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, 2017

812,473,246 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter 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, a non-accelerated filer or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨	Emerging growth company ¨

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ¨

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

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

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PART I
INTRODUCTION

Unless otherwise indicated, all references herein to (1) “BRF” are references to BRF S.A., a corporation organized under the laws of the Federative Republic of Brazil (“Brazil”), and its consolidated subsidiaries, (2) the “Company,” “we,” “us,” “our” or “our company” are references to BRF, and (3) “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 the United States dollar. All references to “euro” or “EUR” are to euros, the official currency of the Eurozone in the European Union. All references to “Argentine peso,” or “ARS” are to the Argentine peso, the official currency of Argentina.

Market data and certain industry forecasts used herein were obtained from internal surveys, market research, publicly available information and industry publications. While we believe that market research, publicly available information and industry publications we use are reliable, we have not independently verified market and industry data from third-party sources. Moreover, while we believe our internal surveys are reliable, they have not been verified by any independent source.

We have made rounding adjustments to reach some of 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.

Forward-Looking Statements

This Annual Report on Form 20-F contains information that constitute forward-looking statements. They 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 acquisitions 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, (iv) health risks related to the food industry, (v) the risk of outbreak of animal diseases (vi) more stringent trade barriers in key export markets and increased regulation of food safety and security, (vii) strong international and domestic competition, (viii) interest rate fluctuations, inflation and exchange rate movements of the real in relation to the U.S. dollar and other currencies, (ix) the declaration or payment of dividends, (x) the direction and future operation of the Company, (xi) the implementation of the Company’s financing strategy and capital expenditure plans, (xii) the Company’s financial condition or results of operations and (xiii) 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 information set forth under the heading “Item 5. Operating and Financial Review and Prospects,” identifies important factors that could cause such differences. In light of the risks, uncertainties and assumptions associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this Annual Report on Form 20-F not to occur.

Our forward-looking statements speak only as of the date of this Annual Report on Form 20-F or as of the date they are made, and except as otherwise required by applicable securities laws, the Company undertakes no obligation to publicly update any forward-looking statement, whether because of new information, future events or otherwise.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

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ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

We present below certain selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, included herein, prepared in accordance with the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS differs in certain significant respects from the accounting principles generally accepted in the United States, or “U.S. GAAP.”

In July 2015, we sold the assets of our then dairy segment, including plants and trademarks, to Lactalis do Brasil – Comércio, Importação e Exportação de Laticínios Ltda. (“Lactalis”). As a result, this segment is reported as discontinued operations. Unless stated otherwise, the results and cash flows that we present in this Annual Report on Form 20-F do not consider the results and cash flows from our dairy segment discontinued operation.

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,
	2017	2016	2015	2014	2013
	(in millions of **reais, except share, per share and per ADS amounts and as otherwise indicated)**
Income Statement Data
Continuing Operations
Net sales	33,469.4	33,732.9	32,196.6	29,006.8	27,787.5
Gross profit	6,904.1	7,526.5	10,088.9	8,509.4	6,909.9
Operating income	736.2	1,815.2	4,228.4	3,478.3	1,896.4
Income (Loss) from Continuing Operations	(1,098.9)	(367.4)	2,947.7	2,135.0	1,019.7

Income (Loss) from Discontinued Operations	—	—	183.1	89.8	47.2
Net profit (Loss)	(1,098.9)	(367.4)	3,130.8	2,224.8	1,066.8
Attributable to:
Controlling shareholders	(1,125.6)	(372.4)	3,111.2	2,225.0	1,062.4
Non-controlling shareholders	26.7	5.0	19.6	(0.2)	4.4

Earnings (loss) per share - basic from continuing operations	(1.3675)	(0.4581)	3.5009	2.4529	1.1713
Earnings (loss) per ADS - basic from continuing operations	(1.3675)	(0.4581)	3.5009	2.4529	1.1713
Earnings (loss) per share – basic	(1.3675)	(0.4581)	3.7184	2.5563	1.2204
Earnings (loss) per ADS – basic	(1.3675)	(0.4581)	3.7184	2.5563	1.2204
Weighted average shares outstanding at the end of the year – basic (millions)	803,560	801,903	842,000	870,412	870,535
Earnings (loss) per share – diluted	(1.3675)	(0.4581)	3.6932	2.5551	1.2192
Earnings (loss) per ADS – diluted	(1.3675)	(0.4581)	3.6932	2.5551	1.2192
Weighted average shares outstanding at the end of the year – diluted (millions)	803,560	801,903	842,402	870,824	871,442
Dividends per share	—	0.7641	1.1998	0.8486	0.8315
Dividends per ADS	—	0.7641	1.1998	0.8486	0.8315
Dividends per ADS (in U.S.$)	—	0.2345	0.3073	0.3195	0.3550
Exchange Rate (R$/U.S.$) on December 31	3.3080	3.2591	3.9048	2.6562	2.3426

	At December 31,
	2017	2016	2015	2014	2013
	(in millions of **reais, except as otherwise indicated)**
Balance Sheet Data
Cash and cash equivalents	6,010.8	6,356.9	5,362.9	6,006.9	3,127.7
Trade accounts receivable, net	3,919.0	3,085.1	3,876.3	3,046.9	3,338.4
Inventories	4,948.2	4,791.6	4,032.9	2,941.4	3,111.6
Total current assets	19,185.4	18,893.7	19,180.1	17,488.3	13,242.5
Property, plant and equipment, net	12,190.6	11,746.2	10,915.8	10,059.3	10,821.6
Intangible assets	7,197.6	6,672.6	5,010.9	4,328.6	4,757.9
Total non-current assets	26,043.1	24,051.2	21,207.9	18,615.4	19,132.1
Total assets	45,228.5	42,944.9	40,388.0	36,103.7	32,374.6
Short-term debt	5,031.4	3,245.0	2,628.2	2,738.9	2,696.6
Trade accounts payable	6,445.5	5,839.8	4,745.0	3,522.2	3,674.7
Total current liabilities	14,907.9	12,640.4	11,621.2	9,569.1	8,436.0
Long-term debt	15,413.0	15,717.4	12,551.1	8,850.4	7,484.6
Total non-current liabilities	18,607.8	18,085.1	14,931.0	10,844.7	9,242.4
Equity
Capital	12,460.5	12,460.5	12,460.5	12,460.5	12,460.5
Total equity	11,712.9	12,219.4	13,836.0	15,689.9	14,696.2
Total liabilities and equity	45,228.5	42,944.9	40,388.0	36,103.7	32,374.6

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	2017	2016	2015	2014	2013
Operating Data
Poultry slaughtered (million heads per year)	1,628.1	1,715.3	1,724.4	1,663.6	1,795.9
Pork/beef slaughtered (thousand heads per year)	9,938.4	9,614.1	9,510.5	9,620.6	9,744.1
Total production of meat and other processed products (thousand tons per year)	4,332.2	4,251.6	4,358.2	4,307.1	4,595.4
Employees (at year end)⁽¹⁾	108,234	102,463	96,279	108,829	110,138

⁽¹⁾ Includes permanent and temporary employees.

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.

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
2013	2.4457	1.9528	2.1605	2.3426
2014	2.7403	2.1974	2.3547	2.6562
2015	4.1949	2.5754	3.3387	3.9048
2016	4.1558	3.1193	3.4833	3.2591
2017	3.3807	3.0510	3.1925	3.3080

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	*Reais* per U.S. Dollar
Month	High	Low
October 2017	3.28	3.20
November 2017	3.29	3.21
December 2017	3.33	3.23
January 2018	3.27	3.14
February 2018	3.28	3.17
March 2018	3.33	3.21
April 2018 (through April 26, 2018)	3.50	3.31

Source: Central Bank.

The exchange rate on April 26, 2018 was R$3.49 per U.S.$1.00.

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

Health risks related to our business and the food industry could adversely affect our ability to sell our products. We have been recently subject to significant investigations relating to, among other things, food safety and quality control.

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, public perception of product safety for both the industry as a whole and also our products specifically, but not exclusively, as a result of disease outbreaks or the fear of such outbreaks, the potential cost and disruption of a product recall and possible impacts on our image and brands. Among such risks are those related to raising animals, including disease and adverse weather conditions.

Meat can be subject to contamination during processing and distribution. In particular, processed meat may become exposed to various disease-producing pathogens, including listeria monocytogenes, salmonella and generic E. coli. These pathogens can also be introduced to our products during production or as a result of improper handling by third-party food processors, franchisees, distributors, foodservice providers or consumers. Spoilage, especially spoilage due to failure of temperature-control storage and transportation systems, is also a risk. We maintain systems designed to monitor food safety risks throughout all stages of production and distribution, but these systems could fail to function properly and product contamination could still occur. Failures in our systems to ensure food safety could result in harmful publicity that could cause damage to our brands, reputation and image and negatively impact sales, which could have a material adverse impact on our business, results of operations, financial condition and prospects.

Brazilian authorities are investigating the Brazil’s meat processing industry in the so-called “Carne Fraca Operation.” The investigation involves a number of companies in the Brazilian industry and, among other things, include allegations relating to food safety and quality control. On January 22, 2018, the 3^rd Public Prosecutor’s Office of the State of Goiás, offered a complaint against Mr. Laércio José Brunetto, industrial manager of our Mineiros plant, located in the State of Goiás, by the time of the events of the Carne Fraca Operation and current member of our corporate engineering team, and a former employee who was dismissed on August 16, 2016 and was the head of the quality control of the Mineiros plant. Both of them were charged for allegedly committing crimes against consumers, as provided in article 7, item II of Law 8,137/90. In connection with this investigation, there is currently no indictment in Brazil against us for production of products unfit for human consumption or possible harm for the health of consumers. According to the Public Prosecutor’s Office, laboratory tests (dripping tests) have verified excessive levels of water absorbed by the chicken products apprehended at Mineiros plant. The Public Prosecutor’s Office alleges we produced chicken products with higher quantities of water than the limits permitted by the Brazilian Ministry of Agriculture, Livestock and Food Supply (Ministério da Agricultura, Pecuária e Abastecimento, or “MAPA”), with potential damages to customers, considering they would be acquiring chicken meat products with inferior weight than those indicated on the product package, since part of the weight of the frozen chicken would consist merely of water contained therein.

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On March 5, 2018, BRF learned of a decision issued by a federal judge of the 1^st Federal Court of Ponta Grossa - Paraná, authorizing the search and seizure of information and documents from us and certain current and former employees, and the temporary detention of certain individuals. In what media reports have identified as “Trapaça Operation,” in total eleven current and former employees of BRF were temporarily detained for questioning, including former Chief Executive Officer Pedro Faria and former Vice President for Global Operations Helio Rubens. All such current and former employees have been released. A number of other BRF employees and former employees were identified for questioning. Based on the judge’s decision authorizing the temporary detention and the search and seizure, the main allegations at this stage involve alleged misconduct relating to quality violations, improper use of feed components, and falsification of tests at certain BRF manufacturing plants and accredited labs.

We are cooperating with authorities and initiated an internal investigation with respect to the allegations.

As a result of the Trapaça Operation, on March 5, 2018, we received notice from MAPA that it immediately suspended exports from our Rio Verde/GO, Carambeí/PR and Mineiros/GO plants to twelve countries that require specific sanitary requirements for the control of the bacteria group Salmonella spp and Salmonella pullorum. MAPA temporarily suspended exports from nine other BRF plants to the European Union on March 15, 2018, but revoked the temporary suspension on April 18, 2018. Although to date we have not received any formal notice from Brazilian or European authorities, media reports indicate that the European Union is considering suspending imports of poultry from certain production facilities in Brazil (including ours) supposedly due to sanitary concerns. If the European Union were to implement any such ban of imports from our production facilities, we may not be able to sell our products from such embargoed production plants in the European Union, and depending on the extension of such suspension, our results of operations may be adversely affected if we are not capable of directing any exceeding production capacity resulting from suspension to other markets at similar prices.

Even if our own products are not affected by contamination, our industry may face adverse publicity in certain of its markets if the products of other producers become contaminated, which could result in negative public perception about the safety of our products and reduced consumer demand for our products in the affected category. Significant lawsuits, widespread product recalls, and other negative events faced by us or our competitors could result in a widespread loss of consumer confidence in the safety and quality of our products. Our sales are ultimately dependent on consumer preferences, and any actual or perceived health risks associated with our products could cause customers to lose confidence in the safety and quality of our products and have a material adverse impact on our business, results of operations, financial condition and prospects.

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. Trade barriers can consist of both tariffs and non-tariff barriers. In our industry, non-tariff barriers are a particular concern, especially sanitary and technical restrictions.

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As a result of the regulators’ inquiries and the public announcement of allegations of wrongdoings involving BRF and other companies in the Brazilian meat industry in the context of the Carne Fraca Operation and Trapaça Operation, some export markets have been temporarily closed and our average selling prices for some products and in some markets have fallen. As a result of the Trapaça Operation, on March 5, 2018, we received notice from MAPA that it immediately suspended exports from our Rio Verde/GO, Carambeí/PR and Mineiros/GO plants to twelve countries that require specific sanitary requirements for the control of the bacteria group Salmonella spp and Salmonella pullorum. MAPA temporarily suspended exports from nine other BRF plants to the European Union on March 15, 2018, but revoked the temporary suspension on April 18, 2018. For more information about the “Trapaça Operation” see “Item 8. Financial Information—B. Significant Changes—Carne Fraca Operation” and “Item 8. Financial Information—B. Significant Changes— Trapaça Operation.”

Some countries, such as Russia and South Africa, have a history of erecting trade barriers to imports of food products. In Europe, another of our key markets, the European Union has adopted a quota system for certain chicken products and prohibitive tariffs for certain products that do not have quotas in order to mitigate the effects of Brazil’s lower production costs on local producers over European producers.

Many developed countries use direct and indirect subsidies to enhance the competitiveness of their producers in other markets. In addition, local producers in some markets 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.

For instance, Saudi Arabia recently considered whether poultry slaughtering practices in Brazil conforms with halal practices in Muslim markets. Brazil uses electric currents to leave poultry unconscious prior to slaughtering and Saudi Arabia raised concerns that such practice may violate the Muslim norm. In March 2018, officials with the Brazilian Agriculture Ministry and representatives of Brazil’s animal protein producer association traveled to Saudi Arabia to meet with Saudi Arabian authorities and explain that the electric currents do not kill the poultry. If the Brazilian authorities do not convince the Saudi Arabian authorities that its practices meet halal practices, unless we adapt our poultry slaughtering practices to conform with new practices eventually required by Saudi Arabia, we may not be able to sell the poultry produced by the system using electric currents to Saudi Arabia beginning in May 2018. There can be no assurance that we will able to promote such adaptation in a timely or cost-effective manner or at all, and any such adaptation may negatively affect our margins in sales to Saudi Arabia if we are not able to pass on these increased costs to our customers.

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 their meat, which require us to maintain certain standards of animal health and control disease. We could be required to destroy animals or suspend the sale or export 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 hogs and certain other animals, foot-and-mouth disease and (H5N1) influenza (discussed below); and (2) in the case of poultry, avian influenza and Newcastle disease. In addition, if the Porcine Reproductive and Respiratory Syndrome and Porcine Epidemic Diarrhea, which have broken out in Europe and the United States, were to outbreak in Brazil, we could be required to destroy hogs, however currently there is no legislation supporting this action. 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 and loss of inventory. An outbreak of foot-and-mouth disease could have an effect on livestock we own and the availability of livestock for purchase. Also, the global effects of avian influenza would impact consumer perception of certain protein products and our ability to access certain markets, which would adversely affect our results of operations and financial condition.

Outbreaks, or fears of outbreaks, of any 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 diseases in Brazil may result in foreign governmental action to close export markets to some or all of our products, which may result in the destruction of some or all of these animals. Our poultry business in Brazilian and export markets could also be negatively affected by avian influenza.

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Chicken and other birds in some countries, particularly in Asia but also in Europe, the Americas and Africa, have on occasion become infected by highly pathogenic avian influenza in recent years. In a small number of highly-publicized cases, the avian influenza has been transmitted from birds to humans, resulting in illness and, at times, death. Accordingly, health authorities in many countries have taken steps to prevent outbreaks of this viral disease, including destruction of afflicted poultry flocks.

During the last years, some human cases of avian influenza and related deaths were reported, according to the World Health Organization (“WHO”). The cases reported were caused by the H5N1 virus. In 2013, direct human-to-human transmission of the H7N9 virus was proven. Various countries in Asia, the Middle East and Africa reported human cases in the last five years and various European countries reported avian flu cases in poultry. In 2014, there were reports of human cases of avian influenza in Egypt, Indonesia, Cambodia, China and Vietnam. In the Americas, there were reports of human cases of avian influenza in both Canada and the United States. In early 2015, new cases of H5N1 and H5N2 reported in the United States resulted in restrictions on US exports. In 2016, new outbreaks occurred in bird populations across Northern Europe, including France, the Netherlands, Switzerland, Finland, and Germany. Middle Eastern and African countries also had outbreaks during 2016.

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 in the poultry industry, prevent recovery of costs incurred in raising or purchasing 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. In early 2017, Chile, a neighboring country, confirmed the occurrence of avian influenza.

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 results of operation and financial condition. 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.

Climate change may negatively affect our business and results of operations.

We consider the potential effects of climate change when evaluating and managing our operations and supply chain, recognizing the vulnerability of natural resources and agricultural inputs that are essential for our activities. The main risks we have identified relate to the alterations in temperature (average and extreme), changes in rainfall (average and extreme, such as drought, flooding and storms) and lack of water, which could affect agricultural productivity – grains in particular, animal wellbeing and the availability of energy and water. These changes could have a direct impact on our costs, raising the price of agricultural commodities as a result of long periods of drought or excessive rainfall, increasing operating costs to ensure animal wellbeing, increasing the risk of rationing and raising the price of electrical energy through water shortages and the need for other energy sources to supply the demand for electricity. We also consider potential regulatory changes and monitor trends in changes to licensing legislation for greenhouse gas emissions at the domestic and international levels.

Our operations are largely dependent on electricity, and energy-related expenses are one of our highest fixed costs. Energy costs have historically fluctuated significantly over time, and increases in energy costs could result in reduced profits. A significant interruption in energy supply or outright loss of energy at any of our facilities could result in a temporary disruption in production and delivery of products to customers and additional costs.

A significant portion of Brazil’s installed electric generation capacity is currently dependent upon hydroelectric generation facilities. Hydroelectric production is vulnerable to a variety of factors, including precipitation. If the amount of water available to energy producers becomes increasingly scarce due to drought or diversion for other uses, as has occurred in recent years, our energy expenses may increase. For example, following the 2015 drought conditions in the Southeast of Brazil, the availability of power generation from hydroelectric sources was reduced and as a result, our electricity expenses increased during the period.

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Among the initiatives we have taken to reduce our exposure to climate change and to maintain our competitiveness in terms of costs is the monitoring of stocks in grains purchases and the constant monitoring of the weather in agricultural regions to guide buying decisions, as well as anticipating price movements in the commodity markets. We also undertake projects to develop more efficient processes that consume less energy. Other initiatives include technological innovations in the animal-raising installations to improve the environment and acclimatization and safeguard the animal’s welfare. We may fail to continue to implement programs to mitigate effects of climate change, which may affect our business and results of operations in the future.

Any shortage or lack of water could materially adversely affect our business and results of operations.

A study conducted by the Food and Agriculture Organization indicates that, in the next two decades, the demand for water will increase 50% on a global scale. In connection with that, it is estimated that by 2025, 1.8 billion people will live in places with absolute shortage of water and two thirds of the global population will live in water-stressed places. By 2050, the demand for water will jump 55%, according to the Food and Agriculture Organization, on a global scale, including some of our key markets, such as North Africa and the Middle East. Water is an essential input for our businesses, being present from the production of grains and inputs, the agricultural chain through our production processes. As a result, the shortage or lack of water represents a critical risk for our business. On the other hand, we are aware that the industrial use of water may adversely affect its availability. Although Brazil holds nearly a fifth of the world’s water reserves, the World Economic Forum warns, year-by-year, that water crises is one of the most relevant Global Risk.

In order to mitigate these risks, we developed a methodology to evaluate water-related risks in the locations where we have operations in order to understand the specific impacts of our company and others in those regions and, consequently, reduce our water consumption and exposure to water supply risks in each location. It is an initiative regarding water-related risks through which we can assess internal and external aspects impacting water supply and quality and generate a score for each unit. The objective is to carry out internal and external actions to reduce consumption and comply with applicable rules in order to minimize our impact on the environment and the community. We analyzed the micro and macro watersheds composing the region, as well as the industrial activities and characteristics of the use of water resources, in order to understand the local demand growth, anticipating risks. Although we use a methodology developed by us to evaluate water-related risks in our areas of operation, this methodology may fail to accurately assess the water supply or anticipate water-related risks. This could result in us or our key suppliers encountering water shortages. In addition, the increased industrial use of water by water intensive business may also adversely affect the continuing availability and quality of water in Brazil. Whether unexpected or expected, the shortage or lack of water could materially adversely affect our business and results of operations.

We have a governance structure and compliance processes designed to promote our compliance with law, positive image and reputation in the marketplace, but they may fail to ensure compliance with relevant anti-fraud, anti-corruption, anti-bribery, anti-money laundering and other international trade laws and regulations.

We have a framework of antifraud initiatives - including anti-bribery and anti-corruption - that supports all business segments and their commercial standards worldwide. However, we may not be able to mitigate all fraud risk entirely. Any negative reflection on our image or our brand from these or other activities could have a negative impact on our results of operations, as well as our ability to achieve our growth strategy.

We are subject to anti-fraud, anticorruption, anti-bribery, anti-money laundering and other international trade laws and regulations. We are required to comply with the laws and regulations of Brazil and various jurisdictions where we conduct operations. In particular, we are subject to the Brazilian Anti-Corruption Law nº 12,846, the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”), the United Kingdom Bribery Act of 2010, as well as economic sanction programs, including those administered by the United Nations, the European Union and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of our business, we may deal with entities and employees that are considered foreign officials for purposes of the FCPA. In addition, economic sanctions programs restrict our dealings with certain sanctioned countries, individuals and entities.

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Although we have internal policies and procedures designed to ensure compliance with applicable anti-fraud, anti-bribery and anti-corruption laws and sanctions regulations, potential violations of anti-fraud and anticorruption laws have been identified on occasion as part of our compliance and internal control processes. In addition, we were recently notified of allegations involving potential misconduct by some of our employees in the context of the Carne Fraca Operation. For more details, see “Item 8. Financial Information – B. Significant Changes – Carne Fraca Operation.” As a result of the Carne Fraca Operation and related consequences, we incurred in expenses and recorded provisions for losses in inventories in the total amount of R$363.4 million in 2017, which significantly impacted our results of operations.

When allegations of non-compliance with applicable anti-fraud, anti-bribery and anti-corruption laws and sanctions regulations arise, we attempt to act promptly to learn relevant facts, conduct appropriate due diligence, and take any appropriate remedial action to address the risk. Given the size of our operations and the complexity of the production chain, there can be no assurance our internal policies and procedures will be sufficient to prevent or detect all inappropriate or unlawful practices, fraud or violations of law or our internal policies and procedures by our employees, directors, officers, partners, or any third-party agents and service providers or that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-fraud, anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-fraud, anti-bribery and anti-corruption laws and sanctions regulations could have a material adverse effect on our business, reputation, brand, selling prices, results of operations and financial condition, including as a result of the closure of international markets. We may be subject to one or more enforcement actions, investigations and proceedings by authorities for alleged infringements of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability. Potential bad developments in the Carne Fraca Operation may also negatively affect the market price of our common shares and ADRs.

Failure to maintain adequate internal controls could adversely affect our reputation and business.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting that provide reasonable assurance of the reliability of the preparation and reporting of our financial statements for external use. Inadequate internal controls may result in our failure to meet public reporting requirements accurately and on a timely basis and harm our reputation. The inherent limitations of internal controls over financial reporting may not prevent or detect all misstatements or fraud, regardless of the adequacy of those controls, and, therefore, we cannot assure that material weaknesses will not be identified in the future.

Our failure to continually innovate and successfully launch new products that address our clients’ needs and requirements, as well as maintain our brand image, could adversely impact our operating results.

Our financial success depends on our ability to anticipate changes in consumer preferences and dietary habits and our ability to successfully develop and launch new products and product variations that are desirable to consumers. We devote significant resources to new product development and product extensions; however, we may not be successful in developing innovative new products or our new products may not be commercially successful. For example, trends towards prioritizing health and wellness present a challenge for developing and marketing successful new lines of products to address these consumer preferences. To the extent that we are not able to effectively gauge the direction of our key markets and successfully identify, develop, manufacture and market new or improved products in these changing markets, in a timely or cost-effective manner, our products, brands, our financial results and our competitive position may suffer, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

We also seek to maintain and extend the image of our brands through marketing, including advertising, consumer promotions and trade spending. Due to inherent risks in the marketplace associated with advertising, promotions and new product introductions, including uncertainties about trade and consumer acceptance, our marketing investments may not prove successful in maintaining or increasing our market share. Continuing global focus on health and wellness, including weight management, increasing media attention to the role of food marketing and bad press about our quality controls and products, including in connection with the Carne Fraca Operation and Trapaça Operation, could adversely affect our brand image or lead to stricter regulations and greater scrutiny of food marketing practices.

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Our success in maintaining, extending and expanding our brand image also depends on our ability to adapt to a rapidly changing media environment, including increasing reliance on social media and online dissemination of advertising campaigns. The growing use of social and digital media increases the speed and extent that information or misinformation and opinions can be shared.

Negative posts or comments about us, our brands or our products on social or digital media could seriously damage our reputation and brand image. If we do not maintain or improve our brand image, then our product sales, financial condition and results of operations could be materially and adversely affected.

Recent and future acquisitions or joint ventures may divert management resources or prove to be disruptive to our company.

We regularly review and pursue opportunities for strategic growth through acquisitions, joint ventures and other initiatives. We have completed several acquisitions in recent years, such as Golden Foods Siam (“GFS”) in Thailand, Campo Austral and Calchaqui in Argentina, Universal Meats (UK) Ltd. (“Universal Meats”) in the United Kingdom, Al Khan Foodstuff LLC (“AFK”) in Oman, and the Qatar National Import and Export Co. (“QNIE”) frozen distribution business in Qatar. We entered into in September 2016 a subscription and purchase agreement for the acquisition of 70% of FFM Further Processing SDN BHD, a food processing company incorporated under the laws of Malaysia. This transaction was completed on October 4, 2016. Additionally, we concluded the acquisition of Banvit Bandirma Vitamili Yem Sanayii A.S. (“Banvit”), the largest poultry producer in Turkey, in May 2017. For more details on certain of these transactions, see “Item 4. Information on the Company—A. History and Development of the Company.” Acquisitions, new businesses and joint ventures, especially involving sizeable enterprises, may present financial, managerial, operational and compliance risks and uncertainties, including:

· challenges in realizing the anticipated benefits of the transaction;

· diversion of management attention from existing businesses;

· difficulty with integrating personnel, especially to different managerial practices;

· disruptions when integrating financial, technological and other systems;

· difficulty identifying suitable candidate businesses or consummating a transaction on terms that are favorable to us;

· challenges in retaining an acquired company’s customers and key employees;

· increased compensation expenses for newly-hired employees;

· exposure to unforeseen liabilities or problems of the acquired companies or joint ventures;

· warranty claims and claims for damages which may be limited in content, timeframe and amount;

· challenges arising from a lack of familiarity with new markets with differing commercial and social norms and customs, which may adversely impact our strategic goals or require us to adapt our marketing and sales model for specific countries;

· compliance with foreign legal and regulatory systems; and

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· difficulties in transferring capital to new jurisdictions.

Acquisitions outside of Brazil may present additional difficulties and new political and countries risks, such as compliance with foreign legal and regulatory systems, difficulties to transfer capital, integration of personnel to different managerial practices and would increase our exposure to risks associated with international operations.

We may be unable to realize synergies and efficiency gains from our recent acquisitions in the timeframe we anticipate or at all, because of integration or other challenges. In addition, we may be unable to identify, negotiate or finance future acquisitions or other strategic initiatives particularly as part of our international growth strategy, successfully or at favorable terms, or to effectively integrate these acquisitions or joint venture businesses with our current businesses. Any future joint ventures or acquisitions of businesses, technologies, services or products might require us to obtain additional equity or debt financing, which may not be available on favorable terms, or at all. Future acquisitions and joint ventures may also result in unforeseen operating difficulties and expenditures, as well as strain on our organizational culture.

Political and economic risks in regions and countries where we have exposure could limit the profitability of our operations and our ability to execute our strategy in these regions.

Since we have expanded our operations around the world, we are subject to a variety of situations that may adversely affect our financial results. In the regions where we have production and distribution activities, we are subject, among others, to the following risks:

· governmental inertia;

· geopolitical risk and conflicts (including war, terrorism and civil unrest);

· imposition of exchange or price controls;

· imposition of restrictions on exports of our products or imports of raw materials necessary for our production (including embargos from countries where we have production and/or distribution activities);

· fluctuation of local currencies against the real;

· nationalization of our property;

· increase in export tax and income tax rates for our products; and

· unilateral (governmental) institutional and contractual changes, including controls on investments and limitations on new projects.

As a result of these factors, our results of operations and financial condition in the regions where we have production and distribution activities may be adversely affected, and we may experience in the future significant variability in our revenue on both an annual and a quarterly basis from those operations. For instance, it is unclear to us if the recent diplomatic crisis between Qatar and other Arab countries may lead to measures (such as trade embargo) that could ultimately impact our current operations in Qatar and in the region. The impact of these changes on our ability to deliver on our planned projects and execute our strategy cannot be ascertained with any degree of certainty, and these changes may, therefore, have an adverse effect on our operations and financial results.

Deterioration of general economic and political conditions could negatively impact our business.

Our business may be adversely affected by changes in Brazilian and global economic and political conditions, which may result in increased volatility in our markets and contribute to net losses.

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Brazilian economy is expected to recover more consistently in 2018, resuming gross domestic product (“GDP”) growth and creating more jobs. However, there are a few political risks: (1) presidential elections and (2) structural reforms. Both factors will bring high volatility to the domestic financial markets in the short term, and might hinder economic recovery in a longer term. In this scenario, improvement of the labor market and income growth may be limited, which could disfavor a substantial improvement of consumption. Other factors that may harm our business is the unfolding of the Carne Fraca Operation, which impacted the credibility of the whole sector and led some importers to ban specific slaughterhouses, of which a few remain banned until the present time, and also of the unfolding of the Trapaça Operation. As a result, exported volume declined and will be reallocated in other destinations.

Furthermore, on June 23, 2016, the United Kingdom held an in-or-out referendum on the United Kingdom’s membership within the European Union, the result of which favored the exit of the United Kingdom from the European Union, or “Brexit.” A process of negotiation will determine the future terms of the United Kingdom’s relationship with the European Union. The potential impact of Brexit on our market share, sales, profitability and results of operations is unclear. Depending on the terms of Brexit, economic conditions in the United Kingdom, the European Union and global markets may be adversely affected by reduced growth and volatility. The uncertainty before, during and after the period of negotiation could also have a negative economic impact and increase volatility in the markets, particularly in the Eurozone.

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 and other raw materials, as well as the selling prices of our poultry and pork. These prices are determined by supply and demand, which may fluctuate significantly, and other factors over which we have little or no control. These other factors include, among others, fluctuations in local and global poultry and hog production levels, environmental and conservation regulations, economic conditions, weather, animal and crop diseases, cost of international freight and exchange rate and interest rate fluctuations.

Our industry, both in Brazil and abroad, is generally 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 entirely.

Natural disasters, pandemics or extreme weather, including floods, excessive cold or heat, hurricanes or other storms, as well as any interruption we can observe in our plants that may require the temporary re-allocation of plant functions to other facilities could impair the health or growth of livestock or interfere with our operations due to power outages, damage to our production and processing facilities or disruption in transportation channels or information systems, among other issues.

Our international sales are subject to a broad range of risks associated with international operations.

International sales account for a significant portion of our net sales in line with our global strategy, representing 50.2% in 2015, 52.3% in 2016 and 51.0% in 2017. Our major international markets include the Middle East (particularly Saudi Arabia), Asia (particularly Japan, Hong Kong, Singapore and China), Europe, Eurasia (particularly Russia) Africa and Americas (particularly Argentina), 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 the economic, political and social conditions in our main export markets.

Our future ability to conduct business in our export markets could be adversely affected by factors beyond our control, such as the following:

· exchange rate and interest rate fluctuations;

· commodities price volatility;

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· deterioration in international economic conditions;

· political risks, such as turmoil, government policies, difficulties to transfer capital and political instability;

· decreases in demand, particularly from large markets such as China;

· 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;

· strikes, not only of our employees, but also of port employees, truck drivers, customs agents, sanitary inspection agents and other government agents at the Brazilian ports from which we export our products;

· sabotage affecting our products; and

· bad press related to the Brazilian meat processing industry, including in connection with the Carne Fraca Operation and Trapaça Operation.

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.

Any of these risks could adversely affect our business and results of operations. In addition, flooding and similar events affecting the infrastructure necessary for the export of our products could adversely affect our revenues and results of operations.

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 market and from Brazilian and foreign producers in our international markets. The Brazilian market for whole poultry, poultry 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 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.

The Brazilian poultry and pork cuts markets, 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.

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Increased regulation of food safety and animal welfare could increase our costs and adversely affect our results of operations.

Our manufacturing facilities and products are subject to governmental inspections and extensive regulation in the food safety area, including governmental food processing controls in all countries in which we operate, including internationally and in Brazil. We already incur significant costs in connection with the compliance with applicable rules. Changes in government regulations relating to food safety or animal welfare could require us to make additional investments or incur additional costs to meet the necessary specifications for our products. Our products are often inspected outside of Brazil by foreign food safety officials, and any failure to pass those inspections can result in us being required to return all or part of a shipment to Brazil, recall certain products, destroy all or part of a shipment or incur costs because of delays in delivering products to our customers. Any tightening of food safety or animal welfare regulations could result in increased costs and could have a material adverse effect on our business and results of operations, financial condition and prospects. In addition, we adopt worldwide animal welfare practices to serve our clients even though Brazil has limited regulations regarding animal welfare.

Our performance depends on favorable labor relations with our employees and our compliance with labor laws. Any deterioration of those relations or increase in labor costs could adversely affect our business.

As of December 31, 2017, we had approximately 108,234 employees worldwide. All of our production employees, in Brazil and in countries where there is a labor union force, are represented by labor unions. Upon the expiration of existing collective bargaining agreements or other collective labor agreements, we may not reach new agreements without union action and any such agreements may not be on terms satisfactory to us, which could result in us paying higher wages or benefits to union workers. If we are unable to negotiate acceptable union agreements, we may become subject to work stoppages or strikes.

Labor costs are among our most significant expenditures. Such costs represented approximately 14.8% of our cost of sales in 2017, increasing 0.8 percentage points compared to 2016, especially due to the consolidation of Banvit in our results of operations. In the event of an employee contractual structure review, additional operational expenses could be incurred. Additionally, during our normal business operation, we outsource some of our labor force, therefore being subject to the contingencies that may arise from this relationship. These contingencies may involve claims directly against us as if we were the direct employer of those outsourced workers or claims seeking our subsidiary liability. In the event that a significant amount of these contingencies materializes in an unfavorable outcome against us, we may be held liable for amounts higher than our provisions, which may have a material adverse effect on our business, financial and operational condition and results of operations. In addition, if the outsourced activities are deemed by the authorities to be core activities, outsourcing may be considered illegal and the outsourced workers may be considered our employees, which would result in a significant increase in our costs and could subject us to administrative and judicial procedures by the relevant authorities and fines. We are also subject to increases in our labor costs due to Brazilian inflation and increases in health insurance. Material increases in our labor costs could have a material adverse effect on our business, results of operations and financial condition and prospects.

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 interference with protected areas (conservation units, archeological areas and permanent preservation areas), handling and disposal of waste, discharges of pollutants into the air, water and soil, atmospheric emissions, noise and clean-up of contamination, all of which affect our business. Water management is especially crucial, posing many challenges to our operations. In Brazil, water use regulations impact farming operations, industrial production and hydroelectric power. Any failure to comply with any of 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 civil liability for remediation or compensation for environmental damage without any caps. We cannot operate a plant if the required environmental permit is not valid or updated. Civil penalties may include summons, fines, temporary or permanent bans, the suspension of subsidies by public bodies and the temporary or permanent shutdown of commercial activities. Criminal penalties include fines, temporary interdiction of rights and prison (for individual offenders) and liquidation, temporary interdiction of rights, fines and community services (for legal entities).

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Furthermore, pursuant to Brazilian environmental legislation, the corporate entity of a company will be disregarded (such that the owners of the company will be liable for its debts) if necessary to guarantee the payment of costs related to the recovery of environmental damages, whenever the legal entity is deemed by a court to be an obstacle to reimbursement of damages caused to the quality of the environment.

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 and operational 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 timely renewed or have their request of renewal dismissed by the competent environmental authority, we may incur fines and other administrative penalties, such as 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 in the renewal process, and we cannot guarantee that environmental agencies will approve our renewal requests within the required legal period. Brazilian Complementary Law No. 140/2011 establishes that renewal of environmental licenses must be requested at least 120 days in advance of its expiration, so that the license may be automatically extended until a final decision from the environmental authority is reached. In the interim, we are permitted to continue operations under the respective license, during the renewal process. In addition, if since the issuance of a license under renewal there have been regulatory changes in the environmental standards that the plant is required to meet, the environmental agency may condition the renewal upon expensive facility upgrades, which might result in delays or disruptions, or, in the worst-case scenario, result in a denial of the license.

We are also subject to similar environmental laws and restrictions in all jurisdictions where we have plants and operations.

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, or “TAC”). Under IFRS, we classify the risk of adverse results in legal 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. See “Item 8. Financial Information—Legal Proceedings” and Note 26 of our consolidated financial statements.

We are not required to record provisions for proceedings in which our management judges the risk of loss to be possible or remote. However, the amounts involved in some of these proceedings are substantial, and eventual losses on them could be significantly high. Even for the amounts recorded as provisions for probable losses, a judgment against us would have an impact on our cash flow if we were required to pay those amounts and the eventual losses could be higher than the provisions we have recorded. Unfavorable decisions in our legal proceedings may, therefore, reduce our liquidity and have a material adverse impact on our business, results of operations, financial condition and prospects.

With regard to tax contingencies, we are currently defendants in a number of cases, which include, for example, disputes about the offset of tax credits and the use of tax incentives in several states that have not yet reached a final ruling at Brazilian courts. In addition, we may face risks arising from potential impairment of input state VAT that we accumulate on exportations. We have a case involving Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços, or “ICMS”) on sales of staple foods (cesta básica) on which the Supreme Court of Brazil has ruled against us. The case is currently pending judgment of a last appeal and, if the final decision is upheld against some or all of BRF’s operations, it could have a significant impact on our liquidity and financial results. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Tax Proceedings.”

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As of December 31, 2017, we had R$1,773.2 million in provisions for contingencies, of which R$407.5 million was for civil contingencies, R$303.4 million was for tax contingencies, R$691.7 million was for labor contingencies and R$370.6 million was for contingent liabilities.

We are also currently being investigated in the Carne Fraca Operation and Trapaça Operation, which may result in penalties, fines and sanctions from governmental authorities or other forms of liability. For more information about the “Carne Fraca Operation” and “Trapaça Operation” see “Item 8. Financial Information—B. Significant Changes—Carne Fraca Operation” and “Item 8. Financial Information—B. Significant Changes— Trapaça Operation.” Any investigation from governmental authorities currently unknown to us with respect to any arguably unlawful business practice may also result in penalties, fines and sanctions or other forms of liability.

On March 12, 2018, a purported shareholder class action lawsuit was filed in the U.S. Federal District Court in the Southern District of New York alleging, among other things, that BRF and certain of its officers and/or directors engaged in securities fraud or other unlawful business practices related to the regulatory issues described above. Because this lawsuit is in its early stage, the possible loss or range of losses, if any, arising from this litigation cannot be estimated. While we believe that the claims against us are without merit and will continue to defend against the litigation vigorously, in the event that this litigation is decided against us, or we enter into an agreement to settle, there can be no assurance that an unfavorable outcome would not have a material impact on us.

Our inability or failure to protect our intellectual property and any intellectual property infringement against us could have a negative impact on our operating results.

Our ability to compete effectively depends in part on our rights to trademarks, logos and other intellectual property rights we own or license. We have not sought to register or protect every one of our trademarks in every country in which they are or may be used, which means that third parties may be able to limit or challenge our trademark rights there. Furthermore, because of the differences in foreign intellectual property or proprietary rights laws, we may not receive the same level of legal protection in every country in which we operate. Litigation may be necessary to enforce our intellectual property rights, and if we do not prevail, we could suffer a material adverse impact on our business, goodwill, financial position, results of operations and cash flows. Further, third parties may allege that our intellectual property and/or business activities infringe their own intellectual property or proprietary rights, and any litigation in this regard would be costly, regardless of the merits. If we are unsuccessful in defending any such third-party claims, or to settle such claims, we could be required to pay damages and/or enter into license agreements, which might not be available under favorable terms. We may also be forced to rebrand or redesign our products to avoid the infringement, which could result in significant costs in certain markets. If we are found to infringe any third party’s intellectual property, we could suffer a material adverse impact on our reputation, business, financial position, results of operations and cash flows.

Damages not covered by our insurance policies might result in losses for us, which could have an adverse effect on our business.

Certain kinds of losses cannot be insured against via third-party insurance, and our insurance policies are subject to liability limits and exclusions. For example, ammonia leakage, natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a material adverse effect on us. Additionally, we are exposed to certain product quality risks, such as criminal contamination, bird flu and salmonella that can impact our operations and which are not covered under insurance. If an event that cannot be insured occurs, or the damages are higher than our policy limits, we may incur significant costs. 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 mitigate the loss, such as shifting production to different facilities. These costs may not be fully covered by our insurance.

From time to time, our installations may be affected by fires as was the case with our Toledo/PR unit in 2014 and other units in 2016, such as Chapecó/SC and Paranaguá/PR, and more recently in Lajeado/RS in 2017, besides electrical damages or explosion in substations, or widespread truck driver strikes. Although our business interruption insurance covers certain losses in connection with disruptions to our operations, all of our direct and indirect costs and intangible costs may not be covered by our insurance. Any similar event at these or other facilities in the future could have a material adverse impact on our business, results of operations, financial condition and prospects

Significant changes to the board composition may result in significant changes to our business strategy.

On March 5, 2018, we called for an Extraordinary General Shareholders’ Meeting to be held jointly with the Ordinary General Shareholders’ Meeting on April 26, 2018, or our 2018 Shareholders’ Meeting, at the request of two of our significant shareholders, PREVI and PETROS, which jointly own more than 20% of our capital stock. In their request, PREVI and PETROS called for (i) removal of all current members of the Board of Directors; (ii) approval of the number of 10 members to compose the Board of Directors; (iii) election of new members to fill the positions on the Board of Directors; and (iv) election of the Chairman and Vice-Chairman of the Board of Directors. On April 6, 2018, at an Extraordinary Meeting of our current Board of Directors, it submitted to our shareholders an alternative composition to our Board vis-à-vis the one proposed by PREVI and PETROS. Later on, five out of the ten candidates appointed by our Board of Directors to comprise this alternative Board composition presented us a request for their names to be withdrawn from such composition. Also, on April 12, 2018, we received from Aberdeen Asset Management PLC, for and on behalf of the investment funds and portfolios under management of companies belonging to its economic group, which, according to its declaration, jointly own more that 5% of our capital stock, a request for the adoption of the cumulative voting system for the election of the members of the Board of Directors to be held at our 2018 Shareholders’ Meeting. On April 13, 2018, Mr. Luiz Fernando Furlan, our shareholder (and Board member), proposed Ms. Luiza Helena Trajano Inácio Rodrigues and Mr. Vicente Falconi Campos as candidates for the composition of the Board of Directors. On April 17, 2018, the shareholders Walter Fontana Filho and Vicente Falconi Campos proposed as Chairman and Vice-Chairman of the Board of Directors, once duly elected, Mr. Luiz Fernando Furlan and Ms. Luiza Helena Trajano Inácio Rodrigues, respectively. On April 18, 2018, Mr. Abilio dos Santos Diniz, Tarpon Investimentos S.A. and PETROS, proposed Mr. Pedro Pullen Parente to the position of member of our Board of Directors and as its Chairman. On April 19, 2018, a voting agreement was executed by and between PREVI, PETROS, investment funds represented by their manager Tarpon Gestora de Recursos S.A. and Mr. Abilio dos Santos Diniz, as holders, directly and indirectly, of 32.80% of the shares issued us, on a number of issues regarding the matters to be discussed at our 2018 Shareholders’ Meeting (including the election of members of our Board of Directors). Also on April 19, 2018, our Board of Directors decided, in connection with the election of its members for a new term, for the appointment of the following names to compose the slate of our Board of Directors, in case of withdrawal of the request for cumulative voting presented by Aberdeen Asset Management PLC: Mr. Augusto Marques da Cruz Filho, Mr. Dan Ioschpe, Ms. Flávia Buarque de Almeida, Mr. Francisco Petros Oliveira Lima Papathanasiadis, Mr. José Luiz Osório, Mr. Luiz Fernando Furlan, Mr. Pedro Pullen Parente, Mr. Roberto Antônio Mendes, Mr. Roberto Rodrigues and Mr. Walter Malieni Jr. The appointment of Messrs. Pedro Pullen Parente and Augusto Marques da Cruz Filho to run for Chairman and Vice-Chairman, respectively, was also approved and the composition proposed by our Board of Directors matched with the composition of our Board of Directors proposed by significant shareholders under the voting agreement discussed above (assuming that the request for cumulative voting presented would be withdrawn). Ms. Luiza Helena Trajano Inácio Rodrigues withdrawn her name from the list of candidates to be elected in the 2018 Shareholders’ Meeting.

On April 25, 2018, Aberdeen Asset Management PLC sent a letter withdrawing its request for the adoption of the cumulative voting system at our 2018 Shareholders’ Meeting, however the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários), or the CVM, delivered to us a letter immediately prior to the beginning of our 2018 Shareholders’ Meeting demanding the adoption of the cumulative voting system in our 2018 Shareholders’ Meeting as other shareholders had previously delivered to us their votes based on such system. As a consequence, we adopted the cumulative voting system in our 2018 Shareholders’ Meeting.

As a result of the adoption of the cumulative voting system, the voting slate system originally proposed by both (1) PREVI and PETROS and (2) our Board were not adopted, and the election of our Board members at our 2018 Shareholders’ Meeting were candidate-based (rather than slate-based). All candidates proposed by our Board of Directors and significant shareholders as discussed above to become members of our Board were elected in our 2018 Shareholders’ Meeting. See “Item 6. Directors and Senior Management and Employees—A. Directors and Senior Management—Board of Directors” for further information regarding our recently elected Board members and “Item 10. Additional Information—B. Memorandum and Articles of Association—Board of Directors”, for further information regarding the mechanics of cumulative voting system in shareholders meetings of a Brazilian corporation like us.

Only 4 out of the 10 members of our Board of Directors elected in our 2018 Shareholders’ Meeting were previously members of our Board of Directors. Substantial changes in the composition of the Board of Directors may result in significant changes to our business strategy and give cause for changes at our senior management.

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 our results. In addition, loss of key professionals may adversely affect our ability to implement our strategy, as well as expenses associated to these losses can impact our results. We have experienced in 2017 and 2018 a significant number of departures of senior management, including two of our previous CEOs, CFO, general counsel and VP of operations.

Breaches, disruptions, or failures of our information technology systems derived or not from cybersecurity threats could disrupt our operations and negatively impact our business.

Information technology is an important part of our business operations and we increasingly rely on information technology systems to manage business data and increase efficiencies in our production and distribution facilities and inventory management processes. We also use information technology to process financial information and results of operations for internal reporting purposes and to comply with regulatory, legal and tax requirements. In addition, we depend on information technology for digital marketing and electronic communications between our facilities, personnel, customers and suppliers.

Like other companies, our information technology systems may be vulnerable to a variety of interruptions and cybersecurity threats and incidents, including during the process of upgrading or replacing software, databases or components thereof, natural disasters, terrorist attacks, telecommunications failures, computer viruses, cyber-attacks, hackers, unauthorized access attempts and other security issues. Integrating newly-acquired companies into the system can be uniquely problematic. We have implemented technology security initiatives and disaster recovery plans to mitigate our exposure to these risks, but these measures may not be adequate or sufficient and there can be no assurance that these measures will be successful in preventing a cybersecurity, general information security incident or a disruption of our information technology systems. A significant failure of our systems, including failures that prevent our systems from functioning as intended, could cause transaction errors, processing inefficiencies, loss of customers and sales, have negative consequences on our employees and our business partners and have a negative impact on our operations or business reputation.

In addition, if we are unable to prevent security breaches, we may suffer financial and reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our partners, customers, consumers or suppliers. Also, the disclosure of non-public sensitive information through external media channels could lead to the loss of intellectual property or damage our reputation and brand image.

As cybersecurity threats, and government and regulatory oversight of associated risks continue to evolve, we may be required to expend additional resources to remediate, enhance or expand upon the cybersecurity protection and security measures we currently maintain.

We have substantial indebtedness, and our leverage could negatively affect our ability to refinance our indebtedness and grow our business.

At December 31, 2017, our total consolidated debt (comprised of short-term and long-term debt) was R$20.4 billion.

· 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, capital expenditures 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;

· increasing our expenditures due to depreciations of the Brazilian real, which can lead to an increased amount of capital needed to service indebtedness that are denominated in U.S. dollars;

· 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

· exposing our current and future borrowings made at floating interest rates to increases in interest rates.

In view of our current credit metrics and according to the policies and guidelines set by rating agencies in order to evaluate a company’s creditworthiness, as well as other factors, our credit rating has been recently downgraded, and we are currently rated below “investment grade” for two out of three rating agencies that rate us.

As of December 31, 2017, we had R$5,031.3 million of debt that matures in 2018, R$3,983.9 million of debt that matures in 2019, R$1,684.7 million of debt that matures in 2020, R$125.4 million of debt that matures in 2021, and R$9,619.0 million of debt that matures in in 2022 and thereafter.

A substantial portion of our outstanding debt is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2017, we had R$11,101.3 million of foreign currency debt, including R$1,438.6 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.

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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, results of operations and the market prices of our common shares or the ADRs.

The Brazilian economy has historically been characterized by interventions by the Brazilian government and unstable economic cycles. The Brazilian government has often changed monetary, price controls, taxation, credit, tariff and other policies to influence the course of Brazil’s economy. Our business, results of operations, financial condition and prospects as well as the market prices of our common shares or the American Depositary Receipts (“ADRs”) may be adversely affected by, among others, the following factors:

· exchange rate fluctuations;

· expansion or contraction of the Brazilian economy, as measured by rates of growth in GDP;

· high inflation rates;

· changes in fiscal or monetary policies;

· commodities price volatility;

· increase in interest rates;

· exchange controls and restrictions on remittances abroad;

· volatility and liquidity of domestic capital and credit markets;

· natural disasters and changes in climate or weather patterns;

· energy or water shortages or rationalization, particularly in light of water shortages in parts of Brazil;

· changes in environmental regulation;

· social and political instability, particularly in light of recent protests against the government;

· strikes, not only of our employees, but also of port employees, truck drivers, other transport facilities, customs agents, sanitary inspection agents and other government agents; and

· other economic, political, diplomatic and social developments in or affecting Brazil, including with respect to alleged unethical or illegal conduct of certain figures in the Brazilian government and legislators, which are currently under investigation.

The Brazilian economy has experienced a sharp downturn in recent years due, in part, to the interventionist economic and monetary policies of the Brazilian government and the global drop in commodity prices. GDP growth rates were 1.9%, 3.0% and 0.5% in 2012, 2013 and 2014, respectively, but GDP decreased 3.5% in 2015 and 2016, respectively. In 2017, GDP grew 1.0%, following a two-year contraction, while inflation and interest rates decreased significantly to 2.95% and 7.0%, respectively, from 6.29% and 13.75%, respectively, in 2016. Unemployment had a slight improvement to 11.8%, although still at a high level. For 2018, there is an expectation of improvement of the economic indicators, as the economy will probably resume growth.

The acting Brazilian government has proposed the general terms of a fiscal reform to stimulate the economy and reduce the forecasted budget deficit for 2018, but it is uncertain whether the acting Brazilian government will be able to gather the required support in the Brazilian Congress to pass additional specific reforms. For instance, due to limitations imposed by the Brazilian constitution, it is no longer expected that a broader social security reform will be approved by the Brazilian Congress this year. As of the date of this annual report, many of the proposed public expenses in Brazil’s budget have been maintained and it is not clear whether other expenses will be reduced or entirely eliminated. If some or all of these public expenses are maintained, Brazil will continue to run a budget deficit for 2018 and the years going forward. We cannot predict the effects of this budget deficit on the Brazilian economy. We cannot predict which policies the Brazilian federal government may adopt or change or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse impact on our business, results of operations, financial condition and prospects. Our results of operations and financial condition may be adversely affected by the economic conditions in Brazil and, in addition, protests, strikes and corruption scandals have led to a decrease in confidence and a political crisis.

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Following the legal and administrative impeachment process, Brazil’s Senate removed President Dilma Rousseff from office on August 31, 2016 for infringement of budgetary laws. Former Vice-President Michel Temer, who has been de facto President since Ms. Rousseff’s suspension in May, was sworn in by the Senate to serve out the remainder of the presidential term until 2018. However, the resolution of the political and economic crisis in Brazil still depends on the outcome of the “Lava Jato” investigation and approval of reforms that are expected to be promoted by the new President. Further, the recent decision of the Superior Electoral Court (Tribunal Superior Eleitoral) that acquitted Dilma Rousseff and Michel Temer on charges of illegal campaign financing may be reversed by the Brazilian Supreme Court (Superior Tribunal Federal) if the appeals filed with the Brazilian Supreme Court are accepted, which may cause the annulment of the presidential election of 2014 and require President Michel Temer to leave the office of president. In addition, a number of requests for impeachment have been filed against Mr. Temer, as well as criminal charges by the Brazilian Federal Prosecutor’s Office, which could also result in his removal from office, after allegations surfaced that Mr. Temer had allegedly been leading a political corruption related criminal organization. Furthermore, a Brazilian federal appeals court unanimously upheld the conviction of former President Luís Inácio Lula da Silva on corruption charges uncovered by the “Lava Jato” investigation. This decision may still be appealed to the Brazilian Supreme Court and the Superior Court of Justice (Superior Tribunal de Justiça) even though both court recently rejected the habeas corpus filed by Mr. Lula da Silva. On April 7, 2018, Lula da Silva began his prison sentence. We cannot predict whether these investigations and lawsuits as well as the imprisonment of Mr. Lula da Silva, a popular political leader, will bring about further economic and political instability or if new allegations against high officers of the Brazilian federal government will arise in the future. In addition, we cannot predict the results of any such investigations, including their effects over the Brazilian economy. The development of such cases may negatively affect the economic environment in Brazil, and consequently, us. The political crisis could worsen the economic conditions in Brazil, which may increase production and supply chain costs and adversely affect our results of operations and financial condition. Uncertainty as to whether the Brazilian government will implement changes in policies or regulations affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in our production operations.

In October 2018, general elections will be held in Brazil for the election of its next president for a four-year term as well as for senators and federal congressmen. We cannot predict the policies the future president may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. Any new policies or changes to current policies may have a material adverse effect on us.

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 inflation rates in the past. According to the IPCA, Brazilian consumer price inflation rates were 5.9% in 2013, 6.4% in 2014, 10.7% in 2015, 6.3% in 2016 and 2.95% in 2017. See “Item. 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Results of Operations—Brazilian and Global Economic Conditions” and “—Effects of Exchange Rate Variations and Inflation.”

Although the market is currently forecasting that the inflation level will return to the Central Bank’s target in 2018, it is impossible to dismiss the possibility of higher inflation, taking into account the historic behavior of the country’s economy and the recurring political instability. Periods of higher inflation slow the growth rate of the Brazilian economy, which may lead to lower growth in consumption of food products. Inflation also is likely to continue to put pressure on industry costs of production and expenses, which will force companies to search for innovative solutions in order to remain competitive. We may not be able to pass this cost onto our customers and, as a result, it may reduce our profit margins and net profit. 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 profit. In addition, inflation and its effect on domestic interest rates can 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 prices of our common shares or the ADRs.

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 interest rate is one of the instruments used by the Central Bank to keep inflation under control or to stimulate the economy. If interest rates decrease, the population has greater access to credit and consumes more. This increase in demand can push prices if the industry is not prepared to meet higher consumption. On the other hand, if interest rates go up, the monetary authority inhibits consumption and investment once they get more expensive. Another consequence is the greater return paid by government securities, directly impacting other investments that become less attractive. Investment in public debt absorbs money that would fund the productive sector.

On December 31, 2017, 38.2% of our total liabilities with respect to indebtedness corresponding to the amount of R$20,444.4 million were 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, or “BNDES”) and the Interbank Deposit Certificate Rate (Certificado de Depósito Interbancário, or “CDI”), 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 floating interest based on the London Interbank Offered Rate (“LIBOR”). Any increase in the CDI, TJLP or LIBOR rates may have an adverse impact on our financial expenses and our results of operations.

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 2013, 2014 and 2015, the real depreciated 14.6%, 13.4% and 47.0%, respectively, against the U.S. dollar, while, in 2016, the real appreciated 16.5% and depreciated 1.5% in 2017.

Appreciation of the Brazilian real against the U.S. dollar may lead to a dampening of export-driven growth. Our production costs are denominated in reais, but our international sales are mostly denominated in U.S. dollars. 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 appreciation could reduce the competitiveness of our exports and adversely affect our net sales and our cash flows from exports. On the other hand, a depreciation of Brazilian real against the U.S. dollar may lead to higher exports and revenues, but costs may be higher.

Costs are also directly impacted by the exchange rate. 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.

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We have established policies and procedures to manage our sensitivity to such risks, such as the Financial Risk Management Policy. This policy, however, may not cover 100% of our revenue and cost exposure to exchange rates.

Changes in tax laws or changes in their interpretation 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, which may increase the prices we charge for the products we sell, restrict our ability to do business in our existing markets and, therefore, materially adversely affect our profitability. There can be no assurance that we will be able to maintain our projected cash flow and profitability following any increases in Brazilian taxes that apply to us and our operations.

These changes include modifications in the tax rates 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”) and Contribution for Social Security Funding (Contribuição para o Financiamento da Seguridade Social, or “COFINS”) taxes, the ICMS and some other taxes, such as increases in payroll taxes. These proposals may not be approved and passed into law. Others, such as the Lei do Bem incentive program and the deduction of interest on shareholders’ equity, may be revoked. 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. Moreover, bill-of-law 8456/2017 is the latest attempt of the government to increase the social contributions on payroll and if it is passed into law, our overall tax burden will be increased, which could negatively affect our overall financial performance. For more information, see “Item 8. Financial Information— B. Significant Changes—Social Contributions.”

Moreover, certain tax laws may be subject to controversial interpretation by tax authorities. In the event that tax authorities interpret tax laws in a manner that is inconsistent with our interpretations, we may be adversely affected.

Risks Relating to Our Common Shares and 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 ADRs 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 New York Stock Exchange rules.

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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 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.

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 rights, 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 33.3% or more of our share capital to disclose such information immediately through a filing with the CVM and, within 30 days from the date of such acquisition or event, commence a public tender offer with respect to all of our shares for a price per share that may not be less than the greater of: (i) 140% of the average trading price on the stock exchange trading the greatest volume of shares of the capital stock of the Company during the last 120 trading sessions prior to the date on which the public offer became obligatory; and (ii) 140% of the average trading price on the stock exchange trading the greatest volume of shares of the capital stock of the Company during the last 30 trading days prior to the date on which the public offer became obligatory.

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, of December 29, 2003) 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.

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. 4,373, as amended of the Brazilian National Monetary Council (Conselho Monetário Nacional, or “CMN”)) is generally viewed as being subject to taxation in Brazil. Pursuant to Article 26 of 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 case of a non-Brazilian holder selling common shares on the Brazilian stock exchange, the withholding tax rate would be 0% (in the case of a non-Brazilian holder registered as such before the Central Bank under the rules of the Brazilian Monetary Counsel (“Registered Holder”) and not a resident of a tax haven (“Tax Haven Resident”)), 15% (in the case of a non-Brazilian holder that is not a Registered Holder and not a Tax Haven Resident) or 15% (in the case of a non-Brazilian holder that is a Tax Haven Resident).

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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 the following progressive rate when realized by any non-Brazilian holder that is not a Tax Haven Resident, whether or not such holder is a Registered Holder:

i. 15% upon the portion of capital gains that is lower than R$5,000,000.00;

ii. 17.5% upon the portion of capital gains that exceed R$5,000,000.00 and is lower than R$10,000,000.00;

iii. 20% upon the portion of capital gains that exceed R$10,000,000.00 and is lower than R$30,000,000.00; and

iv. 22.5% upon the portion of capital gains that exceed R$30,000,000.00.

· are subject to income tax at a rate of 25% when realized by a natural or legal person that is a Tax Haven Resident, whether or not such holder is a Registered Holder.

The relative volatility and limited liquidity of the Brazilian securities markets may negatively affect the liquidity and market price of our common shares and ADRs.

The Brazilian securities markets are substantially smaller, less liquid and more volatile than major securities markets in the United States. The B3 S.A. – Brasil, Bolsa, Balcão (the “B3” or the “São Paulo Stock Exchange”) had a total traded volume of R$2.1 trillion, or U.S.$672.3 billion, and an average daily trading volume of R$8.7 billion, or U.S.$2.7 billion for the year in 2017. The New York Stock Exchange had a market traded volume of U.S.$15.7 trillion (U.S. domestic listed companies) and an average daily trading volume of U.S.$62.6 billion for the year in 2017. The Brazilian securities markets are also characterized by considerable share concentration.

The ten largest companies in terms of market capitalization represented approximately 52.5% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2017. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 39% of all shares traded on the São Paulo Stock Exchange in 2017. 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 price of our common shares and ADRs.

The market for securities issued by Brazilian companies is influenced, to varying degrees, by economic and market conditions in other emerging markets. 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 markets have at times resulted in significant outflows of funds from, and declines in, the amount of foreign currency invested in Brazil. In addition, economic and 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, as well as the market for securities issued by Brazilian companies, is also affected, to a varying degree, 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.

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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

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 2017, and we do not expect to be a PFIC for 2018 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

BRF 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 CVM.

We were founded as Perdigão 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;

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· Fundação de Assistência e Previdência Social do BNDES-FAPES, or “FAPES,” the pension fund of employees of Banco Nacional de Desenvolvimento Econômico e Social – BNDES;

· 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.

For recent information about our major shareholders, see “Item 7. Major Shareholders and Related Party Transactions––A. Major Shareholders.

Our principal executive offices are located at Rua Hungria, 1400 - 5th Floor, Jd. Europa, 01455-000, São Paulo, SP, Brazil, and our telephone number at this address is +55-11-2322-5000/5355/5048. Our internet address is www.brf-br.com/ir. From time to time, we may use our website as a channel of distribution of material company information. Financial and other material information regarding us is routinely posted on and accessible at www.brf-br.com/ir. The information on our website is not incorporated by reference into this Annual Report on Form 20-F.

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 (“ADS”) 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 S.A. (“Perdigão”), Sadia, and HFF Participações S.A. (“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.

On December 31, 2012, we incorporated Sadia S.A., then a wholly-owned subsidiary, into BRF, and Sadia ceased to exist as a separate legal entity.

On April 9, 2013, we changed our name from BRF – Brasil Foods S.A. to the current name BRF S.A.

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, followed by the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica, or “CADE”) on July 13, 2011, 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, among others, the suspension of use of certain brands for a range from three to five years and the divestment of certain trademarks, plants, and distribution centers in the domestic market. In March 2012, we entered into an agreement with Marfrig Alimentos S.A., or “Marfrig,” pursuant to which we agreed to transfer certain assets in compliance with our agreement with the CADE. The last suspension of use of brands imposed by CADE in connection with the business combination with Sadia expired on July 3, 2017. Pursuant to our agreement with CADE, we are prohibited until July 13, 2021 from (i) having exclusivity on sales, publicity or merchandising in points of sale in Brazil and (ii) repurchasing the assets transferred to Marfrig. The TCD does not restrict our ability to act freely in the Brazilian food service market or outside the Brazilian market.

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Agreement with Marfrig

In July 2011, we received Brazilian antitrust approval for our business combination with Sadia from CADE, but that approval was subject to a number of conditions set forth in a TCD, including, among others, the suspension of use of certain brands for a range from three to five years and the divestment of certain trademarks, plants, and distribution centers in the domestic market. On March 20, 2012, we entered into an agreement with Marfrig pursuant to which we have agreed to transfer certain assets in compliance with the TCD. In exchange, we acquired the right to receive from Marfrig an amount corresponding to R$350.0 million.

The Asset Exchange agreements between Marfrig and BRF also included as part of the payment for this transaction the acquisition of the total shareholding stake in Quickfood S.A. (equivalent to 90.05% of its capital stock), a publicly held Argentine food corporation. For more details on these agreements, see “Item 4. Information on the Company—A. History and Development of the Company—Business Combination with Sadia.”

Agreement with Lactalis

On September 3, 2014, BRF entered into a binding memorandum of understanding with Lactalis, a company controlled by Parmalat S.p.A., an Italian publicly held company pertaining to the Groupe Lactalis S.A., or “Groupe Lactalis,” for the sale of its dairy division, including: (i) manufacturing facilities located in the cities of Bom Conselho (PE), Carambeí (PR), Ravena (MG), Concórdia (SC), Teutônia (RS), Itumbiara (GO), Terenos (MS), Ijuí (RS), Três de Maio I (RS), Três de Maio II (RS) and Santa Rosa (RS), and (ii) related assets and trademarks (Batavo, Elegê, Cotochés, Santa Rosa and DoBon) dedicated to such segment. The transaction closed on July 1, 2015 for a total consideration of U.S.$697.8 million.

Corporate Reorganization of OneFoods

On January 11, 2017, we established a new wholly-owned subsidiary, OneFoods, based in Dubai, which is focused on predominantly Muslim markets. The incorporation of this subsidiary involved a restructuring to incorporate the operations of Malaysia and some countries in the African continent and Eastern Europe that included: i) the sale and purchase agreement on which OneFoods acquired from BRF GmbH, a BRF wholly-owned subsidiary, certain equity interest in entities that serve the Halal Business; and ii) the contribution of the equity interest in SHB Indústria e Comércio de Alimentos (“SHB”) to OneFoods. SHB holds grain storage facilities, feed mills, outgrowers (outsourced farmers) agreements, hatcheries and 8 slaughtering and processing plants in Brazil. In addition, we entered into certain agreements with OneFoods that provide for the licensing of certain brands, operational and corporate activities cost sharing and supply of raw materials and finished goods. See Note 1.3 to our consolidated financial statements.

Acquisitions of Banvit - Turkey

On May 25, 2017, our subsidiary TBQ Foods GmbH, a joint venture formed with the Qatar Investment Authority in May 2017, completed a transaction for the acquisition of 79.48% of the shares issued by Banvit, the largest poultry producer in Turkey with fully integrated operations and owning the most recognized brand in the industry. Through a subsequent tender offer process completed on August 17, 2017, TBQ’s shareholding of Banvit increased to 91.71%. The total value of the transaction (including the purchase price paid in connection with the tender offer) was R$1.277 billion.

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Carne Fraca Operation

We are currently being investigated in the context of the “Carne Fraca Operation.” For more information, see “Item 8. Financial Information—B. Significant Changes—Carne Fraca Operation.”

Trapaça Operation

We are currently being investigated in the context of Trapaça Operation. For more information, see “Item 8. Financial Information—B. Significant Changes— Trapaça Operation.”

Capital Expenditures

The table below sets forth our capital expenditures for the periods indicated:

	For the year ended December 31,
	2017	2016	2015
	(in millions of *reais*)
Property, plant and equipment	887.0	1,859.2	1,296.7
Biological assets	713.2	784.2	589.4
Acquisitions and other investments	1,120.9	2,873.0	152.5
Intangible assets	51.2	62.8	205.4
Total capital expenditures	2,772.3	5,579.2	2,244.0

The main capital expenditures in 2015, 2016 and 2017 are described below:

Acquisitions. For the main acquisitions in 2017, see “Item 4. Information on the Company—A. History and Development of the Company.”

Logistics Management: BRF invested R$58.8 million in 2016 and 2017 in the Vitória de Santo Antão distribution center in order to better serve all the states in the northeastern region of Brazil and some states in the north of the country.

Automation: In 2017 BRF focused on executing and ramping-up the nearly R$115.0 million investments made in 2016 for the automation of company processes. The goal has been to improve efficiency by increasing productivity and reducing production costs. In 2016, investments on automating the chicken leg deboning processes continued, which not only reduced costs, but also improved ergonomics in the factory and increased product quality. In 2015, BRF invested R$375.8 million for the automation of company processes.

Internationalization Project: BRF is working on a broad long-term internationalization project. The year of 2017 was marked by the acquisition of Banvit in Turkey. In 2016, BRF increased its investments in Argentina, including in the San Jorge burger factory and in Rio Cuarto in the amount of R$17.9 million and R$101.5 million, respectively. In 2017 BRF invested R$136.5 million in our Toledo, Campos Novos and Rio Verde factories, aiming to increase production of pork in order supply the Chinese market and processed goods to supply the Brazilian market. Besides that, R$20.1 million were invested in a new production line for animal ingredients.

Operational footprint: In 2015, the company had a strong focus on improving its operational complex, investing on growth and optimization of production between plants in order to minimize the cost to produce and deliver each product. The optimization takes into account aspects of production cost, logistics, tax, quality and production specialization. At this point, the review also takes this opportunity to improve the mix of the Company's products, maximizing investments in higher value-added products, in line with the strategy of BRF. This footprint revision also provides greater flexibility and agility in the production process.

In 2018, in addition to existing projects, BRF will focus on pursuing our commitment to maximize the use of our assets in investments to eliminate production constraints and increase overall efficiency. Besides that, investments to keep BRF’s high quality standards will still represent a significant share of our expenses.

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B. Business Overview

BRF S.A. is one of the largest producers of fresh and frozen protein foods in the world, with a portfolio of over four thousand stock keeping units (“SKUs”). Our processed products include marinated and frozen chicken, Chester® rooster and turkey meats, specialty meats, frozen processed meats, frozen prepared entrees, portioned products and sliced products. We also sell margarine, sweet specialties, sandwiches, mayonnaise, and animal feed. We are the holder of brands such as Sadia, Perdigão, Qualy, Perdix, Paty, Bocatti, Vienissima, Dánica, Confidence, Speedy Polo and Hilal. In December 2017, BRF was responsible for 13.1% of the world trade in poultry.

Our portfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their needs. We seek to achieve that goal through strong innovation to provide us with increasing value-added items that will differentiate us from our competitors and strengthen our brands.

With 35 industrial facilities in Brazil, we have among our main assets a widespread distribution network that enables our products to reach Brazilian consumers through more than 540,000 monthly deliveries and 46 distribution centers as of December 31, 2017, 20 of which are in the domestic market and 26 of which are in our export markets.

In the international market, BRF has a leading brand, Sadia, in various categories in Middle Eastern countries. We maintain 27 sales offices outside of Brazil serving customers of more than 140 countries on five continents. We have nine industrial units in Argentina, five in Thailand, two in Europe (BRF UK and BRF Holland), one in Abu Dhabi, one in Malaysia and five in Turkey.

We have been a public company since 1980. Our shares have been listed on the Novo Mercado of the São Paulo Stock Exchange (B3 S.A. – Brasil, Bolsa, Balcão, or “B3”) as BRFS3 since 2006 and we are also traded on the New York Stock Exchange, or “NYSE,” (ADR level III). This commitment has been reinforced and internationally recognized since 2012, upon our entrance into the portfolio of Emerging Markets of Dow Jones Sustainability Index.

A breakdown of our products is as follows, all of which are sold both in Brazil and to our international customers:

· Meat Products, consisting of in natura meat, which we define as frozen whole and cut chicken, frozen pork and frozen beef cuts;

· Processed Food Products includes the following:

o marinated, frozen, whole and cut chicken, roosters (sold under the Chester^® brand) and turkey;

o specialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; and

o frozen processed meats, such as hamburgers, steaks, breaded meat products, kibes and meatballs;

· Other Processed Products includes the following:

o margarine, mayonnaise, mustard and ketchup; and

o frozen prepared entrees, such as lasagna and pizzas, as well as other frozen foods; and

· Other, consisting of soy meal, refined soy flour and animal feed.

In Brazil, we operate 33 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and three soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logistic system in our domestic market, with 20 distribution centers, being seven owned by us and 13 leased by third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

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In our international markets, we operate 23 industrial facilities, including meat processing, margarine and oil processing, sauce and mayonnaise processing and frozen vegetables processing plants. We have 26 distribution centers located overseas as well as commercial offices on all five continents.

Our Industry

We manage our business to target both the Brazilian market and the international markets.

Brazilian Market

As a Brazilian company, with a significant portion of our operations in Brazil, we are significantly affected by local economic conditions. Because of our significant operations in Brazil, fluctuations in Brazilian demand for our products affect our production levels and revenues.

Real GDP in Brazil increased at an average annual rate of 2.4% from 2004 through 2017. For two consecutive years, in 2015 and in 2016, Brazil’s GDP decreased by 3.5%, after increasing 0.5% in 2014. Reacting to this weak economic scenario, the Central Bank has lowered the Special System for Settlement and Custody (Sistema Especial de Liquidação e de Custódia, or “SELIC”) interest rate, which is the short-term benchmark interest rate. Overall, the long-term trend remains downward, from 17.8% as of December 31, 2004 to 7.0% as of December 7, 2017. In December 2017, the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or “IPCA”) published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or “IBGE”) increased by 0.44%. In 2017, the IPCA increased 2.95%.

The unemployment rate and consumer confidence levels also have an impact on consumption levels in Brazil. The average unemployment rate for Oct/Nov/Dec was 11.8%, a decrease of 0.20 percentage points when compared to the 12.0% in the same period of 2016. The Consumer Confidence Index for December 2017 was 86.4, 0.4 points below November 2017 but 13.3 points higher than the level reported a year before of 73.1.

According to the Brazilian Association of Supermarkets (Associação Brasileira de Supermercados, or “ABRAS”) in December 2017, supermarket sales in real terms (deflated by the IPCA), increased 20.42% compared to the previous month and increased 2.55% compared to December 2016. In the year, supermarket sales in real terms rose 1.25% in 2017 vs 2016.

Export Markets

The information set forth in this “Export Markets” subsection relates to Brazilian exports as a whole and not only to exports of our company.

Brazilian chicken exports decreased by 1.75% in the year ended December 31, 2017 compared to the year ended December 31, 2016 in terms of volume, with an increase of 5.54% in terms of sales, in U.S. dollars, primarily a result of the 7.52% increase in the average prices of exports in the year ended December 31, 2017. Pork exports registered a decline of 4.7% in volume and an increase of 9.8% in sales in U.S. dollars, in the year ended December 31, 2017 compared to the year ended December 31, 2016, with the average price of exports rising 15.2% in the year ended December 31, 2017. Beef exports recorded a strong increase of 9.4% in volume and 13.4% in sales, in U.S. dollars, in the year ended December 31, 2017 compared to the year ended December 31, 2016.

Brazilian chicken exports in the year ended December 31, 2017 totaled 4.23 million tons on sales of approximately R$23.5 billion (equivalent to U.S.$ 7.1 billion). Saudi Arabia remains the main destination (14.1%), followed by Japan (12.9%), China (10.7%) and UAE (7.2%).

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Pork export volume in 2017 amounted 697.1 thousand tons, totaling around R$5.2 billion (equivalent to U.S.$1.6 billion). The leading importers, Russia, Hong Kong and China, represented 43%, 21% and 6%, respectively, of total exports from Brazil.

Beef shipments in the year ended December 31, 2017 totaled 1,442.9 thousand tons with sales of around R$19.7 billion (equivalent to U.S.$5.9 billion). Volume increase was pushed by higher exports sent to Hong Kong and China, which import 24% and 15% of Brazilian beef exports, respectively.

Competitive Strengths

We believe our major competitive strengths are as follows:

· Leadership in the Brazilian Food Market with Strong Brands and a Global Presence. We are one of the largest producers of fresh and frozen protein foods in the world with a size and scale that allows us to compete in Brazil as well as in our export markets. We are one of the largest food companies in the world in terms of market capitalization. We believe our leading position allows us to take advantage of market opportunities by expanding our business, increasing our offer of added value products and improving our initiatives in export markets. In 2017, we slaughtered approximately 1.63 billion chickens and other poultry and 9.94 million hogs and cattle. In the same year, we sold approximately 4.33 million tons of poultry, hogs, beef and processed products. Our own and licensed brands are highly recognized in a number of countries, such as Brazil, Argentina, Saudi Arabia, Angola, to name a few, and we are expanding the presence with local brands in key markets. Our Sadia and Perdigão brands were included among the “Most Valuable Brand in Brazil” in 2016 and 2015, respectively, by Millward Brown Vermeer. Our sustainable practices have also brought BRF great recognition over the years. We are one of the leading companies in terms of transparency published by the Carbon Disclosure Project (“CDP”). Additionally, we are also among the companies listed on the United Nations Global Compact 100 Index since 2013.

· Extensive Distribution Network in Brazil and the Export Markets. We believe we are one of the few companies with an established distribution network that can deliver frozen and chilled products in practically any region of Brazil. Moreover, we export products to approximately 150 countries and are developing our own distribution network in Europe, where we sell directly to food processing companies and local distributors. We operate in the Middle East through our Halal subsidiary OneFoods, exclusively dedicated to serve the Muslim market, with an operational structure including: equity interests we have acquired in distribution companies such as Al Khan Foodstuff LLC (“AKF”), the leader in the distribution of frozen and chilled food in the Sultanate of Oman, the retail frozen foods distribution business of Alyasra Food Company W.L.L. (“Alyasra”), the leader in the distribution of frozen, chilled and dried food in Kuwait, and Federal Foods Limited (“Federal Foods”), the leader in the distribution of food in the United Arab Emirates. Besides this, we also operate through Al Wafi in Saudi Arabia. Lastly, we also joined the Turkish market through the acquisition in 2017 of Banvit, the largest poultry producer in the country and owner of the most recognized brand in the country. In Argentina, we continue working to optimize the number and increase the loyalty of our distributors. Our established distribution capabilities and logistical experience allow us to expand our national and international business, leading to higher sales volume and a greater coverage of our line of products. Moreover, in Europe, we partnered with Invicta Food Group Limited (“Invicta”) and acquired Universal Meats to strengthen our distribution of processed food in the United Kingdom, Ireland and Scandinavia.

· Low Cost Producers in a Growing Global Market. We believe we have a competitive advantage over producers in some of our export markets due to our lower production costs and gains of efficiency in animal production in Brazil. We have also achieved a scale of production and quality that allows us to compete effectively with the main producers in Brazil and other countries. We set up a series of programs aimed at maintaining and improving our cost effectiveness, including programs to optimize our supply chain by integrating demand, production, inventory management and customer service. Our Shared Service Center (CSC - Centro de Serviços Compartilhados) centralizes our administrative and corporate activities, and our BRF Value Generation system (GV BRF - Geração de Valor BRF”) provides our managers with a more efficient use of fixed and working capital, while our Zero-Base Budget program (OBZ - Orçamento Base Zero) is directed at enhancing the efficiency of cost management.

· Strategic and Diversified Geographic Allocation. Our slaughterhouses are strategically located in different regions of Brazil (South, Southeast and Midwest). This allows us to offset the risks from any restrictions on exports that may occur in particular regions of the country due to sanitary concerns. The geographical diversity of our distribution centers in 14 Brazilian states also allows us to reduce the cost of transport due to their proximity to the grain-producing regions and the country´s main export ports. We opened our first processed food plant in the Middle East in Abu Dhabi, in the United Arab Emirates in 2014. This is the largest BRF factory globally. In Argentina, in 2016, we integrated Campo Austral, through the acquisition of its controller, Eclipse Holding Cooperatief UA, and Alimentos Calchaquí Productos 7 S.A. (“Calchaquí”), both with own production capabilities and local brands to strengthen our position in the cold cuts market. Additionally, in 2016, we increased our presence in Asia by acquiring GFS, one of the leading poultry producers in Thailand, with fully integrated operations and exporting to more than 15 markets globally, and we also completed the acquisition of 70% of FFM Further Processing SDN BHD in Malaysia. More recently, our subsidiary, OneFoods, focused 100% in the Halal market started to operate in January 2017, and we concluded the acquisition of Banvit in Turkey, through TBQ Foods GmbH, a joint venture formed with the Qatar Investment Authority in May 2017. See “Item 4. Information of the Company—A. History and Development of the Company—Corporate Reorganization of OneFoods.” Those are great steps forward as part of our international expansion and aim to provide the best options to clients through local operations, which allow rapid and efficient access to strategic markets and increase the flexibility of the adaptation of products to local wishes. This approach is always carried out according to the specific requirements of each country and follows rigorous controls in all the productive processes.

· Emphasis on Quality, Safety and Diversified Portfolio. We are committed to food safety and quality in all of our operations to meet the specifications of our clients, prevent contamination and reduce the risks of epidemics of animal illnesses. In 2013, we launched a campaign in Brazil to publicize the Sadia Total Guarantee Program (Programa de Garantia Total Sadia) that ensures our chickens have no hormones or preservatives and are individually inspected. We have a diversified variety of products that give us the flexibility to direct our production according to the market demand and the seasonality of our products. To support this continuous innovation of our product portfolio, we have been continuously investing in our Technology Center in Jundiaí, in the State of São Paulo.

· Committed Management Team. Our management endeavors to accentuate best practices in our operations and corporate governance standards, as demonstrated by the listing of our common shares on the Novo Mercado segment of the São Paulo stock exchange. Companies listed on this stock market must pledge to adopt the highest standards of corporate governance. We have improved our organizational structure and have redesigned it under the following eleven vice presidents. See “Item 6. A. Directors, Senior Management and Employees—A. Directors and Senior Management.”

Our general strategy consists of using our competitive advantage as a low-cost producer of food in large scale to increase the return on invested capital and continue to grow sustainably in the coming years. We intend to continue to strengthen our global distribution network and client base, providing a portfolio of diversified, innovative products directed at the market and supported by strong international and local brands. The main elements in our strategy are the following:

· Strengthening our Global Distribution Network. We are continuing to develop our capacity to distribute outside Brazil in order to enhance the services we provide to our current clients and expand our base of export clients. We expect to continue to carry out this long-term distribution strategy in 2018, with the aim of increasing the awareness of our brands globally and expanding to countries where we believe there is a potential for a profitable distribution of our products. We are focusing on expanding our distribution network in Europe, the Middle East, Asia and Latin America to increase our coverage and get closer to final consumers, bringing sales and marketing efforts in these key regions. We are also processing products abroad, in order to allow us to deliver these products directly to the clients located in these markets. One example of this effort was the opening of our first food processing plant in the Middle East in 2014, with an expansion already announced in 2015. We may also consider certain acquisitions as a means of achieving this goal. Among others we have completed several acquisitions in recent years, such as the acquisition of GFS in Thailand, the partnership with Invicta and the acquisition of Universal Meats in the United Kingdom, enhanced our distribution business in Qatar with the acquisition of assets from QNIE the acquisition of Calchaquí, Campo Austral and known brands in Argentina, the acquisition the remaining stake of AKF, our distributor in Oman and the acquisition of Banvit in Turkey in 2017.

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· Increasing our Domestic and International Client Base. We intend to continue strengthening our Brazilian and international client base by continuing to offer high quality products and services. We intend to focus on efficiency to increase BRF’s competitiveness on the global stage, delivering high quality services to our clients and raising distribution and logistics abroad to a central position in our business. We believe there will be considerable opportunities to increase penetration in the export markets, particularly as we are expanding our production base to other countries and actively support efforts to reduce or eliminate existing trade barriers. Our objective is to strengthen our presence in key export markets. We believe there are also opportunities to expand penetration in the Brazilian market by increasing our client base and raising the productivity of the sales team. As of December 31, 2017, food sales in the Brazilian market represented 45.4% of our total net sales while food sales in the export markets represented 51.0%.

· Refocusing our Core Business according to Consumer and Market Preferences. We are focused on delivering innovative products that our clients regard as having added value. We intend to refocus our most important categories of products, as well as increase our market penetration, through a more granular view (by category, channel, region, brands and consumer/consumption segments). As part of this plan, we completed a transaction on July 1, 2015 for the sale of plants and trademarks related to our dairy division to Lactalis, through the sale of Elebat and Nutrifont. We are planning to align our strategy, processes and people to the needs of our clients by creating an integrated medium-term plan for our value chain that is strong, flexible and focused on value creation. Lastly, we intend to promote a pricing model aimed at providing a more rational pricing scheme.

· Diversifying our Lines of Products, Particularly Focusing on Higher Value-Added Food Products. The merger between Perdigão S.A. and Sadia S.A. in 2009 brought a great variety of processed products to our portfolio and created one of the biggest exporters of poultry products in the world. Since then, we have been expanding our portfolio in Brazil through new product launches, such as new lines of ready-to-eat meals and a new line of margarine enriched with vitamins and Omega3 (Qualy Qmix). Outside Brazil, we have been making selective acquisitions of companies and brands since 2011. In Argentina, we acquired companies such as Avex, Flora Dánica, Calchaquí and Campo Austral and well-known trademarks such as Vieníssima. The main purpose of these acquisitions was to expand our competitive base, leveraging our export platform and access the potential of the Argentinean market. Avex produces fresh poultry products, Calchaquí produces cold cuts and Flora Dánica produces mayonnaise, sauces and margarines, amongst other items, while Campo Austral is an integrated swine business with mainstream brands and Vieníssima is the leading Argentinian brand in frankfurter sausages. We intend to continue to diversify our product lines, focusing on processed foods with prices that generally fluctuate less than our cuts of fresh poultry and pork and which may be directed to specific markets. In line with this strategy, we intend to provide products that deliver to our consumers greater practicality, such as the Fácil and Soltíssimo lines, and healthiness, like Sadia’s new lines of cold cuts with 30% less sodium. Additionally, on November 26, 2014, we inaugurated a plant in Abu Dhabi, United Arab Emirates, to service our Middle East and North of Africa segment, and on January 26, 2016, we acquired a fully integrated operation in Thailand, expanding our portfolio of cooked value-added products outside Brazil.

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· Pursuing Leadership in Low Costs. We continue to enhance our cost structure in order to maintain competitive costs and increase the efficiency of our operations while maintaining our commitment with quality and food safety. We intend to obtain greater economies of scale through the efficient use of our production capacity, as well as the elimination of redundancies. We are implementing an optimal operational footprint based on analyzing the current layout of our plants, their cost of grains and the costs of freight to ports in order to increase our capacity and enhance growth. We are also continuing to implement new technologies in order to rationalize our production and distribution activities.

· Maintaining a Strong and Strategic Business Plan. We have recently revised our strategic plan, the BRF 18, which states our vision of being a company that is committed to partner with nature aiming to nurture life and to feed the world by providing food developed and prepared with love. We intend to become a global house of brands offering the best products and solutions to our customers and end consumers putting together our global and regional capabilities. We aim to defend our leadership in our key markets as well as to pursue additional growth in new markets both in Brazil and abroad. We will keep on investing time and resources to improve even more our sustainable chain into new supply models that will enhance our competitive advantages and put BRF ahead of the competition. Likewise, we will leverage and capitalize on our other key capabilities (sales and logistics, innovation, quality and people) to support this strategy. Furthermore, we have been building a new culture that is strong, aligned to the organization and the decision-making process of value creation, and establishing a performance culture in the company that is strengthened by meritocracy. This new culture will reinforce our commitment to attract, develop and retain talent, a key element for the company’s sustainable development.

Products

We are a food company that focuses on the production and sale of poultry, pork and processed foods.

Poultry

We produce frozen whole and cut poultry. In 2017, we slaughtered approximately 1.63 billion heads of poultry, 5.1% decrease compared to 1.72 billion in 2016. We sold 2,127 thousand tons of frozen chicken and other poultry products in 2017, compared to 2,006 thousand tons in 2016. Most of our poultry sales are to our export markets.

Pork and Beef

In 2017, we slaughtered approximately 9.94 million hogs and cattle, compared to 9.61 million in 2016. We raise hogs but do not raise cattle at our facilities. Although most of hogs that we slaughter are used for processed products in the domestic market, we also produce frozen pork and beef cuts, such as loins and ribs, and whole carcasses. We are developing our international customer base for pork and beef cuts. In 2017, we sold 323 thousand tons of pork and beef cuts, compared to 350 thousand tons of pork and beef cuts in 2016.

Aligned with our strategic plan, in 2014, we transferred our beef operations to Minerva, in exchange for an equity participation in that company.

Processed Food Products

We produce processed foods, such as marinated and frozen chicken, Chester® rooster and turkey meat, specialty meats, frozen processed foods, frozen prepared entrees, 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 2,118 thousand tons of processed foods in 2017, compared to 2,017 thousand tons in 2016. 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.

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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, pork and beef products, including hamburgers, steaks, breaded meat products, kibes (a type of Middle Eastern beef patty popular in Brazil) and meatballs.

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.

Halal Products

We offer poultry products for Muslim markets in accordance with the Halal method of animal slaughter.

Margarine

We sell margarine under Qualy, Deline and Claybom brands. We maintain our leadership with Qualy brand and in 2014 we introduced the first aerated margarine in Brazil. The aerated texture is a result of unique manufacturing process. We purchase the soybean oil from an agricultural cooperative supplier. We also entered into a strategic agreement with Unilever for the management of the margarine brands Becel and Becel ProActiv in Brazil.

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, pizza and other ready-to-eat meals. We produce the meat used in these products and buy other raw materials in the domestic market.

· Vegetables. We sell a variety of frozen vegetables, such as broccoli, peas and French 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.

· Pies and Pastries. We produce a variety of pies and pastries, such as chicken and heart-of-palm 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.

Mayonnaise

We began sales of mayonnaise in 2012 under the Dánica brand name as part of our strategy to diversify our product lines and to take advantage of our production capacity in Argentina.

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Other

We produce animal feed mainly to feed poultry and hogs raised by us, although we also sell a small portion to our integrated outgrowers or to unaffiliated customers. In 2017, we produced 10,445 thousand tons of feed and premix, compared to 10,506 thousand tons in 2016. We also produce a limited range of soy-based products, including soy meal and refined soy flour.

Overview of Brazil’s Poultry, Pork and Beef Position in the World

Poultry

Brazil is the second largest producer and the leading exporter of poultry in the world for 2017, followed by the U.S., EU-28 and Thailand, based on estimates calculated by the United States Department of Agriculture, or the “USDA.” Brazil’s production, consumption and export volumes for poultry have increased significantly over the past several years. This development can be explained by the increase of Brazilian companies’ production dedicated to exports, as well as by the competitiveness of Brazilian poultry.

According to the USDA, global poultry trade increased 3.5% in 2017, mainly due to higher exports from US (which increased 2.3%), Thailand (which increased 11.6%), China (which increased 3.6%) and Turkey (which increased 21.6%). According to the Brazilian Association of Animal Protein (ABPA – Associação Brasileira de Proteína Animal), exports of poultry parts increased 4.3%, representing 63.8% of the total poultry exported volumes. Whole chicken, which represents 29.4% of the total, decreased 9.2%. The main destinations were Saudi Arabia, Japan and China, which decreased total imports from Brazil by 21.0%, increased by 12.2% and decreased by 19.2%, respectively.

The following tables identify Brazil’s position within the global poultry industry for the years indicated:

Primary Broiler Producers	2017	2016	2015
	(in thousands of tons – “ready to cook” equivalent)
U.S.	18,596	18,261	17,971
Brazil	13,250	12,910	13,146
European Union (28 countries)	11,700	11,533	10,890
China	11,600	12,300	13,400
India	4,400	4,200	3,900
Russia	3,870	3,730	3,600
Mexico	3,400	3,275	3,175
Argentina	2,086	2,055	2,080
Turkey	1,950	1,900	1,909
Thailand	1,900	1,780	1,700
Others	17,423	17,154	17,355
Total	90,175	89,098	89,126

Primary Broiler Exporters	2017	2016	2015
	(in thousands of tons – “ready to cook” equivalent)
Brazil	4,320	4,384	3,841
U.S.	3,091	3,014	2,867
European Union (28 countries)	1,250	1,276	1,179
Thailand	770	690	622
China	400	386	401
Others	1,568	1,430	1,349
Total	11,399	11,180	10,920

Primary Broiler Consumers	2017	2016	2015
	(in thousands of tons – “ready to cook” equivalent)
U.S.	15,576	15,331	15,094
China	11,650	12,344	13,267
European Union (28 countries)	11,170	11,018	10,441
Brazil	9,252	9,024	9,309
India	4,397	4,196	3,892
Mexico	4,144	4,061	3,960
Russia	3,960	3,850	3,804
Japan	2,425	2,386	2,321
Argentina	1,909	1,905	1,894
Malaysia	1,750	1,731	1,677
Others	21,902	21,522	21,690
Total	88,135	88,368	87,349

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Source: USDA, March 2018.

Pork

Brazil is the fourth largest producer and exporter and 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. The USDA expects an increase in global production and consumption of pork in 2017 of 0.79%. According to the USDA, pork exports reached 900 thousand tons in 2017. Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. 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.

According to the Brazilian Animal Protein Association (Associação Brasileira de Proteína Animal), or “ABPA,” until December 2017, Russia was Brazil’s major destination of pork followed by Hong Kong and China, representing 37.2%, 22.4% and 7.0% respectively of total Brazilian pork exports. Russian, Hong Kong and Chinese imports from Brazil increased 5.8%, decreased 5.1% and 44.3%, respectively, from January to December of 2017.

The following tables identify Brazil’s position within the global pork industry for the years indicated:

	World Pork Panorama
Main Pork Producers	2017	2016	2015
	(in thousands of tons – weight in equivalent carcass)
China	52,750	52,990	54,870
European Union (28 countries)	23,450	23,400	23,249
U.S.	11,844	11,319	11,121
Brazil	3,815	3,700	3,519
Russia	3,000	2,870	2,615
Vietnam	2,750	2,675	2,572
Others	13,118	12,899	12,668
Total	110,727	109,853	110,614

Main Pork Exporters	2017	2016	2015
	(in thousands of tons – weight in equivalent carcass)
U.S.	2,572	2,374	2,272
European Union (28 countries)	3,300	3,126	2,389
Canada	1,300	1,319	1,239
Brazil	687	724	627
China	175	191	231
Chile	180	173	178
Others	323	302	300
Total	8,537	8,209	7,236

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Main Pork Consumers	2017	2016	2015
	(in thousands of tons – weight in equivalent carcass)
China	54,875	54,980	55,668
European Union (28 countries)	20,162	20,286	20,872
U.S.	9,668	9,477	9,341
Russia	3,275	3,192	3,016
Brazil	2,917	2,870	2,893
Japan	2,624	2,626	2,568
Others	17,186	16,422	16,256
Total	110,707	109,853	110,614

Source: USDA, March 2018.

Beef

Brazil is the second largest producer and consumer of beef in the world and the second largest exporter, according to tonnage data compiled by the USDA. From 2017 to 2018, the USDA estimates an increase in global beef production and consumption of approximately 1.9%, 2.0%, respectively and also an increase in exports of 2.7%.

The following tables identify Brazil’s position within the global beef industry for the years indicated:

	World Beef Panorama
Main Beef Producers	2017	2016	2015
	(in thousands of tons – weight in equivalent carcass)
U.S.	12,109	11,507	10,817
Brazil	9,450	9,284	9,425
European Union (28 countries)	7,890	7,881	7,684
China	7,070	7,000	6,700
India	4,250	4,200	4,100
Argentina	2,760	2,650	2,720
Australia	2,125	2,125	2,547
Mexico	1,915	1,879	1,850
Pakistan	1,780	1,750	1,710
Turkey	1,515	1,484	1,423
Others	10,509	10,683	10,723
Total	61,373	60,443	59,699

	World Beef Panorama
Main Beef Consumers	2017	2016	2015
	(in thousands of tons – weight in equivalent carcass)
U.S.	12,191	11,678	11,276
China	7,985	7,765	7,342
European Union (28 countries)	7,830	7,906	7,744
Brazil	7,745	7,652	7,781
Argentina	2,480	2,434	2,534
India	2,425	2,436	2,294
Others	18,706	18,843	18,848
Total	59,362	58,714	57,819

	World Beef Panorama
Main Beef Exporters	2017	2016	2015
	(in thousands of tons – weight in equivalent carcass)
India	1,825	1,764	1,806
Brazil	1,760	1,698	1,705
Australia	1,450	1,480	1,854
U.S.	1,285	1,159	1,028
New Zealand	570	587	639
Others	2,901	2,734	2,513
Total	9,791	9,422	9,545

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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, and Aviagen. We send these chicks 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. 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 1.70 billion day-old chicks, including chickens, Chester® roosters, turkeys, partridge and quail in 2017. We hatch these eggs in our 31 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, the feed-to-meat conversion ratio and the quantity of meat produced 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 business arrangements with approximately 8,830 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.

At December 31, 2017, we had a fully automated slaughtering capacity of 35.7 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 produced by our company or from producers such as Agroceres and DanBred or we 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 2,953 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, 2017, we had a pork slaughtering capacity of 197,188 heads per week.

Beef

We had a beef slaughtering capacity of 14,400 heads per week until October 1, 2014 when BRF and Minerva signed an Investment Agreement pursuant to which BRF, in return for an equity interest in Minerva, allocated its beef slaughtering plants in Várzea Grande and Mirassol as well as the BRF employees involved in these activities to a closed capital company that was incorporated within Minerva. This deal closed on October 1, 2014.

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We currently have a beef slaughtering capacity of approximately 3,500 heads per week in a factory in Argentina.

Processed Foods

We sell a variety of processed foods, some of which contain poultry, pork and beef meat that we produce. BRF has a total production capacity of 197 thousand tons/month across 17 production units in Brazil (Chapecó, Marau, Capinzal, Toledo, Várzea Grande, Videira, Lucas do Rio Verde, Rio Verde, Uberlândia, Concórdia, Tatuí, Vitória de Santo Antão, Herval d’Oeste, Lajeado, Ponta Grossa, Paranaguá and Rio de Janeiro) processing meat products (such as mortadella, franks, sausage, hamburger and breaded) and non-meat products (such as lasagna, ready meals and pizzas) for both the domestic and international markets. 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 processed 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. 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.

BRF also has nine plants in Argentina for processing products such as hamburgers, franks, hams, vegetables and margarines. Their capacities are on average 15 thousand tons/month.

In November 2014, BRF inaugurated its first plant in Middle East, with a total capacity of 70 thousand tons/year, aiming to supply the local Market, Europe and Asia. This plant produces franks, breaded, hamburger, mortadella and marinated chicken breast.

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 Brazilian market, but we import French fries from Belgium and peas from 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.

The raw material for margarine is crude soybean oil, which is subjected to refining and bleaching processes. We produce margarines in our plant in Paranaguá, State of Paraná, Uberlândia, State of Minas Gerais and Vitória de Santo Antão, under the Qualy, Deline and Claybon brands and in the State of Pernambuco 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 also sell halal food, which is the food allowed for Muslim consumption. The halal poultry needs to undergo through a specific religious/technical procedure of slaughter and processing, assuring that it was produced according to the Islamic law and that it had no contact with prohibited food or ingredient. Both BRF and OneFoods are assisted by Muslim entities that are responsible for slaughtering and certifying all our halal products.

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 2016 and 2017, 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 and Minas Gerais. We buy soy meal from major producers such as Bunge, Cargill, ADM, Dreyfus and Amaggi, 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 Results—Principal Factors Affecting our Results of Operations—Commodity Prices.”

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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.

Suppliers

One of our strategies is to build more efficient relationships with our suppliers, using selection criteria to assess the suppliers in different dimensions, including the quality of the product, the product performance and reliability in terms of delivery.

In the third quarter of 2015, we started a process to enhance business arrangements with some strategic suppliers through agreements that value partnership and innovation. This initiative was developed during 2016 and, in 2017 we turned this as a standard process with some suppliers.

The accurate evaluation in selecting suppliers is considered as one of our crucial responsibilities, aiming to maintain our network of main suppliers/partners and facing our growing challenges to ensure our market competitiveness. The assessment process often involves the simultaneous consideration of various important attributes of the supplier´s performance, including price, innovation, delivery time, quality and post-sales support, along with its social and environmental policies and performance.

Our Code of Conduct for Suppliers which is posted on our website and agreed in advance by them, regulates our relationship and focuses on ethical behavior, social and environmental responsibility, as supplier’s performance is one of the determining factors of our success. We added, in early 2017, a stronger Risk Management approach with main criteria focused in Quality, Service Level Agreement (“SLA”), Financial, Sustainability and Compliance. We strongly reinforced this focus on the supply chain throughout 2017.

Our process follows established guidelines, supported by systems and rules to be followed by all members of procurement team, such as the approval level and SLA. In the last quarter of 2017, we began implementing our new purchasing system – Ariba SAP, an advanced tool intended to strengthen our Compliance function.

Tracking and auditing are continually monitored through internal and external audits to ensure that our processes are constantly improving and aligned with our norms and codes.

Brazilian Market

Brazil is the fifth largest country in the world, both in terms of land mass and population. In July 2017, Brazil had an estimated population of 207.66 million people, according to figures from the IBGE. Brazil’s GDP amounted to R$6.0 trillion in 2015, R$6.26 trillion in 2016 and R$6.6 trillion in 2017 in current value. In 2017, GDP increased by 4.8% in nominal terms and 1.0% in real terms.

Inflation measured by the National Amplified Consumer Price Index (known as the IPCA - Índice Nacional de Preços ao Consumidor Amplo), published by the IBGE, came to 10.67% in 2015, 6.29% in 2016, and 2.95% 2017 following a trend of relatively high rates. The end-of-period exchange rate, as measured by the Brazilian Central Bank, was R$3.90/U.S.$1.00 in 2015, R$3.26/U.S.$1.00 in 2016 and R$3.31/U.S.$1.00 in 2017, with the real depreciating by 1.5% in 2017.

Brazil is also one of the largest meat consumers in the world, with per capita consumption in 2017 of 97.58 kilograms, including beef, chicken and pork products, according to the USDA. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. Given the recent slight economic recovery in 2017, meat consumption increased in 2017 compared to 2016. As further economic improvement is expected for 2018 - market analysts consulted by the Central Bank expect that GDP will increase by 2.9%, while inflation is expected to remain low at 3.70% – meat consumption should increase in 2018.

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Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. There are many large producers, most notably BRF, but also Seara Alimentos S.A. (“Seara”) (which was acquired from Marfrig by JBS S.A. (“JBS”) in 2013) and Cooperativa Central Aurora Alimentos (“Aurora”). The main producers in the fresh food market face strong competition from a large number of small players which operate in the informal economy and sometimes offer low quality products at lower prices than those of the large producers. BRF endeavors to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands it owns, such as Sadia and Perdigão.

The processed food sector is more concentrated than the fresh food sector in terms of the number of players. Consumption of processed products is influenced by a number of factors, including the rise in consumer income and marketing efforts directed at meeting consumer demand for more value-added products. We believe that processed foods also represent an opportunity for growth in the coming years.

We estimate the following market information:

· the Brazilian industrialized food market had revenues of approximately R$19,903 million in 2017 compared with R$19,317 million in 2016;

· the Brazilian frozen food market had revenues of approximately R$3,941 million in 2017 compared with R$4,063 million in 2016;

· the Brazilian margarine market had revenues of R$4,025 million in 2017 compared with R$4,007 million in 2016; and

These estimates are calculated by us based on data from A.C. Nielsen, which is reported to them by us and by some of our competitors. These figures do not include BRF data by region or category of products that are not covered by the A.C. Nielsen figures.

International Markets

Brazil is a leading player in global export markets due to its natural advantages (land, water, and climate), competitive inputs costs and increasing efficiencies in animal production. Like other large Brazilian producers, we 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, both (i) tariff barriers, with high rates that ultimately protect certain domestic markets (e.g., the extra-quota tariffs for chicken imports in the EU and the high import tax for poultry in South Africa), or (ii) non-tariff barriers, mainly import quotas, such as those imposed by Russia and Europe, sanitary barriers (sanitary requirements, disease-related bans, and regulations) which in the case of meat industry is the type of trade barrier that mostly affects exports, and technical/religious barriers (i.e. customs, technical standards, licensing requirements, and religious considerations).

With regard to sanitary requirements, most countries demand specific sanitary agreements so that Brazilian producers can export to them. Outbreaks of animal disease may also result in bans on imports, such as when many countries temporarily suspended the imports of bovine meat in 2013 after reports of a possible case of BSE in the State of Paraná in Brazil.

Global trade in poultry products has been negatively affected by the spread of highly pathogenic avian influenza (“HPAI”), particularly in Asia but also in Europe, Africa, Mexico and the United States.

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The HPAI situation in the past five years is considered truly exceptional for at least three reasons: 1) the substantial number of countries and territories affected by HPAI in domestic birds; 2) the substantial number of outbreaks (affected farms, villages, or backyards) in this period; and 3) the high diversity of circulating subtypes during the period, which makes control and eradication complex.

During 2017, cases of various types of HPAI virus (H5 and H7) were reported in several countries, like China, Hong Kong, Japan, Korea and Europe. Avian influenza has not been detected in Brazil. Should this occur, global demand for poultry products would likely decline for a period whose length cannot be predicted. In January 2018, eight countries and territories (Afghanistan, Cambodia, Chinese Taipei, Iraq, Japan, the Republic of Korea (Rep. of), Saudi Arabia and South Africa) in two world regions (Africa and Asia) were still affected.

Human cases were also reported in various countries. For example, from 2015 to 2017 (December), there have been confirmed 207 human cases of avian influenza (H5N1) and 67 deaths, according to the WHO.

In December 2015, the WTO established a panel requested by the Brazilian government in order to investigate technical and sanitary barriers imposed by Indonesia in the imports of poultry meat. It was due to an alleged (unwritten) general prohibition resulting from the combined operation of several different trade-restrictive measures (constitutive elements) and six individual trade-restrictive measures pertaining to the following: i) the non-inclusion of certain chicken products in the list of products that may be imported; ii) the limitation of imports of chicken meat and chicken products to certain intended uses; iii) Indonesia's alleged undue delay in the approval of veterinary health certificates for chicken products from Brazil; iv) certain aspects of Indonesia's import licensing regime; v) surveillance and implementation of halal slaughtering and labelling requirements for imported chicken meat and chicken products established by different Indonesian regulations; and vi) restrictions on the transportation of imported products by requiring direct transportation from the country of origin to the entry points in Indonesia.

Indonesia requested that the Panel reject Brazil's' claims in this dispute in their entirety.

As result, in favor of Brazil, the Panel identified trade restrictions from Indonesia that were inconsistent with WTO rules, as Indonesia violates the SPS Agreement by delaying, without plausible justification, the sanitary recognition process of Brazilian exporting establishments and the Indonesian import licensing legislation establishes unjustified restrictions on trade.

On the other hand, the Panel found that Brazil had failed to demonstrate less favorable treatment between fresh domestic chicken and frozen imported chicken. With respect to the transportation requirement, the Panel decided that it wasn’t proven that the relevant Indonesian laws and regulations, forbid transit (including transshipment) and that Brazil had not sufficiently demonstrated that there is a link between a policy objective of self-sufficiency on the part of Indonesian and that the specific trade-restrictive measures taken by Indonesia or future implementation of such a policy objective through adoption of trade restrictive measures.

On February 7, 2018, Indonesia and Brazil informed the Dispute Settlement Body (DSB) of the WTO that in order to allow sufficient time for them to discuss a mutually agreed period or for an arbitration to be completed, they had agreed on deadlines for arbitration under Article 21.3(c) of the DSU.

Sales

We sell our products both in the domestic and export markets around the world. Net sales to the Brazilian market, including most of our processed foods, accounted for 45.4% of our net sales in 2017 and 43.9% in 2016. Net sales to international markets, including most of our frozen whole and cut chickens and other poultry and frozen pork cuts and beef cuts, accounted for 51.0% and 52.3% of our net sales in 2017 and 2016, respectively.

The table below sets forth the breakdown of our net sales for the periods indicated:

	2017	2016	2015
Brazilian Market
Poultry	8.1%	7.1%	7.1%
Pork/Beef	2.4%	2.1%	2.3%
Processed food products	34.9%	34.4%	37.9%
Other Sales	0.1%	0.3%	0.1%
Total Brazilian market	45.4%	43.9%	47.4%
International Markets
Poultry	29.9%	32.1%	32.8%
Pork/Beef	4.5%	5.0%	5.2%
Processed food products	15.1%	14.4%	12.1%
Other Sales	1.5%	0.8%	0.2%
Total International markets	51.0%	52.3%	50.2%

Other Segments
Poultry	0.1%	0.0%	0.0%
Pork/Beef	1.2%	1.3%	0.0%
Processed food products	0.0%	0.0%	0.1%
Other Sales	2.4%	2.5%	2.3%
Total Other Segments	3.7%	3.8%	2.4%
Total	100%	100%	100%

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In the Brazilian market for whole poultry, 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, 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. The market for processed food products is still growing in Brazil and we believe that the medium and long-term prospects for this segment are positive based on the trend over the preceding years. Simultaneously, BRF is focusing on initiatives aimed at innovation, such as launching new products with a focus on healthiness, a rationalization of our processed meat portfolio in the domestic market and an improvement in the positioning of the brands in our portfolio.

International

We face significant competition in our international markets, both from Brazilian producers and from producers in other countries. An increasingly relevant example are the cooperatives, which have tax advantages and certain mobility to reassign their production to foreign markets at times when exports become more attractive than the domestic market. Another example is JBS, one of our direct competitors in the international market that has many of the same competitive advantages that we have over producers in other countries, including natural resources and competitive inputs costs.

Our chicken and pork cuts, in particular, are highly competitive in price and sensitive to substitution by other products. Customers sometimes seek to diversify their sources of supply in different countries, even though we have the lowest cost of production.

Protectionist measures among Brazil's trading partners are also an important competitive factor. Brazilian exports of poultry and swine are increasingly affected by actions taken by other countries to protect local producers.

Our net sales in the international market reached R$18.3 billion in 2017, a decrease of 3.4% over 2016. Despite the still-challenging international market environment in 2017, we believe we export significantly more than our main Brazilian competitors, as BRF held approximately 36% and 77% of the export market share in poultry and turkey, respectively, in 2017.

In our international markets, our competition is based on quality, cost, sale prices and service to our customers.

Distribution of Products

Brazilian Market

As of December 31, 2017, we operated 20 distribution centers and 27 transit points. In 2017, we gained productivity based on new technologies in our Brazilian distribution and an improvement in the service level with reduction of lead time in deliveries.

International Markets

We export our products mainly through the ports of Itajai, Navegantes and Itapoá in the state of Santa Catarina. We also export our products through Rio Grande in the state of Rio Grande do Sul, Paranaguá in the state of Paraná and Santos in the state of São Paulo. We store our products in refrigerated storages that are owned and operated mainly by third parties located at ports in the states of Paraná, Santa Catarina and Rio Grande. In 2017, we packed more than 58% of our export containers at plants, referred to as loading “fresh frozen products.” We contract with exclusive third-party carriers to transport our products from our production facilities to the ports, and we ship our products to export markets through independent shipping companies.

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All the ports that we use to load our cargo are private terminals from third parties. In the past, we have occasionally experienced disruptions at the ports concerning logistics challenges, including flooding, strong currents, small drafts, strong winds/waves and winter fog.

Our sales and distribution efforts abroad are coordinated through sales offices in the United Kingdom, France, Spain, Italy, Austria, Hungary, Netherlands, Russia, Singapore, South Korea, China, Japan, Saudi Arabia, the United Arab Emirates, Qatar, Oman, Kuwait, South Africa, Argentina, Uruguay, Chile, Turkey and Malaysia. We coordinate our marketing efforts and provide sales support to customers in our main international markets through these offices. Our distribution arrangements in our international markets vary according to the market.

Europe. In Europe, we have revamped our sales and distribution network by selecting and tightening partnerships with food processors, food service operators and local distributors. Invicta Foods Limited (“Invicta Foods”), a regional leader in the food service segment, was successfully acquired in April 2015, to strengthen our position in the food service market and enhance our global sourcing activity. The acquisition of the Universal Meats in June 2016 allowed us to consolidate our position in the food service channel in the frozen and chilled segments. We are distributing our products in practically all EU markets, including Switzerland, improving our delivery time within approximately two days of receiving an order. Our operations are geographically divided into three major markets. We are also expanding our B2C presence in a few focused markets. Food services and a few processing clients are buying goods mainly produced in our two European processing units, which allows us to offer items closer to local preferences developed in the most efficient and rapid form. In Russia and other regions of Eurasia, we sell primarily to selected distributors, which place our products to processors, food service operators and some retailers. Political developments have precluded almost all of our sales in Ukraine, historically the second most important market for our pork exports. On the other hand, we have refurbished our sales to other markets in Central Asia and reentered in the three markets in the Caucasus region.

Asia. China, together with Hong Kong, is our largest market in Asia where we supply a significant volume and diverse portfolio including chicken wings and paws. In Japan, our local level of service, quality standards and product range have made us a preferred supplier of chicken products in the market. Singapore and Hong Kong, while smaller markets, represent reference markets in Asia for us to get closer to local consumers. Through the joint venture SATS BRF Food in Singapore and an exclusive partnership in Hong Kong, we reach our customers with distribution and factories built to suit specific local needs and are growing our retail share of Sadia branded frozen meat. In Thailand, the integration process of BRF Thailand (from the acquisition of GFS in the end of 2015) is progressing well, providing a fully-integrated supply footprint in Asia and bringing to us a complementary set of capabilities in cooked items. In September 2016, we formed a business venture with FFM Berhad in Malaysia through the acquisition of a majority stake of FFM Further Processing SDN BHD, which is FFM Berhad’s food processing facility in Selangor, Malaysia. This in turn serves as a strategic entry point for BRF’s halal company OneFoods to extend its reach into halal markets in Asia.

Middle East. In Saudi Arabia and other countries of the Middle East, we sell to large distributors and small stores (traditional trade), some of which have been our customers for decades. In these markets, we primarily sell frozen chicken in three categories: whole, cuts and processed products. We believe 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, our biggest brand, Sadia is recognized as the #1 preferred food brand in the Middle East and enjoys the highest Top of Mind brand within the frozen meat category, according to a study made by Ipsos Research, a third-party consulting firm. In 2012, we took an important step in increasing our presence in the region: we acquired 49% of the capital stock of Federal Foods, a leading food company in the United Arab Emirates that caters to a full spectrum of retail, food service and wholesale clients and is responsible for the distribution of Sadia products in the region. This transaction was concluded in the beginning of 2013. Then, in 2014, we acquired the remaining economic rights owned by this company. During the year of 2014 we also announced two other strategic acquisitions of distributors following our strategy to advance in the value chain in this region: (1) we acquired 40% of the capital stock of AKF a company leader in the distribution of frozen food in Oman, covering a broad sector of retail, food service and wholesale clients and (2) we acquired 75% of the of the retail frozen foods distribution business of Alyasra Food Company, a leader in food distribution in Kuwait. This transaction was concluded in 2015. We finished the construction of our processed food plant in Kizad, Abu Dhabi, an industrial area, which started operating in November 2014. By October 2015, the Kizad factory released all the planned products seven months ahead of schedule. In December 2015, we acquired the frozen business of QNIE to take full control of BRF operations in the Qatari market, and this transaction was concluded in 2016. These transactions consolidate our leadership position in the retail channel with over 42% market share in the GCC (Gulf Cooperation Council) across our brands. In the first weeks of 2017, we announced the beginning of OneFoods operations. More recently, our subsidiary, OneFoods, focused 100% in the Halal market started to operate in January 2017, and we concluded the acquisition of Banvit in Turkey, through TBQ Foods GmbH, a joint venture formed with the Qatar Investment Authority in May 2017. See “Item 4. Information of the Company—A. History and Development of the Company—Corporate Reorganization of OneFoods.”

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Africa. 2016 was a year where a great deal of energy was placed on the repositioning of strategy and focus, with all efforts towards setting the stage for success in the short and long term. A focal point for the region was unlocking a number of in-market opportunities that fell under the attractive and affordable processed category, mostly driven by Food Processed Products (“FPP”) segments such as franks, bologna and margarine. The current trading model of BRF in Africa remains with direct sales to distributors with the widest possible distribution, all supported by a well-developed relationship. Underpinning this model are Sadia and Perdix, which continue to be the focus brands for the region. Going forward, careful consideration in identifying key selected future growth markets has been a point of focus, with the next phase of developments emphasizing more control of the interaction between the brand and the consumer. We intend to strengthen this control by uncovering consumer insights to strengthen its value proposition and possible distribution opportunities.

Americas and Other Countries. We sell our products to several countries in Latin America, including Paraguay, Uruguay and Chile, where we sell primarily to trading companies that resell the products to distributors. We also sell chicken cuts, including breasts and wings, to processing companies in Canada. In Argentina, where we have local production, we distribute the products directly to big retailers and supermarkets and through other distributors to the small retailers.

Sadia is an established brand and holds important market shares in Chile, Uruguay and Paraguay where we maintain local offices. We reach supermarket channels through direct distribution and traditional channels through the strong partnerships with exclusive distributors. In addition to Sadia in Argentina, we have expanded on brands, such as Patty, Vienissima and Danica, which are leaders or vice leaders in all categories in which we compete. Our brands are recognized as innovative, of high quality and pioneering. In 2016, we acquired the brands Calchaqui and Bocatti, both cold cut brands. Bocatti is a premium brand in Argentina and is well known for the quality of its products, and Campo Austral is a company with a strong agribusiness that will help us with its cost management. These are two important acquisitions that occurred in 2016, increasingly consolidating our position in the region.

Intellectual Property

Our principal intellectual property consists of our domestic and international brands. We sell our products mainly under the “Sadia,” “Qualy,” “Perdigão”, “Nuggets”, “Chester” and other brands in the Brazilian market and mainly under the “Perdix,” “Perdigão”, “Sadia”, “Confidence”, “Fazenda,” “Paty”, “Qualy”, “Borella,” “Sahtein,” “Hilal,” “Halal,” “Danica”, “Sulina”, “Deline” and other brands in our international markets, as described below under “—Marketing.”. We plan to enter into certain agreements with OneFoods for its exclusive right to use the “Sadia” word and design marks and the “Perdix,” “Halal” and “Lequetreque” design marks in approximately 50 countries in Africa and Asia upon the payment of royalties, subject to certain quality standards and branding guidelines.

We also own several brands for specific products or product lines. In the Brazilian market, these brands include, but are not limited to, “Chester,”, “Claybom,” Hot Pocket”, “Salamitos” “Perdigão Ouro,” and “Nabrasa”. Among our trademarks are: “Halal” (in the Middle East, aside from Saudi Arabia), “Unef” (in the Middle East), “Sulina” and “Fazenda” (in Europe) and “Alnoor” (in several Middle Eastern countries). The “Sadia” trademark is registered in more than 90 countries. In the Middle East, Sadia is registered in countries such as Saudi Arabia, the United Arab Emirates, Egypt, Bahrain, Yemen, Iran, Iraq, Israel, Lebanon and Oman, as well as in the Caucasus, Asian countries and in Latin America. 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.

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BRF maintains an active marketing program using both electronic and print media. In addition, we have patents registered in Brazil and more than 10 other countries. BRF has applied to have the Sadia, Perdigão and Qualy trademarks recognized as “well known trademarks” by the Brazilian National Institute for Industrial Property (Instituto Nacional de Propriedade Industrial – INPI), which already granted us that recognition for Sadia in June 2011. BRF has also applied for its new corporate trademark “BRF” (and accompanying design) to be registered in over 150 countries in North and South America, Europe, Asia, Africa and the Middle East.

Lastly, we own several internet domain names in Brazil, registered with the competent authority, such as “perdigao.com.br,” “claybom.com.br,” “qualy.com.br,” “sadia.com.br,” “brf-foodservices.com.br” and “brf-global.com.”

Marketing

Our marketing efforts are based on (1) adding value to existing categories and diversifying our product lines; (2) increasing convenience on our in natura and processed products; (3) ensuring that our brands are recognized and associated with high quality products; and (4) strengthening our reputation for quality by emphasizing high quality service to our customers. Furthermore, we intend to consolidate our brands, while continuing to tailor our appeal to specific export markets and domestic market segments.

In the Brazilian market, we sell our products primarily under the Sadia, Perdigão and Qualy brands. Apart from these major brands, we also sell our products under Sadia master brands: Deline, Hot Pocket, Soltíssimo, Miss Daisy, Nuggets, Frango Fácil, Jamie Oliver and under Perdigão master brands: Chester, Ouro, Na Brasa, Meu Menu and Mini Chicken.

Chester® is a well-known brand for festive products and one of the most popular brands for premium poultry products in Brazil. In 2007, we acquired from Unilever a margarine brand called Claybom, along with other brands, and entered into a joint venture with Unilever to use the margarine brand Becel.

In our international markets, our main brands are Sadia and Perdix. We also operate under tactical brands as Confidence, Hilal, and Speedy Pollo. In Argentina, we sell our products primarily under Paty and Danica brands. The opening of the Abu Dhabi plant in Middle East and its current expansion establish an important milestone in our globalization.

Our recent acquisitions are expanding our brand portfolio internationally. In Argentina, we also have Vienissima, GoodMark, Delícia, Manty, Campo Austral, Bocatti and Calchaqui. In Malaysia, our main brand is Marina. In addition, we shall soon incorporate more brands in Turkey.

Regulation

The MAPA, which is the principal governmental authority overseeing our business, is responsible for the regulation and inspection activities related to health, technical (including labeling) and quality criteria related to the making of animal food products in all industrial units in Brazil focused on national and international markets, and oversees our activities through the Department of Agriculture Defense (Secretaria de Defesa Agropecuária) and the Department of Inspection of Animal Products (Departamento de Inspeção de Produtos Animais).

The inspection activity is performed by placing teams of the Federal Inspection Service (Serviço de Inspeção Federal, or “SIF”) of MAPA in the industrial units. Their scope of work includes all stages of the production process (including receipt of raw materials, production, labeling and storage) and they can appoint noncompliance with applicable rules, with penalties ranging from a warning to permanent suspension of business activities.

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We are also subject to the oversight of a number of other international and Brazilian governmental authorities (at federal, state and municipal levels), which include, among others, multiple environmental agencies and the National Agency for Sanitary Surveillance (Agência Nacional de Vigilância Sanitária, or “ANVISA”), which is responsbile, among other matters, for sanitary surveillance of food products sold across Brazil.

C. Organizational 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.

Entities	Country	Main activity	Interest in Equity as of December 31, 2017
BRF GmbH	Austria	Holding	100.00%
BRF Global GmbH	Austria	Holding and trading	100.00%
Qualy 5201 B.V.	The Netherlands	Import, commercialization of products and holding	100.00%
BRF Holland B.V.	The Netherlands	Import and commercialization of products	100.00%
BRF Invicta Ltd.	England	Import, commercialization and distribution of products	69.16%
Invicta Food Products Ltd.	England	Import and commercialization of products	100.00%
Invicta Food Group Ltd.	England	Import, commercialization and distribution of products	100.00%
Campo Austral S.A.	Argentina	Industrialization and commercialization of products	100.00%
Golden Poultry Siam Limited	Thailand	Holding	100.00%
BRF Thailand Limited	Thailand	Import, Industrialization, commercialization and distribution of products	100.00%
BRF Feed Thailand Limited	Thailand	Import, Industrialization, commercialization and distribution of products	100.00%
BRF Luxembourg Sarl	Luxemburg	Holding	100.00%
BRF Austria GmbH	Austria	Holding	100.00%
One Foods Holdings Ltd	United Arab Emirates	Holding	100.00%
Al-Wafi Food Products Factory LLC	United Arab Emirates	Industrialization and commercialization of products	49.00%
BRF Al Yasra Food K.S.C.C. (“BRF AFC”)	Kuwait	Import, commercialization and distribution of products	49.00%
BRF Foods GmbH	Austria	Industrialization, import and commercialization of products	100.00%
Al Khan Foodstuff LLC (“AKF”)	Oman	Import, commercialization and distribution of products	70.00%
SHB Comércio e Indústria de Alimentos S.A.	Brazil	Industrialization and commercialization of products	99.99%
TBQ Foods GmbH	Austria	Commercialization of products	60.00%
Banvit Bandirma Vitaminli	Turkey	Holding	91.71%
Federal Foods LLC	United Arab Emirates	Import, commercialization and distribution of products	49.00%
Quickfood S.A.	Argentina	Industrialization and commercialization of products	91.21%
Sadia Alimentos S.A.	Argentina	Holding	43.10%
Avex S.A.	Argentina	Industrialization and commercialization of products	100.00%

The chart below shows the simplified corporate structure of our company.

For a complete list of all of our direct and indirect wholly-owned subsidiaries, see Note 1.1 to our consolidated financial statements.

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D. Property, Plant and Equipment

Production

Our activities are organized into six regions: Brazil, Middle East and North Africa (MENA), Africa, Europe, Asia and Latin America (LATAM).

In Brazil, we operate 35 industrial facilities, including meat processing, margarine processing, pasta processing, dessert processing and soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logistic system in our domestic market, with 20 distribution centers (seven owned by us and 13 by third parties), which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our international markets, we operate 23 industrial facilities, including meat processing, margarine and oil processing, sauce and mayonnaise processing and frozen vegetables plants. We have 26 distribution centers located overseas, as well as commercial offices on all five continents.

The table below sets forth our production facilities in Brazil.

Production Plant	State of Location	Activities
*Meat Products:*
Bugio Agropecuária*	Santa Catarina	Pork slaughtering
Buriti Alegre**	Goiás	Poultry slaughtering
Campos Novos	Santa Catarina	Pork slaughtering and animal feed
Capinzal	Santa Catarina	Poultry slaughtering and industrialized products processing
Carambeí/**	Paraná	Poultry slaughtering, animal feed and hatchery
Chapecó	Santa Catarina	Poultry slaughtering (including turkey), industrialized products processing, animal feed and hatcheries
Concórdia	Santa Catarina	Pork and poultry slaughtering, industrialized products processing, animal feed and hatcheries
Dois Vizinhos**	Paraná	Poultry slaughtering, animal feed and hatcheries
Dourados	Mato Grosso do Sul	Poultry slaughtering, animal feed and hatchery
Duque de Caxias	Rio de Janeiro	Industrialized products processing
Francisco Beltrão**	Paraná	Poultry (including Turkey) slaughtering, animal feed and hatcheries
Garibaldi**	Rio Grande Sul	Poultry slaughtering
Herval D'Oeste	Santa Catarina	Pork slaughtering, industrialized products and hatchery.
Jataí**	Goiás	Poultry slaughtering, animal feed and hatchery
Lajeado	Rio Grande do Sul	Pork, poultry slaughtering and industrialized products
Lucas de Rio Verde	Mato Grosso	Pork and poultry slaughtering, industrialized products processing
Marau	Rio Grande Sul	Pork and poultry slaughtering, industrialized products, animal feed and hatcheries
Mineiros*/**	Goiás	Poultry and special poultry (turkey and Chester®) slaughtering and processing
Nova Marilândia*	Mato Grosso	Poultry slaughtering
Nova Mutum**	Mato Grosso	Poultry slaughtering, animal feed and hatchery
Paranaguá	Paraná	Industrialized products processing
Ponta Grossa	Paraná	Industrialized products processing
Rio Verde****	Goiás	Pork and poultry slaughtering, industrialized products processing
Sagrinco*	Santa Catarina	Pork slaughtering
Serafina Corrêa	Rio Grande Sul	Poultry slaughtering
Tatuí	São Paulo	Industrialized products processing
Toledo	Paraná	Pork and poultry slaughtering, industrialized products processing, animal feed and hatcheries
Uberlândia**	Minas Gerais	Poultry (including turkey) and pork slaughtering, industrialized products processing and hatcheries
Várzea Grande	Mato Grosso	Poultry slaughtering and industrialized products processing
Videira	Santa Catarina	Poultry slaughtering, industrialized products, animal feed and hatcheries.
Vitória de Santo Antão	Pernambuco	Industrialized products processing

*Soybean and Margarine Products:*
Paranaguá	Paraná	Margarine processing
Uberlândia	Minas Gerais	Margarine processing
Vitoria de Santo Antão	Pernambuco	Margarine processing
Dois Vizinhos**	Paraná	Soybean crushing
Videira	Santa Catarina	Soybean crushing
Toledo	Paraná	Soybean crushing

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* Production facilities owned and operated by third-party producers who produce according to our specifications.

** Operates in accordance with the Halal requirements.

*** The activities of the Mineiros plant were suspended by the MAPA on March 17, 2017 in connection with the Carne Fraca Operation. The plant resumed operations on April 11, 2017. For more details, see “Item 8. Financial Information—B. Significant Changes—Carne Fraca Operation.”

**** Exports of the Rio Verde, Carambei and Mineiros plants were suspended by the MAPA on March 5, 2018 in connection with Trapaça Operation. For more details, see “Item 8. Financial Information—B. Significant Changes— Trapaça Operation.”

Part of our real estate assets are subject to liens incurred to ensure our obligations to financing agreements, payment of taxes and lawsuits, as described in Note 17 to our consolidated financial statements.

Distribution Centers

We operate 20 distribution centers throughout Brazil, as set forth in the table below.

Location	State	Owned or Leased
Aparecida de Goiânia	Goiás	Leased
Belém	Pará	Leased
Cuiabá	Mato Grosso	Leased
Duque de Caxias	Rio de Janeiro	Leased
Embu	São Paulo	Leased
Exportação Ponta Grossa	Paraná	Owned
Fortaleza	Ceará	Leased
Itajaí	Santa Catarina	Leased
Jundiaí	São Paulo	Owned
Manaus	Amazonas	Leased
Marau	Rio Grande do Sul	Owned
Nova Santa Rita	Rio Grande do Sul	Leased
Ribeirão das Neves	Minas Gerais	Leased
Rio Verde	Goiás	Owned
Salvador	Bahia	Leased
São José dos Pinhais	Paraná	Leased
Uberlândia	Minas Gerais	Owned
Viana	Espírito Santo	Leased
Videira	Santa Catarina	Owned
Vitória de Santo Antão	Pernambuco	Owned

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We operate 27 transit points in Brazil in the locations set forth in the table below.

Transit Points	State of Location	Owned or Leased
Apucarana	Paraná	Leased
Aracajú	Sergipe	Leased
Araçatuba	São Paulo	Leased
Bauru	São Paulo	Owned
Brasília	Distrito Federal	Leased
Campo Grande	Mato Grosso do Sul	Owned
Campo dos Goytacazes	Rio de Janeiro	Leased
Criciúma	Santa Catarina	Leased
Governador Valadares	Minas Gerais	Leased
Guarulhos	São Paulo	Owned
Itabuna	Bahia	Leased
Limeira	São Paulo	Leased
Macapá	Amapá	Leased
Maceió	Alagoas	Leased
Marau	Rio Grande do Sul	Owned
Monte Claros	Minas Gerais	Leased
Parnamirim	Rio Grande do Norte	Leased
Paraíso do Tocantins	Tocantins	Leased
Pelotas	Rio Grande do Sul	Leased
Pouso Alegre	Minas Gerais	Leased
Ribeirão Preto	São Paulo	Leased
Santa Maria	Rio Grande do Sul	Leased
São José do Ribamar	Maranhão	Leased
São José dos Campos	São Paulo	Owned
Seabra	Bahia	Leased
Sorocaba	São Paulo	Leased
Teresina	Piauí	Leased

Environment

Our activities are subject to strict environmental laws and regulations at municipal, state and federal levels, which regulate the aspects related to water, effluents, solid wastes, atmospheric emissions, noise and smells. Our operations are also subject to environmental licensing procedures at federal, state and/or municipal levels.

Failure to comply with the environmental laws and regulations can result in civil and criminal penalties against the offender, in addition to indemnification payments for environmental damages. Civil penalties may include summons, fines, temporary or permanent bans, the suspension of subsidies by public bodies and the temporary or permanent shutdown of commercial activities. Criminal penalties include fines and prison (for individual offenders) and liquidation (for legal entities). Fines for operating without a license vary from state to state in accordance with the environmental damages caused. Furthermore, under Brazil’s environmental legislation, the corporate entity of a company will be disregarded if necessary to guarantee the payment of costs related to environmental damages.

We have an Environmental Policy that is based on the guidelines and principles established in the ISO14001 certification. This policy seeks to ensure that our activities and growth are carried out in accordance with the environmental legislation. We have established a set of standards to be used in the company’s environmental management. The monitoring of implementation of these standards is undertaken through technical indicators, with targets that are established on an annual basis. Corrective actions are established to resolve deviations that have been found. An assessment is carried out to make sure that the environmental management system is being observed.

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In 2017, we maintained seven plants with ISO 14001 certification, of which six are located in Brazil and one in the Netherlands. These plants were audited by regulatory bodies and undergo regular recertification.

Environmental management is part of our daily operations. Our internal controls are built to improve sustainability in our operations. We also take part in initiatives to preserve the environment and focus on developing alternative technologies for the generation and use of sustainable energy and have structured a program with our integrated producers to collect animal waste.

The partnership that we have with the integrated producers is one of the strategies we use to leverage global standards in our activities and those of our suppliers. We are responsible for the licensing projects of our integrated producers and for providing technical support and guidance to help them deal with environmental questions in the best possible way.

We have professional technicians in the environmental area and have trained them in the main environmental aspects. Our plants are built in line with the applicable environmental regulations. Our environmental structure is composed by experts, engineers and environmental analysts to assist the implementation and the monitoring of legal requirements and internal guidelines. We also have the support of the environmental legal department for legal assistance.

Despite our efforts to comply with the legislation and the environmental regulations, we have occasionally been required to sign environmental agreements with the Brazilian federal and local government related to the non-compliance with environmental licensing requirements. We are required, under these agreements, among other things, to repair any damages caused. If we do not comply with these obligations, we are subject to the payment of fines accrued on a daily basis.

On October 16, 2008, we executed a consent agreement with the Prosecutor´s Office of the Santa Catarina State relating to the regularization of the area of the unit installed in a Permanent Preservation Area. The agreement included environmental compensation, including institution of a Private Natural Reserve (Reserva Particular do Patrimônio Natural – RPPN) of 169,184.62 m², donation of assets and vehicles. The performance of this consent agreement is in progress pending the institution of the RPPN by the Santa Catarina State Environmental Foundation.

On May 20, 2008, Zulmar Bertuol (former owner of the property) executed a consent agreement with Mato Grosso State relating to a re-composition of the degradation of 3.3033 hectares in the Permanent Preservation Area and 85,811 hectares in the legal reserve area of Capivara II Farm. We signed the amendment in 2009. The TAC is in progress. If we do not comply with the schedule, we are subject to the payment of fines accrued on a daily basis and suspension of our environmental license.

On December 7, 2011, we executed a consent agreement with the public prosecutors’ office of the Rio Grande do Sul State, whose objective is to fill the non-vegetated areas, providing adequate soil cover with native tree species and the consequent minimization of the effects of erosion on the slope protection and the banks of the stream in the facility located in Lajeado. BRF has fulfilled its obligations thereunder and the Prosecutor’s Office is waiting for the conduction of inspections and receipt of reports from the city of Lajeado confirming compliance with such consent agreement.

On April 5, 2013, we executed a consent agreement with the civil prosecutors’ office of Rio Casca in the State of Minas Gerais for the inactivation of an old station of treatment of industrial effluents and for the restoration of the station area. The consenting party was the current owner of the area subject to the Plan of Recovery of Degraded Area (“PRAD”), Mr. Vicente de Paula Mendes. An alternative compliance Path (“ACP”) was filed, as well as a motion to Stay Execution.

On April 24, 2014, we executed a consent agreement with the public prosecutors’ office of the State of Goiás because of irregularities in the ground activity resulting from approximate 300 tons of solid material, which did not have proper treatment in the facility located in Rio Verde. The TAC is in progress.

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On September 18, 2015, we executed a consent agreement with the public prosecutor office of the Rio de Janeiro State in order to regularize the environmental license of the facility located in Duque de Caxias. The TAC is in progress.

On February 20, 2016, we executed a consent agreement with the public prosecutor office of the Santa Catarina State in order to compensate for the environmental damage caused by the disposal related to disposal of swine waste and violation of the Environmental Operating Law (LAO). The TAC is in progress.

On April 4, 2016, we executed a consent agreement with the public prosecutor office of the Goiás State in order to compensate for the environmental damage caused by the disposal of industrial waste without proper treatment in the Jataí facility. The TAC is in progress.

On June 26, 2016, we executed a commitment agreement with the Environmental Foundation Agency of Santa Catarina (“FATMA”), in order to compensate the failure to submit effluent emission report. The TAC is in progress.

In November 2016, FATMA signed a commitment agreement with Associação Catarinenense de Avicultura (“ACAV”), Sindicato da Indústria de Carnes e Derivados de Santa Catarina (“SINDICARNE”) and Associação Catarinense de Criadores de Suínos (“ACCS”), which has the object of suspending temporarily the liability for the fulfillment of Article 218, of Law 14675/2009 which determines that “activities /undertakings subject to licensing, which use water resources, shall include provisions for rainwater collection for miscellaneous use”, until the required technical parameters are established for the users of water resources in poultry and swine farming. TAC is in progress.

New investments that involve an increase in production or alteration in the process include the analysis of environmental controls and indicators. This procedure is part of the BRF environmental management system.

Insurance Coverage

We purchase insurance to cover all of our plants, equipment and inventories for losses, including business interruption insurance. In addition, we maintain a comprehensive products liability policy, which covers damages arising from the manufacture, distribution and sale of our products. We consider the amounts of our insurance coverage to be typical for a company of our size and adequate to meet the foreseeable risks associated with our operations.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

Overview

BRF S.A. is one of the largest producers of fresh and frozen protein foods in the world, with a portfolio of over four thousand SKUs. Our processed products include marinated and frozen chicken, Chester® rooster and turkey meats, specialty meats, frozen processed meats, frozen prepared entrees, portioned products and sliced products. We also sell margarine, sweet specialties, sandwiches, mayonnaise, and animal feed. We are the holder of brands such as Sadia, Perdigão, Qualy, Perdix, Paty, Bocatti, Vienissima, Dánica, Confidence, Speedy Polo and Hilal. In December 2017, BRF was responsible for 13.1%% of the world trade in poultry.

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We have been a public company since 1980. Our shares have been listed on the Novo Mercado of the São Paulo Stock Exchange as BRFS3 since 2006 and we are also traded on the New York Stock Exchange, or “NYSE,” (ADR level III). This commitment has been reinforced and internationally recognized since 2012, upon our entrance into the portfolio of Emerging Markets of Dow Jones Sustainability Index.

A breakdown of our products is as follows, all of which are sold both in Brazil and to our international customers:

· Meat Products, consisting of in natura meat, which we define as frozen whole and cut chicken, frozen pork and frozen beef cuts;

· Processed Food Products includes the following:

o marinated, frozen, whole and cut chicken, roosters (sold under the Chester^® brand) and turkey;

o specialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; and

o frozen processed meats, such as hamburgers, steaks, breaded meat products, kibes and meatballs;

· Other Processed Products includes the following:

o margarine, mayonnaise, mustard and ketchup; and

o frozen prepared entrees, such as lasagna and pizzas, as well as other frozen foods; and

· Other, consisting of soy meal, refined soy flour and animal feed.

In Brazil, we operate 35 industrial facilities, including meat processing, margarine processing, pasta processing, dessert processing plant and soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logistic system in our domestic market, with 20 distribution centers, being seven owned by us and 13 leased by third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our international markets, we operate 23 industrial facilities, including meat processing, margarine and oil processing, sauce and mayonnaise processing and frozen vegetables processing plants. We have 26 distribution centers located overseas, as well as 27 commercial offices on all five continents.

Principal Factors Affecting Our Results of Operations

Our operating results, financial condition and liquidity have been and will continue to be influenced by a broad range of factors, including:

· Economic conditions in Brazil and globally;

· The effect of trade barriers and other restrictions on imports;

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· Concerns over bird flu and other diseases of animal origin;

· Sensitivity of the domestic market to changes in global demand, including the impact of decisions by our main Brazilian competitors and temporary increases in supply from producers in other countries;

· Changes in commodity prices;

· Fluctuations in the exchange rate and inflation;

· Interest rates; and

· Freight costs.

We present a more detailed description of each of these factors below.

Brazilian and Global Economic Conditions

Brazilian monetary policy framework is of inflation targeting. The National Monetary Council (Conselho Monetário Nacional, or “CMN”) set the target inflation at 4.5% for 2017, with a range of 1.5 percentage points higher or lower. However, the inflation rate which had been consistently above the target at 10.67% and 6.29% in 2015 and 2016, respectively, decreased to 2.95% in 2017. Price increases generally reduce consumers’ purchasing power, particularly among the lower income class, and eventually limit consumption.

The Brazilian labor market registered an average unemployment rate of 11.8% in 2017, according to the IBGE’s National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílios, or “PNAD”), which represents a slight improvement when compared to previous year (12.0% in 2016). Additionally, after decreasing to 73.1 points in 2016 (compared to 86.9 in 2014), Brazilian consumer confidence increased to 86.4 points in December 2017, according to a Consumer Survey of Fundação Getúlio Vargas (FGV).

GDP in Brazil increased at an average annual rate of 2.4% from 2004 through 2017. For two consecutive years, in 2015 and in 2016, Brazil’s GDP decreased by 3.5%, after increasing 0.5% in 2014. Reacting to this weak economic scenario, the Central Bank has lowered the SELIC interest rate, which is the short-term benchmark interest rate. Overall, the long-term trend in interest rates remains downward, from 17.8% as of December 31, 2004 to 7.0% as of December 31, 2017. In 2017, GDP increased by 1.0%.

Regarding the currency, the Brazilian Real depreciated 1.5% against the US dollar in 2017, from R$3.2591 per U.S.$1.00 in 2016 to R$3.3080 per U.S.$1.00 in 2017.

For a discussion on the global economic conditions and further information on the conditions on our export markets and the Brazilian market, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information.”

Effects of Trade and Other Barriers

Global demand for Brazilian poultry and pork products is significantly affected by trade barriers, including (i) tariff barriers, or high rates that ultimately protect certain markets; and (ii) non-tariff barriers, mainly import quotas, sanitary barriers (which are the most common type of barriers faced by the meat industry) and technical/religious barriers. In addition, some countries employ subsidies for production and exports, which tend to distort international trade and interfere with our business.

With regard to sanitary requirements, most countries demand specific sanitary agreements so that Brazilian producers can export to them. Moreover, zoonosis outbreaks may result in banishment to imports.

In addition to trade barriers, the economic conditions of a particular market (national or international) may interfere with the demand for all types of poultry, swine and bovine meat, as well as other processed products.

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We continuously monitor trade barriers and other import restrictions in the global poultry, pork and beef markets, since these restrictions significantly affect the demand for our products and the levels of our exports. These restrictions often change, as illustrated by the following examples.

Tariff barriers (classical form and derived from trade defense disputes)

The EU (since 2007) and Russia (since 2012) have protected their meat industries by applying import quotas and high tariffs (occasionally prohibitive) on volumes imported outside of the quota.

In September 2013, South Africa raised duties on chicken products originating in all countries except the EU (due to a free trade agreement between them that establishes zero tariff on poultry products). Tariffs increased to 82% on whole chicken, 12% on boneless cuts and 37% on bone-in cuts.

In December 2016, Saudi Arabia increased its import tariff for poultry meat from 5% to 20%.

Non-tariff barriers

Import quotas

In 2005, Brazil obtained a favorable result in a panel against the EU at the WTO regarding the reclassification (and tariff increase) of salted chicken breast meat exports. In return, the EU introduced quotas on imports of certain tariff codes, especially for salted chicken breast, marinated turkey breast and processed chicken, and in July 2007, Brazil was awarded the majority of these quotas.

Russia utilizes quotas to control the imports of pork, beef and poultry. As part of the negotiations surrounding its accession to the WTO, Russia made some changes to its quota criteria as of 2013. Regarding chicken imports, Russia defined a quota of 250,000 tons of bone-in products, with no geographical breakdown. The intra-quota tariff is 25% and the extra-quota is 80%. There is also a quota of 70,000 tons of boneless cuts, of which 56,000 tons are reserved for the EU. As for swine, it was defined at a 400,000 tons quota with zero tariff on intra-quota volumes and 65% for volumes imported outside the quota. For bovine imports, Russia has established a quota of 530,000 tons for all WTO members, of which 60,000 belong to the EU and 3,000 to Costa Rica.

In December 2015, Mexico renewed its import poultry meat quota of 300 thousand tons until the end of 2017.

Sanitary barriers

Several major markets (despite progress in trade negotiations) are not yet open to Brazilian meat products due to sanitary barriers. Some examples are the EU, Korea and Colombia for swine meat, and Taiwan and Panama for poultry meat.

Outbreaks of avian flu have already harmed the consumption and chicken exports meat in several countries, like the U.S., China/Hong Kong, Mexico and many European countries.

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Technical barriers

In December 2015, the WTO established a panel requested by the Brazilian government in order to investigate technical barriers imposed by Indonesia in the imports of poultry meat.

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 requirements in order to minimize their effect on our net export sales. In the long term, these restrictions affect the growth rate of our business.

Effect of Animal Diseases

Avian Influenza

Avian Influenza has captured the attention of the international community over the years, with outbreaks in poultry having serious consequences on both livelihoods and international trade in many countries. In addition, although most avian influenza viruses do not infect humans, some, such as avian influenza H5N1 and H7N9, are well known to the public because of their implication in serious and sometimes fatal infections in people.

Demand for our products can be significantly affected by outbreaks of animal diseases like Avian Influenza. For example, global demand for poultry products decreased in 2006 due to concerns over the spread of avian influenza. Although there have been no reported cases of this disease in Brazil, in 2006, the demand for our poultry products in our export markets was significantly lower, resulting in lower net sales of such products in our export markets in that period. Although net sales of poultry products in the domestic market increased in 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, the 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.

Avian Influenza continues to be a global public health concern due to ongoing circulation of various strains (H5N1, H5N2, H5N8, H7N8, etc.). According to the World Organization for Animal Health (“OIE”), from January 2014 to November 2016, avian influenza has been identified in 77 countries and 13 strains have been detected. Avian influenza has killed both domestic and wild birds and has led to the destruction of hundreds of millions of domestic birds.

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 eventually 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.

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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. We do not raise hogs in Mato Grosso do Sul and Paraná. However, these bans have affected Brazilian exports into Russia generally and, at the time, 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.

A viral disease named pork epidemic diarrhea (“PED”) was diagnosed in North America and Asia in the last few years. The principal clinical signs are enteric symptoms, stunting and high mortality. In these places, the disease was responsible for significant increase in terminated animals and consequent increasing price due to low supply. A vaccine to prevent the disease has not yet been developed but general management and biosecurity reduce the impact.

Effect of Export Market Demand on the Domestic Market

Demand fluctuations for poultry, pork and beef products in our export markets often have an effect on the supply and selling prices of those products in the Brazilian market. This is a result of a demand decrease in key export markets caused by the imposition of trade barriers, global economic factors, and concerns about animal disease outbreaks, among others. Brazilian exporters generally redirect the products for that market to the domestic market, increasing the supply of those products internally and often negatively impacting the selling price. This consequently affects our net sales in the domestic market.

For example, in 2014, Russia, banned pork and poultry imports from the United States, Canada and Europe causing a lack of supply of products in the Russian market (and consequently much higher prices), which led Brazilian players to redirect their products to Russia, causing lower supply and higher prices in Brazil. In 2015, some countries banned poultry imports from the United States, in response to the avian flu outbreak. Generally, countries have adopted a policy to ban only the specific region in which the outbreaks occurred. However, China and South Korea have been stricter, banning the country as a whole. In the last months of 2016, many cases of avian flu were reported across Europe and in some Asian countries, such as Japan and South Korea. Those cases did not have a huge impact in world trade due to the fact that importers banned specific regions of the European countries. In Korea, until December 2016, the country was forced to cull 22.5 million poultry, which is approximately 15% of the country’s poultry stock.

We monitor the actions of our domestic competitors since they are also impacted by external market changes and may also redirect their products to the domestic market. In addition, we pay close attention to fluctuations in supply generated by producers in the U.S., the EU and other regions since increases in production in those markets can lead to a greater supply in other countries.

Commodity Prices

Many of our raw materials are commodities whose prices consistently fluctuate in response to market forces of supply and demand. We purchase large quantities of corn, soybean meal, vegetable oils and soybeans (grain), which we use to produce substantially all of 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 and are influenced by exchange rate fluctuations. Purchases of corn, soybean meal and soybeans represented approximately 28.5% of our cost of production in 2017, compared to 32.5% in 2016. Although we produce most of the hogs we use for our pork products, in 2017 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 with them. In 2017, the average corn price in Brazil was 36.0% lower than in 2016. Besides that, corn prices in December 2017 were 17.6% lower than in December 2016. In 2017, the average soybean meal price in Brazil was 19.5% lower than in 2016. In December 2017, soybean meal prices in Brazil were 7.3% lower than in December 2016. 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.

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Wholesale Soybean Meal Prices at Ponta Grossa, State of Paraná (R$ per metric ton)

For further information about trends in commodity prices in 2018, 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 National Index of Consumer Prices (Índice Nacional de Preços ao Consumidor, or “INPC”), IPCA and IGP-M.

	2017	2016	2015
Depreciation of the real against the U.S. dollar	(1.50%)	16.51%	(47.01%)
Period-end exchange rate (U.S.$1.00)	R$3.31	R$3.26	R$3.90
Average (daily) exchange rate (U.S.$1.00)⁽¹⁾	R$3.19	R$3.48	R$3.34
Period-end Basic interest rate SELIC⁽²⁾	7.00%	13.75%	14.25%
Inflation (INPC)⁽³⁾	2.10%	6.58%	11.28%
Inflation (IPCA)⁽⁴⁾	2.90%	6.29%	10.67%
Inflation (IGP-M)⁽⁵⁾	0.50%	7.17%	10.54%

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 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.

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, and the opposite occurs when the real depreciates against those currencies.

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 the real depreciates against the U.S. dollar, the cost in reais 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 the real 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.

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We had total foreign currency-denominated debt obligations in an aggregate amount of R$11,101.3 million at December 31, 2017, representing 54.3% 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 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, 2017, 38.2% of our total liabilities with respect to indebtedness of R$20,444.4 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 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.

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,
	2017	2016	2015
	(%)	(%)	(%)
TJLP	7.0	7.5	6.3
CDI	9.9	14.1	13.4
Six-month LIBOR	1.8	1.1	0.49

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 2017, 2016 and 2015, freight costs represented approximately 4.6%, 4.3% and 5.5% 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.

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Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements included elsewhere in this annual report. The following table sets forth the components of our results of operations as a percentage of net sales for 2017, 2016 and 2015.

	Year Ended December 31,
	2017		2016		2015
	(in millions of *reais*)	(%)	(in millions of *reais*)	(%)	(in millions of *reais*)	(%)
Continuing Operations
Net sales	33,469.40	100.00	33,732.90	100.00	32,196.60	100.00
Cost of sales	(26,565.30)	(79.40)	(26,206.40)	(77.70)	(22,107.70)	(68.70)
Gross profit	6,904.10	20.60	7,526.50	22.30	10,088.90	31.30
Operating income (expenses)
Selling	(4,730.10)	(14.10)	(4,965.70)	(14.70)	(4,805.90)	(14.90)
General and administrative	(572.00)	(1.70)	(577.40)	(1.70)	(506.10)	(1.60)
Other operating expenses	(888.20)	(2.70)	(197.50)	(0.60)	(444.70)	(1.40)
Equity interest of affiliates	22.40	0.10	29.30	0.10	(103.80)	(0.30)
Operating income	736.20	2.20	1,815.20	5.40	4,228.40	13.10
Financial expenses

B. Significant Changes	119
ITEM 9. THE OFFER AND LISTING	122
A. Offer and Listing Details	122
B. Plan of Distribution	123
C. Markets	123
D. Selling Shareholders	126
E. Dilution	126
F. Expenses of the Issue	126
ITEM 10. ADDITIONAL INFORMATION	126
A. Share Capital	126
B. Memorandum and Articles of Association	126
C. Material Contracts	146
D. Exchange Controls	146
E. Taxation	147
F. Dividends and Paying Agents	156
G. Statement by Experts	156
H. Documents on Display	156
I. Subsidiary Information	156
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	156
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	163
A. Debt Securities	163
B. Warrants and Rights	163
C. Other Securities	163
D. American Depositary Shares	163
PART II	163
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	163
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	164
ITEM 15. CONTROLS AND PROCEDURES	164
A. Disclosure Controls and Procedures	164
B. Management's Annual Report on Internal Control Over Financial Reporting	165
C. Attestation Report of the Registered Public Accounting Firm	166
D. Changes in Internal Control Over Financial Reporting	166
ITEM 16. [RESERVED]	166
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT	166
ITEM 16B. CODE OF ETHICS	166
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES	166

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	167
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	167
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	167
ITEM 16G. CORPORATE GOVERNANCE	168
ITEM 16H. MINE SAFETY DISCLOSURE	170
PART III	170
ITEM 17. FINANCIAL STATEMENTS	170
ITEM 18. FINANCIAL STATEMENTS	170
ITEM 19. EXHIBITS	170
INDEX TO FINANCIAL STATEMENTS	F-1

PART I INTRODUCTION	1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3. KEY INFORMATION	2
A. Selected Financial Data	2
B. Capitalization and Indebtedness	4
C. Reasons for the Offer and Use of Proceeds	4
D. Risk Factors	4
ITEM 4. INFORMATION ON THE COMPANY	28
A. History and Development of the Company	28
B. Business Overview	32
C. Organizational Structure	54
D. Property, Plant and Equipment	55
ITEM 4A. UNRESOLVED STAFF COMMENTS	59
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	59
A. Operating Results	59
B. Liquidity and Capital Resources	80
C. Research and Development, Patents and Licenses, etc	92
D. Trend Information	94
E. Off-Balance Sheet Arrangements	96
F. Tabular Disclosure of Contractual Obligations	97
G. Safe Harbor	97
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	97
A. Directors and Senior Management	97
B. Compensation	101
C. Board Practices	102
D. Employees	105
E. Share Ownership	106
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	108
A. Major Shareholders	108
B. Related Party Transactions	110
C. Interests of Experts and Counsel	111
ITEM 8. FINANCIAL INFORMATION	111
A. Consolidated Statements and Other Financial Information	111

PART I INTRODUCTION

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

ITEM 3. KEY INFORMATION

A. Selected Financial Data

B. Capitalization and Indebtedness

C. Reasons for the Offer and Use of Proceeds

D. Risk Factors

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

B. Business Overview

C. Organizational Structure

D. Property, Plant and Equipment

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A. Operating Results

PART I
INTRODUCTION