Paraná. Although we previously used the Batavo brand under license, we acquired a controlling interest in the brand through the Batávia acquisition.
Under our agreement with the CADE in connection with the approval of our business combination with Sadia, we agreed to suspend the use of the Perdigão and Batavo brands with respect to several product lines in the Brazilian market for periods ranging from three to five years and to divest the Rezende, Wilson, Texas and Tekitos brands and other brands. See “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.”
We also have well known brands for specific products, such as our Chester® roosters, one of the most popular brands for premium poultry products in Brazil. In addition, we offer a popular Turma da Mônica line of processed foods for children. We have a licensing agreement to use the name and image of Mônica, a well known cartoon character in Brazil, and we use this brand for a wide variety of products, including our Turma da Mônica brand margarine for kids. Batávia also uses the Parmalat brand for processed refrigerated dairy products, such as yogurt. Upon the acquisition of Batávia, we entered into a license agreement with Parmalat S.p.A. to use the Parmalat brand for processed dairy products and other products for a period of three years until the end of 2009, renewable for subsequent one-year periods, if there is no communication otherwise. This license agreement expired on April 25, 2011 and the parties did not negotiate a renewal. In 2007, we acquired from Unilever the margarine brand Claybom and other brands, and also established a joint venture with Unilever to use the margarine brand Becel.
In our export markets, our premium brand was historically the Perdix brand, but we use other brands in specific markets for historical reasons, such as the Fazenda brand in Russia. In each case, we pair the two-partridge image with the applicable brand name for that market to maintain a coherent international brand. Since our business combination with Sadia, we also use the brands Sadia, Rezende, Hilal, Corcovado and Sahtein in our export markets. In addition, we have secondary brands in some of our export markets. Our Borella brand, for example, is well-known in Saudi Arabia, and we use the Halal brand in some Middle Eastern markets to indicate that we slaughter poultry for those products in accordance with Islamic guidelines. We also use the Confidence brand for selected lower-priced products, such as bologna and frankfurters, in a small number of export markets. We work with a single marketing agency internationally to help us market consistently around the world.
For more information, see “—B. Business Overview—Intellectual Property.”
C. Organizational Structure
See “—A. History and Development of the Company––Corporate Structure.”
D. Property, Plant and Equipment
Production
We have a number of production facilities throughout Brazil. We currently operate 42 meat processing plants, 2 margarine plants, 25 hatcheries, 23 animal feed mills, 15 dairy/dessert processing plants, 13 milk collection points, 1 soybean processing plant and several industrialized processing plants. We also have production facilities in The Netherlands and the United Kingdom, which manufactures items destined for the European market, and seven production facilities in Argentina.
We also operate 35 grain purchasing branches, through which we purchase corn needed for our animal feed production.
In 2011, we terminated our operations at São Lourenço do Sul in the State of Rio Grande do Sul and Itatiba in the State of São Paulo. We transferred production from those plants to Carambeí in the State of Paraná (milk-based beverages) and Teutônia in the State of Rio Grande do Sul (pasteurized milks).
56
The table below sets forth our production facilities in Brazil.
|
Production Plant |
State of Location |
Activities |
|
Bom Retiro do Sul |
Rio Grande do Sul |
Meat processing |
|
Braço do Norte* |
Santa Catarina |
Pork slaughtering |
|
Brasília |
Distrito Federal |
Poultry slaughtering, industrialized products processing and animal feed |
|
Buriti Alegre |
Goiás |
Poultry slaughtering and animal feed |
|
Capinzal |
Santa Catarina |
Poultry slaughtering and poultry processing |
|
Carambeí |
Paraná |
Pork and poultry slaughtering (including turkey); chicken, turkey and pork processing |
|
Caxias do Sul* |
Rio Grande do Sul |
Pork slaughtering |
|
Chapecó |
Santa Catarina |
Poultry (including Turkey) slaughtering, industrialized products processing and animal feed |
|
Concórdia |
Santa Catarina |
Poultry and pork slaughtering, industrialized products processing and animal feed |
|
Dois Vizinhos |
Paraná |
Poultry slaughtering, soybean processing and animal feed |
|
Dourados |
Mato Grosso do Sul |
Poultry slaughtering |
|
Duque de Caxias |
Rio de Janeiro |
Industrialized products processing |
|
Faxinal dos Guedes |
Santa Catarina |
Poultry slaughtering and animal feed |
|
Francisco Beltrão |
Paraná |
Poultry (including Turkey) slaughtering and animal feed |
|
Garibaldi* |
Rio Grande do Sul |
Hatchery, poultry slaughtering and animal feed |
|
Herval D’Oeste |
Santa Catarina |
Pork slaughtering and pork processing |
|
Jataí |
Goiás |
Poultry slaughtering and poultry processing |
|
Lages |
Santa Catarina |
Pasta, pizza and cheese bread processing; beef processing |
|
Lajeado |
Rio Grande do Sul |
Pork and poultry slaughtering and pork processing |
|
Lajeado* |
Rio Grande do Sul |
Poultry slaughtering and animal feed |
|
Lucas do Rio Verde |
Mato Grosso |
Poultry and pork slaughtering, industrialized products processing and animal feed |
|
Marau (3 plants) |
Rio Grande do Sul |
Pork and poultry slaughtering and processing |
|
Mato Castelhano* |
Rio Grande do Sul |
Pork slaughtering |
|
Mineiros |
Goiás |
Special poultry (turkey and Chester®) slaughtering and processing |
|
Mirassol D’Oeste |
Mato Grosso |
Beef plant |
|
Nova Mutum |
Mato Grosso |
Poultry slaughtering and processing |
|
Ponta Grossa |
Paraná |
Pizzas, pasta, desserts (Miss Daisy), industrialized products processing |
|
Porto Alegre |
Rio Grande do Sul |
Poultry slaughtering |
|
Rio Verde |
Goiás |
Pork and poultry slaughtering; poultry, pork, pies and pasta processing |
|
Salto Veloso |
Santa Catarina |
Poultry, pork and beef processing |
|
Santa Cruz do Sul |
Rio Grande do Sul |
Industrialized Products |
|
São Gonçalo dos Campos |
Bahia |
Poultry slaughtering and processing |
|
Serafina Corrêa |
Rio Grande do Sul |
Poultry slaughtering |
|
Tatuí |
São Paulo |
Industrialized Products |
|
Toledo |
Paraná |
Poultry and pork slaughtering, industrialized products processing, animal feed, and soybean oil |
|
Três Passos |
Rio Grande do Sul |
Pork slaughtering and animal feed, |
|
Uberlândia |
Minas Gerais |
Poultry (including turkey) and pork slaughtering, industrialized products processing and animal feed |
|
Várzea Grande/Campo Verde |
Mato Grosso |
Poultry slaughtering, industrialized products processing and animal feed |
|
Videira |
Santa Catarina |
Pork and poultry slaughtering and processing |
|
Videira |
Santa Catarina |
Pork and poultry slaughtering |
|
Vitória de Santo Antão |
Pernambuco |
Industrialized Products |
|
Dairy products: |
|
|
|
Amparo* |
São Paulo |
Dairy products |
|
Barra Mansa* |
Rio de Janeiro |
Dairy products |
|
Bom Conselho** |
Pernambuco |
Dairy products |
|
Carambeí |
Paraná |
Dairy products |
|
Conceição do Pará* |
Minas Gerais |
Dairy products |
|
Concórdia |
Santa Catarina |
Dairy products |
|
Ijuí |
Rio Grande do Sul |
Dairy products |
|
Itumbiara |
Goiás |
Dairy products |
|
Ravena |
Minas Gerais |
Dairy products |
|
Santa Rosa |
Rio Grande do Sul |
Dairy products |
|
São Lourenço |
Rio Grande do Sul |
Dairy products |
|
Terenos |
Mato Grosso |
Dairy Products |
|
Teutônia |
Rio Grande do Sul |
Dairy products |
|
Três de Maio** |
Rio Grande do Sul |
Dairy products |
|
Soybean and margarine: |
||
|
Paranaguá |
Paraná |
Margarine processing |
|
Valinhos |
São Paulo |
Margarine processing |
|
Videira |
Santa Catarina |
Soybean crushing |
* Production facilities owned and operated by third-party producers who produce according to our specifications.
** Under construction.
57
The table below sets forth our production facilities outside Brazil.
|
Production Plant |
Country of Location |
Activities |
|
Plusfood |
Oosterwolde, Netherlands |
Industrialized products processing (frozen foods) |
|
Plusfood |
Wrexham, United Kingdom |
Industrialized products processing (frozen foods) |
|
Avex |
Córdoba, Argentina (Rio Cuarto) |
Poultry slaughtering |
|
Avex |
Córdoba, Argentina (Juárez Celman) |
Animal feed |
|
Avex |
Córdoba, Argentina (General Deheza) |
Hatcheries |
|
Avex |
Córdoba, Argentina (Rio Cuarto) |
Poultry slaughtering |
|
Danica |
Buenos Aires, Argentina (Llavallol) |
Margarines and oils processing |
|
Danica |
San Luis, Argentina (Villa Mercedes) |
Industrialized products processing (sauces and mayonnaise) |
|
Danica |
Buenos Aires, Argentina (Avellaneda) |
Industrialized products processing (pasta and pastries) |
Some of our real estate assets are subject to liens incurred to secure our obligations under financing agreements, as described in note 19 of our consolidated financial statements included elsewhere in this document, as well as liens with respect to payment of taxes and legal proceedings.
Distribution
We operate 40 distribution centers throughout Brazil, as set forth in the table below.
|
Distribution Centers |
Owned or Leased |
|
Aparecida de Goiânia, Goiás |
Leased |
|
Bauru, São Paulo |
Owned |
|
Belém, Pará |
Leased |
|
Belo Horizonte, Minas Gerais |
Owned |
|
Brasília - Distrito Federal |
Owned |
|
Campinas, São Paulo |
Owned |
|
Carambeí, Paraná |
Owned |
|
Cuiabá, Mato Grosso |
Owned |
|
Curitiba, Paraná |
Leased |
|
Embú, São Paulo |
Owned |
|
ETPI, Paraná |
Owned |
|
ETPII, Paraná |
Owned |
|
Esteio, Rio Grande do Sul |
Leased |
|
Fortaleza, Ceará |
Owned |
|
Ijuí, Rio Grande do Sul |
Owned |
|
Itajaí, Santa Catarina |
Leased |
|
Jaguare, São Paulo |
Owned |
|
Jundiaí, São Paulo |
Owned |
|
Manaus, Amazonas (2 distribution centers) |
Leased |
|
Marau, Rio Grande do Sul |
Owned |
|
Ourinhos, São Paulo |
Leased |
|
Ponta Grossa, Paraná |
Owned |
|
Porto Alegre, Rio Grande do Sul |
Leased |
|
Ravena, Minas Gerais |
Owned |
|
Recife, Pernambuco |
Leased |
|
Recife, Pernambuco |
Owned |
|
Rio de Janeiro, Rio de Janeiro (2 distribution centers) |
Owned |
|
Rio de Janeiro, Rio de Janeiro |
Leased |
|
Salvador, Bahia (2 distribution centers) |
Owned |
|
Santa Rosa, Rio Grande do Sul |
Owned |
|
Santos, São Paulo |
Owned |
|
São Gonçalo, Bahia |
Owned |
|
São José dos Pinhais, São Paulo |
Leased |
|
Teutônia, Rio Grande do Sul |
Owned |
|
Uberlândia, Minas Gerais |
Owned |
|
Videira, Santa Catarina |
Owned |
|
Vitória, Espírito Santo |
Leased |
58
We operate 42 transit points in Brazil, in the locations set forth in the table below.
|
Transit Points |
Owned or Leased |
|
Apucarana, Paraná |
Leased |
|
Aracajú, Sergipe |
Leased |
|
Araçatuba, São Paulo |
Leased |
|
Bauru, São Paulo |
Owned |
|
Belem, Pará |
Leased |
|
Belo Horizonte, Minas Gerais |
Leased |
|
Brasilia, Distrito Federal |
Owned |
|
Campo Grande, Mato Grosso do Sul |
Owned |
|
Campo Grande, Mato Grosso do Sul |
Leased |
|
Cascavel, Paraná |
Leased |
|
Catanduva, São Paulo |
Leased |
|
Cuiabá, Mato Grosso |
Leased |
|
Esteio, Rio Grande do Sul |
Leased |
|
Fortaleza, Ceará |
Leased |
|
Goiania, Goiás |
Leased |
|
Guarapuava, Paraná |
Leased |
|
Guarulhos, São Paulo |
Owned |
|
Imperatriz, Maranhão |
Leased |
|
Itabuna, Bahia |
Leased |
|
Itajai, Santa Catarina |
Owned |
|
Jardinópolis, São Paulo |
Leased |
|
Limeira, São Paulo |
Leased |
|
Macapá, Amapá |
Leased |
|
Maceió, Alagoas |
Leased |
|
Natal, Rio Grande do Norte (2 transit points) |
Leased |
|
Paraiso do Tocantins, Tocantins |
Leased |
|
Passo Fundo, Rio Grande do Sul |
Leased |
|
Pouso Alegre, Minas Gerais |
Leased |
|
Ribeirão Preto, São Paulo |
Owned |
|
S Bernardo do Campo, São Paulo |
Leased |
|
S José dos Campos, São Paulo |
Owned |
|
Santa Maria, Rio Grande do Sul |
Owned |
|
Santos, São Paulo |
Leased |
|
São Luís, Maranhão |
Leased |
|
São Paulo, São Paulo |
Owned |
|
Sorocaba/Campinas, São Paulo |
Leased |
|
Teresina, Piauí (2 transit points) |
Leased |
|
Uberlândia, Minas Gerais |
Leased |
|
Varginha, Minas Gerais |
Leased |
|
Vitória, Espírito Santo |
Leased |
59
On June 6, 2011, we sold Sadia’s corporate offices at Vila Anastácio in São Paulo for R$120.0 million. We received R$12.0 million in cash and expect to receive the remainder in 35 equal monthly installments from the date when the purchaser takes possession, which we expect to be later in 2012. We recorded a gain of R$49.4 million on the sale.
We lease our administrative office at Rua Hungria 1400, São Paulo, in the State of São Paulo. In the first quarter of 2011, we subleased a portion of the office to Sadia, as well as our former administrative office in São Paulo. In addition, we own an administrative office in Videira, in the State of Santa Catarina, and we lease an administrative office in Itajaí, in the State of Santa Catarina.
Environment
Our activities are subject to stringent environmental laws and regulations at the local, state and federal levels regulating, among other things, the treatment and release of effluents and the management of industrial waste. In addition, our meat processing plants are subject to federal, state and/or local environmental licensing requirements.
We believe we are in material compliance with our environmental licensing requirements.
Noncompliance with environmental laws and regulations may result in the imposition of administrative and criminal penalties against the violator, in addition to indemnity obligations for environmental damages. Administrative penalties may include notices, fines, temporary or permanent injunctions, suspension of subsidies from public agencies and temporary or permanent closure of a business. Criminal sanctions include fines and imprisonment (for individuals) and dissolution (for legal entities). Fines for operating without a license may vary by state, and penalties vary according to environmental damages caused. In addition, under Brazilian environmental law, the corporate structure of a company may be disregarded if it is deemed necessary to guarantee the payment of the costs related to environmental damages.
We retain professionals with training in risk and waste management capable of prompt action in emergency situations. All our meat processing plants were built in compliance with applicable environmental laws relating to the disposal of effluents and waste. In addition, our Marau facility was the first Brazilian industrial plant in the meat processing sector to adopt the Integrated Management System (SGI), a management tool that seeks excellence in quality, the environment, and occupational health and safety. Its implementation has led to the certification under ISO 9001 and ISO 14001 (International Organization for Standardization), and OHSAS 18001 (Occupational Health and Safety Assessment Series), respectively. In 2009, 2010 and 2011, ten of BRF’s units were certified according to the ISO 14001 standards: Lages, Marau Aves, Marau Suínos, Herval d’Oeste, Serafina Corrêa, Chapecó, Paranaguá, Ponta Grossa, Salto Veloso and Alho Veloso.
60
We have implemented an environmental policy based on ensuring that our activities and growth are developed in harmony with the environment. We have an Environmental Coordination Committee composed of members from different functions within our company that oversees implementation of our environmental policy and monitors our environmental practices.
We not only comply with all the environmental precautions required in the way we conduct our operations, but we also take part in environmental conservation initiatives and run a waste recycling system in conjunction with our integrated outgrowers. Although we endeavor to comply with all environmental laws and regulations, from time to time, we have been required to enter into environmental agreements with the Brazilian government relating to noncompliance with environmental licensing requirements governing the management of solid waste and effluents. Under these agreements, we must, among other things, remediate contaminated soils. If we do not comply with these obligations, we may be subject to the imposition of daily fines.
On July 19, 2010, we signed a consent agreement (Termo de Ajustamento de Conduta) with the Municipality of Rio Verde, in the State of Goiás, to settle a dispute relating to deposits into a stream near our facility pursuant to which we were required to (i) pay R$100,000.00 as environmental compensation to the Municipal Environmental Fund (Fundo Municipal do Meio Ambiente); (ii) build a sidewalk and a wire fence around the Abóbora stream; (iii) build a 24-hour staffed water monitoring system to monitor water quality in the Abóbora stream; and (iv) discontinue use of a certain water reservoir.
On March 11, 2010, Sadia executed a consent agreement with the Uberlândia Municipal Environmental Secretary (Secretaria Municipal de Meio Ambiente) by which it assumed the obligation of installation, operation and monitoring of a system capable of minimizing and eliminating the generation of odors outside the boundaries of the plant located in the Municipality of Uberlândia, State of Minas Gerais.
On March 14, 2011, we executed a consent agreement (Termo de Ajustamento de Conduta) with the Enviromental Foundation (Fundação Meio Ambiente) of the State of Santa Catarina relating to a missing environmental license relating to fire prevention following a fire that affected our unit in Videira. Under that consent agreement, we were required to pay R$287,750.00 as environmental compensation to the Enviromental Foundation (Fundação Meio Ambiente) of the State of Santa Catarina.
On May 13, 2011, we executed a consent agreement (Termo de Ajustamento de Conduta) with the State of Mato Grosso do Sul due to an accident that led to an effluent leakage in an area under environmental protection. Under the consent agreement, we agreed to install, operate and monitor a system capable of minimizing and eliminating odor leakages outside the boundaries of the treatment stations of our plant located in the Municipality of Dourados.
On May 13, 2011, we also executed a consent agreement (Termo de Ajustamento de Conduta) with the Municipality Rio Verde, in the State of Goiás, pursuant to which we agreed (i) to pay R$480,000.00 as environmental compensation to the Municipality Rio Verde and (ii) to report the proper destinations of waste products arising from our Rio Verde plant and agreed not to undertake potentially polluting activity without authorization from the competent environmental agency.
On October 21, 2011, Sadia executed a consent agreement (Termo de Ajustamento de Conduta) with the State of Mato Grosso pursuant to which it agreed to install, operate and monitor a system capable for monitoring watewater treatment at its unit in the Municipality of Várzea Grande, State of Mato Grosso.
Partnerships with integrated outgrowers is one of the strategies we use to ensure that our activities and those of our suppliers are performed according to world environmental standards. We are responsible for our integrated outgrowers’ licensing projects and provide technical support and guidance on the best way to manage environmental issues.
We are also aware of the need to increase and expand our environmental control systems in line with the pace of growth and diversification expected over the next few years. All new investments involving an increase in production must build enhanced effluent treatment plants and fuel and steam generation capacity to meet standards already reached elsewhere and, if possible, improve these standards. In 2011, we invested R$146 million in environmental projects.
61
Insurance Coverage
We purchase insurance to cover the following risks: (1) fire, lightning, explosions and other risks to our property (building, equipment, machinery, furniture and inventories or goods), including business interruption insurance, with a combined maximum insured limit of R$600.0 million and assuming a total value at risk of our property of R$22.3 billion as of December 31, 2011 and R$20.3 billion as of December 31, 2010; (2) domestic and international cargo insurance for our goods, with maximum coverage per occurrence of U.S.$5.0 million for domestic cargo and U.S.$30.0 million for import and export shipping, limited to the cargo invoice amount and shipment terms; and (3) other coverage, including general liability and vehicle third-party liability.
In 2011, fires affected part of the installations of our Nova Mutum unit in March and our Brasília unit in October. The facilities are covered by fire insurance and production at these units was temporarily absorbed by our other plants to avoid disruptions in deliveries to clients and consumers. We have requested indemnification from the insurance company for the losses, and the insurance company is evaluating our request. We cannot guarantee that all of our direct and indirect costs will be covered by our insurance.
ITEM 4A. Unresolved Staff Comments
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating and Financial Review and Prospects
Overview
We are one of Brazil’s largest food companies, with a focus on the production and sale of poultry, pork, beef cuts, milk, dairy products and processed food products. We are a vertically integrated business that produces more than 3,000 SKUs, which we distribute to customers in Brazil and in more than 140 other countries. During the year ended December 31, 2011, we produced 5.8 million tons of food products, 4.1% higher than the sales volumes reported in 2010.
In order to reflect organizational changes that took place during the last quarter of 2011, we currently report our results according to the following segments, divided according to the sales channel:
Ø Domestic market, which includes our sales within Brazil, except for dairy products and sales to food services customers.
Ø Export market, which includes our export sales and sales generated outside Brazil, except for dairy products and sales to food service customers.
Ø Dairy, which includes our sales of milk and dairy products, produced both domestically and abroad.
Ø Food service, which includes sales of all products in our portfolio, except for dairy products, in the domestic and export markets in the food service category, which includes fast food chains, restaurants, hotels and the institutional market.
Within these segments, we report net sales in important product categories, to the extent relevant to a given segment:
Ø Poultry, consisting of frozen whole and cut chickens and other poultry sold in both our domestic and export markets and in our food service segment;
62
Ø Pork and Beef, consisting of frozen pork cuts and beef cuts sold in both our domestic and export markets and in our food service segment;
Ø Processed Food Products sold in both our domestic and export markets and in our food service segment, such as the following:
· marinated frozen whole and cut chickens, roosters (sold under the Chester® brand) and turkeys;
· specialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; and
· frozen processed meats, such as hamburgers, steaks, breaded meat products, kibes and meatballs, and frozen processed vegetarian foods;
Ø Other Processed Products, sold in both our domestic and export markets and in our food service segment:
· frozen prepared entrees, such as lasagna and pizzas, as well as other frozen foods, including vegetables, cheese breads and pies;
· juices, soy milk and soy juices; and
· margarine;
Ø Milk, consisting of both UHT and pasteurized milk sold in Brazil in our dairy products segment;
Ø Other Dairy Products, such as flavored milk, yogurts, fruit juices, soy-based beverages, cheeses and desserts sold primarily in Brazil but also abroad in our dairy product segment; and
Ø Other, such as soy meal, refined soy flour and animal feed sold in our domestic and export markets.
In the year ended December 31, 2011, we generated 29.9% of our net sales from poultry, 9.1% from pork and beef, 34.6% from processed meat products, 9.9% from dairy products, 8.6% from other processed products, 5.6% from food service and 2.3% from other products.
In the domestic market, which accounted for 60.0% of our total net sales in the year ended December 31, 2011, we operate under such brand names as Sadia, Chester, Elegê, Miss Daisy, Qualy and Becel (through a strategic joint venture with Unilever) and Turma da Mônica (under license), which are among the most recognized names in Brazil. In export markets, which take the remaining 40.0% of our total net sales, the leading brands are Perdix, Sadia, Hilal, Halal, Corcovado, Batavo, Fazenda, Borella and Confidence.
We export primarily to distributors, the institutional market (which includes restaurants and food service chains) and food processing companies. In 2011, our exports accounted for 40.2% of our total net sales. We export to more than 5,000 clients, with customers in Europe accounting for 18.3% of our export net sales in 2011; the Far East, 22.4%; Eurasia (including Russia), 7.4%; the Middle East, 30.0% and the Americas, Africa and other regions, 21.9%.
Principal Factors Affecting Our Results of Operations
Our results of operations, financial condition and liquidity have been, and will continue to be, influenced by a broad range of factors, including:
· Brazilian and global economic conditions;
· the effect of trade barriers and other import restrictions;
63
· concerns regarding avian influenza and other animal diseases;
· the effect of demand in our export markets on supply in the domestic market, including the effect of actions by our major Brazilian competitors and of temporary increases in supply by producers in other countries;
· commodity prices;
· exchange rate fluctuations and inflation;
· interest rates; and
· freight costs.
We describe these factors in greater detail below.
Brazilian and Global Economic Conditions
GDP growth was (0.3)% in 2009, 7.5% in 2010 and 2.7% in 2011, according to the IBGE. The slowdown in the second half of 2011 was higher than expected and was mainly related to the monetary and fiscal tightening undertaken since the end of 2010 and the deteriorating external economic environment. The modest growth in consumption, a consequence of moderate increases in mass real income and higher household debt, indicates that the country experienced an economic slowdown in 2011.
The exchange rate in 2011 depreciated during the year, with the average real/U.S. dollar rate rising from 1.67 in January to 1.83 in December. The main reason for this depreciation was the high degree of uncertainty driven by fluctuations in the international economy during the year, as well as internal monetary policy that led to lower interest rates at the end of the year.
At the end of former president Luiz Inácio Lula da Silva’s administration, interest rates were lowered to stimulate economic growth. From 2008 to 2010, interest rates decreased from 13.75% to 10.75% and inflation was kept under 5.0%. With the transition to President Dilma Rousseff’s administration in January 2011, the Brazilian government has set a goal of cutting public expenditures and stabilizing the economy. The lower interest rates from previous years resulted in high inflation rates of 6.5% in 2011, leading to the Central Bank’s decision to increase interest rates to stabilize the situation.
In recent years, the average unemployment rate in Brazil has been lower than historical levels. According to the latest available data from the IBGE, the rate reached 5.2% in November 2011. This relatively low rate has enabled ongoing employment creation and is expected to continue to sustain employment creation in upcoming years. As a consequence of the low unemployment rate, domestic food consumption has increased, mainly for processed foods. In addition, higher mass income (due to higher wage readjustments) contributes to the expansion of retail sales and also reflects the growth of out-of-home food consumption.
Effects of Trade and Other Barriers
We monitor trade barriers and other import restrictions in the poultry, pork and beef markets outside Brazil because these restrictions significantly affect demand for our products and the levels of our export sales. These restrictions often change from period to period, as illustrated by these examples:
· In 2005, in a proceeding before the World Trade Organization, Brazil obtained a favorable result in a panel against the European Union involving the classification of exports of salted chicken breast meat. The European Union has introduced quotas on imports of Brazilian salted chicken breast, marinated turkey breast and processed chicken. Since July 2007, Brazil has been granted a majority share of these quotas. While the quotas establish lower import tariffs for the products mentioned above, the import of the same products and others continues to be permitted at the traditional import tariffs for unprocessed products. The high duties levied on imports in the European market have limited the competitiveness of Brazilian products.
64
· In 2007, Russia began to reopen its market to imports of Brazilian beef and pork products from certain states of Brazil after imposing restrictions in 2006. However, since June 2011, Russia has imposed restrictions on imports from most Brazilian states, including Rio Grande do Sul, Santa Catarina and Mato Grosso, citing health and sanitary issues.
· Russia also typically imposes quotas on imports of meat. Russia has changed its quota criteria over the last two years. With respect to pork products, Russia does not currently discriminate based on place of origin. Regarding poultry products, however, there are three types of quotas: one for turkey, one for bone-in chicken and one for boneless cuts. The latter quota is further divided up by place of origin, with the European Union having largest quota.
· Ukraine has also restricted pork imports, levying higher taxes on pork imports for the retail market for a period through 2008. In March 2009, Ukraine initiated an anti-dumping investigation regarding imports of halves and quarters of poultry, as well as legs and cuts of poultry, in each case originating from the United States and Brazil. In 2010, the investigation was halted when no evidence of dumping was found.
· In June 2011, South Africa initiated an anti-dumping investigation against Brazilian chicken, specifically whole chicken and boneless cuts. In a preliminary determination, the South African government imposed substantial tariffs on these products (62.9% on whole chicken and 46.5% on boneless cuts), which temporarily halted Brazilian imports. A final decision by the South African government is expected by the end of this year. The Brazilian government concurrently considering initiating a WTO panel to investigate alleged violations of anti-dumping agreements.
In the short term, we must respond quickly to the imposition of new restrictions, including temporary health-related restrictions, by redirecting products to other markets or changing product specifications to comply with the new restrictions in order to minimize their effect on our net sales from exports. In the long term, these restrictions affect the rate of growth of our business.
Effect of Animal Diseases
Avian Influenza (H5N1)
Demand for our products can be significantly affected by outbreaks of animal diseases like avian influenza, or by the perception of a risk of such an outbreak. For example, global demand for poultry products decreased in the first half of 2006 due to concerns over the spread of avian influenza. Although there have been no reported cases of this disease in Brazil, in the first half of 2006, the demand for our poultry products in our export markets was significantly lower, resulting in lower net sales of such products in tour export markets in that period. Although net sales of poultry products in the domestic market increased in the first half of 2006, prices decreased due to the oversupply of products that could not be sold as easily in our export markets. In the second half of 2006 and in 2007 and 2008, poultry exports, demand, production and global inventories gradually improved.
However, if significant numbers of new avian influenza cases were to develop in humans, even if they do not occur in any of our markets, then demand for our poultry products both inside and outside Brazil would likely be negatively affected and the extent of the effect on our business cannot be predicted. Even isolated cases of avian influenza in humans could negatively impact our business due to the public sensitivity to the disease.
The Brazilian Ministry of Agriculture established a plan for the prevention of outbreaks of avian influenza and Newcastle disease in 2006, requiring the inspection of Brazilian states’ sanitary systems. In addition to the Brazilian government plan, we have implemented our own regional plan to minimize the transportation of raw materials and finished products across state lines and to allow us to isolate production in any state in which an outbreak of an animal disease may occur. We could incur costs in connection with the implementation of the Brazilian government plan and our own regionalization plan.
65
If an avian influenza outbreak were to occur in Brazil, we might find it necessary to redirect a significant portion of our poultry production to cooked products. Even if we were to do so, however, we expect that demand for our products would still be adversely affected by any instance of avian influenza in Brazil.
A(H1N1) Influenza (“Swine Flu”)
In 2009, A(H1N1) influenza, also called “swine flu,” spread to many countries. On June 11, 2009, the WHO declared a flu alert level six, signaling a “global pandemic.” Many countries, including Russia and China, have prohibited imports of pork from countries reporting a significant number of cases (Mexico, United States and Canada). On August 10, 2010, the WHO terminated the level six influenza pandemic alert and shifted its focus to a post-pandemic period. During this period, localized outbreaks of different magnitudes may show significant levels of A(H1N1) transmission. In China, for instance, at least 20 people died of A(H1N1) influenza in 2011.
According to the WHO, between September 2011 and January 2012, A(H1N1) influenza viruses circulated at very low levels in general, with some exceptions in Asia and the Americas. Regional A(H1N1) activity was reported by a few countries in Asia and Central America, and there were sporadic human cases reported by United States of America. According to the Pan American Health Organization (PAHO), influenza activity increased in Canada and United States but remained within the expected level for this time of the year. In Central America and Caribbean, the activity remained low, with the exception of Guatemala, where it has increased. It also remained low in South America. WHO recommended composition of influenza virus vaccines for use in 2012 for the northern and southern hemispheres, which is related to upcoming influenza season.
Any further outbreak of A(H1N1) influenza could lead to the imposition of costly preventive controls on pork imports in our export markets and could have a negative impact on the consumption of pork in those markets or in Brazil. In addition, any future significant outbreak of A(H1N1) influenza in Brazil could lead to pressure to destroy our hogs, even if no link between the influenza cases and pork consumption is shown. Any such destruction of our hogs would result in decreased sales of pork, prevent recovery of costs incurred in raising or purchasing our hogs, and result in additional expense for the disposal of destroyed hogs. Accordingly, any spread of A(H1N1) influenza, or increasing concerns about this disease, may have a material and adverse effect on our company.
Other Animal Diseases
In addition, demand in our export markets may similarly be influenced by other animal diseases. For example, pork imports from most Brazilian states were banned in Russia from 2005 to 2007 due to cases of foot-and-mouth disease affecting cattle in the States of Mato Grosso do Sul and Paraná. Although we do not raise hogs in Mato Grosso do Sul and our Carambeí plant in Paraná accounts for only 12% of our total hog production, these bans affected Brazilian exports into Russia generally and required us to shift pork production for the Russian market to Rio Grande do Sul, the only Brazilian state that was not subject to the ban, until Russia lifted restrictions on imports from an additional eight Brazilian states in December 2007.
Effect of Export Market Demand on the Domestic Market
Fluctuations in demand for poultry, pork and beef products in our export markets often have an indirect effect on the supply and the selling prices for those products in the domestic market. When global economic factors, concerns about global outbreaks of animal diseases, imposition of trade barriers and other factors lead to a demand decrease in key export markets, we and our principal Brazilian competitors in those markets often attempt to redirect those products to the domestic market. The resulting increases in supply in the domestic market generally lead to a decrease in selling prices, which affects our net sales in the domestic market.
For example, an abrupt decline in pork exports due to the Russian ban on imports of pork, beef and poultry beginning in 2011 has caused an oversupply of products in the domestic market as Brazilian producers, including us, redirected products to the Brazilian market, negatively affecting average selling prices.
66
We closely monitor the actions of our major competitors because their responses to import restrictions in key markets, Brazilian economic conditions and other factors may significantly influence supply and demand both in the domestic market and our export markets. In the domestic market, for example, a significant majority of the market share in several categories, including specialty meats and frozen processed meats, is attributable to our company and a small number of large competitors. See “Item 4. Information on the Company—A. History and Development of the Company—Competition.” In addition to monitoring the actions of our domestic competitors, we pay close attention to fluctuations in supply generated by producers in the United States, the European Union and other regions. Temporary increases in supply in those markets, for example, can lead producers in those countries to increase their exports to other countries.
Commodity Prices
Many of our raw materials are commodities whose prices constantly fluctuate in response to market forces of supply and demand. We purchase large quantities of soy meal, soybeans and corn, which we use to produce substantially all our own animal feed. For the most part, the commodities we purchase are priced in reais. While input costs are real-denominated, the prices of the commodities we purchase tend to follow international prices for soy meal and soybeans and, to a lesser extent, corn, and are influenced by exchange rate fluctuations. Purchases of corn, soy meal and soybeans represented approximately 23.0% of our cost of sales in 2011 and 22.7% in 2010. Although we produce most of the hogs we use for our pork products, in 2011 we also purchased hogs on the spot market.
In addition, the selling prices for many of our products, including substantially all our export products, are highly sensitive to the market price of those commodities and fluctuate together with them. In 2011, the average corn price quoted on the Chicago Board of Trade (CBOT) was 58.8% higher than the average price in 2010. Soybean prices quoted on the CBOT also increased by 25.6% in 2011 compared to 2010. The effect of decreases or increases in prices of raw materials on our gross margin is greater for products that are more similar to commodities in nature relative to more value-added products.
Our ability to pass on increases in raw material prices through our selling prices is limited by prevailing prices for the products we sell in our domestic and export markets, especially for those products that are more similar to commodities.
The following graph illustrates the movements in the price of corn in Ponta Grossa in the State of Paraná (a commonly used reference price for corn in Brazil) for the periods indicated, as reported by Safras & Mercados Ltda., a private Brazilian consulting firm.
Wholesale Corn Prices at Cascavel, State of Paraná (R$ per 60Kg sack)
Current Brazilian government estimates of the Brazilian corn harvest in 2011-2012 forecast 61.7 million tons, according to a survey undertaken in March 2012 by the National Supply Company (Companhia Nacional de Abastecimento, or “CONAB”), an agency of the Brazilian Ministry of Agriculture, Husbandry and Supply. This estimate represents a 7.5% increase from 57.4 million tons harvested in 2010-2011. Of these 61.7 million tons, 35.9 million tons are forecast for the summer crop and 25.8 million tons for the second crop (safrinha), to be harvested up to early August 2012.
67
The following graph illustrates the movements in the price of soybeans in Ponta Grossa in the State of Paraná (a commonly used reference price for soybeans in Brazil) for the periods indicated, as reported by Safras & Mercado Ltda.
Wholesale Soybean Prices at Ponta Grossa, State of Paraná (R$ per 60Kg sack)
According to a survey released by CONAB in March 2012, current Brazilian government estimates of the Brazilian soybean harvest in 2011-2012 forecast 68.7 million tons. This estimate represents an 8.7% decrease from the soybean harvest in 2010-2011.
The estimated total exports of soybeans in the 2011-2012 harvest is 31.8 million tons, which represents a 1.9% decrease from the 2010-2011 harvest (32.4 million tons). Inventory volumes for the 2011-2012 harvest may be decreased compared to 2010-2011. CONAB estimates Brazilian inventories of 1.1 million tons, while in the last season stocks reached 3.6 million tons.
Revenues from exports of soybeans in 2011 totaled U.S.$14.7 billion, with an average price of U.S.$496 per ton, compared with an average price of U.S.$380 per ton in 2010. With higher exports of soybeans, average prices of domestic soybeans increased 14.7% in 2011 relative to 2010, primarily as a result of the appreciation of the real and increasing international market prices.
For information about certain expected trends in commodity prices for 2011, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information––Raw Materials.”
Effects of Exchange Rate Variations and Inflation
The table below sets forth, for the periods indicated, the fluctuation of the real against the U.S. dollar, the period-end and average daily exchange rates and Brazilian inflation as measured by the INPC, IPCA and IGP-M.
|
2011 |
2010 |
2009 | |
|
Appreciation (depreciation) of the real against the U.S. dollar |
12.6% |
4.3% |
25.5% |
|
Period-end exchange rate (U.S.$1.00) |
R$1.88 |
R$1.67 |
R$1.74 |
|
Average (daily) exchange rate (U.S.$1.00) (1) |
R$1.68 |
R$1.76 |
R$1.99 |
|
Basic interest rate SELIC (2) |
11.0% |
10.75% |
8.75% |
|
Inflation (INPC) (3) |
6.5% |
6.5% |
4.1% |
|
Inflation (IPCA) (4) |
6.5% |
5.9% |
4.3% |
|
Inflation (IGP-M) (5) |
5.1% |
11.3% |
(1.7%) |
Sources: IBGE, Fundação Getúlio Vargas and the Central Bank.
(1) The average (daily) exchange rate is the sum of the daily exchange rates based on PTAX 800 Option 5, divided by the number of business days in the period.
(2) The SELIC (Sistema Especial de Liquidação e de Custódia) interest rate is the primary Brazilian reference interest rate.
(3) INPC is published by the IBGE, measuring inflation for families with income between one and eight minimum monthly wages in 11 metropolitan areas of Brazil.
(4) IPCA is published by IBGE, measuring inflation for families with income between one and 40 minimum monthly wages in eleven metropolitan areas of Brazil.
(5) The General Market Price Index (Indice Geral de Preços do Mercado), or “IGP-M” gives different weights to consumer prices, wholesale prices and construction prices. The IGP-M is published by the Getúlio Vargas Foundation (Fundação Getúlio Vargas), a private foundation.
68
Our results of operations and financial condition are significantly affected by movements in the exchange rate of reais to the U.S. dollar, the euro and the pound sterling. We invoice for our export products primarily in U.S. dollars and, in Europe, in euros and pounds sterling, but we report our results of operations in reais. Appreciation of the real against those currencies decreases the amounts we receive in reais and therefore our net sales from exports.
The prices of soy meal and soybeans, which are important ingredients of our animal feedstock, are closely linked to the U.S. dollar. The price of corn, another important ingredient of our feedstock, is also linked to the U.S. dollar, albeit to a lesser degree than the price of soy meal and soybeans. In addition to soy meal, soybeans and corn, we purchase sausage casings, mineral nutrients for feed, packaging and other raw materials, as well as equipment for use in our production facilities, from suppliers located outside Brazil whom we must pay in U.S. dollars or other foreign currencies. When thereal depreciates against the U.S. dollar, the cost inreais of our U.S. dollar-linked raw materials and equipment increases, and such increases could materially adversely affect our results of operations. Although the appreciation of thereal has a positive effect on our costs because part of our costs are denominated in U.S. dollars, this reduction in U.S. dollar costs because of the appreciation of the real does not immediately affect our results of operations because of the length of our production cycles for poultry and pork.
We had total foreign currency-denominated debt obligations in an aggregate amount of R$4,723.9 million at December 31, 2011, representing approximately 59% of our total consolidated indebtedness at that date. Although we manage a portion of our exchange rate risk through foreign currency derivative instruments and future cash flows from exports in U.S. dollars and other foreign currencies, our foreign currency debt obligations are not completely hedged. A significant devaluation of the real in relation to the U.S. dollar or other currencies would increase the amount of reais that we would need in order to meet debt service requirements of our foreign currency-denominated obligations.
Historically, our results of operations and financial condition have been affected by rates of inflation in Brazil. Demand for our products in the domestic market is sensitive to inflation in consumer prices, as reflected in variations in the INPC and IPCA inflation indexes, and most of our costs and expenses are incurred in reais. Because long-term contracts with suppliers and customers are not customary in our industry and prices are generally negotiated monthly or quarterly, increases in inflation have a rapid impact on our net sales and costs.
The IGP-M index is often used as an inflation reference rate in negotiating prices we pay to our suppliers. In addition, we buy energy to run our production facilities pursuant to long-term contracts that contain periodic inflation adjustments according to the IGP-M index.
In terms of personnel costs, Brazilian salaries are adjusted only once a year, based on collective agreements between employers’ syndicates and unions. Generally, unions follow the INPC as a parameter for their negotiations.
Effects of Interest Rates
Our financial expenses are affected by movements in Brazilian and foreign interest rates. At December 31, 2011, approximately 32% of our total liabilities from debt obligations of R$8,053.5 million bore interest based on floating interest rates, either because they were denominated in (or swapped into) reais and bore interest based on Brazilian floating interest rates or because they were U.S. dollar-denominated and subject to LIBOR. At that date, our primary interest rate exposure was to the six-month LIBOR rate. The two primary Brazilian interest rates that apply to our indebtedness are the TJLP, which applies to our long-term debt from the BNDES, and the CDI rate, which applies to our currency swaps and some of our other long-term debt.
69
The table below shows the average interest rates to which we were exposed in the following years:
|
|
Average Interest for the Year Ended December 31, | ||
|
|
2011 |
2010 |
2009 |
|
(%) |
(%) |
(%) | |
|
TJLP |
6.0 |
6.0 |
6.2 |
|
CDI |
11.6 |
9.8 |
10.0 |
|
Six-month LIBOR |
0.51 |
0.52 |
1.1 |
Freight Costs
The cost of transporting our products throughout our domestic distribution network and to our foreign customers is significant and is affected by fluctuations in the price of oil. In 2011 and 2010, freight costs represented approximately 5.6% and 5.9% of our net sales, respectively. For our export goods, we ship many of our goods CFR (cost and freight) or DDP (delivered duty paid), which requires us to pay for freight and insurance costs. Increases in the price of oil tend to increase our freight costs, and fluctuations in exchange rates also significantly affect our international transportation costs.
Changes in Share Capital
On March 31, 2010, the Company’s shareholders approved a one-for-one share split of the Company’s ordinary shares and a change in the ratio of ordinary shares to ADRs such that one ordinary share corresponds to one ADR. The combined effect of the share split and the ADR ratio change was that holders of ADRs received four ADRs for each existing ADR. This share split and ADR ratio change became effective on April 7, 2010 and were designed to reposition the price of the Company’s shares and the ADRs with a focus on an increase in liquidity and the interests of national and international retail investors.
On July 8, 2009, the Company’s shareholders approved the exchange of common shares of HFF for common shares of BRF at an exchange ratio of 0.166247 common shares of BRF for each share of HFF. On August 18, 2009, an additional separate extraordinary meeting of the common shareholders of BRF and Sadia was held to approve the exchange of common and preferred shares of Sadia for common shares of BRF at an exchange ratio of 0.132998 common shares of BRF for each common share or preferred share of Sadia.
Results of Operations
Transition to International Financial Reporting Standards
We have changed our consolidated financial reporting from accounting principles generally accepted in Brazilian GAAP to IFRS, as issued by the IASB. We adopted IFRS for the fiscal year ended December 31, 2010 and retrospectively applied IFRS to the fiscal year ended December 31, 2009 for comparative purposes. The transition date for our adoption of IFRS was January 1, 2009, the date on which the opening balance sheets were prepared in accordance with these new accounting practices. IFRS differs in certain significant respects from U.S. GAAP.
The following discussion should be read in conjunction with the consolidated financial statements included elsewhere in this form.
Limitation on Comparability of Our Financial Statements
Business Combination with Sadia – Our results of operations for 2011 and 2010 include the results of operations of Sadia for the full year. However, our results of operations for 2009 include the results of operations of Sadia since July 8, 2009 and, therefore, are not fully comparable to our results of operations for the years ended December 31, 2010 and 2011.
70
Sadia’s results of operations were fully consolidated as from July 8, 2009, when the common shareholders of BRF, Sadia and HFF, a holding company formed by the controlling shareholders of Sadia for the purposes of the acquisition, approved our business combination with Sadia. Consequently, our results of operations for the year ended December 31, 2009 include the results of operations of Sadia only for the period subsequent to the July 8, 2009 acquisition date.
Business Combination with Avex S.A. and Flora Dánica S.A. – Our results of operations for 2011 include the results of operations of Avex S.A. and Flora Dánica S.A. since October 3, 2011 and, therefore, are not fully comparable to our results of operations for the year ended December 31, 2010.
Business Combination with Heloísa Ind. e Com. de Produtos Lácteos Ltda. – Our results of operations for 2011 include the results of operations of Heloísa Indústria. e Comércio de Produtos Lácteos Ltda. since December 1, 2011 and, therefore, are not fully comparable to our results of operations for the year ended December 31, 2010.
For more information on our acquisitions in 2011, including the business combinations mentioned above, see “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments” and note 6 to our consolidated financial statements for the year ended December 31, 2011.
Results of Operations as a Percentage of Net Sales
The following discussion should be read in conjunction with our consolidated financial statements. The following table sets forth the components of our results of operations as a percentage of net sales for 2011, 2010 and for 2009 on a historical basis.
|
|
Years Ended December 31, | ||
|
2011 |
2010 |
2009 | |
|
(%) |
(%) |
(%) | |
|
Net sales |
100.0% |
100.0% |
100.0% |
|
Cost of sales |
74.1% |
74.7% |
80.0% |
|
Gross profit |
25.9% |
25.3% |
20.0% |
|
Operating expenses: |
|
||
|
Selling expenses |
24.1% |
15.5% |
16.2% |
|
General and administrative expenses |
1.7% |
1.5% |
1.4% |
|
Other operating expenses |
1.6% |
1.7% |
1.9% |
|
Equity interest in income of affiliates |
0.0% |
0.0% |
0.0% |
|
Operating income |
7.8% |
6.5% |
0.5% |
|
Financial income (expenses), net |
1.9% |
2.1% |
1.7% |
|
Income before taxes |
5.9% |
4.4% |
2.1% |
|
Income and social contribution taxes |
0.6% |
0.9% |
1.4% |
|
Net income |
5.3% |
3.5% |
0.7% |
|
Attributable to: |
|
||
|
BRF shareholders |
5.3% |
3.5% |
0.8% |
|
Non-controlling interest |
— |
— |
— |
|
|
|
||
Presentation of Net Sales Information
We report net sales after deducting taxes on gross sales and discounts and returns. Our total sales deductions can be broken down as follows:
· ICMS Taxes — ICMS is a state value-added tax on our gross sales in the domestic market at a rate that varies by state and product sold. Our average ICMS tax rate in 2011 was 10.1%.
· PIS and COFINS Taxes — The PIS and the COFINS taxes are federal social contribution taxes on our gross sales in the domestic market at the rates of 1.65% for PIS and 7.6% for COFINS in 2011. However, we currently benefit from a suspension of these taxes for in natura meat of porks, poultry and beef cuts as well as a zero tax rate for some dairy products.
71
· Discounts, Returns and Other Deductions — Discounts, returns and other deductions are unconditional discounts granted to customers, product returns and other deductions from gross sales.
Most of our deductions from gross sales are attributable to the ICMS, PIS and COFINS taxes. As a result, our deductions from gross sales in the domestic market, which are subject to these taxes, are significantly greater than our deductions from gross sales in our export markets.
The table below sets forth our gross sales and deductions for the years ended December 31, 2011 and 2010:
|
|
As of December 31, | ||
|
|
2011 |
2010 |
2009 |
|
|
(in millions of reais) | ||
|
Gross sales: |
| ||
|
Domestic sales |
14,299.5 |
12,628.2 |
8,254.9 |
|
Foreign sales |
10,363.7 |
9,229.5 |
6,727.9 |
|
Dairy products |
2,999.2 |
2,731.8 |
2,558.8 |
|
Food service |
1,698.3 |
1,444.0 |
826.0 |
|
|
29,360.7 |
26,033.4 |
18,367.7 |
|
Sales deductions |
|
|
|
|
Domestic sales |
(2,669.5) |
(2,450.8) |
(1,647.7) |
|
Foreign sales |
(270.5) |
(244.3) |
(214.2) |
|
Dairy products |
(460.4) |
(420.3) |
(397.6) |
|
Food service |
(253.9) |
(236.8) |
(202.5) |
|
|
(3,654.4) |
(3,352.2) |
(2,461.9) |
|
Net sales |
|
|
|
|
Domestic sales |
11,630.0 |
10,177.4 |
6,607.2 |
|
Foreign sales |
10,093.1 |
8,985.2 |
6,514.8 |
|
Dairy products |
2,538.8 |
2,311.5 |
2,161.3 |
|
Food service |
1,444.3 |
1,207.1 |
623.6 |
|
|
25,706.2 |
22,681.3 |
15,905.8 |
We report net sales by segment. Because we use the same assets to produce products for all our segments, we do not identify assets by segment, except for intangible assets. See note 5 to our consolidated financial statements for the year ended December 31, 2011 for a breakdown of net sales by segment and product line and for a breakdown of intangible assets by each reportable segment.
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010
The following provides a comparison of our results of operations for the year ended December 31, 2011 against our results of operations for the year ended December 31, 2010, based on our consolidated financial statements prepared in accordance with IFRS.
Net Sales
Our net sales increased by R$3,024 million, or 13.3%, to R$25,706 million in 2011 from R$22,681 million in 2010, primarily due to increased performance in our domestic market and food service segments.
Domestic Market
Net sales increased by R$1,453 million, or 14.3%, to R$11,630 million in 2011 from R$10,177 million in 2010, primarily due to increases in net sales of both in natura and processed meat and, to a lesser degree, increases in net sales of other processed products. These increases were achieved in spite of despite lower consumption rates in our domestic market generally compared to 2010.
72
Over the long term, we continue to believe that demand in the domestic market will stimulated by an increase in real incomes in Brazil. For the products we sell in our domestic market, we have generally given higher priority to profit margins over market share.
The following table provides a breakdown of changes in net sales and sales volume in the domestic market.
|
|
Net Sales |
Sales Volumes | ||||
|
|
2011 |
2010 |
Change |
2011 |
2010 |
Change |
|
|
(in millions of reais, unless otherwise specified) |
(%) |
(in thousands of tons, unless otherwise specified) |
(%) | ||
|
Domestic Market |
|
|
|
|
|
|
|
Meat: |
|
|
|
|
|
|
|
In natura: |
|
|
|
|
|
|
|
Poultry |
1,112 |
933 |
19 |
251 |
232 |
8 |
|
Pork/Beef |
774 |
699 |
11 |
128 |
118 |
8 |
|
Total meat (in natura) |
1,887 |
1,632 |
16 |
379 |
350 |
8 |
|
Processed meat |
7,145 |
6,020 |
19 |
1,381 |
1,314 |
5 |
|
Total meat |
9,032 |
7,652 |
18 |
1,760 |
1,664 |
6 |
|
Other processed |
2,043 |
1,996 |
2 |
429 |
446 |
(4) |
|
Other |
555 |
529 |
5 |
440 |
389 |
13 |
|
Total |
11,630 |
10,177 |
14 |
2,629 |
2,499 |
5 |
|
Total processed meat & other processed |
9,188 |
8,017 |
15 |
1,810 |
1,760 |
3 |
|
Total processed products as a percentage of net sales |
79% |
79% |
— |
69% |
70% |
— |
|
|
|
|
|
|
|
|
The following table sets forht our average selling prices in the domestic market.
|
|
Average Selling Prices | ||
|
|
2011 |
2010 |
Change |
|
|
(in reais per kg) | ||
|
|
|
|
(%) |
|
Domestic market |
4.42 |
4.07 |
8.6 |
Meat – Domestic net sales from meat increased R$1,380 million, or 18%, to R$9,032 million in 2011 from R$7,652 million in 2010, primarily due to increased net sales of in natura poultry, processed meats and in natura pork and beef. Net sales of meat increased due to higher average selling prices, a more favorable mix of products and growth in sales volumes, which increased 5.8% to 1.76 million tons in 2011 from 1.67 million tons in 2010.
Other Processed Products – Domestic net sales from other processed products increased R$47 million, or 2.4%, to R$2,043 million in 2011 from R$1,996 million in 2010, primarily due to the successful sales performance of our frozen products and the expansion of both the Sadia product line under the Escondidinho label and the Perdigão Meu Menu line, as described below. Sales volumes decreased 3.8% to 429 million tons in 2011 from 446 million tons in 2010.
In 2010, we introduced Sadia’s Escondidinho line, which is inspired by traditional recipes of Brazilian cuisine and targeted at the family market, and our Meu Menu line, a line of ready-to-eat/cook, frozen and individual dishes for consumers living alone. Overall, our market share in 2011 increased for these products throughout Brazil, resulting in increased sales and positive consumer reception.
Other Products – Other products include soybeans, animal feed and other products. Domestic net sales of other products increased R$26 million, or 4.9%, to R$555 million in 2011 from R$529 million in 2010. Sales volumes increased 13.2% to 440 thousand tons in 2011 from 389 thousand tons in 2010.
73
Export Markets
Net sales to our export markets increased R$1,108 million, or 12.3%, to R$10,093 million in 2011 from R$8,985 million in 2010, primarily due to increased net sales of in natura poultry and, to a lesser degree, increased net sales of processed meats, other processed products and in natura pork and beef. These increases occurred primarily due to our strategy of prioritizing wider margins on our products. Sales volumes decreased 1% in 2011 to 2.22 million tons from 2.24 million tons in 2010 and decreased in each category except other processed products.
Our sales volumes were affected by factors such as fluctuations in exchange rates, the economic crisis in Europe, the Russian ban on Brazilian meat imports beginning in 2011 and other factors. One of our significant focuses in 2011 was redirecting production that would have been sold in Russia and seeking to minimize the effect on volumes. Some markets such as Europe (in spite of the economic crisis), Japan, China and Singapore helped drive positive performance. However, the Middle East, including Egypt (which was affected by the “Arab Spring” popular uprisings) and Iraq, reported a weaker business climate. Our European Plusfood division produced results above forecast, reflecting strategic changes in our client and product portfolios and the modernization of our industrial unit in The Netherlands. In recent years, our Plusfood division, with units in The Netherlands and the United Kingdom, has been instrumental to our strategy in Europe by manufacturing items destined for the European market.
In accordance with the guidelines provided by CADE, we have integrated international sales following our business combination with Sadia, which has enabled us to achieve synergies and economies of scale and improve the management of our product portfolio. Sadia has become a premium brand focused on added value and innovation. Perdix is positioned as a mainstream high-end brand, dedicated to the sale of large volumes and products designed to local demand. Borella, Halal, Fazenda and others have been maintained as brands that compete with local overseas food product industries.
The following table provides a breakdown of changes in net sales and sales volumes in our export markets.
|
|
Net Sales |
Sales Volumes | ||||
|
|
2011 |
2010 |
Change |
2011 |
2010 |
Change |
|
Export Markets |
(in millions of reais, unless otherwise specified) |
(%) |
(thousand tons, unless otherwise specified) |
(%) | ||
|
Meat: |
|
|
|
|
|
|
|
In natura: |
|
|
|
|
|
|
|
Poultry |
6,572 |
5,724 |
15 |
1,582 |
1,594 |
(1) |
|
Pork/Beef |
1,554 |
1,513 |
3 |
258 |
281 |
(8) |
|
Total meat (in natura) |
8,126 |
7,238 |
12 |
1,840 |
1,875 |
(2) |
|
Processed meat |
1,750 |
1,652 |
6 |
313 |
345 |
(9) |
|
Total meat |
9,876 |
8,890 |
11 |
2,153 |
2,220 |
(3) |
|
Other processed |
175 |
91 |
93 |
24 |
18 |
28 |
|
Other |
42 |
4 |
— |
40 |
6 |
— |
|
Total |
10,093 |
8,985 |
12 |
2,217 |
2,244 |
(1) |
|
Total of processed meat, other dairy products and other processed |
1,925 |
1,743 |
10 |
337 |
363 |
(7) |
|
Total processed products as a percentage of net sales |
19% |
19% |
— |
15% |
16% |
— |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
The following table sets forth our average selling prices in our export markets.
|
|
Average Selling Prices | ||
|
|
2011 |
2010 |
Change 2011 - 2010 |
|
|
(in reais per kg) | ||
|
|
|
|
(%) |
|
Export markets |
4.55 |
4.00 |
13.7 |
74
Meats – Export net sales from meat products increased R$986 million, or 11.1%, to R$9,876 million in 2011 from R$8,890 million in 2010, primarily due to increased net sales of in natura poultry and, to a lesser degree, increased net sales of processed meats, other processed products and in natura pork and beef, driven by recovery of demand for those products in our principal export markets. Sales volumes decreased 3.0% to 2.15 million tons in 2011 from 2.22 million tons in 2010, primarily due to decreases in sales volumes of in natura pork and beef, processed meats and, to a lesser degree, in natura poultry. Average prices in U.S. dollars FOB (Free on Board), were 5.0% higher relative to average prices in 2010. However, the depreciation of the real in relation to the U.S. dollar led to a higher increase in average selling prices in real terms of 13.7%.
Other Processed Products – Export net sales from other processed products increased R$84 million, or 92.3%, to R$175 million in 2011 from R$91 million in 2010, primarily due to a 28% increase in sales volumes and a 51% increase in average selling prices.
Other Products – Other products include soybeans, animal feed and other products. Export net sales of other products increased R$38 million to R$42 million in 2011 from R$4 million in 2010, primarily due to an increase in the average selling prices of soybean products.
We reported the following performance in our main overseas markets:
Far East – While the Japanese market performed well throughout the first half of 2011, pressure arose to reduce prices in the final quarter due to high levels of inventories of local producers. Despite the activity in the final quarter, the Japanese market reported an overall improvement in both volumes and revenues in 2011, with 4% and 20.1% growth, respectively. We expect that margins will continue to be narrowed in the Japanese market until local inventories adjust to demand.
Eurasia – In 2011, demand from Russia weakened as a result of a ban on imports from Brazilian exporting plants, resulting in reduced revenues and sales volumes of 26.6% and 31.5%, respectively. Despite the ban in Russia, sales volumes to Ukraine during this period increased, alleviating some of the negative impact resulting from the Russian ban.
Europe – The economic crisis in some European countries, such as Greece, Italy and Portugal, has weakened their domestic economies, causing instability in 2011. However, in spite of these difficulties, net sales to the region increased 8.1% during the period. Sales volumes decreased during this period 9.2%, primarily due to our switch in strategic focus to higher value added products, particularly those produced at our Plusfood division, which expanded its portfolio, and away from a focus on increasing local productive capacity.
Middle East – In 2011, net sales in the Middle East increased 5.7% and sales volumes remained stable. Margins were narrowed, however, on specific products with heightened popularity in this market (such as chicken grillers) during the second half of the year. Marketing efforts in this region focused on the religious period of Ramadan to encourage customer loyalty to the Sadia brand and widen margins on in natura products. We aims to add value in the region by building a new industrial unit in the United Arab Emirates, which will focus on the production of processed products.
South America – In 2011, markets in South America experienced an increase in net sales of 55.2% and an increase in sales volumes of 14.8%. Our business benefitted positively from the acquisitions of Avex and Flora Dánica in the fourth quarter of 2011 in Argentina. Demand for our existing products increased as well.
Africa and other countries – Our net sales increased in the African market 32.7% in 2011, with a 51.7% growth in certain strategic countries. We believe this region presents a growth opportunity for our products, especially in countries such as Algeria, Tunisia, Egypt, Morocco, Mozambique, South Africa and Namibia, as well as Angola. We continue to pursue and improve relationships with distributors in these regions for continued growth in the future.
75
Dairy Products
Net sales increased by R$227 million, or 9.8%, to R$2,539 million in 2011 from R$2,312 million in 2010, primarily due to an improved product mix. The following table provides a breakdown of changes in net sales and sales volume of dairy products.
|
|
Net Sales |
Sales Volumes | ||||
|
|
2011 |
2010 |
Change |
2011 |
2010 |
Change |
|
|
(in millions of reais, unless otherwise specified) |
(%) |
(in thousands of tons, unless otherwise specified) |
(%) | ||
|
Dairy Products: |
|
|
|
|
|
|
|
Milk |
1,720 |
1,586 |
9 |
861 |
873 |
(1) |
|
Other dairy products |
818 |
716 |
13 |
209 |
209 |
(1) |
|
Total dairy products |
2,539 |
2,312 |
10 |
1,071 |
1,078 |
2 |
The following table sets forth our average selling prices of dairy products.
|
|
Average Selling Prices | ||
|
|
2011 |
2010 |
Change 2011-2010 |
|
|
(in reais per kg) | ||
|
|
|
|
(%) |
|
Dairy products |
2.37 |
2.14 |
10.6 |
As noted above, net sales from dairy products increased 9.8% to R$2,539 million in 2011 from R$2,312 million in 2010, primarily due to an improved product mix. Sales volumes decreased for both milk and other dairy products, primarily due to our strategic focus on higher value-added products to mitigate the effects of higher costs of the primary raw material, milk. However, average selling prices increased 10.6% due to the improvements in product mix.
The great majority of our net sales of dairy products are in the domestic market, although we seek to develop our net sales in our export markets. Of our total net sales of dairy products, R$5.4 million were from sales to our export markets in 2011, compared to R$19.8 million in 2010, primarily because lower average selling prices in our export markets caused us to redirect products to our domestic market.
Food Service
Net sales increased by R$237 million, or 19.7%, to R$1,444 million in 2011 from R$1,207 million in 2010, largely because of an increase in consumption of food away from home by Brazilians, increases in nationwide purchasing power (primarily due to increases among the middle class) and expansions in food service chains needed to populate the growing number of shopping malls built in urban as well as more rural areas. We believe our food service segment performed better than the market average during 2011. We believe that our management model contributed to our revenues and profitability in this segment, as we endeavored to adopt the best practices of Sadia and Perdigão following our business combination with Sadia. In addition, we have focused on increasing the added value of our products, particularly in our positioning with global accounts, such as in the delivery of beef and an improved focus on providing dedicated services and marketing to the segment. The following table provides a breakdown of changes in net sales and sales volume to the food service segment.
76
|
|
Net Sales |
Sales Volumes | ||||
|
|
2011 |
2010 |
Change |
2011 |
2010 |
Change |
|
|
(in millions of reais, unless otherwise specified) |
(%) |
(thousand tons, unless otherwise specified) |
(%) | ||
|
Food Service |
|
|
|
|
|
|
|
Poultry |
301.3 |
228.4 |
31.9 |
99 |
69 |
44 |
|
Pork/Beef |
166.7 |
193.4 |
(13.8) |
18 |
27 |
32 |
|
Processed meat |
884.6 |
755.2 |
17.1 |
141 |
135 |
5 |
|
Other processed |
91.8 |
30.1 |
205.0 |
15 |
9 |
77 |
|
Food service |
1,444 |
1,207 |
19.7 |
275 |
240 |
15 |
The following table sets forth our average selling prices in our food service segment.
|
|
Average Selling Prices | ||
|
|
2011 |
2010 |
Change 2011-2010 |
|
|
(in reais per kg) | ||
|
|
|
|
(%) |
|
Food service |
5.25 |
5.04 |
4.3 |
Our food service customers include fast food chains, restaurants, hotels and the institutional market. Food service is one of our strategic growth segments. As indicated above, we believe the food service market is benefitting from a change in the eating habits of the Brazilian population due to income growth and low unemployment rates. The food service segment is an important expansion strategy for our company, and we believe that our customer service capabilities can provide a competitive advantage against our peers. Our decision in 2011 to begin to report our food service sales as a separate segment reflects the importance of these sales to our strategy.
The majority of our net sales in the food service market occur in Brazil, although we are increasing our food service sales outside Brazil. Of our total net sales of dairy products, R$188.4 million were from sales outside Brazil in 2011, compared to R$161.0 million in 2010.
Cost of Sales
Cost of sales increased 12.4% to R$19,047 million in 2011 from R$16,951 million in 2010. As a percentage of net sales, cost of sales decreased to 74.1% in 2011 from 74.7% in 2010, primarily due to synergies as a result of our business combination with Sadia. This decrease in cost of sales as a percentage of net sales permitted an increase in our gross margin, as described below, in spite of upward pressure on prices and a generally volatile price environment for our principal raw materials, including breeding stock, corn and soybeans. In our dairy products segment, a spike in sugar costs and continued upward pressure on milk prices paid to milk producers increased our cost of sales for that segment.
Gross Profit
Gross profits increased 16.2% to R$6,659 million in 2011 from R$5,730 million in 2010. The remaining amount is due to a gradual recovery in performance following the global financial crisis. Our gross profit was 25.9% of net sales in 2011, compared to 25.3% in 2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 10.6% to R$4,264 million in 2011 from R$3,856 million in 2010, primarily due to investments in new IT systems as well as payments in connection with consultants engaged on matters relating to our business combination with Sadia. As a percentage of net sales, selling, general and administrative expenses increased to 25.8% in 2011 from 17.0% in 2010.
77
Other Operating Expenses
Other operating expenses increased 2.2% to R$402.7 million in 2011 from R$393.9 million in 2010, largely due to costs associated with the pre-operational phase of new industrial units, damages in connection with losses and provisions for tax and civil litigation. Other operating expenses also include income from the reversal of provisions, recovery of expenses, benefit plans and insurance claims as well as participations in profits.
Operating Income and Margin
Operating income before financial expenses (income) increased to R$2,001.0 million in 2011 from R$1,484.6 in 2010, primarily due to the improvement in general business performance. Our operating margin (operating income as a percentage of net sales) was 7.8% in 2011 compared to 6.5% in 2010. However, our operating margin decreased to 7.2% in the fourth quarter of 2011 compared to the fourth quarter of 2010 due to pressures from increased costs of our principal raw materials and the increase in operating expenses described above.
The table below sets forth our operating income on a segment basis:
|
|
Operating Income by Segment | ||
|
|
2011 |
2010 |
Change 2011-2010 |
|
|
(in millions of reais) |
(%) | |
|
|
|
|
|
|
Domestic market |
1,249.4 |
1,035.8 |
20.6 |
|
Export markets |
558.8 |
319.1 |
75.1 |
|
Dairy products |
(24.7) |
(14.5) |
(70.3) |
|
Food service |
217.7 |
144.2 |
51.0 |
|
Total |
2,001.1 |
1,484.6 |
34.8 |
In the fourth quarter of 2011, we continued to see challenges in certain of our segments. For example, although our revenues from sales to our export markets was 16.9% higher in the fourth quarter of 2011 compared to the fourth quarter of 2010, our operating margin from sales to our export markets were 1.2% in the fourth quarter of 2011 compared to 5.5% in the fourth quarter of 2010. In our dairy products segment, our net sales increased 4.7% in the fourth quarter of 2011 compared to the fourth quarter of 2010, but our operating margin from dairy products were 2.3% lower in the fourth quarter of 2011 compared to the fourth quarter of 2010. Overall, operating margins in the fourth quarter of 2011 still increased 5.8% compared to the fourth quarter of 2010.
Financial Income (Expenses), net
We recorded net financial expenses of R$479.5 million in 2011, compared to R$483.1 million in 2010. This difference is principally due to exchange rate variations. We believe that we mitigated adverse effects on our financial expenses through risk management and our hedging accounting policies.
Our net debt (total debt minus cash and cash equivalents and marketable securities) as of December 31, 2011 was 48.7% higher than our net debt as of December 31, 2010, primarily due to cash allocations to investments in capital expenditures as well as acquisitions made during the period (rather than allocating that cash to repayment of debt or retaining it on our balance sheet).
Significant reductions in net currency exposure have been possible through the use of financial derivatives and non-derivative instruments in line with our hedge accounting policy. Our financial derivatives include non-deliverable forwards (NDFs), and our non-financial derivatives include incurring foreign currency debt. We have also achieved benefits from matching foreign-currency liabilities with export shipments, thereby reducing the volatility of our financial expenses on a monthly basis.
78
Income Tax and Social Contribution
Income tax and social contribution decreased 20.3% to R$156.5 million in 2011 from R$196.5 million in 2010, primarily due to differences in tax rates on foreign earnings and exchange rate variations on overseas investments. Our income tax and social contribution includes a R$215.2 million provision we recorded in the fourth quarter of 2011, based on our management’s best estimates, relating to income tax and social contribution losses that we do not expect to be able to use following the expected merger of Sadia into BRF on December 31, 2012. We will not be able to determine the final impact of the merger of Sadia into BRF until the end of 2012.
Net Income
For the reasons described above, net income increased 70.1% to R$1,367 million from R$804.9 million in 2010.
Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
The following provides a comparison of our results of operation for the year ended December 31, 2010 against our results of operation for the year ended December 31, 2009, based on our consolidated financial statements prepared in accordance with IFRS.
Basis of Presentation
To facilitate the comparison of the two periods, we present certain sales volume data and prices on a combined basis to give effect to the acquisition of Sadia as if it had occurred on January 1, 2009. The combined presentation of sales volume and average selling price information is not in accordance with IFRS.
As described above in “Item 5. Operating and Financial Review and Prospects—A. Operating and Financial Review and Prospects—Overview,” during the last quarter of 2011, we changed our segment presentation and now report four segments: domestic market sales, export market sales, dairy products and food service. When we made this change, we retroactively applied the new segment presentation to the years ended December 31, 2011 and 2010 for purposes of the section entitled “—Year Ended December 31, 2011 Compared with Year Ended December 31, 2010” above. We also provide a breakdown of net sales by these four segments in the table set forth above under “Item 5. Operating and Financial Review and Prospects—A. Operating and Financial Review and Prospects—Results of Operations—Presentation of Net Sales Information.” However, we did not retroactively apply the change in our segment presentation to our consolidated results of operations for the year ended December 31, 2009 for purposes of the discussion below. In this section, we have used our former segment presentation. The differences between our segment presentation in this section from the section entitled “—Year Ended December 31, 2011 Compared with Year Ended December 31, 2010” above are as follows:
· We present only two segments: domestic market sales and export market sales;
· We report dairy products within each of these two segments, and we provide information on net sales, sales volumes and average selling prices of dairy products in the tables below for our domestic market and export market sales; and
· We do not separately report sales to our food service channel as a segment, but we highlight net sales to food service customers in our discussion of net sales to our domestic market.
Net Sales
Our net sales increased by R$6,775 million, or 42.6%, to R$22,681 million in 2010 from R$15,906 million in 2009. As described in more detail below, the increase in each category is primarily due to the effect of including net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009, and the remaining amount is primarily due to increased net sales in the domestic market and, to a lesser degree, in the export market.
79
Domestic Market
Net sales increased by R$4,145 million, or 44.2%, to R$13,515 million in 2010 from R$9,370 million in 2009. Of this increase, approximately two-thirds is due to the effect of including net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is primarily due to increased net sales of in natura meat, processed meat and other processed foods. On a combined basis, sales volumes increased 4.9% to 3.8 million tons in 2010 from 3.6 million tons in 2009, reaching sales volume levels achieved before the global economic crisis.
The demand in the domestic market was stimulated by an increase in real incomes in Brazil and low unemployment numbers, as well as increased consumption levels among Brazil’s emerging social classes, which helped increase sales in all of our segments, especially our products that are traditionally consumed during the end-of-year holiday season. For the products we sell in our domestic market, we have generally given higher priority to profit margins over market share.
The following table provides a breakdown of changes in net sales and sales volume in the domestic market on a historical basis.
|
Historical |
Net Sales |
Sales Volumes | ||||
|
|
2010 |
2009 |
Change |
2010 |
2009 |
Change |
|
|
(in millions of reais, unless otherwise specified) |
(%) |
(in thousands of tons, unless otherwise specified) |
(%) | ||
|
Domestic Market |
|
|
|
|
|
|
|
Meat: |
|
|
|
|
|
|
|
In natura: |
|
|
|
|
|
|
|
Poultry |
1,039 |
566 |
84 |
255 |
161 |
59 |
|
Pork/Beef |
891 |
376 |
137 |
145 |
86 |
69 |
|
Total meat (in natura) |
1,930 |
942 |
105 |
400 |
246 |
62 |
|
Processed meat |
6,738 |
4,835 |
39 |
1,437 |
1,038 |
38 |
|
Total meat |
8,668 |
5,777 |
50 |
1,837 |
1284 |
43 |
|
Dairy Products: |
|
|
|
|
|
|
|
Milk |
1,585 |
1,437 |
10 |
873 |
793 |
10 |
|
Other dairy products |
707 |
702 |
1 |
202 |
209 |
(3) |
|
Total dairy products |
2,292 |
2,139 |
7 |
1,076 |
1,001 |
7 |
|
Other processed |
2,026 |
1,015 |
100 |
455 |
254 |
79 |
|
Other |
529 |
438 |
21 |
389 |
362 |
8 |
|
Total |
13,515 |
9,370 |
44 |
3,756 |
2,901 |
29 |
|
Total processed meat & other processed |
9,472 |
6,553 |
45 |
2,094 |
1,501 |
29 |
|
Total processed products as a percentage of net sales |
70% |
70% |
— |
56% |
52% |
— |
|
|
|
|
|
|
|
|
The following table provides a breakdown of changes in sales volumes in the domestic market on a combined basis.
|
Combined |
Sales Volumes | ||
|
|
2010 |
2009 |
Change |
|
Domestic Market |
(in thousands of tons, unless otherwise specified) |
(%) | |
|
Meat: |
|
|
|
|
In natura: |
|
|
|
|
Poultry |
255 |
216 |
18 |
|
Pork/Beef |
145 |
124 |
16 |
|
Total meat (in natura) |
400 |
341 |
17 |
|
Processed meat |
1,437 |
1,382 |
4 |
|
Total meat |
1,837 |
1,723 |
7 |
|
Dairy Products: |
|
|
|
|
Milk |
873 |
793 |
10 |
|
Other dairy products |
202 |
209 |
10 |
|
Total dairy products |
1,076 |
1,001 |
7 |
|
Other processed |
455 |
402 |
13 |
|
Other |
389 |
454 |
(14) |
|
Total |
3,756 |
3,580 |
5 |
|
Total of processed meat, other dairy products and other processed |
2,094 |
1,993 |
5 |
|
Total processed products as a percentage of net Sales |
56 |
56 |
— |
|
|
|
|
|
80
The following table provides a breakdown of average selling prices in the domestic market on a combined basis.
|
Combined |
Average Selling Prices | ||
|
|
2010 |
2009 |
Change |
|
|
(in reais per kg) | ||
|
Domestic Market |
|
|
(%) |
|
Meat |
4.72 |
4.55 |
3.6 |
|
Dairy |
2.13 |
2.14 |
(0.3) |
|
Other processed |
4.45 |
4.01 |
11.2 |
|
Other |
1.36 |
1.21 |
11.8 |
|
|
|
|
|
Meat – Domestic net sales from meat increased R$2,891 million, or 50.1%, to R$8,668 million in 2010 from R$5,777 million in 2009. More than two-thirds of this increase is due to the effect of including net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is due to increased sales volumes of in natura meat and processed meat and slightly higher average selling prices in 2010 than in 2009. On a combined basis, sales volumes of meat increased 6.6% to 1.8 million tons in 2010 from 1.7 million tons in 2009. The recovery of in natura meat exports in 2010 helped stabilize the supply of meat products in the domestic market, sustaining domestic prices and the sale of processed meat with greater added value. On a combined basis, sales volumes of processed meat increased 4%, and sales volumes of in natura meat increased 17.4% (including increases in both poultry and pork/beef) for an overall increase in meat sales volumes of 6.6%. Average selling prices for meat were 3.6% higher in 2010 than in 2009 on a combined basis.
Dairy Products – Domestic net sales from dairy products increased 7.2% to R$2,292 million in 2010 from R$2,139 million in 2009, recovering to our net sales levels of 2008. The increase was due to increases in sales volumes, as average prices for dairy products continued at the same levels as in 2009. Our margins for dairy products were negatively affected by the high prices paid to milk producers in 2010.
The results in 2010 for dairy products did not exhibit the typical seasonal pattern seen in other years, which made cost and inventory management more difficult in 2010. Because these problems prevented margins from returning to historical levels, we pursued a policy of preserving profitability in this segment, which translated into reduced market share for processed items and UHT milk.
81
Our combined sales volumes were equal to our historical sales volumes of dairy products because Sadia did not historically sell milk and other dairy products.
Other Processed Products – Domestic net sales from other processed products increased R$1,011 million, or 99.6%, to R$2,026 million in 2010 from R$1,015 million in 2009. More than two-thirds of the increase is due to the effect of including net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is due to increases in both sales volumes and average prices. On a combined basis, sales volumes increased 13.1% to 455 million tons in 2010 from 402 million tons in 2009, and average selling prices increased 11.2% in 2010 from 2009.
In 2010, we introduced Meu Menu, a line of ready-to-eat/cook, frozen and individual dishes for consumers living alone and Escondidinho, which is inspired by traditional recipes of Brazilian cuisine and targeted at the family market. We also ran campaigns designed to consolidate our brands, taking advantage of events with major popular appeal, such as the World Cup soccer tournament. Overall, our market share in 2010 generally remained stable for these products, with the exception of margarines, where our market share grew.
Other Products – Other products include soybeans, animal feed and other products. Domestic net sales of other products increased R$91 million, or 20.8%, to R$529 million in 2010 from R$438 million in 2009. The increase is due to the effect of including the net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. Without the effect of the Sadia transaction, domestic net sales of other products would have decreased in 2010 compared to 2009. On a combined basis, sales volumes decreased 14% to 389 thousand tons in 2010 from 454 thousand tons in 2009. The decrease in sales volumes was partially offset by an 11.8% increase in average selling prices on a combined basis.
Food Service – Domestic net sales from food service increased 13.1% in 2010, largely because of an increase in consumption of food away from home by Brazilians due to greater income levels and low unemployment rates.
Export Markets
Net sales to our export markets increased R$2,630 million, or 40.2%, to R$9,166 million in 2010 from R$6,536 million in 2009. More than three-quarters of this increase is due to the effect of including the net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is due to increased sales of in natura meat and processed meat. On a combined basis, sales volumes increased 5.9% in 2010 to 2.3 million tons from 2.1 million tons in 2009.
The following table provides a breakdown of changes in net sales and sales volumes in our export markets on a historical basis.
82
|
Historical |
Net Sales |
Sales Volumes | ||||
|
|
2010 |
2009 |
Change |
2010 |
2009 |
Change |
|
Export Markets |
(in millions of reais, unless otherwise specified) |
(%) |
(in thousands of tons, unless otherwise specified) |
(%) | ||
|
Meat: |
|
|
|
|
|
|
|
In natura: |
|
|
|
|
|
|
|
Poultry |
5,847 |
4,161 |
40 |
1,640 |
1,155 |
42 |
|
Pork/Beef |
1,515 |
1,025 |
48 |
282 |
223 |
26 |
|
Total meat (in natura) |
7,361 |
5,186 |
42 |
1,922 |
1,378 |
40 |
|
Processed meat |
1,690 |
1,259 |
34 |
357 |
246 |
45 |
|
Total meat |
9,051 |
6,445 |
40 |
2,278 |
1,623 |
40 |
|
Dairy Products |
|
|
|
|
|
|
|
Milk |
1 |
12 |
(92) |
— |
2 |
(92) |
|
Other dairy products |
19 |
10 |
96 |
3 |
2 |
45 |
|
Total dairy products |
20 |
22 |
(10) |
3 |
4 |
(28) |
|
Other processed |
91 |
40 |
129 |
18 |
10 |
90 |
|
Other |
4 |
29 |
(85) |
6 |
9 |
(30) |
|
Total |
9,166 |
6,536 |
40 |
2,306 |
1,645 |
40 |
|
Total of processed meat, other dairy products and other processed |
1,799 |
1,308 |
38 |
378 |
257 |
47 |
|
Total processed products as a percentage of net sales |
20% |
20% |
|
16% |
16% |
— |
|
|
|
|
|
|
|
|
The following table provides a breakdown of changes in sales volumes in our export markets on a combined basis.
|
Combined |
Average Selling Prices | ||
|
|
2010 |
2009 |
Change |
|
Export Markets |
(in reais per kg) |
(%) | |
|
Meat |
3.9 |
4.0 |
(1) |
|
Dairy |
7.0 |
5.6 |
25 |
|
Other Processed |
4.9 |
6.7 |
(27) |
|
Others |
0.7 |
3.4 |
(78) |
|
|
|
|
|
Meats – Export net sales from meat products increased R$2,606 million, or 40.4%, to R$9,051 million in 2010 from R$6,445 million in 2009. More than three-quarters of this increase is due to the effect of including the net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is due to the recovery of the export markets for both in natura meat and processed meat. On a combined basis, sales volumes increased 6.1% to 2.3 million tons in 2010 from 2.1 million tons in 2009. During the first half of 2010, full inventories in the global markets led to depressed prices, and we adjusted our portfolio accordingly. By the second half of 2010, supply and demand was back in equilibrium and conditions had improved. On a combined basis, average prices in U.S. dollars FOB (Free on Board), were 11.4% higher relative to average prices in 2009 on a combined basis. However, the appreciation of the real in relation to the U.S. dollar led to a reduction in average selling prices in real terms.
Dairy Products – Export net sales from dairy products decreased 9.1% to R$20 million in 2010 from R$22 million in 2009, largely driven by lower sales volumes, which decreased 28% to 3 million tons in 2010 from 4 million tons in 2009 due to weaker international demand. This decrease more than offset a 25% increase in average selling prices in 2010 compared to 2009.
83
Our combined sales volumes were equal to our historical sales volumes of dairy products because Sadia did not historically sell milk and other dairy products.
Other Processed Products – Export net sales from other processed products increased R$51 million, or 129%, to R$91 million in 2010 from R$40 million in 2009. This increase is due to the effect of including the net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. Without the effect of the Sadia transaction, net sales of other processed products would have decreased, primarily due to a 27% decrease in average selling prices on a combined basis. On a combined basis, sales volumes remained flat from year to year.
Other Products – Other products include soybeans, animal feed and other products. Export net sales of other products decreased R$25 million, or 85%, to R$4 million in 2010 from R$29 million in 2009, due to decreases in both sales volumes of soybean-based products and average selling prices. Our combined sales volumes of other products were equal to our historical sales volumes because Sadia did not historically export these other products.
We reported the following performance in our main overseas markets:
Europe – The economic crisis in some European countries, such as Greece, Ireland, Portugal and Spain, weakened their domestic economies, causing considerable instability in 2010. Our operations benefited from the upward pressure on international prices for the principal grains (corn and soybeans), permitting an increase in prices to the European market. In addition, our expansion at Plusfood was instrumental in enhancing our penetration in the region.
Middle East – The markets in the Middle Eastern region were severely pressured in the first half of 2010 due to high product inventory. Importers remained cautious in the first half of 2010, but imports improved in the second half of 2010. The Middle East continues to be our principal overseas market. In 2010, we launched 15 new products under Sadia’s brands in this region.
Far East – The Japanese market reported an improvement in the prices for imported products, with consumption remaining steady in 2010. In China, demand for our products continued to be strong, especially following the opening of our office in the financial hub of Shanghai.
Eurasia – Demand from countries in this region, such as Russia, remained strong both for poultry and pork/beef products, resulting in higher prices and volumes.
Africa, Americas and other countries – Our net sales increased in the African market, especially for processed products with an improvement in sales volumes and selling prices.
With a proprietary distribution system in Argentina, Uruguay, Chile and Peru, sales to the Americas were particularly strong for our new line of specialty ham products in Argentina and Uruguay and for our Qualy light margarine in Chile.
Cost of Sales
Cost of sales increased 33.2% to R$16,951 million in 2010 from R$12,729 million in 2009. More than three-fourths of this increase was due to the effect of including the cost of sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31, 2009. As a percentage of net sales, cost of sales decreased to 74.7% in 2010 from 80.0% in 2009, due to increased net sales in 2010 as economic conditions began to recover as our markets emerged from the global economic crisis. This decrease in cost of sales as a percentage of net sales permitted an increase in our gross margin, as described below, in spite of upward pressure on prices and a generally volatile price environment for our principal raw materials, including breeding stock and corn and soybeans.
84
Gross Profit
Gross profits increased 80.4% to R$5,730 million in 2010 from R$3,177 million in 2009. Of this increase, more than one-half is due to effect of including the gross profit of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is due to a gradual and consistent recovery in performance following the global financial crisis. Our gross profit was 25.3% in 2010, compared to 20.0% in 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 37.7% to R$3,856 million in 2010 from R$2,799 million in 2009. Substantially all of this increase is due to the effect of including net sales of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is primarily due to increased expenses on marketing, improvements to our IT systems, consulting expenses relating to our integration of Sadia and new executive hires. As a percentage of net sales, selling, general and administrative expenses improved to 17.0% in 2010 from 17.6% in 2009.
Other Operating Expenses
Other operating expenses increased 30.1% to R$393.9 million in 2010 from R$302.8 million in 2009, largely due to the costs of idle capacity of our new industrial units still in pre-operational phases: Bom Conselho, Pernambuco; Lucas do Rio Verde, Mato Grosso; Vitória de Santo Antão, Pernambuco; Mineiros, Goiás; and Três de Maio, Rio Grande do Sul.
Operating Income
Operating income before financial expenses (income) increased to R$1,484.6 million in 2010 from R$77.4 in 2009. Approximately one-third of this increase is due to effect of including the operating income of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009. The remaining amount is primarily due to increased net sales and the improvements in gross margin as described above.
Financial Income (Expenses), net
We recorded net financial expenses of R$483.1 million in 2010, compared to net financial income of R$262.4 million in 2009. This difference is principally due to the positive foreign exchange rate effect on net currency exposure throughout 2009, compared to the negative foreign exchange rate effect in 2010, as well as the increase in our net currency exposure in 2010 due to the inclusion of the net financial expenses of Sadia for the entire year in 2010, compared to the period from July 8 through December 31 in 2009.
In 2010, we had a lower average cost of debt and a longer average debt maturity profile due to greater financial discipline adopted in our debt restructuring plan following our business combination with Sadia. Our net debt (total debt minus cash and cash equivalents and marketable securities) as of December 31, 2010 was 13.3% less than our net debt as of December 31, 2009.
Significant reductions in net currency exposure were possible largely due to the use of non-derivative instruments (foreign-currency denominated debt) for foreign exchange protection in line with our hedge accounting policy. We achieved benefits from matching foreign-currency liabilities with export shipments, thereby reducing the volatility of our financial expenses on a monthly basis.
Income Tax and Social Contribution
Income tax and social contribution decreased 11.2% to R$196.5 million in 2010 from R$221.2 million in 2009 due in part to a tax loss of R$132 million in 2010 from the incorporation of Perdigão Agroindustrial in the first quarter of 2009, losses recorded by Sadia in 2010 and the effects of currency translations from wholly-owned subsidiaries.
85
Net Income
For the reasons described above, net income increased 578.8% to R$804.9 million from R$118.6 million in 2009. Excluding the effect of including net sales of Sadia for the entire year in 2010, we believe the increase in net income in 2010 reflects better operating performance compared to 2009.
Critical Accounting Policies and Estimates
We have prepared our consolidated financial statements included in this Annual Report on Form 20-F in accordance with IFRS, as issued by the IASB.
The preparation of these financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its estimates and judgments on an ongoing basis and bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The following is a description of the critical accounting policies, estimates or judgments that are important to the presentation of our consolidated financial statements.
Revenue Recognition and Sales Returns
We recognize revenue when we deliver our products to customers, the selling price is fixed and determinable, evidence of arrangements with our customers exists, collectability is reasonably assured and title and risks of ownership have passed to the customer. Our revenue recognition policy therefore requires judgments regarding, among other things, the likelihood of collectability from our customers.
During the holiday season, when volumes of some of our products increase, we offer certain large customers the ability to return products they are unable to sell. We monitor these product returns and record a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending returns. While we believe that we make reliable estimates for these matters, fluctuations in demand could cause our estimates and actual amounts to differ and could have a negative effect on our net sales in future periods.
Allowances for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses from the inability of our customers to make required payments. Our management records an allowance for doubtful accounts for domestic customers who are more than 60 days past due and for foreign customers who are more than 90 days past due. We record the expense of estimated losses due from doubtful accounts under selling expenses. When we are unsuccessful in our effort to recover an account receivable, the amount credited to the estimated loss on doubtful accounts is generally reversed against a permanent write-off of the account receivable. If the financial condition of our customers were to deteriorate, we could be required to increase our allowances for doubtful accounts, which would be charged to our statements of income.
Accounting for Business Combinations
We have made significant acquisitions that include the recording of goodwill and other intangible assets.
As a result of the convergence process from Brazilian GAAP to IFRS, we applied the business combination exemption provided for in IFRS 1 as of the transition date, electing not to restate the business combinations carried out before the transition date. Goodwill calculated prior to the transition date was maintained and is subject to impairment testing every year.
86
Business combinations that occurred after the transition date were accounted for using the acquisition method. The cost of an acquisition is the sum of the consideration transferred, valued based on the fair value at the acquisition date, and the amount of any non-controlling interests in the acquiree. For each business combination, we recognize any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Costs directly attributable to the acquisition must be accounted for as an expense when incurred.
When acquiring a business, our management evaluates the assets acquired and the liabilities assumed in order to classify and allocate them pursuant to the terms of the agreement, economic circumstances and the conditions at the acquisition date.
Goodwill is initially measured as the excess of the consideration transferred over the fair value of the net assets acquired (net assets identified and liabilities assumed). If the consideration is lower than the fair value of the net assets acquired, the difference should be recognized as a gain in the statement of income.
We exercise significant judgment in the process of identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and determining their remaining useful lives. We generally engage third-party valuation firms to assist in valuing the acquired assets and liabilities. The valuation of these assets and liabilities is based on the assumptions and criteria which include in some cases estimates of future cash flow, discounted at the appropriate rates. The use of different assumptions may result in different estimates of value of assets acquired and liabilities assumed.
Goodwill
As mentioned above, goodwill is initially measured as the excess of the consideration transferred over the fair value of the net assets acquired (net assets identified and liabilities assumed). If the consideration is lower than the fair value of the net assets acquired, the difference should be recognized as a gain in the statement of income.
Under IFRS, goodwill is not amortized and is subject to a yearly impairment test. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows. We identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. We then determine the fair value of each reporting unit by expected discounted operating cash flows generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized first to goodwill until it is reduced to zero and then proportionally to other long-lived assets.
The use of different assumptions for valuation purposes, including estimates of future cash flows and discount rates, could have resulted in different estimates.
Depreciation, Depletion, Amortization and Impairment
We recognize expenses related to the depreciation of our property, plant and equipment, the depletion of our forests and the amortization of software, patents, our relationships with suppliers and loyalty among our outgrowers loyalty. The rates of depreciation, depletion and amortization are based on our estimates of the useful lives of the assets over the periods during which these assets can be expected to provide benefits to us. In addition, we monitor the use of our property, plant and equipment and intangibles to determine whether any impairment of those assets should be recorded. The determination of such impairment involves judgments and estimates as to whether the asset is providing an adequate return in relation to its book value. While we believe that we make reliable estimates for these matters, the uncertainty inherent to this estimate could lead to results requiring a material adjustment to the carrying amount of the assets in future periods.
87
Biological Assets
Pursuant to IAS 41, Agriculture, agricultural activity is the management of biological assets (living animals and plants) during the period of growth, production, procreation and for the initial measurement of agricultural produce at the point of harvest.
We recognize biological assets when we control these assets as a result of a past event and it is probable that future economic benefits associated with these assets will flow to us and fair value can be reliably estimated. Biological assets are measured at fair value less selling expenses at the time they are initially recognized and at the end of each accrual period, except for cases in which fair value cannot be reliably estimated.
We classify living poultry, hogs and cattle as biological assets, which are separated into “consumables” and “for production.” The biological assets classified in the subgroup “consumables” are those intended for slaughtering to produce unprocessed meat and/or manufactured and processed products. Before reaching the adequate weight for slaughtering, those biological assets are classified as immature. The slaughter and production process occurs sequentially and in a very short time period, and consequently only the living animals transferred for slaughtering are classified as mature. We record consumable animals as current assets. The biological assets classified in the subgroup “for production” (breeding stock) are those whose function is to produce other biological assets. Before reaching the age of reproduction, those biological assets are classified as immature, and after reaching such age, they are classified as mature. We record breeding poultry and pork as non-current biological assets. During the growing period of these animals, which generally takes approximately six months, the costs of labor, animal feed and medicines associated are also recorded as non-current assets. After that, these amounts are depreciated based on the estimates of offspring to be produced (generally, 15 months for poultry and 30 months for hogs).
In our management’s opinion, the fair value of biological assets is substantially represented by their cost of formation, mainly due to the short life of the animals and the fact that a significant portion of the profits from our products arises from the manufacturing process rather than from obtaining fresh meat (raw material at slaughter readiness). This opinion is supported by a fair value appraisal report prepared by an independent expert, which resulted in an immaterial difference between the two methodologies. As a consequence, our management continues to record biological assets at cost.
Contingencies
We accrue for losses on tax and other legal contingencies when we have a present obligation, formalized or not, as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated.
We are a party to several pending litigations and administrative proceedings. The assessment of the likelihood of an unfavorable outcome in these litigations and proceedings includes the analysis of the evidence available, the hierarchy of the applicable laws, available former court decisions, as well as the most recent court decisions and their importance to the Brazilian legal system, as well as the opinions of our external and in-house legal counsels. We record amounts considered sufficient by our management to cover probable losses based on these elements.
If any changes in the circumstances cause the opinions of outside and our in-house legal counsel to change, such as changes in the applicable statutes of limitation, conclusions of tax inspections or additional exposures identified based on new matters or court decisions, we must reassess the potential liability related to pending litigation and review our estimates accordingly. Any revision may significantly affect our results of operations and financial position.
A contingent liability recognized in a business combination is initially measured at fair value and subsequently measured at the higher of:
· the amount that would be recognized in accordance with the accounting policy for the provisions above (IAS 37, Provisions, Contingent Liabilities and Contingent Assets); or
88
· the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with the revenue recognition policy (IAS 18, Revenue).
As a result of the business combination with Sadia, we recognized contingent liabilities related to tax, civil and labor matters, as described in note 25 of our consolidated financial statements for the year ended December 31, 2011.
Costs incurred in the disposal of assets are accrued based on the present value of the costs expected to settle the obligation using estimated cash flows, and are recognized as an integral part of the corresponding asset, or as a production cost, when incurred.
Derivative Instruments
We use derivative instruments that are actively traded on organized markets, and we determine their fair value based on the amounts quoted in the market at the balance sheet date. These financial instruments are designated at initial recognition, classified as other financial assets and/or liabilities, with a corresponding entry in the statement of income within “Finance income or cost” or “Cash flow hedge,” which are recorded in shareholders’ equity net of taxes.
These derivatives are used to hedge exposures to risks or change the characteristics of financial assets and liabilities, unrecognized firm commitments, highly probable transactions or net investments in transactions abroad, and are (1) highly correlated as regards changes in their fair value in relation to the fair value of the hedged item, both at inception and throughout the life of the contract (effectiveness from 80% to 125%); (2) supported by documents that identify the transaction, the hedged risk, the risk management process and the methodology used to assess effectiveness; and (3) considered as effective in the mitigation of the risk associated with the hedged exposure. Their accounting follows IAS 39, Financial Instruments: Recognition and Measurement, which allows the application of the hedge accounting methodology with the effects of measurement at fair value recognized in equity and their realization in the statement of income under a caption corresponding to the hedged item.
Inventory
We record inventories at average cost, not exceeding market value or net realizable value. The cost of finished products includes raw materials, labor, cost of production, transport and storage, all of which are related to making the products ready for sale. We accrue for obsolescence, adjustments to net realizable value, impaired items and slow-moving inventories when necessary. We record production losses as an integral part of the production cost for each month, whereas we record unusual losses, if any, directly as an expense for the year in other operating income.
Income Tax and Social Contribution
In Brazil, corporate income tax is comprised of income tax (Imposto de Renda – Pessoa Jurídica, or “IRPJ”) and social contribution (Contribuição Social sobre of Lucro Líquido, or “CSLL”), which are calculated monthly on taxable income at the rate of 15% plus a 10% surtax for IRPJ and a surtax of 9% for CSLL and, after considering the offset of tax loss carryforwards, up to a limit of 30% of taxable income.
Income from foreign subsidiaries is subject to taxation in their home countries, pursuant to the local tax rates and regulations.
Deferred taxes represent credits and debits on IRPJ and CSLL tax losses, as well as temporary differences between the tax basis and the carrying amount. Deferred income tax and social contribution assets and liabilities are classified as non-current, as required by IAS 1, Presentation of Financial Statements. When our analysis indicates that the future use of these credits, within the time limit of ten years, is not probable, we accrue for such losses.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to offset current tax assets against current tax liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity. In our consolidated financial statements, our tax assets and liabilities can be offset against the tax assets and liabilities of our subsidiaries if, and only if, these entities have a legally enforceable right to make or receive a single net payment and intend to make or receive this net payment, or recover the assets and settle the liabilities simultaneously. For presentation purposes, we separately disclose the balances of tax assets and tax liabilities.
89
Our analysis of the future use of tax credits for purposes of calculating deferred taxes, our analysis of our legal right to offset current tax assets against current tax liabilities and other features of our tax accounting require estimates of our management.
Marketable Securities
Financial investments are financial assets that consist of public and private fixed-income securities, classified and recorded based on the purpose for which they were acquired, as follows:
· Trading securities — if the financial assets were purchased for the purpose of sale or repurchase in the short term, they are initially recorded at fair value and their variations are recorded directly in the statement of income within the year as financial income or expenses;
· Held to maturity — if we have the intent and financial ability to hold the financial assets to maturity, the investments are recorded at amortized cost. Interest, monetary and exchange rate variation are recognized in the statement of income, when incurred, as financial income or expenses; and
· Available for sale — includes all financial assets that do not qualify in the other two categories above. They are initially measured at fair value and changes in fair value are recorded to shareholders’ equity, within other comprehensive income while the asset is not realized, net of tax. Interest, inflation adjustments and exchange rate variations, when applicable, are recognized in the statement of income, when incurred, as financial income or expenses.
While we believe that we make reliable estimates for these matters, the uncertainty inherent to these estimates could lead to results requiring a material adjustment to the carrying amount of the assets in future periods, which could positively or negatively affect our results of operations.
Recently Issued and Not Yet Adopted Accounting Pronouncements Under IFRS
The interpretations and amendments to the rules described below, applicable to the following accounting periods, were published by IASB. There was no early adoption of these rules.
IAS 1 – Presentation of Items of Other Comprehensive Income
In June 2011, the IASB revised IAS 1, Presentation of Financial Statements. The change in IAS 1 relates to disclosure of other comprehensive income items and establishes the need to separate items that will not be further reclassified to net income, such as the realization of deemed cost, and items that can be further reclassified to the net income, such as gains and losses deferred cash flow hedge. The revised standard is effective for annual reporting periods beginning on or after July 1, 2012. We are assessing the impact of adopting this standard on our consolidated financial statements.
IAS 12 – Deferred Tax: Recovery of Underlying Assets
In December 2010, the IASB revised IAS 12, Income Taxes. The change addresses issues related to the determination of the way deferred income tax assets and liabilities are expected to be recovered when an investment property is measured using the fair value model of IAS 40, Investment Property. The revised standard is effective for annual reporting periods beginning on or after January 1, 2012. We are assessing the impact of applying this change on our consolidated financial statements.
IAS 19 – Employee Benefits
90
In June 2011, the IASB revised IAS 19, Employee Benefits. The change addresses issues related to accounting and disclosure of employee benefits. The revised standard is effective for annual reporting periods beginning on or after January 1, 2013. We are assessing the impact of adopting this standard on our consolidated financial statements.
IAS 27 – Consolidated and Separate Financial Statements
In May 2011, the IASB revised IAS 27, Consolidated and Separate Financial Statements, reissuing it as IAS, Separate Financial Statements. The change addresses issues related to investments in subsidiaries, jointly-controlled entities and associate companies when an entity prepares separate financial statements. The revised standard is effective for annual reporting periods beginning on or after January 1, 2013. We understand that this change will not impact our consolidated financial statements since we do not present separate financial statements for such entities.
IAS 28 – Investments in Associates and Joint Ventures
In May 2011, the IASB revised IAS 28, Investments in Associates and Joint Ventures. The change addresses issues related to investments in associate companies and establishes the rules for using the equity accounting method for investments in associate companies and jointly-controlled entities. The revised standard is effective for annual reporting periods beginning on or after January 1, 2013. We are assessing the impact of adopting this standard on our consolidated financial statements.
IFRS 7 – Financial Instruments - Disclosures: Offsetting of Financial Assets and Liabilities
In December 2011, the IASB issued Disclosures — Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7), a revision of the rule establishing requirements for disclosure of offsetting arrangements of financial assets and liabilities. This standard is effective for annual periods beginning on or after January 1, 2013. We are evaluating the impact of adopting this standard on our consolidated financial statements.
IFRS 7 – Financial Instruments - Disclosures: Transfers of Financial Assets
In October 2010, the IASB revised IFRS 7, Financial Statements: Disclosures with the issuance of Disclosures—Transfers of Financial Assets (Amendments to IFRS 7). This amendment has the objective of adding disclosures that enable users of financial statements to assess the risk of exposure to transfers of financial assets and the effects of these risks on an entity’s financial position. The change in the standard IFRS 7 is effective for annual periods beginning on or after July, 2011. We are evaluating the impact of the adoption of this amendment on our consolidated financial statements.
IFRS 9 – Financial Instruments
In October 2010, the IASB revised IFRS 9, Financial Instruments. The change to this standard addresses the first stage of the project of replacing IAS 39, Financial Instruments: Recognition and Measurement. The date of application of this standard was extended to January 1, 2015. We are evaluating the impact of adopting this standard and any differences from IAS 39 on our consolidated financial statements.
IFRS 10 – Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements. This standard provides the principles for the presentation and preparation of consolidated financial statements when the entity controls one or more entities. The standard provides additional guidance to assist in determining control when there is doubt in the assessment. This standard is effective for annual reporting periods beginning on or after January 1, 2013. We are evaluating the impact of the adoption of this amendment on our consolidated financial statements.
IFRS 11 – Joint Arrangements
91
In May 2011, the IASB issued IFRS 11, Joint Arrangements . This standard relates to the accounting treatment for jointly-controlled entities and joint operations. This standard also limits the use of proportional consolidation just for joint operations and establishes the equity accounting method as the only method acceptable for joint ventures. This standard is effective for annual reporting periods beginning on or after January 1, 2013. We are assessing the impact of adopting this standard on our consolidated financial statements.
IFRS 12 – Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities. This standard deals with aspects related to the disclosure of nature and risks related to interests owned in subsidiaries, jointly-controlled entities and associate companies. This standard is effective for annual reporting periods beginning on or after January 1, 2013. We are assessing the impact of adopting this standard on our consolidated financial statements.
IFRS 13 – Fair Value Measurement
In May 2011, the IASB issued IFRS 13, Fair Value Measurement. This standard establishes fair value and consolidates in a single standard the aspects of fair value measurement and establishes the requirements of disclosure related to fair value. This standard is effective for annual reporting periods beginning on or after January 1, 2013. We are assessing the impact of adopting this standard on our consolidated financial statements.
B. Liquidity and Capital Resources
Our main cash requirements are the servicing of our debt, capital expenditures relating to expansion programs, acquisitions and the payment of dividends and interest on shareholders’ equity. Our primary cash sources have been cash flow from operating activities, loans and other financings, offerings of our common shares and sales of marketable securities. We believe that these sources of cash will be sufficient to cover our working capital needs in the ordinary course of our business.
Since Sadia became our subsidiary on July 8, 2009, we have used a portion of our cash to provide liquidity to this subsidiary. In 2009, we began the restructuring of the Sadia’s debt with funds raised from our issuance of common shares in the amount of R$5,290 million in July 2009. Of this amount, a total of R$3,500 million was transferred to Sadia in 2009 through an Advance for Future Capital Increases (Adiantamento para Futuro Aumento de Capital, or AFAC) and an intercompany loan, reducing short-term bank borrowings at Sadia. We transferred another R$1,200 million to Sadia during 2010.
Cash Flows from Operating Activities
We recorded net cash flows from operating activities of R$1,142.6 million in 2011, compared to net cash flows used in operating activities of R$3,231.5 million in 2010. Our 2011 operating cash flow reflects net income of R$1,367.4 million, net non-cash adjustments of R$2,021.9 million and net changes in operating assets and liabilities of R$2,246.7 million. The net changes in operating assets and liabilities included redemptions of trading securities, net of investments in trading securities, of R$104.0 million, and redemptions of available for sale securities, net of investments in available for sale securities, of R$204.3 million, partially offset by interest paid of R$466.2 million, payroll and related charges of R$808.9 million and the cash effect of an increase in trade accounts receivable of R$640.2 million.
We recorded net cash flows from operating activities of R$3,231.5 million in 2010, compared to net cash flows used in operating activities of R$993.8 million in 2009. Our 2010 operating cash flow reflects net income of R$804.1 million, net non-cash adjustments of R$1,992.2 million and net changes in operating assets and liabilities of R$1,228.1 million. The net changes in operating assets and liabilities included redemptions of trading securities, net of investments in securities held for trading, of R$1,744.1 million, and redemptions of available for sale securities, net of investments in available for sale securities, of R$190.0 million, partially offset by interest paid of R$545.6 million and the cash effect of an increase in trade accounts receivable of R$401.5 million.
92
Cash Flows Used in Investing Activities
We used R$1,875.9 million in cash in investing activities in 2011, compared to R$1,100.4 million in 2010. In 2011, our cash used in investing activities consisted primarily of capital expenditures in property, plant and equipment (other than acquisitions) of R$1,125.2 million, the acquisition and formation of breeding stock of R$492.2 million and the acquisitions of Avex, Flora Dánica and Heloísa in the amount of R$230.2 million.
We used R$1,100.4 million in cash in investing activities in 2010, compared to R$49.7 million in 2009. In 2010, our cash used in investing activities consisted primarily of capital expenditures in property, plant and equipment (other than acquisitions) of R$697.8 million and the acquisition and formation of breeding stock of R$376.1 million. In 2009, our cash used in investing activities consisted primarily of capital expenditures in property, plant and equipment (other than acquisitions) of R$693.2 million and the acquisition and formation of breeding stock of R$225.9 million, but these uses were nearly offset by cash acquired of R$511.3 million relating to our business combination with Sadia and cash provided by redemptions of marketable securities in the amount of R$251.7 million.
Cash Flows Used in Financing Activities
We recorded cash used in financing activities of R$326.3 million in 2011, compared to R$1,583.2 million in 2010. In 2011, we repaid debt in the amount of R$2,838.9 million, partially offset by proceeds from the issuance of debt in the amount of R$3,098.4 million. In addition, in 2011, we paid R$501.6 million related to interest on shareholders’ equity.
We recorded used in financing activities of R$1,583.2 million in 2010, compared to R$1,855.0 million in 2009. In 2010, we repaid debt in the amount of R$4,357.5 million, partially offset by proceeds from the issuance of debt in the amount of R$2,928.7 million. In 2009, we repaid debt in the amount of R$5,923.1 million, partially offset by proceeds from the issuance of debt in the amount of R$2,604.6 million. In addition, in 2009, we received R$5,290.0 million from the proceeds of our offering of common shares.
Dividends and Interest on Shareholders’ Equity
We declared interest on shareholders’ equity in the amount of R$632.1 million with respect to the year ended December 31, 2011, and we paid R$501.6 million in interest on shareholders’ equity in 2011 (of which R$292.3 million related to the 2011 fiscal year and R$209.3 million related to the 2010 fiscal year). We declared interest on shareholders’ equity in the amount of R$262.5 million with respect to the year ended December 31, 2010, and we paid R$153.2 million in interest on shareholders’ equity in 2010 (of which R$53.2 million related to the 2010 fiscal year and R$100.0 million related to the 2009 fiscal year). We paid an additional R$209.3 million in interest on shareholders’ equity in February 2011 relating to the 2010 fiscal year. We declared dividends on shareholders’ equity of R$100.0 million in 2009 and paid R$24.8 million in interest on shareholders’ equity in 2009, all of which related to the 2007 fiscal year.
Debt
We use the net proceeds of our indebtedness primarily for capital expenditures, liquidity and purchases of raw materials. The following table sets forth our indebtedness (according to the type of debt and currency) net of cash, cash equivalents and marketable securities for the periods indicated. We believe this information is useful to investors in light of a strategic decision during the global economic crisis to increase our cash, cash equivalents and marketable securities to provide flexibility in responding to adverse events in our markets.
93
|
|
As of December 31, 2011 |
As of December 31, | ||
|
|
Short-term |
Long-term |
2011 |
2010 |
|
|
(in millions of reais, except where indicated) | |||
|
Total debt |
3,452.4 |
4,601.1 |
8,053.5 |
7,202.9 |
|
Other financial assets and liabilities, net |
(247.2) |
— |
(247.2) |
16.4 |
|
Cash, cash equivalents and marketable securities: |
|
|
|
|
|
Local currency |
1,133.0 |
70.0 |
1,203.0 |
1,059.1 |
|
Foreign currency |
1,607.0 |
83.0 |
1,690.0 |
2,493.0 |
|
Total |
2,740.0 |
153.0 |
2,893.0 |
3,552.1 |
|
Net debt |
959.6 |
4,448.1 |
5,407.7 |
3,634.4 |
|
Exchange rate exposure (in millions of U.S.$)(1) |
|
|
U.S.$ 470.7 |
U.S.$ (85.1) |
(1) See note 4.3.1 to our consolidated financial statements, which includes a table showing the calculation of our exchange rate exposure on the dates presented.
The following table sets forth our indebtedness, according to the type of debt and currency.
|
|
Short-Term Debt as of December 31, |
Long-Term Debt as of December 31, |
Total Debt as of |
Total Debt as of |
|
|
(in millions of reais) | |||
|
|
|
|
|
|
|
BNDES FINEM, other secured debt and development bank credit lines |
451.4 |
990.0 |
1,441.4 |
1,934.2 |
|
Export credit facilities |
404.2 |
332.9 |
737.1 |
387.7 |
|
Working capital facilities |
953.5 |
1.5 |
954.9 |
705.3 |
|
Sadia PESA loan facility |
2.8 |
178.6 |
181.4 |
176.0 |
|
Other |
2.4 |
12.5 |
14.9 |
12.9 |
|
Local currency |
1,814.2 |
1,515.5 |
3,329.7 |
3,216.1 |
|
Export credit facilities |
1,375.1 |
1,130.9 |
2,506.1 |
2,108.3 |
|
Bonds |
46.8 |
1,856.9 |
1,903.7 |
1,688.9 |
|
BNDES, FINEM, other secured debt and development banks credit lines |
62.7 |
97.3 |
160.0 |
189.6 |
|
ACC /ACE pre-export loans |
150.1 |
— |
150.1 |
— |
| Working capital facilities |
3.5 |
0.4 |
3.9 |
— |
|
Foreign currency |
1,638.3 |
3,085.6 |
4,723.8 |
3,986.9 |
|
Total |
3,452.4 |
4,601.1 |
8,053.5 |
7,202.9 |
|
|
|
|
|
|
The maturity schedule of our indebtedness as of December 31, 2011 is as follows:
|
Current (through December 31, 2012) |
R$3,452.4 |
|
2013 |
776.9 |
|
2014 |
578.5 |
|
2015 |
142.4 |
|
2016 to 2046 |
3,103.3 |
|
Total |
R$8,053.5 |
|
|
|
94
Our principal debt instruments are described below. For more information on these facilities, including information on average interest rates and weighted average maturities, see note 19 to our consolidated financial statements.
BNDES FINEM, Other Secured Debt and Development Bank Credit Lines
BNDES Facilities. We have a number of outstanding obligations to BNDES, including loans in the amount of R$937.1 million as of December 31, 2011. The loans from BNDES were entered into to finance purchases of machinery and equipment and construction, improvement or expansion of our production facilities. Principal and interest on the loans are generally payable monthly, with maturity dates varying from 2012 through 2017. The principal amount of the loans is denominated in reais, the majority of which bears interest at the TJLP rate plus a margin. These loans are included in the line “BNDES FINEM, other secured debt and development bank credit lines—Local currency” of the table above.
The remaining amounts totaling R$158.8 million are linked to the Unidade Monetária BNDES, or “UMBNDES,” basket of currencies, which are the currencies in which BNDES borrows, and bear interest at the UMBNDES rate, which reflects the daily exchange rate fluctuations in the currencies in that basket. These loans are guaranteed by BRF – Brasil Foods S.A. and, in most cases, are secured by equipment and facilities. The covenants under these agreements include limitations on indebtedness, liens and mergers and sales of assets. These loans are included in the line “BNDES FINEM, other secured debt and development bank credit lines—Foreign currency” of the table above.
FINAME Financing. We and our subsidiaries obtained certain financing through several banks from the Special Agency for Industrial Financing (Agência Especial de Financiamento Industrial, or “FINAME”) for a total of R$9.6 million as of December 31, 2011. We use the funds from these contracts to purchase machinery and equipment. These contracts are secured, usually by the pledge of the financed assets (which cannot be subject to further liens), and are generally supported by guarantees. Most of the contracts provide for acceleration of the debt in the event of corporate restructuring without prior consent of the creditor. These loans are included in the line “BNDES FINEM, other secured debt and development bank credit lines—Local currency” of the table above.
Industrial Credit Notes. We had outstanding industrial credit notes (Cédulas de Crédito Industrial), receiving credits from official funds (the Fund for Worker Support (Fundo de Amparo ao Trabalhador), the Constitutional Fund for Financing in the Midwest (Fundo Constitucional de Financiamento de Centro-Oeste) and the Constitutional Fund for the Financing of the Northeast (Fundo Constitucional de Financiamento do Nordeste, or FNE) in the amount of R$328.0 million as of December 31, 2011. The notes have maturity dates of up to five years, except that the industrial credit notes with respect to the FNE mature in 2021. These titles are secured by liens on machinery and equipment and real estate mortgages. BRF – Brasil Foods S.A. guarantees the industrial credit notes with respect to the FNE in an amount in excess of the principal amount of the notes. These loans are included in the line “BNDES FINEM, other secured debt and development bank credit lines—Local currency” of the table above.
Export Credit Facilities
BNDES Facilities – Exim. We have credit lines from BNDES to finance exports, with several commercial banks acting as intermediaries. The outstanding amount of debt on these credit lines as of December 31, 2011 was R$737.1 million. Such funds are indexed to TJLP plus a margin and mature in 2012. Settlement occurs in local currency without the risk associated with exchange rate variations. These credit lines are included in the line “Export credit facilities—Local currency” of the table above.
Export Prepayment Facilities. We had several export prepayment facilities in an aggregate outstanding amount of R$1,334.3 million as of December 31, 2011. The indebtedness under these facilities is generally denominated in U.S. dollars, with maturity dates varying from 2012 to 2019. Interest under these export prepayment facilities accrues at the three-month or six-month London Interbank Offered Rate (“LIBOR”) plus a spread. Under each of these facilities, we receive a loan from one or more lenders secured by the accounts receivable relating to exports of our products to specific customers. The facilities are generally guaranteed by BRF – Brasil Foods S.A. The covenants under these agreements include limitations on liens and mergers. These credit lines are included in the line “Export credit facilities—Foreign currency” of the table above.
95
Business Loan Facilities. We had several trade-related business loan facilities in an aggregate outstanding amount of R$1,196.0 million as of December 31, 2011. The indebtedness under these facilities is denominated in U.S. dollars, and maturities vary from one year to four years. These facilities bear interest at LIBOR plus a margin, payable quarterly, semiannually or annually. The proceeds from these facilities are used to import raw materials or for other working capital needs. The facilities are generally guaranteed by BRF – Brasil Foods S.A. The principal covenants under these agreements include limitations on mergers and sales of assets. These credit lines are included in the line “Export credit facilities—Foreign currency” of the table above.
Working Capital Facilities
Rural Credit Financing. We have short-term rural credit loans in the amount of R$942.1 million as of December 31, 2011 with several commercial banks under a Brazilian federal government program that offers favorable interest rates as an incentive to invest in rural activities. We generally use the proceeds of these loans for working capital.
Other Working Capital Facilities. We have also issued Industrial Credit Notes under the Brazilian Fund for Worker Support (Fundo de Amparo ao Trabalhador, or “FAT”) and Constitutional Fund for Financing of the Northeast (Fundo Constitucional de Financiamento do Nordeste, or “FNE”). These notes have maturity dates of up to five years and are secured by pledges of machinery and equipment and real estate mortgages. We also have a small amount of foreign currency credit lines that are used for working capital and import transactions for our operations in Argentina.
Sadia PESA Loan Facility
PESA. Sadia has a loan facility obtained through the Special Sanitation Program for Agroindustrial Assets (Programa Especial de Saneamento de Ativos) for an outstanding amount of R$181.4 million as of December 31, 2011, subject to the variation of the IGP-M as of December 31, 2011 plus interest of 4.93% per year, secured by endorsements and pledges of public debt securities.
Tax Incentive Financing Programs
State Tax Incentive Financing Programs. We also had R$14.9 million outstanding as of December 31, 2011 under credit facilities offered under state tax incentive programs to promote investments in those states. Under these programs, we are granted credit proportional to the payment of ICMS tax generated by investments in the construction or expansion of manufacturing facilities in these states. The credit facilities have a 20-year term and fixed or variable interest rates based on the IGP-M plus a margin. These credit lines are included in the line “Other—Local currency” of the table above.
ACC/ACE Pre-Export Loans
ACCs and ACEs. We obtain short-term pre-export loans known as Advances on Exchange Contracts (Adiantamentos de Contratos de Câmbio), or “ACCs,” and export loans known as Advances on Exchange Delivered (Adiantamentos sobre Câmbios Entregues), or “ACEs.” Central Bank regulations permit companies to obtain short-term financing under ACCs due within 360 days from the scheduled shipment date of export goods or short-term financing under ACEs due within 180 days from the actual shipment date of export goods, in each case from Brazilian banks but denominated in U.S. dollars. We had ACCs and ACEs in an aggregate outstanding principal amount of R$150.1 million as of December 31, 2011. Our ACCs and ACEs bore interest at an average rate of 1.2% as of December 31, 2011.
Bonds
BFF Notes. In January 2010, we, through our subsidiary BFF International Limited, issued senior notes in the aggregate amount of U.S.$750.0 million. The bonds are guaranteed by BRF – Brasil Foods S.A. and Sadia, bear interest at a rate of 7.250% per year and mature on January 28, 2020. The bonds contain certain covenants,including limitations on liens, sale-leaseback transactions, certain mergers and consolidations, and transactions with affiliates.
Sadia Bonds. In May 2007, Sadia issued bonds in the aggregate amount of U.S. $250.0 million. The bonds are guaranteed by BRF – Brasil Foods S.A., bear interest at a rate of 6.875% per year and mature on May 24, 2017. The bonds contain certain covenants, including limitations on liens, sale-leaseback transactions, certain mergers and consolidations, and transactions with affiliates.
96
Derivatives
We enter into foreign currency exchange derivatives under which we had exposure of R$247.2 million as of December 31, 2011. The counterparties include several Brazilian financial institutions and involve interest rate swaps and the purchase and sale of currency. Their maturity dates vary from 2012 through 2019. These transactions do not require any guarantees and follow the rules of the São Paulo Stock Exchange or CETIP S.A., a trading and securities registration company. These derivatives are recorded in our balance sheet as other financial assets and liabilities. See “Item 11—Quantitative and Qualitative Disclosures About Market Risk.”
New Facilities
On March 29, 2012, Perdigão International Ltd. signed a U.S.$100.0 million import finance facility agreement with Sovereign Bank N.A., which we guaranteed. The loan has a three-year term, and principal payments are due every quarter, beginning in December 30, 2014. Interest is calculated at the three-month LIBOR rate plus a 2.35% margin. Disbursement was requested on March 30, 2012.
Covenants and Covenant Compliance
Several of the instruments governing our indebtedness contain limitations on liens, and some of the instruments governing our indebtedness contain other covenants, such as limitations on indebtedness; mergers and sales of assets; and transactions with affiliates. At December 31, 2011, we were in compliance with the covenants contained in our debt instruments.
Our debt instruments include customary events of default. The instruments governing a substantial portion of our indebtedness contain cross-default or cross-acceleration clauses, such that the occurrence of an event of default under one of those instruments could trigger an event of default under other indebtedness or enable a creditor under another debt instrument to accelerate that indebtedness.
Seasonality
Meat and Processed Products
Domestic Market. Our net sales of meat and processed products in the domestic market are not subject to large seasonal fluctuations. However, our fourth quarter is generally slightly stronger than the others due to increased demand for our products during the holiday season, particularly turkeys, Chester® roosters, ham and pork loins. We market certain products specifically for the holiday season, such as gift packages of our products that some employers distribute to their employees. Our results are also affected by the dry and rainy seasons for corn, soy beans and soy meal, which are our primary raw materials in feed production.
In 2011, the first quarter accounted for 23.0% of our total sales in the domestic market, the second quarter accounted for 24.0%, the third quarter accounted for 25.0% and the fourth quarter accounted for 28.0%.
Export Markets. Our export sales as a whole are not materially affected by seasonality, partly because seasonal buying patterns vary according to our export markets. However, net sales in specific export markets sometimes vary with the season. In the Middle East, for example, we experience slower net sales during Ramadan and the summer months.
97
In 2011, the first quarter accounted for 24.0% of our export sales, the second quarter accounted for 25.0%, the third quarter accounted for 24.0% and the fourth quarter accounted for 27.0%.
Dairy Products
In the dairy products market, production varies seasonally between the dry and rainy seasons because most of the milk in Brazil is produced from cows raised in open pastures. Our milk production is higher during the rainy season, which is between November and February in southeastern Brazil and between July and September in southern Brazil. Although most of our production is concentrated in the southern region, our production network helps to mitigate the effects of seasonality.
At the end of the fourth quarter and the beginning of the first quarter of any given year, there has historically been a general decrease in selling prices and a general increase in inventories of UHT milk and pasteurized milk, due to an increase in domestic production and a decrease in domestic demand. During these months, Eleva has historically increased its inventories and has been able to benefit from higher selling prices during the other months of the year. Gross revenues from dairy products have historically been higher in the second and third quarters of the year, and revenues from pork, poultry and beef have historically been higher in the third quarter and even higher in the fourth quarter of the year.
Capital Expenditures
See “Item 4—Information on the Company—A. History and Development of the Company—Capital Expenditures.”
C. Research and Development, Patents and Licenses
We have one technology center located in Videira in the State of Santa Catarina and another in São Paulo in the State of São Paulo. At these two facilities, our Research and Development (R&D) team works on innovation projects, both developing new products, packaging systems and processes and improving existing products to increase productivity and achieve cost reductions. Our R&D team also focuses on adopting international quality control practices at our production facilities; developing traceability systems to monitor products and customer orders and running laboratory analysis of food products to promote food safety. We invested R$24.2 in 2011, R$20.7 million in 2010 and R$17.4 million in 2009 in research and development activities. In August 2012, we will inaugurate a new technology center in the city of Jundiaí in the State of São Paulo. This new facility will be more than 12,000 square meters in size, including a pilot plant, offices and experimental kitchens, and we expect that the facility will be an R&D reference center for Brazilian food industry.
Investing on developing quality control practices substantiates our strategy of assuring food safety and food security in our production processes.
We capitalize development costs only if:
· the development costs can be reliably measured;
· the product or process is technically and commercially viable;
· the future economic benefits are probable; and
· the company has the intention and the resources to complete the development and use or sell the asset.
The expenditures capitalized include the cost of materials, labor and manufacturing costs that are directly attributable to preparing the asset for its intended use. Other development expenditures are recognized in income as incurred. We measure our capitalized development expenditures at cost less accumulated amortization and loss on impairment.
98
D. Trend Information
Macroeconomic indicators of the United States show signs of gradual recovery, with expectations of GDP for the next years less than the historical average of 3.0%. For 2011 and 2012, the IMF forecasts U.S. economic growth of 1.5% and 1.8%, respectively. It will probably take some time until the recovery results in a significant level of hiring and growth of consumption. Unemployment rates are still high, near 9% of the working population.
In the Euro Zone, economic, financial and political conditions have produced a high degree of instability in the last few years. The current unemployment rate is one of the highest in the region’s history, particularly affecting countries such as Greece, Portugal, Ireland, Spain and Italy. According to current market analysis, full European recovery may not occur for some time.
Emerging economies are growing faster in comparison to developed countries and are expected to continue being the main contributors to the global economic growth. However, data from the IMF shows that emerging market growth in the next few years will probably be lower than in recent years, reflecting a global economic downturn. China, Brazil, Russia, India, Mexico, Indonesia and Turkey are leading worldwide economic expansion, relying more on domestic consumption and investments than in the past. However, these countries often apply high import tariffs, meaning that their growth may not significantly spur world trade.
Exports
In 2011, Brazil’s volume of poultry exports was 3.2% higher than in 2010. This improved performance can be explained mainly by higher sales to Saudi Arabia, Hong Kong and Japan.
Brazil is a leading player in global export markets due to natural advantages, including low feed and labor costs, and gains in efficiencies in animal production. We, like other large Brazilian producers, have capitalized on these advantages to develop the scope and scale of our businesses.
Global demand for Brazilian poultry, pork and beef products is significantly affected by, depending on the export market, trade barriers, sanitary requirements and disease-related bans, religious considerations, economic conditions and other factors. Trade barriers may include quotas on imports from Brazil (e.g., in Russia), protective tariffs (e.g., in the European Union), direct and indirect subsidies for local producers, licensing requirements (e.g., in China) and outright bans on imports. Most countries require sanitary agreements with Brazil before Brazilian products may be imported (e.g., the United States, which has no sanitary agreement with Brazil covering poultry, beef and pork products and therefore will not accept Brazilian poultry, beef and pork for import). In addition, outbreaks of animal disease may result in bans on imports (e.g., Russia in the past has banned imports of Brazilian pork products because of outbreaks of foot-and-mouth disease affecting cattle in two Brazilian states). The Middle East, which constitutes an active region for poultry sales by Brazilian producers, does not import pork products due to Muslim religious bans on the consumption of pork. Above all, economic conditions in a particular export market (whether national or regional) may influence levels of demand for all types of poultry, pork and beef products as well as processed products.
Global trade in poultry products has been negatively affected by the spread of highly pathogenic avian influenza (H5N1 virus), particularly in Asia but also in Europe and Africa. China, for instance, suspended supplies of live poultry to Hong Kong in late 2011 after a dead chicken there tested positive for the H5N1 virus. Since the beginning of 2003, there have been 526 confirmed human cases of avian influenza and 311 deaths, according to the WHO. Human cases were reported in various countries in Asia, the Middle East and Africa, and several countries in Europe reported cases of avian influenza in birds. Avian influenza has not yet been detected in Brazil or elsewhere in the Americas. A similar virus strain has been detected in North America, with low pathology. If this animal disease is detected in Brazil, or if it begins to be transmitted from human to human, global demand for poultry products is likely to decline for a period whose length cannot be predicted.
Similarly, global trade in pork products was negatively affected in 2009 by the spread of A(H1N1) influenza, also called “swine flu,” in many countries. On June 11, 2009, the WHO declared a flu alert level six, signaling a “global pandemic.” Many countries, including Russia and China, prohibited imports of pork from countries reporting a significant number of cases (Mexico, United States and Canada). On August 10, 2010, the WHO terminated the level six influenza pandemic alert and shifted its focus to a post-pandemic period. During this period, localized outbreaks of different magnitudes may show significant levels of A(H1N1) transmission. In China, for instance, at least 20 people died of A(H1N1) influenza in 2011.
99
According to the WHO, between September 2011 and January 2012, A(H1N1) influenza viruses circulated at very low levels in general, with some exceptions in Asia and the Americas. Regional A(H1N1) activity was reported by a few countries in Asia and Central America, and there were sporadic human cases reported by United States of America. According to the Pan American Health Organization (PAHO), influenza activity increased in Canada and United States but remained within the expected level for this time of the year. In Central America and Caribbean, the activity remained low, with the exception of Guatemala, where it has increased. It also remained low in South America. WHO recommended composition of influenza virus vaccines for use in 2012 for the northern and southern hemispheres, which is related to upcoming influenza season.
Any further outbreak of A(H1N1) influenza could lead to the imposition of costly preventive controls on pork imports in our export markets and could have a negative impact on the consumption of pork in those markets or in Brazil. In addition, any future significant outbreak of A(H1N1) influenza in Brazil could lead to pressure to destroy our hogs, even if no link between the influenza cases and pork consumption is shown. Any such destruction of our hogs would result in decreased sales of pork, prevent recovery of costs incurred in raising or purchasing our hogs, and result in additional expense for the disposal of destroyed hogs. Accordingly, any spread of A(H1N1) influenza, or increasing concerns about this disease, may have a material and adverse effect on our company.
In export markets, we and other Brazilian producers compete with local and other foreign producers. Traditionally, Brazilian producers have emphasized exports of frozen whole and cut poultry and frozen pork and beef cuts. These products, which are similar commodities in nature, continue to account for the substantial portion of export volumes in recent years. More recently, Brazilian food companies have begun to expand sales of processed food products. We anticipate that, over the next several years, we and our main Brazilian competitors will sell greater volumes of frozen whole and cut poultry and frozen pork and beef cuts as well as increasing volumes of processed food products.
Domestic Market
Brazil is the fifth largest country in the world, both in terms of land mass and population. As of July 2011, Brazil had an estimated population of 194.9 million people, according to data from the IBGE. According to IBGE, Brazil had a GDP of R$4.1 trillion for 2011, representing an increase of 9.8% over GDP of R$3.7 trillion for 2010, in each case in nominal terms. GDP per capita increased 9.4% in 2011 to R$21,536.
The Central Bank forecasts show that the Brazilian GDP in 2011 increased 2.7% compared to 2010. The inflation rate, as measured by the IPCA, published by the IBGE, was 4.3% in 2009, 5.9% in 2010 and 6.5% in 2011, continuing a trend of relatively high rates of inflation. The Brazilian government has implemented fiscal and monetary policies to mitigate the impact of the global economic crisis on the Brazilian economy and in order to minimize inflation and endeavor to keep inflation within a target range.
Brazil is one of the world’s largest consumers of meat, with per capita meat consumption of 98.6 kilograms in 2011, including beef, broiler chicken and pork, according to the USDA. Demand for poultry, pork and beef products is directly affected by economic conditions in Brazil. The overall trend towards improved economic conditions and the increased purchasing power of Brazil’s fast-growing middle class has generally supported increased demand in recent years for processed food products, as well as traditional fresh and frozen poultry and pork products. For information about certain expected macroeconomic trends for 2012, see “Item 5. Operating Financial Review and Prospects—D. Trend Information.”
The Brazilian domestic market is highly competitive, particularly for fresh and frozen poultry and pork products. There are several large producers, most notably BRF, but also Aurora-Cooperativa Central Oeste Catarinense Ltda., or “Aurora,” and Seara Alimentos S.A., or “Seara” (which is owned by Marfrig). The largest producers are subject to significant competition from a substantial number of smaller producers that operate in the informal economy and sometimes offer lower quality products at lower prices than do the major producers. For that reason, we and our main competitors have, in recent years, focused on producing and selling processed food products because these products support better margins. We and our major competitors are generally emphasizing processed food products rather than fresh and frozen poultry and pork products which are more similar to commodities in nature.
100
Among processed food products, frozen processed meats have experienced considerable growth in recent years .Based upon information compiled by A.C. Nielsen, the frozen processed meats market in Brazil represented net sales of approximately R$2.3 billion in 2011, compared to R$2.0 billion in net sales in 2010. We had 71.3% market share by sales volume from November 2010 through October 2011, and a 73.0% share in the same period in 2010, according to A.C. Nielsen.
Although sales volumes decreased somewhat in 2011, the specialty meat market continues to be another important processed food market for us. Based upon information compiled by A.C. Nielsen, the specialty meat market in Brazil accounted for estimated revenues of approximately R$8.7 billion in 2011, compared to R$9.0 billion in 2010. We had a 55.0% market share by sales volume in 2011, compared to 54.5% in 2010.
Based on A.C. Nielsen data, the frozen pasta market in Brazil accounted for estimated revenues of approximately R$614 million in 2011, compared to R$494 million in 2010. We had a 77.3% market share by sales volume in 2011, compared to an 82.3% share in 2010, according to A.C. Nielsen.
Based on A.C. Nielsen data, the frozen pizza market in Brazil accounted for estimated revenues of R$440 million in 2011, compared to R$394 million in 2010. We had a 69.0% market share by sales volume from January through December 2011, compared to a 71.1% share in the same period in 2010, according to A.C. Nielsen.
The processed foods sector is more concentrated in terms of the number of players. Consumption of processed products is influenced by several factors, including the increase in consumer income and marketing efforts with a view to meeting consumer demand for more value-added products. We believe that processed food products represent an opportunity for further growth in coming years.
Brazil is one of the world’s largest consumers of dairy products, according to A.C. Nielsen, the Brazilian market for dairy processed products (yogurts, desserts, probiotic milk and the Petit Suisse brand) totaled approximately R$4.8 billion in 2011, compared to R$4.4 billion in 2010. We had 11.1% market share by sales volume from December 2010 through November 2011, compared to an 11.1% share in the same period in 2010, according to A.C. Nielsen.
The size of the Brazilian margarine market was approximately R$2.0 billion in 2011, compared to R$1.9 billion in 2010, according to A.C. Nielsen. We had a 60.7% market share by sales volume from December 2010 through November 2011, compared to a 62.1% share in the same period in 2010, according to A.C. Nielsen.
The A.C. Nielsen data we receive is based on coverage of a portion of Brazil that accounts for 86% of the Brazilian population, according to the IBGE, and an estimated 92% of the country’s consumption potential.
Raw Materials
In the domestic market, average corn prices for the fourth quarter in 2011 decreased 4.4% compared to the third quarter but increased 4.9%% in 2011 relative to 2010. The decrease in average corn prices in the fourth quarter of 2010 was consistent with adequate available stock in the domestic markets and a positive outlook for the next season. In the international market, record corn production in Ukraine and the harvest of the U.S. crop depressed prices 10.8% in the fourth quarter of 2011 compared to the previous quarter.
Average soybean prices in Brazil for the fourth quarter of 2011 decreased 3.7% relative to the third quarter and declined approximately 6% compared to the same period in 2010. As with the corn market, the U.S. harvest and a positive outlook for the next season in Brazil and Argentina led to price decreases in the last quarter of 2011.
Social tensions affecting countries in North Africa and the Middle East and concerns about a potential conflict with Iran have led to an increase in the price of oil.
101
We believe that the latest published macroeconomic indicators for United States, which have a corresponding effect on global economic conditions generally, are encouraging signs for our company.
In Brazil, the SELIC interest rate (the primary Brazilian interest reference rate) is expected to decrease from 11% per year in December 2011 to 9% per year by December 2012, according to analysis by Focus. A survey conducted by the Applied Economic Research Institute, or “IPEA,” in March 2012 shows that 66% of families polled expect that the economic situation in Brazil will likely improve in the next 12 months, suggesting domestic consumption is likely to remain strong throughout the year, especially for non-durable goods.
E. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than the ones below relating to our subsidiary Sadia, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources that are material to investors.
Sadia provides guarantees to loans obtained by certain outgrowers located in the central region of Brazil as part of a special development program for that region. These loans are used to improve the outgrowers’ farm installations and are expected to be repaid in ten years. The loans guaranteed by Sadia are in the amount of R$509.6 million as of December 31, 2011. In the event of default, Sadia would be required to assume the outstanding balance. As a result, we have recorded provisions in the amount of R$63.4 million as of December 31, 2011, equal to our assessment of the fair value of the non-contingent portion of these obligations, and a reversion of provision in the amount of R$19.8 million in our statement of income for the year ended December 31, 2011.
Sadia is the guarantor of a loan to the Sadia Sustainability Institute (Instituto Sadia de Sustentabilidade) from BNDES to set up biodigestors on the properties of the rural producers that are taking part in Sadia’s integration system as part of the Sadia sustainable hog breeding program, which seeks to develop mechanisms for clean development and reduction of emission of carbon gases. The total amount of these guarantees at December 31, 2011 was R$79.9 million. In the event of default, Sadia would be required to assume the outstanding balance. As a result, we have recorded provisions in the amount of R$5.6 million as of December 31, 2011, equal to our assessment of the fair value of the non-contingent portion of these obligations, and we reversed provisions in the amount of R$2.9 million in our statement of income for the year ended December 31, 2011.
The aggregate amount of Sadia’s off-balance sheet guarantees recorded as provisions as of December 31, 2011 was R$589.5 million, and we reversed provisions in the amount of R$22.6 million in our statement of income for the year ended December 31, 2011. See note 19.7 to our consolidated financial statements.
F. Tabular Disclosure of Contractual Obligations
The following table summarizes significant contractual obligations and commitments at December 31, 2011, that have an impact on our liquidity.
|
|
Payments Due by Year | |||
|
Obligation |
Total |
2012 |
2013 through 2015 |
2016 and thereafter |
|
|
(in millions of reais) | |||
|
Loans and financing (1) |
8,053.5 |
3,452.5 |
1,497.8 |
3,103.3 |
|
Interest on loans and financing(2) |
1,656.8 |
169.6 |
640.9 |
846.2 |
|
Rental and lease obligations on property and equipment (3) |
585.5 |
388.8 |
152.0 |
44.8 |
|
Commitments for purchases of goods and services(4) |
2,499.6 |
546.6 |
839.2 |
1,113.9 |
|
Total |
12,795.4 |
4,557.4 |
3,129.9 |
5,108.2 |
102
(1) Includes both short-term debt and long-term debt.
(2) Represents expected interest obligations on the loans and financing set forth in the table above, assuming the interest rates in effect on each facility as of December 31, 2011.
(3) Includes capital leases (primarily for the financing of machinery, equpment and vehicles) and operating leases. See note 22 to our consolidated financial statements for more information.
(4) These purchase commitments include future purchase commitments for corn and soy meal and service fees to our integrated outgrowers. Amounts payable under contracts for goods or services that allow termination at any time without penalty have been excluded. With respect to contracts for goods and services that allow termination at any time without penalty after a specified noticed period, only amounts payable during the specified notice period have been included.
In addition to the amounts set forth in the table above, we have entered into leasing agreements with respect to “built to suit” office facilities that will be built by third parties and then leased to us during a period of 10 years from the time we accept the properites. The estimated aggregate amount of future payments related to these agreements is R$176.2 million. See note 19.8 to our consolidated financial statements.
We also have funding obligations under the defined contribution plans of BRF – Brasil Foods S.A. (which have a small defined benefit component) and the defined benefit and defined contribution plans of Sadia described in note 24 to our consolidated financial statements.
Our subsidiary Sadia also has the obligations described above under “—E. Off-Balance Sheet Arrangements.”
G. Safe Harbor
See “Part I—Introduction—Forward-Looking Statements.”
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Board of Directors
Our overall strategic direction is provided by our board of directors, which is comprised of eleven members who must be shareholders. Our by-laws also provide for eleven alternate directors. During periods of absence or temporary unavailability of a director, the corresponding alternate director substitutes for that absent or unavailable director. At least 20% of the members of our board of directors are required to be independent directors. Our directors and alternate directors are elected at ordinary general meetings for a two-year term.
On April 24, 2012, a shareholders’ meeting will be held to elect an alternate member of our board of directors, to reelect members of our Fiscal Council described below under “—C. Board Practices—Fiscal Council” and to take certain other actions.
The following table sets forth information with respect to our current directors and alternate directors.
|
|
Director/Alternate | ||
|
Name |
Position Held |
Since |
Age |
|
Nildemar Secches (1) |
Chairman |
April 12, 2007 |
62 |
|
Wang Wei Chang |
Alternate |
April 12, 2007 |
64 |
|
Paulo Assunção de Souza |
Vice Chairman |
April 29, 2011 |
58 |
|
João José Caifa Torres |
Alternate |
April 30, 2009 |
72 |
|
Allan Simões Toledo |
Board Member |
April 29, 2011 |
44 |
|
Heloisa Helena Silva de Oliveira |
Alternate |
April 29, 2011 |
56 |
|
Décio da Silva (1) |
Board Member |
April 12, 2007 |
54 |
|
Gerd Edgar Baumer |
Alternate |
April 12, 2007 |
76 |
|
José Carlos Reis de Magalhães Neto (1) |
Board Member |
April 29, 2011 |
33 |
|
Eduardo Silveira Mufarrei |
Alternate |
April 29, 2011 |
35 |
|
Luis Carlos Fernandes Afonso |
Board Member |
April 22, 2003 |
51 |
|
Susana Hanna Stiphan Jabra |
Alternate |
April 12, 2007 |
54 |
|
Luiz Fernando Furlan (1) |
Board Member |
July 8, 2009 |
65 |
|
Roberto Faldini |
Alternate |
July 8, 2009 |
63 |
|
Manoel Cordeiro Silva Filho (1) |
Board Member |
April 12, 2007 |
58 |
|
Maurício da Rocha Wanderley |
Alternate |
April 12, 2007 |
42 |
|
Walter Fontana Filho (1) |
Board Member |
July 8, 2009 |
68 |
|
Eduardo Fontana d’Avila |
Alternate |
July 8, 2009 |
58 |
|
Pedro de Andrade Faria (1) |
Board Member |
April 29, 2011 |
37 |
|
Marcelo Guimarães Lopo Lima |
Alternate |
April 29, 2011 |
37 |
(1) Independent member (as defined in the Brazilian Novo Mercado rules).
103
The following is a summary of the business experience, areas of expertise and principal outside business interests of our current directors.
Nildemar Secches —Chairman of the Board of Directors. Mr. Secches has also been a member of the Board of Directors of Weg S.A. since 2004, Ultrapar Participações S.A. since 2002 and Iochpe-Maxion since 2004. He was a director of BNDES from 1987 to 1990, Corporate Director General for the Iochpe-Maxion Group from 1990 to 1994 and President of the Brazilian Association of Chicken Exporters (ABEF) from 2001 to 2003. He graduated with a degree in mechanical engineering from the Universidade de São Paulo, has a postgraduate degree in Finance from the Pontificia Universidade Católica do Estado do Rio de Janeiro and has concluded a PhD course in Economics at the Universidade de Campinas.
Paulo Assunção de Souza — Vice Chairman of the Board of Directors. Mr. de Souza has a law degree from the University of São Paulo. He is the former President of Brasilcap-Cap SA and the former director of the Syndicate of São Paulo Bank. Mr. de Souza has experience serving as a director of several companies, including Usiminas.
Allan Simões Toledo — Board member. Mr. Toledo is a business administrator with expertise in finance. He holds a master’s degree in Agribusiness from São Paulo University. He was the Executive Manager and Commercial Director of Banco do Brasil. Mr. Toledo is the Vice President of the international area at Banco do Brasil, member of the board of directors and President of BB Leasing and a member of the board of directors of NeoEnergia.
Décio da Silva — Board member. During his career, Mr. Silva was production officer, regional officer and sales officer of Weg S.A., of which he is currently the Chief Executive Officer and the Chairman of the Board of Directors. Mr. Silva graduated with a degree in mechanical engineering from Universidade Federal de Santa Catarina and degree in business administration from the Higher Educational School of Administration and Management of UDESC, and he has enrolled in a graduate program in business administration at Fundação Dom Cabral.
José Carlos Reis de Magalhães Neto — Board member. Mr. Magalhães has a degree in business administration from Fundação Getúlio Vargas. He is the founder, Chief Executive and Investment Officer and Chairman of the board of directors of Tarpon Investimentos S.A. In addition, he serves as member of the board of directors of Marisa Lojas S.A. Mr. Magalhães qualifies as an independent director under the Brazilian Novo Mercado rules.
Luis Carlos Fernandes Afonso — Board member. Mr. Afonso was appointed to our board by PETROS. He graduated from the Pontificia Universidade Católica de São Paulo with a master’s degree in Economics at Instituto de Estudos e Pesquisas Econômicas IEPE/ Universidade Rio Grande do Sul and a postgraduate degree in Environmental and Economic Development at Universidade de Campinas. He is the President of the Center for the Study of Public Policy of the Universidade de Campinas — FACAMP and also a researcher at Campinas Foundation of Economics. He is also a Member of the Board of Directors of Iguatemi S.A. and Romi S.A. He was Finance Secretary at the Municipal Governments of São Paulo, Campinas and Santo André in the State of São Paulo.
Luiz Fernando Furlan — Co-Chairman of our Board of Directors. Mr. Furlan was a Minister of Development, Industry and Foreign Trade of Brazil from 2003 to 2007. Previously, he was Chairman of the Board of Directors of Sadia from 1993 to 2002, where he had worked since 1976. He also served on the boards of international corporations, such as Panamco (Pan American Beverages, Inc. — USA) from 1994 to 1998. He joined the advisory councils of IBM — Latin America, Embraco S.A. (Brasmotor — Brazil) and ABN Amro Bank (Brazil) and was President of ABEF (Brazilian Chicken Exporters Association), ABIOVE (Vegetal Oil Industries Association), ABRASCA (Brazilian Association of Public Owned Companies); Co-President of the MEBF (Mercosur-European Union Business Forum); and Vice President of FIESP (São Paulo Entrepreneurs Association). At present, he is also Chairman of Amazonas Sustainability Foundation and a member of the boards of Redecard S.A., Amil Participações S.A., Telecomunicações de São Paulo S.A. — Telesp and Telefónica S.A. (Spain) and a member of the International Advisory Boards of Panasonic (Japan) and McLarty Associates (USA). He graduated with a degree in chemical engineering and in business administration with a specialization in financial management.
104
Manoel Cordeiro Silva Filho — Board member. Mr. Silva Filho has 32 years of experience at Companhia Vale do Rio Doce, was an investment and finance officer of VALIA and was also a coordinator of the National Investment Committee of the Brazilian Association of Pension Funds, or ABRAPP. Mr. Silva Filho holds a degree in business administration from Faculdade Moraes Júnior, Rio de Janeiro, a post-graduation qualification in economic engineering from Faculdade Estácio de Sá, Rio de Janeiro and an MBA in finance from IBMEC.
Walter Fontana Filho — Board member. Mr. Fontana Filho was the Chief Executive Officer of Sadia from 1994 to 2005, with previous experience as Commercial Vice President Director and Domestic Commercial Director. Mr. Fontana holds undergraduate and graduate degrees in Economics from Pontificia Universidade Católica, with a specialization in Business Marketing from Fundação Getúlio Vargas.
Pedro de Andrade Faria — Board member. Mr. de Andrade Faria has a degree in business administration from Fundação Getúlio Vargas and a master’s in business administration from the University of Chicago. He is a member of the board of directors and executive vice-president of Tarpon Investimentos S.A. In addition, he serves as member of the board of directors of Arezzo Indústria e Comércio S.A., Companhia de Gás de São Paulo – Comgás, Cremer S.A. and Omega Energia Renovável S.A. Mr. de Andrade Faria was the Chief Financial and Investor Relations Officer of Brasilagro. Mr. de Andrade Faria qualifies as an independent director under the Brazilian Novo Mercado rules.
For a description of arrangements between our major shareholders for the election of our directors, see “Item 7.—Major Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ Voting Agreement.”
Board of Executive Officers
Our executive officers are responsible for our day-to-day operations and implementation of the general policies and guidelines approved from time to time by our board of directors.
Our by-laws require that the board of executive officers consist of a chief executive officer, a chief financial officer, a director of investor relations and up to twelve additional members, each with the designation and duties assigned by our board of directors.
The members of our board of executive officers are elected by our board of directors for two-year terms and are eligible for reelection. The current term of all of our executive officers ends at our annual shareholders’ meeting to be held in 2013. Our board of directors may remove any executive officer from office at any time with or without cause. Under the Brazilian Corporation Law, our executive officers must be residents of Brazil but need not be shareholders of our company. Our board of executive officers holds ordinary monthly meetings, as well as extraordinary meetings, when called by our Chief Executive Officer.
The following table sets forth information with respect to our executive officers.
|
Name |
Position Held |
Current Position Held Since |
Age |
|
|
|
|
|
|
José Antonio do Prado Fay |
Chief Executive Officer |
October 28, 2008 |
58 |
|
Leopoldo Viriato Saboya |
Chief Financial, Administrative and Investor Relations Officer |
June 26, 2008 |
36 |
|
Antonio Augusto de Toni |
Export Market |
April 26, 2007 |
48 |
|
|
Executive Officer |
|
|
|
Giberto Antonio Orsato |
Human Resources Executive Officer |
April 26, 2007 |
50 |
|
Ely David Mizrahi |
Food Service Executive Officer |
March 22, 2010 |
48 |
|
Fabio Medeiros Martins da Silva |
Dairy |
September 23, 2010 |
45 |
|
|
Products Operations Executive Officer |
|
|
|
Nelson Vas Hacklauer |
Strategy and M&A Executive Officer |
May 31, 1995 |
60 |
|
Nilvo Mittanck |
Operations and Technology Executive Officer |
April 26, 2007 |
50 |
|
José Eduardo Cabral Mauro |
Domestic Market Executive Officer |
March 22, 2010 |
48 |
|
Wilson Newton de Mello Neto |
Corporate Affairs Executive Officer |
September 23, 2010 |
39 |
|
Luiz Henrique Lissoni |
Supply Chain Executive Officer |
September 23, 2010 |
53 |
105
The following is a summary of the business experience, areas of expertise and principal outside business interests of our current executive officers.
José Antonio do Prado Fay - Chief Executive Officer. Mr. Fay studied Mechanical Engineer at the Universidade Federal do Rio de Janeiro a received a postgraduate degree in industrial systems at COPPEAD - Universidade Federal do Rio de Janeiro, Petrobrás. He became CEO at Perdigão in October 2008, having held the position of director-general for the Perdigão Business Unit up to then. He has held various posts at leading companies such as Petrobrás, the Bunge Group, Batávia and Electrolux.
Leopoldo Viriato Saboya - Chief Financial, Administrative and Investor Relations Officer. Mr. Saboya is an agronomist engineer with a master’s degree in Applied Economics at ESALQ - Universidade de São Paulo. He has worked at Perdigão since 2001. He has held posts in the areas of strategic planning, corporate finance, capital markets, M&A, project finance, budgeting and competitive intelligence. He took over as our chief financial officer in 2008.
Antonio Augusto de Toni - Export Market Executive Officer. Mr. Toni was manager and foreign trade director at Chapecó Companhia Industrial de Alimentos and executive director at Chapecó Trading S.A. at Perdigão. He took over as General Officer of the Perdix Business position in April 2007. He has a degree in Foreign Trade Administration from the Universidade do Vale do Rio dos Sinos with a specialization in Marketing Administration, International Administration and Corporate Finance. He also has an MBA in Agribusiness from FEA - Universidade de São Paulo.
Giberto Antonio Orsato - Human Resources Executive Officer. Mr. Orsato graduated from Unoesc (Universidade do Oeste de Santa Catarina), with a specialization in Entrepreneurial Management. He also received a degree in Business Management – STC from the Fundação Dom Cabral and Kellog Business School and he received an MBA in Business Administration from Universidade de São Paulo - USP. He joined BRF in 1987, where he worked in the Slaughtering Plants’ managerial area and Operations Management until being appointed to head the Human Resources area.
Ely David Mizrahi - Food Service Executive Officer. Mr. Mizrahi is a former president and partner of the Company Miss Daisy and joined Sadia after Sadia acquired Miss Daisy. He has worked for nine years in the Marketing and Commercial departments, having been appointed to the current position in 2008. He graduated from FAAP (Fundação Armando Álvares Penteado) with specialization in Business Management – STC from the Fundação Dom Cabral and Kellogg Graduate School of Management.
Fabio Medeiros Martins Silva - Dairy Products Operations Executive Officer. Mr. Silva obtained a master’s degree in Production Engineering from the University of São Paulo. He was manager of The Quaker Oats Co., Director of Booz Allen Hamilton, Director of Strategic Planning of SEARA Foods and Food Service Director at Cargill. He is currently Vice President of Dairy Operations of BRF.
106
Nelson Vas Hacklauer - Strategy and M&A Executive Officer. Mr. Hacklauer worked at Perdigão since 1983 and has held previous positions as Financial and Investor Relations Officer from 1994 to 1995 and Commercial Officer from 1989 to 1994. He graduated with a degree in Business Management from the Faculdade de Administração de Empresas Campos Salles.
Nilvo Mittanck - Operations and Technology Executive Officer. Mr. Mittanck studied Mechanical Engineer and specialized in Business Management – STC at Fundação Dom Cabral and Kellogg Graduate School of Management, and he also holds and an MBA in Administration from USP. He joined BRF in 1985, holding posts in the areas of engineering, projects, operations, logistics and supply chain until being appointed to his current position as Operations and Technology Executive Officer.
José Eduardo Cabral Mauro - Domestic Market Executive Officer. Mr. Mauro graduated as a production engineer from University of São Paulo and obtained a post-graduate degree from Harvard University. Previously, he worked for 20 years at Unilever and at WalMart. He joined Sadia in 2009.
Wilson Newton de Mello Neto - Corporate Affairs Executive Officer. Mr. Neto is the Corporate Affairs Executive Officer. Mr. Neto holds a master degree’s in Law from the Catholic University of São Paulo, PUC-SP. He has extensive experience in complex integration processes.
Luiz Henrique Lissoni - Supply Chain Executive Officer. Mr. Lissoni holds a degree in Economics and an MBA in Business Management from the University of São Paulo, USP. Mr. Lissoni has experience in the food sector, having been chairman of the Group Gafor, a multi-business conglomerate.
B. Compensation
In 2011, the aggregate compensation paid by us to all members of the board of directors and all executive officers for services in all capacities was approximately R$22 million. In addition, we paid to all executive officers approximately R$15 million in 2011 as part of our profit sharing plan.
The amount of compensation paid to each executive officer in any year pursuant to our profit sharing plan is primarily related to our net income but is also based on an assessment of the performance of the officer during the year by our board of directors. The methodology utilized to calculate the amount paid was historically related to a percentage of our net income. Starting in 2006, we implemented a new methodology that relates the amount of the profit sharing payment to a multiple of the officer’s monthly salary, taking into account actual net income and EBITDA measured against the budget established at the beginning of each year. We believe this methodology provides a reasonable cap on the amount of compensation paid to executive officers pursuant to our profit sharing plan.
The executive officers receive certain additional company benefits generally provided to company employees and their families, such as medical assistance, educational expenses, development and supplementary social security benefits, among others. In 2011, the amount paid as benefits to the executive officers totaled R$4.7 million. The aggregate total compensation paid to members of the board of directors and executive officers in 2011 (including salaries, profit sharing payments and benefits) was R$41.7 million.
We compensate our alternate directors for each meeting of our board of directors that they attend. We also compensate alternate members of our fiscal council for each meeting of our fiscal council that they attend.
Members of our board of directors, our board of executive officers and our fiscal council are not parties to employment agreements or other contracts providing for benefits upon the termination of employment other than, in the case of executive officers, the benefits described above.
At age 61, we cease making contributions to pension plans for executive officers and other employees.
107
C. Board Practices
For information about the date of expiration of the current term of office and the period during which each director has served in such office, see “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management.”
Fiscal Council
We have a permanent fiscal council (conselho fiscal) composed of three members and their alternates who are elected at the annual shareholders’ meeting, with terms lasting until the succeeding annual shareholders’ meeting with reelection being permitted.
The following table sets forth information with respect to the members of our fiscal council and their respective alternates.
|
Name |
Position Held |
Current Position Held Since |
Age |
|
|
|
|
|
|
Attílio Guaspari (1)(2) |
President of the Fiscal Council |
April 29, 2005 |
65 |
|
Agenor Azevedo dos Santos |
Alternate |
April 12, 2007 |
56 |
|
Decio Magno Andrade Stochiero |
Member of the Fiscal Council |
April 29, 2011 |
48 |
|
Tarcisio Luiz Silva Fontenelle |
Alternate |
April 29, 2011 |
49 |
|
Manuela Cristina Lemos Marçal |
Member of the Fiscal Council |
April 29, 2011 |
38 |
|
Paola Rocha Ferreira |
Alternate |
April 29, 2011 |
33 |
(1) Financial Expert (as defined under the rules of the U.S. Securities and Exchange Commission) and Independent Member (as defined under the Brazilian Novo Mercado rules)
(2) Independent Member (as defined under the Brazilian Novo Mercado rules)
Attílio Guaspari - Member of the Fiscal Council and Financial Specialist. Mr. Guaspari holds a degree in Civil Engineering and a master’s degree in Management Sciences. He is also a member of the Audit Committee of the Banco Nacional de Desenvolvimento Econômico e Social - BNDES. He has extensive experience as Internal Audit Chief, Financial Director and member of the Fiscal Council and Board of Directors.
Decio Magno Andrade Stochiero – Member of the Fiscal Council. Mr. Stochiero holds a degree in Business and an MBA in Rating Asset Investment Portfolios from the University of São Paulo. Mr. Stochiero has had a long career in Fundação Sistel de Seguridade Social, where he is currently Manager of Corporate Planning and Control. Mr. Stochiero is also a member of the Board of Directors of Bonaire Participações S.A. and member of the National Technical Governance Board of the Associação Brasileira das Entidades Fechadas de Previdência Complementar - ABRAPP.
Manuela Cristina Lemos Marçal – Member of the Fiscal Council. Ms. Marçal holds a degree in Economics and a post-graduate degree in Corporate Finance and Capital Markets from the Federal University of Rio de Janeiro. Ms Marçal was Manager of Market Analysis, and is currently the Executive Manager of Equity Transactions, at PETROS – Fundação Petrobrás de Seguridade Social. She also has experience on investment committees of PETROS.
Under the Brazilian Corporation Law, the fiscal council is a corporate body independent of management and the company’s external auditors. The fiscal council has not typically been comparable to a U.S. audit committee; rather, its primary responsibility has been to monitor management’s activities, review the financial statements, and report its findings to the shareholders. Under an exemption pursuant to Rule 10A-3 under the Exchange Act regarding the audit committees of listed companies, a fiscal council may exercise the required duties and responsibilities of a U.S. audit committee to the extent permissible under the Brazilian Corporation Law.
108
To comply with Rule 10A-3, the fiscal council must meet certain standards, including the following: (1) it must be separate from the full board of directors; (2) no executive officer may be a member; and (3) Brazilian law must set forth standards for the independence of the members. The fiscal council must also, to the extent permitted by Brazilian law, among other things: (A) be responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls or auditing; (B) have the authority to engage independent counsel and other advisors as it deems necessary to carry out its duties; and (C) receive appropriate funding from the company for payment of compensation to the external auditors and advisors as well as ordinary administrative expenses.
We have modified our fiscal council to comply with the exemption requirements. Accordingly, the fiscal council operates pursuant to a charter (regimento interno) that contemplates the activities described above to the extent permitted by Brazilian law and is compliant with the requirements of the U.S. Sarbanes-Oxley Act of 2002 and the applicable regulations and requirements of the SEC. Because Brazilian Corporation Law does not permit the board of directors to delegate responsibility for the appointment and removal of the external auditors and does not provide the fiscal council with the authority to resolve disagreements between management and the external auditors regarding financial reporting, the fiscal council cannot perform these functions.
Advisory Committees for our Board of Directors
Under our by-laws, our Board of Directors may, for advisory purposes, set up technical or consultative committees, of a non-deliberative nature, to undertake special tasks or general activities of interest to us.
We have three advisory committees for our Board of Directors (committees on governance and ethics, strategy and finance and remuneration and executive development), which are composed of members of our Board of Directors and our Board of Executive Officers, in addition to other professionals.
D. Employees
The table below sets forth the number of our employees by primary category of activity as of the dates indicated:
|
|
As of December 31, | ||
|
2011(1) |
2010 |
2009 | |
|
Administration |
3,911 |
3,589 |
4,189 |
|
Commercial |
15,009 |
13,291 |
13,856 |
|
Production |
100,247 |
96,901 |
96,228 |
|
Total |
119,167 |
113,781 |
114,273 |
|
|
|
|
|
(1) The information for December 31, 2011 includes employees of Avex S.A. and Flora Dánica S.A., the businesses in Argentina we acquired in 2011.
All of our employees are located in Brazil, except for approximately 1,970 employees who are located abroad, mainly in Europe, who staff our overseas sales offices and processing plants.
We do not employ a material number of temporary employees. However, during the Christmas holiday season, we contract a company that furnishes sales representatives to us to assist with holiday sales.
All of our production employees are represented by labor unions. The production employees in each state have a different union, and the terms of our collective bargaining agreements vary in accordance with the union. In each case, however, salary negotiations are conducted annually between workers’ unions and us. The agreement reached with the local or regional union that negotiates the applicable collective bargaining agreement for a particular facility is binding on all production employees, whether or not they are members of the union. In general, collective bargaining agreements are applicable to all employees of that union or region, respecting the different professional categories. Our administrative employees are also generally members of separate unions. We believe that our relations with our employees are satisfactory, and there have been no strikes or significant labor disputes in the last few years.
109
We maintain a number of employee benefit plans constituting part of an integrated “Perdigão Benefits Plan.” The principal components are (1) the PROHAB-Perdigão Housing Program, which provides home construction financing through an independent credit source, (2) the private Perdigão pension plan, administered by BRF – Brasil Foods Sociedade de Previdência Privada, (3) a credit cooperative that offers to the associated employee credit lines with attractive interest rates, (4) supplementary health plan that allows the employee to use the network agreements with costs subsidized by the Company, (5) meals services agreement, according to which the Company offers meals in its own restaurants or agreements with other restaurants for subsidies of up to 80% by the Company, (6) basic consumer products granted to employees with salary of up to five minimum wages and 80% subsidized by the Company and (7) collective insurance life policy.
Beyond the benefits mentioned above, the wholly-owned subsidiary Sadia, also offers: (1) the private pension plan administered by Itaú-Unibanco and the private pension plan sponsored by Sadia and administered by Fundação Attílio Fontana; (2) basic consumer products granted to employees through kits of Sadia’s products and / or through meal cards (linked to labor agreements); and (3) funeral assistance to employee’s parents.
We have implemented productivity incentive programs, such as the Profits and Results Sharing Program, which is available to all employees, as well as variable compensation system linked to targets for operating and sales personnel. The purpose of those programs is to institute and regulate employee participation in our profits and results, thus encouraging improved performance, the recognition of team and individual effort and accomplishment of our targets.
On March 31, 2010, our shareholders approved long-term stock option plans for executive officers of BRF and Sadia. For more details, see “Item 6 – Directors, Senior Management and Employees – E. Share Ownership—Stock Option Plan.”
E. Share Ownership
Share Ownership of Directors and Executive Officers
As of December 31, 2011, members of our board of directors and executive officers owned the common shares of our company set forth on the table below.
|
Directors and Officers |
Common Shares |
|
Directors: |
|
|
Nildemar Secches |
536,398 |
|
Wang Wei Chang |
13,484 |
|
Paulo Assunção de Souza |
1 |
|
João José Caiafa Torres |
1 |
|
Allan Simões Toledo |
1 |
|
Décio da Silva(1) |
250,688 |
|
Gerd Edgar Baumer |
200,000 |
|
José Carlos Reis de Magalhães Neto |
1 |
|
Eduardo Silveira Mufarej |
1 |
|
Luis Carlos Fernandes Afonso |
2 |
|
Susana Hanna Stiphan Jabra |
2 |
|
Luiz Fernando Furlan |
5,994,216 |
|
Heloisa Helena Silva de Oliveira |
1 |
|
Manoel Cordeiro Silva Filho |
2 |
|
Maurício da Rocha Wanderley |
2 |
|
Pedro de Andrade Faria |
1 |
|
Marcelo Guimarães Lopo Lima |
1 |
|
Walter Fontana Filho |
2,990,290 |
110
|
Directors and Officers |
Common Shares | |
|
Directors: |
| |
|
Eduardo Fontana d’Ávila |
2,048,630 | |
|
Roberto Faldini |
|
464 |
|
Subtotal |
|
12,034,186 |
|
Officers: |
| |
|
Nelson Vas Hacklauer |
8,436 | |
|
Nilvo Mittanck |
9,837 | |
|
Fabio Medeiros Martins Silva |
3,404 | |
|
José Eduardo Cabral Mauro |
12,100 | |
|
Ely David Mizrahi |
11,666 | |
|
Leopoldo Viriato Saboya |
8,028 | |
|
Gilberto Antonio Orsato |
8,380 | |
|
Antonio Augusto de Toni |
11,656 | |
|
Luiz Henrique Lissoni |
3,300 | |
|
José Antonio do Prado Fay |
|
24,125 |
|
Subtotal |
|
100,932 |
|
|
| |
|
Total |
|
12,135,118 |
(1) Excludes 26,346,620 common shares that may be deemed beneficially owned through Weg Participações e Serviços S.A.
Stock Option Plan
On March 31, 2010, our shareholders approved a long-term stock option plan for the executive officers of BRF and its subsidiaries for the award of stock options under two instruments: (1) a general stock option plan for annual grants as part of compensation and (2) an additional stock option plan pursuant to which an eligible executive officer may purchase additional stock options with a portion of their compensation based on profit-sharing (collectively, the “Stock Option Plan”). The shares underlying options granted under the plan may consist of newly issued or treasury shares of BRF. A prior stock option plan of Sadia for its executive officers has been folded into the Stock Option Plan. The Stock Option Plan is intended to attract, retain and motivate our executives to generate value for our companies and to align their interests with the interests of our shareholders. At the extraordinary general shareholders’ meeting held on April 24, 2012, our shareholders approved an expansion of the categories of executive officers who can participate in the Stock Option Plan.
The Stock Option Plan is managed by our board of directors. The maximum number of options granted under the Stock Option Plan may not exceed, at any time, the amount equivalent to 2% of the total number of common shares issued by BRF. Exercise prices of stock options granted under the Stock Option Plan are determined by our board of directors based on the average closing price of our shares on the 20 trading days preceding the grant date. Exercise prices are adjusted monthly based on the IPCA.
Stock options granted under the Stock Option Plan vest over three years in three equal annual installments. Unexercised options are forfeited five years after the grant date.
As of December 31, 2011, a total of 5,370,416 options had been granted, of which 4,277,946 were outstanding and held by approximately 55 persons. No person has received a number of options for common shares that, together with the common shares owned by that person, exceed one percent of our common shares.
For more information about the Stock Option Plan, including information about exercise prices, expiration dates and exercises, see note 23 to our consolidated financial statements.
111
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
On December 31, 2011, we had outstanding 869,453,804 common shares (excluding 3,019,442 common shares held in treasury), without par value, 114,147,505 of which corresponded to ADRs. On December 31, 2011, we had approximately 28,000 holders of record.
Major Shareholders
The following table sets forth certain information as of March 31, 2012, with respect to (1) any person known to us to be the beneficial owner of more than 5% of our common shares (including treasury shares) and (2) the total amount of our common shares owned by our directors and executive officers as a group.
|
|
2012 |
|
|
Shareholders |
Quantity |
% |
|
|
|
|
|
Caixa de Previdência dos Funcionarios do Banco do Brasil – PREVI (1) |
111,519,618 |
12.78 |
|
Fundação Petrobras de Seguridade Social – PETROS (1) |
89,500,982 |
10.26 |
|
Fundação Sistel de Seguridade Social – SISTEL (1) |
11,726,232 |
1.34 |
|
Fundação Vale do Rio Doce – VALIA (1) |
16,671,890 |
1.91 |
|
FPRV1 Sabiá FIM Previdenciário (2) |
3,474,904 |
0.40 |
|
Tarpon Investimentos S.A |
61,106,290 |
7.00 |
|
All directors and executive officers as a group, alternative members and executive persons (22 persons) (3) |
11,903,096 |
1.36 |
|
Subtotal |
305,903,012 |
35.05 |
|
Others |
566,570,234 |
64.95 |
(1) These pension funds are controlled by participating employees of the respective companies, and they are parties to a voting agreement described in “— Shareholders’ Voting Agreement” below.
(2) Investment fund held solely by the Fundação de Assistência e Previdência Social of BNDES - FAPES. The common shares currently held by this fund are part of the voting agreement signed by the Pension Funds described in “—Shareholders’ Voting Agreement” below.
(3) See “—E. Share Ownership— Share Ownership of Directors and Executive Officers” for a table setting forth the share ownership of members of our board of directors and executive officers. The number of common shares held by directors and executive officers excludes any shares that may be deemed to be beneficially owned by Mr. Décio da Silva through Weg Participações S.A., as described in “Item 6. Directors, Senior Management and Employees—Share Ownership of Directors and Executive Officers.” In addition, this number excludes any shares held by the pension funds of which certain of our directors are representatives.
Changes in Ownership
There has been no significant change in the percentage ownership held by any major shareholder since January 1, 2009, except as described below.
· In 2008 and 2009, Real Grandeza Fundação de Assistência e Previdência Social sold all of the common shares of our company that it held, representing 1.72% of our share capital, in a series of market transactions on the São Paulo Stock Exchange.
· On July 8, 2009, in connection with our business combination with Sadia, we issued 37,637,557 new common shares to the shareholders of HFF, a holding company formed by the controlling shareholders of Sadia for purposes of the business combination, as part of the merger of shares of HFF with BRF, which was the first step in our business combination with Sadia. We issued an additional 59,390,963 new common shares to the shareholders of Sadia as part of the merger of shares of Sadia with BRF, which was the final step in our business combination with Sadia. These shares were delivered to Sadia shareholders on September 22, 2009. These new issuances diluted the percentage of shares held by our shareholders.
112
· On July 2009, we also issued 115 million common shares, including common shares underlying American Depositary Shares, in a public offering. In August 2009, we issued another 17.25 million common shares pursuant to the underwriters’ exercise of their over-allotment option.
· As a result of the increase in our share capital in connection with our business combination with Sadia, BIRD Fundo de Investimento em Ações – Investimento no Exterior, a fund controlled by members of the Shan Ban Shun family, now holds less than 5.0% of our common shares. As of December 31, 2008, it held 30,031,734 of our common shares, representing 7.26% of our share capital, and as of December 31, 2009, those common shares represented 3.44% of our share capital.
· In April 2010, the number of common shares held by investment and portfolio funds under the discretionary management of Tarpon Investimentos S.A. reached 43,773,390, representing 5.02% of our share capital. Since that time, funds managed by Tarpon Investimentos S.A. have acquired additional shares and now hold a total of 61,106,290 common shares, representing 7.00% of our share capital.
The pension funds that are a party to the voting agreement described below held 27.5% of our share capital as of December 31, 2011, compared to 28.03% held at December 31, 2010.
Shareholders’ Voting Agreement
The Pension Funds entered into a shareholders’ voting agreement, dated March 6, 2006, which provided for the exercise of the voting rights of these shareholders with respect to (1) the election of the members of our board of directors, board of executive officers and fiscal council and (2) the matters set forth in Article 136 of the Brazilian Corporations Law, including decisions relating to dividends, corporate restructurings, our corporate purpose and other matters.
These shareholders have agreed to meet before any shareholders’ or board of directors’ meeting to reach a voting agreement regarding such matters. The decision will be taken by the majority of the shareholders, except in relation to the election of the members of (1) our board of directors, where each shareholder is entitled to indicate one member; and (2) the fiscal council.
The shareholders’ voting agreement was valid for a term of five years or until the participation of the Pension Funds was collectively less than 20% of our share capital. Under the agreement, the Pension Funds were free to transfer and encumber their shares, in whole or in part, without seeking the remaining shareholders’ approval. The shares transferred to unrelated third parties were no longer bound by the shareholders’ voting agreement. Shares acquired by the Pension Funds after the date of the agreement were also not bound by the agreement. While the voting agreement expired on April 12, 2011, the Pension Funds expect to sign a new shareholders’ voting agreement with the same terms and conditions as the prior agreement.
The foregoing description summarizes the material terms of the shareholders’ voting agreement and it is qualified in its entirety by reference to the full text of the agreement attached hereto as Exhibit 4.02.
B. Related Party Transactions
The following summarizes the material transactions that we have engaged in with our directors, key management personnel, principal shareholders and ours and their affiliates since January 1, 2011. The disclosure of related party transactions below is provided for purposes of the rules governing Annual Reports on Form 20-F and is not meant to suggest that these matters would be considered related party transactions under IFRS.
BNDES Financings
As of December 31, 2011, we had outstanding debt obligations to BNDES, including long-term loans under our FINEM credit line in an aggregate principal amount of R$937.1 million, and credit lines for the financing of international trade transactions through BNDES’s EXIM program in the amount of R$737.1 million. Although BNDES is the sponsor of FAPES, which controls FPRVI Sabiá FIM Previdenciária, one of our principal shareholders, FAPES is independently managed.
113
The transactions with BNDES were made in the ordinary course of business, on substantially the same terms as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectability or present other unfavorable features.
Banco do Brasil Financings
From time to time, we incur trade-related loans from Banco do Brasil S.A. on arm’s-length commercial terms in the ordinary course of business. These loans are included in “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Debt.” Although Banco do Brasil S.A. is the sponsor of PREVI, one of our principal shareholders, PREVI is independently managed.
We are also borrowers under long-term loans with favorable interest rates from Banco do Brasil S.A. to fund eligible capital expenditures in the Central-West region of Brazil under a Brazilian federal government incentive program. Our primary long-term loans from Banco do Brasil S.A. at December 31, 2011 include (1) a commercial credit line in the amount of R$763.9 million, (2) an export credit note in the amount of R$425.2 million and (3) an industrial credit note in the amount of R$5.6 million. Our outgrowers of poultry and hogs may also obtain federal government-subsidized rural credit financing from Banco do Brasil S.A. to fund capital expenditures. We assist our outgrowers in arranging this long-term financing. BRF currently does not guarantee and is not financially responsible for these outgrowers’ financing arrangements; however, we pay part of the payments that we would otherwise make to the outgrowers directly to a mutual fund operated by Banco do Brasil S.A. to support repayment of these financings. Sadia provides the guarantees of outgrower financing described in “Item 5. Operating and Financial Review and Prospects—E. Off-Balance Sheet Arrangements.”
The transactions with Banco do Brasil were made in the ordinary course of business, on substantially the same terms as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectability or present other unfavorable features.
Transactions with Subsidiaries
Loans
Our subsidiaries have entered into certain loan agreements. The following table sets forth the outstanding balances and interest rates on inter-company loans above R$10 million as of December 31, 2011:
|
Creditor |
Debtor |
As of December 31, 2011 |
Interest Rate |
Denominations |
|
(in millions of reais) | ||||
|
BFF International |
Perdigão International |
808.8 |
1.8% p.a. + exchange rate variation |
U.S.$ |
|
BFF International |
Wellax Food Comércio |
548.1 |
8.00% p.a. + exchange rate variation |
U.S.$ |
|
Crossban Holdings |
Sadia GmbH |
18.9 |
3.00% p.a. + exchange rate variation |
U.S.$ |
|
Crossban Holdings |
Plusfood Holland B.V. |
90.5 |
3.00% p.a. |
Euro |
|
Plusfood Holland B.V. |
Plusfood Groep B.V. |
70.9 |
3.00% p.a. |
Euro |
|
Plusfood Groep B.V. |
Plusfood Wrexham |
13.8 |
3.00% p.a. + exchange rate variation |
Pound Sterling |
|
Plusfood Groep B.V. |
Plusfood B.V. |
55.0 |
3.00% p.a. |
Euro |
|
Sadia GmbH |
BRF Foods LLC |
26.7 |
7.00% p.a. + exchange rate variation |
U.S.$ |
114
Arrangements with FAF
Sadia has entered into an operational leasing agreement with Francisco Xavier Fontana Foundation (“FAF”), a foundation established by members of the Furlan and Fontana families, the former controlling shareholders of Sadia. Under the agreement, we rent a distribution center facility in the City of Jundiaí, São Paulo that is owned by FAF. The total rent expense for 2011 amounted to R$11.5 million (R$12.1 million in 2010). The lease monthly payments were established on an arm’s length basis.
FAF also administers a defined benefit plan for employees of Sadia. FAF is controlled by members of the Fontana family. Luiz Fernando Furlan and Walter Fontana Filho, who are members of our board of directors, may have significant influence over Concórdia, including Concórdia Corretora. For more information on the defined benefit plan, see note 24.1.2 to our consolidated financial statements.
Transactions with Affiliates of the Former Controlling Shareholders of Sadia
Sadia is a party to transactions with Concórdia Holding Financeira S.A. (together with its subsidiaries, “Concórdia”), a company that was controlled by Sadia before the business combination and which, in turn, controlled Banco Concórdia S.A. and Concórdia S.A. Corretora de Valores Mobiliários, Câmbio e Commodities (“Concórdia Corretora”). In connection with the business combination, Sadia sold the shares of Concórdia Holding Financeira S.A. to HFIN Participações S.A., a holding company formed by the former controlling shareholders of Sadia for purposes of the transaction. The former controlling shareholders of Sadia, consisting of members of the Furlan and Fontana families and entities controlled by them, are now shareholders of our company. The transactions between Sadia and Concórdia historically included transactions related to (1) human resources (contracting of retirement plan, life insurance, and dental insurance with third parties), (2) telephone and (3) information technology, representing an aggregate monthly amount for clauses (1), (2) and (3) of R$50,000. These transactions were terminated prior to December 31, 2009.
Concórdia Corretora provided services to Sadia in connection with foreign exchange, brokerage, currency hedging and commercial paper transactions and asset management, and Sadia paid Concórdia Corretora an average monthly amount of R$120,000 in 2008. The foreign exchange, brokerage, currency hedging and commercial paper transactions ceased prior to 2009. Concórdia Corretora continues to provide asset management services to Sadia, with average monthly payments of R$0.1 million by Sadia to Concórdia Corretora in 2010, including with respect to the Credit Assignment Investment Fund described below. Luiz Fernando Furlan and Walter Fontana Filho, who are members of our board of directors, may have significant influence over Concórdia, including Concórdia Corretora.
Until September 30, 2010 Sadia was party to an agreement to sell, from time to time, its domestic receivables to a Credit Assignment Investment Fund (Fundo de Investimentos em Direitos Creditórios, or “FIDC”) administered by Concórdia S.A. Corretora de Valores Mobiliários, Câmbio e Commodities. This agreement was terminated on September 30, 2010. In the year ended December 31, 2010, Sadia received funds in the amount of R$3,138.1 million from the sale of receivables to the fund and incurred R$18.8 million of related expenses.
Sadia has financial transactions with Sadia International Ltd. and operating and financial transactions with Wellax Food Logistics C.P.A.S.U. Lda., or “Wellax,” both of which are vehicles for sales outside Brazil. Wellax also acts as a financing entity for Sadia by obtaining export financing loans from international banks and investing the proceeds in marketable securities.
Transactions with Affiliated Sustainability Institutes
The Sadia Sustainability Institute (Instituto Sadia de Sustentabilidade) is a Brazilian not-for-profit organization organized by Sadia and dedicated to promoting sustainable development. Sadia is the guarantor of a loan to the Sadia Sustainability Institute from BNDES to set up biodigestors on the properties of the rural producers that are taking part in Sadia’s integration system as part of the Sadia sustainable hog breeding program, which seeks to develop mechanisms for clean development and reduction of emission of carbon gases. The total amount of these guarantees at December 31, 2011 was R$79.9 million (R$83.9 million as of December 31, 2010).
115
Sadia has also provided loans to the Sadia Sustainability Institute to help finance its operations. As of December 15, 2011, we forgave R$44.1 million outstanding under these loans, as approved by our board of directors.
The Perdigão Sustainability Institute (Instituto Perdigão de Sustentabilidade) is similarly a Brazilian not-for profit organization organized by BRF and dedicated to promoting sustainable development. We have provided loans to the Perdigão Sustainability Institute to help finance its operations. Our outstanding loans to the Perdigão Sustainability Institute as of December 31, 2011 were R$6.6 million (R$5.9 million as of December 31, 2010), bearing interest at 12.0% per year.
C. Interests of experts and counsel.
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information.
See Exhibits.
The authorized capital stock of the Company is comprised of common shares. As of December 31, 2011, 2011, 869,453,804, or 99.65%, of our common shares (excluding 3,019,442 held in treasury) were issued and outstanding, 114,147,505, or 13.08%, of which correspond to ADRs.
Legal Proceedings
We are involved in certain legal proceedings arising from the regular course of business, which include civil, administrative, tax, social insurance and labor lawsuits.
We classify the risk of adverse decisions in the legal suits as “remote,” “possible” or “probable.” We record provisions for eventual losses in our financial statements in connection with these proceedings in an amount determined by our management on the basis of legal advice. We disclose the aggregate amounts of these proceedings that we have judged possible or probable, to the extent those amounts can be reasonably estimated, and we record provisions only for losses that we consider probable. However, the amounts involved in certain of the proceedings in which we believe our risk of loss is remote are substantial, and the losses to us could, therefore, be significantly higher than the amounts for which we have recorded provisions. Even for the amounts recorded as provisions for probable losses, a judgment against us would have an effect on our cash flow if we are required to pay those amounts. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Unfavorable outcomes in legal proceedings may reduce our liquidity and negatively affect us.”
Tax Proceedings
Contingencies for Probable Losses
We are engaged in several legal proceedings with Brazilian tax authorities for which we have recorded provisions for probable losses. As of December 31, 2011, our provisions in such tax proceedings were R$231.6 million, compared to R$209.5 million as of December 31, 2010. Of these proceedings for which we have recorded a provision for probable losses, the primary proceedings are the following:
· Income tax and social contribution: We recorded a R$26.0 million provision (R$23.2 million as of December 31, 2010) related to Brazilian income tax (Imposto de Renda – Pessoa Jurídica, or “IRPJ”) and social contribution (Contribuição Social sobre of Lucro Líquido, or “CSLL”), including (1) R$16.4 million (R$15.3 million as of December 31, 2010) relating to a tax assessment notice challenging the taxable income of Granja Rezende, a former subsidiary of Sadia that merged into Sadia in 2002, (2) R$7.4 million related to the disallowed of claims from a subsidiary acquired in 2008 from the Brazilian Tax Recovery Program (“REFIS”), a program for the voluntary settlement of outstanding tax disputes, and (3) R$1.9 million (R$7.9 million as of December 31, 2010) relating to other lawsuits.
116
· ICMS: We are involved in a number of administrative and judicial tax disputes regarding the recording and/or use of amounts paid in respect of the Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or “ICMS,” as tax credits against other taxes assessed on certain transactions, such as exports, acquisition of consumption materials and monetary correction. The provision amounts to R$79.0 million (R$66.7 million as of December 31, 2010).
· PIS and COFINS: We are involved in administrative proceedings related to the use of federal PIS and COFINS tax credits to offset other federal taxes, in the amount of R$66.3 million (R$34.1 million as of December 31, 2010).
· Other tax contingencies: We recorded other provisions for lawsuits related to the payment of social security contributions under various Brazilian government programs (SAT, INCRA, FUNRURAL, Education Salary) and tax liabilities relating to accessory obligations, the payment of legal fees and other matters in a total amount of R$56.1 million (R$41.2 million as of December 31, 2010).
Contingencies for Possible Losses
The amount of tax contingencies which the probability of losses were classified as “possible” was R$5,295.0 million as of December 31, 2011 (R$3,523.7 million as of December 31, 2010). Of this amount, R$566.0 million as of December 31, 2011 (R$578.5 million as of December 31, 2010) reflected our fair value estimate of contingent tax liabilities relating to our business combination with Sadia. The most significant of these tax cases for which the risk of losses is classified as possible are described below:
· Profits earned abroad: We received a tax assessment from the Brazilian Internal Revenue Service for alleged underpayment of income tax and social contribution on profits earned by subsidiaries established abroad in the total amount of R$365.7 million as of December 31, 2011 (R$164.8 million as of December 31, 2010). Our legal defense is based on the fact that our subsidiaries located abroad are only subject to full taxation in the countries in which they are based as a result of the treaties regarding double taxation.
· Income tax and social contribution: We are involved in administrative disputes regarding the use of income tax and social contribution losses, refunds and credits to offset other federal tax debts, including credits generated by the legal disputes over the Plano Verão, an economic stabilization plan from 1989. These disputes totaled R$222.5 million as of December 31, 2011 (R$114.7 million as of December 31, 2010). The increase in the amount related to 2011 is justified by new cases and to monetary indexation of existing cases.
· ICMS: We are involved in a number of disputes relating to the ICMS tax: (1) allegedly undue ICMS tax credits generated by tax incentives granted by states of origin (knows as the guerra fiscal dispute) in a total amount of R$1,3331.6 million as of December 31, 2011 (R$1,057.3 million as of December 31,2010), (2) the maintenance of ICMS tax credits on the acquisition of essential products with a reduced tax burden (cesta básica) in a total amount of R$493,4 million as of December 31, 2011 (R$388.9 million as of December 31, 2010), (3) the recording of deemed ICMS tax credits in a total amount of R$86.2 million as of December 31, 2011 (R$10.8 million as of December 31, 2010) and (4) R$563.4 million as of December 31, 2011 (R$564.9 as of December 31,2010) related other lawsuits.
· IPI: We are involved in administrative proceedings relating to the failure to permit the use of credits under the sales tax for industrial products (Imposto sobre Produtos Industrializados, or “IPI”) generated from purchases of goods not taxed, sales to the Manaus Free Zone and purchases of supplies by non-taxpayers to offset PIS and COFINS taxes in the amount of R$125.0 million as of December 31, 2011 (R$55.0 million as of December, 2010).
117
· IPI premium credits: Our subsidiary Sadia is involved in a judicial dispute related to the alleged undue use of IPI premium credits to offset other federal taxes in the amount of R$399.7 million as of December 31, 2011 (R$387.3 million as of December 31, 2010). We have recorded these credits based on a final judicial decision.
· PIS and COFINS: We are involved in administrative proceedings regarding the use of PIS and COFINS tax credits to offset other federal tax liablities in the amount of R$582.9 million as of December 31, 2011 (R$390.0 million as of December 31, 2010). The 2011 increase relates to new cases as well as to monetary indexation of existing cases.
· Normative Instruction 86: We were assessed by the Brazilian Internal Revenue Service for a total amount of R$158.2 million related to a fine for alleged non-compliance in the delivery of magnetic files for the years 2003-2005 to the tax authorities.
· Social security taxes: We are involved in disputes related to social security taxes allegedly due on payments to service providers and social contributions allegedly due to civil construction service providers and others in the aggregate amount of R$185.3 million as of December 31, 2011 (R$165.1 million as of December 31, 2010).
· Other contingencies: We are involved in other tax contingencies involving a variety of matters, including rural activities, transfer pricing and the basis for calculating social contribution taxes, totalling R$151.0 million as of December 31, 2011 (R$158. 5 million as of December 31, 2010).
Additionally, we were included as co-defendant in a tax lawsuit against Huaine Participações Ltda (a former holding company of Perdigão), claiming our liability for taxes in the amount of R$572.2 million as of December 31, 2011. On February 16, 2012, we received a favorable decision from the Superior Court, which remanded the matter to the lower court. Our legal advisors classify the risk of loss in this lawsuit as remote. As noted above, we are involved in other lawsuits for which we classify our risk of loss as remote, and the amounts involved in certain of those proceedings are substantial.
Labor Proceedings
As of December 31, 2011, we were involved in 9,379 labor proceedings amounting to total claims of R$1,740.0 million, compared to R$2,955 million as of December 31, 2010. These cases are mainly related to overtime, salary adjustments for inflation for periods prior to the introduction of the Real, illnesses allegedly contracted at work and work-related injuries. The labor suits are mainly at the lower court level, and for the majority of the cases, a decision dismissing the pleadings has been granted. None of these suits is individually significant. Our provisions for probable losses in labor claims were R$105.2 million as of December 31, 2011, compared to R$110.2 million as of December 31, 2010. We recorded these provisions based on our past history of payments and the opinion of our legal counsel.
Civil, Commercial and Other Proceedings
As of December 31, 2011, we were defendants in 5,711 civil proceedings amounting to total claims of R$538.3 million, compared to R$365.2 million as of December 31, 2010. We were defendants in several civil, commercial and others proceedings related to, among other things, traffic accidents, breach of contract claims, property damage and physical injuries. The civil, commercial and other actions are mostly in lower courts in the evidentiary phase, and we are awaiting the decisions of the applicable courts. We have recorded provisions for probable losses in the amount of R$45.2 million in connection with our pending civil, commercial and other proceedings as of December 31, 2011, compared to R$97.0 million as of December 31, 2010. We recorded these provisions based on past history of payments and the opinion of our legal counsel.
118
Litigation Relating to Sadia’s Pre-Business Combination Derivatives Activities
In the fall of 2008, Sadia sustained significant losses on foreign exchange derivative transactions. In connection therewith, Sadia sold certain of its long-term financial investments to be able to make deposits in margin accounts related to the currency derivatives, which resulted in further losses due to the decrease in the value of such financial instruments as a result of the global economic crisis. In connection with these losses, Sadia, as well as certain individuals who were officers and/or directors of Sadia during the events at issue, were named in five lawsuits in U.S. courts alleging various violations of U.S. federal securities laws related to losses that Sadia incurred with respect to foreign exchange derivative contracts. These five actions have since been consolidated in a single class action lawsuit, which was settled in December 2011 with the payment by Sadia of a total amount of US$27 million.
In addition, on May 15, 2009, Sadia received a letter from the CVM informing Sadia that the CVM had initiated a preliminary investigation of possible liability of certain individuals who were officers and/or directors of Sadia for losses in connection with the derivative transactions in 2008. On August 21, 2009, Sadia received an additional letter from the CVM requesting that Sadia provide certain documents to the CVM in connection with its investigation, which was complied with by Sadia. This investigation related only to these individuals and not to Sadia itself. Accordingly, no contingency has been recorded. On December 14, 2010, the CVM issued a decision holding certain directors and former officers of Sadia liable and imposed fines of up to R$400,000 on each of them. These individuals settled the proceedings with the CVM. Three such individuals still serve as directors or alternative directors of our company.
Following the derivative losses described above, Sadia retained BDO Trevisan, as unanimously approved by all of the shareholders present at the meeting in question, to conduct an independent investigation of the financial transactions that led to the currency derivative losses, including the potential liability of Sadia officers to indemnify Sadia in relation to such transactions in light of Article 159 of the Brazilian Corporations Law.
The conclusions of the BDO report were also considered by the shareholders who voted unanimously at an Extraordinary Meeting of Shareholders held on April 6, 2009, for Sadia to file a liability action against the former Chief Financial Officer (based on negligent conduct, bad business judgment or imprudence, under The Brazilian Corporations Law Article 159), seeking indemnification for Sadia’s losses. As a consequence, Sadia retained a specialized law firm that evaluated the facts and merits of the case, including the BDO report, in order to file a lawsuit against the former Chief Financial Officer. A lawsuit in connection with this matter was filed on June 18, 2009. In addition, the same former officer filed a labor lawsuit against Sadia. Both cases are recorded as possible losses in Sadia’s contingency system, and no provisions have been recorded. Both cases are now pending the former officer’s appeal, which are awaiting a decision from the lower courts.
On December 14, 2009, Sadia filed a liability action for indemnification under The Brazilian Corporations Law Article 159 against the two financial managers based on negligent conduct, bad business judgment or imprudence. These civil lawsuits are in preliminary stages. On September 27, 2010, one of these managers filed a labor lawsuit against Sadia, which is also in a preliminary stage.
In 2010, the CVM reopened a previous investigation into certain officers of Sadia and members of its board of directors regarding potential liability arising out of interviews conducted with newspapers and magazines prior to the announcement of the business combination between Sadia and our company. The investigation is continuing, and in 2011 we furnished certain documents to the CVM in response to its request. The CVM also initiated a proceeding to investigate potential liability arising out of the sale of HFF, a holding company formed by the controlling shareholders of Sadia for purposes of the business combination transaction with our company. These administrative or judicial proceedings are still at a preliminary stage and are awaiting a decision from the lower courts. The proceedings currently relate only to such individuals. Sadia itself is not a part of such investigations and, accordingly, no contingency has been recorded.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Unfavorable outcomes in legal proceedings may reduce our liquidity and negatively affect us.”
119
Dividends and Dividend Policy
Our dividend policy has historically included the distribution of periodic dividends, based on quarterly balance sheets approved by our board of directors. When we pay dividends on an annual basis, they are declared at our annual shareholders’ meeting, which we are required by the Brazilian Corporation Law and our bylaws to hold by April 30 of each year. When we declare dividends, we are generally required to pay them within 60 days of declaring them unless the shareholders’ resolution establishes another payment date. In any event, if we declare dividends, we must pay them by the end of the fiscal year in which they are declared.
As permitted by the Brazilian Corporation Law, our bylaws specify that 25% of our adjusted net profits for each fiscal year must be distributed to shareholders as dividends or interest on shareholders’ equity. We refer to this amount as the mandatory distributable amount. Under the Brazilian Corporation Law, the amount by which the mandatory distributable amount exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized income reserve, and the mandatory distribution may be limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which our net income exceeds the sum of (1) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain associated companies, and (2) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year. As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization.
The following table sets forth the dividends and interest on shareholders’ equity paid to holders of our common shares and preferred shares since 2009 on a per share basis in reais. On March 31, 2010, the Company’s shareholders approved a one-for-one share split of the Company’s ordinary shares and a change in the ratio of ordinary shares to ADRs such that one ordinary share corresponds to one ADR. The combined effect of the share split and the ADR ratio change was that holders of ADRs received four ADRs for each existing ADR. This share split and ADR ratio change became effective on April 7, 2010 and were designed to reposition the price of the Company’s shares and the ADRs with a focus on an increase in liquidity and the interests of national and international retail investors.
|
Year |
Description |
First Payment Date |
Nominal Currency Brazilian per Share |
U.S.$ Equivalent |
|
2009 |
Interest on shareholders’ equity |
February 26, 2010 |
0.23 |
0.13 |
|
2010 |
Interest on shareholders’ equity |
August 27, 2010 |
0.06 |
0.03 |
|
2010 |
Interest on shareholders’ equity |
February 24, 2011 |
0.24 |
0.14 |
|
2011 |
Interest on shareholders’ equity |
August 29, 2011 |
0.33 |
0.21 |
|
2011 |
Interest on shareholders’ equity |
February 15, 2011 |
0.39 |
0.23 |
The following table sets forth total dividends and interest on shareholders’ equity by share class:
|
Year |
Dividends and Interest on Shareholders’ Equity on Common Shares |
Dividends and Interest on Shareholders’ Equity on Preferred Shares |
Total Dividends and Interest on Shareholders’ Equity |
|
|
(in millions of reais) | ||
|
2009 |
100.00 |
— |
100.00 |
|
2010 |
262.50 |
— |
262.50 |
|
2011 |
632.10 |
— |
632.10 |
|
|
|
|
|
Amounts Available for Distribution
The section of this form entitled “Description of Share Capital” contains a description of the calculation and payment of dividends and interest on shareholders’ equity under the Brazilian Corporation Law. See “— Allocation of Net Income and Distribution of Dividends” and “—Payment of Dividends and Interest on Shareholders’ Equity” under Item 10.
120
B. Significant Changes.
The Company is not aware of any changes bearing upon its financial condition since the date of the financial statements included in this Annual Report on Form 20-F.
ITEM 9. THE OFFER AND LISTING
A. Markets
The principal trading market for our common shares is the São Paulo Stock Exchange.
On October 20, 2000, ADRs representing our preferred shares began trading on the NYSE. On April 12, 2006, our preferred shares were converted into common share and our ADRs have represented our common shares since then. On March 31, 2012, there were 113,838,033 ADRs outstanding, representing 13.05% of our outstanding common shares.
Share Reclassification and Related Share Split
On March 31, 2010, the Company’s shareholders approved a one-for-one share split of the Company’s ordinary shares and a change in the ratio of ordinary shares to ADRs such that one ordinary share corresponds to one ADR. The combined effect of the share split and the ADR ratio change was that holders of ADRs received four ADRs for each existing ADR. This share split and ADR ratio change became effective on April 7, 2010 and were designed to reposition the price of the Company’s shares and the ADRs with a focus on an increase in liquidity and the interests of national and international retail investors. In accordance with IFRS, per share data and other information in this Annual Report on Form 20-F have been adjusted to give effect to the reclassification and related share split.
On March 31, 2012, we had approximately 29,000 shareholders, including 1,314 U.S. resident holders of our common shares (including The Bank of New York, as depositary). On March 31, 2012, there were 871,745,274 common shares issued and outstanding (excluding 2,925,956 common shares held in treasury).
Price History of Our Common Shares, Preferred Shares and ADRs
The tables below set forth the high and low closing sales prices for our common shares and preferred shares on the São Paulo Stock Exchange and the high and low closing sales prices for the ADRs on the NYSE for the periods indicated. The sales prices for our common shares and preferred shares, and the ADRs, have been adjusted to give effect to the three-for-one share split that became effective on April 12, 2006.
|
|
São Paulo Stock Exchange |
New York Stock | ||
|
|
Reais per |
U.S. dollars per ADR | ||
|
|
High |
Low |
High |
Low |
|
Year |
|
|
|
|
|
2007 |
24.48 |
12.26 |
14.24 |
5.72 |
|
2008 |
26.65 |
13.60 |
16.43 |
5.84 |
|
2009 |
24.38 |
13.08 |
14.26 |
5.44 |
|
2010 |
27.09 |
21.26 |
16.95 |
11.62 |
|
2011 |
37.85 |
24.09 |
21.42 |
15.52 |
|
|
|
|
|
|
121
|
|
São Paulo Stock Exchange |
New York Stock | ||
|
|
Reais per |
U.S. dollars per ADR | ||
|
|
High |
Low |
High |
Low |
|
Quarter |
|
|
|
|
|
2009 |
|
|
|
|
|
First Quarter |
16.75 |
13.08 |
7.36 |
5.44 |
|
Second Quarter |
19.99 |
14.36 |
10.26 |
6.40 |
|
Third Quarter |
24.38 |
18.95 |
13.59 |
9.63 |
|
Fourth Quarter |
24.23 |
19.90 |
14.26 |
11.52 |
|
2010 |
|
|
|
|
|
First Quarter |
24.10 |
21.84 |
13.77 |
11.79 |
|
Second Quarter |
25.81 |
21.26 |
14.71 |
11.62 |
|
Third Quarter |
25.75 |
22.35 |
15.53 |
12.92 |
|
Fourth Quarter |
27.60 |
23.90 |
16.95 |
14.02 |
|
2011 |
|
|
|
|
|
First Quarter |
30.83 |
26.57 |
19.09 |
16.25 |
|
Second Quarter |
31.85 |
24.09 |
20.71 |
15.52 |
|
Third Quarter |
32.95 |
25.17 |
20.03 |
16.27 |
|
Fourth Quarter |
37.85 |
31.01 |
21.42 |
16.85 |
|
2012 |
|
|
|
|
|
First Quarter |
38.25 |
32.90 |
21.46 |
18.97 |
Source: Bloomberg
On April 12, 2012, the closing sales price of:
· our common shares on the São Paulo Stock Exchange was R$34.27 per share;
· the ADRs on the NYSE was U.S.$19.02 per ADR.
B. Plan of Distribution
Not applicable.
C. Markets
Trading on the BM&F Bovespa - Securities, Commodities & Futures Exchange
The BM&F Bovespa - Securities, Commodities & Futures Exchange, or “São Paulo Stock Exchange,” is a public company which resulted from the merger, in 2008, among Bolsa de Mercadorias e Futuros (BM&F, the Brazilian commodities and futures exchange), Bolsa de Valores de São Paulo (Bovespa, the São Paulo stock exchange), and Companhia Brasileira de Liquidação e Custódia (CBLC, a clearinghouse). Before the merger, BM&F and Bovespa, which were non-profit entities owned by their member brokerage firms until 2007, conducted their initial public offerings (IPOs) and became public companies.
The integration process among such companies was fully completed in November 2008. Trading on the São Paulo Stock Exchange is limited to member brokerage firms and a limited number of authorized non-members. The São Paulo Stock Exchange currently has open outcry trading sessions, from 10:00 a.m. to 5:00 p.m. or from 11:00 a.m. to 6:00 p.m. during Brazilian summer time. There is also trading in the so-called After-Market, only through the automated quotation system of the São Paulo Stock Exchange, from 5:45 p.m. to 6:30 p.m. or from 6:45 p.m. to 7:30 p.m. during Brazilian summer time. Only shares that were traded during the regular trading session of the day may be traded in the After-Market of the same day. Trades are made by entering orders in the Mega Bolsa electronic trading system, created and operated by BOVESPA.
122
Settlement of transactions conducted on the São Paulo Stock Exchange is effected three business days after the trade date without any adjustment for inflation. Delivery of and payment for shares is made through the facilities of the Brazilian Clearing and Depository Corporation (Companhia Brasileira de Liquidação e Custódia), or “CBLC,” which is the São Paulo Stock Exchange’s securities clearing system. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date.
In order to maintain better control over the fluctuation of the São Paulo Stock Exchange index, the São Paulo Stock Exchange has a “circuit breaker” system in which the trading session is suspended for a period of 30 minutes or one hour in the event the São Paulo Stock Exchange index were to fall below the limit of 10.0% or 15.0%, respectively, in relation to the closing rate of the index of the previous trading session.
From September to October of 2008, due to high volatility in the São Paulo Stock Exchange, the “circuit breaker” system was activated six times, in some cases right after the opening of the session and in others, after the dissemination of news that contradicted market expectations that resulted in investor panic. On October 6, 2008, the opening of the São Paulo Stock Exchange was stopped twice, forcing the exchange to disclose special rules for halting trades if the São Paulo Stock Exchange index fell 20%. Ultimately, the market did not fall to such extent.
The São Paulo Stock Exchange is significantly less liquid than the NYSE and many other of the world’s major stock exchanges. While all of the outstanding shares of a listed company may trade on the São Paulo Stock Exchange, in most cases fewer than half of the listed shares are actually available for trading by the public. The remaining shares are often held by a single or small group of controlling persons or by governmental entities.
Trading on the São Paulo Stock Exchange by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilian holders may trade on the São Paulo Stock Exchange only in accordance with the requirements of Resolution No. 2,689 of January 26, 2000 of the CMN. Resolution No. 2,689 requires securities held by non-Brazilian holders to be maintained in the custody of, or in deposit accounts with, financial institutions that are authorized by the Central Bank and the Brazilian Securities Commission. In addition, Resolution No. 2,689 requires non-Brazilian holders to restrict their securities trading to transactions on the São Paulo Stock Exchange or organized over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through private transactions. For more information, see “Regulation of Foreign Investment” under Item 10.
Regulation of Brazilian Securities Markets
The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, by the CMN and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Brazilian Law No. 6,385/76, as amended, and by the Brazilian Corporation Law and other CVM rulings and regulations.
Under the Brazilian Corporation Law, a company may be either public (companhia aberta), as we are, or closely held (companhia fechada). All public companies are registered with the CVM and are subject to periodic reporting requirements. A company registered with the CVM may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. The shares of a listed company, like those of our company, also may be traded privately subject to certain limitations.
The Brazilian over-the-counter market consists of direct trades between persons in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM must receive notice of all trades carried out in the Brazilian over-the counter market by the respective intermediaries.
Trading of a company’s securities on the São Paulo Stock Exchange may be suspended in anticipation of a material announcement. A company must also suspend trading of its securities on international stock exchanges on which its securities are traded. Trading may also be suspended by the São Paulo Stock Exchange or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to an inquiry by the CVM or the relevant stock exchange.
123
Brazilian Law No. 6,385/76, as amended, the Brazilian Corporation Law and regulations issued by the CVM provide for, among other things, disclosure obligations, restrictions on insider trading and price manipulation and protections for minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as securities markets in the United States and some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States, which may put holders of our common shares and ADRs at a disadvantage. Corporate disclosures also may be less complete than for public companies in the United States and certain other jurisdictions.
São Paulo Stock Exchange Corporate Governance Standards
The São Paulo Stock Exchange has listing segments:
· Corporate Governance Level 1;
· Corporate Governance Level 2; and
· The Novo Mercado (New Market) of the São Paulo Stock Exchange.
These listing segments have been designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those already required under the Brazilian Corporation Law. The inclusion of a company in any of the new segments requires adherence to a series of corporate governance rules. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations.
In April 2006, we entered into a listing agreement with the São Paulo Stock Exchange, under which we agreed to comply with stricter corporate governance and disclosure requirements established by the São Paulo Stock Exchange in order to qualify as a company admitted to the Novo Mercado.
When we became a company within the Novo Mercado, we agreed, among other things, to:
· maintain a share capital structure composed exclusively of common shares;
· ensure that shares representing 25% of our total outstanding share capital are held by investors other than our directors, executive officers and any controlling shareholders;
· adopt offering procedures that favor widespread ownership of shares whenever making a public offering;
· comply with minimum quarterly disclosure standards;
· follow stricter disclosure policies with respect to transactions involving our securities made by any controlling shareholders and our directors and executive officers;
· make a schedule of corporate events available to our shareholders;
· offer tag-along rights to minority shareholders (meaning that, upon the acquisition of a controlling interest, the purchaser must also agree to purchase the shares of minority shareholders for the same price paid for the shares in the controlling stake);
· in the event of a delisting of shares, conduct a public tender offer for our common shares at a price at least equal to the economic value determined pursuant to an appraisal;
124
· present an annual balance sheet prepared in accordance with, or reconciled to, IFRS;
· establish a two-year term for all members of the board of directors;
· require that at least 20% of our board of directors consist of independent directors; and
· submit to arbitration by the Market Arbitration Chamber (Câmara de Arbitragem do Mercado) all controversies and disputes involving our company, members of our board of directors, board of executive officers, fiscal council or shareholders relating to the application, validity, efficacy, interpretation, violation or effect of the Novo Mercado listing agreement and regulations, our bylaws, the Brazilian Corporation Law or the rules of the CMN, the Central Bank, the CVM or the Market Arbitration Chamber or other rules within the jurisdiction of the Market Arbitration Chamber.
All members of our board of directors, our board of executive officers and our fiscal council signed a management compliance statement (Termo de Anuência dos Administradores) under which they take personal responsibility for compliance with the Novo Mercado listing agreement, the rules of the Market Arbitration Chamber and the regulations of the Novo Mercado.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Description of Share Capital
Set forth below is a summary of the material terms of provisions of our common shares. This description does not purport to be complete and is qualified in its entirety by reference to our bylaws (filed herewith as Exhibit 1.01), the Brazilian Corporation Law, the rules and regulations of the CVM and the rules of the Novo Mercado.
Under the Novo Mercado listing agreement we entered into with the São Paulo Stock Exchange, we may not issue preferred shares or shares with restricted voting rights. Accordingly, this section does not discuss the Brazilian statutory rights conferred upon holders of preferred shares.
General
We are currently a publicly held corporation (sociedade por ações de capital aberto) incorporated under the laws of Brazil. Our headquarters currently are located in Itajai, State of Santa Catarina. We are duly registered with Junta Comercial do Estado de Santa Catarina under the number NIRE 42.300.034.240 and with the CVM under No. 01629-2.
125
On July 8, 2009, a shareholders’ meeting approved the merger of all shares issued by HFF into our assets, the conversion of HFF into a wholly-owned subsidiary of the Company and the capital increase of BRF, upon contribution of 226,395,405 shares issued by HFF, based on the economic value of such shares, in the amount of R$1.5 billion by issuing 37,637,557 new common shares all nominative and will no par value, at an issuance price of R$39.40 per share. As a result our capital stock increased to R$4,927,933,697.75.
On July 21, 2009, a Board of Directors meeting approved an increase in our capital stock within the limits of the authorized capital in the amount of R$4.6 billion, to R$9,527,933,697.75 through the issuance of 115,000,000 common shares, all book entry and with no par value, through a primary public offering in Brazil, in the non-organized over-the-counter market, and in the overseas market, including shares in the form of American Depositary Shares evidenced by American Depositary Receipts.
On August 18, 2009, a shareholders’ meeting approved the merger of all common and preferred shares issued by Sadia into the Company, and approved the capital increase of the Company, upon the conversion of 25,904,595 common shares and 420,650,712 preferred shares issued by Sadia, based on the equity value of such shares, in the amount of R$2.3 billion through the issuance of 59,390,963 new registered common shares, with no par value, at the issuance price of R$39.32 per share, the capital, therefore, being increased R$9,527,933,697.75 to R$11,863,417,953.36.
On August 20, 2009, the Board of Directors, within the limit of the authorized capital, in connection with the exercise of the option to purchase additional shares exercised by lead underwriter, in the amount of 17,250,000 common, nominative, book-entry shares, with no par value, at the issuance price of R$40.00 per share, resulting in the increase in capital stock, within the limit of the Company’s authorized capital in the amount of R$690.0 million, representing an increase in the capital stock to R$12,553,417,953.36, represented by 436,236,623 common shares.
On March 31, 2010, the Company’s shareholders approved a one-for-one share split of the Company’s ordinary shares and a change in the ratio of ordinary shares to ADRs such that one ordinary share corresponds to one ADR. The combined effect of the share split and the ADR ratio change was that holders of ADRs received four ADRs for each existing ADR. This share split and ADR ratio change became effective on April 7, 2010 and were designed to reposition the price of the Company’s shares and the ADRs with a focus on an increase in liquidity and the interests of national and international retail investors.
On March 31, 2010, the capital stock subscribed for and paid up is R$12,553,417,953.36, represented by 872,473,246 common shares, all book entry and with no par value.
On March 31, 2010, we amended our bylaws to increase our authorized share capital to 1,000,000,000 common shares. As a result, our share capital may be increased up to that number without an amendment to our bylaws, upon approval by our board of directors, which will set the terms of the issuance, including the price and the period for payment. Any increase exceeding the authorized capital must be approved at an annual meeting of our shareholders.
Corporate Purpose
Article 3 of our bylaws provides that our corporate purpose consists of:
· the processing and sale of foods in general, principally those derived from animal protein and those that use a refrigerated supply chain for distribution;
· the processing and sale of animal feed and nutrients for animals;
· the provision of food services in general;
· the processing, refinement and sale of vegetable oils;
· the exploration, conservation, storage and sale of grains, their derivatives and by products;
126
· reforestation activities and other activities involving the extraction, processing and sale of wood;
· the wholesale and resale of consumer and manufactured goods, including the sale of equipment and vehicles used in logistical activities;
· the export and import of manufactured and consumer goods;
· participation in other companies, which may increase our ability to attain our other purposes; and
· participating in projects that are necessary for the operation of the business of our company.
The Brazilian Corporation Law forbids us to engage in any business practices inconsistent with our corporate purpose and core business, including the granting of pledges, collateral, endorsement or any guarantees not related to our corporate purpose or contrary to our bylaws, except for those practices already engaged in, and any such practices will be null and void.
Restrictions on Certain Activities
Our bylaws prohibit us from granting financing or guarantees to third parties in transactions outside the ordinary course of our business.
Rights of Common Shares
At our shareholders’ meetings, each share of common stock is generally entitled to one vote. Pursuant to our bylaws and to the Novo Mercado listing agreement, we may not issue shares without voting rights or with restricted voting rights. In addition, our bylaws and the Brazilian Corporation Law provide that holders of our shares are entitled to dividends or other distributions made in respect of our shares ratably in accordance with their respective participation in the total amount of our issued and outstanding shares. See “— Payment of Dividends and Interest on Shareholders’ Equity” for a more complete description of the payment of dividends and other distributions on our shares. In addition, upon our liquidation, holders of our shares are entitled to share our remaining assets, after payment of all of our liabilities, ratably in accordance with their respective participation in the total amount of our issued and outstanding shares. Common shareholders have, except in certain circumstances listed in the Brazilian Corporation Law and in our Bylaws, the right to participate in our company’s future capital increases, in proportion to their participation in our capital stock, and also the right to dispose of shares in a public offering in case of acquisition of shares in quantities equal to or in excess of 20% of total shares issued in the offering, in compliance with the terms and conditions provided in Article 37 of our bylaws.
According to the Brazilian Corporation Law, neither our bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of the following rights:
· The right to participate in the distribution of profits;
· the right to participate equally and ratably in any remaining residual assets in the event of our liquidation;
· preemptive rights in the event of issuance of shares, convertible debentures or warrants, except in certain specific circumstances under Brazilian Corporation Law described under “—Preemptive Rights”;
· the right to monitor our management in accordance with the provisions of the Brazilian Corporation Law; and
· the right to withdraw from our company in the cases specified in the Brazilian Corporation Law, which are described under “—Withdrawal Rights.”
127
Meeting of Shareholders
Under the Brazilian Corporation Law, our shareholders are generally empowered at our shareholders’ meetings to take any action relating to our corporate purposes and to pass resolutions that they deem necessary to our interests and development at duly called and convened general meetings. Shareholders at our annual shareholders’ meeting, which is required to be held within 120 days of the end of our fiscal year, have the exclusive right to approve our audited financial statements and to determine the allocation of our net profits and the distribution of dividends with respect to the fiscal year ended immediately prior to the relevant shareholders’ meeting. The election of our directors typically takes place at the annual shareholders’ meeting, although under Brazilian Corporation Law it may also occur at an extraordinary shareholders’ meeting. Members of the fiscal council (conselho fiscal), if the requisite number of shareholders requests its establishment, may be elected at any shareholders’ meeting.
An extraordinary shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year. Under our bylaws and the Brazilian Corporation Law, the following actions, among others, may be taken only at a shareholders’ meeting:
· amendment of our bylaws;
· election and dismissal, at any time, of the members of our board of directors and fiscal council and approval of their aggregate compensation;
· approval of management accounts and our audited financial statements;
· granting stock awards and approval of stock splits or reverse stock splits;
· approval of stock option plans for our management and employees, as well as stock option plans for companies directly or indirectly controlled by us;
· authorization of the issuance of convertible debentures and/or secured debentures;
· suspension of the rights of a shareholder;
· approval, in accordance with the proposal submitted by our board of directors, of the distribution of our profits and payment of dividends, as well as the establishment of any reserve other than the legal reserve;
· acceptance or rejection of the valuation of in-kind contributions offered by a shareholder in consideration for issuance of shares of our share capital;
· approval of our transformation, merger, consolidation, spin-off;
· approval of any dissolution or liquidation, and the appointment and dismissal of a liquidator, as well as the members of our fiscal council, which shall be installed in the event of our liquidation if it does not already exist at the time;
· authorization to delist from the Novo Mercado and to become a private company, as well as to retain a specialized firm to prepare a valuation report with respect to the value of our shares in such circumstances; and
· authorization to petition for bankruptcy or file a request for judicial or extra-judicial restructuring.
128
Quorum
As a general rule, the Brazilian Corporation Law provides that the quorum for our shareholders’ meetings consists of shareholders representing at least 25% of our issued and outstanding shares on the first call and, if that quorum is not reached, any percentage on the second call. If the shareholders are convened to amend our bylaws, a quorum at a shareholders’ meeting consists of shareholders representing at least two-thirds of our issued and outstanding share capital entitled to vote on the first call and any percentage on the second call. In most cases, the affirmative vote of shareholders representing at least the majority of our issued and outstanding shares present in person or represented by proxy at a shareholders’ meeting is required to ratify any proposed action, and blank votes are not counted as shares present in person or represented by proxy. However, the affirmative vote of shareholders representing not less than one-half of our issued and outstanding shares is required to, among other measures:
· reduce the percentage of mandatory dividends;
· change our corporate purpose;
· consolidate with or merge our company into another company;
· spin off assets of our company;
· approve our participation in a centralized group of companies;
· apply for cancellation of any voluntary liquidation;
· approve our dissolution; and
· approve the merger of all of our shares into another Brazilian company.
A quorum smaller than the quorum established by the Brazilian Corporation Law may be authorized by the CVM for a public company with widely traded and held shares that has had at least half of the holders of its voting shares in attendance at its last three shareholders’ meetings.
Elimination of or amendment to limit shareholders’ rights under Article 37 of our bylaws, which requires any shareholder who becomes the holder of 20% or more of our total capital stock to effect a public tender offer for all of our outstanding stock, is permitted only when approved by the majority of shareholders present at the shareholders’ meeting. The shareholders who approve such elimination or amendment must launch a public tender offer in accordance with the rules established by Article 37 of our bylaws.
Notice of Shareholders’ Meetings
Under the Brazilian Corporation Law, notice of each of our shareholders’ meetings must be published at least three times in the Diário Oficial do Estado de Santa Catarina, the official newspaper of the State of Santa Catarina, and in another widely circulated newspaper in the same state, which is currently the Diário Catarinense. In addition, in accordance with CVM rules, we must publish a notice of the shareholders’ meeting and other official documents in a newspaper specializing in business matters called Valor Econômico. Such notice must contain the agenda for the meeting and, in the case of an amendment to our bylaws, a summary of the proposed amendment. The first notice must be published at least 15 days before the date of the meeting on the first call, and no later than eight days before the date of the meeting on second call. However, pursuant to our bylaws, the shareholders’ meeting to approve our delisting from the Novo Mercado or a going private transaction must be called not less than 30 days prior to the meeting. In certain other circumstances, the CVM may require that the first notice be published not later than 30 days prior to the meeting. In addition, upon request of any shareholder, the CVM may suspend for up to 15 days the required prior notice of an extraordinary shareholders’ meeting so that the CVM can become familiar with and analyze the proposals to be submitted at the meeting and, if applicable, inform the company, up to the end of the suspension period, the reasons why it believes that a proposed resolution violates legal or regulatory provisions.
129
Location of Shareholders’ Meetings
Our shareholders’ meetings take place at our head offices in the City of Itajaí, State of Santa Catarina. The Brazilian Corporation Law allows our shareholders to hold meetings in another location in the event of force majeure, provided that the meetings are held in the City of Itajaí and the relevant notice includes a clear indication of the place where the meeting will occur.
Calling of Shareholders’ Meetings
Our board of directors may call shareholders’ meetings. Shareholders’ meetings also may be called by:
· any shareholder, if our board of directors fails to call a shareholders’ meeting within 60 days after the date it is required to do so under applicable law and our bylaws;
· shareholders holding at least 5% of our shares, if our board of directors fails to call a meeting within eight days after receipt of a request to call the meeting by those shareholders indicating the reasons for calling such a meeting and the proposed agenda;
· shareholders holding at least 5% of our shares if our board of directors fails to call a meeting within eight days after receipt of a request to call a meeting to approve the creation of a fiscal council;
· our fiscal council, if the board of directors fails to call an annual shareholders’ meeting within one month after the date it is required to do so under applicable law and our bylaws. The fiscal council may also call an extraordinary general shareholders’ meeting if it believes that there are important or urgent matters to be addressed; and
· any co-chairman of our board of directors, within two days of a determination by the São Paulo Stock Exchange that the prices of our common shares must be quoted separately from other Novo Mercado securities or following the suspension of trading of our shares on the Novo Mercado, in each case, due to our non-compliance with the Novo Mercado regulations. All members of our board of directors must be replaced at such shareholders’ meeting. If any co-chairman of the board of directors fails to call such shareholders’ meeting within the prescribed time limit, any shareholder of our company may do so.
Conditions of Admission
Our shareholders may be represented at a shareholders’ meeting by a proxy appointed less than a year before the meeting, which proxy must be either a shareholder, a corporate officer, a lawyer or, in the case of a publicly traded company, such as our company, a financial institution. An investment fund shareholder must be represented by its investment fund officer or a proxy.
Pursuant to our bylaws, shareholders attending a shareholders’ meeting must deliver, at least five days prior to the shareholders’ meeting, proof of their status as shareholders and proof that they hold the shares they intend to vote by delivery of proper identification and, if necessary, a receipt issued by the custodian agent, a power of attorney (if the shareholder is represented by a third party) and/or an extract evidencing the holding of registered shares.
In inspecting the validity of documents submitted with respect to shareholder representation, we apply the principle of good faith. Unauthenticated copies of documents or those bearing no verified signature, when not required by law, are permitted and confer entitlement to fully exercise shareholders’ rights, provided that the person concerned undertakes to present the original documents or the equivalent required by us within five working days after the shareholders’ meeting. If the shareholder does not submit the originals or equivalent required by us within the deadline, his or her vote shall be disregarded, and he or she shall be responsible for any loss or damage that his act has caused us.
130
Board of Directors
Under our bylaws, our board of directors consists of up to 11 members and an equal number of alternates. The members of our board of directors are elected at the annual shareholders’ meeting for a period of two years and may be reelected. At least 20% of the directors must be independent (as defined in the Novo Mercado regulations). There is no mandatory retirement age for our directors.
Under the Novo Mercado rules, the members of our board of directors must, prior to taking office, sign a compliance statement subscribing to the Novo Mercado rules and Arbitration Regulations of the Arbitration Chamber of the São Paulo Stock Exchange.
Pursuant to our bylaws, a shareholder who intends to nominate one or more members of our board of directors, other than the current members of the board of directors, must notify us in writing at least five days prior to the shareholders’ meeting at which the members of the board of directors will be elected, providing us with the name and resume of the candidate. In case we receive such a notification, we must disclose our receipt and the contents of such notification (1) immediately in electronic form to the CVM and the São Paulo Stock Exchange and (2) through a press release to our shareholders, within not less than three days after receipt of such notification, considering only the days the newspapers generally used by us are published.
Shareholders who fail to provide notice of their intention of appointing members to our board of directors may be deprived from appointing these members at the shareholders’ meeting. We believe that this provision is valid and enforceable as it provides other shareholders with the opportunity to learn about the candidates and prepare themselves and, if they so desire, to attend and vote at the respective shareholders meeting. In case of any dispute arising from efforts to appoint members that were not previously notified under the terms required by our bylaws, such dispute may be submitted to arbitration in accordance with the rules of Novo Mercado.
The Brazilian Corporation Law sets forth that a multiple vote system must be made available upon request of shareholders representing at least 10% of our voting share capital. The multiple vote system entitles each shareholder to as many votes as there are members of the board of directors for each share it holds. Further, shareholders have the right to allocate their votes to one candidate or several. Under CVM Instruction 282, the minimum percentage of voting capital required for the adoption of the multiple vote system by a publicly held company may be reduced based on its share capital, varying from 5% to 10%. In our case, considering the amount of our share capital, shareholders representing 5% of the voting capital may request the adoption of the multiple vote system to elect the members of our board of directors. If there is no request for the adoption of the multiple vote system, directors are elected by a majority of the shareholders of our issued and outstanding common shares present in person or represented by proxy at a shareholders’ meeting, except that any minority shareholders that, individually or collectively, hold at least 10% of the common shares have the right to select one director and his or her alternate. The members of our board of directors are elected at our annual shareholders’ meetings for two-year terms.
Under our bylaws, if multiple voting is not requested, the members of our board of directors may decide, by a majority of the members present, to propose a complete list of candidates to replace vacancies. In the event multiple voting is requested, each candidate from the list proposed by the board of directors will be considered one candidate for the board of directors.
Pursuant to our bylaws, if a shareholder requests the adoption of the multiple vote system, as provided by Section 141 of the Brazilian Corporation Law, we must disclose our receipt and the contents of such notification (1) immediately in electronic form to the CVM and the São Paulo Stock Exchange, and (2) through a press release to our shareholders, within not more than two days after receipt of such notification, considering only the days the newspapers generally used by us are published.
On July 8, 2009, the Company’s bylaws were amended to implement a new structure for the board of directors, now presided over by two co-chairmen and with a total of 11 members.
131
The shareholders approve the aggregate compensation of the members of the board of directors and fiscal council for each fiscal year. The board of directors decides the allocation of the compensation among its members and the members of the fiscal council.
Fiscal Council
Under the Brazilian Corporation Law, the fiscal council is an outside auditing body independent of the company’s management. Its main responsibility is to inspect the actions of the management and audit our consolidated financial statements, reporting its observations to the shareholders.
We have a permanent fiscal council composed of three members and an equal number of alternates. Under the Novo Mercado rules, the members of the fiscal council must, prior to taking office, sign a compliance statement subscribing to the Novo Mercado Listing Regulations and Arbitration Regulations of the Arbitration Chamber.
Members of the fiscal council may not be members of the board of directors, officers or an employee of a controlled company or a company from the same group, nor may they be the spouse or relative of any of our officers. The Brazilian Corporation Law also requires that members of the fiscal council receive remuneration, at a minimum, in the amount of 10% of the average remuneration paid to directors, excluding other benefits. At least one of the members of our fiscal council must have a background in accounting, auditing and finance, which qualifies him or her as a financial expert. According to our bylaws, a member of the fiscal council shall not act as a member of more than two other corporate bodies, such as the board of directors, fiscal council or audit committee.
Transactions in Which Directors and Officers Have a Conflict of Interest
Our bylaws contain a specific provision limiting the right of a director to vote on a proposal, arrangement or contract in which the director has an interest that conflicts with our interests. In addition, the Brazilian Corporation Law prohibits a director or officer from:
· performing any charitable act at our expense, except for such reasonable charitable acts for the benefit of employees or of the community in which we participate, upon approval by the board of directors or the executive officers;
· by virtue of the director’s or officer’s position, receiving any type of direct or indirect personal advantage from third parties without authorization in our bylaws or from a shareholders’ meeting;
· borrowing money or property from us or using our property, services or credits for the director’s or officer’s own benefit, for the benefit of a company in which the director or officer has an interest or of a third party, without the prior approval at a shareholders’ meeting or of our board of directors;
· taking part in any corporate transaction in which the director or officer has an interest that conflicts with our interests, or in the decisions made by other directors or officers on the matter;
· using, for its own benefit or for the benefit of third parties, commercial opportunities made known to it as a result of its participation in our management;
· failing to exercise or protect our rights or, for the purposes of obtaining benefits for itself or third parties, failing to take advantage of business opportunities for us; and
· purchasing, for resale, assets or rights known to be of interest to us or necessary for our activities.
132
Allocation of Net Income and Distribution of Dividends
Calculation of Distributable Amount
At each annual shareholders’ meeting, our board of executive officers and our board of directors are required to recommend how to allocate our net profits, if any, from the preceding fiscal year. This allocation is subject to deliberation by our shareholders.
The Brazilian Corporation Law defines “net profits” for any fiscal year as net profits after income and social contribution taxes for that fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our net profits in such fiscal year. Our board of directors’ and board of executive officers’ participation in our net profits, when allocated, can be in an amount approved at the shareholders’ meeting up to 10% of our net profits in such fiscal year.
Our bylaws provide that an amount equal to 25% of our net profits, if any, as reduced by amounts allocated to our legal reserves and contingency reserves, and increased by any reversals of our contingency reserves, if any, must be allocated for dividend distributions or payment of interest on shareholders’ equity in any particular year. This dividend is limited to the realized portion of our net profits, which amount is the minimum mandatory dividend. The calculation of our net profits, allocations to reserves and distributable amounts are determined on the basis of our unconsolidated financial statements prepared in accordance with the Brazilian Corporation Law.
Profit Reserve Accounts
The financial statements of corporations constituted under Brazilian law include two principal reserve accounts: profit reserves and capital reserves. Except for the legal reserve, allocations to any reserve are subject to the approval of our shareholders at our annual shareholders’ meetings.
Profit Reserves
Under the Brazilian Corporation Law, our profit reserves account is comprised of the legal reserve, unrealized profits reserve, contingency reserve, bylaw reserves and retained earnings reserve. Allocations to each of these reserves (other than the legal reserve) are subject to approval by company’s shareholders at annual shareholders’ meeting.
Legal Reserve
Under the Brazilian Corporation Law and our bylaws, we are required to maintain a legal reserve to which we must allocate 5% of net profits for each fiscal year until the aggregate amount in the reserve equals 20% of share capital. However, we are not required to make any allocations to legal reserve in a fiscal year in which the legal reserve, when added to established capital reserves, exceeds 30% of total capital. The amounts to be allocated to such reserve must be approved by company’s shareholders at a shareholders’ meeting and may only be used to increase share capital or to absorb losses, but are not available for distribution. At December 31, 2011, we had a legal reserve of R$179.6 million.
Unrealized Profit Reserve
Under the Brazilian Corporation Law, the amount by which the distributable amount exceeds realized net profits in a given fiscal year may be allocated to unrealized profits reserves. The Brazilian Corporation Law defines realized net profits as the amount by which net profits exceed the sum of (1) the portion of net income, if any, attributable to earnings and losses of subsidiaries and affiliates accounted for using the equity method of accounting and (2) the profits, gains or returns that will be received by company after the end of the next fiscal year. The profits allocated to the unrealized profits reserves must be added to the next mandatory minimum dividend distribution after those profits have been realized, if they have not been used to absorb losses in subsequent periods. At December 31, 2011, we did not have an unrealized profits reserve.
133
Contingency Reserve
Under the Brazilian Corporation Law, a percentage of net profits may be allocated to a contingency reserve for estimable losses that are considered probable in future years. Any amount so allocated in a prior year must either be reversed in the fiscal year in which the loss had been anticipated if the loss does not occur as projected or be offset in the event that the anticipated loss occurs. At December 31, 2011, we did not have a contingency reserve.
Bylaw Reserves
Under the Brazilian Corporation Law, any corporation may provide in its bylaws for additional reserves, provided that the maximum amount that may be allocated, the purpose and allocation criteria of the reserve are specified. Our bylaws provide for two additional reserves:
· Reserves for increases in capital. 20% of adjusted net profits for each fiscal year must be allocated to reserves for increases in capital until the aggregate amount in such reserve equals 20% of share capital. At December 31, 2011, we had reserves for increases in capital of R$545.8 million.
· Expansion reserves. Under our bylaws, shareholders may decide at a meeting to retain a portion of net profits to allocate to an expansion reserve, up to a limit of 80% of share capital. This reserve is intended to minimize the effects of a decrease in our working capital. At December 31, 2011, we had an expansion reserve of R$978.6 million.
· Reserves for tax incentives. Under our bylaws, shareholders may decide at a meeting to retain a portion of net profits arising from donations on government grants for investment to allocate to a reserve for tax incentives. This reserve can be excluded from the calculation basis of the mandatory minimum dividends. At December 31, 2011, we had a reserve for tax incentives of R$56.5 million.
Retained Earnings Reserves
Under the Brazilian Corporation Law, our shareholders may decide at a general shareholders’ meeting to retain a portion of our net profits that is provided for in a capital expenditure budget. At December 31, 2011, we did not have a retained earnings reserve.
Capital Reserves
Under the Brazilian Corporation Law, the capital reserve consists of the share premium from the issuance of shares, goodwill reserves from mergers, sales of founders’ shares, sales of subscription warrants, premium from the issuance of debentures, tax and fiscal incentives and donations. Amounts allocated to our capital reserve are not taken into consideration for purposes of determining the mandatory minimum dividends. We are not allowed to issue founders’ shares. In addition, the remaining balance in the capital reserve may only be used to increase share capital, to absorb losses that surpass accumulated profits and the profit reserves or to redeem, reimburse or purchase shares. At December 31, 2011, we had a capital reserve of R$76.3 million.
Payment of Dividends and Interest on Shareholders’ Equity
The bylaws of a Brazilian company must specify a minimum percentage of profit available for distribution, which must be paid to shareholders as mandatory dividends or as interest on shareholders’ equity. Consistent with the Brazilian Corporation Law, our bylaws provide that an amount equal to 25% of our net profits, adjusted as described in “—Allocation of Net Income and Distribution of Dividends” above, must be allocated for dividend distributions or payment of interest on shareholders’ equity in a particular year.
While we are required under the Brazilian Corporation Law to pay a mandatory dividend each year, we may suspend the mandatory dividends if our administrative bodies report to our annual shareholders’ meeting that the distribution is incompatible with our financial condition. Our fiscal council, if in operation, must review any suspension of mandatory dividends recommended by our management. In such case, our management would be required to submit a report to the CVM setting forth the reasons for any suspension of dividends. Profits not distributed by virtue of such a suspension are allocated to a special reserve and, if not absorbed by any subsequent losses, are required to be distributed as dividends as soon as our financial condition permits their distribution.
134
We are able to allocate mandatory dividends in the form of interest on shareholders’ equity, which is deductible when calculating our income tax and social contribution. We have done so in the past and expect to continue to do so in the foreseeable future.
Dividends
We are required by the Brazilian Corporation Law and our bylaws to hold an annual shareholders’ meeting no later than the fourth month following the end of each fiscal year at which, among other things, the shareholders must vote to declare an annual dividend. The annual dividend is calculated based on our audited financial statements prepared for the immediately preceding fiscal year.
Any holder of shares on the date the dividend is declared is entitled to receive the dividend. Under the Brazilian Corporation Law, dividends are generally required to be paid within 60 days of the declaration date, unless the shareholders’ resolution establishes another date of payment, which, in any case, must occur before the end of the fiscal year in which the dividend is declared.
Our bylaws do not require that we index the amount of any dividend payment to inflation.
Our board of directors may declare interim dividends or interest on shareholders’ equity based on realized profits reflected in semiannual financial statements. The board of directors may also declare dividends based on financial statements prepared for shorter periods, but they cannot exceed the amount of capital reserves. Any payment of interim dividends may be set off against the amount of mandatory dividends relating to the net profits earned in the year in which the interim dividends were paid.
Interest on Shareholders’ Equity
Since January 1, 2006, Brazilian companies are permitted to pay interest on shareholders’ equity and treat those payments as a deductible expense for purposes of calculating Brazilian income tax and social contribution tax. The amount of the deduction is limited to the greater of: (1) 50% of our net profits (after deduction of social contribution and before payment of any interest or any deduction for income taxes) relating to the period to which the payment is made; and (2) 50% of our accumulated profits. The payment of interest on shareholders’ equity is an alternative to the payment of mandatory dividends. The rate applied in calculating interest on shareholders’ equity cannot exceed the TJLP rate for the applicable period. The amount distributed to our shareholders as interest on shareholders’ equity, net of any income tax, may be included as part of the mandatory dividends. In accordance with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net amount they receive in respect of interest on shareholders’ equity, after payment of any applicable withholding tax plus the amount of declared dividends, is at least equivalent to the mandatory dividend amount. For more information, see “E. Taxation—Brazilian Tax Considerations—Income Tax.”
Any payment of interest on shareholders’ equity to holders of common shares or ADRs, whether or not they are Brazilian residents, is subject to Brazilian withholding tax at the rate of 15%, except that a 25% withholding tax rate applies if the recipient is a resident of a tax haven jurisdiction. A tax haven jurisdiction is a country (1) that does not impose income tax or whose income tax rate is lower than 20% or (2) that does not permit disclosure of the identity of shareholders of entities organized under its jurisdiction. Under our bylaws, we may include the amount distributed as interest on shareholders’ equity, net of any withholding tax, as part of the mandatory dividend amount.
There are no restrictions on our ability to distribute dividends that have been lawfully declared under Brazilian law. However, as with other types of remittances from Brazil, the Brazilian government may impose temporary restrictions on remittances to foreign investors of the proceeds of their investments in Brazil, as it did for approximately nine months in 1989 and early 1990, and on the conversion of Brazilian currency into foreign currencies, which could hinder or prevent the depositary from converting dividends into U.S. dollars and remitting these U.S. dollars abroad.
135
Prescription
Our shareholders have three years to claim dividend distributions made with respect to their shares, from the date that we distribute the dividends to our shareholders, after which any unclaimed dividend distributions legally revert to us. We are not required to adjust the amount of any distributions for inflation that occurs during the period from the date of declaration to the payment date.
Withdrawal Rights
Shareholders who dissent from certain actions taken by our shareholders at a shareholders’ meeting have withdrawal rights. Under the Brazilian Corporation Law, a shareholder’s withdrawal rights may be exercised in the following circumstances, among others:
· spin-off (as described below);
· reduction in our mandatory dividends;
· change in our corporate purpose;
· consolidation with or merger into another company;
· participation in a group of companies (as defined in the Brazilian Corporation Law); or
· the acquisition by our company of the control of any company if the acquisition price exceeds the limits established in the second paragraph of Article 256 of the Brazilian Corporation Law.
However, under the Brazilian Corporation Law, a spin-off will not trigger withdrawal rights unless, as a result:
· there is a change in our corporate purpose, except to the extent that the principal business purpose of the entity to which the spun-off assets and liabilities were transferred is consistent with our business purpose;
· there is a reduction in our mandatory dividend; or
· we are made part of a centralized group of companies, as defined in the Brazilian Corporation Law.
In cases where we:
· merge into or consolidate with another company;
· participate in a group of companies (as defined in the Brazilian Corporation Law);
· participate in a merger of shares; or
· acquire the control of any company if the acquisition price exceeds the limits established in the second paragraph of Article 256 of the Brazilian Corporation Law,
our shareholders will not be given withdrawal rights if our shares (1) are “liquid,” which means that they are part of the São Paulo Stock Exchange Index or another traded stock exchange index, as defined by the CVM, and (2) are widely held, such that our controlling shareholders and their affiliates jointly hold less than 50% of the type or class of shares that are being withdrawn.
136
The right to withdraw expires 30 days after publication of the minutes of the relevant shareholders’ meeting. We are entitled to reconsider any action giving rise to withdrawal rights for ten days after the expiration of this period if we determine that the redemption of shares of dissenting shareholders would jeopardize our financial stability.
Any shareholder who exercises withdrawal rights is entitled to receive book value for its shares, based on our most recent audited balance sheet approved by our shareholders. However, if the resolution giving rise to the withdrawal rights is made more than 60 days after the date of our most recent balance sheet, a shareholder may request that its shares be valued in accordance with a new balance sheet dated no more than 60 days prior to the date of the resolution. In such case, we are obligated to pay 80% of the refund value of the shares based on the most recent balance sheet approved by our shareholders, and the remaining balance must be paid within 120 days after the date of the resolution at the shareholders’ meeting that gave rise to withdrawal rights based on the new balance sheet.
Redemption
Under the Brazilian Corporation Law, we may redeem our shares by a decision taken in an extraordinary shareholders’ meeting by shareholders representing at least 50% of our share capital.
Preemptive Rights
Except as described below, each of our shareholders has a general preemptive right to participate in any issuance of new shares, convertible debentures and warrants, in proportion to its shareholding at such time, but the conversion of debentures and warrants into shares, the granting of options to purchase shares and the issuance of shares as a result of the exercise of options are not subject to preemptive rights.
A period of at least 30 days following the publication of notice of the issuance of shares, convertible debentures or warrants is allowed for the exercise of the preemptive right, and the right may be transferred or disposed of for value. Under the terms of Article 172 of the Brazilian Corporation Law and our bylaws, our board of directors may reduce or exclude preemptive rights or reduce the exercise period with respect to the issuance of new shares, debentures convertible into our shares and warrants up to the limit of our authorized stock capital if the distribution of those securities is effected through a stock exchange, through a public offering or through an exchange offer for shares in a public offering the purpose of which is to acquire control of another company.
Anti-Takeover Effects of Provisions in Bylaws
Our bylaws contain provisions that have the effect of avoiding concentration of our shares in the hands of a small group of investors, in order to promote more widespread ownership of our shares. These provisions require each shareholder who becomes the holder of 20% or more of our total share capital to, within 30 days from the date of such acquisition, commence a public tender offer to buy all of our outstanding shares in accordance with the CVM and the São Paulo Stock Exchange regulations and our bylaws. These provisions are triggered by the acquisition of beneficial ownership as well as record ownership of our shares.
These provisions are not applicable to shareholders who become holders of 20% or more of our shares as a result of (1) legal succession, provided that the shareholder sells any shares in excess of the 20% limit within 60 days of the event, (2) the merger of another company into us, (3) the merger of shares of another company by us and (4) the acquisition of 20% or more of our shares through a primary offering that has been approved at a shareholders’ meeting duly called by our board of directors, provided that the share issue price has been set based on the economic value of the shares, as determined by a valuation report prepared by a specialized and independent firm.
137
Involuntary capital increases resulting from cancellation of treasury shares or capital reductions with cancellation of shares will not be considered in the calculation of the 20% of total shares issued by us.
The public tender offer must be (1) directed to all our shareholders, (2) made through an auction to take place at the São Paulo Stock Exchange, (3) launched at a fixed price in accordance with the procedure set forth below and (4) paid upfront in Brazilian currency. The price per share in the public tender offer shall be equivalent to at least the greatest of: (a) the economic value of our company, determined pursuant to Article 37 of our bylaws; (b) 135% of the issue price of the shares issued in any capital increase through a public offering that takes place within the preceding 24-month period; and (c) 135% of the market price of our shares within the preceding 30-day period. In the event CVM regulations applicable to the public tender offer require the adoption of a share price calculation criterion that results in a higher share price, the price set in accordance with the CVM regulations will prevail.
The realization of the public tender offer does not exclude the right of another of our shareholders or of our company to launch a competing public tender offer in accordance with applicable regulations.
All shareholders who vote in favor of an amendment to the provisions of our bylaws that results in the limitation of this public tender offer obligation or the elimination of this mechanism are obligated to launch a public tender offer based on the existing rules.
Restriction on Certain Transactions by Controlling Shareholders, Directors and Officers
We are subject to the rules of CVM Instruction 358, of January 3, 2002, relating to the trading of our securities. We, the members of our board of directors, executive officers and members of our fiscal council and members of any technical or advisory body, any current or future controlling shareholders, or whomever or whatever, by virtue of their or its title, duty or position with us, or with any such controlling shareholder, controlled company or affiliates, has knowledge of a material fact, and any other person who has knowledge of material information and knows it has not been disclosed to the market (including auditors, analysts, underwriters and advisers), are considered insiders and must abstain from trading our securities, including derivatives based on our securities, prior to the disclosure of such material information to the market.
This restriction also applies:
· to any of our former officers, directors or members of the fiscal council for a six-month period, if any such officer, director or member of the fiscal council left office prior to disclosure of material information that occurred while in office;
· if we intend to merge or combine with another company, consolidate, spin off part or all of our assets or reorganize, until such information is disclosed to the market;
· to us, if an agreement for the transfer of our control has been executed, or if an option or mandate to such effect has been granted, until such information is disclosed to the market;
· during the 15-day period before the disclosure of our quarterly and annual financial statements required by the CVM; or
· to the controlling shareholders, our officers, and members of our board of directors, whenever we, or any of our controlling companies, affiliates or companies under common control, are in the process of purchasing or selling shares issued by us.
Arbitration
In accordance with our bylaws, we, our shareholders, directors and members of our fiscal council agree to resolve through arbitration any disputes or controversies that may arise between us relating to or derived from, in particular, the application, validity, enforceability, interpretation or breach (and its effects) of the Novo Mercado listing agreement, Novo Mercado rules, our bylaws, the shareholders’ agreements filed at our headquarters, the Brazilian Corporation Law, the rules published by the CMN, the Central Bank, the CVM, the other rules applicable to the Brazilian capital markets in general or the rules of the Market Arbitration Chamber of the São Paulo Stock Exchange itself, in each case in accordance with the rules of the Market Arbitration Chamber. According to Chapter 12 of these Rules, the parties may consensually agree to use another arbitration chamber or center to resolve their disputes.
138
Going-Private Process
We may become a private company by decision of any controlling shareholder or group of controlling shareholders only if we or such controlling shareholders conduct a public tender offer to acquire all of our outstanding shares in accordance with the rules and regulations of the Brazilian Corporation Law and CVM regulations. The minimum price offered for the shares in the public tender offer must correspond to the economic value of such shares, as determined by an appraisal report issued by a specialized firm.
The appraisal report must be prepared by a specialized and independent firm of recognized experience chosen by shareholders representing the majority of the outstanding shares of the shareholders present at the meeting (excluding, for such purposes, the shares held by any controlling shareholder, its partner and any dependents included in the income tax statement (should the controlling shareholder be an individual), treasury shares, shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes) from a list of three institutions presented by our board of directors. All the expenses and costs incurred in connection with the preparation of the appraisal report must be paid for by the controlling shareholder that wishes to take the company private.
Shareholders holding at least 10% of our outstanding shares (as adjusted in the manner described in the prior paragraph) may require our management to call an extraordinary shareholders’ meeting to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the shares in the public tender offer and must be justified. The shareholders who make such request, as well as those who vote in its favor, must reimburse us for any costs involved in preparing the new valuation if the new valuation price is not higher than the original valuation price. If the new valuation price is higher than the original valuation price, the public tender offer must be made at the higher price or cancelled, and this decision must be announced to the market in accordance with Brazilian law.
If our shareholders determine to take us private and at that time we are controlled by a shareholder holding less than 50% of our total share capital or by a shareholder who is not a member of a group of shareholders (as defined in our bylaws), we must conduct the public tender offer, within the limits imposed by law. In this case, subject to applicable regulation, we may only purchase shares from shareholders who have voted in favor of our becoming a private company after purchasing all shares from the other shareholders who voted against going private and who have accepted the public tender offer.
Delisting from the Novo Mercado
At any time, we may delist our shares from the Novo Mercado, provided that shareholders representing the majority of our shares approve the action and that we give at least 30 days’ written notice to the São Paulo Stock Exchange. The deliberation must specify if the delisting will occur because the securities will no longer be traded on the Novo Mercado, or because we are going private. Our delisting from the Novo Mercado will not result in the loss of our registration as a public company on the São Paulo Stock Exchange.
If we delist from the Novo Mercado, by deliberation taken at a shareholders’ meeting, our controlling shareholder or group of controlling shareholders must conduct a public tender offer for the acquisition of our outstanding shares.
The price per share shall be equivalent to the economic value of those shares as determined in a valuation report prepared by a specialized and independent company of recognized experience, which will be chosen at a shareholders’ meeting from a list of three institutions presented by our board of directors by a majority of the outstanding shares of the shareholders present at the meeting (excluding, for such purposes, the shares held by any controlling shareholder, its partner and dependents included in the income tax statement (should the controlling shareholder be an individual), treasury shares, shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes). All the expenses and costs incurred in connection with the preparation of the valuation report must be paid by the controlling shareholder undertaking the delisting.
139
If we are subject to widespread ownership, our delisting from the Novo Mercado, either for our shares to be traded outside the Novo Mercado or as a result of a corporate reorganization, the shareholders that voted in favor of such resolution must conduct a public tender offer for the acquisition of our shares in accordance with applicable regulations.
Pursuant to our bylaws, we may also be delisted if the São Paulo Stock Exchange decides to suspend trading of our shares on the Novo Mercado due to our non-compliance with the Novo Mercado regulations. In such a case, the chairman of the board of directors must call a shareholders’ meeting within two days of the determination by the São Paulo Stock Exchange in order to replace all members of our board of directors. If the chairman of the board of directors does not call the shareholders’ meeting, any shareholder may do so. The new board of directors will be responsible for compliance with the requirements that resulted in the delisting.
Additionally, if we delist from the Novo Mercado (1) as a result of our non-compliance with the Novo Mercado regulations resulting from a decision taken at our shareholders’ meeting, the public tender offer must be conducted by the shareholders who voted in favor of the decision, or (2) as a result of our non-compliance with the Novo Mercado regulations resulting from acts of our management, we must conduct the public tender offer in order to become a private company, within the limits imposed by law.
Under the Novo Mercado listing regulations, in the event of a transfer of control of our company within 12 months following our delisting from the Novo Mercado, the selling controlling shareholders and the acquirer must offer to acquire the remaining shares for the same price and terms offered to the selling controlling shareholders, adjusted for inflation.
If our shares are delisted from the Novo Mercado, we will not be permitted to have shares listed on the Novo Mercado for a period of two years after the delisting date, unless there is a change in our control after the delisting from the Novo Mercado.
Widespread Ownership
There will be widespread control over our activities if such control is exercised by: (1) shareholders that hold less than 50% of our share capital; (2) shareholders that together hold a percentage greater than 50% of our share capital, provided these shareholders have not entered into voting agreements, are not under common control and are not acting in concert; and (3) shareholders that have entered into a shareholders’ agreement which together hold less than 50% of our share capital.
As set forth in our bylaws, if there is widespread ownership of our shares, then, among other things: (1) in the event we go private, we will be responsible for undertaking a public tender offer at a price corresponding to the economic value set forth in an appraisal report, provided, however, that subject to applicable regulation, we will only be able to purchase the shares owned by shareholders that voted in favor of our becoming a private company after purchasing all shares of the shareholders who voted against going private and who have accepted the public tender offer, (2) in the event we delist from the Novo Mercado as a result of a resolution of the shareholders, shareholders who voted in favor of the delisting will be responsible for conducting the public tender offer at a price corresponding to the economic value set forth in an appraisal report; and (3) in the event we delist from the Novo Mercado as a result of non-compliance with the obligations set forth in its rules, shareholders voting in favor of the decision which resulted in such noncompliance will be responsible for conducting the public tender offer at a price corresponding to the economic value set forth in an appraisal report, provided that if the non-compliance resulted from the actions of our management, we will be responsible for the public offering.
140
Change of Control
Under the rules of the Novo Mercado, the direct or indirect sale of our control, in one transaction or in a series of transactions, creates an obligation by the acquirer to complete, subject to applicable regulations, a public tender offer for the acquisition of all other outstanding shares on the same terms and conditions granted to the selling controlling shareholder.
A public tender offer is also required:
· when there is an assignment of share subscription rights or rights of other securities convertible into our shares that results in the transfer of our control; or
· in case of change of control of another company that holds control of the company. In this case, the selling controlling shareholder must inform the São Paulo Stock Exchange of the amount of the purchase price paid for control and provide the corresponding documents.
In the event we are subject to widespread ownership, the shareholder that acquires control of our company will only be obligated to conduct a public tender offer acquire our remaining shares if there is a sale of a number of shares of our share capital that entitles the acquiring shareholder, directly or indirectly, legally or in fact, effectively to control our business and orient our management. Such situations must be analyzed on a case-by-case basis. The change of control concept provided for in our bylaws and the situations in which the acquiring shareholder is required to make a public tender offer includes and may be broader than the concepts and situations provided for in the Brazilian Corporation Law and in the Novo Mercado listing regulations.
The acquirer must take all necessary measures to reconstitute the minimum 25% free float required under the Novo Mercado listing regulations within six months of the acquisition.
The controlling shareholder may not transfer the shares it holds to the purchaser of control, and we may not register the transfer of such shares, if the purchaser fails to execute the Terms of Consent to the Novo Mercado Regulations and the Rules of the Market Arbitration Chamber established by the São Paulo Stock Exchange.
Public Tender Offers
Any person who acquires or becomes a shareholder through an offering for quantities of shares equal to or greater than 20% of the total issued shares should undertake or apply for registration of a takeover bid of all shares of our offering and should comply with CVM rules, the regulations of the São Paulo Stock Exchange, and the provisions of our bylaws.
The takeover should be (1) sent immediately to all of our shareholders, (2) put in effect by public auction to be held by São Paulo Stock Exchange and (3) paid immediately in Brazilian reais. The price for the shares offered may not be less than the greater of (a) the economic value determined by an appraisal report, (b) 135% of the issue price of our shares in any capital increase carried out through public distribution occurring in the 24 months preceding the date on which the takeover is executed, as updated by the IPCA to date of payment, and (c) 135% of the average unit price of the shares of our offering during the 30 days prior to the completion of the takeover on the stock exchange where the bulk of the shares are traded.
For a detailed description of the procedures applicable to takeover bid by increased participation, see our bylaws filed as an exhibit to this Annual Report on Form 20-F.
Suspension of Rights of Acquiring Shareholder for Violation of Our Bylaws
In the event an acquiring shareholder violates the provisions of our bylaws regarding the need to conduct a public tender offer as a result of a change of control or of the purchase of shares representing 20% or more of our share capital, the rights of such acquiring shareholder may be suspended by a decision taken at our shareholders’ meeting. If such a violation occurs, we must hold a shareholders’ meeting and the acquiring shareholder will not be entitled to vote at such meeting.
141
Purchases of Our Shares by Our Company
Our bylaws entitle our board of directors to approve the acquisition of our shares. The acquisition of our shares for cancellation or maintenance in treasury may not, among other actions:
· result in a reduction of our share capital;
· require the use of resources greater than our retained earnings or reserves (other than the legal reserve, unrealized profit reserve, revaluation reserve, and special mandatory dividend reserves) recorded in our most recent balance sheet;
· create, directly or indirectly, any artificial demand, supply or share price condition, or use any unfair practice as a result of any action or omission;
· be conducted during the course of a public tender offer of our shares; or
· be used to purchase shares not fully paid or held by any controlling shareholder.
The decision to purchase our own shares must be taken by the board of directors, which shall specify: (1) the purpose of the transaction; (2) the amount of shares to be purchased; (3) the period in which we will proceed with such purchases, not to exceed 365 days; (4) the amount of the free float of our shares; and (5) the financial institutions that will act as intermediaries for such purchases.
We cannot hold in treasury more than 10% of our total shares, including the shares held by our subsidiaries and affiliates.
Any acquisition of our shares by our company must be made on a stock exchange unless prior approval for the acquisition outside a stock exchange is obtained from the CVM. The purchase price of any such shares may not exceed their market price. We also may purchase our own shares for the purpose of going private. Moreover, subject to certain limitations, we may acquire or issue put or call options related to our shares.
Reporting Requirements
We are subject to the reporting requirements established by the Brazilian Corporation Law and the regulations of the CVM. Also, as a result of our listing on the Novo Mercado, we must meet the reporting requirements of the Novo Mercado.
Information Required by the CVM
Brazilian securities regulations require that a publicly held corporation must provide the CVM and the relevant stock exchanges with the following periodic information:
· financial statements prepared in accordance with IFRS and related management and auditors’ reports, within three months from the end of its fiscal year or on the date in which they are published or made available to shareholders, whichever occurs first, together with the Demonstrações Financeiras Padronizadas (a report on a standard form containing financial information derived from our financial statements required to be filled out by us and filed with the CVM);
· notices of our annual shareholders’ meeting, on the date of its publication;
· a summary of the decisions taken at the annual general shareholders’ meeting, on the day the meeting is held;
142
· a copy of the minutes of the annual shareholders’ meeting, within ten days of its occurrence;
· Formulário de Refêrencia - a report on a standard form containing annual corporate, business, and selected financial information, within a month from the date of the annual general shareholders’ meeting; and we must update this document in accordance with Instructions 480 and 481 of the CVM;
· Informações Trimestrais - ITR (a report on a standard form containing quarterly corporate, business and financial information), together with a special review report issued by our independent auditor, within 45 days from the end of each quarter (except for the last quarter of each year) or upon disclosure of such information to the public if it occurs within 45 days from the end of the relevant quarter.
In addition to the foregoing, we must also file with the CVM and the São Paulo Stock Exchange the following information:
· a notice of any extraordinary shareholders’ meeting, on the same date it is published;
· a summary of the decisions taken at any extraordinary shareholders’ meetings, on the following day;
· minutes of any extraordinary shareholders’ meeting, within ten days of the date the meeting occurred;
· a copy of any shareholders’ agreement on the date it is filed with us;
· any press release giving notice of material facts, on the same date it is published in the press;
· information on any filing for corporate reorganization, the reason for such filing, special financial statements prepared for obtaining a legal benefit and, if applicable, a plan for payment of holders of debentures, as well as a copy of any judicial decision granting such request, on the same date it is filed and on the date we take notice of the judicial decision, respectively;
· request for information or notice of bankruptcy, the same day of notice by the Company, or the filing of a bankruptcy petition in court, as appropriate; and
· a copy of any judicial decision granting a bankruptcy request and appointing of a bankruptcy trustee, on the date we take notice of it.
Information Required by the São Paulo Stock Exchange from Companies Listed on the Novo Mercado
As a Novo Mercado company, we must observe the following additional disclosure requirements:
· no later than six months following our listing on the Novo Mercado, we must disclose financial statements and consolidated financial statements at the end of each quarter (except the last quarter of each year) and at the end of each fiscal year, including a cash flow statement that must indicate, at a minimum, the changes in our cash and cash equivalents, divided into operating, finance and investment cash flows;
· as from the date we release our financial statements relating to the second fiscal year following our listing on the Novo Mercado we must, no later than four months after the end of the fiscal year:
· release our annual financial statements and consolidated financial statements in accordance with IFRS, in reais and in the English language, including notes to the financial statements and including information on net profits and net worth calculated at the end of such fiscal year in accordance with IFRS, together with a management report and the management proposal for the allocation of net profits and our independent auditors’ report; or
143
· disclose, in the English language, the complete financial statements of BRF – Brasil Foods S.A. (parent company on an unconsolidated basis), management reports and notes to the financial statements prepared in accordance with Brazilian Corporation Law, as well as the independent auditors’ report; and
· as from the date we release our first financial statements prepared as provided above, no more than 15 days following the period established by law for the publication of quarterly financial information, we must:
· disclose, in its entirety, our quarterly financial information translated into the English language; or
· disclose our financial statements and consolidated financial statements in accordance with IFRS, accompanied by the independent auditors’ report.
Due to the listing of our shares on the Novo Mercado, we must disclose the following information, pursuant to the Novo Mercado regulations, with our quarterly information (Informações Trimestrais):
· our consolidated balance sheet, consolidated statement of income, and a discussion and analysis of our consolidated performance;
· any direct or indirect ownership interest exceeding 5% of our share capital, looking through to any ultimate individual beneficial owner;
· the number and characteristics of our shares held directly or indirectly by any controlling shareholders and members of our board of directors, board of executive officers and fiscal council;
· changes in the numbers of our shares held by any controlling shareholders and members of our board of directors, board of executive officers and fiscal council in the immediately preceding 12 months;
· our cash flow statement and consolidated cash flow statement, together with an explanatory note thereto;
· the number of shares constituting our free float and their percentage in relation to the total number of issued shares; and
· if we are party to an arbitration agreement for dispute resolution.
Information relating to the ownership interest exceeding five percent of our share capital, the number and characteristics of our shares directly or indirectly held by any controlling shareholders and members of the board of directors, board of executive officers and fiscal council, changes in the number of securities held by such persons within the immediately preceding 12 months, the number of free float shares and their respective percentage in relation to the total number of shares issued and disclosure of whether we are party to an arbitration agreement for dispute resolution must also be included in our Annual Report on Form 20-F (Informações Anuais-IAN).
Information Regarding Any Trading Carried Out by Any Controlling Shareholders, Members of Our Board of Directors, Our Board of Executive Officers or Members of Our Fiscal Council
Pursuant to the rules of the CVM and the Novo Mercado, any controlling shareholders, officers, directors, members of the fiscal council, if active, and members of any other technical or advisory committee created by our bylaws, must disclose to us, the CVM and the São Paulo Stock Exchange information in connection with the total amount and characteristics of our securities owned, directly or indirectly, or any derivatives with reference to such securities, as well as any subsequent trading of such securities and derivatives. In the case of individuals, this information must also include securities held by the spouse, companion or dependents of such persons and be included in the annual income tax statement of the controlling shareholder, officer, director or member of the fiscal council. This information must be communicated to the CVM and the São Paulo Stock Exchange by the Investor Relations Officer within ten days after the end of each month.
144
In addition, any controlling shareholders, our shareholders who have caused the election of members of our board of directors or fiscal council, as well as any individual, legal entity or group of persons acting jointly that holds directly or indirectly 5% or more of our shares must provide to us, the CVM and the São Paulo Stock Exchange the following information:
· the name and qualifications of the person acquiring the shares or other securities;
· the amount, price, type, and/or class, in the case of acquired shares, or characteristics, in the case of other securities;
· the form of acquisition (private placement, purchase through a stock exchange, among others);
· the reason and purpose of the acquisition; and
· information on any agreement regarding the exercise of voting rights or the purchase and sale of our securities.
The disclosure requirement referred to above will also apply to any person or group of persons acting jointly holding participations equal to or in excess of five percent each time such person increases or decreases its participation in our shares by an amount equal to 5% of our shares. In addition, pursuant to our bylaws, after reaching the 5% threshold, major shareholders or groups of shareholders must report any acquisition of shares that, when added to those currently held, represent more than 1% (one percent) of our share capital, or multiples of that percentage. These requirements also apply to holders of debentures convertible into our shares or subscription rights that guarantee the holder the right to acquire shares.
Disclosure of Material Developments
According to Law No. 6,385 of December 7, 1976 and subsequent amendments, and the rules published by the CVM, we must disclose any material development related to our business to the CVM and to the São Paulo Stock Exchange and must publish a notice of the material development. A development is deemed to be material if it impacts the price of our securities, the decision of investors to trade in our securities or the decision of investors to exercise any rights as holders of any of our securities. Under special circumstances, we may request confidential treatment of certain material developments from the CVM when our management believes that public disclosure could result in adverse consequences to us.
Public Meeting with Analysts
Novo Mercado regulations require that our company conduct a public meeting with analysts and any other interested parties at least once a year to disclose information regarding the company’s economic and financial situation, its projects and its expectations.
Annual Calendar
Novo Mercado regulations require that companies and their management, by the end of January of each year, disclose an annual calendar, and send a copy to the São Paulo Stock Exchange, containing all scheduled corporate events, company information, the time and place of such events and the date when the information relating to these events will be disclosed and sent to the São Paulo Stock Exchange. Amendments to the calendar must be communicated to the São Paulo Stock Exchange.
Trading on Stock Exchanges
Our shares trade on the Novo Mercado segment of the São Paulo Stock Exchange under the symbol “BRFS3.” The CVM and the São Paulo Stock Exchange have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.
145
Settlement of transactions on the São Paulo Stock Exchange occurs three business days after the trade date. Delivery of and payment for shares is made through the facilities of an independent clearinghouse. The clearinghouse for São Paulo Stock Exchange is the CBLC. The CBLC is the central counterparty for transactions effected on the São Paulo Stock Exchange, carrying out multi-party settlement for financial obligations and securities transfers. Under the regulations of the CBLC, financial settlement is carried out through the Reserve Transfer System of the Central Bank (Sistema de Transferência de Reservas). The settlement of trades of shares is carried out in the custodial system of the CBLC. All deliveries against final payment are irrevocable.
Stock Option Plan
On March 31, 2010, our shareholders approved long-term stock option plans for executive officers of BRF and Sadia. For more details, see “Item 6. Directors, Senior Management and Employees—E. Share Ownership—Stock Option Plan.” We were required to seek shareholder approval of this stock option plan, as described in “— Meeting of Shareholders” above, and we were required to disclose the stock option plan and provide the São Paulo Stock Exchange and the CVM with a copy.
Agreements Within Our Group
According to the Novo Mercado regulations, our company must disclose and send the São Paulo Stock Exchange information relating to any agreements entered into by our company with our controlled companies and affiliates, officers and any controlling shareholders, and, moreover, any agreements entered into by our company with controlled companies and affiliates of the officers and controlling shareholders as well as other companies that, together with these persons, compose a single group, in fact or in right, provided that such agreements, whether or not they involve one single agreement or successive agreements or the same or different purposes, have a value greater than or equal to R$0.2 million or 1% of our net equity in any period of one year, whichever is greater.
The information disclosed should include a description of the purpose of the relevant agreement, its term, value, termination provisions and any influence that this agreement may have over the management and operations of our company.
Regulation of Foreign Investment
Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including our common shares, on the São Paulo Stock Exchange, provided that they comply with the registration requirements set forth in Resolution No. 2,689 and CVM Instruction No. 325.
With certain limited exceptions, Resolution No. 2,689 investors are permitted to carry out any type of transaction in the Brazilian capital markets involving a security traded on a stock, future or organized over-the-counter market, but may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through private transactions. Investments and remittances outside Brazil of gains, dividends, profits or other payments under our common shares are made through the foreign exchange market.
In order to become a Resolution No. 2,689 investor, an investor residing outside Brazil must:
· appoint at least one representative in Brazil who will be responsible for complying with registration an reporting requirements and procedures with the Central Bank and the CVM. If the representative is an individual or a non-financial company, the investor must also appoint an institution duly authorized by the Central Bank that will be jointly and severally liable for the representative’s obligations;
· complete the appropriate foreign investor registration form;
· register as a foreign investor with the CVM;
· register the foreign investment with the Central Bank;
146
· appoint a tax representative in Brazil; and
· obtain a taxpayer identification number from the Brazilian federal tax authorities.
Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions on the São Paulo Stock Exchange or in organized over-the-counter markets licensed by the CVM.
C. Material Contracts
The descriptions of our material contracts provided below are qualified in their entirety by reference to the full text of the agreements attached hereto as Exhibits 4.01, 4.02 and 4.05.
Business Combination with Sadia
On May 19, 2009, we signed a merger agreement with Sadia. On July 8, 2009, the business combination was approved by the board of directors of Perdigão, Sadia and HFF, a holding company formed by the controlling shareholders of Sadia for purposes of the acquisition. As a result of those approvals, among other things, Sadia became a subsidiary of our company, and we changed our name to BRF – Brasil Foods S.A.
On July 13, 2011, the CADE approved the business combination, conditioned upon compliance with the terms of a Performance Commitment Agreement (Termo de Compromisso de Desempenho, or “TCD”) that we entered into with the CADE on July 18, 2011. We agreed to a number of measures under the TCD, and several of these are summarized under “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.”
On March 30, 2012, we entered into an agreement with Marfrig for an exchange of assets in compliance with the TCD. The terms of the Marfrig agreement are summarized under “Item 4. Information on the Company—A. History and Development of the Company—Recent Acquisitions and Investments—Business Combination with Sadia.” The transaction with Marfrig is subject to conditions precedent, including an announcement by the CADE that the agreement fulfills the conditions of the TCD. We expect the transaction to be completed by June 1, 2012.
Shareholders’ Voting Agreement
On March 6, 2006, the Pension Funds that then held 49.0% of our share capital entered into a shareholders’ voting agreement, which is summarized under “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders—Shareholders’ Voting Agreement.” The Pension Funds held 28.0% of our share capital as of March 31, 2012. Although the current shareholders’ agreement has expired, the Pension Funds continue to be guided by its terms and are currently negotiating a new shareholders’ voting agreement.
D. Exchange Controls
Before March 2005, there were two legal foreign exchange markets in Brazil, the Commercial Market and the Floating Market. The Commercial Market was reserved primarily for foreign trade transactions and transactions that generally require previous approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign individuals and related remittances of funds abroad. The Commercial Market Rate was the commercial exchange rate for conversion of Brazilian currency into U.S. dollars, as reported by the Central Bank. The Floating Market Rate was the prevailing exchange rate for conversion of Brazilian currency into U.S. dollars, and was applicable to transactions to which the Commercial Rate does not apply. Both the Commercial Market Rate and the Floating Market Rate were reported by the Central Bank on a daily basis.
Pursuant to Resolution No. 3,265, of March 4, 2005, which was revoked by Resolution No. 3,568, issued on May 29, 2008, the National Monetary Council introduced a single Foreign Exchange Market and abolished the legal differences between the Commercial and Floating Markets. Among the modifications to Exchange Market rules is a broader permission to remit funds abroad through the Foreign Exchange Market. On the other hand, the so-called “CC5-Accounts,” which are bank accounts inreais held in Brazil by foreign entities, may no longer be used to transfer funds on behalf of third parties. As it is a very recent rule, it is not possible to assess the impact of its provisions on the Brazilian Exchange Market, but it is expected to have a general positive effect by reducing costs derived from currency exchange transactions.
147
Resolution No. 3,568, issued on May 29, 2008 by the National Monetary Council, kept in effect the main provisions of Resolution No. 3,265, which it superseded. However, among the changes introduced by Resolution No. 3,568 was that travel agencies and hotels are no longer be permitted to operate directly in the foreign exchange markets, but that such companies may execute agreements with authorized financial institutions, up a maximum amount equal to U.S.$3,000.00, in order to service those of their clients who might need to engage in foreign exchange transactions.
Brazilian law provides that, whenever there is a significant imbalance in Brazil’s balance of payments or reasons to foresee such an imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989 and early 1990, for example, aiming at preserving Brazil’s foreign currency reserves, the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors and held by the Central Bank. These amounts were subsequently released in accordance with Brazilian Government directives. There can be no assurance, however, that the Brazilian Government may not take similar measures in the future.
There are no restrictions on ownership of capital share of the Company by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of Preferred Shares into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation which generally requires, among other things, obtaining an Electronic Registration under the Resolution No. 2,689. Under Resolution No. 2,689, qualified foreign investors registered with the CVM and acting through authorized custody accounts managed by local agents may buy and sell shares on Brazilian share exchanges without obtaining separate Electronic Registration for each transaction. Investors under the Resolution No. 2,689 are also generally entitled to favorable tax treatment.
Electronic Registrations by the Brazilian Central Bank have been issued in the name of the Company with respect to the ADRs. Pursuant to the electronic registration, the Custodian will be able to convert dividends and other distributions with respect to the shares represented by the ADRs into foreign currency and remit the proceeds outside Brazil.
E. Taxation
The following summary contains a description of certain Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADRs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase common shares or ADRs. The summary is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change. Prospective purchasers of common shares or ADRs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADRs.
Although there is at present no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. Holders (as defined below under “—U.S. Federal Income Tax Considerations”) of common shares or ADRs. Prospective holders of common shares or ADRs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADRs in their particular circumstances.
148
Brazilian Tax Considerations
The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of common shares or ADRs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (a “Non-Resident Holder”) and does not specifically address all of the Brazilian tax considerations applicable to any particular Non-Resident Holder. Each Non-Resident Holder should consult its own tax adviser concerning the Brazilian tax consequences of an investment in common shares or ADRs. The discussion below is based on Brazilian law as currently in effect. Any change in that law may change the consequences described below.
Income Tax
Dividends. Dividends paid by a Brazilian corporation, such as our company, including stock dividends and other dividends paid to a Non-Resident Holder of common shares or ADRs, are currently not subject to Brazilian withholding income tax, as far as such amounts are related to profits generated on or after January 1, 1996. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding tax at varying rates, depending on the year the profits were generated.
Interest on Shareholders’ Equity. Law No. 9,249, dated December 26, 1995, as amended, permits a Brazilian corporation, such as our company, to make distributions to shareholders of interest on shareholders’ equity. These distributions may be paid in cash. Such payments represent a deductible expense from the payer’s corporate income tax and social contribution on net profits tax basis. For tax purposes, this interest is limited to the daily pro rata variation of the TJLP, as determined by the Central Bank from time to time, and may not exceed the greater of:
· 50% of net income (after the social contribution on net profits tax, and before the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and
· 50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made.
Payment of interest to a Non-Resident Holder is subject to withholding income tax at the rate of 15%, or 25% if the Non-Resident Holder is domiciled in a tax haven (“Tax Haven Residents”). For this purpose, a “tax haven” is a country or location that does not impose income tax, where the income tax rate is lower than 20% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment. These payments of interest on shareholders’ equity may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on shareholders’ equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable Brazilian withholding income tax, plus the amount of declared dividends is at least equal to the mandatory dividend.
On June 24, 2008, Law No. 11,727 was enacted, which provides that, as of January 1, 2009, a “tax haven” will also include:
(1) jurisdictions or countries whose local legislation imposes restrictions on the access of information relating to the ownership of shares of a Brazilian entity or a given investment; and
(2) any “privileged tax regime.” A “privileged tax regime” is a tax regime that meets any one of the following requirements: (i) does not tax income or taxes income at a maximum rate of less than 20%; (ii) grants tax advantages to a non-resident entity or individual (a) without requiring substantial economic activity in the jurisdiction of such non-resident entity or individual or (b) to the extent such non-resident entity or individual does not conduct substantial economic activity in the jurisdiction of such non-resident entity or individual; (iii) does not tax income generated abroad or imposes tax on income generated abroad at a maximum rate of less than 20% or (iv) restricts disclosure of assets and ownership rights or disclosure concerning economic transactions.
149
Since Law No. 11,727 has only recently been enacted, regulations by the Brazilian Revenue Service are likely to be issued, and such regulations might affect the analysis of what constitutes a “tax haven” for purposes of the Brazilian tax law.
Specifically with respect to the part of the new Law No. 11,727 described in clause (2) above, our Brazilian counsel has advised us that, although this part of the new law should apply only for the purpose of determining what constitutes a “tax haven” for purposes of Brazilian transfer pricing rules, because several Brazilian regulations utilize the “privileged tax regime” concept when referencing tax havens, there is a possibility that the privileged tax regime concept may impact the definition of what constitutes a “tax haven” for purposes of the Brazilian tax law.
Distributions of interest on shareholders’ equity to Non-Resident Holders may be converted into U.S. dollars and remitted outside Brazil, subject to applicable exchange controls, to the extent that the investment is registered with the Central Bank.
Gains
According to Law No. 10,833/03, the gains recognized on a disposition of assets located in Brazil, such as our common shares, by a Non-Resident Holder, are subject to withholding income tax in Brazil. This rule is applicable regardless of whether the disposition is conducted in Brazil or abroad and/or if the disposition is or is not made to an individual or entity resident or domiciled in Brazil.
As a general rule, capital gains realized as a result of a disposition transaction are the positive difference between the amount realized on the disposition of the common shares and the respective acquisition cost.
Capital gains realized by Non-Resident Holders on the disposition of common shares sold on the Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market):
· are subject to the withholding income tax at a zero percent rate, when realized by a Non-Resident Holder that (i) has registered its investment in Brazil before the Central Bank under the rules of the Brazilian Monetary Council (“Registered Holder”) and (ii) is not a Tax Haven Resident; and
· are subject to withholding income tax at a rate of 15% with respect to gains realized by a Non-Resident Holder that is not a Registered Holder (including a Non-Resident Holder who qualifies under Law No. 4,131/62) and gains earned by Tax Haven Residents that are Registered Holders. In this case, a withholding income tax of 0.005% shall be applicable and can be offset against any income tax due on the capital gain.
Any other gains realized on the disposition of common shares that are not carried out on the Brazilian stock exchange:
· are subject to income tax at a rate of 15% when realized by any Non-Resident Holder that is not a Tax Haven Resident, whether or not such holder is a Registered Holder; and
· are subject to income tax at a rate of 25% when realized by a Tax Haven Resident, whether or not such holder is a Registered Holder.
In the cases described above, if the gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset against any income tax due on the capital gain.
Any exercise of preemptive rights relating to common shares will not be subject to Brazilian withholding income tax. Gains realized by a Non-Resident Holder on the disposition of preemptive rights will be subject to Brazilian income tax according to the same rules applicable to disposition of common shares.
In the case of a redemption of common shares or a capital reduction, the positive difference between the amount received by the Non- Resident Holder and the acquisition cost of the common shares redeemed in reais is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the rate of 15%, or 25%, as the case may be.
150
There can be no assurance that the current favorable tax treatment of Registered Holders will continue in the future.
Sale of ADRs by U.S. Holders to Other Non-Residents in Brazil
As discussed above, the sale of property located in Brazil involving Non-Resident Holders is subject to Brazilian withholding income tax as of February 1, 2004. Our understanding is that ADRs do not qualify as property located in Brazil and, thus, should not be subject to the Brazilian withholding tax. Insofar as the regulatory norm referred to in Section 26 is recent and generic and has not been tested through the administrative or judicial courts, we are unable to assure the final outcome of such discussion.
Gains on the Exchange of ADRs for Common Shares
Although there is no clear regulatory guidance, the exchange of ADRs for common shares should not be subject to Brazilian withholding tax. Non-Resident Holders may exchange the ADSs evidenced by ADRs for the underlying common shares, sell the common shares on a Brazilian stock exchange and remit abroad the proceeds of the sale within five business days from the date of exchange (in reliance on the depositary’s electronic registration) with no tax consequences.
Upon receipt of the underlying common shares in exchange for ADSs evidenced by ADRs, Non-Resident Holders may also elect to register with the Central Bank the U.S. dollar value of such common shares as a foreign portfolio investment under Resolution No. 2,689/00, which will entitle them to the tax treatment discussed above.
Alternatively, the Non-Resident Holder is also entitled to register with the Central Bank the U.S. dollar value of such common shares as a foreign direct investment under Law No. 4,131/62, in which case the respective sale would be subject to the tax treatment applicable to transactions carried out on the Brazilian stock exchange.
Gains on the Exchange of Common Shares for ADRs
The deposit of common shares in exchange for the ADRs may be subject to Brazilian withholding income tax on capital gains if the amount previously registered with the Central Bank as a foreign investment in common shares or, in the case of other market investors under Resolution No. 2,689, the acquisition cost of the common shares, as the case may be, is lower than:
· the average price per common share on the Brazilian stock exchange on which the greatest number of such common shares were sold on the day of deposit; or
· if no common shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of common shares were sold during the 15 preceding trading sessions.
The difference between the amount previously registered, or the acquisition cost, as the case may be, and the average price of the common shares, calculated as set forth above, is considered a capital gain subject to income tax at a rate of 15%, or 25% for Tax Haven Residents.
Tax on Foreign Exchange and Financial Transactions
Foreign Exchange Transactions. Brazilian law imposes a Tax on Foreign Exchange Transactions, or “IOF/Exchange Tax,” on the conversion of reais into foreign currency and on the conversion of foreign currency into reais. Currently, IOF rates for almost all foreign currency exchange transactions are 0.38%. In the case of transactions performed in the stock market or under the regulations issued by the Monetary Council of Brazil, the applicable rate is zero. In any situation, the Ministry of Finance is permitted to increase the rate at any time up to 25% on the foreign exchange transaction amount. However, any increase in the rate will not apply retroactively.
151
Tax on Transactions Involving Bonds and Securities. Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, or “IOF/Bonds Tax,” including those carried out on a Brazilian stock exchange. The rate of IOF/Bonds Tax applicable to transactions involving common shares is currently zero, but the Minister of Finance is permitted to increase such rate at any time up to 1.5% of the transaction amount per day, but any increase in the rate will not apply retroactively.
Other Brazilian Taxes
There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares or ADRs, except for gift and inheritance taxes imposed by some Brazilian states on gifts or bequests by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled or residing within such states. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of common shares or ADRs.
U.S. Federal Income Tax Considerations
The following summary describes certain U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares and ADRs as of the date hereof. Except where noted, this summary deals only with U.S. Holders (as defined below) that hold our common shares or ADRs as capital assets for U.S. federal income tax purposes (generally, property held for investment). As used in this summary, the term “U.S. Holder” means a holder of our common shares or ADRs that is for U.S. federal income tax purposes:
· an individual citizen or resident of the United States;
· a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
· an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
· a trust if it (1) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.
This summary does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:
· a dealer in securities or currencies;
· a financial institution;
· a regulated investment company;
· a real estate investment trust;
· an insurance company;
· a tax-exempt organization;
· a person holding our common shares or ADRs as part of a hedging, integrated or conversion transaction or a straddle;
· a person deemed to sell our common shares or ADRs under the constructive sale provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”);
152
· a trader in securities that has elected the mark-to-market method of accounting for your securities;
· a person liable for alternative minimum tax;
· a person who owns or is deemed to own 10% or more of our voting stock;
· a partnership or other pass-through entity for U.S. federal income tax purposes; or
· a person whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar.
The discussion below is based upon the provisions of the Code, and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement relating to the ADRs, and all other related agreements, will be performed in accordance with their terms.
If a partnership holds our common shares or ADRs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or ADRs, you should consult your tax advisors.
This summary does not contain a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our common shares or ADRs, you should consult your own tax advisors concerning the U.S. federal income tax consequences to you in light of your particular situation, as well as any consequences arising under the laws of any other taxing jurisdiction.
ADRs
If you hold ADRs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by the ADSs evidenced by ADRs. Accordingly, deposits or withdrawals of common shares for ADRs will not be subject to U.S. federal income tax.
Taxation of Dividends
Subject to the discussion under “—Passive Foreign Investment Company” below, the gross amount of distributions on the ADRs or our common shares (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) will be taxable as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income (including withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of our common shares, or by the depositary, in the case of ADRs. Such dividends will not be eligible for the dividends received deduction allowed to corporations under the Code.
With respect to non-corporate U.S. Holders, certain dividends received in taxable years before January 1, 2013 from a qualified foreign corporation may be subject to reduced rates of taxation. Subject to certain limitations, a foreign corporation is treated as a qualified foreign corporation with respect to dividends received from that corporation on shares (or ADRs backed by such shares) that are readily tradable on an established securities market in the United States. U.S. Treasury Department guidance indicates that the ADRs (which are listed on the NYSE), but not our common shares, are readily tradable on an established securities market in the United States. Thus, although we believe that dividends received with respect to ADRs currently meet the conditions required for those reduced tax rates, we do not believe that dividends received with respect to common shares (rather than ADRs) currently meet the conditions required for those reduced tax rates. We cannot assure you that the ADRs will be considered readily tradable on an established securities market in later years. Non-corporate holders that do not meet a minimum holding period requirement during which they are not protected from the risk of loss or that elect to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation. In addition, the rate reduction will not apply to a dividend if the recipient of the dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. Furthermore, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company (as discussed below under “— Passive Foreign Investment Company”) in the taxable year in which such dividends are paid or in the preceding taxable year. You should consult your own tax advisors regarding the application of these rules given your particular circumstances.
153
The amount of any dividend paid in reais will equal the U.S. dollar value of the reais received calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of common shares, or by the depositary, in the case of ADRs, regardless of whether the reais are converted into U.S. dollars. If the reais received as a dividend are converted into U.S. dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the reais received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in the reais equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the reais will be treated as U.S. source ordinary income or loss.
Subject to certain conditions and limitations, Brazilian withholding taxes on distributions (including distribution of interest on shareholders’ equity) will be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADRs or our common shares will be treated as income from sources outside the United States and will generally constitute passive category income. In addition, in certain circumstances, if you have held ADRs or common shares for less than a specified minimum period during which you are not protected from risk of loss, or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on the ADRs or common shares. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. Instead of claiming a credit, you may, at your election, deduct such otherwise creditable Brazilian withholding taxes in computing your taxable income, but only for a taxable year in which you elect to do so with respect to all foreign income taxes paid or accrued in such taxable year and subject to generally applicable limitations under U.S. law.
To the extent that the amount of any distribution (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADRs or common shares, and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange (as discussed below under “—Taxation of Capital Gains”). However, we do not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should assume that a distribution will generally be treated as a dividend (as discussed above).
Distributions of common shares or ADRs, or rights to subscribe for common shares or ADRs, which are received as part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.
Passive Foreign Investment Company
Based on our financial statements, relevant market and shareholder data, and the projected composition of our income and valuation of our assets, including goodwill, we do not believe we were a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes for 2011, and we do not expect to be a PFIC for 2012 or in the future, although we can provide no assurances in this regard.
In general, we will be a PFIC for any taxable year in which:
· at least 75% of our gross income is passive income, or
154
· at least 50% of the value (determined on a quarterly basis) of our assets is attributable to assets that produce or are held for the production of passive income.
For this purpose, cash is a passive asset and passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person). If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.
The determination of whether we are a PFIC must be made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our income or asset composition. Because we have valued our goodwill based on the market value of our equity, a decrease in the price of our ADRs or common shares may also result in our becoming a PFIC. If we are a PFIC for any taxable year during which you hold our ADRs or common shares, you will be subject to special tax rules discussed below and could suffer adverse tax consequences.
If we are a PFIC for any taxable year during which you hold our ADRs or common shares, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ADRs or common shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADRs or common shares will be treated as excess distributions. Under these special tax rules:
· the excess distribution or gain will be allocated ratably over your holding period for the ADRs or common shares,
· the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, will be treated as ordinary income, and
· the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.
In addition, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us in taxable years beginning prior to January 1, 2013, if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year. You will be required to file Internal Revenue Service Form 8621 if you hold our ADRs or common shares in any year in which we are classified as a PFIC.
If we are a PFIC for any taxable year and any of our non-United States subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the common shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, you may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may be available to holders of ADRs because the ADRs are listed on the NYSE, which constitutes a qualified exchange, although there can be no assurance that the ADRs will be “regularly traded” for purposes of the mark-to-market election. It should also be noted that only the ADRs and not the common shares are listed on the NYSE. Our common shares are listed on the Novo Mercado (New Market) of the São Paulo Stock Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that the common shares will be “regularly traded” for purposes of the mark-to-market election.
155
If you make an effective mark-to-market election, you will include in each year that we are a PFIC as ordinary income the excess of the fair market value of your ADRs or common shares at the end of the year over your adjusted tax basis in the ADRs or common shares. You will be entitled to deduct as an ordinary loss each year the excess of your adjusted tax basis in the ADRs or common shares over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your ADRs or common shares will be treated as ordinary income and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.
Your adjusted tax basis in the ADRs or common shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADRs or common shares are no longer regularly traded on a qualified exchange or the Internal Revenue Service consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.
Alternatively, you can sometimes avoid the rules described above by electing to treat us as a “qualified electing fund” under Section 1295 of the Code. This option is not available to you because we do not intend to comply with the requirements necessary to permit you to make this election. You are urged to consult your tax advisors concerning the United States federal income tax consequences of holding ADRs or common shares if we are considered a PFIC in any taxable year.
Taxation of Capital Gains
For U.S. federal income tax purposes and subject to the discussion under “—Passive Foreign Investment Company” above, you will recognize taxable gain or loss on any sale, exchange or redemption of common shares or ADRs in an amount equal to the difference between the amount realized for the common shares or ADRs (including any amounts withheld to reflect Brazilian withholding taxes) and your tax basis in the common shares or ADRs, both determined in U.S. dollars. Such gain or loss will generally be capital gain or loss. Capital gains of non-corporate holders derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by you will generally be treated as U.S. source gain or loss. Consequently, you may not be able to use the foreign tax credit arising from any Brazilian tax imposed on the disposition of our common shares or ADRs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from sources outside the United States in the appropriate category for foreign tax credit purposes.
Other Brazilian Taxes
You should note that any Brazilian IOF/Exchange Tax or IOF/Bonds Tax (as discussed above under “—Brazilian Tax Considerations”) will not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code. You should consult your tax advisors regarding the U.S. federal income tax consequences of these other Brazilian taxes.
Information Reporting and Backup Withholding
In general, information reporting will apply to dividends in respect of common shares or ADRs and the proceeds from the sale, exchange or redemption of common shares or ADRs that are paid to you within the United States (and in certain cases, outside the United States), unless you are an exempt recipient. Backup withholding may apply to such payments if you fail to provide a taxpayer identification number or certification of other exempt status or fail to report in full dividend and interest income.
Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is furnished to the Internal Revenue Service.
156
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Company makes its filings in electronic form under the EDGAR filing system of the U.S. Securities and Exchange Commission. Its filings are available through the EDGAR system at www.sec.gov. In addition, the Company’s filings are available to the public over the internet at BRF’s web site at http://www.brasilfoods.com/ir. Such filings and other information on its website are not incorporated by reference in this Annual Report on Form 20-F. You may request a copy of this filing, and any other report, at no cost, by writing to us at the following address or telephoning us:
Investor Relations Department
BRF - Brasil Foods S.A.
Rua Hungria,1400
01455-000 - São Paulo - SP - Brazil
Tel.: +55 11 2322-5052
Fax: +55 11 2322-5747
E-mail: acoes@brasilfoods.com
I. Subsidiary Information
See the notes to our consolidated financial statements for a description of the Company’s subsidiaries.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks related to potential losses resulting from adverse changes in interest rates, exchange rates and the price of some commodities. We have established policies and procedures to manage our sensitivity to such risks. These procedures include the monitoring of our level of exposure to each market risk through an analysis based on our balance-sheet exposure combined with an analysis of expected cash flows. We also use derivative financial instruments to mitigate our exposure to these risks, guided by our risk policy under the management of the Financial Risk Management Committee, Board of Executive Officers and Board of Directors.
Our risk management department is responsible for monitoring, evaluating and reporting our financial risk. Our Board of Directors is responsible for approving our risk policy and periodically evaluating improvements to it, defining the limits of risk tolerance for different types of risks to which we are exposed and defining action plans to align the risks within these limits. Our Financial Risk Management Committee is in charge of the execution of our risk policy, which includes supervising the risk management process, planning and verifying the impact of the decisions implemented, evaluating and approving hedging alternatives, and monitoring the exposure levels to risks in order to ensure compliance with our risk policy. Our risk policy defines the risk management strategies to be adopted. Among other things, our risk policy does not authorize us to engage in leveraged transactions in derivative markets and states that the notional amount of individual hedging transactions must be limited to 2.5% of our shareholders’ equity.
Under IFRS, we have accounted for our derivative instruments using the fair value method. For more information on our financial instruments and risk management, see note 4 to our consolidated financial statements.
The following section describes the significant market risks associated to our activities and the related financial instruments.
Interest Rate Risk
We are exposed to risk from changes in interest rates, which may be caused by factors related to the global economic crises, changes in monetary policy in the Brazilian and foreign markets, and other factors. Our interest rate exposure under our indebtedness is primarily to the LIBOR rate, the TJLP rate and the UMBNDES rate. We also have indebtedness denominated in reais and U.S. dollars that bear interest at fixed rates. With regards to our marketable securities, our principal exposure is to the CDI rate for investments in the Brazilian market. Our marketable securities in foreign markets are generally U.S. dollar instruments at a fixed coupon.
The table below provides information about our financial instruments that are sensitive to changes in interest rates at December 31, 2011. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in real equivalents. The instruments’ actual cash flows are denominated in U.S. dollars, euro and reais, as applicable, once these currencies are subject to interest rate risks. See also “—Foreign Exchange Risk” below, which describes our foreign exchange derivatives. Even though these derivatives were entered into primarily to manage foreign exchange risk, they may also have an interest rate risk component because certain derivatives are linked to variable interest rates such as the CDI rate.
To facilitate the analysis of market risk, the table below includes cash and cash equivalents and the amounts of derivative instruments (amounts in millions of reais, except weighted average annual interest rates).
157
|
All-in Weighted Average Annual Interest Rate |
Short |
2013 |
2014 |
2015 |
2016 |
There-after |
Carrying Amount |
Fair Value | |
|
Financial Instruments |
|
||||||||
|
Assets - Short/Long-term.. |
2,739.5 |
83.4 |
— |
— |
— |
70.0 |
2,892.9 |
2,892.9 | |
|
Fixed rate |
1,522.8 |
— |
— |
— |
— |
— |
1,522.8 |
1,522.8 | |
|
In U.S. dollars |
1.95% |
1,122.3 |
— |
— |
— |
— |
— |
1,122.3 |
1,122.3 |
|
In Euros |
0.37% |
379.2 |
— |
— |
— |
— |
— |
379.2 |
379.2 |
|
Other currencies |
0.07% |
21.3 |
— |
— |
— |
— |
— |
21.3 |
21.3 |
|
Variable rate |
— |
1,149.9 |
83.4 |
— |
— |
— |
70.0 |
1,303.3 |
1,303.3 |
|
In Reais |
101.31% CDI |
711.3 |
— |
— |
— |
— |
— |
711.3 |
711.3 |
|
In Reais |
100% SELIC |
355.1 |
— |
— |
— |
— |
— |
355.1 |
355.1 |
|
In Reais |
IGPM+12% |
— |
— |
— |
— |
— |
70.0 |
70.0 |
70.0 |
|
In U.S. dollars |
Libor+4.5% |
83.4 |
83.4 |
— |
— |
— |
— |
166.8 |
166.8 |
|
Without rate |
66.9 |
66.9 |
— |
— |
— |
— |
— |
66.9 |
66.9 |
|
In Reais |
66.9 |
66.9 |
— |
— |
— |
— |
— |
66.9 |
66.9 |
|
Liabilities - Short/Long-term |
3,452.5 |
776.9 |
578.5 |
142.4 |
79.9 |
3,025.4 |
8,053.5 |
8,053.5 | |
|
Fixed rate |
1,288.1 |
121.4 |
46.5 |
45.6 |
45.7 |
2,424.2 |
3,971.6 |
3,971.6 | |
|
In Reais |
7.06% |
987.0 |
55.5 |
46.3 |
45.6 |
45.7 |
192.2 |
1,372.4 |
1,372.4 |
|
In U.S. dollars |
6.14% |
299.0 |
65.9 |
0.2 |
— |
— |
2,232.0 |
2,597.2 |
2,597.2 |
|
In Euros |
4.5% |
— |
— |
— |
— |
— |
— |
— |
— |
|
In Argentine pesos |
15% |
2.0 |
— |
— |
— |
— |
— |
2.0 |
2.0 |
|
Variable rate |
2,164.4 |
655.5 |
532.0 |
96.8 |
34.2 |
601.2 |
4,081.9 |
4,081.9 | |
|
In Reais |
827.2 |
291.2 |
499.9 |
85.8 |
31.4 |
221.8 |
1,957.3 |
1,957.3 | |
|
Index |
TJLP + 3.54% |
822.0 |
291.2 |
499.9 |
85.8 |
31.4 |
32.9 |
1,763.2 |
1,763.2 |
|
Index |
IGPM + 4.64% |
5.2 |
— |
— |
— |
— |
189.0 |
194.2 |
194.2 |
|
In U.S. dollars |
1,337.2 |
364.2 |
32.0 |
11.0 |
2.8 |
379.3 |
2,124.6 |
2,124.6 | |
|
Index |
Libor + 1.8% |
1,245.0 |
304.3 |
5.2 |
— |
— |
374.5 |
1,929.0 |
1,929.0 |
|
Index |
UMBNDES |
62.1 |
45.3 |
26.9 |
11.0 |
2.8 |
4.8 |
150.9 |
150.9 |
|
Index |
92.86% CDI |
30.1 |
14.6 |
— |
— |
— |
— |
44.7 |
44.7 |
|
Net |
713.0 |
693.5 |
578.5 |
142.4 |
79.9 |
2,955.4 |
5,160.6 |
5,160.6 | |
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Risk
In managing our foreign exchange risk, we try to balance our assets denominated in foreign currency against our liabilities also denominated in foreign currency. We also consider future cash flows resulting from transactions in foreign currency, especially exports denominated in U.S. dollars, euro and pounds sterling. We usually enter into derivative instruments, mainly local short-term swaps, to manage such foreign exchange risk, but these derivatives generally do not cover 100% of the principal amount of our U.S. dollar-denominated obligations.
The table below provides information about our financial instruments and presents such information in real equivalents as of December 31, 2011. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates (amounts in millions of reais, except average annual interest rates).
|
On-Balance Sheet Financial Instruments |
Short Term |
2013 |
2014 |
2015 |
2016 |
Thereafter |
Carrying Amount |
Fair Value |
|
US dollar-denominated instruments |
2,842.0 |
513.5 |
32.2 |
11.0 |
2.8 |
2,609.4 |
5,860.8 |
5,860.8 |
|
Assets |
|
|
|
|
|
|
|
|
|
Short/Long-term investments(1) |
1,205.8 |
83.4 |
— |
|
1,289.1 |
1,289.1 | ||
|
Average annual interest rate |
2.2% |
5.1% |
— |
— |
— |
— |
2.4% |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
Short/Long-term investments (2) |
1,636.3 |
430.1 |
32.2 |
11.0 |
2.8 |
2,609.4 |
4,571.7 |
4,571.7 |
|
Average annual interest rate |
2.6% |
3.6% |
5.5% |
8.7% |
8.4% |
6.1% |
4.8% |
|
|
|
||||||||
|
Euro-denominated instruments |
379.2 |
— |
— |
— |
— |
— |
379.2 |
379.2 |
|
Assets |
|
|
|
|
|
|
|
|
|
Short/Long-term investments |
379.2 |
— |
— |
— |
— |
— |
379.2 |
379.2 |
|
Average annual interest rate |
0.4% |
— |
— |
— |
— |
— |
0.4% |
|
|
Argentine peso denominated instruments |
2.0 |
0.02 |
— |
— |
— |
— |
2.0 |
2.0 |
|
Average annual interest rate |
15% |
15% |
— |
— |
— |
— |
— |
— |
|
Other currency-denominated instruments |
21.3 |
— |
— |
— |
— |
— |
21.3 |
21.3 |
|
Average annual interest rate |
0.1% |
— |
— |
— |
— |
— |
— |
— |
(1) Includes overnight deposits, time deposits, long-term Brazilian government bonds, credit linked notes and oher short-term investments.
(2) Represents indebtedness denominated in US dollar.
158
The table below presents our derivative financial instruments under which we have exposure to foreign exchange risk, using the notional amounts and weighted average exchange rates by expected (contractual) maturity dates.
|
Short |
2013 |
2014 |
2015 |
2016 |
There-after |
Carrying Amount |
Fair Value | |
|
|
||||||||
|
Total Notional |
4,847.1 |
317.5 |
334.2 |
2.8 |
¾ |
665.2 |
(247.6) |
(247.6) |
|
Cross-currency swaps: |
11.2 |
11.2 |
334.2 |
2.8 |
¾ |
¾ |
(47.8) |
(47.8) |
|
Receive reais/Pay U.S.$ |
|
|||||||
|
Notional amount |
11.2 |
11.2 |
334.2 |
2.8 |
¾ |
¾ |
(47.8) |
(47.8) |
|
Average annual interest received in reais |
9.6% |
9.6% |
9.6% |
9.6% |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in U.S.$ |
1.4% |
1.4% |
1.4% |
1.4% |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.6 |
2.0 |
3.0 |
4.0 |
¾ |
¾ |
¾ |
¾ |
|
Interest rate swaps: |
1,025.6 |
306.3 |
¾ |
¾ |
¾ |
665.2 |
(111.9) |
(111.9) |
|
Receive U.S.$/Pay U.S.$ |
|
|||||||
|
Notional amount |
878.6 |
103.2 |
¾ |
¾ |
¾ |
665.2 |
(96.2) |
(96.2) |
|
Average annual interest received in U.S.$ |
2.2% |
2.2% |
¾ |
¾ |
¾ |
2.2% |
¾ |
¾ |
|
Average annual interest paid in U.S.$ |
4.5% |
4.5% |
¾ |
¾ |
¾ |
4.5% |
¾ |
¾ |
|
Duration |
0.7 |
2.0 |
¾ |
¾ |
¾ |
6.9 |
¾ |
¾ |
|
Receive U.S.$/Pay reais |
|
|||||||
|
Notional amount |
147.0 |
203.1 |
¾ |
¾ |
¾ |
¾ |
(15.7) |
(15.7) |
|
Average annual interest received in U.S.$ |
4.8% |
4.8% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in 94.4% of CDI |
10.3% |
10.3% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.6 |
2.0 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Non-deliverable forwards: |
3,594.4 |
¾ |
¾ |
¾ |
¾ |
¾ |
(86.3) |
(86.3) |
|
Receive reais /Pay U.S.$ |
|
|||||||
|
Notional amount |
2,551.1 |
¾ |
¾ |
¾ |
¾ |
¾ |
(88.2) |
(88.2) |
|
Average annual interest received in reais |
9.3% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in U.S.$ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.4 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Receive reais/ Pay euros |
|
|||||||
|
Notional amount |
769.2 |
¾ |
¾ |
¾ |
¾ |
¾ |
6.6 |
6.6 |
|
Average annual interest received in reais |
7.7% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in euros |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.4 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Receive reais /Pay U.K. pounds |
|
|
|
|
|
|
|
|
|
Notional amount |
202.0 |
¾ |
¾ |
¾ |
¾ |
¾ |
(5.3) |
(5.3) |
|
Average annual interest received in reais |
7.6% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in U.K. pounds |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.4 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Receive U.S.$/Pay euros |
|
|
|
|
|
|
|
|
|
Notional amount |
60.9 |
¾ |
¾ |
¾ |
¾ |
¾ |
0.5 |
0.5 |
|
Average annual interest received in U.S.$ |
0.5% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in euros |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.4 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Receive U.S.$/Pay Argentine pesos |
|
|
|
|
|
|
|
|
|
Notional amount |
11.3 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest received in U.S.$ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in Argentine pesos |
13.5% |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
FX Options: |
150.1 |
¾ |
¾ |
¾ |
¾ |
¾ |
(1.3) |
(1.3) |
|
Notional amount |
150.1 |
¾ |
¾ |
¾ |
¾ |
¾ |
(1.3) |
(1.3) |
|
Duration |
0.1 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
FX Futures: |
65.8 |
¾ |
¾ |
¾ |
¾ |
¾ |
(0.3) |
(0.3) |
|
Notional amount |
65.8 |
¾ |
¾ |
¾ |
¾ |
¾ |
(0.3) |
(0.3) |
|
Duration |
0.1 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
159
The table below provides further detail on our foreign currency-denominated assets and liabilities as of December 31, 2011 and 2010:
|
|
As of December 31, | |
|
|
2011 |
2010 |
|
|
(in millions of reais) | |
|
Cash and cash equivalents and marketable securities |
1,689.6 |
2,493.0 |
|
Trade accounts receivable - third parties |
1,379.4 |
951.0 |
|
U.S. dollar futures |
65.8 |
121.3 |
|
Inventory |
112.3 |
100.9 |
|
Forward contracts (NDFs) (a) |
11.3 |
(241.7) |
|
Exchange rate contracts (Swaps) |
(359.4) |
— |
|
Loans and financing |
(4,723.8) |
(4,016.1) |
|
Prepayment exports designated as hedge accounting instruments |
1,210.2 |
804.0 |
|
Trade accounts payable |
340.3 |
(105.8) |
|
Advance pre-payment from subsidiaries |
— |
— |
|
Other operating assets and liabilities, net |
71.9 |
35.1 |
|
|
(883.0) |
141.7 |
|
|
|
|
|
Foreign exchange exposure in US$ |
(470.7) |
85.1 |
(a) Offshore non-deliverable forwards (“NDFs”), not designated as hedge accounting instruments, that impact our financial results and not our shareholders’ equity.
As permitted by CVM regulations, we account for the exchange rate variation clauses of our export prepayment facilities as hedging instruments that mitigate the risk of exchange rate variations relating to our exports. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Export Credit Facilities—Export Prepayment Facilities” for a general description of our export prepayment facilities. For more information about our accounting relating to these facilities, see note 4.4.4 to our consolidated financial statements.
The table below presents a sensitivity analysis relating to our foreign exchange risk that considers five scenarios the next twelve months for the variations in exchange rates between the real and the U.S. dollar, the real and the euro, and the real and the pound sterling. We have adopted what we believe is the most likely scenario shown in the table. The total of export sales analyzed corresponds to the total of derivative financial instruments plus the amortization flow under export prepayment facilities designated as hedge accounting instruments.
|
Exchange Rate - Brazilian Reais x U.S. Dollar |
|
1.8758 |
1.6882 |
1.4069 |
2.3448 |
2.8137 |
|
Transaction/Instrument |
Risk |
Scenario I |
Scenario II |
Scenario III |
Scenario IV |
Scenario V |
|
|
|
(probable) |
(10% appreciation) |
(25% appreciation) |
(25% devaluation) |
(50% devaluation) |
|
|
|
(in millions of reais) | ||||
|
Non-deliverable forwards (hedge accounting) |
Devaluation of R$ |
(29.4) |
225.7 |
608.4 |
(667.1) |
(1,304.9) |
|
Options – foreign currencies |
Devaluation of R$ |
(0.1) |
4.8 |
16.0 |
(18.9) |
(37.6) |
|
Prepayment export facilities (1) |
Devaluation of R$ |
(46.2) |
74.8 |
256.3 |
(348.8) |
(651.3) |
|
Exports(2) |
Appreciation of R$ |
41.8 |
(264.3) |
(727.5) |
813.7 |
1,585.6 |
|
Net effect |
|
(33.9) |
41.0 |
153.2 |
(221.1) |
(408.2) |
|
Statement of income |
|
— |
— |
— |
— |
— |
|
Shareholders' equity |
|
(33.8) |
41.0 |
153.4 |
(221.1) |
(408.3) |
|
|
|
|
|
|
|
|
|
Exchange Rate - Brazilian Reais x Euro |
|
2.4230 |
2.1807 |
1.8173 |
3.0288 |
2.6345 |
|
Transaction/Instrument |
Risk |
Scenario I |
Scenario II |
Scenario III |
Scenario IV |
Scenario V |
|
|
|
(probable) |
(10% appreciation) |
(25% appreciation) |
(25% devaluation) |
(50% devaluation) |
|
|
|
(in millions of reais) | ||||
|
Non-deliverable forwards (hedge accounting) |
Devaluation of R$ |
27.7 |
104.3 |
219.1 |
(163.7) |
(355.1) |
|
Exports(2) |
Appreciation of R$ |
(27.7) |
(104.3) |
(219.1) |
163.7 |
355.1 |
|
Net effect |
|
— |
— |
— |
— |
— |
|
Statement of income |
|
— |
— |
— |
— |
— |
|
Shareholders' equity |
|
— |
— |
— |
— |
— |
|
|
|
|
|
|
|
|
|
Exchange Rate - Brazilian Reais x Pound |
|
2.8930 |
2.6037 |
2.1698 |
3.6163 |
4.3395 |
|
Transaction/Instrument |
Risk |
Scenario I |
Scenario II |
Scenario III |
Scenario IV |
Scenario V |
|
|
|
(probable) |
(10% appreciation) |
(25% appreciation) |
(25% devaluation) |
(50% devaluation) |
|
|
|
(in millions of reais) | ||||
|
Non-deliverable forwards (hedge accounting) |
Devaluation of R$ |
660.0 |
20.7 |
50.8 |
(49.5) |
(99.6) |
|
Exports(2) |
Appreciation of R$ |
(660.0) |
(20.7) |
(50.8) |
49.5 |
99.6 |
|
Net effect |
|
— |
— |
— |
— |
— |
|
Statement of income |
|
— |
— |
— |
— |
— |
|
Shareholders' equity |
|
— |
— |
— |
— |
— |
(1) Represents liabilities under prepayment export facilities.
(2) Represents net revenues from exports that are hedged using the instruments set forth in this table.
Commodity Price Risk
In the normal course of our operations, we purchase commodities, mainly corn, soy meal and live hogs, which make up a significant portion of our raw materials and costs of production.
Corn and soy meal prices are subject to volatility resulting from weather conditions, crop yield, transportation costs, storage costs, agricultural policy of the government, foreign exchange rates and the prices of these commodities on the international market, among other factors. The price of hogs acquired from third parties is subject to market conditions and are determined by supply and demand in the international market, among other factors.
Our risk policy provides guidelines to hedging against increases in the price of corn and soy meal. We continuously analyze the possibility of using derivative instruments or inventory management for this purpose. Currently we manage our inventory levels as a method of hedging.
During the 2011 fiscal year, we used derivative instruments to mitigate the exposure to variations in live cattle prices. We entered into derivative instruments to protect our positions under the following transactions: (1) forward purchases of cattle, (2) contracting our own cattle confinement, (3) contracting cattle confinement in partnership with other parties and (4) spot purchases of cattle to ensure sufficient supply in the off-season. The contracts are recorded at fair value in our financial results, regardless of the month of expiration of the contracts.
The table below presents derivative financial instruments related to commodities, using the notional amounts and weighted average exchange rates by expected (contractual) maturity dates.
|
Short |
2013 |
2014 |
2015 |
2016 |
There-after |
Carrying Amount |
Fair Value | |
|
|
||||||||
|
Non-deliverable forward: |
1.7 |
¾ |
¾ |
¾ |
¾ |
¾ |
— |
— |
|
Receive reais /Pay BGI(1) |
|
|
|
|
|
|
|
|
|
Notional amount |
1.7 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest received in reais |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Average annual interest paid in BGI |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.8 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Cattle Options: |
33.6 |
¾ |
¾ |
¾ |
¾ |
¾ |
0.3 |
0.3 |
|
Notional amount |
33.6 |
¾ |
¾ |
¾ |
¾ |
¾ |
0.3 |
0.3 |
|
Duration |
0.1 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Cattle Futures: |
11.0 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Notional amount |
11.0 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
|
Duration |
0.4 |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
¾ |
(1) BGI = live cattle (boi gordo)
Debt
For a description of our principal indebtedness, please see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Debt.”
160
The following table sets for the fees and charges that a holder of ADRs may have to pay pursuant to our Amended and Restated Deposit Agreement, dated as of November 14, 2011 (the “Deposit Agreement”), with The Bank of New York Mellon, as depositary, in connection with our ADR program:
|
Fee and Reimbursement Provisions | |
|
Fee or Charge: |
Relating to: |
|
1. Taxes and other governmental charges |
|
|
2. Registration fees as may be in effect for the registration of transfers of common shares underlying the ADRs on the share register of our company or any Brazilian registrar |
The transfer of common shares underlying ADRs to or from the name of the depositary or its nominee or Banco Itaú, S.A., as custodian for the depositary, or its nominee on the making of deposits or withdrawals under the Deposit Agreement |
|
3. Cable, telex and facsimile transmission expenses expressly provided under the Deposit Agreement |
|
|
4. Expenses incurred by the depositary in the conversion of foreign currency |
Amounts in reais received by way of dividends or other distributions or the net proceeds from the sale of securities, property or other rights in respect of ADRs |
|
5. U.S.$5.00 or less per 100 ADRs (or portion thereof) |
The delivery of ADRs and the surrender of ADRs, or the distribution of securities or other property to holders of ADRs |
|
6. U.S.$0.02 or less per ADR (or portion thereof) |
Any cash distribution made pursuant to the Deposit Agreement, except for distributions of cash dividends |
|
7. U.S.$0.02 or less per ADR (or portion thereof) per year, subject to prior consent by the Company |
Depositary services |
|
8. Payment of any other charges payable by the depositary, any of the depositary’s agents, including the depositary’s custodian, or the agents of the depositary’s agents in connection with the servicing of shares underlying the American Depositary Shares or other deposited securities |
|
|
|
|
The fee and reimbursement provisions described in rows 7 and 8 of the table above may, at the depositary’s discretion, be billed to the holders of ADRs or deducted from one or more cash dividends or other cash distributions. In the year ended December 31, 2011, the annual fee for depositary services was charged to holders of ADRs.
In the year ended December 31, 2011, pursuant to a letter agreement between our company and the depositary, the depositary reimbursed us for fees, expenses and related taxes of R$729.7 thousand, consisting of (1) expenses in connection with investor relations events of U.S.$201.8 thousand, (2) investor relations expenses and listing fees of U.S.$73.2 thousand, (3) legal expenses in connection with ongoing reporting requirements of U.S.$113.7 thousand, (4) conference calls expenses of U.S.$6.8 thousand, (5) fees paid to self-regulatory organizations (the NYSE, the PCAOB and the FASB) and to the depositary of U.S.$111.9 thousand, (6) fees and expenses for other services of U.S.$3.4 thousand and (7) related withholding taxes on these amounts of U.S.$218.9 thousand.
A form of the Deposit Agreement is filed as Exhibit 2.01 to this Annual Report on Form 20-F. We encourage you to review this document carefully if you are a holder of ADRs.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 20-F, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2011, the design and operation of our disclosure controls and procedures were effective at the reasonable assurance level.
B. Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
161
Based on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2011, based on criteria in Internal Control-Integrated Framework, issued by the COSO.
KPMG Auditores Independentes, an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Annual Report on Form 20-F, has issued an attestation report on management’s assessment of our internal control over financial reporting.
C. Attestation Report of the Registered Public Accounting Firm
See “Item 18––Financial Statements.”
D. Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that Attílio Guaspari, a member of the Company’s Fiscal Council, is a “financial expert,” as such term is defined in the SEC rules. Mr. Guaspari is independent, as such term is defined in the Novo Mercado listing rules. The Company has determined that Mr. Guaspari is independent under the standards of the NYSE listing rules and Rule 10A-3 under the Exchange Act that would apply if the Company were not relying on the exemption provided in paragraph (c)(3) of Rule 10A-3, as described in “Item 16D. Exemptions from the Listing Standards for Audit Committees.” See “Item 6. Directors, Senior Management and Employees—C. Board Practices” for information regarding the experience of Mr. Guaspari.
ITEM 16B. CODE OF BUSINESS CONDUCT AND ETHICS
Under NYSE Rule 303A.10, each U.S. listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. We are subject to a similar recommendation under Brazilian law and we have adopted a code of ethics that applies to our officers and employees.
Our code of ethics, as well as further information concerning our corporate governance practices and applicable Brazilian law, is available on our website www.brasilfoods.com/ir. Information on our website is not incorporated by reference in this form. Copies of our Code of Business Conduct and Ethics are also available without charge upon request to our Investor Relation Office. “Item 10—Additional Information—B. Memorandum and Articles of Association.”
If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the code of ethics, we will disclose the nature of such amendment or waiver on our website. During the year ended December 31, 2011, no such amendment was made or waiver granted.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
162
Audit and Non-Audit Fees
The following table sets forth the fees billed to the Company by its independent auditors, KPMG Auditores Independentes, responsible for auditing the Financial Statements including in the Annual Report on Form 20-F, during the fiscal years ended December 31, 2011 and 2010. No payments of consultancy fees were made to the independent auditors KPMG Auditores Independentes during 2011 and 2010. The hiring of our auditors for consultancy services is subject to Board of Directors’ and Fiscal Council/Audit Committee approval and presupposes that the service in question does not risk the independence and objectivity of our auditors in the performance of the outside audit. The Board’s approval will also take into account restrictions on certain services prohibited by the Sarbanes-Oxley Act.
|
|
Year Ended | |
|
|
2011 |
2010 |
|
|
(in thousands of reais) | |
|
Audit fees |
3,055.9 |
3,944.2 |
|
Audit-related fees |
428.1 |
465.6 |
|
Tax fees |
215.5 |
328.0 |
|
All other fees |
290.0 |
— |
|
Total fees |
3,989.5 |
4,737.8 |
|
|
|
|
Audit fees in the above table are the aggregate fees billed by our independent auditors in connection with the audit of the Company’s annual consolidated financial statements and review of the Company’s quarterly financial information.
Audit-related fees in the above table are fees billed by KPMG Auditores Independentes in connection with our offering of the 7.25% notes due 2020 in 2010 and 2011.
Tax fees in the above table are fees billed relating to tax compliance services.
The Company’s Board of Directors has established pre-approval procedures for the engagement of its registered public accounting firm for audit and non audit services. Such services can only be contracted if they are approved by the Board of Directors, they comply with the restriction provided under applicable rules and they do not jeopardize the independence of our auditors.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
In establishing a permanent Fiscal Council, the Company has availed itself of paragraph (c)(3) of Rule 10A-3 of the Exchange Act, which provides a general exemption from the audit committee requirements for a foreign private issuer (such as the Company) with a Fiscal Council, subject to certain requirements, which continue to be applicable under Rule 10A-3.
NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, the Company only needs to comply with the requirement that the audit committee, or fiscal council in the case of the Company, meet the SEC rules regarding audit committees for listed companies. The Brazilian Corporate Law requires companies to have a non-permanent Fiscal Council composed of three to five members who are elected at the general shareholders’ meeting. The Fiscal Council operates independently from management and from a company’s external auditors. Its main function is to monitor the activities of management, examine the financial statements of each fiscal year and provide a formal report to our shareholders.
163
The Company has a permanent Fiscal Council that consists of three members and three alternates and which has ordinary meetings every month. The members of the Company’s Fiscal Council are all financially literate and one member has accounting expertise that qualifies him as a financial expert. The Company believes that its Fiscal Council meets the requirements for the exemption available to foreign private issuers under the SEC rules regarding audit committees of listed companies. In addition, the Fiscal Council operates under a written charter, which the Company believes meets the NYSE’s requirements for audit committee charters. The Fiscal Council is not the equivalent of, or wholly comparable to, a U.S. audit committee. Among other differences, it is not required to meet the standards of “independence” established in Rule 10A-3 and is not fully empowered to act on matters that are required by Rule 10A-3 to be within the scope of an audit committee’s authority. Nonetheless, with the attributions that have been provided to the Fiscal Council to the extent permitted by Brazilian law, the Company believes that its current corporate governance system, taken as a whole, including the ability of the Fiscal Council to consult internal and external experts, is fully equivalent to a system having an audit committee functioning as a committee of its Board of Directors. Accordingly, the Company does not believe that its reliance on the exemption in paragraph (c)(3) of Rule 10A-3 materially adversely affects the ability of the Fiscal Council to act independently and to satisfy the other requirements of Rule 10A-3 to the extent permitted by the Brazilian Corporation Law. For a further discussion of our Fiscal Council, see “Item 6. Directors, Senior Management and Employees—C. Board Practices—Fiscal Council.”
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
KPMG Auditores Independentes was appointed to act as our independent public accounting firm for a five-year period to audit our consolidated financial statements for the fiscal years ended December 31, 2007, 2008, 2009, 2010 and 2011. Pursuant to CVM regulations, Brazilian public companies are required to rotate their independent public accounting firm every five years. On November 24, 2011, our board of directors, as recommended by our Fiscal Council, approved the appointment of Ernst&Young Terco Auditores Independentes S/S to act as our independent public accounting firm beginning as of January 1, 2012.
KPMG Auditores Independentes’s reports on our financial statements for the each of the five fiscal years ended on December 31, 2007, 2008, 2009, 2010 and 2011 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. During such five fiscal years, there were no disagreements with KPMG Auditores Independentes on any matter of accounting principles or practices, financial statement disclosure, or scope of audit procedures, which disagreement, if not resolved to the satisfaction of KPMG Auditores Independentes, would have caused KPMG Auditores Independentes to make a reference to the subject matter of the disagreement in connection with its audit reports for such fiscal years.
We did not consult Ernst&Young Terco Auditores Independentes S/S during our two most recent fiscal years or any subsequent interim period as to the application of accounting principles to a specified transaction, either completed or proposed, the type of audit opinion that might be rendered on our financial statements or any matter that was either the subject of a disagreement (as defined in Item 16F(a)(1)(iv) of Form 20-F) or a reportable event (as described in Item 16F(a)(1)(v) of Form 20-F).
We have requested that KPMG Auditores Independentes furnish us with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of this letter is filed as Exhibit 16.01 to this Form 20-F.
ITEM 16G. CORPORATE GOVERNANCE
We adopt best corporate governance practices based on a continual process of organizational improvement, translating into greater transparency, liquidity and confidence for our investors.
The first company in the food sector to list on Bovespa’s Novo Mercado (2006), we comply with listing regulations, among them, diffused control, protection mechanisms and equality of rights.
Company data is given full disclosure on our investor relations website where information on our vision of sustainability and actions with respect to the theme can be found. The Company has adhered to Level B of the Global Reporting Initiative guidelines for the publication of its annual reports under Brazilian law.
Further information concerning our corporate governance practices and applicable Brazilian law is available on the Company’s website (www.brasilfoods.com/ir). Information on our website is not incorporated by reference in this Annual Report on Form 20-F.
We have also voluntarily adhered to the Novo Mercado listing standards of the São Paulo Stock Exchange on which our shares are traded, which impose heightened standards of disclosure, transparency and corporate governance on us.
Under Section 303A.11 of the NYSE Corporate Governance Rules, we are required to disclose any significant differences in our corporate governance practices from those required to be followed by U.S. companies under the NYSE listing standard. We have summarized these significant differences below.
164
We are permitted to follow practices in Brazil in lieu of the provisions of the NYSE Corporate Governance Rules, except that we are required to have a qualifying audit committee under Section 303A.06 of the Rules or avail ourselves of an appropriate exemption. As a foreign private issuer, we have modified our fiscal council in order to avail ourselves of an exemption from the listing standards for audit committees. See “Item 6. Directors, Senior Management and Employees—C. Board Practices—Fiscal Council.” In addition, our chief executive officer is obligated, under Section 303A.12(b), to promptly notify the NYSE in writing after any of our executive officers becomes aware of any material non-compliance with any applicable provisions of the NYSE Corporate Governance Rules. We are also required under Section 303A.12(c) of the NYSE Corporate Governance Rules to submit an annual written affirmation of compliance with applicable provisions of the rules and, under certain circumstances, an interim written affirmation of compliance.
Majority of Independent Directors
Under NYSE Rule 303A.01, each U.S. listed company must have a majority of independent directors. Under the Novo Mercado rules, at least 20% of our directors must be independent for purposes of those rules, and a majority of our directors currently meet that standard.
Separate Meetings of Non-Management Directors
Under NYSE Rule 303A.03, the non-management directors of each U.S. listed company must meet at regularly scheduled executive sessions without management. We do not have a similar requirement under Brazilian practice, but in any event, all members of our board are non-executive directors. Our independent directors do not meet separately from directors who are not independent.
Nominating/Corporate Governance Committee
Under NYSE Rule 303A.04, each U.S. listed company must have a nominating/corporate governance committee composed entirely of independent directors. We are not required to have such a committee under Brazilian law. Directors are recommended for our board of directors in a manner consistent with the shareholders’ voting agreement which is described under “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
Compensation Committee
Under NYSE Rule 303A.05, each U.S. listed company must have a compensation committee composed entirely of independent directors. We are not required to have such a committee under Brazilian practice. In accordance with Brazilian Corporation Law, our shareholders approve the aggregate compensation of the members of our board of directors and fiscal council for each fiscal year. Our board of directors then decides the allocation of the compensation among its members and the members of the fiscal council. In addition, our board of directors is directly responsible for employee and executive compensation and recruitment, incentive compensation and related matters.
Audit Committee
Under NYSE Rule 303A.06 and the requirements of Rule 10A-3 of the SEC, each U.S. listed company is required to have an audit committee consisting entirely of independent members that comply with the requirements of Rule 10A-3. In addition, the audit committee must have a written charter compliant with the requirements of NYSE Rule 303.A.06(c), the listed company must have an internal audit function and the listed company must fulfill all other requirements of the NYSE and Rule 10A-3. The SEC has recognized that, for foreign private issuers, local legislation may delegate some of the functions of the audit committee to other bodies. We have availed ourselves of an exemption from certain of the standards for audit committees. See “—Item 16D—Exemption from the Listing Standards for Audit Committees,” which explains how our fiscal council differs from an audit committee for a U.S. listed company and which is incorporated herein by reference.
165
Equity Compensation Plans
Under NYSE Rule 303A.08, shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto, with certain limited exemptions as described in the Rule. Our board of directors recently authorized the establishment of a stock option plan to stimulate our growth and to retain the services of executives and certain employees by enabling them to become shareholders in our company. Under our bylaws and the Brazilian Corporation Law, stock option plans for our management and employees must be approved by our shareholders. On March 31, 2010, our shareholders approved long-term stock option plans for executive officers of BRF and Sadia. For more details, see “Item 6. Directors, Senior Management and Employees—E. Share Ownership—Stock Option Plan.” and “Item 10. Additional Information—B. Memorandum and Articles of Association—Meeting of Shareholders.”
Corporate Governance Guidelines
Under NYSE Rule 303A.09, each U.S. listed company must adopt and disclose their corporate governance guidelines. We do not have a similar requirement under Brazilian law. However, we have listed our common shares on the Novo Mercado of the São Paulo Stock Exchange, which requires adherence to the corporate governance standards described under “Item 9. The Offer and Listing—C. Markets —São Paulo Stock Exchange Corporate Governance Standards.” In addition, we have adopted a written policy on trading of securities and disclosure matters.
Code of Business Conduct and Ethics
Under NYSE Rule 303A.10, each U.S. listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. We are subject to a similar recommendation under Brazilian law, and we have adopted a code of ethics that applies to our officers and employees. Further information concerning our corporate governance practices and applicable Brazilian law is available on our website. Information on our website is not incorporated by reference in this form.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
See our consolidated financial statements beginning at page F-1.
ITEM 19. EXHIBITS
The agreements and other documents filed as exhibits to this Annual Report on Form 20-F are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and for the benefit of the other parties to the agreements and they may not describe the actual state of affairs as of the date they were made or at any other time.
The total amount of long-term debt of the Company authorized under any instrument does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the SEC all other instruments relating to long-term debt of the Company and its subsidiaries upon request by the SEC.
EXHIBIT INDEX
|
Exhibit Number |
Description |
|
2.01 |
Form of Deposit Agreement among Perdigão S.A., The Bank of New York Mellon, as depositary, and the owners and beneficial owners of American Depositary Shares, as amended and restated as of November 14, 2011 (incorporated by reference to Exhibit 1 to the Registration Statement on Form F-6, filed November 2, 2011, SEC File No. 333-177676). |
|
2.02 |
Form of American Depositary Receipt (incorporated by reference to Exhibit A to Exhibit 1 to the Registration Statement on Form F-6, filed November 2, 2011, SEC File 333-177676). |
|
4.01 |
Merger Agreement, dated May 19, 2009, among Perdigão S.A., HFF Participações S.A., Sadia S.A. and the shareholders of the Registrant and Sadia S.A. named therein (incorporated by reference to Exhibit 4.01 to the Annual Report of Foreign Private Issuer on Form 20-F, filed June 30, 2009, SEC File No. 001-15148). |
|
4.02 |
Shareholders’ Voting Agreement of Perdigão S.A., dated March 6, 2006, among certain shareholders of the Registrant and the Registrant (incorporated by reference to Exhibit 99.1 to the Report of Foreign Private Issuer on Form 6-K, filed March 7, 2006, SEC File No. 001-15148). |
|
4.03 |
Purchase Option Plan or Application for Shares (incorporated by reference to Exhibit 99.5 to the Report of Foreign Private Issuer on Form 6-K/A, filed March 24, 2010, SEC File No. 001-15148). |
|
4.04 |
Stock Options Program (incorporated by reference to Exhibit 99.4 to the Report of Foreign Private Issuer on Form 6-K/A, filed March 24, 2010, SEC File No. 001-15148). |
|
4.05* |
Performance Commitment Agreement (Termo de Compromisso de Desempenho), dated July 18, 2011, between BRF – Brasil Foods S.A. and the Brazilian Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica) (incorporated by reference to the Report of Foreign Private Issuer on Form 6-K filed July 18, 2011, SEC File No. 001-15148). |
|
|
|
* Portions of the Performance Commitment Agreement were omitted pursuant to a request for confidential treatment filed with the Commission.
** This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.
166
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.
| BRF – BRASIL FOODS S.A. | |||
| By: | /s/ José Antonio do Prado Fay | ||
|
|
|||
|
Name: José Antonio do Prado Fay |
|||
|
Title: Chief Executive Officer |
|||
| By: | /s/ Leopoldo Viriato Saboya | ||
|
Name: Leopoldo Viriato Saboya |
|||
|
Title: Chief Financial Officer |
Date: April 30, 2012
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
BRF – Brasil Foods S.A.
We have audited the accompanying consolidated balance sheets of BRF – Brasil Foods S.A. and subsidiaries (“the Company”) as of December 31, 2011 and 2010, and the related consolidated statements of income, changes in shareholders’ equity, comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2011. We also have audited the Company’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BRF – Brasil Foods S.A. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with International Financial Report Standards, as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As mentioned in note 1.2, on July 13, 2011, the Administrative Council for Economic Defense ("CADE") approved the business combination between the Company and Sadia S.A., and revoked the Agreement to Preserve Reversibility and Operation ("APRO ") signed on July 8, 2009. This approval is subject to compliance with the obligations assumed by the Company with the CADE in the Term Performance Commitment ("TCD") entered into on the same date. On March 20, 2012, the Company signed the Contract of Exchange of Assets and Other Agreements with Marfrig Alimentos S.A., whose main objective is to establish the terms and conditions enabling the transaction to occur as mentioned in notes 1.2 and 38, which is subject to suspension conditions depending on the CADE manifestation. Our conclusion does not contain any qualification relating to this matter.
/s/ KPMG Auditores Independentes
KPMG Auditores Independentes
São Paulo, Brazil
April 27, 2012
BRF - BRASIL FOODS S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(Amounts expressed in millions of Brazilian reais)
| ASSETS | Note | 12.31.11 | 12.31.10 | |||
| CURRENT ASSETS | ||||||
|
Cash and cash equivalents |
7 | 1,366.8 | 2,310.6 | |||
|
Marketable securities |
8 | 1,372.7 | 1,032.4 | |||
|
Trade accounts receivable, net |
9 | 3,207.8 | 2,565.0 | |||
|
Inventories |
10 | 2,679.2 | 2,135.8 | |||
|
Biological assets |
11 | 1,156.1 | 900.7 | |||
|
Recoverable taxes |
12 | 907.9 | 695.9 | |||
|
Assets held for sale |
13 | 19.0 | 62.2 | |||
|
Other financial assets |
21 | 23.5 | 98.6 | |||
|
Other current assets |
390.8 | 219.5 | ||||
|
Total current assets |
11,123.8 | 10,020.7 | ||||
| NON-CURRENT ASSETS | ||||||
|
Marketable securities |
8 | 153.4 | 209.1 | |||
|
Trade accounts receivable, net |
9 | 2.4 | 7.0 | |||
|
Credit notes |
9 | 147.3 | 93.1 | |||
|
Recoverable taxes |
12 | 744.6 | 767.4 | |||
|
Deferred income taxes |
14 | 2,628.8 | 2,487.6 | |||
|
Judicial deposits |
15 | 228.3 | 234.1 | |||
|
Biological assets |
11 | 387.4 | 377.7 | |||
|
Other non-current assets |
362.6 | 223.2 | ||||
|
Investments |
16 | 20.4 | 17.5 | |||
|
Property, plant and equipment, net |
17 | 9,798.4 | 9,066.8 | |||
|
Intangible assets |
18 | 4,386.1 | 4,247.3 | |||
|
Total non-current assets |
18,859.7 | 17,730.8 | ||||
| TOTAL ASSETS | 29,983.5 | 27,751.5 | ||||
See accompanying notes to the consolidated financial statements.
F-1
BRF - BRASIL FOODS S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(Amounts expressed in millions of Brazilian reais)
| LIABILITIES | Note | 12.31.11 | 12.31.10 | ||
| CURRENT LIABILITIES | |||||
|
Short-term debt |
19 | 3,452.5 | 2,227.7 | ||
|
Trade accounts payable |
20 | 2,681.3 | 2,059.2 | ||
|
Payroll and related charges |
434.2 | 387.4 | |||
|
Tax payable |
224.8 | 210.8 | |||
|
Interest on shareholders' equity |
26 | 312.6 | 193.1 | ||
|
Employee and management profit sharing |
224.5 | 111.3 | |||
|
Other financial liabilities |
21 | 270.7 | 82.2 | ||
|
Provision for tax, civil and labor |
25 | 118.5 | 65.1 | ||
|
Other current liabilities |
268.7 | 349.6 | |||
|
Total current liabilities |
7,987.8 | 5,686.4 | |||
| NON-CURRENT LIABILITIES | |||||
|
Long-term debt |
19 | 4,601.1 | 4,975.2 | ||
|
Social and tax payable |
29.5 | 64.2 | |||
|
Provision for tax, civil and labor |
25 | 835.2 | 981.8 | ||
|
Deferred income taxes |
14 | 1,791.9 | 1,635.7 | ||
|
Employee benefit plan |
24 | 266.0 | 274.5 | ||
|
Other non-current liabilities |
362.0 | 497.2 | |||
|
Total non-current liabilities |
7,885.7 | 8,428.6 | |||
| SHAREHOLDERS' EQUITY | 26 | ||||
|
Capital |
12,460.5 | 12,460.5 | |||
|
Capital reserves |
76.3 | 69.4 | |||
|
Profit reserves |
1,760.4 | 1,064.7 | |||
|
Treasury shares |
(65.3) | (0.7) | |||
|
Other comprehensive (income) loss |
(161.5) | 35.2 | |||
|
Parent company shareholders' equity |
14,070.4 | 13,629.1 | |||
|
Non-controling interest |
39.6 | 7.4 | |||
|
Total shareholders' equity |
14,110.0 | 13,636.5 | |||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 29,983.5 | 27,751.5 | |||
See accompanying notes to the consolidated financial statements.
F-2
BRF - BRASIL FOODS S.A.
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
(Amounts expressed in millions of Brazilian reais)
| Note | 12.31.11 | 12.31.10 | 12.31.09 | ||||
| NET SALES | 30 | 25,706.2 | 22,681.3 | 15,905.8 | |||
| Cost of Sales | 35 | (19,047.0) | (16,951.2) | (12,728.9) | |||
| GROSS PROFIT | 6,659.2 | 5,730.1 | 3,176.9 | ||||
| OPERATING INCOME (EXPENSES) | |||||||
|
Selling |
35 | (3,837.5) | (3,523.1) | (2,577.1) | |||
|
General and administrative |
35 | (426.9) | (332.9) | (222.2) | |||
|
Other operating expenses |
33 | (402.7) | (393.9) | (302.8) | |||
|
Equity interest in income of affiliates |
9.0 | 4.4 | 2.5 | ||||
| OPERATING INCOME | 2,001.1 | 1,484.6 | 77.3 | ||||
|
Financial income |
34 | 845.8 | 880.2 | 1,525.1 | |||
|
Financial expenses |
34 | (1,325.3) | (1,363.3) | (1,262.6) | |||
| INCOME BEFORE TAXES | 1,521.6 | 1,001.5 | 339.8 | ||||
| Current | 14 | (39.9) | (130.6) | (80.2) | |||
| Deferred | 14 | (116.6) | (65.9) | (141.0) | |||
| NET INCOME | 1,365.1 | 805.0 | 118.6 | ||||
| Attributable to: | |||||||
|
BRF shareholders |
1,367.4 | 804.1 | 123.0 | ||||
|
Non-controlling interest |
(2.3) | 0.9 | (4.4) | ||||
| Earnings per share - basic | 870,507.5 | 870,887.1 | 604,120.0 | ||||
| Weighted average shares outstanding (thousands) - basic | 28 | 1.57 | 0.92 | 0.20 | |||
| Earning per share - diluted | 870,546.2 | 875,538.7 | 606,044.4 | ||||
| Weighted average shares outstanding (thousands) - diluted | 28 | 1.57 | 0.92 | 0.20 |
See accompanying notes to the consolidated financial statements.
F-3
BRF - BRASIL FOODS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian reais, except interest on own capital per share data)
| Attributed to interest of controlling shareholders | ||||||||||||||
| Capital reserve | Profit reserves | Other comprehensive income | ||||||||||||
| Accumulated | ||||||||||||||
| foreign | Available for | Total | ||||||||||||
| Reserve for | currency | sale | Total | Participation of | shareholders' | |||||||||
| Capital | Treasury | Reserve for | capital | Reserve of | translation | marketable | Actuarial gains | Retained | shareholders' | non-controlling | equity | |||
| Capital | reserve | shares | Legal reserve expansion | increases tax incentives adjustments | securities | (losses) | earning (losses) | equity | interest | (consolidated) | ||||
| BALANCES AT JANUARY 1, 2009 | 3,445.0 | - | (0.8) | 66.2 | 505.1 | 160.3 | - | (2.9) | (35.3) | - | (213.0) | 3,924.6 | 0.7 | 3,925.3 |
| Comprehensive income: | ||||||||||||||
| Gain in foreign currency translation adjustments | - | - | - | - | - | - | - | 19.6 | - | - | - | 19.6 | 8.4 | 28.0 |
| Unrealized loss in available for sale marketable | ||||||||||||||
| securities | - | - | - | - | - | - | - | - | (1.2) | - | - | (1.2) | - | (1.2) |
| Unrealized loss in cash flow hedge | - | - | - | - | - | - | - | - | (4.7) | - | - | (4.7) | - | (4.7) |
| Actuarial loss | - | - | - | - | - | - | - | - | - | (23.1) | - | (23.1) | - | (23.1) |
| Net income (loss) for the year | - | - | - | - | - | - | - | - | - | - | 123.0 | 123.0 | (4.4) | 118.6 |
| TOTAL COMPREHENSIVE INCOME | 16.7 | (41.2) | (23.1) | (90.0) | 4,038.2 | 4.7 | 4,042.9 | |||||||
| Capital increase | 9,108.5 | - | - | - | - | - | - | - | - | - | - | 9,108.5 | - | 9,108.5 |
| Appropriation of income (loss): | ||||||||||||||
| Interest on shareholders' equity - R$ 0,229985 per | ||||||||||||||
| outstanding share at the end of the year | - | - | - | - | - | - | - | - | - | - | (100.0) | (100.0) | - | (100.0) |
| Legal reserve | - | - | - | 4.8 | - | - | - | - | - | - | (4.8) | - | - | - |
| Reserve for expansion | - | - | - | - | (8.7) | - | - | - | - | - | 8.7 | - | - | - |
| Reserve for capital increase | - | - | - | - | - | - | - | - | - | - | - | - | - | - |
| Share-based payments | - | - | - | - | - | - | - | - | - | - | - | - | - | - |
| Valuation of shares | - | 62.8 | - | - | - | - | - | - | - | - | - | 62.8 | - | 62.8 |
| Cost of shares issuance | (91.7) | - | - | - | - | - | - | - | - | - | - | (91.7) | - | (91.7) |
| Treasury shares sold | - | - | (26.8) | - | - | - | - | - | - | - | - | (26.8) | - | (26.8) |
| BALANCES AT DECEMBER 31, 2009 | 12,461.8 | 62.8 | (27.6) | 71.0 | 496.4 | 160.3 | - | 16.7 | (41.2) | (23.1) | (186.1) | 12,991.0 | 4.7 | 12,995.7 |
| Comprehensive income: | ||||||||||||||
| Gain in foreign currency translation adjustments | - | - | - | - | - | - | - | (5.2) | - | - | (5.2) | - | (5.2) | |
| Unrealized gain in available for sale marketable | ||||||||||||||
| securities | - | - | - | - | - | - | - | - | 0.9 | - | - | 0.9 | - | 0.9 |
| Unrealized loss in cash flow hedge | - | - | - | - | - | - | - | - | 103.9 | - | - | 103.9 | - | 103.9 |
| Actuarial loss | - | - | - | - | - | - | - | - | - | (16.8) | (18.5) | (35.3) | - | (35.3) |
| Net income (loss) for the year | - | - | - | - | - | - | - | - | - | - | 804.1 | 804.1 | 0.9 | 805.0 |
| TOTAL COMPREHENSIVE INCOME | 11.5 | 63.6 | (39.9) | 599.5 | 13,859.4 | 5.6 | 13,865.0 | |||||||
| Appropriation of income (loss): | ||||||||||||||
| Interest on shareholders' equity - R$ 0,3016 per | ||||||||||||||
| outstanding share at the end of the year | - | - | - | - | - | - | - | - | - | - | (262.5) | (262.5) | - | (262.5) |
| Legal reserve | - | - | - | 40.2 | - | - | - | - | - | - | (40.2) | - | - | - |
| Reserve for expansion | - | - | - | - | 176.9 | - | - | - | - | - | (176.9) | - | - | - |
| Reserve for capital increase | - | - | - | - | - | 119.9 | - | - | - | - | (119.9) | - | - | - |
| Share-based payments | - | 6.6 | - | - | - | - | - | - | - | - | - | 6.6 | - | 6.6 |
| Cost of shares issuance | (1.3) | - | - | - | - | - | - | - | - | - | - | (1.3) | - | (1.3) |
| Participation of non-controlling interest | - | - | - | - | - | - | - | - | - | - | - | - | 1.8 | 1.8 |
| Treasury shares sold | - | - | 26.9 | - | - | - | - | - | - | - | - | 26.9 | - | 26.9 |
| BALANCES AT DECEMBER 31, 2010 | 12,460.5 | 69.4 | (0.7) | 111.2 | 673.3 | 280.2 | - | 11.5 | 63.6 | (39.9) | - | 13,629.1 | 7.4 | 13,636.5 |
| Comprehensive income: | ||||||||||||||
| Gain in foreign currency translation adjustments | - | - | - | - | - | - | - | 1.1 | - | - | - | 1.1 | - | 1.1 |
| Unrealized gain in available for sale marketable | ||||||||||||||
| securities | - | - | - | - | - | - | - | - | 3.6 | - | - | 3.6 | - | 3.6 |
| Unrealized loss in cash flow hedge | - | - | - | - | - | - | - | - | (229.4) | - | - | (229.4) | - | (229.4) |
| Actuarial gain (loss) | - | - | - | - | - | - | - | - | - | 28.0 | (39.6) | (11.6) | - | (11.6) |
| Net income (loss) for the year | - | - | - | - | - | - | - | - | - | - | 1,367.4 | 1,367.4 | (2.3) | 1,365.1 |
| TOTAL COMPREHENSIVE INCOME | - | - | - | - | - | - | - | 12.6 | (162.2) | (11.9) | 1,327.8 | 14,760.2 | 5.1 | 14,765.3 |
| Appropriation of income (loss): | ||||||||||||||
| Interest on shareholders' equity - R$ 0,7270 per | ||||||||||||||
| outstanding share at the end of the year | - | - | - | - | - | - | - | - | - | - | (632.1) | (632.1) | - | (632.1) |
| Legal reserve | - | - | - | 68.4 | - | - | - | - | - | - | (68.4) | - | - | - |
| Reserve for expansion | - | - | - | - | 305.3 | - | - | - | - | - | (305.3) | - | - | - |
| Reserve for capital increase | - | - | - | - | - | 265.6 | - | - | - | - | (265.6) | - | - | - |
| Reserve of tax incentives | - | - | - | - | - | - | 56.4 | - | - | - | (56.4) | - | - | - |
| Share-based payments | - | 15.8 | - | - | - | - | - | - | - | - | - | 15.8 | - | 15.8 |
| Gains and losses on disposals of shares | - | 3.3 | - | - | - | - | - | - | - | - | - | 3.3 | - | 3.3 |
| Acquisition of non-controlling entities | - | (12.2) | - | - | - | - | - | - | - | - | - | (12.2) | - | (12.2) |
| Participation of non-controlling interest | - | - | - | - | - | - | - | - | - | - | - | - | 34.5 | 34.5 |
| Treasury shares acquired | - | - | (72.0) | - | - | - | - | - | - | - | - | (72.0) | - | (72.0) |
| Treasury shares sold | - | - | 7.4 | - | - | - | - | - | - | - | - | 7.4 | - | 7.4 |
| BALANCES AT DECEMBER 31, 2011 | 12,460.5 | 76.3 | (65.3) | 179.6 | 978.6 | 545.8 | 56.4 | 12.6 | (162.2) | (11.9) | - | 14,070.4 | 39.6 | 14,110.0 |
See accompanying notes to the consolidated financial statements.
F-4
BRF - BRASIL FOODS S.A.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian reais)
| Note | 12.31.11 | 12.31.10 | 12.31.09 | |
| Net Income | 1,365.1 | 805.0 | 118.6 | |
|
Gain (loss) in foreign currency translation adjustments |
1.1 | (5.2) | 19.6 | |
|
Unrealized gain (loss) in available for sale marketable securities, net of |
||||
|
income taxes of (R$0.05) in 2011 and (R$0.3) in 2010. |
8 | 3.5 | 0.9 | (1.2) |
|
Unrealized gains (loss) in cash flow hedge, net of income taxes of R$97.8 in |
||||
|
2011 and (R$53.5) in 2010. |
4 | (229.4) | 103.9 | (4.7) |
|
Actuarial gains (losses), net of income taxes of R$14.4 in 2011 and R$8.7 in |
||||
|
2010. |
24 | 28.0 | (16.8) | (23.1) |
| Net income (loss) recorded directly in the shareholders' equity | (196.8) | 82.8 | (9.4) | |
| Comprehensive Income | 1,168.3 | 887.8 | 109.2 | |
| Attributable to: | ||||
|
BRF Shareholders |
1,170.6 | 886.9 | 113.6 | |
|
Non-controlling interest |
(2.3) | 0.9 | (4.4) |
See accompanying notes to the consolidated financial statements.
F-5
BRF - BRASIL FOODS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian reais)
| 12.31.11 | 12.31.10 | 12.31.09 | |
| OPERATING ACTIVITIES: | |||
| Net income for the year | 1,367.4 | 804.1 | 123.0 |
| Adjustments to reconcile net income to net cash provided by operating activities: | |||
|
Non-controlling shareholders |
(2.3) | 0.9 | (4.4) |
|
Depreciation and amortization |
886.3 | 780.0 | 544.6 |
|
Equity interest in income of affiliates |
(9.0) | (4.4) | (2.5) |
|
Loss on disposal of property, plant and equipment |
158.7 | 87.3 | 45.0 |
|
Deferred income tax |
116.6 | 65.9 | 141.0 |
|
Provision (reversal) for tax, civil and labor risks |
78.9 | 122.7 | (14.9) |
|
Other provisions (reversals) |
60.5 | (89.7) | 20.2 |
|
Exchange rate variations and interest |
732.2 | 236.5 | (533.8) |
| Changes in Operating Assets and Liabilities: | |||
|
Investment in trading securities |
(4,003.6) | (2,809.7) | (9,448.8) |
|
Redemption of trading securities |
4,107.6 | 4,553.8 | 8,480.0 |
|
Investment in available for sale |
(1,703.5) | (980.7) | (239.3) |
|
Redemptions of available for sale |
1,499.2 | 1,170.7 | 69.0 |
|
Other financial assets and liabilities |
(23.8) | (75.9) | (8.0) |
|
Trade accounts receivable |
(640.2) | (401.5) | 118.9 |
|
Inventories |
(538.6) | 163.5 | 244.7 |
|
Trade accounts payable |
566.7 | 154.8 | (28.9) |
|
Payable of provisions for tax, civil and labor risks |
(203.2) | (91.3) | (30.1) |
|
Interest paid |
(466.2) | (545.6) | (438.6) |
|
Cash paid during the year for income taxes |
(37.8) | (78.1) | - |
|
Interest on shareholders' equity received |
5.6 | 4.0 | - |
|
Payroll and related charges |
(808.9) | 164.2 | (30.9) |
|
Net cash provided by (used) operating activities |
1,142.6 | 3,231.5 | (993.8) |
| INVESTING ACTIVITIES: | |||
|
Marketable securities |
- | - | (0.4) |
|
Redemptions in marketable securities |
29.2 | - | 251.7 |
|
Additional acquisition costs |
- | - | 99.2 |
|
Business combination, net of cash |
(230.2) | - | 511.3 |
|
Other investments, net |
(4.7) | - | (58.8) |
|
Additions to property, plant and equipment |
(1,125.2) | (697.8) | (693.2) |
|
Additions to biological assets |
(492.2) | (376.1) | (225.9) |
|
Proceeds from disposals of property, plant and equipment |
6.0 | 38.2 | 66.4 |
|
Additions to intangible |
(58.8) | (64.7) | - |
|
Net cash used in investing activities |
(1,875.9) | (1,100.6) | (49.7) |
| FINANCING ACTIVITIES: | |||
|
Proceeds from debt issuance |
3,098.4 | 2,928.7 | 2,604.6 |
|
Repayment of debt |
(2,838.9) | (4,357.5) | (5,923.1) |
|
Capital increase |
- | - | 5,290.0 |
|
Treasury shares acquisition |
(72.0) | - | - |
|
Acquisition of non-controlling entities |
(12.2) | - | - |
|
Interest on shareholders' equity paid |
(501.6) | (153.2) | (24.8) |
|
Cost of shares issuance |
- | (1.2) | (91.7) |
|
Net cash (used in) provided by financing activities |
(326.3) | (1,583.2) | 1,855.0 |
| EFFECT ON EXCHANGE RATE VARIATION ON CASH AND CASH EQUIVALENTS | 115.8 | (135.3) | (146.8) |
| Net (decrease) increase in cash | (943.8) | 412.4 | 664.7 |
| At the beginning of the year | 2,310.6 | 1,898.2 | 1,233.5 |
| At the end of the year | 1,366.8 | 2,310.6 | 1,898.2 |
See accompanying notes to the consolidated financial statements.
F-6
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
1. COMPANY’S OPERATIONS
The BRF – Brasil Foods S.A. (“BRF”) and its subsidiaries (collectively “Company”) is one of Brazil’s largest companies in the food industry. The Company is a public company, listed on the Brazilian Securities, Commodities & Futures Exchange (“BM&FBOVESPA”), under the ticker BRFS3, and listed on the New York Stock Exchange (“NYSE”), under the ticker BRFS, which headquarters is located at 475, Jorge Tzachel Street in the City of Itajaí, State of Santa Catarina. With a focus on raising, producing and slaughtering of poultry, pork and beef, processing and/or sale of fresh meat, processed products, milk and dairy products, pasta, frozen vegetables and soybean derivatives, among which the following are highlighted:
· Whole chickens and cuts of chicken, turkey, pork and beef cuts;
· Ham products, sausages, bologna, frankfurters and other smoked products;
· Hamburgers, breaded meat products and meatballs;
· Lasagnas, pizzas, vegetables, cheese breads, pies and frozen pastries;
· Milk, dairy products and desserts;
· Juices, soy milk and soy juices;
· Margarine; and
· Soy meal and refined soy flour, as well as animal feed.
During the last quarter of 2011, the Company's activities started to be segregated into 4 operating segments, being: domestic market, foreign market, food service and dairy products.
In the domestic market, the Company operates 45 meat processing plants, 16 milk and dairy products processing plants, 3 margarine processing plants, 4 pasta processing plants, 1 dessert processing plant and 1 soybean crushing plant, all of them located near the Company’s raw material suppliers or the main consumer centers.
In the foreign market, the Company operates 3 meat processing plants, 1 margarine and oil processing plant, 1 sauces and mayonnaise processing plant, 1 pasta and pastries processing plant and 1 cheese processing plant, and has subsidiaries or sales offices in the United Kingdom, Italy, Austria, Hungary, Japan, The Netherlands, Russia, Singapore, United Arab Emirates, Portugal, France, Germany, Turkey, China, Cayman Islands, South Africa, Venezuela, Uruguay and Chile.
The Company has an advanced distribution system and uses 38 distribution centers, to deliver its products to supermarkets, retail stores, wholesalers, food service stores and other institutional customers in the domestic market and exports to more than 145 countries.
F-7
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
BRF has a large number of brands, the principal of which are the following: Batavo, Claybon, Chester®, Confiança, Delicata, Doriana, Elegê, Fazenda, Nabrasa, Perdigão, Perdix, Fiesta, Hot Pocket, Miss Daisy, Nuggets, Qualy, Rezende, Sadia, Speciale Sadia, Texas and Wilson, in addition to licensed brands such as Turma da Mônica.
The table below summarizes the direct and indirect ownership interests of the Company, as well as the activities of each:
F-8
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
1.1 Interest in subsidiaries:
| Subsidiary | Main activity | Country | 12.31.11 | 12.31.10 | |
| PSA Laboratório Veterinário Ltda. | Veterinary activities | Brazil | 88.00% | 88.00% | |
|
Sino dos Alpes Alimentos Ltda. |
Industrialization and commercializations of products | Brazil | 99.99% | 99.99% | |
| PDF Participações Ltda. | Holding | Brazil | 1.00% | 1.00% | |
|
Sino dos Alpes Alimentos Ltda. |
Industrialization and commercializations of products | Brazil | 0.01% | 0.01% | |
| Vip S.A. Emp. Part. Imobiliárias | Commercialization of owned real state | Brazil | 65.49% | 65.49% | |
|
Establecimiento Levino Zaccardi y Cia. S.A. |
Processing of dairy products | Argentina | 10.00% | 10.00% | |
|
Avipal S.A. Construtora e Incorporadora |
(a) | Construction and real estate marketing | Brazil | 100.00% | 100.00% |
|
Avipal Centro-oeste S.A. |
(a) | Industrialization and commercializations of milk | Brazil | 100.00% | 100.00% |
|
Establecimiento Levino Zaccardi y Cia. S.A. |
Processing of dairy products | Argentina | 90.00% | 90.00% | |
|
UP! Alimentos Ltda. |
Industrialization and commercializations of products | Brazil | 50.00% | 50.00% | |
|
Perdigão Trading S.A. |
(a) | Holding | Brazil | 100.00% | 100.00% |
|
PSA Laboratório Veterinário Ltda |
Veterinary activities | Brazil | 12.00% | 12.00% | |
|
PDF Participações Ltda. |
Holding | Brazil | 99.00% | 99.00% | |
|
Heloísa Ind. e Com. de Produtos Lácteos Ltda. |
(i) | Industrialization and commercializations of milk | Brazil | 100.00% | - |
|
Perdigão Export Ltd. |
(g) | Import and export of products | Cayman Island | - | 100.00% |
|
Crossban Holdings GmbH |
Holding | Austria | 100.00% | 100.00% | |
|
Perdigão Europe Ltd. |
Import and commercialization of products | Portugal | 100.00% | 100.00% | |
|
Perdigão International Ltd. |
Import and commercialization of products | Cayman Island | 100.00% | 100.00% | |
|
BFF International Ltd. |
Unrestricted activities | Cayman Island | 100.00% | 100.00% | |
|
Highline International |
(a) | Unrestricted activities | Cayman Island | 100.00% | 100.00% |
|
Perdigão UK Ltd. |
(j) | Marketing and logistics services | United Kingdom | - | 100.00% |
|
Plusfood Germany GmbH |
Import and commercialization of products | Germany | 100.00% | 100.00% | |
|
Perdigão France SARL |
Import and commercialization of products | France | 100.00% | 100.00% | |
|
Plusfood Holland B.V. |
Administrative services | The Netherlands | 100.00% | 100.00% | |
|
Plusfood Groep B.V. |
Holding | The Netherlands | 100.00% | 100.00% | |
|
Plusfood B.V. |
Import and commercialization of products | The Netherlands | 100.00% | 100.00% | |
|
Plusfood Wrexham |
Import and commercialization of products | United Kingdom | 100.00% | 100.00% | |
|
Plusfood Finance UK Ltd. |
(c) | Financial fund-raising | United Kingdom | - | 100.00% |
|
Plusfood Iberia SL |
Marketing and logistics services | Spain | 100.00% | 100.00% | |
|
Plusfood Italy SRL |
Import and commercialization of products | Italy | 67.00% | 67.00% | |
|
BRF Brasil Foods Japan KK |
Import and commercialization of products | Japan | 100.00% | 100.00% | |
|
BRF Brasil Foods PTE Ltd. |
Marketing and logistics services | Singapore | 100.00% | 100.00% | |
|
Plusfood Hungary Trade and Service LLC |
Import and commercialization of products | Hungary | 100.00% | 100.00% | |
|
Plusfood UK Ltd. |
Marketing and logistics services | United Kingdom | 100.00% | 100.00% | |
|
Acheron Beteiligung-sverwaltung GmbH |
(b) | Holding | Austria | 100.00% | 100.00% |
|
Xamol Consultores Serviços Ltda. |
(a) | Import and commercialization of products | Portugal | 100.00% | 100.00% |
|
BRF Brasil Foods Africa Ltd. |
Import and commercialization of products | South Africa | 100.00% | 100.00% | |
|
Sadia Chile S.A. |
(e) | Import and commercialization of products | Chile | 40.00% | - |
|
Sadia S.A. |
Industralization and commercialization of products | Brazil | 100.00% | 100.00% | |
|
Sadia International Ltd. |
Import and commercialization of products | Cayman Island | 100.00% | 100.00% | |
|
Sadia Uruguay S.A. |
Import and commercialization of products | Uruguay | 100.00% | 100.00% | |
|
Sadia Alimentos S.A. |
(f) | Import and commercialization of products | Argentina | - | 5.00% |
|
Sadia Chile S.A. |
Import and commercialization of products | Chile | 60.00% | 60.00% | |
|
Sadia Alimentos S.A. |
(f) | Import and commercialization of products | Argentina | - | 95.00% |
|
Sadia U.K. Ltd. |
Import and commercialization of products | United Kingdom | 100.00% | 100.00% | |
|
Concórdia Foods Ltd. |
(d) | Import and commercialization of products | United Kingdom | - | 100.00% |
|
Vip S.A. Emp. Part. Imobiliárias |
Commercialization of owned real estate | Brazil | 34.51% | 34.51% | |
|
Estelar Participações Ltda. |
(j) | Holding | Brazil | - | 99.90% |
|
Athena Alimentos S.A. |
(k) | Industrialization and commercialization of commodities | Brazil | 99.99% | 99.90% |
|
Estelar Participações Ltda. |
(j) | Holding | Brazil | - | 0.10% |
|
Sadia Overseas Ltd. |
Financial fund-raising | Cayman Island | 100.00% | 100.00% | |
|
Sadia GmbH |
Holding | Austria | 100.00% | 100.00% | |
|
Wellax Food Logistics C.P.A.S.U. Lda. |
Import and commercialization of products | Portugal | 100.00% | 100.00% | |
|
Sadia Foods GmbH |
Import and commercialization of products | Germany | 100.00% | 100.00% | |
|
BRF Foods Limited Liability Company |
Import and commercialization of products | Russia | 10.00% | 10.00% | |
|
Qualy B.V. |
(b) | Import and commercialization of products | The Netherlands | 100.00% | 100.00% |
|
Sadia Japan KK |
Import and commercialization of products | Japan | 100.00% | 100.00% | |
|
Badi Ltd. |
Import and commercialization of products | Arab Emirates | 100.00% | 100.00% | |
|
Al-Wafi |
Import and commercialization of products | Saudi Arabia | 75.00% | 75.00% | |
|
BRF Foods Limited Liability Company |
Import and commercialization of products | Russia | 90.00% | 90.00% | |
|
Baumhardt Comércio e Participações Ltda. |
Holding | Brazil | 73.94% | 73.94% | |
|
Excelsior Alimentos S.A. |
Industralization and commercialization of products | Brazil | 25.10% | 25.10% | |
|
Excelsior Alimentos S.A. |
Industralization and commercialization of products | Brazil | 46.01% | 46.01% | |
|
K&S Alimentos S.A. |
Industrialization and commercialization of products | Brazil | 49.00% | 49.00% | |
|
Sadia Alimentos S.A. |
(f) | Import and export of products | Argentina | 100.00% | - |
|
Avex S.A. |
(h) | Industrialization and commercialization of products | Argentina | 70.70% | - |
|
Flora Dánica S.A. |
(h) | Industrialization and commercialization of products | Argentina | 100.00% | - |
|
Flora San Luis S.A. |
(h) | Industrialization and commercialization of products | Argentina | 100.00% | - |
|
GB Dan S.A. |
(h) | Industrialization and commercialization of products | Argentina | 100.00% | - |
F-9
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
(a) Dormant subsidiaries.
(b) The wholly-owned subsidiary Acheron Beteiligung-sverwaltung GmbH owns 100 direct subsidiaries in Madeira Island, Portugal, with an investment of R$1.6 (R$0.6 as of December 31, 2010), and the wholly-owned subsidiary Qualy B.V. owns 48 subsidiaries in The Netherlands, and the amount of this investment, as of December 31, 2011 , is represented by a net capital deficiency of R$9.4 (R$8.9 as of December 31, 2010), the purpose of these two subsidiaries is to operate in the European market to increase the Company’s market share, which is regulated by a system of poultry and turkey import quotas.
(c) Company´s activities were terminated in February 2011.
(d) Company´s activities were terminated in July 2011.
(e) Acquisition of remaining non-controlling interest in September 2011 which represents 40% of the capital.
(f) Exchange of capital interest between groups, companies occurred in September 2011.
(g) Company´s activities were terminated in October 2011.
(h) Acquired in October 2011.
(i) Acquired in December 2011.
(j) Company´s activities were terminated in December 2011.
(k) The name of Sadia Industrial S.A. was changed to Athena Alimentos S.A.
1.2 Performance Commitment Agreement
As disclosed on July 13, 2011, the Company, its wholly-owned subsidiary and the Administrative Council for Economic Defense (“CADE”) signed the Performance Commitment Agreement (“TCD”) which the main purpose was to establish measures to accomplish the following:
(1) prevent that the merger between the Company and its subsidiary from substantially eliminating the competition;
(2) establish conditions to the existence of a strong competitor in the markets affected by the merger;
(3) propitiate condition to the fast and efficient entrance of competitors in the affected markets; and
(4) ensure that the benefits originated from the merger be equally distributed among participants and consumers.
The measures established in the TCD are limited to the national territory, in certain markets and/or products category. The Company and its subsidiary are free to act in the whole foreign market, in the dairy products market and in the food service local market, as long as they do not interfere in the assumptions and effectiveness of the TCD.
F-10
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
In order to attend the TCD’s purposes, the Company and its subsidiary committed to take the following measures:
(1) disposal of the brands: Rezende, Wilson, Texas, Tekitos, Patitas, Escolha Saudável, Light Ellegant, Fiesta, Freski, Confiança, Doriana and Delicata, as well as all, the intellectual properties rights related to these brands;
(2) jointly dispose all the assets and rights related to the production plants:
| Processing plant | State | Activity |
| Pork slaughtering, finished goods processing, | ||
| Carambeí | PR | animal feed production, hatcheries and pork |
| farms. | ||
| Pork slaughtering, finished goods processing, | ||
| Três Passos | RS | |
| hatcheries and pork farms. | ||
| Brasília | DF | Poultry slaughtering, finished goods processing, |
| animal feed production, hatcheries and farms. | ||
| São Gonçalo | BA | Poultry slaughtering, finished goods processing, |
| animal feed production, hatcheries and farms. | ||
| Salto Veloso | SC | Finished goods processing. |
| Bom Retiro do Sul | RS | Finished goods processing. |
| Lages | SC | Finished goods processing. |
| Duque de Caxias | RJ | Finished goods processing. |
| Várzea Grande | MS | Finished goods processing. |
| Valinhos | SP | Finished goods processing. |
| Excelsior | RS | Finished goods processing. |
The total production capacity of the units to be disposed of must correspond to 730.0 tons per annum (“p.a.”).
F-11
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
(3) disposal of all the assets and rights related to the following distribution centers:
| Location | State |
| Salvador | BA |
| Duque de Caxias | RJ |
| Campinas | SP |
| Bauru | SP |
| Brasília | DF |
| São José dos Pinhais | PR |
| Ribeirão Preto | SP |
| Cubatão | SP |
(4) assignment of the entire portfolio of contracts with poultry and pork outgrowers, currently utilized in order to guarantee the supply to the specific processing plants listed in the item (2) above;
(5) suspension of the use of the Perdigão brand, from the signing date of the disposal agreement, in the Brazilian territory, for the following products and periods:
| Product | Period |
| Cooked hams, luncheon meat | 3 years |
| Pork festive line | 3 years |
| Smoked sausage and pork sausage | 3 years |
| Salamis | 4 years |
| Lasagna | 5 years |
| Frozen pizzas | 5 years |
| Kibes and meat balls | 5 years |
| Turkey cold cuts light line | 5 years |
(6) suspension of the use of the Batavo brand, from the signing date of the disposal agreement, for the period of 4 years, related to the products listed above in item (5).
The CADE has been assessing the Company’s compliance with the commitments disclosed herein; as the Company is subject to penalties in case of noncompliance with CADE’s provisions, which ultimately, includes the review of the operation.
F-12
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
In order to attend the obligations derived from the TCD, the Company’s management set up a plan to sell the above mentioned facilities including the related assets, rights and obligations. Additionally, the plan comprises the necessary actions to transfer the productive capacity of 730.0 tons to the future acquirer as established by the TCD, which includes: assets transfers, purchase and installation of new product lines and the shutdown of existing productions line with the correspondent transfer to other production plants.
On December 8, 2011, the Company and Marfrig Alimentos S.A. (“Marfrig”) disclosed to the market that they signed a binding document, Memorandum of Understanding (“MOU”), which was confirmed with an amendment by the Asset Exchange and Other Agreements signed on March 20, 2012, as disclosed in note 38 – Subsequent Events, establishing the main term and conditions aiming to the accomplish an exchange of assets comprising of the Company’s assets and rights related to the TCD with Marfrig or its subsidiary Quickfood’s including assets and rights as follows:
(1) the entire equity interest held either directly or indirectly by Marfrig, equivalent to 90.05% of the capital of Quickfood, a company based in Argentina, which owns the rights of Paty brand. Additionally, Marfrig is compelled to adopt all necessary actions to segregate and remove from Quickfood, all assets and liabilities related to beef activity that will remain under control of Marfrig, except the San Jorge cold storage, that property will be transferred to the BRF;
(2) additional payment of an amount of R$350.0, of which R$100.0 will be paid between June and October 2012 and the remaining amount of R$250.0 will be paid in 72 monthly installments bearing market interest rates; and
(3) commercial operations related to the Paty brand in Uruguay and Chile.
Additionally, it was agreed that risks and benefits regarding to the BRF's pork manufacturing facility, located in the City of Carambeí, State of Paraná, will be transferred to Marfrig through a lease contract for a period of 3 years, renewable for more 1 year, with a call option for the amount of R$188.0.
Management's understanding of both companies is that the assets to be exchanged have equivalent values. Such understanding is subject to corroboration through an appraisal report at fair market value of the businesses which is currently being prepared. The transaction is subject to adjustments resulting from the legal, accounting, financial and operational due diligence, which are in progress and until the date of the issuance of these consolidated financial statements have not been finalized.
F-13
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The signing of the definitive agreements and the actual implementation of the transaction are subject to precedent conditions, including the assessment of CADE, in the terms and limits placed on the TCD signed on July 13, 2011.
The Company did not reclassify the set of assets and liabilities to be disposed of as held for sale, because it concluded that on December 31, 2011, the current condition of these assets did not met the requirements of IFRS 5, paragraph 7 “the assets or group of assets held for sale must be immediately available in its current conditions…”. The Company’s conclusion is supported by the following factors:
(1) in order to attend the requirements related to the disposal of productive capacity, which correspond to 730.0 tons, the Company prepared a plan comprising of refurbishments and adaptations necessary in these plants which demand an investment in the amount of R$78.5. Until December 31, 2011, only R$10.8 was effectively invested, hence showing that the plants were not immediately available for sale in the conditions determined by CADE;
(2) in the MOU signed on December 8, 2011, and in the Asset Exchange and Other Agreements, Marfrig imposed other conditions that also require additional changes in the plants besides those mentioned in the item (1) above, denominated “precedent conditions”;
(3) the buildings and lands related to the plants to be disposed of are pledged as guarantees;
(4) as required by CADE, the plants in the scope of the TCD must operate until the moment of ownership transfer; therefore, such plants will attend the sales orders of the products currently being manufactured, which are not part of the products portfolio to be sold to Marfrig according to the TCD. Thus, the sales orders backlog will not be transferred to the Marfrig.
Due to the fact that the Company and Marfrig have not concluded all appraisal reports of the fair value of the assets at the date of the issuance of these financial statements and also because there are no identified other impairment factors, no adjustments have been recorded in these consolidated financial statements for the year ended December 31, 2011.
On December 31, 2011, the book value of BRF’s assets to be exchange does not exceed their fair value.
F-14
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
On December 31, 2011, the estimated balances of the assets and liabilities to be exchanged with Marfrig according to the MOU and confirmed by the Asset Exchange and Other Agreements are set forth below:
| ASSETS | |
| CURRENT ASSETS | |
| Cash and cash equivalents | 3.7 |
| Trade accounts receivable | 11.3 |
| Inventories | 129.5 |
| Others | 1.8 |
| 146.3 | |
| NON-CURRENT ASSETS | |
| Deferred taxes | 6.8 |
| Judicial deposits | 1.2 |
| Others assets | 1.2 |
| Investments | - |
| Property, plant and equipment | 554.5 |
| Intangible | 83.0 |
| 646.7 | |
| TOTAL ASSETS | 793.0 |
| Current assets | 11,123.8 |
| Non-current assets | 18,859.7 |
| Total assets | 29,983.5 |
| % that represents in current assets | 1.3% |
| % that represents in non-current assets | 3.4% |
| % that represents in total assets | 2.6% |
F-15
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| LIABILITIES | |
| CURRENT LIABILITIES | |
|
Short term debt |
11.8 |
|
Trade accounts payable |
8.1 |
|
Social and labor obligations |
16.1 |
|
Tax obligations |
2.3 |
|
Other obligations |
1.7 |
| 40.0 | |
| NON-CURRENT LIABILITIES | |
|
Long term debt |
0.1 |
|
Tax obligations |
6.1 |
|
Other obligations |
1.8 |
| 8.0 | |
| NET ASSETS | 745.0 |
| TOTAL LIABILITIES | 793.0 |
| Current liabilities | 7,987.8 |
| Non-current liabilities | 7,885.7 |
| Total liabilities | 29,983.5 |
| % that represents in current liabilities | 0.5% |
| % that represents in non-current liabilities | 0.1% |
| % that represents in total liabilities | 2.6% |
The labor obligations related to the retirement supplementary plan and other benefits presented in the note 24, are still being estimated and for this reason were not included in the position above.
The Company does not expect the disposal of these assets and liabilities to cause significant impacts on the Company’s future cash flows.
The Company´s Management and Marfrig expect to conclude the precedent conditions established by the Asset Exchange and Other Agreements by May 31, 2012, to allow the conclusion of the definitive asset exchange agreement on June 1, 2012.
1.3 Seasonality
The Company does not operate with any significant seasonality impact through the fiscal year. In general, during the fourth quarter the demand in the domestic market is slightly stronger than in the other quarters, mainly due to the year-end celebration such as Christmas and New Years Eve. The most sold products are: turkey, Chester® and ham.
F-16
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
2. MANAGEMENT’S STATEMENT AND BASIS OF PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS
The Company’s consolidated financial statements for the years ended December 31, 2011, 2010 and 2009 are in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”).
The Company’s consolidated financial statements are expressed in thousands of Brazilian Reais (“R$”), as well as, the amount of other currencies disclosed in the consolidated financial statement, when applicable, were also expressed in thousands.
The preparation of the Company’s consolidated financial statements requires Management to make judgments, use estimates and adopt assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, as well as the disclosures of contingent liabilities, as of the reporting date of these consolidated financial statement, see note 3.30. However, the uncertainty inherent to these judgments, assumptions and estimates could lead to results requiring a material adjustment to carrying amount of the affected asset or liability in future periods.
The settlement of the transactions involving these estimates can result in amounts that significantly different from those recorded in the consolidated financial statement due to the lack of precision inherent to the estimation process. The Company reviews its judgments, estimates and assumptions on a quarterly basis.
The consolidated financial statements were prepared based on the historical cost except for the following material items recognized in the balance sheet:
· derivative financial instruments measured at fair value;
· derivative financial instruments measured at fair value through the statement of income;
· financial assets available for sale measured at fair value;
· assets and liabilities of acquired companies from January 1, 2009 recorded initially at fair value; and
· share-based payments measured at fair value.
F-17
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3. Summary of significant accounting practices
3.1. Consolidation: includes the BRF’s financial statements and the financial statements of the directly and indirectly held subsidiaries where BRF has control. For the joint ventures, the Company adopts the equity method. All transactions and balances between BRF and its subsidiaries have been eliminated upon consolidation, as well as the unrealized profits or losses arising from negotiations between the Company and its subsidiaries, and the related charges and taxes. Non-controlling interest is presented separately.
In the preparation of the consolidated financial statements, the Company applied IAS 21, related to Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements. Pursuant to this accounting standard, the Company must apply the following criteria for the consolidation of foreign subsidiaries:
· Functional currency: the financial statements of each subsidiary included in the Company’s consolidated financial statements are prepared using the currency of the main economic environment where it operates. The foreign subsidiaries adopt the Brazilian Real as their functional currency, except for the subsidiary Plusfood Groep B.V. and Avex S.A. which adopted the Euro and the Argentine Peso, respectively, as their functional currency;
· Investments: investments in affiliates are accounted for under the equity method adjusted for the effects of measurement of the business combination, where applicable. The financial statements of foreign subsidiaries are translated into Brazilian Reais in accordance with their functional currency using the following criteria:
Functional currency – Euro and Argentine Peso
· Assets and liabilities are translated at the exchange rate at the end of the period;
· Statement of income accounts are translated at the exchange rate obtained from the monthly average rate of each month; and
· The cumulative effects of gains or losses upon translation are directly recognized in shareholders’ equity.
Functional currency – Brazilian Reais
F-18
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
· Non-monetary assets and liabilities are translated at the historical rate of the transaction;
· Monetary assets and liabilities are translated at the exchange rate effective at the end of the period;
· Statement of income accounts are translated at the exchange rate obtained from the monthly average rate of each month; and
· The cumulative effects of gains or losses upon translation are directly recognized in the statement of income.
The accounting practices have been consistently applied in all subsidiaries included in the consolidated financial statements.
3.2. Business combinations: business combinations are accounted for using the acquisition method. The cost of an acquisition is the sum of the consideration transferred, valued based on the fair value at acquisition date, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquirer’s net assets. Costs directly attributable to the acquisition must be accounted for as an expense when incurred.
When acquiring a business, Management evaluates the assets acquired and the liabilities assumed in order to classify and allocate them pursuant to the terms of the agreement, economic circumstances and the conditions at the acquisition date.
Goodwill is initially measured as the excess of the consideration transferred over the fair value of the net assets acquired (net assets identified and liabilities assumed). If the consideration is lower than the fair value of the net assets acquired, the difference is recognized as a gain in the statement of income.
After initial recognition, goodwill is measured at cost, net of any accumulated impairment losses. For purposes of impairment testing, the goodwill acquired in a business combination, as from the acquisition date, is allocated to each of the Company’s cash generating units expected to benefit from the synergies of the combination, regardless of whether other assets or liabilities of the acquire are attributed to these units.
F-19
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3.3. Segment information: an operating segment is a Company’s component that carries out business activities from which it can obtain revenues and incur expenses. The operating segments reflect how the Company’s management reviews financial information to make decisions and for which individual financial information is available. The Company’s management has identified 4 reportable segments, which meet the quantitative and qualitative disclosure parameters. The segments identified for disclosure represent mainly sales channels. The information according to the characteristics of the products is also presented, based on their nature, as follows: poultry, pork, beef, dairy products, processed, others processed and animal feed.
3.4. Cash and cash equivalents: include cash on hand, bank deposits and highly liquid investments in fixed-income funds and/or securities with maturities, upon acquisition, of 90 days or less, which are readily convertible into known amounts of cash and subject to immaterial risk of change in value. The investments classified in this group, due to their nature, are measured at fair value through the statement of income.
3.5. Financial instruments: financial assets and liabilities are recorded on the date they are delivered to the Company (settlement date) and classified based on the purpose for which they were acquired, being divided into the following categories: financial investments, loans, receivables, derivatives and other.
3.5.1. Financial investments are financial assets that comprise of public and private fixed-income securities, classified and recorded based on the purpose for which they were acquired, in accordance with the following categories:
· Trading securities: acquired for sale or repurchase in the short term, initially recorded at fair value and its variations, with a corresponding entry directly recorded in the statement of income for the year within interest income or expense;
· Held to maturity: when the Company has the intention and financial ability to hold them up to maturity, the investments are recorded at amortized cost, plus interest, monetary and exchange rate changes, when applicable, and recognized in the statement of income when incurred, within interest income or expense; and
· Available for sale: this category is for all the financial assets that do not classify for any of the categories above, which are measured at fair value, with variations recorded in the shareholders’ equity within other comprehensive income while the asset is not realized, net of taxes. Interest, inflation adjustments and exchange rate changes, when applicable, are recognized in the statement of income when incurred within interest income or expense.
F-20
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3.5.2. Derivatives measured at fair value: derivatives that are actively traded on organized markets, and their fair value is determined based on the amounts quoted in the market at the balance sheet date. These financial instruments are designated at initial recognition, classified as other financial assets and/or liabilities, with a corresponding entry in the statement of income within finance income or costs or cash flow hedge, which are recorded in shareholders’ equity net of taxes.
3.5.3. Hedge transactions: derivatives used to hedge exposures to risks or change the characteristics of financial assets and liabilities, unrecognized firm commitments, highly probable transactions or net investments in transactions abroad, and which: (i) are highly correlated as regards changes in their fair value in relation to the fair value of the hedged item, both at inception and throughout the life of the contract (effectiveness from 80% to 125%); (ii) are supported by documents that identify the transaction, the hedged risk, the risk management process and the methodology used to assess effectiveness; and (iii) are considered as effective in the mitigation of the risk associated with the hedged exposure. Their accounting follows IAS 39 “Financial Instruments-Recognition and Measurement”, which allows the application of the hedge accounting methodology with the effects of measurement at fair value recognized in shareholders’ equity and their realization in the statement of income under a caption corresponding to the hedged item.
3.5.4. Loans and receivables: these are financial assets with fixed or determinable payments which are not quoted on an active market. Such assets are initially recognized at fair value plus any attributable transaction costs. After initial recognition, loans and receivables are measured at amortized cost under the effective interest rate method, less any impairment losses.
3.6. Adjustment to present value: the Company and its subsidiaries measure the adjustment to present value of outstanding balances of other non- current rights, trade payables, social obligations and other non-current obligations. The Company adopts the weighted average of the cost of funding on the domestic and foreign markets to determine the adjustment to present value to the assets and liabilities previously mentioned, which corresponds to 6.7% p.a. (6.3% p.a. as of December 31, 2010).
F-21
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3.7. Trade receivables and other receivables: are recorded at the invoiced amount and adjusted to present value, when applicable, net of estimated losses on doubtful receivables.
The Company adopts procedures and analyses to establish credit limits and substantially does not require collateral from customers. In the event of default, collection attempts are made, which includes direct contact with customers and collection through third parties. Should these efforts not prove successful, court measures are considered and the notes are reclassified to non-current at the same time receivables are written-off.
3.8. Inventories: are stated at average cost, not exceeding market value or net realizable value. The cost of finished products includes raw materials, labor, cost of production, transport and storage, all of which are related to making the products ready for sale. Provisions for obsolescence, adjustments to net realizable value, impaired items and slow-moving inventories are recorded when necessary. Production losses are recorded and are an integral part of the production cost of the respective month, whereas unusual losses, if any, are recorded directly as an expense for the year in other operating income.
3.9. Biological assets: due to the fact that the Company is responsible for managing the biological transformation of poultry, pork and beef, pursuant to IAS 41 “Biological Assets”, the Company classified these assets as biological assets.
The Company recognizes biological assets when it controls these assets as a result of a past event and it is probable that future economic benefits associated with these assets will flow to the Company and fair value can be reliably estimated.
Pursuant to IAS 41, the biological assets should be measured at fair value less selling expenses at the time they are initially recognized and at the end of each accrual period, except for cases in which fair value cannot be reliably estimated.
In Management’s opinion, the fair value of the biological assets is substantially represented by formation cost, mainly due to the short life cycle of the animals and the fact that a significant share of the profits from our products arises from the manufacturing process rather than from obtaining in natura meat (raw materials at slaughtering point). This opinion is supported by a fair value appraisal report prepared by an independent expert, which presented an immaterial difference between the two methodologies. As a consequence, Management continues to record biological assets at cost.
F-22
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3.10. Non-current assets held for sale: assets included in this subgroup are those identified as unusable by the Company and whose sale has been authorized by Management; accordingly, there is a firm commitment to find a purchaser and conclude the sale within 12 months, the assets are readily available at a reasonable price and it is unlikely there will be changes in the plan to sale. These assets are measured at carrying amount or fair value, whichever is lower, net of selling costs and are not depreciated or amortized.
3.11. Property, plant and equipment: stated at cost of acquisition, formation or construction, less accumulated depreciation and impairment losses, when applicable. The costs of short term debt are recorded as an integral part of construction in progress, pursuant to IAS 23 considering the average interest rate of the short term debt in effect on the capitalized date.
Depreciation is recognized based on the estimated economic useful life of each asset on a straight-line basis. The estimated useful life, residual values and depreciation methods are annually reviewed and the effects of any changes in estimates are accounted for prospectively. Land is not depreciated.
The Company performs an annual analysis of impairment indicators. If an impairment indicator is identified, the corresponding assets are tested for impairment using the discounted cash flow methodology. Hence, when impairment is identified, a provision is recorded.
The company performed an impairment test for some of the assets that showed indicators of impairment, as described in the note 17.
Gains and losses on disposals of property, plant and equipment are calculated by comparing the sales value with the residual book value and recognized in the statement of income.
3.12. Intangible assets: are identifiable non-physical assets, under the Company’s control and which generate future economic benefits.
F-23
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Intangible assets acquired are measured at cost at the time they are initially recognized. The cost of intangible assets acquired in a business combination corresponds to the fair value at acquisition date. After initial recognition, intangible assets are stated at cost less accumulated amortization and impairment losses, when applicable. Internally-generated intangible assets, excluding development costs, are not capitalized and expenditure is recognized in the statement of income for the year in which it was incurred.
The useful life of intangible assets is assessed as finite or indefinite.
Intangible assets with a finite life are amortized over the economic useful life and reviewed for impairment whenever there is an indication of a reduction in the economic value of the asset. The amortization period and method for an intangible asset with a finite useful life are reviewed at least at the end of each fiscal year. The amortization of intangible assets with a finite useful life is recognized in the statement of income as an expense consistently with the use of the intangible asset.
Intangible assets with an indefinite useful life are not amortized, but are tested annually for impairment on an individual basis or at the cash generating unit level. The Company records in intangible assets the goodwill balance.
Goodwill recoverability was tested in the last quarter of 2011 and no adjustments to reflect an impairment loss were identified. Such test involved the adoption of assumptions and judgments, as detailed in note 18.
3.13. Income taxes and social contributions: in Brazil, are comprised of income tax (“IRPJ”) and social contribution (“CSLL”), which are calculated monthly on taxable income, at the rate of 15% plus 10% surtax for IRPJ and of 9% for CSLL, considering the offset of tax loss carryforwards, up to the limit of 30% of taxable income.
The income from foreign subsidiaries is subject to taxation in their home countries, pursuant to the local tax rates and standards.
Deferred taxes represent credits and debits on IRPJ and CSLL tax losses, as well as temporary differences between the tax basis and the carrying amount. Deferred income tax and social contribution assets and liabilities are classified as non-current, as required by IAS 1. When the Company’s analysis indicates that the future use of these credits, within the time limit of 10 years, is not probable, a provision for losses will be recorded.
F-24
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity. In the consolidated financial statements, the Company’s tax assets and liabilities can be offset against the tax assets and liabilities of the subsidiaries if, and only if, these entities have a legally enforceable right to make or receive a single net payment and intend to make or receive this net payment, or recover the assets and settle the liabilities simultaneously; therefore, for presentation purposes, the balances of tax assets and tax liabilities are being disclosed separately.
3.14. Accounts payable and trade accounts payable: are initially recognized at fair value and subsequently increased, if applicable, with the accrued charges, monetary and exchange variations incurred until the closing dates of the consolidated financial statements.
3.15. Provision for tax, civil and labor risks and contingent liabilities: provisions are established when the Company has a present obligation, formalized or not, as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and the amount of the obligation can be reliably estimated.
The Company is a party to various lawsuits and administrative proceedings. The assessment of the likelihood of an unfavorable outcome in these lawsuits and proceedings includes the analysis of the evidence available, the hierarchy of the laws, available former court decisions, as well as the most recent court decisions and their importance to the Brazilian legal system, as well as the opinion of external legal counsel. The provisions are reviewed and adjusted to reflect changes in the circumstances, such as the applicable statute of limitation, conclusions of tax inspections or additional exposures identified based on new matters or court decisions.
A contingent liability recognized in a business combination is initially measured at fair value and subsequently measured at the higher of:
· the amount that would be recognized in accordance with the accounting policy for the provisions above (IAS 37); or
· the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with the revenue recognition policy (IAS 18).
F-25
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
As a result of the business combination with Sadia, the Company recognized contingent liabilities related to tax, civil and labor matters.
Costs incurred with disposal of assets are accrued based on the present value of the costs expected to settle the obligation using estimated cash flows, and are recognized as an integral part of the corresponding asset, or as a production cost, when incurred.
3.16. Leases: lease transactions in which the risks and rewards of ownership are substantially transferred to the Company are classified as finance leases. When there is no significant transfer of the risks and rewards of ownership, lease transactions are classified as operating leases.
Finance lease agreements are recognized in property, plant and equipment and in liabilities at the lower of the present value of the minimum mandatory installments of the agreement and the fair value of the asset, including, when applicable, the initial direct costs incurred in the transaction. The amounts recorded in property, plant and equipment are depreciated and the underlying interest is recorded in the statement of income in accordance with the term of the lease agreement.
Operating lease agreements are recognized as expenses throughout the lease period.
3.17. Share based payments: the Company provides share based payments for its executives, which are settled with Company shares. The Company adopts the provisions of IFRS 2, recognizes as an expense, on the straight-line basis, the fair value of the options granted, over the length of service required by the plan, with a corresponding entry to shareholder’s equity.
3.18. Supplementary retirement plan and other benefits to employees: the Company and its subsidiaries recognize actuarial assets and liabilities related to employee benefits in accordance with the criteria provided for in IAS 19 “Employee Benefits”. Actuarial gains and losses are recognized in other comprehensive income, in shareholders’ equity, based on the actuarial report prepared by independent specialists.
The contributions made by the sponsors are recognized as an expense for the year.
The plan assets are not at the disposal of the Company’s creditors and cannot be directly paid to the Company. Fair value is based on information on the market price and, in the case of quoted securities, on the purchase price disclosed. The value of any defined benefit asset recognized is restricted to the sum of any past service costs not yet recognized and the fair value of any economic benefit available in the form of reductions in the plan’s future employer contributions.
F-26
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3.19. Capital: corresponds to the value obtained in the issuance of common shares. Additional costs directly attributable to issue of shares are recognized as a deduction from shareholder’s equity, after any tax effects.
3.20. Treasury shares: when the capital recognized as equity is repurchased, the amount of compensation paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from shareholder’s equity. When treasury shares are subsequently sold or reissued, the value received is recognized as an increase in shareholders' equity and surplus or deficit arising is recorded to retained earnings.
3.21. Earnings per share: basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year, plus the weighted average number of ordinary shares that would be issued on conversion of all potentially dilutive ordinary shares.
3.22. Determination of income: results from operations are recorded on the accrual basis.
3.23. Revenues: revenues comprise of the fair value of consideration received or receivable by the sale of products, net of taxes, returns, rebates and discounts in the consolidated financial statements and also net of eliminations of sales between BRF and its subsidiaries.
Revenue is recognized in accordance with the accrual basis of accounting, when the sales value is reliably measurable and when the Company no longer has control over the goods sold, or otherwise related to the property, the costs incurred or to be incurred due to transaction can be reliably measured, it is probable that economic benefits will be received by the Company and the risks and benefits were fully transferred to the purchaser.
In addition, the Company and its subsidiaries have incentive programs and sales discounts, which are accounted for as deductions from sales or selling expenses, based on their nature. These programs include discounts to customers for a good sales performance based on volumes and marketing actions carried out at the sales points.
F-27
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
3.24. Employee and management profit sharing: employees are entitled to profit sharing based on certain targets agreed upon on an annual basis, whereas managers are entitled to profit sharing based on the provisions of the by-laws, proposed by the Board of Directors and approved by the shareholders. The profit sharing amount is recognized in the statement of income for the period in which the targets are attained.
3.25. Research and development: expenditures on research activities, undertaken with the opportunity to gain knowledge and understanding of science or technology, are recognized in income as incurred. Development activities involve a plan or project aimed at producing new or significantly improved technologies, process or products. The development costs are capitalized only if development costs can be reliably measured, if the product or process is technically and commercially viable if the future economic benefits are probable, and if the Company has the intention and the resources to complete the development and use or sell the asset. The expenditures capitalized include the cost of materials, labor, manufacturing costs that are directly attributable to preparing the asset for its intended use, other development expenditures are recognized in income as incurred.
The capitalized development expenditures are measured at cost less accumulated amortization and loss on impairment.
3.26. Financial income: include interest earnings on amounts invested (including available for sale financial assets), dividend income (except for dividends received from equity investees evaluated by the Company), gains on disposal of available for sale financial assets, changes in fair value of financial assets measured at fair value through income and gains on hedging instruments that are recognized in income. Interest income is recognized in earnings through the effective interest method. The dividend income is recognized in the statement of income on the date that the Company's right to receive payment is established. The distributions received from investees that are recorded under the equity method reduce the value of the investment.
3.27. Subsidies and tax incentives: Government subsidies are recognized at fair value when there is reasonable assurance that the conditions established and related benefits will be received. The amounts are accounted for as follows:
F-28
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
· Subsidies relating to assets: are accounted for in the statement of income in proportion to the depreciation of the asset; and
· Subsidies to Investments: the amounts recorded as revenue in the statement of income when excluded from the income tax and social contribution calculation basis will be reclassified to equity, as a reserve of tax incentives, unless there are accumulated losses.
3.28. Dividends and interest on capital: the proposal for payment of dividends and interest on capital made by the Company, which is within the portion equivalent to the mandatory minimum dividend, is recorded in current liabilities, for it is regarded as a legal obligation provided for in the bylaws; on the other hand, the dividends that exceed the mandatory minimum dividend, declared by Management before the end of the accounting period covered by the financial statements, not yet approved by the shareholders, is recorded as additional dividend proposed in shareholders’ equity.
For financial statement presentation purposes, interest on capital is stated as an allocation of income directly in equity.
3.29. Translation of foreign currency denominated assets and liabilities: as mentioned in item 3.1 above, the balances of assets and liabilities of foreign subsidiaries are translated into Brazilian Reais using the exchange rates in effect at the balance sheet date and statement of income accounts are translated at the average monthly rates in effect.
The exchange rates in Brazilian Reais effective at the date of the balance sheets translated were as follows:
| Final rate | 12.31.11 | 12.31.10 |
| U.S. Dollar (US$) | 1.8758 | 1.6662 |
| Euro (€) | 2.4342 | 2.2280 |
| Pound sterling (£) | 2.9148 | 2.5876 |
| Argentine Peso ($) | 0.4360 | 0.4194 |
| Average rates | ||
| U.S. Dollar (US$) | 1.6746 | 1.7593 |
| Euro (€) | 2.3278 | 2.3315 |
| Pound sterling (£) | 2.6835 | 2.7172 |
| Argentine Peso ($) | 0.4056 | 0.4500 |
3.30. Accounting judgments, estimates and assumptions: as mentioned in note 2, in the process of applying the Company’s accounting policies, Management made the following judgments which have a material impact on the amounts recognized in the consolidated financial statements:
F-29
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
· impairment of non-financial assets, see notes 5, 17 and 18;
· share-based payment transactions, see note 23;
· loss on the reduction of recoverable value of taxes, see notes 12 and 14;
· retirement benefits, see note 24;
· measurement at fair value of items related to business combinations, see note 6;
· fair value of financial instruments, see note 4;
· provision for tax, civil and labor risks, see note 25;
· estimated losses on doubtful receivables, see note 9;
· biological assets, see note 11; and
· useful lives of property, plant and equipment, see notes 17 and 18.
The Company reviews estimates and underlying assumptions used in its accounting estimates at least on a quarterly basis. Revisions to accounting estimates are recognized in the consolidated financial statements in the period in each the estimates are revised.
3.31. Reclassifications: we have reclassified certain items in the accompanying consolidated financial statements and note thereto for prior periods to be comparable with the classification for the year ended December 31, 2011. Theses reclassification had no effect on previously reported net income.
4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
4.1. Overview
In the normal course of its business, the Company is exposed to market risks related mainly to the fluctuation of interest rates, variation of foreign exchange rates and changes in the commodities prices.
The Company utilizes hedging instruments to mitigate its exposure to these risks, based on a Risk Policy under the management of the Financial Risk Management Committee, Board of Executive Officers and Board of Directors. Such policy includes the monitoring of the levels of exposure to each market risk and its measurement is performed based on the accounting exposure and forecast of future cash flows. The policy establishes limits for the decision making and adoption of hedging instruments with the purposes of:
(i) protecting from the exposure to fluctuation of interest rates;
F-30
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
(ii) protecting from the exposure to variation of foreign exchange rates on debt and cash flow; and
(iii) protecting from the exposure to changes in the commodities prices.
The Board of Directors plays a crucial role in the financial risk management structure as responsible for approving the Risk Policy. Moreover, the Board of Directors defines the limits of tolerance of the different risks identified as acceptable for the Company on behalf of its shareholders.
The Board of Directors is in charge of the evaluation of the Company’s positioning for each identified risk, according to the guidelines enacted by the Board of Directors as well as for approving:
(i) the action plans defined for aligning the risks within the defined limits of tolerance;
(ii) the performance indicators to be used in risk management;
(iii) the overall limits; and
(iv) the evaluation of improvements to the Risk Policy.
The Financial Risk Management Committee is in charge of the execution of the Risk Policy, which comprises the supervision of the risk management process, planning and verification of the impacts of the decisions implemented, as well as the evaluation and approval of hedging alternatives and monitoring the exposure levels to risks in order to ensure the compliance of the Policy.
The Risk Management area has as primary task the monitoring, evaluation and reporting of financial risk taken by the Company, and among these are:
(i) an ongoing review of the scope of Risk Policy, ensuring that hedging instruments utilized are within the limits of tolerance established by the Policy;
(ii) the preparation of reports;
(iii) the evaluation and presentation of alternatives to mitigate risks; and
(iv) the modeling and assessment of exposure to risks.
F-31
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The tasks mentioned above are performed in order to highlight and give acknowledgement to Management on the magnitude of the risks and the related hedging instruments utilized presenting the potential impacts.
The Risk Policy defines the strategies to be adopted, and Management contracts hedging instruments that are approved within the delegation of authority levels. The Board of Directors, Board of Executive Officers and Financial Risk Committee have different levels of authority where each one acts within the limits pre-established in this Policy.
The Policy does not authorize the Company to contract leveraged transactions in derivative markets, as well as determines that individual hedge operations (notional) must be limited to 2.5% of the Company’s shareholders’ equity.
The inclusion and updating of transactions are recorded in the Company’s operating systems, with proper segregation of duties, being validated by the back-office and daily monitored by the Risk Management area.
Considering the objective of hedging transactions is to mitigate the risks and the uncertainties to which the Company is exposed, the results obtained in the year ended December 31, 2011 met the established objectives.
As permitted by IAS 39, the Company applies hedge accounting rules to its derivative instruments classified as cash flow hedge, in accordance with its Risk Policy. The cash flow hedge consists of hedging the exposure to variations of the cash flow that:
(i) is attributable to a particular risk associated with a recognized asset or liability;
(ii) a highly probable predicted transaction; and
(iii) could affect profit and loss.
The Policy has also the purpose of determining parameters of use of financial instruments, including derivatives, which are designed to protect the operating and financial assets and liabilities, which are exposed to the variations of foreign exchange rates, the fluctuation of the interest rates and changes to the commodities prices. The Risk Management area is responsible for ensuring compliance to the requirements established by the Company’s Risk Policy.
F-32
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
4.2. Interest rate risk management
The risk of interest rates is that one which the Company may suffer economic losses, arising from changes in these rates, which can be caused by factors related to economic crises or changes in monetary policy on domestic and foreign markets. This exhibition refers primarily to changes in market interest rates, that affect assets and liabilities of the companies, indexed to the London Interbank Offered rate ("LIBOR"), Long Term Interest Rate ("TJLP"). Currency of the Bank National Economic and Social Development ("UMBNDES") or Interbank Deposit ("CDI") Certificate, and any transactions with pre-established positions in some of the indices mentioned above, which can lead to losses unrealized or realized through the calculation of fair market value (mark to market).
The Company’s Risk Policy does not restrict exposure to different interest rates, neither establishes limits for fixed or floating rates.
The Company continually monitors the market interest rates, in order to evaluate any potential need to enter in hedging contracts to protect from the exposure to fluctuation of such rates. These transactions are basically characterized by contracts that exchange floating rate for fixed rate. Such transactions were designated by the Company as cash flow hedge.
The Company seeks a stable correlation between its current and non-current term indebtedness, maintaining a higher portion in the non-current term.
The Company’s indebtedness is essentially tied to the LIBOR, fixed coupon (“R$ and USD”), TJLP and UMBNDES rates. In case of adverse changes in the market that result in LIBOR hikes, the cost of the floating indebtedness rises and on the other hand, the cost of the fixed indebtedness decreases in relative terms. The same consideration is also applicable to the TJLP and UMBNDES.
With regards to the Company's marketable securities, the main index is the CDI for investments in the domestic market and fixed coupon (“USD”) for investments in the foreign market. If CDI increases, impacts become favorable, while if CDI decreases, results become unfavorable.
In August 2011, the Monetary Policy Committee ("COPOM") initiated a cycle of monetary policy easing by reducing the basic interest rate from 12.5% p.a. to 11.0% p.a. in December 2011. Thus, interest income derived from investments subject to the CDI variations was reduced. Moreover, there is the maintenance of the expectation of low international interest rates. With LIBOR at historically low levels, there was a positive impact on financial costs linked to this indicator.
F-33
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Regarding the exposure to fluctuation of interest rates, the results obtained for the year ended December 31, 2011, met the established objectives.
4.3. Foreign exchange risk management
Foreign exchange risk is the one related to variations of foreign exchange rates that may cause the Company to incur unexpected losses, leading to a reduction of the assets or an increase of the amounts of liabilities.
The main exposures to which the Company is subject, as regards foreign exchange rates variations, refer to the fluctuation of the U.S. Dollar (“US$” or “USD”) and also of the Euro (“EUR”) and the British Pound (“GBP”) in relation to the Brazilian Real.
The objective of the Company’s Risk Policy is the protection from excessive exposure to the risks of foreign exchange variations by balancing its assets not denominated in Brazilian Reais against its obligations not denominated in Brazilian Reais, thus protecting the Company’s balance sheet, through the use of over-the-counter transactions (“swap”) and transactions on the futures exchange.
4.3.1. Breakdown of the balances of exposure in foreign currency
Foreign currency denominated assets and liabilities are as follows:
| 12.31.11 | 12.31.10 | |
| Cash and cash equivalents and marketable securities | 1,689.5 | 2,493.0 |
| Trade accounts receivable - third parties | 1,379.4 | 951.1 |
| Dollar futures agreements | 65.8 | 121.3 |
| Inventory | 112.4 | 100.8 |
| Forward contracts (NDF) (a) | 11.3 | (241.7) |
| Exchange rate contracts (SWAP) | (359.4) | - |
| Loans and financing | (4,723.8) | (4,016.1) |
| Pre-payment exports designated as hedge accounting | 1,210.2 | 804.0 |
| Trade accounts payable | (340.3) | (105.8) |
| Other operating assets and liabilities, net | 71.9 | 35.1 |
| (883.0) | 141.7 | |
| Foreign exchange exposure in US$ | (470.7) | 85.1 |
(a) Offshore non-deliverable forwards (“NDFs”) not designated as hedge accounting, impacting financial result and not shareholders' equity.
The Company's total net foreign exchange exposure as of December 31, 2011, is a liability of US$470.7 and is within the limit established by the Risk Policy.
The Risk Policy aims to protect the operating revenues and costs that are related to the operations resulting from the business activity, such as estimates of exports and purchases of raw materials. For the purpose, the Company utilizes hedge instruments focusing mainly on the protection of its foreign currency denominated projected cash flow.
F-34
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
In order to conduct an active management and as required by the Risk Policy, the Company performs daily monitoring, through reports issued by the Risk Management area, on cash flow needs and foreign exchange exposure.
4.3.2. Breakdown of the balances of derivative financial instruments
The positions of outstanding derivatives are as follows:
| 12 .3 1.11 | |||||||
| Instrument | Subject to hedge |
Maturity | Receivable | Payable | value (notional) |
Market value (1) | |
| Financial instruments designated a s hedge accounting | |||||||
| NDF | Exchange rate | 01/2012 to 11/2012 | R$ (P re- o f 9.25%) | US$ | 2,551.09 | (88.15) | |
| NDF | Exchange rate | 01/2012 to 11/2012 | R$ (P re- o f 7.72%) | EUR | 769.21 | 6.64 | |
| NDF | Exchange rate | 01/2012 to 11/2012 | R$ (P re- o f 7.59%) | GB P | 202.00 | (5.27) | |
| Options | Exchange rate | 01/2012 | R$ | US$ | 150.06 | (1.31) | |
| Swap | Exchange rate | Up to 07/2013 | US$ +7% | R$ (76% from CDI) | 56.11 | 1.03 | |
| Swap | Exchange rate | 10/2011to 12/2013 | US$ +LIB OR 3M | +3.83% | R$ (97.50% fro m CDI) | 330.75 | (16.70) |
| Swap | Interest rate | 08/2012 to 06/2018 | US$ +LIB OR 3M | +1.43% | US$ +3.92% | 375.16 | (18.10) |
| Swap | Interest rate | 07/2012 to 02/2019 | US$ +LIB OR 6M | +1.77% | US$ +4.80% | 1,095.20 | (74.18) |
| Swap | Interest rate | Up to 11/2012 | US$ +LIB OR 12M +0.71% | US$ +3.70% | 187.58 | (3.59) | |
| 5 ,7 17.2 6 | ( 19 9 .8 3 ) | ||||||
| Financial instruments not designated as hedge accounting | |||||||
| NDF | Exchange rate | 01/2012 to 11/2012 | US$ | A RS (P re o f 13.45%) | 11.26 | - | |
| NDF | Exchange rate | 03/2012 | US$ (P re- o f 0.54%) | EUR | 60.86 | 0.52 | |
| Swap | Interest rate | 05/2012 | US$ +LIB OR 3M | +3.85% | US$ +5.78% | 56.27 | (0.36) |
| Swap | Exchange rate | 03/2015 | R$ (P re- o f 9.62%) | US$ +1.40% | 359.37 | (47.80) | |
| Options | Live cattle | 01/2012 to 10/2012 | R$ | R$ | 33.64 | 0.35 | |
| NDF | Live cattle | 09/2012 | R$ | R$ | 1.68 | - | |
| Future contract | Exchange rate | 01/2012 | US$ | R$ | 65.80 | (0.20) | |
| Future contract | Live cattle | 10/2012 | R$ | R$ | 10.97 | - | |
| 6 0 0 .0 4 | ( 4 7 .5 9 ) | ||||||
| 6 ,3 17.2 9 | ( 2 4 7 .4 2 ) | ||||||
| 12 .3 1.10 | |||||||
| Instrument | Subject to hedge |
Maturity | Receivable | Payable | value ( notional) |
Market value(1) | |
| Financial instruments designated as hedge accounting | |||||||
| NDF | Exchange rate | 01/2011to 11/2011 | R$ (P re- o f 9.66%) | US$ | 716.47 | 54.50 | |
| NDF | Exchange rate | 01/2011to 11/2011 | R$ (P re- o f 9.49%) | EUR | 416.64 | 23.00 | |
| NDF | Exchange rate | 01/2011to 11/2011 | R$ (P re- o f 9.40%) | GB P | 112.56 | 7.90 | |
| Swap | Exchange rate | 07/2013 | US$ +7% | R$ (76% fro m CDI) | 56.11 | (0.80) | |
| Swap | Exchange rate | 01/2011to 12/2013 | US$ +LIB OR 3M +3.83% | R$ (97.50% from CDI) | 330.75 | (42.80) | |
| Swap | Interest rate | 01/2010 to 08/2013 | US$ +LIB OR 3M +0.25% | US$ +2.37% | 172.23 | (4.00) | |
| Swap | Interest rate | 01/2011to 08/2013 | US$ +LIB OR 6M +0.80% | US$ +3.77% | 838.76 | (23.80) | |
| Swap | Interest rate | 11/2012 | US$ +LIB OR 12M +0.71% | US$ +3.70% | 198.03 | (7.00) | |
| Optio ns | Exchange rate | 01to 02/2011 | R$ | US$ | 85.46 | 2.10 | |
| 2 ,92 7 .10 | 9 .10 | ||||||
| Financial instruments not designated as hedge account ing | |||||||
| NDF | Exchange rate | 01/2011to 06/2011 | R$ (P re- o f 8.21%) | US$ | 241.74 | 11.15 | |
| NDF | Exchange rate | 03/2011 | US$ (P re- o f 0.23%) | EUR | 100.26 | (1.68) | |
| Swap | Interest rate | 05/2012 | US$ +LIB OR 3M +3.85% | US$ +5.78% | 62.79 | (0.89) | |
| Optio ns | Live cattle | 08/2011to 11/2011 | R$ | R$ | 44.04 | (0.23) | |
| Future co ntract | Exchange rate | 02/2011 | US$ | R$ | 121.34 | (1.10) | |
| Future co ntract | Live cattle | 01/2011to 10/2011 | R$ | R$ | 4.42 | - | |
| 5 74 .50 | 7 .2 4 | ||||||
| 3 ,50 1.59 | 16 .4 3 | ||||||
(1) The market value determination method used by the Company consists of calculating the future value based on the contracted conditions and determining the present value based on market curves, extracted from the database of Bloomberg and BM&F.
F-35
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The Company contracted swap operations, NDF and future contracts with the objective of minimize the effects of the variations in the foreign exchange rates and for protection from the fluctuations of interest rates.
Management understands that the results obtained with these derivative operations are in compliance with the Risk Policy adopted by the Company.
4.4. Breakdown of the balances of financial instruments designated for cash flow hedge accounting and export revenues
The Company formally designated its operations for hedge accounting treatment for the derivative financial instruments to protect cash flows and export revenues, documenting:
(i) the relationship of the hedge;
(ii) the objective and risk management strategy of the Company to hire a hedge transaction;
(iii) the identification of the financial instrument;
(iv) the hedge object or transaction;
(v) the nature of the risk to be hedged;
(vi) the description of the hedge relationship;
(vii) the demonstration of the correlation between the hedge transaction and the hedge object, when applicable; and
(viii) the prospective demonstration of the effectiveness of the hedge.
The transactions for which the Company has designated hedge accounting, are highly probable to present a variation in cash flow that could affect profit and loss are highly effective in achieving changes in fair value or cash flows attributable to hedged risk, consistent with the risk originally documented in the Risk Policy.
The Company recorded the unrealized results of the designated derivatives for interest rates and exchange rates risks in shareholders’ equity, net of taxes.
F-36
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
4.4.1. Non-deliverable forwards – NDF
| 12.31.11 | ||||||||||||
| NDF | R$ x USD | R$ x EUR | R$ x GBP | |||||||||
| Maturities | Curve | MTM | Notional | Average USD | Curve | MTM | Notional | Average EUR | Curve | MTM | Notional | Average GBP |
| January 2012 | (12.3) | (11.8) | 145.0 | 1.7955 | 0.5 | 0.7 | 32.0 | 2.4539 | (0.5) | (0.5) | 8.0 | 2.8546 |
| February 2012 | (15.1) | (13.3) | 155.0 | 1.7969 | 0.9 | 1.3 | 34.0 | 2.4806 | (0.6) | (0.5) | 7.0 | 2.8499 |
| March 2012 | (13.5) | (11.7) | 143.0 | 1.8106 | 0.8 | 1.2 | 37.0 | 2.4890 | (0.8) | (0.7) | 7.7 | 2.8479 |
| April 2012 | (19.3) | (15.8) | 156.0 | 1.8012 | 1.6 | 2.0 | 38.0 | 2.5265 | (0.8) | (0.6) | 7.5 | 2.8702 |
| May 2012 | (16.7) | (12.4) | 158.0 | 1.8342 | (0.4) | 0.0 | 30.0 | 2.4877 | (0.9) | (0.8) | 6.5 | 2.8450 |
| June 2012 | (7.0) | (4.8) | 100.0 | 1.8763 | (0.8) | (0.3) | 27.0 | 2.4912 | (0.7) | (0.6) | 5.6 | 2.8738 |
| July 2012 | (16.5) | (11.8) | 153.0 | 1.8544 | (1.1) | (0.3) | 34.0 | 2.5064 | (0.7) | (0.5) | 7.0 | 2.9271 |
| August 2012 | (0.6) | (0.4) | 10.0 | 1.9080 | (0.7) | (0.4) | 23.0 | 2.5143 | (0.5) | (0.4) | 5.0 | 2.9343 |
| September 2012 | (1.1) | 0.6 | 100.0 | 1.9646 | 0.9 | 1.0 | 19.0 | 2.5919 | (0.2) | (0.2) | 5.0 | 3.0076 |
| October 2012 | (8.1) | (4.6) | 140.0 | 1.9334 | 0.1 | 0.8 | 22.0 | 2.5805 | (0.4) | (0.2) | 5.0 | 2.9971 |
| November 2012 | (4.1) | (2.2) | 100.0 | 1.9559 | (0.4) | 0.6 | 20.0 | 2.5735 | (0.3) | (0.3) | 5.0 | 3.0265 |
| (114.3) | (88.2) | 1,360.0 | 1.8542 | 1.4 | 6.6 | 316.0 | 2.5107 | (6.4) | (5.3) | 69.3 | 2.9025 |
F-37
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
4.4.2. Interest rate swap
| 12.31.11 | |||||
| Assets (Hedged object) |
Liabilities (Protected risk) |
Notional | Maturity date |
Balance (contract curve) |
Balance (MTM) |
| Libor 6M + 1.75% p.a. | 4.22% p.a. | US$26.0 | 07.25.12 | (0.44) | (0.70) |
| Libor 6M | 4.06% p.a. | US$42.8 | 07.22.13 | (1.23) | (3.28) |
| Libor 6M + 0.80% p.a. | 4.31% p.a. | US$24.0 | 08.23.13 | (0.44) | (1.50) |
| Libor 6M + 0.80% p.a. | 4.36% p.a. | US$16.0 | 07.19.13 | (0.40) | (1.04) |
| Libor 3M + 0.5% p.a. | 3.96% p.a. | US$10.0 | 08.20.12 | (0.06) | (0.37) |
| Libor 3M + 0.5% p.a. | 3.96% p.a. | US$20.0 | 08.15.12 | (0.15) | (0.75) |
| Libor 3M + 0.5% p.a. | 3.96% p.a. | US$20.0 | 08.10.12 | (0.16) | (0.75) |
| Libor 6M | 3.82% p.a. | US$12.0 | 03.20.13 | (0.21) | (0.68) |
| Libor 6M | 3.79% p.a. | US$18.0 | 02.13.13 | (0.41) | (1.01) |
| Libor 6M + 1.65% p.a. | 4.15% p.a. | US$15.0 | 05.10.13 | (0.07) | (0.45) |
| Libor 6M + 0.60% p.a. | 2.98% p.a. | US$50.0 | 12.19.12 | (0.87) | (2.03) |
| Libor 6M + 0.60% p.a. | 2.99% p.a. | US$50.0 | 11.26.12 | (0.05) | (1.19) |
| Libor 6M + 1.55% p.a. | 3.55% p.a. | US$30.0 | 07.02.12 | (0.31) | (0.42) |
| Libor 12M + 0.71% p.a. | 3.57% p.a. | US$50.0 | 11.19.12 | (0.17) | (1.69) |
| Libor 12M + 0.71% p.a. | 3.82% p.a. | US$50.0 | 11.26.12 | (0.17) | (1.90) |
| Libor 3M | 0.78% p.a. | US$50.0 | 08.03.12 | (0.05) | 0.03 |
| Libor 6M + 2.82% p.a. | 5.86% p.a. | US$100.0 | 01.22.18 | (1.64) | (19.14) |
| Libor 3M + 2.60% p.a. | 5.47% p.a. | US$100.0 | 06.18.18 | (0.24) | (16.24) |
| Libor 6M + 2.70% p.a. | 5.90% p.a. | US$100.0 | 02.01.19 | (1.56) | (21.50) |
| Libor 6M + 2.70% p.a. | 5.88% p.a. | US$100.0 | 02.01.19 | (1.55) | (21.25) |
| 7.00% p.a. | 76.00% from CDI | US$35.0 | 07.15.13 | (0.05) | 1.03 |
| Libor 3M + 2.50% p.a. | 92.50% from CDI | US$44.4 | 10.01.13 | (1.46) | (5.27) |
| Libor 3M + 4.50% p.a. | 100.00% from CDI | US$88.8 | 12.23.13 | (0.25) | (11.44) |
| (11.94) | (111.54) |
4.4.3. Options
The Company designates only the variation in the intrinsic value of its options as a hedge instrument (hedge accounting), recognizing the time value of the premium in the financial result. If the hedge is not effective and the option is not exercised due to devaluation of the Real, the losses related to the options will be registered in the financial result.
The Company has designated as hedge accounting transactions involving options denominated collar where there is a purchase of a put option ("PUT") and a sale of a call option ("CALL").
When the quotation of any of the options is not available in an active market, the fair value will be based on an option pricing model (Black-Scholes or Binomial).
F-38
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | ||||||
| PUT | R$ x USD | |||||
| Maturities | Curve | MTM | Notional (USD) | USD Average | ||
| January 2012 | - | 0.3 | 40.0 | 1.8088 | ||
| CALL | R$ x USD | |||||
| Maturities | Curve | MTM | Notional (USD) | USD Average | ||
| January 2012 | (0.9) | (1.6) | 40.0 | 1.8733 |
As authorized by IAS 39, the Company utilizes the exchange rates variation of export pre-payments contracts (“PPEs”) as a hedge instrument in order to mitigate the risk of the variation of exchange rate resulting from the highly probable future sales in foreign currency.
In order to test the effectiveness of this hedge category, the Company established a comparison between the exchange rate variation arising from the PPE agreement (variation of the fair value of the hedging instrument) and the variation of the fair value of highly probable future export revenues (Spot-to-Spot rate method).
The position of the PPEs designated as hedge accounting is set forth below:
| 12.31.11 | |||||
| Hedge Instrument | Subject to hedge | Type of risk hedged |
Maturity | Notional (US$) |
MTM |
| From 01.2012 | |||||
| PPE | Foreign Market Sales | US$ (E.R.) | to 02.2019 | 645.2 | 1,210.2 |
The unrealized gains and losses from PPEs designated as hedge accounting, and recorded in the shareholders’ equity, is represented by a loss of R$30.5, net of income tax of R$15.7.
4.5. Gains and losses of derivative financial instruments designated as hedge accounting
The amounts of gains and losses resulting from derivative financial instruments for the years ended December 31, 2011 and 2010 recorded in the statements of income as financial income or expenses, while the unrealized gains and losses were recognized in shareholders’ equity, are shown below:
F-39
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| Shareholders' equity | Statement of income | |||||
| 12.31.11 | 12.31.10 | 12.31.09 | 12.31.11 | 12.31.10 | 12.31.09 | |
| Derivatives intended for protection | ||||||
| Exchange risks | (101.2) | 46.0 | - | (2.6) | (2.1) | - |
| Interest rate risk | (85.8) | (28.9) | (57.8) | (10.2) | (5.9) | - |
| (187.0) | 17.1 | (57.8) | (12.8) | (8.0) | - | |
| Derivatives intended for financial results | ||||||
| Interest rate risk | - | - | - | (0.4) | (0.9) | - |
| Exchange risks | - | - | 1.6 | (47.6) | 8.3 | (2.7) |
| Market risk of live cattle | - | - | - | 0.4 | (0.2) | - |
| - | - | 1.6 | (47.6) | 7.2 | (2.7) | |
| (187.0) | 17.1 | (56.2) | (60.4) | (0.8) | (2.7) | |
The gains and losses from derivative financial instruments designated as hedge accounting, recorded in shareholders’ equity, are represented by a loss of R$137.0, net of income tax of R$50.0.
4.5.1. Breakdown by category of the balances of financial instruments – except derivatives:
| 12.31.11 | ||||||
| Loans and | Available for | Trading | Held to | Financial | ||
| receivables | sale | securities | maturity | liabilities | Total | |
| Assets | ||||||
| Amortized cost | ||||||
| Marketable securities | - | - | - | 236.8 | - | 236.8 |
| Trade accounts receivable | 3,210.2 | - | - | - | - | 3,210.2 |
| Credit notes | 204.2 | - | - | - | - | 204.2 |
| Fair value | ||||||
| Marketable securities | - | 235.2 | 1,054.1 | - | - | 1,289.3 |
| Liabilities | ||||||
| Amortized cost | ||||||
| Trade accounts payable | - | - | - | - | (2,681.3) | (2,681.3) |
| Loans and financing | - | |||||
| Local currency | - | - | - | - | (3,329.7) | (3,329.7) |
| Foreign currency | - | - | - | - | (4,723.8) | (4,723.8) |
| 3,414.4 | 235.2 | 1,054.1 | 236.8 | (10,734.8) | (5,794.3) | |
| 12.31.10 | ||||||
| Loans and | Available for | Financial | ||||
| receivables | sale Trading securities | Held to maturity | liabilities | Total | ||
| Assets | ||||||
| Amortized cost | ||||||
| Marketable securities | - | - | - | 227.7 | - | 227.7 |
| Trade accounts receivable | 2,572.0 | - | - | - | - | 2,572.0 |
| Credit notes | 134.8 | - | - | - | - | 134.8 |
| Fair value | ||||||
| Marketable securities | - | 390.3 | 623.5 | - | - | 1,013.8 |
| Liabilities | ||||||
| Amortized cost | ||||||
| Trade accounts payable | - | - | - | - | (2,059.2) | (2,059.2) |
| Loans and financing | ||||||
| Local currency | - | - | - | - | (3,216.1) | (3,216.1) |
| Foreign currency | - | - | - | - | (3,986.8) | (3,986.8) |
| 2,706.8 | 390.3 | 623.5 | 227.7 | (9,262.1) | (5,313.8) | |
F-40
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
4.6. Determination of the fair value of financial instruments
The Company discloses its financial assets and liabilities at fair value, based on the pertinent accounting pronouncements, which refers to concepts of valuation and practices, and requires certain disclosures on the fair value.
Specifically as regards to disclosure, the Company applies hierarchy requirements set out in IAS 39, which involves the following aspects:
· The fair value is the price that an asset could be exchanged, a liability settled, between knowledgeable willing parties in a transaction without favoritism; and
· Hierarchy on 3 levels for measurement of the fair value, according to observable inputs for the valuation of an asset or liability on the date of its measurement.
The valuation established on 3 levels of hierarchy for measurement of the fair value is based on observable and non-observable inputs. Observable inputs reflect market data obtained from independent sources, while non-observable inputs reflect the Company’s market assumptions. These two types of input create the hierarchy of fair value presented below:
- Level 1 - Prices quoted for identical instruments in active markets;
- Level 2 - Prices quoted in active markets for similar instruments, prices quoted for identical or similar instruments in non-active markets and evaluation models for which inputs are observable; and
- Level 3 - Instruments whose significant inputs are non-observable.
Management concluded that balances of cash and cash equivalents, accounts receivable and accounts payable are close to their fair value recognition due to the short-term cycle of these operations.
The book value of financing and loans in the financial statements is close to the fair value due to the major portion of the total gross debt bears interest based on the variation of TJLP, LIBOR and CDI, except the capital markets transactions (Bond). On December 31, 2011, the fair value adjustment for Bond (“BRFSBZ”) is represented by a negative impact of R$186.7.
F-41
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
4.6.1. Comparison between book value and fair value of financial instruments
The comparison between book value and fair value of financial instruments is set forth below:
| 12.31.11 | 12.31.10 | |||
| Book | Fair | Book | Fair | |
| value | value | value | value | |
| Cash and cash equivalents | 1,366.8 | 1,366.8 | 2,310.6 | 2,310.6 |
| Marketable securities: | ||||
|
Available for sale |
235.2 | 235.2 | 390.3 | 390.3 |
|
Trading securities |
1,054.1 | 1,054.1 | 623.5 | 623.5 |
|
Held to maturity |
236.8 | 241.5 | 227.7 | 236.1 |
| Trade accounts receivable, net | 3,210.2 | 3,210.2 | 2,572.0 | 2,572.0 |
| Notes receivable | 204.2 | 204.2 | 134.8 | 134.8 |
| Short and long term debt | (8,053.5) | (8,240.2) | (7,202.9) | (7,327.4) |
| Trade accounts payable | (2,681.3) | (2,681.3) | (2,059.2) | (2,059.2) |
| Other financial assets | 23.5 | 23.5 | 98.6 | 98.6 |
| Other financial liabilities | (270.7) | (270.7) | (82.2) | (82.2) |
| (4,674.7) | (4,856.7) | (2,986.8) | (3,102.9) |
4.6.2. Fair value valuation hierarchy
The table below depicts the overall classification of financial assets and liabilities according to the valuation hierarchy.
| 12.31.11 | ||||
| Level 1 | Level 2 | Level 3 | Total | |
| Assets | ||||
| Financial Assets | ||||
| Available for sale: | ||||
| Credit linked notes | 147.0 | - | - | 147.0 |
| Brazilian foreign debt securities | 86.5 | - | - | 86.5 |
| Shares | 1.7 | - | - | 1.7 |
| Held for trading: | ||||
| Bank deposit dertificates | - | 699.0 | - | 699.0 |
| Financial treasury bills | 355.1 | - | - | 355.1 |
| Other financial assets | ||||
| Derivatives designated as hedge | - | 22.4 | - | 22.4 |
| Derivatives not designated as hedge | - | 1.1 | - | 1.1 |
| 590.3 | 722.5 | - | 1,312.8 | |
| Liabilities | ||||
| Financial liabilities | ||||
| Other financial liabilities: | ||||
| Derivatives designated as hedge | - | (222.0) | - | (222.0) |
| Derivatives not designated as hedge | - | (48.7) | - | (48.7) |
| - | (270.7) | - | (270.7) |
F-42
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.10 | ||||
| Level 1 | Level 2 | Level 3 | Total | |
| Assets | ||||
| Financial Assets | ||||
| Available for sale: | ||||
| Purchase and sale commitments | - | 129.2 | - | 129.2 |
| Bank deposit certificates | - | 74.8 | - | 74.8 |
| Brazilian foreign debt securities | 61.3 | - | - | 61.3 |
| Financial treasury bills | 52.9 | - | - | 52.9 |
| Exclusive investment funds | - | 45.7 | - | 45.7 |
| Investment funds | 24.7 | - | - | 24.7 |
| Shares | 1.7 | - | - | 1.7 |
| Held for trading | ||||
| Bank deposit certificates | - | 560.5 | - | 560.5 |
| Financial treasury bills | 63.0 | - | - | 63.0 |
| Other financial assets | ||||
| Derivatives designated as hedge | - | 87.4 | - | 87.4 |
| Derivatives not designated as hedge | - | 11.2 | - | 11.2 |
| 203.6 | 908.8 | - | 1,112.4 | |
| Liabilities | ||||
| Financial liabilities | ||||
| Other financial liabilities | ||||
| Derivatives designated as hedge | - | (78.3) | - | (78.3) |
| Derivatives not designated as hedge | - | (3.9) | - | (3.9) |
| - | (82.2) | - | (82.2) |
Presented below is the description of the valuation methodologies used by the Company for financial instruments measured at fair value:
· The investments in financial assets in the categories of Brazilian foreign debt securities, National Treasury Certificates (“CTN”), Financial Treasury Notes (“LFT”), financial investment funds and shares are classified at Level 1 of the fair value hierarchy, as the market prices are available in an active market;
· The investments in financial assets in the categories of Bank Deposit Certificates (“CDB”) and the repurchase agreements backed by debentures are classified at Level 2, since the determination of fair value is based on the price quotation of similar financial instruments in non-active markets; and
· The derivatives are valued through existing pricing models widely accepted by financial market and described in appendix 3 of the Risk Policy. Readily observable market inputs are used, such as interest rate forecasts, volatility factors and foreign currency rates. These instruments are classified at Level 2 of the valuation hierarchy, including swaps, NDFs and options.
4.7. Credit management
The Company is potentially subject to the credit risk related to trade accounts receivable, financial investments and derivative contracts. The Company limits its risk associated with these financial instruments, allocating them to financial institutions selected by the criteria of rating and percentage of maximum concentration by counterparties.
F-43
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The credit risk concentration of accounts receivable is minimized due to the diversification of the customer portfolio and concession of credit to customers with good financial and operational conditions. The Company does not normally require collateral for credit sales, yet it has a contracted credit insurance policy for specific markets.
On December 31, 2011, the Company had financial investments over R$10.0 at the following financial institutions: Banco do Brasil, Banco Itaú Unibanco, Deutsche Bank, Banco Bradesco, Credit Suisse, Banco Votorantim, Citigroup, Santander, Erste Bank, BTG Pactual, Banco do Nordeste, Caixa Econômica Federal and JP Morgan.
The Company also held derivative contracts with the following financial institutions: Banco Santander, Citibank, HSBC, Credit Suisse, Banco do Brasil, Banco Itaú, Rabobank, Merrill Lynch, Deutsche Bank, Banco Votorantim, Banco Bradesco, JP Morgan, Morgan Stanley, Standard Bank, Goldman Sachs, Barclays Bank, ING Bank and Banco Safra.
4.8. Liquidity risk management
Liquidity risk management aims to reduce the impacts caused by events which may affect the Company’s cash flow performance.
The Company has identified market risk factors which are associated to future cash flow that may jeopardize its liquidity and calculates the Cash Flow at Risk (“CFaR”) on a twelve-month basis aiming to verify potential cash flow forecast deviations. The Company determined that the minimum value of its cash availability should consider mainly the average monthly revenue and EBITDA for the last twelve-month period.
Derivatives transactions may demand payments of periodic adjustments. Currently, the Company holds only BM&F operations with daily adjustments. In order to control the adjustments, the Company utilizes Value at Risk methodology (“VaR”), which statistically measures potential maximum adjustments to be paid in a 1 to 21-day interval.
The allocation of financial investments among counterparts is conservative and seeks the liquidity and profitability of these assets avoiding concentration.
F-44
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The Company maintains its leverage levels in a manner to not jeopardize the ability to honor commitments and obligations. As a guideline, the majority of the debt should be in long term. On December 31, 2011, the long term debt portion accounted for 58% of the total outstanding debt with an average term greater than 3.5 years.
The table below summarizes the commitments and contractual obligations that may impact the Company’s liquidity as of December 31, 2011:
| 12.31.11 | |||||||||
| Book | Cash flow | Up to 6 | 6 to 12 | After 5 | |||||
| value | contracted | months | months | 2013 | 2014 | 2015 | 2016 | years | |
| Non derivatives financial liabilities | |||||||||
| Loans and financing | 6,149.8 | 6,790.2 | 1,457.5 | 2,030.4 | 877.6 | 657.9 | 200.5 | 125.7 | 1,440.6 |
| Bonds BRF | 1,431.5 | 2,273.8 | 51.0 | 51.0 | 102.0 | 102.0 | 102.0 | 102.0 | 1,763.8 |
| Bonds Sadia | 472.2 | 646.3 | 16.1 | 16.1 | 32.2 | 32.2 | 32.2 | 32.2 | 485.1 |
| Trade accounts payable | 2,681.3 | 2,681.3 | 2,681.3 | - | - | - | - | - | - |
| Capital lease | 57.0 | 63.6 | 18.2 | 18.2 | 24.5 | 1.4 | 1.0 | 0.2 | - |
| Operational lease | 522.0 | 522.0 | 176.2 | 176.2 | 61.1 | 40.6 | 23.4 | 44.6 | - |
| Derivatives financial liabilities | |||||||||
| Designated as hedge accounting | |||||||||
| Interest rate derivatives | 112.6 | 189.0 | 26.0 | 24.9 | 56.9 | 17.3 | 17.4 | 7.6 | 39.0 |
| Currency derivatives (NDF) | 107.8 | 107.9 | 27.8 | 80.1 | - | - | - | - | - |
| Currency derivatives (options) | 1.6 | 1.7 | 1.7 | - | - | - | - | - | - |
| Not designated as hedge accounting | |||||||||
| Currency derivatives (NDF) | - | 0.1 | 0.1 | - | - | - | - | - | - |
| Currency derivatives (future) | 0.3 | 0.3 | 0.3 | - | - | - | - | - | - |
| Interest rate derivatives | 48.2 | 2.1 | (13.7) | (13.9) | 29.0 | 0.7 | - | - | - |
| Commodities derivatives | 0.2 | 0.2 | 0.2 | - | - | - | - | - | - |
4.9. Commodity price risk management
In the regular course of its operations, the Company purchases commodities, mainly corn, soymeal and live hog, which are some of the individual components of production cost.
Corn and soymeal prices are subject to volatility resulting from weather conditions, crop yield, transportation and storage costs, government’s agricultural policy, foreign exchange rates and the prices of these commodities on the international market, among others factors. The prices of hog acquired from third parties are subject to market conditions and are influenced by internal availability and levels of demand in the international market, and other aspects.
The Risk Policy establishes limits for hedging the corn and soymeal purchase flow, aiming to reduce the impact resulting from a price increase of these raw materials, and may utilize derivative instruments or inventory management for this purpose. Currently, the Management of inventory levels is used as a hedging instrument.
During the 2011 fiscal year, the Company utilized derivative instruments to mitigate the exposure to live cattle prices variation. The derivative instruments are entered into to protect the following transactions:
F-45
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
(i) forward purchase of cattle,
(ii) contracting of own cattle confinement,
(iii) contracting of cattle confinement with partnership, and
(iv) spot purchase of cattle aiming to guarantee the off-season scale of slaughtering.
The contracts are recorded at their fair value in the statement of income, regardless of the contract expiration date.
On December 31, 2011, the Company held a short position in the BM&F of 150 future contracts (137 contracts as of December 31, 2010) with maturity dates between January and October 2012. In the counter market, the Company held a short position of 50 contracts with maturity dates in 2012. Additionally, through the utilization of options, the Company also held a short position of 600 allotments (700 allotments as of December 31, 2010) (note 4.3.2).
4.10. Table of sensitivity analysis
The Company has financing and loans and receivables denominated in foreign currency and in order to mitigate the risks resulting from exchange rate exposure it contracts and derivative financial instruments.
The Company understands that the current interest rate fluctuations do not significantly affect its financial results since it opted to change to fixed rate a considerable part of its floating interest rates debts by using derivative transactions (interest rates swaps). The Company designates such derivatives as hedge accounting and, therefore, the effectiveness is monitored through prospective and retrospective tests.
In the table depicted below, five scenarios are considered for the next twelve-month period, considering the variations of the quotations of the parity between the Brazilian Reais and U.S. Dollar, Brazilian Reais and Euro and Brazilian Reais and Pounds, whereas the most likely scenario is that one adopted by the Company. The total of export sales analyzed corresponds to the total of derivative financial instruments increased by the amortization flow of PPEs designated as hedge accounting.
F-46
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| Parity - Brazilian Reais x U.S. Dollar | 1.8758 | 1.6882 | 1.4069 | 2.3448 | 2.8137 | |
| Transaction/Instrument | Risk | Scenario I | Scenario II | Scenario III | Scenario IV | Scenario V |
| (probable) | (10% appreciation) | (25% apreciation) | (25% devaluation) | (50% devaluation) | ||
| NDF (hedge accounting) | Devaluation of R$ | (29.4) | 225.7 | 608.4 | (667.1) | (1,304.9) |
| Options - currencies | Devaluation of R$ | (0.1) | 4.8 | 16.1 | (18.9) | (37.6) |
| Pre payment export | Devaluation of R$ | (46.2) | 74.8 | 256.3 | (348.8) | (651.3) |
| Exports | Appreciation of R$ | 41.8 | (264.3) | (727.5) | 813.7 | 1,585.6 |
| Net effect | (33.9) | 41.0 | 153.3 | (221.1) | (408.2) | |
| Statement of income | - | - | - | - | - | |
| Shareholders' equity | (33.9) | 41.0 | 153.3 | (221.1) | (408.2) | |
| Parity - Brazilian Reais x Euro | 2.4230 | 2.1807 | 1.8173 | 3.0288 | 3.6345 | |
| Transaction/Instrument | Risk | Scenario I | Scenario II | Scenario III | Scenario IV | Scenario V |
| (probable) | (10% appreciation) | (25% apreciation) | (25% devaluation) | (50% devaluation) | ||
| NDF (hedge accounting) | Devaluation of R$ | 27.7 | 104.3 | 219.1 | (163.7) | (355.1) |
| Exports | Appreciation of R$ | (27.7) | (104.3) | (219.1) | 163.7 | 355.1 |
| Net effect | - | - | - | - | - | |
| Statement of income | - | - | - | - | - | |
| Shareholders' equity | - | - | - | - | - | |
| Parity - Brazilian Reais x Pound | 2.8930 | 2.6037 | 2.1698 | 3.6163 | 4.3395 | |
| Transaction/Instrument | Risk | Scenario I | Scenario II | Scenario III | Scenario IV | Scenario V |
| (probable) | (10% appreciation) | (25% apreciation) | (25% devaluation) | (50% devaluation) | ||
| NDF (hedge accounting) | Devaluation of R$ | 0.7 | 20.7 | 50.8 | (49.5) | (99.6) |
| Exports | Appreciation of R$ | (0.7) | (20.7) | (50.8) | 49.5 | 99.6 |
| Net effect | - | - | - | - | - | |
| Statement of income | - | - | - | - | - | |
| Shareholders' equity | - | - | - | - | - | |
F-47
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
5. SEGMENT INFORMATION
The operating segments are reported consistently with the management reports provided to Board and Directors for assessment the performance of each segment and allocating resources.
In order to reflect the organizational changes in the Company, during the last quarter of 2011, the segment information began to be prepared considering 4 reportable segments, as follows: domestic market, foreign markets, dairy products and food service. The reportable segments identified primarily observe division by sales channel.
- Domestic market: includes the Company´s sales for inside the Brazilian territory, except those relating to products in the dairy and the food service channel.
- Foreign market: includes the Company´s sales for exports and those generated outside the national territory, except those relating to products in the dairy and the food service channel.
- Dairy products: includes the Company´s sales of milk and dairy products produced domestically and abroad.
- Food service: includes the Company's sales of all products in its portfolio, except in the category of dairy products, generated in the domestic and foreign customers for food service category that includes bars, restaurants, kitchens, etc.
Hence, these segments are subdivided according to the nature of the products whose characteristics are described below:
- Poultry: involves the production and trade of whole birds and poultry cuts in natura.
- Pork and beef cuts: involves the production and trade of cuts in natura.
- Processed: involves the production and trade of processed foods, frozen and processed derivatives of poultry, pigs and cattle.
- Others processed: involves the production and trade of processed foods like margarine and vegetable products and soy.
- Milk: involves the production and trade of pasteurized and UHT milk.
- Dairy products and other drinks: involves the production and trade of foods milk derivatives, including flavored milk, yogurts, fruit juices, soy-based beverages, cheeses and desserts.
F-48
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
- Others: involves the production and trade of animal feed, soy meal and refined soy flour.
The information for the years ended December 31, 2010 and 2009 were restated for comparative purposes.
The net sales for each one of the reportable operating segments are presented below:
| Net sales | 12.31.11 | 12.31.10 | 12.31.09 |
| Domestic market: | |||
| Poultry | 1,112.3 | 933.1 | 434.5 |
| Porks/beef | 774.5 | 699.0 | 336.5 |
| Processed products | 7,145.0 | 6,020.4 | 4,424.1 |
| Other processed | 2,043.0 | 1,996.3 | 974.0 |
| Other | 555.2 | 528.7 | 438.1 |
| 11,630.0 | 10,177.5 | 6,607.2 | |
| Foreign market: | |||
| Poultry | 6,571.9 | 5,724.3 | 4,161.5 |
| Porks/beef | 1,554.1 | 1,513.3 | 1,025.0 |
| Processed products | 1,750.1 | 1,652.5 | 1,258.8 |
| Other processed | 175.1 | 90.7 | 39.7 |
| Other | 41.9 | 4.4 | 28.8 |
| 10,093.1 | 8,985.2 | 6,513.8 | |
| Dairy products: | |||
| Milk | 1,720.5 | 1,585.5 | 1,449.7 |
| Dairy products | 818.3 | 726.0 | 711.5 |
| 2,538.8 | 2,311.5 | 2,161.3 | |
| Food service: | |||
| Poultry | 301.3 | 228.4 | 131.2 |
| Porks/beef | 166.7 | 193.4 | 39.8 |
| Processed products | 884.6 | 755.2 | 411.1 |
| Other processed | 91.7 | 30.1 | 41.4 |
| 1,444.3 | 1,207.1 | 623.6 | |
| 25,706.2 | 22,681.3 | 15,905.8 |
The operating results before financial income (expenses) and others for each one of the reportable operating segments are presented below:
| 12.31.11 | 12.31.10 | 31.12.09 | |
| Operating income: | |||
| Domestic market | 1,249.4 | 1,035.8 | 266.7 |
| Foreign market | 558.8 | 319.1 | (309.4) |
| Dairy products | (24.7) | (14.5) | 80.5 |
| Food service | 217.6 | 144.2 | 39.5 |
| 2,001.1 | 1,484.6 | 77.3 |
F-49
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
No customer was individually responsible for more than 5% of the total revenue earned in the twelve month period ended December 31, 2011.
Net revenues from exports originate in the segments of the foreign market, dairy products and food service, as shown below:
| 12.31.11 | 12.31.10 | 31.12.09 | |
| Export net income per market: | |||
| Foreign market | 10,093.1 | 8,985.2 | 6,513.8 |
| Dairy products | 5.4 | 19.8 | 22.0 |
| Food service | 188.4 | 161.0 | - |
| 10,286.9 | 9,166.0 | 6,535.7 |
Export net income by region is presented below:
| 12.31.11 | 12.31.10 | 31.12.09 | |
| Export net income per region: | |||
| Europe | 1,882.4 | 1,742.1 | 1,400.2 |
| Far East | 2,301.8 | 1,916.5 | 1,267.3 |
| Middle East | 3,087.3 | 2,919.7 | 2,075.5 |
| Eurasia (including Russia) | 763.3 | 1,040.1 | 734.6 |
| America / Africa / Other | 2,252.1 | 1,547.6 | 1,058.1 |
| 10,286.9 | 9,166.0 | 6,535.7 |
The goodwill originated from the expectation of future profitability, as well as the intangible assets with indefinite useful life, were allocated to the reportable operating segments, taking into account the nature of the products manufactured in each segment (cash-generating unit). The allocation of intangible assets is presented below:
| Goodwill | Trademarks | Total | |||||||
| 12.31.11 | 12.31.10 | 12.31.11 | 12.31.10 | 12.31.11 | 12.31.10 | ||||
| Domestic market | 1,153.8 | 1,153.8 | 1,065.5 | 1,065.5 | 2,219.3 | 2,219.3 | |||
| Foreign market | 1,074.4 | 959.7 | 190.5 | 190.5 | 1,264.9 | 1,150.2 | |||
| Dairy products | 664.1 | 638.0 | - | - | 664.1 | 638.0 | |||
| Food service | 81.5 | 81.5 | - | - | 81.5 | 81.5 | |||
| 2,973.8 | 2,833.0 | 1,256.0 | 1,256.0 | 4,229.8 | 4,089.0 |
The Company performed the impairment test of the assets allocated to the reportable segments as depicted in the table above. The results are presented in note 18.
Information referring to the total assets by reportable segments is not being presented, as it is not comprised in the set of information made available to the Company’s Management, which make investment decisions on a consolidated basis.
F-50
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
6. BUSINESS COMBINATION AND OTHER ACQUISITIONS
6.1 Business combination – Avex S.A. and Flora Dánica S.A.
On October 3, 2011, acting through its wholly-owned subsidiary, Sadia Alimentos S.A., the Company acquired 70.7% of the equity interest in Avex S.A. (“Avex”), which is located in Argentina. In addition, the Company acquired Avex’s 100% equity interest in Flora Dánica S.A. and its subsidiaries, Flora San Luis S.A. and GB Dan S.A. (“Dánica group”). These acquisitions were made as part of the Company’s strategic plan to become a global player and to reinforce the Company’s brands in MERCOSUL.
Avex is located in the city of Rio Cuarto, in Córdoba province, engaged in the poultry production as well as chilled and frozen chicken, sold as a whole and in cuts.
Avex contributed net revenue of R$51.0 and net income of R$2.0, from the date of acquisition to December 31, 2011 to the Company’s results.
Avex is the sixth largest participant in the Argentine poultry domestic market, with 4% of participation and its productive capacity is presented below:
| Activity | Location | Productive capacity | ||
| Poultry slaughtering | Rio Cuarto, Córdoba | 750.0 heads per week | ||
| Animal feed industry | Juárez Celman, Córdoba | 40 ton per hour | ||
| Hatcheries | General Deheza, Córdoba | 758.8 eggs per week | ||
| Termination poultry farm | Rio Cuarto, Córdoba | - |
The company paid R$104.9 in cash for the acquisition of Avex and the preliminary goodwill generated in the business combination corresponds to R$60.2, calculated as follows:
| Cash consideration | 104.9 |
| Assets and liabilities acquired, net as of October 3, 2011 | 63.2 |
| % acquisition | 70.7% |
| Preliminary net assets acquired at fair value | 44.7 |
| Preliminary goodwill | 60.2 |
The Dánica group has an extensive distribution structure for dry, refrigerated and frozen goods, in addition to the exportation of products to South Cone and to the development of products for the food service segment. The groups is the market leader in margarine (62%) and vice leader in the production of sauces (20%) and its main brands are: Dánica, Manterina, Vegetalina, Danifesta and Primor.
F-51
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The Dánica group contributed net revenue of R$50.5 and net loss of R$1.7, from the date of acquisition to December 31, 2011, to the Company’s results. The net loss in the last quarter of 2011 is a result of the acquisition costs incurred.
The headquarters of the group is located in Buenos Aires.
| Activity | Location | Productive capacity | ||
| Margarines and oils | Llavallol, Buenos Aires | 4.0 ton per month | ||
| Sauces and mayonnaise | Villa Mercedes, San Luis | 6.0 ton per month | ||
| Pasta and pastries | Avellaneda, Buenos Aires | 0.4 ton per month |
The Company paid R$83.4 in cash for the acquisition of the Dánica group and the preliminary goodwill generated in the business combination corresponds to R$53.4, calculated as follows:
| Cash consideration | 83.4 |
| Assets and liabilities acquired, net as of October 3, 2011 | 30.0 |
| % acquisition | 100.0% |
| Preliminary net assets acquired at fair value | 30.0 |
| Preliminary goodwill | 53.4 |
The primary reasons that support the goodwill for these acquisitions are the expected future profitability due to the possibility of business expansion in the Argentinean market from Avex and the relevance of the brands acquired and the supply chain from the Dánica group. The independent appraisal reports are still in progress and Management’s expectation is that they will be concluded within one year, in accordance with the requirements of IFRS 3, when the final goodwill allocation and the respective accounting impacts will be finalized.
Management estimates that if the business combinations with Avex and Dánica group had occurred on January 1, 2011, the consolidated net sales and net income for the year ended December 31, 2011 would be approximately R$26,130.4 and R$1,366.1, respectively.
The pro forma amounts were determined based on the results generated from January 1, 2011 to September 30, 2011, and do not consider any future allocations of amortization of the fair value of assets and liabilities.
F-52
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
6.2 Business combination – Heloísa Ind. e Com. de Produtos Lácteos Ltda.
On December 1, 2011, the Company acquired 100% of the capital of Heloísa Indústria e Comércio de Produtos Lácteos Ltda. (“Heloísa”), focusing on the production of cheese and other dairy products. The total processing capacity of the subsidiary is 600.0 liters of milk per day. The acquisition of this business is aligned with the Company’s strategic plan for expand and add value to the dairy segment.
Heloísa was acquired by the cash amount of R$55.0 and the preliminary goodwill generated in the business combination corresponds to R$26.2, calculated as follows:
| Cash consideration | 55.0 |
| Assets and liabilities acquired, net as of December 1, 2011 | 28.8 |
| % acquisition | 100.0% |
| Preliminary net assets acquired at fair value | 28.8 |
| Preliminary goodwill | 26.2 |
The primary reason that supports the goodwill for the acquisition is the expected future profitability due to the possibility of business expansion in the dairy segment.
The independent appraisal reports are still in progress and the Management’s expectation is that they will be concluded within one year in accordance with the requirements of IFRS 3, when the final goodwill allocation and the respective accounting impacts will be finalized.
The acquiree contributed with net revenue of R$3.1 and net loss of R$1.0, from the date of acquisition to December 31, 2011for the Company’s results.
Management estimates that if the business combinations with Heloísa had occurred on January 1, 2011, the consolidated net sales and net income for the year ended on December 31, 2011, would be approximately R$25,712.9 and R$1,347.2, respectively.
The pro forma amounts were determined based on the results generated from January 1, 2011 to December 31, 2011, and do not consider any future allocations of amortization of the fair value of assets and liabilities.
F-53
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
6.3 Agreed exercise of the call option of property, plant and equipment of Copercampos
On September 15, 2011, the Company exercised the right of the call option of the industrial plant from Copercampos, located in the City of Campos Novos, Santa Catarina State.
The plant comprises a pork slaughtering farm with a capacity of 7,000 heads per day.
The total amount invested by the Company in this transaction totaled R$154.5, from which R$79.4 was paid out in 2011 and R$75.1 in 2010. The Company accounted for these amounts in property, plant and equipment.
The main objective of BRF with the acquisition of these assets is to maximize the pork industrial processing, in order to gain efficiency and competitive advantage in this activity, looking for the major world markets.
6.4 Acquisition of assets related to integration, production and slaughter of porks
With the purpose of acquiring assets related to integration, production and slaughter of pork, the Company made advanced payments in the amount of R$180.0.
CADE decided that this transaction could cause an adverse impact to the competitive market and rejected the acquisition. Thus, the Company and the seller dedicated their best efforts in order to identify another buyer for these assets and such negotiations are in an advanced stage. Management expects that the transaction will be concluded by the end of the first semester of 2012.
The advanced payments are secured by statutory liens that corresponds to R$205.0.
Management does not expect any loss resulting from this transaction.
6.5 Business combination – Sadia
On July 8, 2009, the shareholders of BRF approved in a special meeting of shareholders the merger of all 226,395,405 shares issued by HFF Participações S.A. (former parent company of Sadia) based on the economic value in the amount of R$1,482.9, through the exchange of 37,637,557 new shares of common stock, registered, in book-entry format and without par value, issued by BRF, for the issue price of thirty-nine Brazilian Reais and forty cents (R$39.40) per share.
F-54
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
On August 18, 2009, the merger of Sadia’s common and preferred shares was approved by BRF shareholders, at an extraordinary shareholders’ general meeting, excluding shares indirectly owned by the Company, through the issuance of 25,904,595 common shares and 420,650,712 preferred shares issued by Sadia, according to its economic value, in the amount of R$2,335.5, through the issuance of 59,390,963 new common registered shares, with no par value issued by BRF, for thirty-nine Brazilian Reais and thirty-two cents (R$39.32) per share. On the date hereof, Sadia became a wholly-owned subsidiary of BRF.
The schedule below shows the assessment of the cost of acquisition:
| Number of shares exchanged on July 8, 2009 | 37,637,557 |
| Number of shares exchanged on August 18, 2009 | 59,390,963 |
| Total stock | 97,028,520 |
| Quoted BRF stock (lots of 1,000) on July 8, 2009 | 40 |
| Cost of acquisition at fair value | 3,881.1 |
| Net assets acquired at fair value | (2,587.3) |
| Goodwill | 1,293.8 |
The costs related to the transaction are represented by commissions, fees of counsel and auditors, among others, and amount to R$44.0, were included in the results for the year ended on December 31, 2009 in the item of other operating results.
The identifiable assets acquired and liabilities assumed that were recognized on the date of acquisition and the corresponding fair value, on the date of acquisition, July 8, 2009, are presented below:
F-55
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| Net assets | ||||
| Net assets | Fair value | acquired at fair | ||
| acquired | adjustments | value | ||
| Cash equivalents | 1,759.7 | - | 1,759.7 | |
| Trade accounts receivable and other receivables | 609.8 | - | 609.8 | |
| Inventories | 1,193.0 | 0.8 | (a) | 1,193.9 |
| Biological assets | 465.6 | - | 465.6 | |
| Others | 546.6 | - | 546.6 | |
| Total current assets | 4,574.7 | 0.8 | 4,575.6 | |
| Long-term assets | 1,421.2 | 1,155.8 | (g) | 2,577.0 |
| Biological assets | 221.5 | - | 221.4 | |
| Investments | 14.7 | - | 14.7 | |
| Property, plant and equipment | 4,034.7 | 2,057.1 | (b) | 6,091.8 |
| Intangible | 58.6 | 1,393.0 | (c) | 1,451.6 |
| Total non-current assets | 5,750.7 | 4,605.9 | 10,356.5 | |
| Total assets | 10,325.4 | 4,606.7 | 14,932.1 | |
| Loans and financing | 4,425.1 | (34.5) | (d) | 4,390.6 |
| Trade accounts payable | 889.3 | - | 889.3 | |
| Taxes and contribution | 80.0 | - | 80.0 | |
| Dividends payable | 0.8 | - | 0.8 | |
| Provisions | 286.3 | 139.2 | (e) | 425.5 |
| Others | 391.7 | - | 391.7 | |
| Total current liabilities | 6,073.2 | 104.7 | 6,177.9 | |
| Loans and financing | 3,503.6 | - | 3,503.6 | |
| Provisions | 337.2 | 630.2 | (f) | 967.4 |
| Others | 286.4 | 1,409.5 | (g) | 1,695.9 |
| Total non-current liabilities | 4,127.2 | 2,039.7 | 6,166.9 | |
| Shareholders’ equity | 125.0 | 2,462.3 | (h) | 2,587.3 |
| Total liabilities | 10,325.4 | 4,606.7 | 14,932.1 | |
(a) Refers to the adjustment to the fair value of the inventories realized in full in year 2009;
(b) Refers to the adjustment to the fair value of the fixed assets according to an appraisal report prepared by an external expert, which is being realized by its economic useful life;
(c) Refers to the fair value of the brands whose useful lives are indefinite and to the fair value of assets of definite useful life, such as relationship with suppliers and patents. The realization of the fair value occurs by means of rates that vary from 25% to 48% p.a.;
(d) Refers to the adjustment to the fair value of the loans and financing realized according to their maturity dates;
F-56
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
(e) Refers to the fair value of the guarantees granted by Sadia and deferred revenue related to the sale of employee banking relationships realized according to the maturity dates;
(f) Refers to the fair value of the contingent tax, civil and employment liabilities. The fair value of the contingent tax liabilities was determined, at first, based on the appraisal of external consultants, who attributed to these processes an average probability of loss. Then, Management measured the contingencies considering the premises of the programs of fiscal recovery promoted from time to time by the State and Federal Governments, which is the amount that the counterparties would be willing to liquidate from the existing debts;
(g) Refers to the effect of the deferred taxes on the adjustments (a) through (f) presented above and the effect of the deferred taxes on the difference between the accounting and tax goodwill; and
(h) Refers to the corresponding entry of the adjustments (a) through (g) in the shareholders’ equity.
The remaining goodwill generated in the relation of exchange of shares with Sadia includes, in addition to the controlling goodwill, the future benefits expected from the synergy of the transactions of the companies.
The goodwill for tax purposes, generated in the operation, corresponds to R$3,594.5.
Sadia contributed net revenue of R$5,241.6 and net income of R$313.5 as from the date of acquisition until December 31, 2009. If the merger had occurred on January 1, 2009, the Company estimates that consolidated net revenue would have been approximately R$20,937.6 and net income for the fiscal year ended December 31, 2009 would have been approximately R$225.3.
In connection with the association between Sadia and the Company, there was a primary public distribution of 115,000,000 shares with a supplementary lot of 17,250,000.
F-57
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
7. CASH AND CASH EQUIVALENTS
| Average | ||||||
| rate p.a. | 12.31.11 | 12.31.10 | ||||
| Cash and bank accounts: | ||||||
|
U.S. Dollar |
- | 17.2 | 70.3 | |||
|
Brazilian Reais |
- | 65.2 | 81.4 | |||
|
Euro |
- | 43.7 | 0.8 | |||
|
Others |
- | 3.9 | 4.8 | |||
| 130.0 | 157.3 | |||||
| Highly liquid investments: | ||||||
| In Brazilian Reais: | ||||||
|
Investment funds |
10.72% | 12.4 | 9.9 | |||
| 12.4 | 9.9 | |||||
| In U.S. Dollar: | ||||||
|
Interest bearing account |
0.11% | 42.1 | 345.7 | |||
|
Fixed term deposit |
1.71% | 371.3 | 1,651.7 | |||
|
Overnight |
0.08% | 458.2 | 64.4 | |||
| In Euro: | - | - | ||||
|
Interest bearing account |
0.13% | 235.2 | 74.3 | |||
|
Fixed term deposit |
1.24% | 82.4 | - | |||
|
Overnight |
0.12% | 17.8 | 3.1 | |||
| Other Currencies: | - | - | ||||
|
Interest bearing account |
0.08% | 17.4 | 4.2 | |||
| 1,224.4 | 2,143.4 | |||||
| 1,366.8 | 2,310.6 |
Financial investments classified as cash and cash equivalents are considered financial assets with the possibility of immediate redemption and are subject to an insignificant risk of change of value. Financial investments in foreign currencies refer mainly to overnight and time deposit, and bear interest at a prefixed rate.
F-58
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
8. MARKETABLE SECURITIES
| WATM (*) | Currency | Average interest rate p.a. |
12.31.11 | 12.31.10 | ||||||||
| Available for sale: | ||||||||||||
|
Credit linked notes |
(a) | 7.24 | US$ | 4.79% | 147.0 | - | ||||||
|
Brazilian foreign debt securities |
(b) | 2.66 | US$ | 9.27% | 86.5 | 61.3 | ||||||
|
Shares |
- | R$ | - | 1.7 | 1.7 | |||||||
|
Purchase and sale commitments |
(c) | - | R$ | - | - | 129.2 | ||||||
|
Bank deposit certificates |
(d) | - | R$ | - | - | 74.8 | ||||||
|
Brazilian financial treasury bills |
(e) | - | R$ | - | - | 52.9 | ||||||
|
Exclusive investment funds |
(f) | - | US$ | - | - | 45.7 | ||||||
|
Investment funds |
(g) | - | R$ | - | - | 24.7 | ||||||
| 235.2 | 390.3 | |||||||||||
| Held for trading: | ||||||||||||
|
Bank deposit certificates |
(d) | 1.99 | R$ | 11.01% | 699.0 | 560.5 | ||||||
|
Financial treasury bills |
(e) | 2.48 | R$ | 10.91% | 355.1 | 63.0 | ||||||
| 1,054.1 | 623.5 | |||||||||||
| Held to maturity: | - | |||||||||||
|
Credit linked notes |
(a) | 2.02 | US$ | 4.80% | 166.8 | 166.7 | ||||||
|
National treasury certificates |
(h) | 8.29 | R$ | 12.00% | 70.0 | 61.0 | ||||||
| 236.8 | 227.7 | |||||||||||
| 1,526.1 | 1,241.5 | |||||||||||
| Current | 1,372.7 | 1,032.4 | ||||||||||
| Non-current | 153.4 | 209.1 |
(*) Weighted average maturity in years.
(a) The Credit Linked Note is a structured operation with a first-class financial institution abroad that pays periodic interest (LIBOR + spread) and corresponds to a credit note that contemplates the Company’s risk.
(b) Brazilian foreign debt securities are denominated in U.S. Dollars and remunerated by pre- and post-fixed rates.
(c) Repurchase agreements backed by debentures.
(d) Bank Deposit Certificate (“CDB”) investments are denominated in Brazilian Reais and remunerated at rates varying from 98% to 104% of the Interbank Deposit Certificate (“CDI”).
(e) Financial Treasury Bills (“LFT”) are remunerated at the rate of the Special System for Settlement and Custody (“SELIC”).
(f) The exclusive fund in foreign currency is mainly represented by structured notes.
F-59
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
(g) The foreign currency investment fund has a Credit Linked Note issued by a first-class bank that pays periodic interest (LIBOR + spread) and contemplates the Brazil risk and Sadia risk.
(h) The CTN classified in the held to maturity subgroup are pledged as a guarantee of the loan obtained by means of the Special Program for Asset Recovery (“PESA”), see note 19.
The unrealized gain by the change in fair value of the marketable securities available for sale, recorded in shareholders’ equity as of December 31, 2011, is R$5.1, net of income taxes of R$0.6.
Additionally, on December 31, 2011, of the total of marketable securities, R$88.2 were pledged as collateral for futures contract operations in U.S. Dollars and live cattle, traded on the Futures and Commodities Exchange (“BMF”). On December 31, 2010, the guarantees corresponded to R$27.5.
On December 31, 2011, the maturities of the non-current marketable securities in the consolidated balance sheet is as follow:
| Maturities | 12.31.11 |
| 2013 | 83.4 |
| 2015 onwards | 70.0 |
| 153.4 |
The Company conducted an analysis of sensitivity to foreign exchange rate as presented in note 4.10.
F-60
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
9. TRADE ACCOUNTS RECEIVABLE AND OTHER
| 12.31.11 | 12.31.10 | |||
| Current | ||||
|
Domestic third parties |
1.864,0 | 1.636,7 | ||
|
Foreign third parties |
1.375,5 | 948,4 | ||
|
( - ) Estimated losses from doubtful accounts |
(31,7) | (20,1) | ||
| 3.207,8 | 2.565,0 | |||
|
Credit notes |
56,9 | 41,7 | ||
| 3.264,7 | 2.606,7 | |||
| Non-current | ||||
|
Domestic third parties |
53,1 | 48,0 | ||
|
Foreign third parties |
3,9 | 2,7 | ||
|
( - ) Adjustment to present value |
(0,7) | (1,0) | ||
|
( - ) Estimated losses from doubtful accounts |
(53,9) | (42,7) | ||
| 2,4 | 7,0 | |||
|
Credit notes |
147,3 | 93,1 | ||
| 149,7 | 100,1 |
The rollforward of estimated losses from doubtful accounts is set forth below:
| 12.31.11 | 12.31.10 | |||
| Beginning balance | 62,8 | 68,7 | ||
|
Additions |
112,4 | 41,3 | ||
|
Reversals |
(65,3) | (20,2) | ||
|
Write-offs |
(24,6) | (27,1) | ||
|
Exchange rate variation |
0,3 | 0,1 | ||
| Ending balance | 85,6 | 62,8 |
(1) Merger of Avipal Nordeste S.A. on March 31, 2010.
The expense of the estimated losses on doubtful accounts was recorded under selling expenses in the statement of income. When efforts to recover accounts receivable prove fruitless, the amounts credited to estimated losses on doubtful accounts are generally reversed against the permanent write-off of the invoice.
Breakdown by maturity of overdue amounts and not included in estimated losses on doubtful accounts:
| 12.31.11 | 12.31.10 | |||
| 60 to 90 days | 14.9 | 9.3 | ||
| 91 to 120 days | 3.5 | 1.4 | ||
| 121 to 180 days | 1.3 | 2.8 | ||
| 181 to 360 days | 1.5 | 0.3 | ||
| More than 360 days | 15.4 | 2.8 | ||
| 36.6 | 16.6 |
F-61
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The receivables excluded from allowance for estimated losses on doubtful accounts are secured by letters of credit issued by financial institutions and by credit insurance contracted with insurance companies.
The breakdown of accounts receivable by maturity is as follows:
| 12.31.11 | 12.31.10 | |||
| Current | 2,924.5 | 2,377.7 | ||
| Overdue: | ||||
|
From 01 to 60 days |
251.2 | 182.0 | ||
|
From 61 to 120 days |
30.3 | 17.9 | ||
|
From 121 to 180 days |
13.1 | 6.9 | ||
|
From 181 to 360 days |
8.5 | 6.9 | ||
|
More than 360 days |
68.9 | 44.4 | ||
|
( - ) Adjustment to present value |
(0.7) | (1.0) | ||
|
( - ) Estimated losses with doubtful accounts |
(85.6) | (62.8) | ||
| 3,210.2 | 2,572.0 |
10. INVENTORIES
| 12.31.11 | 12.31.10 | |||
| Finished goods | 1,688.3 | 1,159.1 | ||
| Goods for resale | 8.6 | 20.5 | ||
| Work in process | 316.9 | 123.3 | ||
| Raw materials | 214.6 | 466.3 | ||
| Packaging materials | 99.9 | 85.5 | ||
| Secondary materials | 153.9 | 58.8 | ||
| Warehouse | 115.2 | 118.5 | ||
| Goods in transit | 26.2 | 60.9 | ||
| Imports in transit | 83.6 | 22.1 | ||
| Advances to suppliers | 30.0 | 50.9 | ||
| ( - ) Provision for losses to the disposable value | (42.0) | (14.5) | ||
| ( - ) Provision for deterioration | (12.8) | (10.6) | ||
| ( - ) Provision for obsolescence | (3.2) | (5.0) | ||
| 2,679.2 | 2,135.8 |
The amount of the write-offs of inventories recognized in cost of sales during the twelve month period ended on December 31, 2011, totaled R$19,047 (R$16,951.2 as of December 31, 2010), such amounts include the additions and reversals of inventory provisions presented in the table below:
F-62
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.10 | Additions | Reversals | Write-offs | Exchange rate variation |
12.31.11 | |||||||
| Provision for losses to the disposable value | (14.5) | (69.6) | 41.8 | - | 0.3 | (42.0) | ||||||
| Provision for deterioration | (10.6) | (13.6) | - | 11.4 | - | (12.8) | ||||||
| Provision for obsolescence | (5.0) | (2.0) | 3.8 | - | - | (3.2) | ||||||
| (30.1) | (85.2) | 45.6 | 11.4 | 0.3 | (58.0) |
The additions presented in the provision for inventory losses are mainly related to the decrease in the foreign market sales price of griller chickens which occurred from July to August 2011. From September 2011, there was a recovery in the sales price hence the provision was reversed.
Additionally, during the year ended December 31, 2011, there were write-offs of inventories in the amount of R$53.0 (R$45.3 as of December 31, 2010), referring to items suffering deterioration, which have not been recorded in the provision.
Management expects inventories to be recovered in a period of less than 12 months.
On December 31, 2011, R$67.1 (R$30.5 as of December 31, 2010) of the balance of inventories, was pledged as collateral for rural credit operations.
11. BIOLOGICAL ASSETS
The group of biological assets of the Company comprises living animals which are segregated by the categories: poultry, pork and cattle. In addition, these categories were separated into consumable and for production.
The animals classified in the subgroup of consumables are those intended for slaughtering to produce unprocessed meat and/or manufactured and processed products, and while they do not reach the weight adequate for slaughtering, they are classified as immature. The slaughter and production process occurs sequentially and in a very short time period, and as a consequence, only the living animals transferred for slaughtering in refrigerators are classified as mature.
The animals classified in the subgroup for production (breeding stock) are those that have the function of producing other biological assets. And, while they do not reach the age of reproduction they are classified as immature and when they are able to initiate the reproductive cycle, they are classified as mature.
In the measurement of the biological assets at fair value, the Company adopted the model of discounted cash flow. Firstly, the discount rate used was the Weighted Average Cost of Capital (“WACC”), which was then adjusted to reflect the specific risk of the asset in question, utilizing mathematical model of Weighted Average Return on Assets (“WARA”), as follows:
F-63
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | 12.31.10 | |||
| Cost of nominal owners' equity | 10.31 | 11.10 | ||
| Projected inflation rate USA | 2.26 | 1.85 | ||
| Cost of actual owners' equity | 7.88 | 9.08 | ||
| Actual WACC | 5.80 | 6.93 | ||
| WARA discount rate: | ||||
|
Animals for slaughtering |
5.50 | 6.00 | ||
|
Animals for production |
5.75 | 6.90 |
In Management’s opinion, the fair value of the biological assets is substantially represented by the cost of formation, mainly due to the short life cycle of the animals and to the fact that a significant portion of the profitability of our products derives from the manufacturing process and not from obtaining in natura meat (raw materials at slaughtering point). This opinion is supported by a fair value appraisal report prepared by an independent expert, which presented an immaterial difference between the two methodologies. Therefore, Management maintained the biological assets at formation cost.
The quantities and accounting balances per category of biological assets are presented below:
| 12.31.11 | 12.31.10 | |||||||
| Quantity | Value | Quantity | Value | |||||
| Consumable biological assets: | ||||||||
|
Immature poultry |
209,732.0 | 485.4 | 187,584.0 | 396.3 | ||||
|
Immature pork |
3,803.0 | 581.5 | 4,155.0 | 479.2 | ||||
|
Immature cattle |
75.0 | 89.2 | 24.0 | 25.2 | ||||
| Total current | 213,610.0 | 1,156.1 | 191,763.0 | 900.7 | ||||
| Production biological assets: | ||||||||
|
Immature poultry |
7,643.0 | 97.5 | 7,372.0 | 88.2 | ||||
|
Mature poultry |
12,006.0 | 132.0 | 11,559.0 | 140.5 | ||||
|
Immature pork |
125.0 | 18.4 | 169.0 | 22.6 | ||||
|
Mature pork |
409.0 | 139.5 | 386.0 | 126.4 | ||||
| Total non-current | 20,183.0 | 387.4 | 19,486.0 | 377.7 | ||||
| 233,793.0 | 1,543.5 | 211,249.0 | 1,278.4 | |||||
The rollforward of biological assets for the period is set forth below:
F-64
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| Current | Non-current | |||||||||||||
| Poultry | Pork | Cattle | Total | Poultry | Pork | Total | ||||||||
| Balance as of 12.31.10 | 396.3 | 479.2 | 25.2 | 900.7 | 228.7 | 149.0 | 377.7 | |||||||
|
Increase due to acquisition |
83.1 | 577.5 | 244.3 | 904.9 | 34.0 | 57.3 | 91.3 | |||||||
|
Increase due to reproduction, |
||||||||||||||
|
consuption of ration, medication and |
||||||||||||||
|
remuneration of partnership |
5,417.6 | 1,787.5 | 109.3 | 7,314.4 | 333.8 | 67.1 | 400.9 | |||||||
|
Business combination (1) |
9.8 | - | - | 9.8 | - | - | - | |||||||
|
Accumulated depreciation |
- | - | - | - | (304.7) | (52.6) | (357.3) | |||||||
|
Transfer between current and non- |
||||||||||||||
|
current |
62.2 | 63.0 | - | 125.2 | (62.3) | (62.9) | (125.2) | |||||||
|
Reduction due to slaughtering |
(5,483.6) | (2,325.7) | (289.6) | (8,098.9) | - | - | - | |||||||
| Balance as of 12.31.11 | 485.4 | 581.5 | 89.2 | 1,156.1 | 229.5 | 157.9 | 387.4 | |||||||
The costs of the breeding animals are depreciated using the straight-line method for a period from 15 to 30 months.
The acquisitions of biological assets for production (non-current) occur when there is an expectation that the production plan cannot be met with its own assets and, usually, this acquisition refers to immature animals in the beginning of the life cycle.
The acquisitions of biological assets for slaughtering (poultry and pork) are represented by poultry of one day old and pork of up to 22 kilos, which are subject to the management of a substantial part of the agricultural activity by the Company.
The increase by reproduction of the biological assets classified in the current assets is related to eggs from animals for production.
12. RECOVERABLE TAXES
| 12.31.11 | 12.31.10 | |||
| State ICMS (VAT) | 754.3 | 647.0 | ||
| Withholding income tax and social contribution | 211.0 | 257.1 | ||
| PIS and COFINS (Federal Taxes to Fund Social Programs) | 755.3 | 577.9 | ||
| Import duty | 7.3 | 9.1 | ||
| IPI (Federal VAT) | 57.2 | 58.7 | ||
| Other | 19.2 | 6.6 | ||
| ( - ) Allowance for losses | (151.8) | (93.1) | ||
| 1,652.5 | 1,463.3 | |||
| Current | 907.9 | 695.9 | ||
| Non-current | 744.6 | 767.4 | ||
F-65
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The rollforward of the allowance for losses is set forth below:
| 12.31.10 | Additions | Reversals | Business combination (1) |
12.31.11 | ||||||
| Allowance for losses - State ICMS (VAT) | (78.4) | (47.6) | 0.8 | (1.6) | (126.8) | |||||
| Allowance for losses - PIS and COFINS | (2.6) | (10.3) | - | - | (12.9) | |||||
| Allowance for losses - IPI (Federal VAT) | (12.1) | - | - | - | (12.1) | |||||
| (93.1) | (57.9) | 0.8 | (1.6) | (151.8) |
(1) Business combination of Avex and Dánica group on October 3, 2011.
12.1 Value-added Tax
Due to its export activity, domestic sales and investments in property, plant and equipment are subject to reduced tax rates and, the Company accumulates credits that are offset with debits generated in sales in the domestic market or transferred to third parties.
The Company has ICMS credit in the States of Mato Grosso do Sul, Paraná, Santa Catarina, Minas Gerais and Distrito Federal, for which Management understands that realization is uncertain and, therefore, formed full provision for loss of these credits as shown in the table above.
The increase in the balance is related to the exports from the States of Parana and Santa Catarina and are presented net of the related allowances judged necessary by the Company’s Management.
12.2 Income tax and social contribution
These correspond to withholdings at source on financial investments, prepayments of income tax and social contribution, and on the reception of interest on shareholders’ equity by the company, realizable through offsetting with federal taxes and contributions payable.
12.3 PIS and COFINS
Recoverable taxes derived from Contribution to the Social Integration Program (“PIS”) and Contribution for Funding of Social Welfare Programs (“COFINS”) basically are originated from credits on purchases of raw materials used in the production of exported products or in the production of products which sales are taxed at the zero rate, such as UHT and pasteurized milk as well as sales to the Manaus Free Zone. The recovery of these receivables can be achieved by means of offsetting with domestic sale operations of taxed products, with other federal taxes or compensation claims.
F-66
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
For the accumulated PIS and COFINS credits, the Company adopts the procedure of legal action aiming to accelerate the analysis process of applications for refund of these contributions already filed, which are under supervision for the release of new amounts.
Management is analyzing alternatives that would allow the utilization of the credits in the operations and there is no expectation of losses in their recovery.
The Law No. 12,350/10 introduced significant changes in the taxation of PIS and COFINS in the productive chain of poultry and pork products with retroactive application of its provisions from January 1, 2011. As a consequence, the Company recognized a credit in cost of sales in the amount of R$90.2 during 2011.
13. NON-CURRENT ASSETS HELD FOR SALE
The rollforward of assets held for sale are set forth below:
| 12.31.10 | Transfers from property, plant and equipment |
Transfers to property, plant and equipment |
Disposal | 12.31.11 | ||||||
| Lands | 42.9 | 1.2 | - | (35.4) | 8.7 | |||||
| Buildings and improvements | 14.7 | 1.4 | - | (7.9) | 8.2 | |||||
| Machinery and equipment | 1.8 | 0.2 | (0.1) | (0.3) | 1.6 | |||||
| Facilities | 2.2 | - | - | (2.2) | - | |||||
| Others | 0.6 | - | - | (0.1) | 0.5 | |||||
| 62.2 | 2.8 | (0.1) | (45.9) | 19.0 | ||||||
On June 6, 2011, the Company disposed of the land and buildings where the old corporate headquarters of the wholly-owned subsidiary Sadia were located in the neighborhood of Vila Anastacio, in the City and State of São Paulo. The approval of the sale occurred in the Extraordinary General Shareholder´s Meeting of its wholly-owned subsidiary VIP S.A. Empreendimentos e Participações Imobiliárias, held on November 8, 2010.
The sales value was R$120.0, of which R$12.0 was received in cash. The remaining amount of R$108.0, will be received in 35 consecutive monthly installments of R$3.1, updated by the National Index of Consumer Prices ("INPC"), which receipt will start in March 2012. The book value of the property on the disposal date was R$45.5. This disposal generated a net gain of R$49.4 recognized in other operating income.
F-67
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
14. INCOME TAX AND SOCIAL CONTRIBUTION
14.1. Deferred income tax and social contribution composition
| 12.31.11 | 12.31.10 | |||
| Assets: | ||||
|
Tax loss carryforwards (corporate income tax) |
765.1 | 564.7 | ||
|
Provision for tax losses |
(166.8) | - | ||
|
Negative calculation basis (social contribution on net profits) |
297.1 | 216.7 | ||
|
Provision for negative calculation basis losses |
(48.4) | - | ||
|
Temporary differences: |
|
|||
|
Provisions for tax, civil and labor risk |
158.3 | 151.6 | ||
|
Provision for estimated losses with doubtful accounts |
12.7 | 8.7 | ||
|
Provision for attorney's fees |
4.7 | 4.8 | ||
|
Provision for property, plant and equipment losses |
11.7 | 3.6 | ||
|
Provision for tax credits realization |
47.6 | 31.7 | ||
|
Provision for other obligations |
46.2 | 57.2 | ||
|
Employees' profit sharing |
72.4 | 35.8 | ||
|
Provision for inventories |
12.2 | 5.7 | ||
|
Employees' benefits plan |
90.5 | 93.3 | ||
|
Amortization on fair value of business combination |
8.8 | 10.9 | ||
|
Business combination - Sadia |
1,139.7 | 1,129.9 | ||
|
Provision for contractual indemnity |
- | 3.4 | ||
|
Unrealized losses on derivatives |
62.6 | 2.9 | ||
|
Unrealized losses on inventories |
4.2 | 1.5 | ||
|
Adjustments relating to the transition tax regime |
76.1 | 139.6 | ||
|
Provision for losses |
10.5 | 11.6 | ||
|
Other temporary differences |
23.6 | 14.0 | ||
| 2,628.8 | 2,487.6 | |||
| Liabilities: | ||||
|
Temporary differences: |
|
|||
|
Provision for recovery - Brasil Foods Previdência Privada (“BFPP”) |
1.8 | - | ||
|
Revaluation reserve |
0.3 | 0.6 | ||
|
Depreciation on rural activities |
68.8 | 76.6 | ||
|
Adjustments relating to the transition tax regime |
531.1 | 401.0 | ||
|
Business combination - Sadia |
1,181.6 | 1,124.5 | ||
|
Unrealized gains on derivatives |
- | 28.0 | ||
|
Other temporary differences |
8.3 | 5.0 | ||
| 1,791.9 | 1,635.7 |
Certain subsidiaries of the Company have tax loss carry forwards and negative basis of social contribution of R$31.7 and R$31.5, respectively, (R$19.6 and R$19.4, respectively, on December 31, 2010), for which the Company has not recorded a deferred tax asset. If there was an expectation that such tax credits would be realized the amount recognized in the balance would be R$10.5 (R$6.7 as of December 31, 2010).
As mentioned in note 38, on February 9, 2012, the Company´s Board of Directors approved the merger of the wholly-owned subsidiary Sadia with BRF, which will be implemented on December 31, 2012.
F-68
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The decision to merge Sadia into BRF will result in the recognition of a loss for 2011 of approximately R$215.2 on the allowance for tax loss carryforwards, which will not be recovered after the merger. The value of the loss reflects Management's best estimate at the date of the publication of these consolidated financial statements, considering the available information. The final value of the impact of the merger of Sadia into BRF will be known on December 31, 2012.
Management has prepared a sensitivity analysis considering variations in the discount rate used in the above estimate, the results are set forth below:
| Long Term Interest Rate | |||
| 5% p.a. | 6% p.a. | 7% p.a. | |
| Estimated value | 212.3 | 215.2 | 218.0 |
| Changes | (2.9) | - | 2.8 |
14.2. Estimated time of realization
Management considers that deferred tax assets related to temporary differences will be realized as the lawsuits are resolved. The deferred tax assets resulting from temporary differences of employee benefits will be realized at the payment of the projected obligations.
Management estimates that the deferred tax assets originated from tax losses carry forwards and negative basis of social contribution are expected to be realized as set forth below:
| Year | Value |
| 2012 | 304.4 |
| 2013 | 33.5 |
| 2014 | 54.6 |
| 2015 | 58.3 |
| 2016 | 71.4 |
| 2017-2019 | 308.9 |
| 2020-2021 | 15.9 |
| 847.0 |
When assessing the likelihood of the realization of deferred tax assets, Management considers whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those temporary differences are deductible.
F-69
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Management considers the scheduled reversal of deferred tax liabilities, projected taxable income and tax-planning strategies when performing this assessment. Based on the level of historical taxable income and projections for future taxable income, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset is considered realizable, however, could be impacted in the short term if estimates of future taxable income during the carryforward period are reduced.
14.3. Income and social contribution taxes reconciliation
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Income before taxes | 1,521.6 | 1,001.5 | 339.8 | |||
|
Nominal tax rate |
|
34.00% | 34.00% | 34.00% | ||
| (517.3) | (340.5) | (115.5) | ||||
|
Tax expense at nominal rate |
|
|||||
|
Adjustments of taxes and contributions on: |
||||||
|
Equity interest in income of affiliates |
3.1 | 1.5 | (0.9) | |||
|
Exchange rate variation on foreign investments |
68.7 | (32.7) | (97.4) | |||
|
Difference of tax rates on earnings from foreign subsidiaries |
269.3 | 99.0 | 124.3 | |||
|
Interest on shareholders' equity |
214.9 | 89.3 | 34.0 | |||
|
Results from foreign subsidiaries |
(4.4) | (3.5) | (1.0) | |||
|
Transfer price |
(2.0) | (0.8) | (17.6) | |||
|
Profit sharing |
(4.9) | (4.6) | (5.2) | |||
|
Donations |
(3.1) | (3.1) | (0.9) | |||
|
Penalties |
(3.8) | (7.0) | (4.0) | |||
|
Write-off of deferred income tax and social contribution |
(215.2) | (3.8) | (132.0) | |||
|
Investment grant |
35.6 | 3.0 | - | |||
|
Other adjustments |
2.6 | 6.7 | (5.0) | |||
| (156.5) | (196.5) | (221.2) | ||||
| Current income tax | (39.9) | (130.6) | (80.2) | |||
| Deferred income tax | (116.6) | (65.9) | (141.0) |
The taxable income, current and deferred income tax from foreign subsidiaries is set forth below:
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Taxable income from foreign subsidiaries | 749.0 | 134.7 | 135.3 | |||
| Current income tax expense from foreign subsidiaries | (11.4) | (13.9) | (4.3) | |||
| Deferred income tax benefit from foreign subsidiaries | 0.5 | 0.8 | 7.6 |
The Company determined that the total profit accounted for by holdings of their wholly-owned subsidiary will not be redistributed. Such resources will be used for investments in the subsidiaries, and thus no deferred income taxes were recognized. The total of undistributed earnings corresponds to R$2,057.7 as of December 31, 2011 (R$1,144.5 as of December 31, 2010 and R$950.7 as of December 31, 2009).
The Brazilian income taxes are subject to review for a 5-year period, during which the tax authorities might audit and assess the company for additional taxes and penalties, in case inconsistencies are found. Subsidiaries located abroad are taxed in their respective jurisdictions, according to local regulations.
F-70
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
15. JUDICIAL DEPOSITS
The Company’s judicial deposits are restricted assets until the final settlement of the disputes to which they are related. The rollforward of the judicial deposits is set forth below:
| 12.31.10 | Additions | Reversals | Write-offs | Exchange rate variation |
12.31.11 | |||||||
| Tax | 79.2 | 18.0 | - | (4.2) | - | 93.0 | ||||||
| Labor | 101.8 | 58.4 | (14.3) | (30.0) | - | 115.9 | ||||||
| Civil, commercial and other | 53.1 | 6.0 | (0.1) | (39.7) | 0.1 | 19.4 | ||||||
| 234.1 | 82.4 | (14.4) | (73.9) | 0.1 | 228.3 |
16. INVESTMENTS
16.1. Investments breakdown
| 12.31.11 | 12.31.10 | |||
| Investment in associates | 19.5 | 16.5 | ||
| Other investments | 0.9 | 1.0 | ||
| 20.4 | 17.5 |
On September 28, 2011, the wholly-owned subsidiary Crossban Holdings GmbH, acquired from Agricola Nova S.A. the total of 1,133,820 quotes which correspond to 40% of the capital of Sadia Chile S.A. (non-controlling shareholders’ interest), for the total amount of R$16.8, originating goodwill of R$12.2, which in the consolidated financial statements was recorded as a capital reserve since it did not result in a change of control of the investment.
The amounts of the gain resulting from foreign exchange rate variation on the investments in subsidiaries abroad, whose functional currency is Brazilian Reais, in the amount of R$211.8 on December 31, 2011 (R$96.2 losses on December 31, 2010 and R$257.9 losses on December 31, 2009), is recognized in financial income/expenses groups in the statement of income.
The exchange rate variation resulting from the investment in the subsidiary Plusfood Groep B.V. and its controlled companies, whose functional currency is the Euro, was recorded in the equity pickup adjustments, in the subgroup of shareholders’ equity.
F-71
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
On December 31, 2011, the subsidiaries do not have significant restriction to transfer dividends or repay their loans or advances to the parent.
On December 31, 2011, the market cap of Excelsior Alimentos S.A., a subsidiary of the Company, corresponded to R$16.1 (R$14.6 as of December 31, 2010).
16.2. Summary financial information of participation in affiliates
The table below presents the values which corresponding to the Company's participation in affiliates:
| UP! | K&S | |||||||
| 12.31.11 | 12.31.10 | 12.31.11 | 12.31.10 | |||||
| Current assets | 13.0 | 11.3 | 7.7 | 7.3 | ||||
| Non-current assets | - | - | 8.4 | 8.5 | ||||
| Current liabilities | (4.0) | (5.6) | (5.2) | (4.8) | ||||
| Non-current liabilities | - | - | (0.4) | (0.2) | ||||
| 9.0 | 5.7 | 10.5 | 10.8 | |||||
| UP! | K&S | |||||||
| 12.31.11 | 12.31.10 | 12.31.11 | 12.31.10 | |||||
| Net revenues | 53.7 | 45.6 | 34.1 | 34.0 | ||||
| Operational expenses | 14.2 | 16.9 | 10.7 | 12.2 | ||||
| Net income (loss) | 9.0 | 5.7 | (0.3) | (1.4) | ||||
| Participation % | 50% | 49% | ||||||
In 2011, there were no increases in capital or commitments by the companies for contributions in investments.
F-72
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
17. PROPERTY, PLANT & EQUIPMENT
The property, plant and equipment rollforward is set forth below:
| Rate | Transfer to | Transfers from | Exchange rate | |||||||||||||||
| p.a. % | 12.31.10 | Additions | Disposal | Transfers | held for sale | held for sale | variation | 12.31.11 | ||||||||||
| Cost | ||||||||||||||||||
|
Land |
- | 617,4 | 3,6 | (0,3) | 15,1 | (1,2) | - | - | 634,7 | |||||||||
|
Buildings and improvements |
- | 4.669,1 | 72,6 | (33,8) | 240,0 | (4,1) | - | 2,2 | 4.946,1 | |||||||||
|
Machinery and equipment |
- | 5.232,5 | 113,0 | (126,4) | 381,8 | (0,5) | 0,1 | 2,8 | 5.603,3 | |||||||||
|
Facilities |
- | 1.309,9 | 1,3 | (10,4) | 14,1 | - | - | 0,1 | 1.315,0 | |||||||||
|
Furniture |
- | 81,5 | 3,2 | (3,6) | 5,5 | - | - | 0,9 | 87,5 | |||||||||
|
Vehicles and aircrafts |
- | 28,5 | 22,8 | (4,0) | 30,8 | (0,4) | - | 0,5 | 78,3 | |||||||||
|
Others |
- | 174,6 | 8,4 | (4,6) | 12,9 | - | - | - | 191,3 | |||||||||
|
Construction in progress |
- | 249,1 | 1.025,2 | (0,1) | (649,8) | - | - | (4,2) | 620,2 | |||||||||
|
Advance to suppliers |
- | 47,5 | 45,3 | - | (59,7) | - | - | (0,2) | 32,9 | |||||||||
| 12.410,1 | 1.295,4 | (183,2) | (9,3) | (6,2) | 0,1 | 2,1 | 13.509,4 | |||||||||||
| Depreciation | ||||||||||||||||||
|
Buildings and improvements |
3,03 | (1.036,3) | (124,5) | 4,1 | (12,7) | 2,7 | - | (1,5) | (1.168,3) | |||||||||
|
Machinery and equipment |
5,28 | (1.902,9) | (263,7) | 94,0 | (2,0) | 0,3 | - | (3,3) | (2.077,5) | |||||||||
|
Facilities |
3,42 | (327,0) | (69,2) | 5,4 | 14,7 | - | - | - | (376,1) | |||||||||
|
Furniture |
5,81 | (38,1) | (5,1) | 2,7 | 0,4 | - | - | (0,5) | (40,7) | |||||||||
|
Vehicles and aircrafts |
14,51 | (15,0) | (4,4) | 2,5 | - | 0,4 | - | (0,3) | (16,9) | |||||||||
|
Others |
4,98 | (24,0) | (9,5) | 2,0 | - | - | - | - | (31,6) | |||||||||
| (3.343,3) | (476,4) | 110,7 | 0,4 | 3,4 | - | (5,6) | (3.711,0) | |||||||||||
| 9.066,8 | 819,0 | (72,5) | (8,9) | (1) | (2,8) | 0,1 | (3,5) | 9.798,4 | ||||||||||
(1) Net transfer to intangible assets (note 18).
F-73
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The acquisitions during the period are substantially represented by construction in progress in the total amount of R$990.2 and advances to suppliers of R$45.3 which comprises mainly:
| Description | 12.31.11 | |
| Expansion projects of industrial units | 148.8 | |
| Copercampos project | 89.1 | |
| Transformation of turkey´s plant into chicken' plant in Carambeí-PR | 69.8 | |
| Car fleet renewal | 51.3 | |
| Improvements in productive units and poultry farm | 38.7 | |
| New pizza production line in Tatuí-SP | 38.7 | |
| Implementation of milk powder in Três de Maio-RS | 19.3 | |
| Expansion of "Escondidinho" production facilities | 19.3 | |
| Reposition of Nova Mutum-MT equipment, where a fire occurred in March 2011 | 14.6 |
The disposals are mainly related to obsolete items in the total amount of R$30.0 and assets that suffered a fire amounting to R$23.0, recorded within other operating results.
The Company has fully depreciated items still in operation. These items are presented below:
| 12.31.11 | 12.31.10 | |||
| Cost | ||||
|
Buildings and improvements |
116.7 | 21.0 | ||
|
Machinery and equipment |
613.8 | 266.3 | ||
|
Facilities |
83.1 | 6.5 | ||
|
Furniture |
16.7 | 7.7 | ||
|
Vehicles and aircrafts |
3.2 | 0.9 | ||
|
Others |
1.2 | - | ||
| 834.7 | 302.4 |
The Company performed an analysis of impairment indicators of the property, plant and equipment during the last quarter of 2011 and identified the need to execute an impairment test for certain manufacturing facilities mainly those affected by the CADE’s decision of suspending the future sales of specific products under the Perdigão’s brand. Hence, the discounted cash flows were prepared, and as a result of the analysis, no provision was deemed necessary by Management.
Management adopted the WACC (12.2% p.a.) and the inflation rate with variation between 5.40% and 4.27% for preparing the discounted cash flows.
During the twelve month period ended December 31, 2011, the Company capitalized interests in the amount of R$20.0 (R$18.4 as of December 31, 2010). The interest rate utilized to determine the capitalized amount was 7.82%.
F-74
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
On December 31, 2011, the Company had no commitments assumed related to acquisition and/or construction of properties, except those disclosed in note 22, item 22.2.
The property, plant and equipment that are held as collateral for transactions of different natures are set forth below:
| 12.31.11 | 12.31.10 | ||
| Book value of | Book value of | ||
| Type of collateral | the collateral | the collateral | |
| Land | Financial/Labor/Tax/Civil | 160.4 | 187.2 |
| Buildings and improvements | Financial/Labor/Tax/Civil | 1,966.2 | 1,926.3 |
| Machinery and equipment | Financial/Labor/Tax | 2,304.5 | 2,028.7 |
| Facilities | Financial/Labor/Tax | 687.5 | 701.0 |
| Furniture | Financial/Labor/Tax/Civil | 299.3 | 17.4 |
| Vehicles and aircrafts | Financial/Tax | 19.4 | 1.3 |
| Others | Financial/Labor/Tax/Civil | 307.4 | 148.6 |
| 5,744.7 | 5,010.5 |
The Company is not allowed to assign these assets as security for other transactions or to sell them.
18. INTANGIBLE
Intangible assets are comprised of the following items:
| Rate | Accumulated | |||||||||
| p.a. % | Cost | amortization | 12.31.11 | 12.31.10 | ||||||
| Goodwill | - | 2,973.8 | - | 2,973.8 | 2,833.0 | |||||
| Brands | - | 1,256.0 | - | 1,256.0 | 1,256.0 | |||||
| Software | 20.00 | 289.3 | (151.1) | 138.2 | 100.3 | |||||
| Relationship with suppliers | 42.00 | 135.0 | (125.4) | 9.6 | 50.8 | |||||
| Patents | 16.92 | 5.7 | (0.8) | 4.9 | 5.3 | |||||
| Outgrowers loyalty | 12.50 | 3.9 | (0.3) | 3.6 | 1.9 | |||||
| 4,663.7 | (277.6) | 4,386.1 | 4,247.3 |
The intangible assets rollforward is set forth below:
F-75
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| Business | Exchange rate | |||||||||||||
| 12.31.10 | Additions | Disposal | combination | Transfers | variation | 12.31.11 | ||||||||
| Cost: | ||||||||||||||
|
Software |
223.2 | 56.6 | (0.9) | 0.5 | 9.3 | 0.6 | 289.3 | |||||||
|
Relationship with suppliers |
135.0 | - | - | - | - | - | 135.0 | |||||||
|
Patents |
5.6 | - | - | - | - | 0.1 | 5.7 | |||||||
|
Trademarks |
1,256.0 | - | - | - | - | - | 1,256.0 | |||||||
|
Outgrowers loyalty |
1.8 | 2.2 | - | - | - | - | 4.0 | |||||||
|
Goodwill: |
|
2,833.0 | - | - | 139.8 | - | 1.0 | 2,973.8 | ||||||
|
Sadia |
1,293.8 | - | - | - | - | - | 1,293.8 | |||||||
|
Eleva Alimentos |
1,273.3 | - | - | - | - | - | 1,273.3 | |||||||
|
Batavia |
133.2 | - | - | - | - | - | 133.2 | |||||||
|
Ava |
49.4 | - | - | - | - | - | 49.4 | |||||||
|
Cotochés |
39.6 | - | - | - | - | - | 39.6 | |||||||
|
Paraiso Agroindustrial |
16.8 | - | - | - | - | - | 16.8 | |||||||
|
Plusfood |
14.6 | - | - | - | - | 1.3 | 15.9 | |||||||
|
Perdigão Mato Grosso |
7.6 | - | - | - | - | - | 7.6 | |||||||
|
Sino dos Alpes |
4.1 | - | - | - | - | - | 4.1 | |||||||
|
Incubatório Paraiso |
0.6 | - | - | - | - | - | 0.6 | |||||||
|
Heloísa |
- | - | - | 26.2 | - | - | 26.2 | |||||||
|
Avex |
- | - | - | 60.2 | - | 2.9 | 63.1 | |||||||
|
Dánica |
- | - | - | 53.4 | - | (3.2) | 50.2 | |||||||
| 4,454.6 | 58.8 | (0.9) | 140.3 | 9.3 | 1.7 | 4,663.8 | ||||||||
| Amortization: | ||||||||||||||
|
Software |
(122.9) | (27.3) | 0.8 | (0.4) | (0.4) | (1.0) | (151.2) | |||||||
|
Relationship with suppliers |
(84.1) | (41.2) | - | - | - | - | (125.3) | |||||||
|
Patents |
(0.3) | (0.5) | - | - | - | - | (0.8) | |||||||
|
Outgrowers loyalty |
- | (0.4) | - | - | - | - | (0.4) | |||||||
| (207.3) | (69.4) | 0.8 | (0.4) | (0.4) | (1.0) | (277.7) | ||||||||
| 4,247.3 | (10.6) | (0.1) | 139.9 | 8.9 | 0.7 | 4,386.1 | ||||||||
Amortizations of outgrowers loyalty and relationship with suppliers are recognized as a cost of sales in the statement of income, while software amortization is recorded according to its use, where the alternatives are cost of sales, administrative or sales expenses.
Trademarks in intangible assets derive from the business combination with Sadia and are considered assets with indefinite useful lives as they are expected to contribute toward the Company’s cash flows indefinitely.
The goodwill presented above is based on expected future profitability supported by valuation reports, after allocation of identified assets in use.
The value of goodwill and the value of intangible assets with indefinite useful life (trademarks and patents) allocated by cash-generating unit, are presented in note 5.
The Company performed the impairment tests of assets based on the fair value that was determined by a discounted cash flow model, in accordance with the level of goodwill and intangible allocations to the group of cash generating units.
Discounted cash flows were prepared based on the multi-annual budget (2012-2016) of the Company and growth projections up to 2021 (9.3% per annum up to 18.2% per annum), which in turn, are based on historical experiences and market projections of government agencies and associations, such as the United States Department of Agriculture (“USDA”), the Brazilian Pork Industry and exporter (“ABIPECS”), the Brazilian Pullet Producer Association (“APINCO”) and others. In the opinion of Management, the use of periods that exceed those quoted (5 years) in the preparation of discounted cash flows is adequate, as it reflects the estimated time of use of the groups of assets.
F-76
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Management adopted the WACC (12.2% p.a.) as the discount rate for the development of discounted cash flows and also adopted the assumptions shown in the table below:
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018-2021 | ||||||||
| PIB Brazil-BACEN | 3.8% | 4.5% | 4.3% | 4.6% | 4.6% | 4.6% | 4.6% | |||||||
| PIB Worldwide - FMI | 4.3% | 4.5% | 4.6% | 4.4% | 4.4% | 4.4% | 4.4% | |||||||
| IPCA | 5.4% | 4.5% | 4.4% | 4.3% | 4.3% | 4.3% | 4.3% | |||||||
| CPI-FMI | 1.6% | 2.4% | 2.4% | 2.3% | 2.3% | 2.3% | 2.3% | |||||||
| SELIC | 10.7% | 9.5% | 9.5% | 8.9% | 8.9% | 8.9% | 8.9% |
The rates presented above do not consider any tax effect (pre-tax).
Based on Management analyses performed during the fourth quarter of 2011, no adjustments for reduction in the balances of the assets to recoverable value were identified.
In addition to the above mentioned recovery analysis, Management drew up a sensitivity analysis considering the variations in the EBITDA margin and in the nominal WACC as presented below:
| Variations | ||||||||||
| Appreciation (depreciation) | 3.0% | 1.5% | 0.0% | -1.5% | -3.0% | |||||
| WACC | 15.2% | 13.7% | 12.2% | 10.7% | 9.2% | |||||
| EBITDA margin | 15.6% | 14.1% | 12.6% | 11.1% | 9.6% | |||||
In none of the scenarios above considered, the Company determined the need to recognize an impairment provision to the intangible assets with indefinite useful life.
F-77
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
19. LOANS AND FINANCING
| Average interest | WAMT | Balance | Balance | |||||||||||
| Charges (% p.a.) | rate (% p.a.) | (*) | Current | Non-current | 12.31.11 | 12.31.10 | ||||||||
| Local currency | ||||||||||||||
|
Working capital |
6.82% (6.75% on 12.31.10) | 6.82% (6.81% on 12.31.10) | 0.5 | 953.5 | 1.5 | 954.9 | 705.3 | |||||||
|
BNDES, FINEM, development bank credit lines |
||||||||||||||
|
and other secured debt |
TJLP + 4.65% (TJLP + 2.86% on 12.31.10) | 8.42% (8.45% on 12.31.10) | 2.9 | 451.4 | 990.0 | 1,441.4 | 1,934.2 | |||||||
| TJLP + 4.23% (TJLP/CDI + 4.42% on | ||||||||||||||
|
Export credit facility |
12.31.10) | 10.23% (10.42% on 12.31.10) | 1.6 | 404.2 | 332.9 | 737.1 | 387.7 | |||||||
|
Financing programs |
IGPM + 1.20% (IGPM + 1.40% on 12.31.10) | 1.08% (3.00% on 12.31.10) | 8.4 | 2.4 | 12.5 | 14.9 | 12.9 | |||||||
|
PESA |
IGPM + 4.93% (IGPM + 4.89% on 12.31.10) | 3.49% (13.21% on 12.31.10) | 8.3 | 2.8 | 178.6 | 181.4 | 176.0 | |||||||
| 1,814.3 | 1,515.5 | 3,329.7 | 3,216.1 | |||||||||||
| Foreign currency | ||||||||||||||
|
Advances on export contracts |
1.18% + e.r. (US$) | 1.18% | 0.1 | 150.1 | - | 150.1 | - | |||||||
|
Bonds |
7.25% (7.13% on 12.31.10) | 7.25% (7.13% on 12.31.10) | 7.9 | 46.8 | 1,856.9 | 1,903.7 | 1,688.9 | |||||||
| LIBOR/CDI + 2.26% (LIBOR/CDI+2.24% on | 2.81% (2.30% on 12.31.10) e.r. | |||||||||||||
|
Export credit facility |
12.31.10) e.r. (US$ and other currencies) | (US$ and other currencies) | 2.7 | 1,375.1 | 1,130.9 | 2,506.1 | 2,108.3 | |||||||
| 8.25% + e.r. (US$/ARS) (8.25% on | ||||||||||||||
|
Working capital |
12.31.10) | 8.25% (8.25% on 12.31.10) | 0.6 | 3.5 | 0.4 | 3.9 | - | |||||||
|
BNDES, FINEM, development bank credit lines |
UMBNDES + 2.35% (UMBNDES+2.46% on | 5.93% (6.61% on 12.31.10) v.c. | ||||||||||||
|
and other secured debt |
12.31.10) e.r. (US$ and other currencies) | (US$ and other currencies) | 2.0 | 62.7 | 97.4 | 160.0 | 189.6 | |||||||
| 1,638.2 | 3,085.6 | 4,723.8 | 3,986.8 | |||||||||||
| 3,452.5 | 4,601.1 | 8,053.5 | 7,202.9 | |||||||||||
(*) Weighted average maturity term (years).
F-78
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
19.1. Working capital
Rural credit: The Company and its subsidiaries entered into short term rural credit loans with several commercial banks, under a Brazilian Federal Government program that offers an incentive to investments in rural activities. The proceeds from these loans are used for working capital.
Industrial credit notes: We issue Industrial Credit Notes, receiving credits from official funds: Fund for Worker Support (“FAT”) and from the Constitutional Fund for financing in the Midwest (“FNE”). The notes have maturity dates ending between 2012 and 2023. These notes are guaranteed by a pledge of machinery and equipment and real estate mortgages.
Working capital in foreign currency: Lines taken from financial institutions and used primarily for working capital current/short term and import operations of subsidiaries located in Argentina. The lines are denominated in Argentine Pesos and US Dollars, maturing in 2012.
19.2. BNDES, FINEM, development bank credit lines and other secured debts
The Company and its subsidiaries have some outstanding obligations with BNDES. The loans were entered into for the acquisition of machinery, equipment and expansion of production facilities.
FINEM: The Company has lines of Loans Financing Projects ("FINEM") which are subject to variations in the basket of currencies UMBNDES, which is composed of the currencies in which BNDES captures its resources. The impact of interest reflects the daily fluctuation of the currencies in the basket. The values of principal and interest are paid in monthly installments, with maturities between 2012 and 2019 and are guaranteed by a pledge of equipment, facilities and mortgage on the property owned by the Company.
PESA: The Company has a loan facility obtained through the Special Program for Asset Recovery (“Programa Especial de Saneamento de Ativos”) subject to the variations of the IGPM plus interest of 4.93% p.a., guaranteed by endorsements and pledges of public debt securities, presented in note 8.
19.3. Fiscal incentives
State Tax Incentive Financing Programs: Under the terms of these programs, the Company was granted credit proportional to the payment of ICMS generated by investments in the construction or expansion of industrial facilities. The credit facilities have a term of 20 years and fixed or variable interest rates based on the IGPM plus a spread.
F-79
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
19.4. Export credits facilities
Pre-export facilities: Generally are denominated in U.S. Dollars, maturing between 2012 and 2019. The export prepayment credit facilities are pegged to the LIBOR of three and twelve months plus a spread. Under the terms of each one of these credit facilities, the Company receives loans guaranteed by accounts receivable relating to exports of the products.
Trade-related facilities: Denominated in U.S. Dollars and maturities range from one to seven years. Trade related facilities yield interest at LIBOR plus a spread with quarterly, semi-annual or annual payments. The funds of these lines are used to purchase imported raw materials and other working capital needs.
BNDES facilities EXIM: These funds are used to finance exports and are pegged to the TJLP with maturity in 2014. Settlement occurs in local currency without the risk associated with changes in foreign currencies.
Advances on exchange contracts: The advances on exchange contracts (“ACCs”) are liabilities with commercial banks, where the principal is settled through exports of products, as shipped. Interest is paid in the settlement of the foreign exchange and the contracts are guaranteed by the actual exported goods. When the export documents are presented to the financing banks, these obligations start to be called advances against draft presentations (“ACEs”) and are written off only upon the final payment by the overseas customer. The regulation of the Brazilian Central Bank allows companies to obtain short-term financing under the terms of the ACCs with maturity in up to 360 days from the date of shipment of the exports, or short-term financing under the terms of the ACEs with maturity in up to 180 days from the date of the shipment of the exports. These loans are denominated in U.S. Dollars.
19.5. Bonds
BFF notes: On January 28, 2010, BFF International Limited issued senior notes in the total value of US$750.0, whose notes are guaranteed by BRF and by Sadia, with a nominal interest rate of 7.25% p.a. and effective rate of 7.31% p.a. maturing on January 28, 2020.
Sadia Bonds: In the total value of US$250.0. The bonds are guaranteed by BRF and by Sadia, with an interest rate of 6.88% p.a. and maturing on May 24, 2017.
F-80
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
19.6. Loans and financing maturity schedule
The maturity schedule of the loans and financing balances is set forth below:
| 12.31.11 | |
| 2012 | 3,452.5 |
| 2013 | 776.9 |
| 2014 | 578.5 |
| 2015 | 142.4 |
| 2016 onwards | 3,103.2 |
| 8,053.5 |
19.7. Guarantees
| 12.31.11 | 12.31.10 | |||
| Total of loans and financing | 8,053.5 | 7,202.9 | ||
|
Mortgage guarantees |
|
1,584.5 | 1,668.1 | |
|
Related to FINEM-BNDES |
1,134.8 | 1,438.8 | ||
|
Related to FNE-BNB |
324.1 | 165.5 | ||
|
Related to tax incentives and other |
125.6 | 63.8 | ||
|
Statutory lien on assets purchased with financing |
|
38.5 | 11.2 | |
|
Related to FINEM-BNDES |
9.5 | 10.8 | ||
|
Related to FINAME-BNDES |
0.1 | 0.4 | ||
|
Related to leasing |
28.9 | - |
The wholly-owned subsidiary Sadia is the guarantor of a loan obtained by Instituto Sadia de Sustentabilidade at the National Bank for Economic and Social Development (“BNDES”). The loan was obtained with the purpose of allowing the implementation of biodigesters in the properties of the outgrowers, which take part in the Sadia’s integration system, targeting the reduction of the emission of greenhouse gases. The value of these guarantees on December 31, 2011, totaled R$79.9 (R$83.9 as of December 31, 2010).
Sadia is guarantor of loans related to a special program, which aimed the development of outgrowers in the central region of Brazil. The proceeds of such loans shall be utilized to improve farm conditions and will be paid in 10 years. The actual collateral is the land and equipment acquired by the outgrowers. The total of the guarantee as of December 31, 2011, amounted to R$509.6 (R$562.5 as of December 31, 2010).
On December 31, 2011, the Company contracted bank guarantees in the amount of R$646.5 (R$456.7 as of December 31, 2010) offered mainly in litigation which were discussed the use of tax credits. These guarantees have an average cost of 1.10% p.a. (1.19% p.a. as of December 31, 2010).
F-81
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
19.8. Commitments
In the normal course of business, the Company enters into agreements with third parties for the purchase of raw materials, mainly corn, soymeal and hog, where the agreed prices can be fixed or to be fixed. The agreements consider the market value of the commodities on the date of these consolidated financial statements and are set forth below:
| 12.31.11 | |
| 2012 | 546.6 |
| 2013 | 297.3 |
| 2014 | 271.6 |
| 2015 | 270.2 |
| 2016 onwards | 1,113.9 |
| 2,499.6 |
The Company entered into leasing agreements denominated “built to suit” in which office facilities will be built by third parties. The agreement terms are 10 years from the signing date as well as the charge of rent expenses. If the Company defaults on its obligations, it will be subject to fines and/or rent falling due, according to each contract.
The estimated schedule of future payments related to the built to suit agreement is set forth below:
| 12.31.11 | |
| 2012 | 10.0 |
| 2013 | 18.7 |
| 2014 | 18.7 |
| 2015 | 17.1 |
| 2016 onwards | 111.7 |
| 176.2 |
F-82
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
20. TRADE ACCOUNTS PAYABLE
| 12.31.11 | 12.31.10 | |||
| Domestic Suppliers | ||||
|
Third parties |
2,335.1 | 1,952.1 | ||
|
Related parties |
5.9 | 1.3 | ||
| 2,341.0 | 1,953.4 | |||
| Foreign Suppliers | ||||
|
Third parties |
340.3 | 105.8 | ||
|
Related parties |
- | - | ||
| 340.3 | 105.8 | |||
| 2,681.3 | 2,059.2 |
Accounts payable to suppliers are not subject to interest charges and are generally settled in average within 38 days.
The related parties in the consolidated financial statements refer to transactions with the investment UP!
F-83
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
21. OTHER FINANCIAL ASSETS AND LIABILITIES
| 12.31.11 | 12.31.10 | |||
|
Derivative financial instruments |
|
|||
|
Cash flow hedge |
|
|||
|
Assets |
|
|||
|
Non-deliverable forward (NDF) |
21.1 | 85.4 | ||
|
Currency option contracts |
0.3 | 2.1 | ||
|
Exchange rate contracts (Swap) |
1.0 | - | ||
| 22.4 | 87.5 | |||
|
Liabilities |
|
|||
|
Non-deliverable forward (NDF) |
(107.8) | - | ||
|
Currency option contracts |
(1.6) | - | ||
|
Exchange rate contracts (Swap) |
(112.6) | (78.3) | ||
| (222.0) | (78.3) | |||
|
Derivatives not designated as hedge accounting |
|
|||
|
Assets |
|
|||
|
Non-deliverable forward (NDF) |
0.5 | 11.1 | ||
|
Live cattle option contracts |
0.6 | - | ||
| 1.1 | 11.1 | |||
|
Liabilities |
|
|||
|
Non-deliverable forward (NDF) |
- | (1.7) | ||
|
Live cattle option contracts |
(0.2) | (0.2) | ||
|
Exchange rate contracts (Swap) |
(48.2) | (0.9) | ||
|
Dollars future contracts |
(0.3) | (1.1) | ||
| (48.7) | (3.9) | |||
|
Current assets |
23.5 | 98.6 | ||
|
Current liabilities |
(270.7) | (82.2) | ||
The collateral given in the transactions presented above are disclosed in note 8.
22. LEASES
The Company is lessee in several contracts, which can be classified as operating or finance leases.
22.1. Operating lease
The minimum future payments of operating lease agreements not cancelable, in total and for each of the following years, are set forth below:
F-84
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | |
| 2012 | 352.3 |
| 2013 | 61.1 |
| 2014 | 40.6 |
| 2015 | 23.4 |
| 2016 onwards | 44.6 |
| 522.0 |
The payments of lease agreements recognized as expense in the current year amounted to R$250.4 on December 31, 2011 (R$258.4 as of December 31, 2010 and R$178.7 as of December 31, 2009).
22.2. Financial lease
The Company contracts finance leases for acquisitions mainly of machinery, equipment and vehicles.
During the second semester of 2011, the Company contracted several finance leasing transactions in order to renew its car fleet. As a consequence, the Company recorded financial debt of R$51.3.
The Company controls the leased assets which are set forth below:
| Average annual | ||||||
| interest rate % | 12.31.11 | 12.31.10 | ||||
| Cost | ||||||
|
Machinery and equipment |
25.0 | 19.5 | ||||
|
Vehicles |
51.5 | - | ||||
| 76.5 | 19.5 | |||||
| Accumulated depreciation | ||||||
|
Machinery and equipment |
28.69 | (16.0) | (11.3) | |||
|
Vehicles |
13.46 | (2.1) | - | |||
| (18.1) | (11.3) | |||||
| 58.4 | 8.2 | |||||
(*) The period of depreciation of leased assets corresponds to the lower amount between term of the contract and the life of the asset, as determined by IAS 20.
The future minimum payments required are segregated as follows, and were recorded as current and non-current liabilities:
F-85
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | ||||||
| Present value of | Minimum future | |||||
| minimum payments | Interest | payments | ||||
| 2012 | 33.0 | 3.5 | 36.5 | |||
| 2013 | 21.8 | 2.7 | 24.5 | |||
| 2014 | 1.2 | 0.2 | 1.4 | |||
| 2015 | 0.8 | 0.2 | 1.0 | |||
| 2016 onwards | 0.2 | - | 0.2 | |||
| 57.0 | 6.6 | 63.6 |
The terms used in contracts for both modalities, with respect to renewal, adjustment and option to purchase, are market practices. In addition, there are no clauses or contingent payments relating to restrictions on dividends, interest payments on equity or additional debt funding.
23. SHARE BASED PAYMENT
On March 31, 2010, the shareholders approved the stock option plan for officers of the Company and of its subsidiaries, consisting of two instruments: (i) stock option plan, granted annually to the beneficiary and (ii) additional stock option plan, optional for the beneficiary, who may adhere with part of their profit-sharing money. The basis of the vesting conditions will be the attainment of effective results and valuation of the Company’s business.
The plan includes shares issued by the Company up to the limit of 2% of the total stock, and its purpose is to: (i) attract, retain and motivate the beneficiaries, (ii) add value for shareholders, and (iii) encourage the view of entrepreneur of the business.
The plan is managed by the Board of Directors, within the limits established in the general guidelines of the plan and in the applicable legislation, which are disclosed in detail in the Company’s “Reference Form”.
The strike price of the options is determined by the Board of Directors and is equivalent to the average amount of the closing price of the share at the last twenty trading sessions of the BM&FBOVESPA, prior to the grant date, updated monthly by the variation of the Amplified Consumer Price Index (“IPCA”) between the grant date and the month prior to the remittance of the option exercise notice by the beneficiary.
The vesting period during which the participant cannot exercise the purchase of the shares ranges from 1 to 3 years and will observe the following deadlines from the grant date of the option:
- up to 1/3 of the total options may be exercised after one year;
F-86
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
- up to 2/3 of the total options may be exercised after two years; and
- all the options may be exercised after three years.
After the vesting period and within no more than five years from the grant date, the beneficiary will lose the right to the unexercised options.
To satisfy the exercise of the options, the Company may issue new shares or use shares held in treasury.
The breakdown of the outstanding granted options is set forth as follow:
| Date | Quantity | Price of converted share | Share price | |||||||||||
| Beginning of | End of the | Options | Outstanding | Updated | ||||||||||
| Grant date | the year | year | granted | options | Grant date | IPCA | at 12.31.11 | |||||||
| 09/27/07 (*) | 09/27/10 | 09/27/12 | 1,329,980 | 486,780 | 37.70 | 47.56 | 36.42 | |||||||
| 05/03/10 | 02/05/11 | 02/05/15 | 1,540,011 | 1,312,141 | 21.35 | 25R.63 | 36.42 | |||||||
| 07/01/10 | 06/30/11 | 06/30/15 | 36,900 | 36,900 | 24.75 | 25.63 | 36.42 | |||||||
| 05/02/11 | 05/01/12 | 05/01/16 | 2,463,525 | 2,442,125 | 30.85 | 31.67 | 36.42 | |||||||
| 5,370,416 | 4,277,946 | |||||||||||||
(*) Sadia’s stock option plan converted to BRF
The rollforward of the outstanding granted options for the twelve months period ended December 31, 2011, is set forth as follows:
| Quantity outstanding options as of December 31, 2009 | 1,155,752 |
|
Granted |
1,576,911 |
|
Exercised |
(79,800) |
|
Canceled |
(155,605) |
| Quantity outstanding options as of December 31, 2010 | 2,497,258 |
|
Granted |
2,463,525 |
|
Exercised |
(391,830) |
|
Canceled |
(291,007) |
| Quantity outstanding options as of December 31, 2011 | 4,277,946 |
The weighted average strike prices of the options is R$31.57 (thirty one Brazilian Reais and fifty seven cent), and the weighted average of the remaining contractual term is 43 months on December 31, 2011, 486,780 of the stock options outstanding are exercisable.
On December 31, 2011, the Company presented in shareholders’ equity the fair value of the options in the amount of R$22.4 (R$6.6 as of December 31, 2010 and R$ 3.8 as of December 31, 2009). In the statement of income the amount recognized as expense was R$15.8 (R$4.8 expense reversal as of December 31, 2010 and R$ 4.3 expense reversal from July 8, 2009 to December 31, 2009).
F-87
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
During the year ended December 31, 2011, the Company’s executives exercised 391,830 shares, with average price of R$27.21 (twenty seven Brazilian Reais and twenty one cents) for the amount of R$10.7. In order to comply with this commitment the Company utilized the treasury shares that had an acquisition cost of R$18.82 (eighteen Brazilian Reais and eighty two cents), a gain in the amount of R$3.3 was recorded as capital reserve.
The fair value of the stock options was measured indirectly using the Black-Scholes pricing model, based on the following assumptions:
| 12.31.11 | 12.31.10 | |||
| Expected maturity of the option: | ||||
|
Exercise in the 1st year |
3.0 years | 3.0 years | ||
|
Exercise in the 2nd year |
3.5 years | 3.5 years | ||
|
Exercise in the 3rd year |
4.0 years | 4.0 years | ||
| Risk-free interest rate | 6.6% | 6.6% | ||
| Volatility | 41.2% | 41.0% | ||
| Expected dividends over shares | 1.1% | 1.1% | ||
| Expected inflation rate | 4.6% | 5.0% |
23.1. Expected period
The expected period is that in which it is believed that the options will be exercised and was determined under the assumption that the beneficiaries will exercise their options at the limit of the maturity period.
23.2. Risk-free interest rate
The Company uses as a risk-free interest rate the National Treasury Bond (“NTN-B”) available on the date of calculation and with maturity equivalent to the life of the option.
23.3. Volatility
The estimated volatility took into account the weighting of the trading history of the Company and of similar companies in the market, considering the unification of Perdigão and Sadia under code BRFS3.
23.4. Expected dividends
The percentage of dividends used was obtained based on the average payment of dividends per share in relation to the market value of the shares, for the past four years.
F-88
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
23.5. Expected inflation rate
The expected average inflation rate is determined based on estimated IPCA by the Central Bank of Brazil, weighted between the closing date of financial statements and the exercise date of the vested options.
24. SUPPLEMENTARY RETIREMENT PLAN AND OTHER BENEFITS TO EMPLOYEES
The Company offers supplementary retirement plans and other benefits to their employees.
The actuarial assets and liabilities and the effects in the statement of income are presented below:
F-89
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | 12.31.10 | 12.31.09 | ||||||||||
| BFPP | FAF | BFPP | FAF | BFPP | FAF | |||||||
|
Reconciliation of assets and liabilities |
|
|||||||||||
|
Present value of actuarial liabilities |
(10.3) |
|
(1,377.8) |
|
(9.0) |
(1,164.8) |
(7.2) |
(939.0) | ||||
|
Fair value of assets |
10.8 |
|
1,897.7 |
|
11.2 |
1,768.9 |
9.0 |
1,570.3 | ||||
|
Deficit not recognized |
(0.6) |
|
(519.9) |
|
(2.2) |
(604.1) |
(1.8) |
(631.3) | ||||
|
Net assets (liabilities) |
|
- |
|
- |
|
- |
- |
- |
- | |||
|
Transfer of the net actuarial asset (liability) |
|
|||||||||||
|
Net assets (liabilities) of the plan on December 31, 2010 |
2.2 |
|
604.1 |
|
1.8 |
631.3 |
1.2 |
570.8 | ||||
|
Revenue (expense) recognized in income |
0.5 |
|
79.9 |
|
0.3 |
82.7 |
- |
37.6 | ||||
|
Service cost |
- |
|
(28.1) |
|
- |
(22.8) |
- |
(10.6) | ||||
|
Gain (loss) recognized |
(2.1) |
|
(136.0) |
|
0.1 |
(87.1) |
0.6 |
32.5 | ||||
|
Net assets of the plan on December 31, 2011 |
|
0.6 |
|
519.9 |
|
2.2 |
604.1 |
1.8 |
630.3 | |||
|
Changes in project benefit obligation |
|
|||||||||||
|
Present value of actuarial obligations on December 31, 2010 |
(9.1) |
|
(1,164.9) |
|
(7.3) |
(939.0) |
(5.7) |
(904.3) | ||||
|
Interest on actuarial obligations |
(1.0) |
|
(116.0) |
|
(0.8) |
(108.3) |
(0.7) |
(52.8) | ||||
|
Service cost |
- |
|
(28.1) |
|
- |
(22.8) |
- |
(10.6) | ||||
|
Beneficit paid |
0.7 |
|
58.7 |
|
0.6 |
54.7 |
0.6 |
28.1 | ||||
|
Contributions of the sponsor |
- |
|
- |
|
- |
- |
- |
(2.7) | ||||
|
Loss actuarial |
(0.9) |
|
(127.5) |
|
(1.7) |
(149.5) |
(1.4) |
3.3 | ||||
|
Present value of actuarial liabilities on December 31, 2011 |
|
(10.3) |
|
(1,377.8) |
|
(9.1) |
(1,164.9) |
(7.2) |
(939.0) | |||
|
Changes in plan assets |
|
|||||||||||
|
Fair value in plan assets on December 31, 2010 |
11.2 |
|
1,768.9 |
|
9.0 |
1,570.3 |
6.9 |
1,475.1 | ||||
|
Expected return on plan |
1.5 |
|
195.9 |
|
1.0 |
191.0 |
0.7 |
90.3 | ||||
|
Beneficit paid |
(0.7) |
|
(58.7) |
|
(0.6) |
(54.7) |
(0.6) |
(28.1) | ||||
|
Contributions of the sponsor |
- |
|
- |
|
- |
- |
- |
3.7 | ||||
|
Gain (loss) actuarial |
(1.2) |
|
(8.4) |
|
1.8 |
62.4 |
2.0 |
29.2 | ||||
|
Fair value in plan assets on December 31, 2011 |
|
10.8 |
|
1,897.7 |
|
11.2 |
1,768.9 |
9.0 |
1,570.2 | |||
|
Revenue and expense recognized |
|
|||||||||||
|
Interest cost |
(1.0) |
|
(116.0) |
|
(0.7) |
(108.3) |
(0.7) |
(52.8) | ||||
|
Service cost |
- |
|
(28.0) |
|
- |
(22.8) |
- |
(10.6) | ||||
|
Expected return on plan assets |
1.5 |
|
195.9 |
|
1.0 |
191.0 |
0.7 |
90.4 | ||||
|
Contributions/others |
- |
|
- |
|
- |
- |
- |
1.0 | ||||
|
0.5 |
|
51.9 |
|
0.3 |
59.9 |
- |
28.0 | |||||
|
Revenue and expense |
|
|||||||||||
|
Service cost |
- |
|
(32.5) |
|
- |
(28.0) |
- |
(22.8) | ||||
|
Interest cost |
(1.0) |
|
(137.7) |
|
(1.0) |
(116.0) |
- |
(108.3) | ||||
|
Expected return on plan assets |
1.3 |
|
220.1 |
|
1.5 |
195.9 |
- |
191.0 | ||||
|
0.3 |
|
49.9 |
|
0.5 |
51.9 |
- |
59.9 | |||||
|
Actuarial premises |
|
|||||||||||
|
Economic hypothesis |
|
|||||||||||
|
Discount rate |
10.29% p.a. |
|
10.25% p.a. |
|
11.78% p.a. |
11.78% p.a. |
11.19% p.a. |
11.83% p.a. | ||||
|
Projected return on the assets |
13.04% p.a. |
|
11.81% p.a. |
|
13.72% p.a. |
13.72% p.a. |
11.91% p.a. |
12.35% p.a. | ||||
|
Inflation rate |
4.50% p.a. |
|
4.50% p.a. |
|
5.65% p.a. |
5.65% p.a. |
4.5% p.a. |
5.00% p.a. | ||||
|
Rate of wage growth |
0.00% p.a. |
|
6.59% p.a. |
|
0.00% p.a. |
0.00% p.a. |
0.00% p.a. |
6.58% p.a. | ||||
|
Demographic hypotheses |
|
|||||||||||
|
Mortality schedule |
AT-2000 |
|
AT-2000 |
|
AT-2000 |
AT-2000 |
AT-1983 |
AT83 | ||||
|
Schedule of mortality of the disabled |
RRB-1983 |
|
IAPC |
|
RRB-1983 |
RRB-1983 |
RRB-1983 |
IAPC | ||||
24.1. Supplementary retirement plan
24.1.1. BFPP
Brasil Foods Previdência Privada (“BFPP”), previously denominated as Perdigão Sociedade de Previdência Privada (“PSPP”) was created in April 1997, sponsored by the Company and its subsidiaries.
The purpose of BFPP is the management of supplementary plans of benefits of retirement for the employees of the sponsors. BFPP manages three retirement plans. Plan I and Plan II which is closed to new adhesions, and Plan III, which has been in operation since October 1, 2011.
F-90
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The plan III was created as result of the association between Sadia and BRF in order to meet the employees who were not participating in any of the previous plan.
In plans I, II and III, the contributions are made on a 1 to 1 basis (the contributions of the sponsor are equal to the basic contributions of the participants), and the actuarial calculations are made by independent actuaries, on a yearly basis, according to the rules in force.
Should the participant end the employment relationship with the sponsor, the balance formed by the contributions of the sponsor not used for the payment of benefits, will form a fund of overage of contributions that may be used to compensate the future contributions of the sponsor. The asset presented in the balance of the fund of reversion amounts to R$5.4 (R$4.1 as of December 31, 2010) and was recorded as other current assets.
Although the plans offered by BFPP are basically of defined contribution, there is a small portion of defined benefits, as presented in the schedule above. The demographic data of the plan are presented below:
| Plan I | Plan II | Plan III | Plan I | Plan II | Plan I | Plan II | ||||||||
| 12.31.11 | 12.31.10 | 12.31.09 | ||||||||||||
| Number of active participants | 1,983 | 11,193 | 615 | 2,344 | 11,735 | 2,758 | 12,604 | |||||||
| Number of self-sponsored participants | 13 | 109 | - | 19 | 85 | 96 | 3 | |||||||
| Number of participants in deferred proportional benefit | 8 | 30 | - | 9 | 30 | 48 | 3 | |||||||
| Number of beneficiary participants | 51 | 12 | - | 50 | 6 | 49 | 2 | |||||||
| Contributions of the sponsor | 236 | 8,084 | 72 | 276 | 6,649 | 3,791 | 2,234 | |||||||
The composition of the investment portfolios of the BFPP plans is presented below:
| BFPP | ||||||||||||
| 12.31.11 | 12.31.10 | 12.31.09 | ||||||||||
| Composition of the fund's portfolio: | ||||||||||||
|
Fixed income |
160.1 | 76.5% | 133.7 | 73.7% | 112.6 | 69.7% | ||||||
|
Variable income |
49.3 | 23.5% | 47.8 | 26.3% | 49.0 | 30.3% | ||||||
| 209.4 | 100.0% | 181.5 | 100.0% | 161.6 | 100.0% | |||||||
| Fixed income | ||||||||||||
|
Financial treasury bills |
20.0 | 12.5% | 25.9 | 19.3% | 26.2 | 23.3% | ||||||
|
National treasury notes |
73.7 | 46.1% | 68.1 | 51.0% | 38.0 | 33.7% | ||||||
|
Bank deposit certificate |
9.5 | 5.9% | 13.1 | 9.8% | 12.0 | 10.7% | ||||||
|
Interbank deposit certificate |
20.7 | 12.9% | 14.5 | 10.8% | 1.6 | 1.4% | ||||||
|
Debentures |
8.1 | 5.1% | 9.6 | 7.2% | 3.6 | 3.2% | ||||||
|
Commited transations |
4.5 | 2.8% | 1.2 | 0.9% | 30.7 | 27.3% | ||||||
|
National treasury bills |
21.7 | 13.6% | - | - | - | 0.0% | ||||||
|
Others |
1.9 | 1.1% | 1.3 | 1.0% | 0.5 | 0.4% | ||||||
| 160.1 | 100.0% | 133.7 | 100.0% | 112.6 | 100.0% | |||||||
| Variable income | ||||||||||||
|
Shares |
49.2 | 99.9% | 47.8 | 100.0% | 48.9 | 99.8% | ||||||
|
Options |
0.1 | 0.1% | - | - | 0.1 | 0.2% | ||||||
| 49.3 | 100.0% | 47.8 | 100.0% | 49.0 | 100.0% | |||||||
The real return on assets of the plans for the year ended December 31, 2011 was 8.98% (5.50% as of December 31, 2010).
F-91
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
24.1.2. FAF
The subsidiary Sadia sponsors a plan of social-security benefits, in the modality of defined benefit, intended for its employees and administered by Attilio Francisco Xavier Fontana Foundation (“FAF”).
The benefit of supplementary retirement is defined as the difference between (i) the benefit salary (updated average of the last 12 updated salaries of participation, capped at 80% of the last participation salary) and (ii) the value of the retirement paid by the official social-security regime. The benefit of supplementation is adjusted on a yearly basis at the INPC.
The actuarial regime adopted is that of capitalization for supplementation of retirements and pensions and simple sharing for the supplementations of sick pay. The contribution of Sadia is made through a percentage that applies to the payroll of the active participants, according to the cost plan prepared on yearly basis by independent actuaries and approved by the Deliberative Council of FAF.
According to the bylaws of the FAF, the sponsoring company is severally liable for the obligations contracted by the entity with its participants and dependents.
As from January 1, 2003, the wholly-owned subsidiary Sadia started to offer a defined contribution plan for supplementary social security for all the employees admitted by Sadia and its subsidiaries. This plan is managed by a third party entity. The funding of the plan is proportional in relation to the basic monthly contribution (mandatory), whose portion of the subsidiary is equal to that made by the employee according to a scale of contribution based on salary ranges, which vary from 1.5% to 6% of the respective remuneration, in accordance with the ceiling of contribution that is updated every year.
The contributions made by Sadia in the fiscal year ended December 31, 2011, amounted to R$2.8 (R$2.6 as of December 31, 2010 and R$1.4 from July 8, 2009 up to December 31, 2009), on that date the plan had 1,376 participants (1,501 participants as of December 31, 2010 and 1,566 participants as of December 31, 2009).
As demonstrated in the schedules above, the plans of BFPP and of FAF had assets in the fiscal years ended December 31, 2011 and December 31, 2010, however, an asset could only be acknowledged if it is clearly evidenced that such asset could actually reduce the contributions of the sponsor or that it will be reimbursable in the future, based on the actuarial reports of these same year, the Company could not benefit from the surplus of the plans, therefore the assets were not acknowledged in the financial statements.
F-92
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The demographic data of the plan is set forth below:
| FAF | ||||||
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Number of active participants | 10,781 | 11,472 | 12,258 | |||
| Number of self-sponsored participants | 968 | 869 | 788 | |||
| Number of participants in deferred proportional benefit | 5 | 37 | - | |||
| Number of beneficiary participants | 4,714 | 4,563 | 1,369 | |||
| Contributions of the sponsor | 1,533 | 1,255 | 1,999 |
The composition of the investment portfolios of the FAF plans are presented below:
| FAF | ||||||||||||
| 12.31.11 | 12.31.10 | 12.31.09 | ||||||||||
| Composition of the fund's portfolio: | ||||||||||||
|
Fixed income |
1,527.7 | 79.6% | 1,415.3 | 78.6% | 1,308.0 | 80.5% | ||||||
|
Variable income |
224.5 | 11.7% | 225.8 | 12.6% | 202.0 | 12.4% | ||||||
|
Structured investments |
20.3 | 1.1% | 11.6 | 0.6% | - | 0.0% | ||||||
|
Real estate |
133.6 | 7.0% | 136.3 | 7.6% | 105.0 | 6.5% | ||||||
|
Transactions with participants |
11.6 | 0.6% | 10.9 | 0.6% | 9.0 | 0.6% | ||||||
| 1,917.7 | 100.0% | 1,799.9 | 100.0% | 1,624.0 | 100% | |||||||
|
Fixed income |
|
|||||||||||
|
Brazilian financial treasury bill |
- | - | 70.0 | 4.9% | 92.0 | 7.0% | ||||||
|
Brazilian treasury notes - Series F |
31.5 | 2.1% | - | - | - | - | ||||||
|
Brazilian treasury notes - Series B |
730.0 | 47.6% | 611.0 | 43.2% | 542.0 | 41.4% | ||||||
|
Brazilian treasury certificates |
47.2 | 3.1% | 61.7 | 4.4% | 76.0 | 5.8% | ||||||
|
Financial bill |
65.6 | 4.3% | 36.0 | 2.5% | - | - | ||||||
|
Time deposits |
30.0 | 2.0% | 10.0 | 0.7% | - | - | ||||||
|
Investment funds |
43.6 | 2.9% | 13.5 | 1.0% | 10.0 | 0.8% | ||||||
|
Exclusive fund |
579.8 | 38.0% | 613.1 | 43.3% | 588.0 | 45.0% | ||||||
| 1,527.7 | 100.0% | 1,415.3 | 100.0% | 1,308.0 | 100% | |||||||
|
Variable income |
|
|||||||||||
|
Shares |
82.6 | 36.8% | 61.9 | 27.4% | 51.0 | 25.2% | ||||||
|
Investment funds |
9.4 | 4.2% | 10.0 | 4.4% | - | - | ||||||
|
Exclusive fund |
132.5 | 59.0% | 153.9 | 68.2% | 151.0 | 74.8% | ||||||
| 224.5 | 100.0% | 225.8 | 100.0% | 202.0 | 100% | |||||||
|
Structured investments |
|
|||||||||||
|
Investment funds |
16.9 | 83.1% | 10.2 | 87.8% | - | - | ||||||
|
Exclusive fund |
3.4 | 16.9% | 1.4 | 12.2% | - | - | ||||||
| 20.3 | 100.0% | 11.6 | 100.0% | - | - | |||||||
|
Real estate |
|
|||||||||||
|
For own use |
- | - | 1.9 | 1.5% | 1.0 | 1.0% | ||||||
|
Leased to sponsors |
85.9 | 64.2% | 125.7 | 92.2% | 94.0 | 90.4% | ||||||
|
Leased to others |
8.1 | 6.1% | 5.2 | 3.8% | 2.0 | 1.9% | ||||||
|
Rights on the sale of properties |
39.6 | 29.7% | 3.5 | 2.5% | 7.0 | 6.7% | ||||||
| 133.6 | 100.0% | 136.3 | 100.0% | 104.0 | 100% | |||||||
|
Transactions with participants |
|
|||||||||||
|
Simple loan |
11.6 | 100.0% | 10.8 | 100.0% | 9.0 | 100.0% | ||||||
| 11.6 | 100.0% | 10.8 | 100.0% | 9.0 | 100.0% | |||||||
The real return on assets of the plans in the fiscal year ended December 31, 2011 was 5.16% (6.67% as of December 31, 2010).
F-93
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
24.2. Other benefits
The transfers of the assets and actuarial liabilities related to other benefits, prepared according to the actuarial report, are presented below:
| 12.31.11 | ||||||||
| Award for | ||||||||
| length of | ||||||||
| service | Medical plan | FGTS penalty | Others | |||||
| Reconciliation of assets and liabilities | ||||||||
|
Present value of actuarial obligations |
(33,1) | (85,1) | (113,4) | (34,4) | ||||
| Liability net | (33,1) | (85,1) | (113,4) | (34,4) | ||||
| Transfer of the net actuarial liability | ||||||||
|
Net liability of the plan on December 31, 2010 |
(47,4) | (67,2) | (137,9) | (22,0) | ||||
|
Expense acknowledged in the income |
(4,6) | (6,7) | (13,7) | (2,2) | ||||
|
Service cost |
(5,0) | (2,6) | (12,1) | (1,5) | ||||
|
Change in policy (*) |
(13,2) | - | - | - | ||||
|
Contributions of the sponsor |
9,4 | 1,5 | 2,3 | 3,9 | ||||
|
Gain (loss) through DRA |
27,7 | (10,1) | 48,0 | (12,6) | ||||
| Net liability of the plan on December 31, 2011 | (33,1) | (85,1) | (113,4) | (34,4) | ||||
| Changes in project benefit obligation | ||||||||
|
Present value of actuarial obligations on December 31, 2010 |
(47,4) | (67,2) | (137,9) | (22,0) | ||||
|
Interest on actuarial obligations |
(4,6) | (6,7) | (13,7) | (2,2) | ||||
|
Service cost |
(5,0) | (2,6) | (12,1) | (1,4) | ||||
|
Beneficit paid |
9,4 | 1,5 | 2,3 | 3,9 | ||||
|
Change in policy (*) |
(13,2) | - | - | - | ||||
|
Gain (loss) actuarial |
27,7 | (10,1) | 48,0 | (12,6) | ||||
| Present value of actuarial obligations on December 31, 2011 | (33,1) | (85,1) | (113,4) | (34,4) | ||||
| Changes in plan assets | ||||||||
|
Beneficit paid |
(9,4) | (1,6) | (2,3) | (3,9) | ||||
|
Contributions of the sponsor |
9,4 | 1,6 | 2,3 | 3,9 | ||||
| Fair value in plan assets on December 31, 2011 | - | - | - | - | ||||
| Revenue and expense realized | ||||||||
|
Interest cost |
(4,6) | (6,8) | (13,7) | (2,2) | ||||
|
Service cost |
(5,0) | (2,6) | (12,1) | (1,4) | ||||
| (9,6) | (9,4) | (25,8) | (3,6) | |||||
| Revenue and expense | ||||||||
|
Service cost |
(1,9) | (3,7) | (6,4) | (1,9) | ||||
|
Interest cost |
(2,9) | (8,6) | (11,5) | (3,2) | ||||
| (4,8) | (12,3) | (17,9) | (5,1) | |||||
| Actuarial premises | ||||||||
| Economic hypothesis | ||||||||
|
Discount rate |
10.25% p.a. | 10.25% p.a. | 10.25% p.a. | 10.25% p.a. | ||||
|
Projected return on the assets |
N/A | N/A | N/A | N/A | ||||
|
Inflation rate |
4.50% p.a. | 4.50% p.a. | 4.50% p.a. | 4.50% p.a. | ||||
|
Rate of wage growth |
6.59% p.a. | 6.59% p.a. | 6.59% p.a. | 6.59% p.a. | ||||
| Demographic hypotheses | ||||||||
|
Mortality schedule |
AT-2000 | AT-2000 | AT-2000 | AT-2000 | ||||
|
Schedule of mortality of the disabled |
IAPC | IAPC | IAPC | IAPC | ||||
(*) See note 24.2.3.
F-94
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.10 | ||||||||
| Award for | ||||||||
| length of | FGTS | |||||||
| service | Medical plan | penalty | Others | |||||
| Reconciliation of assets and liabilities | ||||||||
|
Present value of actuarial obligations |
(47.4) | (67.2) | (137.9) | (22.0) | ||||
| Liability net | (47.4) | (67.2) | (137.9) | (22.0) | ||||
| Transfer of the net actuarial liability | ||||||||
|
Net liability of the plan on December 31, 2009 |
(40.9) | (56.9) | (129.4) | (22.5) | ||||
|
Expense acknowledged in the income |
(4.7) | (6.5) | (14.4) | (2.4) | ||||
|
Service cost |
(4.4) | (2.4) | (12.1) | (1.4) | ||||
|
Beneficit paid |
- | - | 1.8 | - | ||||
|
Contributions of the sponsor |
4.0 | 1.5 | 4.3 | 6.6 | ||||
|
Gain (loss) through DRA |
(1.4) | (2.9) | 11.9 | (2.3) | ||||
| Net liability of the plan on December 31, 2010 | (47.4) | (67.2) | (137.9) | (22.0) | ||||
| Changes in project benefit obligation | ||||||||
|
Present value of actuarial obligations on December 31, 2009 |
(40.9) | (56.9) | (129.4) | (22.5) | ||||
|
Interest on actuarial obligations |
(4.6) | (6.5) | (14.4) | (2.4) | ||||
|
Service cost |
(4.4) | (2.4) | (12.1) | (1.4) | ||||
|
Beneficit paid |
4.0 | 1.5 | 6.1 | 6.6 | ||||
|
Gain (loss) actuarial |
(1.4) | (2.9) | 11.9 | (2.3) | ||||
| Present value of actuarial obligations on December 31, 2010 | (47.4) | (67.2) | (137.9) | (22.0) | ||||
| Changes in plan assets | ||||||||
|
Beneficit paid |
(4.0) | (1.5) | (4.3) | (6.6) | ||||
|
Contributions of the sponsor |
4.0 | 1.5 | 4.3 | 6.6 | ||||
| Fair value in plan assets on December 31, 2010 | - | - | - | - | ||||
| Revenue and expense realized | ||||||||
|
Interest cost |
(4.6) | (6.5) | (14.4) | (2.5) | ||||
|
Gain (loss) actuarial |
(1.1) | - | - | - | ||||
|
Service cost |
(4.7) | (2.4) | (12.1) | (1.3) | ||||
| (10.4) | (8.9) | (26.5) | (3.8) | |||||
| Revenue and expense | ||||||||
|
Service cost |
(3.0) | (1.3) | (6.3) | (1.4) | ||||
|
Interest cost |
(3.1) | (4.3) | (6.6) | (2.2) | ||||
| (6.1) | (5.6) | (12.9) | (3.6) | |||||
| Actuarial premises | ||||||||
| Economic hypothesis | ||||||||
|
Discount rate |
10.24 % p.a. | 10.24 % p.a. | 10.24 % p.a. | 10.24 % p.a. | ||||
|
Projected return on the assets |
N/A | N/A | N/A | N/A | ||||
|
Inflation rate |
4.00% p.a. | 4.00% p.a. | 4.00% p.a. | 4.00% p.a. | ||||
|
Rate of wage growth |
6.08% p.a. | 0.00% p.a. | 6.08% p.a. | 6.08% p.a. | ||||
| Demographic hypotheses | ||||||||
|
Mortality schedule |
N/A | N/A | N/A | N/A | ||||
|
Schedule of mortality of the disabled |
N/A | N/A | N/A | N/A | ||||
F-95
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.09 | ||||||||
| Award for length of service |
Medical plan | FGTS penalty |
Others | |||||
| Reconciliation of assets and liabilities | ||||||||
|
Present value of actuarial obligations |
(41.0) | (56.8) | (129.3) | (22.6) | ||||
|
Fair value of the assets |
(1.1) | - | - | - | ||||
| (Liability)/net asset | (42.1) | (56.8) | (129.3) | (22.6) | ||||
| Transfer of the net actuarial asset (liability) | ||||||||
|
Net asset (liability) of the plan on January 1, 2009 |
(36.6) | (58.3) | (107.5) | (21.0) | ||||
|
Revenue (expense) acknowledged in the income |
(2.9) | (4.5) | (9.7) | (1.2) | ||||
|
Cost of service |
(2.7) | (1.8) | (7.6) | (0.6) | ||||
|
Benefits paid |
1.1 | - | - | - | ||||
|
Contributions of the sponsor |
1.4 | 1.2 | 4.6 | 11.7 | ||||
|
Gain (loss) acknowledged via DRA |
(2.4) | 6.6 | (9.1) | (11.5) | ||||
| Net asset (liability) of the plan on December 31, 2009 | (42.1) | (56.8) | (129.3) | (22.6) | ||||
| Transfer of actuarial obligations | ||||||||
|
Present value of actuarial obligations on January 1, 2009 |
(36.6) | (58.3) | (107.5) | (21.0) | ||||
|
Interest on actuarial obligations |
(2.9) | (4.5) | (9.7) | (1.2) | ||||
|
Cost of service |
(2.7) | (1.8) | (7.6) | (0.6) | ||||
|
Benefits paid |
2.5 | 1.2 | 4.6 | 4.0 | ||||
|
Contributions of the sponsor |
- | - | - | 7.7 | ||||
|
Actuarial gain (loss) |
(1.3) | 6.6 | (9.1) | (11.5) | ||||
| Present value of actuarial obligations on December 31, 200 | (41.0) | (56.8) | (129.3) | (22.6) | ||||
| Transfer of the assets of the plan | ||||||||
|
Benefits paid |
(1.4) | (1.2) | (4.6) | (4.0) | ||||
|
Contributions of the sponsor |
1.4 | 1.2 | 4.6 | 4.0 | ||||
|
Actuarial gain (loss) |
(1.1) | - | - | - | ||||
| Fair value of the assets of the plan on December 31, 2009 | (1.1) | - | - | - | ||||
| Expenses and revenues realized | ||||||||
|
Cost of interest |
(2.9) | (4.5) | (9.7) | (1.2) | ||||
|
Actuarial gain (loss) |
(0.3) | - | - | - | ||||
|
Cost of service |
(3.6) | (1.8) | (7.6) | (0.6) | ||||
|
Contributions/others |
(3.1) | - | - | 7.8 | ||||
| Total | (9.9) | (6.3) | (17.3) | 6.0 | ||||
| Projected expenses and revenues | ||||||||
|
Cost of service |
(2.7) | (1.2) | (5.5) | (1.4) | ||||
|
Cost of interest |
(3.2) | (4.3) | (6.3) | (2.5) | ||||
| Total | (5.9) | (5.5) | (11.8) | (3.9) | ||||
| Actuarial premises | ||||||||
|
Economic hypothesis |
|
|||||||
|
Discount rate |
- | 11.83% p.a. | 11.83% p.a. | 11.83% p.a. | ||||
|
Projected return on the assets |
- | N/A | N/A | N/A | ||||
|
Inflation rate |
- | 5.00% p.a. | 5.00% p.a. | 5.00% p.a. | ||||
|
Rate of salary growth |
- | N/A | 7.00% p.a. | 7.00% p.a. | ||||
| Demographic hypotheses | ||||||||
|
Mortality schedule |
- | AT83 | AT83 | AT83 | ||||
|
Schedule of mortality of the disabled |
- | IAPC | N/A | N/A | ||||
F-96
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
24.2.1. Medical Plan
The Company registered the obligations resulting from Law No. 9,656 and Deliberation of the Council of Supplementary Health No. 21/99, which guarantees to the retired employee that contributed to the health plan by reason of employment relationship, for at least 10 years, the right of maintenance as beneficiary, on the same conditions of coverage enjoyed when the employment contract was in force, provided that they assume full payment.
If there was a variation of 1% in the tendency of evolution of the expenses with Health Care Costs Trend (“HCCT”), the corresponding liability would suffer the following impacts:
| 12.31.11 | ||
| 1% | (1%) | |
| Variation of the actuarial obligation | 16.7 | 13.1 |
24.2.2. F.G.T.S. fine at the time of retirement of the employee
As settled by the Regional Labor Court (“TRT”) on April 20, 2007, retirement does not affect the employment contract between the Company and its employees, and so by means of actuarial calculation and based on the practices of discharge that the Company acknowledged the related liability.
24.2.3. Award for length of service
The Company usually rewards employees that attain at least 10 years of services rendered, the actuarial liability resulting from that practice was recorded in the balance sheet. During 2011, the parent company changed the awards from gifts to cash.
24.2.4. Severance pay
The executive offices discharged on the initiative of the Company, in addition to full pay, are eligible to receive a compensation equivalent to 0.5 salary in force at the time of discharge, for each year or fraction of year worked for the Company.
The grant of this benefit is subject to an assessment of the career, performance and length of service of the beneficiary, actuarial liability resulting from that practice was recorded in the balance sheet.
By decision of the Company's Management, this benefit will be discontinued starting in 2012, new employees are not eligible, keeping only the benefit for current employees.
F-97
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
24.2.5. Retirement compensation
On retirement, managers with executive position in addition to the legal funds are unreadable to additional compensation of 0.5 prevailing wage at the time of retirement for each year worked.
The granting of this benefit is subject to an assessment of his career, performance and length of service of the beneficiary, the actuarial liability resulting from this practice was recorded on the balance sheet.
The expenses incurred with all the benefits presented above were acknowledged in the statement of income in the item other operating revenues (expenses) and include: interest paid, actuarial gain (loss), cost of the service and revenue expected from the asset of the plan.
The actuarial gains and losses recognized in other comprehensive results are set forth below:
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| At the beginning of the year | (39.9) | (23.1) | - | |||
| Rollforward | 28.0 | (16.8) | (23.1) | |||
| At the end of the year | (11.9) | (39.9) | (23.1) |
25. PROVISION FOR TAX, CIVIL AND LABOR
The Company and its subsidiaries are involved in certain legal proceedings arising from the regular course of business, which include civil, administrative, tax, social security and labor lawsuits.
The Company classifies the risk of adverse decisions in the legal suits as “probable”, “possible” or “remote”. The provisions recorded relating to such proceedings fairly reflect the probable losses as determined by the Company’s Management, based on legal advice and reasonably reflect the estimated and probable losses.
In cases where the Company is involved in judicial proceedings for which the amount is not known or cannot be reasonably estimated, but the probability of losses is probable, the amount will not be recorded, however, its nature will be disclosed.
The Company’s Management believes that its provisions for tax, civil and labor contingencies, accounted for according to IAS 37, is sufficient to cover eventual losses related to its legal proceedings, as presented below:
F-98
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
25.1. Contingencies for probable losses
The rollforward of the provisions for tax, civil and labor is summarized below:
| Price index | Business | |||||||||||||
| 12.31.10 | Additions | Reversals | Payments | update | combination (1) | 12.31.11 | ||||||||
| Tax | 209.5 | 82.0 | (47.7) | (22.9) | 10.6 | - | 231.5 | |||||||
| Labor | 110.2 | 111.5 | (52.6) | (80.1) | 14.9 | 1.5 | 105.4 | |||||||
| Civil, commercial and other | 96.9 | 17.6 | (31.9) | (41.7) | 4.1 | - | 45.0 | |||||||
| Contingent liabilities | 630.3 | - | - | (58.5) | - | - | 571.8 | |||||||
| 1,046.9 | 211.1 | (132.2) | (203.2) | 29.6 | 1.5 | 953.7 | ||||||||
| Current | 65.1 | 118.5 | ||||||||||||
| Non-current | 981.8 | 835.2 | ||||||||||||
(1) Business combination with Avex and Dánica group on October 3, 2011.
25.1.1. Tax
The consolidated tax contingencies classified as probable losses involve the following main legal proceedings:
Income tax and social contribution: the Company recorded a provision of R$26.0 (R$23.2 as of December 31, 2010) being: (i) R$16.7 (R$15.3 as of December 31, 2010) related to a tax assessment notice challenging one of its subsidiaries; (ii) R$7.4 related to the disallowance of claims from a subsidiary acquired in 2008 from the Tax Recovery Program (“REFIS”); and (iii) R$1.9 (R$7.9 as of December 31, 2010) related to other lawsuits.
ICMS: the Company is involved in administrative and judicial tax disputes associated to the register and/or maintenance of ICMS tax credits on certain transactions, such as exports, acquisition of consumption materials and monetary correction. The provision amounts to R$79.0 (R$66.8 as of December 31, 2010).
PIS and COFINS: the Company is involved in an administrative proceeding regarding the utilization of tax credits to offset federal taxes, in the amount of R$66.3 (R$34.2 as of December 31, 2010).
Other tax contingencies: the Company recorded other provisions for lawsuits related to the payment of social security contributions (SAT, INCRA, FUNRURAL, Education Salary), as well as to tax debts arising from differences of accessory obligations, duties, payment of legal fees and others, in a total amount of R$56.2 (R$41.3 as of December 31, 2010).
F-99
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
25.1.2. Labor
The Company is a defendant in several labor claims in progress, mainly related to overtime and salary inflation adjustments for periods prior to the introduction of the Brazilian Real, illnesses allegedly contracted at work and work-related injuries and others. The labor suits are mainly in the lower courts, and for the majority of the cases a decision for the dismissal of the pleadings has been granted. None of these suits are individually significant. The Company recorded a provision based on past history of payments. Based on the opinion of the Company’s management and its legal advisors, the provision is sufficient to cover probable losses.
25.1.3. Civil, commercial and others
Civil contingencies are mainly related to lawsuits referring to traffic accidents, moral and property damage, physical casualties and others. The legal actions are mostly in the lower courts, in the evidentiary phase, depending on confirmation or absence of the Company’s guilt.
25.2. Contingencies classified as a risk of possible loss
The Company is involved in other tax, civil, commercial, labor and social security contingencies, for which losses have been assessed as possible.
25.2.
25.2.1. Tax
The tax contingencies which the probability of losses were classified as possible amounted to R$5,295.0 (R$3,523.7 as of December 31, 2010), from which R$565.9 (R$578.5 as of December 31, 2010) were recorded and are relate to the corresponding estimated fair value of contingent liabilities resulting from the business combination with Sadia, according to paragraph 23 of IFRS 3.
The most relevant tax cases for which the risk of losses is classified as possible are set forth below:
Profits earned abroad: The Company was assessed by the Brazilian Internal Revenue Service for alleged underpayment of income tax and social contribution on profits earned by its subsidiaries established abroad, in a total amount of R$365.8 (R$164.8 as of December 31, 2010). The Company’s legal defense is based on the facts that the subsidiaries located abroad are subject exclusively to the full taxation in the countries in which they are based as a result of the treaties signed to avoid double taxation. The total profits earned abroad are presented in note 14.3.
F-100
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Income Tax and Social Contribution: The Company is involved in administrative disputes associated to the use of tax losses, refunds and offset of income tax and social contribution taxes credits against other federal taxes, including credits generated by the Plano Verão legal dispute, in a total amount of R$222.5 (R$114.7 as of December 31, 2010). The increase in 2011, relates to new cases as well as to price index.
ICMS: The Company is involved in the following disputes associated to the ICMS tax: (i) alleged undue ICMS tax credits generated by tax incentives granted by the origin States (“guerra fiscal”) in a total amount of R$1,331.6 (R$1,057.3 as of December 31, 2010); (ii) maintenance of ICMS tax credits on the acquisition of essential products with a reduced tax burden (“cesta básica”) in a total amount of R$493.9 (R$388.9 as of December 31, 2010); (iii) register of ICMS tax deemed credits in a total amount of R$86.2 (R$10.8 as of December 31, 2010); and (iv) R$563.5 (R$565.0 as of December 31, 2010) related to other lawsuits.
IPI: The Company discusses administratively the non-ratification of compensation of IPI credits resulting from the purchases of goods not taxed, sales to Manaus Free Zone and purchases of supplies of non-taxpayers with PIS and COFINS in the amount of R$125.0 (R$55.0 as of December, 2010).
IPI Premium Credits: The wholly-owned subsidiary Sadia is involved in a judicial dispute related to the alleged undue offset of IPI Premium Credits against other federal taxes in a total amount of R$399.7 (R$387.3 as of December 31, 2010). The Company recorded these credits based on a final judicial decision.
PIS and COFINS: The Company is involved in administrative proceedings regarding the offset of credits against other federal taxes, in the amount of R$582.9 (R$390.0 as of December 31, 2010). The increase in 2011, relates to new cases as well as to price index.
Normative Instruction 86: The Company was assessed by the Brazilian Internal Revenue Service for a total amount of R$158.2 related to an isolated fine as a result of alleged non-compliance and delivery of 2003-2005 magnetic files to the tax authorities.
Social Security Taxes: The Company is involved in disputes related to social security taxes allegedly due on payments to service providers as well as jointly responsible with civil construction service providers and others in a total amount of R$185.3 (R$165.1 as of December 31, 2010).
Other Contingencies: The Company is involved in other tax contingencies including rural activity, transfer price, social contribution tax basis and several other, totaling R$151.0 (R$158.5 as of December 31, 2010).
F-101
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
Additionally, the Company’s Management judged it necessary to disclose information related to the lawsuit in which it was included as co-responsible in an obligation from Huaine Participações Ltda (former holding company of Perdigão). In this lawsuit, it is being discussed the inclusion of the Company in the liability from the tax foreclosure in the amount of R$572.2. On February 16, 2012, the Company received a favorable decision from the Superior Court, in which it determined the matter to be judged again by the lower court. The Company’s legal advisors classified the risk of losses as remote.
25.2.2. Civil lawsuits
As of December 31, 2011, the wholly-owned subsidiary Sadia has other civil contingencies in the amount of R$129.8 (R$70.6 as of December 31, 2010).
The subsidiary Sadia and some of its current and former executives were named as defendants in five class actions suits arising from investors of American Depositary Receipts (“ADRs”) issued by Sadia and acquired in the period from April 30, 2008 to September 26, 2008 (Class Period). These claims were filed in the Southern District of New York federal court in the United States of America, seeking remediation in accordance with U.S. Securities Exchange Act of 1934 arising from losses on foreign exchange derivative contracts entered during the Class Period. By order of the U.S. court, the five class actions suits were consolidated into a single case (Class Action) on behalf of the Sadia’s investors group. During the second semester of 2011, the Company reached a final agreement with the plaintiffs homologated by the U.S. judicial authority and as a consequence settled the case with a payment of US$27.0. The Company’s recorded provision was superior to the amount of the settlement; therefore, a reversal in the amount of R$118.7 was recorded in the other operating income. The Company understands that the likelihood of having new lawsuits related to this Class Action is remote.
26. SHAREHOLDERS’ EQUITY
26.1. Capital stock
On December 31, 2011, 2010 and 2009, the capital subscribed and paid by the Company is R$12,553,417,953.36 (twelve billion, five hundred and fifty-three million, four hundred and seventeen thousand, nine hundred and fifty-three Brazilian Reais and thirty-six cents), composed of 872,473,246 book-entry shares of common stock without par value. The realized value of the capital stock in the balance sheet is net of the public offering expenses in the amount of R$92.9.
F-102
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The Company is authorized to increase the capital stock, irrespective of amendment to the bylaws, up to the limit of 1,000,000,000 shares of common stock, in book-entry form, and without par value.
26.2. Breakdown of capital stock
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Common shares | 872,473,246 | 872,473,246 | 872,473,246 | |||
| Treasury shares | (3,019,442) | (781,172) | (2,452,180) | |||
| Outstanding shares | 869,453,804 | 871,692,074 | 870,021,066 |
26.3. Rollforward of outstanding shares
| Quantity outstanding of shares | ||||||
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Shares at the beginning of the year | 871,692,074 | 870,021,066 | 206,958,103 | |||
|
Issuance for shares exchange |
- | - | 97,028,520 | |||
|
Issuance for fund-raising |
- | - | 132,250,000 | |||
|
Split of shares |
- | - | 436,236,623 | |||
|
Purchase of share (treasury) |
(2,630,100) | - | (2,452,180) | |||
|
Sale of shares (share based payment) |
391,830 | 1,671,008 | - | |||
| Shares at the end of the year | 869,453,804 | 871,692,074 | 870,021,066 | |||
26.4. Shareholders’ remuneration
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Net income | 1,367.4 | 804.1 | 96.2 | |||
| Legal reserve (5%) | (68.4) | (40.2) | (4.8) | |||
| Dividends calculation base | 1,299.0 | 763.9 | 91.4 | |||
| Shareholders' remunaration in the form of interest on shareholders' equity: | ||||||
|
Paid on August 29, 2011 (net income tax in the amount of R$24.9) |
267.4 | - | - | |||
|
Paid on February 15, 2012 (net income tax in the amount of R$29.2) |
310.2 | - | - | |||
|
Paid concerning the financial year 2010 (net income tax in the amount of R$17.6) |
- | 244.9 | - | |||
|
Paid concerning the financial year 2009 (net income tax in the amount of R$8.5) |
- | - | 91.4 | |||
| Total shareholders' equity | 577.6 | 244.9 | 91.4 | |||
| Percentage of calculation base | 44.46% | 32.06% | 100.00% | |||
| Dividends paid per share | 0.72705 | 0.30166 | 0.22999 |
F-103
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
26.5. Profit distribution
| Limit on | Income appropriation | Reserve balances | ||||||||||||
| capital % | 12.31.11 | 12.31.10 | 12.31.09 | 12.31.11 | 12.31.10 | 12.31.09 | ||||||||
| Adjustment to CPCs/IFRS | - | - | 186.1 | 26.8 | - | - | - | |||||||
| Gain actuarial FAF | - | 39.6 | 18.5 | - | - | - | - | |||||||
| Interest on shareholders' equity | - | 632.1 | 262.5 | 100.0 | - | - | - | |||||||
| Legal reserve | 20 | 68.4 | 40.2 | 4.8 | 179.6 | 111.2 | 71 | |||||||
| Capital increase reserve | 20 | 265.6 | 119.9 | - | 545.7 | 280.2 | 160.2 | |||||||
| Reserve for expansion | 80 | 305.3 | 176.9 | (8.6) | 978.6 | 673.3 | 496.4 | |||||||
| Reserve for tax incentives | - | 56.4 | - | - | 56.5 | - | - | |||||||
| 1,367.4 | 804.1 | 123.0 | 1,760.4 | 1,064.7 | 727.6 | |||||||||
Legal reserve: Five percent (5%) of net income raised in each fiscal year as specified in article 193 of Law No 6,404/76, modified by Law No 11,638/07, which shall not exceed twenty percent (20%) of the capital stock.
Reserve for capital increase: Twenty percent (20%) towards the establishment of reserves for capital increase, which shall not exceed twenty percent (20%) of the capital stock.
Reserve for expansion: up to 50% (fifty per cent) for the constitution of the reserve for expansion, this reserve not to exceed 80% (eighty per cent) of the capital stock.
Reserve for tax incentives: constituted as specified in article 195-A of the Law No 6,404/76, modified by Law No 11,638/07, based on the value of donations on government grants for investment.
26.6. Treasury shares
During the year ended December 31, 2011, as authorized by the Board of Directors, the Company acquired 2,630,100 of its own shares at a cost of R$72.0. The repurchase program was approved to acquire up to 4,068,336 common shares, without par value, with the purpose to be held in treasury for eventual compliance with the provisions in the stock option plans. Therefore, on December 31, 2011, the Company has 3,019,442 shares in treasury, at a average cost of R$21.63 (twenty one Brazilian Reais and sixty three cents) per share with a market value of R$110.0.
26.7. Breakdown of the capital by owner
The shareholding position of the largest shareholders, management, members of the Board of Directors and Audit Committee of the Company is presented below (not audited):
F-104
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | 12.31.10 | 12.31.09 | ||||||||||
| Shareholders | Quantity | % | Quantity | % | Quantity | % | ||||||
| Main shareholders | ||||||||||||
|
Shareholders' that take part in the voting agreement |
240,061,726 | 27.52 | 244,567,498 | 28.03 | 246,131,222 | 28.21 | ||||||
|
Tarpon |
69,988,490 | 8.02 | 61,106,290 | 7.00 | ||||||||
|
Fundo Bird |
- | - | - | - | 30,031,734 | 3.44 | ||||||
| Management | ||||||||||||
|
Board of directors |
9,721,600 | 1.11 | 14,313,032 | 1.64 | 14,301,584 | 1.64 | ||||||
|
Executives |
100,932 | 0.01 | 646 | - | 646 | - | ||||||
| Treasury shares | 3,019,442 | 0.35 | 781,172 | 0.09 | 2,452,180 | 0.28 | ||||||
| Other | 549,581,056 | 62.99 | 551,704,608 | 63.24 | 579,555,880 | 66.43 | ||||||
| 872,473,246 | 100.00 | 872,473,246 | 100.00 | 872,473,246 | 100.00 | |||||||
The shareholding position of the controlling shareholders that belong to the voting agreement and/or holders of more than 5% of the voting stock is presented below:
| 12.31.11 | 12.31.10 | 12.31.09 | ||||||||||
| Shareholders | Quantity | % | Quantity | % | Quantity | % | ||||||
| Caixa de Previd. dos Func. Do Banco do Brasil (1) | 111,364,918 | 12.76 | 110,846,320 | 12.70 | 119,087,140 | 13.65 | ||||||
| Fundação Petrobrás de Seguridade Social - Petros (1) | 89,866,382 | 10.30 | 87,560,126 | 10.04 | 79,694,726 | 9.13 | ||||||
| Fundação Sistel de Seguridade Social (1) | 11,725,832 | 1.34 | 13,127,812 | 1.50 | 13,317,982 | 1.53 | ||||||
| Fundação Vale do Rio Doce de Seg. Social - Valia (1) | 23,629,690 | 2.71 | 25,828,036 | 2.96 | 25,998,170 | 2.98 | ||||||
| FPRV1 Sabiá FIM Previdenciário (2) | 3,474,904 | 0.40 | 7,205,204 | 0.84 | 8,033,204 | 0.92 | ||||||
| Fundo Bird (3) | 30,031,734 | 3.44 | ||||||||||
| Tarpon | 69,988,490 | 8.02 | 61,106,290 | 7.00 | - | - | ||||||
| 310,050,216 | 35.53 | 305,673,788 | 35.04 | 276,162,956 | 31.65 | |||||||
| Other | 562,423,030 | 64.47 | 566,799,458 | 64.96 | 596,310,290 | 68.35 | ||||||
| 872,473,246 | 100.00 | 872,473,246 | 100.00 | 872,473,246 | 100.00 | |||||||
(1) The pension funds are controlled by employees that participate in the respective companies.
(2) Investment fund held solely by the Fundação de Assistência e Previdência Social of BNDES-FAPES. The shares of common stock currently held by this fund are tied to the voting agreement signed by the Pension Funds.
27. GOVERNMENT GRANTS
27.1. Grants related to assets
On November 18, 2008, the subsidiary Sadia received land as a donation that is located in the State of Pernambuco. The fair value on that date corresponded to R$4.2. The donation was subject to the construction of a manufacturing facility , generating jobs and economic and social development in the region.
Pursuant to the requirements from IAS 20, the fair value of the land, obtained from a local specialist broker, was recorded in the non-current assets with a corresponding entry in the non-current liabilities.
The value attributed to the land is being recognized proportionally in the statement of income based on the depreciation of the manufacturing facility. As of December 31, 2011, the amount of depreciation recognized totaled R$0.2 (R$0.1 as of December 31, 2010).
F-105
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
27.2. Grants related to income through tax benefits
The Company has tax benefits related to ICMS for investments granted by states governments of Goiás, Pernambuco, Mato Grosso and Bahia. Such incentives are directly associated to the manufacturing facilities operations, job generation and to the economic and social development in the respective states, being accounted for as a reserve for tax incentives in the shareholders’ equity.
On December 31, 2011, this incentive totaled R$97.4, from which R$49.1 was recorded as a reserve for tax incentives. The remaining amount of R$48.3 was recorded in the wholly-owned subsidiary Sadia and utilized to absorb the accumulated losses, and therefore it is not part of the balance of the reserve for tax incentives, in accordance with the current tax legislation. These incentives were not utilized in the 2010 fiscal year.
The total amount of these tax benefits is related to the following state programs:
· State of Bahia Industrial and Economic Integration Development Program (“DESENVOLVE”): this program aims to promote and diversify the industrial and agricultural activity, with the formation of high density industrial areas in the economic regions and integration of productive chains that are essential to the economic and social development as well as job and income generation in the state. The total amount of incentive recognized in the statement of income was R$3.9.
· State of Pernambuco Development Program (“PRODEPE”): this program intends to attract and promote investments in industrial activity and wholesale trade of Pernambuco, by granting tax and financial incentives, becoming effective in accordance to the current legislation. The total amount of this incentive was R$42.5.
· State of Mato Grosso Industrial and Commercial Development Program (“PRODEIC”): the program has purpose of leveraging the development of economic activities defined as strategic and designated to the priority production of goods and services in the State, considering social and environmental aspects, in order to improve the Human Development Index (“IDH”) and the social welfare. The total amount of this incentive was R$32.8.
· State of Goiás Participation and Development for Industrialization Fund (“FOMENTAR”): this program intends to stimulate the implementation and expansion of industrial enterprises that promote the industrial development in the State. The total amount of this incentive was R$18.2.
F-106
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
27.3. Grants related to government assistance
The Company recognized the benefits from the Special Credit for Investments (“CEI”) granted by the State of Goiás, applied to the implementation of an agro-industrial complex for heavy poultry meat, proportional to the execution of the correspondent project. This special credit, which totaled R$7.4 on December 31, 2011 (R$9.2 on December 31, 2010), refers to 40% of the total estimated amount of fixed investments that were made by the Company.
28. EARNING PER SHARE
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Basic numerator: | ||||||
|
Net income for the period attributable to BRF shareholders |
1,367.4 | 804.1 | 123.0 | |||
| Basic denominator: | ||||||
|
Shares of common stock |
872,473,246 | 872,473,246 | 872,473,246 | |||
|
Weighted average number of outstanding shares basic (except treasury |
||||||
|
shares) |
870,507,468 | 870,887,093 | 604,119,958 | |||
| Earnings per share - basic - R$ | 1.5708 | 0.9233 | 0.2036 | |||
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Diluted numerator: | ||||||
|
Net income for the period attributable to BRF shareholders |
1,367.4 | 804.1 | 123.0 | |||
| Diluted denominator: | ||||||
|
Weighted average number of outstanding shares - basic (except treasury |
||||||
|
shares) |
870,507,468 | 870,887,093 | 604,119,958 | |||
|
Number of potential shares (stock options) |
38,768 | 2,078,063 | 2,025,071 | |||
|
Weighted average number of outstanding shares - diluted |
870,546,236 | 872,965,156 | 606,145,029 | |||
| Earnings per share - diluted - R$ | 1.5707 | 0.9211 | 0.2029 | |||
On December 31, 2011, from the total of 4,277,946 outstanding options, 2,928,905 (658,340 as of December 31, 2010 and 1,155,752 as of December 31, 2009) were not considered in the calculation of the diluted earnings per share due to the fact that the strike price was higher than the average market price of the common shares during the year and, therefore, the effect was anti-diluted.
29. RELATED PARTIES
During its operations, rights and obligations are contracted between related parties, resulting from transactions of purchase and sale of products, transactions of loans agreed on normal conditions of market for similar transactions, based on contract.
The Company entered into loan agreements with Instituto Perdigão de Sustentabilidade. On December 31, 2011, the total receivable is R$6.6 (R$5.9 as of December 31, 2010), being remunerated to interest rate of 12% p.a.
F-107
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
On December 15, 2011, the Company forgave the outstanding loan with Instituto Sadia de Sustentabilidade in the amount of R$44.1, as approved by the Board of Directors on this date.
The Company entered into loan agreements with its subsidiaries. Below is a summary of the balances and rates charged for the transactions in excess of R$10.0 on the date of closing of these consolidated financial statements:
| Counterparty | Balance | ||
| Creditor | Debtor | 12.31.11 | Interest rate |
| BFF International Ltd. | Perdigão International Ltd. | 805.8 | 1.8% p.a. - US$ |
| BFF International Ltd. | Wellax Food Comércio | 548.1 | 8.0% p.a. - US$ |
| Crossban Holdings GmbH | Sadia GmbH | 18.9 | 3.0% p.a. + ER - US$ |
| Crossban Holdings GmbH | Plusfood Holland B.V. | 90.5 | 3.0% p.a. - EUR |
| Plusfood Holland B.V. | Plusfood Groep B.V. | 70.9 | 3.0% p.a. - EUR |
| Plusfood Groep B.V. | Plusfood Wrexham | 13.8 | 3.0% p.a. + ER - GBP |
| Plusfood Groep B.V. | Plusfood B.V. | 55.0 | 3.0% p.a. - EUR |
| Sadia GmbH | BRF Foods LLC | 26.7 | 7.0% p.a. + ER - US$ |
29.1. Other Related Parties
The Company entered into an operating lease agreement with FAF. The amount of rent paid as of December 31, 2011, was R$11.5 (R$12.1 as of December 31, 2010 and R$12.7 as of December 31, 2009).
29.2. Granted guarantees
All the relationships between the Company and its subsidiaries were disclosed irrespective of the existence or not of transactions between these parties.
All the transactions and balances among the companies were eliminated upon consolidation and refer to commercial and/or financial transactions.
29.3. Management remuneration
The key management personnel include the directors and officers, members of the executive committee and the chief of internal audit. On December 31, 2011, there were 27 professionals (41 professionals as of December 31, 2010 and 67 professionals as of December 31, 2009).
The total remuneration and benefits paid to these professionals are demonstrated below:
F-108
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Salary and profit sharing | 37.1 | 41.0 | 32.8 | |||
| Short term benefits of employees (a) | 1.5 | 1.5 | 1.3 | |||
| Post-employment benefits | 1.1 | 0.2 | 0.5 | |||
| Termination benefits | 2.1 | 3.2 | 8.8 | |||
| Stock-based payment | 5.7 | 1.2 | - | |||
| 47.5 | 47.1 | 43.4 |
The value of the profit sharing in the results paid to each director in any period is related especially to the net income of the Company and to the assessment of the performance of the director during the fiscal year by the Board of Directors.
The supplementary members of the Board of Directors and of the Fiscal Council are compensated for each meeting that they attend. The members of the Board of Directors and Fiscal Council have no employment connection with the Company and do not provide services of any kind.
When the management and employees attain the age of 61 years, retirement is mandatory.
30. SALES REVENUE
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Gross sales | ||||||
|
Domestic sales |
14,299.5 | 12,628.2 | 8,254.9 | |||
|
Foreign sales |
10,363.7 | 9,229.5 | 6,727.9 | |||
|
Dairy products |
2,999.2 | 2,731.7 | 2,558.8 | |||
|
Food service |
1,698.3 | 1,444.0 | 826.0 | |||
| 29,360.7 | 26,033.4 | 18,367.7 | ||||
| Sales deductions | - | |||||
|
Domestic sales |
(2,669.5) | (2,450.8) | (1,647.7) | |||
|
Foreign sales |
(270.5) | (244.3) | (214.2) | |||
|
Dairy products |
(460.5) | (420.3) | (397.6) | |||
|
Food service |
(253.9) | (236.8) | (202.5) | |||
| (3,654.4) | (3,352.2) | (2,461.9) | ||||
| Net sales | - | |||||
|
Domestic sales |
11,630.0 | 10,177.4 | 6,607.2 | |||
|
Foreign sales |
10,093.1 | 8,985.2 | 6,513.8 | |||
|
Dairy products |
2,538.8 | 2,311.5 | 2,161.3 | |||
|
Food service |
1,444.3 | 1,207.2 | 623.6 | |||
| 25,706.2 | 22,681.3 | 15,905.8 |
F-109
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
31. RESEARCH AND DEVELOPMENT COSTS
Consists of expenditures on internal research and development of new products, recognized when incurred in the consolidated statement of income. The total expenditure of research and development in the fiscal year ended December 31, 2011, is R$24.2 (R$20.7 as of December 31, 2010 and R$17.4 as of December 31, 2009).
32. EXPENSES WITH EMPLOYEE’S REMUNERATION
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Salaries and social charges | 2,630.1 | 2,221.8 | 2014.8 | |||
| Social security cost | 610.9 | 532.3 | 491.5 | |||
| Government severance indemnity fund for employees, guarantee fund for | ||||||
| length of service | 170.0 | 148.1 | 137.1 | |||
| Medical assistance and outpacient care | 100.7 | 125.2 | 115.5 | |||
| Retirement supplementary plan | 13.0 | 12.6 | 12.5 | |||
| Employees profit sharing | 219.5 | 128.7 | 40.4 | |||
| Other benefits | 437.6 | 354.6 | 321.1 | |||
| Provision for contingencies | 41.6 | 85.9 | 22.5 | |||
| 4,223.4 | 3,609.2 | 3,155.4 |
33. OTHER OPERATING INCOME (EXPENSES), NET
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Income | ||||||
|
Gain from the disposal of property, plant and equipment |
23.2 | - | 24.4 | |||
|
Gain from the disposal of investments |
0.1 | - | 60.6 | |||
|
Insurance indemnity |
46.9 | 9.0 | 141.8 | |||
|
Employees |
51.9 | 31.9 | - | |||
|
Recovery of expenses |
84.9 | 35.3 | - | |||
|
Provision reversal (a) |
118.7 | - | - | |||
|
Scrap sales |
5.3 | 19.9 | - | |||
|
Other |
12.1 | 11.4 | 16.4 | |||
| 343.1 | 107.5 | 243.2 | ||||
| Expenses | ||||||
|
Net gain (loss) from the disposal of property, plant and equipment |
- | (26.3) | 4.9 | |||
|
Idleness costs |
(102.7) | (144.3) | (133.9) | |||
|
Insurance claims costs |
(56.8) | (8.5) | (185.6) | |||
|
Employees profit sharing |
(219.5) | (128.7) | (66.4) | |||
|
Stock options plan |
(15.8) | (4.8) | - | |||
|
Management profit sharing |
(15.9) | (9.1) | - | |||
|
Canceled projects |
- | (3.1) | (11.1) | |||
|
Contractual agreements |
(9.8) | (26.5) | (11.5) | |||
|
Other employees benefits |
(26.9) | (46.0) | (14.7) | |||
|
Provision for tax and labor risks |
(216.7) | (73.9) | (74.0) | |||
|
Provision for civil risks |
(18.0) | - | - | |||
|
Other operating expenses, net |
(63.7) | (30.2) | (53.7) | |||
| (745.8) | (501.4) | (546.0) | ||||
| (402.7) | (393.9) | (302.8) |
(a) See note 25, item 25.2.2, Contingency settled in the current year.
F-110
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
34. FINANCIAL INCOME (EXPENSES), NET
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Financial income | ||||||
| Interest on marketable securities | 37.1 | 16.6 | 27.5 | |||
| Exchange rate variation on marketable securities | 18.7 | 31.3 | 42.9 | |||
| Interests on other assets | 49.8 | 52.5 | 34.4 | |||
| Exchange rate variation on other assets | 50.5 | 62.0 | 56.0 | |||
| Interests on financial assets classified as: | 143.3 | 164.5 | 170.1 | |||
|
Available for sale |
54.0 | 32.1 | 33.9 | |||
|
Held for trading |
72.9 | 112.1 | 133.5 | |||
|
Held to maturity |
16.4 | 20.3 | 2.7 | |||
| Gains from derivative transactions | - | 24.5 | 19.5 | |||
| Interest income on loans to related parties | - | - | 1.7 | |||
| Gains from the translation of foreign investments | 431.7 | 64.0 | 41.0 | |||
| Adjustment to present value | 5.2 | 85.7 | 34.6 | |||
| Exchange rate variation on loans and financing | 16.4 | 70.8 | 585.3 | |||
| Exchange rate variation on other liabilities | 46.1 | 218.8 | 451.5 | |||
| Financial income from the acquisition of raw materials | - | 3.8 | 12.6 | |||
| Amortization of fair value of other | - | 23.2 | 21.3 | |||
| Other | 47.0 | 62.5 | 26.7 | |||
| 845.8 | 880.2 | 1,525.1 | ||||
| Financial expenses | ||||||
|
Interest on loans and financing |
(456.8) | (509.8) | (447.8) | |||
|
Exchange rate variation on loans and financing |
(14.9) | (127.4) | (93.6) | |||
|
Interest on liabilities |
(18.5) | (25.7) | (19.9) | |||
|
Exchange rate variation on liabilities |
(453.9) | (155.9) | 321.2 | |||
|
Financial expenses from the acquisition of raw materials |
(6.4) | (27.5) | (21.5) | |||
|
Losses from derivative transaction |
(82.5) | (83.2) | (315.6) | |||
|
Losses from the translation of foreign investments |
(219.8) | (160.2) | (298.9) | |||
|
Adjustment to present value |
(2.9) | (110.2) | (34.9) | |||
|
Exchange rate variation on marketable securities |
- | (37.6) | (21.6) | |||
|
Exchange rate variation on other assets |
- | (50.8) | (196.2) | |||
|
Other |
(69.6) | (74.9) | (133.8) | |||
| (1,325.3) | (1,363.3) | (1,262.6) | ||||
| (479.5) | (483.1) | 262.5 |
F-111
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
35. STATEMENT OF INCOME BY NATURE
The Company has chosen to disclosure its statement of income by function and thus presents below the details by nature:
| 12.31.11 | 12.31.10 | 12.31.09 | ||||
| Costs of sales | ||||||
|
Costs of goods |
13,916.8 | 12,392.6 | 9,089.0 | |||
|
Depreciation |
794.4 | 616.0 | 395.5 | |||
|
Amortization |
5.8 | 17.5 | 10.5 | |||
|
Salaries and employees benefits |
2,642.4 | 2,162.9 | 1,614.4 | |||
|
Other |
1,687.6 | 1,762.2 | 1,619.5 | |||
| 19,047.0 | 16,951.2 | 12,728.9 | ||||
| Selling expenses | ||||||
|
Depreciation |
26.2 | 21.0 | 9.4 | |||
|
Amortization |
6.1 | 17.0 | 0.1 | |||
|
Salaries and employees benefits |
854.1 | 703.7 | 464.0 | |||
|
Other |
2,951.1 | 2,781.4 | 2,103.6 | |||
| 3,837.5 | 3,523.1 | 2,577.1 | ||||
| General and administrative expenses | ||||||
|
Depreciation |
11.5 | 3.4 | 9.0 | |||
|
Amortization |
16.1 | 6.9 | 1.1 | |||
|
Salaries and employees benefits |
251.1 | 139.5 | 124.4 | |||
|
Other |
148.2 | 183.1 | 87.7 | |||
| 426.9 | 332.9 | 222.2 |
36. INSURANCE COVERAGE
The Company adopts the policy of contracting insurance coverage for assets subject to risks in amounts sufficient to cover any claims, considering the nature of its activity. The assumptions and risks adopted, given their nature, are not part of the scope of an audit and, therefore, were not audited by our independent auditors.
| 12.31.11 | |||
| Unaudited | |||
| Insured | Amount of | ||
| Assets covered | Coverage | amounts | coverage |
| Fire, lightning, explosion, windstorm, deterioration of | |||
| refrigerated products, breakdown of machinery, loss | |||
| Inventories and property, plant and equipment | of profit and other | 22,282.3 | 600.0 |
| National transport | Road risk and civil liability of cargo carrier | 16,819.8 | 56.3 |
| International transport for exports | - | 8,869.2 | 56.3 |
| International transport for imports | - | 8,869.2 | 56.3 |
| General civil liability for directors and officers | Third party complaints | 27,000.0 | 30.0 |
| Credit | Clients default | 3,500.0 | 80.0 |
F-112
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
37. NEW RULES AND PRONOUNCEMENTS NOT ADOPTED
The interpretations and amendments to the rules existent below, applicable to the following accounting periods, were published by IASB and its application to the financial statements of the Company to be filed with CVM (the Brazilian Securities Commission) only if there is a Deliberation by that agency, therefore, there was no anticipated adoption of these rules.
IAS 1 – Presentation of Items of Others Comprehensive Income
In June 2011, the IASB revised IAS 1. The change in IAS 1 deals with aspects related to disclosure of other comprehensive income items and establishes the need to separate items which will not be further reclassified to the net income (for example: realization of the deemed cost) and items that can be further reclassified to the net income, such as gains and losses deferred cash flow hedge. The revised standard is effective for annual reporting periods beginning on or after July 1, 2012. The Company is assessing the impact of adopting this standard on its consolidated financial statements.
IAS 12 – Deferred Tax: Recovery of Underlying Assets
In December 2010, the IASB revised IAS 12. The change addresses issues related to the determination of the way deferred income tax assets and liabilities are expected to be recover when an investment property is measured using the fair value model of IAS 40. The revised standard is effective for annual reporting periods beginning on or after January 1, 2012. The Company is assessing the impact of applying this change on its consolidated financial statements.
IAS 19 – Employee Benefits
In June 2011, the IASB revised IAS 19. The change addresses issues related to accounting and disclosure of employee benefits. The revised standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company is assessing the impact of adopting this standard on its consolidated financial statements.
IAS 27 – Consolidated and Separate Financial Statements
In May 2011, the IASB revised IAS 27. The change addresses issues related to investments in subsidiaries, jointly-controlled entities and associate companies, when an entity prepares separate financial statements. The revised standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company understands that this change will not impact its consolidated financial statements since separate financial statements are not presented.
F-113
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
IAS 28 – Investments in associates and joint ventures
In May 2011, the IASB revised IAS 28. The change addresses issues related to investments in associate companies and establishes the rules for using the equity accounting method for investments in associate companies and jointly-controlled entities. The revised standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company is assessing the impact of adopting this standard on its consolidated financial statements.
IFRS 7 – Financial Instruments - Disclosures: Offsetting of Financial Assets and Liabilities
In December 2011, the IASB issued a revision of the rule establishing requirements for disclosure of compensation arrangements of financial assets and liabilities. This standard is effective for annual periods beginning on or after January 1, 2013. The Company is evaluating the impact of adopting this standard on its consolidated financial statements.
IFRS 7 – Financial Instruments - Disclosures: Transfers of Financial Assets
In October 2010, the IASB revised IFRS 7. This amendment has the objective of adding disclosures that enable users of financial statements to assess the risk of exposure over transfers of financial assets and the effects of these risks on the entity's financial position. The change in the standard IFRS 7 is effective for annual periods beginning on or after July, 2011. The Company is evaluating the impact of the adoption of this amendment in its consolidated financial statements.
IFRS 9 – Financial Instruments
In October 2010, the IASB revised IFRS 9. The change of this standard addresses the first stage of the project of replacement of IAS 39. The date of application of this standard was extended to January 1, 2015. The Company is evaluating the impact of adopting this standard and any differences from IAS 39 in its consolidated financial statements.
IFRS 10 – Consolidated Financial Statements
In May 2011, the IASB issued IFRS 10. This standard provides the principles for the presentation and preparation of financial statements of the Consolidated Financial Statement when the entity controls one or more entities. The standard provides additional guidance to assist in determining control when there is doubt in the assessment. This standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company is evaluating the impact of the adoption of this amendment in its consolidated financial statements.
F-114
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
IFRS 11 – Joint Arrangements
In May 2011, the IASB issued IFRS 11. This standard deals with aspects related to the accounting treatment for jointly-controlled entities and joint operations. This standard also limit the use of proportional consolidation just for joint operations, and also establish the equity accounting method as the only method acceptable for joint ventures. This standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company is assessing the impact of adopting this standard on its consolidated financial statements
IFRS 12 – Disclosure of Interests in Other Entities
In May 2011, the IASB issued IFRS 12. This standard deals with aspects related to the disclosure of nature and risks related to interests owned in subsidiaries, jointly-controlled entities and associate companies. This standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company is assessing the impact of adopting this standard on its consolidated financial statements.
IFRS 13 – Fair Value Measurement
In May 2011, the IASB issued IFRS 13. This standard establishes fair value and consolidates in a single standard the aspects of fair value measurement and establishes the requirements of disclosure related to fair value. This standard is effective for annual reporting periods beginning on or after January 1, 2013. The Company is assessing the impact of adopting this standard on its consolidated financial statements.
38. SUBSEQUENT EVENTS
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
38.1. Approval for Merger of SADIA S.A.
According to the material fact released on February 9, 2012, the Board of Directors of the Company approved the merger of Sadia S.A. into BRF which will occur on December 31, 2012. The merger is part of the reorganization which started with the business combination between the two companies, which main purpose is to maximize synergies and to rationalize activities, with consequent reductions in administrative and operating costs and increased productivity.
F-115
BRF – Brasil Foods S.A.
Notes to Consolidated Financial Statements
Years ended December 31, 2011, 2010 and 2009
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)
The decision to merge Sadia into BRF resulted in losses of approximately R$215.2 in the fiscal year of 2011 related to a valuation allowance for deferred income tax and social contribution over tax losses and negative base of social contribution on net income, which will not be utilized after the merger. The above value reflects Management´s best estimate at the data base of these consolidated financial statements, considering the available information. The final monetary impact of the Sadia merger into BRF will be determined on December 31, 2012.
38.2. Establishment of Joint Venture in China
On February 14, 2012, the Company disclosed the establishment of the Rising Star Food Company Limited, a Joint Venture (“JV”) with the participation of the Dah Chong Hong Limited (“DCH”), which purpose will be:
- Access to the Chinese distribution market in Continental China, Hong Kong and Macau reaching retail and food service channels;
- Local processing of the products; and
- Developing the Sadia brand in these countries.
The Company owns 50% participation in the JV and is committed to make a capital increase amounting to approximately R$2.5, which is proportional to its participation in the JV.
Management estimates that during the first year of operation, the JV will have sales volumes of more than 140.0 tons and have net sales of approximately R$844.1.
38.3. Signature of Asset Exchange and Other Agreements with Marfrig
In continuity of the negotiations for the fulfillment of the TCD and as disclosed by the relevant fact issued on March 20, 2012, the Company and Marfrig signed on this date an Asset Exchange and Other Agreements, which confirmed with some amendments the MOU signed on December 8, 2011, whose main objective is to establish the term and conditions aiming to accomplish an exchange of assets, as described in note 1, item 1.2.
38.4. Credit line Revolving Credit Facility - (“RFC")
As disclosed through the “Announcement to the Market” issued on April 27, 2012, with the purpose of improving the financial liquidity, the Company and its wholly-owned subsidiaries Perdigão International Ltda. and Perdigão Europe hired a credit line RFC, in the amount of US$500,000, with a 3 years maturity term in two tranches (USD and EUR), from a syndicate comprised of 19 global banks, lead by Santander, Morgan Stanley and HSBC. In different levels the following financial institutions also entered into the syndicate: Banco Bradesco, Banco do Brasil, Bank of China, The Bank of Nova Scotia, The Bank of Tokyo-Mitsubishi, BNP Paribas, Mizuho Corporate Bank, Standard Chartered Bank, Sumitomo Mitsui Banking, ING Bank, Rabobank Curaçao, Bank of Taiwan, Deutsche Bank, Mega International Commercial Bank, United Taiwan Bank, Credit Agricole Corporate and Investment Bank.
The transaction was structured to allow the Company to utilize the credit line at anytime, throughout the 3 years and will yield interest indexed to LIBOR plus a spread which may range from 1.6% p.a. to 2.5% p.a. considering the credit rating classification of the Company’s long term debt.
39. APPROVAL OF THE FINANCIAL STATEMENTS
The consolidated financial statements were approved and its disclosure authorized by the Board of Directors on March 22, 2012.
F-116
EXHIBIT INDEX
|
Exhibit Number |
Description |
|
2.01 |
Form of Deposit Agreement among Perdigão S.A., The Bank of New York Mellon, as depositary, and the owners and beneficial owners of American Depositary Shares, as amended and restated as of November 14, 2011 (incorporated by reference to Exhibit 1 to the Registration Statement on Form F-6, filed November 2, 2011, SEC File No. 333-177676). |
|
2.02 |
Form of American Depositary Receipt (incorporated by reference to Exhibit A to Exhibit 1 to the Registration Statement on Form F-6, filed November 2, 2011, SEC File 333-177676). |
|
4.01 |
Merger Agreement, dated May 19, 2009, among Perdigão S.A., HFF Participações S.A., Sadia S.A. and the shareholders of the Registrant and Sadia S.A. named therein (incorporated by reference to Exhibit 4.01 to the Annual Report of Foreign Private Issuer on Form 20-F, filed June 30, 2009, SEC File No. 001-15148). |
|
4.02 |
Shareholders’ Voting Agreement of Perdigão S.A., dated March 6, 2006, among certain shareholders of the Registrant and the Registrant (incorporated by reference to Exhibit 99.1 to the Report of Foreign Private Issuer on Form 6-K, filed March 7, 2006, SEC File No. 001-15148). |
|
4.03 |
Purchase Option Plan or Application for Shares (incorporated by reference to Exhibit 99.5 to the Report of Foreign Private Issuer on Form 6-K/A, filed March 24, 2010, SEC File No. 001-15148). |
|
4.04 |
Stock Options Program (incorporated by reference to Exhibit 99.4 to the Report of Foreign Private Issuer on Form 6-K/A, filed March 24, 2010, SEC File No. 001-15148). |
|
4.05* |
Performance Commitment Agreement (Termo de Compromisso de Desempenho), dated July 18, 2011, between BRF – Brasil Foods S.A. and the Brazilian Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica) (incorporated by reference to the Report of Foreign Private Issuer on Form 6-K filed July 18, 2011, SEC File No. 001-15148). |
|
|
|
* Portions of the Performance Commitment Agreement were omitted pursuant to a request for confidential treatment filed with the Commission.
** This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.