U.S. UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

¨            REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20152018
OR

¨            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨            SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-15148

BRF S.A.

(Exact Name of Registrant as Specified in its Charter)charter)

N/A

(Translation of Registrant’s name into English)

Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)

R. Hungria, 1400 - 5thAv. Das Nações Unidas, 8501 – 1st Floor
Jd. EuropaPinheiros01455-00005425-070

São Paulo – SP, Brazil
(Address of principal executive offices)

José Alexandre Carneiro Borges, Lorival Nogueira Luz Júnior

Global Chief Operating Officer and Interim Chief Financial and Investor Relations Officer
Tel. (5511) 2322-5005, Fax (5511) 2322-5740
R. Hungria, 1400 - 5thAv. Das Nações Unidas, 8501 – 1st Floor
Jd. Europa - 01455-000Pinheiros – 05425-070

São Paulo – SP, Brazil
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Classeach class

Name of Each Exchange on

 

Common Shares, no par value*

American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of common stock

Name of each exchange on

which Registeredregistered

The New York Stock Exchange

The New York Stock Exchange

____________________

*  Not for trading purposes, but only in connection with the registration of American Depositary Shares representing those common shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None


 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

At December 31, 20152018

872,473,246812,473,246 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.  Yesx   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¨   Nox

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 Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yesx  No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data filedInteractive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 203.405232.405 of this chapter) during the preceding 12 months (or for such othershorter period that the registrant was required to submit and post such files). Yes¨x  No¨

Note:  Not required for registrant.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer, and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerx

Accelerated filer¨

Non-accelerated filer  ¨

Non-accelerated filerEmerging 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¨   Nox

 


 

TABLE OF CONTENTS

Page

PART I INTRODUCTION

1

ITEM 1.      IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

12

ITEM 2.      OFFER STATISTICS AND EXPECTED TIMETABLE

2

ITEM 3.      KEY INFORMATION

2

A.           Selected Financial Data

2

B.           Capitalization and Indebtedness

43

C.           Reasons for the Offer and Use of Proceeds

43

D.           Risk Factors

43

ITEM 4.      INFORMATION ON THE COMPANY

2329

A.           History and Development of the Company

2329

B.           Business Overview

2832

C.           Organizational Structure

4851

D.           Property, Plant and Equipment

4952

ITEM 4A.   UNRESOLVED STAFF COMMENTS

56

ITEM 5.      OPERATING AND FINANCIAL REVIEW AND PROSPECTS

56

A.           Operating Results

56

B.           Liquidity and Capital Resources

8474

C.           Research and Development, Patents and Licenses

9186

D.           Trend Information

9388

E.           Off-Balance Sheet Arrangements

9590

F.            Tabular Disclosure of Contractual Obligations

9591

G.           Safe Harbor

9691

ITEM 6.      DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

9691

A.           Directors and Senior Management

9691

B.           Compensation

10096

C.           Board Practices

10197

D.           Employees

104100

E.           Share Ownership

105101

ITEM 7.      MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

107103

A.           Major Shareholders

107103

B.           Related Party Transactions

109106

C.           Interests of Experts and Counsel

110107

ITEM 8.      FINANCIAL INFORMATION

110107

A.           Consolidated Statements and Other Financial Information

110107


B.           Significant Changes

116117

i


ITEM 9.      THE OFFER AND LISTING

116117

A.           Offer and Listing Details

116117

B.           Plan of Distribution

117

C.           Markets

117

D.           Selling Shareholders

119120

E.           Dilution

119120

F.            Expenses of the Issue

120

ITEM 10.    ADDITIONAL INFORMATION

120

A.           Share Capital

120

B.           Memorandum and Articles of Association

120

C.           Material Contracts

142141

D.           Exchange Controls

142141

E.           Taxation

143141

F.            Dividends and Paying Agents

151

G.           Statement by Experts

151152

H.           Documents on Display

151152

I.            Subsidiary Information

152

ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

152

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

159158

A.           Debt Securities

159158

B.           Warrants and Rights

159158

C.           Other Securities

159158

D.           American Depositary Shares

159158

PART II

160159

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

160159

ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

160159

ITEM 15.    CONTROLS AND PROCEDURES

160159

A.           Disclosure Controls and Procedures

160159

B.           Management’s Annual Report on Internal Control Over Financial Reporting

161160

C.           Attestation Report of the Registered Public Accounting Firm

161160

D.           Changes in Internal Control Over Financial Reporting

161160

ITEM 16.    [RESERVED]

162160

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

162160

ITEM 16B. CODE OF ETHICS

162161

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

162161


ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

163162

ii


ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

163162

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

163162

ITEM 16G. CORPORATE GOVERNANCE

163162

ITEM 16H.MINE SAFETY DISCLOSURE

165164

PART III

165164

ITEM 17.    FINANCIAL STATEMENTS

165164

ITEM 18.    FINANCIAL STATEMENTS

165164

ITEM 19.    EXHIBITS

165164

INDEX TO FINANCIAL STATEMENTS

167

F-1

 

iii


 

Table of Contents

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,” or “our” or “our company” are references to BRF, together with its consolidated subsidiaries, 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 dollars.  Sadia S.A. (“Sadia”), formerly our wholly-owned subsidiary, was incorporated by BRF on December 31, 2012.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” 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 acquisition or joint venture transactions or other investment opportunities that may occur in the future, (ii) general economic, political and business conditions in our company’s markets, both in Brazil and abroad, (iii) the cyclicality and volatility of raw materials and selling prices, (iv) health risks related to the food industry, (v) the risk of outbreak of animal diseases (vi)including in connection with ongoing investigations and legal proceedings, (ii) more stringent trade barriers in key export markets and increased regulation of food safety and security, (iii) the risk of outbreak of animal diseases, (iv) risks related to climate change, (v) the risk of any shortage or lack of water or other raw materials necessary for our business, (vi) compliance with various laws and regulations, (vii) risks related to new product innovation, (viii) the implementation of the principal operating strategies of the Company, including through divestitures, acquisitions or joint ventures, (ix) general economic, political and business conditions in our markets, both in Brazil and abroad, (x) the cyclicality and volatility of raw materials and selling prices, including as a result of ongoing global trade disputes, (xi) strong international and domestic competition, (viii)(xii) risks related to labor relations, (xiii) the protection of our intellectual property, (xiv) the potential unavailability of transportation and logistics services, (xv) the risk that our insurance policies may not cover certain of our costs, (xvi) our ability to recruit and retain qualified professionals, (xvii) the risk of cybersecurity breaches, (xviii) risks related to our indebtedness, (xix) risks related to the Brazilian economy and to Brazilian politics, (xx) interest rate fluctuations, inflation and exchange rate movements of thereal in relation to the U.S. dollar and other currencies, (ix) the declaration or payment of dividends, (x)(xxi) the direction and future operation of the Company, (xi) the implementation of the Company’s financing strategy and capital expenditure plans, (xii)(xxii) the Company’s financial condition or results of operations and (xiii)(xxiii) other factors identified or discussed under “Item 3. Key Information––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.

1


ITEM 1.           IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.


Table of Contents

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, 2018, 2017, 2016, 2015 2014, 2013, 2012 and 2011,2014, 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 2014,July 2015, we entered into an agreement with Lactalis for the sale ofsold the assets of our then dairy segment, including plants and trademarks, toLactalis do Brasil – Comércio, Importação e Exportação de Laticínios Ltda. (“Lactalis”).

We adopted a financial and operational restructuring plan in June 2018 to reduce our leverage and rationalize some of our business operations. In connection with this plan, we disposed of assets in Argentina and the plant located at Várzea Grande – MT in early 2019, and we entered into a share sale and purchase agreement for the disposal of most of our assets in Europe and Thailand, which deal was closedwe expect to complete in 2015. As a result, this segment is2019. These businesses are reported in our financial statements as discontinued operations which requires the presentation of priorfor all periods of this segment as discontinued operations. Unless stated otherwise, the results and cash flows that we present in this annual report do not consider the results and cash flows from this discontinued operation (dairy segment).presented.

The summaryselected 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,

 

Year Ended December 31,

2018

2017

2016

2015

2014

 

2015

 

2014

 

2013

 

2012

 

2011

(in millions ofreais, except share, per share and per ADS amounts and as otherwise indicated)

Income Statement Data

 

(in millions ofreais, except share, per share and per ADS amounts and as otherwise indicated)

 

 

Continuing Operations

          

 

 

Net sales

 

32,196.6

 

29,006.8

 

27,787.5

 

25,974.6

 

23,167.4

30,188.4

28,314.2

27,883.9

27,514.0

25,464.4

Gross profit

 

10,088.9

 

8,509.4

 

6,909.9

 

5,902.5

 

6,112.1

4,867.7

5,712.9

6,949.9

9,052.8

7,711.1

Operating income

 

4,228.4

 

3,478.3

 

1,896.4

 

1.359.9

 

2,025.8

Income from Continuing Operations

 

2,947.7

 

2,135.0

 

1,019.7

 

804.6

 

1,383.5

Operating income (loss)

(206.3)

663.2

1,962.9

3,841.8

3,221.7

Income (Loss) from Continuing Operations

(2,114.5)

(966.8)

(111.0)

2,630.4

1,944.7

          

 

Income from Discontinued Operations

 

183.1

 

89.8

 

47.2

 

(27.2)

 

(18.4)

Net profit

 

3,130.8

 

2,224.8

 

1,066.8

 

777.4

 

1,365.1

Income (Loss) from Discontinued Operations

(2,351.7)

(132.1)

(256.3)

317.3

190.3

Net profit (Loss)

(4,466.2)

(1,098.9)

(367.3)

2,947.7

2,135.0

Attributable to:

          

 

Controlling shareholders

 

3,111.2

 

2,225.0

 

1,062.4

 

770.0

 

1,367.4

(4,448.1)

(1,125.6)

(372.3)

2,928.1

2,135.2

Non-controlling shareholders

 

19.6

 

(0.2)

 

4.4

 

7.4

 

(2.3)

(18.1)

26.7

5.0

19.6

(0.2)

          

 

Earnings per share - basic from continuing operations

 

3.5009

 

2.4529

 

1.1713

 

0.9254

 

1.5893

Earnings per ADS - basic from continuing operations

 

3.5009

 

2.4529

 

1.1713

 

0.9254

 

1.5893

Earnings per share - basic

 

3.7184

 

2.5563

 

1.2204

 

0.9352

 

1.5708

Earnings per ADS - basic

 

3.7184

 

2.5563

 

1.2204

 

0.9352

 

1.5708

Earnings (loss) per share - basic from continuing operations

(2.6069)

(1.2249)

(0.1344)

3.5009

2.4529

Earnings (loss) per ADS - basic from continuing operations

(2.6069)

(1.2249)

(0.1344)

3.5009

2.4529

Earnings (loss) per share – basic

(5.4827)

(1.4007)

(0.4644)

3.7184

2.5563

Earnings (loss) per ADS – basic

(5.4827)

(1.4007)

(0.4644)

3.7184

2.5563

Weighted average shares outstanding at the end of the year – basic (millions)

 

842,000

 

870,412

 

870,535

 

869,534

 

870,507

811,294

803,560

801,903

842,000

870,412

Earnings per share - diluted

 

3.6932

 

2.5551

 

1.2192

 

0.9400

 

1.5707

Earnings per ADS - diluted

 

3.6932

 

2.5551

 

1.2192

 

0.9400

 

1.5707

Earnings (loss) per share – diluted

(2.6069)

(1.2249)

(0.1344)

3.6932

2.5551

Earnings (loss) per ADS – diluted

(2.6069)

(1.2249)

(0.1344)

3.6932

2.5551

Weighted average shares outstanding at the end of the year – diluted (millions)

 

842,402

 

870,824

 

871,442

 

869,703

 

870,546

811,294

803,560

801,903

842,402

870,824

Dividends per share

 

1.1998

 

0.8486

 

0.8315

 

0.3200

 

0.7271

0.7641

1.1998

0.8486

Dividends per ADS

 

1.1998

 

0.8486

 

0.8315

 

0.3200

 

0.7271

0.7641

1.1998

0.8486

Dividends per ADS (in U.S. dollars)

 

0.3073

 

0.3195

 

0.3550

 

0.1566

 

0.3876

 

3.9048

 

2.6562

 

2.3426

 

2.0435

 

1.8758

Dividends per ADS (in U.S.$)

0.2345

0.3073

0.3195

Exchange Rate (R$/U.S.$) on December 31

3.8748

3.3080

3.2591

3.9048

2.6562


Table of Contents

  

 

At December 31,

  

2015

 

2014

 

2013

 

2012

 

2011

  

(in millions ofreais, except as otherwise indicated)

Balance Sheet Data

          

Cash and cash equivalents

 

5,362.9

 

6,006.9

 

3,127.7

 

1,930.7

 

1,366.8

Trade accounts receivable, net

 

3,876.3

 

3,046.9

 

3,338.4

 

3,131.2

 

3,207.8

Inventories

 

4,032.9

 

2,941.4

 

3,111.6

 

3,018.6

 

2,679.2

Total current assets

 

19,180.1

 

17,488.3

 

13,242.5

 

11,590.0

 

11,123.8

Property, plant and equipment, net

 

10,915.8

 

10,059.3

 

10,821.6

 

10,670.7

 

9,798.4

Intangible assets

 

5,010.9

 

4,328.6

 

4,757.9

 

4,751.7

 

4,386.1

Total non-current assets

 

21,207.9

 

18,615.4

 

19,132.1

 

19,175.5

 

18,859.7

Total assets

 

40,388.0

 

36,103.7

 

32,374.6

 

30,765,5

 

29,983.5

Short-term debt

 

2,628.2

 

2,738.9

 

2,696.6

 

2,440.8

 

3,452.5

Trade accounts payable

 

4,745.0

 

3,522.2

 

3,674.7

 

3,381.3

 

2,681.3

Total current liabilities

 

11,621.2

 

9,569.1

 

8,436.0

 

7,481.6

 

7,987.8

Long-term debt

 

12,551.1

 

8,850.4

 

7,484.6

 

7,077.6

 

4,601.1

Total non-current liabilities

 

14,930.8

 

10,844.7

 

9,242.4

 

8,694.7

 

7,885.7

Shareholders’ equity

          

Capital

 

12,460.5

 

12,460.5

 

12,460.5

 

12,460.5

 

12,460.5

Total shareholders' equity

 

13,836.0

 

15,689.9

 

14,696.2

 

14,589.2

 

14,110.0

Total liabilities and shareholders’ equity

 

40,388.0

 

36,103.7

 

32,374.6

 

30,765,5

 

29,983.5

          

 

                     

 

 

2015

2014

2013

2012

2011

Operating Data

 

 

 

 

 

Poultry slaughtered (million heads per year)

1,724.4

1,663.6

1,795.9

1,792.4

1,756.4

Pork/beef slaughtered (thousand heads per year)

9,510.5

9,620.6

9,744.1

10,874.1

10,847.9

Total production of meat and other processed products (thousand tons per year)

4,358.2

4,307.1

4,595.4(1)(2)

4,809.0

4,641.0

Employees (at year end)

96,279

108,829

110,138

113,992

119,167


(1)     Meat volumes for the third quarter of 2013 were adjusted from 985.5 to 985.2 due to a correction in the Argentina’s production volumes.

(2)     Other processed volumes for the third quarter of 2013 were adjusted from 131.5 to 130.9 due to a correction in the Argentina’s production volumes.2

Exchange Rates

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reaisby 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 realto float freely or will intervene in the exchange rate market through the return of a currency band system or otherwise.  The realmay 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

2011

1.9016

1.5345

1.6746

1.8758

2012

2.1121

1.7024

1.9550

2.0435

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

 

 

Reais per U.S. Dollar

Month

High

Low

September 2015

4.1949

3.6725

October 2015

4.0010

3.7386

November 2015

3.8506

3.7010

December 2015

3.9831

3.7476

January 2016

4.1558

3.9863

February 2016

4.0492

3.8653

 

At December 31,

 

2018

2017

2016

2015

2014

 

(in millions ofreais, except as otherwise indicated)

Balance Sheet Data

 

 

 

 

 

Cash and cash equivalents

4,869.6

6,010.8

6,356.9

5,362.9

6,006.9

Trade accounts receivable, net

2,604.9

3,919.0

3,085.1

3,876.3

3,046.9

Inventories

3,877.3

4,948.2

4,791.6

4,032.9

2,941.4

Assets held for sale

3,326.3

41.6

26.1

32.4

1,958.0

Total current assets

19,030.9

19,185.4

18,893.7

19,180.1

17,488.3

Property, plant and equipment, net

10,697.0

12,190.6

11,746.2

10,915.8

10,059.3

Intangible assets

5,019.4

7,197.6

6,672.6

5,010.9

4,328.6

Total non-current assets

23,351.5

26,043.1

24,051.2

21,207.9

18,615.4

Total assets

42,382.4

45,228.5

42,944.9

40,388.0

36,103.7

Short-term debt

4,547.4

5,031.4

3,245.0

2,628.2

2,738.9

Trade accounts payable

5,552.4

6,445.5

5,839.8

4,745.0

3,522.2

Total current liabilities

14,488.6

14,874.4

12,640.4

11,621.2

9,569.1

Long-term debt

17,618.1

15,413.0

15,717.4

12,551.1

8,850.4

Total non-current liabilities

20,362.0

18,641.3

18,085.1

14,931.0

10,844.7

Equity

 

 

 

 

 

Capital

12,460.5

12,460.5

12,460.5

12,460.5

12,460.5

Total equity

7,531.8

11,712.8

12,219.4

13,836.0

15,689.9

Total liabilities and equity

42,382.4

45,228.5

42,944.9

40,388.0

36,103.7

 

Source: Central Bank.

        The exchange rate on March 15, 2016 was R$3.7116 per US$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 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 our brandsbrands. Among such risks are those related to raising animals, including disease and adverse weather conditionsconditions.

Meat iscan be subject to contamination during processing and distributiondistribution. In particular, processed meat may become exposed to various disease-producing pathogens, including Listeria monocytogenes, Salmonella enteritidis,Salmonella tiphimurium and E. coliO157:H7. Contamination during processing could affect a large number ofThese 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-controlled storage and therefore could havetransportation systems, is also a significant impact on our operations.


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Our sales are dependent on consumer preferences and any actual or perceived health risks associated with our products, including any adverse publicity concerning these risks, could cause customers to lose confidence in the safety and quality of our products, reducing the level of consumption of those products.

Even if our own products are not affected by contamination, our industry may face adverse publicity if the products of other producers become contaminated, which could result in reduced consumer demand for our products in the affected categoryrisk. We maintain systems designed to monitor food safety risks throughout all stagesallstages of the production process (including the production of poultry and hogs),distribution, but these systems could fail to function properly and product contamination may occur,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.

Raising animals

3


On February 13, 2019, we announced a voluntary recall of approximately 164.7 metric tons of fresh chicken meat for the Brazilian domestic market and approximately 299.6 metric tons of fresh chicken meat processing involve animal healthfor the international market due to a concern of salmonella contamination. While we believe we have taken all appropriate steps to address this issue, the recall resulted in increased costs and disease control risks, which could have an adverse impact onnegatively affect our resultsbrands’ reputation. In the future, a product that has been actually or allegedly contaminated could result in product withdrawals or recalls, disposal of operationsproduct inventory, negative publicity, temporary plant closings, substantial cost of compliance or remediation and financial condition.

Our operations involve raising poultry and hogs and processing their meat, which require us to maintain animal health and control disease.  Wepotentially significant product liability judgments against us. Any of these events could be required to destroy animals or suspend the saleresult in a loss of some ofdemand for 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 A(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. An outbreak of foot-and-mouth disease could have an effect on livestock we own, the availability of livestock for purchase, consumer perception of certain protein products or our ability to access certain markets, which would adversely affect our results of operations and financial condition.

Outbreaks, or fears of outbreaks, of any of these or other animal diseases may lead to cancellation of orders by our customers and, particularly if the disease has the potential to affect humans, create adverse publicity that may have a material adverse effect on our business, results of operations, financial condition and prospects.

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.  Moreover, outbreaks of animal diseaseproducts in Brazil maythe affected category. Significant lawsuits, widespread product recalls and other negative events faced by us or our competitors could result in foreign governmental actiona 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 close export markets to some or alllose confidence in the safety and quality of our products which may result in the destructionand have a material adverse impact on our business, results of some or all of these animals. Our poultry business in Brazilianoperations, financial condition and export markets could also be negatively affected by avian influenza.prospects.

We have recently been subject to significant investigations relating to, among other things, food safety and quality control.

Chicken and other birdsBrazilian authorities are investigating Brazil’s meat processing industry in some countries, particularly in Asia but also in Europe and Africa, have become infected by highly pathogenic avian influenzathe so-called “.Carne Fraca InOperation.” The investigation involves a small number of cases,companies in the avian influenza has been transmitted from birdsBrazilian industry and, among other things, includes allegations relating to humans, resultingfood safety and quality control. On January 22, 2018, the Attorney General’s Office of the Third District of the State of Goiás filed a complaint against the industrial manager of our Mineiros plant at the time of the events subject to investigation in illness and, on occasion, death.  Accordingly, health authorities in many countries have taken steps to prevent outbreakstheCarne Fraca Operation, who is a current member of this viral disease, including destruction of afflicted poultry flocks.

Between 2010our corporate engineering team, and the first weekformer head of 2016, therequality control at our Mineiros plant, who was dismissed on August 16, 2016. Both of them were charged for allegedly committing crimes against consumers, as provided in article 7, item II of Law 8,137/90. According to the Attorney General’s Office of the Third District of the State of Goiás, laboratory tests (dripping tests) have detected excessive levels of water absorbed by the chicken products collected by authorities at our Mineiros plant. The Attorney General’s Office of the Third District of the State of Goiás 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 potentially be acquiring chicken meat products with a weight lower than that indicated on the packaging, since part of the weight of the frozen chicken would consist merely of water contained therein. The complaint does not contain any allegations of corruption.

On March 5, 2018, BRF learned of a decision issued by a federal judge of the 1st Federal Court of Ponta Grossa in the State of Paraná, which authorized 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 the “Trapaça Operation,” 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 over 378 human casesreleased from custody, but all such current employees are on leaves of avian influenzaabsence from BRF. A number of other BRF employees and over 167 related deaths, accordingformer employees were identified for questioning. The primary allegations in theTrapaça Operation involve alleged misconduct relating to the World Health Organization (WHO)quality violations, improper use of feed components and Foodfalsification of tests at certain BRF manufacturing plants and Agriculture Organization (FAO). The cases reported were caused by the H5N1 and H7N9 viruses. 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, additional new cases of H5N1 and H5N2 were reported in the United States, which has already resulted in restrictions on U.S. exports.accredited labs. 


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To date, Brazil4


On October 15, 2018, the Brazilian Federal Police issued the final report on the investigation of theTrapaça Operation accusing forty-three people, among which twenty-three are BRF employees or former employees, including former Chief Executive Officer Pedro Faria, former chairman of the board of directors Abilio Diniz, and three former vice presidents. All such current employees are on leaves of absence from BRF. Allegations against these senior employees generally focused on communications relating to alleged dioxin contamination. Since then, the police investigation has not had a documented case of avian influenza, although there are concerns that an outbreak of avian influenza may occur inbeen under review by the country in the future.  Any outbreak of avian influenza in Brazil could lead to required destruction of our poultry flocks, which would result in decreased sales of poultry by us, prevent recovery of costs incurred in raising or purchasing such poultry, and result in additional expenseBrazilian Federal Prosecutor responsible for the disposal of destroyed poultry.  In addition, any outbreak of avian influenza in Brazil would likely leadcase 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.

Whetherdetermine whether or not an outbreak of avian influenza occurs in Brazil, further outbreaks of avian influenza anywhere into present criminal charges. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for additional information. We are continuing to cooperate with the world could have a negative impact on the consumption of poultry inauthorities and are also continuing our key export markets or in Brazil, and a significant outbreak would negatively affect our net sales and overall financial performance.  Any outbreak could leadinternal investigation with respect 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.allegations.

We may also be subject from time to time to additional outbreaks of animal-related diseases, such as Porcine Epidemic Diarrhea and foot-and-mouth disease affecting cattle. See “Item 5: Operating and Financial Review and Prospects—A. Operating Results—Effect of Animal Diseases—Other Animal Diseases” for further information.

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

A consensus has developed in the scientific community that global warming will continue to occur even if greenhouse gas emissions were to be slowed, thereby reinforcing the need to intensify actions to adapt to climate changes. 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) and changes in rainfall (average and extreme, such as drought, flooding and storms), both of which could affect agricultural productivity, the quality and availability of pasture areas, animal wellbeing and the availability of energy. These changes could have a direct impact on our costs, raising the price of agricultural commodities asAs a result of long periodstheTrapaçaOperation, 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 13 countries with specific sanitary requirements related to Salmonella spp. As a precautionary measure, MAPA also suspended exports from 10 other BRF plants to the European Union on March 15, 2018. This precautionary suspension was lifted on April 18, 2018 by MAPA. On May 14, 2018, the European Union released its decision to remove 12 of drought or excessive rainfall, increasing operating costsour production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. The European Union generally has stricter requirements related to ensure animal wellbeing, increasing the risk of rationingsalmonella levels and raising the price of electrical energy through water shortagesother food safety standards compared to Brazil and the need for other energy sourcesinternational markets in which we operate. Given the ban of imports from our production facilities, we are no longer able 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 aresell our second highest fixed cost. A significant portion of Brazil’s installed electric generation capacity is currently dependent upon hydroelectric generation facilities. 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.

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 movementsproducts from such embargoed production plants in the commodity markets. We also undertake efficiency projects to develop more efficient processes that consume less energy. Other initiatives include technological innovations in the animal-raising installations to improve the environmentEuropean Union and, acclimatization and safeguard the animal´s wellbeing. 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.

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


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A study conducted by the United Nations Food and Agriculture Organization (FAO) indicates that, in the next two decades, the demand for water will increase 50% on a global scale. In conenction 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 FAO, on a global scale, including some of our key markets, such as North Africa and the Middle East. Water is an essential raw material 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.

In order to mitigate these risks, in 2015, we began developing 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 conducted this methodology in four plants in Brazil– Toledo (PR), Rio Verde (GO), Lucas do Rio Verde (MT) and Carambeí (PR) – in 2015 as a pilot-project. We analyzed the and 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. In 2016, we expect to expand this assessment to the other plants in Brazil.

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

We rely on our governance structure and compliance processes to sustain our positive image and reputation in the marketplace.

BRF has a strong image related to solid corporate governance and is associated with values such as trust, ethics and transparency. We have a framework of antifraud initiatives - including anti-corruption - that supports all business segments and their commercial standards worldwide. However, we may not be able to mitigate all fraud risk entirely. In cases of bad publicity or acts that may negatively affect our image, we have a Crisis Committee that works with our stakeholders. Any negative reflection on our image or the strength of our brand from these or other activities could have a negative impact ontherefore, our results of operations as well as our ability to achieve our growth strategy.

We are required to comply with the laws and regulations of Brazil and various jurisdictions where we conduct operations. In particular,may be further adversely affected if we are subjectnot able to the Brazilian Anti-corruption Law nº 12.846, the U.S. Foreign Corrupt Practices Actdirect excess production capacity resulting from such suspension to other markets at similar prices or margins.

Any of 1977 (“FCPA”), the United Kingdom Bribery Actthese investigations could result in penalties, fines or other forms of 2010, as well as economic sanction programs, including those administered by the United Nations, the European Unionliability 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 employees of certain entities who may be considered foreign officials for purposes of the FCPA. In addition, economic sanctions programs restrict our dealings with certain sanctioned countries, individuals and entities. Although we have internal policies and procedures designed to ensure compliance with applicable anti-fraud and anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that our employees, directors, officers, partners, agents and service providers will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-corruption laws and sanctions could have a material adverse effect on our business, reputation, brand, results of operations and financial conditioncondition.

Our failure to continually innovate and successfully launch new products, as well as maintain our brand image, could adversely impact our operating results.


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Our financial success depends on our ability to anticipate changes in consumer preferences and dietary habits and successfully developing and launching new products and product extensions that consumers want. We devote 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. 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, our financial results and our competitive position may suffer.

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, and increasing media attention to the role of food marketing could adversely affect our brand image or lead to stricter regulations and greater scrutiny of food marketing practices.

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 extend 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 outside  Brazil in recent years, such as Golden Foods Siam (“GFS”) in Thailand, Qatar National Import and Export Co. (“QNIE”) in the State of Qatar, Campo Austral in Argentina, and acquired certain trademarks in Argentina.For more details on these and other transactions, see “Item 4. Information on the Company—A. History and Development of the Company—Other Acquisitions and Investments in 2015.” Acquisitions, new businesses and joint ventures, especially involving sizeable enterprises, may present financial, managerial and operational risks and uncertainties, including:

·challenges in realizing the anticipated benefits of the transaction;

·diverting management attention from existing businesses;

·difficulty with integrating personnel and financial 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; and


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

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, 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;

·imposition of exchange or price controls;

·imposition of restrictions on exports of our products or imports of raw materials necessary for our production;

·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. 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 conditions could negatively impact our business.

Our business may be adversely affected by changes in Brazilian and global economic conditions, which may result in increased volatility in our markets and contribute to net losses. Since the end of 2015, the oil price hasdeclined significantly and has led to lower economic growth in relevant oil dependent regions, such as several countries in the Middle East, Russia, Venezuela and Angola. Thus, per capita meat consumption in these areas could be affected as well. In addition, concerns about the Chinese economy and its inability to grow at rates as high as the ones we had in prior years could affect the prices and consumption of all commodities, including chicken and hogs.Because of the global nature of our business, we remain subject to the risk of economic volatility worldwide, and economic and political disruptions around the world can have a material adverse effect on our business and results of operations.


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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, pork and beef. 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, hog and cattle 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 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 48.1% in 2013, 46.8% in 2014 and50.2% in 2015. Our major international markets include the Middle East (particularly Saudi Arabia), Asia (particularly Japan, Hong Kong, Singapore and China), Europe, 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 and interest rate fluctuations;

·commodities price volatility;

·deterioration in international economic conditions;

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


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·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 BRF’s 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; and

·sabotage affecting our products.

The market dynamics of our important export markets can change quickly and unpredictably due to these factors, the imposition of trade barriers 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 our 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 our results of operations.

Morestringent 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 aof particular concern, especially sanitary and technical restrictions.

As a result of the regulators’ inquiries and the public announcement of allegations of wrongdoing involving BRF and other companies in the Brazilian meat industry in the context of theCarne Fraca Operation andTrapaça Operation, some export markets have been temporarily closed and our average selling prices for some products and in some markets have decreased. For additional information, see “—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.”

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,Also, the European Union has adopted a quota system for certain chickenpoultry 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. In addition,Other countries have also imposed trade barriers against our products. For example, in August 2017, the European Union has a banChinese government initiated an antidumping investigation in connection with Brazilian exports of whole chicken and chicken parts, including BRF’s exports. The investigation ended in February 2019 and Brazilian exporters agreed to certain minimum export prices for sales to China. Additionally, in August 2018, Iraq increased the tariff on certain types of Brazilian meat, including pork, fresh cuts and some premium cuts of frozen beef backs.poultry products from 10% to 60%.

In addition, manyMany 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.

5


For instance, in April 2018, Saudi Arabia instituted a no-stunning requirement for the animal slaughtering process. Saudi Arabia claimed that Brazilian companies’ chicken slaughtering practices violated Halal principles due to the use of an electric shock to stun the birds. BRF and other Brazilian companies were therefore required to migrate their production processes to non-stunning slaughters in order to supply the Saudi Arabian market. We have incurred, and expect to incur, additional costs in connection with these requirements for exporting to Saudi Arabia. In January 2019, the Saudi Arabian Food and Drug Authority published a report authorizing 25 Brazilian facilities to produce chicken meat for the Saudi Arabian market, which included eight of BRF’s plants. One of BRF’s plants (Lajeado/RS) that had previously produced chicken meat for the Saudi Arabian market was not included as an authorized plant. However, the eight authorized plants have provided sufficient capacity to meet the demand of this market. Although we expect to be able to continue to shift production of chicken meat for Saudi Arabia to the authorized plants without a significant disruption to our shipments to Saudi Arabia, such changes may result in decreased revenues and additional expenses. Furthermore, there can be no assurance that the Saudi Arabian government will not further restrict our ability to export our products to Saudi Arabia, which could result in a material adverse impact on our business, financial condition and results of operations.  

Outbreaks, or fears of outbreaks, of any animal diseases may lead to cancellation of orders by our customers and 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 for some or all of our products, which may result in the loss of some or all of these animals.

Our operations involve raising poultry and hogs and processing their meat, which requires us to maintain certain standards of animal health and control disease. We could be required to dispose of 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, influenza (H5N1) and African swine fever; and (2) in the case of poultry, avian influenza and Newcastle disease. In addition, if the Porcine Reproductive and Respiratory Syndrome (PRRS), which has broken out in Europe and the United States in 1990 and 1985, respectively, the Porcine Epidemic Diarrhea (PEDV), which has broken out in Europe and the United States in 2014 and 2013, respectively, or the African swine fever which broke out in China in 2018, were to break out in Brazil, we could be required to dispose of hogs. Disposal 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.

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, 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 disposal of afflicted poultry flocks.

In recent 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 U.S. 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. In early 2017, Chile, a neighboring country to Brazil, confirmed the occurrence of avian influenza. Additionally, beginning in August 2018, China reported a series of outbreaks of African swine fever.

Brazil has not yet 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 the required disposal 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 poultry. In addition, any outbreak of avian influenza in Brazil would likely lead to immediate restrictions on theexport 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.

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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 operations 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.

An outbreak of foot-and-mouth disease or other similar diseases could have an effect on livestock we own and the availability of livestock for purchase. In addition, the global effects of avian influenza or other similar diseases 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.

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 changes in temperature, changes in rainfall, including drought, flooding, storms and lack of water, which could affect agricultural productivity, animal welfare and the availability of energy. These changes could have a direct impact on our costs, including by raising the price of agricultural commodities as a result of long periods of drought or excessive rainfall, increasing operating costs to ensure animal welfare, increasing the risk of rationing and raising the price of 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 electricity generation capacity is currently dependent upon hydroelectric facilities. Hydroelectric production is vulnerable to a variety of factors, including the variability of 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.  In order to increase our energy efficiency and reduce electricity demand, we are developing more efficient processes to consume less energy, but there can be no assurance that such efforts will be successful.

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 grain stocks and 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. Other initiatives include technological innovations in our animal-raising installations to improve efficiency and safeguard the welfare of the animals. However, we may fail to effectively implement programs to reduce our exposure to climate change, which may adversely 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. Additionally, it is estimated that by 2025, 1.8 billion people will live in areas with a shortage of water and two thirds of the global population will live in water-stressed areas. Water is an essential input for our businesses and is used in the production of grains and other agricultural inputs required for our production processes. As a result, the shortage or lack of water represents a critical risk for our business. In addition, we are aware that the industrial use of water may adversely affect its availability. AlthoughBrazil holds nearly a fifth of the world’s water reserves, the World Economic Forum warns that water crises remain one of the most relevant global risks.

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We have developed procedures to reduce our water consumption, comply with applicable rules and minimize our impact on the environment and the community. In developing these procedures, we analyzed the micro and macro watersheds in the regions in which we operate and the industrial activities and characteristics of the use of water resources in order to understand the local demand growth. However, we 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 businesses 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 may fail to ensure compliance with relevant anti-fraud, anti-corruption, anti-money laundering and other international laws and regulations.

We are subject to anti-fraud, anti-corruption, anti-money laundering and other international 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”) and the United Kingdom Bribery Act of 2010. 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.

Although we have internal policies and procedures designed to ensure compliance with applicable anti-fraud, anti-corruption, anti-money laundering and other international laws and regulations, potential violations of law have been identified on occasion as part of our compliance and internal control processes. In addition, we were notified of allegations involving potential misconduct by some of our employees in the context of theCarne Fraca Operation andTrapaçaOperation. For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” As a result of theCarne Fraca Operation andTrapaça Operation and related matters, we incurred expenses and recorded provisions for losses in inventories in the total amount of R$492.8 million and R$363.4 million in 2018 and 2017, respectively, which negatively impacted our results of operations. Additionally, these or other proceedings may result in penalties, fines, sanctions or other forms of liability. Furthermore, 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.

When allegations of non-compliance with applicable anti-fraud, anti-corruption, anti-money laundering or other international laws and regulations arise, we attempt to act promptly to learn relevant facts, conduct appropriate due diligence and take any appropriate remedial action to address the issue. Given the size of our operations and the complexity of our production chain, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate or unlawful practices, including fraud or violations of law or violations of our internal policies and procedures by our employees, directors, officers, partners or any third-party agents or service providers. Furthermore, there can be no assurance that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of applicable laws and regulations) for which we or they may ultimately be held responsible. Violations of anti-fraud, anti-corruption, anti-money laundering or other international laws and 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 or proceedings by authorities for alleged infringement of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability. Potential negative developments in theCarne Fraca Operation andTrapaça Operation may also negatively affect the market price of our common shares and American Depositary Receipts (“ADRs”).

We are subject to antitrust and competition laws and regulations and we may fail to ensure compliance with such laws and regulations.

We are subject to antitrust and competition laws and regulations in the jurisdictions in which we operate. Consequently, we may be subject to regulatory scrutiny in certain of these jurisdictions. For instance, on March 14,2019, the Turkish Competition Authority (“TCA”) announced a decision regarding its investigation into Banvit and other producers for alleged anticompetitive practices in connection with chicken meat production in Turkey. The TCA imposed an administrative fine of TRY 30,518,617.48, or approximately U.S.$5.2 million, against Banvit. For additional information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Civil, Commercial and Other Proceedings.” Although we have internal policies and procedures designed to ensure compliance with applicable antitrust and competition laws and regulations, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate or unlawful practices. As a result, we may be subject to one or more enforcement actions, investigations or proceedings by authorities for alleged infringement of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability and 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. Furthermore, there can be no assurance that the introduction of new competition laws in the jurisdictions in which we operate, the interpretation of existing antitrust or competition laws, the enforcement of existing antitrust or competition laws by authorities or civil antitrust litigation by private parties, or any agreements with antitrust or competition authorities, against us or our subsidiaries will not have a material adverse impact on our business, results of operations or financial condition.

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A failure to comply with export control or economic sanctions laws and regulations could have a material adverse impact on our results of operations, financial condition and reputation.

We operate on a global basis and face risks related to compliance with export control and economic sanctions laws and regulations, 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. Economic sanctions programs restrict our dealings with certain sanctioned countries, individuals and entities. However, we have conducted, and may in the future seek to conduct, business in certain countries that are subject to sanctions under the laws of the United States or other countries. Although we have pursued these transactions, and intend to pursue any future transactions, in full compliance with applicable laws and regulations, we may not be successful in ensuring compliance with limitations or restrictions on business with companies in any such countries. If we are found to be in violation of applicable sanctions laws or regulations, we may face criminal or civil fines or other penalties, we may suffer reputational harm and our results of operations and financial condition may be adversely affected. Additionally, there can be no assurance that our employees, directors, officers, partners or any third-parties that we do business with, including, among others, any distributors or suppliers, will not violate sanctions laws and regulations. We may ultimately be held responsible for any such violation of sanctions laws and regulations by these persons, which could result in criminal or civil fines or other penalties, have a material adverse impact on our results of operations and financial condition and damage our reputation.

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

Our management is responsible for establishing and maintaining adequate internal controls 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 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, but 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. Furthermore, a reduction in our investment in product development could negatively affect not only our ability to generate innovative solutions, but also the in-market success of any such products. Additionally, BRF employees working on innovation and research anddevelopment could move to one of our competitors, which would compromise our ability to deliver new and innovative products and could also result in our competitors gaining information we view as proprietary. 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, financial results and competitive position may suffer, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

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We also seek to maintain and extend the image of our brands through marketing, including advertising and consumer promotions. 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. A continued global focus on health and wellness, including weight management, increasing media attention on the role of food marketing and negative press coverage about our quality controls and products, including in connection with theCarne FracaOperation andTrapaça Operation, could adversely affect our brand image or lead to stricter regulations and greater scrutiny of food marketing practices.

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 sales, financial condition and results of operations could be materially and adversely affected.

We may divest or acquire businesses or enter into joint ventures, which may divert management resources or prove to be disruptive to our company.

We regularly review and pursue opportunities to rationalize our business through divestitures or expand by means of acquisitions, joint ventures and other initiatives. We have completed several divestitures and acquisitions in recent years.  For additional details on certain of these transactions, see “Item 4. Information on the Company—A. History and Development of the Company.” Divestments, acquisitions, new businesses and joint ventures, particularly those involving sizeable businesses, may present financial, managerial, operational and compliance risks and uncertainties, including:

·challenges in realizing the anticipated benefits of the transaction;

·difficulties with managing various macroeconomic variables and their impact on the business;

·difficulties with managing commercial relationships in various countries;

·diversion of management attention from existing businesses;

·difficulties with integrating/carving-out personnel, especially to different managerial practices;

·disruptions when integrating or carving out financial, technological and other systems;

·difficulties 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;

·challenges related to the loss of key employees in connection with a divestment;

·increased compensation expenses for newly-hired employees;

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

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

·legal challenges, including claims for indemnification;

·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;

·difficulties in transferring capital to new jurisdictions; and

·challenges receiving the necessary approvals from governments and international antitrust authorities.

We may be unable to realize the strategic benefits from our divestitures or acquisitions in the timeframe we anticipate, or at all. In addition, we may be unable to identify, negotiate or finance future divestitures, acquisitions or other strategic initiatives successfully or on favorable terms. 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 divestitures, acquisitions and joint ventures may also result in unforeseen operating difficulties and expenditures, as well as strain 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 business operations around the world, we are subject to a variety of risks 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 instability;

·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 processes (including embargoes from countries where we have production and/or distribution activities);

·fluctuation of local currencies against thereal;

·nationalization of our property;

·increases 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 significant variability in our revenue 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 embargoes, that could ultimately impact our current operations in Qatar and in the Middle East. In addition, Brazil’s current president announced Brazil’s intention to open a business office in Jerusalem. This announcement led to protest and unrest throughout the Middle East. The impact of these changes on our ability to deliver on our planned projects and execute our strategy cannot beascertained with any degree of certainty, and these changes may, therefore, have an adverse effect on our operations and financial results.

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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.

Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide. While Brazil exports a diversified bundle of products to a variety of countries, a significant decline in the economic growth or demand for imports of any of Brazil’s major trading partners, such as the European Union, China or the United States, could have a material adverse impact on Brazil’s exports and balance of trade and adversely affect Brazil’s economic growth.

Furthermore, because international investors’ reactions to the events occurring in one emerging market country sometimes produce a “contagion” effect, in which an entire region or class of investment is disfavored by international investors, Brazil could be adversely affected by negative economic or financial developments in other countries. Such developments may affect the Brazilian economy in the future and, consequently, our results of operations.

Uncertainty as to whether the Brazilian government will implement significant changes in public policy in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and the securities issued by Brazilian companies. As a result, there may be high volatility in the domestic financial markets in the short term, and economic recovery in the long term may be hindered. Accordingly, improvements in the labor market and income growth may be limited, which could have an adverse effect on our operations and financial results.

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.” The United Kingdom was initially expected to depart the European Union on March 29, 2019, but on March 21, 2019, the European Union and the United Kingdom agreed to extend the deadline for Brexit. The European Union and the United Kingdom agreed to a further extension on April 10, 2019. The terms of the United Kingdom’s withdrawal and the nature of its future relationship with the European Union are still being decided. Furthermore, the departure may be delayed further. This referendum has caused and may continue to cause political and economic uncertainty, including significant volatility in global stock markets and currency exchange rate fluctuations. If no agreement is reached prior to the deadline for Brexit, the United Kingdom’s membership in the European Union could terminate under a so-called “hard Brexit”. The effects of Brexit will depend on many factors, including any agreements that the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate. In a “hard Brexit” scenario, there could be increased costs from re-imposition of tariffs on trade between the United Kingdom and the European Union, shipping delays because of the need for customs inspections and procedures, and temporary shortages of certain goods. In addition, trade and investment between the United Kingdom, the European Union, Brazil and other countries will be impacted by the fact that the United Kingdom currently operates under the European Union’s tax treaties. The United Kingdom will need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete. 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.

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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. In addition, prices for our raw materials, including corn, soy meal and soybeans, have been affected, and may continue to be affected, by the ongoing trade dispute between the U.S. and China. It is unclear whether this trade dispute will be resolved and what effects it may have on global political and economic conditions in the long term. Any changes in the price of raw materials required to produce our products as a result of the foregoing or other factors could have a material impact on our business.

Our industry, both in Brazil and abroad, is generally characterized by cyclical periods of higher prices and higher profitability, followed by overproduction, leading to periods of lower prices and lower profitability or losses. There can be no assurance that we will be able to adequately adapt to any such cyclicality or volatility, which may have an adverse effect on our operations and financial results.

Natural disasters, pandemics or extreme weather, including floods, excessive cold or heat, hurricanes or other storms, as well as any interruption at our plants that may require the temporary re-allocation of plant functions to other facilities could, among other things, 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.

Our external market sales are subject to a broad range of risks associated with cross-border operations.

External market sales account for a significant portion of our global net sales, and represented 43.8% of our net sales in 2016, 43.5% of our net sales in 2017 and 43.3% of our net sales in 2018. Our external market is comprised of two business units: Halal (predominantly Islamic markets, including Turkey, North of Africa, Gulf Cooperation Council (GCC) and Malaysia) and International (Asia, Europe, Eurasia, Africa and Americas), where we are subject to many of the same risks described below in relation to Brazil. Furthermore, we may seek to expand sales of our products to additional international markets. Our future financial performance depends, to a significant extent, on the economic, political and social conditions in those regions as well as on our supply conditions.

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

·exchange rate and interest rate fluctuations;

·commodities price volatility;

·deterioration in global economic conditions;

·political risks, such as turmoil and instability, foreign exchange controls and uncertainty regarding government policies;

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

·imposition of increased tariffs, anti-dumping duties or other non-tariff trade barriers;

·strikes or other events affecting ports and other transport facilities;

·compliance with differing foreign legal and regulatory regimes;

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·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 several of our products;

·access to adequate infrastructure, which could be affected by flooding or similar events;

·sabotage affecting our products; and

·negative media exposure related to the Brazilian agriculture and/or meat processing industry, including in connection with theCarne Fraca Operation and/orTrapaça Operation.

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 ourboth the domestic market and from Brazilian andexternal markets. In addition, we compete with foreign producers in our internationalexternal markets. The Brazilian market for whole poultry, and poultry and pork cuts is highly fragmented.  Small producers, can also be important competitors, some of which operate in the informaleconomy, 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 similarly low cost, as well as with foreign producers.costs.


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In addition, the size and growth potential growth of the Brazilian market for processed food, poultry, pork and beef andcombined with Brazil’s low production costs are attractive to international competitors. Although the main barrier to these companies entering the Brazilian market has been the need to build a comprehensive distribution network, andincluding a network of outgrowers international(outsourced farmers), foreign competitors with significant resources could undertake to build these networks and/or acquire and expand existing networks.such capabilities.

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, customerswith strong brands, consumers may seekchoose to diversify their sources of supply by purchasing a portion of thepurchase other products they need from producers in other countries, as some of our customers in key export markets have begun to do.or brands. We expect that we willto 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 delay or failure by us to respondin responding to product, pricing and other movesstrategies by competitors may negatively affect our financial performance.

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 regular Brazilian federal, state and local, as well as foreign, governmental inspections and extensive regulation in the food safety area, including governmental food processing controls.controls in all countries in which we operate. We currently comply with all food safety requirements and animal welfare laws in the markets where we conduct our business. We already incur significant costs in connection with such complianceour efforts to comply with applicable food safety and changesprocessing 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 cancould result in ourus being required to return all or part of a shipment to Brazil, destroyrecall certain products, dispose of all or part of a shipment or incur costs because of delays in delivering products to our customers. Although Brazil currently has limited regulations regarding animal welfare, we have adopted worldwide animal welfare practices to serve our clients. Any tightening of food safety or animal welfare regulations could result in increased costs and could have ana material adverse effect on our business, and results of operations.operations, financial condition and prospects.

Our performance depends on favorable labor relations with our employees, and our compliance with labor laws.laws and the safety of our facilities. Any deterioration of those relations, or increaseincreases in labor costs or injuries at our facilities could adversely affect our business.

As of December 31, 2015,2018, we had a total of 96,279approximately 105,000 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 reachbe unable toreach new agreements without union actionwith the labor unions 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. IfAdditionally, if we are unable to negotiate acceptable union agreements, we may become subject to work stoppages or strikes.

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Labor costs are among our most significant expenditures. In 2015, theySuch costs represented 15.4%approximately 14.4% of our cost of sales representing an increasein 2018. In the event of 1.5 percentage points compared to 2014.a review of our employee contract structure, additional operational expenses could be incurred. Additionally, during our normal business operation, we outsource some of our labor force, in the ordinary course of business, therefore being subjectwhich subjects us to the contingenciesclaims that may arise from this relationship. These contingencies may involvethese relationships, including claims directly against us as if we were the direct employer of thosethe outsourced workers or claims seeking our subsidiary liability.workers. In the event that a significant amount of these contingencies haveclaims result in an unfavorable outcome against us, we may be held liable for amounts higher than ourprovisions, 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 considereddeemed by the authorities to be our core activities, outsourcing may be considered illegal and the outsourced workers may be considered our employess,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.insurance costs. Material increases in our labor costs could have a material adverse effect on our business, and results of operations.operations and financial condition and prospects.


TableIn addition, we face risks related to the safety of Contentsour facilities. If we fail to implement safety procedures or if the procedures we implement are ineffective or are not followed by our employees or others, our employees and others may be injured, which could result in costs for the injuries and lost productivity. Any of the foregoing could have an adverse impact on our business, results of operations and reputation.

Environmental laws and regulations require increasingincreased 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, (conservationsuch as conservation units, archeological areas and permanent preservation areas),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 and poses 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 andor 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).

Furthermore, Additionally, pursuant to Brazilian environmental legislation,laws, 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.environmental damages.

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 usageuse 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 offor 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 a failure to fulfill the conditions of validity foreseen in the environmental licenses already held by us. Furthermore, we cannot operate a plant if therequired environmental permit is not valid or updated. 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 itstheir expiration, so that the licenselicenses may be automatically extended until a final decision from the environmental authority is reached. In the interim, we arewould be permitted to continue operations under the respective license during the renewal process. In addition, the environmental agency may condition the renewal upon expensive facility upgrades if there have been regulatory changes in the environmental standards that the plant is required to meet, which might result in delays, disruptions or in the denial of the license.


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

Unfavorable outcomes in administrative and legal proceedings may reduce our liquidity and negatively affect us.

We are defendants in civil and other proceedings (including administrative, regulatory and environmental), 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 27 of our consolidated financial statements.

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

With regard to tax contingencies, we are currently defendants in a number of cases, which include, for example, disputes regarding the offset of tax casescredits and the use of tax incentives in several states that involve tax credit offsets. These cases have not yet reached a final ruling byin the Brazilian courts.We In addition, we may face risks arising from tax liabilitiespotential impairment of input state VAT that we accumulate on exportations. We currently have a case involving Tax on the Circulation of Merchandise and the monetizationServices (Imposto Sobre a Circulação de Mercadorias e Serviços, or “ICMS”) on sales of tax credits,staple foods (cesta básica) in which can negatively impact our results.Thethe Supreme Court of Brazil has ruled that the use of total ICMS tax credits in operations related to food products classified as staple foods in Brazil (cesta básica), which benefit from a reduced tax basis in the calculation of the ICMS tax, is improper.against us. The case is currently onpending judgment of a final appeal and, if the final decision is upheld and determined to apply toagainst some or all of BRF’s operations, it could have a significant impact on our operations, liquidity and financial results. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Tax Proceedings.”

As of December 31, 2015,2018, we had R$65.71,350 million in provisions for contingencies, of which R$282 million was for civil and other contingencies (including administrative, regulatory and environmental), R$240.6230 million in provisionswas for tax contingencies, and R$377.0469 million in provisionswas for labor contingencies. See Note 27contingencies and R$370 million was for contingent liabilities.

We are also currently being investigated in theCarne Fraca Operation andTrapaça 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—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Trapaça Operation.” Any investigation from governmental authorities currently unknown to us with respect to any potentially unlawful business practice may also result in penalties, fines and sanctions or other forms of liability.

On March 12, 2018, a shareholder class action lawsuit was filed in the U.S. Federal District Court in the Southern District of New York. On July 2, 2018, the Court appointed the City of Birmingham Retirement and Relief System lead plaintiff in the action (the “Lead Plaintiff”). On August 31, 2018, the Lead Plaintiff filed an amended class action complaint.  On December 5, 2018, the Lead Plaintiff filed a second amended complaint. The second amended complaint seeks to represent all persons and entities who purchased or otherwise acquired BRF ADRs during the period from April 4, 2013, through and including March 2, 2018, 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 in connection with theCarne Fraca Operation andTrapaça Operation. A motion to dismiss briefing has been stayed pending the determination of Lead Plaintiff’s motion to amend the second amended complaint, which was filed on April 1, 2019. Because this lawsuit is in its early stages, we believe the possible loss or range of losses, if any, arising from this litigation cannot be estimated. 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.

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BRF was granted an ICMS tax credit of 4.5% by the State of Rio de Janeiro on sales and transfers of meat products. BRF entered into an agreement with the State of Rio de Janeiro related to this tax credit in 2014. The agreement required that BRF: (1) construct a sandwich factory, with an investment of R$11.5 million, which would generate 38 jobs and (2) construct a sausage factory, with investment initially set at R$136 million, which would generate 180 jobs within a period of 18 months. Due to several factors beyond BRF’s control, including obtaining environmental licenses and building licenses, and due to changes to our consolidatedproduction focus, we did not meet the initial deadlines. As a result, the State of Rio de Janeiro granted additional time for completion of the projects, but also increased the required aggregate investment to R$280 million and the minimum number of jobs to 280. We have commenced construction of the plant and the project is currently on schedule. However, the Brazilian Treasury Department filed an administrative request seeking the cancellation of the tax benefit previously granted to BRF. BRF has filed a writ of mandamus to guarantee the continuation of the current benefit and to protect the credits that BRF has already received. On March 14, 2019, the new Secretary of Finance of Brazil executed an order to cancel the tax benefit and to restore the standard collection of ICMS. The collection of past tax credits can only occur through an infraction notice issued by the Treasury Department, which has not yet occurred. The value of the tax benefits that BRF has received since 2014 is R$307 million (R$435 million when taking into account a potential fine and interest upon the principal amount). If the final decision is upheld against BRF and the tax credits are required to be returned, it could have a significant impact on our financial statements.condition and results of operations.

We cannot assure you that we will obtain favorable decisions in these proceedingsOur inability or thatfailure to protect our reserves will be sufficient to cover potential liabilities resulting from unfavorable decisions.intellectual property and any intellectual property infringement against us could have a negative impact on our operating results.

In addition,Our principal intellectual property consists of our domestic and international brands. 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 partythird-party claims, or to settlesettling 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 on 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.

We are vulnerable to third party transportation and logistics risks.


                We depend on fast and efficient transportation and logistics services to, among other things, deliver raw materials to our production facilities, deliver animal feed to our poultry and pork growers and distribute our products. Any prolonged disruption of these services may have a material adverse impact on our business, financial condition and results of operations. For example, on May 21, 2018, a national truckers’ strike commenced in Brazil regarding increases in fuel prices. The strike materially disrupted the supply chain of various industries across the country, including the supply chain of raw materials to our production facilities and the delivery of animal feed to our poultry and pork growers, and, at its peak, led to the suspension of the operation of all of our production facilities located in Brazil. Furthermore, this strike also materially affected the regular functioning of the ports from where our products are exported. We incurred increased costs in connection with the truckers’ strike and also were required to dispose of certain animals as a result of the strike. There can be no assurance that the truckers will not seek to engage in any further strikes, that the Brazilian federal government or any other relevant party will be able to meet the demands of the truckers in a satisfactory manner or that any such strike will not adversely affect our supply chain or the operation of our production facilities. In addition, any other reduction in the dependability or availability of transportation or logistics services or a significant increase in transportation service rates, including as a result of, among other things, flooding in ports, warehouse fires or labor strikes, could impair our ability to satisfyour supply chain requirements and deliver our products economically to our customers. Any such disruption to the transportation or logistics services that we depend on could have a material adverse impact on our results of operations and financial condition.

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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, political risks, environmental and climate events, fraud, strike, 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 toindemnify parties affected by such an event.

In addition, Furthermore, 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 another facility.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 the facilities are covered by fireour business interruption insurance and the units’ production was temporarily absorbed by other BRF plants, we cannot assure you thatcovers certain losses in connection with disruptions to our operations, all of our direct and indirect costs willand intangible costs may not be covered by our insurance. For example, the negative impacts on our business from the 2018 Brazilian truckers’ strike, including the suspension of operations at our production facilities and increased transportation and logistics costs, were not covered by any of our insurance policies. Any similar event at other facilitiesevents in the future could adversely affecthave a material adverse impact on our revenues, expensesbusiness, results of operations, financial condition and our business.

prospects.

We have incurred, and expect to continue to incur, significant costs in connection with theCarne Fraca Operation, theTrapaça Operation and the shareholder class action lawsuit filed on March 12, 2018. The costs associated with these investigations and the costs of defending the class action lawsuit may not be covered by our insurance policies. Furthermore, there can be no assurance that we will be able to obtain insurance coverage in the future, related to the foregoing or any other matters, on terms acceptable to us. As a result, we may incur significant additional expenses which may adversely impact our financial condition and results of operations.  

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, the loss of key professionals may adversely affect our ability to implement our strategy, as well as the expenses associated to these losses can impact our results. In 2017 and 2018, we experienced a significant number of departures of senior management, including two of our previous CEOs, our CFO, our Chief Human Resources Officer (“CHRO”), our Brazil General Manager and our Vice President of operations. In addition, on March 5, 2018, we called an Ordinary and Extraordinary Shareholders’ Meeting (the “Ordinary and Extraordinary General Meeting”), which was held on April 26, 2018, at the request of two of our shareholders, Caixa de Previdência dos Funcionários do Banco do Brasil, or “PREVI,” and Fundação Petrobras de Seguridade Social, or “PETROS,” which jointly hold approximately 20% of our capital stock. At the Ordinary and Extraordinary General Meeting, the number of members of our board of directors was set at 10 members, new members were elected to the board of directors and the Chairman and Vice-Chairman of the board of directors were elected. Only four of the ten board members elected during the Ordinary and Extraordinary Shareholders’ Meeting were previously members of our board of directors. Furthermore, pursuant toNovo Mercado rules, we anticipate that Mr. Pedro Pullen Parente’s term as Chief Executive Officer will end on June 18, 2019, as he may only hold the positions of Chairman of the Board of Directors and Chief Executive Officer at the same time for a period of one year. In connection with the end of Mr. Pedro Pullen Parente’s term as Chief Executive Officer, the Company will appoint a new Chief Executive Officer. On March 28, 2019, Mr. Lorival Nogueira Luz Júnior, the Company’scurrent Chief Operating Officer, was named Mr. Parente’s successor as Chief Executive Officer following the end of Mr. Parente’s term. On April 25, 2019, Mr. Ivan de Souza Monteiro, who was appointed as Chief Financial andInvestor Relations Officer on March 11, 2019, resigned from his position. Mr. Lorival Nogueira Luz Júnior, theCompany’s current Chief Operating Officer, was appointed on April 25, 2019 as Interim Chief Financial andInvestor Relations Officer.These changes, and other potential changes, in the composition of our senior management team and our board of directors may result in modifications to our business strategy and have a material adverse effect on us.

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FailuresBreaches, disruptions, or security breachesfailures of our information technology systems, including as a result of cybersecurity attacks, 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 inimprove the efficiency of 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

Our information technology systems may be vulnerable to a variety of interruptions and cybersecurity threats and incidents. In the current environment there are numerous and evolving risks related to cybersecurity and privacy, including duringcriminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. Computer hackers and others routinely attempt to breach the processsecurity of upgradinginformation technology systems and to fraudulently induce employees, customers and other third parties to disclose information or replacing software, databasesunwittingly provide access to systems or components thereof, natural disasters, terroristdata. Successful cybersecurity attacks, telecommunications failures, computer viruses, cyber-attacks, hackers,breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access attemptsto, disclosure, modification, misuse, loss or destruction of data or systems, including those belonging to us, our customers or third parties; theft of sensitive, regulated or confidential data including personal information; the loss of access to critical data or systems through ransomware, destructive attacks or other means; transaction errors; business delays; and service or system disruptions. In the event of such actions, we, our customers and other security issues. We have implemented technology security initiativesthird parties could be exposed to potential liability, litigation, and disaster recovery plans to mitigate our exposure to these risks, but these measures may not be adequate. Any significant failure of our systems, including failures that prevent our systems from functioning as intended, could cause transaction errors, processing inefficiencies,regulatory or other government action, the loss of existing or potential customers, loss of sales, damage to brand and sales, have negative consequences on our employeesreputation and our business partners and have a negative impact on our operations or business reputation.

other financial loss. 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. In addition,The cost and operational consequences of responding to cybersecurity incidents and implementing remediation measures could be significant and may not be covered by insurance. Our cybersecurity risk also depends on factors such as the disclosureactions, practices and investments of non-public sensitivecustomers, contractors, business partners, vendors and other third parties.

To date, while we continue to monitor for, identify, investigate, respond to and remediate security incidents, including those associated with cybersecurity attacks, there has not been a cybersecurity attack that has had a material adverse impact on us, though there is no assurance that there will not be a cybersecurity attack that has a material adverse impact in the future.

We have implemented technology security initiatives and disaster recovery plans, 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 attack, a general information through external media channelssecurity incident or a disruption of our information technology systems. Furthermore, as our business and the cybersecurity landscape evolve, we may find it necessary to make significant further investments to protect our data and information technology infrastructure, which may adversely impact our financial condition and results of operations.

The regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on our business, including increased risk, costs and expanded compliance obligations. The Brazil General Data Privacy Law (Lei Geral de Proteção de Dados Pessoais), which was signed into law in August 2018 and will become effective in 2020, and an increased number of data protection laws around the globe could leadcontinue to result in increased compliance costs and risks. The potential costs of compliance with or imposed by new or existing regulations and policies that are applicable to us may affect the lossuse of intellectual property or damage our reputationproducts and brand image.services and could have a material adverse impact on our results of operations.


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Risks Relating to Our Indebtedness

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

At December 31, 2015,2018, our total consolidated debt (comprised of short-term and long-term debt) was R$15,179.3 million (US$3,887.3 million).22.2 billion.

Our substantial indebtedness could have major consequences for us, including:

·        requiring that a substantial portion of our cash flows from operations be used for the payment of principal and interest on our debt, reducing the funds available for our operations, 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 Brazilianreal,, 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 ratings 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” by all the rating agencies that rate us.

We have substantial debt that matures in each of the next several years.

As of December 31, 2015,2018, we had R$2,628.2 million of debt that matures in 2016, R$1,132.5 million of debt that matures in 2017, R$2,762.0 million of debt that matures in 2018, R$291.3 million4.6 billion of debt that matures in 2019, and R$8,365.4 million3.4 billion of debt that matures in 2020, R$2.9 billion of debt that matures in 2021, R$3.1 billion of debt that matures in 2022 and thereafter.R$8.2 billion of debt that matures in 2023 and thereafter.

A substantial portion of our outstanding debt is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2015,2018, we had R$11,359.7 million11.5 billion of foreign currency debt, including R$1,166.1 million1.5 billion 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 inreaisor other currencies to service our U.S. dollar-denominated debt. Depreciation in the value of the realor 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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Any future uncertainty in the stock and credit markets could also negatively impact our ability to access additional short-term and long-term financing, which could negatively impact our liquidity and financial condition. If, in future years:


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·        the pressures on credit return as a result of disruptions in the global stock and credit markets,markets;

·        our operating results worsen significantly,significantly;

·        we are unable to complete any necessary divestitures of non-core assets and our cash flow or capital resources prove inadequate,inadequate; or

·        we are unable to refinance any of our debt that becomes due,

·we could face liquidity problems and may not be able to pay our outstanding debt when due, which could have a material adverse effect on our consolidated business and financial condition.

The terms of our indebtedness impose significant restrictions on us.

The instruments governing our consolidated indebtedness impose significant restrictions on us. These restrictions may limit, directly or indirectly, our ability, among other things, to undertake the following actions:

·        borrow money;

·        make investments;

·        sell assets, including capital stock of subsidiaries;

·        guarantee indebtedness;

·        enter into agreements that restrict dividends or other distributions from certain subsidiaries;

·        enter into transactions with affiliates;

·        create or assume liens; and

·        engage in mergers or consolidations.

Although the covenants to which we are subject have exceptions and qualifications, the breach of any of these covenants could result in a payment default under the terms of other existing debt obligations. Upon the occurrence of such an event of default, all amounts outstanding under the applicable debt instruments and the debt issued under other debt instruments containing cross-default or cross-acceleration provisions, together with accrued and unpaid interest, if any, might become or be declared immediately due and payable. If such indebtedness were to be accelerated, we may have insufficient funds to repay in full any such indebtedness. In addition, in connection with the entry into new financings or amendments to existing financing arrangements, our subsidiaries’ financial and operational flexibility may be further reduced as a result of the imposition of covenants that are more restrictive, the requirements for additional security and other terms.

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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 orand 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 orand the American Depositary Receipts (“ADRs”)ADRs may be adversely affected by, among others, the following factors:


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·        exchange rate fluctuations;

·        expansion or contraction of the Brazilian economy, as measured by rates of growth in gross domestic product (GDP);economy;

·        high inflation rates;rate fluctuations;

·        changes in fiscal or monetary policies;

·        increasecommodities price volatility;

·increases in interest rates;

·        exchange control policies;controls and restrictions on remittances abroad;

·        volatility and liquidity of domestic capital and credit markets;

·        natural disasters and changes in climate andor weather patterns;

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

·        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 been experiencingexperienced a slowdown –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. The GDP growth rates were 3.9%, 1.8%, 2.7%, and 0.1%rate in 2011, 2012, 2013 and 2014 respectively,was 0.5%, but GDP decreased 3.8%3.5% in 2015. In addition,both 2015 and 2016. Following this two-year contraction, GDP grew 1.0% in 2017 and grew 1.1% in 2018, while inflation, unemploymentmeasured by 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”), and interest rates increasedchanged to 3.75% and 6.5% in 2015,2018, respectively, from 2.95% and 7.00%, respectively, in 2017. Unemployment had a slight improvement from 11.8% in 2017 to 11.6% in 2018, although it remained at a high level. For 2019, there is an expectation that such economic indicators will improve modestly.

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In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Lava Jato Operation,” have indirectly negatively impacted the Brazilian economy and political environment.

A number of senior politicians, including current and former members of Congress and the Executive Branch, and high-ranking executive officers of major corporations and state-owned companies in Brazil were arrested, convicted of various charges relating to corruption, entered into plea agreements with federal prosecutors and/or have resigned or been removed from their positions as a result of theseLava Jato investigations. These individuals are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. The profits of these kickbacks, which were not publicly disclosed, allegedly financed the political campaigns of political parties forming the previous government’s coalition that was led by former President Dilma Rousseff. These funds were also allegedly used for the personal enrichment of certain individuals. The effects ofLava Jato as well as other ongoing corruption-related investigations resulted in an adverse impact on the image and reputation of those companies that have been implicated as well as on the general market perception of the Brazilian economy, political environment and the Brazilian real weakened significantlycapital markets. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political and economic instability or whether new allegations against government officials will arise in comparisonthe future.

Amidst this background of political uncertainty, in August 2016, the Brazilian Senate approved the removal from office of Brazil’s then-President, Dilma Rousseff, following a legal and administrative impeachment process for infringement of budgetary laws. Michel Temer, the former Vice-President, who assumed the presidency of Brazil following Rousseff’s ouster, is also under investigation on corruption allegations. In addition, the former President, Luiz Inacio Lula da Silva, began serving a 12-year prison sentence on corruption and money laundering charges in April 2018. The new Brazilian president, a former member of the military and three-decade congressman, was elected on October 28, 2018 and took office on January 1, 2019. During his presidential campaign, the new Brazilian President was reported to favor the U.S. dollar. The market expectation for 2016privatization of state-owned companies, economic liberalization, and social security and tax reforms. However, there is no guarantee that the new Brazilian President will be successful in executing his campaign promises or passing certain favored reforms fully or at all, particularly when confronting a fractured congress. In addition, the current minister of the economy proposed during the presidential campaign the revocation of the income tax exemption for the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies. This could impact our capacity to receive, from our subsidiaries, future cash dividends or distributions net of taxes and also our ability to make distributions to our shareholders net of taxes. Moreover, the new Brazilian President was generally a polarizing figure during his campaign for presidency, particularly in relation to certain of his social views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms, all of which could have a negative impact on our business and the price of our common shares and ADRs.

In addition, the current Brazilian federal government is expected to propose the general terms of a fiscal reform to stimulate the economy and reduce the forecasted budget deficit for 2019, but it is uncertain whether the Brazilian government will be able to gather the required support in the Brazilian Congress to pass such reforms. 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 slow down.

Ourrun a budget deficit for 2019 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 or 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, and financial condition may be adversely affected by the economic conditions in Brazil. In addition, protests, strikes and corruption scandals, including the “Lava Jato” investigation, have led to a fall in confidenceprospects.

Worsening political and a political crisis. There is strong popular pressure and several legal and administrative proceedings for the impeachment of Dilma Rousseff, the Brazilian President, and/or revocation of the mandates or resignation of the Brazilian President and/or the Head of the House of Representatives, which have led to uncertainties. The political crisis could worsen the economic conditions in Brazil which may worsen purchasing power, consumptionincrease 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.

 

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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 orand the ADRs.

Brazil has experienced high inflation rates in the past. According to the National Amplified 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 the “IBGE”),IPCA, Brazilian consumer price inflation rates were 6.5% in 2011, 5.8% in 2012, 5.9% in 2013,  6.4% in 2014, and 10.7% in 2015.2015 and 6.3% in 2016, while downward inflation pressures caused this figure to reach 2.95% in 2017 and 3.75% in 2018. See “Item“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.”


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Brazil may continue experiencing highAlthough inflation levels ofhave been relatively stable in 2017 and 2018, there can be no assurance that inflation rates will not rise in 2016, above the Central Bank’s target.near future. Periods of higher inflation slow the growth rate of the Brazilian economy, which may lead to lower growth in consumption of food products. InflationHigh inflation also is likely to continue to putputs pressure on industry costs of production and expenses, which willmay force companies to search for innovative solutions in order to remain competitive. We may not be able to pass this costany such increase in costs onto our customers and, as a result, it may reduceadversely impact our profit marginsresults of operations and net profit.financial condition. 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,increase. Furthermore, 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 and the ADRs.

Fluctuations in interest rates may have an adverse effect on our business, financial condition and the market prices of our common shares orand the ADRs.

The interest rate is one of the instruments used by the Central Bank uses interest rates to attempt to keep inflation under control or to stimulate the economy. If interest rates fall down, the population hasdecrease, there is generally greater access to credit and consumes more.consumption of goods typically increases. This increase in demand can push prices if the industry is not prepared to meet higher consumption.in turn result in inflation. On the other hand, if interest rates go up, the monetary authority inhibitscost of borrowing increases which may inhibit consumption and investment once they get more expensive.additional investments. Another consequence of rising interest rates is thethat a greater return is paid by thein respect of government securities, impacting directlywhich may impact other investments by making them less attractive in the investments which become less attractive. Investmentcomparison. As a result, there may be additional investment in public debt, which absorbs money that wouldcould otherwise fund the productiveprivate sector.

AtOn December 31, 2015, 23.5%2018, 38.2% of our total liabilities with respect to indebtedness and derivative instruments of R$15,845.822,165.5 million werewas 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,”“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“BNDES”) or the Interbank Deposit Certificate Rate (Certificado de Depósito Interbancário), or “CDI” rate,), an interbank certificate of deposit rate that applies to our foreign currency swaps and some of our otherreal-denominated real-denominated indebtedness, or (2) U.S. dollar-denominated and bears floating interest based on the London Interbank Offered Rate or “LIBOR.”(“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 2011, 2012, 2013,Thereal depreciated 13.4% and 47.0% in 2014 and 2015, the realrespectively, appreciated 16.5% in 2016, depreciated 12.6%, 8.9%, 14.6%, 13.4%1.5% in 2017, and 47.0%, respectively,depreciated 16.9% in 2018 against the U.S. dollar.

Appreciation of the Brazilianrealagainst the U.S. dollar may lead to a dampening of export-driven growth. Our production costs are denominated inreais, but our international sales are mostly denominated in U.S. dollars. Financial revenuesRevenues generated by exports are reduced when translated toreaisin the periods in which the realappreciates 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 Brazilianrealagainst the U.S. dollar may lead to higher exports and revenues, but costs may be higher.

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Costs are also directly impacted by the exchange rate.rates. Any depreciation of therealagainst 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, which are important ingredients offor 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 offor our feedstock, is also linked to the U.S. dollar, but 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 therealdepreciates against the U.S. dollar, the cost inreaisof our U.S. dollar-linked raw materials and equipment increases, and these increases could materially adversely affect our results of operations. We have established policies and procedures to manage our sensitivity to such risks included in our Financial Risk Management Policy. This policy, however, may not adequately cover our revenue and cost exposure to exchange rates.


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We had total foreign currency-denominated debt obligations in an aggregate amount of R$11,359.711,538.4 million at December 31, 2015,2018, representing 74.8%52.1% 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 thereal in relation to the U.S. dollar or other currencies would increase the amount ofreaisthat we would need in order to meet debt service requirements of our foreign currency-denominated obligations.

Changes in tax laws or changes in their interpretation may increase our tax burden and, as a result, negatively affect our profitability.results of operations and financial condition.

The Brazilian government regularly implements changes to tax regimes that may increase our and our suppliers’ and customers’ tax burdens. burdens, which may in turn 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 results of operations and financial condition.

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 ContributionFunding (Contribuição para o Financiamento da Seguridade Social, or “COFINS”) taxes, the state Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços, or “ICMS”)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 R&Dtax incentive program (“Lei do Bem”) and the deduction of interest on shareholders’ equity, may be revoked to increase revenues for the government in light of a possible reduction of the income tax rate, which have been and are being studied by the new Brazilian government’s financial team. The effects of these proposed tax reform measures and any other changes that could result from enactment of additional tax reforms have not been, and cannot be, quantified.quantified yet due to the uncertainty of whether any changes will be implemented. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance.

Recently, regarding For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Social Contributions.” Moreover, certain tax laws may be subject to controversial interpretation by tax authorities. In the “ICMS”, there have been some discussions about the difference betweenevent that tax authorities interpret tax laws in a full exemption and a base reduction. If a base reductionmanner that is considered a partial exemption, there is a risk of reduction ofinconsistent with our tax credits, whichinterpretations, we may be adversely affect our results of operations.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 ADSsAmerican Depositary Shares (“ADS”) and evidenced by ARSsADRs 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 ADRsADR holders. For example, we are required to publish a notice of our shareholders’ourshareholders’ 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.


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Non-Brazilian holders of ADRs andor 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 aremay be 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 underlimited compared to 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 thancompared to 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 andor 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 andor 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 andor 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 thanreais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reaismay onlymayonly 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.

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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 proceedsfromproceeds 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.


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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. Subjectdirectors.Subject to limited exceptions, these provisions require any shareholder that acquires shares representing 20%33.3% or more of our share capital to disclose such information immediately through a filing with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários, or “CVM”) and, within 30 days from the date of such acquisition or event, commence a public tender offer with respect to all of our share capitalshares for a price per share equivalent tothat may not be less than the greater of: (i) 140% of the average trading price on the stock exchange trading the greatest of: (1) the economic valuevolume of our company, which shall be equivalent to the arithmetic averageshares of the mean pointscapital stock of the economic value ranges obtained in two appraisal reports prepared based onCompany during the discounted cash flow method, as long as the variation between these mean points shall not exceed 10%, in which case the economic value shall be determined through arbitration; (2) 135% of the issue price of the shares issued in any capital increase through a public offering that takes place within the 24-month period beforelast 120 trading sessions prior to the date on which the public offering shall become mandatory, duly adjusted in accordance withoffer became obligatory; and (ii) 140% of the IPCA variation upaverage 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 of payment; and (3) 135% of the unit price of our shares within the 30-day period beforeon which the public offering. 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. 2,689,4,373, as amended of the Brazilian National Monetary Council (Conselho Monetário Nacional), or “CMN,”“CMN”)) is generally viewed as being subject to taxationtotaxation 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 this case of a non-Brazilian holder selling common shares on the Brazilian stock exchange, the withholding tax rate applicable on the gain would be 15% (or 25% in0% (in the case of a non-Brazilian holder organizedregistered as such before Brazilian Central Bank (“Bacen”) under the lawsrules of orthe CMN (“Registered Holder”) and not a resident of a tax haven). For additional discussion ofhaven (“Tax Haven Resident”)), 15% (in the tax consequencescase of a non-Brazilian holder that is not a Registered Holder and not a Tax Haven Resident) or 25% (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 our common shares see “Item 10. Additional Information––Taxation.”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 not exceeding R$5,000,000.00;

ii.17.5% upon the portion of capital gains that exceeds R$5,000,000.00 but not exceeding R$10,000,000.00;

iii.20% upon the portion of capital gains that exceeds R$10,000,000.00 but not exceeding R$30,000,000.00; and

iv.22.5% upon the portion of capital gains that exceeds 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, including the B3 S.A. – Brasil, Bolsa, Balcão (the “B3” or the “São Paulo Stock Exchange”) are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Novo Mercado of BM&FBovespa (the “BM&FBOVESPA” or the “São Paulo Stock Exchange”) had a total traded volume of  R$1.5 trillion, or U.S.$457.5 billion, and an average daily trading volume of R$6.7 billion, or U.S.$2,069.2 million for the year in 2015. The New York Stock Exchange had a market traded volume of U.S.$16.13 trillion (U.S. domestic listed companies) and an average daily trading volume of  U.S.$64.02 billion for the year in 2015. The Brazilian securities markets are also characterized by considerable share concentration.


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The ten largest companies in terms of market capitalization represented approximately 51.5%52% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2015.2018. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 44.5%41% of all shares traded on the São Paulo Stock Exchange in 2015.2018. 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 varying degrees, 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 orand 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.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 2015,2018, and we do not expect to be a PFIC for 20162019 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 status is made on an annual basisfact-specific and will depend on the composition of our income and assets from time to time.time, and a separate determination must be made each taxable year as to whether we are a PFIC (after the close of each such taxable year). 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.  Accordingly, it is possible that we may become a PFIC for 2019 or future taxable years due to changes in our income or asset composition. See “Item 10.  Additional Information––Information—E.  Taxation––Taxation—U.S. Federal Income Tax Considerations––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 Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) or “CVM.”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-relatedproducts,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.


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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 Brazilian pension funds:

·PREVI – Caixa de Previdência dos Funcionários do Banco do Brasil, or “PREVI,” the pension fund of employees of Banco do Brasil S.A.;

·SISTEL – Fundação Telebrás de Seguridade Social, or “SISTEL,” the pension fund of employees of Telecomunicações Brasileiras S.A. – Telebrás;

·PETROS – Fundação Petrobras de Seguridade Social, or “PETROS,” the pension fund of employees of Petróleo Brasileiro S.A. Petrobras;

·Real Grandeza Fundação de Assistência e Previdência Social, or “Real Grandeza,” the pension fund of employees of Furnas Centrais Elétricas S.A. – Furnas;

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

funds. 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

For additional information about our financial structure.

Five of the eight original pension funds remain ourmajor shareholders, TELOS and PREVI-BANERJ sold all of their shares in our company in 2003 and October 2007, respectively. Real Grandeza sold its shares in 2008 and 2009. As of December 31, 2015, the five remaining pension funds, directly or indirectly, held 26.03%  of our common shares. Seesee “Item 7.  Major Shareholders and Related Party Transactions––A. Major Shareholders.”

Our principal executive offices are located at Rua Hungria, 1400, Jd. Europa, 01455-000,Av. das Nações Unidas, 8501 – 1st Floor, Pinheiros, 05425-070, São Paulo, SP, Brazil, and our telephone number at this address is +55-11-2322-5000/5052/5355/5048. The U.S. Securities and Exchange Commission (the “SEC”) maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as BRF, that file electronically with the SEC. 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 routinelyposted 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.

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Business Combinationcombination 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 sharesSadia S.A. and preferred shares ofPerdigão S.A. The business combination became fully effective on September 22, 2009, and Sadia received common shares ofbecame our wholly owned subsidiary. On December 31, 2012, we merged Sadia S.A., then a wholly-owned subsidiary, into BRF, and holdersof American depositary shares representing preferred shares of Sadia received ADRs evidencing ADSs representing common shares of BRF.


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A number of steps of the merger were approved atceased to exist as a 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.legal entity. 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 becameOn April 9, 2013, we changed our wholly owned subsidiary.

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

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, pursuant to which we agreed to transfer certain assets in compliance with our agreement with the CADE.

The TCD applies only to the specified markets and product categories within the Brazilian market.  The TCD does not restrict the ability ofcurrent name BRF and Sadia to act freely in our export markets and in the Brazilian food service market.  The CADE will monitor our compliance with the agreement, and we must submit monthly reports to the CADE.S.A.

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 Alimentos S.A. (“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 to be paid as follows:

·R$25.0 million paid on June 11, 2012;

·R$25.0 million, adjusted by the General Market Price Index (Índice Geral de Preços do Mercado), or “IGP-M,” paid on July 1, 2012;

·R$250.0 million to be paid by Marfrig to BRF in 72 monthly and successive installments, which are due from August 1, 2012, being the first installment in the amount of R$4.4 million and other remaining installments in the amount of R$4.8 million, subject to the fixed rate of 12.1% per year.

As disclosed in the quarterly information for the nine month period ended September 30, 2012, BRF and Marfrig renegotiated the payment terms of the amount correspondent to R$50.0 million which previous settlement was expected to occur on October 1, 2012. As a consequence, this amount has been received as from January 2, 2013 in 67 monthly and successive installments in the amount of R$964 thousand.

All the installments were properly paid by Marfrig.


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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, BRFwe entered into a binding memorandum of understanding with Lactalis, do Brasil – Comércio, Importação e Exportação de Laticínios Ltda. (“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 itsour dairy division, includingincluding:  (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 considerationsale price of US$U.S.$697.8 million.

Other Acquisitions and Investments in 2015Corporate Reorganization of One Foods

On January 11, 2017, we established a new wholly-owned subsidiary, One Foods Holdings Limited, based in Dubai International Financial Centre, which is focused on Halal markets. The formation of this subsidiary involved a restructuring of certain of our operations in Malaysia and some countries in the Middle East and Africa, including (i) the sale and purchase agreement pursuant to which One Foods acquired equity interests in entities that serve the Halal market from  BRF GmbH, a BRF wholly-owned subsidiary, and (ii) the contribution of the equity interest in SHB Indústria e Comércio de Alimentos S.A. (“SHB”) to One Foods. SHB held grain storage facilities, feed mills, outgrower agreements, hatcheries and eight slaughtering and processing plants in Brazil. In addition, we entered into certain agreements with One Foods that provided for the licensing of certain brands, operational and corporate activities, cost sharing and supply of raw materials and finished goods. See Note 1.7 to our consolidated financial statements for additional information.

On September 1, 2018, BRF executed a Share Sale and Purchase Agreement with two of its subsidiaries, BRF Foods GmbH and One Foods Holding Ltd., to acquire all common shares of SHB. On December 12, 2018 at BRF’s extraordinary shareholders meeting, the merger of SHB with and into BRF was approved. The merger took effect on December 31, 2018, following its approval at the extraordinary shareholders meeting of SHB. 

SATS BRF – SingaporeAcquisition of Banvit - Turkey

On April 16, 2015, BRF,through itsMay 25, 2017, our subsidiary BRFTBQ Foods GmbH entered into an agreement with Singapore Food Industries Pte. Ltd. (“SFI”TBQ”)  to form, a joint venture in Singapore and acquire 49% of the shares of a new company formed by SFI named SATS BRF Food Pte. Ltd., for a purchase price of US$19.0 million. In connection with this transaction, SFI contributed its food distribution business to SATS BRF. This transaction was completed on June 2, 2015.

Invicta Food Group Limited – United Kingdom

On April 22, 2015, BRF, through its subsidiary BRF GmbH, entered into an agreement with the shareholders of Invicta Food Group Limited (“IFGL”) to formQatar Investment Authority in May 2017, completed a joint venture between BRF GmbH and IFGL for the distribution of processed food in the United Kingdom, Ireland and Scandinavia. The joint venture was named BRF Invicta Ltd.. In connection with this transaction: (i) IFGL contributed its current operations to the joint venture with a strong presence in the food service market in the United Kingdom; and (ii) BRF GmbH contributed its current operations in the United Kingdom, Ireland and Scandinavia to the joint venture and acquired additional interest in the joint venture for the amount of GBP25.6 million. At closing, BRF GmbH holds 62% of the joint venture’s total share capital and the original shareholders of IFGL hold the remaining 38%.

Qatar National Import and Export Co. - Qatar

On October 5, 2015, BRF signed a binding memorandum of understanding with Qatar National Import and Export Co. ("QNIE")transaction for the acquisition of 79.48% of the shares issued by Bandirma Vitaminli (“Banvit”), which is the largest poultry producer in Turkey, has fully integrated operations and owns one of the most recognized brands in Turkey.Through a partsubsequent tender offer process completed on August 17, 2017, TBQ’s ownership of QNIE’sBanvit 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.

 Sale of Quickfood

                On December 7, 2018, we executed a Share Sale and Purchase Agreement with Marfrig Global Foods S.A. (“Marfrig”) for the sale of our total ownership interest in Quickfood (which constituted 91.89% of the capital stock of Quickfood) based on an enterprise value of US$60 million (equivalent to R$232 million). Quickfood was our subsidiary in Argentina and operated 3 beef slaughtering plants with a capacity of 620 heads per day and aprocessing capacity of approximately 6,000 metric tons per month of hamburgers, franks, cold products and frozen distribution businessvegetables. The transaction closed on January 2, 2019.

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Sale of Várzea Grande Plant

On December 7, 2018, we executed an agreement with Marfrig for the sale of R$100 million of both real estate assets and equipment from our plant located in Várzea Grande in the State of Qatar,Mato Grosso, which produces, among other items, hamburgers, meatballs and kibbehs (a type of Middle Eastern beef patty popular in Brazil). This transaction closed on January 23, 2019 and, on April 1, 2019, a Supply Agreement with Marfrig became effective, under which Marfrig undertook to provide us with finished goods produced in the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Sale of Avex

On December 19, 2018, we entered into a Share Sale and Purchase Agreement whereby we agreed to sell all of the issued and outstanding shares of our Argentinian subsidiary, Avex S.A., to Granja Tres Arroyos S.A. and Fribel S.A., based on an enterprise value of US$50 million (equivalent to R$194 million). Avex S.A. operates three facilities located in Llavalol, Villa Mercedes and Rio Cuarto, in Argentina, for the total considerationproduction of US$146.2 million. QNIE acted as BRF’s distributor in the State of Qatar for over 40 years.poultry and margarine. This transaction was completedclosed on January 6, 2016 byFederal Foods Qatar LLC, a subsidiary of BRF.

February 4, 2019.

Molino’s Trademarks – ArgentinaSale of Assets in Europe and Thailand

On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand, based on an enterprise value of US$340 million (equivalent to R$1.3 billion). We expect the closing of this transaction to occur in 2019, but it remains subject to customary closing conditions, including approval by European antitrust authorities.

Other Transactions in 2018 and 2019

On October 1, 2015, BRF, throughDecember 6, 2018, the Company was notified by VDG Holding S.A. that it was exercising its controlled entities Quickfoodright to terminate Minerva S.A. and Avex’s shareholders’ agreement entered into by the parties, as shareholders of Minerva S.A., both headquartered in Argentina, executed, with Molinos Río de la Plata S.A. and one of its controlled entities, the documents required for the acquisitionon November 1, 2013, as a result of the following sausage, hamburger and margarine trademarks, all present inCompany holding less than 6% of the Argentinean retail market: Vieníssima, GoodMark, Manty, Delícia, Hamond, Tres Cruces and Wilson. The total consideration for the transaction was US$43.5 million, paid in in Argentinean currency. This transaction was completed on October 16, 2015.

Campo Austral – Argentina

On December 1, 2015, BRFsigned a binding offer with Pampa Agribusiness Fund L.P. and Pampa Agribusiness Follow-on Fund L.P. related to the acquisition of all theoutstanding shares issued by Eclipse Holding CooperatiefUA,Minerva S.A.

On January 10, 2019, the Company executed an Asset Sale and Purchase Agreement with BOGS S.A. for the sale of its facility located in the city of Florencio Varela, in Argentina, and all assets and liabilities related to it, including the brands “Bocatti” and “Calchaquí,” based on an enterprise value of U.S.$24.5 million (equivalent to R$91 million). The transaction closed on February 28, 2019.

On January 10, 2019, the Company executed a Dutch company that controlsShare Sale and Purchase Agreement with La Piamontesa de Averaldo Giacosa y Compañía S.A. for the sale of all of the capital stock of the Company’s subsidiary, Campo Austral a group of companies with fully integrated business operations in the hog segment in Argentina, including the cold cuts market. Campo Austral is valued at US$85.0 million. As of the date hereof, this transaction has not yet been completed.


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Golden Food Siam - Thailand

On December 1, 2015, BRF,through its controlled entity BRF GmbH, entered into a share purchase agreement for the acquisition of all the common shares issued by Golden Foods Siam,S.A., including its assetsfacilities in ThailandSan Andrés de Giles and Europe, forPilar and the total considerationbrand “Campo Austral,” based on an enterprise value of US$348.7 million. ThisU.S.$11 million (equivalent to R$42 million). The transaction was completedclosed on January 26, 2016. Golden Foods Siam is one of the leading poultry producers in Thailand with fully integrated operations and presence in more than 15 global markets.

Universal Meats (UK) Ltd – United Kingdom

March 11, 2019.

On December 1, 2015, BRF, through18, 2018 the Company concluded the formation of a receivables investment fund (“FIDC”) to acquire trade receivables of commercial transactions entered into by the Company and its controlled entity BRF Invicta Limited, signed a binding memorandumclients in Brazil. The fund has 3 distinct classes and achieved an aggregate volume of understandingR$875 million.

Carne Fraca Operation

We are currently being investigated in connection with the shareholders of Universal Meats (UK) Ltd, Carne Fraca Operation. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation.”

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Trapaça food distributor Operation

We are currently being investigated in connection with the UK, focused on food service, for the total consideration of GBP31.8 million. This transaction was completed on February 1, 2016.Trapaça Operation. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings— Trapaça Operation.”

Capital Expenditures

The table below sets forth our capital expenditures with respect to both continuing and discontinued operations for the periods indicated:

 

As of December 31,

 

2015

2014

2013

 

(in millions of reais)

Expansion and enhancement of production facilities

495.0

292.8

558.3

UAE Facility

51.8

236.9

84.6

Other expansion investments

443.1

55.9

473.7

Productivity investments

435.1

267.8

169.0

Automation

257.6

124.9

99.8

Other productivity investments

177.6

142.9

69.2

Other capital expenditures

554.8

387.5

281.4

Subtotal capital expenditures

1,485.0

948.1

1,008.6

Biological Assets

598.9

517.5

501.8

Acquisitions and other investments

376.9

514.4

222.6

Leasing

21.3

67.8

182.7

Total capital expenditures

2,482.0

2,047.8

1,915.8

 

 

 

 

 

For the year ended December 31,

 

2018

2017

2016

 

(in millions ofreais)

Property, plant and equipment

533.6

887.0

1,859.2

Biological assets

877.1

713.2

784.2

Acquisitions and other investments

200.7

1,120.9

2,873.0

Intangible assets

20.6

51.2

62.8

Total capital expenditures

1,631.7

2,772.3

5,579.2

 

 

 

 

      

The total amount spent in 2015 is in line with investments in previous years, with higher investments for increases in capacity, yield improvements, cost reductions, processes automation, improvement of service levels and for better working conditions for our employees. Additionally, we have strengthened our commitment to a more efficient use of the employed capital aiming at generating value to shareholders and sticking to our strategic plan.

In 2014, we had a reduction of investments aimed at increasing capacity. On the other hand, there was an increase in the amount invested for improvement of efficiency, cost reduction, process automation and service level, as well as working conditions for employees, improving the focus on compliance with regulatory standards. Additionally, there was a reinforcement on the focus on capital efficiency used to generate shareholder value and aligned with the strategic plan.

The main capital expenditures in 2015, 20142016, 2017 and 20132018 are described below:

Tatui (SP-Brazil):In 2014Acquisitions and 2013,divestments: For information regarding our recent acquisitions and divestments, see “Item 4. Information on the Company—A. History and Development of the Company.”

Logistics Management: BRF invested a total of R$65.958.8 million in developing a production line for sliced cold cut products to be sold in an exclusive single package. This new line was installed2016 and 2017 in the Tatui Industrial Complex, locatedVitória de Santo Antão distribution center in order to better serve all the states in the statenorth and northeastern regions of São Paulo (Brazil). This new product aims at strengtheningBrazil.

Automation: In 2017, BRF focused on executing the presenceof the Sadia brandnearly R$115.0 million of investments made in the cold cuts category, offering a differentiated pre-sliced product, with clear identification of the brand and food security assurance.


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BRF is a leader in the cold cuts category and wants to expand the portfolio of products that reach the consumer needs, such as single fresh slices. The new sliced cold cuts lineSoltissimo offers thin and single slices that do not stick together, with “easy-open” and storage packaging and fresh products.

Logistics Management:BRF has been working on a Logistics Growth Acceleration Project, which consists of the implementation of two logistics management systems: Transportation Management System (“TMS”) and Warehouse Management System (“WMS”). With that, we expect to improve the company’s service levels and On Time In Full (“OTIF”) index, representing the percentage of orders that are fully satisfied with the items and quantities requested and within the time specified by the customer, and align it with market benchmarks.

Automation:In 2015, 2014 and 2013, BRF invested R$482.3 million2016 for the automation of company processes. The goal has beenof these investments is to improve efficiency by increasing productivity and reducing production costs. In 2015,2016, investments in automating the focus of automation investments was onchicken leg deboning processes and poultry packaging.

Internationalization Project: BRF is working on a broad long-term internationalization project. In 2014, for example, the company opened a processed products facilitycontinued, which not only reduced costs but also improved ergonomics in the UAE, with production capacity of 70 thousand tons/year. This represented a total investment of around US$160.0 million.

Operational footprint:factory and increased product quality. In 2015, BRF invested R$375.8 million for the automation of company hadprocesses.

International Projects: In 2017, we invested R$136.5 million in our Toledo, Campos Novos and Rio Verde factories to increase pork production for the Chinese market.

Additionally, in 2017, we invested R$20.1 million in a strong focusnew production line for animal ingredients.

In 2018, we focused our investments 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,our quality and production specialization. At this point,security standards rather than acquisitions, reflecting the review also takes this opportunity to improve the mixpolicies of the Company's products, maximizing investments in higher value-added products, in line with the strategyour new board of BRF. The revaluation of footprint also provides greater flexibility and agility in the production process.

directors.

In 2016,2019, in addition to existing projects, we planexpect to focus on the development of new products and technologies as well as on manufacturing efficiency and logistics improvements. In accordance with BRF’spursuing our commitment to a more efficientmaximizing the use of its employed capital,our assets by making investments to help eliminate production constraints and increase overall efficiency. We expect that investments aimed at maintaining our high-quality standards will still represent a significant share of our expenses. In addition, we will also analyze divestiture opportunities (such as inactive real estate assets) should they allow the companyseek to increase its focus on the core businessmake further progress under our financial and generate higher returns for shareholders.

operational restructuring plan.

B.                 Business Overview

BRF S.A. is one of the largest producers of fresh and frozen protein foods in the world,world.We are committed to operating our business and delivering products to our global customer base in line with our core values: quality, safety and integrity. We have a portfolio of over fourapproximately three thousand stock keeping units (“SKUs”). Our processed products include marinated and frozen whole and cutchicken,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 asSadia, Perdigão, Qualy, Chester, Perdix,Confidence andPatyHilal. In 2018, BRF is responsibleaccounted for 14.5%11.3% of the worldworld’s poultry trade, in poultry.according Trademap.

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Our portfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their needs.preferences. 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 plants31 industrial facilities in all regions of Brazil, BRF haswe have among itsour main assets a widespread distribution network that enables itsour products to reach Brazilian consumers through 623,000more than 530,000 monthly deliveries and 4047 distribution centers as of December 31, 2018, 20 of which are in the domestic market and 2027 of which are in our export markets.


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In the international market, BRF has a leading brand,Sadia, in various categories in Middle Eastern countries. We maintain 22 sales27 offices outside of Brazil serving customers ofin more than 120150 countries on five continents. We have sixone industrial units in Argentina, two in Europe (BRF UK and BRF Holland) and onefacility in Abu Dhabi, United Arab Emirates, that was inauguratedone in Malaysia and three in Turkey.

We have been a public company since 1980. Our shares have been listed on November 26, 2014.

We are able to reach substantially alltheNovo Mercado of the Brazilian population through a nationwide networkSão Paulo Stock Exchange as BRFS3 since 2006, and ADRs representing our common shares are traded on the New York Stock Exchange, or “NYSE.”

A breakdown of 20 distribution centers. our products is as follows, which are sold both in Brazil and to our international customers:

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

·Processed Food Products including the following:

omarinated, frozen, whole and cut chicken, roosters (sold under theChester® brand) and turkey;

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

ofrozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs;

·Other Processed Products including the following:

omargarine; and

ofrozen 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.

Prior to the divestitures made in connection with our financial and operational restructuring plan, other processed products included mayonnaise, mustard and ketchup.

In the Brazilian market,Brazil, we operate 3524 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and threetwo soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logisticlogistics system in our domestic market, with 20 distribution centers, being ninesix of which are owned by BRFus and 1114 of which are leased byfrom third parties, all of which serve the domestic marketsupermarkets, retail stores, wholesale stores, restaurants and export markets.other clients.

In the international market,our International and Halal markets, we operate sixfive industrial facilities for meat processing plants, one margarineprocessing. Additionally, after giving effect to the divestitures made in connection with our financial and oil processing plant, one sauce and mayonnaise processing plant and one frozen vegetables processing plant. We have 20operational restructuring plan, we continue to operate 27 distribution centers located overseas,in Asia, Southern Cone and the Middle East as well as commercial offices on four continents.

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Our Industry

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

Brazilian Market

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

Real GDP in Brazil increased at an average annual rate of 2.4% from 2004 through 2018.  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 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 6.5% as of December 31, 2018.  For the year ended December 31, 2018, the IPCA increased by 3.75%.

The unemployment rate and consumer confidence levels also have an impact on consumption levels in Brazil. The average unemployment rate for October, November and December of 2018 was 11.7%, a decrease of 0.1 percentage points when compared to the 11.8% in the United Kingdom, France, Spain, Italy, Austria, Hungary, Netherlands, Russia, Singapore, South Korea,same period of 2017. The Consumer Confidence Index for December 2018 was 93.8, 7.4 percentage points above that in December 2017 of 86.4%.

According to the Brazilian Association of Supermarkets (Associação Brasileira de Supermercados, or “ABRAS”) in December 2018, supermarket sales in real terms (deflated by the IPCA), increased 3.9% compared to December 2017. For the full year, supermarket sales in real terms rose 2.1% in 2018 as compared to 2017.

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 5.1% in the year ended December 31, 2018, compared to the year ended December 31, 2017, in terms of volume. Pork exports registered a decrease of 7.4% in volume sold in the year ended December 31, 2018, compared to the year ended December 31, 2017. Beef exports recorded an increase of 12.2% in volume in the year ended December 31, 2018, compared to the year ended December 31, 2017.

Brazilian chicken exports in the year ended December 31, 2018 totaled 4.1 million tons on sales of R$23.45 billion (equivalent to U.S.$6.57 billion). Saudi Arabia remains the main destination for these exports (12.5%), followed by China (12.4%), Japan Saudi Arabia,(11.4%) and the United Arab Emirates Qatar, Oman, Kuwait, South Africa, Argentina, Uruguay(11.1%).

Pork export volume in the year ended December 31, 2018 totaled 645.5 thousand tons, totaling around R$4.69 billion (equivalent to U.S.$1.21 billion). The leading importers, China, Hong Kong and Chile.Singapore represented 25.0%, 23.9% and 6.8%, respectively, of total exports from Brazil.

BRF has beenBeef shipments in the year ended December 31, 2018 totaled 1.35 million tons with sales of around R$21.15 billion (equivalent to U.S.$5.46 billion). This increase in volume was driven by higher exports sent to China and Hong Kong which import 23.8% and 20.5% of Brazilian beef exports, respectively.

For a public company since 1980. Our shares have been listeddiscussion on the BM&FBovespa as BRFS3 since 2006,global economic conditions and we are also tradedfurther information on the New York Stock Exchange (NYSE - ADR level III). Since 2005, BRF has been part of BM&FBovespa’s Corporate Sustainability Index (ISE) portfolio in acknowledgement of its strong commitment to sustainable development. This commitment has been reinforced and internationally recognized since 2012, upon our entrance into the portfolio of Emerging Markets of Dow Jones Sustainability Index.

Competitive Strengths

We believe our strongest competitive points are:

·Leadership in the Brazilian Food Market with Strong Brands and a Global Presence in the Market.We are one of the biggest food companies in Brazil, the biggest company in Brazilian agrobusiness (according to Globo Rural magazine), with a size and scale that allows us to compete in Brazil as well as in international markets. 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 business in international markets.  In 2015, we slaughtered around 1,724.4 million chickens and other poultry, 9.5 million hogs and cattle. In this same year, we sold around 4.5 million tons of poultry, pork and processed products. Our own and licensed brands have a high recognition specially in Brazil, Argentina and Golf countries and we are expanding our presence internationally. Our sustainable practices have also brought BRF great recognition over the years. We are the only representative of the food sectorconditions on a list of 10 leading Brazilian companies in terms of transparency published by the Carbon Disclosure Project (CDP). We are the only company in the food sector to be part on BM&FBovespa’s Corporate Sustainability Index (ISE) of the São Paulo stock exchange for the last 11 years. The company also became part of the Emerging Markets portfolio of the Dow Jones Sustainability Index four years ago. BRF is also among the companies listed on the Global Compact 100 Index, a list of the United Nations Global Pact.

·Extensive Distribution Network in Brazil and the Export Markets.  We are one of the few companies with an established distribution network that can deliver frozen and chilled products in practically any region in Brazil. Moreover, we export products to around 120 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 stakes we have acquired in distribution companies like Al Khan Foodstuff LLC, 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., the leader in the distribution of frozen, chilled and dried food in Kuwait, and Federal Foods Limited, the leader inthe distribution of food in the United Arab Emirates (UAE). Besides this, we also operate through Al Wafi in Saudi Arabia. In Argentina, we are working to optimize the number and increase the loyalty of our distributors. Our established distribution capacities 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.


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·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 labor 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 client attendance. 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 (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 plants in 10 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. In order to have a greater focus on our core business, we made an strategical partnership with Minerva, through which we transferred our beef operations to them, in exchange for an equity stake in this company. This transaction was approved by Brazil’s anti-trust agency (CADE) in 2014. In 2015, we also sold our dairy division to Lactalis do Brasil – Comércio, Importação e Exportação de Laticínios Ltda, a company controlled by Parmalat S.p.A., a listed Italian company that belongs to the Groupe Lactalis. We also opened our first processed food plant in the Middle East in Abu Dhabi in the United Arab Emirates in 2014, the largest processed food plant in the region. This is a great step forward as part of our Company’s international expansionBrazilian market, see “Item 5. Operating and aims to provide the best options to clients through local operations, which allow rapidFinancial Review 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 of the Product.  We concentrate on food safety and quality in all our operations to meet the specifications of the clients, prevent contamination and reduce the risks of epidemics of animal illnesses. We monitor the treatment of the poultry and the hogs we create in all the stages of their lives and during the whole production process. 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 inspected individually. Moreover, we were the first Brazilian company approved by the European Food Safety and Inspection System which qualified us to sell processed poultry products to European consumers. This means we attend the most demanding clients in the world and meet their quality controls and external audits. 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 upstate São Paulo.

·Committed Management Team.  Our management endeavors to accentuate the best practices in our operations and corporate governance standards, as shown in the listing of our common shares on theNovo Mercadosegment ofthe São Paulo stock exchange. Those companies listed on this stock market must pledge to adopt the highest standards of corporate governance. Pedro Faria assumed the position of Global CEO in January 2015. He is leading a long-term cycle focused on excellence and high performance, consolidating the management model that has been implemented to date, based on people, quality, efficiency and meritocracy. He is also continuing with our international expansionplans, focusing on gaining new markets in a sustainable way so that BRF moves increasingly closer to the consumers, attending their wishes and demands.


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Business Strategy

We intend to become the most inspiring and relevant global food company. In order to achieve this, we reviewed our long-term plan in our yearly strategic planning process. We set three main targets for our company in the next years:

·become a global, brand-focused, consumer-oriented food company;

·be dominant in our relevant playing fields; and

·implement a market-driven, global and agile supply footprint.

BRF is focused on three main strategic pillars:

·Build Sadia as a truly global brand. Sadia has different brand stages across our markets. In Brazil and Golf countries, for example, it has impressive penetration and preference levels. We are working to achieve our goal for Sadia to be strong in all our relevant markets, building a unified and global brand.

·Focus in four key global categories.Strengthen our portfolio and its quality must be a global effort. Therefore, we elected our most important categories, considering strategic and value importance, to be our global focus: value added poultry and pork cuts, cold cuts, breaded and ready to eat meals. Some exceptions apply locally, e.g., paty in Argentina.

·Capture global opportunities.To consolidate our leadership and global reach, we aim to strengthen our leadership in Brazil, Middle East and Latin America; consumerize Asia; and enter the business to comment (B2C) in African markets.

To fulfill this, we are conducting solid initiatives across the globe. In Brazil, we will continue to take advantage of Perdigão’s growth due to its return in some categories while we strengthen our three most popular brands. We already have brands in the top 5 preferred food brands in Brazil: Sadia, Perdigão and Qualy are the first, third and fifth most preferred food brands in Brazil, respectively.

Internationally, we are consolidating BRF as a global company. In Middle East and Africa, we will continue to establish local production (Abu-Dhabi plant), consolidate distribution and increase processed food portfolio participation. In Asia, we are investing in branded portfolio and footprint expansion. In Eastern Europe and Russia, we are focusing on retailing presence and, in the UK, our food service channel is strongly growing.Prospects—D. Trend Information.”

Products

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

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Poultry

We produce frozen whole and cut poultry. In 2015,2018, we slaughtered approximately 1.721.55 billion heads of poultry, a 4.6% decrease compared to 1.661.63 billion in 2014.2017. We sold 1,9442,261 thousand tons of frozen chicken and other poultry products in 2015,2018, compared to 1,9772,127 thousand tons in 2014.2017. Excluding the discontinued operations, we sold 2,064 thousand tons of frozen chicken and other poultry products in 2018, compared to 1,945 thousand tons in 2017. Most of our poultry sales are to our export markets.

As a result of the trade barriers imposed by the European Union, we significantly reduced our production of turkey in 2018, as the European Union was our main consumer market for this product. For additional information, see “Item 3. Key Information—D. Risk Factors—More stringent trade barriers in key export markets may negatively affect our results of operations.”

Pork and Beef

In 2015,2018, we slaughtered approximately 9.519.84 million hogs and 154,571 cattle, compared to 9.629.79 million and 145,361 in 2014.2017, respectively. We raise hogs but do not raise cattle at our facilities. Although most of the 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 wholecarcasses.whole carcasses. In 2018, we sold 293 thousand tons of pork and beef cuts, compared to 323 thousand tons of pork and beef cuts in 2017. Excluding the discontinued operations, we sold 252 thousand tons of pork and beef cuts, compared to 268 thousand tons of pork and beef cuts in 2017. We are also further developing our international customer base for pork and beef cuts.  In 2015, we sold 273 thousand tons of pork and beef cuts, compared to 336 thousand tons of pork and beef cuts in 2014.


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Aligned with our strategic plan (BRF 17), in 2014, we transferred our beef operations to Minerva S.A. 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 2,1162,123 thousand tons of processed foods in 2015,2018, compared to 2,0732,118 thousand tons in 2014.2017. Excluding the discontinued operations, we sold 1,869 thousand tons of processed foods in 2018, compared to 1,735 thousand tons in 2017. Most of our sales of processed foods are to our domestic market. We believe that there are opportunities to market value-added products like these to targeted regions and other market segments in Brazil as well as to expand our sales in the export market.

Our processed food products strategy relies on accurate brand equity management, a varied product portfolio with strategic pricing and innovation and service excellence, which allowswe believe will allow our products to expand their reach thousands ofboth in the Brazilian market and international homes each day.markets.

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)kibbeh and meatballs.

Marinated Poultry

We produce marinated and seasoned chickens, roosters (under theChester® brand) and turkeys. We originally developed theChester® breed of rooster to maximize the yield of breast and leg cuts. In 2004, we sold our rights to theChester® 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 agreementtechnologyagreement under which Cobb Vantress manages theChester® breed of rooster. We continue to oversee the production ofChester® roosters in Brazil from hatching to distribution, and we own the trademarks for theChester® line of products.

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Halal Products

We offer poultry products for Islamic markets in accordance with the Halal method of animal slaughtering.

Margarine

We sell margarine under theQualy,Deline andClaybom brands. We maintain our leading market position with theQualy brand by bringing innovation to the Brazilian market. For example, in 2014 we introduced the first aerated margarine in Brazil and in 2016 we improved theQualy portfolio by adding a proprietary mix of vitamins and minerals to our products, which is called the Q-Mix. Additionally, in 2017 we introduced the first margarine with whole grains,Qualy Multigrãos. This technology to add grains inside the margarine is protected under a patent in partnership with our equipment supplier. In 2018, we launched Qualy Light Zero Lactose, the first zero lactose margarine in the Brazilian market.

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, except for the durum flour used to make the noodles for the lasagna, which we import.market.

·        VegetablesFrench Fries.. We sell a variety offrozen French fries, which are imported from Belgium where they are produced and packaged for us by third parties. Prior to the divestitures made in connection with our financial and operational restructuring plan, we sold other frozen vegetables, such asincluding broccoli, cauliflower, 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.


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·Cheese Bread. We produce cheese bread, a popular Brazilian bread infused with cheese. We purchase the ingredients in the domestic market, except for the parmesan cheese, which we import.beans.

·        Pies and Pastries. We produce a variety of pies and pastries, such as chicken and heart-of-palm pies and lime pies. We produce the meat, sauces and toppings used in our pies and pastries, and we purchase other raw materials, such as heart-of-palm, lime and other fillings from third parties.

MargarineFrozen desserts

We sell margarinehave produced and sold Miss Daisy deserts since 1999. We believe the Miss Daisy brand has a leading market position and has been highly resilient to market changes. We offer a wide variety of products under Qualy, Deline and Claybom brands. We maintain our leadership with Qualythe Miss Daisy brand, and in 2014 we introduced the first aerated margarine in Brazil. The aincluding:

·erated 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 brandsBecel andBecel ProActivin Brazil.Mousse pie;

Mayonnaise·Dutch pie; and

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

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 orand to unaffiliated customers. In 2015,2018, we produced 10,4379,559.56 thousand tons of feed and premix, compared to 10,36010,444.75 thousand tons in 2014.2017. We also produce a limited range of soy-based products, including soy meal and refined soy flour.

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

Poultry

Brazil iswas the second largest producer and the leading exporter of poultry in the world for 2015, followed by the U.S., EU-27 and Thailand,in 2018 based on estimates calculated by the USDA.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 explainedgrowth has been driven by the increase of Brazilian companies’ production dedicated to exports as well as by the competitiveness of Brazilian poultry. Sanitary issues in the main producing countries, such as avian influenza cases in the United States in recent years, have changed the global poultry trade dynamics by reducing competition from major exporting countries. In 2013, however, European and Japanese markets reopened to Thailand for in-natura chicken and the United States is recovering its volume in some countries (despite new bans due to avian flu). In 2014, Russia banned poultry and pork from USA, Europe and Canada, which then caused an excess demand that was met mainly by an increase in exports from Brazil. Russia experienced a great deal of volatility in exported volumes in 2014 due to this banishment, as well as the economic crisis it went through, in light of geopolitical events in Ukraine and the drop in oil prices.

According to the USDA, global poultry trade decreased 2.3%increased 1.9% in 2015 (mainly2018 compared to 2017, mainly due to higher exports from the United States which exported 9.7% less, losing 2.4% of market share)(which increased 3.3%), while Brazilian poultry exportsEuropean Union (which increased 5.1% in the same period, reaching 3.74 million tons.7.8%); Thailand (which increased 10.3%) and China (which increased 2.5%). According to the Brazilian Association of Animal Protein (ABPA – (Associação Brasileira de Proteína Animal)Animal, or “ABPA”), exports of poultry parts increased 12.0%,0.3% in 2018 compared to 2017, representing 58.8%66.1% of the total poultry exported volumes. Whole chicken, which represents 33.2%represented 27.0% of the total volume, decreased 1.9%.11.0% in 2018 compared to 2017. The main destinations in 2018 were Saudi Arabia, JapanChina and the European Union, whichJapan. In 2018, Saudi Arabia decreased total imports from Brazil by 18.0%, China increased total imports from Brazil by 21.8%11.0% and 1.6% andJapan decreased total imports from Brazil by 1.6%, respectively.10.7% compared to 2017.


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

Primary Broiler Producers

2015

2014

2013

2018

2017

2016

(in thousands of tons – “ready to cook” equivalent)

(in thousands of tons – “ready to cook” equivalent)

U.S.

17,966

17,299

16,976

19,361

18,938

18,510

Brazil

13,355

13,612

13,523

European Union (28 countries)

12,200

11,912

11,560

China

13,025

13,000

13,350

11,700

11,600

12,448

Brazil

13,080

12,692

12,308

European Union (27 countries)

10,600

10,070

9,900

Russia

4,872

4,617

4,328

India

3,900

3,725

3,450

4,855

4,640

4,427

Mexico

3,485

3,400

3,275

Thailand

3,170

2,990

2,813

Turkey

2,225

2,188

1,925

Argentina

2,110

2,150

2,119

Japan

1,685

1,661

1,629

Others

29,373

29,503

28,500

16,482

15,914

15,695

Total

87,944

86,549

84,494

 

Primary Broiler Exporters

2015

2014

2013

2018

2017

2016

(in thousands of tons – “ready to cook” equivalent)

(in thousands of tons – “ready to cook” equivalent)

Brazil

3,740

3,558

3,482

3,687

3,847

3,889

U.S.

2,990

3,312

3,332

3,244

3,140

3,086

European Union (27 countries)

1,150

1,133

1,083

European Union (28 countries)

1,429

1,326

1,276

Thailand

580

546

504

835

757

690

China

395

430

420

447

436

386

Others

1,376

1,491

1,434

1596

1519

1391

Total

10,231

10,470

10,255

11,238

11,025

10,718

 

Primary Broiler Consumers

2015

2014

2013

2018

2017

2016

(in thousands of tons – “ready to cook” equivalent)

(in thousands of tons – “ready to cook” equivalent)

U.S.

16,185

15,823

15,510

China

12,880

12,830

13,174

11,595

11,475

12,492

U.S.

14,996

14,034

13,691

European Union (28 countries)

11,474

11,279

11,047

Brazil

9,344

9,137

8,829

9,671

9,768

9,637

European Union (27 countries)

10,160

9,906

9,498

Russia

4,947

4,718

4,451

India

4,852

4,638

4,424

Mexico

3,853

3,738

3,582

4,301

4,198

4,061

Russia

3,775

3,676

3,520

Japan

2,761

2,688

2,587

Thailand

2,345

2,226

2,129

Argentina

1,997

1,978

1,969

South Africa

1,835

1,778

1,781

Others

31,268

31,631

30,693

21,666

21,284

20,841

Total

86,276

84,952

82,987

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Source: USDA, February 2016.April 2019. 

Pork

Brazil iswas the fourth largest producer and exporter and fifth largest consumer of pork in the world in 2018, 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 of 2.0% and a decrease in pork consumption of pork3.8% in 2015 of 0.81% and 0.82%, respectively.2019%. According to ABIPECS,the USDA, global pork exports reached 5468,446 thousand tons in 2015.2018. Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. Research developments haveand development has also helped to reduce fat, cholesterol and calories in pork produced in Brazil. These enhancements allow for better productivitymore efficient production of prime cuts, more meat per carcass and more nutritious and healthier meat. Improved genetic potential of breeders has also contributed to the production increase.

According to the Brazilian Animal Protein Association (Associação Brasileira de Proteina Animal, or “ABPA”), untilABPA, as of December 2015, Russia2018, China was Brazil’s majorprimary destination offor pork followed by Hong Kong, representing 25.0% and Angola, representing 44.6%23.9%, 22.6% and 6.5% respectively, of total Brazilian pork exports. RussianChinese and Hong Kong imports from Brazil increased 30.58%3.5% and 11.55%215.7%, respectively, from January to December of 2015. Ukraine imports decreased 98.2% mainly as a result of the economic downturn due to conflicts with Russia and the substitution of chicken for pork, which has a higher price. In June 2013, Brazil was authorized to export in-natura pork meat to Japan, the sixth biggest consumer of pork meat in the world, reaching 2.55 million tons per year.2018.

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

 

World Pork Production

Main Pork Producers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

China

54,040

54,518

54,255

European Union (28 countries)

24,300

23,660

23,866

U.S.

11,942

11,611

11,320

Brazil

3,763

3,725

3,700

Russia

3,155

2,990

2,870

Vietnam

2,801

2,741

2,701

Others

13,080

12,869

12,682

Total

113,081

112,114

111,394


World Pork Exports

Main Pork Exporters

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

European Union (28 countries)

2,934

2,858

3,130

U.S.

2,663

2,554

2,376

Canada

1,330

1,351

1,320

Brazil

730

786

832

China

203

208

191

Chile

200

171

173

Mexico

178

170

141

Others

208

210

192

World Pork Consumption

Main Pork Consumers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

China

55,398

55,930

56,245

European Union (28 countries)

21,380

20,816

20,748

U.S.

9,749

9,542

9,476

Russia

3,197

3,327

3,192

Brazil

3,035

2,941

2,870

Vietnam

2,786

2,703

2,647

Others

16,927

16,383

15,890

Total

112,472

111,642

111,068

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World Pork Panorama

Main Pork Producers

2015

2014

2013

(in thousands of tons – weight in equivalent carcass)

China

56,375

56,500

54,930

European Union (27 countries)

23,000

22,400

22,342

U.S.

11,158

10,329

10,524

Brazil

3,451

3,344

3,280

Vietnam

2,450

2,425

2,349

Russia

2,630

2,650

2,400

Others

12,394

12,618

12,990

Total

111,458

110,566

108,888

 

Main Pork Exporters

2015

2014

2013

(in thousands of tons – weight in equivalent carcass)

U.S.

2,268

2,321

2,264

European Union (27 countries)

2,350

2,150

2,232

Canada

1,210

1,180

1,245

Brazil

565

585

585

China

250

275

244

Chile

185

165

164

Others

317

290

303

Total

7,145

6,873

7,031

Main Pork Consumers

2015

2014

2013

(in thousands of tons – weight in equivalent carcass)

China

57,200

57,010

55,406

European Union (27 countries)

20,662

20,262

20,125

U.S.

9,340

8,455

8,662

Russia

2,929

3,109

3,267

Brazil

2,887

2,760

2,696

Japan

2,545

2,558

2,550

Others

15,381

15,431

15,701

Total

110,944

110,044

108,486

Source: USDA, February 2016.April 2019. 

Beef

Brazil iswas the second largest producer, the fourth largest consumer and consumerthe largest exporter of beef in the world and the third largest exporter,in 2018, according to tonnage data compiled by the USDA. From 20152018 to 2016,2019, the USDA estimates an increase in global beef production and consumption of approximately 0.6% and 0.8%, respectively, and also an increase in exports of approximately 1,29%, 0.96% and 3.39%, respectively.2.7%.

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

World Beef Panorama

World Beef Production

Main Beef Producers

2015

2014

2013

2018

2017

2016

(in thousands of tons – weight in equivalent carcass)

(in thousands of tons – weight in equivalent carcass)

U.S.

10,861

11,076

11,751

12,253

11,943

11,507

Brazil

9,425

9,723

9,675

9,900

9,550

9,284

European Union (27 countries)

7,540

7,443

7,388

European Union (28 countries)

8,030

7,869

7,880

China

6,750

6,890

6,730

6,440

6,346

6,169

India

4,200

4,100

3,800

4,300

4,250

4,200

Argentina

2,740

2,700

2,850

3,050

2,840

2,650

Australia

2,306

2,149

2,125

Mexico

1,980

1,925

1,879

Pakistan

1,800

1,780

1,750

Turkey

1,400

1,399

1,484

Others

16,927

17,814

17,273

10,734

10,600

10,731

Total

58,443

59,746

59,467

62,193

60,651

59,659

 

World Beef Consumption

Main Beef Consumers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

U.S.

12,179

12,052

11,676

European Union (28 countries)

8,049

7,838

7,899

China

7,910

7,313

6,928

Brazil

7,865

7,750

7,652

India

2,744

2,401

2,436

Argentina

2,544

2,547

2,434

Others

18,967

18,778

18,893

Total

60,258

58,679

57,918


 

World Beef Exports

Main Beef Exporters

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

Brazil

2,083

1,856

1,698

Australia

1,662

1,485

1,480

India

1,556

1,849

1,764

U.S.

1,432

1,297

1,160

New Zealand

633

593

587

Others

3187

2882

2734

Total

10,553

9,962

9,423

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World Beef Panorama

Main Beef Consumers

2015

2014

2013

(in thousands of tons – weight in equivalent carcass)

U.S.

11,400

11,242

11,608

Brazil

7,870

7,896

7,885

European Union (27 countries)

7,610

7,515

7,520

China

7,350

7,297

7,052

Argentina

2,510

2,503

2,664

Russia

2,047

2,289

2,393

Others

17,679

18,966

18,663

Total

56,446

57,708

57,785

 

World Beef Panorama

Main Beef Exporters

2015

2014

2013

(in thousands of tons – weight in equivalent carcass)

Brazil

1,625

1,909

1,849

India

2,000

2,082

1,765

Australia

1,815

1,851

1,593

U.S.

1,035

1,167

1,174

New Zealand

590

579

529

Others

2,536

2,402

2,216

Total

9,601

9,990

9,126

Source: USDA, February 2016.April 2019.

Production Process

We are a vertically integrated producer of poultry and pork products. We raise poultry and hogs, produce animal feed, slaughter the animals, process poultry and pork to produce processed food products and distribute unprocessed and processed products throughout Brazil and in our export markets.

The following graphic is a simplified representation of our meat production chain.


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Meat Production Chain

Description: 20- F - Cadeia produtiva - Meat

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 chickseggs to our grandparent stock farms, where the chickseggs are hatched, and the chicks are 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 inresultin day-old chicks that are ultimately used in our poultry products. We produced 1,762 million1.6 billion day-old chicks, including chickens, Chester®Chester® roosters, turkeys, partridge and quail in 2015.2018. We hatch these eggs in our 31 hatcheries.

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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 partnership agreementsbusiness arrangements with approximately 8,8748,000 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.

AtAs of December 31, 2015,2018, we had a fully automated slaughtering capacity of 35.835.7 million heads of poultry per week.


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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, wePiglet producers either purchase parent breeder hogs produced by our company or from producers such as Agroceres and DanBred. 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 DanBredweight, 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. Weweight, and then transport the hogs from these outgrowers to our slaughtering facilities. We have agreements with a total of approximately 3,1663,000 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, andbut we provide limited technical support. We purchase the hogs raised by these local producers pursuant to contracts.contracts with the local producers.

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 toseparated based on their intended use. These parts become the raw material for the production of pork cuts and specialty meats.

AtAs of December 31, 2015,2018, we had a pork slaughtering capacity of 214,200197,188 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 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. BRF received an equity interest in Minerva in return for an equity in Minerva. This dealconnection with this transaction. The transaction closed on October 1, 2014. BRF currently hasOn December 7, 2018, we executed an agreement with Marfrig for its acquisition in the amount of R$100 million of real estate and equipment from our plant located in Várzea Grande in the State of Mato Grosso, which produces approximately 69,000 tons of hamburger meat per year. This transaction closed on January 23, 2019 and, on April 1, 2019, a beef slaughtering capacity of 3,520 heads per weekSupply Agreement with Marfrig became effective, under which Marfrig undertook to provide us with finished goods produced in a factory in Argentina.the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Processed Foods

We sell a variety of processed foods, some of which contain poultry pork and beefpork meat that we produce. BRF has a total production capacity of 194197 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,d’Oeste, Lajeado, Ponta Grossa, Paranaguá and RioDuque de Janeiro)Caxias) processing meat products (Mortadella, Franks, Sausage, Hamburger, Breaded, etc.)(such as mortadella, franks, sausage, hamburger and breaded) and non-meat products (Lasagna, Ready(such as lasagna, ready-to-eat meals Pizzas, etc.)and pizzas) for both the domestic and international markets. We produce lasagnas, pizzas, pastas and other frozen prepared entrees in Rio Verde in the state of Goiás. In Tatuí, in the State of São Paulo, we produce ready-to-eat sandwiches, lasagnas, pizzas, cheese breads and other pasta and bakery items. In Ponta Grossa, in the State of Paraná, we produce pizzas, pastas, desserts (Miss Daisy) and other 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 six plants in Argentina for processing products such as hamburgers, franks, hams, vegetables and margarines. Their capacities are on average 15 thousand tons/month.  


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

We also sell a variety of frozen vegetables, such as broccoli, cauliflower, peas, French beans, French fries, and cassava fries. These productswhich are imported from Belgium where they are produced and packaged for us by third parties that deliver themparties. Prior to us packaged. We purchase most of these productsthe divestitures made in the Brazilian market, butconnection with our financial and operational restructuring plan, we importsold other frozen vegetables, including broccoli, cauliflower, peas and French fries from Belgium and peas from Chile, France and Argentina. We alsobeans.  In addition, we 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 plantplants in Paranaguá, State of Paraná, Uberlândia, State of Minas Gerais and Vitória de Santo Antão, under theQualy, Delineand Claybon Claybom brands and in the State of Pernambuco under the brandsQualy andDeline. 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 Islamic consumption. The halal poultry needs to undergo a specific religious/technical procedure of slaughtering and processing, assuring that it was produced according to the Islamic requirements and that it had no contact with prohibited foods or ingredients. In addition, the Brazilian Federal Inspection Service (Serviço de Inspeção Federal, or “SIF”) of MAPA may establish additional requirements for halal food production that we must comply with. BRF is assisted by Islamic entities that are responsible for slaughtering and certifying all of 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 2831 feed production plants. The basic raw materials used in animal feed production are corn and soy meal mixed with preservatives and micronutrients.  In 20142017 and 2015,2018, 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.significantly, influenced by international quotes and local currency rates. 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 by using selection criteria to assess the suppliers in different dimensions, includingbased on the quality of the product, the product performance and reliability in terms of delivery.reliability.

In the third quarter of 2015, we started a process to enhance partnershipsbusiness arrangements with some strategic suppliers through agreements that value partnership and innovation. This initiative was developed during 2016 and, in 2017, we made this a standard process with some suppliers. In addition, we have a Chain Monitoring Program that is structured to strengthen social and environmental risk control, support an ethical and responsible business model and develop sustainable partnerships. We seek to accomplish this by undertaking quality audits, distributing our Code of Conduct for Suppliers, following the Policy for Related-Party Transactions, consulting public data and also including certain related obligations in our contracts with suppliers. When a supplier is not in compliance with the Code of Conduct for Suppliers, we will execute improvement plans or, depending on the severity of the infraction, cancel the contract.

In the case of conflicts of interest with suppliers, we have a specialized team that analyzes the risk of maintaining or replacing the specified supplier. Additionally, through biweekly reviews of publicly available data in Brazil, we identify suppliers that do not comply with legal requirements and/or BRF’s standards. When evaluating suppliers, we regularly analyze, among other things, the following: environmental practices, labor relations and practices and general compliance with laws and regulations. We are in the process of standardizing our monitoring program across all of BRF’s departments, but all of BRF’s new suppliers are required to follow the Code of Conduct for Suppliers and the Policy for Related-Party Transactions, whether in connection with a contract or spot purchase.

Our Code of Conduct for Suppliers which is posted on our website and agreed to in advance by our suppliers, regulates our relationship and focuses on ethical behavior, social and environmental responsibility. In early 2017, we added a stronger risk management approach with criteria focused on quality, sustainability and compliance. We strongly reinforced this focus on the supply chain throughout 2018.

The efficient evaluation in selectingand appropriate selection of suppliers and maintaining relationships with those suppliers is regarded as one of our critical responsibilities, aimed at maintaining a network of accomplished suppliers and meeting our growing challenges to ensure our market competitiveness. The supplier assessment process often involves the simultaneous consideration of various important attributesaspects of the supplier´ssupplier’s performance, including price, innovation, delivery time, quality and post-sales support, along with its social and environmental policies and performance.


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Our Code of Conduct, which is posted on our website and agreed in advance by our suppliers, governs and regulates our relationship and focuses on ethical behavior and social and environmental responsibility, as the supplier´s performance is one of the determining factors of our success.

Our process follows established guidelines, supported by systems that lay downand rules and instructions to be followed by all members of our procurement team, such as the Approval Chain of Command and the Service Level Agreement (SLA).team. In 2018, we implemented our purchasing system – Ariba SAP, which is an advanced purchasing 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.improving and aligned with our norms and codes, compliance and sustainability efforts.

Brazilian Market

Brazil is the fifth largest country in the world, both in terms of land mass and population. In July 2015,For 2018, Brazil had an estimated population of 204.5208.5 million people, according to figures from the IBGE. Brazil’s GDP amounted to R$5.326.26 trillion in 2013,2016, R$5.686.6 trillion in 20142017 and R$4.376.8 trillion in 2018. In 2018, GDP increased by the third quarter of 2015,1.1% in current value. GDP decreased in accumulatednominal terms in 2015 by 3.2%.and 0.3% per capita compared to 2017.

Inflation measured by the National Amplified Consumer Price Index (known as the IPCA - ÍndiceÍndice Nacional de Preços ao Consumidor Amplo)Amplo), published by the IBGE, came to 5.91% in 2013, 6.41% in 2014 and  10.67% in 2015, 6.29% in 2016, 2.95% 2017 and 3.75% in 2018 following a trend of relatively high rates. The end-of-period exchange rate, as measured by the BraziliantheBrazilian Central Bank, was R$2.34/US$13.26/U.S.$1.00 in 2013,2016, R$2.65/US$13.31/U.S.$1.00 in 20142017 and R$3.90/US$13.87/U.S.$1.00 in 2015,2018, with thereal depreciating by 47.4%16.9% in 2015.2018 compared to 2017.

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Brazil is also one of the largest meat consumers in the world, with per capita consumption in 20152018 of 98.398.5 kilograms, including beef, chicken and pork products, according to the United States DepartmentUSDA, an increase of Agriculture, the USDA.0.7% compared to 2017. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. The overall trend towards anGiven the slight economic recovery in 2018, meat consumption increased in 2018 compared to 2017. As further economic improvement is expected for 2019—market analysts consulted by the Central Bank expect that GDP will increase by 2.6%, while inflation is expected to remain low at 4.02%—meat consumption should increase in economic conditions and the higher purchasing power of Brazil’s fast-growing middle class has supported the recent rise in demand for processed products, as well as traditional fresh food and frozen poultry and pork products.

2019. Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. ThereBesides BRF, there are many large producers, most notably BRF, but also Aurora andincluding Seara Alimentos S.A. (“Seara”) (which was acquired from Marfrig by JBS S.A. (“JBS”) in 2013)., Cooperativa Central Aurora Alimentos (“Aurora”) and JBS. The main producers in the fresh food market face strong competition from a large number of small playersproducers which operate in the informal economy and sometimes offer low quality products at lower prices than those of the large producers. BRF endeavorsseeks to to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands it owns, such asSadia andPerdigão.o.

The processed food sector is more concentrated than the fresh food sector in terms of the number of players.competitors. Consumption of processed products is influenced by a number of factors, including the rise inlevel of 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$ 13,260 million in 2015 compared with R$11,861 million in 2014;

·the Brazilian frozen food market had revenues of approximately R$ 3,385 million in 2015 compared with R$3,081 million in 2014;

·the frozen pizza with filling market in Brazil had revenues of R$ 613 million in 2015 compared with R$594 million in 2014, and


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·the Brazilian margarine market had revenues of R$2,729 million in 2015 compared with R$2,688 million in 2014.

These estimates are calculated by usinformation based on available data from A.C. Nielsen, which is reported to them by us and by some of our competitors.  competitors:

·the Brazilian industrialized food market had revenues of approximately R$20,384 million in 2018 compared with R$19,902 million in 2017;

·the Brazilian frozen food market had revenues of approximately R$4,241 million in 2018 compared with R$4,109 million in 2017; and

·the Brazilian margarine market had revenues of R$3,921 million in 2018 compared with R$4,034 million in 2017.

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 playerproducer 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, including both (i) tariff barriers, with high rates thatwhich 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 including 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,barriers. See “Item 5. Operating and religious considerations).

With regard to sanitary requirements, most countries demand specific sanitary agreements so that Brazilian producers can export to them. OutbreaksFinancial Review and Prospects—A. Principal Factors Affecting our Results of animal disease may also result in bans on imports, such as when many countries temporarily suspended the importsOperations––Effects 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 (H5N1 virus), particularly in Asia but also in Europe, Africa, MexicoTrade and the United States. Human cases were reported in various countries. For example, from 2013 to 2015 (December) there have been 234 confirmed human cases of avian influenza and 89 deaths, according to the WHO. Several countries have also reported cases of avian influenza in birds. During 2015, cases of various types of virus (H5 and H7) were reported in several countries, like China, Hong Kong, Japan, Korea, the USA and Europe. Avian influenza has not been detected in Brazil. Should this occur, global demandOther Barriers” for poultry products would likely decline for a period whose length cannot be predicted.

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.

With regards to religious barriers, while the Middle East is an active region for Brazilian poultry exporters, it generally does not import pork meat and products because of a Muslim prohibition of its consumption.

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

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 49.8%53.9%, 53.6% and 53.1% of our net sales in 20152018, 2017 and 53.2% in 2014.2016, respectively. Net sales to international markets, including most of our frozen whole and cut chickens andchickensand other poultry and frozen pork cuts and beef cuts, accounted for 50.2%43.3%, 43.5% and 46.8%43.8% of our net sales in 20152018, 2017 and 2014,2016, respectively.  None of our customers (or groups of affiliated customers) accounted for more than 5%  of our total net sales in 2015. 


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

2015

2014

2013

2018

2017

2016

Brazilian Market

 

 

 

 

Poultry

7.1%

5.9%

10.6%

9.5%

8.6%

Pork/Beef

2.3%

3.6%

3.8%

2.6%

2.8%

2.5%

Processed food products

38.0%

39.3%

38.6%

40.6%

41.3%

41.6%

Other Sales

2.4%

3.2%

3.8%

0.1%

0.4%

Total Brazilian market

49.8%

53.2%

52.1%

53.9%

53.6%

53.1%

International Markets

 

 

 

Poultry

32.8%

29.5%

30.5%

33.2%

31.6%

34.6%

Pork/Beef

5.0%

6.4%

6.8%

2.9%

4.8%

3.7%

Processed food products

12.1%

10.8%

10.5%

6.1%

5.5%

5.4%

Other Sales

0.4%

0.2%

0.1%

1.0%

1.5%

0.2%

Total International markets

50.2%

46.8%

47.9%

43.3%

43.5%

43.8%

 

Other Segments

 

Poultry

0.1%

0.1%

0.0%

Pork/Beef

0.1%

0.0%

Processed food products

0.1%

0.0%

Other Sales

2.6%

2.8%

3.0%

Total Other Segments

2.8%

2.9%

3.0%

Total

100.0%

100%

 

Seasonality

See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”Resources—Seasonality” for information regarding seasonality.

Overall Comparison of the Company’s Net Sales for the Years Ended December 31, 20152018 and 20142017

Brazil

We cover substantially all of the Brazilian population through a nationwide distribution network. In the domestic market, we sell our products directly to supermarkets, wholesalers, retail stores, and food services and other institutional buyers. The tablegraphs below setsset forth our Brazilian net sales to supermarkets, retail stores, wholesalers and food services buyers as a percentage of total domestic net sales for the periods indicated.

Distribution Channel

*BRF has adopted a new sales structure since January 2014 in order to make this classification fit more adequately into the Company’s current situation. All clients were reclassified under this new structure, in line with their profiles, creating new groups with a different composition and size from those existing in 2013. This reorganization mainly affected the Supermarkets and Retail channels. As a result, 2014 is not comparable to 2013.

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Our domestic distribution network usescomprises 20 distribution centers in several Brazilian states.  Refrigerated trucks transport our products from our processing plants to the distribution centers and from the distribution centerstocenters to our customers. We have 3327 transit points, previously referred as cross-docking points, in several areas of the country that enable us to unload products from large refrigerated trucks onto smaller trucks or vans for transportation to our customers. We own 9six of our distribution centers and lease the remaining 1114 centers, which are listed below under “—Property, Plant and Equipment.” We do not own the vehicles used to transport our products, and products—we contract with several carriers to provide this service for us on an exclusive basis.


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International

We exportoperate in four business segments which primarily reflect our products togeographical structure: Brazil, Halal (consisting of the Middle East/East, North Africa, (MEA)Malaysia and Eastern Europe), International (consisting of Africa, Asia Europe, Eurasia and Latin America (LATAM).the Americas) and Other Segments. The graphs below set forth a breakdown of our export net sales by region.segment. 

Competition

Brazil

We face significant competition in theBrazil’s domestic market is highly competitive, particularly due to the growth infor fresh food and frozen poultry and pork production capacity in Brazil inproducts. BRF endeavors to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the last few years.strong brands it owns, such asSadia andPerdigão.

The graph below shows the most recently available percentage of our market share in 20152018 for the selected categories:

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Source: A.C. Nielsen Bimonthly Retail – Margarines and Ready MadeReady-Made Dishes (Oct/Nov(October/November 2018 survey); Filled and Chilled (Nov/Dec(November/December 2018 survey)


Table* The Becel brand was removed from the Company’s market share reading during the fourth quarter of Contents2018 due to the cancellation of the joint venture between Unilever Brasil Alimentos Ltda. and BRF.

Because A.C. Nielsen gathers data from those in the industry who report to it voluntarily in the areas of the country and categories covered by it, the overall market sizes on which these percentages were based are smaller than our own internal estimates of the market sizes that we describe above under “—Brazilian Market.” 

JBS is our main competitor in the domestic market. In the processed meat segment, we compete against JBS. In the specialty meat market, we compete against Aurora and JBS, while the remainder of the market is represented by several small players.producers. In the frozen product market (which includes hamburgers, steaks, breaded meat,kibes, meatballs and pasta), we are the leader in terms of market share, followed by JBS, Aurora and Pif Paf Alimentos S.A. (“Pif Paf”) and other smaller players. In the frozen pizza market, we are also the leader of the market, followed by JBS, Dr. Oetker Brasil Ltda. and Pif Paf.producers. In the margarine market, we also maintained the majority of thea leading position with respect to market share, followed by Bunge Alimentos Unilever,S.A., JBS (under the brand Doriana) and Vigor Alimentos S.A., an affiliate of JBS S.A.

In the Brazilian market for whole poultry, and poultry and pork cuts, we face competition from small producers, some of which operate in the informal economy and offer lower quality products at lower prices. This competition from small producers is a significant factor in our selling a majority of our whole chickens, and poultry and pork cuts in the export markets and is a barrier to expanding our sales of those products in the domestic market.

In the domestic market, we compete primarily based on brand recognition, distribution capabilities, selling prices, quality and service to our customers. 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,health, 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. AnCooperatives are increasingly relevant example are the cooperatives, whichcompetitors, as they 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 exampleIn addition, JBS is JBS, one of our direct competitors in theinternationalmarket that has many of theofthe same competitive advantages that we have over producers in other countries, including natural resources and competitive inputsinput costs.

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Our chicken and pork cuts, in particular, are highly competitive in priceprice-sensitive and sensitive to substitution bywith other products. Customers sometimes seek to diversify their sources of supply in different countries, even though we often have the lowesta lower cost of production.

Protectionist measures among Brazil'sBrazil’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 theinternationalmarket reached R$16.213.1 billion in 2015,2018, an increase of 19.0% over 2014, which kept us6.1% from 2017. Despite the still-challenging international market environment in the eighth position in the largest Brazilian exporters ranking, according to the Secretary of Foreign Commerce (Secretaria de Comércio Exterior, or “SECEX”). We2018, we believe we export significantly more than our main Brazilian competitors.


Tablecompetitors, as BRF is one of Contentsthe largest poultry exporters in the world. In 2018, BRF accounted for 11.3% of the world’s poultry trade, according Trademap.

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, 2015,2018, we operated 20 distribution centers and 3327 transit points. During 2015, the Company focusedIn 2018, we improved productivity based on its logistical operations, seeking to improve efficiencynew technologies in our Brazilian distribution and customer service and reduce distribution costs. Over the year, the OTIF index showed significant improvements.a reduction of lead time in deliveries.

International Markets

We export our products mainly through the ports of Itajaí,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  and are located at the ports. We previously owned two refrigerated storages in Paranaguá but we stopped their export operations in 2014.Grande. In 2015,2018, we packed more than 60%58% of our export containers at the 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.

All the ports that we use to load our cargo are private terminals from third parties. In the past, weWe have occasionally experienced disruptions at the ports concerningas a result of 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, Vietnam, Saudi Arabia, the United Arab Emirates, Qatar, Oman, Kuwait, South Africa, Argentina, Uruguay, Chile, Turkey and ChileMalaysia. 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 On May 14, 2018, the European Union released its decision to remove 12 of our production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. Given the ban of imports from our production facilities, we are no longer able to sell our products from such embargoed production plants in the European Union. This suspension on certain products from Brazilian producers caused challenges for our operations in Europe we have revampedand required us to reorganize our sales and distribution network by selecting and tighteningstrengthening our partnerships with other food processors, food service operators and local distributors. A joint-venture with Invicta Foods Limited, a regional leader in the food service segment, was sucessufully launched in April 2015 to strengthen our position in the food service market and enhanceFurthermore, we leveraged our global sourcing activity.network to supply the European market with products produced outside of Brazil. On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand, based on an enterprise value of US$340 million(equivalent to R$1.3 billion). We are distributing ourexpect the closing of this transaction to occur in 2019, but it remains subject to customary closing conditions, including approval by European antitrust authorities.

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In 2018, the Russian government banned all imports of pork from Brazil. As a result, we could no longer sell pork products in practically all EU markets, including Switzerland, improving our delivery time within approximately two days of receiving an order. Our operations are geographically divideddirectly into three major markets. We are also expanding our B2Cthe Russian market. To maintain BRF’s presence in a few focused markets. Afterthis market, however, we continued the acquisition and now full integrationdevelopment of Plusfoodour chicken portfolio to certain distributors in 2008, retail, food services and a few processing clients are buying goods mainly produced in our two European processing units,Russia, 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, wethen sell primarily to selected distributors, which place our products to local processors and food service operators and some retailers. In view of our strong brand awareness under the Sadia brand and the potential offered by the sizeable and demanding local retail market, we worked intensively and re-entered this channel in June 2015, with the Sadia brand developing a tailor-made innovative portfolio. Russian customers rapidly recognized our lasagna as the best and most innovative product in the segment. 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. operators. 

Asia. China, together with Hong Kong, is our largest market in Asia where we supply a significant volume and diverse portfolio, including chicken wings, chicken feet and pork cuts. Also, with a small distribution operation in Shanghai, BRF has been partnering with retailers to sell Sadia frozen chicken cuts to Chinese consumers. In Japan, and Korea, twoour local level of our most relevant international markets, our main clients are food processors, distributors, restaurants and supermarket chains and trading companies. We primarily supply special cuts of chicken, including boneless legs, produced specifically for those markets, which has helped us foster customer relationship. We also believe that ourservice, quality standards and product range have made us one of thea preferred supplierssupplier of chicken products in the market. We also supply a significant amount and diverse portfolioIn South Korea, BRF was the first Brazilian producer to China, Hong Kong and Singapore, as well asexport pork cuts to other countriesthis market, which has provided new business opportunities in Southeast Asia. In June 2015, we announced our jointventure with SATS Group via its subsidiary Singapore Food Industries in Singapore. The joint-venture calledthis country. Through the joint venture SATS BRF Food playsin Singapore, 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 with an important roleinnovative portfolio of cooked chicken cuts, sausages and hamburgers. As described above, in our regional go-to-market strategy by granting us direct accessFebruary 2019, we agreed to a reference market in Asia. In December 2015, we also announced the acquisition of GFS, a Thailand-based business bringing us complementary set of products, channels and customers. Its productionsell our facilities in Thailand, are alignedalong with most of our long-term global strategy.European assets, to Tyson International Holding Co. 


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Middle East.In Saudi Arabia and other countries of the Middle East, Turkey and Malaysia we sell to large distributors, some of which have been our customers for decades.wholesalers, retailers, small stores (traditional trade), food service providers, and processors. 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, ourOur biggest brand,Sadia is recognized as the #1preferredleading 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 2012,2017, 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 inannounced the beginning of 2013. Then,Halal operations, which is focused 100% in 2014, we acquired the remaining economic rights owned by this company.  During the year of 2014 weHalal market. 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%completion of the capital stockacquisition of AKFBanvit in Turkey, through TBQ Foods GmbH, a company leaderjoint venture formed with the Qatar Investment Authority in May 2017. See “Item 4. Information on the distribution of frozen food in Oman, covering a broad sector of retail, food serviceCompany—A. History and wholesale clients and (2) we acquired 75%Development of the Company—Corporate Reorganization of the retail frozen foods distribution business of Alyasra Food Company, a leader in food distribution in Kuwait.  We finished the construction of our processed food plant in Kizad, Abu Dhabi, an industrial area , which started operating in November of this same year. 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 Qatar National Import and Export (QNIE) to take full control of BRF operations in the Qatari market. This transactions consolidates our leadership position in the retail channel with over 42% market share in the GCC (Gulf Cooperation Council) across our brands.One Foods.”

Africa. 2015 was a year where a great deal of energy was placed Our strategy in Africa has focused on the repositioning of strategy and focus, with all efforts towards setting the stage for success in the short and long term. A successful year of results culminated in double digit earnings before interest, taxes, depreciation, and amortization (“EBITDA”). A focal point for the region was unlocking a number of in-market opportunities that fellfall 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 BRFcategory. In 2018, we focused on strengthening our partnerships in the region. We pursue sales in Africa remains with directthrough sales to distributors with the widest possible distribution, all supported by a well-developed relationship. Underpinning this modeldistribution. TheSadia andPerdixbrands are Sadiathe primary brands that we have focused on distributing in the region. Angola remains our main market for chicken cuts and Perdix, whichprocessed food, such as franks and mortadella. We also expanded the supply of processed food to South Africa through BRF facilities in Turkey and Thailand. Going forward, we will continue to be the focus brands for the region. Going forward, careful consideration in identifying key selectedcarefully consider future growth markets has been a point of focus, with themarkets. Furthermore, our next phase of developments emphasizingwill emphasize more control ofover the interactioninteractions between the brandbrands and the consumer. We intendconsumers by gaining additional insight into consumer preferences to strengthen this control by uncovering consumer insights to strengthen itsour value proposition and possible distribution opportunitiesopportunities.

Americas and Other Countries. We sell our products in the Americas through direct sales to several countrieskey distributors. Additionally, we have strengthened our commercial relationship with Mexican clients in Latin America, including Paraguay, Uruguay2017 and Chile,2018, where we primarily sell primarily to trading companies that resellfrozen chicken cuts. Cuba has been one of the main destinations for our processed food products, to distributors.such as chicken franks. 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.Additionally,

Sadia is an established brand and holds important market shares in Chile Uruguay and ParaguayUruguay, where we maintain local offices. We reach supermaket channels through direct distributionoffices, and traditional channels through the strong partnerships with exclusivein Paraguay, where we operate via consolidated local distributors. In addition to Sadia in Argentina, we have expanded on brands, such as Party 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.

Termo de Ajustamento de Conduta, or “TAC”). Unfavorable decisions in our legal proceedings may 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 regarding the offset of tax credits and the use of tax incentives in several states that have not yet reached a final ruling in the Brazilian courts. In addition, we may face risks arising from potential impairment of input state VAT that we accumulate on exportations. We currently 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) in which the Supreme Court of Brazil has ruled against us. The case is currently pending judgment of a final 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.”

As of December 31, 2018, we had R$1,350 million in provisions for contingencies, of which R$282 million was for civil and other contingencies (including administrative, regulatory and environmental), R$230 million was for tax contingencies, R$469 million was for labor contingencies and R$370 million was for contingent liabilities.

We are also currently being investigated in theCarne Fraca Operation andTrapaça 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—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Trapaça Operation.” Any investigation from governmental authorities currently unknown to us with respect to any potentially unlawful business practice may also result in penalties, fines and sanctions or other forms of liability.

On March 12, 2018, a shareholder class action lawsuit was filed in the U.S. Federal District Court in the Southern District of New York. On July 2, 2018, the Court appointed the City of Birmingham Retirement and Relief System lead plaintiff in the action (the “Lead Plaintiff”). On August 31, 2018, the Lead Plaintiff filed an amended class action complaint.  On December 5, 2018, the Lead Plaintiff filed a second amended complaint. The second amended complaint seeks to represent all persons and entities who purchased or otherwise acquired BRF ADRs during the period from April 4, 2013, through and including March 2, 2018, 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 in connection with theCarne Fraca Operation andTrapaça Operation. A motion to dismiss briefing has been stayed pending the determination of Lead Plaintiff’s motion to amend the second amended complaint, which was filed on April 1, 2019. Because this lawsuit is in its early stages, we believe the possible loss or range of losses, if any, arising from this litigation cannot be estimated. 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.

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BRF was granted an ICMS tax credit of 4.5% by the State of Rio de Janeiro on sales and transfers of meat products. BRF entered into an agreement with the State of Rio de Janeiro related to this tax credit in 2014. The agreement required that BRF: (1) construct a sandwich factory, with an investment of R$11.5 million, which would generate 38 jobs and (2) construct a sausage factory, with investment initially set at R$136 million, which would generate 180 jobs within a period of 18 months. Due to several factors beyond BRF’s control, including obtaining environmental licenses and building licenses, and due to changes to our production focus, we did not meet the initial deadlines. As a result, the State of Rio de Janeiro granted additional time for completion of the projects, but also increased the required aggregate investment to R$280 million and the minimum number of jobs to 280. We have commenced construction of the plant and the project is currently on schedule. However, the Brazilian Treasury Department filed an administrative request seeking the cancellation of the tax benefit previously granted to BRF. BRF has filed a writ of mandamus to guarantee the continuation of the current benefit and to protect the credits that BRF has already received. On March 14, 2019, the new Secretary of Finance of Brazil executed an order to cancel the tax benefit and to restore the standard collection of ICMS. The collection of past tax credits can only occur through an infraction notice issued by the Treasury Department, which has not yet occurred. The value of the tax benefits that BRF has received since 2014 is R$307 million (R$435 million when taking into account a potential fine and interest upon the principal amount). If the final decision is upheld against BRF and the tax credits are required to be returned, it could have a significant impact on our financial condition and results of operations.

Intellectual PropertyOur 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 principal intellectual property consists of our domestic and international brands. Our ability to compete effectively depends in part on our rights to trademarks, logos and other intellectual property rights we own or license. We sellhave 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 settling 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 mainly underto avoid the “Sadia,” “Qualy,” “Hot Pocket”,” “Perdigão”, “Nuggets”infringement, which could result in significant costs in certain markets. If we are found to infringe on any third party’s intellectual property, we could suffer a material adverse impact on our reputation, business, financial position, results of operations and “Chester” brandscash flows.

We are vulnerable to third party transportation and logistics risks.

                We depend on fast and efficient transportation and logistics services to, among other things, deliver raw materials to our production facilities, deliver animal feed to our poultry and pork growers and distribute our products. Any prolonged disruption of these services may have a material adverse impact on our business, financial condition and results of operations. For example, on May 21, 2018, a national truckers’ strike commenced in Brazil regarding increases in fuel prices. The strike materially disrupted the Brazilian marketsupply chain of various industries across the country, including the supply chain of raw materials to our production facilities and mainly under the “Perdix,” “Perdigão”, “Sadia”, “Confidence”, “Fazenda,” “Paty”, “Qualy”, “Borella,”“Sahtein,” “Hilal,” “Deline,” “Corcovado”delivery of animal feed to our poultry and other brands in our international markets, as described below under “—Marketing.”


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We also own several brands for specific products or product lines. Inpork growers, and, at its peak, led to the Brazilian market, these brands include, but are not limited to, “Chester®,” “Toque de Sabor” (for lasagnas), “Claybom,” “Pense Light,” “Bio Fibras,” “Naturis,” “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). In addition, we entered into a strategic agreement with Unilever for the managementsuspension of the margarine brands “Becel” and “Becel ProActiv”operation of all of our production facilities located in Brazil.

The “Sadia” trademark is registered in more than 90 countries. In Furthermore, this strike also materially affected the Middle East, Sadia is registered in countries such as Saudi Arabia,regular functioning of the United Arab Emirates, Egypt, Bahrain, Yemen, Iran, Iraq, Israel, Lebanon and Oman, as well as in the Caucasuses 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.

On December 5, 2014, BRF executed with Lactalis a sale agreement of its dairy division, which deal closed on July 1, 2015. Due to the execution of this sale agreement, all the trademarks/brands related to the dairyports from where our products business were transferred to Lactalis during the year of 2015, among others, the trademarks “Elegê”, “Elege alimentos” “Batavo”, “Naturis soja”, “Batavito”, “Batavo batavito”, “Batavo Smoothies”, “Cotochés”, “Dobon”, “Clube produtor de leite”, “Terneleite”, “Santa Rosa”, “Eleva”, “Batavinho”, “Batavo Beer”, “Batavo Bio Soja”, “Batavo Creamy”, “Kissy”, “Batavo Fruitier”, “Batavo Flan”, “Bio Fibras”, “Batavo Top”, “Batavo Shake”, “Batavo Choco Milk”, “Batavo Naturis Soja”, “Batavo pense zero”, “Batavia”, “Bate Chantilly Batavo”, “Yog”, “Bav”, “Sensy”, “Chocomilk”, “Batmilk”, “Yoge”, “ Bio vivo”, “Kissy Cola”, and “Pense Light”.

Under our agreement with CADEare exported. We incurred increased costs in connection with the approvaltruckers’ strike and also were required to dispose of certain animals as a result of the strike. There can be no assurance that the truckers will not seek to engage in any further strikes, that the Brazilian federal government or any other relevant party will be able to meet the demands of the truckers in a satisfactory manner or that any such strike will not adversely affect our supply chain or the operation of our business combination with Sadia S.A. in 2011, we agreed to suspend the use of the trademarks “Perdigão” and “Batavo” with respect to several product linesproduction facilities. In addition, any other reduction in the Brazilian market for periods ranging from three to five years. On July 2, 2015, the restriction on using the PERDIGÃO trademarkdependability or availability of transportation or logistics services or a significant increase in relation to “salamis” products was terminated.  Astransportation service rates, including as a result of, among other things, flooding in ports, warehouse fires or labor strikes, could impair our ability to satisfyour supply chain requirements and deliver our products economically to our customers. Any such disruption to the transportation or logistics services that we depend on could have a material adverse impact on our results of operations and financial condition.

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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, political risks, environmental and climate events, fraud, strike, 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 now authorizedexposed to usecertain product quality risks, such trademark. See “Item 4. Information onas 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 Company-  A History and Development of the Company - Business Combination with Sadia.”

BRF maintains an active marketing program using both electronic and print media.damages are higher than our policy limits, we may incur significant costs. In addition, we have patents registeredcould be required to indemnify parties affected by such an event. Furthermore, 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 Brazil2014 and other units in 2016, such as Chapecó/SC and Paranaguá/PR, and more than 20 other countries. BRF has applied to have the Sadia, Chester, 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 Sadiarecently in June 2011. BRF has also applied for its new corporate trademark “BRF” (and accompanying design) to be registeredLajeado/RS in over 120 countries2017, besides electrical damages or explosion in North and South America, Europe, Asia, Africa and the Middle East.

Lastly, we own several internet domain namessubstations, or widespread truck driver strikes. Although our business interruption insurance covers certain losses in Brazil, registeredconnection with the competent authority, such as “perdigao.com.br,” “chester.com.br,” “perdix-international.com.br” “claybom.com.br,” “sadia.com.br,” “missdaisy.com.br,” “hotpocket.com.br,” “sadiafoodservices.com.br,” “brasilfoods.com”, “brf-br.com”,” 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 ourin natura 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 servicedisruptions 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 theSadia, Perdigão and Qualybrands. Apart from these major brands, we also sell our products underSadia master brands: Deline, Hot Pocket, Soltíssimo, Miss Daisyandunder Perdigãomaster brands: Chester, Ouro, Na Brasa, Meu Menu, Sanduba and Mini Chicken.


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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 calledClaybom, along with other brands, and entered into a joint venture with Unilever to use the margarine brandBecel.

In our international markets, our main brands areSadiaand Perdix.We also operate under tactical brands asBorella, Hilal, Unef andConfidence. In Argentina, we sell our products primarily underPaty andDanica brands. Theopening of 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 haveVienissima,GoodMark,Delicia andManty. In addition, we shall soon incorporate more brands in Argentina and Thailand.

Regulation

The Brazilian Ministry of Agriculture, Livestock and Food Supply (Ministério da Agricultura, Pecuária e Abastecimento, or MAPA) regulates 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), which is responsible for 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 focused on national and international markets.

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 (receipt of raw materials, production, labeling, storage, etc.) and they can appoint noncompliance with applicable rules, with penalties ranging from a warning to permanent suspension of business activities.

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

Corporate Purpose

Interest in Equity as
of December 31, 2015

BRF GmbH

Austria

Holding

100.00%

Al-Wafi

United Arab Emirates

Industrialization and commercialization of products

49.00%

BRF Al Yasra Food K.S.C.C.

Kuwait

Import and commercialization and distribution of products

75.00%

BRF Global GmbH

Austria

Holding and trading

100.00%

BRF Invicta Ltd.

England

Import and commercialization and distribution of products

62.00%

Invicta Food Products Ltd.

England

Import and commercialization of products

100.00%

Invicta Food Group Ltd.

England

Import and commercialization and distribution of products

100.00%

Invicta Foods Ltd.

England

Import and commercialization and distribution of products

100.00%

Federal Foods LLC

United Arab Emirates

Import and commercialization and distribution of products

49.00%

Quickfood S.A.

Argentina

Industrialization and commercialization of products

90.05%

Sadia Alimentos S.A.

Argentina

Holding

43.10%

Avex S.A.

Argentina

Industrialization and commercialization of products

94.60%


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

For a complete list ofoperations, all of our direct and indirect costs and intangible costs may not be covered by our insurance. For example, the negative impacts on our business from the 2018 Brazilian truckers’ strike, including the suspension of operations at our production facilities and increased transportation and logistics costs, were not covered by any of our insurance policies. Any similar events in the future could have a material adverse impact on our business, results of operations, financial condition and prospects.

We have incurred, and expect to continue to incur, significant costs in connection with theCarne Fraca Operation, theTrapaça Operation and the shareholder class action lawsuit filed on March 12, 2018. The costs associated with these investigations and the costs of defending the class action lawsuit may not be covered by our insurance policies. Furthermore, there can be no assurance that we will be able to obtain insurance coverage in the future, related to the foregoing or any other matters, on terms acceptable to us. As a result, we may incur significant additional expenses which may adversely impact our financial condition and results of operations.  

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. In 2017 and 2018, we experienced a significant number of departures of senior management, including two of our previous CEOs, our CFO, our Chief Human Resources Officer (“CHRO”), our Brazil General Manager and our Vice President of operations. In addition, on March 5, 2018, we called an Ordinary and Extraordinary Shareholders’ Meeting (the “Ordinary and Extraordinary General Meeting”), which was held on April 26, 2018, at the request of two of our shareholders, Caixa de Previdência dos Funcionários do Banco do Brasil, or “PREVI,” and Fundação Petrobras de Seguridade Social, or “PETROS,” which jointly hold approximately 20% of our capital stock. At the Ordinary and Extraordinary General Meeting, the number of members of our board of directors was set at 10 members, new members were elected to the board of directors and the Chairman and Vice-Chairman of the board of directors were elected. Only four of the ten board members elected during the Ordinary and Extraordinary Shareholders’ Meeting were previously members of our board of directors. Furthermore, pursuant toNovo Mercado rules, we anticipate that Mr. Pedro Pullen Parente’s term as Chief Executive Officer will end on June 18, 2019, as he may only hold the positions of Chairman of the Board of Directors and Chief Executive Officer at the same time for a period of one year. In connection with the end of Mr. Pedro Pullen Parente’s term as Chief Executive Officer, the Company will appoint a new Chief Executive Officer. On March 28, 2019, Mr. Lorival Nogueira Luz Júnior, the Company’scurrent Chief Operating Officer, was named Mr. Parente’s successor as Chief Executive Officer following the end of Mr. Parente’s term. On April 25, 2019, Mr. Ivan de Souza Monteiro, who was appointed as Chief Financial andInvestor Relations Officer on March 11, 2019, resigned from his position. Mr. Lorival Nogueira Luz Júnior, theCompany’s current Chief Operating Officer, was appointed on April 25, 2019 as Interim Chief Financial andInvestor Relations Officer.These changes, and other potential changes, in the composition of our senior management team and our board of directors may result in modifications to our business strategy and have a material adverse effect on us.

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Breaches, disruptions, or failures of our information technology systems, including as a result of cybersecurity attacks, 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 improve the efficiency of 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.

Our information technology systems may be vulnerable to a variety of interruptions and cybersecurity threats and incidents. In the current environment there are numerous and evolving risks related to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. Computer hackers and others routinely attempt to breach the security of information technology systems and to fraudulently induce employees, customers and other third parties to disclose information or unwittingly provide access to systems or data. Successful cybersecurity attacks, breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss or destruction of data or systems, including those belonging to us, our customers or third parties; theft of sensitive, regulated or confidential data including personal information; the loss of access to critical data or systems through ransomware, destructive attacks or other means; transaction errors; business delays; and service or system disruptions. In the event of such actions, we, our customers and other third parties could be exposed to potential liability, litigation, and regulatory or other government action, the loss of existing or potential customers, loss of sales, damage to brand and reputation and other financial loss. 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. The cost and operational consequences of responding to cybersecurity incidents and implementing remediation measures could be significant and may not be covered by insurance. Our cybersecurity risk also depends on factors such as the actions, practices and investments of customers, contractors, business partners, vendors and other third parties.

To date, while we continue to monitor for, identify, investigate, respond to and remediate security incidents, including those associated with cybersecurity attacks, there has not been a cybersecurity attack that has had a material adverse impact on us, though there is no assurance that there will not be a cybersecurity attack that has a material adverse impact in the future.

We have implemented technology security initiatives and disaster recovery plans, 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 attack, a general information security incident or a disruption of our information technology systems. Furthermore, as our business and the cybersecurity landscape evolve, we may find it necessary to make significant further investments to protect our data and information technology infrastructure, which may adversely impact our financial condition and results of operations.

The regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on our business, including increased risk, costs and expanded compliance obligations. The Brazil General Data Privacy Law (Lei Geral de Proteção de Dados Pessoais), which was signed into law in August 2018 and will become effective in 2020, and an increased number of data protection laws around the globe could continue to result in increased compliance costs and risks. The potential costs of compliance with or imposed by new or existing regulations and policies that are applicable to us may affect the use of our products and services and could have a material adverse impact on our results of operations.

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Risks Relating to Our Indebtedness

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

At December 31, 2018, our total consolidated debt (comprised of short-term and long-term debt) was R$22.2 billion.

Our substantial indebtedness could have major consequences for us, including:

·requiring that a substantial portion of our cash flows from operations be used for the payment of principal and interest on our debt, reducing the funds available for our operations, 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 ratings 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” by all the rating agencies that rate us.

We have substantial debt that matures in each of the next several years.

As of December 31, 2018, we had R$4.6 billion of debt that matures in 2019, R$3.4 billion of debt that matures in 2020, R$2.9 billion of debt that matures in 2021, R$3.1 billion of debt that matures in 2022 and R$8.2 billion of debt that matures in 2023 and thereafter.

A substantial portion of our outstanding debt is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2018, we had R$11.5 billion of foreign currency debt, including R$1.5 billion 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 inreais 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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Any future uncertainty in the stock and credit markets could also negatively impact our ability to access additional short-term and long-term financing, which could negatively impact our liquidity and financial condition. If, in future years:

·the pressures on credit return as a result of disruptions in the global stock and credit markets;

·our operating results worsen significantly;

·we are unable to complete any necessary divestitures of non-core assets and our cash flow or capital resources prove inadequate; or

·we are unable to refinance any of our debt that becomes due,

we could face liquidity problems and may not be able to pay our outstanding debt when due, which could have a material adverse effect on our consolidated business and financial condition.

The terms of our indebtedness impose significant restrictions on us.

The instruments governing our consolidated indebtedness impose significant restrictions on us. These restrictions may limit, directly or indirectly, our ability, among other things, to undertake the following actions:

·borrow money;

·make investments;

·sell assets, including capital stock of subsidiaries;

·guarantee indebtedness;

·enter into agreements that restrict dividends or other distributions from certain subsidiaries;

·enter into transactions with affiliates;

·create or assume liens; and

·engage in mergers or consolidations.

Although the covenants to which we are subject have exceptions and qualifications, the breach of any of these covenants could result in a payment default under the terms of other existing debt obligations. Upon the occurrence of such an event of default, all amounts outstanding under the applicable debt instruments and the debt issued under other debt instruments containing cross-default or cross-acceleration provisions, together with accrued and unpaid interest, if any, might become or be declared immediately due and payable. If such indebtedness were to be accelerated, we may have insufficient funds to repay in full any such indebtedness. In addition, in connection with the entry into new financings or amendments to existing financing arrangements, our subsidiaries’ financial and operational flexibility may be further reduced as a result of the imposition of covenants that are more restrictive, the requirements for additional security and other terms.

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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 and 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 and the ADRs may be adversely affected by, among others, the following factors:

·exchange rate fluctuations;

·expansion or contraction of the Brazilian economy;

·inflation rate fluctuations;

·changes in fiscal or monetary policies;

·commodities price volatility;

·increases 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 rationing;

·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. The GDP growth rate in 2014 was 0.5%, but GDP decreased 3.5% in both 2015 and 2016. Following this two-year contraction, GDP grew 1.0% in 2017 and grew 1.1% in 2018, while inflation, measured by 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”), and interest rates changed to 3.75% and 6.5% in 2018, respectively, from 2.95% and 7.00%, respectively, in 2017. Unemployment had a slight improvement from 11.8% in 2017 to 11.6% in 2018, although it remained at a high level. For 2019, there is an expectation that such economic indicators will improve modestly.

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In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Lava Jato Operation,” have indirectly negatively impacted the Brazilian economy and political environment.

A number of senior politicians, including current and former members of Congress and the Executive Branch, and high-ranking executive officers of major corporations and state-owned companies in Brazil were arrested, convicted of various charges relating to corruption, entered into plea agreements with federal prosecutors and/or have resigned or been removed from their positions as a result of theseLava Jato investigations. These individuals are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. The profits of these kickbacks, which were not publicly disclosed, allegedly financed the political campaigns of political parties forming the previous government’s coalition that was led by former President Dilma Rousseff. These funds were also allegedly used for the personal enrichment of certain individuals. The effects ofLava Jato as well as other ongoing corruption-related investigations resulted in an adverse impact on the image and reputation of those companies that have been implicated as well as on the general market perception of the Brazilian economy, political environment and the Brazilian capital markets. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future.

Amidst this background of political uncertainty, in August 2016, the Brazilian Senate approved the removal from office of Brazil’s then-President, Dilma Rousseff, following a legal and administrative impeachment process for infringement of budgetary laws. Michel Temer, the former Vice-President, who assumed the presidency of Brazil following Rousseff’s ouster, is also under investigation on corruption allegations. In addition, the former President, Luiz Inacio Lula da Silva, began serving a 12-year prison sentence on corruption and money laundering charges in April 2018. The new Brazilian president, a former member of the military and three-decade congressman, was elected on October 28, 2018 and took office on January 1, 2019. During his presidential campaign, the new Brazilian President was reported to favor the privatization of state-owned companies, economic liberalization, and social security and tax reforms. However, there is no guarantee that the new Brazilian President will be successful in executing his campaign promises or passing certain favored reforms fully or at all, particularly when confronting a fractured congress. In addition, the current minister of the economy proposed during the presidential campaign the revocation of the income tax exemption for the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies. This could impact our capacity to receive, from our subsidiaries, future cash dividends or distributions net of taxes and also our ability to make distributions to our shareholders net of taxes. Moreover, the new Brazilian President was generally a polarizing figure during his campaign for presidency, particularly in relation to certain of his social views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms, all of which could have a negative impact on our business and the price of our common shares and ADRs.

In addition, the current Brazilian federal government is expected to propose the general terms of a fiscal reform to stimulate the economy and reduce the forecasted budget deficit for 2019, but it is uncertain whether the Brazilian government will be able to gather the required support in the Brazilian Congress to pass such reforms. 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 2019 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 or 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.

Worsening political and economic conditions in Brazil 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.

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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 and the ADRs.

Brazil has experienced high inflation rates in the past. According to the IPCA, Brazilian consumer price inflation rates were 6.4% in 2014, 10.7% in 2015 and 6.3% in 2016, while downward inflation pressures caused this figure to reach 2.95% in 2017 and 3.75% in 2018. 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 inflation levels have been relatively stable in 2017 and 2018, there can be no assurance that inflation rates will not rise in the near future. Periods of higher inflation slow the growth rate of the Brazilian economy, which may lead to lower growth in consumption of food products. High inflation also puts pressure on industry costs of production and expenses, which may force companies to search for innovative solutions in order to remain competitive. We may not be able to pass any such increase in costs onto our customers and, as a result, it may adversely impact our results of operations and financial condition. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our debt may increase. Furthermore, 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 and may have an adverse effect on our business, results of operations, financial condition and the market prices of our common shares and the ADRs.

Fluctuations in interest rates may have an adverse effect on our business, financial condition and the market prices of our common shares and the ADRs.

The Central Bank uses interest rates to attempt to keep inflation under control or to stimulate the economy. If interest rates decrease, there is generally greater access to credit and consumption of goods typically increases. This increase in demand can in turn result in inflation. On the other hand, if interest rates go up, the cost of borrowing increases which may inhibit consumption and additional investments. Another consequence of rising interest rates is that a greater return is paid in respect of government securities, which may impact other investments by making them less attractive in comparison. As a result, there may be additional investment in public debt, which absorbs money that could otherwise fund the private sector.

On December 31, 2018, 38.2% of our total indebtedness of R$22,165.5 million was either (1) denominated in (or swapped into)reais and bears interest based on Brazilian floating interest rates, such as the Long-Term Interest Rate (Taxa de Juros de Longo Prazo, or “TJLP”), the interest rate used in our financing agreements with Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social, or “BNDES”) or 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. Thereal depreciated 13.4% and 47.0% in 2014 and 2015, respectively, appreciated 16.5% in 2016, depreciated 1.5% in 2017, and depreciated 16.9% in 2018 against the U.S. dollar.

Appreciation of the Brazilianreal against the U.S. dollar may lead to a dampening of export-driven growth. Our production costs are denominated inreais, but our international sales are mostly denominated in U.S. dollars. Revenues generated by exports are reduced when translated toreais 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 Brazilianreal against the U.S. dollar may lead to higher exports and revenues, but costs may be higher.

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Costs are also directly impacted by exchange rates. Any depreciation of thereal 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, which are important ingredients for 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 for our feedstock, is also linked to the U.S. dollar, but 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 thereal depreciates against the U.S. dollar, the cost inreais of our U.S. dollar-linked raw materials and equipment increases, and these increases could materially adversely affect our results of operations. We have established policies and procedures to manage our sensitivity to such risks included in our Financial Risk Management Policy. This policy, however, may not adequately cover our revenue and cost exposure to exchange rates.

We had total foreign currency-denominated debt obligations in an aggregate amount of R$11,538.4 million at December 31, 2018, representing 52.1% 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 thereal in relation to the U.S. dollar or other currencies would increase the amount ofreaisthat we would need in order to meet debt service requirements of our foreign currency-denominated obligations.

Changes in tax laws or changes in their interpretation may increase our tax burden and, as a result, negatively affect our results of operations and financial condition.

The Brazilian government regularly implements changes to tax regimes that may increase our and our suppliers’ and customers’ tax burdens, which may in turn 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 results of operations and financial condition.

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 R&Dtax incentive program (“Lei do Bem”) and the deduction of interest on shareholders’ equity, may be revoked to increase revenues for the government in light of a possible reduction of the income tax rate, which have been and are being studied by the new Brazilian government’s financial team. The effects of these proposed tax reform measures and any other changes that could result from enactment of additional tax reforms have not been, and cannot be, quantified yet due to the uncertainty of whether any changes will be implemented. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—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 American Depositary Shares (“ADS”) 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 ADR holders. For example, we are required to publish a notice of ourshareholders’ 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 or 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 may be 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 limited compared to 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 compared to 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 or 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 or 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 or 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 thanreais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reaismayonly 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.

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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 Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários, or “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 totaxation 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 Brazilian Central Bank (“Bacen”) under the rules of the CMN (“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 25% (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 not exceeding R$5,000,000.00;

ii.17.5% upon the portion of capital gains that exceeds R$5,000,000.00 but not exceeding R$10,000,000.00;

iii.20% upon the portion of capital gains that exceeds R$10,000,000.00 but not exceeding R$30,000,000.00; and

iv.22.5% upon the portion of capital gains that exceeds 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, including the B3 S.A. – Brasil, Bolsa, Balcão (the “B3” or the “São Paulo Stock Exchange”) are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Brazilian securities markets are also characterized by considerable share concentration.

The ten largest companies in terms of market capitalization represented approximately 52% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2018. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 41% of all shares traded on the São Paulo Stock Exchange in 2018. 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 varying degrees, 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 and 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 2018, and we do not expect to be a PFIC for 2019 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 PFIC status is fact-specific and will depend on the composition of our income and assets from time to time, and a separate determination must be made each taxable year as to whether we are a PFIC (after the close of each such taxable year). 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.  Accordingly, it is possible that we may become a PFIC for 2019 or future taxable years due to changes in our income or asset composition. 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 Brazilian pension funds. 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.

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

Our principal executive offices are located at Av. das Nações Unidas, 8501 – 1st Floor, Pinheiros, 05425-070, São Paulo, SP, Brazil, and our telephone number at this address is +55-11-2322-5000/5355/5048. The U.S. Securities and Exchange Commission (the “SEC”) maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as BRF, that file electronically with the SEC. 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 routinelyposted 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.

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Business combination with Sadia

On May 19, 2009, we signed a merger agreement with Sadia for a business combination of Sadia S.A. and Perdigão S.A. The business combination became fully effective on September 22, 2009, and Sadia became our wholly owned subsidiary. On December 31, 2012, we merged Sadia S.A., then a wholly-owned subsidiaries, seesubsidiary, into BRF, and Sadia ceased to exist as a separate legal entity. In connection with the business combination, we changed our name from Perdigão S.A. to BRF – Brasil Foods S.A. On April 9, 2013, we changed our name from BRF – Brasil Foods S.A. to the current name BRF S.A.

Agreement with Lactalis

On September 3, 2014, we 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 our 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 sale price of U.S.$697.8 million.

Corporate Reorganization of One Foods

On January 11, 2017, we established a new wholly-owned subsidiary, One Foods Holdings Limited, based in Dubai International Financial Centre, which is focused on Halal markets. The formation of this subsidiary involved a restructuring of certain of our operations in Malaysia and some countries in the Middle East and Africa, including (i) the sale and purchase agreement pursuant to which One Foods acquired equity interests in entities that serve the Halal market from  BRF GmbH, a BRF wholly-owned subsidiary, and (ii) the contribution of the equity interest in SHB Indústria e Comércio de Alimentos S.A. (“SHB”) to One Foods. SHB held grain storage facilities, feed mills, outgrower agreements, hatcheries and eight slaughtering and processing plants in Brazil. In addition, we entered into certain agreements with One Foods that provided for the licensing of certain brands, operational and corporate activities, cost sharing and supply of raw materials and finished goods. See Note 1.11.7 to our consolidated financial statements.statements for additional information.

On September 1, 2018, BRF executed a Share Sale and Purchase Agreement with two of its subsidiaries, BRF Foods GmbH and One Foods Holding Ltd., to acquire all common shares of SHB. On December 12, 2018 at BRF’s extraordinary shareholders meeting, the merger of SHB with and into BRF was approved. The merger took effect on December 31, 2018, following its approval at the extraordinary shareholders meeting of SHB. 

Acquisition of Banvit - Turkey

On May 25, 2017, our subsidiary TBQ Foods GmbH (“TBQ”), 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 Bandirma Vitaminli (“Banvit”), which is the largest poultry producer in Turkey, has fully integrated operations and owns one of the most recognized brands in Turkey.Through a subsequent tender offer process completed on August 17, 2017, TBQ’s ownership 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.

 Sale of Quickfood

                On December 7, 2018, we executed a Share Sale and Purchase Agreement with Marfrig Global Foods S.A. (“Marfrig”) for the sale of our total ownership interest in Quickfood (which constituted 91.89% of the capital stock of Quickfood) based on an enterprise value of US$60 million (equivalent to R$232 million). Quickfood was our subsidiary in Argentina and operated 3 beef slaughtering plants with a capacity of 620 heads per day and aprocessing capacity of approximately 6,000 metric tons per month of hamburgers, franks, cold products and frozen vegetables. The transaction closed on January 2, 2019.

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Sale of Várzea Grande Plant

On December 7, 2018, we executed an agreement with Marfrig for the sale of R$100 million of both real estate assets and equipment from our plant located in Várzea Grande in the State of Mato Grosso, which produces, among other items, hamburgers, meatballs and kibbehs (a type of Middle Eastern beef patty popular in Brazil). This transaction closed on January 23, 2019 and, on April 1, 2019, a Supply Agreement with Marfrig became effective, under which Marfrig undertook to provide us with finished goods produced in the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Sale of Avex

On December 19, 2018, we entered into a Share Sale and Purchase Agreement whereby we agreed to sell all of the issued and outstanding shares of our Argentinian subsidiary, Avex S.A., to Granja Tres Arroyos S.A. and Fribel S.A., based on an enterprise value of US$50 million (equivalent to R$194 million). Avex S.A. operates three facilities located in Llavalol, Villa Mercedes and Rio Cuarto, in Argentina, for the production of poultry and margarine. This transaction closed on February 4, 2019.

Sale of Assets in Europe and Thailand

On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand, based on an enterprise value of US$340 million (equivalent to R$1.3 billion). We expect the closing of this transaction to occur in 2019, but it remains subject to customary closing conditions, including approval by European antitrust authorities.

Other Transactions in 2018 and 2019

On December 6, 2018, the Company was notified by VDG Holding S.A. that it was exercising its right to terminate Minerva S.A.’s shareholders’ agreement entered into by the parties, as shareholders of Minerva S.A., on November 1, 2013, as a result of the Company holding less than 6% of the outstanding shares issued by Minerva S.A.

On January 10, 2019, the Company executed an Asset Sale and Purchase Agreement with BOGS S.A. for the sale of its facility located in the city of Florencio Varela, in Argentina, and all assets and liabilities related to it, including the brands “Bocatti” and “Calchaquí,” based on an enterprise value of U.S.$24.5 million (equivalent to R$91 million). The transaction closed on February 28, 2019.

On January 10, 2019, the Company executed a Share Sale and Purchase Agreement with La Piamontesa de Averaldo Giacosa y Compañía S.A. for the sale of all of the capital stock of the Company’s subsidiary, Campo Austral S.A., including its facilities in San Andrés de Giles and Pilar and the brand “Campo Austral,” based on an enterprise value of U.S.$11 million (equivalent to R$42 million). The transaction closed on March 11, 2019.

On December 18, 2018 the Company concluded the formation of a receivables investment fund (“FIDC”) to acquire trade receivables of commercial transactions entered into by the Company and its clients in Brazil. The fund has 3 distinct classes and achieved an aggregate volume of R$875 million.

Carne Fraca Operation

We are currently being investigated in connection with theCarne Fraca Operation. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation.”

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Trapaça Operation

We are currently being investigated in connection with theTrapaça Operation. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings— Trapaça Operation.”

Capital Expenditures

The table below sets forth our capital expenditures with respect to both continuing and discontinued operations for the periods indicated:

 

For the year ended December 31,

 

2018

2017

2016

 

(in millions ofreais)

Property, plant and equipment

533.6

887.0

1,859.2

Biological assets

877.1

713.2

784.2

Acquisitions and other investments

200.7

1,120.9

2,873.0

Intangible assets

20.6

51.2

62.8

Total capital expenditures

1,631.7

2,772.3

5,579.2

 

 

 

 

      

The main capital expenditures in 2016, 2017 and 2018 are described below:

Acquisitions and divestments: For information regarding our recent acquisitions and divestments, 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 north and northeastern regions of Brazil.

Automation: In 2017, BRF focused on executing the nearly R$115.0 million of investments made in 2016 for the automation of company processes. The goal of these investments is to improve efficiency by increasing productivity and reducing production costs. In 2016, investments in 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.

International Projects: In 2017, we invested R$136.5 million in our Toledo, Campos Novos and Rio Verde factories to increase pork production for the Chinese market.

Additionally, in 2017, we invested R$20.1 million in a new production line for animal ingredients.

In 2018, we focused our investments on our quality and security standards rather than acquisitions, reflecting the policies of our new board of directors.

In 2019, in addition to existing projects, we expect to focus on pursuing our commitment to maximizing the use of our assets by making investments to help eliminate production constraints and increase overall efficiency. We expect that investments aimed at maintaining our high-quality standards will still represent a significant share of our expenses. In addition, we will seek to make further progress under our financial and operational restructuring plan.

D.B.                 Property, Plant and EquipmentBusiness Overview

ProductionBRF S.A. is one of the largest producers of fresh and frozen protein foods in the world.We are committed to operating our business and delivering products to our global customer base in line with our core values: quality, safety and integrity. We have a portfolio of approximately three 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 and animal feed. We are the holder of brands such asSadia, Perdigão, Qualy, Perdix,Confidence andHilal. In 2018, BRF accounted for 11.3% of the world’s poultry trade, according Trademap.

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Our activitiesportfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their preferences. 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 31 industrial facilities in Brazil, we have among our main assets a distribution network that enables our products to reach Brazilian consumers through more than 530,000 monthly deliveries and 47 distribution centers as of December 31, 2018, 20 of which are organized intoin the domestic market and 27 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 offices outside of Brazil serving customers in more than 150 countries on five regions:continents. We have one industrial facility in Abu Dhabi, one in Malaysia and three in Turkey.

We have been a public company since 1980. Our shares have been listed on theNovo Mercado of the São Paulo Stock Exchange as BRFS3 since 2006, and ADRs representing our common shares are traded on the New York Stock Exchange, or “NYSE.”

A breakdown of our products is as follows, which are sold both in Brazil Middle East/Africa (MEA)and to our international customers:

·Meat Products, Europe, Asiaconsisting ofin natura meat, which we define as frozen whole and Latin America (LATAM).cut chicken, frozen pork and frozen beef cuts;

·Processed Food Products including the following:

omarinated, frozen, whole and cut chicken, roosters (sold under theChester® brand) and turkey;

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

ofrozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs;

·Other Processed Products including the following:

omargarine; and

ofrozen 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.

Prior to the divestitures made in connection with our financial and operational restructuring plan, other processed products included mayonnaise, mustard and ketchup.

In Brazil, we operate 3524 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and threetwo soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logisticlogistics system in our domestic market, with 20 distribution centers, ninesix of which are owned by us and 1114 of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our internationalInternational and Halal markets, we operate sixfive industrial facilities for meat processing plants, one margarineprocessing. Additionally, after giving effect to the divestitures made in connection with our financial and oil processing plant, one sauceoperational restructuring plan, we continue to operate 27 distribution centers located in Asia, Southern Cone and mayonnaise processing plant, and one frozen vegetables processing plant. We have 20 distributioncenters located overseas,the Middle East as well as commercial offices on four continents.

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Our Industry

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

Brazilian Market

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

Real GDP in Brazil increased at an average annual rate of 2.4% from 2004 through 2018.  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 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 6.5% as of December 31, 2018.  For the year ended December 31, 2018, the IPCA increased by 3.75%.

The unemployment rate and consumer confidence levels also have an impact on consumption levels in Brazil. The average unemployment rate for October, November and December of 2018 was 11.7%, a decrease of 0.1 percentage points when compared to the 11.8% in the same period of 2017. The Consumer Confidence Index for December 2018 was 93.8, 7.4 percentage points above that in December 2017 of 86.4%.

According to the Brazilian Association of Supermarkets (Associação Brasileira de Supermercados, or “ABRAS”) in December 2018, supermarket sales in real terms (deflated by the IPCA), increased 3.9% compared to December 2017. For the full year, supermarket sales in real terms rose 2.1% in 2018 as compared to 2017.

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 5.1% in the year ended December 31, 2018, compared to the year ended December 31, 2017, in terms of volume. Pork exports registered a decrease of 7.4% in volume sold in the year ended December 31, 2018, compared to the year ended December 31, 2017. Beef exports recorded an increase of 12.2% in volume in the year ended December 31, 2018, compared to the year ended December 31, 2017.

Brazilian chicken exports in the year ended December 31, 2018 totaled 4.1 million tons on sales of R$23.45 billion (equivalent to U.S.$6.57 billion). Saudi Arabia remains the main destination for these exports (12.5%), followed by China (12.4%), Japan (11.4%) and the United Kingdom, France, Spain, Italy,Arab Emirates (11.1%).

Pork export volume in the year ended December 31, 2018 totaled 645.5 thousand tons, totaling around R$4.69 billion (equivalent to U.S.$1.21 billion). The leading importers, China, Hong Kong and Singapore represented 25.0%, 23.9% and 6.8%, respectively, of total exports from Brazil.

Beef shipments in the year ended December 31, 2018 totaled 1.35 million tons with sales of around R$21.15 billion (equivalent to U.S.$5.46 billion). This increase in volume was driven by higher exports sent to China and Hong Kong which import 23.8% and 20.5% of Brazilian beef exports, respectively.

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.”

Products

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

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Poultry

We produce frozen whole and cut poultry. In 2018, we slaughtered approximately 1.55 billion heads of poultry, a 4.6% decrease compared to 1.63 billion in 2017. We sold 2,261 thousand tons of frozen chicken and other poultry products in 2018, compared to 2,127 thousand tons in 2017. Excluding the discontinued operations, we sold 2,064 thousand tons of frozen chicken and other poultry products in 2018, compared to 1,945 thousand tons in 2017. Most of our poultry sales are to our export markets.

As a result of the trade barriers imposed by the European Union, we significantly reduced our production of turkey in 2018, as the European Union was our main consumer market for this product. For additional information, see “Item 3. Key Information—D. Risk Factors—More stringent trade barriers in key export markets may negatively affect our results of operations.”

Pork and Beef

In 2018, we slaughtered approximately 9.84 million hogs and 154,571 cattle, compared to 9.79 million and 145,361 in 2017, respectively. We raise hogs but do not raise cattle at our facilities. Although most of the 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. In 2018, we sold 293 thousand tons of pork and beef cuts, compared to 323 thousand tons of pork and beef cuts in 2017. Excluding the discontinued operations, we sold 252 thousand tons of pork and beef cuts, compared to 268 thousand tons of pork and beef cuts in 2017. We are also further developing our international customer base for pork and beef cuts.

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 2,123 thousand tons of processed foods in 2018, compared to 2,118 thousand tons in 2017. Excluding the discontinued operations, we sold 1,869 thousand tons of processed foods in 2018, compared to 1,735 thousand tons in 2017. Most of our sales of processed foods are to our domestic market. We believe that there are opportunities to market value-added products like these to targeted regions and other market segments in Brazil as well as to expand our sales in the export market.

Our processed food products strategy relies on accurate brand management, a varied product portfolio with strategic pricing and innovation and service excellence, which we believe will allow our products to expand their reach both in the Brazilian market and international markets.

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, kibbeh and meatballs.

Marinated Poultry

We produce marinated and seasoned chickens, roosters (under theChester® brand) and turkeys. We originally developed theChester® breed of rooster to maximize the yield of breast and leg cuts. In 2004, we sold our rights to theChester® 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 technologyagreement under which Cobb Vantress manages theChester® breed of rooster. We continue to oversee the production ofChester® roosters in Brazil from hatching to distribution, and we own the trademarks for theChester® line of products.

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Halal Products

We offer poultry products for Islamic markets in accordance with the Halal method of animal slaughtering.

Margarine

We sell margarine under theQualy,Deline andClaybom brands. We maintain our leading market position with theQualy brand by bringing innovation to the Brazilian market. For example, in 2014 we introduced the first aerated margarine in Brazil and in 2016 we improved theQualy portfolio by adding a proprietary mix of vitamins and minerals to our products, which is called the Q-Mix. Additionally, in 2017 we introduced the first margarine with whole grains,Qualy Multigrãos. This technology to add grains inside the margarine is protected under a patent in partnership with our equipment supplier. In 2018, we launched Qualy Light Zero Lactose, the first zero lactose margarine in the Brazilian market.

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.

·French Fries. We sell frozen French fries, which are imported from Belgium where they are produced and packaged for us by third parties. Prior to the divestitures made in connection with our financial and operational restructuring plan, we sold other frozen vegetables, including broccoli, cauliflower, peas and French beans.

·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.

Frozen desserts

We have produced and sold Miss Daisy deserts since 1999. We believe the Miss Daisy brand has a leading market position and has been highly resilient to market changes. We offer a wide variety of products under the Miss Daisy brand, including:

·Mousse pie;

·Dutch pie; and

·Frozen mousse.

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 and to unaffiliated customers. In 2018, we produced 9,559.56 thousand tons of feed and premix, compared to 10,444.75 thousand tons in 2017. We also produce a limited range of soy-based products, including soy meal and refined soy flour.

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

Poultry

Brazil was the second largest producer and the leading exporter of poultry in the world in 2018 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 growth has been driven 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 1.9% in 2018 compared to 2017, mainly due to higher exports from the United States (which increased 3.3%), European Union (which increased 7.8%); Thailand (which increased 10.3%) and China (which increased 2.5%). According to the Brazilian Association of Animal Protein (Associação Brasileira de Proteína Animal, or “ABPA”), exports of poultry parts increased 0.3% in 2018 compared to 2017, representing 66.1% of the total poultry exported volumes. Whole chicken, which represented 27.0% of the total volume, decreased 11.0% in 2018 compared to 2017. The main destinations in 2018 were Saudi Arabia, China and Japan. In 2018, Saudi Arabia decreased total imports from Brazil by 18.0%, China increased total imports from Brazil by 11.0% and Japan decreased total imports from Brazil by 10.7% compared to 2017.

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

Primary Broiler Producers

2018

2017

2016

 

(in thousands of tons – “ready to cook” equivalent)

U.S.

19,361

18,938

18,510

Brazil

13,355

13,612

13,523

European Union (28 countries)

12,200

11,912

11,560

China

11,700

11,600

12,448

Russia

4,872

4,617

4,328

India

4,855

4,640

4,427

Mexico

3,485

3,400

3,275

Thailand

3,170

2,990

2,813

Turkey

2,225

2,188

1,925

Argentina

2,110

2,150

2,119

Japan

1,685

1,661

1,629

Others

16,482

15,914

15,695

Primary Broiler Exporters

2018

2017

2016

 

(in thousands of tons – “ready to cook” equivalent)

Brazil

3,687

3,847

3,889

U.S.

3,244

3,140

3,086

European Union (28 countries)

1,429

1,326

1,276

Thailand

835

757

690

China

447

436

386

Others

1596

1519

1391

Total

11,238

11,025

10,718

Primary Broiler Consumers

2018

2017

2016

 

(in thousands of tons – “ready to cook” equivalent)

U.S.

16,185

15,823

15,510

China

11,595

11,475

12,492

European Union (28 countries)

11,474

11,279

11,047

Brazil

9,671

9,768

9,637

Russia

4,947

4,718

4,451

India

4,852

4,638

4,424

Mexico

4,301

4,198

4,061

Japan

2,761

2,688

2,587

Thailand

2,345

2,226

2,129

Argentina

1,997

1,978

1,969

South Africa

1,835

1,778

1,781

Others

21,666

21,284

20,841

37


Source: USDA, April 2019. 

Pork

Brazil was the fourth largest producer and exporter and fifth largest consumer of pork in the world in 2018, according to the USDA. Brazil’s production and consumption of pork has increased since 2009. The USDA expects an increase in global production of 2.0% and a decrease in pork consumption of 3.8% in 2019%. According to the USDA, global pork exports reached 8,446 thousand tons in 2018. Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. Research and development has also helped to reduce fat, cholesterol and calories in pork produced in Brazil. These enhancements allow for more efficient production of prime cuts, more meat per carcass and more nutritious and healthier meat. Improved genetic potential of breeders has also contributed to the production increase.

According to the ABPA, as of December 2018, China was Brazil’s primary destination for pork followed by Hong Kong, representing 25.0% and 23.9%, respectively, of total Brazilian pork exports. Chinese and Hong Kong imports from Brazil increased 3.5% and 215.7%, respectively, from January to December of 2018.

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

 

World Pork Production

Main Pork Producers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

China

54,040

54,518

54,255

European Union (28 countries)

24,300

23,660

23,866

U.S.

11,942

11,611

11,320

Brazil

3,763

3,725

3,700

Russia

3,155

2,990

2,870

Vietnam

2,801

2,741

2,701

Others

13,080

12,869

12,682

Total

113,081

112,114

111,394

World Pork Exports

Main Pork Exporters

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

European Union (28 countries)

2,934

2,858

3,130

U.S.

2,663

2,554

2,376

Canada

1,330

1,351

1,320

Brazil

730

786

832

China

203

208

191

Chile

200

171

173

Mexico

178

170

141

Others

208

210

192

World Pork Consumption

Main Pork Consumers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

China

55,398

55,930

56,245

European Union (28 countries)

21,380

20,816

20,748

U.S.

9,749

9,542

9,476

Russia

3,197

3,327

3,192

Brazil

3,035

2,941

2,870

Vietnam

2,786

2,703

2,647

Others

16,927

16,383

15,890

Total

112,472

111,642

111,068

38


Source: USDA, April 2019. 

Beef

Brazil was the second largest producer, the fourth largest consumer and the largest exporter of beef in the world in 2018, according to the USDA. From 2018 to 2019, the USDA estimates an increase in global beef production and consumption of approximately 0.6% and 0.8%, 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 Production

Main Beef Producers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

U.S.

12,253

11,943

11,507

Brazil

9,900

9,550

9,284

European Union (28 countries)

8,030

7,869

7,880

China

6,440

6,346

6,169

India

4,300

4,250

4,200

Argentina

3,050

2,840

2,650

Australia

2,306

2,149

2,125

Mexico

1,980

1,925

1,879

Pakistan

1,800

1,780

1,750

Turkey

1,400

1,399

1,484

Others

10,734

10,600

10,731

Total

62,193

60,651

59,659

 

World Beef Consumption

Main Beef Consumers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

U.S.

12,179

12,052

11,676

European Union (28 countries)

8,049

7,838

7,899

China

7,910

7,313

6,928

Brazil

7,865

7,750

7,652

India

2,744

2,401

2,436

Argentina

2,544

2,547

2,434

Others

18,967

18,778

18,893

Total

60,258

58,679

57,918

 

World Beef Exports

Main Beef Exporters

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

Brazil

2,083

1,856

1,698

Australia

1,662

1,485

1,480

India

1,556

1,849

1,764

U.S.

1,432

1,297

1,160

New Zealand

633

593

587

Others

3187

2882

2734

Total

10,553

9,962

9,423

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Source: USDA, April 2019.

Production Process

We are a vertically integrated producer of poultry and pork products. We raise poultry and hogs, produce animal feed, slaughter the animals, process poultry and pork to produce processed food products and distribute unprocessed and processed products throughout Brazil and in our export markets.

The following graphic is a simplified representation of our meat production chain.

Meat Production Chain

Poultry

At the beginning of the poultry production cycle, we purchase breeder chicks in the form of eggs from Cobb of Brazil, an affiliate of Cobb Vantress, and Aviagen. We send these eggs to our grandparent stock farms, where the eggs are hatched, and the chicks are 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 resultin day-old chicks that are ultimately used in our poultry products. We produced 1.6 billion day-old chicks, including chickens,Chester® roosters, turkeys, partridge and quail in 2018. We hatch these eggs in our 31 hatcheries.

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We send the day-old chicks, which we continue to own, to outgrowers, 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 8,000 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.

As of December 31, 2018, 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 pork on the spot market.

Piglet producers either purchase parent breeder hogs produced by our company or from producers such as Agroceres and DanBred. We generally purchase piglets from integrated outgrowers near our production facilities, which raise the piglets until they reach a specified weight, 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, and then transport the hogs from these outgrowers to our slaughtering facilities. We have agreements with a total of approximately 3,000 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, but we provide limited technical support. We purchase the hogs raised by these local producers pursuant to contracts with the local producers.

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 separated based on their intended use. These parts become the raw material for the production of pork cuts and specialty meats.

As of December 31, 2018, 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 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. BRF received an equity interest in Minerva in connection with this transaction. The transaction closed on October 1, 2014. On December 7, 2018, we executed an agreement with Marfrig for its acquisition in the amount of R$100 million of real estate and equipment from our plant located in Várzea Grande in the State of Mato Grosso, which produces approximately 69,000 tons of hamburger meat per year. This transaction closed on January 23, 2019 and, on April 1, 2019, a Supply Agreement with Marfrig became effective, under which Marfrig undertook to provide us with finished goods produced in the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Processed Foods

We sell a variety of processed foods, some of which contain poultry and pork 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, Videira, Lucas do Rio Verde, Rio Verde, Uberlândia, Concórdia, Tatuí, Vitória de Santo Antão, Herval d’Oeste, Lajeado, Ponta Grossa, Paranaguá and Duque de Caxias) processing meat products (such as mortadella, franks, sausage, hamburger and breaded) and non-meat products (such as lasagna, ready-to-eat 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.

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

We also sell frozen French fries, which are imported from Belgium where they are produced and packaged for us by third parties. Prior to the divestitures made in connection with our financial and operational restructuring plan, we sold other frozen vegetables, including broccoli, cauliflower, peas and French beans.  In addition, we produce soy-based products, such as soy meal and refined soy flour, at our plants in Videira, located in the State of Santa Catarina, 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 plants in Paranaguá, State of Paraná, Uberlândia, State of Minas Gerais and Vitória de Santo Antão, under theQualy, Delineand Claybom brands and in the State of Pernambuco under the brandsQualy andDeline. 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 Islamic consumption. The halal poultry needs to undergo a specific religious/technical procedure of slaughtering and processing, assuring that it was produced according to the Islamic requirements and that it had no contact with prohibited foods or ingredients. In addition, the Brazilian Federal Inspection Service (Serviço de Inspeção Federal, or “SIF”) of MAPA may establish additional requirements for halal food production that we must comply with. BRF is assisted by Islamic entities that are responsible for slaughtering and certifying all of 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 2017 and 2018, we also purchased corn from rural producers and small merchants, through cooperatives and from trading companies such as Coamo, Bunge, Cargill 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 and Amaggi, primarily pursuant to long-term contracts. The prices of corn, soybeans and soy meal fluctuate significantly, influenced by international quotes and local currency rates. 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 by using selection criteria to assess suppliers based on the quality of the product, the product performance and reliability.

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 made this a standard process with some suppliers. In addition, we have a Chain Monitoring Program that is structured to strengthen social and environmental risk control, support an ethical and responsible business model and develop sustainable partnerships. We seek to accomplish this by undertaking quality audits, distributing our Code of Conduct for Suppliers, following the Policy for Related-Party Transactions, consulting public data and also including certain related obligations in our contracts with suppliers. When a supplier is not in compliance with the Code of Conduct for Suppliers, we will execute improvement plans or, depending on the severity of the infraction, cancel the contract.

In the case of conflicts of interest with suppliers, we have a specialized team that analyzes the risk of maintaining or replacing the specified supplier. Additionally, through biweekly reviews of publicly available data in Brazil, we identify suppliers that do not comply with legal requirements and/or BRF’s standards. When evaluating suppliers, we regularly analyze, among other things, the following: environmental practices, labor relations and practices and general compliance with laws and regulations. We are in the process of standardizing our monitoring program across all of BRF’s departments, but all of BRF’s new suppliers are required to follow the Code of Conduct for Suppliers and the Policy for Related-Party Transactions, whether in connection with a contract or spot purchase.

Our Code of Conduct for Suppliers which is posted on our website and agreed to in advance by our suppliers, regulates our relationship and focuses on ethical behavior, social and environmental responsibility. In early 2017, we added a stronger risk management approach with criteria focused on quality, sustainability and compliance. We strongly reinforced this focus on the supply chain throughout 2018.

The evaluation and appropriate selection of suppliers and maintaining relationships with those suppliers is critical to our market competitiveness. The supplier assessment process often involves the simultaneous consideration of various aspects 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 process follows established guidelines, supported by systems and rules to be followed by all members of our procurement team. In 2018, we implemented our purchasing system – Ariba SAP, which is an advanced purchasing 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, compliance and sustainability efforts.

Brazilian Market

Brazil is the fifth largest country in the world, both in terms of land mass and population. For 2018, Brazil had an estimated population of 208.5 million people, according to figures from the IBGE. Brazil’s GDP amounted to R$6.26 trillion in 2016, R$6.6 trillion in 2017 and R$6.8 trillion in 2018. In 2018, GDP increased by 1.1% in nominal terms and 0.3% per capita compared to 2017.

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, 2.95% 2017 and 3.75% in 2018 following a trend of relatively high rates. The end-of-period exchange rate, as measured by theBrazilian Central Bank, was R$3.26/U.S.$1.00 in 2016, R$3.31/U.S.$1.00 in 2017 and R$3.87/U.S.$1.00 in 2018, with the real depreciating by 16.9% in 2018 compared to 2017.

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Brazil is one of the largest meat consumers in the world, with per capita consumption in 2018 of 98.5 kilograms, including beef, chicken and pork products, according to the USDA, an increase of 0.7% compared to 2017. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. Given the slight economic recovery in 2018, meat consumption increased in 2018 compared to 2017. As further economic improvement is expected for 2019—market analysts consulted by the Central Bank expect that GDP will increase by 2.6%, while inflation is expected to remain low at 4.02%—meat consumption should increase in 2019. Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. Besides BRF, there are many large producers, including Seara Alimentos S.A. (“Seara”) (which was acquired from Marfrig by JBS S.A. (“JBS”) in 2013), Cooperativa Central Aurora Alimentos (“Aurora”) and JBS. The main producers in the fresh food market face strong competition from a large number of small producers which operate in the informal economy and sometimes offer low quality products at lower prices than those of the large producers. BRF seeks to to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands it owns, such asSadia andPerdigão.

The processed food sector is more concentrated than the fresh food sector in terms of the number of competitors. Consumption of processed products is influenced by a number of factors, including the level of 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 based on available data from A.C. Nielsen, which is reported to them by us and by some of our competitors:

·the Brazilian industrialized food market had revenues of approximately R$20,384 million in 2018 compared with R$19,902 million in 2017;

·the Brazilian frozen food market had revenues of approximately R$4,241 million in 2018 compared with R$4,109 million in 2017; and

·the Brazilian margarine market had revenues of R$3,921 million in 2018 compared with R$4,034 million in 2017.

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 producer 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, including both (i) tariff barriers, which ultimately protect certain domestic markets, and (ii) non-tariff barriers, mainly including import quotas, sanitary barriers and technical/religious barriers. See “Item 5. Operating and Financial Review and Prospects—A. Principal Factors Affecting our Results of Operations––Effects of Trade and Other Barriers” for additional information.

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 53.9%, 53.6% and 53.1% of our net sales in 2018, 2017 and 2016, respectively. Net sales to international markets, including most of our frozen whole and cut chickensand other poultry and frozen pork cuts and beef cuts, accounted for 43.3%, 43.5% and 43.8% of our net sales in 2018, 2017 and 2016, respectively.

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

 

2018

2017

2016

Brazilian Market

 

 

 

Poultry

10.6%

9.5%

8.6%

Pork/Beef

2.6%

2.8%

2.5%

Processed food products

40.6%

41.3%

41.6%

Other Sales

0.1%

0.1%

0.4%

Total Brazilian market

53.9%

53.6%

53.1%

 

International Markets

 

 

 

Poultry

33.2%

31.6%

34.6%

Pork/Beef

2.9%

4.8%

3.7%

Processed food products

6.1%

5.5%

5.4%

Other Sales

1.0%

1.5%

0.2%

Total International markets

43.3%

43.5%

43.8%

 

 

 

 

Other Segments

 

 

 

Poultry

0.1%

0.1%

0.0%

Pork/Beef

0.1%

0.0%

0.0%

Processed food products

0.1%

0.0%

0.0%

Other Sales

2.6%

2.8%

3.0%

Total Other Segments

2.8%

2.9%

3.0%

Total

100%

100%

100%

Seasonality

See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Seasonality” for information regarding seasonality.

Overall Comparison of the Company’s Net Sales for the Years Ended December 31, 2018 and 2017

Brazil

We cover substantially all of the Brazilian population through a nationwide distribution network. In the domestic market, we sell our products directly to supermarkets, wholesalers, retail stores, food services and other institutional buyers. The graphs below set forth our Brazilian net sales to supermarkets, retail stores, wholesalers and food services buyers as a percentage of total domestic net sales for the periods indicated.

Distribution Channel

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Our domestic distribution network comprises 20 distribution centers in several Brazilian states.  Refrigerated trucks transport our products from our processing plants to the distribution centers and from the distribution centers to our customers. We have 27 transit points, previously referred as cross-docking points, in several areas of the country that enable us to unload products from large refrigerated trucks onto smaller trucks or vans for transportation to our customers. We own six of our distribution centers and lease the remaining 14 centers, which are listed below under “—Property, Plant and Equipment.” We do not own the vehicles used to transport our products—we contract with carriers to provide this service for us on an exclusive basis.

International

We operate in four business segments which primarily reflect our geographical structure: Brazil, Halal (consisting of the Middle East, North Africa, Malaysia and Eastern Europe), International (consisting of Africa, Asia Europe, Eurasia and the Americas) and Other Segments. The graphs below set forth a breakdown of our export net sales by segment. 

Competition

Brazil

Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. BRF endeavors to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands it owns, such asSadia andPerdigão.

The graph below shows the most recently available percentage of our market share in 2018 for the selected categories:

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Source: A.C. Nielsen Bimonthly Retail – Margarines and Ready-Made Dishes (October/November 2018 survey); Filled and Chilled (November/December 2018 survey)

* The Becel brand was removed from the Company’s market share reading during the fourth quarter of 2018 due to the cancellation of the joint venture between Unilever Brasil Alimentos Ltda. and BRF.

Because A.C. Nielsen gathers data from those in the industry who report to it voluntarily in the areas of the country and categories covered by it, the overall market sizes on which these percentages were based are smaller than our own internal estimates of the market sizes that we describe above under “—Brazilian Market.” 

JBS is our main competitor in the domestic market. In the processed meat segment, we compete against JBS. In the specialty meat market, we compete against Aurora and JBS, while the remainder of the market is represented by several small producers. In the frozen product market (which includes hamburgers, steaks, breaded meat, meatballs and pasta), we are the leader in terms of market share, followed by JBS, Aurora and Pif Paf Alimentos S.A. (“Pif Paf”) and other smaller producers. In the margarine market, we also maintained a leading position with respect to market share, followed by Bunge Alimentos S.A., JBS (under the brand Doriana) and Vigor Alimentos S.A.

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 health, 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. Cooperatives are increasingly relevant competitors, as they have tax advantages and certain mobility to reassign their production to foreign markets at times when exports become more attractive than the domestic market. In addition, JBS is one of our direct competitors in the international market that has many ofthe same competitive advantages that we have over producers in other countries, including natural resources and competitive input costs.

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Our chicken and pork cuts, in particular, are price-sensitive and sensitive to substitution with other products. Customers sometimes seek to diversify their sources of supply in different countries, even though we often have a lower 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$13.1 billion in 2018, an increase of 6.1% from 2017. Despite the still-challenging international market environment in 2018, we believe we export more than our main Brazilian competitors, as BRF is one of the largest poultry exporters in the world. In 2018, BRF accounted for 11.3% of the world’s poultry trade, according Trademap.

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

Distribution of Products

Brazilian Market 

As of December 31, 2018, we operated 20 distribution centers and 27 transit points. In 2018, we improved productivity based on new technologies in our Brazilian distribution and a 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 2018, 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.

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

Our sales and distribution efforts abroad are coordinated through offices in Austria, Hungary, Netherlands, Russia, Singapore, South Korea, China, Japan, Vietnam, Saudi Arabia, the United Arab Emirates, Qatar, Oman, Kuwait, South Africa, Argentina, Uruguay, Chile, Turkey and Chile.


Table of ContentsMalaysia. 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.

The table below sets forthEurope. On May 14, 2018, the European Union released its decision to remove 12 of our production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. Given the ban of imports from our production facilities, we are no longer able to sell our products from such embargoed production plants in the European Union. This suspension on certain products from Brazilian producers caused challenges for our operations in Europe and required us to reorganize our sales and distribution network by strengthening our partnerships with other food processors, food service operators and local distributors. Furthermore, we leveraged our global sourcing network to supply the European market with products produced outside of Brazil. On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand, based on an enterprise value of US$340 million(equivalent to R$1.3 billion). We expect the closing of this transaction to occur in 2019, but it remains subject to customary closing conditions, including approval by European antitrust authorities.

Production Plant

State of Location

Activities

Meat Products:

Bugio Agrop.*

Santa Catarina

Poultry slaughtering and pork, industrialized products

Buriti Alegre

Goiás

Poultry slaughtering

Campos Novos

Santa Catarina

Pork slaughtering

Capinzal

Santa Catarina

Poultry slaughtering and industrialized products processing

Carambeí

Paraná

Poultry slaughtering

Chapecó

Santa Catarina

Poultry slaughtering (including turkey), industrialized products processing, animal feed and hatcheries

Concórdia

Santa Catarina

Poultry slaughtering and porks, 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 hatcheries

Duque de Caxias

Rio de Janeiro

Industrialized products processing

Francisco Beltrão

Paraná

Poultry (including Turkey) slaughtering

Garibaldi*

Rio Grande Sul

Poultry slaughtering

Herval D'Oeste

Santa Catarina

Pork slaughtering and industrialized products

Jataí

Goiás

Poultry slaughtering

Lajeado

Rio Grande do Sul

Pork, poultry slaughtering and industrialized products

Lucas de Rio Verde

Mato Grosso

Poultry slaughtering and porks, industrialized products processing

Marau

Rio Grande Sul

Poultry slaughtering and pork, industrialized products, Animal feed and hatcheries

Mineiros

Goiás

Special poultry (turkey and Chester®) slaughtering and processing

Nova Marilândia*

Mato Grosso

Poultry slaughtering

Nova Mutum

Mato Grosso

Poultry slaughtering

Paranaguá

Paraná

Industrialized products processing

Ponta Grossa

Paraná

Industrialized products processing

Rio Verde

Goias

Poultry slaughtering and porks, industrialized products processing

Sagrinco *

Santa Catarina

Poultry slaughtering and pork


Table of Contents

Production Plant

State of Location

Activities

Serafina Corrêa

Rio Grande Sul

poultry slaughtering

Tatuí

São Paulo

industrialized products processing

Toledo

Paraná

Poultry slaughtering and porks, industrialized products processing

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

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

 

*      Production48


In 2018, the Russian government banned all imports of pork from Brazil. As a result, we could no longer sell pork products directly into the Russian market. To maintain BRF’s presence in this market, however, we continued the development of our chicken portfolio to certain distributors in Russia, which then sell our products to local processors and food service operators. 

Asia. China, together with Hong Kong, is our largest market in Asia where we supply a significant volume and diverse portfolio, including chicken wings, chicken feet and pork cuts. Also, with a small distribution operation in Shanghai, BRF has been partnering with retailers to sell Sadia frozen chicken cuts to Chinese consumers. In Japan, our local level of service, quality standards and product range have made us a preferred supplier of chicken products in the market. In South Korea, BRF was the first Brazilian producer to export pork cuts to this market, which has provided new business opportunities in this country. Through the joint venture SATS BRF Food in Singapore, 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 with an innovative portfolio of cooked chicken cuts, sausages and hamburgers. As described above, in February 2019, we agreed to sell our facilities ownedin Thailand, along with most of our European assets, to Tyson International Holding Co. 

 Middle East.In the Middle East, Turkey and operated by third-party producers who produceMalaysia we sell to wholesalers, retailers, small stores (traditional trade), food service providers, and processors. 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. Our biggest brand,Sadia is recognized as the leading food brand in the Middle East and enjoys the highest Top of Mind brand within the frozen meat category, according to our specifications.

Parta study made by Ipsos Research, a third-party consulting firm. In 2017, we announced the beginning 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 18 to our consolidated financial statements.

Distribution Centers

We operate 20 distribution centers throughout Brazil, as set forthHalal operations, which is focused 100% in the table below.

Location

State

Owned or Leased

Aparecida Goiânia

Goiás

Leased

Belém

Pará

Leased

Cuiabá

Mato Grosso

Leased

Duque de Caxias

Rio de Janeiro

Leased

Embu

São Paulo

Owned

Exportação Ponta Grossa

Paraná

Owned

Fortaleza

Ceará

Owned

Itajaí

Santa Catarina

Leased

Jundiaí

São Paulo

Owned

Manaus

Amazonas

Leased


TableHalal market. We also announced the completion of Contentsthe 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 on the Company—A. History and Development of the Company—Corporate Reorganization of One Foods.”

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

Visa

Pernambuco

Owned

Africa

We operate 33 transit points. Our strategy in BrazilAfrica has focused on unlocking a number of in-market opportunities that fall under the attractive and affordable processed category. In 2018, we focused on strengthening our partnerships in the locations set forthregion. We pursue sales 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

Brasilia

Distrito Federal

Leased

Campo Grande

Mato Grosso do Sul

Owned

Campo dos Goytacazes

Rio de Janeiro

Leased

Cascavel

Paraná

Leased

Criciúma

Santa Catarina

Leased

Feira de Santana

Bahia

Leased

Governador Valadares

Minas Gerais

Leased

Guarulhos

São Paulo

Owned

Ilheus

Bahia

Leased

Juazeiro do Norte

Ceará

Leased

Limeira

São Paulo

Leased

Macapá

Amapá

Leased

Maceió

Alagoas

Leased

Marabá

Montes Claros

Pará

Minas Gerais

Leased

Leased

Parnamirim

Rio Grande do Sul

Leased

Paraiso do Tocantins

Tocantins

Leased

Pelotas

Ponta Grossa

Rio Grande do Sul

Paraná

Leased

Owned

Pouso Alegre

Minas Gerais

Leased

Ribeirão Preto

São Paulo

Leased

Santa Maria

Rio Grande do Sul

Leased

Santos

São Paulo

Leased

São Bernardo do Campo

São Paulo

Leased

São Gonçalo

Rio Janeiro

Leased

São José do Ribamar

Maranhão

Leased

São José dos Campos

São Paulo

Owned

Seabra

Bahia

Leased

Sorocaba

São Paulo

Leased

Teresina

Piauí

Leased


Table of Contents

Environment

Our activities are subjectAfrica through sales 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 complydistributors with the environmental lawswidest possible distribution. TheSadia and regulation can result in civil and criminal penalties againstPerdixbrands are 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 corporate norms to be used in the company’s environmental management. The monitoring of the implementation with these norms are 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.

We have nine plants which have received ISO 14001 certification, of which eight are located in Brazil and one in the Netherlands. These plants were audited by regulatory bodies and undergo regular recertification.

We set up a Corporate Environmental Operational Committee, which is responsible for defining management models, developing strategic plans and supporting specific working groups. This Committee is part of the Health, Safety and Environment Program and is composed of members from different areas of the company. 

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 relating to effluents and waste disposal. Our environmental structure is formed 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.

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 collectanimal waste.

The partnershipprimary brands that we have focused on distributing in the region. Angola remains our main market for chicken cuts and processed food, such as franks and mortadella. We also expanded the supply of processed food to South Africa through BRF facilities in Turkey and Thailand. Going forward, we will continue to carefully consider future growth markets. Furthermore, our next phase of developments will emphasize more control over the interactions between the brands and the consumers by gaining additional insight into consumer preferences to strengthen our value proposition and distribution opportunities.

Americas and Other Countries. We sell our products in the Americas through direct sales to key distributors. Additionally, we have strengthened our commercial relationship with the integrated producers isMexican clients in 2017 and 2018, where we primarily sell frozen chicken cuts. Cuba has been one of the strategiesmain destinations for our processed food products, such as chicken franks. We also sell chicken cuts, including breasts and wings, to processing companies in Canada. Additionally,Sadia is an established brand and holds important market shares in Chile and Uruguay, where we use to leverage global standardsmaintain local offices, and 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.Paraguay, where we operate via consolidated local distributors.

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 April 10, 2007, we executed a consent agreement (Termo de Ajustamento de Conduta, or “TAC”). Unfavorable decisions in our legal proceedings may 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 regarding the offset of tax credits and the use of tax incentives in several states that have not yet reached a final ruling in the Brazilian courts. In addition, we may face risks arising from potential impairment of input state VAT that we accumulate on exportations. We currently 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) in which the Supreme Court of Brazil has ruled against us. The case is currently pending judgment of a final 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.”

As of December 31, 2018, we had R$1,350 million in provisions for contingencies, of which R$282 million was for civil and other contingencies (including administrative, regulatory and environmental), R$230 million was for tax contingencies, R$469 million was for labor contingencies and R$370 million was for contingent liabilities.

We are also currently being investigated in theCarne Fraca Operation andTrapaça 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—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Trapaça Operation.” Any investigation from governmental authorities currently unknown to us with respect to any potentially unlawful business practice may also result in penalties, fines and sanctions or other forms of liability.

On March 12, 2018, a shareholder class action lawsuit was filed in the U.S. Federal District Court in the Southern District of New York. On July 2, 2018, the Court appointed the City of Birmingham Retirement and Relief System lead plaintiff in the action (the “Lead Plaintiff”). On August 31, 2018, the Lead Plaintiff filed an amended class action complaint.  On December 5, 2018, the Lead Plaintiff filed a second amended complaint. The second amended complaint seeks to represent all persons and entities who purchased or otherwise acquired BRF ADRs during the period from April 4, 2013, through and including March 2, 2018, 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 in connection with theCarne Fraca Operation andTrapaça Operation. A motion to dismiss briefing has been stayed pending the determination of Lead Plaintiff’s motion to amend the second amended complaint, which was filed on April 1, 2019. Because this lawsuit is in its early stages, we believe the possible loss or range of losses, if any, arising from this litigation cannot be estimated. 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.

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BRF was granted an ICMS tax credit of 4.5% by the State of Rio de Janeiro on sales and transfers of meat products. BRF entered into an agreement with the Environmental Resource AgencyState of Rio de Janeiro related to this tax credit in 2014. The agreement required that BRF: (1) construct a sandwich factory, with an investment of R$11.5 million, which would generate 38 jobs and (2) construct a sausage factory, with investment initially set at R$136 million, which would generate 180 jobs within a period of 18 months. Due to several factors beyond BRF’s control, including obtaining environmental licenses and building licenses, and due to changes to our production focus, we did not meet the initial deadlines. As a result, the State of Rio de Janeiro granted additional time for completion of the Bahia State,projects, but also increased the required aggregate investment to R$280 million and the minimum number of jobs to 280. We have commenced construction of the plant and the project is currently on schedule. However, the Brazilian Treasury Department filed an administrative request seeking the cancellation of the tax benefit previously granted to BRF. BRF has filed a writ of mandamus to guarantee the continuation of the current benefit and to protect the credits that BRF has already received. On March 14, 2019, the new Secretary of Finance of Brazil executed an order to cancel the tax benefit and to restore the standard collection of ICMS. The collection of past tax credits can only occur through an infraction notice issued by the Treasury Department, which has not yet occurred. The value of the tax benefits that BRF has received since 2014 is R$307 million (R$435 million when taking into account a potential fine and interest upon the principal amount). If the final decision is upheld against BRF and the tax credits are required to be returned, it could have a significant impact on our financial condition and results of operations.

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 principal intellectual property consists of our domestic and international brands. 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 settling 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 on 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.

We are vulnerable to third party transportation and logistics risks.

                We depend on fast and efficient transportation and logistics services to, among other things, deliver raw materials to our production facilities, deliver animal feed to our poultry and pork growers and distribute our products. Any prolonged disruption of these services may have a material adverse impact on our business, financial condition and results of operations. For example, on May 21, 2018, a national truckers’ strike commenced in Brazil regarding increases in fuel prices. The strike materially disrupted the supply chain of various industries across the country, including the supply chain of raw materials to our production facilities and the delivery of animal feed to our poultry and pork growers, and, at its peak, led to the suspension of the operation of all of our production facilities located in Brazil. Furthermore, this strike also materially affected the regular functioning of the ports from where our products are exported. We incurred increased costs in connection with the truckers’ strike and also were required to dispose of certain animals as a result of the strike. There can be no assurance that the truckers will not seek to engage in any further strikes, that the Brazilian federal government or any other relevant party will be able to meet the demands of the truckers in a satisfactory manner or that any such strike will not adversely affect our supply chain or the operation of our production facilities. In addition, any other reduction in the dependability or availability of transportation or logistics services or a significant increase in transportation service rates, including as a result of, among other things, flooding in ports, warehouse fires or labor strikes, could impair our ability to satisfyour supply chain requirements and deliver our products economically to our customers. Any such disruption to the transportation or logistics services that we depend on could have a material adverse impact on our results of operations and financial condition.

17


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, political risks, environmental and climate events, fraud, strike, 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 indemnify parties affected by such an event. Furthermore, 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. For example, the negative impacts on our business from the 2018 Brazilian truckers’ strike, including the suspension of operations at our production facilities and increased transportation and logistics costs, were not covered by any of our insurance policies. Any similar events in the future could have a material adverse impact on our business, results of operations, financial condition and prospects.

We have incurred, and expect to continue to incur, significant costs in connection with theCarne Fraca Operation, theTrapaça Operation and the shareholder class action lawsuit filed on March 12, 2018. The costs associated with these investigations and the costs of defending the class action lawsuit may not be covered by our insurance policies. Furthermore, there can be no assurance that we will be able to obtain insurance coverage in the future, related to the foregoing or any other matters, on terms acceptable to us. As a result, we may incur significant additional expenses which may adversely impact our financial condition and results of operations.  

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. In 2017 and 2018, we experienced a significant number of departures of senior management, including two of our previous CEOs, our CFO, our Chief Human Resources Officer (“CHRO”), our Brazil General Manager and our Vice President of operations. In addition, on March 5, 2018, we called an Ordinary and Extraordinary Shareholders’ Meeting (the “Ordinary and Extraordinary General Meeting”), which was held on April 26, 2018, at the request of two of our shareholders, Caixa de Previdência dos Funcionários do Banco do Brasil, or “PREVI,” and Fundação Petrobras de Seguridade Social, or “PETROS,” which jointly hold approximately 20% of our capital stock. At the Ordinary and Extraordinary General Meeting, the number of members of our board of directors was set at 10 members, new members were elected to the board of directors and the Chairman and Vice-Chairman of the board of directors were elected. Only four of the ten board members elected during the Ordinary and Extraordinary Shareholders’ Meeting were previously members of our board of directors. Furthermore, pursuant toNovo Mercado rules, we anticipate that Mr. Pedro Pullen Parente’s term as Chief Executive Officer will end on June 18, 2019, as he may only hold the positions of Chairman of the Board of Directors and Chief Executive Officer at the same time for a period of one year. In connection with the end of Mr. Pedro Pullen Parente’s term as Chief Executive Officer, the Company will appoint a new Chief Executive Officer. On March 28, 2019, Mr. Lorival Nogueira Luz Júnior, the Company’scurrent Chief Operating Officer, was named Mr. Parente’s successor as Chief Executive Officer following the end of Mr. Parente’s term. On April 25, 2019, Mr. Ivan de Souza Monteiro, who was appointed as Chief Financial andInvestor Relations Officer on March 11, 2019, resigned from his position. Mr. Lorival Nogueira Luz Júnior, theCompany’s current Chief Operating Officer, was appointed on April 25, 2019 as Interim Chief Financial andInvestor Relations Officer.These changes, and other potential changes, in the composition of our senior management team and our board of directors may result in modifications to our business strategy and have a material adverse effect on us.

18


Breaches, disruptions, or failures of our information technology systems, including as a result of cybersecurity attacks, 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 improve the efficiency of 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.

Our information technology systems may be vulnerable to a variety of interruptions and cybersecurity threats and incidents. In the current environment there are numerous and evolving risks related to cybersecurity and privacy, including criminal hackers, hacktivists, state-sponsored intrusions, industrial espionage, employee malfeasance and human or technological error. Computer hackers and others routinely attempt to breach the security of information technology systems and to fraudulently induce employees, customers and other third parties to disclose information or unwittingly provide access to systems or data. Successful cybersecurity attacks, breaches, employee malfeasance, or human or technological error could result in, for example, unauthorized access to, disclosure, modification, misuse, loss or destruction of data or systems, including those belonging to us, our customers or third parties; theft of sensitive, regulated or confidential data including personal information; the loss of access to critical data or systems through ransomware, destructive attacks or other means; transaction errors; business delays; and service or system disruptions. In the event of such actions, we, our customers and other third parties could be exposed to potential liability, litigation, and regulatory or other government action, the loss of existing or potential customers, loss of sales, damage to brand and reputation and other financial loss. 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. The cost and operational consequences of responding to cybersecurity incidents and implementing remediation measures could be significant and may not be covered by insurance. Our cybersecurity risk also depends on factors such as the actions, practices and investments of customers, contractors, business partners, vendors and other third parties.

To date, while we continue to monitor for, identify, investigate, respond to and remediate security incidents, including those associated with cybersecurity attacks, there has not been a cybersecurity attack that has had a material adverse impact on us, though there is no assurance that there will not be a cybersecurity attack that has a material adverse impact in the future.

We have implemented technology security initiatives and disaster recovery plans, 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 attack, a general information security incident or a disruption of our information technology systems. Furthermore, as our business and the cybersecurity landscape evolve, we may find it necessary to make significant further investments to protect our data and information technology infrastructure, which may adversely impact our financial condition and results of operations.

The regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on our business, including increased risk, costs and expanded compliance obligations. The Brazil General Data Privacy Law (Lei Geral de Proteção de Dados Pessoais), which was signed into law in August 2018 and will become effective in 2020, and an increased number of data protection laws around the globe could continue to result in increased compliance costs and risks. The potential costs of compliance with or imposed by new or existing regulations and policies that are applicable to us may affect the use of our products and services and could have a material adverse impact on our results of operations.

19


Risks Relating to Our Indebtedness

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

At December 31, 2018, our total consolidated debt (comprised of short-term and long-term debt) was R$22.2 billion.

Our substantial indebtedness could have major consequences for us, including:

·requiring that a substantial portion of our cash flows from operations be used for the payment of principal and interest on our debt, reducing the funds available for our operations, 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 ratings agencies in order to recover degraded areasevaluate a company’s creditworthiness, as well as other factors, our credit rating has been recently downgraded, and enhance industrialwater waste treatment, air emissions monitoring and waste managementwe are currently rated below “investment grade” by all the rating agencies that rate us.

We have substantial debt that matures in each of the facilitynext several years.

As of December 31, 2018, we had R$4.6 billion of debt that matures in 2019, R$3.4 billion of debt that matures in 2020, R$2.9 billion of debt that matures in 2021, R$3.1 billion of debt that matures in 2022 and R$8.2 billion of debt that matures in 2023 and thereafter.

A substantial portion of our outstanding debt is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2018, we had R$11.5 billion of foreign currency debt, including R$1.5 billion 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 inreais 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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Any future uncertainty in the stock and credit markets could also negatively impact our ability to access additional short-term and long-term financing, which could negatively impact our liquidity and financial condition. If, in future years:

·the pressures on credit return as a result of disruptions in the global stock and credit markets;

·our operating results worsen significantly;

·we are unable to complete any necessary divestitures of non-core assets and our cash flow or capital resources prove inadequate; or

·we are unable to refinance any of our debt that becomes due,

we could face liquidity problems and may not be able to pay our outstanding debt when due, which could have a material adverse effect on our consolidated business and financial condition.

The terms of our indebtedness impose significant restrictions on us.

The instruments governing our consolidated indebtedness impose significant restrictions on us. These restrictions may limit, directly or indirectly, our ability, among other things, to undertake the following actions:

·borrow money;

·make investments;

·sell assets, including capital stock of subsidiaries;

·guarantee indebtedness;

·enter into agreements that restrict dividends or other distributions from certain subsidiaries;

·enter into transactions with affiliates;

·create or assume liens; and

·engage in mergers or consolidations.

Although the covenants to which we are subject have exceptions and qualifications, the breach of any of these covenants could result in a payment default under the terms of other existing debt obligations. Upon the occurrence of such an event of default, all amounts outstanding under the applicable debt instruments and the debt issued under other debt instruments containing cross-default or cross-acceleration provisions, together with accrued and unpaid interest, if any, might become or be declared immediately due and payable. If such indebtedness were to be accelerated, we may have insufficient funds to repay in full any such indebtedness. In addition, in connection with the entry into new financings or amendments to existing financing arrangements, our subsidiaries’ financial and operational flexibility may be further reduced as a result of the imposition of covenants that are more restrictive, the requirements for additional security and other terms.

21


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 and 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 and the ADRs may be adversely affected by, among others, the following factors:

·exchange rate fluctuations;

·expansion or contraction of the Brazilian economy;

·inflation rate fluctuations;

·changes in fiscal or monetary policies;

·commodities price volatility;

·increases 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 rationing;

·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. The GDP growth rate in 2014 was 0.5%, but GDP decreased 3.5% in both 2015 and 2016. Following this two-year contraction, GDP grew 1.0% in 2017 and grew 1.1% in 2018, while inflation, measured by 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”), and interest rates changed to 3.75% and 6.5% in 2018, respectively, from 2.95% and 7.00%, respectively, in 2017. Unemployment had a slight improvement from 11.8% in 2017 to 11.6% in 2018, although it remained at a high level. For 2019, there is an expectation that such economic indicators will improve modestly.

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In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Lava Jato Operation,” have indirectly negatively impacted the Brazilian economy and political environment.

A number of senior politicians, including current and former members of Congress and the Executive Branch, and high-ranking executive officers of major corporations and state-owned companies in Brazil were arrested, convicted of various charges relating to corruption, entered into plea agreements with federal prosecutors and/or have resigned or been removed from their positions as a result of theseLava Jato investigations. These individuals are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. The profits of these kickbacks, which were not publicly disclosed, allegedly financed the political campaigns of political parties forming the previous government’s coalition that was led by former President Dilma Rousseff. These funds were also allegedly used for the personal enrichment of certain individuals. The effects ofLava Jato as well as other ongoing corruption-related investigations resulted in an adverse impact on the image and reputation of those companies that have been implicated as well as on the general market perception of the Brazilian economy, political environment and the Brazilian capital markets. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future.

Amidst this background of political uncertainty, in August 2016, the Brazilian Senate approved the removal from office of Brazil’s then-President, Dilma Rousseff, following a legal and administrative impeachment process for infringement of budgetary laws. Michel Temer, the former Vice-President, who assumed the presidency of Brazil following Rousseff’s ouster, is also under investigation on corruption allegations. In addition, the former President, Luiz Inacio Lula da Silva, began serving a 12-year prison sentence on corruption and money laundering charges in April 2018. The new Brazilian president, a former member of the military and three-decade congressman, was elected on October 28, 2018 and took office on January 1, 2019. During his presidential campaign, the new Brazilian President was reported to favor the privatization of state-owned companies, economic liberalization, and social security and tax reforms. However, there is no guarantee that the new Brazilian President will be successful in executing his campaign promises or passing certain favored reforms fully or at all, particularly when confronting a fractured congress. In addition, the current minister of the economy proposed during the presidential campaign the revocation of the income tax exemption for the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies. This could impact our capacity to receive, from our subsidiaries, future cash dividends or distributions net of taxes and also our ability to make distributions to our shareholders net of taxes. Moreover, the new Brazilian President was generally a polarizing figure during his campaign for presidency, particularly in relation to certain of his social views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms, all of which could have a negative impact on our business and the price of our common shares and ADRs.

In addition, the current Brazilian federal government is expected to propose the general terms of a fiscal reform to stimulate the economy and reduce the forecasted budget deficit for 2019, but it is uncertain whether the Brazilian government will be able to gather the required support in the Brazilian Congress to pass such reforms. 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 2019 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 or 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.

Worsening political and economic conditions in Brazil 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.

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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 and the ADRs.

Brazil has experienced high inflation rates in the past. According to the IPCA, Brazilian consumer price inflation rates were 6.4% in 2014, 10.7% in 2015 and 6.3% in 2016, while downward inflation pressures caused this figure to reach 2.95% in 2017 and 3.75% in 2018. 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 inflation levels have been relatively stable in 2017 and 2018, there can be no assurance that inflation rates will not rise in the near future. Periods of higher inflation slow the growth rate of the Brazilian economy, which may lead to lower growth in consumption of food products. High inflation also puts pressure on industry costs of production and expenses, which may force companies to search for innovative solutions in order to remain competitive. We may not be able to pass any such increase in costs onto our customers and, as a result, it may adversely impact our results of operations and financial condition. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our debt may increase. Furthermore, 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 and may have an adverse effect on our business, results of operations, financial condition and the market prices of our common shares and the ADRs.

Fluctuations in interest rates may have an adverse effect on our business, financial condition and the market prices of our common shares and the ADRs.

The Central Bank uses interest rates to attempt to keep inflation under control or to stimulate the economy. If interest rates decrease, there is generally greater access to credit and consumption of goods typically increases. This increase in demand can in turn result in inflation. On the other hand, if interest rates go up, the cost of borrowing increases which may inhibit consumption and additional investments. Another consequence of rising interest rates is that a greater return is paid in respect of government securities, which may impact other investments by making them less attractive in comparison. As a result, there may be additional investment in public debt, which absorbs money that could otherwise fund the private sector.

On December 31, 2018, 38.2% of our total indebtedness of R$22,165.5 million was either (1) denominated in (or swapped into)reais and bears interest based on Brazilian floating interest rates, such as the Long-Term Interest Rate (Taxa de Juros de Longo Prazo, or “TJLP”), the interest rate used in our financing agreements with Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social, or “BNDES”) or 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. Thereal depreciated 13.4% and 47.0% in 2014 and 2015, respectively, appreciated 16.5% in 2016, depreciated 1.5% in 2017, and depreciated 16.9% in 2018 against the U.S. dollar.

Appreciation of the Brazilianreal against the U.S. dollar may lead to a dampening of export-driven growth. Our production costs are denominated inreais, but our international sales are mostly denominated in U.S. dollars. Revenues generated by exports are reduced when translated toreais 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 Brazilianreal against the U.S. dollar may lead to higher exports and revenues, but costs may be higher.

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Costs are also directly impacted by exchange rates. Any depreciation of thereal 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, which are important ingredients for 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 for our feedstock, is also linked to the U.S. dollar, but 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 thereal depreciates against the U.S. dollar, the cost inreais of our U.S. dollar-linked raw materials and equipment increases, and these increases could materially adversely affect our results of operations. We have established policies and procedures to manage our sensitivity to such risks included in our Financial Risk Management Policy. This policy, however, may not adequately cover our revenue and cost exposure to exchange rates.

We had total foreign currency-denominated debt obligations in an aggregate amount of R$11,538.4 million at December 31, 2018, representing 52.1% 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 thereal in relation to the U.S. dollar or other currencies would increase the amount ofreaisthat we would need in order to meet debt service requirements of our foreign currency-denominated obligations.

Changes in tax laws or changes in their interpretation may increase our tax burden and, as a result, negatively affect our results of operations and financial condition.

The Brazilian government regularly implements changes to tax regimes that may increase our and our suppliers’ and customers’ tax burdens, which may in turn 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 results of operations and financial condition.

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 R&Dtax incentive program (“Lei do Bem”) and the deduction of interest on shareholders’ equity, may be revoked to increase revenues for the government in light of a possible reduction of the income tax rate, which have been and are being studied by the new Brazilian government’s financial team. The effects of these proposed tax reform measures and any other changes that could result from enactment of additional tax reforms have not been, and cannot be, quantified yet due to the uncertainty of whether any changes will be implemented. However, some of these measures, if enacted, may result in increases in our overall tax burden, which could negatively affect our overall financial performance. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—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 American Depositary Shares (“ADS”) 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 ADR holders. For example, we are required to publish a notice of ourshareholders’ 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 or 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 may be 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 limited compared to 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 compared to 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 or 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 or 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 São Gonçalo.Brazil. As a result, it may not be possible for non-Brazilian holders of ADRs or 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 thanreais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reaismayonly 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 TAC is waitingthen prevailing exchange may not afford non-Brazilian investors with full compensation for completion procedures.any claim arising out of or related to our obligations under the common shares or the ADRs.


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Table

Holders of ContentsADRs 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 Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários, or “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 totaxation 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 Brazilian Central Bank (“Bacen”) under the rules of the CMN (“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 25% (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 not exceeding R$5,000,000.00;

ii.17.5% upon the portion of capital gains that exceeds R$5,000,000.00 but not exceeding R$10,000,000.00;

iii.20% upon the portion of capital gains that exceeds R$10,000,000.00 but not exceeding R$30,000,000.00; and

iv.22.5% upon the portion of capital gains that exceeds 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, including the B3 S.A. – Brasil, Bolsa, Balcão (the “B3” or the “São Paulo Stock Exchange”) are substantially smaller, less liquid and more volatile than major securities markets in the United States. The Brazilian securities markets are also characterized by considerable share concentration.

The ten largest companies in terms of market capitalization represented approximately 52% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2018. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 41% of all shares traded on the São Paulo Stock Exchange in 2018. 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 varying degrees, 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 and 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 2018, and we do not expect to be a PFIC for 2019 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 PFIC status is fact-specific and will depend on the composition of our income and assets from time to time, and a separate determination must be made each taxable year as to whether we are a PFIC (after the close of each such taxable year). 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.  Accordingly, it is possible that we may become a PFIC for 2019 or future taxable years due to changes in our income or asset composition. 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 Brazilian pension funds. 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.

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

Our principal executive offices are located at Av. das Nações Unidas, 8501 – 1st Floor, Pinheiros, 05425-070, São Paulo, SP, Brazil, and our telephone number at this address is +55-11-2322-5000/5355/5048. The U.S. Securities and Exchange Commission (the “SEC”) maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as BRF, that file electronically with the SEC. 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 routinelyposted 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.

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Business combination with Sadia

On May 19, 2009, we signed a merger agreement with Sadia for a business combination of Sadia S.A. and Perdigão S.A. The business combination became fully effective on September 22, 2009, and Sadia became our wholly owned subsidiary. On December 31, 2012, we merged Sadia S.A., then a wholly-owned subsidiary, into BRF, and Sadia ceased to exist as a separate legal entity. In connection with the business combination, we changed our name from Perdigão S.A. to BRF – Brasil Foods S.A. On April 9, 2013, we changed our name from BRF – Brasil Foods S.A. to the current name BRF S.A.

Agreement with Lactalis

On September 3, 2014, we 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 our 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 sale price of U.S.$697.8 million.

Corporate Reorganization of One Foods

On January 11, 2017, we established a new wholly-owned subsidiary, One Foods Holdings Limited, based in Dubai International Financial Centre, which is focused on Halal markets. The formation of this subsidiary involved a restructuring of certain of our operations in Malaysia and some countries in the Middle East and Africa, including (i) the sale and purchase agreement pursuant to which One Foods acquired equity interests in entities that serve the Halal market from  BRF GmbH, a BRF wholly-owned subsidiary, and (ii) the contribution of the equity interest in SHB Indústria e Comércio de Alimentos S.A. (“SHB”) to One Foods. SHB held grain storage facilities, feed mills, outgrower agreements, hatcheries and eight slaughtering and processing plants in Brazil. In addition, we entered into certain agreements with One Foods that provided for the licensing of certain brands, operational and corporate activities, cost sharing and supply of raw materials and finished goods. See Note 1.7 to our consolidated financial statements for additional information.

On September 1, 2018, BRF executed a Share Sale and Purchase Agreement with two of its subsidiaries, BRF Foods GmbH and One Foods Holding Ltd., to acquire all common shares of SHB. On December 12, 2018 at BRF’s extraordinary shareholders meeting, the merger of SHB with and into BRF was approved. The merger took effect on December 31, 2018, following its approval at the extraordinary shareholders meeting of SHB. 

Acquisition of Banvit - Turkey

On May 25, 2017, our subsidiary TBQ Foods GmbH (“TBQ”), 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 Bandirma Vitaminli (“Banvit”), which is the largest poultry producer in Turkey, has fully integrated operations and owns one of the most recognized brands in Turkey.Through a subsequent tender offer process completed on August 17, 2017, TBQ’s ownership 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.

 Sale of Quickfood

                On April 20, 2007,December 7, 2018, we executed a consentShare Sale and Purchase Agreement with Marfrig Global Foods S.A. (“Marfrig”) for the sale of our total ownership interest in Quickfood (which constituted 91.89% of the capital stock of Quickfood) based on an enterprise value of US$60 million (equivalent to R$232 million). Quickfood was our subsidiary in Argentina and operated 3 beef slaughtering plants with a capacity of 620 heads per day and aprocessing capacity of approximately 6,000 metric tons per month of hamburgers, franks, cold products and frozen vegetables. The transaction closed on January 2, 2019.

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Sale of Várzea Grande Plant

On December 7, 2018, we executed an agreement with Marfrig for the Environment Secretarysale of R$100 million of both real estate assets and equipment from our plant located in Várzea Grande in the State of Mato Grosso, aimingwhich produces, among other items, hamburgers, meatballs and kibbehs (a type of Middle Eastern beef patty popular in Brazil). This transaction closed on January 23, 2019 and, on April 1, 2019, a Supply Agreement with Marfrig became effective, under which Marfrig undertook to end, adapt, restore, correct or minimizeprovide us with finished goods produced in the effectsVárzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Sale of environmental degradationAvex

On December 19, 2018, we entered into a Share Sale and Purchase Agreement whereby we agreed to sell all of the issued and outstanding shares of our Argentinian subsidiary, Avex S.A., to Granja Tres Arroyos S.A. and Fribel S.A., based on an enterprise value of US$50 million (equivalent to R$194 million). Avex S.A. operates three facilities located in Llavalol, Villa Mercedes and Rio Cuarto, in Argentina, for the production of poultry and margarine. This transaction closed on February 4, 2019.

Sale of Assets in Europe and Thailand

On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand, based on an enterprise value of US$340 million (equivalent to R$1.3 billion). We expect the closing of this transaction to occur in 2019, but it remains subject to customary closing conditions, including approval by European antitrust authorities.

Other Transactions in 2018 and 2019

On December 6, 2018, the Company was notified by VDG Holding S.A. that it was exercising its right to terminate Minerva S.A.’s shareholders’ agreement entered into by the parties, as shareholders of Minerva S.A., on November 1, 2013, as a result of the Company holding less than 6% of the outstanding shares issued by Minerva S.A.

On January 10, 2019, the Company executed an Asset Sale and Purchase Agreement with BOGS S.A. for the sale of its facility located in Cuiabáthe city of Florencio Varela, in Argentina, and all assets and liabilities related to it, including the brands “Bocatti” and “Calchaquí,” based on an enterprise value of U.S.$24.5 million (equivalent to R$91 million). The TAC is waitingtransaction closed on February 28, 2019.

On January 10, 2019, the Company executed a Share Sale and Purchase Agreement with La Piamontesa de Averaldo Giacosa y Compañía S.A. for completion procedures.the sale of all of the capital stock of the Company’s subsidiary, Campo Austral S.A., including its facilities in San Andrés de Giles and Pilar and the brand “Campo Austral,” based on an enterprise value of U.S.$11 million (equivalent to R$42 million). The transaction closed on March 11, 2019.

On December 18, 2018 the Company concluded the formation of a receivables investment fund (“FIDC”) to acquire trade receivables of commercial transactions entered into by the Company and its clients in Brazil. The fund has 3 distinct classes and achieved an aggregate volume of R$875 million.

Carne Fraca Operation

We are currently being investigated in connection with theCarne Fraca Operation. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation.”

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Trapaça Operation

We are currently being investigated in connection with theTrapaça Operation. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings— Trapaça Operation.”

Capital Expenditures

The table below sets forth our capital expenditures with respect to both continuing and discontinued operations for the periods indicated:

 

For the year ended December 31,

 

2018

2017

2016

 

(in millions ofreais)

Property, plant and equipment

533.6

887.0

1,859.2

Biological assets

877.1

713.2

784.2

Acquisitions and other investments

200.7

1,120.9

2,873.0

Intangible assets

20.6

51.2

62.8

Total capital expenditures

1,631.7

2,772.3

5,579.2

 

 

 

 

      

The main capital expenditures in 2016, 2017 and 2018 are described below:

Acquisitions and divestments: For information regarding our recent acquisitions and divestments, 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 north and northeastern regions of Brazil.

Automation: In 2017, BRF focused on executing the nearly R$115.0 million of investments made in 2016 for the automation of company processes. The goal of these investments is to improve efficiency by increasing productivity and reducing production costs. In 2016, investments in 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.

International Projects: In 2017, we invested R$136.5 million in our Toledo, Campos Novos and Rio Verde factories to increase pork production for the Chinese market.

Additionally, in 2017, we invested R$20.1 million in a new production line for animal ingredients.

In 2018, we focused our investments on our quality and security standards rather than acquisitions, reflecting the policies of our new board of directors.

In 2019, in addition to existing projects, we expect to focus on pursuing our commitment to maximizing the use of our assets by making investments to help eliminate production constraints and increase overall efficiency. We expect that investments aimed at maintaining our high-quality standards will still represent a significant share of our expenses. In addition, we will seek to make further progress under our financial and operational restructuring plan.

B.Business Overview

BRF S.A. is one of the largest producers of fresh and frozen protein foods in the world.We are committed to operating our business and delivering products to our global customer base in line with our core values: quality, safety and integrity. We have a portfolio of approximately three 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 and animal feed. We are the holder of brands such asSadia, Perdigão, Qualy, Perdix,Confidence andHilal. In 2018, BRF accounted for 11.3% of the world’s poultry trade, according Trademap.

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Our portfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their preferences. 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 31 industrial facilities in Brazil, we have among our main assets a distribution network that enables our products to reach Brazilian consumers through more than 530,000 monthly deliveries and 47 distribution centers as of December 31, 2018, 20 of which are in the domestic market and 27 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 offices outside of Brazil serving customers in more than 150 countries on five continents. We have one industrial facility in Abu Dhabi, one in Malaysia and three in Turkey.

We have been a public company since 1980. Our shares have been listed on theNovo Mercado of the São Paulo Stock Exchange as BRFS3 since 2006, and ADRs representing our common shares are traded on the New York Stock Exchange, or “NYSE.”

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

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

·Processed Food Products including the following:

omarinated, frozen, whole and cut chicken, roosters (sold under theChester® brand) and turkey;

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

ofrozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs;

·Other Processed Products including the following:

omargarine; and

ofrozen 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.

Prior to the divestitures made in connection with our financial and operational restructuring plan, other processed products included mayonnaise, mustard and ketchup.

In Brazil, we operate 24 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and two soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logistics system in our domestic market, with 20 distribution centers, six of which are owned by us and 14 2007,of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our International and Halal markets, we operate five industrial facilities for meat processing. Additionally, after giving effect to the divestitures made in connection with our financial and operational restructuring plan, we continue to operate 27 distribution centers located in Asia, Southern Cone and the Middle East as well as commercial offices on four continents.

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Our Industry

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

Brazilian Market

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

Real GDP in Brazil increased at an average annual rate of 2.4% from 2004 through 2018.  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 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 6.5% as of December 31, 2018.  For the year ended December 31, 2018, the IPCA increased by 3.75%.

The unemployment rate and consumer confidence levels also have an impact on consumption levels in Brazil. The average unemployment rate for October, November and December of 2018 was 11.7%, a decrease of 0.1 percentage points when compared to the 11.8% in the same period of 2017. The Consumer Confidence Index for December 2018 was 93.8, 7.4 percentage points above that in December 2017 of 86.4%.

According to the Brazilian Association of Supermarkets (Associação Brasileira de Supermercados, or “ABRAS”) in December 2018, supermarket sales in real terms (deflated by the IPCA), increased 3.9% compared to December 2017. For the full year, supermarket sales in real terms rose 2.1% in 2018 as compared to 2017.

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 5.1% in the year ended December 31, 2018, compared to the year ended December 31, 2017, in terms of volume. Pork exports registered a decrease of 7.4% in volume sold in the year ended December 31, 2018, compared to the year ended December 31, 2017. Beef exports recorded an increase of 12.2% in volume in the year ended December 31, 2018, compared to the year ended December 31, 2017.

Brazilian chicken exports in the year ended December 31, 2018 totaled 4.1 million tons on sales of R$23.45 billion (equivalent to U.S.$6.57 billion). Saudi Arabia remains the main destination for these exports (12.5%), followed by China (12.4%), Japan (11.4%) and the United Arab Emirates (11.1%).

Pork export volume in the year ended December 31, 2018 totaled 645.5 thousand tons, totaling around R$4.69 billion (equivalent to U.S.$1.21 billion). The leading importers, China, Hong Kong and Singapore represented 25.0%, 23.9% and 6.8%, respectively, of total exports from Brazil.

Beef shipments in the year ended December 31, 2018 totaled 1.35 million tons with sales of around R$21.15 billion (equivalent to U.S.$5.46 billion). This increase in volume was driven by higher exports sent to China and Hong Kong which import 23.8% and 20.5% of Brazilian beef exports, respectively.

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.”

Products

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

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Poultry

We produce frozen whole and cut poultry. In 2018, we slaughtered approximately 1.55 billion heads of poultry, a 4.6% decrease compared to 1.63 billion in 2017. We sold 2,261 thousand tons of frozen chicken and other poultry products in 2018, compared to 2,127 thousand tons in 2017. Excluding the discontinued operations, we sold 2,064 thousand tons of frozen chicken and other poultry products in 2018, compared to 1,945 thousand tons in 2017. Most of our poultry sales are to our export markets.

As a result of the trade barriers imposed by the European Union, we significantly reduced our production of turkey in 2018, as the European Union was our main consumer market for this product. For additional information, see “Item 3. Key Information—D. Risk Factors—More stringent trade barriers in key export markets may negatively affect our results of operations.”

Pork and Beef

In 2018, we slaughtered approximately 9.84 million hogs and 154,571 cattle, compared to 9.79 million and 145,361 in 2017, respectively. We raise hogs but do not raise cattle at our facilities. Although most of the 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. In 2018, we sold 293 thousand tons of pork and beef cuts, compared to 323 thousand tons of pork and beef cuts in 2017. Excluding the discontinued operations, we sold 252 thousand tons of pork and beef cuts, compared to 268 thousand tons of pork and beef cuts in 2017. We are also further developing our international customer base for pork and beef cuts.

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 2,123 thousand tons of processed foods in 2018, compared to 2,118 thousand tons in 2017. Excluding the discontinued operations, we sold 1,869 thousand tons of processed foods in 2018, compared to 1,735 thousand tons in 2017. Most of our sales of processed foods are to our domestic market. We believe that there are opportunities to market value-added products like these to targeted regions and other market segments in Brazil as well as to expand our sales in the export market.

Our processed food products strategy relies on accurate brand management, a varied product portfolio with strategic pricing and innovation and service excellence, which we believe will allow our products to expand their reach both in the Brazilian market and international markets.

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, kibbeh and meatballs.

Marinated Poultry

We produce marinated and seasoned chickens, roosters (under theChester® brand) and turkeys. We originally developed theChester® breed of rooster to maximize the yield of breast and leg cuts. In 2004, we sold our rights to theChester® 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 technologyagreement under which Cobb Vantress manages theChester® breed of rooster. We continue to oversee the production ofChester® roosters in Brazil from hatching to distribution, and we own the trademarks for theChester® line of products.

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Halal Products

We offer poultry products for Islamic markets in accordance with the Halal method of animal slaughtering.

Margarine

We sell margarine under theQualy,Deline andClaybom brands. We maintain our leading market position with theQualy brand by bringing innovation to the Brazilian market. For example, in 2014 we introduced the first aerated margarine in Brazil and in 2016 we improved theQualy portfolio by adding a proprietary mix of vitamins and minerals to our products, which is called the Q-Mix. Additionally, in 2017 we introduced the first margarine with whole grains,Qualy Multigrãos. This technology to add grains inside the margarine is protected under a patent in partnership with our equipment supplier. In 2018, we launched Qualy Light Zero Lactose, the first zero lactose margarine in the Brazilian market.

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.

·French Fries. We sell frozen French fries, which are imported from Belgium where they are produced and packaged for us by third parties. Prior to the divestitures made in connection with our financial and operational restructuring plan, we sold other frozen vegetables, including broccoli, cauliflower, peas and French beans.

·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.

Frozen desserts

We have produced and sold Miss Daisy deserts since 1999. We believe the Miss Daisy brand has a leading market position and has been highly resilient to market changes. We offer a wide variety of products under the Miss Daisy brand, including:

·Mousse pie;

·Dutch pie; and

·Frozen mousse.

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 and to unaffiliated customers. In 2018, we produced 9,559.56 thousand tons of feed and premix, compared to 10,444.75 thousand tons in 2017. We also produce a limited range of soy-based products, including soy meal and refined soy flour.

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

Poultry

Brazil was the second largest producer and the leading exporter of poultry in the world in 2018 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 growth has been driven 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 1.9% in 2018 compared to 2017, mainly due to higher exports from the United States (which increased 3.3%), European Union (which increased 7.8%); Thailand (which increased 10.3%) and China (which increased 2.5%). According to the Brazilian Association of Animal Protein (Associação Brasileira de Proteína Animal, or “ABPA”), exports of poultry parts increased 0.3% in 2018 compared to 2017, representing 66.1% of the total poultry exported volumes. Whole chicken, which represented 27.0% of the total volume, decreased 11.0% in 2018 compared to 2017. The main destinations in 2018 were Saudi Arabia, China and Japan. In 2018, Saudi Arabia decreased total imports from Brazil by 18.0%, China increased total imports from Brazil by 11.0% and Japan decreased total imports from Brazil by 10.7% compared to 2017.

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

Primary Broiler Producers

2018

2017

2016

 

(in thousands of tons – “ready to cook” equivalent)

U.S.

19,361

18,938

18,510

Brazil

13,355

13,612

13,523

European Union (28 countries)

12,200

11,912

11,560

China

11,700

11,600

12,448

Russia

4,872

4,617

4,328

India

4,855

4,640

4,427

Mexico

3,485

3,400

3,275

Thailand

3,170

2,990

2,813

Turkey

2,225

2,188

1,925

Argentina

2,110

2,150

2,119

Japan

1,685

1,661

1,629

Others

16,482

15,914

15,695

Primary Broiler Exporters

2018

2017

2016

 

(in thousands of tons – “ready to cook” equivalent)

Brazil

3,687

3,847

3,889

U.S.

3,244

3,140

3,086

European Union (28 countries)

1,429

1,326

1,276

Thailand

835

757

690

China

447

436

386

Others

1596

1519

1391

Total

11,238

11,025

10,718

Primary Broiler Consumers

2018

2017

2016

 

(in thousands of tons – “ready to cook” equivalent)

U.S.

16,185

15,823

15,510

China

11,595

11,475

12,492

European Union (28 countries)

11,474

11,279

11,047

Brazil

9,671

9,768

9,637

Russia

4,947

4,718

4,451

India

4,852

4,638

4,424

Mexico

4,301

4,198

4,061

Japan

2,761

2,688

2,587

Thailand

2,345

2,226

2,129

Argentina

1,997

1,978

1,969

South Africa

1,835

1,778

1,781

Others

21,666

21,284

20,841

37


Source: USDA, April 2019. 

Pork

Brazil was the fourth largest producer and exporter and fifth largest consumer of pork in the world in 2018, according to the USDA. Brazil’s production and consumption of pork has increased since 2009. The USDA expects an increase in global production of 2.0% and a decrease in pork consumption of 3.8% in 2019%. According to the USDA, global pork exports reached 8,446 thousand tons in 2018. Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. Research and development has also helped to reduce fat, cholesterol and calories in pork produced in Brazil. These enhancements allow for more efficient production of prime cuts, more meat per carcass and more nutritious and healthier meat. Improved genetic potential of breeders has also contributed to the production increase.

According to the ABPA, as of December 2018, China was Brazil’s primary destination for pork followed by Hong Kong, representing 25.0% and 23.9%, respectively, of total Brazilian pork exports. Chinese and Hong Kong imports from Brazil increased 3.5% and 215.7%, respectively, from January to December of 2018.

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

 

World Pork Production

Main Pork Producers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

China

54,040

54,518

54,255

European Union (28 countries)

24,300

23,660

23,866

U.S.

11,942

11,611

11,320

Brazil

3,763

3,725

3,700

Russia

3,155

2,990

2,870

Vietnam

2,801

2,741

2,701

Others

13,080

12,869

12,682

Total

113,081

112,114

111,394

World Pork Exports

Main Pork Exporters

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

European Union (28 countries)

2,934

2,858

3,130

U.S.

2,663

2,554

2,376

Canada

1,330

1,351

1,320

Brazil

730

786

832

China

203

208

191

Chile

200

171

173

Mexico

178

170

141

Others

208

210

192

World Pork Consumption

Main Pork Consumers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

China

55,398

55,930

56,245

European Union (28 countries)

21,380

20,816

20,748

U.S.

9,749

9,542

9,476

Russia

3,197

3,327

3,192

Brazil

3,035

2,941

2,870

Vietnam

2,786

2,703

2,647

Others

16,927

16,383

15,890

Total

112,472

111,642

111,068

38


Source: USDA, April 2019. 

Beef

Brazil was the second largest producer, the fourth largest consumer and the largest exporter of beef in the world in 2018, according to the USDA. From 2018 to 2019, the USDA estimates an increase in global beef production and consumption of approximately 0.6% and 0.8%, 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 Production

Main Beef Producers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

U.S.

12,253

11,943

11,507

Brazil

9,900

9,550

9,284

European Union (28 countries)

8,030

7,869

7,880

China

6,440

6,346

6,169

India

4,300

4,250

4,200

Argentina

3,050

2,840

2,650

Australia

2,306

2,149

2,125

Mexico

1,980

1,925

1,879

Pakistan

1,800

1,780

1,750

Turkey

1,400

1,399

1,484

Others

10,734

10,600

10,731

Total

62,193

60,651

59,659

 

World Beef Consumption

Main Beef Consumers

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

U.S.

12,179

12,052

11,676

European Union (28 countries)

8,049

7,838

7,899

China

7,910

7,313

6,928

Brazil

7,865

7,750

7,652

India

2,744

2,401

2,436

Argentina

2,544

2,547

2,434

Others

18,967

18,778

18,893

Total

60,258

58,679

57,918

 

World Beef Exports

Main Beef Exporters

2018

2017

2016

 

(in thousands of tons – weight in equivalent carcass)

Brazil

2,083

1,856

1,698

Australia

1,662

1,485

1,480

India

1,556

1,849

1,764

U.S.

1,432

1,297

1,160

New Zealand

633

593

587

Others

3187

2882

2734

Total

10,553

9,962

9,423

39


Source: USDA, April 2019.

Production Process

We are a vertically integrated producer of poultry and pork products. We raise poultry and hogs, produce animal feed, slaughter the animals, process poultry and pork to produce processed food products and distribute unprocessed and processed products throughout Brazil and in our export markets.

The following graphic is a simplified representation of our meat production chain.

Meat Production Chain

Poultry

At the beginning of the poultry production cycle, we purchase breeder chicks in the form of eggs from Cobb of Brazil, an affiliate of Cobb Vantress, and Aviagen. We send these eggs to our grandparent stock farms, where the eggs are hatched, and the chicks are 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 resultin day-old chicks that are ultimately used in our poultry products. We produced 1.6 billion day-old chicks, including chickens,Chester® roosters, turkeys, partridge and quail in 2018. We hatch these eggs in our 31 hatcheries.

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We send the day-old chicks, which we continue to own, to outgrowers, 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 8,000 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.

As of December 31, 2018, 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 pork on the spot market.

Piglet producers either purchase parent breeder hogs produced by our company or from producers such as Agroceres and DanBred. We generally purchase piglets from integrated outgrowers near our production facilities, which raise the piglets until they reach a specified weight, 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, and then transport the hogs from these outgrowers to our slaughtering facilities. We have agreements with a total of approximately 3,000 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, but we provide limited technical support. We purchase the hogs raised by these local producers pursuant to contracts with the local producers.

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 separated based on their intended use. These parts become the raw material for the production of pork cuts and specialty meats.

As of December 31, 2018, 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 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. BRF received an equity interest in Minerva in connection with this transaction. The transaction closed on October 1, 2014. On December 7, 2018, we executed a consentan agreement with Marfrig for its acquisition in the public prosecutors’ officeamount of R$100 million of real estate and equipment from our plant located in Várzea Grande in the State of Mato Grosso, which produces approximately 69,000 tons of hamburger meat per year. This transaction closed on January 23, 2019 and, on April 1, 2019, a Supply Agreement with Marfrig became effective, under which Marfrig undertook to provide us with finished goods produced in the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Processed Foods

We sell a variety of processed foods, some of which contain poultry and pork 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, Videira, Lucas do Rio Verde, Rio Verde, Uberlândia, Concórdia, Tatuí, Vitória de Santo Antão, Herval d’Oeste, Lajeado, Ponta Grossa, Paranaguá and Duque de Caxias) processing meat products (such as mortadella, franks, sausage, hamburger and breaded) and non-meat products (such as lasagna, ready-to-eat 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.

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

We also sell frozen French fries, which are imported from Belgium where they are produced and packaged for us by third parties. Prior to the divestitures made in connection with our financial and operational restructuring plan, we sold other frozen vegetables, including broccoli, cauliflower, peas and French beans.  In addition, we produce soy-based products, such as soy meal and refined soy flour, at our plants in Videira, located in the State of Santa Catarina, Dois Vizinhos, in order to promote recovery and compensation of the environmental damage caused by disposal of industrial waste without proper treatment in the Capinzal facility. The TAC is in progress.

On May 20, 2008, we executed a consent agreement with the State of Mato GrossoParaná, and in order to settle environmental liabilities identified by the Environment Secretary of State aiming to make, adapt, correct, restore or minimize the effects of degradation in rural property of our facility located in Lucas do Rio Verde.  The process is waiting for completion formalities.

On June 4, 2008, we executed a consent agreement with the public prosecutors’ office of the State of Minas Gerais to regularize the death of fish and air pollution through the production and emission of gases coming from the company's activities causing smell in the facility located in Uberlândia. The process is waiting for completion formalities.

On October 16, 2008, we executed a consent agreement with the Environment Foundation (Fundação Ambiental) of the Santa Catarina State relating to a missing environmental license for fire prevention that affected our unit in Videira. It seeks the regularization of the industrial park and  permits the reconstruction of the stricken area and construction of extension work through the establishment of compensatory measures.  The process is waiting for completion formalities.

On May 10, 2010, we executed a consent agreement with the Environment Secretary of State of Mato Grosso, in order to regularize the change of water abstraction of the facility located in Mirassol D' Oeste.  The process is waiting for completion formalities.

On May 30, 2011, we executed a consent agreement with the Regional Superintendent of Environmental Regulation (Superintendências Regionais de Regularização Ambiental, “SUPRAM”), Uberlândia, the State of Minas Gerais, for the settlement of legal reserves of rural properties.  The TAC is in progress.

On July 8, 2011, we executed a consent agreement with the public prosecutors’ office of the State of Santa Catarina aiming at the creation of more effective mechanisms to control the environmental impacts of the facility located in Concordia.  The TAC is in progress.

On July 22, 2011, we executed a consent agreement with the public prosecutors’ office of the Mato Grosso do Sul State as a result of certain facts related to water and solid waste discovered in a civil investigation and aiming to foster legal and environmental compliance activities for our facility in Dourados.  The process is waiting for completion formalities.

On September 16, 2011, we executed a consent agreement with the Brazilian Institute for the Environment – IBAMA to plant in an area of 332.55 hectares and keep planted the equivalent to a volume of 79.813 meters, based on volumetric of Eucalyptus clonal forest with high-tech application in land good natural fertility, equivalent to the forest raw materials consumed by the company of our facility in Dourados. The TAC is in progress.

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. The TAC is in progress.


Table of Contents

On February 28, 2012, we signed a consent agreement with the Environmental Institute of Paraná (IAP), resulting from particulate emissions at the facility 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 committedproduce margarines in our plants in Paranaguá, State of Paraná, Uberlândia, State of Minas Gerais and Vitória de Santo Antão, under theQualy, Delineand Claybom brands and in the State of Pernambuco under the brandsQualy andDeline. We sell these products as part of our strategy to implementing improvementsdiversify 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 Islamic consumption. The halal poultry needs to undergo a specific religious/technical procedure of slaughtering and processing, assuring that it was produced according to the Islamic requirements and that it had no contact with prohibited foods or ingredients. In addition, the Brazilian Federal Inspection Service (Serviço de Inspeção Federal, or “SIF”) of MAPA may establish additional requirements for halal food production that we must comply with. BRF is assisted by Islamic entities that are responsible for slaughtering and certifying all of 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 plant equipmentanimal feed production are corn and soy meal mixed with preservatives and micronutrients.  In 2017 and 2018, we also purchased corn from rural producers and small merchants, through cooperatives and from trading companies such as Coamo, Bunge, Cargill 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 and Amaggi, primarily pursuant to long-term contracts. The prices of corn, soybeans and soy meal fluctuate significantly, influenced by international quotes and local currency rates. 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 by using selection criteria to assess suppliers based on the quality of the product, the product performance and reliability.

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 made this a standard process with some suppliers. In addition, we have invested R$2.5 million.  The processa Chain Monitoring Program that is waitingstructured to strengthen social and environmental risk control, support an ethical and responsible business model and develop sustainable partnerships. We seek to accomplish this by undertaking quality audits, distributing our Code of Conduct for completion formalities.

On August 23, 2012, we executedSuppliers, following the Policy for Related-Party Transactions, consulting public data and also including certain related obligations in our contracts with suppliers. When a consent agreementsupplier is not in compliance with the Municipal Environment AgencyCode of Itumbiara,Conduct for Suppliers, we will execute improvement plans or, depending on the severity of the infraction, cancel the contract.

In the case of conflicts of interest with suppliers, we have a specialized team that analyzes the risk of maintaining or replacing the specified supplier. Additionally, through biweekly reviews of publicly available data in Brazil, we identify suppliers that do not comply with legal requirements and/or BRF’s standards. When evaluating suppliers, we regularly analyze, among other things, the following: environmental practices, labor relations and practices and general compliance with laws and regulations. We are in the process of standardizing our monitoring program across all of BRF’s departments, but all of BRF’s new suppliers are required to follow the Code of Conduct for Suppliers and the Policy for Related-Party Transactions, whether in connection with a contract or spot purchase.

Our Code of Conduct for Suppliers which is posted on our website and agreed to in advance by our suppliers, regulates our relationship and focuses on ethical behavior, social and environmental responsibility. In early 2017, we added a stronger risk management approach with criteria focused on quality, sustainability and compliance. We strongly reinforced this focus on the supply chain throughout 2018.

The evaluation and appropriate selection of suppliers and maintaining relationships with those suppliers is critical to our market competitiveness. The supplier assessment process often involves the simultaneous consideration of various aspects 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 process follows established guidelines, supported by systems and rules to be followed by all members of our procurement team. In 2018, we implemented our purchasing system – Ariba SAP, which is an advanced purchasing 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, compliance and sustainability efforts.

Brazilian Market

Brazil is the fifth largest country in the world, both in terms of land mass and population. For 2018, Brazil had an estimated population of 208.5 million people, according to figures from the IBGE. Brazil’s GDP amounted to R$6.26 trillion in 2016, R$6.6 trillion in 2017 and R$6.8 trillion in 2018. In 2018, GDP increased by 1.1% in nominal terms and 0.3% per capita compared to 2017.

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, 2.95% 2017 and 3.75% in 2018 following a trend of relatively high rates. The end-of-period exchange rate, as measured by theBrazilian Central Bank, was R$3.26/U.S.$1.00 in 2016, R$3.31/U.S.$1.00 in 2017 and R$3.87/U.S.$1.00 in 2018, with the real depreciating by 16.9% in 2018 compared to 2017.

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Brazil is one of the largest meat consumers in the world, with per capita consumption in 2018 of 98.5 kilograms, including beef, chicken and pork products, according to the USDA, an increase of 0.7% compared to 2017. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. Given the slight economic recovery in 2018, meat consumption increased in 2018 compared to 2017. As further economic improvement is expected for 2019—market analysts consulted by the Central Bank expect that GDP will increase by 2.6%, while inflation is expected to remain low at 4.02%—meat consumption should increase in 2019. Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. Besides BRF, there are many large producers, including Seara Alimentos S.A. (“Seara”) (which was acquired from Marfrig by JBS S.A. (“JBS”) in 2013), Cooperativa Central Aurora Alimentos (“Aurora”) and JBS. The main producers in the fresh food market face strong competition from a large number of small producers which operate in the informal economy and sometimes offer low quality products at lower prices than those of the large producers. BRF seeks to to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands it owns, such asSadia andPerdigão.

The processed food sector is more concentrated than the fresh food sector in terms of the number of competitors. Consumption of processed products is influenced by a number of factors, including the level of 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 based on available data from A.C. Nielsen, which is reported to them by us and by some of our competitors:

·the Brazilian industrialized food market had revenues of approximately R$20,384 million in 2018 compared with R$19,902 million in 2017;

·the Brazilian frozen food market had revenues of approximately R$4,241 million in 2018 compared with R$4,109 million in 2017; and

·the Brazilian margarine market had revenues of R$3,921 million in 2018 compared with R$4,034 million in 2017.

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 producer 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, including both (i) tariff barriers, which ultimately protect certain domestic markets, and (ii) non-tariff barriers, mainly including import quotas, sanitary barriers and technical/religious barriers. See “Item 5. Operating and Financial Review and Prospects—A. Principal Factors Affecting our Results of Operations––Effects of Trade and Other Barriers” for additional information.

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 53.9%, 53.6% and 53.1% of our net sales in 2018, 2017 and 2016, respectively. Net sales to international markets, including most of our frozen whole and cut chickensand other poultry and frozen pork cuts and beef cuts, accounted for 43.3%, 43.5% and 43.8% of our net sales in 2018, 2017 and 2016, respectively.

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

 

2018

2017

2016

Brazilian Market

 

 

 

Poultry

10.6%

9.5%

8.6%

Pork/Beef

2.6%

2.8%

2.5%

Processed food products

40.6%

41.3%

41.6%

Other Sales

0.1%

0.1%

0.4%

Total Brazilian market

53.9%

53.6%

53.1%

 

International Markets

 

 

 

Poultry

33.2%

31.6%

34.6%

Pork/Beef

2.9%

4.8%

3.7%

Processed food products

6.1%

5.5%

5.4%

Other Sales

1.0%

1.5%

0.2%

Total International markets

43.3%

43.5%

43.8%

 

 

 

 

Other Segments

 

 

 

Poultry

0.1%

0.1%

0.0%

Pork/Beef

0.1%

0.0%

0.0%

Processed food products

0.1%

0.0%

0.0%

Other Sales

2.6%

2.8%

3.0%

Total Other Segments

2.8%

2.9%

3.0%

Total

100%

100%

100%

Seasonality

See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Seasonality” for information regarding seasonality.

Overall Comparison of the Company’s Net Sales for the Years Ended December 31, 2018 and 2017

Brazil

We cover substantially all of the Brazilian population through a nationwide distribution network. In the domestic market, we sell our products directly to supermarkets, wholesalers, retail stores, food services and other institutional buyers. The graphs below set forth our Brazilian net sales to supermarkets, retail stores, wholesalers and food services buyers as a percentage of total domestic net sales for the periods indicated.

Distribution Channel

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Our domestic distribution network comprises 20 distribution centers in several Brazilian states.  Refrigerated trucks transport our products from our processing plants to the distribution centers and from the distribution centers to our customers. We have 27 transit points, previously referred as cross-docking points, in several areas of the country that enable us to unload products from large refrigerated trucks onto smaller trucks or vans for transportation to our customers. We own six of our distribution centers and lease the remaining 14 centers, which are listed below under “—Property, Plant and Equipment.” We do not own the vehicles used to transport our products—we contract with carriers to provide this service for us on an exclusive basis.

International

We operate in four business segments which primarily reflect our geographical structure: Brazil, Halal (consisting of the Middle East, North Africa, Malaysia and Eastern Europe), International (consisting of Africa, Asia Europe, Eurasia and the Americas) and Other Segments. The graphs below set forth a breakdown of our export net sales by segment. 

Competition

Brazil

Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. BRF endeavors to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands it owns, such asSadia andPerdigão.

The graph below shows the most recently available percentage of our market share in 2018 for the selected categories:

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Source: A.C. Nielsen Bimonthly Retail – Margarines and Ready-Made Dishes (October/November 2018 survey); Filled and Chilled (November/December 2018 survey)

* The Becel brand was removed from the Company’s market share reading during the fourth quarter of 2018 due to the cancellation of the joint venture between Unilever Brasil Alimentos Ltda. and BRF.

Because A.C. Nielsen gathers data from those in the industry who report to it voluntarily in the areas of the country and categories covered by it, the overall market sizes on which these percentages were based are smaller than our own internal estimates of the market sizes that we describe above under “—Brazilian Market.” 

JBS is our main competitor in the domestic market. In the processed meat segment, we compete against JBS. In the specialty meat market, we compete against Aurora and JBS, while the remainder of the market is represented by several small producers. In the frozen product market (which includes hamburgers, steaks, breaded meat, meatballs and pasta), we are the leader in terms of market share, followed by JBS, Aurora and Pif Paf Alimentos S.A. (“Pif Paf”) and other smaller producers. In the margarine market, we also maintained a leading position with respect to market share, followed by Bunge Alimentos S.A., JBS (under the brand Doriana) and Vigor Alimentos S.A.

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 health, 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. Cooperatives are increasingly relevant competitors, as they have tax advantages and certain mobility to reassign their production to foreign markets at times when exports become more attractive than the domestic market. In addition, JBS is one of our direct competitors in the international market that has many ofthe same competitive advantages that we have over producers in other countries, including natural resources and competitive input costs.

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Our chicken and pork cuts, in particular, are price-sensitive and sensitive to substitution with other products. Customers sometimes seek to diversify their sources of supply in different countries, even though we often have a lower 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$13.1 billion in 2018, an increase of 6.1% from 2017. Despite the still-challenging international market environment in 2018, we believe we export more than our main Brazilian competitors, as BRF is one of the largest poultry exporters in the world. In 2018, BRF accounted for 11.3% of the world’s poultry trade, according Trademap.

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

Distribution of Products

Brazilian Market 

As of December 31, 2018, we operated 20 distribution centers and 27 transit points. In 2018, we improved productivity based on new technologies in our Brazilian distribution and a 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 Goiás,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 2018, 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.

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

Our sales and distribution efforts abroad are coordinated through offices in Austria, Russia, Singapore, South Korea, China, Japan, Vietnam, Saudi Arabia, the United Arab Emirates, Qatar, Oman, Kuwait, South Africa, 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. On May 14, 2018, the European Union released its decision to remove 12 of our production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. Given the ban of imports from our production facilities, we are no longer able to sell our products from such embargoed production plants in the European Union. This suspension on certain products from Brazilian producers caused challenges for our operations in Europe and required us to reorganize our sales and distribution network by strengthening our partnerships with other food processors, food service operators and local distributors. Furthermore, we leveraged our global sourcing network to supply the European market with products produced outside of Brazil. On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand, based on an enterprise value of US$340 million(equivalent to R$1.3 billion). We expect the closing of this transaction to occur in 2019, but it remains subject to customary closing conditions, including approval by European antitrust authorities.

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In 2018, the Russian government banned all imports of pork from Brazil. As a result, we could no longer sell pork products directly into the Russian market. To maintain BRF’s presence in this market, however, we continued the development of our chicken portfolio to certain distributors in Russia, which then sell our products to local processors and food service operators. 

Asia. China, together with Hong Kong, is our largest market in Asia where we supply a significant volume and diverse portfolio, including chicken wings, chicken feet and pork cuts. Also, with a small distribution operation in Shanghai, BRF has been partnering with retailers to sell Sadia frozen chicken cuts to Chinese consumers. In Japan, our local level of service, quality standards and product range have made us a preferred supplier of chicken products in the market. In South Korea, BRF was the first Brazilian producer to export pork cuts to this market, which has provided new business opportunities in this country. Through the joint venture SATS BRF Food in Singapore, 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 with an innovative portfolio of cooked chicken cuts, sausages and hamburgers. As described above, in February 2019, we agreed to sell our facilities in Thailand, along with most of our European assets, to Tyson International Holding Co. 

 Middle East.In the Middle East, Turkey and Malaysia we sell to wholesalers, retailers, small stores (traditional trade), food service providers, and processors. 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. Our biggest brand,Sadia is recognized as the need for pre-treatmentleading food brand in the Middle East and enjoys the highest Top of effluents directed tailing pondsMind brand within the frozen meat category, according to a study made by Ipsos Research, a third-party consulting firm. In 2017, we announced the beginning of Halal operations, which is focused 100% in the Halal market. We also announced the completion of the facility locatedacquisition of Banvit in Itumbiara.Turkey, through TBQ Foods GmbH, a joint venture formed with the Qatar Investment Authority in May 2017. See “Item 4. Information on the Company—A. History and Development of the Company—Corporate Reorganization of One Foods.”

Africa. Our strategy in Africa has focused on unlocking a number of in-market opportunities that fall under the attractive and affordable processed category. In 2018, we focused on strengthening our partnerships in the region. We pursue sales in Africa through sales to distributors with the widest possible distribution. The TACSadia andPerdixbrands are the primary brands that we have focused on distributing in the region. Angola remains our main market for chicken cuts and processed food, such as franks and mortadella. We also expanded the supply of processed food to South Africa through BRF facilities in Turkey and Thailand. Going forward, we will continue to carefully consider future growth markets. Furthermore, our next phase of developments will emphasize more control over the interactions between the brands and the consumers by gaining additional insight into consumer preferences to strengthen our value proposition and distribution opportunities.

Americas and Other Countries. We sell our products in the Americas through direct sales to key distributors. Additionally, we have strengthened our commercial relationship with Mexican clients in 2017 and 2018, where we primarily sell frozen chicken cuts. Cuba has been one of the main destinations for our processed food products, such as chicken franks. We also sell chicken cuts, including breasts and wings, to processing companies in Canada. Additionally,Sadia is an established brand and holds important market shares in progress.Chile and Uruguay, where we maintain local offices, and in Paraguay, where we operate via consolidated local distributors.

On September 11, 2012,Intellectual Property

Our principal intellectual property consists of our domestic and international brands. We sell our products mainly under the “Sadia,” “Qualy” and “Perdigão” brands in the Brazilian market and mainly under the “Perdix,” “Perdigão,” “Sadia,” “Confidence,” “Fazenda,” “Qualy,” “Borella,” “Sahtein,” “Hilal,” “Halal,” “Sulina” and “Deline” brands in our international markets, as described below under “—Marketing.”

We also own several brands for specific products or product lines. In the Brazilian market, these brands include, but are not limited to, “Sadia Bio,” “Sadia Salamitos,” “Sadia Hot Pocket,” “Perdigão Ouro,” “ChesterPerdigão,” “Perdigão NaBrasa” and “Claybom.” 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, Lebanon and Oman, as well as in the Caucasus, Asian countries and in Latin America. TheSadia mascot is protected both as a registered trademark and copyright pursuant to a registration with the Brazilian National Library, and such protection extends to countries other than Brazil.

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In addition, we executedhave patents registered in Brazil and more than 10 other countries. BRF has applied to have theSadia,Perdigão andQualy trademarks recognized as “well known trademarks” by the Brazilian National Institute for Industrial Property (Instituto Nacional de Propriedade Industrial – INPI), which granted us that recognition forSadia 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

BRF maintains an active marketing program using several channels, including television and video, digital, print and brand experiences. Our marketing efforts are based on (i) adding value to existing categories and diversifying our product lines; (ii) increasing convenience with respect to ourin natura and processed products; (iii) ensuring that our brands are recognized and associated with high quality products; and (iv) 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 theSadia, Perdigão and Qualybrands. Apart from these major brands, we also sell our products under variousSadia brands, including:Soltíssimo, Nuggets, Frango Fácil and BIO.Additionally, we sell products under various Perdigãobrands, including: Chester, Ouro, Na Brasa, Meu Menuand Mini Chicken.

Sadia is our premium brand and it holds a consent agreementleading position in the Brazilian market.Perdigão is also a leading brand in the Brazilian food market, including in the processed food segment.Chester is aPerdigão brand well-known for its Christmas products.

We sell margarine under theQualy,Deline andClaybom brands. We maintain our leading market position with SUPRAM Triangulo MineirotheQualy brand by bringing innovation to the Brazilian market. For example, in 2014 we introduced the first aerated margarine in Brazil and Alto Parnaíbain 2016 we improved theQualy portfolio by adding a proprietary mix of vitamins and minerals to our products, which is called the Q-Mix. Additionally, in 2017 we introduced the first margarine with whole grains,Qualy Multigrãos. This technology to add grains inside the margarine is protected under a patent in partnership with our equipment supplier. In 2018, we launched Qualy Light Zero Lactose, the first zero lactose margarine in the Brazilian market. Through our technical knowledge combined with a deep understanding of consumers’ preferences, we will seek to maintain our leading market positions.

Miss Daisy is BRF’s frozen dessert product line.We have produced and sold Miss Daisy deserts since 1999. We believe the Miss Daisy brand has a leading market position and has been highly resilient to market changes. We offer a wide variety of products under the Miss Daisy brand, including mousse pie, Dutch pie and frozen mousse. In addition, Miss Daisy develops specific products for Christmas kits which have been popular in the Brazilian market.

In our Halal markets, our main brands areSadia andBanvit, which have been leading brands in terms of market share and consumer preference. We also use secondary brands such asPerdix,Hilal andKorpe, as well as other brands such asConfidence,UNEF andGozde in different countries and distribution channels. The opening ofthe Abu Dhabi plant in the Middle East and its current expansion are important milestones in the expansion of our Halal business. Local production of processed food greatly increases our ability to adapt our products to local preferences and has assisted with the expansion of our product portfolio in the Middle East, as we seek to provide the best food products to our customers.

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In addition, our acquisition of Banvit in 2017, the largest producer of poultry in Turkey, has provided us with growth opportunities in processed products beyond the Turkish markets, where we will seek to consolidate our leadership in the Halal animal protein market through a larger portfolio of brands.

Regulation

The MAPA, which is the principal governmental authority overseeing our business, is responsible for the settlement of the legal reserve of the facility located in Uberlândia.  The TAC is in progress.

On October 9, 2012, we executed a consent agreement with the Municipal Department of Environmentregulation and Urban Control of Fortaleza, in the Ceará State,inspection activities related to health, technical (including labeling) and quality criteria related to the expansion projectmaking of animal food products in all industrial units in Brazil. MAPA also 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 from the SIF of MAPA in the industrial units. Their scope of work includes all stages of the distribution center located in that city. The TAC is in progress.

On January 24, 2013, we executed a consent agreement with SUPRAM with respect to the facility located in Uberlândia, which did not have proper licenses.  The unit's operating license was issued in January 2014. We are now just waiting for the approvalproduction process (including receipt of the conclusion of the TAC process.

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 effluentsraw materials, production, labeling and for the restoration of the station area.  The TAC is in progress.

On June 13, 2013, we executed a consent agreement with the federal public prosecutors’ office, aiming at complyingstorage) and they can identify noncompliance with applicable rules, with respectpenalties ranging from a warning to permanent suspension of business activities.

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 responsible for supervising, among other matters, the sanitation 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, 2018

BRF GmbH

Austria

Holding

100.00%

BRF Global GmbH

Austria

Holding and Trading

100.00%

BRF Luxembourg Sarl

Luxembourg

Holding

100.00%

BRF Austria GmbH

Austria

Holding

100.00%

One Foods Holdings Ltd

UAE

Holding

100.00%

Badi Ltd.

UAE

Holding

100.00%

Al-Wafi Al-Takamol International for Foods Products

Saudi Arabia

Importing and Marketing

75.00%

BRF Al Yasra Food K.S.C.C. ("BRF AFC")

Kuwait

Importing, Marketing and Distribution

49.00%

BRF Foods GmbH

Austria

Production, Import and Marketing

100.00%

Al Khan Foodstuff LLC ("AKF")

Oman

Importing, Marketing and Distribution

70.00%

TBQ Foods GmbH

Austria

Holding

60.00%

Banvit Bandirma Vitaminli

Turkey

Industrialization and commercialization of products

91.71%

Federal Foods LLC

UAE

Importing, Marketing and Distribution

49.00%

Federal Foods Qatar

Qatar

Importing, Marketing and Distribution

49.00%

The chart below shows our simplified corporate structure.

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

D.Property, Plant and Equipment

Production

Our activities are organized into three regions: Brazil, Halal (consisting of the Middle East, North Africa, Malaysia and Eastern Europe) and International (consisting of Africa, Asia Europe, Eurasia and the Americas).

In Brazil, we operate 25 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and two soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logistics system in our domestic market, with 20 distribution centers, six of which are owned by us and 14 of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our International and Halal markets, we operate five industrial facilities for meat processing. Additionally, after giving effect to the divestitures made in connection with our financial and operational restructuring plan, we continue to operate 27 distribution centers located in Asia, Southern Cone and the Middle East as well as commercial offices on four continents.

The table below sets forth our production facilities in Brazil.

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Production Plant

State of Location

Activities

Meat Products:

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

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

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

*      Production facilities owned and marketing of cattle obey.  The TAC isoperated by third-party producers who produce according to our specifications.

**    Operates in progress.

On April 24, 2014, we executed a consent agreementaccordance with the public prosecutors’ officeHalal requirements.

***  The activities of the State Goiás because of irregularitiesMineiros plant were suspended by the MAPA on March 17, 2017 in connection with the ground activity resulting from approximate 300 tons of solid material, which did not have proper treatment in the facility located in Rio Verde.Carne Fraca Operation. The TAC is in progress.plant resumed operations on April 11, 2017. For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation.”

On July 13, 2015, we executed a consent agreement with the SUPRAM Triangulo Mineiro and Alto Parnaíba because of irregularities in the irrigation system of the facility located in Uberlândia. The TAC is in progress.

On July 21, 2015, we executed a consent agreement with the public prosecutor office of the Mato Grosso do Sul State in order to renew the operation license of the facility located in Dourados. The TAC is in progress.

On September 18, 2015, we executed a consent agreement with the public prosecutor office****        Exports of the Rio de Janeiro StateVerde, Carambei and Mineiros plants were suspended by the MAPA on March 5, 2018 in orderconnection withTrapaça

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Operation. For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings— Trapaça Operation.”

Part of our real estate assets are subject to regularizeliens incurred in connection with 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

Leased

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

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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.

In the Company’s Health, Safety and Environmental Policy (SSMA Policy), we established guidelines for environmental management based on the principles of the facilityISO 14001. This policy seeks to ensure that our activities and growth are carried out in accordance with applicable environmental regulations. 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.

In 2018, we maintained three plants with ISO 14001 certification, all of which are located in Duque de Caxias. The TACBrazil. 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 progress.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.

New investments that involve an increaseWe use our partnerships with integrated producers to leverage global standards in production or alterationour 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 properly address environmental issues.

We have professional environmental technicians and have trained them in the process includemain aspects of environmental regulations. Our plants are built in line with the analysisapplicable environmental regulations. Our environmental structure is composed of experts, engineers and environmental analysts to assist with the capacityimplementation and monitoring of legal requirements and internal guidelines. We also have the installedsupport of our environmental controllegal 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 to, among other things, address the environmental infraction and remediate any environmental damage. If we do not comply with these obligations, we will be subject to the payment of fines accrued on a daily basis. See “Item 8. FinancialInformation—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Civil, Commercial and Other Proceedings” for additional information.

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Health and Safety

We are committed to the safety of our facilities. All BRF employees and contractors in Brazil and as part of our international operations must follow our safety protocols. In addition, we have hired a consulting firm to assist with further strengthening our health and safety structure, including with respect to ammonia cooling systems, based on internal indicators. Thefire prevention and other health and safety improvements. Our health and safety policies aim of this is to meet the standards already attainedreduce lost time and enhance the company’s performance indicators as a whole.non-lost time accidents, occupational illnesses and material loss incidents. In 2018, we reduced accidents by 45% between February and December.

Insurance Coverage

We purchase insurance to cover all of our plants,plant assets, equipment and inventoriesinventory. Our insurance coverage includes comprehensive general liability insurance coverage for losses, including business interruption insurance. In addition, we maintain a comprehensive products liability, policy, which covers damages arising fromrecalls and other claims in connection with the manufacture, production, 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.


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ITEM 4A.     Unresolved Staff CommentsUNRESOLVED 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 We are committed to operating our business and delivering products to our global customer base in line with our core values: quality, safety and integrity. We have a portfolio of over fourapproximately three 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 and animal feed. We are the holder of brands such asSadia, Perdigão, Qualy, Chester, Perdix,Confidence andPatyHilal.

In 2018, BRF was created from the merger of Perdigão and Sadia, whose consolidation was announced in 2009 and completed in 2012, and operates in the frozen meat (poultry and pork), processed meat foods, margarine, pasta, pizza and frozen vegetable markets. BRF is responsibleaccounted for 14.5%11.3% of the worldworld’s poultry trade, in poultry.according Trademap.

Our portfolio strategy is focused on creating new, convenient, practical and healthy products for our consumers based on their preferences. 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 plants31 industrial facilities in all regions of Brazil, BRF haswe have among itsour main assets a widespread distribution network that enables itsour products to reach Brazilian consumers through 623,000more than 530,000 monthly deliveries and 4047 distribution centers as of December 31, 2018, 20 of which are in the domestic market and 2027 of which are in our export markets.

In Argentina, we are the leading producer, distributor and seller of margarines (with a market share of approximately 95.1% from January 2015 to December 2015), hamburgers (with a market share of approximately 62.1% from January 2015 to December 2015) and sauces (market share of approximately 36.1% from January 2015 to December 2015), according to Nielsen.

In the international market, BRF has a leading brand,Sadia, in various categories in Middle Eastern countries. We maintain 22 sales27 offices outside of Brazil serving customers ofin more than 120150 countries on five continents. We have sixone industrial units in Argentina, two in Europe (BRF UK and BRF Holland) and onefacility in Abu Dhabi, United Arab Emirates, that was inaugurated on November 26, 2014.one in Malaysia and three in Turkey.

BRF hasWe have been a public company since 1980. Our shares have been listed on the BM&FBovespaNovo Mercado of the São Paulo Stock Exchange as BRFS3 since 2006, and weADRs representing our common shares are also traded on the New York Stock Exchange (NYSE - ADR level III). Since 2005, BRF has been part of BM&FBovespa’s Corporate Sustainability Index (ISE) portfolio in acknowledgement of its strong commitment to sustainable development. This commitment has been reinforced and internationally recognized since 2012, upon our entrance into the portfolio of Emerging Markets of Dow Jones Sustainability Index.NYSE.

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

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·        Meat products:Products

·frozen whole and cut chickens

·frozen pork cuts and beef cuts, which we refer to in this Form 20-F, together with frozen whole and cut chickens, as, consisting ofin natura meat, which we define as frozen whole and cut chicken, frozen pork and frozen beef cuts;

·        Processed food products, such asFood Products including the following:

·o   marinated, frozen, whole and cut chickens,chicken, roosters (sold under theChester® brand) and turkeysturkey;

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

·o   frozen processed meats, such as hamburgers, steaks, breaded meat products,kibes kibbeh and meatballsmeatballs;


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·        Other processed products:Processed Products including the following:

·omargarine; and

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

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

·Prior to the divestitures made in connection with our financial and operational restructuring plan, other processed products included mayonnaise, mustard and ketchup

·Other:

·soy meal and refined soy flour, as well as animal feed.ketchup.

In 2015, net sales totaled R$32.2 billion and net income was R$2.9 billion. Net equity as of December 31, 2015 totaled R$ 13.8 billion.

In 2015, we generated 39.9% of our net sales fromin natura poultry, 5.9% fromin natura pork, 1.6% fromin natura beef, 50.0% from processed meat and other processed products, and 2.6% from other products. Our Brazil, sales accounted for 49.8% of our total net sales in 2015 while our sales to international markets accounted for 50.2%.

We are able to reach substantially all of the Brazilian population through a nationwide network of 20 distribution centers. 

In the Brazilian market, we operate 3524 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and threetwo soybean crushing plants, all of them near our raw material suppliers or the main consumer centers. We have an advanced logisticlogistics system in our domestic market, with 20 distribution centers, being 9six of which are owned by BRFus and 1114 of which are leased byfrom third parties, all of which serve the domestic marketsupermarkets, retail stores, wholesale stores, restaurants and export markets.other clients.

In our foreign (international)International and Halal markets, we operate sixfive industrial facilities for meat processing plants, one margarineprocessing. Additionally, after giving effect to the divestitures made in connection with our financial and oil processing plant, one sauce and mayonnaise processing plant and one frozen vegetables processing plant. We have 20operational restructuring plan, we continue to operate 27 distribution centers located overseas,in Asia, Southern Cone and the Middle East as well as commercial 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 and Chile.on four continents.

On November 1, 2013 we entered into an agreement to allocate our cattle operations to Minerva in exchange for 29 million common shares, representing on the date of the conclusion of the transaction, a percentage equivalent to 16.8% of the total and voting capital stock of Minerva that will amount to approximately 15.2% when the entire conversion of mandatory convertible debentures issued by Minerva occurs in 2015. This transaction was concluded on October, 1, 2014.

In 2014, we entered into an agreement with Lactalis for the sale of the assets of our dairy segment, including plants and trademarks, which deal was closed in 2015. As a result, this segment is reported as discontinued operations, which requires the presentation of prior periods of this segment as discontinued operations. Unless stated otherwise, the results and cash flows that we present in this annual report do not consider the results and cash flows from this discontinued operation (dairy segment).

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:

·        Economiceconomic conditions in Brazil and globally;

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


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

·         Sensibilitysensitivity 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;

·        Changeschanges in commodity prices;

·        Fluctuationsfluctuations in the exchange raterates and inflation;

·        Interestinterest rates; and

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·        Freightfreight 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 - "CMN")CMN set the target inflation in Brazil at 4.5% for 2015,2018, with a potential range of two1.5 percentage points higher or lower. However,lower than this target.  The inflation rate, haswhich had been consistently above the target at 5.91%, 6.41%6.29% and 10.67%2.95% in 2013, 20142016 and 2015, respectively.2017, respectively, increased to 3.75% in 2018. Price increases usuallygenerally reduce consumers’ purchasing power, particularly among the lower income class, which eventually limitsand ultimately limit consumption.

The Brazilian labor market registered an average unemployment rate of 8.9%11.6% in the twelve months ended September 30, 2015,2018, according to the IBGE’s National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílios, or “PNAD”), showing deterioration from 6.8%which represents a year before. Also, wages rose 8.7%slight improvement when compared to the rate of 11.8% in 2015 in nominal terms, meaning a decrease in real terms.2017.  Additionally, after several years of rising consumption,decreasing to 81.4 points in 2017, Brazilian consumer confidence decreasedincreased to 65.493.8 points in December 2015, which is well below the average of the previous five years (95.4),2018, according to a Consumer Survey of Fundação Getúlio Vargas (FGV).

Despite the reductionReal GDP in demand, inflation did not slow down, pushed by the adjustment in regulated prices, which rose 18.07%Brazil increased at an average annual rate of 2.4% from 2004 through 2018. For two consecutive years, in 2015 accordingand in 2016, Brazil’s GDP decreased by 3.5%, after increasing 0.5% in 2014. Reacting to this weak economic situation, the Central Bank’s estimate, and inertial component. In an attempt to control rising inflation and to curb inflation expectations,Bank lowered the Brazilian Central Bank’s monetary policy committee, the COPOM, raised the baseSELIC interest rate, knownwhich is the short-term benchmark interest rate. Overall, the long-term trend in interest rates remains downward, from 17.8% as Selic,of December 31, 2004 to 6.5% as of December 31, 2018. In 2018, GDP increased by 250 basis points1.1% compared to 14.25% in the end of 2015, thereby worsening consumer credit conditions.2017.

The Brazilian economy has been experiencing a slowdown – GDP growth rates were 3.9%, 1.8%, 2.7%, and 0.1% in 2011, 2012, 2013 and 2014, respectively, but GDP decreased 3.8% in 2015.

Regarding the currency, Brazilian Realreal depreciated 45%16.9% against the USU.S. dollar in 2015 going2018, from R$2.693.31 per U.S.$1.00 in 2017 to R$4.043.87 per dollar, despite Central Bank’s interventionU.S.$1.00 in the form of currency swap and dollar auctions following buyback agreements aimed at reducing the depreciation. This outlook of depreciation helped improve the competitiveness of Brazilian exports by reducing costs in US dollars. In such a scenario, the financial revenues generated by exports increased when converted into Reais.2018.

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

Effects of Trade and Other Barriers

Global demand for Brazilian poultry pork and beefpork products is significantly affected by trade barriers, whether:including (i) tariff barriers, or high rates thatwhich ultimately protect certain markets;domestic markets, and (ii) non-tariff barriers, mainly including 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.


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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.

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:Certain examples of these barriers are described below.

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

·India has imposed an import tariff of 100% for chicken cuts and processed products since 1995.

·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%.

In August 2017, the Chinese government initiated an antidumping investigation in connection with Brazilian exports of whole chicken and chicken parts, including BRF’s exports. In the preliminary determination released in June 2018, Chinese authorities imposed provisional duties on the imports of poultry products fromBrazil. The investigation ended in February 2019 and Brazilian exporters agreed to certain minimum export prices for sales to China.

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In August 2018, Iraq increased the tariff on poultry products from 10% to 60%.

Non-tariff barriers 

Import quotas

·In 2005, Brazil obtained a favorable result in a panel against the EU at the WTOWorld Trade Organization (“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 has made some changes to its quota criteria as ofin 2013. RegardingWith respect to 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 isRussia also has a quota of 70,000 tons of boneless cuts, of which 56,000 tons are reserved for the EU. AsThe quota for swine it was defined at ais 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 belong to Costa Rica.

·Canada imposes import quotas for bovine and poultry meat. Its bovine quota is applied to all countries, except the U.S., Mexico, Chile and Peru. Its chicken meat quota is valid for all countries.

·In December 2015,2017, Mexico renewed its import poultry meat quota of 300 thousand300,000 tons until 2017 (approximately 250 thousand tons are still available).the end of 2019.

Sanitary barriers

·Between late 2012 and early 2013, several countries (including Japan, South Africa, China, Saudi Arabia, Peru, Lebanon, and others) suspended Brazilian bovine imports after a possible case of BSE in the state of Paraná was reported. Until the end of 2014, some countries, like Japan, still held the suspension.

·Several major markets (despiteDespite progress in trade negotiations)negotiations, several major markets are not yet open to Brazilian meat products due to sanitary barriers. Some examples arebarriers, including the EU, KoreaEuropean Union and Colombia for swine meat,pork and Taiwan and Panama for chicken.

As a result of theTrapaça 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 13 countries with specific sanitary requirements related to Salmonella spp. As a precautionary measure, MAPA also suspended exports from 10 other BRF plants to the European Union on March 15, 2018. This precautionary suspension was lifted on April 18, 2018 by MAPA. On May 14, 2018, the European Union released its decision to remove 12 of our production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. The European Union generally has stricter requirements related to salmonella levels and other food safety standards compared to Brazil and the Dominican Republic for poultry meat.


Tableinternational markets in which we operate. Given the ban of Contents

·Outbreaksimports from our production facilities, we are no longer able to sell our products from such embargoed production plants in the European Union and, therefore, our results of avian flu have already harmed the consumption and exports of chicken meat in several countries, like the U.S., China/Hong Kong, Thailand and Mexico.operations may be further adversely affected if we are not able to direct excess production capacity resulting from such suspension to other markets at similar prices or margins.

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 any 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 may affect the growth rate of our business.

In April 2018, Saudi Arabia instituted a no-stunning requirement for the animal slaughtering process. Saudi Arabia claimed that Brazilian companies’ chicken slaughtering practices violated Halal principles due to the use of an electric shock to stun the birds. BRF and other Brazilian companies were therefore required to migrate their production processes to non-stunning slaughters in order to supply the Saudi Arabian market. We have incurred, and expect to incur, additional costs in connection with these requirements for exporting to Saudi Arabia. In January 2019, the Saudi Arabian Food and Drug Authority published a report authorizing 25 Brazilian facilities to produce chicken meat for the Saudi Arabian market, which included eight of BRF’s plants. One of BRF’s plants(Lajeado/RS) that had previously produced chicken meat for the Saudi Arabian market was not included as an authorized plant. However, the eight authorized plants have provided sufficient capacity to meet the demand of this market. Although we expect to be able to continue to shift production of chicken meat for Saudi Arabia to the authorized plants without a significant disruption to our shipments to Saudi Arabia, such changes may result in decreased revenues and additional expenses.

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Effect of Animal Diseases 

Avian Influenza (H5N1)

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, or by the perception of a risk of such an outbreak.  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, ifIf 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 establishedBrazil has not yet had a plan for the prevention of outbreaksdocumented case 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 whichalthough there are concerns that an outbreak of an animal disease may occur.

If an avian influenza outbreak were tomay occur in Brazil, we might find it necessary to redirect a significant portion of our poultry production to cooked products. Even if we were to do so, however, we expect that demand for our products would still be adversely affected by any instancethe country in the future. Any outbreak of avian influenza in Brazil.

A(H1N1) Influenza 

In 2009, A(H1N1) influenza, spread to many countries. On June 11, 2009, the WHO declared a flu alert level six, signaling a “global pandemic.” Many countries, including Russia and China, have prohibited imports of pork from countries reporting a significant number of cases (Mexico, United States and Canada). On August 10, 2010, the WHO terminated the level six influenza pandemic alert and shifted its focus to a post-pandemic period. During this period, localized outbreaks of different magnitudes may show significant levels of A(H1N1) transmission. In China, for instance, at least 20 people died of A(H1N1) influenza in 2011.

According to the WHO, between September 2011 and January 2012, A(H1N1) influenza viruses circulated at very low levels in general, with some exceptions in Asia and the Americas. Regional A(H1N1) activity was reported by a few countries in Asia and Central America, and there were sporadic human cases reported by United States of America.


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Any further outbreak of A(H1N1) influenzaBrazil could lead to the impositionrequired disposal of costly preventive controls on pork importsour poultry flocks, which would result in our export marketsdecreased sales in the poultry industry, prevent recovery of costs incurred in raising or purchasing poultry and could have a negative impactresult in additional expense for the disposal of poultry. In addition, any outbreak of avian influenza in Brazil would likely lead to immediate restrictions on the consumptionexport of porksome of our products to key export markets. Preventive actions adopted by Brazilian authorities, if any, may not be effective in those markets or inprecluding the spread of avian influenza within Brazil. In addition, any future significant outbreak of A(H1N1)avian influenza in Brazil could eventually lead to pressure to destroydispose of our hogs, even if no link between the influenza cases and pork consumption is shown. Any such destructiondisposal 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)avian influenza, or increasing concerns about this disease, may have a material and adverse effect on our company.us.

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 as Pork andpork epidemic diarrhea (PED)(“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 reductionincrease in terminated animals and consequent increasing price due to low offer. There isn’t yet asupply. A vaccine to prevent the disease has not yet been developed but general management and biosecurity reduce the impact.

In August 2018, there was an outbreak of African swine fever in China. The Chinese market shifted its purchasing as a result of this outbreak. Consequently, our volumes of pork cuts sold to China increased. As a consequence of the Chinese outbreaks of African swine fever, the Brazilian Minister of Agriculture suspended imports of natural pork casings from China. This suspension was precautionary and has since been lifted.

60


In October 2018, an outbreak of Classical Swine Fever was confirmed in the Brazilian State of Ceara. The Brazilian government took action to restrain the outbreak. No formal commercial embargoes were announced as a result of this outbreak.

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 marketinternational markets to the domestic market, increasing the supply of those products internallydomestically and often negatively impacting the selling price. This consequently affects our net sales in the domestic market.

For example, in 20142017, Russia banned the imports of pork and poultry importsmeat from Brazil, alleging the United States, Canada and Europe causing a lackpresence of supply of productsractopamine in the Russiananimals’ feed meal. As a result, nearly 259.4 thousand tons per year had to be redirected to other markets, which ultimately generated excess supply in the domestic market (and consequently much higher prices), which led Brazilian playersand contributed to redirect their products to Russia, causing lower supply and higherthe decrease in pork carcass prices in Brazil. In 2015, some countries banned poultry imports from2018.

Additionally, in April 2018, Saudi Arabia instituted a no-stunning requirement for the United States, in responseanimal slaughtering process. Saudi Arabia claimed that Brazilian companies’ chicken slaughtering practices violated Halal principles due to the avian flu outbreak. Generally, countries have adopted a policyuse of an electric shock to ban onlystun the specific regionbirds. BRF and other Brazilian companies were therefore required to migrate their production processes to non-stunning slaughters in whichorder to supply the outbreaks occurred. However, ChinaSaudi Arabian market.

In August 2017, the Chinese government initiated an antidumping investigation in connection with Brazilian exports of whole chicken and South Korea have been stricter, banningchicken parts, including BRF’s exports. In the country as a whole.preliminary determination released in June 2018, Chinese authorities imposed provisional duties on the imports of poultry products from Brazil. The investigation ended in February 2019 and Brazilian exporters agreed to certain minimum export prices for sales to China.

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 tomonitor fluctuations in supply generated by producers in the U.S., the EUEuropean Union 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) and corn,, which we use to produce substantially all of our own animal feed. For the most part, the commodities we purchase are priced inreais. While input costs are denominated inreal-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 27.4%24.8% of our cost of salesproduction in 2015 and 27.2%2018, compared to 28.5% in 2014.2017. Although we produce most of the hogs we use for our pork products, in 2015 we also purchased hogs on the spot market.market in 2018.


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In addition, the selling prices for many of our products, including substantially all our export products, are highly sensitive to the market price of those commodities and fluctuate together with them. In 2015,2018, the average corn price in Brazil was 11.7%33% higher than the average corn price in 2014.  Besides that, corn2017. Corn prices in December 20152018 were 25.1%19.4% higher than in December 2014.2017. In 2015,2018, the average Soybeansoybean meal price in Brazil was 8.2%27% higher than the average price in 2014.2017. In December 2015,2018, soybean meal prices in Brazil were 15.3%17.2% higher than in December 2014.2017. The effect of decreases or increases in prices of raw materials on our gross margin is greater for fresh products that are more similar to commodities in nature relative to more value-added products.

Our ability to pass on increases in raw material prices through our selling prices is limited by prevailing prices for the products we sell in our domestic and export markets, especially for those products that are more similar to commodities.fresh products.

The following graph illustrates the movements in the price of corn in Ponta Grossa in the State of Paraná (a commonly used reference price for corn in Brazil) for the periods indicated, as reported by Safras & Mercados Ltda., a private Brazilian consulting firm.

Wholesale Corn Prices at Ponta Grossa, State of Paraná (R$ per 60 Kg bag)

Current Brazilian government estimates of the Brazilian corn harvest in 2015-2016 forecast 82.3 million tons in total production, according to a survey undertaken in January 2016 by the National Supply Company (Companhia Nacional de Abastecimento, or “CONAB”), an agency of the Brazilian Ministry of Agriculture, Husbandry and Supply. This estimate represents a decrease of 2.8% from the 84.7 million tons harvested in 2014-2015. Of these 82.3 million tons, 27.8 million tons are forecast for the summer crop and 54.5 million tons for the second crop, to be harvested from July to September 2016.

The following graph illustrates the movements in the price of soybean meal in Ponta Grossa in the State of Paraná (a commonly used reference price for soybean meal in Brazil) for the periods indicated, as reported by Safras & Mercado Ltda.


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

 According to a survey released by CONAB in January 2016, current Brazilian government estimates of the Brazilian soybean harvest in 2015-2016 will be 102.1 million tons. This estimate represents an increase of 6.1% compared to the soybean harvest in 2014-2015.

The estimated total exports of soybeans crop in the 2015-2016 is 57.5 million tons, which represents an increase of 5.8% from the 2014-2015 harvest of 54.3 million tons. Inventory volumes for the 2015-2016 harvest may be increased compared to 2014-2015.  CONAB estimates Brazilian inventories of 1.2 million tons, while in the last season they reached 0.8 million tons.

In 2015, the soybeans average prices was 8.2% higher than the last year. The prices in December 2015 were 27.8% higher than the same period of 2014.

For further information about trends in commodity prices in2016, 2019, see “—“Item 5. Operating and Financial Review and Prospects—D. Trend Information––Raw Materials.”

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Effects of Exchange Rate Variations and Inflation

The table below sets forth, for the periods indicated, the fluctuation of the realagainst 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.the General Market Price Index (Índice Geral de Preços do Mercado, or “IGP-M”).

 

2015

2014

2013

Depreciation of the real against the U.S. dollar

(47.01%)

(13.39%)

(14.64%)

Period-end exchange rate (U.S.$1.00)

R$ 3.90

R$ 2.66

R$2.34

Average (daily) exchange rate (U.S.$1.00) (1)

R$ 3.34

R$ 2.35

R$2.16

Period-end Basic interest rate SELIC (2)

14.25%

11.65%

10.00%

Inflation (INPC) (3)

11.28%

6.23%

5.56%

Inflation (IPCA) (4)

10.67%

6.41%

5.91%

Inflation (IGP-M) (5)

10.54%

3.69%

5.51%

 

2018

2017

2016

Depreciation of the real against the U.S. dollar

(16.92%)

(1.50%)

16.51%

Period-end exchange rate (U.S.$1.00)

R$3.87

R$3.31

R$3.26

Average (daily) exchange rate (U.S.$1.00)(1)

R$3.66

R$3.19

R$3.48

Period-end Basic interest rate SELIC(2)

6.50%

7.00%

13.75%

Inflation (INPC)(3)

3.43%

2.07%

6.58%

Inflation (IPCA)(4)

3.75%

2.95%

6.29%

Inflation (IGP-M)(5)

7.55%

(0.53)%

7.19%

 

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.


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Our results of operations and financial condition are significantly affected by movements in the exchange rate ofreaisto 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 inreais. Appreciation of therealagainst those currencies decreases the amounts we receive inreaisand therefore our net sales from exports, and the opposite occurs when thereal depreciates against those currencies.

The prices of soy meal and soybeans, which are important ingredients offor our animal feedstock, are closely linked to the U.S. dollar. The price of corn, another important ingredient offor 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 therealdepreciates against the U.S. dollar, the cost inreaisof 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 therealhas 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 therealdoes not immediately affect our results of operations because of the length of our production cycles for poultry and pork.

We had total foreign currency-denominated debt obligations in an aggregate amount of R$11,359.711,538.4 million atas of December 31, 2015,2018, representing 74.8%52.1% of our total consolidated indebtedness aton 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 therealin relation to the U.S. dollar or other currencies would increase the amount ofreaisthat 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 inreais. 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.

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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. AtAs of December 31, 2015, 23.5%2018, 38.2% of our total liabilities with respect to indebtedness and derivative instruments of R$15,845.8 million bore interest based on floating interest rates,22,165.5 was either because they were(1) denominated in (or swapped into)reais and borebears interest based on Brazilian floating interest rates, or because they were U.S. dollar-denominated and subject to LIBOR. At that date, our primarysuch as the TJLP, the interest rate exposure was toused in our financing agreements with BNDES or the LIBOR rate. The two primary Brazilian interest ratesCDI, an interbank certificate of deposit rate 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 ourforeign currency swaps and some of our other long-term debt.


Tablereal-denominated indebtedness, or (2) U.S. dollar-denominated and bears floating interest based on LIBOR. Any increase in the CDI, TJLP or LIBOR rates may have an adverse impact on our financial expenses and our results of Contentsoperations.

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,

Average Interest for the Year Ended December 31,

2015

2014

2013

2018

2017

2016

(%)

(%)

TJLP

6.3

5.0

7.0

7.5

CDI

13.4

10.8

8.0

6.4

9.9

14.1

Six-month LIBOR

0.49

0.33

0.41

2.5

1.8

1.1

 

 

Freight Costs

The cost of transporting our products throughout our domestic distribution network and to our foreign customers is significant and is affected by fluctuations in the price of oil. In 2015,2018, 2017 and 2016, freight costs represented approximately 4.9% offrom our net sales. In 2014 and 2013, freight costscontinuing operations represented approximately 5.5%, 5.0% and 5.2%4.9% of our net sales, respectively. For our export goods, we ship many of our goods CFR (cost and freight) or DDP (delivered duty paid), which requires us to pay for freight and insurance costs. Increases in the price of oil tend to increase our freight costs, and fluctuations in exchange rates also significantly affect our international transportation costs.

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 2015, 20142018, 2017 and 2013.2016.

 

Year Ended December 31,

 

2015

2014

2013

 

(%)

(%)

(%)

Continuing Operations

   

Net sales

100.0%

100.0%

100.0%

Cost of sales

68.7%

70.7%

75.1%

Gross profit

31.3%

29.3%

24.9%

Operating income (expenses):

   

Selling expenses

(14.9)%

(14.5)%

(14.9)%

General and administrative expenses

(1.6)%

(1.4)%

(1.5)%

Other operating (expenses), net

(1.4)%

(1.5)%

(1.6)%

Income (loss) from associates and joint ventures

(0.3)%

0.1%

0.0%

Operating income

13.1%

11.8%

6.7%

Financial expenses

(15.6)%

(8.9)%

(5.6)%

Financial income

10.4%

5.4%

2.9%

Income before taxes

7.9%

8.4%

4.0%

 

Year Ended December 31,

 

2018

Restated 2017

Restated 2016

 

(in millions ofreais)

(%)

(in millions ofreais)

(%)

(in millions ofreais)

(%)

Continuing Operations

 

 

 

 

 

 

Net sales

30,188.4

100.0

28,314.1

100.0

27,883.9

100.0

Cost of sales

(25,320.7)

(83.9)

(22,601.2)

(79.8)

(20,934.0)

(75.01)

Gross profit

4,867.7

16.1

5,712.9

20.2

6,949.9

24.9

Operating income (expenses)

 

 

 

 

 

 

Selling

(4,513.6)

(15.0)

(4,208.7)

(14.9)

(4,521.2)

(16.2)

General and administrative

    Impairment loss on trade and other receivables

(551.1)

(46.3)

(1.8)

(0.2)

(462.5)

(67.5)

(1.6)

(0.2)

(442.6)

(53.5)

(1.6)

(0.2)

Other operating expenses

19.3

0.1

(333.4)

(1.2)

1.0

(0.0)

Equity interest of affiliates

17.7

0.1

22.4

0.1

29.3

0.1

Operating income (loss)

(206.3)

(0.7)

663.2

2.3

1,962.9

7.0

Financial expenses

(3,891.1)

(12.9)

(3,445.5)

(12.2)

(4,277.4)

(15.3)

Financial income

1,649.6

5.5

1,563.7

5.5

2,336.5

8.4

Income (loss) before taxes

(2,447.8)

(8.1)

(1,218.6)

(4.3)

22.0

0.1

Current income and social contribution tax

(6.80)

(0.0)

41.2

0.1

(148.8)

(0.5)

Deferred income and social contribution tax

340.1

1.1

210.6

0.7

15.8

0.1

Loss from Continuing Operations

(2,114.5)

(7.0)

(966.8)

(3.4)

(111.0)

(0.4)

Discontinued Operations

 

 

 

 

 

 

Loss from Discontinued Operations

(2,351.7)

(7.8)

(132.1)

(0.5)

(256.3)

(0.9)

Net loss

(4,466.2)

(14.8)

(1,098.9)

(3.9)

(367.3)

(1.3)

Attributable to

 

 

 

 

 

 

Controlling shareholders

(4,448.1)

(14,7)

(1,125.6)

(4.0)

(372.3)

(1.3)

Non-controlling shareholders

(18.1)

(0.1)

26.7

0.1

5.0

0.0

              

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Current income tax

(0.1)%

0.4%

0.0%

Deferred income tax

1.3%

0.8%

0.4%

Income from Continuing Operations

9.2%

9.6%

4.4%

    

Income from Discontinued Operations

0.6%

0.3%

0.2%

Net profit

9.8%

9.9%

4.6%

Attributable to

   

Controlling shareholders

9.7%

9.9%

4.6%

Non-controlling shareholders

0.1%

0.0%

0.0%

 

Unless stated otherwise, the results that we present below do not consider the results from our discontinued operation (dairy segment).operations.

Presentation of Operating Segments and Net Sales Information

Since 2015,In 2018, following the discontinuation of operations in Argentina, Europe and Thailand, we havechanged our operating segments to reflect the Company’s updated operational structure. Our operating segments are: (i) Brazil; (ii) Halal (formerly One Foods); (iii) International, which includes the continuing operations formerly reported netin the Southern Cone segment and no longer presents operations in Europe or Thailand; and (iv) Other Segments. During the fourth quarter of 2018, the Southern Cone segment was eliminated and is now included in the International segment. As a result, the segment presentations for 2017 and 2016 were adjusted and restated. These segments include sales bythrough all of our distribution channels and operations, subdivided according to the following five segments: Brazil; Latin America (Latam); Europe; Middle East and Africa (MEA); and Asia, which primarily reflect our geographical structure. Within these segments, we disclose below a breakdownnature of net sales by the following products: (i) poultry (whole poultry andin natura cuts), (ii) pork (inand others (in natura cuts); (iii) beef cuts (in natura cuts); (iv) others (fish, sheep and vegetables); (v) processed foods (processed foods, frozen and processed derivatives ofproducts derived from poultry, pork and beef, and other processed processed foods, such as margarine, and vegetable and soybean-based products); and (vi)(iv) other sales (including(refined soy flour for food service). The Other business segment is divided into the following business units: (i) Ingredients (commercialization and development of animal feed, soy mealhealth ingredients, human nutrition, plant nutrition (fertilizers) and refined soy flour)health care (health and wellness)) and (ii) Other Sales (commercialization of agricultural products). Because we use the same assets to produce products for all our segments, we do not identify assets by segment, except for intangible assets.assets with an indefinite useful life. See Note 5 to our consolidated financial statements for the year ended December 31, 20152018 for a breakdown of net sales by segment and product line and for a breakdown of intangible assets by each reportable segment.

We report net sales after deducting taxes on gross sales and discounts and returns. Our total sales deductions can be broken down as follows:

·        ICMS Taxes — ICMS is a state value-added tax levied on our gross sales in the domesticBrazilian market at ratesa rate that varyvaries by state and product.product sold. Our average ICMS tax rate in 2015for the year ended December 31, 2018 was approximately 10.0%9.29%. However, exports are not subject to these taxes.

·        PIS and COFINS Taxes — The PIS and the COFINS taxes are federal social contribution taxes levied on gross sales inrevenues from the domesticBrazilian market andat the rates areof 1.65% for PIS and 7.60%7.6% for COFINS.COFINS for the year ended December 31, 2018. However, there(1) exports are some products withnot subject to these taxes, (2) we currently benefit from a zeroreduction of the tax rate (to zero with respect to ourin natura meat of porks andpork, poultry and beef cuts).cuts and (3) our financial revenues had benefitted from a PIS and COFINS tax rate of zero since 2004. However, the enactment of Decree No. 8,426/15 reestablished PIS and COFINS on financial revenues at the rates of 0.65% and 4.0%, respectively. For more information, see “Item 3. KeyInformation—D. Risk Factors—Risks Relating to Brazil—Changes in tax laws or changes in their interpretation may increase our tax burden and, as a result, negatively affect our profitability;” and

64


·        Discounts, Returns and Other Deductions — Discounts, returns and other deductions are unconditional discounts granted to customers, product returns and other deductions from gross sales.

Most of our deductions from gross sales are attributable to the ICMS, PIS and COFINS taxes.  As a result, our deductions from gross sales in the domestic market, which are subject to these taxes, are significantly greater than our deductions from gross sales in our export markets.

The table below sets forth our gross sales and deductions for the years ended December 31, 2015, 20142018, 2017 and 2013:2016:

 

As of December 31,

 

2018

Restated 2017

Restated 2016

 

in millions of reais

Gross sales

 

 

 

Brazil

20,651.2

19,350.0

18,621.1

Halal

9,040.7

7,494.3

6,877.2

International

4,963.1

5,796.0

6,289.3

Other Segments

958.4

895.5

941.7

 

35.613.4

33,535.8

32,729.3

Sales deduction

 

 

 

Brazil

(4,366.4)

(4,161.4)

(3,813.1)

Halal

(747.4)

(800.3)

(650.6)

International

(195.9)

(182.5)

(289.2)

Other Segments

(115.3)

(77.5)

(92.5)

 

(5,425.0)

(5,221.7)

(4,845.4)

Net sales

 

 

 

Brazil

16,284.8

15,188.6

14,808.0

Halal

8,293.3

6,694.0

6,226.6

International

4,767.2

5,613.5

6,000.1

Other Segments

843.1

818.0

849.2

 

30,188.4

28,314.1

27,883.9


Table of Contents

 

As of December 31,

 

2015

2014

2013

 

(in millions ofreais)

Gross sales

 

Brazil

19,867

18,742

17,577

Europe

3,853

3,308

3,260

Middle East and Africa (MEA)

7,643

5,909

5,448

Asia

3,432

3,110

2,811

Latin America (LATAM)

2,439

1,878

2,532

 

37,235

32,947

31,628

Sales deduction

 

 

 

Brazil

(3,830)

(3,318)

(3,091)

Europe

(214)

(215)

(251)

Middle East and Africa (MEA)

(546)

(199)

(191)

Asia

(143)

(37)

(87)

Latin America (LATAM)

(306)

(171)

(222)

 

(5,038)

(3,940)

(3,841)

Net Sales

 

 

 

Brazil

16,038

15,424

14,486

Europe

3,640

3,093

3,010

Middle East and Africa (MEA)

7,098

5,710

5,258

Asia

3,290

3,073

2,724

Latin America (LATAM)

2,132

1,707

2,310

 

32,197

29,007

27,787

The following discussion provides comparisons of our results of our continuing operations for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, based on our consolidated financial statements prepared in accordance with IFRS, as issued by the IASB.

Year Ended December 31, 2018 Compared with Year Ended December 31, 2017

Net Sales

Our net sales increased R$1,874 million, or 6.6%, to R$30.2 billion in 2018 from R$28.3 billion in 2017, primarily due to higher volumes sold in the Brazil segment, which increased 7.1% from 2017, and the Halal segment, which increased 5.7% from 2017, as well as the average price increases in both markets.

Net Sales by Operating Segments

In 2018, we recorded the following net sales and volumes in our operating segments.

Operating Segments

Volume

Change

Net Sales

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Brazil

2,273.0

7.1

16,284.8

7.2

Halal

1,143

5.7

8,293.3

23.9

International

754.8

(11.0)

4,767.1

(15.1)

Other Segments

270.2

12.4

843.2

3.2

Ingredients

56.3

(55.8)

436.2

62.0

Other sales

213.9

89.1

407.0

(25.7)

Total

4,441.0

3.5

30,188.4

6.6

65


Brazil

Our net sales for Brazilian operations increased R$1,096 million, or 7.2%, to R$16.3 billion in 2018 from R$15.2 billion in 2017. This is primarily attributable to the increase in volume sold in the Brazil segment, which increased 7.1% from 2017, as well as the average price increases in the Brazil markets.

 The following table provides a breakdown of our net sales and sales volume for Brazil.

 

Volume

Net Sales

 

2018

2017

Change

2018

2017

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Poultry

532.4

454.0

17.3

3,197.1

2,697.5

18.5

Pork and Others

117.1

108.5

7.9

799.7

792.4

0.9

Totalin natura meat

649.5

562.4

15.5

3,996.8

3,489.8

14.5

Processed foods

1622.9

1,559.5

4.1

12,271.3

11,681.6

5.0

Other sales

0.3

0.3

20.6

16.7

17.1

(2.3)

Total

2,272.7

2,122.2

7.1

16,284.8

15,188.6

7.2

The following table sets forth our average selling prices in Brazil.

 

Average Selling Prices

 

2018

2017

Change

 

(inreais per kg)

(%)

Brazil

7.17

7.16

0.1

Halal

Our net sales for the Halal segment increased R$1,599 million, or 23.9%, to R$8.3 billion in 2018 from R$6.7 billion in 2017, reflecting more favorable prices in 2018, due to the improved balance between supply and demand of products and the consolidation of Banvit for the full year in 2018.

The following table provides a breakdown of our net sales and volumes for Halal.

 

Volume

Net Sales

 

2018

2017

Change

2018

2017

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Poultry

991.4

966.9

2.5

6,632.9

5,554.4

19.4

Others

2.6

2.1

23.8

52.2

34.4

51.6

Totalin natura meat        

993.9

969.1

2.6

6,685.0

5,588.8

19.6

Processed foods

149.4

112.8

32.4

1,295.6

909.7

42.4

Other sales

-

-

-

312.6

195.5

59.9

Total

1,143.3

1,081.9

5.7

8,293.3

6,694.0

23.9

The following table sets forth our average selling prices for Halal.

66


 

Average Selling Prices

 

2018

2017

Change

 

(inreais per kg)

(%)

Halal

7.25

6.19

17.3

International

Our net sales for the International segment decreased R$0.8 billion, or 15.1%, to R$4.8 billion in 2018 from R$5.6 billion in 2017, driven by (i) volume restrictions in Russia; (ii) excess supply in the Japanese market; (iii) temporary anti-dumping measures imposed by China; and (iv) saturation of the Hong Kong market. In addition, the increase in grain prices and a suboptimal channel and product mix offset our restructuring savings. Volumes of pork cuts sold to China increased due to Russia’s partial ban on Brazilian pork imports. The following table provides a breakdown of our net sales and volumes for International.

 

Volume

Net Sales

 

2018

2017

Change

2018

2017

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Poultry

535.7

513.0

4.4

3,382.4

3,401.4

(0.6)

Pork and Others

129.3

156.6

(17.4)

831.1

1,335.5

(37.8)

Totalin natura meat

665.0

669.6

(0.7)

4,213.5

4,736.9

(11.0)

Processed foods

89.7

61.3

46.3

553.4

654.0

(15.4)

Other sales

-

117.6

NM

0.2

222.6

NM

Total

754.7

848.5

(11.0)

4,767.1

5,613.5

(15.1)

        

NM = not meaningful

The following table sets forth our average selling prices for International.

 

Average Selling Prices

 

2018

2017

Change

 

(inreais per kg)

(%)

International

6.31

6.62

(4.5)

Other Segments

Our consolidated net sales for the Other Segments increased R$25.1 million, or 3.1%, to R$843 million in 2018 from R$818 million in 2017, primarily driven by higher volumes of ingredients sold in 2018.

The following table provides a breakdown of our net sales and volumes for Other Segments.

 

Volume

Net Sales

 

2018

2017

Change

2018

2017

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Ingredients

172.0

127.3

35.2

436.1

269.2

62.0

Other sales

98.2

113.1

-13.2

407.0

548.8

-25.9

Total

270.2

240.4

12.4

843.1

818.0

3.1

 

 

 

 

 

 

 

The following table sets forth our average selling prices for Other Segments.

 

Average Selling Prices

 

2018

2017

Change

 

(inreais per kg)

(%)

Other Segments

3.12

3.39

(8.0)

67


Cost of Sales

Cost of sales totaled R$25.3 billion in 2018, an increase of 11.9% compared to R$22.6 billion in 2017. This increase was driven by an increase in grain prices and changes in our product mix to expand the share ofin natura products. In addition, non-recurring factors also negatively influenced cost of sales, including: (i) R$403 million related to theTrapaça/Carne Fraca Operations; (ii) R$196 million from the Operating and Financial Restructuring Plan; and (iii) R$73 million resulting from the Brazilian truck drivers’ strike.

Gross Profit

Our gross profit decreased 14.0% in 2018, to R$4.9 billion, from R$5.7 billion in 2017, with a gross margin of 16.1% in 2018 compared to 20.2% in 2017. This decrease was primarily driven by the operating challenges that impacted our business chain, such as higher grain prices, antidumping measures imposed by China and adjustments to the production process to meet the new non-stunning requirements of Saudi Arabia. We also had a negative impact of R$184 million related to the effects of hedge accounting of export debt (established upon its designated) in 2018.

Operating Expenses

Our operating expenses increased 0.5% in 2018, to R$5.1 billion, from R$5.0 billion in 2017. This increase was mainly driven by (i) higher logistics expense as a result of the expansion of our logistics network to serve a higher average number of points of sale; (ii) increases in inflation; and (iii) exchange rate variation in our international operations. As a percentage of net sales, operating expenses decreased to 16.8% in 2018 from 17.8% in 2017.

Selling Expenses

Our selling expenses increased 7.1% to R$4.5 billion in 2018 from R$4.2 billion in 2017, mainly due to higher logistics expense as a result of the expansion of our logistics network to serve a higher average number of points of sale.

General and Administrative Expenses

Our general and administrative expenses increased 19.2%, to R$ 551.1 million in 2018, from R$462.5 million in 2017, mainly driven by increases in inflation and exchange rate variation in our international operations.

Impairment loss on trade and other receivables

Impairment loss on trade and other receivables decreased to R$46.3 million in 2018 from R$67.5 million in 2017, primarily as a result of the initial adoption of IFRS 9.

Other Operating Income (Expenses), Net

Other operating income (expenses), net, increased to an income of R$19.3 million in 2018 from R$333.4 million of expenses in 2017, mainly because of a decrease in provisions for civil contingencies and the recognition of tax credits after a favorable court decision regarding the exclusion of the ICMS from the PIS/COFINS calculation basis.

68


Income (loss) from associates and joint ventures

Income (loss) from associates and joint ventures decreased to R$17.7 million in 2018 from R$22.4 million in 2017, primarily due to the termination of the Unilever Brasil Alimentos Ltda. joint venture, which was partially offset by increased profit from the joint venture SATS BRF Food in Singapore.

Operating Income (Loss)

As a result of the foregoing, our operating income (loss) before financial expenses decreased to a loss of R$206.3 million in 2018 from an income of R$663.2 million in 2017.

The table below sets forth our operating income (loss) on a segment basis.

 

Operating Income (Loss) by Segment

 

2018

Restated 2017

Change

 

(in millions ofreais)

(%)

 

 

 

 

Brazil

589.5

960.7

(38.6)

Halal

323.9

7.5

NM

International

(287.5)

46.1

(723.6)

Other Segments

78.0

72.0

8.3

Ingredients

115.0

52.1

120.7

Other sales

(37.4)

19.8

(288.9)

Subtotal

703.5

1,086.2

(35.2)

Corporate(1)

(909.8)

(423.0)

115.1

Total

(206.3)

663.2

(131.1)

NM = not meaningful

(1)       The significant variation in Corporate in 2017 and 2018 is attributable to incurred expenses throughout the year, such as those in connection with theCarne Fraca Operation and provisions.

Financial Income (Expenses), Net

Net financial expenses amounted to R$2.2 billion in 2018, an increase of 19.1% compared to R$1.9 billion in 2017, mainly attributable to the negative impact of (i) a higher foreign exchange rate variation on assets and liabilities denominated in foreign currency; and (ii) the fair value adjustment of the Total Return Swap derivative instrument, which expense totaled R$214 million in 2018.

Loss Before Taxes

As a result of the foregoing, our loss before taxes was R$2.5 billion in 2018 and R$1.2 billion in 2017.

Income Tax and Social Contribution

In 2018, income tax and social contribution amounted to income of R$333.3 million. In 2017, income tax and social contribution amounted to income of R$251.8 million. The effective tax rate in 2018 was 13.6% compared to an effective rate of 20.7% in 2017. This variance is primarily attributable to the increase in losses in 2018, deferred tax assets related to tax loss and negative basis not being recognized because the realization was not probable, exchange rate variation on foreign investments, results of our foreign subsidiaries and a write-off of unrealized tax assets due to the merger of SHB with and into BRF.

69


Net Loss

As a result of the above, our net loss from continuing operations increased to R$2.1 billion in 2018 from R$967 million of net loss in 2017. Including the discontinued operations, our net loss increased to R$4.5 billion in 2018 from R$1.1 billion of net loss in 2017.

Year Ended December 31, 20152017 Compared with Year Ended December 31, 20142016

Net Sales

Our net sales increased R$3.2 billion,430.3 million, or 11.0%1.5%, to R$32.228.3 billion in 20152017 from R$29.027.9 billion in 2014,2016, primarily due to stronghigher average selling prices inreais, which was driven by stronger results in Middle East/Africa, Latin Americathe Brazil and Europe and 16.2% higher average prices, which benefited from an average 41.6% devaluation year-on-year of thereal against the U.S. dollar. Thisreal devaluation was instrumental in offsetting the 4.4% decline in volume in 2015, which was in line with our strategy of focusing on products with higher added value.Halal segments.

Net Sales by Operating Segments

In 2015,2017, we recorded the following net sales and volumes in our operating segments.

Operating Segments

Net Sales

Volume

 

(in millions ofreais)

(in thousands of tons)

Brazil

16,038

2,395

Europe

3,640

353

Middle East/Africa (MEA)

7,097

1,080

Asia

3,290

464

Latin America (LATAM)

2,132

224

Total

32,197

4,515

Operating Segments

Volume

Change

Net Sales

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Brazil

2,122.2

4.3

15,188.6

2.6

Halal

1,081.9

16.7

6,694.0

7.5

International

848.5

28.6

5,613.5

(6.4)

Other Segments

240.4

108.2

818.0

(3.7)

Ingredients

127.3

NM

269.2

NM

Other sales

113.1

NM

548.7

NM

Total

4,293.0

14.9

28,314.1

1.5

 


Table of ContentsNM = not meaningful

Brazil

Our net sales for the Brazilian marketoperations increased R$0.6 billion,380.6 million, or 4.0%2.6%, to R$16.015.2 billion in 20152017 from R$15.414.8 billion in 2014,2016. This is primarily dueattributable to a 7.4%an increase in average selling prices (mainly as a result of increases4.3% in prices of processed foods), partially offset by a 3.2% decrease in the volume of products sold, which, in turn, was partially affected by a decrease of 1.7% in average selling prices. Given its lower price,in natura volume significantly increased in 2017, reflecting the still-fragile macroeconomic situation in Brazil, which totaled 2.4 million tonsand impacting directly the operation’s average selling prices.

The following table sets forth our average selling prices in 2015. The volume decrease was mainly due to a 46.2% decrease in the volume of other sales and the disposal of the beef segment, which were partially offset by a 4.2% increase in the volume of processed foods and a 10.2% increase in the volume of poultry in 2015.Brazil.

 

Volume

Net Sales

 

2017

2016

Change

2017

2016

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Poultry

454.0

377.1

20.4

2,697.5

2,410.3

11.9

Pork and Others

108.5

97.7

11.0

792.4

698.7

13.4

Totalin natura meat

562.4

474.8

18.4

3,489.9

3,109.0

12.2

Processed foods

1,559.5

1,513.6

3.0

11,681.6

11,600.8

0.7

Other sales

0.3

45.4

(99.3)

17.1

98.2

(82.6)

Total

2,122.2

2,033.8

4.3

15,188.6

14,808.0

2.6

The following table provides a breakdown of our net sales and sales volume infor Brazil.

 

Volume

Net Sales

 

2015

2014

Change

2015

2014

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

401

364

10.2%

2,293

2,045

12.2%

Pork

96

98

(1.7)%

697

702

(0.8)%

Beef

2

29

(93.6)%

34

339

(90.0)%

Others

0

0

175.2%

3

0

NM

Totalin natura meat

499

491

1.6%

3,027

3,086

(1.9)%

Processed foods

1,713

1,644

4.2%

12,228

11,384

7.4%

Other sales

182

339

(46.2)%

783

955

(18.0)%

Total

2,395

2,474

(3.2)%

16,038

15,424

4.0%

 

Average Selling Prices

 

2017

2016

Change

 

(inreais per kg)

(%)

Brazil

7.16

7.28

(1.7%)

NM=not meaningful70


The following table sets forth our average selling prices in Brazil.

 

Average Selling Prices

 

2015

2014

Change

 

(inreais per kg)

(%)

Brazil

6.70

6.23

7.4%

 

 

 

 

 

InternationalHalal

BRF’s global operations recorded significant results in 2015. At the same time, we advanced in the value chain in the markets in which we operate, introducing products with more added value, improving the prices and the execution at the sales points.

Our net sales for international marketsthe Halal segment increased R$2.6 billion467.4 million, or 7.5%, to R$16.26.7 billion in 20152017 from R$13.66.2 billion in 2014,2016, reflecting our internationalization strategy through acquisitions or partnerships. The regions that stood out were the Middle East/Africa, Latin America (other than Brazil) and Europe. This growth16.7% higher volume of products sold, which was drivenpartially offset by the strong increasea decrease in average selling prices inreais, which partially offset of 7.9% because of the lower volumes.

Middle East/Africa (MEA)

Our net sales for the Middle East/Africa region increased R$1.4 billion, or 24.3%, to R$7.0 billion in 2015 from R$5.7 billion in 2014, primarily due to 30.2% higher average selling prices mainly as a result of increasesstill-challenging competitive landscape in the prices of poultry and processed foods. We continued our acquisition strategyMiddle-East region. 2017 was marked by severe competition, especially in this region, acquiring the frozen foods distribution business from Qatar National Import and Export in 2015. As a result, we began to control distribution in mostfirst half of the Gulf region (strengthening our presenceyear, which resulted in excess volume in the region).


Tableregion and drove prices down. In addition, increased volume of Contents

products sold is also attributable to the consolidation into our financial statements since June 1, 2017 of Banvit’s results of operation, the Turkish operation we acquired in May 2017.

The following table provides a breakdown of our net sales and volumes in the Middle East/Africa region.for Halal.

Volume

Net Sales

Volume

Net Sales

2015

2014

Change

2015

2014

Change

2017

2016

Change

2017

2016

Change

(in thousands of tons)

(%)

(in millions ofreais)

(%)

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

Poultry

964

979

(1,5)%

6,365

4,910

29.6%

966.9

848.7

13.9

5,554.4

5,542.1

0.2

Pork

22

32

(32.3)%

115

160

(28.1)%

Beef

0

7

(96.0)%

2

73

(97.0)%

Others

2

1

48,5%

33

21

58.9%

2.1

2.6

(19.2)

34.4

42.2

(18.5)

Totalin natura meat

988

1,019

(3.1)%

6,515

5,163

26.2%

969.1

851.3

13.8

5,588.8

5,584.3

0.1

Processed foods

91

111

(17.8)%

582

547

6.5%

112.8

76.0

48.4

909.7

642.3

41.6

Other sales

0

0

0.0

195.5

0

NM

Total

1,080

1,131

(4.5)%

7,097

5,710

24.3%

1,081.9

927.3

16.7

6,694.0

6,226.6

7.5

 

 

 

 

NM = not meaningful

The following table sets forth our average selling prices in the Middle East/Africa region.for Halal.

 

Average Selling Prices

 

2015

2014

Change

 

(inreais per kg)

(%)

Middle East/Africa

6.57

5.05

30.2%

 

 

 

 

 

Average Selling Prices

 

2017

2016

Change

 

(inreais per kg)

(%)

Halal

6.19

6.71

(7.9)

 

EuropeInternational

Our net sales for the European region increasedInternational segment declined R$0.5 billion,386.6 million, or 17.7%6.4%, to R$3.65.6 billion in 20152017 from R$ 3.16.0 billion in 2014, primarily due to a better mix of products/channels, mainly as result of establishing a joint venture with Invicta Food for distributing processed foods in markets in2016, driven by the United Kingdom, Ireland and Scandinavia. Moreover, the Brazilian currency depreciation led to an increase of 16.1%decrease in average selling prices in Reais. 

reais. The increase of 28.6 % in volume of products sold and the 27.3% reduction in selling prices inreais were driven by headwinds from theCarne Fraca Operation, but also a more challenging industry environment in specific key markets such as Russia and Japan.

The following table provides a breakdown of our net sales and volumes in Europe.for International.

Volume

Net Sales

Volume

Net Sales

2015

2014

Change

2015

2014

Change

2017

2016

Change

2017

2016

Change

(in thousands of tons)

(%)

(in millions ofreais)

(%)

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

Poultry

95

81

16.8%

855

484

76.7%

513.0

581.4

(11.8)

3,401.4

4,106.5

(17.2)

Pork

78

72

9.1%

703

729

(3.6)%

Beef

5

7

(26.2)%

147

166

(11.5)%

Pork and Others

156.6

90.4

73.2

1,335.5

1,018.7

31.1

Totalin natura meat

178

160

11.5%

1,705

1,379

23.6%

669.6

671.8

(0.3)

4,736.9

5,125.2

(7.6)

Processed foods

175

189

(7.2)%

1,934

1,713

12.9%

61.3

13.2

365.4

654.0

863.7

(24.3)

Other sales

117.6

-25.3

(564.3)

222.6

11.2

NM

Total

353

349

1.3%

3,640

3,093

17.7%

848.5

659.7

28.6

5,613.5

6,000.1

(6.4)

      

71


NM = not meaningful

The following table sets forth our average selling prices in Europe.


Table of Contentsfor International.

 

Average Selling Prices

 

2015

2014

Change

 

(inreais per kg)

(%)

Europe

10.30

8.87

16.1%

 

 

 

 

 

Average Selling Prices

 

2017

2016

Change

 

(inreais per kg)

(%)

International

6.62

9.10

(27.3)

 

AsiaOther Segments

Our consolidated net sales for the Asian region increasedOther Segments declined R$0.2 billion,31.2 million, or 7.1%3.7%, to R$3.3 billion818.0 million in 20152017 from R$ 3.1 billion849.2 million in 2014,2016, primarily due to 16.8% higherdriven by a reduction in average selling prices partially offset by a 8.3% decrease in volumes in the region comparedreais due to the same period in 2014. Our performance in the region iscreation of a result of the work carried out to build distribution partnerships in key markets and progressnew business unit, “Ingredients,” which has products with governments and clients in order to better serve our customers.

In line with our internationalization strategy, we established, in partnership with Singapore Food Industries Pte. Ltd., the joint venture SATS BRF Food Pte. Ltd., of which we hold 49% interest, in order  to increase the offer of processed and semi-processed foods with high added value beginning in the Singapore market and to strengthen our retail presence in the Southeast Asia region. In addition, we acquired Golden Foods Siam (GFS), the third largest exporter of cooked value-added chicken products in Thailand, as part of our strategy to expand our global footprint.lower prices.

The following table provides a breakdown of our net sales and volumes in Asia.for Other Segments.

 

Volume

Net Sales

 

2015

2014

Change

2015

2014

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

411

444

(7,4)%

2,834

2,613

8.5%

Pork

41

48

(15.3)%

350

354

(1.2)%

Beef

2

4

(48.0)%

24

34

(29.8)%

Totalin natura meat

454

496

(8.5)%

3,208

3,002

6.9%

Processed foods

10

10

(1.9)%

82

71

14.4%

Total

464

506

(8.3)%

3,290

3,073

7.1%

 

Volume

Net Sales

 

2017

2016

Change

2017

2016

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

Ingredients

127.3

-

NM

269.2

-

NM

Other sales

113.1

115.4

(2.0)

548.8

849.2

(35.4)

Total

240.4

115.4

108.3

818.0

849.2

(3.7)

 

 

 

 

 

 

 

NM = not meaningful

The following table sets forth our average selling prices in Asia.for Other Segments.

 

Average Selling Prices

 

2015

2014

Change

 

(inreais per kg)

(%)

Asia

7.10

6.08

16.8%

 

 

 

 

Latin America (other than Brazil) (LATAM)

Our net sales for the Latin American region(other than Brazil)increased R$0.4 billion, or 24.9%, to R$2.1 billion in 2015 from R$ 1.7 billion in 2014, primarily due to 48.3% higher average selling prices, mainly as a result of the better mix of products in Argentina with more processed products. The increase in average selling prices was partially offset by a 15.8% decrease in volumes, mainly due to the fact that we ceased shipping to Venezuela in 2015.


Table of Contents

We achieved significant progress in this region in 2015. We established a closer relationship with our customers (business to consumer model – B2C) in line with our global strategy. This regions is significant to us, among other reasons, because it is a success story with respect to our internationalization process due to some relevant acquisitions there, especially in Argentina. We acquired seven brands from Molinos Río de la Plata in October 2015 and entered into the Argentinean pork market through the acquisition of Campo Austral. Once this acquisition is completed, we will gain relevance in the categories of cooked ham, salami, bologna and pork, allowing us to inaugurate the integrated pork chain in Argentina.

The following table provides a breakdown of our net sales and volumes in Latin America.

 

Volume

Net Sales

 

2015

2014

Change

2015

2014

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

73

110

(33.1)%

502

537

(6.6)%

Pork

5

6

(14.6)%

36

32

12.1%

Beef

14

26

(46.2)%

217

255

(14.8)%

Others

5

5

9.1

42

27

56.4%

Totalin natura meat

98

147

(33.3)%

797

851

(6.3)%

Processed foods

126

119

5.7%

1,284

806

59.3%

Other Sales

0

0

-

51

50

2.4%

Total

224

266

(15.8)%

2,132

1,707

24.9%

The following table sets forth our average selling prices in Latin America.

 

Average Selling Prices

 

2015

2014

Change

 

(inreais per kg)

(%)

Latin America

9.52

6.42

48.3%

 

Average Selling Prices

 

2017

2016

Change

 

(inreais per kg)

(%)

Other Segments

3.40

7.36

(53.8)

 

Cost of Sales

Cost of sales totaled R$22.122.6 billion in 2015,2017, an increase of 7.9%8.1% compared to 2014, mainly dueR$20.9 billion in 2016. This increase reflects greater-than-desired idleness at our plants in Brazil and increased indirect costs related to the increase in (i) prices of grains, components of packaginglabor agreements and imported inputs due to the impact of the foreign exchange rate; (ii) freight; and (iii) costs of utilities and energy. The price of grains, a main component of our costs, recorded an increase inreais of 8% in corn, 3% in soy and 11% in soymeal in 2015.utilities. Cost of sales as a percentage of net sales was 68.8%79.9% in 2015,2017, compared to 70.7%74.9% in 2014, an improvement of 2 percentage points despite the appreciation of the US dollar.


Table of Contents2016.

Gross Profit

Our gross profit increased 18.6%decreased 17.4% in 20152017, to R$10.15.7 billion from R$8.56.9 billion in 2014,2016, with a gross margin of 31.3%20.2% in 20152017 compared to 29.3%24.9% in 2014,2016. Such decrease was primarily duedriven by the elevated grain prices during the first half of 2017. In addition, significant commercial obstacles related to a 16.2% increasetheCarne Fraca Operation, in average selling prices in reais in all regions (26.3% increase in theboth domestic and international markets) in 2015.markets, impacted our business operations.

Operating Expenses

Our operating expenses increased 15.0%1.3% in 20152017, to R$5.35.0 billion, from R$4.65.0 billion in 2014, primarily due to the increases of 14.0% in selling expenses and 25.9% in administrative expenses. Operating expenses were 16.5%2016. As a percentage of net sales, operating expenses decreased to 17.8% in 2015, compared2017 from 17.9% in the previous year. This decrease as a percentage of net sales mainly reflects higher net revenue of 1.5% partially offset by operating expenses incurred during the year, especially those related to 15.9% in 2014.theCarne Fraca Operation. Gains from our Zero-Base Budget program partially offset both selling and general and administrative expenses.

72


Selling Expenses

Our selling expenses increased 14.0%decreased 6.9% in 2017, to R$4,805.9 million4.2 billion, from R$4.5 billion in 2015 from R$4,216.5 million in 2014, primarily2016, mainly due to higherlower expenditures for marketing and trade marketing in Brazil, Middle East/Africa and Latin American regions,as well as lower corporate commercial expenses in line with our strategy of strengthening the presence of our brands in these markets. In addition, there has been higher spending on salaries, as a result of collective wage agreements and restructuring of the sales teams in Brazil; and higher spending on storage.Zero-Base Budget program.

General and Administrative Expenses

Our general and administrative expenses increased 25.9%4.5% in 2017, to R$506.1462.5 million, from R$442.6 million in 20152016, mainly driven by the ongoing management of operating expenses in line with our Zero-Base Budget program.

Impairment loss on trade and other receivables

Impairment loss on trade and other receivables increased to R$67.5 million in 2017 from R$402.153.5 million in 2014,2016, which was primarily due to higher personnel expenses in our international operations due to the depreciation of the Brazilian real.

driven by exchange rate variation.

Other Operating Expenses,Income (Expenses), Net

Other operating income (expense), net, decreased to an expense of R$333.4 million in 2017 from an income of R$1.0 million in 2016 mainly because of expenses net,incurred in connection with theCarne Fraca Operation and increased 1.5%provisions for contingencies. For 2017, expenses with provisions for losses in inventories resulting from theCarne Fraca Operation amounted to R$444.7363.4 million, in 2015of which R$157.5 million related to media and communication expenses, attorneys’ fees, freight storage and inventory losses arising from R$438.1 million in 2014, primarily due to a significant increase in losses from doubtful accounts in internationalclosed markets impacted by currency variation.and/or blocked products.

Income (loss) from associates and joint ventures

Income (loss) from associates and joint ventures decreased from an income ofto R$25.622.4 million in 2014 to a loss of2017, from R$103.829.3 million in 2015,2016 primarily due to the impactintegration of Al Khan Foodstuff LLC (“AKF”) as a controlling subsidiary and the termination of the proportional resultjoint venture with K&S Alimentos S.A., resulting in Minerva’s participation.a direct distribution contract with the company.

Operating Income (Loss)

As a result of the foregoing, our operating income before financial expenses increased 21.6%decreased 66.2% in 2017, to R$4.3663.2 million, from R$1.9 billion in 2015 from R$3.5 billion in 2014.2016.

The table below sets forth our operating income (expenses) on a segment basis:

 

Operating Income (Loss) by Segment

 

Restated 2017

Restated 2016

Change

 

(in millions ofreais)

(%)

Brazil

960.7

1,012.1

(5.1)

Halal

7.5

348.6

(97.8)

International

46.1

690.5

(93.3)

Other Segments

72.0

20.7

247.8

Ingredients

52.1

NM

Other sales

19.8

20.7

(4.3)

Subtotal

1,086.2

2,071.9

(46.2)

Corporate(1)

(423.0)

(109.0)

288.1

Total

663.2

1,962.9

(66.2)


NM = not meaningful

(1)       The significant variation in Corporate in 2017 is attributable to incurred expenses throughout the year, such as those in connection with theCarne Fraca Operation and provisions.

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Operating Income by Segment

 

2015

2014

Change

 

(in millions ofreais)

(%)

 

 

 

 

Brazil

1,622

2,002

(19.0)%

Europe

572

553

3.5%

Middle East/Africa (MEA)

1,214

315

285.9%

Asia

703

547

28.7%

Latin America (LATAM)

116

63

86.2%

Total

4,228

3,478

21.6%

73


Financial Income (Expenses), netNet

Net financial expenses totaledamounted to R$1,670.2 million, an increase1.9 billion in 2017, a decrease of 68.6%3.0% compared to 2014,  impacted2016, mainly byattributable to the positive impact of foreign exchange variation on our loans and financing.financing, which reduced the amount ofreais necessary to pay principal and interest on foreign currency debt during 2017.

Income (Loss) Before Taxes

As a result of the foregoing, our income (loss) before taxes increased 2.8%amounted to a loss of R$2,558.31.2 billion in 2017, from income of R$22.0 million in 2015 from R$2,487.6 million in 2014.2016.

Income Tax and Social Contribution

IncomeIn 2017, income tax and social contribution credit in 2015 wereamounted to income of R$389.6251.8 million, compared withto an expense of R$352.6133.0 million in 2014,2016. The effective tax rate in 2017 was 20.7%. This variance is attributable to the larger accumulated losses during 2017 versus 2016, along with benefits from exchange rate variation during 2017 (U.S.$ increase against R$) against losses in 2016 (U.S.$ decline against R$). While the exchange rate variation fully impacts our financial results (U.S.$ debt exposure), the portion that adjusts the value of investments does not have fiscal effect, thus, leading to a decrease of 210.5%, with an effective rate of 15.2% compared to -14.2%fiscal profit in 2014.2016 and a fiscal loss in 2017.

Net Profit

Net profit from our continuing operations increased 37.1% in 2015 to R$2.9 billion with an increase in net margin from 7.4% in 2014 to 9.1% in 2015.

Net profit from our discontinued operations (dairy segment) was R$183.1 million, 103.8% higher than in 2014, when we had a net profit of R$89.8 million.

As a result of the foregoing, net profit (including our discontinued operations) in 2015 was R$3.1 billion, an increase of 39.8% compared to 2014, resulting in a gain of 2.3 percentage points in net margin.

 Year Ended December 31, 2014 Compared with Year Ended December 31, 2013

Net Sales

Our net sales increased R$1.2 billion, or 4.4%, to R$29.0 billion in 2014 from R$27.8 billion in 2013, primarily due to higher average selling prices of products in the period both in Brazil and internationally (10.7% and 13.6% higher, respectively, compared to 2013).

Net Sales by Operating Segment

In 2014, we recorded the following net sales and volumes in our operating segments.

Operating Segments

Net Sales

Volume

 

(in millions ofreais)

(in thousands of tons)

Brazil

15,424

2,474

Europe

3,093

349

Middle East/Africa (MEA)

5,710

1,131

Asia

3,073

506

Latin America (LATAM)

1,707

266

Total

29,007

4,725


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Brazil

Our net sales for the Brazilian market increased R$0.9 billion, or 6.5%, to R$15.4 billion in 2014 from R$ 14.5 billion in 2013, primarily due to 10.7% higher average selling prices, as we managed to pass on increased costs to our products, particularly during the first two quarters of the year, and 1.9% higher volume. 

In 2014, our renewal index was 1.2 percentage points higher than in 2013, totaling 123 product innovations in the Brazilian market.

2014 was an important year for the Company, particularly in terms of the implementation of its strategies for Brazil. In January, we began the new go-to-market (GTM) process in the state of Minas Gerais and, subsequently, introduced it to other states in the country with a view to increase penetration in the areas that the Company did not serve or did not serve directly, increasing the number of clients and the productivity per salesperson, along with cross selling among the brands. The GTM model has already shown positive results.

Aligned with this project, we also focused on enhancing our level of service through investments in systems, IT and staff training, allowing us to capture more sales and avoid losses, as well as to improve our clients’ views of the company. We also undertook a project to reduce the number of SKUs in Brazil by approximately 35.0%, aiming to simplify the processes, also aligned with the project to improve service levels.

These efforts reflected positively in our Brazilian sales in 2014, more specifically in the fourth quarter.

The following table provides a breakdown of changes in net sales and sales volume in the Brazilian market.

 

Volume

Net Sales

 

2014

2013

% Change

2014

2013

% Change

 

(in thousands of tons)

 

(in millions ofreais)

 

In natura meat:

 

 

 

 

 

 

Poultry

364

299

21.7

2,045

1,649

24.0

Pork

98

83

18.1

702

528

33.0

Beef

29

55

(47.3)

339

516

(34.3)

Others

0

1

-

0

20

-

Totalin natura meat

491

438

12.1

3,086

2,712

13.8

Processed foods

1,644

1,652

(0.5)

11,384

10,722

6.2

Other sales

339

482

(29.7)

955

1,052

(9.2)

Total

2,474

2,573

(3.8)

15,424

14,486

6.5

The following table sets forth our average selling prices in the Brazilian market.


Table of Contents

 

Average Selling Prices

 

2014

2013

Change
2014-2013

 

(inreais per kg)

(%)

Brazil

6.23

5.63

10.7

 

 

 

 

International

Our net international sales increased R$0.3 billion, or 2.1%, to R$13.5 billion in 2014 from R$13.3 billion in 2013, primarily due to a rise of 13.6% in the average price of our products, partially offset by a 10.1% decrease in volume, which reflected part of the company’s strategy to reduce volumes in international markets during the year. Our international operating margins increased 7.5 percentage points from 3.4% in 2013 to 10.9% in 2014.

Middle East/Africa (MEA)

Our net sales for the Middle East/Africa region increased R$0.5 billion, or 8.6%, to R$5.7 billion in 2014 from R$5.3 billion in 2013, primarily due to 8.6% higher average selling prices.

This region includes the most significant countries in the Middle East and Africa, the most strategically important region for our process of internationalization. A leader in the region with premium brands and an increasingly consolidated distribution model. In 2012, we began the building of a processed foods plant in Abu Dhabi in the United Arab Emirates which was inaugurated on November 26, 2014. The total investment in the new unit was approximately US$155 million with an annual production capacity of about 70 thousand tons/year in breaded products, hamburgers, pizzas, and industrialized and marinated products. Local production of processed items allows us to adapt the products in line with regional demands and to expand the portfolio in the Food Services channels.

The following table provides a breakdown of our net sales and volumes in the Middle East/Africa region.

 

Volume

Net Sales

 

2014

2013

Change

2014

2013

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

979

1,011

(3.2)%

4,910

4,666

5.2%

Pork

32

33

(3.0)%

160

137

16.8%

Beef

7

16

(56.3)%

73

150

(51.3)%

Others

1

6

(83.3)%

21

30

(30.0)%

Totalin natura meat

1,019

1,066

(4.4)%

5,163

4,983

3.6%

Processed foods

111

63

76.2%

547

270

102.6%

Other Sales

0

1

-

0

6

-

Total

1,131

1,130

0.1%

5,710

5,258

8.6%

The following table sets forth our average selling prices in the Middle East/Africa region.

 

Average Selling Prices

 

2014

2013

Change

 

(inreais per kg)

(%)

Middle East/Africa

5.05

4.65

8.6%

 

 

 

 


Table of Contents

Europe

Our net sales for the European region increased R$83 million, or 2.8%, to R$3.1 billion in 2014 from R$3.0 billion in 2013, primarily due to 32.2% higher average selling prices. In line with our strategy to improve profitability, in 2014 we focused on the improvement of our mix of products in Europe, and stopped selling products in excess of our quota. Russian sanctions against poultry and pork imposed on the United States, the European Union, Canada, Australia and Norway had a direct impact on the trade flow and price of protein in our international markets during the second half of 2014.

The following table provides a breakdown of our net sales and volumes in Europe.

 

Volume

Net Sales

 

2014

2013

Change

2014

2013

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

81

127

(36.2)%

484

668

(27.5)%

Pork

72

119

(39.5)%

729

790

(7.7)%

Beef

7

7

-

166

110

(50.9)%

Totalin natura meat

160

253

(36.8)%

1,379

1,568

(12.1)%

Processed foods

189

195

(3.1)%

1,713

1,440

19.0%

Other Sales

0

0

-

0

2

-

Total

349

448

(22.2)%

3,093

3,010

2.8%

 

 

 

 

 

 

 

The following table sets forth our average selling prices in Europe.

 

Average Selling Prices

 

2014

2013

Change

 

(inreais per kg)

(%)

Europe

8.87

6.71

32.2%

 

 

 

 

Asia

Our net sales for the Asian region increased R$0.3 billion, or 12.8%, to R$3.1 billion in 2014 from R$2.7 billion in 2013, primarily due to 16.7% higher average selling prices, partially offset by a 3.2% decrease in volumes compared to 2013. The Japanese market suffered from high inventories carried over in 2012 and 2013, pressuring prices and margins, although the inventory levels normalized during 2014. The Japanese market played an important role in the company’s structural changes in 2014. During the year we consolidated our presence in Japan and our relationship with our main clients there.

The following table provides a breakdown of our net sales and volumes in Asia.

 

Volume

Net Sales

 

2014

2013

Change

2014

2013

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

444

452

(1.8)%

2,613

2,265

15.4%

Pork

48

54

(11.1)%

354

341

3.8%

Beef

4

7

(42.9)%

34

57

(40.4)%

Totalin natura meat

496

513

(3.3)%

3,002

2,663

12.7%

Processed foods

10

9

(11.1)%

71

58

22.4%

Other Sales

0

0

-

0

3

-

Total

506

522

(3.2)%

3,073

2,724

12.8%

 

 

 

 

 

 

 


Table of Contents

The following table sets forth our average selling prices in Asia.

 

Average Selling Prices

 

2014

2013

Change

 

(inreais per kg)

(%)

Asia

6.08

5.21

16.7%

 

 

 

 

Latin America (other than Brazil) (LATAM)

Our net sales for the Latin American region(other than Brazil) decreased R$0.6 billion, or 26.1%, to R$1.7 billion in 2014 from R$2.3 billion in 2013, primarily due to 34.1% lower volumes in this region, mainly as a result of the decision to reduce shipments to Venezuela.

After assuming control of Quickfood in Argentina, whose main brand is Paty (a leader in the hamburger market), Avex and Dánica, we concentrated our efforts in 2013 on the integration of these companies and streamlining processes, using the distribution chains to expand the Paty and Sadia brands in Argentina, Uruguay, Paraguay and Chile. In 2014, we did a full turn around in these companies, which has already shown positive results despite adverse economic conditions and an increasingly complex outlook for business in Argentina. Argentina is our principal market in the Americas, a region where we possess a solid portfolio of brands, distribution capabilities and local production capacity.

The following table provides a breakdown of our net sales and volumes in Latin America.

 

Volume

Net Sales

 

2014

2013

Change

2014

2013

Change

 

(in thousands of tons)

(%)

(in millions ofreais)

(%)

In natura meat:

 

 

 

 

 

 

Poultry

110

195

(43.6)%

537

869

(38.2)%

Pork

6

5

(20.0)%

32

25

28.0%

Beef

26

23

(13.0)%

255

251

1.6%

Others

5

0

-

27

0

-

Totalin natura meat

147

223

(34.1)%

851

1,144

(25.6)%

Processed foods

119

181

34.3%

806

1,163

(30.7)%

Other Sales

0

0

-

50

3

1,567%

Total

266

404

(34.1)%

1,707

2,310

(26.1)%

The following table sets forth our average selling prices in Latin America.


Table of Contents

 

Average Selling Prices

 

2014

2013

Change

 

(inreais per kg)

(%)

Latin America

6.42

5.72

12.2%

Cost of Sales

Cost of sales totaled R$20.5 billion in 2014, a decrease of 1.8% compared to 2013, primarily due to a fall in corn price during the period, which was partially offset by an increase in soybean meal prices, better slaughtering productivity and better food conversion of our animals (defined as the kilograms of feed needed per eventual kilogram of meat produced). In 2014, cost of sales represented 70.7% of net sales, compared to 75.1% in 2013.

Gross Profit

Our gross profit increased 23.1% in 2014 to R$8.5 billion, with a gross margin of 29.3% in 2014 compared to 24.9% in 2013, primarily due to an increase in the efficiency of our operations and execution of our business strategy of increasing profitability in Brazil and internationally, which translated into more robust earnings.

Operating Expenses

Our operating expenses remained relatively stable, increasing 0.6% in 2014 compared to 2013, primarily due to higher expenditures for marketing, in line with the company´s strategy of having a greater focus on the customer and strengthening our brands. Operating expenses were 17.4% of net sales in 2014, compared to 18.1% in 2013.

Selling Expenses

Our selling expenses increased 1.8% to R$4,216.5 million in 2014 from R$4,141.0 million in 2013, primarily due to higher expenditures for marketing and promotional materials and efforts at the point of sale of our goods.

General and Administrative Expenses

Our general and administrative expenses decreased 5.9% to R$402.1 million in 2014 from R$427.3 million in 2013, primarily as a result of better cost controls that resulted from a company-wide budget review that prioritized essential expenditures and cut various administrative costs.

Other Operating Expenses, Net

Other operating expenses, net, totaled R$438.1 million, a decrease of 4.4% compared to 2013. We had other operating revenues of R$482.4 million in 2014, primarily due to non-recurring gains from a share swap transaction with Minerva, along with net gains from the related one-time disposal of property, plants and equipment that totaled R$111.4 million in 2014. These other operating revenues partially offset other operating expenses of R$920.5 million for 2014, which included our employee profit-sharing plan (R$356.5 million), restructuring expenses (R$214.7 million) and higher provisions for tax and civil/labor risks (R$91.2 million and R$72.4 million, respectively).

Operating IncomeLoss

As a result of the foregoing,above, our operating income before financial expenses increased 83.4% to R$3.5 billion in 2014net loss from R$1.9 billion in 2013.

The table below sets forth our operating income on a segment basis:


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Operating Income by Segment

 

2014

2013

Change

 

(in millions ofreais)

(%)

 

 

 

 

Brazil

2,002

1,441

38.9%

Europe

553

171

223.4%

Middle East/Africa (MEA)

315

85

270.6%

Asia

547

106

416.0%

Latin America (LATAM)

63

94

(33.0)%

Total

3,478

1,896

83,4%

Financial Income (Expenses), net

Net financial expenses totaled R$990.7 million, an increase of 32.5% compared to 2013, primarily due to the premium paid in carrying out the buyback of bonds of R$198.5 million in the second quarter of the year.

Income Before Taxes

As a result of the foregoing, our income before taxes amounted to R$2,487.6 million in 2014 from R$1,148.8 million in 2013, a 116.5% increase for the year.

Income Tax and Social Contribution

Income tax and social contribution expense in 2014 was R$352.6 million compared with R$129.1 million in 2013, an increase of 173.1%, with an effective rate of 14.2% compared to 11.2% in 2013. This increase was primarily due to improvements in the company´s results during the year, both in Brazil and internationally.

Net Profit

Net profit from our continuing operations increased 109.4%to R$966.8 million in 2014 compared to 2013, to2017 from R$2.1 billion, with110.9 million of net margin increasing from 3.7%loss in 2013 to 7.4% in 2014.

Net profit from our2016. Taking into account the discontinued operations, (dairy segment) was R$89.8 million, 90.4% higher than in 2013, when we had a net profit of R$47.2 million, mainly due to higher average prices of our goods as compared to 2013.

As a result of the foregoing, net profit in 2014 was R$2.2 billion, an increase of 108.5% compared to 2013, resulting in a gain of 3.5 percentage points in net margin.

Critical Accounting Policies and Estimates

We have prepared our consolidated financial statements included in this Annual Report on Form 20-F in accordance with IFRS, as issued by the IASB.

The preparation of these financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its estimates and judgments on an ongoing basis and bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following is a description of the critical accounting policies, estimates or judgments that are important to the presentation of our consolidated financial statements.


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Revenue Recognition and Sales Returns

We recognize revenue in accordance with the accrual basis of accounting when all the following conditions are met: (i) the sales value is reliably measurable and when we no longer have control over the goods sold or otherwise related to the property, (ii) the costs incurred or to be incurred due to the transaction can be reliably measured, and (iii) it is probable that economic benefits will be received by us and the risks and benefits were fully transferred to the purchaser.

During the holiday season, when volumes of some of our products increase, we offer certain large customers the ability to return products they are unable to sell. We monitor these product returns and record a provision for the estimated amount of such future returns, based on historical experience and any notification received of pending returns. While we believe that we make reliable estimates for these matters, fluctuations in demand could cause our estimates and actual amounts to differ and could have a negative effect on our net sales in future periods.

Allowances for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses from the inability of our customers to make required payments. In the event of default, collection attempts are made, which include direct contact with customers and collection through third parties. Should these efforts prove unsuccessful, the amount credited to the estimated loss on doubtful accounts is generally reversed against a permanent write-off of the account receivable. If the financial condition of our customers were to deteriorate, we could be required to increase our allowances for doubtful accounts, which would be charged to our statements of income.

Accounting for Business Combinations

Business combinations are accounted for using the purchase method. The cost of an acquisition is the sum of the consideration transferred, based on the fair value at the acquisition date, and the amount of any non-controlling interests in the acquiree. For each business combination, we recognize any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. Costs directly attributable to the acquisition must be accounted for as an expense when incurred.

When acquiring a business, our management evaluates the assets acquired and the liabilities assumed in order to classify and allocate them pursuant to the terms of the agreement, economic circumstances and the conditions at the acquisition date.

We exercise significant judgment in the process of identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and determining their remaining useful lives. We generally engage third-party valuation firms to assist in valuing the acquired assets and assumed liabilities. The valuations of theses assets and liabilities are based on assumptions and certain criteria, which include, in some cases, estimates of future cash flow, discounted at appropriate rates.

Goodwill is initially measured as the excess of the consideration paid over the fair value of the net assets acquired.

After initial recognition, goodwill is measured at cost, net of any accumulated impairment losses. For purposes of impairment testing, the goodwill recognizedloss increased to R$1.1 billion in a business combination, as2017 from the acquisition date, is allocated to each of our cash generating units expected to benefit from the business combination.

Goodwill

As mentioned above, goodwill is initially measured as the excess of the consideration transferred over the fair value of the net assets acquired (net assets identified and liabilities assumed). If the consideration is lower than the fair value of the net assets acquired, the difference should be recognized as a gainR$0.4 billion in the statement of income.


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Under IFRS, goodwill is not amortized and is subject to an annual impairment test. The amount of impairment, if any, is measured based on discounted future free cash flow projections. We identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. We then determine the fair value of each reporting unit by expected discounted operating cash flows generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized first to goodwill until it is reduced to zero and then proportionally to other long-lived assets.

The use of different assumptions for valuation purposes, including estimates of future cash flows and discount rates, could have resulted in different estimates.

The carrying amount of goodwill and the key assumptions used in the annual impairment test are disclosed in note 19 of our consolidated financial statements.

Depreciation, Depletion, Amortization and Impairment

We recognize expenses related to the depreciation of our property, plant and equipment, the depletion of our forests and the amortization of software, patents, our relationships with customers and suppliers, and loyalty among our outgrowers. The rates of depreciation, depletion and amortization are based on our estimates of the useful lives of the assets over the periods during which these assets can be expected to provide benefits to us. In addition, we monitor the use of our property, plant and equipment and intangibles to determine whether any impairment of those assets should be recorded. The determination of such impairment involves judgments and estimates as to whether the asset is providing an adequate return in relation to its book value. While we believe that we make reliable estimates for these matters, the uncertainty inherent to this estimate could lead to results requiring a material adjustment to the carrying amount of the assets in future periods.

Contingencies

We establish provisions when we have a present obligation, formalized or not, as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation and its amount can be reliably estimated.

We are party to various lawsuits, including, tax, labor and civil claims. The assessment of the likelihood of an unfavorable outcome in these lawsuits includes the analysis of the available evidence, the hierarchy of the laws, available former court decisions, as well as the most recent court decisions and their importance of the legal system, as well as the opinion of external legal counsel. We review and adjust the provisions to reflect changes in the circumstances, such as the applicable statute of limitation, conclusions of tax inspections or additional exposures identified based on new claims or court decisions.

A contingent liability recognized in a business combination is initially measured at fair value and subsequently measured at the higher of:

·the amount that would be recognized in accordance with the accounting policy for the provisions above (IAS 37,Provisions, Contingent Liabilities and Contingent Assets); or

·the amount initially recognized less, if appropriate, cumulative amortization recognized in accordance with the revenue recognition policy (IAS 18,Revenue).

As a result of the business combinations with Sadia, Avex and Dánica, we recognized contingent liabilities related to tax, civil and labor claims.

Derivative Instruments

We use derivative instruments that are actively traded on organized markets, and we determine their fair value based on the amounts quoted in the market at the balance sheet date. These financial instruments aredesignated at initial recognition, classified as other financial assets and/or liabilities, with a corresponding entry in the statement of income within “Finance income or cost” or “Cash flow hedge,” which are recorded in shareholders’ equity net of taxes.


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These derivatives are used to hedge exposures to risks or change the characteristics of financial assets and liabilities, unrecognized firm commitments, highly probable transactions or net investments in transactions abroad, and are (1) highly correlated as regards changes in their fair value in relation to the fair value of the hedged item, both at inception and throughout the life of the contract (effectiveness from 80.0% to 125.0%); (2) supported by documents that identify the transaction, the hedged risk, the risk management process and the methodology used to assess effectiveness; and (3) considered as effective in the mitigation of the risk associated with the hedged exposure.  Their accounting follows IAS 39,Financial Instruments:Recognition and Measurement, which allows the application of the hedge accounting methodology with the effects of measurement at fair value recognized in equity and their realization in the statement of income under a caption corresponding to the hedged item. 

Inventory

We record inventories at average acquisition or formation cost, not exceeding market value or net realizable value.  The cost of finished products includes raw materials, labor, cost of production, transport and storage, which are related to all process needed to make the products ready for sale. Provisions for obsolescence, adjustments to net realizable value, impaired items and slow-moving inventories are recorded when necessary. Usual production losses are recorded and are an integral part of the production cost of the respective month, whereas unusual losses, if any, are recorded as other operating expense.

Income Tax and Social Contribution

In Brazil, we are subject to income tax (Imposto de Renda Pessoa Jurídica, or “IRPJ”) and social contribution (Contribuição Social sobre o Lucro Liquido, or “CSLL”), which are calculated monthly on taxable income, at the rate of 15% plus 10% surtax for IRPJ and of 9% for CSLL, after considering the offset of tax loss carryforwards, up to the limit of 30% of annual taxable income.

The income from foreign subsidiaries is subject to taxation pursuant to the local tax rates and legislation.  In Brazil, this income is taxed according to the Brazilian tax rules, respecting the tax treaty signed by each country with Brazil in order to avoid double taxation.

Deferred taxes are recorded on IRPJ and CSLL tax losses, assets and liabilities and temporary differences between the tax basis and the carrying amount of assets and liabilities are classified as non-current assets and liabilities, as required by IAS 01. When the Company’s analysis indicates that the realization of these credits is not probable, a valuation allowance is recorded.

Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity.

Deferred tax assets and liabilities must be measured by rates that are expected to be applicable for the period when the assets are realized and liabilities are settled.

Marketable Securities

Financial investments are financial assets that consist of public and private fixed-income securities, classified and recorded based on the purpose for which they were acquired, in accordance with the following categories:

·Trading securities — acquired for sale or repurchase in the short term, recorded at fair value with variations directly recorded in the statement of income for the year within interest income or expense;


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·Held to maturity — when the Company has the intention and ability to hold them up to maturity, investments are recorded at amortized cost, plus interest, monetary and exchange rate changes, when applicable, and recognized in the statement of income when incurred, within interest income or expense; and

·Available for sale — this category is for the remaining securities that are not classified in any of the categories above, which are measured at fair value, with changes to fair value recorded in other comprehensive income while the asset is not realized, net of taxes. Interest and monetary and exchange variation, when applicable, are recognized in the statement of income when incurred within interest income or expense.

Recently Issued and Not Yet Adopted Accounting Pronouncements Under IFRS

The interpretations and amendments to the rules below were published by IASB. We have not yet adopted these rules. 

IFRS 9 – Financial Instruments

In July 2014, IASB issued the final version of IFRS 9 – Financial Instruments, which reflects all phases of financial instruments project and replaces IAS 39 – Financial Instruments: Recognizing and Measurement and all previous versions of IFRS 9. The standard introduces new guidance about classification and measurement, impairment loss and hedge accounting. Early adoption is not permitted and is effective for periods beginning on January 1, 2018. Retroactive adoption is mandatory, however, the presentation of comparative information is not required. Early adoption of previous versions of IFRS 9, issued in 2009, 2010 and 2013, is permitted if the initial adoption date is prior to February 1, 2015. The adoption of this standard affects only the classification and measurement of financial assets; financial liabilities are exempt. The Company is evaluating the impact of adopting this standard in its consolidated financial statements.

IFRS 15 – Revenue from Contracts with Customers

In May 2014, IASB issued IFRS 15, which establishes a five-step model that will be applied to revenue obtained from a contract with a customer. In accordance with this standard, revenues are recognized based on an amount that reflects the consideration to which an entity expects to be entitled for the transfer of goods or services to a customer. The guidelines of IFRS 15 consider a more structured approach to measure and recognize revenue. This standard is applicable to all entities for periods beginning on January 1, 2018 and will replace all current requirements related to revenue recognition. Retroactive adoption, total or modified, is mandatory for periods beginning on January 1, 2017 or after. Earlier adoption is permitted, but it is under analysis by regulatory entities in Brazil. The Company is evaluating the impact of adopting this standard on its consolidated financial statements.

IFRS 11 – Accounting for Acquisition of Interests in Joint Operations – Amendment

In May 2014, IASB issued amendments to IFRS 11, pursuant to which a joint operator that is accounting for an acquisition of equity interest in which the joint operation activity constitutes a business should apply the guidelines according to IFRS 3. The amendments also clarify that an equity interest previously held in a joint operation is not remeasured on an additional acquisition of interest in the same joint operation while the joint control is held. Additionally, the amendments are not applicable when the parties sharing control, including the reporting entity, are under common control of the parent company.

The amendments are applicable to both the acquisition of the final equity interest in a joint operation and on the acquisition of any additional equity interest in the same joint operation. This standard will be effective prospectively to periods beginning on January 1, 2017 or after. Early adoption in Brazil is not permitted by regulatory entities. The Company is evaluating the impact of adopting this standard on its consolidated financial statements.

IAS 16 and IAS 38 – Clarification of Accountable Methods of Depreciation and Amortization – Amendment


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In May 2014, IASB issued amendments to clarify guidelines of IAS 16 and IAS 38 and determined that revenue reflects a model of economic benefits generated from operation of business (of which the asset is a part), instead of economic benefits generated from the use of the asset. As a result, a method based on revenue cannot be used for property, plant and equipment depreciation purposes and may be used only under very limited circumstances to amortize intangible assets. The amendments will be effective prospectively to amortize intangible assets for fiscal years beginning on January 1, 2016 or after. The Company does not expect any impact on its consolidated financial statements, since it has not used a method based on revenue to depreciate non-current assets.

IFRS 16 – Leases

In January 2016, IASB issued the final version of IFRS 16 – Leases, which superseds IAS 17 – Leases and will apply to periods beggining on January 1, 2019. Early adoption will be permited for entities which also apply IFRS 15 – Revenue from Contracts with Customers. The adoption of this standard will affect mainly property, plant and equipment and financial liabilities, as the treatment between financial and operational lease will no longer exist, being the leases treated in a similar way of the financial lease as per IAS 17. The Company is evaluating the impact of adopting this standard on its consolidated financial statements.

2016.

B.                 Liquidity and Capital Resources

As of December 31, 2015,2018, we held R$5,362.94,869.6 million in cash and cash equivalents. Of that amount, R$4,786.01,047.7 million, or 89.2%21.5%, was held in jurisdictions outside Brazil. We regularly review the amount of cash and cash equivalents held outside of Brazil to determine the amounts necessary to fund the current operations of our foreign operations and their growth initiatives and amounts needed to service our Brazilian indebtedness and related obligations. If these amounts are moved out of these jurisdictions or repatriated to Brazil, we may be subject to Brazilian tax upon repatriation.

Our main cash requirements are the servicing of our debt and capital expenditures relating to expansion programs and acquisitions, and the payment of dividends and interest on shareholders’ equity.expenditures. Our primary cash sources have been cash flowflows from operating activities, loans and other financings, offerings of our common shares and sales of marketable securities. Although we have substantial debt that will mature in the next several years (see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Indebtedness— We have substantial debt that matures in each of the next several years”), we believe that these sourcesour solid position in cash and cash equivalents, along with our cash flows from operating activities and the extension of cashthe maturity of a portion of our current indebtedness will be sufficient to cover our working capital needs and the service of our indebtedness in the ordinary course of our business.

We also havehad a revolving credit facility, with a committed maximum capacity of US$U.S.$1.0 billion to provide additional liquidity for working capital needs. As of December 31, 2018, there were no amounts outstanding under the revolving credit facility. On February 22, 2019, the Company terminated the revolving credit facility.

Cash Flows from Continuing OperationsFlow

Unless stated otherwise,The following table sets forth certain consolidated cash flow information for the comparisons below do not consider the cash flows from our discontinued operations (dairy segment).periods indicated:

 

Year Ended December 31,

 

2018

2017

2016

Cash Flow

(in millions of reais)

Net cash provided by operating activities

295.7

649.4

1,821.1

Net cash used in investing activities

(1,415.9)

(2,134.5)

(4,159.9)

Net cash provided by financing activities

73.9

1,057.1

3,720.6

Effect on exchange rate variation on cash and cash equivalent

71.5

81.9

(387.9)

Net increase (decrease) in cash and cash equivalents

(974.8)

(346.1)

994.0

74


Cash Flows from Operating Activities

We recorded net cash flows provided by continued operating activities of R$4,134.2428.4 million in 2015,2018, compared to cash flows provided by continued operating activities of R$669.8 million in 2017. The reduction of R$241.4 million is mainly due to an increase in net loss to R$2,114.5 million for the year ended December 31, 2018 (compared to a net loss of R$966.8 million for the year ended December 31, 2017), adjusted by the non-cash inflow effects of R$4,425.2 million for the year ended December 31, 2018 (compared to non-cash inflow effects of R$3,752.6 million for the year ended December 31, 2017), which was mainly related to financial results of R$2,241.5 million, partially offset by R$340.1 million of deferred income tax. We recorded net cash flows used in discontinued operating activities of R$132.7 million in 2018, compared to cash flows used in discontinued operating activities of R$20.4 million in 2017, resulting in net cash flows provided by consolidated operating activities (continued and discontinued) of R$295.7 million in 2018, compared to net cash flows fromprovided by consolidated operating activities (continued and discontinued) of R$4,841.6649.4 million in 2014. Our 2015 operating cash flow reflects net income of R$2,928.1 million, net non-cash adjustments of R$4,222.0 million and net changes in operating assets and liabilities of R$3,016.2 million. The net changes in operating assets and liabilities included changes in investments of trading securities, net of redemptions, of R$123.7 million, trade accounts payable of R$882.2 million, supply chain finance of R$719.5 million and biological assets of R$199.3 million, partially offset by interests paid of R$693.9 million, provisions for tax, civil and labor risks of R$194.4 million, trade accounts receivable of R$1,112.5 million, inventories of R$1,066.2 million, other financial assets and liabilities of R$687.4 million and other operating assets and liabilities of R$553.7 million.2017.

We recorded net cash flows provided by continued operating activities of R$4,841.6669.8 million in 2014,2017, compared to cash flows provided by continued operating activities of R$2,337.4 million in 2016. The reduction of R$1,667.6 million is mainly due to an increase in net loss to R$966.8 million for the year ended December 31, 2017 (compared to a net loss of R$111.0 million for the year ended December 31, 2016), adjusted by the non-cash inflow effects of R$3,752.6 million for the year ended December 31, 2017 (compared to non-cash inflow effects of R$3,301.4 million for the year ended December 31, 2016), which was mainly related to financial results of R$1,881.8 million, partially offset by R$449.8 million of non-cash outflow effects from a tax amnesty program (Programa Especial de Regularização Tributária, or “PERT”). We recorded net cash flows used in discontinued operating activities of R$20.4 million in 2017, compared to cash flows used in discontinued operating activities of R$516.3 million in 2016, resulting in net cash flows provided by consolidated operating activities (continued and discontinued) of R$649.4 million in 2017, compared to net cash flows fromprovided by consolidated operating activities (continued and discontinued) of R$3,213.21,821.1 million in 2013. Our 2014 operating cash flow reflects net incomeof R$2,135.2 million, net non-cash adjustments of R$2,674.7 million and net changes in operating assets and liabilities of R$31.6 million. The net changes in operating assets and liabilities included redemptions of trading securities, of R$76.5 million, trade accounts payable of R$202.9 million and biological assets of R$75.3 million, partially offset by changes in interest paid of R$618.7 million, provisions for tax, civil and labor risks of R$259.4 million, cash effect of an increase in trade accounts receivable of R$459.2 million, inventories of R$369.2 million, other financial assets and liabilities of R$284.5 million and other operating assets and liabilities of R$164.1 million.


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Cash Flows Used in Investing Activities

We used R$1,674.01,326.7 million in cash in continued investing activities in 2015,2018, compared to R$1,862.42,050.4 million in 2014.2017, a reduction of R$723.7 million, primarily because we did not use any cash for business combinations in 2018. In 2015,2018, our cash used in investing activities consisted primarily of R$1,710.9578.0 million in restricted cash, capital expenditures in property, plant and equipment, (other than acquisitions) in the amount of R$1,296.7845.3 million and thefor acquisition and formation of breeding stock and R$249.4 million in the amountrestricted cash. We recorded net cash flows used in discontinued investing activities of R$589.489.2 million which were partially offset by ain 2018, compared to cash receiptflows used in discontinued investing activities of R$1,957.384.1 million relatedin 2017, resulting in net cash flows used in consolidated investing activities (continued and discontinued) of R$1,415.9 million in 2018, compared to the salenet cash flows used in consolidated investing activities (continued and discontinued) of dairy segment (net of cash transferred).R$2,134.5 million in 2017.

 

We used R$1,862.42,050.4 million in cash in continued investing activities in 2014,2017, compared to R$1,424.91,294.9 million in 2013.2016, an increase of R$755.5 million, primarily because more cash was used in business combinations in 2017 compared to 2016 (R$325.9 million increase). In 2014,2017, our cash used in investing activities consisted primarily of R$1,119.6 million in business acquisitions, net of cash, mainly related to the Banvit acquisition in the amount of R$1,034.1 million, R$681.2 million in capital expenditures in property, plant and equipment (other than acquisitions) in the amount ofand R$1,021.0681.7 million thefor acquisition and formation of breeding stockstock. We recorded net cash flows used in the amountdiscontinued investing activities of R$517.584.1 million and the acquisition of Federal Foods and the retail frozen foods distribution business of Alyasra Food Company W.L.L. in the amount2017, compared to net cash flows used in discontinued investing activities of R$372.8 million.2,865.0 million

75


in 2016, resulting in net cash flows used in consolidated investing activities (continued and discontinued) of R$2,134.5 million in 2017, compared to net cash flows used in consolidated investing activities (continued and discontinued) of R$4,159.9 million in 2016.

Cash Flows Provided by (Used in) Financing Activities

We recorded cash flows used inprovided by continued financing activities of R$4,313.9173.7 million in 2015,2018, compared to cash flows used inprovided by continued financing activities of R$568.11,047.7 million in 2014.2017. In 2015,2018, we repaid debt in the amount of R$6,031.6 million, partially offset byreceived proceeds from the issuance of debt in the amount of R$6,290.1 million. We acquired shares6,500.1 million, which was partially offset by the repayment of debt in the amount of R$3,765.86,224.0 million. We recorded net cash flows used in discontinued financing activities of R$99.8 million in 2018, compared to increase our treasury shares for compliance with the provisionsnet cash flows provided by discontinued financing activities of our stock options plans. In addition,R$9.4 million in 2015, we paid2017, resulting in net cash flows provided by consolidated financing activities (continued and discontinued) of R$889.173.9 million relatedin 2018, compared to interest on shareholder’s equitynet cash flows provided by consolidated financing activities (continued and dividends.discontinued) of R$1,057.1 million in 2017.

We recorded cash flows used inprovided by continued financing activities of R$568.11,047.7 million in 2014,2017, compared to cash flows provided by continued financing activities of R$757.23,594.0 million in 2013.2016. In 2014,2017, we repaid debt in the amount of R$4,707.8 million, partially offset byreceived proceeds from the issuance of debt in the amount of R$5,116.88,020.2 million, which was partially offset by the repayment of debt in the amount of R$7,332.5 million. In addition,We also received proceeds from the disposal of treasury shares in 2014, we paidthe amount of R$726.0509.9 million related to interest on shareholder´s equity.accelerate the reduction of our financial leverage ratios. We recorded net cash flows provided discontinued financing activities of R$9.4 million in 2017, compared to net cash flows provided by discontinued financing activities of R$126.6 million in 2016, resulting in net cash flows provided by consolidated financing activities (continued and discontinued) of R$1,057.1 million in 2017, compared to net cash flows provided by consolidated financing activities (continued and discontinued) of R$3,720.6 million in 2016.

Dividends and Interest on Shareholders’ Equity

We have not made any distributions for the year ended December 31, 2017 or 2018.

Anextraordinary meeting of the Board of Directors held on June 18, 201530, 2016 approved the distribution of R$425.9513.2 million allocated to the payment of interest on shareholders’ equity. Payments were made on August 14, 2015.15, 2016.

Anextraordinary meeting of the Board of Directors held on December 17, 2015 approved the distribution of R$473.4 million allocated to the payment of interest on shareholders’ equity, and R$91.4 million for an additional distribution in the form of dividends, totaling R$564.8 million. Payments were made on February 12, 2016. (See Note 28.2 to the consolidated financial statements included herein elsewhere.)

An extraordinary meeting of the Board of Directors held on February 25, 2016 approved the distribution of additional dividends available in the profit reserve in the total amount of R$98.2 million. Payments were made on April 1, 2016.

WeIn 2016, we distributed a2015 earnings in the total amount of R$1,088.91,176.3 million to shareholders, with respect to our 2015 result, of which R$899.3986.6 million was in the form of interest on shareholders’ equity and R$189.6 million was in the form of dividends.


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Debt

We use the net proceeds of our indebtedness primarily for capital expenditures, liquidity and purchases of raw materials. The following table sets forth our indebtedness (according to the type of debt and currency) net of cash, cash equivalents, and marketable securities, restricted cash and derivative financial instruments for the periods indicated. 

As of December 31, 2015

As of December 31,

As of December 31, 2018

As of December 31,

Short-term

Long-term

2015

2014

Short-term

Long-term

2018

2017

(in millions ofreais, except where indicated)

(in millions ofreais, except where indicated)

Total debt

(2,628.2)

(12,551.1)

(15,179.3)

(11,589.3)

(4,547.4)

(17,618.1)

(22,165.5)

(20,444.4)

Other financial assets and liabilities, net

(537.2)

-

(537.2)

(214.3)

Cash, cash equivalents and marketable securities:

 

 

Derivative financial instruments, net

(52.7)

-

(52.7)

(209.0)

Cash, cash equivalents and marketable securities and restricted cash

 

 

 

Local currency

774.7

935.9

1,710.6

2,220.5

4,381.7

660.2

5,041.9

4,714.4

Foreign currency

6,669.2

-

6,669.2

4,551.2

1,272.2

214.8

1,487.0

2,629.3

Total

7,443.9

935.9

8,379.7

6,771.7

5,653.9

874.9

6,528.8

7,343.6

Net debt

4,278.5

(11.615.2)

(7,336.8)

(5,032.0)

1,053.8

(16,743.2)

(15,689.4)

(13,309.8)

Exchange rate exposure (in millions of U.S.$)(1)

 

U.S.$ (117)

U.S.$ 567

Exchange rate exposure (in millions of U.S.$)(1)

 

(60.7)

16.7

 

(1)       See Note 4.1.d4.4.b to our consolidated financial statements, which includes a table showing the calculation of our exchange rate exposure on the dates presented.

 

We have made a strategic decision to increase our cash, cash equivalents and marketable securities to provide flexibility in responding to adverse events in our markets.

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The table below provides a further breakdown of our indebtedness by the type of debt.

 

Short-Term Debt

Long-Term Debt

Total Debt as of December 31,

 

As of December 31, 2015

2015

2014

 

(in millions ofreais)

Development bank credit lines

217.4

508.9

726.3

763.7

Other secured debt

32.6

127.1

159.7

294.7

Export credit facilities

-

-

-

967.7

Bonds

4.1

497.9

502.0

501.2

Working capital facilities

1,169.6

-

1,169.6

1,239.8

PESA loan facility

3.3

231.5

234.8

213.5

Agribusiness Receivables Certificate

33.1

992.2

1,025.3

-

Other

1.9

-

1.9

12.5

Local currency

1,462.0

2,357.6

3,819.6

3,993.1

 

 

 

 

 

Export credit facilities

598.8

1,553.5

2,152.3

1,059.4

Bonds

159.4

8,628.4

8,787.8

6,414.0

Development bank credit lines

12.6

11.6

24.2

42.4

Other secured debt

3.5

-

3.5

11.6

Advances on foreign exchange rate contracts

391.1

-

391.1

-

Working capital facilities

0.7

-

0.8

68.8

Foreign currency

1,166.1

10,193.5

11,359.7

7,596.2

 

 

 

 

 

Total:

2,628.2

12,551.1

15,179.3

11,589.3

 

 

Short-Term Debt

Long-Term Debt

Total Debt as of December 31,

 

As of December 31, 2018

2018

2017

 

(in millions ofreais)

Development bank credit lines

220.4

44.1

264.5

570.1

Export credit facilities

39.3

1,586.0

1,625.3

1,889.2

Bonds

-

-

-

503.8

Working capital facilities

1,695.4

4,167.6

5,863.0

2,555.4

PESA loan facility

3.8

269.7

273.4

249.4

Agribusiness Receivables Certificate

1,114.9

1,482.6

2,597.5

3,571.7

Other

3.3

-

3.3

3.6

Local currency

3,077.1

7,550.1

10,627.1

9,343.0

 

 

 

 

 

Export credit facilities

998.7

384.5

1,383.2

2,150.7

Bonds

99.6

9,646.9

9,746.5

8,529.9

Development bank credit lines

-

-

-

3.6

Advances on foreign exchange rate contracts

214.2

-

214.2

-

Working capital facilities

157.8

36.7

194.5

417.1

Foreign currency

1,470.3

10,068.0

11,538.3

11,101.3

Total:

4,547.4

17,618.1

22,165.5

20,444.4

 

The maturity schedule of our indebtedness is as follows:

 

As of December 31, 2018
(in millions of
reais)

Current (through December 31, 2018)

4,555.9

2020

3,395.4

2021

2,936.0

2022

3,072.7

2023 onwards

8,205.5

Total

22,165.5


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As of December 31, 2015

 

(in millions ofreais)

Current (through December 31, 2016)

2,628.2

2017

1,132.5

2018

2,762.0

2019

291.3

2020 to 2024

8,365.4

Total

15,179.3

 

Our principal debt instruments as of December 31, 20152018 are described below. For more information on these facilities, including information on average interest rates and weighted average maturities, see Note 1919.8 to our audited consolidated financial statements.

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Local Currency Debt

Credit Facilities

In July 2018, we refinanced certain of our outstanding credit facilities with Banco do Brasil having maturities in 2018 and 2019 and we also made additional borrowings under such facilities. These refinancing transactions and additional borrowings totaled R$4.3 billion.

Development Bank Credit Lines

BNDES FINEM FacilitiesFacilities.. We have a number of outstanding obligations towith BNDES, including loans under its FINEM program in the amount of R$ 559.2217.6 million as of December 31, 2015.2018. The loans from BNDES were entered into to finance purchases of machinery and equipment and construction, improvement or expansion of our production facilities. Principal and interest on the loans are generally payable monthly, with remaining maturity dates varying from 20162019 through 2020. The principal amount of the loans is denominated inreais, the majority of which bears interest at the TJLP rate plus a margin. These loans are included in the line “Development bank credit lines—Local currency” of the table above.

FINEP FinancingFinancing.We obtained certain financing from the FunderBrazilian Financing Agent for ResearchStudies and Projects (Financiadora de Estudos e Projetos, or “FINEP”), a public financing company under the Brazilian Ministry of Science, Technology and Innovation.Innovation, with maturity dates between 2018 and 2019. The outstanding debt under this financing was R$46.9 million at December 31, 2018. We obtained FINEP credit lines in the amount of R$167.1 million at a fixed rate of 4.37% per year  with reduced chargesrates for projects relatedrelating to research, development and innovation, with remaining maturity dates between 2016 and 2019.innovation. These loans are included in the line “Development bank credit lines—Local currency” of the table above.

Export Credit Facilities

Export Credit Notes.  We have export credit notes in local currency, totaling R$1,625.3 million as of December 31, 2018. These notes bear interest at floating rates (CDI), with maturity dates from 2019 through 2023. These credit lines are included in the line “Local currency—Export credit facilities” in the table above.

Working Capital Facilities

Rural Credit Financing. We have short-term rural credit loans in the amount of R$1,169.65,863.0 million as of December 31, 20152018 with several commercial banks under a Brazilian federal government program that offers favorable interest rates, of 7.24% per year, Asas an incentive to invest in rural activities. We generally useactivities, with maturity dates from 2019 through 2021. Generally, the proceeds of thesesuch loans are used for working capital. These credit lines are included in the line “Working capital facilities—Local currency” in the table above.

Other Secured Debt

Industrial Credit Notes. We had outstanding industrial credit notes (Cédulas de Crédito Industrial), receiving credits from the Constitutional Fund for the Financing of the Northeast (Fundo Constitucional de Financiamento do Nordeste, or “FNE”), in the amount of R$159.6 million at a rate of 8.14% per year  as of December 31, 2015. The notes have maturity dates from 2016 to 2021. These titles are secured by liens on machinery and equipment and real estate mortgages. BRF S.A. guarantees the industrial credit notes with respect to the FNE in an amount in excess of the principal amount of the notes. These loans are included in the line “Other secured debt —Local currency” in the table above.

PESA Loan Facility

PESA. We have a loan facility obtained through the Special Sanitation Program for Agroindustrial Assets (Programa Especial de Saneamento de Ativos, or “PESA”) for an outstanding amount of R$234.8273.4 million as ofDecemberof December 31, 2015,2018, subject to the variation of the IGP-M plus interest of 4.9% per year, secured by endorsements and pledges of public debt securities.


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Tax Incentive Financing Programs

State Tax Incentive Financing Programs. We also had R$1.93.3 million outstanding as of December 31, 20152018 under credit facilities offered by the State of Goiás under state tax incentive programs to promote investments in those states.such state. Under these programs, we are granted credit proportional to the payment of ICMS tax generated by investments in the construction or expansion of manufacturing facilities in these states.that state. The credit facilities have a 20-year term and fixed or variable interest rates. Theserates based on the IGP-M plus a margin. This credit lines areline is included in the line “Other—Local currency” in the table above.

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Agribusiness Receivables Certificate

Agribusiness Receivables Certificate ("CRA"(“CRA”):. On September 29, 2015,April 19, 2016, BRF concluded the Octante Securitizadora SA issued CRAs through aCRA issuance related to the public offeringdistribution of the 1st 3rd Seriesfirst series of the ninth issuance of Octante Securitizadora SAby the securitization company, in the amount of R$1.0 billion net of interest, atwhich were issued with a costcoupon of 96.9% per year96.50% of the CDIInterbank Deposit rate with principal due in a single installment on October 1, 2018 and interest(“DI”), payable every nine months. The CRAs are derived fromrelated to our exports contracted with BRF Global BRF GmbH which have beenand were transferred and/or pledged to Octantethe securitization company. The CRAs matured and were repaid on April 19, 2019.

On December 16, 2016, BRF concluded the CRA issuance related to the public offer of distribution of the first and second series of the first issuance of Vert Companhia Securitizadora, SA.  in the amount of R$1.5 billion, net of interest. The CRAs of the first series were issued at a cost of 96.00% of the DI rate, with the principal maturing in a single installment on December 16, 2020 and interest paid every eight months. The second series of CRAs were issued at a cost of 5.8970% restated by the variation of the IPCA, with the principal maturing in a single installment on December 18, 2023 and interest paid every 16 or 18 months.

On December 31, 2015,2018, the balance of this transaction totalledthese transactions totaled R$1,025.22,597.5 million. This transaction is included inThese transactions comprise the line "Agribusiness“Agribusiness Receivables Certificate"Certificate” in the table above.

Foreign Currency Debt

Development Bank Credit Lines

BNDES Facilities. The values set out in the table mainly consist of a total funding of R$24.2 million related to the BNDES Monetary Unit, or “UMBNDES,” currency basket, which are the currencies in which BNDES borrows, and are subject to interest at the rate of UMBNDES, reflecting fluctuations in daily exchange rates of the currencies of this basket. These loans are guaranteed by BRF and, in most cases, are secured by assets. The covenants under these agreements include limitations on indebtedness, liens and mergers and sales of assets. These loans are included under "Development banks credit lines - foreign currency" in the table above.

Export Credit Facilities

Export Prepayment Facilities. We had several export prepayment facilities in an aggregate outstanding amount of R$1,762.0718.9 million as of December 31, 2015.2018. The indebtedness under these facilities is generally denominated in U.S. dollars, with maturity dates in 2019.between 2019 and 2024. Interest under these export prepayment facilities accrues at LIBOR plus a spread. Under each of these facilities, we receive a loan from one or more lenders secured by the accounts receivable relating to exports of our products to specific customers. The facilities are generally guaranteed by BRF S.A. The covenants under these agreements include limitations on liens and mergers. These credit lines are included in the line “Export credit facilities—Foreign currency” in the table above.

Business Loan Facilities. We had several trade-related business loan facilities in an aggregate outstanding amount of R$390.3668.9 million as of December 31, 2015.2018. The indebtedness under these facilities is denominated in U.S. dollars, with maturity in 2018.Euros. These facilities bear interest at LiborLIBOR plus a margin, payable quarterly. The proceeds from these facilities are used to import raw materials or for other working capital needs. The facilities are generally guaranteed by BRF.BRF S.A. The principal covenants under these agreements include limitations on mergers and sales of assets. These credit lines are included in the line “Export credit facilities—Foreign currency” in the table above. The facilities matured and were repaid in January 2019.

Advances on foreign exchange contracts

Advances on foreign exchange contracts.We had exchange contract advances, modality for funding through exports, with a total balance of R$391.1 million on December 31, 2015, maturing in 2016 and bearing interest at a fixed rate of 1.76%. Since these lines are trade-related, we must later provide proof of export of products on the accounts receivable and export registries.  These loans are included under "Advances on foreign exchange rate contracts"  in the table above.


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Working Capital Facilities

Working capital in foreign currency. These are funds obtained from financial institutions, mainly used for working capital and short-term import financing operations of subsidiaries mainly located in Argentina and Turkey in the amount of R$0.8194.5 million. This funding is denominated in Argentine pesos with interest rates of 22.0% per year, due to the fact that most of the debt is denominated in Argentine pesos, and withTurkish lira and have maturity substantially in 2016.dates between 2019 and 2022. These credit lines are included in the line “Working capital facilities—Foreign currency” in the table above.

Other Secured Debt

Investments Financing. The subsidiaries of BRF in Argentina obtained financing for investment projects for the acquisition of capital goods and /or construction of necessary facilities for the production of goods and /or services and marketing of goods (excluding inventories) in the amount of R$3.5 million, denominated in Argentine pesos with an interest rate of 15.1% and maturity dates in 2016. These loans are included in the line “Other secured debt —Foreign currency” in the table above.

Bonds

BRF Notes 2024.  On May 15, 2014,  BRF completed a Senior Notes offering totaling US$750 million (“Senior Notes BRF 2024”). The principal is due on May 22, 2024 and bears interest at 4.75% per year (yield to maturity of 4.952%), payable semiannually from November 22, 2014.  Of the proceeds from the offering, US$470.6 million was used for a tender offer to buy back part of the debt of the Sadia Overseas Bonds 2017 and BRF Notes 2020, both defined below.  To implement the tender offer, BRF made a payment of US$86.4 million (equivalent to R$198.6 million) to the holders of existing bonds, which was recorded as an interest expense. As of December 31, 2015, there was US$750.0 million outstanding on these bonds.

BFF Notes 2020.2020.On January 28, 2010, BFF International Limited issued Senior Notessenior notes in the amount of US$U.S.$750 million, guaranteed by BRF S.A., bearing a nominal interest rate of 7.25% per year and effective rate of 7.54% per year, and maturing on January 28, 2020 (“BFF Notes 2020”). On June 20, 2013, US$U.S.$120.7 million of these Seniorthe BFF Notes 2020 was replaced by the Senior Notes BRF 2023 (as defined below,below) and, on May 15, 2014, US$U.S.$409.6 million of the BFF Notes 2020 were repurchased with part of the proceeds from the Senior Notes BRF 2024.2024 (as defined below). On May 28, 2015, the Company finishedwe completed a tender offer of bondsfor the BFF Notes 2020 in the amount of US$ U.S.$101.4 million so that the remaining balance totaled US$U.S.$118.3 million on June 30, 2015. On September 21, 2016, we completed a repurchase offer for the BFF Notes 2020 in the amount of U.S.$32.2 million and premiumwas paid in the transaction, net of interest, in the amount of U.S.$4.1 million. The premium paid to holders of existing bonds was recorded as a financial expense. As of December 31, 2015, there was US$118.3 million2018, the outstanding on these bonds.

Sadia Overseas Bonds 2017. In May 2007, Sadia issued bonds in an aggregate amount of US$250.0these notes was U.S.$86.1 million (“Sadia Overseas Bonds 2017”)(equivalent to R$333.6 million). The bonds are guaranteed by

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BRF Notes 2022:On May 29, 2015, we completed a senior notes offering totaling EUR500.0 million, with principal due on May 3, 2022, which bear interest at a rate of 6.875%2.75% per year and mature on May 24, 2017.year. On June 20, 2013, US$29.3 millionDecember 31, 2018, the outstanding amount of these bondsnotes was replaced by the Senior Notes BRF 2023, defined below, and, on May 15, 2014,  US$61.0EUR500.0 million was repurchased with part of the proceeds from the Senior Notes BRF 2024. On May 28, 2015, the Company completed a tender offer of bonds in the amount of US$ 47.0 million so that the remaining balance totaled US$112.8 million on June 30, 2015. As of December 31, 2015, there was US$112.8 million outstanding on these bonds.(equivalent to R$2,219.5 million).

BRF Notes 20232022..  In May 2013, we issued senior notes in an aggregate amount of US$500.0 million, with principal due on May 22, 2023 and bearing interest at a rate of 3.95% per year, payable semiannually as of November 22, 2013. As of December 31, 2015, there was US$500.0 million outstanding on these bonds.

BRF Notes 2018.In May 2013, we issued senior notes in an aggregate amount of R$500.0 million, with principal due on May 22, 2018, and bearing interest at a rate of 7.75% per year, payable semiannually as of November 22, 2013 (“BRF Notes 2018”). As of December 31, 2015, there was R$500.0 million outstanding on these bonds.


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BRF Notes 2022. InOn June 6, 2012, we issued senior notes in an aggregate amount of US$U.S.$500.0 million. The bonds were guaranteed by BRF S.A., bear interest at a rate of 5.875% per year and mature on June 6, 2022. Later the same month, we issued an additional US$U.S.$250.0 million of senior notes under the same indenture and with the same terms and conditions (collectively, the “BRF Notes 2022”). On May 28, 2015, the Companywe completed a tender offer of bondsfor the BRF Notes 2022 in the amount of US$ U.S.$577.1 million so that the remaining balance totaled US$U.S.$172.9 million on June 30, 2015. On September 21, 2016, we completed a repurchase offer for the BRF Notes 2022 in the amount of U.S.$54.2 million, and premium was paid in the transaction, net of interest, in the amount of U.S.$5.7 million. The premium paid to holders of existing bonds was recorded as financial expense. As of December 31, 2015, there2018, the outstanding amount of these notes was US$172.9U.S.$118.7 million outstanding on these bonds.(equivalent to R$459.9 million).

BRF Notes 20222023.: In May 2013, we issued senior notes in an aggregate amount of U.S.$500.0 million, with principal due on May 22, 2023 and bearing interest at a rate of 3.95% per year (“Senior Notes BRF 2023”). As of December 31, 2018, the outstanding amount of these notes was U.S.$500.0 million (equivalent to R$1,937.4 million).

BRF Notes 2024.On May 29, 2015,15, 2014, we completed a senior notes offering totaling EUR500,0U.S.$750 million with(“Senior Notes BRF 2024”). The principal is due on May 3, 2022, issued with22, 2024 and bears interest at a coupon (interest) of 2.75% per year (Yield to maturity of 2.822%), to be paid annually as of June 3, 2016. On December 31, 2015, there were EUR500,0 million outstanding of these notes.

Bonds Quickfood. In 2013, a subsidiary of BRF in Argentina, Quickfood, issued notes guaranteed by BRF, in the amount of ARS150.0 million with a nominal interest rate of 21.8%4.75% per year andyear. Of the proceeds from the offering, U.S.$470.6 million was used for a debt repurchase tender offer. To implement the tender offer, BRF made a payment of U.S.$86.4 million (equivalent to R$198.6 million) to the holders of existing bonds, which was recorded as an effective rate of 22.1% per year, with maturity dates between 2015 and 2016. In 2014, Quickfood again issued notes guaranteed by BRF, in the amount of ARS436.0 million with a nominal interest rate of 24.1% per year and an effective rate of 27.0% per year, with maturity dates between 2015 and 2018. In 2015, Quickfood again issued notes guaranteed by BRF, in the amount of ARS475.2 million with a nominal interest rate of 24.3% per year and an effective rate of 29.0% per year, with maturity dates between 2018 and 2022.expense. As of December 31, 2015, there2018, the outstanding amount of these notes was ARS917.6U.S.$750.0 million outstanding on these bonds.(equivalent to R$2,906.1 million).

BRF Notes 2026:On September 29, 2016, we, through our wholly-owned subsidiary BRF GmbH, issued senior notes in the aggregate amount of U.S.$500.0 million, which bear interest at a rate of 4.35% per year and mature on September 29, 2026. As of December 31, 2018, the outstanding amount of these notes was U.S.$500.0 million (equivalent to R$1,937.4 million).

Derivatives Financial Liabilities, Net

We entered into foreign currency exchange derivatives under which we had exposurea fair value of negative R$527.761.5 million and commodity derivatives under which we had exposurea fair value of R$9.58.8 million, in each case as of December 31, 2015.2018. The counterparties include several Brazilian financial institutions and involve interest rate swaps, and the purchase and sale of currencies and commodities. Their maturity dates vary from 20162018 through 2019. These transactions do not require any guarantees and follow the rules of the São Paulo Stock Exchange or CETIP S.A.,B3, a trading and securities registration company. These derivatives are recorded in our balance sheet as other financial assets and liabilities. See “Item 11—11. Quantitative and Qualitative Disclosures About Market Risk.”

International Credit Facilities

Revolving Credit Facility. In order to improveAdditionally, on August 16, 2017, we sold 12,134,300 of our liquidity management, in 2014, BRFcommon shares at a cost of R$650,373 thousand, with a sale value of R$509,875 thousand and, its wholly owned subsidiary BRF Global GmbHon the same date, entered into a revolving credit facility (“Revolver Credit Facility”)Total Return Swap, or TRS, contract with Banco Bradesco, in amounts equivalent to the common shares sold. The TRS contract had a syndicatematurity date of 28 banks, in the amount of US$1.0 billion and maturing in MayFebruary 5, 2019. The transactionsettlement amount for the contract was structured so that(A) the company and its subsidiary may make usemarket value of our common shares at the date of settlement, less (B) the reference price of the credit linecommon shares agreed at any time during the contracted period. Asinception of December 31, 2015, the company had not yet used any portioncontract, plus an interest rate of this facility.110.5% of CDI. We settled the TRS contract in February 2019, which resulted in a payment to the swap counterparty of approximately R$200 million.

 

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Seasonality of Continuing Operations

Brazil

Our net sales of meat and processed products in the Brazilian market are not subject to large seasonal fluctuations. However, our fourth quarter is generally slightly stronger than the othersother quarters due to increased demand for our products during the holiday season, particularly turkeys, Chester®Chester® roosters, ham and pork loins. We also market certain products specifically for the holiday season, such as gift packages of our products that some employers distribute to their employees. Our results are also affected by the dry and rainy seasons for corn, soybeans and soy meal, which are our primary raw materials in feed production.

In 2015,2018, total Brazilian sales by quarter were as follows: 23.0% for the first quarter, accounted22.6% for 23.6% of our total sales in the Brazilian market, the second quarter, accounted25.3% for 24.7%, the third quarter accountedand 29.1% for 24.6% and the fourth quarter accounted for 27.1%.quarter.


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International

Our sales to international markets as a whole are not materially affected by seasonality, partly because seasonal buying patterns vary according to our international markets. However, net sales in specific markets sometimes vary with the season. In the Middle East/Africa,Halal, for example, we experience slowerlower net sales during Ramadan and the summer months.

In 2015,2018, total International sales by quarter were as follows: 23.6% for the first quarter, accounted24.5% for 20.2 % of our international sales, the second quarter, accounted26.3% for 24.5%, the third quarter accountedand 25.6% for 26.8%the fourth quarter.

Critical Accounting Policies

We have prepared our consolidated financial statements included in this Annual Report on Form 20-F in accordance with IFRS, as issued by the IASB.

The preparation of these consolidated financial statements required management to make estimates and assumptions that affected the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its estimates and judgments on an ongoing basis and bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following is a description of the critical accounting policies, estimates or judgments that are important to the presentation of our consolidated financial statements.

Revenue Recognition

As of January 1, 2018, we adopted IFRS 15, Revenue from Contracts with Customers. We concluded that the measurement and recognition of revenue did not change substantially as a result of this adoption.

Revenues comprise the value of the consideration received or to be received for the sale of products, net of corresponding taxes, returns and applicable discounts.

Revenues are recognized on an accrual basis when the sales value is reliably measurable and when we no longer have control over the goods sold or otherwise any involvement related to the ownership and it is probable that economic benefits will be received by us.

Our sales can be made either through at sight payments or term payments, which are discounted to present value in order to recognize the revenue. The average number of days outstanding for term payments is 31 days.

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Expected credit losses

Effective January 1, 2018, we maintain provisions for expected credit losses, which, prior to the adoption of IFRS 9, were calculated based on a historical credit loss model. In the event of default, collection attempts are made, which include direct contact with customers and collection through third parties. Should these efforts prove unsuccessful, legal measures are considered, and the trade receivables are reclassified to non-current assets at the same time a provision is recognized. The trade receivables are written-off when management considers that they are not recoverable after taking all appropriate measures to collect them.

Assets held for sale and discontinued operations

Assets held for sale are measured at carrying amount or fair value less the costs to sell, whichever is lower, and are not depreciated or amortized. Such items are only classified under this account when the sale is highly probable and they are available for immediate sale under their current conditions. In 2018, it was necessary to recognize impairment losses for certain of these assets.

The statements of income and cash flows from discontinued operations are presented separately from those of continuing operations of the Company. The comparative periods are reclassified in the statements of income and cash flows. However, the statements of financial position remain as previously reported.

Goodwill

Goodwill is initially measured as the excess of the consideration paid over the fair value of the net assets acquired (net assets identified and liabilities assumed). If the consideration is lower than the fair value of the net assets acquired, the difference should be recognized as a gain in the statement of income.

Under IFRS, goodwill is not amortized and is subject to an annual impairment test. We identify our reporting units and determine the carrying amount of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets. The recoverable amount of each reporting unit is the greater of its value in use and its fair value less cost to sell. We determine the value in use of each reporting unit by expected discounted operating cash flows generated by the reporting unit. If the carrying amount of a reporting unit exceeds its recoverable amount, an impairment loss is recognized first to goodwill until it is reduced to zero and then proportionally to other long-lived assets.

The use of different assumptions for valuation purposes, including estimates of future cash flows and discount rates, could have resulted in different estimates.

The carrying amount of goodwill and the key assumptions used in the annual impairment test are disclosed in Note 18 to our consolidated financial statements.

Contingencies

We establish provisions when we have a present obligation, formalized or not, as a result of a past event, if it is probable that an outflow of resources will be required to settle the obligation and its amount can be reliably estimated.

We are party to various lawsuits, including, tax, labor and civil claims. The assessment of the likelihood of an unfavorable outcome in these lawsuits includes the analysis of the available evidence, the hierarchy of the laws, available prior court decisions and the opinion of external legal counsel. We review and adjust the provisions to reflect changes in the circumstances, such as the applicable statute of limitation, conclusions of tax inspections or additional exposures identified based on new claims or court decisions.

Contingent liabilities from business combinations are recognized at fair value if they arise from a present obligation due to past events and if their fair value can be measured reliably, and subsequently are measured at the higher of:

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·the amount that would be recognized in accordance with the accounting policy for the provisions above; or

·the amount initially recognized less, if appropriate, cumulative amortization recognized.

Inventory

We record inventories at average acquisition or formation cost, not exceeding their net realizable value. The cost of finished products includes raw materials, labor, cost of production, transport and storage, which are related to all processes needed to make the products ready for sale. Provisions for obsolescence, adjustments to net realizable value, impaired items and slow-moving inventories are recorded when necessary. Usual production losses are recorded and are an integral part of the production cost of the respective period, whereas abnormal losses, if any, are recorded directly as cost of sales.

Income Tax and Social Contribution

In Brazil, we are subject to income tax (Imposto de Renda Pessoa Jurídica, or “IRPJ”) and social contribution (Contribuição Social sobre o Lucro Líquido, or “CSLL”), which are calculated monthly on taxable income, at the rate of 15% plus 10% surtax for IRPJ and of 9% for CSLL, after considering the offset of tax loss carryforwards, up to the limit of 30% of annual taxable income.

The income from foreign subsidiaries is subject to taxation pursuant to local tax rates and legislation (Brazilian CFC Rules) regarding the tax treaty signed by each country with Brazil in order to avoid double taxation.

Deferred taxes are recorded on IRPJ and CSLL tax losses, assets and liabilities and temporary differences between the tax basis and the carrying amount of assets and liabilities are classified as non-current assets and liabilities, as required by IAS 01. When the Company’s analysis indicates that the realization of these credits is not probable, the deferred taxes are no longer recognized.

Deferred tax assets and liabilities must be measured by rates that are expected to be applicable for the period when the assets are realized and liabilities are settled.

IAS 29Hyperinflationary Economies

On June 14, 2018, the National Institute of Statistics and Census of Argentina (“INDEC”), disclosed the wholesale price index data for May 2018, which has been consistently published in Argentina and used as a basis for monitoring inflation in Argentina. Based on this data, the accumulated inflation in the last three years exceeded 100%, and with support from qualitative analysis, the fourth quarter accountedCompany concluded that as of July 1, 2018, Argentina was considered a country with a hyperinflationary economy.

As a result, the Company has adopted the IAS 29 - Financial Reporting in Hyperinflationary Economies.

Non-monetary items and income statement balances were restated to reflect the terms of the measuring unit at the end of the reporting exercise. The balances were calculated by applying the changes in the index from the initial recognition date to the reporting date.

Because accounting for 28.5%hyperinflation is applicable only to the Company’s subsidiaries located in Argentina, and BRF S.A. is not in a country with a hyperinflationary economy, we have made an accounting policy election not to restate prior periods. The impacts of the changes on net financial position from the initial recognition date until December 31, 2017 were recorded against equity, generating a positive impact of R$130.2 million, while the changes on the financial position for the year ended December 31, 2018were recorded against the results of discontinued operations.

The translation of the balances of a hyperinflationary economy to the reporting currency were based on the closing rate of the reporting period for both statement of financial position and statement of income (loss) balances.

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The impact caused by the adoption of the above-mentioned standard on the Company’s net results was a gain of R$370.0 million, both recorded in discontinued operations.

The Company used the General Consumer Price Index (“IPC”) for the calculation of hyperinflation effects on the balances from January 1, 2017 to December 31, 2018. For the hyperinflation effects from prior periods until December 31, 2016, the Company used the National Wholesale Price Index (“IPIM”), because prior to December 2016 the IPC was not published in a consistent basis to assure the reliability of the index. Both indexes were obtained from INDEC.

The inflation rates used in 2017 and 2018 are described in the table below:

Period

Accumulated inflation rates

2016

34.60%

2017

24.80%

2018

48.01%

Financial instruments

On January 1, 2018, we adopted IFRS 9, Financial Instruments, in replacement of IAS 39, Financial Instruments: Recognition and Measurement. The changes in accounting policies and its impacts to the consolidated financial statements are described below.

Classification of Financial Assets

IFRS 9 contains a new classification and measurement approach for financial assets which contains three principal classification categories: measured at amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). The standard eliminates the IAS 39 categories of held to maturity, held for trading, loans and receivables and available for sale.

This change did not cause any retrospective impact in the measurement of the Company’s financial assets. Prospectively, for equity instruments measured at FVOCI, when settled or transferred, the gains and losses accumulated in other comprehensive income no longer affect the statement of income, but rather are immediately reclassified to accumulated profits or losses, in equity.

The classification of financial assets is based on individual characteristics of the instrument and the business model of the portfolio in which it is contained. For financial instruments existing as of January 1, 2018, we considered the categories in the following manner:

(i)             Financial assets held to maturity and loans and receivables were transferred to the amortized cost category;

(ii)            Financial assets held for trading were transferred to the FVTPL classification;

(iii)           Financial assets available for sale were transferred to the FVOCI classification;

The tables related to financial instruments in notes 4 and 7 now follow the categories described above.

Hedge accounting

We have chosen to apply the new hedge accounting requirements of IFRS 9. The standard requires that hedge accounting relationships are aligned with the Company’s risk management objectives and strategy, the application of a more qualitative and forward-looking approach to assessing hedge effectiveness and prohibits voluntary discontinuation of hedge accounting.

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For financial instruments designated as cash flow hedge instruments, the Company has begun to account for the time value of purchased options, the forward element of forward contracts and foreign currency basis spreads as costs of hedging into other comprehensive income. When the instrument is terminated, the costs of hedging are reclassified to the statement of income together with the intrinsic values of the instrument.

The categories and designation models for hedge accounting remain unchanged.

Impairment of Financial Assets

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model. This model is applicable to financial assets measured at amortized cost or at FVOCI, except for equity instruments.

For financial investments and cash and equivalents, the Company did not experience any relevant impact on credit losses due to the elevated ratings of its counterparties.

For trade receivables and notes receivables, the Company has elected the practical expedient of the aging-based provision matrix in item B5.5.35 of IFRS 9, with the appropriate categorization of the receivables.

We prepared a study of historical losses and recoveries of our customer portfolios for every active region, taking into consideration the dynamics of the markets and the instruments used to reduce credit exposures, including letters of credit, insurance and guarantees. In addition to the analysis of the consolidated portfolios, specific clients with different credit risk were treated separately. Based on these studies, expected loss indices were calculated for each portfolio and aging class. The indices were applied to the accounts receivable balances and generated the amounts of expected credit losses. We monitor the indices, customers and portfolios regularly, recognizing the respective changes into the impairment loss on trade and other receivables account.

Transition

Changes in accounting policies resulting from the adoption of IFRS 9 were applied retrospectively to January 1, 2018, except as described below:

·The Company took advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes. Differences in carrying amounts of financial assets and financial liabilities resulting from the adoption of IFRS 9 were recognized in retained earnings at January 1, 2018; and
·The new hedge accounting requirements were applied prospectively.

Recently Issued and Not Yet Adopted Accounting Pronouncements Under IFRS

The interpretations and amendments to the standards below were published by IASB and are applicable for accounting periods beginning after January 1, 2019.  

 IFRS 16 – Leases

We assessed the estimated impact arising from adoption of this pronouncement in our consolidated financial statements. The impacts of adoption on January 1, 2019 may change as a result of the following:

·we are concluding the implementation, testing and assessment of controls over our new IT systems for the management of leasing agreements;

·the discount rate; and

·an assessment as to whether we will exercise any renewal options and the choice to use practical expedients and recognition exemptions.

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IFRS 16 introduces a single model for the accounting of leases for the lessee, for which there should be recognized a right-of-use for the underlying asset and a lease liability representing an obligation to make payments. Assets classified as short-term leases and leases of low-value items, are exempt from this treatment. The accounting model for lessors remains unchanged, meaning lessors continue to classify leases as finance or operating leases.

For leases in which the Company is a lessee, we will recognize new assets and liabilities arising from lease agreements relating to land, outgrower relationships, offices, distribution centers and vehicles, among others. The nature of expenses related to those lease agreements will change because the Company will recognize a depreciation charge for right-of-use assets and interest expense on lease liabilities. Previously, we recognized operating lease expense on a straight-line basis over the term of the lease.

Based on information currently available, we estimate that we will recognize in our consolidated financial statement a right-of-use asset and a lease liability of approximately R$2.7 billion on January 1, 2019. Given the complexity of the topic, until the initial adoption of this pronouncement there may be a variation in relation to the estimated value which the Company estimates by up to 20%. The adoption of IFRS 16 does not affect the Company’s ability to comply with any contractual agreements.

At the date of initial adoption, we chose the modified retrospective approach, whose cumulative effect will be recognized as an adjustment to the opening balance of retained earnings on January 1, 2019, with no comparative information.

We will choose to use the exemptions provided by the pronouncement for lease agreements with terms expiring within 12 months from the date of initial adoption and lease agreements with an underlying asset of low-value.

IFRIC 23 – Uncertainty over Income Tax Treatments

The interpretation IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, the Company will recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. The interpretation is valid from January 1, 2019.

We are analyzing relevant tax decisions of superior courts and whether they conflict with the positions adopted by us. For known uncertain tax positions, we are also reviewing corresponding legal opinions. At present, we have not identified any material impact that should be disclosed or recorded.

Capital Expenditures

See “Item 4—4. Information on the Company—A. History and Development of the Company—Capital Expenditures.”

C.                 Research and Development, Patents and Licenses

BRF’sIn 2018, we launched 339 new products for consumers, of which 107 were released for the domestic market and 232 for the international market. Of the international market releases, 49 were in Asia, 16 in Europe, 32 in Africa, 28 in the Americas, 26 in the Southern Cone and 91 in the Middle East.

Our Research, Development and Innovation activities (RD&I)(“RD&I”) incorporate agricultural research and innovation, as well as products and processes research and development. The Research and Development of Meat Products’ team is based in Jundiaí city, in the state of São Paulo, where our BRF Innovation Center (“BIC”) is based.

The agricultural RD&I area endeavorsaims to guarantee thestrengthen our international competitiveness of the company through the continuous introduction of new technologies at the appropriate time, aimingtechnologies. The goal of these activities is to result in a reduction inreduce production costs, improvement inimprove product qualityqualityand client satisfaction and satisfaction of client andmeet consumer demands. For this purpose, the company maintainswe maintain a qualified and experienced team of specialists to experiment with new products and a substantial experimental physicalinnovations. This team includes highly qualified researchers with advanced degrees, specialists working in animal production, researchers, veterinarians, agronomists and laboratorial structure.technical support. In addition, the company uses the production system in a structured manner to generate knowledge and to establish partnershipswe have collaborative arrangements with several universities, government research institutions and innovative private companies. BRF makescompanies, and we use of variousseveral research incentives made available by government research and development bodies.agencies.

The agricultural RD&I area currently has researchers dedicated to the activities of product innovation and support who hold PhDs, masters’ qualifications or specializations in the corporate area of animal production. In addition to corporate research workers, the company has a vast contingent of veterinarians, agronomists and zoologists who operate directly within the production system.

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In recent years, we have been promoting the introduction of professionals with PhDs in our technical team in association with governmental agencies as FINEP, CNPq (PNPD – National Post-Doctorate Program and RHAE – Human Resources Formation in Strategic Areas Program), Araucária Foundation (Post-Doctorate Program in company) and the Araucária Foundation (the Post-Doctorate Program atFAPESP (Foundation for Research Support of the company), over the past five years the company has been promoting the inclusionState of professionals with master’s degrees and doctorates in its technical ranks. To date, 13São Paulo).  As a result, we have hired 17 researchers have been added to the company’s technical personnel.  The company hasdate. We have also been developing a robust trainee and internship program as well as encouraging itsour employees to participate in postgraduategraduate courses.

BRF hasWe have one of the largest poultry and hogswine agricultural experimental research structures in the world withworld. Our system includes 19 installations atfacilities and an experimental feed meal plant distributed across four experimental farms situated in the state of Santa Catarina. The companyCatarina, with a total of 1,380 experimental pens to evaluate impacting characteristics of the production chain. In addition, we have a backup farm in Minas Gerais state. We also has sevenhave six bromatological and five agriculturalanimal health laboratories supporting research and operational activities.

In addition to the company’sour formal research structure, the company has in placewe have a field research process in the production system allowing itwhich allows us to evaluate all technologies under real production conditions with a suitable number of samples, in orderconditions. We also use this field research to calculate the productiveproductivity and financial impact of innovations and establish the appropriate moment to introduce a given technology. BRF believesWe believe that its use of athe field research system provides itus with an advantage in relation to third partyother research centers and other companies in the sector. With respect to RD&I projects related to products, we are in the process of researching the reduction of additives in meat products, natural solutions for ingredients to extend the products’ due date with the food safety guarantee, optimizing the raw material generated under our production chain, new packaging materials and the reduction in the use of materials.

Beginning on June 20, 2013, BIC was financed by FINEP for a total amount of R$106.0 million, of which R$53.9 million was used for building the facilities. BIC has total space of 13,500m². The building exemplifies our commitment to investing in research, development and innovation in order to create and aggregate value in our products, processes and services. Its structure, which was developed to set standards in technological development in the food industry, includes research and development areas for meat, pastas, margarines, vegetables and packaging, along with quality control, project management and graphics. The facility also has meeting rooms, a pilot plant, areas for tests and sensorial evaluation, packaging laboratories, kitchens for food service clients, a library and a brainstorming room.

We see investments in RD&I as a key factor in maintaining our competitive advantages, including by optimizing our production chain, improving our sustainability, launching innovative products and reaching the expectations and needs of consumers, clients and markets. 

BRF has itsAdditionally, we have our own hog genetics improvementswine breeding program, which it believeswe believe is a leader among the international breeding programs. The breeding program has a team of eight highly qualified geneticists. We are preparing to be on par with the programs of international genetics companies. The program operates with a nucleus of six farms in the state of Santa Catarina with 110 employees and a backup farm in Minas Gerais. In order to match the company’s growth, a new farm is under construction in the state of Goiás, which the company expects will expand the program’s production capacity by 27%.  Work is underway for the incorporation ofincorporate genomic evaluation into the swine evaluation process in the selection process. The company has set up partnerships2019. In order to implement this new technology, we established collaborative arrangements with six Embraparesearch centers at the Brazilian Company for Agricultural and Farming Research (Empresa Brasileira de PesquisaAgropecuária, or “EMBRAPA”) research centers,, as well as with universities and researchgovernmental agencies (including BNDES, Finep and development bodies (BNDES, Finep, CNPq) and has established a team of nine geneticists, eight of them holding PhDs..


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In the past fewrecent years, BRF has formedwe have established research partnerships foron projects financedfunded by EMBRAPA, FINEP, CNPq and BNDES, and, since 2009, BRF has benefitedwe have been benefiting from tax credits underfrom the Science, Technology and Innovation Ministry (Ministério da Ciência, Tecnologia e Inovação) to incentivize innovation research, calledLei do Bem.Bem. This law introduced a tax incentive for activities related to Research, Development and Technological Innovation. The law defines Technological Innovation as the conception of a new product or manufacturing process, such as new functionalities or features that bring incremental improvements and effective gains of quality or productivity, resulting in stronger market competitiveness. The main feature of the tax incentive mechanism is an expenditure exclusion for determining the amount of income tax and social contribution tax that is levied on net income.

BRF’s agricultural integratedprogram supports technological innovation process is based on interfaces with companies and research centers. It is characterized by the shared use of physical structures and technical teams for the solution of the principal demands for developing joint work and above all resulting from feedback from new proposals on innovation accruing from the company’s technological development network. This process of innovation has been recognized by independent organizations with the following awards:

·EMBRAPA National Award for Teams in the Partnership Category, 2012

·EMBRAPA National Award for Teams in the Creativity Category, 2011

·Innovation Management Category Award, southeast region, awarded by FINEP, 2010.

The Meat Products Research and Development team is located in the city of Jundiaí in the state of São Paulo where the BRF Innovation Center (“BIC”) is situated.

The meat products RD&I area is working to ensure that BRF remains in the vanguard of innovation through the development of new products and new manufacturing processes in line with market demands, continuousand incremental improvement in existingactual products or processes.

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 The RD&I teams were integrated under the same business unit in 2015 in order to encourage efficiencies among the teams, to increase the speed to market of products and to improve consumer and technological connections.

More than 100 researchers and project managers are dedicated to continuously contributing innovative ideas to the evaluationRD&I pipeline, while running cost, process and formulation optimization. BRF has developed a unique stage gate process, which is managed by a multifunctional team to make bi-monthly decisions regarding potential innovations. This allows us to accelerate the decision-making process in a very complex chain while considering multiple points of new technologies. For this purpose,view.

We define our growth platforms based on consumer preferences. Our five main platforms are convenience, health and well-being, between meals, premium and food experience. The project managers are now able to navigate through different categories, such as prepared meals, cold cuts,in natura, spreads, snacks and even food services, to design and apply solutions that either fulfill an unmet need or enhance a specific consumer preference. Accordingly, we enjoyinvested R$53.5 million, R$52.0 million and R$200.2 million in 2018, 2017 and 2016, respectively.

In 2018, under the benefitSadia brand we launched the Bio sub brand, which is part of highly qualified professionals for developing productsthe chickenin natura portfolio, and was designated “Certified Humane” by a non-profit organization that guarantees that all stages of production follow high standards of animal welfare, including plant-free and antibiotic-free diets, rest areas and humane management and conditions. We also rebranded certainSadia packaging and for sensorial analysis as well as support teams such as managementproducts to better reflect its leading brand position, superior quality and transparency with consumers. In ourPerdigão brand we launched a line of projectsflavored sausages focused on adding value and innovation, graphic arts and registration and labeling teams. Our technical team consists of food technicians and engineers, chemical engineers, chemists, pharmaceutical and veterinary personnel.

Unveiled on June 20, 2013, BIC received funding from FINEP fordeveloping a total of R$106 million, of which R$53.9 million is for the construction of installationsnew consumption opportunity to a very mature category. We also launched a new sub brand,Tá Na Mão, with a total arearobust portfolio of 13,500 square meters. The project represents BRF’s commitmentsharable snacks, including chicken popcorn, chicken strips and cheese bread, to invest in RD&I both for creatingreinforce our brand positioning and adding valueits focus as a shareable option, including at social events. With respect to its products, processestheQualy brand, we launched a zero percent lactose margarine to meet demand from the growing number of people with dietary restrictions. Lastly, we launched the brandKidelli with an affordable portfolio and services. Designed to be a benchmark in technological development of the food sector, the structure incorporates RD&I areas for meats, pastas, margarines, vegetables and packaging, as well as quality, management of projects and graphic arts. BIC offers a structure of offices and meeting rooms, a pilot plant, dedicated environments for tests and sensorial evaluations, food packaging laboratory, food services client kitchens, a library and a creativity room.

The RD&I also operates jointly with our quality team in the adoption of international practices for quality control at our production installations, in our surveillance development systems for monitoring products and customer orders and the execution of laboratory analyses of food products for the promotion of food safety. Investment in the development of quality control practices provides support for our strategy of ensuring food safety in our production processes.

In 2010, the RD&I products team formalized an Open Innovation program for setting up research partnerships with universities, research centers and other companies. Since 2010, BRF has concluded agreements involving nine projects with science and technology institutions and three projects with other companies. 

We invested R$ 227.3 million in 2015, R$192.8 million in 2014 and R$68.6 million in 2013 in RD&I activities. In 2013, we classified only fixed expenses of RD&I activities as RD&I expenditures. In 2014 and 2015, we included in RD&I expenditures the variable expenses, such as feed, vaccine and packaging expenses, used inexperimental research tests and field research involving agricultural RD&I projects, which accounts for the significant increase compared to prior years.


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BRF is of the opinion that investing in RD&I is key to retaining its competitive advantages whether in the form of optimizing its production chain, improving sustainability or launching innovative products that meet the expectations and requirements offocused on consumers clients and markets.

BRF filed with INPI (National Institute for Industrial Property) for one patent in 2014;two invention patents, one utility patent and one industrial design patent in 2013. In 2015, wewho did not file for any patents.have access to theSadia andPerdigão brands.

D.                 Trend Information

In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “—A. Operating Results—Results of Operations—Principal Factors Affecting our Results of Operations.” You should also read our discussion of the risks and uncertainties that affect our business in “Item 3. Key Information—D. Risk“Risk Factors.”

Global GDP is expected to grow 3.1%2.9% in 20152019 and 3.4%2.8% in 2016,2020, according to a report released in January 2019 by the World Bank. A threat to global economic growth is the intensification of protectionist pressures, because of a potential widening of global imbalances coupled with sharp exchange rate movements. According to the International Monetary Fund (“IMF”). A threat to, increased restrictions on global economic growth will betrade and migration would hurt productivity and incomes and have an immediate impact on market sentiment. Another potential risk discussed by the U.S. Federal Reserve’s normalizationIMF is a tightening of monetary policy by increasing interest rates (as it happened in December of 2015), until they gradually reach 2.75% at the end of 2016.

global financing terms. The IMFWorld Bank expects growth of 2.5% in 20152019 and 2.6%1.7% in 20162020 for the U.S. while their expectations remain low, at aroundand of 1.6% in 2019 and 1.5% in 20152020 for European Union. For emerging markets and 1.6% in 2015 for Western Europe. For developing countries in 2019, the IMFWorld Bank expects a growth rate of 7.5% for India and a decrease of 1.0%1.5% for Russia, along with a reducedmore modest growth in China of 6.3% this year.6.2% for 2019. The same studyreport expects Brazil’s GDP to decrease 3.8%increase 2.2% in 20152019 and 3.5%2.4% in 2016.2020. The SELIC interest rate (the primary Brazilian interest reference rate) is expected to end 20162019 at 14.64%7.00%, according to reports by Focus. Additionally, as a result of the regulators’ inquiries and the public announcement of allegations of wrongdoing involving BRF and other companies in the Brazilian meat industry in the context of theCarne Fraca Operation andTrapaça Operation, some export markets have been temporarily closed and our average selling prices for some products and in some markets have decreased. For more information about theCarne Fraca Operation andTrapaça Operation, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information-Legal Proceedings—Trapaça Operation.”

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Exports

In 2015, Brazilian volume of chicken exports was 5.1% higher than in 2014. This increase can be explained mainly by higher sales to the Middle East and several Asian countries, partly as an effect of the Brazilian real devaluation, which increased Brazilian cost competitiveness.

Brazil is a leading playerproducer in the global export markets of poultry and pork due to its natural advantages including low feed(land, water, and laborclimate), competitive inputs costs and gains ofincreasing efficiencies in animal production. Like other large Brazilian producers, we have capitalized on these advantages to develop the scope and scale of our businesses.business.

Brazilian chicken exports decreased by 5.1% in the year ended December 31, 2018, compared to the year ended December 31, 2017, in terms of volume.  Pork exports registered a decrease of 7.4% in volume sold in the year ended December 31, 2018, compared to the year ended December 31, 2017. Beef exports recorded an increase of 12.2% in volume sold in the year ended December 31, 2018, compared to the year ended December 31, 2017.

In international markets, we and other Brazilian producers compete with local and other foreign producers. Traditionally, Brazilian producers have emphasized exports of frozen whole and cut poultry and frozen pork and beef cuts. These products which are similar commodities in nature, continue to account for thea substantial portion of export volumes in recent years. Brazilian food companies have also expanded the sales of processed food products. We anticipate that, over the next several years, we and our main Brazilian competitors will sell greater volumes of frozen whole and cut poultry and frozen pork as well as increasing volumes of processed food products.

Brazilian chicken exports in the year ended December 31, 2018 totaled 4.1 million tons on sales of R$23.45 billion (equivalent to U.S.$6.57 billion). Saudi Arabia remains the main destination for these exports (12.5%), followed by China (12.4%), Japan (11.4%) and the United Arab Emirates (11.1%).

Pork export volume in the year ended December 31, 2018 totaled 645.5 thousand tons, totaling around R$4.69 billion (equivalent to U.S.$1.21 billion). The significant dropleading importers, China, Hong Kong and Singapore represented 25.0%, 23.9% and 6.8%, respectively, of total exports from Brazil.

Beef shipments in oil prices continued in 2015, affecting several countries that have a big share over Brazilian exports, such as Russia, Venezuela, Angola and some Middle East countries. The effectsthe year ended December 31, 2018 totaled 1.35 million tons with sales of oil price drops for big oil producers generally present themselves in two main ways: less inflow of money, which devalues the currency (if not pegged), which then negatively affects the country’s disposable income duearound R$21.15 billion (equivalent to anU.S.$5.46 billion). This increase in inflation;volume was driven by higher exports sent to China and decreased GDP growth, dueHong Kong which import 23.8% and 20.5% of Brazilian beef exports, respectively.

According to smaller oil revenues. The additional drop of 30.5% in oil prices (thethe West Texas Intermediate index, which benchmarks oil prices, droppedoil prices increased 24.4% in 2018, from US$ 53.27an average of U.S.$51.87 in 2017 to US$ 37.04) has causedan average of U.S.$64.54 in 2018, which benefited countries that are economically dependent on oil revenues. Certain of these countries represent a significant share of Brazilian exports, including Russia, Venezuela, Angola and will continue to cause turmoilsome Middle Eastern countries. A decrease in oil exporting economies, reducing theirprices will generally result in decreased GDP growth and decreased revenues for these countries, which can devalue the local currency and negatively affect disposable income due to an increase in inflation. In the past, declines in the price of oil reduced the ability of certain countries to import Brazilian products. The recent price improvement will likely help protein prices to rise since countries dependent on revenue from oil production will be able to import additional products. There will likely be some lag in this price improvement, however. Food products are less sensitive than other goods to foreign exchange and to income variations. Rich oil producing countries that are located in warm regions with a low availability of grains rely on government subsidies in order to cope with much higher chicken production costs than countries with moderate climateclimates and a high availability ofgrains,of grains, such as Brazil. Thus, falling oil prices will not necessarily lead to lower chicken imports from Brazil as governments might reduce subsidies leading to a decline in local production of chicken. As opposed to top oil exporters, countries that are net importers of oil and its sub products benefit from lower price in terms of higher disposable income.


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In 2016,2019, we intend to place new products in the Middle East/Africa market to meet the demand for healthier products.

Brazilian Market

Brazil is one of the world’s largest meat consumers of meat,in the world, with a per capita meat consumption in 20142018 of 97.698.5 kilograms, including beef, broiler chicken and pork products, according to the USDA,. an increase of 0.7% compared to 2017. Demand for poultry and pork and beef products in the domestic market is directly affected by the country’s economic conditionsconditions. Given the slight economic recovery in Brazil. The emergence of2018, meat consumption increased in 2018 compared to 2017. As further economic improvement is expected for 2019—market analysts consulted by the middle class has had a relevant impact in chicken and pork consumption whereas beef consumption remained flat over the last years. According to the Brazilian Central Bank survey, domestic GDP shrank 3.8% in 2015 and according to the Central Bank’s Focus reportexpect thatGDP will increase by 2.6%, while inflation is expected to shrink 3.0%remain low at 4.02%—meat consumption should increase in 2016 and inflation is to remain elevated. Beef price in Brazil should remain at very high levels versus chicken, considering that beef production declined by close to 10% in 2015. Beef production is expected to keep falling in 2016 since the cattle production cycle usually lasts for four to six years, thus and, therefore, beef supply takes several years to adjust to demand. This was a highly relevant factor for chicken demand to rise in Brazil in 2015 and should remain in place in 2016.

The Brazilian2019. Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. ThereBesides BRF, there are severalmany large producers, most notably BRF, but alsoincluding Seara (which was acquired from Marfrig by JBS in 2013), Aurora and Seara.JBS. The largestmain producers are subject to significantin the fresh food market face strong competition from a substantiallarge number of smallersmall producers thatwhich operate in the informal economy and sometimes offer lowerlow quality products at lower prices than dothose of the majorlarge producers. ForBRF seeks to to develop quality products, focusing on innovative solutions that reason, wemeet clients’ needs and our main competitors have, in recent years, focused on producingcapture value for the strong brands it owns, such asSadia and selling processed food products because these products support better margins. We and our major competitors are generally emphasizing processed food products rather than fresh and frozen poultry and pork products that are more similar to commodities in nature.Perdigão.

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The processed foodsfood sector is more concentrated than the fresh food sector in terms of the number of players.competitors. Consumption of processed products is influenced by severala number of factors, including the increase inlevel of consumer income and marketing efforts with a view todirected at meeting consumer demand for more value-added products. We believe that processed food productsfoods also represent an opportunity for further growth in coming years.

Given the more challenging economic context in Brazil, our priorities remain to be the implementation of initiatives emphasizing operational excellence, especially in cost management and sales, that will be drivers for growth in the market, aiming toward the recovery of our operating margins in Brazil. Price adjustment and new products will be the major growth drivers for profitability in 2016. We remain confident in our strategy and capacity to resume growth in Brazil through more internal efforts toward reducing the cost of services, a more robust sales structure with improved execution that is focused on each region, and by strengthening our leadership by repositioning our major brands.coming years.

Raw Materials

During 2018 a series of events affected grains prices worldwide, including the soybean crop failure in Argentina. This limited Argentina’s ability to export grain and helped increase global demand for Brazilian soybeans which positively impacted Brazilian soybean prices.

Additionally, the trade dispute between the U.S. and China, which began in April 2018, caused the Chinese government to tax U.S. soybeans at 25%, which shifted Chinese demand from the U.S. to Brazil. This also impacted domestic prices positively. Average soybean prices in Brazil increased 30.2%, while soybean prices on the Chicago Board of Trade (“CBOT”) increased 8.6% in 2018.

In the Brazilian market, average corn prices for the fourth quarterincreased 28.8% in 2015 increased 18.3%2018 compared to 2017. According to Brazil’s national food supply agency (Companhia Nacional de Abastecimento), the third quarter and increased 9.1%corn crop totaled 81.4 million tons in 2015 relative to the average2017/18, after totaling 97.8 million tons in 2014. The increase in average corn prices in the fourth quarter of 2015 was due to uncertainties of weather conditions in the harvest period and 8.6% devaluation of the Brazilian real against the US dollar compared to the third quarter.2016/17. In the international market, a record corn crop in the US together with itsUnited States in 2016/17 (384.78 million tons) and a slightly lower competitiveness led to a 40.5% increase in stocks for 2014/15, which may rise by additional 6.1% in 2015/16 according to the USDA. Given both distinct effects of better crop in 2017/18 (370.96 million tons) increased the US and potential El Niño-related climate impact on crops elsewhere in the end of last year, average CBOT (Chicago Board of Trade) corn prices remained stableby 3.4% in 2018.

Social Contributions

Brazilian Provisional Measure No. 774/17, valid as of July 2017, required that we pay a social contribution equal to 20% our payroll, which is higher than the fourth quartersocial contribution we had previously paid based on our gross operating revenue (between 1% and 2.5%). This Provisional Measure was revoked on August 2017 by Provisional Measure 794/17 and thus was not converted into law. In May 2018 Law No. 13,670/18 reestablished paying the social contribution based on gross operating revenues instead of 2015 compared topayroll until December 2020. Although the fourth quarter of 2014 in US dollars. However, innew Brazilian government is considering granting Brazilian companies permanent relief from social contributions, we cannot assure that the year as a whole, 2015 average corn prices fell 9.5%.


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Average soybean prices in Brazil for the fourth quarter of 2015 increased 14.63% relative to the third quarter of 2015 and 6.97% in 2015 over 2014. CBOT prices dropped by 24.1% in 2015, reflecting both strong production (large crop in Brazil and in US, together with more favorable outlook for Argentine grains exports) and weak demand (Chinese demand is growing at a weaker pace than previously expected, following slower economic growth).current relief will available after December 2020.

E.                 Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, other than the ones described below, that have or are reasonably likely to have a current or future effecteffects on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources that are material to investors.

BRF provides guarantees to loans obtained by certain outgrowers located in the central region of Brazil as part of a special development program for that region. These loans are used to improve the outgrowers’ farm installations and are expected to be repaid in ten years. The loans guaranteed by BRF are in the amount of R$208.829.8 million as of December 31, 2015.2018 (compared to R$87.1 million as of December 31, 2017).  In the event of a default, we willwould be required to assume the outstanding balance.  As a result, we have recorded provisions in the amount of R$14.72.5 million as of December 31, 2015,2018 (compared to R$4.0 million as of December 31, 2017), which is equal to our assessment of the fair value of the non-contingent portion of these obligations, and a reversion of provision in the amount of R$8.31.5 million in our statement of income for the year ended December 31, 2015.2018 (compared to R$4.4 million as of December 31, 2017).

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BRF guarantees a loan to the BRF Sustainability Institute (Instituto(Instituto BRF de Sustentabilidade)Sustentabilidade) from BNDES to set up biodigestorsbiodigesters on the properties of the rural producers that are taking partparticipating in BRF’s integration system as part of the BRF’s sustainable hog breeding program, which seeks to develop mechanisms for clean development and reduction of emission of carbon gases. The total amount of these guarantees as of December 31, 20152018 was R$39.16.0 million (compared to R$53.317.3 million as of December 31, 2014)2017). In the event of a default, BRF would be required to assume the outstanding balance. As a result, we have recorded provisions in the amount of R$0.3 million as of December 31, 2015, equal toBased on our assessment of the fair value of the non-contingent portion of these obligations, we have not recorded provisions as of December 31, 2018 (compared to R$0.03 million as of December 31, 2017), and we reversed provisions in the amount of R$0.60.3 million in our statement of income for the year ended December 31, 2015.2018 (compared to R$0.1 million as of December 31, 2017).

The aggregate amount of BRF’s off-balance sheet guarantees as of December 31, 20152018 was R$247.935.8 million (compared to R$104.4 million as of December 31, 2017), and we reversed provisions for the non-contingent portion of these obligations in the amount of R$8.91.6 million, which had been included in our statement of income for the year ended December 31, 2014.2018 (compared to R$4.5 million as of December 31, 2017).

F.                  Tabular Disclosure of Contractual Obligations

The following table summarizes significant contractual obligations and commitments at December 31, 2015, that have an impact on our liquidity.2018.

 

Payments Due by Year

Payments Due by Year

Obligation

 

Total

 

2016

 

2017 to 2019

 

2020 onwards

Total

2019

2020

2021 to 2023

2024 onwards

 

(in millions of reais)

(in millions of reais)

Loans and financing(1)

 

15,179.3

 

2,628.2

 

4,185.7

 

8,365.4

21,905.5

4,171.8

3,479.5

9,410.7

4,843.5

Interest on loans and financing(2)

 

3,868.7

 

606.1

 

1,800.7

 

1,461.9

4,365.6

1,031.2

897.9

2,114.6

321.9

Lease obligations on property and equipment(3)

 

1,157.0

 

530.6

 

272.0

 

354.4

Lease obligations on property, plant and equipment(3)

2,563.8

513.5

169.3

416.3

1,464.7

Commitments for purchases of goods and services(4)

 

6,753.5

 

4,560.9

 

1,740.4

 

452.2

5,708.9

4,338.1

527.8

528.0

315.0

Total

 

23,089.8

 

7,719.7

 

6,198.1

 

9,172.0

34,543.8

10,054.6

5,074.5

12,469.6

6,945.1

 

(1)       Includes both short-term debt and long-term debt.

(2)       Represents expected interest obligations on the loans and financing set forth in the table above, assuming the interest rates in effect on each facility as of December 31, 2015.                                                                            2018.

(3)       Includes capital and operating leases.

(4)       These purchase commitments include future purchase commitments for corn and soy meal and service fees to our integrated outgrowers. Amounts payable under contracts for goods or services that allow termination at any time without penalty have been excluded. With respect to contracts for goods and services that allow termination at any time without penalty after a specified noticednotice period, only amounts payable during the specified notice period have been included.


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We also recorded R$1,205.91,350.3 million as contingencies forwith probable losses for the year endedas of December 31, 2015.2018.

G.                 Safe Harbor

See “Part I—Introduction—Forward-Looking Statements.”

ITEM 6.           DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.                 Directors and Senior Management

Board of Directors

Our board of directors provides our overall strategic direction. Our by-laws also provide for alternate directors. During periods of absence or temporary unavailability of a director, the corresponding alternate director substitutes for that absent or unavailable director. At least 2 members or 20% of the members of our board of directors, are required towhichever is greater, must be independent under theNovo Mercadolisting rules. Our directors and alternate directorsboard members are generally elected at ordinary general meetingsOrdinary General Shareholders’ Meetings for a two-year term.term and may be reelected. Our board of directors currently consists of nineten members.

At the general shareholders’ meeting to be held on April 7, 2016, our shareholders will be asked to ratify the election of Renato Proença Lopes and Aldemir Bendine (and their alternates), who were previously appointed to our board by the other directors, and to approve amendments to our Our bylaws including the elimination ofdo not contemplate alternates to board members. TheThere is no mandatory retirement age for our board members. In case of any vacancy, the remaining members will nominate a board member who will serve until the next shareholders’ meeting, and the shareholders shall elect another board member to serve for the remaining term of office at such meeting. If more than one-third of all our currentthe positions on theboard of directors will expireare vacant at the ordinary general meeting to be held in 2017 or their earlier departure (assuming, in the case of Messrs. Lopes and Bendine, that their election to the board will be ratified by our shareholders at the generalsame time, then an extraordinary shareholders’ meeting toshall be held on April 7, 2016).

called within 30 days counted from such vacancy event. The following table sets forth information about our current directors and their respective alternates:Board members:

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Director/AlternateDirector

Name

Position Held

Since

Age

Abilio dos Santos Diniz(1)

Pedro Pullen Parente

Chairman

April 9, 201326, 2018

7966

Eduardo Rossi(1)Augusto Marques da Cruz Filho(1)

AlternateVice-Chairman

April 9, 201326, 2018

4466

Renato Proença Lopes (3)

Vice Chairman

August 5, 2015

44

Sergio Ricardo Miranda Nazaré (3)

Alternate

July 30, 2015

52

Henri Philippe Reichstul Dan Ioschpe(1)

Board Member

April 8, 201526, 2018

6654

José Violi Filho (1)

Alternate

April 8, 2015

61

José Carlos ReisFlavia Buarque de Magalhães NetoAlmeida(1)

Board Member

April 29, 201126, 2018

3851

Fernando Shayer

Alternate

April 8, 2015

42

Luiz Fernando Furlan(1) (2)

Board Member

July 8, 2009

69

Roberto Faldini(1)

Alternate

July 8, 2009

67

Manoel Cordeiro Silva Filho(1)Francisco Petros O. L. Papathanasiadis(1)

Board Member

April 12, 200726, 2018

6254

Maurício da Rocha Wanderley José Luiz Osório(1)

Alternate

April 12, 2007

46

Aldemir Bendine (4)

Board Member

March 1, 2016April 26, 2018

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Director/Alternate

Name

Position Held

Since

Age

Henrique Jäger (4)

Alternate

March 1, 2016

5067

Walter Fontana Filho(1) (2)Luiz Fernando Furlan(1)

Board Member

July 8, 2009April 26, 2018

6272

Eduardo Fontana D’Avila(1) (2)

Alternate

July 8, 2009

62

Vicente Falconi CamposRoberto Antônio Mendes(1)

Board Member

May 22, 2014April 26, 2018

7566

Mateus Affonso BandeiraRoberto Rodrigues(1)

AlternateBoard Member

April 8, 201526, 2018

4676

Walter Malieni Jr

Board Member

April 26, 2018

49

 

(1)       Independent member (as defined in the BrazilianNovo Mercado listing regulations).

(2)   Messrs. Eduardo Fontana D’Avila, Walter Fontana

On March 5, 2018, we called for the Ordinary and Extraordinary General Meeting, which was held on April 26, 2018, at the request of two of our shareholders, PREVI and PETROS, which jointly hold approximately 20% of our capital stock. Additionally, on April 12, 2018, we received from Aberdeen, on behalf of the investment funds and portfolios managed by it and its subsidiaries, a request that a cumulative vote system be adopted for the election of members of our board of directors at the Ordinary and Extraordinary General Meeting.

On April 19, 2018, PREVI, PETROS, Tarpon Investimentos S.A. (“Tarpon”), Mr. Abilio Diniz holders, directly and indirectly, of 32.80% of the shares issued by us, entered into a voting agreement regarding matters to be discussed at the Ordinary and Extraordinary General Meeting (the “Voting Agreement”). On the same date, our board decided that if Aberdeen were to withdraw its request for the adoption of a cumulative vote system, it would nominate the following individuals to serve as board members: Mr. Augusto Marques da Cruz Filho, Mr. Dan Ioschpe, Mrs. Flávia Buarque de Almeida, Mr. Francisco Petros Oliveira Lima Papathanasiadis, Mr. José Luiz Osório, Mr. Luiz Fernando Furlan, are cousins.Mr. Pedro Pullen Parente, Mr. Roberto Antonio Mendes, Mr. Roberto Rodrigues and Mr. Walter Malieni Jr. Our board of directors nominated Mr. Pedro Pullen Parente and Mr. Augusto Marques da Cruz Filho as Chairman and Vice-Chairman, respectively.

(3)   Marco Geovanne Tobias da Silva (electedOn April 25, 2018, Aberdeen withdrew its request for the adoption of a cumulative vote system at the shareholder meeting held on April 8, 2015) presented his letter of resignation on May 28, 2015Ordinary and was replaced by his alternate, Sergio Ricardo Miranda Nazaré. On August 5, 2015, Renato Proença Lopes was appointed as a memberExtraordinary General Meeting. However, minutes before the start of the BoardOrdinary and Extraordinary Shareholders’ Meeting, we received a letter from the CVM requesting that such a system be adopted given that some shareholders previously delivered their votes based on such system. Therefore, we adopted the cumulative vote system at the Ordinary and Extraordinary General Meeting. Under a cumulative voting system, Brazilian Corporation Law provides that the dismissal or other vacancy of Directors, on which occasion Sergio Ricardo Miranda Nazaré reoccupiedany board member shall mean the positiondismissal of alternate member.

(4)   On March 1, 2016, Mr. Bendine (who had observer status onall other board members and a new election will have to be called. As a result, the adoption of the cumulative voting system would have created a greater degree of instability at our board from August 27, 2015 through February 29, 2016) was appointed as a memberof directors because the departure of any director would result in the early termination of the Boardterm of Directorsoffice of all other board members. However, on November 8, 2018, the CVM confirmed that the election of our board members at the Ordinary and Mr. JägerExtraordinary General Meeting occurred via an adequate slate-based voting system and, therefore, none of the effects of the cumulative voting system are applicable to the election.

At the Ordinary and Extraordinary General Meeting, the number of members of our board of directors was appointed as his alternate member. They replaced Paulo Guilherme Farah Correa (formerset at 10 members, new members were elected to the board member)of directors and Arthur Prado Silva  (former alternate member), respectively, who presented their lettersthe Chairman and Vice-Chairman of resignation on February 29, 2016.the board of directors were elected. Only four of the ten board members elected during the Ordinary and Extraordinary Shareholders’ Meeting were previously members of our board of directors.

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Below is a summary of the professional experience and areas of activity of our current board members.

Pedro Pullen Parente –Mr. Parente received a bachelor’s degree in electric engineering from the University of Brasília in 1976. He has been the Global CEO of the Company since June 2018, also serving as Chairman of the board of directors since April 2018.Mr. Parente started his professional career at Banco do Brasil in 1971 and was transferred to the Brazilian Central Bank in 1973. He has been a consultant for the International Monetary Fund and public institutions in Brazil, including several State Departments and the National Constituent Assembly of 1988, and has occupied various government positions focusing on economics. As deputy minister of Finance, he was part of the team leading Plano Real which succeeded in reducing inflation in Brazil. Between 1999 and 2003, he served as the Chief of Staff to President Fernando Henrique Cardoso, Minister of Planning, and led the transition team after president Luiz Inácio Lula da Silva’s election in 2002. During this period, he played an important role as Chairman of the Energy Crisis Management Chamber when he coordinated the efforts that allowed Brazil to avoid an energy crisis. During president Cardoso’s government, Mr. Parente was chairman of Petrobras’ board, the state owned oil company, later becoming its CEO in July 2016, after an invitation from president Temer. In the private sector, he served as the Chief Operating Officer for media group RBS, as chairman and CEO of Bunge Brasil and has also served on the board of directors of private and state-owned companies, including CPFL and B3.

Abilio dos Santos Diniz -Augusto Marques da Cruz FilhoChairman Vice-Chairman of BRF’s Board.our Board of Directors member of Strategy and Marketing Committee and People, Governance, Organization and Culture Committees. Mr. DinizCruz Filho holds a PhD in Economic Theory from the Institute of Economic Research (IPE) of the University of São Paulo, graduated in BusinessEconomic Sciences from the Economic and Administration University of the University of São Paulo (FEA-USP) and attended development abroad at Fundação Getúlio Vargas (FGV)INSEAD –Institut Européen d’Administration des Affaires. Together with his father, he was responsible for the establishment and development ofMr. Cruz Filho worked at Grupo Pão de Açúcar whose Boardfor 11 years holding the positions of Managers he chaired until September 2013. Between 1979 and 1989, he was a memberexecutive officer of the Brazilian National Monetary Council. Sincecompany, administrative and financial officer and, for over two years, CFO, until leaving the position in 2005. Between 2005 and 2010, he has been ministering a 360º Leadership course in partnership with FGV for developing young leaders. Currently, Mr. Diniz is also president of the Board at Península Participações, the investment firm that belongs to his family, and is aCruz Filho was member of the Board at Carrefour Brasil.

Renato Proença Lopes Board Member. Mr. Lopes has a bachelor’s degree in Civil Engineering Technology from the Universidade Mackenzie (São Paulo). He has a post-graduate degree in Business Administration from the Universidade Paulista (UNIP) and an MBA in Wholesale Businesses Management from FIPECAFI - Universidade de São Paulo (USP). He joined Banco do Brasil in 1992.  Over the past few years, he has held various positions in the bank as Deputy Manager in New York (2013/ 2015), Managing Director in the USA (2013/2015), Executive Manager – Commercial Department (2010/ 2013) and Corporate General Manager (2006/ 2010). He participated in the initial development of the integration and business prospection involving the wholesale pillar portfolio of Banco do Brasil and Banco Patagônia – Argentina (2010). In June 2015, Mr. Lopes was appointed Investments Director for PREVI (the Banco do Brasil employees’ pension fund), a position he currently holds.

Henri Philippe Reichstul Board Member. Mr. Reichstul has a bachelor’s degree in economics from the Universidade de São Paulo and postgraduate studies at Hertford College, Oxford. He was CEO of IPEA, Petrobras, Globopar and Brenco. Currently, Mr. Reichstul sits on the boards of directors of Peugeot Citroen S.A., Repsol YPF, LATAM Airlines Group, Semco Partners and Chairman of the board of Directors and Audit Committee of Fives Group.  HeB2W. Since April 2016, Mr. Cruz Filho is also a member of the consultative boards of Lhoist do Brasil Ltda., AES Brasil; vice president of the board of directors of the Foundation for Sustainable Development; and vice president of Einstein Hospital. Mr. Reichstul is a former member of the boards of directors of Louis Dreyfus Brasil, Ashmore Energy Internacional, BNDES, ABDIB, COINFRA, Foster Wheeler, and Gafisa, among other companies.

José Carlos Reis de Magalhães Neto Board Member.Mr. Magalhães Neto is a graduate in Business Administration from the Fundação Getúlio Vargas. He is a founder member and Chairman of the Board of Directors of Tarpon Investimentos S.A.BR Distribuidora. He is also sits onmember of the Board of Omega Energia Renováveis.Directors of JSL S.A. and General Shopping.

Dan Ioschpe Board member and member of Finance and Risk Management Committee and People, Governance, Organization and Culture Committee. Mr. MagalhãDan Ioschpe obtained his undergraduate degree in journalism from the Federal University of Rio Grande do Sul, a postgraduate degree at ESPM - SP and an MBA from the Tuck School of Dartmouth College. Mr. Ioschpe joined Iochpe-Maxion in 1986, where he held several positions until June 1996 when he left to become CEO at AGCO in Brazil. He returned to Iochpe-Maxion in January 1998 and was the CEO. In April 2014, he left Iochpe-Maxion to become Chairman of its board of directors. He is a member of the board of directors of WEG, Cosan and Marcopolo and Chairman of the board of Profarma. He is also Chairman of the board of directors of Sindipeças and Chairman of theFórum das Empresas Transnacionais Brasileiras - FET (Brazilian Transnational Companies Forum).

Flavia Buarque de Almeida Board member and member of People, Governance, Organization and Culture Committee and Strategy and Marketing Committee. Ms. Almeida has been an executive officer of Peninsula Capital Participações NetoS.A. since 2013 and a board member of the Carrefour S.A. (France) and W2W E-Commerce de Vinhos S.A (wine.com.br). Ms. Almeida was nominateda board member of Harvard University (Board of Overseers) from 2011 to stand2017, GAEC S.A.-Anima Educação from 2014 to 2017, and also an independent member of the board of directors of Lojas Renner S.A. from 2011 to 2016. Between 2009 and 2013, she was a senior partner of Monitor Group (currently Monitor Deloitte). Prior to that, between 2003 and 2009, Ms. Almeida was the general director of Participações Morro Vermelho S.A., a family holding company that controls the Camargo Corrêa Group. During the years 1989 to 2003, Ms. Almeida worked at McKinsey & Company, where she was a partner. Ms. Almeida holds a degree in Business Administration from Fundação Getúlio Vargas and an MBA from Harvard Business School.

Francisco Petros Oliveira Lima Papathanasiadis Board member, Coordinator of our Statutory Audit and Integrity Committee and member of the Finance and Risk Management Committee. Mr. Papathanasiadis is an economist and a lawyer specializing in corporate law, capital markets and corporate governance.He is the managing director of Fernandes, Figueiredo, Françoso and Petros - Sociedade de Advogados.He has worked for electionmore than 30 years in the Brazilian capital and financial markets, in the areas of investment analysis, corporate finance and asset management, in several institutions, including Unibanco, Brasilpar and Grupo Sul América. He was vice presidentand president of the Brazilian Association of Capital Markets (ABAMEC - São Paulo) between 1999 and 2001 and the first Chairman of the Supervisory Council of the Association of Capital Markets Analysts and Investment Professionals (APIMEC). From July 2015 to ourJanuary 2019, he was a member of the Board of Directors by Tarpon.of Petrobras and its Statutory Audit Committee.

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José Luiz Osório Board member and member of the Quality and Sustainability Committee. Mr. José Luiz Osório has Bachelor’s and Master’s degrees in Engineering from PUC-Rio and a Master’s degree in Engineering from Stanford University in the United States. He founded Jardim Botânico Investimentos in 2003 and he has been a member of the Board of Elba Equipamentos e Serviços S.A., since 2010. He held executive positions at Bank Boston and Banco Garantia, between 1978 to 1993. In addition, he was the managing partner of investment banking at Banco Icatu (1993 – 1997), country manager at Lehman Brothers Brasil (1997-1999), executive officer of BNDES/BNDESPar (1999) and President of the CVM (2000-2002) He was member of the board of directors of Lojas Renner (2005-2007), Invest Tur (2007 – 2008), Merge and Acquisitions Committee (2013 – 2015), Banco Triângulo (2003 – 2017), MZ Group (2009 – 2018) and was member of the Advisory Council of the Millstein Center for Global Markets and Corporate Ownership, Columbia University (2013 – 2016) and Millstein Center for Global Markets and Corporate Ownership, Columbia University (2007 – 2012).

Luiz Fernando Furlan –Board Member.member and member of the Quality and Sustainability Committee and Strategy and Marketing Committee. Mr. Furlan is a member of the Boardsboard of Directorsdirectors of Telefônica Brasil S.A. (Brazil), and Telefónica S.A. (Spain) and AGCO Corporation (USA). He was Chairman of the Boardboard of Directorsdirectors of Sadia S.A. from 1993 to 2002 and from 2008 to 2009, a company whereand he also heldoccupied several differentexecutivedifferent executive positions in the period from 1976 to 1993.  He was Co-ChairmanVice-Chairman of the Boardboard of Directorsdirectors of BRF S.A. from 2009 to 2011, as well as a member of the Boardboard of AMIL Participações S.A. from 2008 to 2013, Redecard S.A.AGCO Corporation (USA) from 20072010 to 20102017 and a member of the Advisory Board of ABERTIS Infraestruturas S.A. (Spain) from 2013 to 2015. He served as Minister of Development, Industry and Foreign Trade of Brazil from 2003 to 2007. SinceFrom 2008 to 2016, he has been Presidentwas Chairman of the Board ofFundação Amazonas Sustentável (FAS), and since 2013,then has been an honorary member. He was also a member of the Global Commission for the Conservation of Oceans (Global Ocean Commission – USA) from 2013 to 2015 and a Seniorcurrently is  Chairman of the board of LIDE and President of Deliberative Council Member forof SP Negócios (appointed by the Mayor of the São Paulo Health Management. Mr. FurlanCity) and is a graduatemember of the Wise Group Brazil-Japan (which seeks the strengthening of strategic economic partnership between Brazil and Japan).Mr. Furlan graduated with a degree in Chemical Engineering from FEI (the Industrial Engineering School) and a degree in Business Administration from the Universidade de Santana - São Paulo, having also concluded extension and specialization courses in Brazil and overseas.Paulo.


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Manoel Cordeiro Silva FilhoRoberto Antônio Mendes - Board Member.Mr. Silva Filho has 32 years of experience at Vale S/A, was a Chief Investment Oficer of VALIA and was a coordinator of the National Investment Committee of Associação Brasileira das Entidades Fechadas de Previdência Complementar, or ABRAPP. Mr. Silva Filho holds a degree in business administration from Faculdade Moraes Júnior, Rio de Janeiro, a post-graduation qualification in economic engineering from Faculdade Estácio de Sá, Rio de Janeiro and an MBA in finance from IBMEC.

Walter Fontana Filho Board Member.member and member of the Statutory Audit and Integrity Committee. Mr. Fontana Filho holds a Bachelor’s and postgraduate degrees from PUC in São Paulo and a specialization course in Marketing Administration from FGV. He wasRoberto Mendes is currently a member of the Advisory Boardboard of directors of Hermes Pardini Institute, Pottencial Insurance Company and Hapvida. He also participates in the newspaperO Estado de São Paulo from 1999 to 2013Audit and is currently ChairmanFinance Committees of the Board of Directors. He is also member of the Board of Martins Comércio e Serviços de Distribuição S.A. since 2013.Localiza Rent a Car. He was Director of Finance and Investor Relations of Pottencial Insurance Company from 1985 to 2018 and CFO from July 2018 to January 2019. He graduated with a degree in Business Administration and Accounting Sciences from the Federal University of Minas Gerais. He attended the Executive STC of FDC and Kellogg School of Management in Chicago and the Strategy and Innovation in Business at Wharton University of Pennsylvania in 2011. He began his career in 1971 at PWC, worked at KPMG and was Controller of Valep (now Fosfertil) and Mendes Junior.

Roberto RodriguesBoard member of ALGAR – Algar S.A. Empreendimentos e Participações and member of the BoardQuality and Sustainability Committee. Mr. Rodrigues graduated with a degree in agricultural engineering from the Luiz de Queiroz College of Directors of WTorre Empreendimentos Imobiliários S.A. At Sadia, he was Commercial Director – Domestic Market from 1983 to 1988, Commercial Executive Vice President from 1988 to 1994, Chief Executive Officer from 1994 to 2005 and ChairmanAgriculture of the BoardUniversity of DirectorsSão Paulo (ESALQ-USP) in 1965. He was awarded an Honorary Doctorate degree in Rural Administration from 2005 to 2008.the São Paulo State University (UNESP) in 1998. Mr. Rodrigues was a professor at UNESP and member of the board of directors of Minerva S.A. from 1967 until 2017. He has been member of the Advisory Council of the Organization of Cooperatives of the State of São Paulo (OCESP) since 1990 and Coordinator of the Agribusiness Center of theFundação Getúlio Vargas (FGV) since 2006. He was President (2006-2012) and is currently a member of the Agribusiness Council of the Federation of Industries of the State of São Paulo (COSAG FIESP). Additionally, Mr. Rodrigues is a managing partner of Agroerg Investimentos e Serviços Ltda.

Vicente Falconi CamposWalter Malieni Júnior Board Member. Mr. Falconi Campos is founder and Chairmanmember, member of the Board of Directors of FALCONI - Consultores de Resultados, the largest management consulting company in Brazil. He is a consultant to the Brazilian Federal GovernmentStatutory Audit and various state governmentsIntegrity Committee and municipalities, in addition to large Brazilian companies such as AmBev, Gerdau, Vale, AMIL (United Health), PETROBRAS and B2W, among others. He graduated in Engineering in 1963 from the Universidade Federal de Minas Gerais (UFMG) and has the qualifications of M.Sc. and Ph. D. in Engineering from the Colorado School of Mines, in the U.S. He is Professor Emeritus of UFMG, was awarded the Medalmember of the OrderFinance and Risk Management Committee. Mr. Malieni Junior holds a degree in Economics from Universidade Presbiteriana Mackenzie, an MBA in Capital Markets and Finance from Ibmec, a postgraduate degreein General Training for Executives from USP and a Master’s Degree in Business Administration from Universidade Presbiteriana Mackenzie. Currently, he is the CEO of Rio Branco for services rendered to the nation, and was chosen by the American Society for Quality Control as one of the “21 voices of the XXI Century.”

Aldemir Bendine –Board Member.BrasilPrev. Mr. BendineMalieni has been the Chairman of  Petrobras – Petróleo Brasileiro S.A.  since February 9, 2015. He was born in 1963 and holds a bachelor’s degree in Business Management. He also has an MBA for Top Executives from FIPECAFI-USP and in Finance at PUC, Rio de Janeiro. He is a civil servant beginning his professional career as a trainee at Banco do Brasil since 1984, when he joined the company in 1978.  Hethe Minor Apprentice program. In addition to his most recent position as Vice President in the Wholesale Business area, he also served as Chairman of Banco do Brasil from April 2009 to February 2015. He held several positions at the bank  including Vice President for Cardsof Retail Distribution and New Retail Business andPersonnel Management, Vice President for Retailof Internal Controls and Distribution, also serving as Executive Board Secretary, Executive Manager of the Retail BoardRisk Management and Branch Manager. Mr. Bendine has been an ExecutiveStatutory Commercial Director of the Brazilian FederationCia. De Seguros Alliance of Banks (FEBRABAN), CEO of the Brazilian Association of Card CompaniesBrazil. His career also includes experience as a consultant to important companies such as BRF, Eletrobrás, Kepler Weber S.A, Neoenergia and Services (ABECS), Chairman of the Board of Directors of CBSS (Visa Vale), CEO of BB Administrador  de Cartôes de Crédito S.A. and BB Administrador  de Consorcios S.A.Previ.

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Executive Officers

Our executive officers are responsible for our day-to-day operations and implementation of the general policies and guidelines approved from time to time by our board of directors.

Our by-lawsbylaws require that the board of executive officers consist of a chief executive officer,Chief Executive Officer, a chief financial officer, a director of investor relationsChief Financial and Investor Relations Officer and up to twelvethirteen additional members,Vice Presidents, each with the designation and duties assigned by our board of directors.

Our executive officers are elected by our board of directors for two-year terms and are eligible for reelection. The current term of all of our executive officers ends at our annual shareholders’ meeting to be held in2017. Our board of directors may remove any executive officer from office at any time with or without cause. Under the Brazilian Corporation Law, our executive officers must be residents of Brazil but do not need notto be shareholders of our company.shareholders. Our board of executive officers holdshold ordinary monthly meetings, as well as extraordinary meetings, when called by our Chief Executive Officer.


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The following table sets forth the name, position and the yearapplicable date of electionappointment of each of our current executive officers. A brief biographical description of each of our executive officers follows the table:

Senior Management

Name

Position Held

SinceAppointment Date

Age

 

 

 

 

Pedro de Andrade FariaPullen Parente

Global Chief Executive Officer Global

January 1, 2015June 18, 2018

4066

José Alexandre Carneiro Borges   Lorival Nogueira Luz Júnior

   Global Chief Operating Officer and Interim 

June 18, 2018; April 25, 2019

47

Chief Financial and Investor Relations Officer

February 25, 2016Vinícius Guimarães Barbosa

45

Gilberto Antonio OrsatoOperations and Procurement Officer

Vice President – Quality and ManagementAugust 1, 2018

January 1, 2015

54

José Roberto Pernomian Rodrigues

Vice President – Legal and Corporate Affairs

January 1, 2015

47

Helio Rubens Mendes dos Santos Junior

Vice President – Supply Chain

January 1, 2015

51

Rodrigo Reghini Vieira

Vice President – People

January 1, 2015

43

Simon Cheng

General Manager Asia

June 25, 2015

40

50

*On December 31, 2018 the Chief Financial and Investor Relations Officer was Mr. Elcio Mitsuhiro Ito who resigned on March 11, 2019.On April 25, 2019, Mr. Ivan de Souza Monteiro, who was appointed as ChiefFinancial and Investor Relations Officer on March 11, 2019, resigned from his position. Mr. Lorival Nogueira LuzJúnior, the Company’s current Chief Operating Officer, was appointed on April 25, 2019 as Interim Chief Financialand Investor Relations Officer.

Pursuant toNovo Mercado rules, we anticipate that Mr. Pedro Pullen Parente’s term as Chief Executive Officer will end on June 18, 2019, as he may only hold the positions of Chairman of the Board of Directors and Chief Executive Officer at the same time for a period of one year. In connection with the end of Mr. Pedro Pullen Parente’s term as Chief Executive Officer, the Company will appoint a new Chief Executive Officer. On March 28, 2019, Mr. Lorival Nogueira Luz Júnior, the Company’s current Chief Operating Officer, was named Mr. Parente’s successor as Chief Executive Officer following the end of Mr. Parente’s term.

The following is a summary of the business experience in the sector, areas of expertise and principal outside business interests of our current executive officers.

Pedro de Andrade FariaPullen Parente Chief Executive Officer, Global. Mr. Faria has a degree in Business Administration from Fundação Getúlio Vargas in São PauloPlease see “—A. Directors and an MBA from the University of Chicago. Mr. Faria was a member of the Senior Management—Board of DirectorsDirectors” for the biographical information of BRF from April 2011 to November 2013. He vacated the position on the Board to become the Company’s International CEO, a post that he held until the end of 2014. Mr. Faria is currently BRF’s Global CEO. Mr. Faria was a member of the Board of Directors of Tarpon, as well as its CEO and Investor Relations Officer from January, 2013 until August 2013. In addition, he sits on the Boards of Directors of Cremer S.A., Ômega Energia Renovável S.A., AGV Holding S.A., Morena Indústria e Comércio de Confecções S.A., Cia Acqua and Arezzo. Mr. Faria was also Finance Director/IRO at Brasilagro from its foundation until February 2007. Before joining Tarpon, he was an executive partner at Pátria Investimentos, responsible for monitoring private equity portfolio. Mr. Faria also worked at the Chase Manhattan Bank and at Patrimônio/Salamon Brothers.Pedro Pullen Parente.

José Alexandre Carneiro Borges –Lorival Nogueira Luz Júnior— Mr. Lorival Luz has more than 26 years of professional experience. In September 2017, he was appointed as Chief Financial and Investor Relations Officer, . Mr. Borges holds an undergraduate degree in Economics from Universidade Federal do Rio de Janeiro and an MBA from Columbia Business School, New York. Until February 25, 2016,April 2018, he was General Manager - Latam, based in Buenos Aires, Argentina, with responsibility forappointed as interim CEO. In June 2018 he was appointed Global Chief Operating Officer and, on March 28, 2019, he was named Mr. Parente’s successor as the entire region except Brazil. PriorGlobal CEO of the Company following the end of Mr. Parente’s term. On April 25, 2019, he was appointed as Interim Chief Financial and Investor Relations Officer. From 2013 to assuming that position,September 2017, he was the CEOVice President of Cremer, a leading companyFinance and Investor Relations at Votorantim Cimentos S.A. Between 2010 and 2011, he was Executive Officer of Treasury and Investor Relations at Votorantim Industrialand in healthcare productsMarch 2011 he was elected as Finance and Investor Relations Officer of CPFL Energia S.A. and subsidiaries of the CPFL Energia group. From 2008 to 2009, he was CFO and Investor Relations Officer at Estácio Participações. Prior to that, Mr. Lorival Luz worked at Citibank for 17 years, holding different positions in Brazil.the Corporate and Investment Bank, Treasury, Retail Bank and Financial Control divisions. He was also a partnerExecutive Officer of Treasury at Tarpon Investimentos, an investment manager company, responsible for investmentsCredicard and operational management of invested companies. Before joining Tarpon,held the same position at Banco Citicard until 2008. Mr. Borges worked at Egon Zehnder as well as at Morgan Stanley´s Latin America Investment Division as Vice President. He also worked at Goldman Sachs in New York in the investment banking area. He began his career in financial and planning positions at Esso, a subsidiary of Exxon Mobil in Brazil.

Gilberto Antonio Orsato - Vice President - Quality and Management. Mr. OrsatoLorival Luz holds a degree in Business Management. He also received a degree in Business Management — STC from theAdministration at Fundação Dom Cabral /Kellogg Business SchoolArmando Álvares Penteado - FAAP, with several specialization courses abroad.

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Vinícius Guimarães Barbosa — Mr. Vinícius Barbosa graduated in Production Engineering at the Federal University of ManagementRio de Janeiro and holds an MBA in Business Administration from FIA/Universidade de São Paulo (USP).Ibmec. He joined BRF in 1980,started his career as a trainee at Brahma (Anheuser-Busch Inbev), where he worked as Sectionfor 25 years and Factory Head, Slaughtering Supervisor, Processing Plant Production Manager, Deputy Directorserved in several positions in procurement, operations and Executive Vice President – Human Resources.

José Roberto Pernomian Rodrigues— Vice President - Legal and Corporate Affairs. Mr. Rodrigues has had a long legal career with extensive experiencelogistics. He was responsible for the integration of several M&As in the fieldsupply chain department. Before joining BRF, Mr. Vinícius Barbosa was Vice-President of business law.Operations and Logistics at Anheuser-Busch for the United States and Canada. He was professor of general theory of law, financial lawbecame our Operations and tax lawProcurement Officer in various educational institutions, as well as a judge on the Court of Taxes and Duties of the Secretary of the São Paulo State Finance. He worked briefly as a manager in the information technology area. Mr. Rodrigues holds a degree in Law and Doctor of Law from the University of São Paulo (USP).He is a Member of AASP (Associação dos Advogados de São Paulo) and IASP (Instituto dos Advogados de São Paulo).2018.


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Hélio Rubens Mendes dos Santos Junior -Vice President - Supply Chain. Mr. Santos Junior has a degree in Chemical and Food Engineering from the Universidade Federal de Rio Grande (FURG) with specialization in business administration from FGV in São Paulo and Universidade de Campinas (UNICAMP). He began his career at Sadia in 1988, gaining experience in the areas of production, engineering, industrial excellence, RD&I and integrated planning.

Rodrigo Reghini Vieira - Vice President - People.Mr. Vieira has had 17 years of professional experience working as a consultant, executive and entrepreneur. He was an engineer at Ericsson Telecommunications, a founding partner of Arremate.com, a director of K2 Achievements and a member of the Executive Committee of the BMG Group. He sat on the boards of directors of AGV, Morena Rosa Group S.A., Cremer and Tarpon Investimentos, where he was also a partner and Human Resources Director from 2011 to 2013. Mr. Vieira has a degree in Electrical Engineering from the Polytechnic School, USP, and an MBA from the Kellogg School of Management in the U.S.

Simon Cheng - General Manager Asia. Prior to becoming General Manager Asia in 2014, Mr. Cheng was a member of our Board and our Strategic Committee between 2013 and 2014, while also being an Investment Officer with Tarpon Investments leading new investments thesis and pipeline. He spent 15 years with The Boston Consulting Group, where he was a Partner and Managing Director. He focused on consumer & retail industry, and led the Corporate Development Practice for Latin America. Simon has lived and worked in multiple countries across Asia and North and South America. He has a Master degree in Business Administration from Harvard Business School and a Bachelor degree in Business Administration, Cum Laude, from Fundação Getúlio Vargas.

B.                 Compensation

In 2015,2018, the total salary paid by us to all our executive officers and the total compensation paid by us to all members of our board of directors and fiscal council and statutory audit committee for services in all capacities was R$ 30.540.1 million. In addition, wethe amount paid to our executive officers R$10.4 million in 20152018 as part of our profit sharing plan.plan was R$3.7 million. The aggregate total compensation paid to members of the board of directors, fiscal council and statutory audit and integrity committee and executive officers in 20152018 (including salaries, profit sharing payments, as described below, and benefits) was R$ 42.360.5 million.

The amount of variable compensation paid to each executive officer in any year pursuant to our profit sharing plan is primarily related to ourfinancial and non-financial results such as EBITDA, volume growth, and net profit, among others, but is also based on an assessment by our board of directors of the performance of the officer during the year by our board of directors.year. The amount paid depends on the amount of the profit sharing payment to a multiple of the officer’s monthly salary, taking into accountconsidering results reached, based on the minimum EBITDA goalgoals set by the company for the year, the quality standards of our icon products and the budget of  the area.year. We believe this methodology provides a reasonable cap on the amount of compensation paid to executive officers pursuant to our profit sharing plan.plan and is competitive when compared to market practices.

Our executive officers are also eligible to participate in our Stock Option Plan and Restricted Stock Plan. As of December 31, 2015,2018, a total of 3,735,419898,157 stock options and restricted stock units were held by them,our executive officers, with a cost to our company of R$13.05.6 million. NoIn 2018, a total of 730,030 stock options and shares of restricted stocks have beenstock were granted to our executive officers as of December 31, 2015.officers. For more details aboutadditional information regarding our Stock Option Plan and Restricted Stock Plan, see “—E. Share Ownership—Stock Option Plan and Restricted Stock Plan.”

The table below shows information about the options and restricted stock units granted to executive officers of BRF in previous years that are still outstanding:outstanding as of December 31, 2018:

Grant

# Options

Grant Price(1)

Strike Price as
of December 31, 2015

Expiration Date

2012

19,274

R$ 34.95

R$ 44.86

May 1, 2017

2013

75,413

R$ 46.86

R$ 56.48

May 1, 2018

2014

589,832

R$ 44.48

R$ 50.44

April 3, 2019

2015

3,050,900

R$ 63.49

R$ 70.14

December 17, 2019

Total

3,735,419

 

 

 

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Grant

# Options / Restricted Stock Units

Grant Price(1)

Strike Price as
of December 31, 2018(2)

Expiration Date

 

 

 

 

 

2014

42,712

R$44.48

R$55.85

April 3, 2019

2015

16,970

R$63.49

R$77.15

December 17, 2019

2016

34,180

R$46.68

R$48.87

May 30, 2022

2017 (Restricted Stock Units)

74,265

R$41.85(3)

N/A

September 30, 2019

2018 (Restricted Stock Units)

276,000

R$22.29

N/A

June 30, 2020

2018 (Restricted Stock Units)

135,000

R$20.00

N/A

June 30, 2020

2018 (Restricted Stock Units)

319,030

R$21,44

N/A

October 1, 2021

Total

898,157

 

 

 

 

(1)       The grant price refers to the average stock price at BM&F BovespaB3 of the last 20 trading days before the Grantgrant date.


Table(2)       Strike price updated with IPCA from January 2018 through November 2018.

(3)       The grant price refers to the stock price at B3 on the day of Contents

the grant date.

The executive officers receive certain additional company benefits generally provided to company employees and their families, such as medical assistance, educational expenses, development and supplementary social security benefits, among others. They also participate in our private pension plan. At age 61, we cease making contributions to pension plans for executive officers and other employees. In 2015,2018, the amount paid as benefits and private pension plan to the executive officers totaled R$1.30.6 million. 

We compensate our alternate directors for each meeting of our board of directors that they attend. We also compensate alternate members of our fiscal council and statutory audit committee for each meeting of our fiscal council and statutory audit committee, respectively, that they attend.

Our executive officers and the members of our board of directors, statutory audit and integrity committee and fiscal council are not parties to employment agreements or other contracts providing for benefits upon the termination of employment other than that, in the case ofemployment. However, non-compete agreements may be entered into with executive officers non-compete agreements are signed upon hiring.departing the Company. In 2015,2018, we paid severance benefits to former executive officers in the amount of R$0.20.1 million.

C.                 Board Practices

For information about the date of expiration of the current term of office and the period during which each directormember of the Board of Directors and executive officer has served in such office, see “—A. Directors and Senior Management.” For information about contracts for benefits upon termination of employment, see “—B. Compensation.”

Fiscal Council

Under the Brazilian Corporation Law, the fiscal council is a corporate body independent of management and the company’s external auditors, which has authority, among other matters, to supervise certain acts of management, to issue a report on the financial statements prepared by management and to give an opinion on management proposals to be submitted to general shareholders’ meetings regarding changes in the capital stock, issuance of debentures or warrants, investment plans or capital budgets, dividend distribution, transformation, merger, consolidation or demerger. The fiscal council is not the equivalent of, or wholly comparable to, a U.S. audit committee.

We have a permanent fiscal council composed of three members and their alternates who are elected at the annualordinary general shareholders’ meeting, with terms lasting until the succeeding annualordinary general shareholders’ meeting with reelection being permitted.

New elections to the fiscal council are scheduled for the general shareholders’ meeting to be held on April 7, 2016, with a proposed slate to the fiscal council to include Attilio Guaspari, Reginaldo Ferreira Alexandre and Marcus Vinícius Dias Severini. In addition, the proposed slate includes the following alternates: Susana Hanna Stiphan Jabra, as alternate to Attilio Guaspari; Walter Mendes de Olveira Filho, as alternate to Reginaldo Ferreira Alexandre; and Marcos Tadeu de Siqueira, as alternate to Marcus Vinícius Dias Severini. We cannot predict whether these proposed Fiscal Council members will, in fact, be elected at the shareholders’ meeting.

The following table sets forth information with respect to the current members of our fiscal council and their respective alternates.

Name

Position Held

Current Position Held Since

Age

Attilio Guaspari(1)

President of the Fiscal Council

April 29, 20052019

6972

Susana Hanna Stiphan Jabra(1)

Alternate

April 8, 201529, 2019

5861

Reginaldo Ferreira Alexandre

Maria Paula Soares Aranha(1)

Member of the Fiscal Council

April 29, 2019

62

Monica Hojaij Carvalho Molita(2)

Alternate

April 29, 2019

49

André Vicentini(1)

Member of the Fiscal Council

April 8, 201529, 2019

5637

Walter Mendes de Olveira FilhoValdecyr Maciel Gomes(1)

Alternate

April 8, 201529, 2019

60

Marcus Vinícius Dias Severini

Member of the Fiscal Council

April 8, 2015

58

Marcos Tadeu de Siqueira

Alternate

April 8, 2015

6064

 

(1)       Independent Member (as defined under the BrazilianNovo Mercado rules).

(2)      Mrs. Maria Paula Soares Aranha and her alternate, Mrs. Mônica Hojaij Carvalho Molina, were appointed to the Fiscal Council on April 29, 2019. From April 26, 2018 to April 29, 2019, Mr. MarcusVinicius Dias Severini was a member of the Fiscal Council and Mr. Marcos Tadeu de Siquiera was his alternate.

 

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Below is a summary of the professional experience and areas of activity of our current fiscal council members:

Attilio Guaspari — President—President of the Fiscal Council. Mr. Guaspari holds a degree in Civil Engineering and a Master’s degree in Business Sciences. He is alsowas a member of the Audit Committee of the National Development Bank – BNDES. He wasBNDES and President of the Fiscal Council and the Audit Committee of both Perdigão and BRF, with the designation of audit committee financial expert. He has extensive experience in the position of Internal Audit Committee Head, as finance directorFinancial Director and member of fiscal councils.boards of directors. Mr. Guaspari qualifies as an independent member of the Fiscal Council under the Novo Mercado rules.

Reginaldo Ferreira Alexandre –Member of the Fiscal Council. Mr. Ferreira Alexandre is an economist with fifteen years of experience in the area of investment analysis as an analyst, organizer and director of research teams, having held positions at Citibank, Unibanco, BBA (currently Itaú-BBA) and Itaú Corretora de Valores. He has also worked as a corporate credit analyst (Citibank) and as a consultant in the areas of strategy (Accenture) and corporate finance (Deloitte). At present, Mr. Ferreira Alexandre works for ProxyCon Consultoria Companyrial, a company dedicated to advisory and service activities in the areas of capital markets, finance and corporate governance. Mr. Ferreira Alexandre would qualify as an independent member under theNovo Mercado rules.

Marcus Vinicius Dias SeveriniMaria Paula Soares Aranha– Member of the Fiscal Council. Mr. Dias Severini holdsMrs. Maria Paula Has a bachelor's degree in accounting and electrical engineering andbusiness from FGV-EAESP, she has a post-graduate degree in economic engineering. Before his retirementbusiness with expertise in 2015, hefinance from FGVEAESP, a post-graduate degree in accounting sciences from FGV-RJ, a Master of Business Administration from Universidade de São Paulo – USP and a master’s degree in controllership and accountability from FEA/USP. She was a member of the controllerBoard of Valia, which he joinedDirectors of Fibria Celulose S.A. from 2013 to 2018, acting as coordinator of CAE–Committee of Statutory Audit, since its incorporation, a member of the Board of Directors of Paranapanema S.A. from 2014 to 2016, also acting as coordinator of the Non-Statutory Audit Committee of this company, a tax advisor for two years at Fibria Celulose S.A. from 2011 to 2013 and she also worked two years at Invepar S.A. from 2016 to 2018. Currently, she serves on the Audit and Risks Committee of Grupo Hapvida, acting as a specialist in October 1994. From Decemberrisk management and financial statements. She is a certified Board Member by the ICSS-A and she participated on the commission of IBGC Risks and Control Management. She is a specialist advisor in controllership, internal controls and corporate management systems. She was an employee of Banco do Brasil from 1981 to 1994, Mr. Dias Severini held positions at Arthur Andersen S/C, including the position of Audit and Accounting Consultant Manager. He has also served2007, where she worked as a member or alternate member on the supervisory boards of several companies and as a chairmanExecutive Manager of the boardControllership Board and Distribution Board. She has experience working in 28 financial institutions, promoting the creation of Fundação Vale de Seguridade Social – VALIA.

Undervarious models and the Brazilian Corporation Law, the fiscal council is a corporate body independentimplementation and development of management systems. She has experience with planning, budgeting, costs, management accounting, risk management, management in bank services distribution, agency network management and the company’s external auditors. The fiscal council has not typically been comparable to a U.S. audit committee; rather, its primary responsibility has been to monitor management’s activities, review the financial statements, and report its findings to the shareholders. At our shareholders’ meetingterminal service.

André Vicentini — Member of April 3, 2014, our shareholders approved the establishment of the Statutory Audit Committee. Thus, the Fiscal Council that performed certain functionsMr. André Vicentini graduated in Mechanical Production Engineer from Escola Politécnica of an Audit Committee becamethe University of São Paulo – USP (2003), with a pure Fiscal Council,specialization in ALM (Asset Liability Management) and Risk Management from the Educational Institute of BM&FBOVESPA (now B3) (2010 and 2012). From January 2009 to March 2016, he acted as definedCorporate Superintendent of Treasury and Financial Services of BM&FBOVESPA S.A. (now B3) and was responsible for the financial management of companies of the group, both in Brazil and abroad, in the new bylaws dated April 3, 2014areas of treasury, financial planning, accounts payable, accounts receivable, credit and collection. He was also responsible for the financial management of the pension plan fund, acting as Director of Investments of Mercaprev (AETQ). From September 2006 to December 2008, Mr. Vicentini acted as Manager of Financial Management of Telefônica S.A. and was responsible for the financial operations of the group in accordance with Brazilian Corporation Law.local and International markets, for cash management and protection of market risks. From September 2003 to September 2006, he acted as Financial Analyst of Perdigão Agroindustrial, and was a member of the treasury group responsible for the management of cash flow, analysis of feasibility and pricing of structured operations, derivatives and operations of foreign trade. From January 2001 to September 2003, he was a trainee at Banco Votorantim, acting in the structuring desk and pricing of products.

Statutory Audit and Integrity Committee

Our shareholders approved the establishment of the Statutory Audit Committee at our ordinary and extraordinary general shareholders’ meeting held on April 3, 2014. On November 5, 2018, shareholders at our extraordinary general shareholders’ meeting resolved to rename the committee the Statutory Audit and Integrity Committee. The Statutory Audit and Integrity Committee is composed of upthree to fourfive members, a majority of whom at least two must be independent members, one of whom cannot be a member of the company’s Boardboard of Directorsdirectors and none of whom shall be an executive officer (in accordance with the independence standards of the CVM, in particular CVM Instruction No. 509/11) and at least two must be independent external members who must not be directors or executive officers of the company. Notwithstanding the above, our Board has approved some amendments to our bylaws subject to approval by the shareholders at the annual meeting to be held on April 7, 2016. According to the proposed by-laws, the Audit Committee shall consist of a minimum of three (3) and a maximum of five (5) members, of whom at least one (1) will be an independent member..

The members of the Statutory Audit and Integrity Committee must be appointed by the Boardboard of Directorsdirectors for terms of two years, but for a total period not to exceed ten years. They are subject to removal from their positions bypositionsby the Boardboard of Directorsdirectors at any time. The members of the Statutory Audit and Integrity Committee who are also members of the Boardboard of Directorsdirectors shall terminate concomitantly with his or her termination as a director.board member.

The members

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Our Statutory Audit and Integrity Committee complies with CVM Instruction No. 509/11 of November 16, 2011, and accordingly, allows us to rely on the exemption from the audit committee requirements of the SEC contained in paragraph (c)(3) of Rule 10A-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Statutory Audit Committee shall comply with both Brazilian regulations, in particular CVM Instruction 509/11, and applicableIntegrity committee is not the equivalent of, or wholly comparable to, a U.S. regulations, including provisions of the Sarbanes–Oxley Act and rules issued by the U.S. Securities and Exchange Commission.audit committee.

The following table sets forth information with respect to the current members of our Statutory Audit and Integrity Committee.


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Name

Position Held

Current Position Held Since

Age

Sergio Ricardo Silva Rosa Francisco Petros Oliveira Lima Papathanasiadis(2)

Coordinator

April 3, 2014June 14, 2018

5654

Roberto Antônio Mendes(2)

Member

June 14, 2018

66

Fernando Maida Dall Acqua Dall’Acqua(1)(2)

External Member and Financial Expert

April 3, 2014June 14, 2018

6670

Walter Fontana Filho(2)Malieni Júnior

Member

April 3, 2014June 14, 2018

6247

Thomas Tosta de Sa(2)(3)

External Member

January 31, 2019

80

 

(1)       Audit and Integrity Committee Financial Expert (as defined under the rules of the U.S. Securities and Exchange Commission)SEC)

(2)       Independent Member (as defined under the BrazilianNovo Mercado rules).

(3)       On December 31, 2018 Mr. Sergio Ricardo Silva Rosa was an external member and was replaced by Mr. Thomas Tosta de Sa on January 31, 2019.

Below is a summary of the professional experience and areas of activity of our current members of the Statutory Audit and Integrity Committee:

Please see “—A. Directors and Senior Management” for the biographical information of Mr. Papathanasiadis, Mr. Roberto Antônio Mendes and Mr. Malieni Júnior.

Fernando Maida Dall’AcquaExternal Member of the Statutory Audit and Integrity Committee and its Financial Expert. Mr. Dall’Acqua holds a mastermaster’s degree in business administration from the Getulio Vargas Foundation, a PhD in Economic Development from the University of Wisconsin-Madison, USA, and received the post-doctoral title of “Livre Docente” in Business Administration from the Getulio Vargas Foundation. He is a Professor of Economics ofat the School of Administration of São Paulo (Getulio Vargas Foundation) and provides consulting services to major companies on mergers and acquisitions, economic and financial valuation and macroeconomic and tax advisory services. He was the Chairman of the Fiscal Council of Grupo Pão de Açucarúcar and Viavarejo. He is currently a Boardboard member and chairman of the Audit Committee of ISA-CTEEP and the chairman of the Audit Committee ofO Estado de São Paulo newspaper. He was the Finance Secretary of the state of São Paulo, state, has held financial, tax, budget and strategic management positions, besidesin addition to serving as a member of the São Paulo State Privatization Council. He was director of the Project Center for Latin America and the CaribeanCaribbean of the IICA/OEA.  He was also a member of the Board of Directors and the Audit Committee of Sabesp and a member of the Boards of CESP, PRODESP, DERSA, Banco Nossa Caixa and Banespa, as well as served on the Advisory Board of Grupo Pão de Açúcar. He was president of the People Bank of the São Paulo Government .Government. He was also a Fellow at Michigan State University, U.S.AU.S.A. and adviser of the World Bank for fiscal policy and credit market and of the Ministry of Finance of the Brazilian government.market.

Sérgio Ricardo Silva Rosa –Thomas Tosta de Sa– External Member of the Statutory Audit and Integrity Committee. Mr. Silva Rosa graduated in journalismTosta is an Engineering graduate from the ArtsPUC-RJ and Communication Schoolreceived an MBA from New York University. He is CEO of USP. Mr. Silva Rosa was investment directorIbmec (Brazilian Institute of ABRAPP; a memberCapital Markets). He also acts as coordinator of the Social and Economic Development Council (CDES) and a founder and memberExecutive Committee of the PRI (Principles for Responsible Investment) Council, a United Nations-supported program. Mr. Silva Rosa was a Director of the Bank Workers Labor Union, President of the National Confederation of Bank Workers under the umbrella of the United Workers Central - CUT and the Latin American Bank Workers Federation. He was a member of São Paulo city council between 1994 and 1996. He was also aCapital Markets Master Plan, member of the Board of America Latina Logística S.A.Abrasca (Brazilian Association of Public Companies) and Brasil Telecom S.A.member of the Advisory Board of ABVCAP (Brazilian Association of Private Equity & Venture Capital). He wasis former president of the executive directors for the companies: Valepar S.A, Litel S.A., 521 Participações, BrasilPrevCVM (Securities Exchange Commission in Brazil) and PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil between 2003 and 2010, where he also held the position of Equity Investment Director. He chaired theCosra (Securities Regulators Board of Companhia Vale S.A. between 2003 and 2010, and was the Vice Chairman of the Board of Directors of BRF S.A between 2013 and 2015.Americas) - 1995.

Please see “—A. Directors and Senior Management” for the biographical information of Ms. Fontana Filho.

Paulo Guilherme Farah Correa (former board member) was previously a member of our Statutory Audit Committee. He resigned from the board and the committee on February 29, 2016.99


For more information about the Statutory Audit and Integrity Committee, see “Item 10.Additional10. Additional Information –– B. Memorandum and Articles of Association –– Statutory Audit and Integrity Committee.”


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Advisory Committees for our Board of Directors

Under our by-laws,bylaws, our Boardboard of Directorsdirectors may, for advisory purposes, set up technical or consultative committees, of a non-deliberative nature, to undertake special tasks or general activities of interest to us.

In addition to the Statutory Audit and Integrity Committee, we have other threefour advisory committees for our Boardboard of Directors:directors: (i) Strategy, M&AFinance and MarketsRisk Management Committee, (ii) Finance,Strategy and Marketing Committee, (iii) People, Governance, Organization and SustainabilityCulture Committee and (iii) People, Organization(iv) Quality and CultureSustainability Committee. They are composed of members of our Boardboard of Directors,directors, as well as other professionals.

The People, Governance, Organization and Culture Committee is responsible for advising the board of directors in setting compensation policies and the compensation of executives and employees, provides support to the executive officers in the assessment, selection and development of top leadership, advises the board of directors in the formulation and practice of BRF culture to monitor and encourage proper behavior of leaders, and proposes actions to align the expectations of shareholders and executives.Its members are Vicente Falconi Campos (Chairman), Henri Philippe Reichstul, José Carlos Reis Magalhães Neto, Luiz Fernando Furlan and Manoel Cordeiro Silva Filho.Thisexecutives. This committee is not the equivalent of, or wholly comparable to, a U.S. compensation committee.

D.                 Employees

The table below sets forth the number of our employees by primary category of activity as of the dates indicated:

As of December 31

As of December 31,

2015

2014

2013(1)

2018

2017

2016

Administration

13,147

13,555

16,009

21,839

21,189

21,346

Commercial

7,644

9,601

9,664

Production

75,488

81,621

84,465

83,782

87,045

81,117

Total

96,279

104,777

110,138

105,621

108,234

102,463

 

(1)   This information includes employees in Brazil. While the total number of employees did not change significantly, we changed the manner in which we allocate employees internally, which accounts for the difference in Administration and Commercial employees from 2013 to 2014.

All of our employees listed above are located in Brazil, except for approximately 5,24520,739 employees in 2015 (4,0522018 (16,028 in 20142017 and 4,18616,151 in 2013),2016) who are located abroad, mainly in our sales offices and processing plants in Europe, Argentina,Southern Cone, Middle East and Asia.

We do not employ a material number of temporary employees. However, during the Christmas holiday season in Brazil we contract a company that furnishes sales representatives to assist us with holiday sales.

All of our production employees in Brazil are represented by labor unions. The production employees inunions and each state havelocation has a different union, and theunion. The terms of our collective bargaining agreements vary in accordance with the union. In each case, however, salary negotiations are conducted annually between workers’ unions and us. The agreement reached with the local or regional union that negotiates the applicable collective bargaining agreement for a particular facility is binding on all production employees, whether or not they are members of the union. In general, collective bargaining agreements are applicable to all employees of that union or region, respecting the different professional categories. Our administrativeIn other countries, where applicable, a union represents our employees and all of them are also generally members of separate unions.covered by collective bargaining agreement. We believe that our relations with our employees and their labor unions are satisfactory, and there have been no strikes or significant labor disputes in the last few years.satisfactory.

We offer to our employees all legally required benefits according to each country’s laws and in some locations complementary benefits are also offered. We have quite competitive benefit plans for each office around the world. In Brazil, the main benefits areare: (1) the private pension plan, administered by BRF Previdência (formerly BFPP – Brasil Foods Sociedade de Previdência Privada,Privada), (2) a creditcooperativecredit cooperative that offers to the associated employee credit lines with attractive interest rates, (3) supplementary health plan that allows the employee to use the network agreements with costs subsidized by us, (4) meals, offered in our own restaurants or restaurant cards for subsidiesforsubsidies of up to 80% by us, (5) basic consumer products granted to employees with salary of up to five times the minimum wageswage and 80% subsidized by us and (6) a collective insurance life policy.


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We have implemented productivity incentive programs, such as the Profits and Results Sharing Program, which is available to all employees, as well as variable compensation systemsystems linked to targets for operating and sales personnel. The purpose of those programs is to institute and regulate employee participation in our profits and results, thus encouraging improved performance, the recognition of team and individual effort and accomplishment of our targets.

E.                 Share Ownership

Share Ownership of Directors, Executive Officers and Members of the Fiscal Council and the Statutory Audit and Integrity Committee

As of March 15, 2016,April 17, 2019, members and alternates of our board of directors, our executive officers and members of our fiscal council (and alternates) and statutory audit and integrity committee owned the common shares of our company set forth on the table below. The share numbers set forth below show the shares held by such persons in their individual capacity and exclude any shares held by shareholders who have nominated certain of our directors.

Directors (and Alternates), Executive Officers and Members of the

Fiscal Council (and Alternates) and the Statutory Audit Committee

Common Shares

%

Directors and Alternates:

 

 

Abilio dos Santos Diniz

24,053,300

3.0

Eduardo Rossi

0

0

Renato Proença Lopes

0

0

Sergio Ricardo Miranda Nazaré

0

0

Henri Philippe Reichstul

0

0

José Violi Filho

31,800

*

José Carlos Reis de Magalhães Neto

1

*

Fernando Shayer

1

*

Luiz Fernando Furlan

6,233,596

0.8

Roberto Faldini

464

*

Manoel Cordeiro Silva Filho

0

0

Maurício da Rocha Wanderley

0

0

Aldemir Bendine

0

0

Henrique Jäger

0

0

Walter Fontana Filho

2,455,971

0.3

Eduardo Fontana D’Avila

1,119,402

0.1

Vicente Falconi Campos

2,250,000

0.3

Mateus Affonso Bandeira

0

0

Subtotal

36,144,535

4.5

Executive Officers:

 

 

Pedro de Andrade Faria

1

*

José Alexandre Carneiro Borges

6,400

*

Gilberto Antonio Orsato

6,942

*

José Roberto Pernomian Rodrigues

0

0

Helio Rubens Mendes dos Santos Junior

28,145

*

Rodrigo Reghini Vieira

19,972

*

Simon Cheng

3,176

*

Subtotal

64,636

*


Directors, Executive Officers and Members of the

Fiscal Council (and Alternates) and the Statutory Audit and Integrity Committee

Common Shares

%

Members of the Board of Directors

 

 

Pedro Pullen Parente

205,300

0.03

Augusto Marques da Cruz Filho

Dan Ioschpe

Flavia Buarque de Almeida

Francisco Petros O. L. Papathanasiadis

José Luiz Osório

Luiz Fernando Furlan

6,083,596

0.75

Roberto Antônio Mendes

Roberto Rodrigues

2

0.00

Walter Malieni Jr

Subtotal

6,376,083

0.77

Executive Officers(1)

 

 

Lorival Nogueira Luz Júnior

12,161

0.00

Elcio Mitsuhiro Ito(2)

29,645

0.00

Ivan de Souza Monteiro(2)

-

-

Vinicius Guimarães Barbos

-

-

Subtotal

41,806

0.01

Fiscal Council (and alternates)

 

Attilio Guaspari

Susana Hanna Stiphan Jabra

Marcus Vinícius Dias Severini

Marcos Tadeu de Siqueira

André Vicentini

1,200

0.00

Valdecyr Maciel Gomes

Subtotal

1,200

Statutory Audit and Integrity Committee(3)

 

 

Sérgio Ricardo Silva Rosa(4)

Thomás Tosta de Sá(4)

Fernando Maida Dall’Acqua

Subtotal

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Directors (and Alternates), Executive Officers and Members of the

Fiscal Council (and Alternates) and the Statutory Audit Committee

Common Shares

%

Fiscal Council:

 

 

Attilio Guaspari

0

0

Susana Hanna Stiphan Jabra

0

0

Reginaldo Ferreira Alexandre

0

0

Walter Mendes de Olveira Filho

0

0

Marcus Vinícius Dias Severini

0

0

Marcos Tadeu de Siqueira

0

0

Subtotal

0

0

Statutory Audit Committee(1)

 

 

Sergio Ricardo Silva Rosa

0

0

Fernando Maida Dall Acqua

0

0

Subtotal

0

0

Total

36,209,171

4.5

 

* Less than 0.1%

(1)The other member of the audit committee, Walter Fontana Filho,executive officer, Pedro Pullen Parente, is a member of the boardBoard of directorsDirectors whose share ownership is already included above.

(2)    Mr. Elcio Mitsuhiro Ito resigned on March 11, 2019 and was replaced by Mr. Ivan de Souza Monteiro On April 25, 2019, Mr. Ivan de Souza Monteiro, who was appointed as Chief Financial and Investor Relations Officer on March 11, 2019, resigned from his position. Mr. Lorival Nogueira Luz Júnior, the Company’s  current Chief Operating Officer, was appointed on April 25, 2019 as Interim Chief Financial and Investor Relations Officer.

(3)    The other members of the statutory audit and integrity committee, Francisco Petros O. L. Papathanasiadis, Roberto Antônio Mendes and Walter Malieni Júnior, are members of the Board of Directors whose share ownership is already included above.

(4)     Mr. Sergio Ricardo Rosa was replaced by Mr. Thomas Tosta de Sa on January 31, 2019.

 

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For information about the stock options held by the persons listed above, including information about exercise prices, expiration dates and exercises, see “–“—B. Compensation.” 

Stock Option Plan and Restricted Stock Plan

We have a long-term stock option plan for the executive officers and other employees of BRF and its subsidiaries for the award of stock options .options. This plan is part of the eligible executives’ compensation and is intended to attract, retain and motivate our executives in order to generate value for our companies and align their interests with the interests of our shareholders.

The current stock option plan has beenwas approved at the shareholder meeting held on April 8, 2015. This new plan replaces the stock option plan approved on March 31, 2010 and modified on April 24, 2012, March 9, 2013 and April 3, 2014.

The Stock Option Plan is managed by our board of directors. Exercise prices of stock options granted under the Stock Option Plan are determined by our board of directors on the grant date based on the average closing price of our shares on the 20 trading days preceding the grant date.  Exercise prices are adjusted monthly based on the IPCA.

The current plan presents some changes from the previous plan, as described below:

·        the maximum number of options granted under the Stock Option Plan may not exceed, at any time, the amount equivalent to 2% of the total number of common shares issued by BRF;

·        stock options granted under the Stock Option Plan vest over four years in four equal annual installments;

·        after exercising the stock option and purchasing shares, the participant must hold at least part of those shares for at least one year before selling them and is only be permitted to sell up to the number of shares whose value covers their purchase price prior to the one-year date (lock-up); and

·        in case of retirement or termination of the contract (resignation or dismissal) other than with cause, the participant may exercise the options accrued up to that date, and the remaining options will be immediately canceled.

As of December 31, 2015,2018, a total of 27,289,82820,941,681 options had been granted, of which 17,360,8706,157,454 were outstanding and held by approximately 180123 persons.  During the year ended December 31, 2015, 1,935,296 optionswere exercised at an average exercise price of  R$42.60 per share for aggregate payments to our company of R$ 82.4 million.2018, no options were exercised. As of December 31, 2015,2018, the weighted average strike price of our outstanding options was R$59.2758.81 per share, and the weighted average of the remaining contractual terms was 5834 months.  No individual has received a number of options for common shares that, together with the common shares owned by that individual, exceed one percent of our common shares.


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For more information about the Stock Option Plan, including information about exercise prices, expiration dates and exercises, see Note 2524 to our consolidated financial statements.

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In addition to changes to our Stock Option Plan, our shareholders approved the Restricted Stock Plan for employees at the shareholder meeting held on April 8, 2015 the26, 2017. The Restricted Stock Plan for employees.was modified and approved at the shareholder meetings held on May 25, 2018 and April 29, 2019. The purpose of the Restricted Stock Plan is to, among others, toother items, stimulate the expansion, success and the achievement of socialthe Company’s objectives, of the Company; align the interests of shareholders of the Company to the plan participants and allow the Company or other companies under its control to attract and retain the eligible persons.

The Restricted Stock Plan is managed by our board of directors. As administrator of this plan, our board of directors may invite a limited number of executives to invest a sum of funds (such as profits bonus, hiring bonus and other resources not including salary) in stock of BRF or may use their bonus to invest in stocksany other criteria deemed appropriate for the granting of BRF. By investing at least 25% of their bonus, the company would grant restricted shares that would be given to participants after 3 years as long as certain goals related to TSR (Total Shareholder Return) are achieved by the company. If the participant is laid off during those three years, the restricted shares will be immediately canceled.stock.

The total number of shares of restricted stock that may be granted under the Restricted Stock Plan shall not exceed 0.5% of the common stock, with no par value, representing the total capital stock of the Company.AsCompany. As of December 31, 2015, no2018, a total of 761,846 restricted stock hashad been granted, under the Restricted Stock Plan.of which 706,820 were outstanding and held by approximately 32 persons.

ITEM 7.           MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.                 Major Shareholders

The capital stock of BRF is comprised of common shares. As of March 15, 2016,April 17, 2019, we had outstanding 806,643,545811,428,346 common shares, or 99.28%99.87% of our total common shares (excluding 5,829,7011,044,900 common shares held in treasury), 104,047,463,141,688,402, or 12.90%17.44%, of which correspond to ADRs. On March 15, 2016,April 17, 2019, we had approximately 28,00048,314 shareholders, including approximately 36228 registered U.S. resident holders of our common shares (including The Bank of New York Mellon, as depositary).

Major Shareholders

The following table sets forth certain information as of March 15, 2016April 17,2019 (except to the extent disclosed below), with respect to (1) any person known to us to be the beneficial owner of more than 5% of our common shares (including treasury shares) and (2) certain other shareholders who disclose their share ownership in Brazil.

Major Shareholders

Quantity

%

Fundação Petrobras de Seguridade Social – PETROS (1)

94,549,299

11.7

Tarpon Investimentos S.A.(2)

97,032,185

12.0

Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI (1)

86,652,752

10.7

BlackRock Inc.

40,736,990

5.1

Major Shareholders

Quantity

%

Fundação Petrobras de Seguridade Social – PETROS(1)

93,514,966

11.5

Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI(1)

87,187,652

10.7

(1)       These pension funds are controlled by participating employees of the respective companies.

(2)   On March 2, 2016, Tarpon Investimentos S.A. (“TISA”), Tarpon Gestora de Recursos S.A. (“Tarpon Gestora”) and José Carlos Reis de Malgalhāes Neto (collectively with Tarpon Gestora and TISA, “Tarpon”) filed a Report on Schedule 13D/A reporting beneficial ownership of 97,032,185 common shares, representing 12.0% of the outstanding common shares, based on 806,643,545 common shares outstanding as of March 15, 2016.

        Each of TISA, as the holding company controlling Tarpon Gestora; Tarpon Gestora, as the sole investment advisor of the funds; and Mr. Magalhães Neto, as the sole portfolio manager of Tarpon Gestora registered with the CVM, may be deemed to be the beneficial owner of 97,032,185 common shares, representing 12.0% of our common shares outstanding as of March 15, 2016. Each of them has (1) the shared power to vote or direct the vote and (2) the shared power to dispose or direct the disposition of all of the common shares that each of themmay be deemed to beneficially own. Each of them disclaims any beneficial ownership in any of our common shares, except to the extent of their pecuniary interest therein.


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Our major shareholders do not have differing voting rights.

Changes in Ownership

There has been no significant change in the percentage ownership held by any major shareholder since January 1, 2013,2016, except as described below.

·In February 2013, the number of common shares held by investment and portfolio funds under the discretionary management of Tarpon Investimentos S.A. reached 69,988,490, representing 8.02% of our share capital. Since that time, funds managed by Tarpon Investimentos S.A. have acquired additional shares and held a total of 79,780,190 common shares, representing 9.14% of our share capital as of January 28, 2014.

·On December 26, 2013, Blackrock, Inc. informed us that its aggregated holdings were reduced to 33,841,894 common shares and 8,643,151ADRs, representing in the aggregate 4.86% of our share capital as of December 26, 2013.

·On January 28, 2014, Tarpon Gestora de Recursos S.A., in compliance with CVM Instruction No. 358, art. 12, reported that the investment funds and portfolios under its discretionary management acquired additional common shares of BRF, reaching a total of 79,780,190 common shares, representing 9.14% of the total common shares issued by the company.

·On March 18, 2014, Tarpon Gestora de Recursos S.A, in compliance with CVM Instruction No. 358, art. 12, reported that the number of common shares issued by BRF held by its investment funds and portfolios under discretionary management reached 88,732,385 common shares, representing 10.17% of the total common shares issued by the company.

·On March 28, 2014, Tarpon Gestora de Recursos S.A. informed us and reported that the number of common shares issued by BRF and ADRs representing common shares held by the investment funds and portfolios under its discretionary management reached 91,529,085, representing 10.49% of the total common shares issued by BRF.

·On April 15, 2014, BlackRock, Inc., informed us that its aggregate shareholding position had reached 34,540,789 common shares and 9,372,885 ADRs, representing approximately 5.03% of our share capital as of April 15, 2014.

·On December 19, 2014, Blackrock, Inc. informed us that it had divested common shares issued by BRF and held an overall stake of ADRs, representing approximately 4.98% of our share capital as of December 19, 2014.

·        On February 1, 2016, Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI informed us and reported to the CVM that the number of common shares issued by BRF held by the investment funds and portfolios under its discretionary management reached 87,153,652, representing 9.99% of our share capital as of February 1, 2016.

·        On March 2, 2016, Tarpon filed a Schedule 13D reporting beneficial ownership of 97,032,185 common shares, representing 12.03% of the outstanding common shares on February 29, 2016.

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·On March 8, 2016, BlackRock, Inc., informed us that its aggregate shareholding position had reached 33,478,602 common shares and 7,258,388 ADRs, representing approximately 5.01% of our share capital as of March 8, 2016.

·        On MarchMay 31, 2016, BlackRock, Inc. informed us that its aggregate shareholding position had reached 38,734,476 common shares and 551,035 ADRs, representing approximately 4.82% of our share capital as of May 31, 2016.

·On July 14, 2016, GIC Private Limited informed us that its aggregate shareholding position had reached 40,690,360 common shares, representing approximately 5.01% of our share capital as of July 14, 2016.

·On August 12, 2016, BlackRock, Inc. informed us that its aggregate shareholding position had reached 33,893,720 common shares and 7,000,760 ADRs, representing approximately 5.03% of our share capital as of August 12, 2016.

·On February 2, 2016,2017, GIC Private Limited informed us that its aggregate shareholding position had reached 40,467,128 common shares, representing approximately 4.98% of our share capital as of February 2, 2017.

·On May 5, 2017, Tarpon informed us that its aggregate shareholding position had reached 69,485,935 common shares, representing approximately 8.55% of our share capital as of May 5, 2017.

·On May 9, 2017, GIC Private Limited informed us that its aggregate shareholding position had reached 51,913,800 common shares and/or other securities and derivatives referred in such shares, representing approximately 6.39% of our share capital as of May 4, 2017.

·On June 2, 2017, BlackRock, Inc. informed us that its aggregate shareholding position had reached 30,643,993 common shares and 6,912,165 ADRs, representing approximately 4.62% of our share capital as of May 31, 2017.

·On August 18, 2017, Standard Life Aberdeen plc. informed us that its aggregate shareholding position had reached 41,421,259 common shares and/or other securities and derivatives referred in such shares, representing approximately 5.09% of our share capital as of August 14, 2017.

·On September 21, 2017, Standard Life Aberdeen plc. informed us that its aggregate shareholding position had reached 40,164,585 common shares and/or other securities and derivatives referred in such shares, representing approximately 4.94% of our share capital as of September 18, 2017.

·On September 25, 2017, Standard Life Aberdeen plc. informed us that its aggregate shareholding position had reached 41,205,885 common shares and/or other securities and derivatives referred in such shares, representing approximately 5.07% of our share capital as of September 20, 2017.

·On October 17, 2017, Standard Life Aberdeen plc. informed us that its aggregate shareholding position had reached 40,586,026 common shares and/or other securities and derivatives referred in such shares, representing approximately 4.99% of our share capital as of October 12, 2017.

·On October 20, 2017, Standard Life Aberdeen plc. informed us that its aggregate shareholding position had reached 40,748,226 common shares and/or other securities and derivatives referred in such shares, representing approximately 5.02% of our share capital as of October 20, 2017.

·On December 6, 2017, GIC Private Limited informed us that its aggregate shareholding position had reached 40,618,045 common shares and/or other securities and derivatives referred in such shares, representing approximately 4.99% of our share capital as of December 4, 2017.

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·On June 1, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,594,345 common shares and 3,425,202 ADRs, representing approximately 5.04% of our share capital as of May 30, 2018.

·On June 15, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,508,775 common shares and 3,069,935 ADRs, representing approximately 4.99% of our share capital as of June 14, 2018.

·On July 5, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,309,516 common shares and 3,413,575 ADRs, representing approximately 5.01% of our share capital as of July 3, 2018.

·On July 13, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 36,965,486 common shares and 3,535,739 ADRs, representing approximately 4.98% of our share capital as of July 12, 2018.

·On July 24, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,112,724 common shares and 3,550,231 ADRs, representing approximately 5.00% of our share capital as of July 23, 2018.

·On August 8, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,147,915 common shares and 3,436,208 ADRs, representing approximately 4.99% of our share capital as of August 7, 2018.

·On August 9, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,211,315 common shares and 3,436,208 ADRs, representing approximately 5.00% of our share capital as of August 8, 2018.

·On August 10, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 37,128,021 common shares and 3,396,733 ADRs, representing approximately 4.98% of our share capital as of August 9, 2018.

·On September 28, 2018, Tarpon informed us that its aggregate shareholding position had reached 40,229,235 common shares, representing approximately 4.95% of our share capital as of September 26, 2018.

·On October 26, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 36,795,404 common shares and 3,881,447 ADRs, representing approximately 5.00% of our share capital as of October 25, 2018.

·On October 30, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 36,584,167 common shares and 3,881,447 ADRs, representing approximately 4.98% of our share capital as of October 26, 2018.

·On October 31, 2018, BlackRock, Inc. informed us that its aggregate shareholding position had reached 36,857,067 common shares and 3,823,935 ADRs, representing approximately 5.00% of our share capital as of October 30, 2018.

·On December 6, 2018, Standard Life Aberdeen plc. informed us that its aggregate shareholding position had reached 40,485,544 common shares and/or other securities and derivatives referred in such shares, representing approximately 4.98% of our share capital as of December 5, 2018.

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·On February 12, 2019, Standard Life Aberdeen plc. filed a Report on Schedule 13D13G/A reporting beneficial ownership of 97,032,18539,027,817 common shares and/or ADRs, representing 12.03%approximately 4.8% of the outstanding common shares on February 29, 2016.our share capital.


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B.                 Related Party Transactions

Intercompany Loans

We have entered into loans agreement with our subsidiaries. Below is a summary of the balances as of December 31, 2015and the rates charged for each transaction:   

Counterparty

 

Currency

 

As of December 31, 2015

 

Interest Rate (% p.a.)

Creditor

 

Debtor

  

(in millions ofReais)

 

Sadia Overseas Ltd.

 

BRF Global GmbH

 

US$

 

341.2

 

7.0%

BRF Global GmbH

 

BFF International Ltd.

 

US$

 

275.7

 

1.5%

BRF GmbH

 

BRF Foods GmbH

 

US$

 

232.7

 

1.2%

Sadia International Ltd.

 

Wellax Food Logistics

 

US$

 

221.6

 

1.5%

Perdigão International Ltd.

 

BRF Global GmbH

 

US$

 

147.0

 

0.9%

BRF GmbH

 

BRF Holland B.V.

 

EUR

 

96.8

 

3.0%

BRF GmbH

 

BRF Foods LLC

 

US$

 

74.7

 

2.5%

BRF Holland B.V.

 

BRF B.V. (NL)

 

EUR

 

49.6

 

3.0%

Wellax Food Logistics

 

BRF GmbH

 

EUR

 

34.5

 

1.5%

Perdigão International Ltd.

 

BRF S.A

 

US$

 

29.4

 

0.8%

BRF Holland B.V.

 

BRF GmbH

 

EUR

 

17.2

 

1.5%

BRF GmbH

 

AL Wafi

 

US$

 

11.4

 

1.2%

BRF GmbH

 

BRF Global GmbH

 

EUR

 

9.2

 

1.5%

BRF GmbH

 

BRF Singapore

 

SGD

 

5.6

 

1.5%

Perdigão International Ltd.

 

BRF Foods LLC

 

US$

 

4.7

 

1.0%

BRF Holland B.V.

 

BRF Wrexam

 

GBP

 

3.2

 

3.0%

BRF GmbH

 

BRF Foods LLC

 

US$

 

2.7

 

1.6%

Wellax Food Logistics

 

BRF Foods LLC

 

US$

 

2.3

 

7.0%

BRF Holland B.V.

 

BRF Iberia

 

EUR

 

1.9

 

3.0%

Consulting Services and Sales of Products

During the year 2015ended December 31, 2017 and 2016, the Company entered into transactions with companies that are owned by members of itsour Board of Directors or senior management as demonstrated below:described below. During the year ended December 31, 2018 the Company did not enter into any such transactions.

Amounts of revenues (expenses)
(in millions of
Reais)

Companies

Type of transactions

Related party

2015

Hortigil Hortifruti S.A. ("Hortigil")

BRF sells products to Hortigil

Manoel Cordeiro Silva Filho

15.2

Instituto de Desenvolvimento Gerencial S.A.("Instituto")

Instituto provided consulting services to BRF

Vicente Falconi Campos

(11.3)

 

    

Board Member/Officer

Amount of revenues (expenses)

(in millions ofReais)

Companies

 

Type of transaction

 

 

2018

 

2017

 

2016

Corall Consultoria Ltda.(1)

 

Corall provided consulting services to BRF

 

Artur Tacla(2)

-

 

-

 

(1.8)

Edavila Consultoria Empresarial Eireli (“Edavila”)

 

Edavila provided consulting services to BRF related to international marketing and innovation

 

Luiz Fernando Furlan

Walter Fontana Filho(3)

José Carlos Reis de

Magalhães Neto(3)

-

 

(0.5)

 

(0.3)

Hortigil Hortifruti S.A. (“Hortigil”)(1)

 

BRF sells products to Hortigil

 

Manoel Cordeiro Silva Filho(3)

-

 

-

 

3.5

Instituto de Desenvolvimento Gerencial S.A.(“Instituto”)(1)

 

Instituto provided consulting services to BRF

 

Vicente Falconi Campos(3)

-

 

(0.9)

 

(5.0)


Table(1) Entities are no longer related parties.

(2) Individual is no longer an officer.

(3) Individual is no longer a member of Contentsthe Board of Directors.

.ArrangementsArrangements with FAF

The CompanyWe leased properties owned by the Francisco Xavier Fontana Foundation (“FAF”), a foundation established by members of the Furlan and Fontana members,family, some of which are members of our board of directors. For the year ended December 31, 2015, theThe total amount of rental payments paid to FAF was R$10.1 million.15.9 million and R$16.9 million for the year ended December 31, 2017 and 2018, respectively. The rent value was set based on market conditions.

Transactions with Sustainability Institutes

We are the guarantors of a loan obtained by the Sadia Sustainability Institute (Instituto Sadia de Sustentabilidade) from BNDES. The loan was obtained with the purpose of allowing the implementation of biodigesters in the farms of the outgrowers which take part in Sadia’s integration system, targeting the reduction of greenhouse gases emission. The value of these guarantees on December 31, 20152018 totaled R$39.16.0 million.

We had a liability in the amount of R$8.51.3 million as of December 31, 20152018 related to the fair value of these guarantees (for more details, see “Item 5E – 5. E—Operating and Financial Review and Prospects – Prospects—Off-balance Sheet Arrangements”).

In addition, we had, as of December 31, 2015,2018, a liability in the amount of R$30.64.7 million withinin other obligations with this entity in connection with our acquisition of biodigesters from Institutothe Sadia de Sustentabilidade.Sustainability Institute.

Indemnification Agreements

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We have entered into indemnification agreements with our executive officers (the “indemnified parties” and each, an “indemnified party”). Pursuant to these agreements, we have agreed to indemnify and hold harmless each indemnified party with respect to losses which they may be subject to in connection with any administrative or judicial proceedings in Brazil or abroad so long as the proceeding arises from their relationship with us in such role (or related roles), among other circumstances (the “covered risks”), excluded from the coverage of these indemnifications agreements any action of the indemnified parties taken with bad faith or scienter. Under the terms of these agreements, we have also agreed to either advance or reimburse expenses incurred by the indemnified parties in connection with the covered risks (including legal counsels’ fees). We have also have agreed to contract director and officer insurance coverage for acts carried out by the indemnified parties in the course of their duties. Each agreement will remain in force during and after the period of the indemnified party’s employment with us, for an indefinite period of time.  In our extraordinary shareholders’ meeting held on May 25, 2018, our shareholders approved the execution of indemnification agreements by us with current and former members of our board of directors.

C.                 Interests of Experts and Counsel.Counsel

Not applicable.

ITEM 8.           FINANCIAL INFORMATION

A.                 Consolidated Statements and Other Financial Information.Information

See Exhibits.Our consolidated financial statements are appended at the end of this Annual Report starting at page F-1, and form a part hereof.

Legal Proceedings

We are involved in certain legal proceedings arising from the regular course of business, which include civil, commercial, administrative, regulatory, environmental, tax, social insurance and labor lawsuits.

We classify the risk of adverse decisions in the legal suits as “remote,” “possible” or “probable.” We record provisions for probable losses in our financial statements in connection with these proceedings in an amount determined by our management on the basis of legal advice. We disclose the aggregate amounts of these proceedings that we have judged possible or probable, to the extent those amounts can be reasonably estimated, and we record provisions only for losses that we consider probable. However, the amounts involved in certain of the proceedings are substantial, and the losses to us could, therefore, be significantly higher than the amounts for which we have recorded provisions, if any. Even for the amounts recorded as provisions for probable losses, a judgment against us would have an effectadverse impact on our cash flow if we are required to pay those amounts. See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Unfavorable outcomes in legal proceedings may reduce our liquidity and negatively affect us.”

TaxProceedings

Contingencies for Probable Losses


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We are engaged in several legal proceedings with Brazilian tax authorities for which we have recorded provisions for probable losses. As of December 31, 2015,2018, our provisionsprovision for such tax proceedings was R$240.6230.1 million, compared to R$252.4303.4 million as of December 31, 2014.2017.

The tax contingencies classified as probable losses involve the following main legal proceedings:

·        ICMS:We are involved in a number of administrative and judicial tax disputes regarding the recording and/or use of amounts paid in respect of the Tax on the Circulation of Merchandise and Services (Imposto Sobre a Circulação de Mercadorias e Serviços), or “ICMS,”ICMS as tax credits against other taxes assessed on certain transactions, such as exports, acquisition of consumption materials and monetary correction. The provisionTheprovision amount is R$107.7100.7 million as of December 31, 20152018 (R$96.3157.0 million as of December 31, 2014)2017).

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·        PIS and COFINS:We are involved in administrative proceedings related to the use of federal PIS and COFINS tax credits to offset other federal taxes, in the amount of R$77.5125.1 million as of December 31, 20152018 (R$78.9106.5 million as of December 31, 2014)2017). Although we intend to vigorously defend against these tax assessment notices and related administrative proceedings, we expect that the number of cases and the aggregate amount of possible losses will continue to increase as the tax authorities address later tax years.

·        Other tax contingencies:We recorded other provisions for lawsuits related to the payment of social security contributions under various Brazilian government programs (SAT, INCRA, FUNRURAL, Education Salary) and tax liabilities relating to accessory obligations, the payment of legal fees and other tax matters in a total amount of R$52.047.5 million as of December 31, 20152018 (R$54.351.6 million as of December 31, 2014)2017).

Contingencies for Possible Losses

The amount of tax contingencies for which the probability of loss was classified as “possible” was R$10,569.912,336.9 million as of December 31, 20152018 (R$8,514.311,469.9 million as of December 31, 2014)2017). Of this amount, R$511.4369.6 million as of December 31, 20152018 (R$530.1370.2 million as of December 31, 2014)2017) reflected our fair value estimate of contingent tax liabilities relating to our business combination with Sadia, Avex and Danica.Sadia.

The most significant of these tax cases for which the risk of loss is classified as possible are described below:

·        PIS and COFINS: We are involved in administrative proceedings regarding the use of PIS and COFINS tax credits to offset other federal tax liabilities in the amount of R$3,097.24,363.1 million as of December 31, 20152018 (R$2,572.34,001.2 million as of December 31, 2014)2017). The 2015 increase for 2018 relates to new cases as well as to monetary indexationindexing of existing cases.

·        ICMS:We are involved in a number of disputes related to the ICMS tax:tax, including: (1) allegedly unduethe alleged improper granting of ICMS tax credits generated by tax incentives granted by states of origin (known as theguerra fiscaldispute) in a total amount of R$2,267.71,724.8 million as of December 31, 20152018 (R$1,963.11,690.6 million as of December 31, 2014)2017); (2) the maintenance of ICMS tax credits on the acquisition of staple foods (cesta básica) with a reduced tax burden in a total amount of R$547.6816.4 million as of December 31, 20152018 (R$522.0789.9 million as of December 31, 2014),2017); (3) the absence of evidence to prove the balances of exports in the amount of R$324.8396.2 million as of December 31, 20152018 (R$45.6333.8 million as of December 31, 2014)2017); (4) a new tax assessment notice related to the offset of tax benefit credits (“PRODEPE”) in the amount of R$288.1 million; and (4)(5) R$ 1,416.92,062 million as of December 31, 20152018 (R$1,007.51,946.1 million as of December 31, 2014)2017) related to other tax lawsuits regarding ICMS.ICMS, as described further in the second bullet point below.

o·        With respect toOther cases include an assessment notice received on December 2015 by the State of Paraná (SISCRED), requiring partial reversal of ICMS credit in the amount of R$ 340.9 million as of December 31, 2018 (R$339.6 million as of December 31, 2017). The matter addresses several items, including “guerra fiscal(item (1) above),” credit for use and consumption material and presumed undue credit on meat and imports. Following an appeal by the Company, the credit was partially recognized on December 14, 2015, BRF received a tax assessment notice from20, 2018. Because of this partial favorable decision, the Stateprobability of Paranáloss was reclassified as of December 31, 2018: R$139 million as possible (R$98.7 million as of December 31, 2017), demanding a partial rebateR$2.5 million as probable (R$ 20.4 million as of ICMS creditsDecember 31, 2017) and R$199.4 million as remote (R$220.4 million as of December 31, 2017). The Company is currently waiting for the final administrative judgement in the total amount of R$339.6 million for undue credits related to materials used in the production and undue credits over imports.

oWith respect to thecesta básica (item (2) above), in a meeting held on October 16, 2014, the Supreme Court of Brazil ("STF") was favorable to the Tax Authority of the State of Rio Grande do Sul, in the judgment of the extraordinary appeal No.635,688 submitted by the company SantaLúcia, understanding as improper the integral maintenance of ICMS tax credits on the reduced tax basis of food products that are classified as staple foods in Brazil. The decision applies to all taxpayers; however, there is still a claim for clarification waiting to be judged, requesting more details related to the timing of such decision (previously or only after), which suggests the need to wait for this final decision to recognize the effects on our financial statements.case.


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·        Profits earned abroad:We were assessed by the Brazilian Internal Revenue Service for alleged underpayment of income tax and social contribution on profits earned by subsidiaries established abroad in theabroad. The total amount ofis R$636.5524.5 million as of December 31, 20152018 (R$588.1506.3 million as of December 31, 2014)2017). We have presented our defense based on the fact that our subsidiaries located

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abroad are only subject to full taxation in the countries in which they are based as a result of treaties regarding double taxation. One of the cases was closed in 2017 with a favorable decision for us. Part of the assessment was canceled. We will continue to address the remaining cases in the judicial system.

·        Income tax and social contribution: We are involved in administrative disputes regarding the use of income tax and social contribution losses, refunds and credits to offset other federal tax debts, including credits generated by legal disputes related to thePlano Verão, an economic stabilization plan from 1989. Also,In addition, on February 5, 2015, BRF received a tax assessment notice related to the compensation of tax loss carryforwards and negative calculation basis up to a limit of 30% when it incorporated one of the group’s entities during calendar year 2012 in2012. The judgment of our appeal to the amount of R$574.7 million as of December 31, 2015.superior administrative court remains pending. The income tax and social contribution disputes totaledtotal R$1,127.71,311.1 million as of December 31, 20152018 (R$482.91,276.4 million as of December 31, 2014)2017). The increase in the amount related to 2014 is justified by new cases and monetary indexation of existing cases.

·        IPI: We are involved in administrative proceedings relating to the failure to permit the use of credits under the sales tax for industrial products (Imposto sobre Produtos Industrializados, or “IPI”) generated from purchases of goods not taxed, sales to the Manaus Free Zone and purchases of supplies by non-taxpayers to offset PIS and COFINS taxes in the amount of R$453.2445.1 million as of December 31, 20152018 (R$546.2441.7 million as of December 31, 2014)2017).

·IPI premium credits: Our subsidiary Sadia is involved in a judicial dispute related to the alleged undue use of IPI premium credits to offset other federal taxes in the amount of R$464.7 million as of December 31, 2015 (R$420.5 million as of December 31, 2014). We have recorded these credits only based on a final judicial decision.

·Normative Instruction 86:We were assessed by the Brazilian Internal Revenue Service for a total amount of R$237.4 million as of December 31, 2015 (R$219.4 million as of December 31, 2014) related to a fine for alleged non-compliance in the delivery of magnetic files for the years 2003–2005 to the tax authorities. In October 2013, the case was judged favorably for BRF by the Tax Administrative Appeals Board. In January 2016, the case was judged favorably for BRF by the Superior Chamber of Tax Administrative Appeal Board, which led to the definitive closure of the case.

·        Social security charges:We are involved in disputes related to social security charges allegedly due on payments to service providers and social contributions allegedly due to civil construction service providers and others in the aggregate amount of R$194.4244.5 million as of December 31, 20152018 (R$113.3262.9 million as of December 31, 2014)2017).

·        Other contingencies: We are involved in other tax contingencies involving a variety of matters, including rural activities, transfer pricingcases related to the requirement of a fine of 50% of the amount of PIS/COFINS and IRPJ compensation not ratified but pending final judgment before the compensation proceedings, the tax basis for calculating social contribution on net income, tax assessment notice referred taxes on services, IPTU, import tax, IOF as well as an isolated fine resulting from alleged inaccuracies in EFD (accessory obligation) totaling R$39.0449.3 million as of December 31, 20152018 (R$198.0190.0 million as of December 31, 2014)2017).

Additionally, we were included as co-defendant in a tax lawsuit against Huaine Participações Ltda. (a former holding company of Perdigão), claiming our liability for taxes in the amount of R$625.5 million as of December 31, 2015 (R$609.3 million as of December 31, 2014). On February 16, 2012, we received a favorable decision from the Superior Court, which remanded the matter to the lower court. However, on November 17, 2013, the Federal Court judged the lawsuit unfavorably for BRF and has determined that BRF is co-responsible for the tax debt. For this reason, we filed a new appeal to the Superior Court. In 2014, the Federal District Court (TRF-3)sustained BRF’s responsibility for the tax debt. In response, BRF filed a special and extraordinary appeal, which has been awarded suspensive effect, by precautionary measure (case nº. 0000185-28.2014.4.03.0000), which is waiting Superior Court of Justice and Supreme Court decisions. In the tax foreclosure proceeding, BRF had guaranteed the debt, which was accepted by the court, and filed an appeal, which is awaiting first instance judgment. Despite this, our external legal advisors maintain that the risk of loss in this lawsuit is remote.


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Social Security Contribution Assessment

On April 1, 2015, the Brazilian Internal Revenue Service (Secretaria da Receita Federal) filed a tax assessment against us in the amount of R$75.9 million (R$82.2 million on December 31, 2015, for which we recorded a provision of R$10.4 million for probable losses). The tax assessment is related to alleged irregularities in (i) our Stock Options Plan, (ii) our Profit Sharing Program and (iii) certain variable compensation to executive and managerial employees in 2011 and 2012. We filed an administrative appeal on May 4, 2015. We received an unfavorable decision and await the decision in the 2nd administrative level. Based on advice from outside counsel, we have classified our risk of loss as possible (with a probable part as stated above).

ICMS Assessment

On March 30, 2015, the São Paulo State Treasury Office (Secretaria de Fazenda do Estado de São Paulo) filed a tax assessment against us in the amount of R$54.4 million (R$59.4 million on December 31, 2015) related to alleged irregularities in the collection of ICMS taxes levied on certainin natura beef transactions carried out in 2012 and 2013. We filed an administrative appeal on April 28, 2015 and await the judicial decision. Based on advice from outside counsel, we have classified our risk of loss as possible.

As noted above, we are involved in other lawsuits for which we classify our risk of loss as remote, and the amounts involved in certain of those proceedings are substantial.

Contingent Assets:  Exclusion of VAT (ICMS) from PIS and COFINS Tax Base

On March 15, 2017, the Supreme Court decided in the judgment of the Extraordinary Appeal (“RE”) No. 574.706/PR, brought by the Import, Export and Oil Industry (“IMCOPA”), that the amount of ICMS levied on the sale of products or services should not be included in the taxable base of PIS/COFINS. The Brazilian government made a final appeal which is pending with the Court.

As of December 31, 2018, the Company has a contingent asset estimated at R$954.6 million, corresponding to PIS/COFINS values collected in the past, including ICMS in the calculation basis. In addition, the Company has other lawsuits addressing the same issue filed by merged companies, with favorable decisions, whose amounts are already being determined and will be recognized upon final decision.

Labor Proceedings

On December 31, 2015,2018, we were involved in 19,83016,520 labor claims in the total amount of R$1.4 billion863.6 million (amount includes risks deemed “remote”, “possible” and “probable”), compared to R$1.91.035 billion as of December 31, 2014.2017. These cases are mainly related to overtime, time spent by employees when changing clothes for uniforms, work-related travel time, rest breaks, article 253 of the Labor Code (Consolidation of Labor Laws), illnesses allegedly contracted at work and work accidents. Labor claims are being processed mainly at the Lower CourtBrazilian lower court level and our provisions for “probable” losses from​​these labor claims are recorded in the amount of R$377.0468.6million on December 31, 2018, compared to R$691.7 million on December 31, 2015, compared to R$330.4 million on December 31, 2014.2017. These provisions were recorded based on our past historical payments and in the opinionopinions of our experts.legal counsel.

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Included in these proceedings is a series of lawsuits filed by the Public Ministry of Federal Work whichand Union related to overtime, mandatory rest breaks and other labor-related issues. Others in the industry have been the subject of similar cases, and we do not believe that these proceedings will have a material adverse effect on us. Of the 67115 cases pending, some have no assigned value and the largest has a value of approximately R$26.529.4 million, which is included in the total amounts disclosed above. We do not agree with the arguments presented by the Ministryabove as of Federal Labor and the decisions of these proceedings. During 2015, we had meetings and hearings with the Federal Public Ministry of Labor, seeking negotiations when we believed they were in our interest.

On October 1, 2014, we entered into a judicial agreement with the Ministry of Labor related to one of these cases to settle throughout the country a claim that the Company was not using the minimum number of young apprentices, as required by law. According to the Judicial Agreement, the Company agreed to donate R$50,000 to a charity and still has five years to hire a number of young apprentices equivalent to 5% of the total number of our production employees instead of 5% of the total number of our employees, as required by law. If the Company reaches the goal within five years, the claim on which the lawsuit was based will be remedied. See “Item 6. Directors, Senior Management and Employees—D. Employees” for information on the breakdown of our workforce by type of employee.


Table of ContentsDecember 31, 2018.

Civil, Commercial and Other Proceedings

As of December 31, 2015,2018, we were defendants in 1,8254,201 civil, commercial and other proceedings (administrative, environment, regulatory and other matters) amounting to total claims of R$ 1.5 billion.2.223 billion (such amount includes risks deemed “remote,” “possible” and “probable”). We were defendants in several civil, commercial and othersother proceedings related to, among other things, traffic accidents, alleged breach of contracts, alleged breach of civil and commercial law, traffic and other accidents, consumer claims etc.and alleged infringement of environmental and regulatory standards. We have recorded provisions for probable losses in the amount of R$ 65.7282.0 million in connection with our pending civil, commercial and other proceedings as of December 31, 2015.2018. We recorded these provisions based on historyour historical payments and on the opinions of paymentsour legal counsel.

The most significant of these civil, commercial and other proceedings are described below. We are involved, or may become involved, in other legal proceedings from time to time and the amounts involved in certain of those other proceedings could be substantial.

On May 18, 2001, a declaratory action together with a condemnatory request was filed by Texaco do Brasil S/A Produtos de Petróleo (currently Ipiranga Produtos de Petróleo S/A), where the plaintiff claimed that Perdigão Alimentos S/A (currently BRF) did not comply with the three contracts set between the parties (the Tax Incentives Implementation Commitment and Promise of Share Purchase and Sales, the Share Purchase and Sale Contract and Resale Promise and the Private Instrument of Tax Incentives Implementation Commitment and Promise of Share Purchase and Sales). Such contracts were related to the structuring and acquisition of common and preferred shares of Perdigão Amazônia S.A, whose project would be financed by Texaco via tax incentives. The case ended with an unfavorable decision against BRF, ordering the company to indemnify Ipiranga for the damages related to the project. Although the damages are currently subject to an expert evaluation, we recorded a provision  with respect to this dispute, which is based on the opinion of a valuation and accounting expert.

On October 6, 2004, a public civil action was filed by the Federal Public Prosecutor Office seeking moral and material damages resulting from the integrated production contracts executed with public resources of an agricultural fund. BRF was ordered to pay an award with respect to the material damages, but this decision was suspended by the Court of Appeals. BRF filed an appeal to the Superior Court of Justice and, since September 8, 2015, the admissibility of such appeal has been pending. Based on the report of our outside counsel, we have not included any provision for this lawsuit regarding the material damages (the amount of which will be determined in a future procedure).

In 2008 and 2012, the Federal Public Prosecutor’s Office filed two public civil actions in order to obtain a judicial decision compelling us not to use overweight trucks on federal highways and sought indemnification for collective damages. Both cases resulted in favorable decisions for us in the Court of Appeals and Superior Courts, with no provisions recorded. In 2018, the Federal Public Prosecutor’s Office filed a third class action with similar claims, but based on a different cause of action. This case has not yet been ruled on.

On August 20, 2008, the Federal Public Prosecutor’s Office filed a public civil action against BRF due to alleged damages to consumers related to the excess of water absorbed by the chicken products manufactured at Francisco Beltrão/PR and Dois Vizinhos/PR. The Public Prosecutor Office requests indemnification for all consumers individually who acquired products with any quality issues related to water in excess, as well as publicly disclose the problems via newspaper, radio and other means. After an unfavorable judgment was issued ordering the defendants to indemnify the consumers about the irregularity of the products, pay R$700.0 thousand as collective damages and publicly disclose a message describing the matter via local media (newspaper, radio and other means), BRF and the other defendants filed their respective appeals and the Court of Appeal rejected them in 2011. OnJanuary 30, 2012 BRF filed an appeal to the Superior Court. The case is currently awaiting judgment at the Superior Court. We recorded a provision with respect to this dispute based on the opinion of our legal counsels.advisers. On January 28, 2009, Valore Participações e Empreendimentos Ltda e Ama Participações e Empreendimentos filed an execution proceeding based on extrajudicial title requesting the payment of the fifth and sixth installments (R$79.9 million) of its industrial plant sales contract signed with BRF. The lower court dismissed the claim based on lack of title. The decision was remanded to the lower court by the Court of Appeals. BRF filed an appeal to the Superior Court, and, since June 2, 2016, the appeal has been pending.

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On October 1, 2009, we received an environmental infraction notice for allegedly not complying with licensing conditions related to air condenser equipment and gas tank installation and constructing buildings in a permanent preservation area. The value of the fine on the date of the assessment was R$811.0 thousand. An administrative appeal is pending in this proceeding.    

On September 21, 2011, the Association of the Villagers of Paraíba and Mudau River Ares filed an action seeking indemnification for moral and material damages due to the “Açude das Nações” dam rupture. The case is in the pre-trial phase and evidence is being produced. This action is still at its preliminary stages and we have classified the risk of loss as possible, with no provisions recorded. The amount at issue in the case is currently estimated to be R$111.7 million.

On December 7, 2011, we executed a consent agreement with the public prosecutors’ office of the Rio Grande do Sul State. Their objective is to fill the non-vegetated areas and provide adequate soil cover with native tree species. In addition, they are seeking to minimize the effects of erosion near the facility located in Lajeado. Satisfaction of the TAC is in progress and an evaluation of the evidence is pending.

On February 06, 2012, Agro Avícola Rizzi Ltda. filed a lawsuit against BRF seeking damages for losing the SIF 665 registration and for the termination of the agreement that led to its financial collapse. On March 20, 2019, the lower court dismissed the requests made by Agro Avícola Rizzi. The plaintiff may still appeal to the Court of Appeals and Superior Courts. Since the decision is not final and conclusive, we have classified the risk of loss as possible, with no provisions recorded and the amount at issue in the case is currently estimated to be R$281.5 million.

BRF and WJ Produtos Alimentícios Ltda.(“WJ”) had a leasing contract for an industrial plant, which was terminated by BRF. On April 11, 2012, WJ filed an action to require BRF to comply with the leasing contract and to pay an early termination fine of R$3.7 million and material damages of up to R$5 million. The expert report indicated that the industrial plant was destroyed and calculated a loss value of R$28 million. The case is awaiting final judgment. We believe we are not responsible for the damages caused to the industrial plant and we have classified the risk of loss as possible, with no provisions recorded. The amount at issue in the case is currently estimated to be R$85.3 million.

On October 10, 2013, an action for damages was filed by Attilio Fontana’s heiresses in order to require BRF to pay damages for the destruction and/or concealment of SADIA S.A.’s statutory books. Such books were not exhibited in the preliminary proceeding, which would have prevented the plaintiffs from discovering eventual illegal donations made by Mr. Fontana to his other heirs and their other siblings. On December 12, 2018, the case was dismissed on the grounds that the lack of the statutory books did not cause any harm to the plaintiffs since they could investigate the existence of potential illegal donations through other statutory documents that were available to them. The plaintiffs filed an appeal to the Court of Appeals and BRF will present its defense. Since the decision is not final and conclusive, we have classified the risk of loss as possible, with no provisions recorded.

In the last few years, BRF have been sued by ex-carriers seeking indemnification for the absence of the previous payment for road toll fees, as established under Brazilian federal law. BRF currently has seven ongoing cases related to this matter: three cases have initially resulted in unfavorable decisions for us, two cases were initially dismissed without prejudice and two cases are pending decisions. For all seven cases, we recorded a provision with respect to the disputes based on the opinion of our legal advisers.

On October 17, 2013, Mr. Marcus Macedo Cazarré filed an indemnification action as a result of the alleged exploitation of his Patent MU 8300298-7 by BRF in the biodigesters used in farms. Mr. Cazarré requested damagesof over R$300.0 million. An expert report favorable to BRF was issued, which indicated that there was no violation of Mr. Cazarré’s patent. On September 22, 2017 the lower court judge dismissed the requests made by Mr. Cazarré. On December 1, 2017 Mr. Cazarré filed an appeal and BRF presented its counterarguments on February 02, 2018. On June 20, 2018 the Court of Appeals ruled and granted the appeal on the merits and, therefore, the trial decision was overturned. As a result, Mr. Cazarré’s requests were granted and BRF was ordered to pay material damages (in an amount to be calculated in the execution proceedings) and R$150,000 for moral damages.  On February 20, 2019, BRF filed an appeal to the Superior Court, and on March 27, 2019, Mr. Cazarré responded to such appeal. BRF’s appeal remains pending. We have classified the risk of loss as possible, with no provisions recorded for this case.

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On April 27,24, 2014, we signedexecuted a TACconsent agreement with the Public Prosecutors’ Officepublic prosecutors’ office of the State of Goiás due to problemsbecause of irregularities in the ground activity resulting from approximately 300 tons of solid material, which did not have proper treatment in the facility located in Rio Verde. Satisfaction of the TAC is in progress.

On April 30, 2014, we received an environmental infraction notice for allegedly improperly disposing of certain waste. The value of the fine on the date of assessment was R$7.0 million. BRF presented an administrative defense in this proceeding, which is currently pending with the disposalcourt.

On August 22, 2014, Transfood Logística filed a lawsuit against BRF seeking moral and material damages resulting from the termination of solid materials (animal carcasses) ofcontracts between them. After BRF’s defense on October 30, 2014, oral evidence was produced and several witnesses were heard. Both parties then filed their closing statements and, since April, 19 2017, the Rio Verde unit. Because ofcase has been pending. As an award has not yet been rendered, we have not made provisions for this BRF was requiredcase. The amount at issue in the case is currently estimated to pay a fine ofbe R$1.4 million and to assume other obligations that are still being fulfilled by the Company.74.8 million.

On March 24, 2014, we signed a TAC with the Consumer Protection Agency of the Municipality of Rio de Janeiro (Procon Carioca)(Procon Carioca) due to problems with the distribution of skimmed UHT milk in Rio de Janeiro. Because of that agreement, the Company had to paywe paid a fine of R$150 thousand150,000 and assumed other obligations that have already been fulfilled by the Company.us. On October 23, 2014, the Consumer Protection Agency of the State of Rio de Janeiro (Procon(Procon Estadual)filed a civil action against BRF related to the same problema similar claim with respect to the distribution of skimmed milk. ThisIn May 2016, a judgment was issued recognizing that BRF had diligently taken all necessary actions to mitigate damages on this case, is still awaiting trial. On December 14, 2009, Sadia filedincluding signing a liability action for indemnification under Article 159TAC on the matter. Nevertheless, the lower court determined that any consumers that manage to prove they suffered material losses as a result of the Brazilian Corporation Law against two financial managersmilk shall be reimbursed. The PROCON Estadual appealed the decision and their appeal was dismissed, but they made a Special Appeal which was granted and BRF was ordered to pay R$100,000. The case currently awaits judgment in the Superior Court of Justice following BRF’s appeal.  We recorded a provision with respect to this dispute based on negligent conduct, bad business judgment or imprudence.  This civil lawsuit is currently in the expert examination phase and was classified with a possible loss prognosis by BRF’sopinion of our legal counsel. Each of these financial managers filed labor lawsuits against BRF in February 2011. One of the lawsuits is still awaiting trial and the other one was ruled in 2014, sentencing BRF to pay R$98 thousand to the plaintiff, which payment has already been made by us.advisers.

On October 19,23, 2015, Public Prosecutors’ Office ofPerdue Foods LLC (“Perdue”) filed an enforcement lawsuit against BRF. Perdue sought to order BRF to comply with the State of Santa Catarina filed a public civil action against BRF in connection with alleged excess of waterobligations assumed in the chicken commercializedCoexistence Agreement, as amended, entered into by both parties related to the Company. Wetrademarks of Perdue and Perdix. In the event that BRF does not comply with these obligations, Perdue also seeks the imposition of a daily fine, in the amount of R$50,000 for each day of delay. BRF has presented its defense in the case and the case is currently pending in the lower court. Concurrently, the parties are assessing the possibility of entering into a new Coexistence Agreement and settling the case. Since the enforcement lawsuit has no measurable economic value, no provisions have already filed our defense and are awaiting trial.been recorded for these proceedings.

On December 7,August 20, 2015, a city councilor filed a popular action against BRF in connection with alleged irregularities identified on a competitive bid for the supply of school meal to the Municipality of São Paulo. We have already filed our defense and aredefense. This case is awaiting trial.the beginning of the expert evidence ordered by the judge. We have classified the risk of loss as possible, with no provisions recorded.

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

On December 22,14, 2015, the Public Prosecutors’ Office of the State of Pernambuco filed a public civil action against BRF in connection with alleged irregularities identified on dairy products sold by BRF. On March 19, 2019, the plaintiff’s claims were partially granted and BRF was ordered to: (i) pay damages in the amount of R$1 million; (ii) under the penalty of payment of a R$5 million fine for each instance of non-compliance, (a) recall thebatches of sausages that present risk to consumers’ health and (b) provide a public notice regarding such recall through the company’s website and social media; (iii) publish the trial court decision in a newspaper of general circulation in the city of Recife, under the penalty of a R$1 million daily-fine for non-compliance; and (iv) pay 50% of the court fees. BRF may still appeal this decision to the Pernambuco Court of Appeals and Superior Courts. Since the decision is not final and conclusive, we have classified the risk of loss as possible, with no provisions recorded.

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On March 11, 2016, we received an environmental infraction notice from the APA Estadual Chapada dos Guimarães conservation unit for allegedly failing to comply with legal requirements related to deforestation activities. The fine on the date of assessment was R$5.0 million. BRF presented an administrative defense in this proceeding and the lower court reduced the fine to R$1.0 million. An administrative appeal is pending in this proceeding. 

On March 14, 2016, a public civil action was filed by Abracon-Saúde – Associação Brasileira de Defesa dos Consumidores de Plano de Saúde, an association for health insurance customers, seeking to require BRF to insert the following warning on the package of its products: “CONTAINS GLUTEN – gluten is harmful to celiac patients” or another similar alert to demonstrate how gluten can be harmful to consumers. After BRF presented its defense, a judgment was issued on September 14, 2016 ordering BRF to include said information on the package of all of its products that contain gluten. BRF appealed the decision in October 2016 and the case is currently pending trial at the State Court of Appeals of Mato Grosso do Sul. No substantial provisions were deemed necessary for this proceeding.

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 “Córrego Lageado” by the Jataí facility. Satisfaction of the TAC is in progress, pursuant to which the Company will implement its environmental remediation.

On October 11, 2017, the Public Prosecutor’s Office of Rio Grande do Sul filed a public civil action requesting that BRF restore native vegetation at BRF’s property in Porto Alegre. The case is in its preliminary stages.

On March 22, 2018, we executed a consent agreement with the environmental agency of the Minas Gerais state in order to restore the environmental license of the farm called “Granja C” located in Uberlândia. Satisfaction of the TAC is in progress, pursuant to which the Company will maintain its operations until the license is issued.

On May 9, 2018, the Public Prosecutors’ Office of the State of Pernambuco filed a public civil action against BRF in the past.connection with alleged irregularities identified in meat products (sausages) sold by BRF. The judge granted theplaintiff requested a preliminary injunction, requested by the plaintiff, mainly in order to: (i)which is still pending, to order BRF to suspend the sale of its meat products everyeach time the Ministry of Agriculture identifies new irregularities; (ii) makeirregularities, under the penalty of payment of a $5 million fine for each instance of non-compliance. BRF responsible for the burden of proof; (iii) order BRF to provide a public notice of the decision so that consumers possibly affected by the alleged irregularities may join the lawsuit; and (iv) order BRF to publish the preliminary decision in a newspaper of general circulation.has not yet been served with this case. We have already prepared an appeal against this preliminary injunction and have also filed our defense to this lawsuit in order to clarify, among other topics, that BRF is not responsible forclassified the production and salerisk of these products anymore.

 All the class actions abovementioned are at preliminary stages and therefore have been classified with aloss as possible, loss prognosis, with no provisions recorded.

BRF also has potential regulatory liabilities corresponding to 1,068 cases, with a total provision of R$28.2 million (probable losses) as of December 31, 2018. The cases refer to MAPA fines for alleged noncompliance with the sanitary legislation and, individually, they do not represent significant losses. These fines are a result of routine inspection of the quality processes by the MAPA. The cases are addressed directly with the MAPA, and when BRF does not successfully defend against these penalties, the payments are provided to the MAPA, or BRF may initiate legal proceedings to attempt to nullify the penalties imposed.

On March 14, 2019, the TCA announced a decision regarding its investigation into Banvit and other producers for alleged anticompetitive practices in connection with chicken meat production in Turkey. The TCA imposed an administrative fine of TRY 30,518,617.48, or approximately U.S.$5.2 million, against Banvit. BRF will record an expense in its results of operations in the first quarter of 2019, corresponding to Banvit’s obligation to pay the administrative fine, even though the decision remains subject to appeal. The period covered by the investigation largely preceded BRF’s acquisition of Banvit.

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Carne Fraca Operation

Brazilian authorities are investigating 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, includes allegations relating to food safety, quality control and misconduct related to improper offers and/or promises to government inspectors.

On March 17, 2017, we learned of a decision issued by a federal judge of the state of Paraná authorizing the search and seizure of information and documents from us, and the detention of certain individuals in the context of theCarne FracaOperation. Two BRF employees were detained (both of whom have been released) and three others were identified for questioning (of which only two were questioned).

In addition, our Mineiros plant was temporarily suspended by the MAPA on March 17, 2017, so that MAPA could conduct an additional audit on its production process. After conducting an audit, the MAPA authorized the Mineiros plant to resume operations as of April 8, 2017. The Mineiros plant reopened on April 10, 2017 and resumed its operations on April 11, 2017.

On April 15, 2017, the Brazilian Federal Police issued a report on the investigation and recommended charges against three BRF employees. On April 20, 2017, based on the Brazilian Federal Police investigation, Brazilian federal prosecutors filed charges against two BRF employees (one of our regional manufacturing officers and one of our corporate affairs managers).

In June 2018 the Company learned of an administrative proceeding commenced by the Comptroller General of the Union (“CGU”), which is primarily related to alleged irregularities in the relationship between BRF employees and government inspectors from the MAPA at BRF’s plants located in: Rio Verde (State of Goiás), Mineiros (State of Goias), Uberlândia (State of Minas Gerais) and at the Paranagua Harbor (State of Paraná). This administrative proceeding remains pending.

                On January 22, 2018, the Attorney General’s Office of the Third District of the State of Goiás filed a complaint against the industrial manager of our Mineiros plant at the time of the events subject to investigation in the Carne Fraca Operation, who is a current member of our corporate engineering team, and the former head of quality control at our Mineiros plant, who was dismissed on August 16, 2016. Both of them were charged for allegedly committing crimes against consumers, as provided in article 7, item II of Law 8,137/90. According to the Attorney General’s Office of the Third District of the State of Goiás, laboratory tests (dripping tests) have detected excessive levels of water absorbed by the chicken products collected by authorities at our Mineiros plant. The Attorney General’s Office of the Third District of the State of Goiás alleges we produced chicken products with higher quantities of water than the limits permitted by the MAPA, with potential damages to customers, considering they would potentially be acquiring chicken meat products with a weight lower than that indicated on the packaging, since part of the weight of the frozen chicken would consist merely of water contained therein. The complaint does not contain any allegations of corruption.

BRF informed certain regulators and governmental entities of theCarne Fraca Operation, including the SEC and the U.S. Department of Justice. BRF is cooperating with the authorities.

BRF’s Statutory Audit and Integrity Committee initiated an investigation with respect to the allegations involving BRF employees in theCarne Fraca Operation, CGU proceedings, and related conduct with the assistance of outside counsel. Following this initial investigation, the Statutory Audit and Integrity Committee started a new internal investigation to address the allegations related to theTrapaça Operation, as described below. The  internal investigations remain ongoing with the assistance of outside counsel. The effects of theCarne Fraca Operation had operational consequences for us, as we incurred expenses in the amount of R$157.5 million recorded in the other operating expenses, such as media and communication expenses, law firms, freight, storage, provision for losses in inventories, among others in the amount of R$80.3 million and inventory losses, arising from closed external markets and/or blocked products in the amount of R$77.2 million, recorded in the first half of 2017.

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For information about the risks related to this investigation, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—We may fail to ensure compliance with relevant anti-fraud, anti-corruption, anti-money laundering and other international laws and regulations.”

Trapaça Operation

On March 5, 2018, BRF learned of a decision issued by a federal judge of the 1st Federal Court of Ponta Grossa in the State of Paraná, which authorized 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 the “Trapaça Operation,” 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 from custody, but all such current employees are on leaves of absence from BRF. A number of other BRF employees and former employees were identified for questioning. The primary allegations in theTrapaça Operation involve alleged misconduct relating to quality violations, improper use of feed components and falsification of tests at certain BRF manufacturing plants and accredited labs.

On October 15, 2018, the Brazilian Federal Police issued the final report on the investigation of theTrapaça Operation accusing forty-three people, among which twenty-three are BRF employees or former employees, including former Chief Executive Officer Pedro Faria, former chairman of the board of directors Abilio Diniz, and three former vice presidents. All such current employees are on leaves of absence from BRF. Allegations against these senior employees generally focused on communications relating to alleged dioxin contamination. Since then, the police investigation has been under review by the Brazilian Federal Prosecutor responsible for the case to determine whether or not to present criminal charges.

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 13 countries with specific sanitary requirements related to Salmonella spp. As a precautionary measure, MAPA also suspended exports from 10 other BRF plants to the European Union on March 15, 2018. This precautionary suspension was lifted on April 18, 2018 by MAPA. On May 14, 2018, the European Union released its decision to remove 12 of our production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. The European Union generally has stricter requirements related to salmonella levels and other food safety standards compared to Brazil and the international markets in which we operate. Given the ban of imports from our production facilities, we are no longer able to sell our products from such embargoed production plants in the European Union and, therefore, our results of operations may be further adversely affected if we are not able to direct excess production capacity resulting from such suspension to other markets at similar prices or margins.

BRF informed certain regulators and governmental entities of theTrapaça Operation, including the SEC and the U.S. Department of Justice. BRF is cooperating with the authorities. BRF’s Statutory Audit and Integrity Committee has initiated an investigation with respect to the allegations and related conduct involving BRF employees in theTrapaça Operation. The investigation involves outside counsel and is still in progress. The effects of theTrapaça Operation already had operational consequences for us, as we incurred expenses in the amount of R$78.9 million for the year ended December 31, 2018 with respect communication, legal and other expenses.

The outcome of theTrapaça Operation may result in penalties, fines and sanctions from governmental authorities or other forms of liabilities which may have a material adverse impact on our results of operations, financial position and cash flows. Currently, the losses related to this matter are not possible to be estimated, and, as a result, no provision has been recorded.

See “Item 3.—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.”

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U.S. Class Action

On March 12, 2018, a shareholder class action lawsuit was filed in the U.S. Federal District Court in the Southern District of New York. On July 2, 2018, the Court appointed the City of Birmingham Retirement and Relief System lead plaintiff in the action. On August 31, 2018, the Lead Plaintiff filed an amended class action complaint. On December 5, 2018, the Lead Plaintiff filed a second amended complaint. The second amended complaint seeks to represent all persons and entities who purchased or otherwise acquired BRF ADRs during the period from April 4, 2013, through and including March 2, 2018, 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 in connection with theCarne Fraca Operation andTrapaça Operation. A motion to dismiss briefing has been stayed pending the determination of Lead Plaintiff’s motion to amend the second amended complaint, which was filed on April 1, 2019. Because this lawsuit is in its early stages, we believe the possible loss or range of losses, if any, arising from this litigation cannot be estimated. 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.

Dividends and Dividend Policy

Our dividend policy has historically included the distribution of periodic dividends, based on quarterly balance sheets approved by our board of directors. When we pay dividends on an annual basis, they are declared at our annual shareholders’ meeting, which we are required by the Brazilian Corporation Law and our bylaws to hold by April 30 of each year. When we declare dividends, we are generally required to pay them within 60 days ofdeclaringof declaring them unless the shareholders’ resolution establishes another payment date. In any event, if we declare dividends, we must pay them by the end of the fiscal year in which they are declared.


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As permitted by the Brazilian Corporation Law, our bylaws specify that 25% of our adjusted net profits for each fiscal year must be distributed to shareholders as dividends or interest on shareholders’ equity. We refer to this amount as the mandatory distributable amount. Under the Brazilian Corporation Law, the amount by which the mandatory distributable amount exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized income reserve, and the mandatory distribution may be limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which our net income exceeds the sum of (1) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain associated companies, and (2) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year. As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization.

The following table sets forth the dividends and interest on shareholders’ equity paid to holders of our common shares since 20132016 on a per share basis inreais.

Year

Description

Payment Date

Nominal Brazilian Currency per Share

U.S.$ Equivalent per Share

at Payment Date

2013

Interest on shareholders’ equity

August 8, 2013

0.41

0.18

2013

Interest on shareholders’ equity

February 14, 2014

0.42

0.18

2014

Interest on shareholders’ equity

August 15, 2014

0.41

0.18

2014

Interest on shareholders’ equity

February 13, 2015

0.43

0.15

2014

Dividends

February 13, 2015

0.10

0.04

2015

Interest on shareholders’ equity

August 14, 2015

0.50

0.14

2015

Interest on shareholders’ equity

February 12, 2016

0.58

0.15

2015

Dividends

February 12, 2016

0.11

0.03

2015

Dividends

April 1, 2016

0.12

0.03

Year

Description

Payment Date

Amounts per Share inReais

U.S.$ Equivalent per Share

at Payment Date

2016

Interest on shareholders’ equity

August 15, 2016

0.64

0.20

2017

N/A

N/A

¾

¾

2018

N/A

N/A

¾

¾

The following table sets forth total dividends and interest on shareholders’ equity paid in each year presented below:

Year

Total Dividends and Interest on Shareholders’ Equity

 

(in millions of reais)

2013

724.0

2014

824.3

2015

1,088.9

Year

Total Dividends and Interest on Shareholders’ Equity
(in millions of
reais)

2016

513.2

2017

¾

2018

¾

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Any decision to declare and pay dividends and/or interest on shareholders’ equity in the future will be made at our discretion and will be subject to our continuing determination that such payments are in the best interests of our shareholders and are in compliance with all laws and agreements to which we are subject.

Amounts Available for Distribution

The section of this form entitled “Item 10. Additional Information –– Information––B. Memorandum and Articles of Association ––  Association––Description of Share Capital” contains a description of the calculation and payment of dividends and interest on shareholders’ equity under the Brazilian Corporation Law. See “—Allocation of Net Income and Distribution of Dividends” and “—Payment of Dividends and Interest on Shareholders’ Equity” under Item 10.


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B.                 Significant Changes.Changes

We are not aware of any changes bearing upon our financial condition since the date of the financial statements included in this Annual Report on Form 20-F.

None.

ITEM 9.           THE OFFER AND LISTING

A.                 Offer and Listing Details

Our common shares trade on the São Paulo Stock Exchange. ADRs representing our common shares trade on the NYSE. On March 15, 2016,December 31, 2018, there were 806,643,545811,416,022 common shares issued and outstanding (excluding 5,829,7011,057,224 common shares held in treasury), and there were 104,047,46323,627,702 ADRs outstanding, representing 12.90%15.22% of our outstanding common shares.

Price History of Our Common Shares  and ADRs 

The tables below set forth the high and low closing sales prices for our common shares on the São Paulo Stock Exchange and the high and low closing sales prices for the ADRs on the NYSE for the periods indicated.

 

BM&FBovespa

New York Stock
Exchange

 

Reais per
Common Share

U.S.$ per ADR

 

High

Low

High

Low

Year

 

 

 

 

2011

37.85

24.09

21.42

15.52

2012

42.79

27.74

21.46

13.70

2013

58.96

41.10

26.27

20.37

2014

67.85

40.0

27.19

16.71

2015

71.16

53.23

23.88

13.82

 

BM&FBovespa

New York Stock
Exchange

 

Reais per
Common Share

U.S.$ per ADR

 

High

Low

High

Low

Quarter

 

 

 

 

2014

 

 

 

 

First Quarter

47.50

40.00

20.48

16.71

Second Quarter

53.40

45.45

24.31

20.04

Third Quarter

60.40

52.97

26.94

23.28

Fourth Quarter

67.85

57.14

29.19

21.22

 

 

 

 

 

2015

 

 

 

 

First Quarter

65.65

59.51

23.88

18.82

Second Quarter

67.47

58.55

21.79

19.60

Third Quarter

71.16

63.01

21.83

16.37

Fourth Quarter

70.55

53.23

17.97

13.82

Source: Bloomberg 


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BM&FBovespa

New York Stock
Exchange

 

Reais per
Common Share

U.S.$ per ADR

Month

High

Low

High

Low

September 2015

70.65

67.87

18.78

16.37

October 2015

70.55

59.35

17.97

15.15

November 2015

57.41

53.23

15.30

14.07

December 2015

58.37

54.70

15.29

13.82

January 2016

55.25

45.62

13.71

11.24

February 2016

55.50

47.85

14.07

11.92

B.                 Plan of Distribution

Not applicable.

C.                 Markets

Our common shares trade on the São Paulo Stock Exchange. ADRs representing our common shares trade on the NYSE.

Trading on the BM&FBovespaB3

The BM&FBOVESPAB3 S.A. – Brasil, Bolsa, de Valores Mercadorias e FuturosBalcão, or the São Paulo Stock Exchange, is a public company which resulted from the merger in 2008, amongBolsa de Mercadorias e Futuros (BM&F, the Brazilian commodities and futures exchange),Bolsa de Valores de São Paulo (Bovespa, the São Paulo stock exchange)(“Bovespa”), andCompanhia Brasileira de Liquidação e Custódia (CBLC, a clearinghouse)(“CBLC,” the Bovespa’s securities clearing system) and CETIP S.A. - Balcão Organizado de Ativos e Derivativos.

Trading on the São Paulo Stock Exchange is limited to member brokerage firms and a limited number of authorized non-members. The São Paulo Stock Exchange currently has trading sessions, from 10:00 a.m. to 5:00 p.m., during Brazilian summer local time. There is also trading in the so-called After-Market, only through the automated quotation system of the São Paulo Stock Exchange, from 5:30 p.m. to 6:00 p.m. local time. Only shares that were traded during the regular trading session of the day may be traded in the After-Market of the same day. Trades are made by entering orders in the Mega Bolsa electronic trading system, created and operated by Bovespa.the B3.

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Settlement of transactions conducted on the São Paulo Stock Exchange is effected three business days after the trade date without any adjustment for inflation. Delivery of and payment for shares is made through the facilities of the Brazilian Clearing and Depository Corporation (Companhia Brasileira de Liquidação e Custódia), or “CBLC,” which isCentral Depositária, the São Paulo Stock Exchange’s securities clearing system. The seller is ordinarily required to deliver the shares to the exchange on the secondthird business day following the trade date.

In order to maintain better control over the fluctuation of the São Paulo Stock Exchange index, the São Paulo Stock Exchange has a “circuit breaker” system in which the trading session is suspended for a period of 30 minutes or one hour in the event the São Paulo Stock Exchange index were to fall below the limit of 10% or 15%, respectively, in relation to the closing rate of the index of the previous trading session.

The São Paulo Stock Exchange is significantly less liquid than the NYSE and other the world’s other major stock exchanges. While all of the outstanding shares of a listed company may trade on the São Paulo Stock Exchange, in most cases fewer than half of the listed shares are actually available for trading by the public. The remaining shares are often held by a single or small group of controlling persons or by governmental entities.

Trading on the São Paulo Stock Exchange by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment regulations. With limited exceptions, non-Brazilian holders may trade on the São Paulo Stock Exchange only in accordance with the requirements of Resolution No. 2,6894,373 of January 26, 2000September 29, 2014 of the CMN. Resolution No. 2,6894,373 requires securities held by non-Brazilian holders to be maintained in the custody of, or in deposit accounts with, financial institutions that are authorized by the Central Bank and the Brazilian Securities Commission. Inaddition,In addition, Resolution No. 2,6894,373 requires non-Brazilian holders to restrict their securities trading to transactions on the São Paulo Stock Exchange or organized over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,6894,373 to other non-Brazilian holders through private transactions. For more information, see “Regulation of Foreign Investment” under Item 10.


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Regulation of Brazilian Securities Markets

The Brazilian securities markets are regulated by the CVM, which has authority over stock exchanges and the securities markets generally, by the CMN and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and which regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Brazilian Law No. 6,385/76, as amended, and by the Brazilian Corporation Law and other CVM rulings and regulations.

Under the Brazilian Corporation Law, a company may be either public (companhia aberta), as we are, or closely held (companhia fechada). All public companies are registered with the CVM and are subject to periodic reporting requirements. A company registered with the CVM may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. The shares of a listed company, like those of our company, also may be traded privately subject to certain limitations.

The Brazilian over-the-counter market consists of direct trades between persons in which a financial institution registered with the CVM serves as intermediary. No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market. The CVM must receive notice of all trades carried out in the Brazilian over-the counter market by the respective intermediaries.

Trading of a company’s securities on the São Paulo Stock Exchange may be suspended in anticipation of a material announcement. A company must also suspend trading of its securities on international stock exchanges on which its securities are traded. Trading may also be suspended by the São Paulo Stock Exchange or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to an inquiry by the CVM or the relevant stock exchange.

Brazilian Law No. 6,385/76, as amended, the Brazilian Corporation Law and regulations issued by the CVM provide for, among other things, disclosure obligations, restrictions on insider trading and price manipulation and protections for minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as securities markets in the United States and some other jurisdictions. In addition, rules and policies againstpoliciesagainst self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States, which may put holders of our common shares and ADRs at a disadvantage. Corporate disclosures also may be less complete than for public companies in the United States and certain other jurisdictions.

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São Paulo Stock Exchange Corporate Governance Standards

The São Paulo Stock Exchange has listing segments:

·TheBovespa Mais;

·TheBovespa Mais Level 2;

·        Corporate Governance Level 1;

·        Corporate Governance Level 2; and

·        TheNovo Mercado (New Market) of the São Paulo Stock Exchange.

These listing segments have been designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those already required under the Brazilian Corporation Law. The inclusion of a company in any of the new segments requires adherence to a series of corporate governance rules. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations.


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In April 2006, we entered into a listing agreement with the São Paulo Stock Exchange, under which we agreed to comply with stricter corporate governance and disclosure requirements established by the São Paulo Stock Exchange in order to qualify as a company admitted to theNovo Mercado.

When we becameAs a company withinlisted on theNovo Mercado, and subject to its regulations, we agreed, among other things, to:

·        maintain a share capital structure composed exclusively of common shares;

·        ensure thatthe free float of shares representing at least 25% of our total outstanding share capital are held by investors otheror 15%, in case of average daily trading volume greater than our directors, executive officers and any controlling shareholders;R$25 million;

·        adopt offering procedures that favor widespread ownership of shares whenever making a public offering;

·        comply with minimum quarterly disclosure standards;

·        follow stricter disclosure policies with respect to transactions involving our securities made by any controlling shareholders and our directors and executive officers;

·        make a schedule of corporate events available to our shareholders;

·        offer tag-along rights to minority shareholders (meaning that, upon the acquisition of a controlling interest, the purchaser must also agree to purchase the shares of minority shareholders for the same price paid for the shares in the controlling stake);

·        in the event of a delisting of shares, conduct a public tender offer for our common shares at a price at least equal to the economic value determined pursuantaccording to an appraisal;CVM andNovo Mercado rules;

·        present an annual balance sheet prepared in accordance with, or reconciled to, IFRS;

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·        establish a maximum of two-year term for all members of the board of directors;

·        require that at least 2 members or 20% of our board of directors, whichever is greater, consist of independent directors; and

·        submit to arbitration by the Market Arbitration Chamber (Câmara de Arbitragem do Mercado) all controversies and disputes involving our company, members of our board of directors, board of executive officers, fiscal council and statutory audit and integrity committee or shareholders relating to the application, validity, efficacy, interpretation, violation or effect of theNovo Mercado listing agreement and regulations,rules, our bylaws, the Brazilian Corporation Law or the rules of the CMN, the Central Bank, the CVM or the Market Arbitration Chamber or other rules within the jurisdiction of the Market Arbitration Chamber.

All members of our board of directors and board of executive officers signedexecuted a management compliance statement (Termo de Anuência dos Administradores) under which they take personal responsibility for compliance with theNovo Mercado listing agreement, the rules of the Market Arbitration Chamber and the regulations of theNovo Mercado rules.

D.                 Selling Shareholders

Not applicable.

E.                 Dilution 

Not applicable.


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F.                  Expenses of the Issue

Not applicable.

ITEM 10.        ADDITIONAL INFORMATION

A.                 Share Capital

Not applicable.

B.                 Memorandum and Articles of Association

Description of Share Capital

Set forth below is a summary of the material terms of provisions of our common shares. This description does not purport to be complete and is qualified in its entirety by reference to our amended and restated bylaws (filed herewith as Exhibit 1.01), the Brazilian Corporation Law, the rules and regulations of the CVM, and the rules of theNovo Mercado. Our Board has approved some amendments to our bylaws subject to approval by the shareholders at the annual meeting to be held on April 7, 2016. We.We have described some of the proposed amendments below. This description does not purport to be complete and is qualified in its entirety by reference to our new proposed bylaws filed as an exhibit to the Report on Form 6-K filed on March 2, 2016 (File No. 001-15148).

Under theNovo Mercado listing agreement, we entered into with the São Paulo Stock Exchange (B3) and our bylaws, we may not issue preferred shares or shares with restricted voting rights. Accordingly, this section does not discuss the Brazilian statutory rights conferred upon holders of preferred shares.

General

We are currently a publicly held corporation (sociedade por ações de capital aberto) incorporated under the laws of Brazil. Our headquarters currently are located in Itajaí, State of Santa Catarina. We are duly registered withJunta Comercial do Estado de Santa Catarina under the number NIRE 42.300.034.240 and with the CVM under No. 01629-2.

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On December 31, 2015,2018, our additional paid-in capital subscribed and paid up was R$12,553,417,953.36, which is composed of 872,473,246812,473,246 book-entry shares of common stock without par value. The new proposed bylaws change the number of common shares to 812,473,246 as a result of the cancellation of 60,000,000 shares approved by our Board of Directors on February 25, 2016. The Board is authorized to increase our capital stock to 1 billion common shares.

Corporate Purpose

Article 3 of our bylaws provides that our corporate purpose consists of:

·        the processingmanufacture, sale, in the retail and sale, whether wholesale or retail,sector, and transaction of foodsbusiness relating to food in general, principally those derived fromparticularly animal protein by-products and thosefood items that use a refrigerated supplythe cold chain for support and distribution;

·        the processingmanufacture and sale of animal feed, nutrients and nutrientsfood supplements for animals;

·        the provision of food services in general;

·        the processing, refinementmanufacture, refining and sale of vegetable oils, fatfats and dairy products;

·        the exploration,production, conservation, storage, silage and sale of grains, their derivatives and by products;by-products;

·        the sale on the retail and wholesale and resalemarket of consumer and manufacturedproduction goods, including the sale of equipment and vehicles used infor the development of its logistical activities;activity;


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·        the export and import of manufacturedproduction and consumer goods;

·        participation in other companies, which may increase our ability to attain our other purposes; and

·participating in projects that are necessary for the operation of the business of our company.

The new proposed bylaws, in addition to the above, include the processing and sale of food supplements and the provision of services of transport, logistics and distribution of cargofreight and food in general.general;

The Corporation·holding equity stakes in other companies, with the aim of achieving the corporate purposes to the fullest extent; and

·the participation in any projects needed for the operation of our business.

We may further engage directly, or indirectly through others, in any support activities for the core business described in Section Three above, such as:

·        To conduct supporting administrative, technical or operational support activities, aimingaimed at creating conditions for the development of itsto improve our core business;

·        To provide freighttransport services, generally;in general;

·        To provide product storage and stocking services and all other related ancillary services relating thereto;services;

·        Toactivities to promote and reposition itsreplace our products in the retail productsmarket and at points of displaysale exposed to the final consumer, including the support needed by clients which allows the packaging and pointsvisualization of sale to final consumers, including providing necessary support for clients that package and display ourthe products;

·        To provide the services offor receiving and allocating raw materials to be used in production;

·        To providethe provision of machine and vehicle repair, maintenance and overhaul services;

·        To foster the promotion of the growth of agribusiness industry in Brazil through the promotion of activities, projectsprograms, technical assistance and technical assistance;supply;

·        Tothe manufacture, developdevelopment and sellsale of packaging products of any kind;

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·        To process and raise livestock;

·To conduct research on and to develop techniques for the production and improvement of genetic matrices for the Corporation;

·To conduct reforestation activities, the harvesting, processing and saleraising of timber; and

·To sell property and assets, including machinery, equipment and vehicles, to finance activities includedlivestock in our corporate purpose.general;

The new proposed bylaws, in addition to the above, include the following:

·        the sale of commodities in general;

·research and development of techniques for the production and improvement of our genetic matrixes;

·the activities of reforestation, extraction, manufacturing and sale of timber;

·the sale of mobile assets, real estate, including machines, equipment and vehicles, fixed assets, to meet the activities within our corporate purpose; and

·        the provision of services to supply fuel for the Company’sour own fleet or outsourced service providers, particularly cargo,freight, transport, logistics and distribution.

The Brazilian Corporation Law forbidsOur bylaws forbid us to engage in any business practices inconsistent with our corporate purpose and core business, including the granting of pledges, collateral, endorsement or any guarantees not related to our corporate purpose or contrary to our bylaws, except for those practices already engaged in, and any such practices will be null and void.


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Rights of Common Shares

At our shareholders’ meetings, each share of our common stock is generally entitled to one vote. Pursuant to our bylaws and to theNovo Mercado listing agreement, we may not issue shares without voting rights or with restricted voting rights. In addition, our bylaws and the Brazilian Corporation Law provide that holders of our common shares are entitled to dividends or other distributions made in respect of our common shares ratably in accordance with their respective participation in the total amount of our issued and outstanding shares. See “— Payment of Dividends and Interest on Shareholders’ Equity” for a more complete description of the payment of dividends and other distributions on our shares. In addition, upon our liquidation, holders of our common shares are entitled to share our remaining assets, after payment of all of our liabilities, ratably in accordance with their respective participation in the total amount of our issued and outstanding shares. Common shareholders have, except in certain circumstances listed in the Brazilian Corporation Law and in our bylaws, the right to participate in our company’s future capital increases, in proportion to their participation in our capital stock, and also the right to dispose of shares in a public offering in case of acquisition of shares in quantities equal to or in excess of 20%33.3% of total shares issued in the offering, in compliance with the terms and conditions provided in Article 3641 of our current bylaws. Under the new proposed bylaws, this is changed to 33.3% of total shares issued.

According to the Brazilian Corporation Law, neither our bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of the following rights:

·        the right to participate in the distribution of profits;

·        the right to participate equally and ratably in any remaining residual assets in the event of our liquidation;

·        preemptive rights in the event of issuance of shares, convertible debentures or warrants, except in certain specific circumstances under Brazilian Corporation Law described under “—Preemptive Rights”;

·        the right to monitor our management in accordance with the provisions of the Brazilian Corporation Law; and

·        the right to withdraw from our company in the cases specified in the Brazilian Corporation Law, which are described under “—Withdrawal Rights.”

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Meeting of Shareholders

Under the Brazilian Corporation Law, our shareholders are generally empowered at our shareholders’ meetings to take any action relating to our corporate purposes and to pass resolutions that they deem necessary to our interests and development at duly called and convened general meetings. Shareholders at our annual shareholders’ meeting, which is required to be held within four months of the end of our fiscal year, have the exclusive right to approve our audited financial statements and to determine the allocation of our net profits and the distribution of dividends with respect to the fiscal year ended immediately prior to the relevant shareholders’ meeting. The election of our directorsboard members typically takes place at the annual shareholders’ meeting, every two years, although under Brazilian Corporation Law it may also occur at an extraordinary shareholders’ meeting. Members of the fiscal council (conselho fiscal), if the requisite number of shareholders requests its establishment, may be elected at any shareholders’ meeting.

An extraordinary shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year.

Under our bylaws and the Brazilian Corporation Law, the following actions, among others, may be taken only at a shareholders’ meeting:

·        amendment of our bylaws;


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·        election and dismissal, at any time, of the members of our board of directors and fiscal council and approval of their aggregate compensation;

·        approval of management accounts and our audited financial statements;

·        granting stock awards and approval of stock splits or reverse stock splits;

·        approval of stock option plans for our management and employees (and, pursuantor individuals who provide services to our new proposed bylaws, service providers),us, as well as those of companies directly or indirectly controlled by us;

·        authorization of the issuance of convertible debentures and/or secured debentures;exceeding the authorized capital stock;

·        suspension of the rights of a shareholder;

·        approval in accordance with the proposal submitted by our board of directors, of the distribution of our profits and payment of dividends, as well as the establishment of any reserve other than the legal reserve;

·        acceptance or rejection of the valuation of in-kind contributions offered by a shareholder in consideration for issuance of shares of our share capital;

·        approval of our transformation, merger, consolidation, spin-off;

·        approval of any dissolution or liquidation, and the appointment and dismissal of a liquidator, as well as the members of our fiscal council, which shall be installed in the event of our liquidation if it does not already exist at the time;

·        authorization to delist from theNovo Mercado, and to go private, (pursuant to our new proposed bylaws, shareholder approval will no longer be required in connection with our company going private), as well as to retain a specialized firm to prepare a valuation report with respect to the valueapproval of our sharesthe waiver of the presentation of the Public Offer of Purchase of Shares in such circumstances; and

·        authorization to petition for bankruptcy or file a request for judicial or extra-judicial restructuring.

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Quorum

As a general rule, the Brazilian Corporation Law provides that the quorum for our shareholders’ meetings consists of shareholders representing at least a quarter of our issued and outstanding shares on the first call and, if that quorum is not reached, any percentage on the second call. If the shareholders are convened to amend our bylaws, a quorum at a shareholders’ meeting consists of shareholders representing at least two-thirds of our issued and outstanding share capital entitled to vote on the first call and any percentage on the second call. In most cases, the affirmative vote of shareholders representing at least the majority of our issued and outstanding shares present in person or represented by proxy at a shareholders’ meeting is required to ratifyapprove any proposed action, and blank votes are not counted as shares present in person or represented by proxy. However, the affirmative vote of shareholders representing not less than one-half of our issued and outstanding shares is required to, among other measures:

·        reduce the percentage of mandatory dividends;

·        change our corporate purpose;

·        consolidate with or merge our company into another company;

·        spin off assets of our company;


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·        approve our participation in a centralized group of companies;

·        apply for cancellation of any voluntary liquidation;

·        approve our dissolution; and

·        approve the merger of all of our sharesmerging into another Brazilian company.

A quorum smaller than the quorum established by the Brazilian Corporation Law may be authorized by the CVM for a public company with widely traded shares and held shares that has had at leastless than half of the holders of its voting shares in attendance at its last three shareholders’ meetings.

Elimination of or amendment to limit shareholders’ rights under Article 3641 of our current bylaws, which requires any shareholder who becomes the holder of 20%33.3% or more of our total capital stock to effect a public tender offer for all of our outstanding stock, is permitted only when approved by the majority of shareholders present at the shareholders’ meeting. The shareholders who approve such elimination or amendment must launch a public tender offer in accordance with the rules established by Article 36 of our current bylaws. Under the new proposed bylaws, this amount is changed to 33.3%.

Notice of Shareholders’ Meetings

Under the Brazilian Corporation Law, notice of our shareholders’ meetings must be published at least three times in theDiário Oficial do Estado de Santa Catarina, the official newspaper of the State of Santa Catarina, and in another widely circulated newspaper in the same state, which is currently theDiário Catarinense. We have also published such notices in theValor Econômico. Subject to approval by the shareholders at the annual meeting to be held on April 7, 2016, in addition to theDiário Oficial do Estado de Santa Catarina, we will publish notices of the shareholders’ meeting and other official documents inValor Econômicoonly, and will cease to useDiário Catarinense.

Notices of shareholders’ meetings must contain the agenda for the meeting and, in the case of an amendment to our bylaws, a summary of the proposed amendment. Under the Brazilian Corporation Law, and our bylaws, the first notice must be published at least 15 days before the date of the meeting on the first call, and no later than eight days before the date of the meeting on the second call. However, under our bylaws and CVM Instruction No. 559 of March 27, 2015, Brazilian issuers of depositary receipts, such as our company, must call their shareholders’ meetings not less than 30 days prior to the meeting.meeting in the first call, and no later than eight days before the date of the meeting on the second call. In addition, upon request of any shareholder, the CVM may suspend for up to 15 days the required prior notice of an extraordinary shareholders’ meeting so that the CVM can become familiar with, and analyze, the proposals to be submitted at the meeting and, if applicable, inform the company, up to the end of the suspension period, about the reasons why it believes that a proposed resolution violates legal or regulatory provisions.

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Location of Shareholders’ Meetings

Our shareholders’ meetings take place at our head offices in the City of Itajaí, State of Santa Catarina. The Brazilian Corporation Law allows our shareholders to hold meetings in another location in the event of force majeure, provided that the meetings are held in the City of Itajaísame city in which the company’s head office is located and the relevant notice includes a clear indication of the place where the meeting will occur.

Calling of Shareholders’ Meetings

Our board of directors may call shareholders’ meetings. Shareholders’ meetings also may be called by:

·        any shareholder, if our board of directors fails to call a shareholders’ meeting within 60 days after the date it is required to do so under applicable law and our bylaws;


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·        shareholders holding at least 5% of our common shares, if our board of directors fails to call a meeting within eight days after receipt of a request to call the meeting by those shareholders indicating the reasons for calling such a meeting and the proposed agenda;

·        shareholders holding at least 5% of our common shares if our board of directors fails to call a meeting within eight days after receipt of a request to call a meeting to approve the creation of a fiscal council; and

·        our fiscal council, if the board of directors fails to call an annual shareholders’ meeting within one month after the date it is required to do so under applicable law and our bylaws. The fiscal council may also call an extraordinary general shareholders’ meeting if it believes that there are important or urgent matters to be addressed; andaddressed.

·any co-chairman of our board of directors, within two days of a determination by the São Paulo Stock Exchange that the prices of our common shares must be quoted separately from other Novo Mercado securities or following the suspension of trading of our shares on the Novo Mercado, in each case, due to our non-compliance with the Novo Mercado regulations. All members of our board of directors must be replaced at such shareholders’ meeting. If any co-chairman of the board of directors fails to call such shareholders’ meeting within the prescribed time limit, any shareholder of our company may do so.

Conditions of Admission

Our shareholders may be represented at a shareholders’ meeting by a proxy appointed less than a year before the meeting, which proxy holder must be either a shareholder, a corporate officer, a lawyer or, in the case of a publicly traded company, such as our company, a financial institution. An investment fund shareholder must be represented by its investment fund officer or by a proxy.proxy holder.

Pursuant to our bylaws, to ensure the efficiency of the works during our shareholders’ meetings shareholders attending a shareholders’ meeting mustare required to deliver, at least five days prior to the shareholders’ meeting, proof of their status as shareholders and proof that they hold the shares they intend to vote by delivery of proper identification and, if necessary, a receipt issued by the custodian agent, a power of attorney (if the shareholder is represented by a third party) and/or an extract evidencing the holding of registered shares. Notwithstanding the above and in accordance with Brazilian Corporation Law and our bylaws, shareholders who are able to make proof of their status as shareholders of the Company may participate and vote at our shareholder meeting.

In inspectingaddition, shareholders may vote by sending the validitydistance voting form or by public request for proxy made available by the Company, duly filled and signed directly to the Company at Avenida das Nações Unidas, 8.501, 1°. Floor, Zip Code 05425-070, São Paulo – SP – Brazil to the attention of documents submittedthe Corporate Legal Department, with respect to shareholder representation, we apply the principle of good faith. Unauthenticated copies of the following documents:

·certified copies of identity document (which should contain a picture of the shareholder) for individual persons and the bylaws, corporate and proxy documents or those bearing no verified signature, when not required by law, are permitted and confer entitlement to fully exercise shareholders’ rights, provided that the person concerned undertakes to presentidentity document (which should contain a picture of the original documentsproxy holder) of the proxy holder for legal entities; and

·in the case of investment funds, the rules of the fund, the bylaws of the manager or the equivalent requiredadministrator, according to the voting policy of the fund, corporate and proxy documents and the identity documents of the proxy holder (which should contain a picture of the proxy holder).

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It is not mandatory to notarize the signature on the distance voting form. Corporate and proxy documents of legal entities and investment funds in foreign languages shall be notarized and officially translated.

The holders of ADRs will be represented by us within five working days after the shareholders’ meeting. If the shareholder does not submit the originals or equivalent required by usThe Bank of New York Mellon, in its capacity as a depository institution within the deadline, his or herterms of the Deposit Agreement signed with the Company.

Shareholders may also vote shallby means of instruction transmitted to the Company’s bookkeeping agent. This option is aimed exclusively to shareholders whose shares are kept with the bookkeeping agent and that are not held in the central depositary.

Shareholders with shares which are not held in the central depositary and who choose to exercise their voting right through service providers may transmit their instructions to the bookkeeping agent of the shares issued by BRF, in accordance with the service provider’s rules. Shareholders should contact the bookkeeping agent and verify the procedures it has established for distance voting form along with the documents and information it requires to exercise this service.

Theshareholders whose shares are deposited in the central depositary of the B3 and who choose to exercise their voting right through service providers should transmit their instructions to the respective custodian agents, in line with their rules, which, in turn, will forward these voting instructions to the central depositary of the B3. This option is aimed exclusively at shareholders whose shares are in the custody of the B3. Voting will be disregarded, and he or she shall be responsible for any loss or damage that his act has caused us.exercised by the shareholders according to the procedures adopted by their custodian agents.

Board of Directors

Under our bylaws, our board of directors is composed of nine to eleven members and an equal number of alternates.members. The members of our board of directors and alternate directors are elected at the annual shareholders’ meeting for a period of two years and may be reelected. Our new proposed bylaws do not contemplate alternates to board members. At least 2 of the directors or 20% of the board of directors, whichever is greater, must be independent (as defined in theNovo Mercado regulations)rules). The Board of Directors must annually assess and disclose the independent board members and describe any event that may compromise their independence. There is no mandatory retirement age for our directors.

Under In case of any vacancy, theNovo Mercado rules, remaining members will nominate an alternate director who will serve until the membersnext shareholders’ meeting, when shareholders shall elect another director to serve for the remaining term of ouroffice. If more than 1/3 of the seats on the board of directors must, priorare vacant at the same time, then an extraordinary shareholders’ meeting shall be called within 30 days counted from such vacancy event to takingelect the substitutes for such positions, who will serve for a term of office sign a compliance statement subscribing tocoinciding with theNovo Mercado rules and Arbitration Regulations term of the Arbitration Chamber of the São Paulo Stock Exchange.other members.


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Pursuant to our bylaws, a shareholder who intends to nominate one or more members of our board of directors, other than the current members of the board of directors, must notify us in writing preferably at least five days prior to the shareholders’ meeting at which the members of the board of directors will be elected, providing us with the name and resume of the candidate. In case we receive such a notification, we must disclose our receipt and the contents of such notification (1)will be responsible for immediately in electronic form to the CVM and the São Paulo Stock Exchange and (2)disclosing this information through a press releaseShareholders’ Notice to our shareholders, within not less than three days after receipt of such notification, considering only the days the newspapers generally used by us are published.  Under the new proposed bylaws, this disclosure must be made through a Shareholder Notice, availableposted on the CVM website.

Shareholders who fail to provide notice of their intention of appointing members towebsite and our board of directors may be deprived from appointing these members at the shareholders’ meeting. We believe that this provision is valid and enforceable as it provides other shareholders with the opportunity to learn about the candidates and prepare themselves and, if they so desire, to attend and vote at the respective shareholders meeting. In case of any dispute arising from efforts to appoint members that were not previously notified under the terms required by our bylaws, such dispute may be submitted to arbitration in accordance with the rules ofNovo Mercado.website.

The Brazilian Corporation Law sets forth that a cumulative vote system must be made available upon request of shareholders representing at least 10% of our voting share capital. The cumulative vote system entitles each share held by a shareholder to as many votes as there are members of the board of directors forand to give each share it holds. Further, shareholders have the right to allocate their votes tovote cumulatively for only one candidate or several. Underto distribute its votes among several candidates. Whenever the election has been carried out by the cumulative vote process, the dismissal of any member of the board of directors by the shareholders’ meeting will imply the dismissal of all other members, and a new election shall be held.

Pursuant to CVM Instruction 282,regulations, the minimum percentage of voting capital required for the adoption of the cumulative vote system by a publicly held company may be reduced based on its share capital, varying from 5% to 10%. In our case, considering the amount of our share capital, shareholders representing 5% of the voting capital may request the adoption of the cumulative vote system to elect the members of our board of directors. If there is no request for the adoption of the cumulative vote system, directors are elected by a majority of the shareholders of our issued and outstanding common shares present in person or represented by proxy at a shareholders’ meeting, except that any minority shareholders that, individually or collectively, hold at least 10% of the common shares have the right to select one director and his or her alternate.

Under our bylaws, if cumulative voting is not requested, the members of our board of directors may decide, by a majority of the members present, to propose a complete list of candidates to replace vacancies. In the event cumulative voting is requested, each candidate from the list proposed by the board of directors will be considered one candidate for the board of directors.

Pursuant to ourtoour bylaws, if a shareholder requests the adoption of the cumulative vote system, as provided by Section 14,141, paragraph one of the Brazilian Corporation Law, we must disclose our receipt and the contents of such notification (1) immediately in electronic form to the CVM and the São Paulo Stock Exchange, and (2) through a press release to our shareholders, within not more than two days after receipt of such notification, considering only the days the newspapers generally used by us are published. Under the new proposed bylaws, this disclosure must be made through a Shareholder Notice, available on the CVM website or in accordance with applicable laws or CVM rulesrules.

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At the Company’s Ordinary and Extraordinary General Meeting held on April 26, 2018, a cumulative voting system was adopted for the election of our board members, pursuant to CVM instruction. However, in a decision published on November 8, 2018, after an appeal that was presented by the Company, CVM overruled this decision and agreed that the votes cast for the election of our board members should be considered effected under a slate-based voting system.  See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Board of Directors”

The shareholders approve the aggregate compensation of the directors, fiscal council members and executive officers for each fiscal year. The board of directors decides the allocation of the compensation among its members, the fiscal council members and the executive officers.

Board of Executive Officers

Our bylaws provide for a board of executive officers composed of at least two and no more than 15 members, elected for a period of two years, one of which is the Global Chief Executive Officer, one of which is the Chief Financial and Investor Relations Officer and one of which is the Investor Relations Officer.all other members as Vice-President. The titles and duties of the remaining executive officers are proposed by the Global Chief Executive Officer to the Board of Directors.

The members of our board of executive officers are elected by our board of directors for two-year terms and are eligible for reelection. Our board of directors may remove any executive officer from office at any time withorwith or without cause. Under the Brazilian Corporation Law, our executive officers must be residents of Brazil but need not be shareholders of our company.


TableIn accordance with theNovo Mercado rules and our bylaws, the position of ContentsChairman of the Board of Directors and Chief Executive Officer may not be occupied by the same individual, except in the event of a vacancy in the position of Chief Executive Officer, in which case, the company should: (i) disclose the occurrence of an individual holding both positions as a result of the vacancy; (ii) disclose, within 60 days, counted from the vacancy, the measures taken to end any such occurrence; and (iii) end any such occurrence within one year.

Pursuant toNovo Mercado rules, we anticipate that Mr. Pedro Pullen Parente’s term as Chief Executive Officer will end on June 18, 2019, as he may only hold the positions of Chairman of the Board of Directors and Chief Executive Officer at the same time for a period of one year. In connection with the end of Mr. Pedro Pullen Parente’s term as Chief Executive Officer, the Company will appoint a new Chief Executive Officer. On March 28, 2019, Mr. Lorival Nogueira Luz Júnior, the Company’s current Chief Operating Officer, was named Mr. Parente’s successor as Chief Executive Officer following the end of Mr. Parente’s term.

Fiscal Council

Under the Brazilian Corporation Law, the fiscal council is an auditing body independent from the company’s management. Its main responsibility is to inspect the management actions and audit our consolidated financial statements, reporting its conclusions to the shareholders.

We have a permanent fiscal council composed of three members and an equal number of alternates. The new proposedBrazilian Corporation Law and our bylaws stateprovide that, if there is a controlling shareholder, then minority shareholders jointly representing 10% or more of the company shares will have the right to elect, in a separate vote, one member of the fiscal council and one alternate. Under theNovo Mercado rules, the members of the fiscal council must, prior to taking office, sign a compliance statement subscribing to theNovo Mercado Listing Regulations and Arbitration Regulations of the Arbitration Chamber.

Members of the fiscal council may not be members of the board of directors, officers or employees of the company or of a controlled company or a company from the same group.  The Brazilian Corporation Law also requires that members of the fiscal council receive remuneration,compensation, at a minimum, in the amount of 10% of the average remuneration paid to directors,the Company’s officers, excluding other benefits. 

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Statutory Audit and Integrity Committee

At our shareholders’ meeting held on April 3, 2014, our shareholders approved the establishment of a permanent statutory audit and integrity committee. Our bylaws provide that the permanent statutory audit and integrity committee shall be comprised of four members, two of whom must be independent members of the board of directors and the other two of whom must be independent external members who are not members of our board of directors or our board of executive officers. The new proposed bylaws contemplate a minimum of three and a maximum of five members, provided that (i) the majority of whomthe members shall be independent, (ii) at least one will be an independent director of the Board of Directors. The new proposed bylaws also contemplate that the Board may appoint theindependent members of the statutory audit committee among the membersboard of directors shall be a member of the fiscal council.audit and integrity committee, (iii) at least one of the audit and integrity committee members shall not be a member of the board of directors, and (iv) none of them can be an officer. The statutory audit and integrity committee is designed to comply with CVM Instruction No. 509/11 of November 16, 2011308, as amended, and to comply withallow us to rely on the exemption from the audit and integrity committee requirements of the SEC contained in paragraph (c)(3) of Rule 10A-3 under the Exchange Act.  See “Item 16D. Exemptions from the Listing Standards for Audit Committees.”

The statutory audit and integrity committee is an advisory body directly linked to the board of directors.  The members of the proposedstatutory audit and integrity committee would beare appointed by the board of directors for terms of two years and will serve for no more than 10 years.  At least one of the members of the statutory audit and integrity committee must be a financial specialist, having knowledge of corporate accounting, auditing and finance.

The statutory audit and integrity committee havehas the following functions:

·        opine on the engagement and removal of the independent external auditors for the preparation of the outside independent audit or for any other service;

·        supervise the activities (a) of the independent external auditors to evaluate their independence, and the quality and suitability of the services rendered and the annual work plan, (b) of our internal controls department, (c) of our internal audit department and (d) of our financial reporting department;

·        monitor the quality and integrity of our internal control mechanisms, our quarterly information, our interim and annual financial statements and additional information and metrics published on the basis of adjusted account data and non-accounting data which may incorporate information not typically reported in the financial statements;


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·        evaluate and monitor our exposure to risk, including requiring detailed information on policies and procedures related to management compensation, the use of our assets and expenses incurred in our name;name, and integrity (compliance) practices;

·        evaluate and monitor, togetherjointly with management and the internal audit department, the policy, suitability and reasoning of transactions with related parties;parties, and internal policies;

·evaluate, monitor and recommend to the board of directors the remediation or improvement of the Company’s internal policies, including the Related Parties Transactions Policy;

·evaluate the Company’s compliance practices and suggest improvements;

·evaluate and discuss the annual work plan for the independent external auditor and submit it to the board of directors for its assessment; and

·        prepare a summarized annual report to be presented together with the financial statements containing a description of its activities, results and conclusions reached and recommendations offered, and any situations where there is significant divergence between our management, the independent external auditors and the statutory audit and integrity committee in relation to our financial statements.

The statutory audit and integrity committee must also have fundingmechanisms to receive, retain and respond to whistleblower complaints, including of a confidential nature, on matters related to the scope of the company’s internal or external activities, such asrelated to the violation of legal provisions and rules applicable to the Company(including those of an accounting, internal controls and auditing nature.nature), in addition to internal codes and rules, including with provisions for specific procedures for the protection of whistleblowers and the confidentiality of the information.

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The statutory audit and integrity committee has a written charter, which was approved by the board of directors and describes in detail the committee’s functions and operating procedures.

Transactions in Which Members of the Board of Directors and Executive Officers Have a Conflict of Interest

Our bylaws contain a specific provision limiting the right of a member of the board of directors to have access to information, participate in the discussions or vote on a proposal, arrangement or contract in which he or she has an interest that conflicts with our interests. In addition, the Brazilian Corporation Law prohibits a member of the board of directors or board of executive officers from intervening in any transaction that conflicts with the interests of the company.

Allocation of Net Income and Distribution of Dividends

Calculation of Distributable Amount

At each annual shareholders’ meeting, our board of executive officers and our board of directors are required to recommend how to allocate our net profits, if any, from the preceding fiscal year. This allocation is subject to deliberationconsideration by our shareholders.

The Brazilian Corporation Law defines “net profits” for any fiscal year as net profits after income and social contribution taxes for that fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our net profits in such fiscal year. Our directors’ and executive officers’ participation in our net profits, when allocated, can be in an amount approved at the shareholders’ meeting up to 10% of our net profits in such fiscal year. Under the new proposed bylaws provide that the shareholders may allocate the participation of directors, executive officers and employees on our net profits at a shareholders meeting as follows: up to 10% to employees and up to the limit established under applicable laws to our directors and executive officers.

Our bylaws provide that an amount equal to 25% of our net profits, if any, as reduced by amounts allocated to our legal reserves and contingency reserves, and increased by any reversals of our contingency reserves, if any, must be allocated for dividend distributions or payment of interest on shareholders’ equity in any particular year. This dividend is limited to the realized portion of our net profits, which amount is the minimum mandatory dividend. Under the new proposed bylaws, thisSuch amount must be calculated after excluding the allocation of profits to employees officers and directors. The calculation of our net profits, allocations to reserves and distributable amounts are determined on the basis of our unconsolidated financial statements prepared in accordance with the Brazilian Corporation Law.


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Profit Reserve Accounts

The financial statements of corporations constituted under Brazilian law include two principal reserve accounts: profit reserves and capital reserves. Except for the legal reserve, allocations to any reserve are subject to the approval of our shareholders at our annual shareholders’ meetings.

Profit Reserves

Under the Brazilian Corporation Law, our profit reserves account is comprised of the legal reserve, unrealized profits reserve, contingency reserve, bylaw reserves and retained earnings reserve. Allocations to each of these reserves (other than the legal reserve) are subject to approval by company’s shareholders at annual shareholders’ meeting.

Legal Reserve

Under the Brazilian Corporation Law and our bylaws, we are required to maintain a legal reserve to which we must allocate 5% of net profits for each fiscal year until the aggregate amount in the reserve equals 20% of share capital.sharecapital. However, we are not required to make any allocations to legal reserve in a fiscal year in which the legal reserve, when added to the established capital reserves, exceeds 30% of total capital. The amounts to be allocated to such reserve must be approved by company’s shareholders at a shareholders’ meeting and may only be used to increase share capital or to absorb losses, but are not available for distribution. Under the new proposed bylaws, thisThis amount must be calculated after excluding the allocation of profits to employees, officers and directors. AtAs of December 31, 2015,2018, we haddid not have a legal reserve of R$540.2 million.reserve.

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Unrealized Profit Reserve

Under the Brazilian Corporation Law, the amount by which the distributable amount exceeds realized net profits in a given fiscal year may be allocated to unrealized profits reserves. The Brazilian Corporation Law defines realized net profits as the amount by which net profits exceed the sum of (1) the portion of net income, if any, attributable to earnings and losses of subsidiaries and affiliates accounted for using the equity method of accounting and (2) the profits, gains or returns that will be received by company after the end of the next fiscal year. The profits allocated to the unrealized profits reserves must be added to the next mandatory minimum dividend distribution after those profits have been realized, if they have not been used to absorb losses in subsequent periods. AtAs of December 31, 2015,2018, we did not have an unrealized profits reserve.

Contingency Reserve

Under the Brazilian Corporation Law, a percentage of net profits may be allocated to a contingency reserve for estimable losses that are considered probable in future years. Any amount so allocated in a prior year must either be reversed in the fiscal year in which the loss had been anticipated if the loss does not occur as projected or be offset in the event that the anticipated loss occurs. AtAs of December 31, 2015,2018, we did not have a contingency reserve.

Bylaw Reserves

Under the Brazilian Corporation Law, any corporation may provide in its bylaws for additional reserves, provided that the maximum amount that may be allocated, the purpose and allocation criteria of the reserve are specified. Our bylaws provide for the following additional reserves:

·        Reserves for increases in capital. 20% of adjusted net profits for each fiscal year must be allocated to reserves for increases in capital until the aggregate amount in such reserve equals 20% of share capital. Under the new proposed bylaws, thisThis amount must be calculated after excluding the allocation of profits to employees, officers and directors. AtAs of December 31, 2015,2018, we had reserves fordid not have increases in capital of R$1,898.6 million.reserve.


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·        Expansion reserves. Under our bylaws, shareholdersShareholders may decide at a meeting to retain up to 50% of our net profits to allocate to an expansion reserve, up to a limit of 80% of share capital. Under the new proposed bylaws, thisThis amount must be calculated after excluding the allocation of profits to employees, officers and directors. This reserve is intended to minimizeensure investment in fixed assets or the effects of a decreaseincrease in our working capital. AtAs of December 31, 2015,2018, we haddid not have an expansion reserve of R$3,120.8 million.reserve.

·Reserves for tax incentives. UnderIn addition, under the Brazilian Corporate Law, shareholders may decide at a meeting to retain athe portion of net profits arising from government donations on government grantsor subsidies for investment toand allocate them to a reserve for tax incentives. This reserve can be excluded from the calculation basis of the mandatory minimum dividends. AtAs of December 31, 2015,2018, we haddid not have a reserve for tax incentives of R$517.2 million. incentives. 

Retained Earnings Reserves

Under the Brazilian Corporation Law, our shareholders may decide at a general shareholders’ meeting to retain a portion of our net profits that is provided for in a capital expenditure budget. AtAs of December 31, 2015,2018, we did not have a retained earnings reserve.

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Capital Reserves

Under the Brazilian Corporation Law, the capital reserve consists of the share premium from the issuance of shares, goodwill reserves from mergers, sales of founders’ shares and sales of subscription warrants, premium from the issuance of debentures, tax and fiscal incentives and donations.warrants. Amounts allocated to our capital reserve are not taken into consideration for purposes of determining the mandatory minimum dividends. We are not allowed to issue founders’ shares. In addition, the remaining balance in the capital reserve may only be used to increase share capital, to absorb losses that surpass accumulated profits and the profit reserves or to redeem, reimburse or purchase shares. AtAs of December 31, 2015,2018, we had a capital reserve of R$7.0115.4 million.

Payment of Dividends and Interest on Shareholders’ Equity

The bylaws of a Brazilian company must specify a minimum percentage of profit available for distribution, which must be paid to shareholders as mandatory dividends or as interest on shareholders’ equity. Consistent with the Brazilian Corporation Law, our bylaws provide that an amount equal to 25% of our net profits, adjusted as described in “—Allocation of Net Income and Distribution of Dividends” above, must be allocated for dividend distributions or payment of interest on shareholders’ equity in a particular year.

While we are required under the Brazilian Corporation Law to pay a mandatory dividend each year, we may suspend the mandatory dividends if our administrative bodies report to our annual shareholders’ meeting that the distribution is incompatible with our financial condition. Our fiscal council, if in operation, must review any suspension of mandatory dividends recommended by our management. In such case, our management would be required to submit a report to the CVM setting forth the reasons for any suspension of dividends. Profits not distributed by virtue of such a suspension are allocated to a special reserve and, if not absorbed by any subsequent losses, are required to be distributed as dividends as soon as our financial condition permits their distribution.

We are able to allocate mandatory dividends in the form of interest on shareholders’ equity, which is deductible when calculating our income tax and social contribution. We have done so in the past and expect to continue to do so in the foreseeable future.

Dividends

We are required by the Brazilian Corporation Law and our bylaws to hold an annual shareholders’ meeting no later than the fourth month following the end of each fiscal year at which, among other things, the shareholders must vote to declare an annual dividend. The annual dividend is calculated based on our audited financial statements prepared for the immediately preceding fiscal year.


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Any holder of shares on the date the dividend is declared is entitled to receive the dividend. Under the Brazilian Corporation Law, dividends are generally required to be paid within 60 days of the declaration date, unless the shareholders’ resolution establishes another date of payment, which, in any case, must occur before the end of the fiscal year in which the dividend is declared.

Our bylaws do not require that we index the amount of any dividend payment to inflation.

Our board of directors may declare interim dividends or interest on shareholders’ equity based on realized profits reflected in semiannual financial statements. The board of directors may also declare dividends based on financial statements prepared for shorter periods, but they cannot exceed the amount of capital reserves. Any payment of interim dividends may be set off against the amount of mandatory dividends relating to the net profits earned in the year in which the interim dividends were paid.

Interest on Shareholders’ Equity

Since January 1, 2006, Brazilian companies are permitted to pay interest on shareholders’ equity and treat those payments as a deductible expense for purposes of calculating Brazilian income tax and social contribution tax. The amount of the deduction is limited to the greater of: (1) 50% of our net profits (after deduction of social contribution and before payment of any interest or any deduction for income taxes) relating to the period to which

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the payment is made; and (2) 50% of our accumulated profits. The payment of interest on shareholders’ equity is an alternative to the payment of mandatory dividends. The rate applied in calculating interest on shareholders’ equity cannot exceed the TJLP rate for the applicable period. The amount distributed to our shareholders as interest on shareholders’ equity, net of any income tax, may be included as part of the mandatory dividends. In accordance with applicable law, we are required to pay to shareholders an amount sufficient to ensure that the net amount they receive in respect of interest on shareholders’ equity, after payment of any applicable withholding tax plus the amount of declared dividends, is at least equivalent to the mandatory dividend amount. For more information, see “E. Taxation—Brazilian Tax Considerations—Income Tax.”

Any payment of interest on shareholders’ equity to holders of common shares or ADRs, whether or not they are Brazilian residents, is subject to Brazilian withholding tax at the rate of 15%, except that a 25% withholding tax rate applies if the recipient is a resident of a tax haven jurisdiction.Tax Haven Resident. A tax haven jurisdiction is a country (1) that does not impose income tax or whose income tax rate is lower than 20% or (2) that does not permit disclosure of the identity of shareholders of entities organized under its jurisdiction. Under our bylaws, we may include the amount distributed as interest on shareholders’ equity, net of any withholding tax, as part of the mandatory dividend amount.

There are no restrictions on our ability to distribute dividends that have been lawfully declared under Brazilian law. However, as with other types of remittances from Brazil, the Brazilian government may impose temporary restrictions on remittances to foreign investors of the proceeds of their investments in Brazil, as it did for approximately nine months in 1989 and early 1990, and on the conversion of Brazilian currency into foreign currencies, which could hinder or prevent the depositary from converting dividends into U.S. dollars and remitting these U.S. dollars abroad.

PrescriptionStatute of Limitations

Our shareholders have three years to claim dividend distributions made with respect to their shares, from the date that we distribute the dividends to our shareholders, after which any unclaimed or not received dividend distributions legally revert to us. We are not required to adjust the amount of any distributions for inflation that occurs during the period from the date of declaration to the payment date.

Withdrawal Rights

Shareholders who dissent from certain actions taken by our shareholders at a shareholders’ meeting have withdrawal rights. Under the Brazilian Corporation Law, a shareholder’s withdrawal rights may be exercised in the following circumstances, among others:


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·        spin-off (as described below);

·        reduction in our mandatory dividends;

·        change in our corporate purpose;

·        consolidation with or merger into another company;

·        participation in a group of companies (as defined in the Brazilian Corporation Law); or

·        the acquisition by our company of the control of any company if the acquisition price exceeds the limits established in the second paragraph of Article 256 of the Brazilian Corporation Law.

However, under the Brazilian Corporation Law, a spin-off will not trigger withdrawal rights unless, as a result:

·        there is a change in our corporate purpose, except to the extent that the principal business purpose of the entity to which the spun-off assets and liabilities were transferred is consistent with our business purpose;

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·        there is a reduction in our mandatory dividend; or

·        we are made part of a centralized group of companies, as defined in the Brazilian Corporation Law.

In cases where we:

·        merge into or consolidate with another company;

·        participate in a group of companies (as defined in the Brazilian Corporation Law);

·        participate in a merger of shares; or

·        acquire the control of any company if the acquisition price exceeds the limits established in the second paragraph of Article 256 of the Brazilian Corporation Law,

·our shareholders will not be given withdrawal rights if our shares (1) are “liquid,” which means that they are part of the São Paulo Stock Exchange Index or another traded stock exchange index, as defined by the CVM, and (2) are widely held, such that our controlling shareholders and their affiliates jointly hold less than 50% of the type or class of shares that are being withdrawn.

The right to withdraw expires 30 days after publication of the minutes of the relevant shareholders’ meeting. We are entitled to reconsider any action giving rise to withdrawal rights for ten days after the expiration of this period if we determine that the redemption of shares of dissenting shareholders would jeopardize our financial stability.

Any shareholder who exercises withdrawal rights is entitled to receive book value for its shares, based on our most recent audited balance sheet approved by our shareholders. However, if the resolution giving rise to the withdrawal rights is made more than 60 days after the date of our most recent balance sheet, a shareholder may request that its shares be valued in accordance with a new balance sheet dated no more than 60 days prior to the date of the resolution. In such case, we are obligated to pay 80% of the refund value of the shares based on the most recent balance sheet approved by our shareholders, and the remaining balance must be paid within 120 days after the date of the resolution at the shareholders’ meeting that gave rise to withdrawal rights based on the new balance sheet.


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Redemption

Under the Brazilian Corporation Law, we may redeem our shares by a decision taken in an extraordinary shareholders’ meeting by shareholders representing at least 50% of our share capital.

Preemptive Rights

Except as described below, each of our shareholders has a general preemptive right to participate in any issuance of new shares, convertible debentures and warrants, in proportion to its shareholding at such time, but the conversion of debentures and warrants into shares, the granting of options to purchase shares and the issuance of shares as a result of the exercise of options are not subject to preemptive rights.

A period of at least 30 days following the publication of notice of the issuance of shares, convertible debentures or warrants is allowed for the exercise of the preemptive right, and the right may be transferred or disposed of for value. Under the terms of Article 172 of the Brazilian Corporation Law and our bylaws, our board of directors may reduce or exclude preemptive rights or reduce the exercise period with respect to the issuance of new shares, debentures convertible into our shares and warrants up to the limit of our authorized stock capital if the distribution of those securities is effected through a stock exchange, through a public offering or through an exchange offer for shares in a public offering the purpose of which is to acquire control of another company.

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Anti-Takeover Effects of Provisions in Bylaws

Our bylaws contain provisions that have the effect of avoiding concentration of our common shares in the hands of a small group of investors, in order to promote more widespread ownership of our common shares. These provisions require each shareholder who becomes the holder of 20%33.3% or more of our total share capital to immediately disclose that fact and within 30 days from the date of such event or acquisition, commence a public tender offer to buy all of our outstanding shares in accordance with the CVM and the São Paulo Stock Exchange regulations and our bylaws. These provisions are triggered by the acquisition of beneficial ownership as well as record ownership of our common shares. The new proposed bylaws provide that each shareholder that becomes a holder of 33.3% or more of our total share capital must immediately issue a press release to disclose that fact and must commence a public tender offer to buy all outstanding shares.  The new proposed bylaws also change the percentages below to 33.3%.

These provisions are not applicable to shareholders who become holders of 20%33.3% or more of our common shares as a result of (1) legal succession, provided that the shareholder sells any shares in excess of the 20%33.3% limit within 60 days of the event, (2) the mergermerging of another company into us, (3) the mergermerging of the shares of another company by us and (4) the acquisitionsubscription of 20% or more of our shares through a primary offering that has been approved at a shareholders’ meeting duly called by our board of directors, provided that the share issue price has been set based on the economic value of the shares, as determined byCompany carried out in a valuation report prepared by a specialized and independent firm.single primary issue.

Involuntary capital increases resulting from cancellation of treasury shares or capital reductions with cancellation of shares will not be considered in the calculation of the 20%33.3% of total shares issued by us.

The public tender offer must be (1) directed to all our shareholders, (2) made through an auction to take place at the São Paulo Stock Exchange, (3) launched at a fixed price in accordance with the procedure set forth below and (4) paid upfront in Brazilian currency. The takeover should be immediately disclosed through a material fact notice, anda public tender offer must be commenced within 30 days from the date of such acquisition or event and must be done with respect to all of our shares for a price per share in the public tender offer shall be equivalent to at least the greatest of: (a) the economic value of our company, determined pursuant to Article 36 of our current bylaws; (b) 135% of the issue price of the shares issued in any capital increase through a public offering that takes place within the preceding 24-month period; and (c) 135% of the market price of our shares within the preceding 30-day period. In the event CVM regulations applicable to the public tender offer require the adoption of a share price calculation criterion that results in a higher share price, the price set in accordance with the CVM regulations will prevail. The new proposed bylaws provide that the price per share in the public tender offer may not be less than the greater of: (a)(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 tender offer became obligatory; and (b)(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 tender offer became obligatory.


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The realization of the public tender offer does not exclude the right of another of our shareholders or of our company to launch a competing public tender offer in accordance with applicable regulations.

All shareholders who vote in favor of an amendment to the provisions of our bylaws that results in the limitation of this public tender offer obligation or the elimination of this mechanism are obligated to launch a public tender offer based on the existing rules.

Restriction on Certain Transactions by Controlling Shareholders, Directors and Officers

We are subject to the rules of CVM Instruction 358, of January 3, 2002, relating to the trading of our securities. We, the members of our board of directors, executive officers and members of our fiscal council and members of any technical or advisory body, any current or future controlling shareholders, or whomever or whatever, by virtue of their or its title, duty or position with us, or with any such controlling shareholder, controlled company or affiliates, has knowledge of a material fact, and any other person who has knowledge of material information and knows it has not been disclosed to the market (including auditors, analysts, underwriters and advisers), are considered insiders and must abstain from trading our securities, including derivatives based on our securities, prior to the disclosure of such material information to the market.

This restriction also applies:

·        to any of our former officers, directors or members of the fiscal council for a six-monthtwelve-month period if any such officer, director or member ofafter leaving the fiscal council left office prior to disclosure of material information that occurred while in office;Company;

·        if we intend to merge or combine with another company, consolidate, spin off part or all of our assets or reorganize, until such information is disclosed to the market;

·        to us, if an agreement for the transfer of our control has been executed, or if an option or mandate to such effect has been granted, until such information is disclosed to the market;

·during the public distribution of securities issued by us;

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·at any time, to the trading of derivatives based on securities issued by us;

·        during the 15-day period before the disclosure of our quarterly and annual financial statements required by the CVM; or

·        to the controlling shareholders, our officers, and members of our board of directors, whenever we, or any of our controlling companies, affiliates or companies under common control, are in the process of purchasing or selling shares issued by us.

Arbitration

In accordance with our bylaws, we, our shareholders, directors and members of our fiscal council agree to resolve through arbitration any disputes or controversies that may arise between us relating to or derived from, in particular, the application, validity, enforceability, interpretation or breach (and its effects) of the provisions under Law No. 6,385/1976, Novo Mercado listing agreement,Novo Mercado rules, our bylaws, the shareholders’ agreements filed at our headquarters, the Brazilian Corporation Law, the rules published by the CMN, the Central Bank, the CVM, the other rules applicable to the Brazilian capital markets in general, orother B3 rules, as well as the rules of the Market Arbitration Chamber of the São Paulo Stock Exchange itself, in each case in accordance with the rules of the Market Arbitration Chamber.

Going-Private Process

Our shareholdersWe may decide to take usbecome private only if we or our controlling shareholders,shareholder or any company which controls us, directly or indirectly, as the case may be, conductconducts a public tender offer to acquire all of our outstanding shares in accordance with the rules under theNovo Mercado rules. The offered price per share must be fair and regulationsshareholders holding more than 33.33% of the Brazilian Corporation Law and CVM regulations. The minimum price offered for theoutstanding shares inmust agree to the public tender offer must correspondor otherwise expressly agree to voluntarily exit theNovo Mercado without the economic valueeffective sale of such shares, as determined by an appraisal report issued by a specialized firm.


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The appraisal report must be prepared by a specialized and independent firm of recognized experience chosen by shareholders representing the majority of the outstanding shares of the shareholders present at the meeting (excluding, for such purposes, the shares held by any controlling shareholder, its partner and any dependents included in the income tax statement (should the controlling shareholder be an individual), treasury shares, shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes) from a list of three institutions presented by our board of directors. All the expenses and costs incurred in connection with the preparation of the appraisal report must be paid for by the controlling shareholder that wishes to take the company private.

Shareholders holding at least 10% of our outstanding shares (as adjusted in the manner described in the prior paragraph) may require our management to call an extraordinary shareholders’ meeting to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the shares in the public tender offer, if approved by shareholders in a meeting pursuant to the rules and conditions of theNovo Mercadorules.

The compulsory exit from theNovo Mercado must be justified. The shareholders who make such request, as well as those who votepreceded by a public tender offer pursuant to the CVM rules. Our shares will remain listed under the Novo Mercado segment for an additional six months in its favor, must reimburse us the event the minimum percentagefor any costs involved in preparing the new valuation if the new valuation pricedelisting is not higher than the original valuation price. If the new valuation price is higher than the original valuation price,reached after completionof the public tender offer must be made at the higher price or cancelled, and this decision must be announced to the market in accordance with Brazilian law.

If our shareholders determine to take us private and at that time we do not have a controlling shareholder, we must conduct a public tender offer.In this case,addition, BRF will remain subject to applicable regulation, weotherpenalties that may only purchase shares from shareholders who have voted in favor of our going private after purchasing all shares from the other shareholders who voted against going private and who have accepted the public tender offer. If, however, we have a controlling shareholder who decides to take us private, such controlling shareholder is required, pursuant to our bylaws, to conduct a public tender offer.be imposed by B3.

Delisting from theNovo Mercado

Our delisting from theNovo Mercado, either by voluntary or compulsory action or by virtue of a corporate restructuring, shall observe the rules contained in the Regulation of the Novo Mercado. At any time, we may delist our shares from theNovo Mercado, provided that shareholders representing the majority of our shares approve the action and that we give at least 30 days’ written notice to the São Paulo Stock Exchange. The deliberation must specify if the delisting will occur because the securities will no longer be traded on theNovo Mercado, or because we are going private. Our delisting from theNovo Mercado will not result in the loss of our registration as a public company on the São Paulo Stock Exchange.

If we delist from theNovo Mercado, by deliberation taken at a shareholders’ meeting, our controlling shareholder or group of controlling shareholders, if we have one, must conduct a public tender offer for the acquisition of our outstanding shares.shares is carried out.

TheSuch tender offer shall observe the procedures provided in the regulation issued by CVM on the tender offer for the cancellation of registration as a publicly held company, including the following requirements: (i) the price per shareoffered shall be equivalent tofair, and a request of new valuation of the economic value of those shares as determinedCompany shall be in a valuation report prepared by a specializedthe form established in the Brazilian Corporation Law; and independent company of recognized experience, which will be chosen at a shareholders’ meeting from a list of three institutions presented by our board of directors by a majority(ii) shareholders holding more than 1/3 of the outstanding shares ofshall accept the shareholders present at the meeting (excluding, for such purposes, the shares held by any controlling shareholder, its partner and dependents included in the income tax statement (should the controlling shareholder be an individual), treasury shares, shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes). All the expenses and costs incurred in connection with the preparation of the valuation report must be paid by the controlling shareholder undertaking the delisting.

If we do not have a controlling shareholder or group of controlling shareholders, in the event of our delisting from theNovo Mercado, either for our shares to be traded outside theNovo Mercado or as a result of a corporate reorganization, the shareholders that voted in favor of such resolution must conduct a public tender offer for the acquisition of our shares in accordanceor expressly agree with applicable regulations.

Pursuant to our bylaws, we may also be delisted if the São Paulo Stock Exchange decides to suspend trading of our shares on theNovo Mercado due to our non-compliance with theNovo Mercado regulations. In such a case, the chairman of the board of directors must call a shareholders’ meeting within two days of the determination by the São Paulo Stock Exchange in order to replace all members of our board of directors. If the chairman of theboard of directors does not call the shareholders’ meeting, any shareholder may do so. The new board of directors will be responsible for fixing the non-compliance with the requirements that resulted in the delisting.


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Additionally, if we delist from theNovo Mercado (1) as a result of our non-compliance with theNovo Mercado regulations resulting from a decision taken at our shareholders’ meeting, the public tender offer must be conducted by the shareholders who voted in favor of the decision, or (2) as a result of our non-compliance with theNovo Mercado regulations resulting from acts of our management, we must call a shareholder meeting to decide whether we will fix the noncompliance or delist from theNovo Mercado,in which case the shareholders will have to decide who will be responsible for undertaking a public offering in connection with that.

Under theNovo Mercado listing regulations, in the event of a transfer of control of our company within 12 months following our delisting from theNovo Mercado, the selling controlling shareholders and the acquirer must offer to acquire the remaining shares for the same price and terms offered to the selling controlling shareholders, adjusted for inflation.

If our shares are delisted from theNovo Mercado, we will not be permitted to have shares listed on theNovo Mercado for a period of two years after the delisting date, unless there is a change in our control after the delisting from theNovo Mercado without the effective sale of the shares.

The voluntary delisting from theNovo Mercado may occur regardless of the completion of the tender offer mentioned above in the event of a waiver approved at a General Shareholders’ Meeting, which must observe the rules and conditions of the Regulation of theNovo Mercado. The compulsory delisting from theNovo Mercado shall be preceded by a tender offer that observes the procedures provided in the regulation issued by CVM on public tender offers for purchases of shares for cancellation of registration of a publicly held company and the requirements established in Article 43 of our bylaws.  Our shares will remain listed under the Novo Mercado segment for an additional six months in the event the minimum percentage for delisting is not reached after completion of the public tender offer. In addition, BRF will remain subject to other penalties that may be imposed by B3.

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With the exception of tender offers related to the delisting from theNovo Mercado and/or to the cancellation of registration of a publicly held company, the unified tender offer may only be initiated by a shareholder who holds an amount equal or higher than 33.33% of our total shares, observing the minimum price to be paid per share established in Article 41 of our bylaws.

Change of Control

Under the rules of theNovo Mercado, the direct or indirect sale of our control, in one transaction or in a series of transactions, creates an obligation by the acquirer to complete, subject to applicable regulations, a public tender offer for the acquisition of all other outstanding shares on the same terms and conditions granted to the selling controlling shareholder.

A public tender offer is also required:

·when there is an assignment of share subscription rights or rights of other securities convertible into our shares that results in the transfer of our control; or

·in case of change of control of another company that holds control of the company. In this case, the selling controlling shareholder must inform the São Paulo Stock Exchange of the amount of the purchase price paid for control and provide the corresponding documents.

In the event we are subject to widespread ownership, the shareholder that acquires control of our company will only be obligated to conduct a public tender offer acquire our remaining shares if there is a sale of a number of shares of our share capital that entitles the acquiring shareholder, directly or indirectly, legally or in fact, effectively to control our business and orient our management. Such situations must be analyzed on a case-by-case basis. The change of control concept provided for in our bylaws and the situations in which the acquiring shareholder is required to make a public tender offer includes and may be broader than the concepts and situations provided for in the Brazilian Corporation Law and in theNovo Mercado listing regulations.rules.

The acquirer must take all necessary measures to reconstitute the minimum 25%percentage of the free float required under theNovo Mercado listing regulations within sixeighteen months of the acquisition.

The controlling shareholder may not transfer the shares it holds to the purchaser of control, and we may not register the transfer of such shares, if the purchaser fails to execute the Terms of Consent to theNovo Mercado Regulations and the Rules of the Market Arbitration Chamber established by the São Paulo Stock Exchange.

Holders of 20%33.3% or More of Our Shares

Any person who acquires or becomes a shareholder through an offering for quantities of shares equal to or greater than 20%33.3% of the total issued shares should undertake or apply for registration of a takeover bid of all shares of our offering and should comply with CVM rules, the regulations of the São Paulo Stock Exchange, and theprovisionsthe provisions of our bylaws. The new proposed bylaws, as stated above, changes this amount to 33.3% of the total of shares


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The takeover should be (1) sent immediately disclosed through a material fact notice, anda public tender offer must be commenced within 30 days from the date of such acquisition or event and must be done with respect to all of our shareholders, (2) put in effect by public auction to be held by São Paulo Stock Exchange and (3) paid immediately inreais. Theshares for a price for the shares offered may not be less than the greater of (a) the economic value determined by an appraisal report, (b) 135% of the issue price of our shares in any capital increase carried out through public distribution occurring in the 24 months preceding the date on which the takeover is executed, as updated by the IPCA to date of payment, and (c) 135% of the average unit price of the shares of our offering during the 30 days prior to the completion of the takeover on the stock exchange where the bulk of the shares are traded. The new proposed bylaws provideper share that the price for the shares offered may not be less than the greater of: (a)(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 tender offer became obligatory; and (iii)(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 tender offer became obligatory.

Forobligatory.For a detailed description of the procedures applicable to takeover bid by increased participation, see our bylaws filed as an exhibit 1.01 to this Annual Report on Form 20-F and our new proposed bylaws filed as an exhibit to the Report on Form 6-K filed on March 2, 2016 (File No. 001-15148).20-F.

Suspension of Rights of Acquiring Shareholder for Violation of Our Bylaws

In the event an acquiring shareholder violates the provisions of our bylaws regarding the need to conduct a public tender offer as a result of a change of control or of the purchase of shares representing 20%33.3% or more of our share capital, (33.3% under our new proposed bylaws), the rights of such acquiring shareholder may be suspended by a decision taken at our shareholders’ meeting. If such a violation occurs, we must hold a shareholders’ meeting and the acquiring shareholder will not be entitled to vote at such meeting.

Purchases of Our Shares by Our Company

Our bylaws entitle our board of directors to approve the acquisition of our shares.shares, except when approval by the shareholders is mandatory pursuant to CVM rules. The acquisition of our shares for cancellation or maintenance in treasury may not, among other actions:

·        resultbe used to purchase shares of the controlling shareholder;

·be carried out in organized markets at a reductionprice greater than market price;

·be carried out during a public tender offer for the acquisition of our share capital;shares issued by us;

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·        require the use of resources greater than our retained earnings or reserves (other thanthose available, pursuant to the legal reserve, unrealized profit reserve, revaluation reserve, and special mandatory dividend reserves) recorded in our most recent balance sheet;CVM rules;

·        create, directly or indirectly, any artificial demand, supply or share price condition, or use any unfair practice as a result of any action or omission;

·be conducted during the course of a public tender offer of our shares; or

·        be usedcarried out when there is a material information not yet disclosed to purchase shares not fully paid or held by any controlling shareholder.the market.

The decision to purchase our own shares, must bewhen taken by the board of directors, which shall specify: (1)must specify, among other information: (i) the purpose and economic effects of the transaction; (2)purchase; (ii) the amount of shares to be purchased; (3)(iii) price; (iv) impacts on the period in which we will proceed with such purchases, not to exceed 365 days; (4)shareholding structure; (v) maximum term for the amountliquidation of the free floatpurchase; (vi) intermediary institutions, if any; and (vii) the reasons why the board believes the purchase will not affect the compliance with obligations with creditors or the payment of our shares; and (5) the financial institutions that will act as intermediaries for such purchases.mandatory dividends.

We cannot hold in treasury more than 10% of our total shares, including the shares held by our subsidiaries and affiliates.

Any acquisition of our shares by our company must be made on a stock exchange unless prior approval for the acquisition outside a stock exchange is obtained from the CVM. The purchase price of any such shares may notexceed their market price. We also may purchase our own shares for the purpose of going private. Moreover, subject to certain limitations, we may acquire or issue put or call options related to our shares.


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Reporting Requirements

We are subject to the reporting requirements established by the Brazilian Corporation Law and the regulations of the CVM. In addition, as a result of our listing on theNovo Mercado, we must meet the reporting requirements of theNovo Mercado.rules.

Information Required by the CVM

Brazilian securities regulations require that a publicly held corporation must provide the CVM and the relevant stock exchanges with the following periodic information:information, among others:

·        financial statements prepared in accordance with IFRS and related management, fiscal council, audit and integrity committee and auditors’ reports, within three months from the end of its fiscal year or on the date in which they are published or made available to shareholders, whichever occurs first, together with theDemonstrações Financeiras Padronizadas (a report on a standard form containing financial information derived from our financial statements required to be filled out by us and filed with the CVM);

·        notices of our annual shareholders’ meeting on the date of its publication;

·        a summary of the decisions taken at the annual general shareholders’ meeting on the day the meeting is held;

·        a copy of the minutes of the annual shareholders’ meeting within seven business days of its occurrence;

·        report on good governance practices, pursuant to the Brazilian Code of Corporate Governance for Publicly Listed Companies (Código Brasileiro de Governança Corporativa - Companhias Abertas);

·Formulário de RefêrenciaReferência – a report on a standard form containing annual corporate, business, and selected financial information, within a monthfive (5) months from the dateend of the annual general shareholders’ meeting;our fiscal year; and we must update this document in accordance with Instructions 480 and 481 of the CVM;

·        Informações Trimestrais– ITR (a report on a standard form containing quarterly corporate, business and financial information), together with a special review report issued by our independent auditor, within 45 days from the end of each quarter (except for the last quarter of each year) or upon disclosure of such information to the public if it occurs within 45 days from the end of the relevant quarter.

·

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In addition to the foregoing, we must also file with the CVM and the São Paulo Stock Exchange the following information:information, among others:

·        a notice of any extraordinary shareholders’ meeting on the same date it is published;

·        a summary of the decisions taken at any extraordinary shareholders’ meetings on the day the meeting is held;

·        minutes of any extraordinary shareholders’ meeting within seven business days of the date the meeting occurred;

·minutes of board of directors' meetings, whenever its decisions are to be effective in relation to third parties;

·        a copy of any shareholders’ agreement within seven business days it is filed with us;

·        any press release giving notice of material facts, on the same date it is published in the press;


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·        information on any filing for plan of reorganization, the reason for such filing, special financial statements prepared for obtaining a legal benefit and, if applicable, a plan for payment of holders of debentures, as well as a copy of any judicial decision grantingon such request, on the same date it is filed and on the date, we take notice of the judicial decision, respectively;

·        request for information or notice of bankruptcy, on the same day of notice bythat the Company or the filingbecomes aware of a bankruptcy petition in court, as appropriate;such requests; and

·        a copy of any judicial decision granting a bankruptcy request and appointing of a bankruptcy trustee, on the date we take noticebecome aware of it.

Information Required by the São Paulo Stock Exchange from Companies Listed on the Novo Mercado

The shares of the CorporationCompany have been listed to trade on the Brazilian Securities and Derivatives Stock Exchange special listing segment namedNovo Mercado, of BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros.B3.  Accordingly, the Corporation,Company, its shareholders, the Directorsdirectors and Officersofficers and the Fiscal Councilfiscal council members (if the council is active) are bound by BM&FBOVESPA’s B3’sNovo MercadoListing Rules.  WhereWhenever a provision of our bylaws is detrimental to our shareholders who may benefit from any tender offer, required under the provisions of these bylaws is materially detrimental to the rights of shareholders, the Novo Mercado Listing Regulations shall prevail over the provisions of thesethe bylaws.

As aNovo Mercado company, we must observe the following additional disclosure requirements:requirements, among others:

·        no later than six months following our listing on theNovo Mercado, we must disclose financial statements and consolidated financial statements atpublish the end of each quarter (except the last quarter of each year) and at the end of each fiscal year, including a cash flow statement that must indicate, at a minimum, the changes in our cash and cash equivalents, divided into operating, finance and investment cash flows;

·as from the date we release our financial statements relating to the second fiscal year following our listing on theNovo Mercado we must, no later than four months after the end of the fiscal year:

·release our annual financial statements and consolidated financial statements in accordance with IFRS, in reaisand in the English language, including notes to the financial statements and including information on net profits and net worth calculated at the end of such fiscal year in accordance with IFRS, together with a management report and the management proposal for the allocation of net profits and our independent auditors’ report; or

·disclose, in the English language, the complete financial statements of BRF (parent company on an unconsolidated basis), management reports and notes to the financial statements prepared in accordance with Brazilian Corporation Law, as well as the independent auditors’ report; and

·as from the date we release our first financial statements prepared as provided above, no more than 15 days following the period established by law for the publication of quarterly financial information, we must:

·disclose, in its entirety, our quarterly financial information translated into the English language; or

·disclose our financial statements and consolidated financial statements in accordance with IFRS, accompanied by the independent auditors’ report.

Due to the listing of our shares on theNovo Mercado, we must disclose the following information, pursuant to theNovo Mercadoregulations, with our quarterly information (Informações Trimestrais):


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·our consolidated balance sheet, consolidated statement of income, and a discussion and analysis of our consolidated performance;

·any direct or indirect ownership interest exceeding 5% of our share capital, looking through to any ultimate individual beneficial owner;

·the number and characteristics of our shares held directly or indirectly by any controlling shareholders and membersinternal rules of our board of directors boardand its advisory committees, and of executive officers andthe fiscal council;

·        changes inwe must inform the numbers of our shares held by any controlling shareholders and members of our board of directors, board of executive officers and fiscal council in the immediately preceding 12 months;market that an officer or a director has resigned or has been removed;

·        we must publish statements of material facts, information on earnings and press releases of our cash flow statement and consolidated cash flow statement, together with an explanatory note thereto;results in English;

·        the numberwe must make a public presentation on our quarterly results and on our financial statements within five (5) days of shares constituting our free float and their percentage in relation to the total number of issued shares;publishing; and

·        if we are partymust make a calendar available up to an arbitration agreement for dispute resolution.

Information relating toDecember 10th each year with the ownership interest exceeding five percentdates of the following events: (i) publishing of our share capital, the numberfinancial statements and characteristicsour standardized financial statements (DFP); (ii) publishing of our shares directly or indirectly held by any controlling shareholdersquarterly information (ITR); (iii) ordinary general shareholders’ meeting; and members(iv) filing of the board of directors, board of executive officers and fiscal council, changes in the number of securities held by such persons within the immediately preceding 12 months, the number of free float shares and their respective percentage in relation to the total number of shares issued and disclosure of whether we are party to an arbitration agreement for dispute resolution must also be included in our Annual Report on Form 20-F.Formulário de Referência (FR).

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Information Regarding Any Trading Carried Out by Any Controlling Shareholders, Members of Our Board of Directors, Our Board of Executive Officers or Members of Our Fiscal Council

Pursuant to the rules of the CVM and theNovo Mercado, any controlling shareholders, officers, directors, members of the fiscal council, if active, and members of any other technical or advisory committee created by our bylaws, must disclose to us, the CVM and the São Paulo Stock Exchange information in connection with the total amount and characteristics of our securities owned, directly or indirectly, or any derivatives with reference to such securities, as well as any subsequent trading of such securities and derivatives. In the case of individuals, this information must also include securities held by the spouse, companion or dependents of such persons and be included in the annual income tax statement of the controlling shareholder, officer, director or member of the fiscal council. This information must be communicated to the CVM and the São Paulo Stock Exchange by the Investor Relations Officer within ten days after the end of each month.

In addition, any controlling shareholders, our shareholders who have caused the election of members of our board of directors or fiscal council, as well as any individual, legal entity or group of persons acting jointly to conduct relevant negotiations (i.e., transactions by means of which the direct or indirect equity of such persons surpasses, upwards or downwards, 5%, 10%, 15% and so on of the specie or class of shares that holds directly or indirectly 5% or more ofrepresent our sharescapital stock) must provide to us, the CVM and the São Paulo Stock Exchange the following information:

·        the name and qualifications of the person acquiring the shares or other securities;securities, with their respective enrollment number before the Taxpayers’ Registry;

·        the number of shares and other securities and derivative financial instruments benchmarked on such shares, either physically or financially settled, informing the amount, price,class and type and/or class, inof the case of acquired shares, or characteristics, in the case of other securities;

·the form of acquisition (private placement, purchase through a stock exchange, among others);benchmarked shares;

·        the reason and purpose of the acquisition; andacquisition containing, if applicable, statement that such negotiations do not intend to modify our equity or management structure;


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·        information on any agreement regarding the exercise of voting rights or the purchase and sale of our securities.securities; and

The disclosure requirement referred to above will also apply to any person·in case the shareholder is resident or groupdomiciled abroad, the name or corporate name and the Taxpayer enrollment number of persons acting jointly holding participations equal toits attorney or legal representative in excess of five percent each time such person increases or decreases its participation in our shares by an amount equal to 5% of our shares.  In addition, pursuant to our bylaws, after reaching the 5% threshold, major shareholders or groups of shareholders must report any acquisition of shares that, when added to those currently held, represent more than 1% of our share capital, or multiples of that percentage. These requirements also apply to holders of debentures convertible into our shares or subscription rights that guarantee the holder the right to acquire shares.country.

Disclosure of Material Developments

According to Law No. 6,385 of December 7, 1976 and subsequent amendments, and the rules published by the CVM, we must disclose any material development related to our business to the CVM and to the São Paulo Stock Exchange and must publish a notice of the material development. A development is deemed to be material if it impacts the price of our securities, the decision of investors to trade in our securities or the decision of investors to exercise any rights as holders of any of our securities. Under special circumstances, we may request confidential treatment of certain material developments from the CVM when our management believes that public disclosure could result in adverse consequences to us.

Public Meeting with Analysts

Novo Mercado regulations require that our company conduct a public meeting with analysts and any other interested parties at least once a year to disclose information regarding the company’s economic and financial situation, its projects and its expectations.

Annual Calendar

Novo Mercado regulations require that companies and their management, by December 10th of each year, disclose an annual calendar, and send a copy to the São Paulo Stock Exchange, containing all scheduled corporate events, companythe dates for the following events: (i) the publishing of our financial statements and our standardized financial statements (DFP); (ii) the publishing of our quarterly financial information (ITR); (iii) our ordinary general shareholders’ meeting; and (iv) the time and placefiling of such events and the date when the information relating to these events will be disclosed and sent to the São Paulo Stock Exchange.ourFormulário de Referência (FR). Amendments to the calendar must be communicated to the São Paulo Stock Exchange.

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Trading on Stock Exchanges

Our shares trade on theNovo Mercado segment of the São Paulo Stock Exchange under the symbol “BRFS3.” The CVM and the São Paulo Stock Exchange have discretionary authority to suspend trading inof the shares of a particular issuer under certain circumstances.

SettlementThe São Paulo Stock Exchange operates a central clearing system. A holder of transactions onour shares may choose, in its discretion, to participate in this system and elect all shares to be deposited in the custody of the São Paulo Stock Exchange occurs three business days after(through a Brazilian institution duly authorized by the trade date. Delivery ofCentral Bank and payment for shares is made throughwith a clearing account with the facilities of an independent clearinghouse. The clearinghouse for São Paulo Stock Exchange isExchange). The fact that those shares are held in the CBLC. The CBLC is the central counterparty for transactions effected oncustody of the São Paulo Stock Exchange carrying out multi-party settlement for financial obligationswill be reflected in our register of shareholders. Each participating shareholder will, in turn, be registered in our register of beneficial shareholders maintained by the São Paulo Stock Exchange and securities transfers. Under the regulations of the CBLC, financial settlement is carried out through the Reserve Transfer System of the Central Bank (Sistema de Transferência de Reservas). The settlement of trades of shares is carried outwill be treated in the custodial system of the CBLC. All deliveries against final payment are irrevocable.same way as registered shareholders.

Agreements Withinwithin Our Group

According to theNovo Mercado regulations,CVM Instruction no. 480, we must disclose and send the São Paulo Stock Exchange information relating to any agreements entered into by our company with our controlled companies and affiliates, officers and any controlling shareholders, and, moreover, any agreements entered into by our company with controlled companies and affiliates of the officers and controlling shareholders as well as other companies that,together with these persons, compose a single group, in fact or in right, provided that such agreements, whether or not they involve one single agreement or successive agreements or the same or different purposes, in the explanatory notes.


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The information disclosed should include a description of the purpose of the relevant agreement, its term, value, termination provisions and any influence that this agreement may have over the management and operations of our company.

Regulation of Foreign Investment

Investors residing outside Brazil, including institutional investors, are authorized to purchase equity instruments, including our common shares, on the São Paulo Stock Exchange, provided that they comply with the registration requirements set forth in Resolution No. 2,6894,373 and CVM Instruction No. 325.560.

With certain limited exceptions, Resolution No. 2,6894,373 investors are permitted to carry out any type of transaction in the Brazilian capital markets involving a security traded on a stock, future or organized over-the-counter market, but may not transfer the ownership of investments made under Resolution No. 2,6894,373 to other non-Brazilian holders through private transactions. Investments and remittances outside Brazil of gains, dividends, profits or other payments under our common shares are made through the foreign exchange market.

In order to become a Resolution No. 2,6894,373 investor, an investor residing outside Brazil must:

·        appoint at least one representative in Brazil who will be responsible for complying with registration anand reporting requirements and procedures with the Central Bank and the CVM. If the representative is an individualCV, which shall be a financial institution or a non-financial company, the investor must also appoint an institution duly authorized by the Central Bank that will be jointly and severally liable for the representative’s obligations;

·complete the appropriate foreign investor registration form;to operate in Brazil.

·        register as a foreign investor with the CVM;

·register the foreign investment with the Central Bank; and

·        appoint a tax representative in Brazil; and

·obtain a taxpayer identification number from the Brazilian federal tax authorities.at least one custodian duly authorized by CVM.

Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,6894,373 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading by foreign investors is generally restricted to transactions on the São Paulo Stock Exchange or in organized over-the-counter markets licensed by the CVM.

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C.                 Material Contracts

BRF hasFor the two years immediately preceding the publication of this annual report, we were not entered intoa party to any material contracts since January 1, 2014.contract outside the ordinary course of business. 

D.                 Exchange Controls

Brazilian law provides that, whenever there is a significant imbalance in Brazil’s balance of payments or reasons to foresee such an imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. For approximately six months in 1989 and early 1990, for example, aiming atwith the goal of preserving Brazil’s foreign currency reserves, the Brazilian government froze all dividend and capital repatriations that were owed to foreign equity investors and held by the Central Bank. These amounts were subsequently released in accordance withBrazilian Governmentwith Brazilian government directives. There can be no assurance, however, that the Brazilian Governmentgovernment may not take similar measures in the future.


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There are no restrictions on ownership of capital share of the Company by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of Common Sharescommon shares into foreign currency and to remit such amounts outside Brazil is subject to exchange control restrictions and foreign investment legislation that generally requires, among other things, obtaining an Electronic Registrationelectronic registration under the Resolution No. 2,689.4,373. Under Resolution No. 2,689,4,373, qualified foreign investors registered with the CVM and acting through authorized custody accounts managed by local agents may buy and sell shares on Brazilian share exchanges without obtaining separate Electronic Registrationelectronic registration for each transaction. Investors under the Resolution No. 2,6894,373 are also generally entitled to favorable tax treatment.

Electronic Registrationsregistrations by the Brazilian Central Bank have been issued in the name of the Company with respect to the ADRs. Pursuant to the electronic registration, the Custodiancustodian will be able to convert dividends and other distributions with respect to the shares represented by the ADRs into foreign currency and remit the proceeds outside Brazil.

E.                 Taxation

The following summary contains a description of certain Brazilian and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADRs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase common shares or ADRs. The summary is based upon the tax laws of Brazil and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change.Prospective purchasers of common shares or ADRs should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADRs.

Although there is at present no income tax treaty to avoid double taxation between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. Holders (as defined below under “—U.S. Federal Income Tax Considerations”) of common shares or ADRs. Prospective holders of common shares or ADRs should consult their own tax advisors asin order to clarify the tax consequences of the acquisition, ownership and disposition of common shares or ADRs in their particular circumstances.

Brazilian Tax Considerations

The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of common shares or ADRs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (a “Non-Resident Holder”) and does not specifically address all of the Brazilian tax considerations applicable to any particular Non-Resident Holder. Each Non-Resident Holder should consult its own tax adviser concerning the Brazilian tax consequences of an investment in common shares or ADRs. The discussioninformation below is based on Brazilian law as currently in effect. Any change in that law may change the consequences described below.

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Income Tax

Dividends. Dividends paid by a Brazilian corporation, such as our company,BRF, including stock dividends and other dividends paid to a Non-Resident Holder of common shares or ADRs, are currently not subject to Brazilian withholding income tax, as far as such amounts are related to profits generated on or after January 1, 1996. Dividends relating to profits generated prior to January 1, 1996 may be subject to Brazilian withholding tax at varying rates, depending on the year the profits were generated.

Interest on Shareholders’ Equity. Law No. 9,249, dated as of December 26, 1995, as amended, permits a Brazilian corporation such as our company, to make distributions to shareholders of interest on shareholders’ equity. These distributions may be paid in cash. Such payments represent a deductible expense from the payer’s corporate income tax and social contribution on net profits tax basis. For tax purposes, this interest is limited to thedailythe daily pro rata variation of the TJLP (the Brazilian government's long-term interest rate), as determined by theBrazilian Central Bank from time to time, and may not exceed the greater of:


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·        50% of net income (after the social contribution on net profits tax, and before the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and

·        50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made.

Payment of interest to a Non-Resident Holder is subject to withholding income tax at the rate of 15%, or 25% if the Non-Resident Holder is domiciled inresident of a tax haven (“Tax Haven Residents”).haven. For this purpose, a “tax haven” is a country or location that does not impose income tax, where the income tax rate is lower than 20% or where the local legislation imposes restrictions on disclosing the shareholding composition or the ownership of the investment. These payments of interest on shareholders’ equity may be included at their net value, as part of mandatory dividends.

We recommend prospective investors to consult their own tax advisors from time to time to verify any mandatory dividend. To the extent paymentpossible tax consequences arising from Normative Instruction No. 1,037/2010 (that provides an exhaustive list of interest on shareholders equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount receivedall jurisdictions considered by them, after payment of the applicable Brazilian withholding income tax, plus the amount of declared dividends is at least equal to the mandatory dividend.legislation as “tax havens.”

Distributions of interest on shareholders equity to Non-Resident Holders may be converted into U.S. dollars and remitted outside Brazil, subject to applicable exchange controls, to the extent that the investment is registered with the Brazilian Central Bank.

The Brazilian President enacted the Provisional Measure No. 694/15 to effect the following changes:

·the maximum TJLP will be 5% (currently this rate is approximately 6.5%); and

·the withholding tax will rise from 15% to 18% (except for Tax Haven Residents who continue to be subject to 25% withholding tax).

Such Provisional Measure had not been converted into law within the required legal deadlines and therefore had not changed the rules about interest on shareholders’ equity as initially intended.

Gains

According to Law No. 10,833/03, thecapital gains recognized by Non-Resident Holders on athe disposition of assets located in Brazil, such as our common shares by a Non-Resident Holder, are subject to withholding income tax in Brazil. This rule is applicable regardless of whether the disposition is conducted in Brazil or abroad and/or if the disposition is or is not made to an individual or entity resident or domiciled in Brazil.

As a general rule,Generally, capital gains realized as a result of a disposition transaction are the positive difference between the amount realized on the disposition of the common shares and the respective acquisition cost.

Capital gains realized by Non-Resident Holders on the disposition of common shares sold on the Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market):

·are subject to the withholdingfollowing taxes:

·0% income tax at a zero percent rate, whenwith respect to gains realized by a Non-Resident Holder that (i) has registered its investment in Brazil before theis a Registered Holder (according to Resolution 4,373 from Brazilian Central Bank under the rules of the Brazilian Monetary Council (“Registered Holder”)Bank) and (ii) is not a Tax Haven Resident; and

·        are subject to withholding income tax at a rate of 15% with respect to gains realized by a Non-Resident Holder that is notneither a Registered Holder (includingnor a Tax Haven Resident.

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·income tax at a rate of 15% with respect to gains realized by a Non-Resident Holder who qualifies under Law No. 4,131/62) and gains earned bythat is a Tax Haven Residents that areResident if such holder is a Registered Holders.Holder. For Non-Registered holders domiciled in a Tax Haven withholding income tax should be applied at a 25% rate. In this case, awithholdingaddition, a withholding income tax of 0.005% shall be applicablewill apply and can be offset against any income tax due on the capital gain.


Tablegain, except in the case of Contentsa Registered Holder that is not resident or domiciled in a tax haven jurisdiction.

Any other gains realized on the disposition of common shares that are not carried out on the Brazilian stock exchange:

·        are subject to income tax at a rate of 15%the following progressive rates when realized by any Non-Resident Holder that is not a Tax Haven Resident, whether or not such holder is a Registered Holder;Holder:

i.15% upon the portion of capital gains not exceeding R$5,000,000.00;

ii.17.5% upon the portion of capital gains that exceeds R$5,000,000.00 but not exceeding R$10,000,000.00;

iii.20% upon the portion of capital gains that exceeds R$10,000,000.00 but not exceeding R$30,000,000.00; and

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

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

In the cases described above, if the gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset against any income tax due on the capital gain.

Any exercise of preemptive rights relating to common shares will not be subject to Brazilian withholding income tax. Gains realized by a Non-Resident Holder on the disposition of preemptive rights will be subject to Brazilian income tax according to the same rules applicable to disposition of common shares.

In the case of a redemption of common shares or a capital reduction, the positive difference between the amount received by the Non-Resident Holder and the acquisition cost of the common shares redeemed in reaisis treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the above-mentioned progressive rate, of 15%, or 25%, as the case may be.

There can be no assurance that the current favorable tax treatment of Registered Holders will continue in the future.

Sale of ADRs by U.S. Holders to Other Non-Residents in Brazil

As discussed above, the sale of property located in Brazil involving Non-Resident Holders is subject to Brazilian withholding income tax as of February 1, 2004.tax. Our understanding is that ADRs do not qualify as property located in Brazil and, thus, should not be subject to the Brazilian withholding tax. Insofar as the regulatory norm referred to in Article 26 of Law No. 10,833/03 is generic and has not been tested through the administrative or judicial courts, we are unable to assure the final outcome of such discussion.

Gains on the Exchange of ADRs for Common Shares

Although there is no clear regulatory guidance, the exchange of ADRs for common shares should not be subject to Brazilian withholding tax. Non-Resident Holders may exchange the ADSs evidenced by ADRs for the underlying common shares, sell the common shares on a Brazilian stock exchange and remit abroad the proceeds of the sale within five business days from the date of exchange (in reliance on the depositary’s electronic registration) with no tax consequences.

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Upon receipt of the underlying common shares in exchange for ADSs evidenced by ADRs, Non-Resident Holders may also elect to register with the Brazilian Central Bank the U.S. dollar value of such common shares as a foreign portfolio investment under Resolution No. 2,689/00,4,373, which will entitle them to the tax treatment discussed above.

Alternatively, the Non-Resident Holder is also entitled to register with the Brazilian Central Bank the U.S. dollar value of such common shares as a foreign direct investment under Law No. 4,131/62, in which case the respective sale would be subject to the tax treatment applicable to transactions carried out on the Brazilian stock exchange.


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Gains on the Exchange of Common Shares for ADRs

The deposit of common shares in exchange for the ADRs may be subject to Brazilian withholding income tax on capital gains if the amount previously registered with the Central Bank as a foreign investment in common shares or, in the case of other market investors under Resolution No. 2,689,4,373, the acquisition cost of the common shares, as the case may be, is lower than:

·        the average price per common share on the Brazilian stock exchange on which the greatest number of such common shares were sold on the day of deposit; or

·        if no common shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of common shares were sold during the 15 preceding trading sessions.

The difference between the amount previously registered, or the acquisition cost, as the case may be, and the average price of the common shares, calculated as set forth above, is considered a capital gain subject to income tax at athe above-mentioned progressive rate offrom 15% to 22.5%, or 25% for Tax Haven Residents.

Tax on Foreign Exchange and Financial Transactions (“IOF”)

Foreign Exchange Transactions.Brazilian law imposes a Taxtax on Foreign Exchange Transactions, or “IOF/Exchange Tax,”financial transactions involving foreign exchange, securities, credit and insurance. The rate of IOF applicable on the conversion of reaisinto foreign currency and on the conversion of foreign currency intoreais. Currently, IOF rates for almost all foreign currency exchange transactions are 0.38%. In(“IOF exchange”) involving common shares is currently 0%, but the case of transactions performed in the stock market or under the regulations issued by the Monetary Council of Brazil, the applicable rate is zero. In any situation, the MinistryMinister of Finance is permitted to prospectively increase thesuch rate at any time up to 25%.

IOF may also be levied on the foreign exchange transaction amount. However, any increase in the rate will not apply retroactively.

Tax on Transactions Involving Bondstransactions involving bonds and Securities. Brazilian law imposes a Tax on Transactions Involving Bonds and Securities, or “IOF/Bonds Tax,”securities (“IOF securities”), including those carried out on a Brazilian stock, exchange.futures or commodities exchanges. The rate of IOF/Bonds Taxthe IOF securities applicable to most transactions involving common shares is currently zero,0%, but the MinisterBrazilian government may also prospectively increase the rate of Finance is permitted to increase such rate at any timethe IOF up to 1.5% of the transaction amount per day butat any increase in the rate will not apply retroactively.time.

Other Brazilian Taxes

There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common shares or ADRs, except for gift and inheritance taxes imposed by some Brazilian states on gifts or bequests by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled or residing within such states. There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of common shares or ADRs.

U.S. Federal Income Tax Considerations

The following summary describes certain U.S. federal income tax consequences of the acquisition, ownership and disposition of our common shares and ADRs as of the date hereof.

Except where noted, this summary deals only with U.S. Holders (as defined below) that hold our common shares or ADRs as capital assets for U.S. federal income tax purposes (generally, property held for investment). As used in this summary, the term “U.S. Holder” means a holder of our common shares or ADRs that is for U.S. federal income tax purposes:

·        an individual citizen or resident of the United States;

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·        a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;

·        an estate the income of which is subject to U.S. federal income taxation regardless of its source; or


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·        a trust if it (1) is subject to the primary supervision of a U.S. court within the United States and one or more United StatesU.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United StatesU.S. Treasury regulations to be treated as a United States person.U.S. person for U.S. federal income tax purposes.

A “non-U.S. Holder” is a beneficial owner of our common shares or ADRs that is neither a U.S. Holder nor a partnership for U.S. federal income tax purposes.

This summary does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:

·        a broker or dealer in securities or currencies;

·        a bank or other financial institution;

·        a regulated investment company;

·        a real estate investment trust;

·        an insurance company;

·        a tax-exempt organization;

·        a person holdingholder who holds our common shares or ADRs as part of a hedging, integrated or conversion transaction or a straddle;

·        a personholder deemed to sell our common shares or ADRs under the constructive sale provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”);

·        a trader in securities that has elected the mark-to-market method of accounting for your securities;

·        a personholder liable for alternative minimum tax;

·        a personholder who owns or is deemed to own 10% or more of our voting stock;stock (by vote or value);

· a controlled foreign corporation or a passive foreign investment company;

·        a partnership or other pass-through entity for U.S. federal income tax purposes;

·a holder who is required to accelerate the recognition of any item of gross income with respect to our common shares or ADRs as a result of such income being recognized on an applicable financial statement;

·a holder who is a U.S. expatriate, former U.S. citizen or former long-term resident of the United States; or

·        a personholder whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar.

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The discussion below is based upon the provisions of the Code, existing and proposed income tax regulations rulingsissued under the Code and judicial decisions and administrative rulings thereunder, all as of the date hereof, and such authorities mayof this Annual Report. All of the foregoing are subject to be replaced, revoked or modified so as to result inat any time, and any such action could be retroactive and could affect the accuracy of this discussion. This discussion is not binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take a different position concerning the U.S. federal income tax consequences different from those discussed below.of an investment in our common shares or the ADRs or that any such position would not be sustained. In addition, this summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreement relating to the ADRs, and all other related agreements, will be performed in accordance with their terms.

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) holds our common shares or ADRs, the U.S. tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our common shares or ADRs, you should consult your tax advisors.

This summary does not contain a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income, U.S. federal non-income tax laws, such as U.S. federal estate and gift tax laws, or the effects of any state, local or non-United States tax laws. If you are considering the purchase, ownership or disposition of our common shares or ADRs, you should consult your own tax advisors concerning the U.S. federal income tax consequences to you in light of your particular situation, as well as any consequences arising under the laws of any other taxing jurisdiction.


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ADRs

If you hold ADRs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by the ADSs evidenced by ADRs. Accordingly, deposits or withdrawals of common shares for ADRs will not be subject to U.S. federal income tax.  The U.S. Department of Treasury has expressed concerns that intermediaries in the chain of ownership between the holder of an ADS and the issuer of the security underlying the ADS may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. holders of ADSs. Accordingly, the credibility of foreign taxes, if any, as described below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and the Company.

Taxation of Dividends

Subject to the discussion under “—Passive Foreign Investment Company” below, if you are a U.S. Holder, the gross amount of distributions on the ADRs or our common shares (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) will be taxable to you as dividends, to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Such income (including withheld taxes) will be includable in your gross income as ordinary income on the day actually or constructively received by you, in the case of our common shares, or by the depositary, in the case of ADRs. Such dividends will not be eligible for the dividends received deduction generally allowed to U.S. corporations under the Code.in respect of dividends received from other U.S. or, in certain circumstances, non-U.S. corporations.

With respect to non-corporate U.S. Holders, certain dividends received from a qualified foreign corporation may be subject to reduced rates of taxation. Subject to certain limitations, a foreign corporation generally is treated as a qualified foreign corporation with respect to dividends received from that corporation onif its shares (or ADRs backed by such shares) that are readily tradable on an established securities market in the United States.States, and such corporation is not a passive foreign investment company (as discussed below under “— Passive Foreign Investment Company”) in the taxable year in which dividends are paid or in the preceding taxable year. U.S. Treasury Department guidance indicates that the ADRs (which are listed on the NYSE), but not our common shares, are readily tradable on an established securities market in the United States. Thus, although we believe that dividends received with respect to ADRs currently meet the conditions required for those reduced tax rates, we do not believe that dividends received with respect to common shares (rather than ADRs) currently meet the conditions required for those reduced tax rates. We cannot assure you that the ADRs will be considered readily tradable on an established securities market in later years. Non-corporate holdersAdditionally, even if we are aqualified foreign corporation, the reduced rates on dividends will apply only if such dividends are paid with respect to the ADRs that doa non-corporate U.S. Holder has held for at least 61 days during the 121-day period beginning 60 days before the “ex-dividend date.” Also, regardless of our status as a qualified foreign corporation, the reduced rates will not meetapply if a minimum holding period requirement during which they are not protected from the risk of loss or that electnon-corporate U.S. Holder elects to treat the dividend income as “investment income” pursuant tofor purposes of the investment interest expense limitations of Section 163(d)(4) of the Code will not be eligible for the reduced rates of taxation regardless of our status as a qualified foreign corporation.Code. In addition, the rate reduction will not apply to a dividend if the recipient of the dividend is obligated to make related payments with respect to positions in substantially similar or related property. This disallowance applies even if the minimum holding period has been met. Furthermore, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if weThe dividend rules are a passive foreign investment company (as discussed below under “— Passive Foreign Investment Company”) in the taxable year in which such dividends are paid or in the preceding taxable year. Youcomplex, and you should consult your own tax advisors regarding the application of these rules given your particular circumstances.

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The amount of any dividend paid in reaiswill equal the U.S. dollar value of the reaisreceived calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of common shares, or by the depositary, in the case of ADRs, regardless of whether the reaisare converted into U.S. dollars. If the reaisreceived as a dividend are converted into U.S. dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the reaisreceived as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in the reaisequal to their U.S. dollar value on the date of receipt. Any gain or loss of a U.S. Holder realized on a subsequent conversion or other disposition of the reaisgenerally will be treated as U.S. source ordinary income or loss.

Subject to certain conditions and limitations, if you are a U.S. Holder of our common shares or ADRs, Brazilian withholding taxes on distributions (including distribution of interest on shareholders’ equity) paid to you with respect to the common shares or ADRs generally will be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. For purposes of calculating the foreign tax credit, dividends paid on the ADRs or our common shares will be treated as income from sources outside the United States and will generally constitute passive category income. In addition, in certain circumstances, if you have held ADRs or common shares for less than a specified minimum period during which you are not protected from risk of loss or are obligated to make payments related to the dividends, you will not be allowed a foreign tax credit for foreign taxes imposed on dividends paid on the ADRs or common shares. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. Instead of claiming a credit, you may, at your election, deduct such otherwise creditable BrazilianwithholdingBrazilian withholding taxes in computing your taxable income, but only for a taxable year in which you elect to do so with respect to all foreign income taxes paid or accrued in such taxable year and subject to generally applicable limitations under U.S. law.


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ToSubject to the discussion under “—Passive Foreign Investment Company” below, to the extent that the amount of any distribution (including amounts withheld to reflect Brazilian withholding taxes and distributions of interest on shareholders’ equity, as described above under “—Brazilian Tax Considerations”) exceeds our current and accumulated earnings and profits for a taxable year, as determined under U.S. federal income tax principles, the distribution will first be treated as a tax-free return of capital, causing a reduction in the adjusted basis of the ADRs or common shares, and the balance in excess of adjusted basis will be taxed as capital gain recognized on a sale or exchange (as discussed below under “—Taxation of Capital Gains”). However, we do not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should assume that a distribution will generally be treated as a dividend (as discussed above).

Distributions of common shares or ADRs, or rights to subscribe for common shares or ADRs, which are received as part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

If you are a non-U.S. Holder, dividends paid to you generally will not be subject to U.S. income tax unless the dividends are “effectively connected” with your conduct of a trade or business within the United States, and the dividends are attributable to a permanent establishment (or in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis. In such cases you generally will be taxed in the same manner as a U.S. Holder. If you are a corporate non-U.S. Holder, “effectively connected” dividends may, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

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Passive Foreign Investment Company

Based on our financial statements, relevant marketThe Code provides special rules regarding certain distributions received by U.S. persons (which would include U.S. Holders as defined above for purposes of this discussion) with respect to, and shareholder data,sales, exchanges and the projected compositionother dispositions, including pledges, of, our income and valuationshares of our assets, including goodwill, we do not believe we werestock (or ADRs backed by such shares) in a PFIC for U.S. federal income tax purposes for 2015, and we do not expect to be a PFIC for 2016 or in the future, although we can provide no assurances in this regard.

PFIC. In general, we will be a PFIC for any taxable year in which:

·        at least 75% of our gross income is passive income, or

·        at least 50% of the value (determined(based on athe average of the fair market values of the assets determined at the end of each quarterly basis)period) of our assets is attributable to assets that produce or are held for the production of passive income.

For this purpose, cash is a passive asset and passive income generally includes dividends, interest, royalties, and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person)., gains from commodities and securities transactions, and gains from passive assets. Passive assets generally include the assets that produce passive income or are held for the production of passive income. For this purpose, cash is treated as passive asset. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income.

Based on our financial statements, relevant market and shareholder data, and the projected composition of our income and valuation of our assets, including goodwill, we do not believe we were a PFIC for U.S. federal income tax purposes for 2018, and we do not expect to be a PFIC for 2019 or in the future, although we can provide no assurances in this regard. The determination of whether we are a PFIC must be made annually. Accordingly, it is possible that we may become a PFIC in the current or any future taxable year due to changes in our income or asset composition. Because we have valued our goodwill based on the market value of our equity, a decrease in the price of our ADRs or common shares may also result in our becoming a PFIC. If you are a U.S. Holder and we are a PFIC for any taxable year during which you hold our ADRs or common shares, you will be subject to special tax rules discussed below and could suffer adverse tax consequences.

If we are a PFIC for any taxable year during which you holda U.S. Holder holds our ADRs or common shares, yousuch U.S. Holder will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ADRs or common shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or yourthe U.S. Holder’s holding period for the ADRs or common shares will be treated as excess distributions. Under these special tax rules:

·        the excess distribution or gain will bedistributions and gains are allocated ratably over yourto each day of the U.S. Holder’s holding period for the ADRs or common shares,during which we were a PFIC,


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·        the amountamounts allocated to the current taxable year in which the disposition occurs and amounts allocated to any taxable year prior toperiod in the U.S. Holder’s holding period before the first day of the first taxable year in whichthat we were a PFIC will be treated as ordinary income and(rather than capital gain) earned in the taxable year of the disposition,

·        the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.year, and

·the tax liability for amounts allocated to years before the year of disposition or “excess distribution” cannot be offset by any net operating losses for such year, and gains (but not losses) realized on the sale of the common shares or ADRs cannot be treated as capital, even if the U.S. Holder held such common shares or ADRs as capital assets.

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If we are a PFIC for any taxable year during which a U.S. Holder holds the common shares or ADRs, then we generally will continue to be treated as a PFIC with respect to the U.S. Holder for all succeeding years during which the U.S. Holder holds the common shares or ADRs, even if we no longer satisfy either the passive income or passive asset test described above, unless the U.S. Holder terminates this deemed PFIC status by making a “deemed sale” election. If such election is made, the U.S. Holder will be deemed to have sold the common shares or ADRs at their fair market value on the last day of the last taxable year for which we were a PFIC, and any gain from such deemed sale would be subject to the excess distribution rules as described above. After the deemed sale election, the common shares or ADRs with respect to which the deemed sale election was made will not be treated as shares in a PFIC unless we subsequently become a PFIC.

In addition, non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a PFIC in the taxable year in which such dividends are paid or in the preceding taxable year.year (as described above under “—Taxation of Dividends”). You will generally be required to file Internal Revenue Service Form 8621 if you hold our ADRs or common shares in any year in which we are classified as a PFIC.

If we are a PFIC for any taxable year and any of our non-United Statesnon-U.S. subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the common shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

In certain circumstances, in lieu of being subject to the excess distribution rules discussed above, youa U.S. Holder may make an election to include gain on the stock of a PFIC as ordinary income under a mark-to-market method, provided that such stock is regularly traded on a qualified exchange. Under current law, the mark-to-market election may be available to holdersthe U.S. Holders of ADRs because the ADRs are listed on the NYSE, which constitutes a qualified exchange, although there can be no assurance that the ADRs will be “regularly traded” for purposes of the mark-to-market election. It should also be noted that only the ADRs and not the common shares are listed on the NYSE. Our common shares are listed on theNovo Mercado (New Market) of the São Paulo Stock Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that the common shares will be “regularly traded” for purposes of the mark-to-market election.

If you make an effectivea U.S. Holder makes a valid mark-to-market election youfor the first taxable year in which such U.S. Holder holds (or is deemed to hold) the common shares or ADRs when we are determined to be a PFIC, such U.S. Holder generally will not be subject to the PFIC rules described above in respect of its common shares or ADRs. Instead, a U.S. Holder that makes a mark-to-market election will be required to include in income each year that we are a PFIC as ordinary incomean amount equal to the excess, if any, of the fair market value of your ADRs orthe common shares ator ADRs that the endU.S. Holder owns as of the close of the taxable year over yourthe U.S. Holder’s adjusted tax basis in the ADRscommon shares or common shares. YouADRs. The U.S. Holder will be entitled to deduct as an ordinary loss in each such year the excess, if any, of yourthe U.S. Holder’s adjusted tax basis in the ADRscommon shares or common sharesADRs over their fair market value atas of the endclose of the taxable year, but only to the extent of the net amount previouslymark-to-market gains with respect to the common shares or ADRs included by the U.S. Holder in incomeprior taxable years as a result of the mark-to-market election. If you make an effectivethe U.S. Holder makes a valid mark-to-market election, in each year that we are a PFIC anyamounts included in income of such U.S. Holder pursuant to a mark-to-market election, as well as gain you recognize uponon the sale, exchange or other disposition of your ADRs orits common shares or ADRs will be treated as ordinary income, and any loss will be treated as ordinary loss, but only to the extent of the net amount previously included in income as a result of the mark-to-market election.

YourIf a U.S. Holder makes a valid mark-to-market election, its adjusted tax basis in the ADRs or common shares will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you makeAny distributions made by us in a year in which we are a PFIC and a mark-to-market election itis in effect would generally be subject to the rules discussed above under “—Taxation of Dividends,” except the lower rate applicable to qualified dividend income would not apply. In addition, gain or loss realized by the U.S. Holder on the sale of our common shares or ADRs will be a capital gain or loss and taxed in the manner described below under “—Taxation of Capital Gains,” provided a valid mark-to-market election is in effect.

Once properly made, a mark-to-market election will be effective for the taxable year for which the electionit is made and all subsequent taxable years unless the ADRscommon shares or common sharesADRs are no longer regularly traded on a qualified

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exchange or the Internal Revenue ServiceIRS consents to the revocation of the election. The excess distribution rules generally do not apply to a U.S. Holder for taxable years for which a mark-to market election is in effect. If we are a PFIC for any year in which the U.S. Holder owns our common shares or ADRs but before a mark-to-market election is made, the interest charge rules described above will apply to any mark-to-market gain recognized in the year the election is made. Generally, if we cease to be a PFIC, the U.S. Holder’s mark-to-market election would no longer require the income inclusion described above. However, cessation of our status as a PFIC will not terminate a mark-to-market election and if we become a PFIC again, mark-to-market inclusion may be required. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances.

Alternatively, you can sometimes avoid the excess distribution rules described above bymay be avoided if a U.S. Holder makes a qualified electing to treatfund (“QEF”) election effective beginning with the first taxable year in the U.S. Holder’s holding period in which we are treated as a PFIC as a “qualified electing fund” under Section 1295 of the Code. This optionwith respect to such U.S. Holder. However, QEF election is not available to youour U.S. Holders because we do not intend to comply with the requirements necessary to permit youour U.S. Holders to make this election. You

                U.S. Holders are urged to consult yourtheir tax advisors concerning the United States federal income tax consequences of holding ADRs or common sharesas to our status as a PFIC, and, if we are consideredtreated as a PFIC, in any taxable year.


Tableas to the effect on them of, Contentsand the reporting requirements with respect to, the PFIC rules and the desirability of making, and the availability of, a mark-to-market election with respect to our common shares or ADRs.

Taxation of Capital Gains

For U.S. federal income tax purposes, youa U.S. Holder generally will recognize taxable gain or loss on any sale, exchange or redemption of its common shares or ADRs in an amount equal to the difference between the amount realized for the common shares or ADRs (including any amounts withheld to reflect Brazilian withholding taxes) and yourthe U.S. Holder’s tax basis in the common shares or ADRs, both determined in U.S. dollars. Subject to the discussion under “—Passive Foreign Investment Company” above, such gain or loss will generally be capital gain or loss. Capital gains of non-corporate holdersU.S. Holders who are individuals (as well as certain trusts and estates) derived with respect to capital assets held for more than one year are generally eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by youa U.S. Holder will generally be treated as U.S. source gain or loss. Consequently, youU.S. Holders may not be able to use the foreign tax credit arising from any Brazilian tax imposed on the disposition of our common shares or ADRs unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from sources outside the United States in the appropriate category for foreign tax credit purposes.

If you are a non-U.S. Holder, you will not be subject to U.S. federal income tax on gain recognized on the sale, exchange or other disposition of your common shares or ADRs unless:

·the gain is “effectively connected” with your conduct of a trade or business in the United States, and the gain is attributable to a permanent establishment (or, in the case of an individual, a fixed place of business) that you maintain in the United States if that is required by an applicable income tax treaty as a condition for subjecting you to U.S. taxation on a net income basis, or

·you are an individual, you are present in the United States for 183 or more days in the taxable year of such sale, exchange or other disposition and certain other conditions are met.

In the first case, the non-U.S. Holder will be taxed in the same manner as a U.S. Holder. In the second case, the non-U.S. Holder will be subject to U.S. federal income tax at a rate of 30% on the amount by which such non-U.S. Holder’s U.S. source capital gains exceed non-U.S. source capital losses.

If you are a corporate non-U.S. Holder, “effectively connected” gains that you recognize may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.

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Other Brazilian Taxes

It is important to note that any Brazilian IOF/Exchange TaxIOF exchange or IOF/Bonds TaxIOF securities (as discussed above under “—Brazilian Tax Considerations”) will not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code. You should consult your tax advisors regarding the U.S. federal income tax consequences of these other Brazilian taxes.

Information with respect to Foreign Financial Assets

U.S. Holders that are individuals (and, to the extent provided in regulations, certain entities) that own “specified foreign assets,” including possibly the common shares or ADRs, with an aggregate value in excess of $50,000 are generally required to file IRS Form 8938 with information regarding such assets. Depending on the circumstances, higher threshold amounts may apply. Specified foreign financial assets include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stock and securities issued by non-U.S. person, (ii) financial instruments and contracts held for investment that have non-U.S. issuer or counterparties, and (iii) interests in non-U.S. entities. If a U.S. Holder is subject to this information reporting regime, the failure to timely file IRS Form 8938 may subject the U.S. Holder to penalties. In addition to these requirements, U.S. Holders may be required to annually file FinCEN Report 114 (Report of Foreign Bank and Financial Accounts) with the U.S. Department of Treasury. U.S. Holders are thus encouraged to consult their U.S. tax advisors with respect to these and other reporting requirements that may apply to their acquisition of the common shares and ADRs.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to dividends in respect ofdistributions made on the common shares or ADRs within the United States to a non-corporate U.S. holder and to the proceeds from the sale, exchange, redemption or redemptionother disposition of common shares or ADRs that are paidby a non-corporate U.S. Holder to you within the United Statesor through a U.S. office of a broker. Payments made (and in certain cases,sales or other dispositions effected at an office) outside the United States), unless you are an exempt recipient. BackupU.S. will be subject to information reporting in limited circumstances.

In addition, backup withholding of U.S. federal income tax may apply to such paymentsamounts if you failthe U.S. Holder fails to provide aan accurate taxpayer identification number (or otherwise establishes, in the manner provided by law, an exemption from backup withholding) or certification of other exempt status or fail to report in full dividenddividends required to be shown on the U.S. Holder’s U.S. federal income tax returns.

Backup withholding is not an additional income tax, and interest income.

Any amounts withheld under the amount of any backup withholding rulesfrom a payment to a U.S. holder will be allowed as a refund or a credit against yourthe U.S. Holder’s U.S. federal income tax liability provided that the requiredappropriate returns are timely filed.

A non-U.S. Holder generally may eliminate the requirement for information is furnishedreporting and backup withholding by providing a properly completed and duly executed certification of its foreign status to the Internal Revenue Service.payer, under penalties of perjury, on IRS Form W-8BEN or, W-8BEN-E or other appropriate W-8, as applicable. You should consult your own tax advisor as to the qualifications for exemption from backup withholding and the procedures for obtaining the exemption.

The foregoing does not purport to be a complete analysis of the potential tax considerations relating to the acquisition, ownership and disposition of common shares or ADRs. Prospective investors should consult their own tax advisors as to the particular tax considerations applicable to them relating to the acquisition, ownership and disposition of common shares or ADRs, including the applicability of the U.S. federal, state and local tax laws or non-tax laws, foreign tax laws, any tax treaties, and any changes in applicable tax laws and any pending or proposed legislation or regulations.

F.                  Dividends and Paying Agents

Not applicable.

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G.                 Statement by Experts

Not applicable.

H.                 Documents on Display

The Company makes its filings in electronic form under the EDGAR filing system of the U.S. Securities and Exchange Commission.SEC. Its filings are available through the EDGAR system at www.sec.gov. In addition, the Company’s filings are available to the public over the internetInternet at BRF’s web site at http://www. brf-br.com/www.brf-br.com/ir.  Such filings and other information on its website are not incorporated by reference in this Annual Report on Form 20-F. You may request a copy of this filing, and any other report, at no cost, by contacting usBRF at:

Investor Relations Department


BRF S.A.

Rua Hungria, 1400

01455-000
Avenida das Nações Unidas, 8501 - 1st Floor
05425-070 – São Paulo – SP – Brazil


Tel.: +55 11 2322-5398

Fax: +55 11 2322-5740

2322-5377
E-mail: acoes@brf-br.com


Table of Contentsacoesri@brf-br.com

I.                   Subsidiary Information

See Note 1.1 to our consolidated financial statements for a description of the Company’s subsidiaries.

ITEM 11.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to a variety of market risks related to potential losses resulting from adverse changes in interest rates, exchange rates and the price of some commodities. We have established policies and procedures to manage our sensitivity to such risks the so-calledin our Financial Risk Management Policy. These procedures include the monitoring of our level of exposure to each market risk through an analysis based on our balance-sheetbalance sheet exposure combined with an analysis of expected cash flows. We also use derivative financial instruments to mitigate our exposure to these risks, guided by our risk policy under the management of our Financial Risk Management Committee, our board of executive officers and our board of directors. For example, we negotiate long-term contracts with some of our suppliers, especially soybean meal and soybean oil not only for hedging, but also to minimize our operational risk

Our risk management department is responsible for monitoring, evaluating and reporting our financial risk. Our board of directors is responsible for approving our risk policy and periodically evaluating improvements to it, defining the limits of risk tolerance for different types of risks to which we are exposed and defining action plans to align the risks within these limits. Our Financial Risk Management Committee is in charge of the execution of our risk policy, which includes supervising the risk management process, planning and verifying the impact of the decisions implemented, evaluating and approving hedging alternatives, and monitoring the exposure levels to risks in order to ensure compliance with our risk policy.  Our risk policy defines the risk management strategies to be adopted. Among other things, our risk policy does not authorize us to engage in leveraged transactions in derivative markets and states that the notional amount of individual hedging transactions must be limited to 2.5% of our shareholders’ equity.

Under IFRS, we have accounted for our derivative instruments using the fair value method.  For more information on our financial instruments and risk management, see Note 4 to our consolidated financial statements.

The following section describes the significant market risks associated towith our activities and the related financial instruments.

Interest Rate Risk

We are exposed to risk from changes in interest rates, which may be caused by factors related to the global economic crisis,economy, changes in monetary policy in the Brazilian and foreign markets, and other factors. Our interest rate exposure under our indebtedness is primarily to the LIBOR rate, the TJLP rate, the UMBNDES rate and the UMBNDES rate.CDIrate. We also have indebtedness denominated inreais and U.S. dollars that bear interest at fixed rates. With regardsrespect to our marketable securities, our principal exposure is to the CDI rate for investments in the Brazilian market. Our marketable securities in foreign markets are generally U.S. dollar instruments at a fixed coupon.

152


The table below provides information about our financial instruments that are sensitive to changes in interest rates atas of December 31, 2015.2018. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented inreal equivalents. The instruments’ actual cash flows are denominated in U.S. dollars, euro andreais, as applicable, once these currencies are subject to interest rate risks. See also “—Foreign Exchange Risk” below, which describes our foreign exchange derivatives. Even though these derivatives were entered into primarily to manage foreign exchange risk, they may also have an interest rate risk component because certain derivatives are linked to variable interest rates such as the CDI rate.

To facilitate the analysis of market risk, the table below includes cash, and cash equivalents and the amounts of derivative instrumentsdebt (amounts in millions ofreais, except weighted average annual interest rates).


Table of Contents

Financial Instruments

All-in weighted average annual interest rate

Short Term

2017

2018

2019

2020

Thereafter

Carrying amount

Fair value

All-in weighted average annual interest rate

Short Term

2020

2021

2022

2023

Thereafter

Fair value

Assets - Short/Long-term

 

7,443.9

793.1

-

-

142.8

-

8,379.7

8,379.7

 

5,653.9

860.2

-

14.7

-

6,528.8

Fixed rate

 

5,322.9

-

-

-

-

-

5,322.9

5,322.9

 

1,251.1

159.1

-

14.7

-

1,424.9

In US dollar

1%

5,128.4

-

-

-

-

-

5,128.4

5,128.4

1.18%

1,230.0

159.1

-

1,389.1

In Euros

 

-

-

-

-

-

-

-

-

In Argentine Pesos

29.31%

177.8

-

-

-

-

-

177.8

177.8

In Reais

0.59%

-

-

14.7

-

14.7

Other Currencies

5.24%

16.7

-

-

-

-

-

16.7

16.7

2.68%

21.1

-

21.1

Variable rate

 

709.4

407.4

-

-

142.8

-

1,259.6

1,259.6

 

4,276.5

569.6

-

4,846.1

In Reais

99.19% CDI

554.1

337.0

-

-

-

-

891.2

891.2

90.48% CDI

3,980.8

248.2

-

4,229.0

In Reais

100% SELIC

155.3

70.3

-

-

-

-

225.6

225.6

100% SELIC

295.7

87.7

-

383.4

In Reais

IGPM +12%

-

-

-

-

142.8

-

142.8

142.8

IGPM +12%

-

233.7

-

233.7

 

-

-

-

-

-

-

-

-

 

 

 

 

Whitout rate

 

65.3

385.7

-

-

-

-

451.0

451.0

Without rate

 

126.3

131.6

-

257.9

In Reais

-

65.3

385.7

-

-

-

-

451.0

451.0

-

105.3

75.9

-

181.2

Whitout rate

 

1,346.3

-

-

-

-

-

1,346.3

1,346.3

In US dollar

-

1,346.3

-

-

-

-

-

1,346.3

1,346.3

-

16.7

-

16.7

Other Currencies

-

4.3

55.7

-

60.0

 

-

-

-

-

-

-

-

-

 

 

 

 

Liabilities - Short/Long-term

Liabilities - Short/Long-term

2.628,2

1,132.5

2,762.0

291.3

800.7

7,564.7

15,179.3

15,179.3

 

4,547.4

3,394.3

2,945.8

3,072.8

3,399.9

4,805.4

22,165.5

Fixed rate

 

2,084.9

641.8

562.1

53.6

544.4

7,564.7

11,451.4

11,451.4

 

2,370.8

1,620.8

96.9

2,765.1

2,034.3

4,805.4

13,693.3

In Reais

6.89%

1,335.0

143.0

527.9

30.0

30.0

7.2

2,073.0

2,073.0

7.79%

1,697.5

1,251.4

-

2,948.9

In US dollar

4.71%

631.7

440.3

-

-

461.0

5,416.0

6,949.0

6,949.0

4.35%

475.4

332.7

96.9

556.7

2,034.3

4,805.4

8,301.4

In Euros

2.75%

33.8

-

-

-

-

2,105.7

2,139.5

2,139.5

2.75%

40.1

-

2,208.4

-

2,248.5

In Argentine Peso

29.42%

84.5

58.4

34.2

23.6

53.4

35.8

289.9

289.9

 

 

 

 

 

 

 

 

 

In TRY

21.91%

157.8

36.7

-

194.5

        

 

 

 

 

Variable rate

 

543.2

490.7

2,199.9

237.7

256.3

0.0

3,727.8

3,727.8

 

2,176.6

1,773.5

2,848.9

307.7

1,365.6

-

8,472.2

In Reais

 

127.1

133.3

1,123.5

106.4

256.3

0.0

1,746.6

1,746.6

 

1,379.6

1,776.5

2,848.9

307.7

1,365.6

-

7,678.2

Index

TJLP+2.37%

88.9

100.0

85.5

65.9

12.2

-

352.6

352.6

TJLP+2.28%

122.5

19.4

-

141.9

Index

IGPM+4.9%

3.3

-

-

-

231.5

0.0

234.8

234.8

SELIC + 2.26%

97.9

24.7

-

122.7

Index

96.9% CDI

33.1

-

992.2

-

-

-

1,025.2

1,025.2

IGPM+4.9%

3.8

269.7

-

273.4

Index

109.88% CDI

1,155.4

1,462.7

2,848.9

307.7

1,365.6

-

7,140.2

In US dollar

 

416.2

357.4

1,076.4

131.3

-

-

1,981.3

1,981.3

 

128.1

(3.0)

-

125.1

Index

LIBOR+2.36%

405.2

357.9

1,073.3

130.2

-

-

1,966.5

1,966.5

LIBOR+2.8%

128.1

(3.0)

-

125.1

In Euro

 

668.9

-

668.9

Index

UMBNDES+2.26%

12.6

7.4

3.1

1.1

-

-

24.2

24.2

EURIBOR+2.05%

668.9

-

668.9

 

-

-

-

-

-

-

-

-

 

 

 

 

Net

 

4,815.7

339.4

2,762.0

291.3

657.9

7,564.7

6,799.5

6,799.5

 

(1,106.5)

2,534.1

2,945.8

3,072.7

3,385.2

4,805.4

15,636.7

 

Foreign Exchange Risk

In managing our foreign exchange risk, we tryseek to balance our assets denominated in foreign currency against our liabilities also denominated in foreign currency. We also consider future cash flows resulting from transactions in foreign currency, especially exports denominated in U.S. dollars, euro and pounds sterling. Weusually enter into derivative instruments, mainly local short-term swaps, to manage such foreign exchange risk, but these derivatives generally do not cover 100%all of the principal amount of our U.S. dollar-denominated obligations.


153


Table of Contents

The table below provides information about our financial instruments and presents such information in realequivalents as of December 31, 2015.2018. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates (amounts in millions ofreais, except average annual interest rates).

On-balance Sheet Financial InstrumentsShort Term2017201820192020ThereafterCarrying amountFair value

Short Term

2020

2021

2022

2023

Thereafter

Fair value

US dollar denominated instruments7,522.5797.81,076.4131.3461.05,416.015,405.015,405.0

US dollars denominated instruments

710.67

(271.40)

(96.87)

(556.66)

(2,034.27)

(4,843.50)

(7,092.03)

Assets

 

Short/Long-term investments

1,246.68

159.09

-

1,405.77

Average annual interest rate

0.80%

3.87%

-

Liabilities

 

Short/Long-term debt

(536.01)

(429.62)

(96.87)

(556.66)

(2,034.27)

(4,708.54)

(8,497.80)

Average annual interest rate

3.00%

6.65%

4.58%

5.65%

3.98%

4.59%

-

Euro denominated instruments

(662.92)

-

(2,208.40)

-

(2,882.42)

Assets

 

Short/Long-term investments

2.93

-

2.93

Average annual interest rate

-

-

Liabilities

 

Short/Long-term debt

(665.85)

-

(2,208.40)

-

(2,885.35)

Average annual interest rate

1.78%

-

2.75%

-

Other Currencies denominated instruments

(132.08)

19.03

-

(113.05)

Assets        

 

Short/Long-term investments6,474.7-----6,474.76,474.7

25.48

55.69

-

81,43

Average annual interest rate0.79%0.0%0.0%0.0%0.0%0.0%0.79% 

2.22%

-

Liabilities        

 

Short/Long-term debt1,047.9797.81,076.4131.3461.05,416.08,930.38,930.3

(157.82)

(36.66)

-

(194,48)

Average annual interest rate2.49%5.13%2.94%2.87%4.82%4.82%4.32%-

22.50%

19.75%

-

 

Euro denominated instruments33.8----2,105.72,139.52,139.5
Liabilities        
Short/Long-term debt33.8----2,105.72,139.52,139.5
Average annual interest rate2.75%----2.75%2.75%-
Argentine Peso denominated instruments262.258.434.223.653.435.8467.7467.7
Assets        
Short/Long-term investments177.8-----177.8177.8
Average annual interest rate29.31%-----29.31%-
Liabilities        
Short/Long-term debt84.558.434.223.653.435.8289.9289.9
Average annual interest rate28.94%29.61%29.61%29.61%29.61%29.61%29.42%-
Other Currencies denominated instruments16.7-----16.716.7
Assets        
Short/Long-term investments16.7-----16.716.7
Average annual interest rate5.24%-----5.24%-

 

(1)       Includes overnight deposits, time deposits, long-term Brazilian government bonds, credit linked notes and other short-term investments.

(2)       Represents indebtedness denominatedDenominated in U.S.U.S. dollars.

The table below presents our derivative financial instruments under which we have exposure to foreign exchange risk and interest rate risk, using the notional amounts and weighted average exchange rates by expected (contractual) maturity dates.

Exchange / Interest rate derivatives

Short Term

2017

2018

2019

2020

Thereafter

Carrying amount

Fair value

Total Notional

13,633.1

151.8

759.2

55.6

-

-

(527.7)

(527.7)

         

Cross currency swaps:

969.7

-

250.0

-

-

-

(249.4)

(249.4)

Receive US$/ Pay R$

        

Notional amount

969.7

-

-

-

-

-

(1.0)

(1.0)

Average annual interest received in US$

1.8%

-

-

-

-

-

-

-

Average annual interest paid in 87.7% of CDI

12.3%

-

-

-

-

-

-

-

Duration

0.9

-

-

-

-

-

-

-

         

Receive R$/ Pay USD

        

Notional amount

-

-

250.0

-

-

-

(248.5)

(248.5)

Average annual interest received in R$

 

-

7.8%

-

-

-

-

-

Average annual interest paid in US$

 

-

1.6%

-

-

-

-

-

Duration

-

-

2.4

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Interest rate swaps:

-

151.8

509.2

55.6

-

-

(80.5)

(80.5)

Receive US$/ Pay US$/

-

-

-

-

-

-

-

-

Notional amount

-

151.8

459.2

55.6

-

-

(78.2)

(78.2)

Average annual interest received in US$

-

3.2%

3.2%

3.2%

-

-

-

-

Average annual interest paid in US$

-

5.8%

5.8%

5.8%

-

-

-

-

Duration

-

2.0

3.0

4.1

-

-

-

-


Exchange / Interest rate derivatives

Short Term

2020

2021

2022

2023

Thereafter

Fair value

Total Notional

13,300.1

-

-

-

-

-

4.8

 

 

 

 

 

 

 

 

Cross currency swaps:

408.2

-

-

-

-

-

9.3

Receive U.S.$. Pay R$

 

 

 

 

 

 

 

Notional amount

408.2

-

-

-

-

-

9.3

Average annual interest received in U.S.$

9.6%

-

-

-

-

-

-

Average annual interest paid in 110.9% of CDI

6.0%

-

-

-

-

-

-

Duration

0.3

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Interest rate swaps:

628.1

-

-

-

-

-

27.0

Receive U.S.$. Pay U.S.$

 

 

 

 

 

 

 

Notional amount

129.2

-

-

-

-

-

(0.1)

Average annual interest received in U.S.$ Libor 1.54% + spread

5.0%

-

-

-

-

-

-

Average annual interest paid in U.S.$

5.9%

-

-

-

-

-

-

Duration

0.1

-

-

-

-

-

-

Receive R$. Pay R$

 

 

 

 

 

 

 

Notional amount

499.0

-

-

-

-

-

27.1

Average annual interest received in R$

3.7%

-

-

-

-

-

-

Average annual interest paid in 91.6% of CDI

6.4%

-

-

-

-

-

-

Duration

0.6

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Non-deliverable forward

4,096.6

-

-

-

-

-

(14.1)

Receive R$. Pay U.S.$

 

 

 

 

 

 

 

Notional amount

890.8

-

-

-

-

-

(2.6)

Average annual interest received in R$

-

-

-

-

-

-

-

Average annual interest paid in U.S.$

4.5%

-

-

-

-

-

-

Duration

0.3

-

-

-

-

-

-

Receive R$. Pay Euro

 

 

 

 

 

 

 

Notional amount

44.4

-

-

-

-

-

0.2

Average annual interest received in R$

-

-

-

-

-

-

-

Average annual interest paid in Euro

15.1%

-

-

-

-

-

-

Duration

0.1

-

-

-

-

-

-

Receive R$. Pay Yen

 

 

 

 

 

 

 

Notional amount

224.5

-

-

-

-

-

(1.8)

Average annual interest received in R$

-

-

-

-

-

-

-

Average annual interest paid in Yen

12.2%

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

Receive Euro Pay U.S.$

 

 

 

 

 

 

 

Notional amount

443.9

-

-

-

-

-

2.4

Average annual interest received in Euro

-

-

-

-

-

-

-

Average annual interest paid in U.S.$

3.9%

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

Receive U.S.$. Pay R$

 

 

 

 

 

 

 

Notional amount

492.1

-

-

-

-

-

(2.5)

Average annual interest received in U.S.$

1.5%

-

-

-

-

-

-

Average annual interest paid in R$

-

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

Receive Euro Pay R$

 

 

 

 

 

 

 

Notional amount

1,757.8

-

-

-

-

-

(-9.1)

Average annual interest received in Euro

-

-

-

-

-

-

-

Average annual interest paid in R$

6.7%

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

Receive Pounds Pay R$

 

 

 

 

 

 

 

Notional amount

243.1

-

-

-

-

-

(0.7)

Average annual interest received in Pounds

3.9%

-

-

-

-

-

-

Average annual interest paid in R$

-

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

 

 

 

 

 

 

 

 

FX Options:

5,851.0

-

-

-

-

-

24.9

Notional amount U.S.$

5,851.0

-

-

-

-

-

24.9

Duration

0.3

-

-

-

-

-

-

 

 

 

 

 

 

 

 

FX Futures:

2,306.8

-

-

-

-

-

(9.4)

Notional amount

2,306.7

-

-

-

-

-

(9.4)

Duration

0.1

-

-

-

-

-

-

Table of Contents

154


Receive R$/ Pay R$

-

-

-

-

-

-

-

-

Notional amount

-

-

50.0

-

-

-

(2.3)

(2.3)

Average annual interest received in R$

0.0%

-

7.8%

-

-

-

-

-

Average annual interest paid in 64.8% of CDI

0.0%

-

9.0%

-

-

-

-

-

Duration

-

-

2.4

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Non deliverable forward:

1,788.0

-

-

-

-

-

(57.6)

(57.6)

Receive R$/ Pay US$

-

-

-

-

-

-

-

-

Notional amount

171.8

-

-

-

-

-

(17.9)

(17.9)

Average annual interest received in R$

14.4%

-

-

-

-

-

-

-

Average annual interest paid in US$

-

-

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Receive R$/ Pay Euro

-

-

-

-

-

-

-

-

Notional amount

135.2

-

-

-

-

-

(5.5)

(5.5)

Average annual interest received in R$

12.0%

-

-

-

-

-

-

-

Average annual interest paid in Euro

-

-

-

-

-

-

-

-

Duration

0.3

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Receive R$/ Pay Pounds

-

-

-

-

-

-

-

-

Notional amount

63.7

-

-

-

-

-

(1.6)

(1.6)

Average annual interest received in R$

15.5%

-

-

-

-

-

-

-

Average annual interest paid in Pounds

-

-

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

-

         

Receive R$/ Pay Yen

-

-

-

-

-

-

-

-

Notional amount

429.7

-

-

-

-

-

(40.7)

(40.7)

Average annual interest received in R$

21.4%

-

-

-

-

-

-

-

Average annual interest paid in Yens

-

-

-

-

-

-

-

-

Duration

0.1

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Receive Euro/ Pay US$

-

-

-

-

-

-

-

-

Notional amount

637.6

-

-

-

-

-

1.3

1.3

Average annual interest received in Euro

0.9%

-

-

-

-

-

-

-

Average annual interest paid in US$

-

-

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Receive US$/ Pay Pounds

-

-

-

-

-

-

-

-

Notional amount

115.8

-

-

-

-

-

1.1

1.1

Average annual interest received in US$

-0.8%

-

-

-

-

-

-

-

Average annual interest paid in Pounds

-

-

-

-

-

-

-

-

Duration

0.2

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Receive US$/ Pay R$

-

-

-

-

-

-

-

-

Notional amount

195.2

-

-

-

-

-

(2.3)

(2.3)

Average annual interest received in US$

-

-

-

-

-

-

-

-

Average annual interest paid in R$

14.9%

-

-

-

-

-

-

-

Duration

0.1

-

-

-

-

-

-

-


Table of Contents

Receive US$/ Pay Argentine Pesos

-

-

-

-

-

-

-

-

Notional amount

39.0

-

-

-

-

-

8.0

8.0

Average annual interest received in US$

-

-

-

-

-

-

-

-

Average annual interest paid in Argentine Pesos

43.9%

-

-

-

-

-

-

-

Duration

0.3

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Currency forward:

723.5

-

-

-

-

-

(33.8)

(33.8)

Receive R$/ Pay US$

-

-

-

-

-

-

-

-

Notional amount

723.5

-

-

-

-

-

(33.8)

(33.8)

Average annual interest received in R$

12.2%

-

-

-

-

-

-

-

Average annual interest paid in US$

-

-

-

-

-

-

-

-

Duration

0.4

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Foreign Exchange Options:

9,410.1

-

-

-

-

-

(121.0)

(121.0)

 

 

 

 

 

 

 

 

 

Notional amount US$

9,348.1

-

-

-

-

-

(124.5)

(124.5)

Duration

0.4

-

-

-

-

-

-

-

         

Notional amount Euro

62.0

-

-

-

-

-

3.5

3.5

Duration

0.2

-

-

-

-

-

-

-

 

-

-

-

-

-

-

-

-

Foreign Exchange Futures:

741.8

-

-

-

-

-

14.6

14.6

 

-

-

-

-

-

-

-

-

Notional amount

741.8

-

-

-

-

-

14.6

14.6

Duration

0.1

-

-

-

-

-

-

-

 

The table below provides further detail on our foreign currency-denominated assets and liabilities as of the dates indicated below:below.

 

As of December 31,

 

2015

2014

 

(in millions ofreais)

Cash and cash equivalents and marketable securities

5,322.9

4,551.2

Trade accounts receivable – third parties

2,146.0

1,693.3

Trade accounts receivable – affiliates

250.8

1.3

Restricted Cash

1,346.3

-

U.S. dollar futures

741.9

252.3

Embedded derivative

-

1,853.4

Inventory

0.2

21.1

Exchange rate contracts (Swaps)

968.8

(4.6)

Loans and financing

(11,359.7)

(7,596.2)

Bonds designated as hedge accounting instruments

1,171.4

796.9

Prepayment exports designated as hedge accounting instruments

1,171.4

796.9

Trade accounts payable

(1,496.8)

(794.8)

Supply chain finance

Other operating assets and liabilities, net

(489.0)

(232.1)

(162.4)

97.6

 

(457.9)

1,506.0

 

-

 

Foreign exchange exposure in U.S.$.

(117.3)

567.0

 

As of December 31,

 

2018

2017

(in millions of R$)

 

 

Cash and cash equivalents

127.3

278.1

Trade accounts receivable – third parties

65.8

862.2

Trade accounts payable

(861.3)

31.4

Loans and financing

(7,348.0)

(6,136.4)

Hedge(1)

5,209.2

3,049.7

Investments, net

2.571.9

1,985.7

Other assets and liabilities, net

0.3

(15.3)

Foreign exchange exposure in U.S.$

(234.8)

55.4

 

(1)       Swaps, U.S. dollar futures and embedded derivativederivatives not designated as hedge accounting instruments, thatwhich impact our financial results and not our shareholders’ equity.


Table of Contents

We account for the exchange rate variation clauses of our export prepayment facilities as hedging instruments that mitigate the risk of exchange rate variations relating to our exports. See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Export Credit Facilities—Export Prepayment Facilities” for a general description of our export prepayment facilities.  For more information about our accounting relating to these facilities, see Note 4.4.44 to our consolidated financial statements.

The table below presents a sensitivity analysis relating to our foreign exchange risk that considers five scenarios in the next twelve months for the variations in exchange rates between thereal and the U.S. dollar, thereal and the euro, and thereal and the pound sterling. We have adopted what we believe is the most likely scenario shown in the table. The total of export sales analyzed corresponds to the total of derivative financial instruments plus the amortization flow under export prepayment facilities designated as hedge accounting instruments.

    

3.9048

 

3.5143

 

2.9286

 

4.8810

 

5.8572

Exchange Rate - Brazilian Reais x U.S. Dollar

   

Scenario

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

(probable)

 

(10% appreciation)

 

(25% appreciation)

 

(25% devaluation)

 

(50% devaluation)

Designated as hedge accounting

            

Non-deliverable forward

 

Devaluation of R$

 

(13.7)

 

3.5

 

29.2

 

(56.7)

 

(99.6)

Currency forward

 

Devaluation of R$

 

7.5

 

86.0

 

203.7

 

(188.7)

 

(384.9)

Options - foreign currencies

 

Devaluation of R$

 

-

 

295.2

 

1,013.9

 

647.6

 

1,786.8

Prepayment export facilities (1)

 

Devaluation of R$

 

(637.6)

 

(520.4)

 

(344.7)

 

(930.4)

 

(1,223.2)

Bonds

 

Devaluation of R$

 

(562.4)

 

(445.3)

 

(269.5)

 

(855.3)

 

(1,148.2)

Swaps

 

Devaluation of R$

 

(231.4)

 

(183.2)

 

(111.0)

 

(351.7)

 

(472.0)

Exports(2)

 

Appreciation of R$

 

6.2

 

(384.7)

 

(1,246.9)

 

(402.2)

 

(1,302.3)

Non designated as hedge accounting

          

Non-deliverable forward

 

Appreciation of R$

 

(8.1)

 

(27.6)

 

(56.9)

 

40.7

 

89.5

U.S. dollar futures - BMF

 

Devaluation of R$

 

(0.9)

 

73.2

 

184.6

 

(186.4)

 

(371.9)

Net effect

   

(1,440.4)

 

(1,103.3)

 

(597.6)

 

(2,283.1)

 

(3,125.8)

Shareholders' equity

   

(1,431.4)

 

(1,149.0)

 

(725.3)

 

(2,137.4)

 

(2,843.5)

Statement of income

   

(9.0)

 

45.7

 

127.7

 

(145.7)

 

(282.3)

             
             
    

4.2504

 

3.8254

 

3.1878

 

5.3130

 

6.3756

Exchange Rate - Brazilian Reais x Euro

   

Scenario

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

(probable)

 

(10% appreciation)

 

(25% appreciation)

 

(25% devaluation)

 

(50% devaluation)

Designated as hedge accounting

            

Non-deliverable forward

 

Devaluation of R$

 

1.1

 

14.6

 

34.9

 

(32.7)

 

(66.5)

Options - foreign currencies

 

Devaluation of R$

 

3.8

 

17.0

 

36.8

 

10.5

 

43.4

Exports(2)

 

Appreciation of R$

 

(4.9)

 

(31.6)

 

(71.7)

 

22.2

 

23.1

Non designated as hedge accounting

          

Non-deliverable forward

 

Devaluation of R$

 

1.2

 

(62.5)

 

(158.2)

 

160.6

 

320.0

Net effect

   

1.2

 

(62,5)

 

(158.2)

 

160.6

 

320.0

Shareholders' equity

   

-

 

-

 

-

 

-

 

-

Statement of income

   

1.2

 

(62.5)

 

(158.2)

 

160.6

 

320.0

Parity - Brazilian Reais x U.S. Dollar

3.8748

3.4873

2.9061

4.8435

5.8122

 

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Transaction/Instrument

Risk

Scenario

10% appreciation

25% appreciation

25% devaluation

50% devaluation

Designated as hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

Non-deliverable forward

Devaluation of R$

4.1

93.2

226.8

(218.5)

(441.2)

Options - currencies

Devaluation of R$

32.7

278.0

680.9

(559.4)

(1,242.3)

Export prepayments

Devaluation of R$

(66.6)

(53.7)

(34.3)

(98.9)

(131.2)

Bonds

Devaluation of R$

(495.4)

(391.3)

(235.1)

(755.6)

(1,015.9)

Exports (object)

Appreciation of R$

526.5

117.7

(530.5)

1,527,.4

2,619.1

Costs (object)

Appreciation of R$

(1.4)

(43.9)

(107.8)

105.1

211.5

 

 

 

 

 

 

 

Not designated as hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

NDF - Purchase

Appreciation of R$

(5.1)

(54.3)

(128.2)

117.9

240.9

Futures purchase - B3

Appreciation of R$

(2.3)

(232.7)

(578.4)

573.9

1,150.0

Net effect

 

(7.5)

(287.0)

(706.6)

691.9

1,390.9

 


Parity - Brazilian Reais x Euro

4.4390

3.9951

3.3293

5.5488

6.6585

 

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Transaction/Instrument

Risk

Scenario

10% appreciation

25% appreciation

25% devaluation

50% devaluation

Designated as hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

Non-deliverable forward

Devaluation of R$

0.3

4.7

11.4

(10.8)

(21.9)

Exports (object)

Appreciation of R$

(0.3)

(4.7)

(11.4)

10.8

21.9

 

 

 

 

 

 

 

Not designated as hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

NDF - Purchase EUR x U.S.$

Devaluation of R$

(0.5)

(44.9)

(111.5)

110.5

221.5

NDF - Purchase

Devaluation of R$

(29.9)

(205.7)

(469.4)

(409.6)

849.0

Net effect

 

(30.4)

(250.6)

(580.9)

520.1

1,070.5

155


Table of Contents

    

5.7881

 

5.2093

 

4.3411

 

7.2351

 

8.6822

Exchange Rate - Brazilian Reais x Pound

   

Scenario

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

(probable)

 

(10% appreciation)

 

(25% appreciation)

 

(25% devaluation)

 

(50% devaluation)

Designated as hedge accounting

            

Non-deliverable forward

 

Devaluation of R$

 

0.5

 

6.9

 

16.4

 

(15.4)

 

(31.3)

Exports(2)

 

Appreciation of R$

 

(0.5)

 

(6.9)

 

(16.4)

 

15.4

 

31.3

Non designated as hedge accounting

          

Non-deliverable forward

 

Devaluation of R$

 

(0.4)

 

(12.0)

 

(29.4)

 

28.5

 

57.5

Net effect

   

(0.4)

 

(12.0)

 

(29.4)

 

28.5

 

57.5

Shareholders' equity

   

-

 

-

 

-

 

-

 

-

Statement of income

   

(0.4)

 

(12.0)

 

(29.4)

 

28.5

 

57.5

             

 

Parity - Brazilian Reais x GBP

Parity - Brazilian Reais x GBP

4.9617

4.4655

3.7213

6.2021

7.4426

   

0.0324

 

0.0292

 

0.0243

 

0.0405

 

0.0486

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Exchange Rate - Brazilian Reais x Yen

   

Scenario

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

(probable)

 

(10% appreciation)

 

(25% appreciation)

 

(25% devaluation)

 

(50% devaluation)

Risk

Scenario

10% appreciation

25% appreciation

25% devaluation

50% devaluation

Designated as hedge accounting

Designated as hedge accounting

 

 

 

 

            

 

 

 

 

 

Designated as hedge accounting

            

Non-deliverable forward

 

Devaluation of R$

 

(34.3)

 

(12.2)

 

20.8

 

(89.4)

 

(144.6)

Exports(2)

 

Appreciation of R$

 

34.3

 

12.2

 

(20.8)

 

89.4

 

144.6

Non designated as hedge accounting

          

Non-deliverable forward

 

Devaluation of R$

 

3.0

 

24.0

 

55.3

 

(49.3)

 

(101.6)

Devaluation of R$

(1.1)

(25.4)

(61.9)

59.7

120.4

Net effect

   

3.0

 

24.0

 

55.3

 

(49.3)

 

(101.6)

 

(1.1)

(25.4)

(61.9)

59.7

120.4

Shareholders' equity

   

-

 

-

 

-

 

-

 

-

Statement of income

   

3.0

 

24.0

 

55.3

 

(49.3)

 

(101.6)

            

 

Parity - Brazilian Reais x JPY

Parity - Brazilian Reais x JPY

0.0353

0.0317

0.0265

0.0441

0.0529

   

142.80

 

128.52

 

107.10

 

178.50

 

214.20

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Corn CBOT - US$/Ton

   

Scenario

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

(probable)

 

(10% devaluation)

 

(25% devaluation)

 

(25% appreciation)

 

(50% appreciation)

Risk

Scenario

10% appreciation

25% appreciation

25% devaluation

50% devaluation

Designated as hedge accounting

Designated as hedge accounting

 

 

 

 

            

 

 

 

 

 

Designated as hedge accounting

            

Non-deliverable forward

 

Appreciation of US$/Ton

 

(11.7)

 

(47.1)

 

(100.0)

 

76.6

 

164.9

Devaluation of R$

(1.1)

21.4

55.0

(57.2)

(113.4)

Non designated as hedge accounting

          

Non-deliverable forward

 

Appreciation of US$/Ton

 

2.9

 

6.0

 

10.5

 

(4.7)

 

(12.4)

Exports (object)

Appreciation of R$

1.1

(21.4)

(55.0)

57.2

113.4

Net effect

   

(8.8)

 

(41.1)

 

(89.5)

 

71.9

 

152.5

 

-

-

-

-

Shareholders' equity

   

(11.7)

 

(47.1)

 

(100.0)

 

76.6

 

164.9

Statement of income

   

2.9

 

6.0

 

10.5

 

(4.7)

 

(12.4)

 

(1)       Represents contract liabilities from prepayment and exports.

(2)       Represents net sales from exports that have hedge instruments indicated in this table.


158

Table of Contents

Commodity Price Risk

In the normal course of our operations, we purchase commodities, mainlyincluding corn, soy meal and live hogs, which make up a significant portion of our raw materials and costs of production.

Corn and soy meal prices are subject to volatility resulting from weather conditions, crop yield, transportation costs, storage costs, agricultural policy of the government, foreign exchange rates and the prices of these commodities on the international market, among other factors. The price of hogs acquired from third parties is subject to market conditions and areis determined by supply and demand in the international market, among other factors.

Our risk policy provides guidelines to hedging against increases in the price of corn and soy meal. In 2015,2018, we used derivative instruments such as corn futures in addition to inventory management for this purpose.

The table below presents the notional amounts of our derivative financial instruments under which we have exposure to corn prices:

Commodities derivatives

Short Term

2020

2021

2022

2023

Thereafter

Fair value

Commodities Futures:

937.6

-

-

-

-

-

9.8

Receive Corn/ Pay U.S.$

 

 

 

 

 

 

 

Notional amount (Ton/U.S.$)

61.0

-

-

-

-

-

0.7

Duration

0.3

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Receive Soy/ Pay U.S.$

 

 

 

 

 

 

 

Notional amount (Ton/U.S.$)

46.0

-

-

-

-

-

(2.7)

Duration

0.3

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Receive Soy Oil/ Pay U.S.$

 

 

 

 

 

 

 

Notional amount (Ton/U.S.$)

10.0

-

-

-

-

-

(4.4)

Duration

0.2

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Receive Soybean Meal/ Pay U.S.$

 

 

 

 

 

 

 

Notional amount (Ton/U.S.$)

51.0

-

-

-

-

-

(2.7)

Duration

0.6

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Receive U.S.$/ Pay Corn

 

 

 

 

 

 

 

Notional amount (Ton/U.S.$)

735.3

-

-

-

-

-

17.9

Duration

0.3

-

-

-

-

-

-

 

 

 

 

 

 

 

 

Corn Futures:

 

 

 

 

 

 

 

Notional amount (Ton/U.S.$)

34.3

-

-

-

-

-

(0.1)

Duration

0.1

-

-

-

-

-

-

 

 

 

 

 

 

 

 

156


The table below presents a sensitivity analysis relating to our commodity price risk that considers five scenarios in the next twelve months for the variations in corn, price:soybean meal and soybeanprices.

Commodities derivatives

Short Term

2017

2018

2019

2020

Thereafter

Carrying amount

Fair value

Corn Futures:

688.3

-

-

-

-

-

(9.5)

(9.5)

Receive Corn/ Pay US$

-

-

-

-

-

-

-

-

Notional amount (US$/Ton)

633.6

-

-

-

-

-

(11.7)

(11.7)

Duration

0.2

-

-

-

-

-

-

-

Receive US$/ Pay Corn

-

-

-

-

-

-

-

-

Notional amount (US$/Ton)

54.8

-

-

-

-

-

2.2

2.2

Duration

0.5

-

-

-

-

-

-

-

         

Price parity CBOT - Corn - U.S.$/Ton

150.60

135.54

112.95

188.25

225.90

 

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Transaction/Instrument

Risk

Scenario

Decrease 10%

Decrease 25%

Increase 25%

Increase 50%

Designated as hedge accounting

 

 

 

 

 

NDF - Corn Sale

Increase in corn price

18,1

60.9

125.3

(89.1)

(196.4)

NDF - Corn purchase

Decrease in corn price

0.8

(2.7)

(8.1)

9.7

18.6

Costs (object)

Decrease in corn price

(18.9)

(58.2)

(117.2)

79.4

177.8

Net effect

 

-

-

-

-

-

Price parity CBOT - Soybean meal - U.S.$/Ton

124.99

112.49

93.74

156.24

187.49

 

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Transaction/Instrument

Risk

Scenario

Decrease 10%

Decrease 25%

Increase 25%

Increase 50%

Designated as hedge accounting

 

 

 

 

 

NDF - Soybean meal purchase

Decrease in soybean meal price

(1.0)

(3.4)

(7.1)

5.2

11.4

Costs (object)

Increase in soybean meal price

1.0

3.4

7.1

(5.2)

(11.4)

Net effect

 

-

-

-

-

-

Price parity CBOT - Soybean - U.S.$/Ton

332.31

299.08

249.23

415.39

498.46

 

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Transaction/Instrument

Risk

Scenario

Decrease 10%

Decrease 25%

Increase 25%

Increase 50%

Designated as hedge accounting

 

 

 

 

 

NDF - Soybean purchase

Decrease in soybean price

(2.7)

(8.6)

(17.5)

12.1

26.9

Costs (object)

Increase in soybean price

2.7

8.6

17.5

(12.1)

(26.9)

Net effect

 

-

-

-

-

-

Equity Risk

On August 16, 2017, we sold 12,134,300 of our common shares at a cost of R$650,373 thousand, with a sale value of R$509,875 thousand and, on the same date, entered into a TRS contract with Banco Bradesco, inamounts equivalent to the common shares sold. The TRS contract had a maturity date of February 5, 2019. The settlement amount for the contract was (A) the market value of our common shares at the date of settlement, less (B) the reference price of the common shares agreed at the inception of the contract, plus an interest rate of 110.5% of CDI. We settled the TRS contract in February 2019, which resulted in a payment to the swap counterparty of approximately R$200 million.

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The table below presents the notional amounts of our derivative financial instruments under which we have exposure in equity prices:

Equity derivatives

Short Term

2020

2021

2022

Thereafter

Fair value

Total Return Swap

 

 

 

 

 

 

Receive BRFS3/ Pay R$

 

 

 

 

 

 

Notional amount (R$)

170.0

 

 

 

 

(99.2)

Average annual interest to be paid in fixed-rate(1)

7.1%

 

 

 

 

 

Duration

0.1

 

 

 

 

 

(1)       The number represents an estimative based in the interest rate futures curve and does not denote what will happen.

During the lifespan of the TRS contracts, the mark to market price will be registered on a monthly basis in our financial statements, under the financial expenses item, and the changes may result in relevant impacts (positive or negative) in our net income. As of December 31, 2018, we had recorded R$201.1 million of financial expenses in connection with this TRS contract. The table provides a sensitivity analysis of our TRS contract demonstrating the potential impact in four different scenarios:

Price parity - Brazilian Reais/BRFS3

21.93

19.74

16.45

27.41

32.90

 

Current

Scenario I

Scenario II

Scenario III

Scenario IV

Transaction/Instrument

Risk

Scenario

Decrease 10%

Decrease 25%

Increase 25%

Increase 50%

Not designated as hedge accounting

 

 

 

 

 

Total Return Swap

Decrease in BRFS3 price

(99.2)

(108.0)

(121.3)

(77.0)

(54.8)

Net effect

 

(99.2)

(108.0)

(121.3)

(77.0)

(54.8)

 

ITEM 12.        DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

A.                 Debt Securities

Not applicable.

B.                 Warrants and Rights

Not applicable.

C.                 Other Securities

Not applicable.

D.                 American Depositary Shares

The following table sets for the fees and charges that a holder of ADRs may have to pay pursuant to our Amended and Restated Deposit Agreement, dated as of November 2, 2011 (the “Deposit Agreement”), with The Bank of New York Mellon, as depositary, in connection with our ADR program:


Fees and Reimbursement Provisions

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Fees and Reimbursement Provisions

Rates and Fees

Service

1.     US$U.S.$0.05 (or less) per ADR

Issuance of ADRs, including issuances resulting from a distribution of shares, rights or other property; and

Cancellation of ADRs for the purpose of withdrawal, including if the deposit agreement terminates.

2.     US$U.S.$0.02 (or less) per ADR

Any cash distribution to ADR holders.

3.     US$U.S.$0.02 (or less) per ADRs per calendar year

Depositary services.

4.     A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADRs

Distribution of securities distributed to holders of deposited securities which are distributed by the Depositary to ADR holders.

5.     Registration or transfer fees

Transfer and registration of shares on BRF’s share registry to or from the name of the Depositary or its agent when you deposit or withdraw shares.

6.     Expenses of the Depositary

Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); and

Converting foreign currency to U.S. dollars.

7.     Taxes and other governmental charges the Depositary or the Custodian may have to pay on any ADR or share underlying an ADR

As necessary.

8.     Any charges incurred by the Depositary or its agents for servicing the deposited securities

As necessary.

 

The fee and reimbursement provisions described in rows three3. and eight8. of the table above may, at the depositary’s discretion, be billed to the holders of ADRs or deducted from one or more cash dividends or other cash distributions. 

For the year ended December 31, 2015,2018, pursuant to a letter agreement between BRF and the depositary, the depositary reimbursed us for fees, expenses and related taxes in the gross amount of US$2.4U.S.$2.5 million or net amount of U.S.$1.8 million.

A form of the Deposit Agreement is filed as Exhibit 2.01 to this Annual Report on Form 20-F. We encourage you to review this document carefully if you are a holder of ADRs.

PART II 

ITEM 13.        DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14.        MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15.        CONTROLS AND PROCEDURES

A.                 Disclosure Controls and Procedures

As of the end of the period covered by this Annual Report on Form 20-F, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”).Act. Our disclosure controls and procedures aredesignedare designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized andsummarizedand reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. For information about the significance of these entities, see “—B. Management’s Annual Report on Internal Control Over Financial Report.” Based on thisour management’s evaluation, and subject to the paragraph below, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2015,2018, our disclosure controls and procedures were effective at the reasonable assurance level.level.


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We acquired BRF Invicta Ltd. (“BRF Invicta”) on April 22, 2015. Management excluded this company’s disclosure controls and procedures from its evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2015. BRF Invicta had total assets and net assets of R$720.5 million and  R$494.8 million, respectively, as of December 31, 2015 and R$773.5 million and R$32.5 million of revenues and net income, respectively, for the year ended December 31, 2015. These amounts were included in our consolidated financial statements for the year ended December 31, 2015.

B.                 Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, management has conducted an assessment, including testing, using the 2013 criteria in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on its assessment, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2015,2018, based on criteria in Internal Control-Integrated Framework, issued by the COSO (2013).

We acquired BRF Invicta on April 22, 2015. Management excluded this company’s internal controls over financial reporting from its assessment of the effectiveness of our internal controls over financial reporting as of December 31, 2015. BRF Invicta had total assets and net assets of R$720.5 million and  R$494.8 million, respectively, as of December 31, 2015 and R$773.5 million and R$32.5 million of revenues and net income, respectively, for the year ended December 31, 2015. These amounts were included in our consolidated financial statements for the year ended December 31, 2015.

Ernst & YoungKPMG Auditores Independentes, S.S., an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Annual Report on Form 20-F, has issued an attestation report on management’s assessment of our internal control over financial reporting.

C.             ��   Attestation Report of the Registered Public Accounting Firm

See “Item 18—Financial Statements.”

D.                 Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the year ended December 31, 20152018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Table of ContentsWe have not made any significant change in internal controls over financial reporting during the year ended December 31, 2018.

ITEM 16.        [RESERVED]

ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined that Fernando Maida Dall’Acqua, a member of the Company’s Statutory Audit and Integrity Committee, is an “audit committee financial expert,” as such term is defined in the SEC rules. Mr. Dall’Acqua is independent, as such term is defined in theNovo Mercado listing rules. The Company has determined that Mr. Dall’Acqua is independent under the standards of the NYSE listing rules and Rule 10A-3 under the Exchange Act that would apply if the Company were not relying on the exemption provided in paragraph (c)paragraph(c)(3) of Rule 10A-3, as described in “Item 16D. Exemptions from the Listing Standards for Audit Committees.” See “Item 6. – A. Directors, Senior Management and Employees—C. Board Practices” for information regarding the experience of Mr. Dall’Acqua.


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ITEM 16B.   CODE OF ETHICS

Under NYSE Rule 303A.10, each U.S. listed company must adopt and disclose a code of business conduct and ethics for directors, officers and employees and promptly disclose any waivers of the code for directors or executive officers. We are subject to a similar requirement under Brazilian law,Decree 8.420/2015, article 42 item 2, and we have adopted a code of conduct and ethics that applies to our directors, officers and employees.

Our code of conduct and ethics, called the “Transparency Guide,” as well as further information concerning our corporate governance practices and applicable Brazilian law, is available on our website www.brf-br.com/ir.at https://www.brf-global.com/wp-content/uploads/2018/08/transparency_guide-eng.pdf. Information on our website is not incorporated by reference in this form.Annual Report on Form 20-F. Copies of our Code“Code of Business ConductEthics and EthicsConduct” are also available without charge upon request to our Investor Relations Office.

If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the code of ethics that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, we intend to disclose the nature of such amendment or waiver on our website. During the year ended December 31, 2015,2018, no such amendment was made or waiver granted.

ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit and Non-Audit Fees

The following table sets forth the fees billed to BRF by its independent auditors responsible for auditing the financial statements included in the Annual Report on Form 20-F, which was Ernst & YoungKPMG Auditores Independentes S.S. for the fiscal years ended December 31, 20152018 and 2014.2017. No payments of consultancy fees were made to the independent auditors during 20152018 and 2014.2017. The hiring of our auditors for consultancy services is subject to Board of Directors’ and Statutory Audit Committeeand Integrity Committee’s approvals and presupposes that the service in question does not risk the independence and objectivity of our auditors in the performance of the outside audit. The Board’s approval also takes into account restrictions on certain services under the Sarbanes-Oxley Act.

Aggregate fees for professional services rendered to us by Ernst & YoungKPMG Auditores Independentes S.S. for the years ended December 31, 20142018 and 20152017 were:

Year Ended

Year Ended
December 31,

December 31,

2015

2014

2018

2017

(in thousands ofreais)

(in thousands of Reais)

Audit fees

8,616.7

5,083.2

10,071.9

8,580.2

Audit-related fees

2,106.5

1,478.7

430.4

16.8

Tax fees

72.8

619.0

1,924.7

748.6

All other fees

-

1,615.0

-

Total fees

10,796.0

8,795.9

12,427.0

9,345.6

 

 


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Audit fees in the above table are the fees billed by our independent auditors in connection with the audit of our annual consolidated financial statements, the review of our quarterly financial information, the audit of our internal control over financial reporting and the statutory audits of our foreign subsidiaries.

Audit-related fees in the above table for 2018 refer to services relatingrelated to debt offerings. In 2018 and 2017, tax fees related to claims for a bond offeringrefund of import taxes paid in 2015, issuance of audit reports in connection with the merger/corporate restructuring of our subsidiaries in Argentina, issuance of book value appraisal reports required in connection with the discontinued operations of our dairy segment, agreed upon procedures, financial due diligence and SOX core training.Europe.

Tax fees in the above table are fees billed relating to tax due diligence.

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There were no other fees in 2015. All other fees in 2014 refer to providing assistance to the Company in its review of such chain process.2018 or 2017.

ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Our statutory audit and integrity committee meets the requirements for the exemption available to foreign private issuers under paragraph (c)(3) of Rule 10A-3 under the Exchange Act. The statutory audit and integrity committee is not the equivalent of, or wholly comparable to, a U.S. audit committee. Among other differences, it is not required to meet the standards of “independence” established in Rule 10A-3 and is not fully empowered to act on all the matters that are required by Rule 10A-3 to be within the scope of an audit committee’s authority. Nonetheless, with the attributes provided to the statutory audit and integrity committee under the Company’s bylaws to the extent permitted by Brazilian law, the Company believes that its corporate governance system, taken as a whole, is fullymaterially equivalent to a system having an audit committee functioning as a committee of its board of directors. Accordingly, the Company does not believe that its reliance on the exemption in paragraph (c)(3) of Rule 10A-3 materially adversely affects the ability of the statutory audit and integrity committee to act independently and to satisfy the other requirements of Rule 10A-3 to the extent permitted by the Brazilian Corporation Law.

The Company also has a permanent Fiscal Council.  However, as of April 3, 2014, the Company no longer relies on the Fiscal Council to avail itself of the exemption contained in paragraph (c)(3) of Rule 10A-3 under the Exchange Act.

ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

None.

ITEM 16G.    CORPORATE GOVERNANCE

We adopt corporate governance practices for a continual process of organizational improvement aimed at greater transparency, liquidity and return for our investors.

We were the first company in the food sector to list on BM&FBOVESPA’sB3’sNovo Mercado (2006), which requires us to comply with stringent listing regulations, including, among them, diffused control, protection mechanisms and equality of rights.rights among shareholders. In addition, the Company has adhered to Level A of the Global Reporting Initiative guidelines for the publication of its annual reports under Brazilian law.

Further information concerning our corporate governance practices and applicable Brazilian law is available on the Company’s website (www.brf-br.com/ir)(https://ri.brf-global.com).  Information on our website is not incorporated by reference in this Annual Report on Form 20-F.


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Under Section 303A.11 of the NYSE Corporate Governance Rules,Listed Company Manual (the “LCM”), we are required to disclose any significant differences in our corporate governance practices from those required to be followed by U.S. companies under the NYSE listing standards. We have summarized these significant differences below.

We are permitted to follow practices in Brazil in lieu of the provisions of the NYSE Listed Company Manual,LCM, except that we are required to have a qualifying audit committee under Section 303A.06 of the RulesLCM or avail ourselves of an appropriate exemption. As a foreign private issuer, we have established a statutory audit and integrity committee in order to avail ourselves of an exemption from the listing standards for audit committees. See “Item 6.—A. Directors, Senior Management and Employees—C. Board Practices—Statutory Audit Committee.” In addition, our chief executive officer is obligated, under Section 303A.12(b), of the LCM, to promptly notify the NYSE in writing after any of our executive officers becomes aware of any material non-compliance with any applicable provisions of the NYSE Listed Company Manual.

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LCM.  We are also required under Section 303A.12(c) of the NYSE Listed Company ManualLCM to submit an annual written affirmation of compliance with applicable provisions of the rules and, under certain circumstances, an interim written affirmation.

Majority of Independent Directors

Under NYSE RuleSection 303A.01 of the LCM, each U.S. listed company must have a majority of independent directors. Under theNovo Mercado rules, at least 2 directors or 20% of our board of directors, whichever is greater, must be independent, and a majority of our directors currently meet that standard. In addition, the independence standards under the NYSE Listed Company ManualLCM are different from the independence standards under theNovo Mercado rules.

Separate Meetings of Non-Management Directors

Under NYSE RuleSection 303A.03 of the LCM, the non-management directors of each U.S. listed company must meet at regularly scheduled executive sessions without management. In addition, if a listed company chooses to hold regular meetings of all non-management directors, such listed company should hold an executive session including only independent directors at least once a year. We do not have a similar requirement under Brazilian practice, but in any event, all members of our board are non-executive directors. However, our independent directors do not meet separately from directors who are not independent.

Nominating/Corporate Governance Committee

Under NYSE RuleSection 303A.04 of the LCM, each U.S. listed company must have a nominating/corporate governance committee composed entirely of independent directors. We are not required to have such a committee under Brazilian law. However, we have a Finance,People, Governance, Organization and SustainabilityCulture Committee composed mostly of independent members according toNovo Mercado rules. This committee is not the equivalent of, or wholly comparable to, a U.S. nominating/corporate governance committee.

Compensation Committee

NYSE RuleSection 303A.05 of the LCM requires each U.S. listed company to have a compensation committee composed entirely of independent directors and containcontains more specific guidance regarding the independence standards for those directors. Listed companies must grant the compensation committee, in its sole discretion, the authority to retain or obtain a compensation adviser and to be directly responsible for the compensation and oversight of any compensation adviser so retained with appropriate funding from the listed company. In addition, the compensation committee must assess the independence of any compensation adviser, subject to certain exceptions.

We are not required to have such a committee or to comply with similar requirements under Brazilian rules. However, we have established the People, Governance, Organization and Culture Committee, which is responsible for advising the board of directors in setting compensation policies and the compensation of executives and employees, providesproviding support to the executive officers in the assessment, selection and development of top leadership, advisesadvising the board of directors in the formulation and practice of BRF culture to monitor and encourageencouraging proper behavior of leaders, and proposesproposing actions to align the expectations of shareholders and executives. This committee is not the equivalent of, or wholly comparable to, a U.S. compensation committee.

In accordance with Brazilian Corporation Law, our shareholders approve the aggregate compensation of the members of our board of directors, statutory auditcommitteeaudit and integrity committee and fiscal council for each fiscal year. Our board of directors then decides the allocation of the compensation among its members and the members of the statutory audit and integrity committee and the fiscal council. In addition, our board of directors is directly responsible for employee and executive compensation and recruitment, incentive compensation and related matters.


Table of Contents

Audit and Integrity Committee

Under NYSE RuleSection 303A.06 of the LCM and the requirements of Rule 10A-3 under the Exchange Act, each U.S. listed company is required to have an audit committee consisting entirely of independent members that comply withcomplywith the requirements of Rule 10A-3. In addition, the audit committee must have a written charter compliant with the requirements of NYSE Rule 303A.06(c),Section 303A.07(b) of the LCM, the listed company must have an internal audit function and the listed company must fulfill all other requirements of the NYSE and Rule 10A-3. The SEC has recognized that, for foreign private issuers, local legislation may delegate some of the functions of the audit committee to other bodies. We have established the statutory audit committeeStatutory Audit and Integrity Committee as approved at the Annual and Extraordinary General Meeting of April 3, 2014. Our statutory audit committeeStatutory Audit and Integrity Committee meets the requirements for the exemption available to foreign private issuers under paragraph (c)(3) of Rule 10A-3 under the Exchange Act. The statutory audit committeeStatutory Audit and Integrity Committee is not the equivalent of, or wholly comparable to, a U.S. audit committee. Among other differences, it is not required to meet the standards of “independence” established in Rule 10A-3 and is not fully empowered to act on all the matters that are required by Rule 10A-3 to be within the scope of an audit committee’s authority.

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Corporate Governance Guidelines

Under NYSE Rule 303A.09, each U.S. listed company must adopt and disclose their corporate governance guidelines. We do not have a similar requirement under Brazilian law. However, we have listed our common shares on theNovo Mercado of the São Paulo Stock Exchange, which requires adherence to the corporate governance standards described under “Item 9. The Offer and Listing—C.  Markets —São Paulo Stock Exchange Corporate Governance Standards.” In addition, we have adopted a written policy on trading of securities and relevant disclosure matters.

Further information concerning our corporate governance practices and applicable Brazilian law is available on our website. Information on our website is not incorporated by reference in this form.Annual Report on Form 20-F.

ITEM 16H.  MINE SAFETY DISCLOSURE

Not applicable.

PART III 

ITEM 17.                    FINANCIAL STATEMENTS

Not applicable.

ITEM 18.        FINANCIAL STATEMENTS

See our consolidated financial statements beginning at page F-1.

ITEM 19.        EXHIBITS

The agreements and other documents filed as exhibits to this Annual Report on Form 20-F are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and for the benefit of the other parties to the agreements and they may not describe the actual state of affairs as of the date they were made or at any other time.


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The total amount of long-term debt of the Company authorized under anyeach instrument does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company undertakes to furnish to the SEC any instruments relating to long-term debt of the Company and its subsidiaries upon request by the SEC.

The exhibit index attached hereto is incorporate herein by reference.following are filed as exhibits hereto:


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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.

BRF S.A.

By:/s/ Pedro de Andrade Faria                       

Name:    Pedro de Andrade Faria

Title:       Global Chief Executive Officer

By:/s/ José Alexandre Carneiro Borges                         

Name:    José Alexandre Carneiro Borges

Title:       Chief Financial and Investor Relations Officer

Date: April 4, 2016

 

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EXHIBIT INDEX

Exhibit Number

Description

1.01

Amended and Restated Bylaws of the Registrant, approved at the ordinary and extraordinary meeting of the shareholders of BRF S.A. on April 3, 2014November 5, 2018 (incorporated by reference to Exhibit 1 to the Report on Form 6-K filed April 4, 2014,on November 6, 2018, SEC File No. 001-15148).

2.01

Form of Deposit Agreement among BRF S.A. (Perdigão S.A.), The Bank of New York Mellon, as depositary, and the owners and beneficial owners of American Depositary Shares, as amended and restated as of November 2, 2011 (incorporated by reference to Exhibit 1 to the Registration Statement on Form F-6, filed on November 2, 2011, SEC File No. 333-177676).

2.02

Form of American Depositary Receipt (incorporated by reference to Exhibit A to Exhibit 1 to the Registration Statement on Form F-6, filed on November 2, 2011, SEC File 333-177676).

4.01

Stock Options Plan for Employees, approved at the ordinary and extraordinary meeting of the shareholders of BRF S.A. on April 3, 2014 (incorporated by reference to Exhibit 1 to the Report on Form 6-K filed on April 4, 2014, SEC File No. 001-15148).

4.02

Stock Options Performance Plan, approved at the ordinary and extraordinary meeting of the shareholders of BRF S.A. on April 3, 2014 (incorporated by reference to Exhibit 1 to the Report on Form 6-K filed on April 4, 2014, SEC File No. 001-15148).

4.03

Stock Options Grant Plan of BRF S.A., approved at the ordinary and extraordinary general shareholdersshareholders’ meeting held on April 8, 2015 (incorporated by reference to Annex I to the Report on Form 6-K, filed on April 10, 2015, SEC File No. 001-15148).

4.04

Amended Restricted Stocks Plan of BRF S.A., approved at the ordinary and extraordinary general shareholdersshareholders’ meeting held on April 8, 2015 (incorporated by reference to Annex II to the Report on Form 6-K, filed April 10, 2015, SEC File No. 001-15148).29, 2019.

8.01

Subsidiaries of the Registrant.

12.01

Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.02

Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.01*

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

13.02*

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

Interactive Data Files (formatted in eXtensible Business Reporting Language (XBRL))

 

*      This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. §78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.



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Table

SIGNATURES

The registrant hereby certifies that it meets all of Contentsthe requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.

BRF S.A.

 

By:/s/    Lorival Nogueira Luz Júnior  

Name: Lorival Nogueira Luz Júnior

Title:     Global  Chief Operating  Officer and  Interim Chief Financial and Investor Relations Officer

Date: April 29, 2019

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INDEX TO FINANCIAL STATEMENTS

Consolidated Financial Statements:

 

 

 

Reports of Independent Registered Public Accounting FirmFirms

R-1

Consolidated Balance Sheets as of December 31, 20152018 and 20142017

F-1

Consolidated Statements of Income for the Years Ended December 31, 2015, 20142018, 2017 and 20132016

F-3

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 20142018, 2017 and 20132016

F-4

Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2015, 20142018, 2017 and 20132016

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 20142018, 2017 and 20132016

F-7

Notes to the Consolidated Financial Statements

F-8


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Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
BRF S.A.:

Opinions on the Consolidated Financial Statements and Shareholders of

BRF S.A.Internal Control Over Financial Reporting

We have audited the accompanying consolidated statement of financial position of BRF S.A.’s and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income (loss), comprehensive income (loss), changes in equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). BRF S.A.’sCommission. 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Emphasis of matter

We draw attention to explanatory notes 1.2 and 1.3 to the consolidated financial statements, which describe the investigations involving the Company in the context of the Brazilian Federal Police operations named “Carne Fraca” and “Trapaça”, as well as their current and potential developments, such as the Responsibility Administrative Process (“PAR - Processo Administrativo de Responsabilização”) issued by the Brazilian Office of the Comptroller General (“CGU - Controladoria Geral da União”) in light of Law 12,846/2013 (“Anti-corruption Law”) and the class action in the United States of America. In the current stage of the investigations and actions, it is not possible to determine the potential financial and non-financial impacts on the Company resulting from them and of their potential developments and, consequently, to record additional potential losses which could have a material adverse effect on the Company´s financial position, results of operations and cash flows in the future.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audit.audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

R-1


We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, andrisk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit providesaudits provide a reasonable basis for our opinion.opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, orthator that the degree of compliance with the policies or procedures may deteriorate.

 

As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls ofBRF Invicta Ltd.,which is included in the 2015 consolidated financial statements of BRF S.A. and constituted R$720.5 million and R$494.8 million of total and net assets, respectively, as of December 31, 2015 and R$773.5 million and R$32.5 million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of BRF S.A. also did not include an evaluation of the internal control over financial reporting of BRF Invicta Ltd..

In our opinion, BRF S.A. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria.


Table of Contents

/s/ KPMG Auditores Independentes

We also have audited, in accordance withserved as the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BRF S.A. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income,changes in shareholders’ equity  and cash flows for each of the three years in the period ended December 31, 2015 of BRF S.A. and our report dated March 31, 2016 expressed an unqualified opinion thereon.

ERNST & YOUNG

Auditores Independentes S.S.

/s/ Antonio Humberto Barros dos Santos

Partner

Company’s auditor since 2017.

São Paulo, – SP, Brazil

March 31, 2016
April 29, 2019

 

R-2



Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

BRF S.A.

We have audited the accompanying consolidated balance sheets of BRF S.A. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows of BRF S.A. (the Company) for each of the three years in the periodyear ended December 31, 2015.2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.audit.

 

We conducted our auditsaudit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provideaudit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BRF S.A. at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years inCompany for the periodyear ended December 31, 2015,2016, in conformity with International Financial Reporting Standards – IFRS as issued by International Accounting Standards Board – IASB.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BRF S.A.'s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 31, 2016 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG

Auditores Independentes S.S.

 

/s/ Antonio Humberto Barros dos Santos

PartnerWe served as the Company’s auditor from 2012 to 2017

 

São Paulo – SP, Brazil

MarchApril 25, 2017, except for Notes 5,12,13, 31, 201633, 34 and 35, as to which the date is April 29, 2019

 

R-3



BRF S.A.

CONSOLIDATED BALANCE SHEETS

STATEMENTS OF FINANCIAL POSITION
As of December 31, 20152018 and 2014

2017
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

ASSETS

Note

 

12.31.15

 

12.31.14

Note

 

12.31.18

 

12.31.17

CURRENT ASSETS

 

 

 

 

 

     

Cash and cash equivalents

7

 

5,362.9

 

6,006.9

6

 

        4,869.6

 

        6,010.8

Marketable securities

8

 

734.7

 

587.5

7

 

           507.0

 

           228.4

Trade accounts receivable, net

9

 

3,876.3

 

3,046.9

8

 

        2,604.9

 

        3,919.0

Notes receivable

9

 

303.7

 

215.1

8

 

           115.1

 

           113.1

Interest on shareholders' equity receivable

30

 

               7.3

 

               6.2

Inventories

10

 

4,032.9

 

2,941.4

9

 

        3,877.3

 

        4,948.2

Biological assets

11

 

1,329.9

 

1,130.6

10

 

        1,513.1

 

        1,510.5

Recoverable taxes

12

 

1,231.8

 

1,009.1

11

 

           560.4

 

           728.9

Other financial assets

23

 

129.4

 

43.1

Income and social contribution tax recoverable

11

 

           506.5

 

           499.3

Derivative financial instruments

22

 

           182.4

 

             90.5

Restricted cash

16

 

1,346.3

 

-

15

 

           277.3

 

           127.8

Other current assets

 

 

799.8

 

549.7

22

 

           683.7

 

           961.1

 

 

19,147.7

 

15,530.3

  

      15,704.6

 

      19,143.8

 

 

 

 

 

     

Assets of discontinued operations and held for sale

13

 

32.4

 

1,958.0

Assets held for sale

12

 

        3,326.3

 

             41.6

Total current assets

 

 

19,180.1

 

17,488.3

  

      19,030.9

 

      19,185.4

 

 

 

 

 

     

NON-CURRENT ASSETS

 

 

 

 

 

     

Marketable securities

8

 

456.0

 

62.1

7

 

           290.6

 

           568.8

Trade accounts receivable, net

9

 

4.1

 

7.7

8

 

               8.0

 

               6.3

Notes receivable

9

 

230.8

 

361.7

8

 

             89.0

 

           116.4

Recoverable taxes

12

 

968.7

 

912.1

11

 

        3,142.5

 

        2,418.2

Deferred income taxes

14

 

1,256.0

 

714.0

Income and social contribution tax recoverable

11

 

               7.2

 

             20.0

Deferred income and social contribution taxes

13

 

        1,519.7

 

        1,369.4

Judicial deposits

15

 

732.1

 

615.7

14

 

           669.1

 

           688.9

Biological assets

11

 

761.0

 

683.2

10

 

        1,061.3

 

           903.7

Restricted cash

16

 

479.8

 

115.2

15

 

           584.3

 

           407.8

Other non-current assets

 

 

206.8

 

317.4

  

           177.4

 

             87.2

Investments in associates and joint ventures

17

 

185.9

 

438.4

16

 

             86.0

 

             68.2

Property, plant and equipment, net

18

 

10,915.8

 

10,059.3

17

 

      10,697.0

 

      12,190.6

Intangible assets

19

 

5,010.9

 

4,328.6

18

 

        5,019.4

 

        7,197.6

Total non-current assets

 

 

21,207.9

 

18,615.4

  

      23,351.5

 

      26,043.1

 

 

 

 

 

     

TOTAL ASSETS

 

 

40,388.0

 

36,103.7

  

      42,382.4

 

      45,228.5

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

 

F-1



BRF S.A.

CONSOLIDATED BALANCE SHEETS

STATEMENTS OF FINANCIAL POSITION
As ofDecember 31, 20152018 and 2014

2017
(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

LIABILITIES

Note

 

12.31.15

 

12.31.14

Note

 

12.31.18

 

12.31.17

CURRENT LIABILITIES

 

 

 

 

 

     

Short-term debt

20

 

2,628.2

 

2,738.9

19

 

        4,547.4

 

        5,031.4

Trade accounts payable

21

 

4,745.0

 

3,522.2

20

 

        5,552.4

 

        6,445.5

Supply chain finance

22

 

1,174.6

 

455.1

21

 

           885.8

 

           715.2

Payroll and related charges

 

 

477.9

 

427.1

  

           555.0

 

           635.1

Tax payable

 

 

353.3

 

299.9

  

           403.0

 

           426.0

Interest on shareholders' equity

28

 

518.5

 

430.9

  

               6.2

 

               1.9

Employee and management profit sharing

 

 

296.3

 

395.8

  

            63.7

 

             95.9

Other financial liabilities

23

 

666.6

 

257.4

Derivative financial instruments

22

 

           235.0

 

           299.5

Provision for tax, civil and labor risks

27

 

231.4

 

243.0

26

 

           495.6

 

           536.1

Pension and other post-employment plans

26

 

67.3

 

56.1

25

 

             94.7

 

             85.2

Other current liabilities

 

 

462.1

 

234.4

  

           518.3

 

           602.6

 

 

11,621.2

 

9,060.8

  

      13,357.1

 

      14,874.4

Liabilities of discontinued operations

13

 

-

 

508.3

     

Liabilities directly associated with the assets held for sale

12

 

        1,131.5

 

                -  

Total current liabilities

 

 

11,621.2

 

9,569.1

  

      14,488.6

 

      14,874.4

 

 

 

 

 

     

NON-CURRENT LIABILITIES

 

 

 

 

 

     

Long-term debt

20

 

12,551.1

 

8,850.4

19

 

      17,618.1

 

      15,413.0

Trade accounts payable

20

 

           179.8

 

           196.8

Tax payable

 

 

26.0

 

25.9

  

           162.2

 

           171.2

Provision for tax, civil and labor risks

27

 

974.5

 

942.8

26

 

           854.7

 

        1,237.1

Deferred income taxes

14

 

188.3

 

90.2

Pension and other post-employment plans

26

 

231.8

 

258.0

Deferred income and social contribution taxes

13

 

             65.8

 

           155.3

Employee benefits plans

25

 

           373.4

 

           343.1

Other non-current liabilities

 

 

959.1

 

677.4

  

        1,108.0

 

        1,124.8

Total non-current liabilities

 

 

14,930.8

 

10,844.7

  

      20,362.0

 

      18,641.3

 

 

 

 

 

     

SHAREHOLDERS' EQUITY

28

 

 

 

 

EQUITY

27

    

Capital

 

 

12,460.5

 

12,460.5

  

      12,460.5

 

      12,460.5

Capital reserves

 

 

7.0

 

109.4

  

           115.3

 

           115.1

Income reserves

 

 

6,076.8

 

3,945.8

  

                -  

 

           101.4

Accumulated losses

  

      (4,279.0)

 

                -  

Treasury shares

 

 

(3,947.9)

 

(304.9)

  

           (56.7)

 

           (71.5)

Other comprehensive loss

 

 

(1,079.5)

 

(620.4)

Accumulated other comprehensive loss

  

      (1,275.5)

 

      (1,405.2)

Equity attributable to interest of controlling shareholders

 

 

13,516.9

 

15,590.4

  

       6,964.6

 

      11,200.3

Equity attributable to non-controlling interest

 

 

319.1

 

99.5

  

          567.2

 

           512.5

Total shareholders' equity

 

 

13,836.0

 

15,689.9

Total equity

  

        7,531.8

 

      11,712.8

 

 

 

 

 

     

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

40,388.0

 

36,103.7

TOTAL LIABILITIES AND EQUITY

  

      42,382.4

 

      45,228.5

 

See accompanying notes to the consolidated financial statements.

F-2



BRF S.A.

CONSOLIDATED STATEMENTS OF INCOME

Years (LOSS)
For the year ended December 31, 2015, 20142018, 2017 and 20132016

(Amounts expressed in millions of Brazilian Reais, except earnings per share and share data)

 

 

Note

 

12.31.15

 

12.31.14

 

12.31.13

CONTINUING OPERATIONS

 

 

 

 

 

 

 

NET SALES

32

 

32,196.6

 

29,006.8

 

27,787.5

Cost of sales

36

 

(22,107.7)

 

(20,497.4)

 

(20,877.6)

GROSS PROFIT

 

 

10,088.9

 

8,509.4

 

6,909.9

OPERATING INCOME (EXPENSES)

 

 

 

 

 

 

 

Selling expenses

36

 

(4,805.9)

 

(4,216.5)

 

(4,141.0)

General and administrative expenses

36

 

(506.1)

 

(402.1)

 

(427.3)

Other operating expenses, net

34

 

(444.7)

 

(438.1)

 

(458.1)

Income (loss) from associates and joint ventures

17

 

(103.8)

 

25.6

 

12.9

OPERATING INCOME

 

 

4,228.4

 

3,478.3

 

1,896.4

Financial expenses

35

 

(5,025.5)

 

(2,571.5)

 

(1,564.8)

Financial income

35

 

3,355.3

 

1,580.8

 

817.3

INCOME BEFORE TAXES

 

 

2,558.2

 

2,487.6

 

1,148.8

Current income tax

14

 

(17.1)

 

(117.4)

 

(13.1)

Deferred income tax

14

 

406.6

 

(235.2)

 

(116.0)

INCOME FROM CONTINUING OPERATIONS

 

 

2,947.7

 

2,135.0

 

1,019.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM DISCONTINUED OPERATIONS

13

 

183.1

 

89.8

 

47.2

NET PROFIT

 

 

3,130.8

 

2,224.8

 

1,066.8

 

 

 

 

 

 

 

 

Attributable to

 

 

 

 

 

 

 

Controlling shareholders

 

 

3,111.2

 

2,225.0

 

1,062.4

Non-controlling interest

 

 

19.6

 

(0.2)

 

4.4

 

 

 

3,130.8

 

2,224.8

 

1,066.8

EARNINGS PER SHARE

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

842,000,012

 

870,412,068

 

870,534,511

Earnings per share - basic

29

 

3.71836

 

2.55612

 

1.22550

Weighted average shares outstanding - diluted

 

 

842,401,821

 

870,823,890

 

871,441,705

Earnings per share - diluted

29

 

3.71659

 

2.55491

 

1.22422

 

 

 

 

 

 

 

 

EARNINGS PER SHARE FROM CONTINUING OPERATIONS

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

842,000,012

 

870,412,068

 

870,534,511

Earnings per share - basic

29

 

3.50091

 

2.45292

 

1.17130

Weighted average shares outstanding - diluted

 

 

842,401,821

 

870,823,890

 

871,441,705

Earning per share - diluted

29

 

3.49924

 

2.45176

 

1.17008

 

 

 

 

 

 

 

 

        
 

Note

  

12.31.18

 

Restated 12.31.17

 

Restated    12.31.16

CONTINUED OPERATIONS

        

NET SALES

31

  

        30,188.4

 

          28,314.1

 

          27,883.9

Cost of sales

35

  

      (25,320.7)

 

         (22,601.2)

 

        (20,934.0)

GROSS PROFIT

   

          4,867.7

 

            5,712.9

 

            6,949.9

OPERATING INCOME (EXPENSES)

        

Selling expenses

35

  

        (4,513.6)

 

           (4,208.7)

 

          (4,521.2)

General and administrative expenses

35

  

           (551.1)

 

              (462.5)

 

             (442.6)

Impairment loss on trade and other receivables

35

  

             (46.3)

 

                (67.5)

 

               (53.5)

Other operating income (expenses), net

33

  

               19.3

 

              (333.4)

 

                   1.0

Income from associates and joint ventures

16

  

               17.7

 

                 22.4

 

                 29.3

INCOME (LOSS) BEFORE FINANCIAL RESULTS AND INCOME TAXES

   

          (206.3)

 

               663.2

 

            1,962.9

Financial expenses

34

  

        (3,891.1)

 

           (3,445.5)

 

          (4,277.4)

Financial income

34

  

          1,649.6

 

            1,563.7

 

            2,336.5

INCOME (LOSS) BEFORE TAXES FROM CONTINUED OPERATIONS

   

       (2,447.8)

 

           (1,218.6)

 

                 22.0

Current income taxes

13

  

               (6.8)

 

                 41.2

 

             (148.8)

Deferred income taxes

13

  

             340.1

 

               210.6

 

                 15.8

LOSS FROM CONTINUED OPERATIONS

   

        (2,114.5)

 

              (966.8)

 

             (111.0)

DISCONTINUED OPERATIONS

        
         

LOSS FROM DISCONTINUED OPERATIONS

12

  

        (2,351.7)

 

              (132.1)

 

             (256.3)

LOSS FOR THE YEAR

   

        (4,466.2)

 

           (1,098.9)

 

             (367.3)

    

 

    

Net Loss From Continued Operations Attributable to

        

Controlling shareholders

   

        (2,115.0)

 

              (984.3)

 

             (107.8)

Non-controlling interest

   

                 0.5

 

                 17.5

 

                 (3.2)

    

        (2,114.5)

 

              (966.8)

 

             (111.0)

         

Net Loss From Discontinued Operations Attributable to

        

Controlling shareholders

   

        (2,333.1)

 

              (141.3)

 

             (264.5)

Non-controlling interest

   

             (18.6)

 

                   9.2

 

                   8.2

    

        (2,351.7)

 

              (132.1)

 

             (256.3)

         

LOSSES PER SHARE FROM CONTINUED OPERATIONS

    

 

 

 

 

Weighted average shares outstanding - basic

   

 811,294,251

 

    803,559,763

 

    801,903,266

Losses per share - basic

28

  

       (2.60691)

 

          (1.22486)

 

         (0.13442)

Weighted average shares outstanding - diluted

   

 811,294,251

 

    803,559,763

 

    801,903,266

Losses per share - diluted

28

  

       (2.60691)

 

          (1.22486)

 

         (0.13442)

     

 

 

 

 

LOSSES PER SHARE FROM DISCONTINUED OPERATIONS

        

Weighted average shares outstanding - basic

   

 811,294,251

 

    803,559,763

 

    801,903,266

Losses per share - basic

28

  

       (2.87577)

 

          (0.17588)

 

         (0.32996)

Weighted average shares outstanding - diluted

   

 811,294,251

 

    803,559,763

 

    801,903,266

Losses per share - diluted

28

  

       (2.87577)

 

          (0.17588)

 

         (0.32996)

 

See accompanying notes to the consolidated financial statements.

F-3



BRF S.A.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

YearsFor the year ended December 31, 2015, 20142018, 2017 and 20132016

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Note

 

12.31.15

 

12.31.14

 

12.31.13

Net profit

 

 

3,130.9

 

2,224.8

 

1,066.8

Other comprehensive income

 

 

 

 

 

 

 

Gain (loss) on foreign currency translation adjustments

 

 

184.9

 

(120.3)

 

(41.3)

Unrealized gains (losses) on available for sale securities

 

 

10.6

 

(11.9)

 

(23.8)

Taxes on unrealized gains (losses) on available for sale securities

 

 

(1.8)

 

-

 

0.1

Unrealized losses on cash flow hedge

4.3

 

(1,020.8)

 

(162.8)

 

(260.0)

Taxes on unrealized losses on cash flow hedge

4.3

 

346.4

 

55.8

 

94.3

Other comprehensive income to be reclassified to the income statement in subsequent periods

 

 

(480.7)

 

(239.2)

 

(230.7)

Actuarial gains on pension and post-employment plans

 

 

48.6

 

8.7

 

34.3

Taxes on realized gains on pension and post-employment plans

 

 

(16.5)

 

(3.0)

 

(11.6)

Other comprehensive income that is not reclassified to income statement

 

 

32.1

 

5.7

 

22.7

Total comprehensive income

 

 

2,682.2

 

1,991.3

 

858.8

Attributable to

 

 

 

 

 

 

 

Controlling shareholders

 

 

2,662.5

 

1,991.5

 

854.4

Non-controlling interest

 

 

19.7

 

(0.2)

 

4.4

 

 

 

2,682.2

 

1,991.3

 

858.8

 

 

 

 

 

 

 

 

See accompanying notes to the consolidated financial statements

  


BRF S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed inmillions of Brazilian Reais, except Dividend and Interest on shareholders’ interest)

 

  

Attributable to interest of controlling shareholders

    
    

Capital reserves

 

Income reserves

 

Other comprehensive income (loss)

        
  

Paid-in capital

 

Capital reserve

 

Treasury shares

 

Legal reserve

 

Reserve for expansion

 

Reserve for capital increases

 

Reserve for retained profit

 

Reserve for income retention

 

Acumulated foreign currency translation adjustments

 

Available for sale marketable securities

 

Losses on cash flow hedge

 

Actuarial gains (losses)

 

Retained earnings (losses)

 

Total equity

 

Non-controlling interest

 

Total shareholders' equity

BALANCES AT DECEMBER 31, 2012

  

12,460.5

 

69.9

 

(51.9)

 

220.2

 

1,216.0

 

700.9

 

13.1

 

124.0

 

9.0

 

18.4

 

(175.9)

 

(52.4)

 

-

 

14,551.7

 

37.5

 

14,589.2

Comprehensive income

                                

Loss on foreign currency translation adjustments

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(41.3)

 

-

 

-

 

-

 

-

 

(41.3)

 

-

 

(41.3)

Unrealized loss on available for sale marketable securities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(23.6)

 

-

 

-

 

-

 

(23.6)

 

-

 

(23.6)

Unrealized loss on cash flow hedge

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(165.8)

 

-

 

-

 

(165.8)

 

-

 

(165.8)

Actuarial gains (losses) on pension and post-employment plans

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

78.1

 

(55.4)

 

22.6

 

-

 

22.6

Net profit for the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

1,062.4

 

1,062.4

 

4.4

 

1,066.8

SUB-TOTAL COMPREHENSIVE INCOME

                 

(41.3)

 

(23.6)

 

(165.8)

 

78.1

 

1,007.0

 

854.4

 

4.4

 

858.8

Appropriation of income (loss)

                                

Dividends - R$0,05171974 per outstanding share at the end of the year

 

-

 

-

 

-

 

-

 

(45.3)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(45.3)

 

-

 

(45.3)

Interest on shareholders' equity - R$0.83154173 per outstanding share at the end of the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(724.0)

 

(724.0)

 

-

 

(724.0)

Legal reserve

 

-

 

-

 

-

 

53.1

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(53.1)

 

-

 

-

 

-

Reserve for capital increase

 

-

 

-

 

-

 

-

 

-

 

121.8

 

-

 

-

 

-

 

-

 

-

 

-

 

(121.8)

 

-

 

-

 

-

Reserve for tax incentives

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

121.2

 

-

 

-

 

-

 

-

 

(121.2)

 

-

 

-

 

-

Reserve for income retention

 

-

 

-

 

-

 

-

 

-

 

-

 

(13.1)

 

-

 

-

 

-

 

-

 

-

 

13.1

 

-

 

-

 

-

Share-based payments

 

-

 

26.8

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

26.8

 

-

 

26.8

Gains on treasury shares sold

 

-

 

17.1

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

17.1

 

-

 

17.1

Non-controlling interest

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(0.8)

 

(0.8)

Treasury shares acquired

 

-

 

-

 

(78.6)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(78.6)

 

-

 

(78.6)

Treasury shares sold

 

-

 

-

 

53.1

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

53.1

 

-

 

53.2

BALANCES AT DECEMBER 31, 2013

 

12,460.5

 

113.8

 

(77.4)

 

273.4

 

1,170.7

 

822.7

 

-

 

245.2

 

(32.3)

 

(5.3)

 

(341.7)

 

25.7

 

-

 

14,655.1

 

41.1

 

14,696.2

Comprehensive income

                                

Loss on foreign currency translation adjustments

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(120.3)

 

-

 

-

 

-

 

-

 

(120.3)

 

-

 

(120.3)

Unrealized loss in available for sale marketable securities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(11.9)

 

-

 

-

 

-

 

(11.9)

 

-

 

(11.9)

Unrealized loss in cash flow hedge

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(107.0)

 

-

 

-

 

(107.0)

 

-

 

(107.0)

Actuarial gains (losses) on pension and post-employment plans

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(27.4)

 

33.2

 

5.8

 

-

 

5.8

Net profit for the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

2,225.0

 

2,225.0

 

(0.2)

 

2,224.8

SUB-TOTAL COMPREHENSIVE INCOME

                 

(120.3)

 

(11.9)

 

(107.0)

 

(27.4)

 

2,258.2

 

1,991.5

 

(0.2)

 

1,991.3

Appropriation of income (loss)

                                

Dividends - R$0.09972393 per outstanding share at the end of the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(86.5)

 

(86.5)

 

-

 

(86.5)

Interest on shareholders' equity - R$0.84863360 per outstanding share at the end of the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(737.8)

 

(737.8)

 

-

 

(737.8)

Legal reserve

 

-

 

-

 

-

 

111.3

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(111.3)

 

-

 

-

 

-

Reserve for expansion

 

-

 

-

 

-

 

-

 

730.7

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(730.7)

 

-

 

-

 

-

Reserve for capital increase

 

-

 

-

 

-

 

-

 

-

 

451.6

 

-

 

-

 

-

 

-

 

-

 

-

 

(451.6)

 

-

 

-

 

-

Reserve for tax incentives

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

140.4

 

-

 

-

 

-

 

-

 

(140.4)

 

-

 

-

 

-

Share-based payments

 

-

 

20.7

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

20.7

 

-

 

20.7

Gains on treasury shares sold

 

-

 

(23.7)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(23.7)

 

-

 

(23.7)

Acquisition of non-controlling interest

 

-

 

(1.3)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1.3)

 

-

 

(1.3)

Non-controlling interest

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

58.5

 

58.5

Treasury shares acquired

 

-

 

-

 

(350.9)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(350.9)

 

-

 

(350.9)

Treasury shares sold

 

-

 

-

 

123.4

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

123.4

 

-

 

123.4

BALANCES AT DECEMBER 31, 2014

 

12,460.5

 

109.4

 

(304.9)

 

384.6

 

1,901.4

 

1,274.2

 

-

 

385.6

 

(152.6)

 

(17.3)

 

(448.7)

 

(1.7)

 

-

 

15,590.4

 

99.5

 

15,689.9

See accompanying notes to the consolidated financial statements.

F-5


BRF S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed inmillions of Brazilian Reais, except Dividend and Interest on shareholders’ interest)

  

Attributable to interest of controlling shareholders

    
    

Capital reserves

 

Income reserves

 

Other comprehensive income (loss)

        
  

Paid-in capital

 

Capital reserve

 

Treasury shares

 

Legal reserve

 

Reserve for expansion

 

Reserve for capital increases

 

Reserve for retained profit

 

Reserve for income retention

 

Acumulated foreign currency translation adjustments

 

Available for sale marketable securities

 

Losses on cash flow hedge

 

Actuarial gains (losses)

 

Retained earnings (losses)

 

Total equity

 

Non-controlling interest

 

Total shareholders' equity

BALANCES AT DECEMBER 31, 2014

 

12,460.5

 

109.4

 

(304.9)

 

384.6

 

1,901.4

 

1,274.2

 

-

 

385.6

 

(152.6)

 

(17.3)

 

(448.7)

 

(1.7)

 

-

 

15,590.4

 

99.5

 

15,689.9

Comprehensive income

                                

Gain on foreign currency translation adjustments

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

184.9

 

-

 

-

 

-

 

-

 

184.9

 

-

 

184.9

Unrealized gain in available for sale marketable securities

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

8.8

 

-

 

-

 

-

 

8.8

 

-

 

8.8

Unrealized loss in cash flow hedge

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(674.4)

 

-

 

-

 

(674.4)

 

-

 

(674.4)

Actuarial gains on pension and post-employment plans

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

21.6

 

10.5

 

32.1

 

-

 

32.1

Net profit for the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

3,111.2

 

3,111.2

 

19.7

 

3,130.9

SUB-TOTAL COMPREHENSIVE INCOME

                 

184.9

 

8.8

 

(674.4)

 

21.6

 

3,121.7

 

2,662.5

 

19.7

 

2,682.2

Appropriation of income (loss)

                                

Dividends - R$0.112896461 per outstanding share at the end of the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(91.4)

 

(91.4)

 

-

 

(91.4)

Interest on shareholders' equity - R$1.086894475 per outstanding share at the end of the year

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(899.3)

 

(899.3)

 

-

 

(899.3)

Legal reserve

 

-

 

-

 

-

 

155.6

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(155.6)

 

-

 

-

 

-

Reserve for expansion

 

-

 

-

 

-

 

-

 

1,219.4

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(1,219.4)

 

-

 

-

 

-

Reserve for capital increase

 

-

 

-

 

-

 

-

 

-

 

624.3

 

-

 

-

 

-

 

-

 

-

 

-

 

(624.3)

 

-

 

-

 

-

Reserve for tax incentives

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

131.7

 

-

 

-

 

-

 

-

 

(131.7)

 

-

 

-

 

-

Share-based payments

 

-

 

67.4

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

67.4

 

-

 

67.4

Gains on shares sold

 

-

 

(40.3)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(40.3)

 

-

 

(40.3)

Gain on the transfer of shares in Invita's business combination (note 6.1.1)

 

-

 

111.2

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

111.2

 

-

 

111.2

Acquisition of non-controlling interest

 

-

 

(240.9)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(240.9)

 

-

 

(240.9)

Non-controlling interest

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

199.9

 

199.9

Treasury shares acquired

 

-

 

-

 

(3,765.8)

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(3,765.8)

 

-

 

(3,765.8)

Treasury shares sold

 

-

 

-

 

122.7

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

122.7

 

-

 

122.7

BALANCES AT DECEMBER 31, 2015

 

12,460.5

 

7.0

 

(3,947.9)

 

540.2

 

3,120.8

 

1,898.6

 

-

 

517.2

 

32.3

 

(8.5)

 

(1,123.2)

 

19.9

 

-

 

13,516.8

 

319.1

 

13,836.0

                                 
                                 

 

Note

 

12.31.18

 

Restated   12.31.17

 

Restated    12.31.16

Loss for the year

  

     (4,466.2)

 

           (1,098.9)

 

             (367.3)

Other comprehensive income (loss)

       

Gain (loss) on foreign currency translation adjustments

  

           84.4

 

                 33.3

 

             (670.9)

Losses on marketable securities at FVTOCI

7

 

        (127.0)

 

                (41.7)

 

               (31.0)

Taxes on unrealized losses on marketable securities at FVTOCI

7

 

            20.8

 

                 11.5

 

                 13.5

Unrealized gains (losses) on cash flow hedge

4

 

          264.3

 

                     -  

 

               820.0

Taxes on unrealized gain (loss) on cash flow hegde

4

 

          (88.3)

 

                   3.7

 

             (272.7)

Net other comprehensive income (loss),  to be reclassified to the statement of income in subsequent periods

  

         154.2

 

                   6.8

 

             (141.1)

Actuarial gains on pension and post-employment plans

25

 

              1.5

 

                   1.5

 

                   7.0

Taxes on realized gains on pension and post-employment plans

25

 

            (1.2)

 

                     -  

 

                 (2.4)

Net other comprehensive income (loss), with no impact into subsequent statement of income

  

             0.3

 

                   1.5

 

                   4.6

Total comprehensive income (loss), net

  

     (4,311.7)

 

           (1,090.6)

 

             (503.8)

Attributable to

       

Controlling shareholders

  

     (4,363.8)

 

           (1,223.7)

 

             (564.1)

Non-controlling interest

  

            52.1

 

               133.1

 

                 60.3

   

     (4,311.7)

 

           (1,090.6)

 

             (503.8)

 

 

See accompanying notes to the consolidated financial statements.

F-4



BRF S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN EQUITY

YearsFor the year ended December 31, 2015, 20142018, 2017 and 20132016

(Amounts expressed in thousandsmillions of Brazilian Reais, unless otherwise stated)

 

 

 

12.31.15

 

12.31.14

 

12.31.13

OPERATING ACTIVITIES

 

 

 

 

 

 

Net profit

 

2,928.1

 

2,135.2

 

1,015.3

Adjustments to reconcile net profit to net cash provided by operating activities

Non-controlling interest

 

19.7

 

(0.2)

 

4.4

Depreciation and amortization

 

771.6

 

704.2

 

641.5

Depreciation and depletion of biological assets

 

545.0

 

526.2

 

475.9

Income (loss) from associates and joint ventures

 

103.8

 

(25.6)

 

(12.9)

Gain on business combination

 

-

 

(25.0)

 

-

Gain in the Minerva investment (note 34)

 

(125.7)

 

(179.3)

 

-

(Gain) loss on disposals of property, plant and equipment

16.4

 

(111.4)

 

(85.2)

Deferred income tax

 

(406.6)

 

235.2

 

116.0

Provision for tax, civil and labor risks

 

98.9

 

306.6

 

314.8

Other provisions

 

345.1

 

70.3

 

(60.2)

Exchange rate variations and interest

 

2,853.9

 

1,173.8

 

1,253.2

Changes in operating assets and liabilities

 

 

 

 

 

 

Investments in trading securities

 

(1,023.7)

 

(295.4)

 

-

Redemptions of trading securities

 

900.0

 

218.9

 

118.1

Interest received

 

13.2

 

-

 

-

Trade accounts receivable

 

(1,112.5)

 

459.2

 

(188.3)

Inventories

 

(1,066.2)

 

369.2

 

(110.6)

Biological assets - current assets

 

(199.3)

 

75.3

 

165.1

Other financial assets and liabilities

 

(687.4)

 

(284.5)

 

(158.4)

Trade accounts payable

 

882.2

 

202.9

 

(64.7)

Supply chain finance

 

719.5

 

-

 

466.8

Payment of tax, civil and labor provisions

 

(194.4)

 

(259.4)

 

(284.8)

Interest paid

 

(693.9)

 

(618.7)

 

(568.4)

Payment of income taxes

 

(6.9)

 

(5.6)

 

(2.3)

Interest on shareholders' equity received

 

15.9

 

54.7

 

22.3

Other operating assets and liabilities

 

(562.5)

 

115.0

 

155.6

Net cash provided by operating activities from continuing operations

4,134.2

 

4,841.6

 

3,213.2

Net cash provided by operating activities from discontinued operations

2.4

 

160.2

 

105.5

Net cash provided by operating activities

 

4,136.6

 

5,001.8

 

3,318.7

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

Investments in held to maturity securities

 

-

 

-

 

(315.0)

Redemptions of held to maturity securities

 

-

 

-

 

429.2

Investments in available for sale securities

 

(58.9)

 

(43.9)

 

(144.9)

Redemptions of available for sale securities

 

130.3

 

43.4

 

156.2

Investments in restricted cash

 

(1,710.9)

 

(16.0)

 

(6.2)

Business combination, net of cash acquired

 

(90.9)

 

(372.8)

 

-

Investments in associates and joint ventures

 

(61.6)

 

(54.8)

 

(73.0)

Acquisition of property, plant and equipment

 

(1,296.7)

 

(1,021.0)

 

(1,180.6)

Acquisition of biological assets - non-current assets

 

(589.4)

 

(517.5)

 

(501.8)

Proceeds from disposals of property, plant and equipment

252.3

 

170.6

 

265.8

Additions to intangible assets

 

(205.4)

 

(50.4)

 

(54.6)

Cash received on the disposal of the discontinued operations, net of transferred cash

1,957.2

 

-

 

-

Net cash used in investing activities from continuing operations

(1,674.0)

 

(1,862.4)

 

(1,424.9)

Net cash used in Investing activities from discontinued operations

(12.3)

 

(51.2)

 

(87.7)

Net cash used in investing activities

 

(1,686.3)

 

(1,913.6)

 

(1,512.6)

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from debt issuance

 

6,290.1

 

5,116.8

 

3,744.3

Repayment of debt

 

(6,031.5)

 

(4,707.8)

 

(3,897.0)

Treasury shares acquired

 

(3,765.8)

 

(350.9)

 

(78.6)

Treasury shares disposal

 

82.4

 

99.8

 

53.2

Payments of dividends and interest on shareholders' equity

(889.1)

 

(726.0)

 

(579.1)

Net cash used in financing activities from continuing operations

(4,313.9)

 

(568.1)

 

(757.2)

Net cash provided by financing activities from discontinued operations

20.0

 

-

 

-

Net cash used in financing activities

 

(4,293.9)

 

(568.1)

 

(757.2)

EXCHANGE RATE VARIATION ON CASH AND CASH EQUIVALENTS

1,199.5

 

359.1

 

148.2

Net increase (decrease) in cash

 

(644.1)

 

2,879.2

 

1,197.0

Cash at the beginning of the year

 

6,006.9

 

3,127.7

 

1,930.7

Cash at the end of the year

 

5,362.9

 

6,006.9

 

3,127.7

       
  

Attributed to of controlling shareholders

  

 

 

Capital reserves

 

Income reserves

 

Other comprehensive income (loss)

        
  

Paid-in capital

 

Capital reserve

 

Treasury shares

 

Legal reserve

 

Reserve for expansion

 

Reserve for capital increases

 

Reserve for tax incentives

 

Acumulated
foreign
currency translation adjustments

 

Marketable securities at FVTOCI

 

Gain (losses) on cash flow hedge

 

Actuarial losses

 

Retained earnings (losses)

 

Total equity

 

Non-controlling interest

 

Total shareholders' equity
(consolidated)

BALANCES AT DECEMBER 31, 2015

 

  12,460.5

 

7.0

 

  (3,947.9)

 

   540.2

 

3,120.8

 

1,898.6

 

  517.2

 

32.3

 

   (8.5)

 

(1,123.2)

 

19.9

 

   -  

 

   13,516.8

 

  319.1

 

  13,835.9

Comprehensive income (loss) (1)

                              

Loss on foreign currency translation adjustments

 

  -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

   (726.1)

 

-  

 

-  

 

  -  

 

   -  

 

(726.1)

 

  55.3

 

   (670.8)

Unrealized loss in marketable secutirities available for sale

 

  -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

   (17.5)

 

-  

 

  -  

 

   -  

 

(17.5)

 

   -  

 

   (17.5)

Unrealized gains in cash flow hedge

 

  -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

   547.3

 

  -  

 

   -  

 

   547.3

 

   -  

 

  547.3

Actuarial gains (losses) on pension and post-employment plans

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  (14.5)

 

19.1

 

  4.6

 

   -  

 

4.6

Loss for the year

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   (372.4)

 

(372.4)

 

5.0

 

   (367.4)

SUB-TOTAL COMPREHENSIVE INCOME (LOSS)

               

   (726.1)

 

   (17.5)

 

   547.3

 

  (14.5)

 

   (353.3)

 

(564.1)

 

  60.3

 

   (503.8)

Appropriation of income (loss)

                              

Dividends - R$0.121749293 per outstanding share at the end of the year

 

  -  

 

   -  

 

  -  

 

-  

 

  (98.2)

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

(98.2)

 

   -  

 

   (98.2)

Interest on shareholders' equity - R$ 0,642347435 per outstanding share at the end of the year

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

   (513.2)

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

(513.2)

 

   -  

 

   (513.2)

Loss absorbed by future capital increase

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

   (475.8)

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

  475.8

 

-  

 

   -  

 

   -  

Reserve for tax incentives

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

 -  

 

  122.6

 

  -  

 

-  

 

-  

 

  -  

 

   (122.6)

 

-  

 

   -  

 

   -  

Share-based payments

 

   -  

 

  75.9

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

  75.9

 

   -  

 

75.9

Losses on shares sold

 

   -  

 

  (1.6)

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

   (1.6)

 

   -  

 

  (1.6)

Valuation of shares

 

   -  

 

  (7.8)

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

   (7.8)

 

   -  

 

  (7.8)

Options canceled

 

   -  

 

   (32.4)

 

  -  

 

-  

 

  -  

 

  -  

 

  -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

(32.4)

 

   -  

 

   (32.4)

Treasury shares acquired

 

   -  

 

   -  

 

  (543.3)

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

(543.3)

 

   -  

 

   (543.3)

Treasury shares sold

 

   -  

 

   -  

 

   8.0

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

  8.0

 

   -  

 

8.0

Treasury shares canceled

 

   -  

 

   -  

 

3,761.4

 

-  

 

  (3,022.6)

 

   (738.8)

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

-  

 

   -  

 

   -  

BALANCES AT DECEMBER 31, 2016

 

  12,460.5

 

  41.0

 

  (721.9)

 

   540.2

 

  -  

 

170.8

 

  639.7

 

   (693.8)

 

   (26.0)

 

  (575.9)

 

   5.4

 

   -  

 

   11,840.0

 

  379.4

 

  12,219.4

Comprehensive income (loss) (1)

                              

Loss on foreign currency translation adjustments

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

  -  

 

  (73.1)

 

-  

 

-  

 

  -  

 

   -  

 

(73.1)

 

  106.5

 

33.4

Unrealized loss in marketable securities at FVTOCI

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

   (30.3)

 

-  

 

  -  

 

   -  

 

(30.3)

 

   -  

 

   (30.3)

Unrealized gains in cash flow hedge

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

  3.7

 

  -  

 

   -  

 

  3.7

 

   -  

 

3.7

Actuarial gains (losses) on pension and post-employment plans

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

 -  

 

   -  

 

  -  

 

-  

 

-  

 

  (15.2)

 

16.8

 

  1.5

 

   -  

 

1.5

Loss for the year

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   (1,125.6)

 

(1,125.6)

 

  26.7

 

   (1,098.9)

SUB-TOTAL COMPREHENSIVE INCOME (LOSS)

               

  (73.1)

 

   (30.3)

 

  3.7

 

  (15.2)

 

   (1,108.8)

 

(1,223.8)

 

  133.2

 

   (1,090.6)

Appropriation of income (loss)

                              

Loss absorbed by legal reserve

 

  -  

 

   -  

 

  -  

 

(438.8)

 

  -  

 

  -  

 

   -  

 

 -  

 

-  

 

-  

 

  -  

 

  438.8

 

-  

 

   -  

 

   -  

Loss absorbed by with future capital increase

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  (30.3)

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

30.3

 

-  

 

   -  

 

   -  

Loss absorbed by with reserve for tax incentives

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

  -  

 

   (639.7)

 

  -  

 

-  

 

-  

 

  -  

 

  639.7

 

-  

 

   -  

 

   -  

Share-based payments

 

   -  

 

  25.6

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

  25.6

 

   -  

 

25.6

Acquisition of non-controlling interest

 

   -  

 

  48.5

 

  -  

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

  48.5

 

   -  

 

48.5

Treasury shares sold

 

   -  

 

   -  

 

650.4

 

-  

 

  -  

 

  -  

 

   -  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

   650.4

 

   -  

 

  650.4

Losses in treasury shares sold

 

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

   (140.5)

 

   -  

 

     -  

 

-  

 

-  

 

  -  

 

   -  

 

(140.5)

 

   -  

 

   (140.5)

BALANCES AT DECEMBER 31, 2017

 

  12,460.5

 

  115.1

 

  (71.5)

 

   101.4

 

  -  

 

  -  

 

   -  

 

   (766.9)

 

   (56.3)

 

  (572.2)

 

(9.8)

 

   -  

 

   11,200.2

 

  512.6

 

  11,712.8

 

(1)All changes in other comprehensive income (loss) are presented net of taxes.

See accompanying notes to the consolidated financial statements.statements.

F-5



BRF S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the year ended December 31, 2018, 2017 and 2016

(Amounts expressed in millions of Brazilian Reais, except Dividend and Interest on shareholders’ interest)

  

BRF S.A.

 

Attributed to of controlling shareholders

 

 

 

Capital reserves

 

Income reserves

 

Other comprehensive income (loss)

        
 

Paid-in capital

 

Capital reserve

 

Treasury shares

 

Legal reserve

 

Acumulated foreign currency translation adjustments

 

Marketable securities at FVTOCI

 

Gain (losses) on cash flow hedge

 

Actuarial losses

 

Retained earnings (losses)

 

Total equity

 

Non-controlling interest

 

Total shareholders' equity
(consolidated)

BALANCES AT DECEMBER 31, 2017

  12,460.5

 

  115.1

 

  (71.5)

 

   101.4

 

   (766.9)

 

   (56.3)

 

  (572.2)

 

(9.8)

 

   -  

 

   11,200.2

 

  512.6

 

  11,712.8

Adoption of IFRS 9

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

-  

 

-  

 

  -  

 

   (17.1)

 

(17.1)

 

2.5

 

   (14.6)

Restatement by hyperinflation

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

-  

 

-  

 

  -  

 

  130.2

 

   130.2

 

   -  

 

  130.2

Comprehensive income (loss) (1)

                       

Gains on foreign currency translation adjustments

  -  

 

   -  

 

  -  

 

-  

 

14.1

 

-  

 

-  

 

  -  

 

   -  

 

  14.1

 

  70.3

 

84.4

Unrealized losses on marketable securities at FVTOCI

  -  

 

   -  

 

  -  

 

-  

 

  -  

 

   (42.2)

 

-  

 

  -  

 

   -  

 

(42.2)

 

   -  

 

   (42.2)

Unrealized gains in cash flow hedge

  -  

 

   -  

 

  -  

 

-  

 

  -  

 

-  

 

   176.0

 

  -  

 

   -  

 

   176.0

 

   -  

 

  176.0

Actuarial gains (losses) on pension and post-employment plans

  -  

 

   -  

 

  -  

 

-  

 

  -  

 

-  

 

-  

 

  (18.2)

 

18.5

 

  0.3

 

   -  

 

0.3

Realized loss in marketable securities at FVTOCI

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

-  

 

-  

 

  -  

 

   (64.0)

 

(64.0)

 

   -  

 

   (64.0)

Loss for the year

   -  

 

   -  

 

  -  

 

-  

 

  -  

 

-  

 

-  

 

  -  

 

   (4,448.0)

 

(4,448.0)

 

   (18.2)

 

   (4,466.2)

SUB-TOTAL COMPREHENSIVE INCOME (LOSS)

        

14.1

 

   (42.2)

 

   176.0

 

  (18.2)

 

   (4,493.5)

 

(4,363.8)

 

  52.1

 

   (4,311.7)

Appropriation of income (loss)

                       

Loss absorbed by with legal reserve

   -  

 

   -  

 

  -  

 

(101.4)

 

  -  

 

-  

 

-  

 

  -  

 

  101.4

 

-  

 

   -  

 

   -  

Share-based payments

   -  

 

0.5

 

   14.8

 

-  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

  15.3

 

   -  

 

15.3

Loss on changes in ownership interest – controlled entities

   -  

 

  (0.2)

 

  -  

 

-  

 

  -  

 

-  

 

-  

 

  -  

 

   -  

 

   (0.2)

 

   -  

 

  (0.2)

BALANCES AT DECEMBER 31, 2018

  12,460.5

 

  115.4

 

  (56.7)

 

  0.0

 

   (752.8)

 

   (98.5)

 

  (396.2)

 

  (28.0)

 

   (4,279.0)

 

   6,964.6

 

  567.2

 

  7,531.8

 

Notes(1)All changes in other comprehensive income (loss) are presented net of taxes.

See accompanying notes to Consolidated Financial Statementsthe consolidated financial statements.

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-6


BRF S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended December 31, 2018, 2017 and 2016

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

   

12.31.18

 

Restated   12.31.17

 

Restated   12.31.16

OPERATING ACTIVITIES

       

Loss from continued operations

  

      (2,114.5)

 

               (966.8)

 

               (111.0)

Adjustments to reconcile loss to net cash

       

Depreciation and amortization

  

           962.7

 

                895.5

 

                 751.7

Depreciation and depletion of biological assets

  

          784.5

 

                736.8

 

                 658.0

Loss (gain) on disposals of property, plant and equipments

  

            51.0

 

                    8.4

 

                 (33.7)

Gain in business combination

  

                   -

 

                        -

 

                 (59.5)

Provision for losses in inventories

  

          352.2

 

                224.7

 

                   70.7

Provision for tax, civil and labor risks

  

          214.4

 

                443.3

 

                 398.8

Tax Amnesty Program ("PERT")

  

                   -

 

               (449.8)

 

                        -

Income from associates and joint ventures

  

          (17.7)

 

                 (22.4)

 

                 (29.3)

Financial results, net

  

        2,241.5

 

             1,881.8

 

              1,300.2

Deferred income tax

  

         (340.1)

 

               (210.6)

 

                 (15.9)

Others

  

           176.7

 

                244.9

 

                 260.4

Cash flow provided by operating activities before working capital

  

       2,310.7

 

             2,785.8

 

              3,190.4

Trade accounts receivable

  

           992.5

 

               (682.1)

 

                 199.9

Inventories

  

         (226.0)

 

                  35.2

 

               (728.1)

Biological assets - current assets

  

           (50.1)

 

                224.9

 

               (301.3)

Trade accounts payable

  

      (1,051.3)

 

             1,085.3

 

                 644.7

Supply chain finance

  

           170.9

 

               (621.3)

 

              1,335.6

Cash generated by operating activities

  

       2,146.7

 

             2,827.8

 

              4,341.2

Investments in securities at FVTPL

  

        (273.7)

 

                    7.6

 

               (210.6)

Redemptions of securities at FVTPL

  

          143.7

 

                  53.3

 

                 218.7

Interest received

  

           177.3

 

                405.5

 

                 186.1

Interest on shareholders' equity received

  

              3.6

 

                  26.8

 

                   41.1

Payment of tax, civil and labor provisions

  

        (355.6)

 

               (509.3)

 

               (401.0)

Interest paid

  

      (1,147.4)

 

            (1,323.3)

 

               (786.1)

Payment of income tax and social contribution

  

            (0.7)

 

                 (37.1)

 

                   (7.1)

Other assets and liabilities

  

         (265.5)

 

               (781.5)

 

            (1,044.9)

Net cash provided by operating activities

  

          428.4

 

                669.8

 

              2,337.4

Net cash used in operating activities from discontinued operations

  

        (132.7)

 

                 (20.4)

 

               (516.3)

Net cash provided by operating activities

  

          295.7

 

                649.4

 

              1,821.1

        

INVESTING ACTIVITIES

       

Investments in securities at amortized cost

  

        (213.7)

 

                 (97.6)

 

               (172.9)

Redemptions of securities at amortized cost

  

          179.7

 

                118.6

 

                        -

Investments in securities at FVTOCI

  

            (5.2)

 

                        -

 

                 (66.7)

Redemptions of securities at FVTOCI

  

          140.9

 

                238.3

 

                   91.5

Redemptions of (investments in) restricted cash

  

        (249.4)

 

                  74.7

 

              1,258.0

Additions to property, plant and equipment

  

        (578.0)

 

               (681.2)

 

            (1,114.0)

Additions to biological assets - non-current assets

  

        (845.3)

 

               (681.7)

 

               (743.4)

Proceeds from disposals of property, plant and equipment

  

          261.5

 

                150.3

 

                 309.6

Additions to intangible assets

  

           (20.5)

 

                 (51.0)

 

                 (62.1)

Business combination, net of cash acquired

  

                  -

 

            (1,119.6)

 

               (793.7)

Sale (Acquisition) of participation in joint ventures and associates

  

              3.3

 

                   (1.2)

 

                   (1.2)

Net cash used in investing activities

  

     (1,326.7)

 

            (2,050.4)

 

            (1,294.9)

Net cash used in investing activities from discontinued operations

  

          (89.2)

 

                 (84.1)

 

            (2,865.0)

Net cash used in investing activities

  

     (1,415.9)

 

            (2,134.5)

 

            (4,159.9)

        

FINANCING ACTIVITIES

       

Proceeds from debt issuance

  

        6,500.1

 

             8,020.2

 

              8,279.8

Repayment of debt

  

      (6,224.0)

 

            (7,332.5)

 

            (2,972.6)

Treasury shares disposed

  

                   -

 

                509.9

 

                     6.4

Treasury shares acquired

  

                   -

 

                        -

 

               (543.3)

Interest on shareholders' equity and dividends paid

  

                  -

 

                        -

 

            (1,176.3)

Commercial leasing

  

         (102.4)

 

               (149.9)

 

                        -

Net cash provided by financing activities

  

          173.7

 

             1,047.7

 

              3,594.0

Net cash provided (used in) by financing activities from discontinued operations

  

          (99.8)

 

                    9.4

 

                 126.6

Net cash provided by financing activities

  

            73.9

 

             1,057.1

 

              3,720.6

EFFECT OF EXCHANGE RATE VARIATION ON CASH AND CASH EQUIVALENTS

 

            71.5

 

                  81.9

 

               (387.9)

Net increase (decrease) in cash and cash equivalents

  

        (974.8)

 

               (346.1)

 

                 994.0

At the beginning of the year

  

       6,010.8

 

             6,356.9

 

              5,362.9

At the end of the year (1)

  

       5,036.0

 

             6,010.8

 

              6,356.9

(1)Includes the amount of R$166.4 related to assets held for sale (note 12).

See accompanying notes to the consolidated financial statements.

F-7


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

1.              COMPANY’S OPERATIONS

 

BRF S.A. (“BRF”) and its consolidated subsidiaries (collectively the “Company”) is a multinational Brazilian Company, which owns a comprehensive and diverse portfolio of products and it is one of Brazil’sthe world’s largest companies in the food industry. BRF is a public company, listed on the New Marketproducers of Brazilian Securities, Commodities & Futures Exchange (“BM&FBOVESPA”), under the ticker BRFS3, and listed on the New York Stock Exchange (“NYSE”), under the ticker BRFS. It´s headquarter is located at 475, Rua Jorge Tzachel in the City of Itajaí, State of Santa Catarina.food. With a focus on raising, producing and slaughtering of poultry and pork for processing, production and sale of fresh meat, processed foods,products, pasta, sauce, mayonnaise, frozen vegetables and soybean by-products, among which the following are highlighted:

 

·            Whole chickens and frozen cuts of chicken, turkey and pork;

·            Ham products, bologna, sausages, frankfurters and other smoked products;

·            Hamburgers, breaded meat products and meatballs;

·            Lasagnas, pizzas, cheese breads, pies and frozen vegetables;

·            Margarine, sauces and mayonnaise;Margarine; and

·            Soy meal and refined soy flour, as well as animal feed.

 

As disclosedBRF is a public company, listed on the New Market of B3 (“Brasil, Bolsa, Balcão”), under the ticker BRFS3, and listed on the New York Stock Exchange (“NYSE”), under the ticker BRFS. Its headquarters are located at 475 Jorge Tzachel street, in the consolidated financial statementsCity of Itajaí, State of Santa Catarina.

Our portfolio strategy is focused on creating new, convenient, practical and healthy products for the year ended December 31, 2014, the Company's Management decided to discontinue its dairy segment after analyzing an offer for acquisition made byour consumers based on their needs, through a subsidiary of Groupe Lactalis, details ofstrong innovation process that provide us with increasing value-added items which are presented in note 13.will differentiate us from our competitors and strengthen our brands.

 

The Company has also changed its management structure in 2015Company's business model is by means of a vertical and thus, its activitiesintegrated production system, which are organized indistributed through an extensive distribution network, reaching the 5 operating segments, being Brazil, Latin America (“LATAM”), Europe, Middle East and Africa (“MEA”) and Asia, as disclosed in note 5.

In the Domestic Market, the Company operates 35 meat processing plants, 3 margarine processing plants, 3 pasta processing plants, 1 dessert processing plant and 3 soybean crushing plant, located closecontinents, to the Company’s raw material suppliers or the main consumer centers.

The Company has 20 distribution centers to deliver its products tomeet supermarkets, retail stores, wholesalers, restaurants and other institutional customers in Brazil and International Markets.

customers. In the Foreign Market, the Company operates 6 meat processing plants, 1 margarine and oil processing plant, 1 sauces and mayonnaise processing plant, 1 frozen vegetables processing plant and 20 distribution centers, besides subsidiariesaddition, our facilities are strategically located near to their raw material suppliers or sales offices in Argentina, Austria, Cayman Island, Chile, China, France, Germany, Hungary, Italy, Japan, Kuwait, Nigeria, Oman, Portugal, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, The Netherlands, United Arab Emirates, United Kingdom, Uruguay and Venezuela. The Company exports to more than 120 countries.its main consumption centers.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

The table below summarizesCompany has as main brands Sadia, Perdigão, Qualy, Chester®, Perdix and Banvit that are highly recognized, especially in Brazil, Turkey and the direct and indirect equity interests ofMiddle East. On February, 2018 the Company as well aslaunched the activitiesKidelli brand in Brazil, which presents a portfolio of each entity:products different from other brands and very diversified, based on poultry and pork, offering our quality products with competitive prices.

 

The Company went through a financial and operational restructuringduring 2018, as detailed in note 1.4, which resulted in a change in its management structure, so that the Company's activities were organized into 4 operational segments: Brazil, International, Halal and Other segments (note 5). Thus, the numbers of 2017 were adjusted and restated.

F-8


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

1.1.        Equity interest

         

Accounting method

 

% equity interest

Entity

 

 

Main activity

 

Country

 

Participation

  

12.31.18

 

12.31.17

              

BRF Energia S.A.

 

 

Commercialization of eletric energy

 

Brazil

 

Direct

 

Consolidated

 

100.00%

 

100.00%

BRF GmbH

  

Holding

 

Austria

 

Direct

 

Consolidated

 

100.00%

 

100.00%

BRF Foods LLC

  

Import and commercialization of products

 

Russia

 

Indirect

 

Consolidated

 

99.90%

 

99.90%

BRF France SARL

(l)

 

Marketing and logistics services

 

France

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Global Company Nigeria Ltd.

  

Marketing and logistics services

 

Nigeria

 

Indirect

 

Consolidated

 

99.00%

 

99.00%

BRF Global Company South Africa Proprietary Ltd.

  

Import and commercialization of products

 

South Africa

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Global Company Nigeria Ltd.

  

Marketing and logistics services

 

Nigeria

 

Indirect

 

Consolidated

 

1.00%

 

1.00%

BRF Global GmbH

(b)

 

Holding and trading

 

Austria

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Foods LLC

  

Import and commercialization of products

 

Russia

 

Indirect

 

Consolidated

 

0.10%

 

0.10%

Qualy 5201 B.V.

(b) (l)

 

Import, commercialization of products and holding

 

The Netherlands

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Xamol Consultores Serviços Ltda.

(l)

 

Import and commercialization of products

 

Portugal

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Japan KK

  

Marketing and logistics services

 

Japan

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Korea LLC

  

Marketing and logistics services

 

Korea

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Shanghai Management Consulting Co. Ltd.

  

Advisory and related services

 

China

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Shanghai Trading Co. Ltd.

  

Commercialization and distribution of products

 

China

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Singapore PTE Ltd.

  

Marketing and logistics services

 

Singapore

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Germany GmbH

(l)

 

Import and commercialization of products

 

Germany

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF GmbH Turkiye Irtibat

(g)

 

Import and commercialization of products

 

Turkey

 

Indirect

 

Consolidated

 

   -  

 

100.00%

BRF Holland B.V.

(l)

 

Import and commercialization of products

 

The Netherlands

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Campo Austral S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

2.66%

 

2.66%

Eclipse Holding Cöoperatief U.A.

(k)

 

Holding

 

The Netherlands

 

Indirect

 

Consolidated

 

0.01%

 

0.01%

BRF B.V.

(l)

 

Industrialization, import and commercialization of products

 

The Netherlands

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

ProudFood Lda

  

Import and commercialization of products

 

Angola

 

Indirect

 

Consolidated

 

10.00%

 

10.00%

BRF Hungary LLC

  

Import and commercialization of products

 

Hungary

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Iberia Alimentos SL

(l)

 

Import and commercialization of products

 

Spain

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Invicta Ltd.

  

Import, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

69.16%

 

69.16%

Invicta Food Products Ltd.

(l)

 

Import and commercialization of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Wrexham Ltd.

(l)

 

Industrialization, import and commercialization of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Invicta Food Group Ltd.

(b) (l)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Invicta Foods Ltd.

(l)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Invicta Foodservice Ltd.

(l)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Universal Meats (UK) Ltd.

(b) (l)

 

Import, Industrialization, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Italia SPA

(l)

 

Import and commercialization of products

 

Italy

 

Indirect

 

Consolidated

 

67.00%

 

67.00%

Compañía Paraguaya Comercial S.A.

  

Import and commercialization of products

 

Paraguay

 

Indirect

 

Consolidated

 

99.00%

 

99.00%

Campo Austral S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

50.48%

 

50.48%

Itega S.A.

(k)

 

Holding

 

Argentina

 

Indirect

 

Consolidated

 

96.00%

 

96.00%

Eclipse Holding Cöoperatief U.A.

(k)

 

Holding

 

The Netherlands

 

Indirect

 

Consolidated

 

99.99%

 

99.99%

Buenos Aires Fortune S.A.

(k)

 

Holding

 

Argentina

 

Indirect

 

Consolidated

 

5.00%

 

5.00%

Campo Austral S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

8.44%

 

8.44%

Eclipse Latam Holdings

(k)

 

Holding

 

Spain

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Buenos Aires Fortune S.A.

(k)

 

Holding

 

Argentina

 

Indirect

 

Consolidated

 

95.00%

 

95.00%

Campo Austral S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

6.53%

 

6.53%

Campo Austral S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

31.89%

 

31.89%

Itega S.A.

(k)

 

Holding

 

Argentina

 

Indirect

 

Consolidated

 

4.00%

 

4.00%

Golden Foods Poultry Limited

(l)

 

Holding

 

Thailand

 

Indirect

 

Consolidated

 

48.52%

 

48.52%

Golden Poultry Siam Limited

(l)

 

Holding

 

Thailand

 

Indirect

 

Consolidated

 

51.84%

 

51.84%

Golden Poultry Siam Limited

(l)

 

Holding

 

Thailand

 

Indirect

 

Consolidated

 

48.16%

 

48.16%

BRF Thailand Limited

(l)

 

Import, Industrialization, commercialization and distribution of products

 

Thailand

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Feed Thailand Limited

(l)

 

Import, Industrialization, commercialization and distribution of products

 

Thailand

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Golden Foods Sales (Europe) Limited

(l)

 

Holding and trading

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Golden Quality Foods Europe BV

(l)

 

Import, commercialization and distribution of products

 

The Netherlands

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Golden Quality Foods Netherlands BV

(l)

 

Import, commercialization and distribution of products

 

The Netherlands

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Golden Foods Siam Europe Limited

(b) (l)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Golden Quality Poultry (UK) Ltd

(l)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Perdigão Europe Lda.

  

Import and export of products

 

Portugal

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Perdigão International Ltd.

  

Import and export of products

 

Cayman Island

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BFF International Ltd.

  

Financial fundraising

 

Cayman Island

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Highline International

(a)

 

Financial fundraising

 

Cayman Island

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Sadia Overseas Ltd.

  

Financial fundraising

 

Cayman Island

 

Indirect

 

Consolidated

 

98.00%

 

98.00%

ProudFood Lda

  

Import and commercialization of products

 

Angola

 

Indirect

 

Consolidated

 

90.00%

 

90.00%

Sadia Chile S.A.

  

Import and commercialization of products

 

Chile

 

Indirect

 

Consolidated

 

40.00%

 

40.00%

Sadia Foods GmbH

(c)

 

Import and commercialization of products

 

Germany

 

Indirect

 

Consolidated

 

   -  

 

100.00%

SATS BRF Food PTE Ltd.

  

Import, industrialization, commercialization and distribution of products

 

Singapore

 

Joint venture

 

Equity pick-up

 

49.00%

 

49.00%

BRF Global Namíbia

  

Import and commercialization of products

 

Namibia

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Wellax Food Logistics C.P.A.S.U. Lda.

 

 

Import and commercialization of products

 

Portugal

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

BRF Luxembourg Sarl

 

 

Holding

 

Luxemburgo

 

Direct

 

Consolidated

 

100.00%

 

100.00%

BRF Austria GmbH

  

Holding

 

Austria

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

One Foods Holdings Ltd

  

Holding

 

United Arab Emirates

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Al-Wafi Food Products Factory LLC

  

Industrialization and commercialization of products

 

United Arab Emirates

 

Indirect

 

Consolidated

 

49.00%

 

49.00%

Badi Ltd.

  

Holding

 

United Arab Emirates

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Al-Wafi Al-Takamol International for Foods Products

  

Import and commercialization of products

 

Saudi Arabia

 

Indirect

 

Consolidated

 

75.00%

 

75.00%

BRF Al Yasra Food K.S.C.C. ("BRF AFC")

  

Import, commercialization and distribution of products

 

Kuwait

 

Indirect

 

Consolidated

 

49.00%

 

49.00%

BRF Foods GmbH

  

Industrialization, import and commercialization of products

 

Austria

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Al Khan Foodstuff LLC ("AKF")

  

Import, commercialization and distribution of products

 

Oman

 

Indirect

 

Consolidated

 

70.00%

 

70.00%

FFM Further Processing Sdn. Bhd.

  

Industrialization, import and commercialization of products

 

Malaysia

 

Indirect

 

Consolidated

 

70.00%

 

70.00%

FFQ GmbH

(i)

 

Industrialization, import and commercialization of products

 

Austria

 

Indirect

 

Consolidated

 

100.00%

 

-  

SHB Comércio e Indústria de Alimentos S.A.

(f) (j)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

Consolidated

 

   -  

 

99.99%

TBQ Foods GmbH

  

Holding

 

Austria

 

Indirect

 

Consolidated

 

60.00%

 

60.00%

Banvit Bandirma Vitaminli

  

Industrialization and commercialization of products

 

Turkey

 

Indirect

 

Consolidated

 

91.71%

 

91.71%

Banvit Enerji ve Elektrik Üretim  Ltd. Sti.

  

Commercialization of eletric energy

 

Turkey

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Banvit Foods SRL

  

Industrialization of grains and animal feed

 

Romania

 

Indirect

 

Consolidated

 

0.01%

 

0.01%

Nutrinvestments BV

  

Holding

 

The Netherlands

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Banvit ME FZE

  

Marketing and logistics services

 

United Arab Emirates

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

Banvit Foods SRL

  

Industrialization of grains and animal feed

 

Romania

 

Indirect

 

Consolidated

 

99.99%

 

99.99%

One Foods Malaysia SDN. BHD.

(d)

 

Marketing and logistics services

 

Malaysia

 

Indireta

 

Consolidated

 

100.00%

 

100.00%

Federal Foods LLC

  

Import, commercialization and distribution of products

 

United Arab Emirates

 

Indirect

 

Consolidated

 

49.00%

 

49.00%

Federal Foods Qatar

  

Import, commercialization and distribution of products

 

Qatar

 

Indirect

 

Consolidated

 

49.00%

 

49.00%

SHB Comércio e Indústria de Alimentos S.A.

(f) (j)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

Consolidated

 

   -  

 

0.01%

BRF Hong Kong LLC

  

Import, commercialization and distribution of products

 

Hong Kong

 

Indirect

 

Consolidated

 

100.00%

 

100.00%

F-9


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

         

% equity interest

Entity

 

 

Main activity

 

Country

 

Participation

 

12.31.15

 

12.31.14

            

Avipal Centro-Oeste S.A.

(a)

 

Industrialization and commercialization of milk

 

Brazil

 

Direct

 

100.00%

 

100.00%

BRF GmbH

  

Holding

 

Austria

 

Direct

 

100.00%

 

100.00%

Al Khan Foodstuff LLC

  

Import, commercialization and distribution of products

 

Oman

 

Joint venture

 

40.00%

 

40.00%

Al-Wafi Food Products Factory LLC

  

Industrialization and commercialization of products

 

United Arab Emirates

 

Indirect

 

49.00%

 

49.00%

Badi Ltd.

  

Holding

 

United Arab Emirates

 

Indirect

 

100.00%

 

100.00%

Al-Wafi Al-Takamol Imp.

  

Import and commercialization of products

 

Saudi Arabia

 

Indirect

 

75.00%

 

75.00%

BRF Al Yasra Food K.S.C.C.

  

Import, commercialization and distribution of products

 

Kuwait

 

Indirect

 

75.00%

 

75.00%

BRF Foods GmbH

  

Industralization, import and commercialization of products

 

Austria

 

Indirect

 

100.00%

 

100.00%

BRF Foods LLC

  

Import and commercialization of products

 

Russia

 

Indirect

 

90.00%

 

90.00%

BRF France SARL

(k)

 

Marketing and logistics services

 

France

 

Indirect

 

100.00%

 

100.00%

BRF Global Company Nigeria Ltd.

  

Marketing and logistics services

 

Nigeria

 

Indirect

 

99.00%

 

99.00%

BRF Global Company South Africa Proprietary Ltd.

  

Import and commercialization of products

 

South Africa

 

Indirect

 

100.00%

 

100.00%

BRF Global Company Nigeria Ltd.

  

Marketing and logistics services

 

Nigeria

 

Indirect

 

1.00%

 

1.00%

BRF Global GmbH

(b)

 

Holding and trading

 

Austria

 

Indirect

 

100.00%

 

100.00%

Qualy 5201 B.V.

(b)

 

Import, commercialization of products and holding

 

The Netherlands

 

Indirect

 

100.00%

 

100.00%

Xamol Consultores Serviços Ltda.

  

Import and commercialization of products

 

Portugal

 

Indirect

 

100.00%

 

100.00%

BRF Japan KK

  

Marketing and logistics services

 

Japan

 

Indirect

 

100.00%

 

100.00%

BRF Korea LLC

  

Marketing and logistics services

 

Korea

 

Indirect

 

100.00%

 

100.00%

BRF Shanghai Management Consulting Co. Ltd.

(v)

 

Advisory and related services

 

China

 

Indirect

 

100.00%

 

-

BRF Shanghai Trading Co. Ltd.

Commercialization and distribution of products

China

Indirect

100.00%

-

BRF Singapore PTE Ltd.

  

Marketing and logistics services

 

Singapore

 

Indirect

 

100.00%

 

100.00%

BRF Germany GmbH

(j)

 

Import and commercialization of products

 

Germany

 

Indirect

 

100.00%

 

100.00%

BRF Holland B.V.

(g)

 

Import and commercialization of products

 

The Netherlands

 

Indirect

 

100.00%

 

100.00%

BRF B.V.

(f)

 

Industrialization, import and commercializations of products

 

The Netherlands

 

Indirect

 

100.00%

 

100.00%

BRF Hungary LLC

(c)

 

Import and commercialization of products

 

Hungary

 

Indirect

 

100.00%

 

100.00%

BRF Iberia Alimentos SL

(l)

 

Import and commercialization of products

 

Spain

 

Indirect

 

100.00%

 

100.00%

BRF Invicta Ltd.

(o)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

62.00%

 

-

Invicta Food Products Ltd.

(d)

 

Import and commercialization of products

 

England

 

Indirect

 

100.00%

 

100.00%

BRF Wrexham Ltd.

(e)

 

Industrialization, import and commercializations of products

 

England

 

Indirect

 

100.00%

 

100.00%

Invicta Food Group Ltd.

(b) (p)

 

Import, commercialization and distribution of products

 

England

 

Indirect

 

100.00%

 

-

Invicta Foods Ltd.

  

Import, commercialization and distribution of products

 

England

 

Indirect

 

100.00%

 

-

Invicta Foodservice Ltd.

  

Import, commercialization and distribution of products

 

England

 

Indirect

 

100.00%

 

-

BRF Italia SPA

(h)

 

Import and commercialization of products

 

Italy

 

Indirect

 

67.00%

 

67.00%

Federal Foods LLC

(w)

 

Import, commercialization and distribution of products

 

United Arab Emirates

 

Indirect

 

49.00%

 

49.00%

Federal Foods Qatar LLC

  

Import, commercialization and distribution of products

 

Qatar

 

Indirect

 

49.00%

 

49.00%

Perdigão Europe Lda.

  

Import and commercialization of products

 

Portugal

 

Indirect

 

100.00%

 

100.00%

Perdigão International Ltd.

  

Import and commercialization of products

 

Cayman Island

 

Indirect

 

100.00%

 

100.00%

BFF International Ltd.

  

Financial fundraising

 

Cayman Island

 

Indirect

 

100.00%

 

100.00%

Highline International

(a)

 

Financial fundraising

 

Cayman Island

 

Indirect

 

100.00%

 

100.00%

Sadia Chile S.A.

  

Import and commercialization of products

 

Chile

 

Indirect

 

40.00%

 

40.00%

Sadia Foods GmbH

(a)

 

Import and commercialization of products

 

Germany

 

Indirect

 

100.00%

 

100.00%

BRF Foods LLC

  

Import and commercialization of products

 

Russia

 

Indirect

 

10.00%

 

10.00%

SATS BRF Food PTE Ltd.

(s)

 

Import, industrialization, commercialization and distribution of products

 

Singapore

 

Joint venture

 

49.00%

 

-

Wellax Food Logistics C.P.A.S.U. Lda.

  

Import and commercialization of products

 

Portugal

 

Indirect

 

100.00%

 

100.00%

Elebat Alimentos S.A.

(i) (u)

 

Industrialization and commercialization of products

 

Brazil

 

Direct

 

-

 

99.00%

Establecimiento Levino Zaccardi y Cia. S.A.

 

 

Industrialization and commercializations of dairy products

 

Argentina

 

Direct

 

98.26%

 

98.26%

K&S Alimentos S.A.

 

 

Industrialization and commercialization of products

 

Brazil

 

Associate

 

49.00%

 

49.00%

Minerva S.A.

(t)

 

Industrialization and commercialization of products

 

Brazil

 

Associate

 

-

 

16.29%

Nutrifont Alimentos S.A.

(u)

 

Industrialization and commercialization of products

 

Brazil

 

Associate

 

-

 

50.00%

PP-BIO Administração de bem próprio S.A.

 

 

Management of assets

 

Brazil

 

Associate

 

33.33%

 

33.33%

PSA Laboratório Veterinário Ltda.

 

 

Veterinary activities

 

Brazil

 

Direct

 

99.99%

 

99.99%

Elebat Alimentos S.A.

(i) (u)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

-

 

1.00%

Sino dos Alpes Alimentos Ltda.

(a)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

99.99%

 

99.99%

PR-SAD Administração de bem próprio S.A.

 

 

Management of assets

 

Brazil

 

Associate

 

33.33%

 

33.33%

Quickfood S.A.

 

 

Industrialization and commercialization of products

 

Argentina

 

Direct

 

90.05%

 

90.05%

Sadia Alimentos S.A.

(n)

 

Holding

 

Argentina

 

Direct

 

43.10%

 

99.98%

Avex S.A.

(q)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

94.60%

 

95.00%

Flora Dánica S.A.

(r)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

-

 

95.00%

GB Dan S.A.

(r)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

-

 

5.00%

Flora San Luis S.A.

(r)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

-

 

95.00%

Flora Dánica S.A.

(r)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

-

 

5.00%

GB Dan S.A.

(r)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

-

 

95.00%

Flora San Luis S.A.

(r)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

-

 

5.00%

Sadia International Ltd.

  

Import and commercialization of products

 

Cayman Island

 

Direct

 

100.00%

 

100.00%

Sadia Chile S.A.

  

Import and commercialization of products

 

Chile

 

Indirect

 

60.00%

 

60.00%

Sadia Uruguay S.A.

(m)

 

Import and commercialization of products

 

Uruguay

 

Indirect

 

5.10%

 

100.00%

Avex S.A.

(q)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

5.40%

 

5.00%

Sadia Alimentos S.A.

(n)

 

Holding

 

Argentina

 

Indirect

 

56.90%

 

0.02%

Sadia Overseas Ltd.

 

 

Financial fundraising

 

Cayman Island

 

Direct

 

100.00%

 

100.00%

Sadia Uruguay S.A.

(m)

 

Import and commercialization of products

 

Uruguay

 

Direct

 

94.90%

 

-

UP Alimentos Ltda.

 

 

Industrialization and commercialization of products

 

Brazil

 

Associate

 

50.00%

 

50.00%

Vip S.A. Emp. Part. Imobiliárias

  

Commercialization of owned real state

 

Brazil

 

Direct

 

100.00%

 

100.00%

Establecimiento Levino Zaccardi y Cia. S.A.

  

Industrialization and commercialization of dairy products

 

Argentina

 

Indirect

 

1.74%

 

1.74%

Sino dos Alpes Alimentos Ltda.

(a)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

0.01%

 

0.01%

         

Accounting method

 

% equity interest

Entity

 

 

Main activity

 

Country

 

Participation

  

12.31.18

 

12.31.17

Establecimiento Levino Zaccardi y Cia. S.A.

(a) (k)

 

Industrialization and commercialization of dairy products

 

Argentina

 

Direct

 

Consolidated

 

99.94%

 

99.94%

BRF Pet S.A.

 

 

Industrialization and commercialization and distribution of feed and nutrients for animals

 

Brazil

 

Direct

 

Consolidated

 

100.00%

 

100.00%

PP-BIO Administração de bem próprio S.A.

(h)

 

Management of assets

 

Brazil

 

Affiliate

 

Equity pick-up

 

66.66%

 

33.33%

PSA Laboratório Veterinário Ltda.

 

 

Veterinary activities

 

Brazil

 

Direct

 

Consolidated

 

99.99%

 

99.99%

Sino dos Alpes Alimentos Ltda.

(a)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

Consolidated

 

99.99%

 

99.99%

PR-SAD Administração de bem próprio S.A.

(e)

 

Management of assets

 

Brazil

 

Affiliate

 

Equity pick-up

 

   -  

 

33.33%

Quickfood S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Direct

 

Consolidated

 

91.21%

 

91.21%

Sadia Alimentos S.A.

(k)

 

Holding

 

Argentina

 

Direct

 

Consolidated

 

43.10%

 

43.10%

Avex S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

33.98%

 

33.98%

Sadia International Ltd.

 

 

Import and commercialization of products

 

Cayman Island

 

Direct

 

Consolidated

 

100.00%

 

100.00%

Sadia Chile S.A.

  

Import and commercialization of products

 

Chile

 

Indirect

 

Consolidated

 

60.00%

 

60.00%

Sadia Uruguay S.A.

  

Import and commercialization of products

 

Uruguay

 

Indirect

 

Consolidated

 

5.10%

 

5.10%

Avex S.A.

(k)

 

Industrialization and commercialization of products

 

Argentina

 

Indirect

 

Consolidated

 

66.02%

 

66.02%

Compañía Paraguaya Comercial S.A.

  

Import and commercialization of products

 

Paraguay

 

Indirect

 

Consolidated

 

1.00%

 

1.00%

Sadia Alimentos S.A.

(k)

 

Holding

 

Argentina

 

Indirect

 

Consolidated

 

56.90%

 

56.90%

Sadia Overseas Ltd.

 

 

Financial fundraising

 

Cayman Island

 

Direct

 

Consolidated

 

2.00%

 

2.00%

Sadia Uruguay S.A.

 

 

Import and commercialization of products

 

Uruguay

 

Direct

 

Consolidated

 

94.90%

 

94.90%

SHB Comércio e Indústria de Alimentos S.A.

(f) (j)

 

Industrialization and commercialization of products

 

Brazil

 

Direct

 

Consolidated

 

   -  

 

-  

UP Alimentos Ltda.

(m)

 

Industrialization and commercialization of products

 

Brazil

 

Affiliate

 

Equity pick-up

 

50.00%

 

50.00%

Vip S.A. Empreendimentos e Participações Imobiliárias

 

 

Commercialization of owned real state

 

Brazil

 

Direct

 

Consolidated

 

100.00%

 

100.00%

Establecimiento Levino Zaccardi y Cia. S.A.

(a) (k)

 

Industrialization and commercialization of dairy products

 

Argentina

 

Indirect

 

Consolidated

 

0.06%

 

0.06%

PSA Laboratório Veterinário Ltda.

  

Veterinary activities

 

Brazil

 

Indirect

 

Consolidated

 

0.01%

 

0.01%

Sino dos Alpes Alimentos Ltda.

(a)

 

Industrialization and commercialization of products

 

Brazil

 

Indirect

 

Consolidated

 

0.01%

 

0.01%

 

(a)        Dormant subsidiaries.

 

(b)        The wholly-owned subsidiary BRF Global GmbH, started to operateoperates as a trading in the European market as from


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

        May 1, 2013. In addition, it owns 101 direct subsidiaries in Madeira Island, Portugal, with an investment of R$4.0 as of December 31, 20152018 of R$4.9 (R$3.03.6 as of December 31, 2014)2017) and a direct subsidiary in Den Bosch, The Netherlands, denominated Qualy 20 with an investment of R$8.2 as of December 31, 20152018 of R$7.4 (R$4.46.5 as of December 31, 2014)2017). The wholly-owned subsidiary Qualy 5201 B.V. owns 213212 subsidiaries in The Netherlands being the amount of this investment of R$22.3 as of December 31, 20152018 of R$20.7 (R$14.620.2 as of December 31, 2014).The2017). The indirect subsidiary Invicta Food Group Ltd. owns 118120 direct subsidiaries in Ashford, England, with an investment of R$161.244.8 as of December 31, 2015.2018 (R$126.6 as of December 31, 2017). The indirect subsidiary Universal Meats (UK) Ltd owns 99 direct subsidiaries in Ashford, England with an investment of R$45.1 as of December 31, 2018 (R$41.6 as of December 31, 2017). The indirect subsidiary Golden Foods Siam Europe Ltd (GFE) owns 32 subsidiaries in Ashford, England with an investment of R$0.04 as of December 31, 2018 (R$0.02 as of December 31, 2017). The purpose of these three subsidiaries is to operate in the European market to increase the Company’s market share, which is regulated by a system of poultry and turkey meat import quotas.

 

(c)         On January 20, 2015, the company’s nameFebruary 28, 2018, Sadia Foods GmbH was changed from Plusfood Hungary Trade and Service LLC to BRF Hungary LLC.extinguished.

 

(d)        On February 06, 2015, the company’sJune 21, 2018, BRF Malaysia Sdn. Bhd changed its name was changed from Plusfood UK Ltd. to BRF UK Ltd.. On July 30, 2015, change the corporate name from BRF UK Ltd. to Invicta Food Products Ltd..One Foods Malaysia SDN. BHD.

 

(e)        On February 06, 2015,July 31, 2018 the company’s name was changed from Plusfood Wrexham to BRF Wrexham Ltd.Company sold its equity stake in PR-SAD.

 

(f)          On February 20, 2015, the company’s name was changed from Plusfood B.V.September 01, 2018, BRF Foods GmbH and One Foods Holdings Ltd., which jointly held 100% of equity stake in SHB Comércio e Indústria de Alimentos S.A., sold their stakes to BRF B.V.S.A.

 

(g)        On February 20, 2015, the company’s nameOctober 02, 2018, BRF GmbH Turkiye Irtibat was changed from Plusfood Holland B.V. to BRF Holland B.V.extinguished.

 

(h)        On February 23, 2015,October 05, 2018, PP-BIO increased its equity interest in 33.33%, totaling 66.66% of the company’s name was changed from Plusfood Italy SRL to BRF Italia SPA.equity.

 

(i)          On February 27, 2015, thereOctober 12, 2018, FFQ GmbH was a change  in equity interest through capital increase.created.

 

(j)          On March 16, 2015,December 31, 2008, SHB Comércio e Indústria de Alimentos SA was merged into the company’s name was changed from Plusfood Germany GmbH toparent company BRF Germany GmbH.S.A. note (1.7).

 

(k)         On March 18, 2015, the company’s name was changed from Perdigão France SARL to BRF France SARL.Subsidiaries in Argentina included in discontinued operations (note 12).

 

(l)          On March 23, 2015, the company’s name was changed from Plusfood Iberia SL to BRF Iberia Alimentos SL.Subsidiaries in Europe and Thailand included in discontinued operations (note 12).

 

(m)       On April 08, 2015, acquisition of equity interest, through capital increaseDecember 2018, UP Alimentos Ltda. ended its activities and disposal of equity interest by the wholly-owned subsidiary Sadia International Ltd.is currently dormant.

 

(n)On April 17, 2015, disposal of equity interest and acquisition of equity interest through a capital increase by the wholly-owned subsidiary Sadia Uruguay S.A..

 

(o)On April 22, 2015, acquisition of 62% equity interest of BRF Invicta Ltd.

F-10


(p)On April 22, 2015, Invicta Food Group Ltd., contributed with its current operation in BRF Invicta Ltd.

(q)On April 30, 2015, change in equity interest through capital increase.

(r)On June 01, 2015, these subsidiaries were merged into Avex S.A.

(s)On June 03, 2015, acquisition of 49% of equity interest of SATS BRF Food PTE Ltd.

(t)On May 25, 2015, June 15, 2015 and June 18, 2015, equity interest decreased due to a third party capital increase in Minerva S.A. without a corresponding increase from BRF S.A. On November 30, 2015 the investment in Minerva was reclassified to marketable securities, as it is no longer qualified as an investment in associate (note 17.2).

(u)On July 01, 2015, disposal of equity interest.

(v)On December 11, 2014, establishment of BRF Shanghai Management Consult Co. Ltd..

(w)The Company owns 49% of the equity interest with rights for 60% of the dividends, permitted by the Federal Law 8/1984, which is effective in the United Arab Emirates and according to the shareholder’s agreement, aswell as 100% of the economic rights resulting in the consolidation of this wholly owned subsidiary.

BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

1.2.        Business combination – Invicta Food Group Limited (“IFGL”)Investigations involving BRF

The Company has been subject to two external investigations, denominated “Carne Fraca Operation” in 2017 and “Trapaça Operation” in 2018, as detailed below. The Company’s Audit and Integrity Committee is conducting independent investigations, along with the Independent Investigation Committee, composed of external members and external legal advisors in Brazil and abroad with respect to the allegations involving BRF employees and former employees in the scope of the aforementioned operations and other ongoing investigations.

For the year ended December 31, 2018, the main impacts observed as result of the referred operations were recorded in: (i) cost of goods sold in the amount of R$403.3 (R$285.0 in 12.31.17) mostly related to inventory losses, adjustments to net realizable value and idleness, (ii) other operating expenses in the amount of R$78.9 (R$78.3 in 12.31.17) mostly related to expenditures with lawyers, legal advisors and consultants, and (iii) sales deductions in the amount of R$10.6 related to legal expenses with import quotas in Europe, which totaled R$492.8 (R$363.4 in 12.31.17).

The independent investigations create, in addition to the impacts already recorded, uncertainties about the outcome of these operations which may result in penalties, fines and normative sanctions, right restrictions and other forms of liabilities, for which the Company is not able to make a reliable estimate of the potential losses.

The outcome may result in payments of substantial amounts, which may cause a material adverse effect on the Company´s financial position, results and cash flows in the future.

1.2.1.Carne Fraca Operation

 

On March 17, 2017, BRF became aware of a decision issued by a judge of the 14th Federal Court of Curitiba - Paraná, authorizing the search and seizure of information and documents, and the detention of certain individuals in the context of theCarne Fraca Operation. Two BRF employees were detained (subsequently released) and three were identified for questioning.

In April 22, 2015,2017, the Brazilian Federal Police and the Brazilian federal prosecutors filed charges against BRF employees, which were accepted by the judge responsible for the process, and its main allegations in this phase involve misconduct related to improper offers and/or promises to government inspectors.

On June 04, 2018, the Company concludedwas informed about the transactionestablishment of a responsibility administrative process (“PAR”) by the Office of the Comptroller General (“CGU”), under the Law Nº 12,846/2013 (“Anti-corruption Law”), which aims to verify eventual administrative responsibilities related to the facts object of the criminal lawsuit Nº 5016879-04.2017.4.04.7000, (“Criminal Lawsuit”) in progress under the 14th Federal Court of the subsection of Curitiba/PR, as a consequence of theCarne FracaOperation.

F-11


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF has informed certain regulators and governmental entities, including the U.S. Securities and Exchange Commission and the U.S. Department of Justice about theCarne Fraca Operation and is cooperating with IFGL throughthe authorities.

On September 28, 2018, the sentence of the Criminal Lawsuit in first instance was published, discharging one of the BRF employees and convicting the other one for six months of detention with the possibility of substitution fornew company, whose main objectiveright-restricting penalty. The Brazilian federal prosecutors presented appeal to the first instance decision. The appeal is being analyzed by the distributionFederal Regional Court of processed foodthe 4th region.

1.2.2.Trapaça Operation

On March 5, 2018, the Company learned of a decision issued by a judge of the 1st Federal Court of Ponta Grossa/PR, authorizing the search and seizure of information and documents due to allegations involving misconduct relating to quality violations, improper use of feed components and falsification of tests at certain BRF manufacturing plants and accredited labs. Such operation was denominated asTrapaça Operation. Still on March 5, 2018, BRF received notice from the Ministry of Agriculture, Livestock and Food Supply (“MAPA”) immediately suspending exports from its Rio Verde/GO, Carambeí/PR and Mineiros/GO plants to 12 countries that require specific sanitary requirements for the control of the bacteria group Salmonella spp and Salmonella pullorum.

On May 14, 2018, the Company received the formal notice that 12 plants located in Brazil were removed from the list that permits imports of animal origin products by the European Union’s countries. The measure came into force as of May 16, 2018 and affects only the plants located in Brazil and which have export licenses to the European Union, not affecting the supply to other markets or other BRF plants located outside Brazil that export to the European market.

On October 15, 2018, the Federal Police Department submitted to the 1st Federal Criminal Court of the Judicial Branch of Ponta Grossa – PR the final report of its investigation in connection to theTrapaça Operation. The police inquiry indicted 43 people, including former key executives of the Company.

1.2.3.Governance enhancement

The Company, in the United Kingdom, Irelandlight of the facts related to the investigations of the authorities collaborates to the complete clarification of the facts. In this sense, the Company has decided to move away, independently of the results of the investigations, all employees mentioned in the Federal Police’s final report of theTrapaça Operation until all facts are fully clarified.

BRF interacts in a wide and Scandinavia,transparent way with the authorities, with the objective of collaborating with the full elucidation of the facts. Simultaneously, it will proceed with the internal investigations led by the Independent Investigation Committee and by the Auditand Integrity Committee to clarify all the facts identified or that may be identified in which BRF holds 62%the future.

F-12


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The Company believes that this cooperation process with the authorities strengthens and consolidates its governance through ongoing actions to ensure the highest levels of share capital (note 6.1.1).safety standards, integrity and quality, as well as greater autonomy to its Compliance Department.

Among the actions implemented, are: (i) strengthening in the risk management, specially compliance, (ii) strengthening of the  Compliance, Internal Audit and Internal Controls departments, (iii) issuance of new policies and procedures specifically related to the anticorruption law, (iv) reputational verification of business partners, (v) revision of the process of internal investigation, (vi) expansion of the independent reporting channel, (vii) review of transactional controls, and (viii) new consequence policy for misconduct.

 

1.3.        Acquisition of equity interest on SATS BRF Food Pte Ltd (“SATS BRF”) U.S. Class Action

 

On April 16, 2015, BRF signed with Singapore Food Industries Pte. Ltd. (“SFI”)March 12, 2018, a shareholder class action lawsuit was filed against the documents for establishingCompany and certain current and former administrators in the U.S. Federal District Court in the city of New York alleging that the Company and those administrators engaged in securities fraud or other unlawful business practices mentioned, among others, in theCarne Fraca andTrapaça Operations. On July 2, 2018, the referred Court appointed the City of Birmingham Retirement and Relief System as lead plaintiff in the action. On August 31, 2018, the lead plaintiff filed an amended class action complaint, and a joint venture in Singapore (namely SATS BRF Food Pte. Ltd.), of which BRF acquired 49%second amendment complaint was presented on December 5, 2018.  An unfavorable outcome of the share capital (“transaction”). On June 02, 2015 BRF concludedclass action may have a material impact for the transaction (note 6.2.1).Company. However, since this lawsuit is in its early stages, it is not possible to make a reasonable estimate of eventual losses.

 

1.4.        ConclusionFinancial and operational restructuring plan

On June 29, 2018, the Board of Directors approved the financial and operational restructuring plan of the Company ("the Plan"), with the objective to improve its share capital structure, by reducing its debt leverage, which also enhances its controlling and quality processes.

The Company’s decision is it to focus its transactions in the Brazilian market, in Asia and in the Muslim market. Then, the segmentation of the businesses was changed as disclosed in note 5.

As a result of the Plan, the following actions will be taken: (i) sale of operational units in Argentina (denominated Argentina Operations), and Europe and Thailand (denominated Europe and Thailand Operations); (ii) sale of real estate and non-operating assets; (iii) sale of non-controlling interests in companies and (iv) operational restructuring plan with the purpose to adjust its productive structure to the market demand and includes adjustments in its the production lines, collective paid leave and a reduction of around 5% of the factory unit employees in Brazil.

F-13


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

During the fourth quarter of 2018, the Company evolved in the negotiations for the sale of the dairy segment to Groupe Lactalis ("Parmalat")assets abovementioned in items (i) and (ii) and met the requirements for its classifications as assets held for sale and discontinued operations (note 12). 

 

On July 20, 2018, following the simplification of the organizational structure, the Company’s Board of Directors approved the hiring and the appointment of new executives for the following positions (i) Sidney Manzaro, assumed his position on August 13, 2018, as Vice-President of Brazilian Market, in substitution of Alexandre Almeida (ii) Vinícius Guimarães Barbosa,  assumed his position on August 01, 2015,2018, as Vice-President of Operations and (iii) Bruno Ferla, who previously served as a consultant to the Company concludedand heading its Legal Department, assumed his position on August 01, 2018, as Vice-President of Institutional Affairs, Legal, and Compliance.

For the saleyear ended December 31, 2018, the impacts recorded due to the operational restructuring plan previously mentioned, such includes termination of its dairy segment to Lactalis, throughcontracts with suppliers and outgrowers, employee terminations, inventory and biological assets losses, as well as increase in idleness, in total amount of R$213.5 and were recorded in (i) cost of goods sold in the disposalamount of 100%R$195.7 an (ii) other operating expenses in the amount of the shares of Elebat Alimentos S.A., a BRF wholly-owned subsidiary, for which the assets and liabilities of the dairy segment were transferred (note 13).R$17.8.

 

1.5.        Trademarks acquisition in ArgentinaStrike of truck drivers

 

On October 16, 2015, BRF, throughThere was a national strike lasting approximately 10 days which resulted in blocked roads and interruption of the transport of goods and supplies, impacting several of the company´s facilities plants. As a result of the strike, the Company incurred in inventory and biological assets losses and idleness during the days of the strike, as well incurred in additional logistics costs to restart its subsidiaries Avex S.A.activities. For the year ended December 31, 2018, such losses amounted to R$85.0 and Quickfood S.A., concluded with Molinos Río de la Plata S.A. and onewere recorded in (i) cost of its subsidiaries, the acquisition of certain sausage, hamburger and margarine trademarks (Vieníssima, GoodMark, Manty, Delícia, Hamond, Tres Cruces e Wilson)goods sold in the amount of US$43.5 (equivalent to R$167.1).72.7 and (ii) selling expenses in the amount of R$12.4.

 

1.6.        Execution of a binding offer with Pampa Agribusiness Fund L.P. and Pampa Agrobusiness Follow-on Fund L.P. (collectively “Pampa”Credit rights investment fund (“FIDC”).

 

On December 01, 2015,12, 2018, the Company concluded the structuring of the Credit rights investment fund – BRF announcedCustomers (“FIDC BRF”), whose exclusive objective is to acquire receivables originated from commercial operations between the Company and its customers in Brazil.

The structuring was made in association with the coordinators Banco Bradesco BBI S.A., BB – Banco de Investimento S.A. and Banco Votorantim S.A. in the format of a close-end fund and has a duration of 5 years.

From the 875,000 quotas that were subscribed and paid-in, 787,500 are senior quotas, 21,875 mezzanine A quotas, 51,012 mezzanine B quotas and 14,613 junior quotas, in the amounts of R$787.5, R$21.9, R$51.0 and R$14.6 respectively. The Company holds the 14,613 junior quotas, which are recorded as marketable securities (note 7).

The transfer of the receivables to the market that it has signed a binding offer with Pampa forFIDC BRF fulfil the acquisitionrequirements forderecognition of financial assets and, therefore, the Accounts Receivable transferred are written-off of the total shares issued by Eclipse Holding Cooperatief UA (“Business”), a Dutch entity that controls Campo Austral.Company’s financial statements. The effects of the discount rate charged on the transfer are recorded in the account of Financial Expenses (note 34).

F-14


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Upon completionThis operation occurs in continuity to the operational and financial restructuring plan and allows an additional offer of the conditions precedent set forth in the offer, the parties will execute the documents providingcredit for the acquisition of the Business, based on a total value of US$85.0.domestic customers.

 

1.7.Incorporation of the wholly-owned subsidiary SHB Comércio e Indústria de Alimentos S.A. ("SHB")

On December 31, 2018, the wholly-owned subsidiary SHB was merged into BRF S.A. with the objective of unifying and centralizing the Company's activities related to the Halal products business, to promote greater simplification, efficiency and transparency of the organizational structure.

1.8.        Seasonality

 

The Company does not operate with any significant seasonality throughoutIn Brazil operating segment, as well as in discontinued operations related to the year. Ingeneral, during the fourth quarteractivities of Argentina, on November and December of each year, the demand in BrazilCompany is slightly stronger than in the other quarters, mainlyimpacted by seasonality due to the year-end holiday season such as Christmas and New Years Eve Celebrations.


BRF S.A.Year’s Celebrations, being the best-selling products in this period: turkey, Chester®, ham and pork loins.

 

NotesIn Halal operating segment (former name of One Foods), seasonality is due to Consolidated Financial Statements

Years ended December 31, 2015, 2014Ramadan, which is the holy month of the Muslim Calendar. The start of Ramadan depends on the beginning of the moon cycle and 2013therefore can vary each year.

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

2.              MANAGEMENT’S STATEMENT AND BASIS OF PREPARATION AND PRESENTATION OF THE CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s consolidated financial statements are prepared in accordance with the International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).

 

The Company’s consolidated financial statements are expressed in millions of Brazilian Reais (“R$”), as well as the amounts of other currencies disclosed in the financial statements.

Amounts disclosed in Brazilian Reais are informed when applicable.

The preparation of the Company’s financial statements requires Management to make judgments, use estimates and adopt assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, includingas well as the disclosures of contingent liabilities.liabilities, as of the reporting date. However, the uncertainty inherent to these judgments, assumptions and estimates could result in material adjustments to the carrying amountsamount of the affected asset or liabilityassets and liabilities in future periods.

The Company reviews its judgments, estimates and assumptions on a quarterly basis.

 

The consolidated financial statements were prepared on the historical cost basis except for the following items which are measured at fair value:

F-15


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

·i.       derivative and non-derivative financial instruments;

 

·ii.       available for sale financial assets;share-based payments;

 

·iii.       highly liquid investments classified as cash and cash equivalents;

·share-based payments and employee benefits,biological assets; and

 

·iv.       biological assets.certain assets held for sale are recorded at fair value less cost to sell.

 

As a result of theThe Company’s decision to discontinue the operating segment of dairy products the consolidated statements of income and cash flows for the years ended December 31, 2015 and 2014 are disclosed in accordance with the requirements of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations.

In the presentation ofManagement notes that the consolidated financial statements as of December 31, 2015,were prepared in a going concern basis.

In addition, all the Company reclassified thesupply chain finance,relevant information was disclosed in the amount of R$455.1 which was originally presented as “trade accounts payable” as of December 31, 2014to a specificcaption in the current liabilities supply chain financeexplanatory notes, in order to be comparable withclarify and complement the presentation as of December 31, 2015, as disclosed in note 22. There was no changeaccounting basis used in the totalpreparation of current liabilities in the amount of R$9,569.1 as of December 31, 2014.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014financial statements and 2013used by the Management.

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1.         Consolidation: includes the consolidatedBRF’s individual financial statements compriseand the financial statements offrom subsidiaries where BRF has direct or indirect control. All transactions and balances between BRF and its subsidiaries have been eliminated upon consolidation, as well as the unrealized profits or losses arising from transactions between the Company and its subsidiaries in which the Company controls. Intercompany accounts and transactions have been eliminated in consolidation.subsidiaries. Non-controlling interest is presented separately.

 

3.2.        Functional currency and foreign currency transactions: the financial statements of each subsidiary included in consolidation are prepared using the currency of the main economic environment where it operates.

 

The financial statements of foreign subsidiaries are translated into Brazilian Reais in accordance with their functional currency using the following criteria:

 

Foreign subsidiaries with functional currency – Argentine Peso, Thailand Bath, Chilean Peso, United Arab Emirates Dirham, Euro, ArgentineForint Hungary, Hong Kong Dollar, Kuwait Dinar, Oman Riyal, Pound Sterling, South African Rand, Renminbi Yuan China, Ringgit Malaysia, Riyal Saudi Arabia, Riyal Qatar, Romanian Leu, Ruble Russia, Singapore Dollar, Turkish Lira, Uruguayan Peso, Chinese Yuan, Kuwaiti DinarU.S. Dollar, Vietnamese Dong, Won South Korea and Pound SterlingYen.

 

·    Assets and liabilities are translated at the exchange rate in effect at year-end;

 

·    Statement of income accounts are translated based on the monthly average rate; and

 

·    The cumulative effects of gains or losses upon translation are recognized as Accumulated Foreign Currency Translation Adjustments componentAdjustmentscomponent of other comprehensive income.

F-16


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Foreign subsidiaries with functional currency – Brazilian Reais

 

·    Non-monetary assets and liabilities are translated at the historical rate of the transaction;

 

·    Monetary assets and liabilities are translated at the exchange rate in effect at year-end;

 

·    Statement of income accounts are translated based on monthly average rate; and

 

·    The cumulative effects of gains or losses upon translation of monetary assets and liabilities are recognized in the statement of income.income; and 


BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014·The cumulative effects of gains or losses upon translation of non-monetary assets and 2013

(Amounts expressedliabilities are recognized in millions of Brazilian Reais, unless otherwise stated)the other comprehensive income.

 

Goodwill arising from a foreign business combination with entities in foreign market is denominatedexpressed in the functional currency of the acquiredthat entity and translated at year-endconverted by the closing exchange rate for the presentationreporting currency of the Company.of the acquirer, with the effects recognized in other comprehensive income.

 

The accounting policies have been consistently applied by all subsidiaries included in consolidation.consolidation, with the exception of the adoption of new accounting standards as discloses in notes 3.7 and 3.27.

 

3.3.        Investments: investments in associates and joint ventures: the Company’s investments in its associates are initially recognized at cost and joint ventures are accountedadjusted thereafter for using the equity method. An associate is an entity over whichIn the investments in associates, the Company hasmust have significant influence, which is the power to participate in the financial and operating policy decisions of the investee, but it is notwithout having its control or joint control overof those policies. Joint ventureIn investments in joint ventures there is a type of joint arrangement, whereby the parties that have joint control of the agreement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control ofthrough an arrangement, which exists only when decisions about the relevant activities requiresrequire the unanimous consent of the parties sharing control.

 

3.4.        Business combinations: are accounted for using the purchase method. The cost of an acquisition is the sum of the consideration paid, evaluated based on the fair value at acquisition date, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company recognizes any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquirer’s net assets. Costs directly attributable to the acquisition are accounted for as an expense when incurred.

 

When the investment has simply been moved from one part of the group to another, the acquirer in a common control transaction use book value (carry-overbasis) accounting.

F-17


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

When acquiring a business, management evaluate the assets acquired and the liabilities assumed in order to classify and allocate them pursuant toassessing the terms of the agreement, economic circumstances and other conditions at the acquisition date.

 

Goodwill is initially measured as the excess of the consideration paid over the fair value of the net assets acquired.

 

After initial recognition, goodwill is measured at cost, net of any accumulated impairment losses. For purposes of impairment testing, the goodwill acquiredrecognized in a business combination, as from the acquisition date, is allocated to each of the Company’s cash generating units expected to benefit from the business combination, regardless of whether other assets and liabilities of the acquiree are assigned to those units.

 

3.5.        Segment information: an operating segment is a component of the Company that carries out business activities from which it can obtain revenues and incur expenses. The operating segments reflect how the Company’s management reviews financial information to make decisions. The Company’s managementhasmanagement has identified reportable segments, which meet the quantitative and qualitative disclosure requirements. The segments identified for disclosure represent mainly sales channels.channels, being, Brazil, Halal (predominantly Islamic markets, including Turkey, North of Africa, Gulf Cooperation Council (GCC) and Malaysia) and International (Japan, Korea, China, Hong Kong, Singapore, Eurasia, Africa and Americas). The information according to the characteristics of the products is also presented, based on their nature, as follows: poultry, pork beef,and others, processed foods and other sales.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

3.6.        Cash and cash equivalentsequivalents:: include cash on hand, bank deposits and highly liquid investments in fixed-income funds and/or securities with maturities, upon acquisition, of 90 days or less, which are readily convertible into known amounts of cash and subject to insignificant risk of change in value. Highly liquidThe investments classified as cash equivalents,in this group, due to their nature, are measured at fair value through the profit and loss, and will be used in a short period time.loss.

 

3.7.        Financial instrumentsinstruments:: financial assetsThe Company adopted IFRS 9 Financial Instruments in replacement of IAS 39 Financial Instruments: Recognition and liabilities are recorded when the Company becomes partymeasurement from January 01, 2018. The changes in accounting policies and its impacts to the contractual provisions of the instruments and classified into the following categories:financial statements are described below:

 

3.7.1.Classification of Financial Assets

Marketable securitiesIFRS: are 9 contains a new classification and measurement approach for financial assets that comprise publicwhich contains three principal classification categories: measured at amortized cost, fair value through other comprehensive income (FVOCI) and private fixed-income securities, classifiedfair value through profit and recordedloss (FVTPL). The standard eliminates the IAS 39 categories of held to maturity, held for trading, loans and receivables and available for sale.

F-18


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

This change did not cause any retrospective impact in the measurement of the Company’s financial assets. Prospectively, for equity instruments measured at FVOCI, when settled or transferred, the gains and losses accumulated in other comprehensive income no longer affect income statement, being immediately reclassified to accumulated profits or losses, in equity.

The classification of financial assets is based on individual characteristics of the purposeinstrument and the business model of the portfolio in which it is contained. For already existent financial instruments on January 01, 2018, the Company has considered the categories on the following manner:

(i)       Financial assets held to maturity and loans and receivables were transferred to the amortized cost category;

(ii)      Financial assets held for which theytrading were acquired,transferred to the FVTPL classification;

(iii)      Financial assets available for sale were transferred to the FVOCI classification;

The charts related to financial instruments in accordancenotes 4 and 7 now follow the categories described above.

Hedge accounting

The Company has chosen to apply the new hedge accounting requirements of IFRS 9. The standard requires that hedge accounting relationships are aligned with the following categories:Company’s risk management objectives and strategy, the application of a more qualitative and forward-looking approach to assessing hedge effectiveness and prohibits voluntary discontinuation of hedge accounting.

For financial instruments designated into cash flow hedge relations, the Company has begun to account for the time value of purchased options, the forward element of forward contracts and foreign currency basis spreads as cost of hedging, into other comprehensive income. When the instrument is terminated, the costs of hedge are reclassified to the income statement together with the intrinsic values of the instrument.

The categories and designation models for hedge accounting remain unchanged.

Impairment of Financial Assets

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ model. This model is applicable to financial assets measured at amortized cost or at FVOCI, except for equity instruments.

For financial investments and cash and equivalents, the Company did not have any relevant impact on credit losses, due to the elevated ratings of itscounterparties.

F-19


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

For trade receivables and notes receivables, the Company has elected the practical expedient of the aging-based provision matrix in the item B5.5.35 of IFRS 9, with the appropriate groupings of the receivables.

The Company prepared a study of historical losses and recoveries of its customers portfolios for every acting region, taking into consideration the dynamics of the markets and the instruments hired to reduce credit exposures, such as: letters of credit, insurances and guarantees. In addition to the analysis of the consolidated portfolios, specific clients with different credit risks were treated separately.

Based on the studies, expected losses indexes were calculated for each portfolio and aging class. The indexes were applied to the accounts receivable balances and generated the amounts of expected credit losses. The Company monitors the indexes, customers and portfolios constantly, recognizing the respective changes into the impairment loss on trade and other receivables account.

The adoption of the new standard has impacted the Company’s equity as per below:

Retained Earnings

Impact of IFRS 9 adoption

Increase in expected credit losses with trade accounts receivable

                    12.6

Increase in expected credit losses with notes receivable

                      6.5

Increase in expected credit losses with financial investments

                      1.4

Deferred taxes

                      (6.0)

Impact on 01.01.18

                     14.5

Transition

Changes in accounting policies resulting from the adoption of IFRS 9 were applied retrospectively, except as described below:

 

·      Trading securities: acquired for sale or repurchase in the short-term, recorded at fair value with changes to fair value recorded as financial income or expense;

·Held to maturity: when theThe Company has the intention and ability to hold them until maturity, investments are recorded at amortized cost, plus interest, monetary and exchange rate changes, when applicable, and recognized as financial income or expense; and

·Available for sale: comprises the remaining securities that are not classified in anytook advantage of the categories above, which are measured at fair value,exemption allowing it not to restate comparative information for prior periods with changesrespect to fair value recordedclassification and measurement (including impairment) changes. Differences in other comprehensive income while the asset is not realized, net of taxes. Interest, monetary correction and exchange differences, when applicable, are recognized as financial income or expense.

3.7.2.Derivatives financial instruments measured at fair value:are those actively traded on organized markets and fair value is determined based on thecarrying amounts quoted on an active market at the balance sheet date. These financial instruments are designated at their inception date, classified as other financial assets and/or liabilities, with a corresponding entry in financial income or expenses or cash flow hedge gains or losses, a component of other comprehensive income, net of taxes.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

3.7.3.Hedge transactions: the Company utilizes derivative and non-derivative financial instruments, as disclosed in note 4, to hedge the exposure to exchange and interest rates or to modify the characteristics of financial assets and financial liabilities and highly probable transactions, which are: (i) highly correlated to changesresulting from the adoption of IFRS 9 were recognized in the market value of the item being hedged, bothretained earnings at inceptionJanuary 01, 2018; and throughout the term of the contract (effectiveness between 80% and 125%); (ii) supported by documents that identify the transaction, the hedged risk, the risk management process and the methodology used to assess effectiveness; and (iii) considered  effective in the mitigation of the risk associated with the hedged exposure. These transactions are accounted for in accordance with IAS 39.

Hedges that meet the criteria for being recognized as·The new hedge accounting are recorded as cash flow hedge.

In a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognized as other comprehensive income, while the ineffective portion of the hedge is recognized immediately as financial income or expense. 

The amounts recorded as other comprehensive income are immediately transferred to the statement of income when the hedged transaction affects the statement of income.

If the occurrence of the forecasted transaction or firm commitment is no longer expected, the amounts previously recognized in other comprehensive income are transferred to the statement of income. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its classification as a hedge is revoked, the gains or losses previously recognized remain recorded in other comprehensive income until the forecasted transaction or firm commitment affect the statement of income.

3.7.4.Loans and receivables: these are financial assets and liabilities with fixed or determinable payments which are not quoted on an active market. Such assets and liabilities are initially recognized at fair value plus any attributable transaction costs. After initial recognition, loans and receivables are measured at amortized cost under the effective interest rate method, less any impairment losses.requirements were applied prospectively.

 

3.8.        Adjustment to present value: the Company and its subsidiaries measuremeasures the adjustment to present value of the outstanding balances of current and non-current trade accounts receivable, trade payables social obligations and other non-current liabilities.liabilities, being recorded in reducing accounts of the respective line items against financial result. The Company adopts theweighted average of the weighted average cost of capital nominal (“WACC”)funding to determine the adjustment to present value to those assetsand liabilities, which corresponds to annual rate of 12.80% (11.20%11.40% on December 2018 (12.70% p.a. on 2014).


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 20132017).

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-20


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

3.9.        Trade accounts receivables and other receivables: are recorded at the invoiced amount and adjusted to present value, when applicable, net of allowance for doubtful accounts.expected credit losses.

An allowance for doubtful accounts is determined through analysis of the aging of trade accounts receivable and assessment of collectability based on historic trends, the financial condition of the Company’s customers and evaluation of economic conditions.

 

The Company writes off uncollectible trade receivables onceadopts procedures and analysis to establish credit limits and substantially does not require collateral from customers. In the event of default, collection attempts are made, which include direct contact with customers and collection through third parties. Should these efforts have been exhausted.prove unsuccessful, court measures are considered and the notes are reclassified to non-current assets at the same time an allowance is recognized. The notes are written-off from the allowance when management considers that they are not recoverable after taking all appropriate measures to collect them.

 

3.10.    Inventories: are measuredevaluated at the weighted average acquisition or formation cost, method, not exceeding market value ortheir net realizable value. The cost of finished products includes raw materials, labor, cost of production, transport and storage, which are related to all process needed to make the products ready for sale. Provisions for obsolescence, adjustments to net realizable value, impaired items and deteriorated productsslow-moving inventories are recorded when necessary. Usual production losses are included in monthlyrecorded and are an integral part of the production cost of the respective month, whereas unusualabnormal losses, if any, are charged to other operating expenses.recorded directly as cost of sales.

 

3.11.    Biological assets: ConsumablesThe consumables and production biological assets (live animals) and foreststhe forest are measured at their fair value, less cost to sell, usingbeing applied the cost approach technique forto live animals and incomemarket approach for forests.to the forest. In the determination of the live animal’s fair value, all the inherent losses to the production process were considered.

 

3.12.    Assets held for sale:sale and discontinued operations: Such assets are measured at carrying amount or fair value less costs to sell, whichever is lower, net of selling costs and are not depreciated or amortized. Such items are only classified under this account when the sale is highly probable and they are available for immediate sale under their current conditions. In 2018, it was necessary to recognize impairment losses for these assets (note 12).

 

The statementsstatement of income (loss) and cash flows from discontinued operations are disclosedpresented separately from those of continuingcontinued operations of the Company.

The comparative periods are reclassified in the case of the statement of income (loss) for the year and cash flows, however the statement of financial position remains as presented in the past.

 

3.13.    Property, plant and equipment: stated at the cost of acquisition or construction, less accumulated depreciation and impairment losses, when applicable. BorrowingTheborrowing costs are capitalized as a component of construction in progress, pursuant to IAS 23, considering the weighted average interest rate of the Company’s debt at the capitalization date.

F-21


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Depreciation is recognized based on the estimated economic useful life of each asset on a straight-line basis. The estimated useful life, residual values and depreciation methods are annually reviewed and the effects of any changes in estimates are accounted for prospectively. Land is not depreciated.

 

The Company annually performs an analysis of impairment indicators of property, plant and equipment along with goodwill impairment test. If an impairment indicator is identified, the corresponding assets are tested forimpairment using the discounted cash flow methodology. Hence, when an impairment is identified, an impairment loss is recorded.equipment. The recoverability of these assets was tested for impairment in 2015,2018, and no adjustments were identified. The detailsrealization of thisthe test areinvolved the adoption of assumptions and judgments, as disclosed in note 19.


BRF S.A.18. An impairment for loss for property, plant and equipment, is only recognized if the related cash-generating unit is devalued. Such condition is also applied if the asset’s recoverable amount is less than its carrying amount. The recoverable amount of asset or cash-generating unit is the greater of its value in use and its fair value less cost to sell.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Gains and losses on disposals of property, plant and equipment items are calculated by comparing the proceeds of the disposals with their net book values and recognized in the statement of income (loss) at the disposal date.

 

3.14.    Intangible assets: Intangible assets acquired are measured at cost at the time they are initially recognized. The cost of intangible assets acquired in a business combination corresponds to the fair value at the acquisition date. After initial recognition, intangible assets are presented at cost less accumulated amortization and impairment losses, when applicable. Internally-generated intangible assets, excluding development costs, are not capitalized but recognized in the statement of income as incurred.

 

The useful life of intangible assets is assessed as finite or indefinite.

 

Intangible assets with a finite life are amortized over the economic useful life and reviewed for impairment whenever there is an indication that their carrying values may be impaired. The amortization period and method for an intangible asset with a finite useful life are reviewed at least at the end of each fiscal year. The amortization of intangible assets with a finite useful life is recognized in the statement of income as an expense consistentrelated to its use and consistently with the useeconomic useful life of the intangible asset.

 

Intangible assets with an indefinite useful life are not amortized, but are tested annually for impairment on an individual basis or at the cash generating unit level. The Company records goodwill and trademarks as intangibles assets with in indefinite useful life.

                   

F-22


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Goodwill recoverability was tested for fiscal year 20152018 and no impairment loss was identified.  Such test involved the adoption of assumptions and judgments, as disclosed in note 19.18.

 

3.15.    Income taxes: in Brazil, are comprised of corporate income tax (“IRPJ”) and social contribution tax (“CSLL”), which are calculated monthly on taxable income, at the rate of 15% plus 10% surtax for IRPJ, and of 9% for CSLL, considering the offset of tax loss carryforwards, up to the limit of 30% of annual taxable income.

 

The income from foreign subsidiaries is subject to taxation pursuant to the local tax rates and legislation.  In Brazil, this income isthese incomes are taxed according to the Brazilian tax rules,Law 12.973/14, respecting the tax treaty signed by each country with Brazil in order to avoid double taxation.

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Deferred taxes are recorded on IRPJ and CSLL tax losses, and on temporary differences between the tax basis and the carrying amount ofon assets and liabilities and classified as non-current assets and liabilities, as required by IAS 01.assets. When the Company’s analysis indicates that the realization of these credits is not probable, the asset is derecognized. In 2018, the need to derecognise part of the Company's deferred tax assets is not probable, a valuation allowance is recorded.was identified, as demonstrated in note 13.3.

Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity. In the consolidated financial statements, the Company’s tax assets and liabilities can be offset against the tax assets and liabilities of the subsidiaries if, and only if, these entities have a legally enforceable right to make or receive a single net payment and intend to make or receive this net payment, or recover the assets and settle the liabilities simultaneously. Therefore, for presentation purposes, the balances of tax assets and tax liabilities are being disclosed separately.

 

Deferred tax assets and liabilities must be measured by the taxenacted or substantially enacted rates that are expected to be applicable for the period when the assets are realized and liabilities are settled.

 

3.16.    Accounts payable and trade accounts payable: are initially recognized at fair value plus any accrued charges, monetary and exchange variations incurred through the balance sheetfinancial position date.

 

3.17.    Provision for tax, civil and labor risks and contingent liabilities: are recognizedestablished when the Company has a present obligation, formalized or not, as a result of a past event, it is probable that a cashan outflow of resources will be required to settle the obligation and its amount can be reliably estimated.

 

The Company is part of various lawsuits, including, tax, labor and civil claims.claims, mainly in Brazil. The assessment of the likelihood of an unfavorable outcome in these lawsuits includes the analysis of the available evidence, the hierarchy of the laws, available formerprior court decisions, as well as the most recent court decisions anddecisionsand their importance onto the Brazilian legal system, as well as the opinion of external legal counsel. The provisions are reviewed and adjusted to reflect changes in the circumstances, such as the applicable statute of limitation, conclusions of tax inspections or additional exposures identified based on new claims or court decisions.

F-23


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

A contingent liabilityliabilities of business combinations are recognized inif they arise from a business combination is initially measured atpresent obligation that arose from past events and if their fair value can be measured reliably and subsequently are measured at the higher of:

 

·      the amount that would be recognized in accordance with the accounting policy for the provisions above that comply with IAS 37;above; or

 

·      the amount initially recognized less, ifwhere appropriate, cumulative amortizationof recognized revenue in accordance with IAS 18.the policy of recognizing revenue from customer contracts.

 

As a result of the business combinations with Sadia, Avex and Dánica the Company recognized contingent liabilities related to tax, civil and labor claims.tax.

 

3.18.    Leases: lease transactions in which the risks and rewards of ownership are


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

substantially transferred to the Company are classified as finance leases. When there is no significant transfer of the risks and rewards of ownership, lease transactions are classified as operating leases.

 

Finance lease agreements are recognized in property, plant and equipment and in liabilities at the lower of the present value of the minimum future payments of the agreement and the fair value of the asset, including, when applicable, the initial direct costs incurred in the transaction. The amounts recorded in property, plant and equipment are depreciated and the underlying interest is recorded in the statement of income in accordance with the terms of the lease agreement.

 

Operating lease agreements are recognized as straight-line expenses throughout the lease terms.

 

Gains or losses arising from sale-leaseback transactions classified after the sale of the assets as operating leases are recognized as follows:

- Immediately in profit or loss when the transaction was measured at fair value;

- If the transaction price is established below or above the fair value, the profit or loss is recognized immediately in profit or loss, unless the result is offset by future lease payments below market value.

On January 01, 2019, IFRS 16 is effective, whose impacts are described in note 37.

F-24


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

3.19.    Share based payments: the Company provides share based payments and restricted stock for its executives, which are settled with Company shares. The Company adopts the provisions of IFRS 2,02, recognizing as an expense, on a straight-line basis, the fair value of the optionsoptions/shares granted, over the length of service required by the stock options plan, with a corresponding entry to equity. The accumulated expense recognized reflects the acquired vesting period and the Company's best estimate of the number of shares to be acquired.

 

The expense or income arising from the movement during the year is recognized in the statement of income as operating expense or income. No expenseaccording to the function performed by the beneficiary. Expense is recognized for options that have not completed theirreversed/trued up in case of failure to satisfy a service vesting period.condition (forfeiture).

 

The dilution effect of outstanding options is reflected as additional dilution in the calculation of diluted earnings per share.

 

3.20.    Pension and other post-employment plans: the Company sponsors fourthree supplementary defined benefit and defined contribution plans, as well as other post-employment benefits, for which, an annual actuarial reportappraisal is annually prepared by an independent actuary.actuary and are reviewed by management. The costingcost of defined benefits is established separately for each plan using the projected unit credit method.

 

The measurements comprise the actuarial gains and losses, the effect of a limit on contributions and yieldsreturns on plan contributions andassets, are recognized in the balance sheetstatement of financial position with a contra entry in other comprehensive income when incurred. These measurements are not reclassified to the statement of income (loss) in subsequent periods.

 

The Company recognizes the net defined benefit asset, when:

 

·      controls a resource and has the ability to use the surplus to generate future benefits;

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

·      the control is a result of past events; and

 

·      the future economic benefits are available to the Company in the form of a reduction in future contributions or a cash refund, either directly to the Company or indirectly to another deficitary plan. The asset ceiling is the present value of those future benefits.

 

The past service cost is recognized in the statement of income at the earliest of the following dates:

 

·      when the plan amendment or curtailment occurs, or

 

·      when the Company recognizes related restructuring costs.

 

F-25


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The past service cost and net interest on net defined benefit liability or asset are recognized in the statement of income as operating expense or income.(loss).

 

3.21.    Earnings (Losses) per share: basic earnings (losses) per share are calculated by dividing the net profit (loss) attributable to the holders of ordinary shares of the Company by the weighted average number of ordinary shares during the year. Diluted earnings (losses) per share are calculated by dividing the net profit (loss) attributable to the holders of ordinary shares of the Company by the weighted average number of ordinary shares during the year, plus the weighted average number of ordinary shares that would be issued when converting all dilutive potential ordinary shares into ordinary shares.

 

3.22.    Determination of income: results from operations are recorded on an accrual basis.

3.23.Revenue recognition: revenues comprise of the fair value of consideration received or receivable by the sale of products, net of taxes, returns, rebates and discounts.

Revenues are recognized when the significant risks and rewards of ownership of the goods have passed to the buyer.

The Company has incentive programs and sales discounts, which are accounted for as deductions from sales or selling expenses. These programs may include discounts to customers for a good sales performance based on volumes and marketing actions carried out at the sales points.

3.24.Employee and management profit sharingbonuses: employees are entitled to profit sharingbonus based on certain targets agreed upon on an annual basis, whereas managers are entitled to profit sharingfor directors is based on the provisions of the bylaws,


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

proposed by the Board of Directors and approved by the shareholders. The profit sharing amountcorresponding expense is recognized in the statement of income for the period in which the targets are attained.

 

3.25.3.23.    Financial income and expenses: include interest earningsincome on amounts invested (including available for sale financial assets),assets, dividend income (received(except for dividends received from investments in associates and joint ventures)equity investees), gains on disposal of available for sale financial assets, exchange rate  variation on assets (situations in which there is a devaluation of the national currency against the currency of the asset in question), changes in fair value of financial assets measured at fair value through incomeprofit or loss, adjustment to present value (trade accounts receivable, notes receivable, short-term debt and trade accounts payable), gains and losses on hedging instruments.instruments that are recognized in income,interest on loans and financing and monetary variation on contingencies and tax credits. Interest income is recognized in earnings through the effective interest method.

 

3.26.3.24.    Grants and government assistance: government subsidies are recognized at fair value when there is reasonable assurance that the conditions established are met and related benefits will be received. Theamounts recorded in the statement of income when excluded from the income tax incentives used to reduce sales taxesand social contribution calculation basis are transferred from retained earnings toin shareholders’ equity, as a reserve of tax incentives, component of shareholders’ equity.unless there are accumulated losses.

 

3.27.Dividends and interest on shareholders’ equity:  the proposal for payment of dividends and interest on shareholders’ equity made by the Company’s Management, which is within the portion equivalent to the mandatory minimum dividend, is recorded in current liabilities, as a legal obligation provided for in the bylaws; the dividends that exceed this mandatory minimum dividend, declared by management before the end of  the accounting period covered by the consolidated financial statements, but not yet approved by the shareholders, is recorded as  additional dividend proposed in shareholders’ equity.

For financial statement presentation purposes, interest on shareholders’ equity is stated as an allocation of income in the shareholders’ equity.

3.28.3.25.    Transactions and balances in foreign currency: the transactions in foreign currency are translated into Brazilian Reais (the Company'sthe functional currency)currency of the company using the exchange rates at the transactions dates. Balance sheet accountstransaction date. Balances of monetary items denominated in foreign currency are translated using the exchange rates in effect at the statement of financial position date of the financial statements and theor settlement, being that gains or losses on foreign exchange rate variation are recognized asin the financial income or expense.result.

 

The exchange rates in Brazilian Reais effective at the balance sheetstatement of financial position dates were as follows:

     

F-26


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Exchange rate at the balance sheet date

 

12.31.15

 

12.31.14

Exchange rate at the balance sheet date

12.31.18

 

12.31.17

Thailand Bath (THB)

 

      0.1198

 

      0.1015

Kwait Dinar (KWD)

 

     12.7755

 

     10.9791

United Arab Emirates Dirham (AED)

United Arab Emirates Dirham (AED)

      1.0550

 

      0.9006

Singapore Dollar (SGD)

 

      2.8464

 

      2.4753

U.S. Dollar (US$ or USD)

 

3.9048

 

2.6562

U.S. Dollar (US$ or USD)

     3.8748

 

      3.3080

Vietnamese Dong (VND)

 

      0.0002

 

      0.0002

Hong Kong dollar (HKD)

 

      0.4948

 

      0.4233

Euro (€ or EUR)

 

4.2504

 

3.2270

 

      4.4390

 

      3.9693

Forint Hungary (HUF)

 

      0.0138

 

      0.0128

Yen (JPY)

 

      0.0353

 

      0.0294

Romanian leu (RON)

 

      0.9527

 

      0.8511

Pound Sterling (£ or GBP)

 

5.7881

 

4.1405

Pound Sterling (£ or GBP)

      4.9617

 

      4.4714

Argentine Peso ($ or ARS)

 

0.3017

 

0.3172

Rial Omã (OMR)

 

10.1529

 

6.8992

Dirham (AED)

 

1.0631

 

0.7232

Turkish Lira (TRY)

 

      0.7331

 

      0.8752

Argentinian Peso ($ or ARS)

Argentinian Peso ($ or ARS)

      0.1029

 

      0.1755

Chilean Peso (CLP)

 

      0.0056

 

      0.0054

Uruguayan Peso (UYU)

 

      0.1199

 

      0.1149

South African Rand (ZAR)

South African Rand (ZAR)

      0.2699

 

      0.2690

Renminbi Yuan China (CNY)

Renminbi Yuan China (CNY)

      0.5636

 

      0.5087

Saudi Riyal (SAR)

 

1.0406

 

0.7079

 

      1.0330

 

      0.8821

Qatar Riyal (QAR)

 

      1.0643

 

      0.9088

Omani Riyal (OMR)

 

     10.0696

 

      8.6011

Ringgit Malaysia (MYR)

 

      0.9382

 

      0.8180

Ruble Russia (RUB)

 

      0.0556

 

      0.0574

Won South Korea (KRW)

Won South Korea (KRW)

      0.0035

 

      0.0031

    
    

 

 

 

 

    

Average rates

 

 

 

 

 

12.31.18

 

12.31.17

Thailand Bath (THB)

 

      0.1130

 

      0.0942

Kwait Dinar (KWD)

 

     12.1043

 

     10.5318

United Arab Emirates Dirham (AED)

United Arab Emirates Dirham (AED)

      0.9950

 

      0.8692

Singapore Dollar (SGD)

 

      2.7071

 

      2.3130

U.S. Dollar (US$ or USD)

 

3.3315

 

2.3536

U.S. Dollar (US$ or USD)

     3.6545

 

      3.1920

Vietnamese Dong (VND)

 

      0.0002

 

      0.0001

Hong Kong dollar (HKD)

 

      0.4663

 

      0.4096

Euro (€ or EUR)

 

3.6929

 

3.1221

 

      4.3092

 

      3.6071

Forint Hungary (HUF)

 

      0.0135

 

      0.0117

Yen (JPY)

 

      0.0331

 

      0.0285

Romanian leu (RON)

 

      0.9265

 

      0.7896

Pound Sterling (£ or GBP)

 

5.0931

 

3.8721

Pound Sterling (£ or GBP)

      4.8701

 

      4.1150

Argentine Peso ($ or ARS)

 

0.3601

 

0.2905

Rial Omã (OMR)

 

8.6563

 

6.1134

Dirham (AED)

 

0.9071

 

0.6408

Turkish Lira (TRY)

 

      0.7696

 

      0.8759

Argentinian Peso ($ or ARS)

Argentinian Peso ($ or ARS)

      0.1369

 

      0.1934

Chilean Peso (CLP)

 

      0.0057

 

      0.0049

Uruguayan Peso (UYU)

 

      0.1190

 

      0.1115

South African Rand (ZAR)

South African Rand (ZAR)

      0.2764

 

      0.2401

Renminbi Yuan China (CNY)

Renminbi Yuan China (CNY)

      0.5521

 

      0.4726

Saudi Riyal (SAR)

 

0.8883

 

0.6275

 

      0.9744

 

      0.8512

Qatar Riyal (QAR)

 

      1.0039

 

      0.8727

Omani Riyal (OMR)

 

      9.4947

 

      8.2978

Ringgit Malaysia (MYR)

 

      0.9053

 

      0.7435

Ruble Russia (RUB)

 

      0.0582

 

      0.0548

Won South Korea (KRW)

Won South Korea (KRW)

      0.0033

 

      0.0028

 

 

F-27


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

3.29.3.26.    Accounting judgments, estimates and assumptions: as mentioned in note 2, in the process of applying the Company’s accounting policies, management made the following judgments which have a material impact on the amounts recognized in the consolidated financial statements:

 

Main judgments:

·control, significant influence and consolidation (note 1.1);

·share-based payment transactions (note 24);

·definition of the moment when ownership is transferred in recognizing revenue.

Main estimates:

·      fair value of financial instruments (see note(note 4);

·      annual analysis of recoverable amountsimpairment of non-financial assets (see note 19)(note 5 and 18);

·      measurement of fair value of items related to business combinations (see note 6);

·allowance for doubtful accounts (see note 9)expected credit losses (note 8);

·      net realizable value provision for inventories (see note 10)(note 9);

·      fair value of biological assets (see note 11)(note 10);

·      annual analysisloss on the reduction of recoverable amountsvalue of taxes(see notes 12taxes (note 11 and 14)13);

·fair value of assets held for sale (note 12);

·      useful lives of property, plant and equipment and intangible assets (see notes 18(note 17 and 19);

·share-based payment transactions (see note 24)18);

·      pension and post-employment plans (see note(note 25); and

·      provision for tax, civil and labor risks (see note 27).(note 26);

 

The Company reviews the estimates and underlying assumptions used in its accounting estimates on a quarterly basis. Revisions to accounting estimates are recognized in the period in eachwhich the estimates are revised.

3.27.IFRS 15 – Revenue from contracts with customers: as of January 01, 2018, the Company adopted the IFRS 15, whose content was assessed, and it was concluded that the measurement and recognition of revenue did not change substantially.

The Company´s revenue comprises the value of the consideration received or to be received for the sale of products, net of corresponding taxes, returns and applicable discounts.

Revenues are recognized in an accrual basis when the sales value is reliably measurable, the Company no longer has control over the goods sold, or any involvement related to the ownership, and is probable that economic benefits will be received by the Company.

The Company´s sales can be done either at sight payments or term payments, which are discounted to present value in order to recognize the financial component (note 3.8). The average days outstanding is 31 days.

F-28


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

3.28.IAS 29 - Hyperinflationary economies:On June 14, 2018, the National Institute of Statistics and Census of Argentina (“INDEC”), disclosed the wholesale price index data for May 2018, which has been consistently published in Argentina and used as a basis for monitoring the inflation in the country. Considering the data published it can be observed that the accumulated inflation in the last 3 years exceeded 100%, and supported by other qualitative analysis, the Company could conclude that as of July 01, 2018, Argentina was considered a country with hyperinflationary economy.

As a result, the Company has adopted the IAS 29 - Financial Reporting in Hyperinflationary Economies.

Non-monetary items and income statement balances were restated to reflect the terms of the measuring unit current at the end of the reporting exercise. The balances were calculated by applying the changes on the index from the initial recognition date to the reporting date.

As the hyperinflation concepts are applicable only to the subsidiaries located in Argentina, and the Parent company is not on a country with hyperinflationary economy, the Company has made an accounting policy election to record the results of the hyperinflation in other comprehensive income (loss) as of January 01, 2018 and not restate prior periods. The impacts of the changes on net monetary position from the initial recognition date until December 31, 2017 were recorded against Equity, generating a positive impact of R$130.2, while the changes on the monetary position for the year ended December 31, 2018were recorded against the result of discontinued operations.

The translation of the balances of a hyperinflationary economy to the reporting currency were based on the closing rate of the reporting period for both statement of financial position and statement of income (loss) balances.

The impact caused by the adoption of the abovementioned standard on the Company´s net result was a gain of R$370.0 recorded in discontinued operations.

The Company used the General Consumer Price Index (“IPC”) for the calculation of hyperinflation effects on the balances from January 01, 2017 until current period. For the hyperinflation effects from prior periods until December 31, 2016 the Company used the National Wholesale Price Index (“IPIM”), as until December 2016 the IPC wasn´t published in a consistent basis to assure the reliability of the index. Both indexes were obtained from INDEC.

The inflation rates used in 2017 and 2018 are described in the table below:

F-29


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Period

 

Accumulated inflation rates

2016

 

34.60%

2017

 

24.80%

2018

 

48.01%

3.29.Comparability of the statement of income and cash flows: In 2018, for a better presentation of expenses by function, the Company reclassified expenses with employee benefits plan, share-based payment, labor contingencies (public civil lawsuit) and certain discontinued production lines.

For the purposes of comparability with the previous year, the Company reclassified the amount of R$500.1 during the year ended December 31, 2017 from other operating income (expenses), net, to (i) cost of sales in the amount of R$484.1 (ii) selling expenses in the amount of R$13.4 and (iii) administrative expenses in the amount of R$2.6 mainly impacted by the cancellation of shares granted. The amount related to discontinued operations in R$2.8, reclassified from other operation income (expenses) to costs of sales. In 2016, the Company reclassified the amount of R$190.5 from other operating income (expenses), net, to (i) cost of sales in the amount of R$168.7 (ii) selling expenses in the amount of R$17.1 and (iii) administrative expenses in the amount of R$4.7.

For the cash flow, the Company reclassified the expenses with finance lease previously classified as operating activities to financing activities in the amount of R$149.9. 

 

 

4.             FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

 

4.1.        Overview

 

In the normalordinary course of its business, the Company is exposed to credit, liquidity and


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

market risks, which are actively managed in conformitycompliance with the Financial Risk Management Policy and Strategic Documents (“Risk Policy”) and internal guidelines subject to such policy.

 

The Risk Policy is under the management of the Board of Directors, Risk Management Committee and Financial Risk Management Committee, Board of Executive Officers and Board of Directors,department, with clear and defined roles and responsibilities, as follows:

 

·      The Board of Directors is responsible for approving the Risk Policy andfurther defining the tolerance limits of tolerance offor the different risks identified as acceptable forto the Company on behalf of its shareholders. The current risk policy was reviewed and approved and is valid until on November 26, 2015, which is valid for a 2-year period and automatically renewed once for the same period;2019;

 

·      The Financial Risk Management Committeebody formally constituted, subordinateand subordinated to the Executive Board, is in charge of the execution of the Risk Policy, which comprises the supervision of the risk management process, planning and verificationandverification of the impacts of the decisions implemented, as well as the evaluation and approval of hedging strategies and monitoring the risk exposure levels to ensure compliance with Risk Policy; and

F-30


·The Board of Executive Officers is in charge of the evaluation of the Company’s exposure for each identified risk, according to the guidelines established by the Board of Directors; and

BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

·      The Risk Management areaDepartment has as a crucialthe key role in monitoring, evaluating and reporting of the financial risks taken by the Company.

 

The Risk Policy does not authorize the Company’s management to contractdetermines that derivatives can only be used for hedge purposes, and prohibits entering into any leveraged derivative transactions and determines thattransaction. Additionally, any individual hedge operationsoperation (notional amount) must not exceed 2.5% of the Company’s shareholders’ equity.

 

a.4.2.        Credit risk management

 

The Company is subjectexposed to the credit risk related to the financial assets held by: trade and non-trade accounts receivable, financial investmentsmarketable securities, derivative instruments and derivative contracts, as follows:cash and equivalents.

 

·a.Accounts receivable credit risk

Credit risk associated with trade accounts receivable is actively managed through specific systems and is supported by a dedicated team, through the useinternal policies for credit analysis. The significant level of specific systems. Furthermore, it should be noted the diversification and geographical dispersion of the customer portfolio andsignificantly reduces the concession of creditrisk, however, the Company choses to customers with sound financial and operational conditions. The Company does not usually require collateral for sales to customers, and it has contracted creditcomplement the risk management tactic by acquiring insurance policypolicies for specific markets; andmarkets. The impairment of these financial assets is carried out based on IFRS 9 (note 3.7).

 


b.

BRF S.A.Counterparty credit risk

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

·Credit risk associated with financial investmentsmarketable securities, cash and cash equivalents and derivative contractsinstruments is mitigated bylimited to counterparties with Investment Grade ratings. The risk concentration is constantly assessed according to credit ratings and the Company’s policy of working with prime institutions.portfolio.

 

On December 31, 2015,2018, the Company had financial investments over R$100.0 at the following financial institutions:Banco Bradesco, Banco BIC,Banco BTG Pactual,Banco do Brasil, Banco Itaú, Banco Bradesco,Safra, Banco Santander, Deutsche Bank, Banco do Brasil, Caixa Econômica Federal, Standard CharteredHSBC and Banco BNP.J.P. Morgan Chase Bank.

 

The Company also held derivative contracts with the following financial institutions:Banco Bradesco, Banco do Brasil, Banco HSBC, Banco Itaú, Banco Santander, Banco Votorantim, Barclays, Bank of America Merrill Lynch,Citibank, Deutsche Bank, ING Bank, Merrill Lynch, Morgan Stanley and Rabobank.

 

b.4.3.        LiquidityCapital management and liquidity risk management

Liquidity risk management aims to reduce the impacts caused by events which may affect the Company’s cash flow. Thus, the Company utilizes the following metrics:

·Cash Flow at Risk (“CFaR”), which aims to statistically estimates the cash flows for the next twelve months and the Company’s liquidity exposure. The Company determined that the minimum cash available should be equivalent mainly to the average monthly billing and EBITDA for the last twelve-month period; and

·Value at Risk ("VaR") is used for derivative transactions that require payments of periodic adjustments. Currently, the Company holds only BM&F Bovespa operations with daily adjustments and in order to monitor them, such methodology is utilized, which statistically measures potential maximum adjustments to be paid at intervals of 1 to 21-days.

 

The Company maintainsis exposed to liquidity risk as far as it needs cash or other financial assets to settle its obligations in the respective terms. The Company’s cash and liquidity strategy takes into consideration historical results volatility scenarios as well assimulations of sectorial and systemic crisis, grounded by allowing resilience in scenarios of capital restriction.

F-31


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF’s ideal capital structure definition is essentially associated with (i) cash strength as tolerance factor to liquidity shocks, contemplating an analysis of minimum cash, (ii) financial leverage levelsand (iii) maximization of the opportunity cost of capital.

The Company is constantly seeking to diversify sources of financing in order to avoid any impactreduce the concentration of its credit exposure, as well as to monitor the financial and capital markets in search of opportunities that improve its abilitynet debt in order to settle commitmentsoptimize the relation to the cost of capital and the average term of the amortization of its obligations.

As a guideline, the majority ofgross debt must be concentrated in the debt should be in long term. On December 31, 2015,2018, the long term consolidated gross debt portion accounted for 82.7% (76.4%represented 78.7% (74.3% as of December 31, 2014)2017) of the total outstanding debtindebtedness with an average term greaterhigher than 53 years.

The Company monitors the net debt and indebtedness as set forth below: 

 

12.31.18

 

12.31.17

 

 Current

 

 Non-current

 

 Total

 

 Total

Foreign currency debt

           (1,470.3)

 

           (10,068.0)

 

       (11,538.3)

 

       (11,101.3)

Local currency debt

           (3,077.1)

 

              (7,550.0)

 

       (10,627.1)

 

         (9,343.0)

Derivative financial instruments liabilities

              (235.0)

 

                            -

 

            (235.0)

 

            (299.5)

Gross debt

           (4,782.4)

 

           (17,618.0)

 

       (22,400.4)

 

       (20,743.8)

 

 

 

 

 

 

 

 

Marketable securities and cash and cash equivalents

            5,376.6

 

                   290.6

 

           5,667.2

 

           6,808.1

Derivative financial instruments assets

                182.3

 

                            -

 

              182.3

 

                90.5

Restricted cash

                277.3

 

                   584.3

 

              861.6

 

              535.6

Net debt

            1,053.8

 

           (16,743.1)

 

       (15,689.3)

 

       (13,309.6)

 

The table below summarizes the significant commitments and contractual obligations that may impact the Company’s liquidity:

    

F-32


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

12.31.18

 

Book
value

 

Cash flow contracted

 

2019

 

2020

 

2021

 

2022

 

2023

 

2024 onwards

Non derivative financial liabilities

               

Loans and financing

  12,419.0

 

  14,324.4

 

4,791.9

 

3,644.7

 

3,617.6

 

613.4

 

1,656.8

 

  -

BRF bonds

7,487.8

 

8,965.1

 

302.6

 

302.6

 

302.6

 

2,968.4

 

2,113.7

 

2,975.2

BFF bonds

343.0

 

369.9

 

   24.2

 

345.7

 

  -

 

  -

 

  -

 

  -

BRF GMBH bonds

1,915.7

 

2,611.6

 

   84.3

 

   84.3

 

   84.3

 

   84.3

 

   84.3

 

2,190.1

Trade accounts payable

5,516.9

 

5,564.9

 

5,564.9

 

  -

 

  -

 

  -

 

  -

 

  -

Supply chain finance

885.8

 

885.8

 

885.8

 

  -

 

  -

 

  -

 

  -

 

  -

Financial lease

215.4

 

305.5

 

   82.5

 

   56.2

 

   29.6

 

   23.6

 

   19.6

 

   94.0

Operational lease

  -

 

2,126.4

 

421.7

 

103.7

 

108.4

 

   49.4

 

157.3

 

1,285.9

                

Derivative financial liabilities

               

Financial instruments designated as cash flow hedge

               

Swap (Interest  rate and exchange rate)

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Currency derivatives (NDF)

  21.0

 

  17.1

 

  17.1

 

-

 

-

 

-

 

-

 

-

Commodities derivatives - Corn (NDF)

3.5

 

3.5

 

3.5

 

-

 

-

 

-

 

-

 

-

Commodities derivatives - Soybean meal (NDF)

2.7

 

2.7

 

2.7

 

-

 

-

 

-

 

-

 

-

Commodities derivatives - Soybean oil (NDF)

4.3

 

4.3

 

4.3

 

-

 

-

 

-

 

-

 

-

Commodities derivatives - Soybean (NDF)

3.3

 

3.3

 

3.3

 

-

 

-

 

-

 

-

 

-

Currency derivatives (options)

  75.8

 

  75.8

 

  75.8

 

-

 

-

 

-

 

-

 

-

Commodities derivatives (Future)

0.1

 

0.1

 

0.1

 

-

 

-

 

-

 

-

 

-

Financial instruments not designated as cash flow hedge

               

Currency derivatives (NDF)

  12.3

 

  36.1

 

  36.1

 

-

 

-

 

-

 

-

 

-

Currency derivatives (Future)

9.4

 

9.4

 

9.4

 

-

 

-

 

-

 

-

 

-

Swap (index / currency / stocks)

  99.2

 

  98.9

 

  98.9

 

-

 

-

 

-

 

-

 

-

Commodities derivatives (Future)

3.4

 

3.4

 

3.4

 

-

 

-

 

-

 

-

 

-


 

4.4.BRF S.A.Market risk management

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

12.31.15

 

Book
value

 

Cash flow contracted

 

2016

 

2017

 

2018

 

2019

 

2020

 

After
5 years

Non derivative financial liabilities

               

Loans and financing

5,889.3

 

6,830.6

 

2,674.0

 

1,002.6

 

2,406.6

 

284.9

 

451.1

 

11.4

BRF bonds

8,085.5

 

10,705.8

 

353.1

 

353.1

 

833.7

 

314.3

 

314.3

 

8,537.3

BFF bonds

475.3

 

612.6

 

33.5

 

33.5

 

33.5

 

33.5

 

478.6

 

-

Sadia bonds

443.3

 

485.7

 

30.3

 

455.4

 

-

 

-

 

-

 

-

Quickfood bonds

285.7

 

413.3

 

143.4

 

109.1

 

72.4

 

53.8

 

34.6

 

-

Trade accounts payable

4,745.0

 

4,745.0

 

4,745.0

 

-

 

-

 

-

 

-

 

-

Financial lease

186.6

 

275.0

 

59.1

 

35.8

 

27.2

 

23.9

 

22.5

 

106.5

Operational lease

-

 

698.4

 

463.6

 

101.6

 

37.6

 

19.2

 

13.6

 

62.8

                

Derivative financial liabilities

               

Financial instruments designated as cash flow hedge

               

Interest rate and exchange rate derivatives

326.7

 

309.6

 

28.2

 

28.2

 

252.7

 

0.5

 

-

 

-

Currency derivatives (NDF)

66.7

 

54.9

 

54.9

 

-

 

-

 

-

 

-

 

-

Fixed exchange rate

33.8

 

40.1

 

40.1

 

-

 

-

 

-

 

-

 

-

Currency derivatives (options)

217.1

 

121.3

 

51.5

 

69.8

 

-

 

-

 

-

 

-

Commodities derivatives (NDF)

11.7

 

28.1

 

28.1

 

-

 

-

 

-

 

-

 

-

Financial instruments not designated as cash flow hedge

               

Currency derivatives (NDF)

3.9

 

4.2

 

4.2

 

-

 

-

 

-

 

-

 

-

Interest rate and exchange rate derivatives

6.8

 

74.8

 

74.1

 

0.5

 

0.2

 

-

 

-

 

-

c.a.             Interest rate risk management

 

Interest ratesrate risk is the one that may cause economic losses to the Company incurs in economic losses resulting from changes in thesevolatility of the rates, which could affectaffecting its assets and liabilities.

 

The Company’s Risk Policy does not restrict exposure to different interest rates, neither establishes limits norfor fixed or floating rates. However, the Company continually monitors

the market interest rates, in order to evaluate any need to enter into hedging transaction to protect from the exposure to fluctuation of such rates and manage the mismatch between its financial investments and debts. In these transactions the Company enters into contracts that exchange floating rate for fixed rate or vice-versa. Such transactions were designated by the Company as cash flow hedge.

 

The Company’s indebtedness is essentially tiedlinked to the London Interbank Offered rateRate ("LIBOR"), fixed coupon (“R$ and USD”), Long Term Interest Rate ("TJLP"Interbank Deposit Certificate (“CDI”) and Monetary Unit of the Bank National Economic and Social Development ("UMBNDES"Broad Consumer Price Index (“IPCA”) rates.. In casesituations of adverse market changes in the market that result in an increase in LIBOR, TJLPCDI and UMBNDES hikes,IPCA, the cost of the floating indebtednessfloating-rate debt rises and on the other hand, the cost of the fixed indebtednessfixed-rate debt decreases in relative terms.

 

With regards toRegarding the Company's marketable securities, the main index isCompany holds mainly instruments indexed by the Interbank Deposit Certificate ("CDI") for investments in Brazil and fixed coupon (“USD”) for investments in the Internationalforeign market.

 

The derivative instruments held to reduce the interest rate risk exposure as of December 31, 2018 are set forth below:

F-33


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.31.18

Cash flow hedges - Derivative instruments

 

Maturity

 

Hedged Object

 

Asset

 

Liability

 

Notional

 

Fair value (R$)

Interest rate swap

 

02.01.19

 

Debt

 

LIBOR 6M + 2.70% p.a.

 

5.90% p.a.

 

      25.0

US$

 

-

Interest rate swap

 

02.01.19

 

Debt

 

LIBOR 6M + 2.70% p.a.

 

5.88% p.a.

 

      25.0

US$

 

-

              
              
              
              

12.31.18

Derivative instruments not designated

 

Maturity

 

Hedged Object

 

Asset

 

Liability

 

Notional

 

Fair value (R$)

Interest rate swap

 

04.02.19

 

Debt

 

R$ (Fixed 9.61% p.a.)

 

95.00% CDI

 

     250.0

BRL

 

13.3

Interest rate swap

 

04.02.19

 

Debt

 

R$ (Fixed 9.61% p.a.)

 

93.54% CDI

 

     249.0

BRL

 

13.8

              
             

27.1

d.b.             ForeignForeing exchange risk management

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Foreign exchange risk is the one related to variations of foreign exchange rates that may cause unexpected losses to the Company to incur unexpected losses, leading to a reductionresulting from volatility of the FX rates, reducing its assets or an increaserevenues or increasing its liabilities and costs. The Company’s exposure is managed in liabilities.two dimensions: statement of financial position exposure and operating income exposure.

i.Statement of financial position exposure

The Risk Policy is intendedregarding the statement of financial position exposure has the objective to protect the Company's results from these variations, in order to:

·Protect operating revenues and costs that are related to transactions arising from commercial activities, such as estimated exports and purchases of raw materials, utilizing hedging instruments, that is, to protect its future cash flow denominated in foreign currency; and

·Managebalance assets and liabilities denominated in foreign currencies, in order to protecthedging the balance sheetCompany’s statement of the Company, through the use offinancial position by using natural hedges, over-the-counter derivatives and futures transactions.exchange traded futures.

 

The Company’s consolidated financial statements are mainly impacted by variations in the following currencies:  (i)Kuwait Dinar, United Arab Emirates Dirhan, U.S. Dollar, (ii) Euro, (iii) Iene, (iv)Yen, Turkish Lira, Saudi Arabian Riyal, Qatari Riyal and Russian Ruble, Thai Baht, Pound Sterling, Argentinian Peso. The last three shall loose relevance in 2019, aligned with the discontinuation of the Argentina, Europe and (v) Argentine Peso.Thailand Operations.

 

Assets and liabilities denominated in foreign currency which exchange variations are recognized in the income statement are as follows:follows, summarized in Brazilian Reais:

 

 

12.31.15

 

12.31.14

Cash and cash equivalents and marketable securities

5,322.9

 

4,551.2

Trade accounts receivable

2,146.0

 

1,693.3

Receivables from unconsolidated associates and joint ventures

250.8

 

1.3

Restricted cash

1,346.3

 

-

Dollar future agreements

741.9

 

252.3

Embedded derivative

-

 

1,853.4

Inventories

0.2

 

21.1

Exchange rate contracts (Swap)

968.8

 

(4.6)

Loans and financing

(11,359.7)

 

(7,596.2)

Bonds designated as cash flow hedge

1,171.4

 

796.9

Export prepayments designated as cash flow hedge

1,171.4

 

796.9

Trade accounts payable

(1,496.8)

 

(794.8)

Supply chain finance

(489.0)

 

(162.4)

Other assets and liabilities, net

(232.1)

 

97.6

 

(457.9)

 

1,506.0

 

 

 

 

Foreign exchange exposure (in US$) (liabilities)/assets

(117.3)

 

567.0

 

 

 

 

Foreign exchange exposure impacting the statement of income (in US$)

(39.8)

 

550.5

Foreign exchange exposure included in other comprehensive income (in US$)

(77.5)

 

16.5

 

 

 

 

Foreign exchange exposure (in US$) (liabilities)/assets

(117.3)

 

567.0

  

12.31.18

 

12.31.17

     

Cash and cash equivalents

 

           127.3

 

           278.1

Trade accounts receivable

 

             65.8

 

           862.2

Trade accounts payable

 

         (861.3)

 

             31.4

Loans and financing

 

      (7,348.0)

 

      (6,136.4)

Hedge

 

        5,209.2

 

        3,049.7

Investments, net

 

        2,571.9

 

        1,985.7

Other assets and liabilities, net

 

              0.3

 

           (15.3)

     

Exposure in result

 

         (234.8)

 

             55.4

 

F-34


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The investments, net line item is comprised of natural hedges derived from assets and liabilities of foreign subsidiaries with Brazilian Reais as functional currency.

The net P&L exposure is mainly composed of the following currencies: 

  

 

 

12.31.18

 

 

 

12.31.17

Net P&L Exposure

 

in millions

 

Equivalent in millions of R$

 

in millions

 

Equivalent in millions of R$

         

Argentinian Peso

 

   1,812.8

 

186.5

 

  1,066.3

 

   187.1

Euros

 

   (87.7)

 

   (389.4)

 

   (41.0)

 

  (162.8)

Pound Sterling

 

   (14.4)

 

  (71.3)

 

   2.9

 

  13.1

Yen

 

   114.6

 

  4.0

 

  1,309.7

 

  38.5

Rubles

 

   1,649.3

 

   91.7

 

  1,334.3

 

  76.6

Turkish Liras

 

(475.6)

 

   (348.6)

 

(391.2)

 

  (342.4)

U.S. Dollars

 

  75.4

 

292.3

 

74.2

 

   245.3

Total

   

   (234.8)

   

  55.4

The Company’s foreign subsidiaries have amounts denominated in Brazilian Reais registered as trade accounts payable, which reduces the exposure to liabilities in foreign

currencies registered in Brazil. On December 31, 2015,2017, this effect overcame the netamount of trade accounts payable in foreign currencies registered in Brazil, generating an inversion of the trade accounts payable exposure when compared to December 31, 2018.

In other situations, this dynamic may also occur for cash and cash equivalents.

In addition, the Company has a foreign exchange exposure is withinrelated to investments abroad that impacts shareholders’ equity equivalent to R$5,872.0 on December 31, 2018 (R$5,519.3 on December 31, 2017). This exposure does not contemplate the limit set byeffects of the Company's Risk Policy.financial instruments designated as hedging instruments, whose changes in fair value present a temporary effect on shareholders’ equity. 

 

 


BRF S.A.The derivative financial instruments hired to hedge foreign currency statement of financial position exposure on December 31, 2018 are not designated as hedge accounting and are set forth below:

   

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.31.18

Derivative instruments not designated

 

Asset

 

Liability

 

Maturity

 

Notional

 

Average Rate

 

Fair value (R$)

Non-deliverable forward

 

 USD

 

 BRL

 

1st Qtr. 2019

 

127.0

 US$

 

   3.9152

 

  (2.5)

Non-deliverable forward

 

 EUR

 

 BRL

 

1st Qtr. 2019

 

396.0

 EUR

 

   4.5145

 

  (9.1)

Non-deliverable forward

 

 GBP

 

 BRL

 

1st Qtr. 2019

 

   49.0

 GBP

 

   4.9844

 

  (0.7)

Futures - B3

 

 USD

 

 BRL

 

02.2019

 

594.8

 US$

 

   3.8786

 

  (9.4)

Currency swap

 

 US$ + 2.61% p.a.

 

 89.00% CDI

 

04.2019

 

   50.4

 US$

 

   -

 

   4.4

Currency swap

 

 US$ + 4.67% p.a.

 

 109.00% CDI

 

11.2019

 

   55.0

 US$

 

   -

 

   4.9

Non-deliverable forward

 

 EUR

 

 US$

 

1st Qtr. 2019

 

100.0

 EUR

 

   1.1468

 

   2.4

Collar

 

 TRY

 

 US$

 

1st Qtr. 2019

 

   50.0

 US$

 

   5.6215

 

  (0.8)

              

Total

            

   (10.8)

 

F-35


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

e.ii.              Commodity price risk managementOperating income exposure

In the normal course of its operations, the Company purchases commodities, mainly corn, soymeal, oil and live hog, which are some of the individual components of production cost.

Corn, soymeal and oil prices are subject to volatility resulting from weather conditions, crop yield, transportation and storage costs, government’s agricultural policy, foreign exchange rates and the prices of these commodities on the international market, among others factors. The prices of hog acquired from third parties are subject to market conditions and are influenced by internal availability and levels of demand in the international market, among other aspects.

 

The Risk Policy establishes limitsregarding operating income exposure has the objective to hedge revenues and costs denominated in foreign currencies. The Company is supported by internal models to measure and monitor these risks, and uses financial instruments for hedging, designating the corn and soymeal purchaserelations as cash flow aiming to reduce the impact resulting from a price increase of these raw materials, and may utilize derivative instruments or inventory management for this purpose. Currently, the management of inventory levels is used as a hedging instrument.

f.Capital managementhedges.

 

The Company’s definition of the adequate capital structure is essentially associated with (i) cash strength as a tolerance factor to liquidity volatility, (ii) financial leverage and (iii) maximization of the opportunity cost of capital.

The cash and liquidity strategy takes into consideration the historical scenarios of volatility of results as well as simulations of sectorial and systemic crises and is based on permitting the resilience in scenarios of restricted access to capital.

Financial leverage aims the balance between the different sources of funding and their conditions of allocation in order to maximize the opportunity cost to BRF in its business expansion initiatives. Moreover, the objective of maintaining the investment grade disciplines the weighting of using own and third party capital.

The Company monitors levels of gross and net debt, which are shown below:


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

12.31.15

 

12.31.14

 

Current

 

Non-current

 

Total

 

Total

Foreign currency debt

(1,166.1)

 

(10,193.5)

 

(11,359.7)

 

(7,596.2)

Local currency debt

(1,462.0)

 

(2,357.6)

 

(3,819.6)

 

(3,993.1)

Other financial liabilities

(666.6)

 

-

 

(666.6)

 

(257.4)

Gross debt

(3,294.7)

 

(12,551.1)

 

(15,845.8)

 

(11,846.7)

 

 

 

 

 

 

 

 

Cash and cash equivalents and marketable securities

6,097.6

 

456.0

 

6,553.6

 

6,656.5

Other financial assets

129.4

 

-

 

129.4

 

43.1

Restricted cash

1,346.3

 

479.8

 

1,826.1

 

115.2

Net debt

4,278.6

 

(11,615.3)

 

(7,336.7)

 

(5,031.9)

4.2.Derivative and non-derivative financial instruments designated as hedge accounting

As established by IAS 39, the Company applies hedge accounting to certain derivative instruments classified as cash flow hedge, in accordance with the Risk Policy. Cash flow hedges consist of hedging the exposure to variations in cash flows attributable to a particular risk associated with a recognized asset or liability, or a highly probable transaction that could affect profit and loss.

The Risk Policy has also the purpose of determining parameters of use of financial instruments, including derivatives, which are designed to protect the operating and financial assets and liabilities, which are exposed to the variations of foreign exchange rates, the fluctuation of the interest rates and changes to the commodity prices. The Risk Management area is responsible for ensuring compliance to the requirements established by the Company’s Risk Policy.

The Company has formally designated its operations for hedge accounting treatment for the derivative financial instruments to protect cash flows and export revenues by documenting:

·The relationship of the hedge;

·The objective and risk management strategy of the Company to enter into a hedge transaction;

·The identification of the financial instrument;

·The hedge object or transaction;

·The nature of the risk to be hedged;

·The description of the hedge relationship;


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

·The demonstration of the correlation between the hedge transaction and the hedge object, when applicable; and

·The prospective demonstration of the effectiveness of the hedge.

The transactions for which the Company has designated hedge accounting are highly probable, present an exposure to variation in cash flow that could affect profit and loss and are highly effective in protecting changes in fair value or cash flows attributable to hedged risk, consistent with the risk originally documented in the Risk Policy.

The effectiveness tests are prepared prospectively and retrospectively at each period end.

The prospective test is based on the comparison between the critical terms of derivative and non-derivative financial instruments and the hedged items. The hedged items (e.g. future monthly export sales) and the hedge instruments have the same critical terms, as follows:

·Both fair value change due to the exchange rate variation (spot or forward rate method);

·Their nominal values (notional) are similar; and

·Their maturities are identical and both the hedged item (revenue) and the settlement of the financial instrument will occur at the same period.

The retrospective test is based on the analysis of the coverage ratio. This ratio compares the fair value variation accumulated since the inception of the hedged item (date of hedge designation) with the accumulated variation of the derivative and non-derivative financial instrument since its inception.

The effectiveness of the hedge is determined at the settlement date of the financial instrument, by comparing the cumulative changes of highly probable revenues with the gains or losses arising from the financial instruments.

The Company, within its hedge accounting strategy, utilizes the following financial instruments:

a.Non-deliverable forwards – NDF

Non-deliverable forward contract is the future commitment to purchase or sell currencies on a certain date in the future for a predetermined price. This contract does not require physical settlement of contracted positions, but the financial settlement of the difference between the settlement price and the predetermined price of the contract.

b.Interest rate and currency swap


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Similar to a non-deliverable forward contract, the swap is the future commitment to buy or sell certain interest rates or currency at a specified date in the future for a predetermined price. The particularity in this type of transaction is the possibility to exchange cash flows on various dates. The Company contracts swaps that do not require the physical settlement of contracted positions, but the financial settlement of the difference between the settlement price and the price established in the contract.

c.Options

A put option gives the holder (option holder) the right to buy an asset at a certain price (strike) at certain future date (the exercise date). A call option gives the holder the right to sell an asset at a certain price at a certain future date. In addition, there is a possibility of buying (premium disbursement, with rights) or selling (premium receiving, with obligations).

d.Fixed exchange rate

Fixed exchange rate is a non-derivative financial instrument contracted from financial institutions that allows the definition of a future rate to internalization of resources arising from foreign activities. Contractually, there is the requirement of submission of export invoices to prove the nature of resources which will be internalized trough closing of exchange rate. Such contract has similar characteristics of a non-deliverable forward derivative contract because it determines, at its inception, a future exchange rate. Nevertheless, the contract requires a physical settlement of the contracted positions.

e.Export prepayments – PPEs

The Company utilizes the exchange rates variation of export prepayments contracts (“PPEs”) as a hedge instrument for the highly probable future sales in foreign currency.

f.Senior unsecured notes – Bonds

The Company designates part of the transactions involving Senior Unsecured Notes as hedge accounting.

g.Commodities non-deliverable forwards  – NDF

Non-deliverable forward contract is the future commitment to purchase or sell determined types of commodities in a certain future date for a predetermined price. This contract does not require physical settlement of contracted positions, but the financial settlement of the difference between the settlement price and the predetermined price of the contract.

4.2.1 Breakdown of the balances of derivative financial instruments


The details of derivative financial instruments are as follows:

12.31.15

 

12.31.14

Instrument

 

Hedge object

 

Reference currency (notional)

 

Reference

value
(notional)

 

Fair value (1)

 

Reference

value
(notional)

 

Fair value (1)

Financial instruments designated as hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

NDF - Dollar sale(2)

 

Currency

 

USD

 

44.0

 

(17.9)

 

439.7

 

(62.7)

NDF - Euro sale(2)

 

Currency

 

EUR

 

31.8

 

(5.5)

 

74.0

 

0.2

NDF - Pound Sterling sale(2)

 

Currency

 

GBP

 

11.0

 

(1.6)

 

41.6

 

(2.1)

NDF - Iene sale(2)

 

Currency

 

JPY

 

6,800.0

 

(39.6)

 

16,993.2

 

(2.8)

Currency swap - US$(2)

 

Currency

 

BRL

 

250.0

 

(248.5)

 

250.0

 

(90.3)

Interest rate swap - US$ (2)

 

Interest

 

USD

 

200.0

 

(31.8)

 

200.0

 

(29.1)

Fixed exchange rate - US$(2)

 

Currency

 

USD

 

201.0

 

(33.8)

 

102.5

 

(2.8)

Fixed exchange rate - Euro(2)

 

Currency

 

EUR

 

-

 

-

 

8.0

 

0.3

Options (Collar) - US$(2)

 

Currency

 

USD

 

1,227.0

 

(124.5)

 

164.0

 

(4.0)

Options (Collar) - Euro(2)

 

Currency

 

EUR

 

31.0

 

3.5

 

-

 

-

NDF - Corn purchase(2)

 

Commodities

 

Ton/USD

 

633.6

 

(11.7)

 

-

 

-

Interest rate swap - US$(2)

 

Interest

 

USD

 

200.0

 

(46.4)

 

200.0

 

(38.6)

Total

 

 

 

 

 

 

 

(557.8)

 

 

 

(231.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments not designated as hedge accounting

 

 

 

 

 

 

 

 

 

 

 

 

NDF - Iene sale(2)

 

Currency

 

JPY

 

6,451.4

 

(1.2)

 

1,000.0

 

1.1

NDF - Purchase of US$(2)

 

Currency

 

USD

 

50.0

 

(2.4)

 

-

 

-

Embedded derivative(2)

 

Currency

 

USD

 

-

 

-

 

697.8

 

28.0

Currency swap - US$ (2)

 

Currency

 

USD

 

250.0

 

(1.0)

 

2.8

 

(1.8)

Interest rate - R$(2)

 

Interest

 

BRL

 

50.0

 

(2.3)

 

590.0

 

(1.4)

NDF - Corn purchase(2)

 

Commodities

 

Ton/USD

 

54.8

 

2.2

 

-

 

-

Future - BM&FBovespa (2)

 

Currency

 

USD

 

190.0

 

14.6

 

95.0

 

(5.7)

NDF - Purchase of Euro (2)

 

Currency

 

EUR

 

150.0

 

1.3

 

-

 

-

NDF - Euro (2)

 

Currency

 

EUR

 

-

 

-

 

150.0

 

0.1

NDF - Pound Sterling sale (2)

 

Currency

 

GBP

 

20.0

 

1.1

 

20.0

 

(2.6)

NDF - Argentine Peso sale (2)

 

Currency

 

USD

 

10.0

 

8.0

 

3.4

 

(0.1)

Total

 

 

 

 

 

 

 

20.3

 

 

 

17.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

(537.5)

 

 

 

(214.3)

             

(1)The market value determination method used by the Company consists of calculating the future value based on the contracted conditions and determining the present value based on market curves, obtained from the database of Bloomberg and BM&FBOVESPA.

(2)Cash flow hedge.

a.Non-deliverable forwards – NDF

i.Currency non-deliverable forwards - NDF

The position of the currency non-deliverable forward – NDF, by maturity, as well as the weighted average exchange rates and the fair value, are presented as follows:

12.31.15

PUT

 

R$ x US$

 

R$ x EUR

 

 

 

 

Maturities

 

Notional (US$)

 

Average rate

 

Fair value

 

Notional (EUR)

 

Average rate

 

Fair value

Financial instruments designated as cash flow hedge

January 2016

 

19.0

 

3.9019

 

(0.5)

 

5.0

 

3.7252

 

(2.9)

February 2016

 

-

 

-

 

-

 

4.5

 

3.8052

 

(2.6)

March 2016

 

-

 

-

 

-

 

5.0

 

4.0961

 

(1.6)

April 2016

 

25.0

 

3.3586

 

(17.4)

 

2.0

 

4.5070

 

0.1

May 2016

 

-

 

-

 

-

 

8.3

 

4.6333

 

1.0

June 2016

 

-

 

-

 

-

 

4.0

 

4.6300

 

0.3

July 2016

 

-

 

-

 

-

 

3.0

 

4.6790

 

0.2

 

 

44.0

 

3.5932

 

(17.9)

 

31.8

 

4.2848

 

(5.5)

             


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

PUT

 

R$ x GBP(1)

 

R$ x JPY(1)

Maturities

 

Notional (GBP)

 

Average rate

 

Fair value

 

Notional (JPY)

 

Average rate

 

Fair value

Financial instruments designed as hedge accounting

            

January 2016

 

3.0

 

5.6571

 

(0.5)

 

2,324.1

 

0.0271

 

(13.2)

February 2016

 

2.5

 

5.5172

 

(1.1)

 

2,023.8

 

0.0273

 

(12.0)

March 2016

 

1.5

 

5.7905

 

(0.3)

 

2,029.4

 

0.0276

 

(11.9)

April 2016

 

1.5

 

6.1620

 

0.2

 

105.7

 

0.0278

 

(0.6)

May 2016

 

1.2

 

6.2570

 

0.2

 

105.7

 

0.0281

 

(0.6)

June 2016

 

1.3

 

6.1400

 

-

 

211.4

 

0.0283

 

(1.3)

  

11.0

 

5.8349

 

(1.6)

 

6,800.1

 

0.0274

 

(39.6)

(1)Cash flow hedge.

CALL

 

USD x BRL

 

USD x EUR

Maturities

 

Notional (US$)

 

Average rate

 

Fair value

 

Notional (EUR)

 

Average rate

 

Fair value

Financial instruments not designated as cash flow hedge

            

January 2016

 

50.0

 

4.0664

 

(2.4)

 

-

 

-

 

-

March 2016

 

-

 

-

 

-

 

150.0

 

1.0864

 

1.3

  

50.0

 

4.0664

 

(2.4)

 

150.0

 

1.0864

 

1.3

PUT

 

USD x GBP

 

R$ x JPY

Maturities

 

Notional (GBP)

 

Average rate

 

Fair value

 

Notional (JPY)

 

Average rate

 

Fair value

Financial instruments not designated as cash flow hedge

            

January 2016

 

-

 

-

 

-

 

6,451.4

 

0.0329

 

(1.2)

March 2016

 

20.0

 

1.4877

 

1.1

 

-

 

-

 

-

  

20.0

 

1.4877

 

1.1

 

6,451.4

 

0.0329

 

(1.2)

PUT

 

ARS x USD

Maturities

 

Notional (USD)

 

Average rate

 

Fair value

Financial instruments not designated as cash flow hedge

      

March 2016

 

3.5

 

9.6730

 

1.7

April 2016

 

4.5

 

9.2879

 

4.4

May 2016

 

2.0

 

9.4290

 

1.9

  

10.0

 

9.4509

 

8.0

ii.Commodities non-deliverable forwards – NDF

The position of the commodities non-deliverable forwards – NDF, by maturity,  as well as weighted average exchange rates and fair value are presented as follows:

12.31.15

Call

 

Quantity

 

Average rate

 

Fair

Maturities

 

(Tonnes)

 

(US$/Tonne)

 

value

Designated as hedge accounting

 

 

 

 

 

 

January 2016

 

133.5

 

0.1

 

(3.4)

February 2016

 

159.4

 

0.1

 

(2.7)

March 2016

 

164.0

 

0.1

 

(2.3)

April 2016

 

99.3

 

0.1

 

(1.3)

May 2016

 

56.5

 

0.2

 

(1.2)

July 2016

 

4.7

 

0.2

 

(0.2)

August 2016

 

16.2

 

0.2

 

(0.6)

 

 

633.6

 

0.1

 

(11.7)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

PUT

 

Quantity

 

Average rate

 

Fair

Maturities

 

(Tonnes)

 

(US$/Tonne)

 

value

Not designated as hedge accounting

 

 

 

 

 

 

June 2016

 

49.2

 

0.2

 

2.0

July 2016

 

3.2

 

0.2

 

0.1

September 2016

 

2.4

 

0.2

 

0.1

 

 

54.8

 

0.2

 

2.2

b.Interest rate and currency swap

The position of interest rate and currency swaps is presented as follows:

12.31.15

Instrument

 

Maturity

 

Assets
(Hedged object)

 

Liabilities (Protected risk)

 

Notional

 

Fair value

Financial instruments designated as cash flow hedge

      
           

Interest rate

 

01.22.18

 

LIBOR 6M + 2.82% p.a.

 

5.86% p.a.

 

100.0

 

(15.9)

Interest rate

 

06.18.18

 

LIBOR 3M + 2.60% p.a.

 

5.47% p.a.

 

100.0

 

(15.9)

Interest rate

 

02.01.19

 

LIBOR 6M + 2.70% p.a.

 

5.90% p.a.

 

100.0

 

(23.3)

Interest rate

 

02.01.19

 

LIBOR 6M + 2.70% p.a.

 

5.88% p.a.

 

100.0

 

(23.1)

          

(78.2)

           

Currency swap

 

05.22.18

 

R$ + 7.75%

 

US$ + 1.60%

 

250.0

 

(248.5)

           
          

(326.7)

           

Financial instruments not designated as cash flow hedge

      

Interest rate - Bond

 

05.22.18

 

R$ (Fixed rate of 7.75% p.a.)

 

68.84% CDI

 

50.0

 

(2.3)

           

Currency swap

 

10.28.16

 

US$ + 1,76 % p.a

 

86,60% CDI

 

100.0

 

(1.2)

Currency swap

 

12.02.16

 

US$ + L3M + 0,90 % p.a

 

85,95% CDI

 

50.0

 

3.4

Currency swap

 

12.16.16

 

US$ + L3M + 1,10 % p.a

 

88,95% CDI

 

50.0

 

(2.7)

Currency swap

 

12.23.16

 

US$ + 2,41 % p.a

 

90,50% CDI

 

50.0

 

(0.5)

          

(1.0)

           
          

(3.3)

c.Fixed exchange rates

The position of fixed exchange rates designated as hedge instruments is presented as follows:


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.31.15

 

 

R$ x US$

Maturities

 

Notional US$

 

Average US$

 

Fair value

January 2016

 

30.0

 

3.0070

 

(27.6)

February 2016

 

19.0

 

3.9687

 

(0.8)

March 2016

 

19.0

 

4.0044

 

(0.7)

April 2016

 

19.0

 

4.0538

 

(0.6)

May 2016

 

19.0

 

4.0929

 

(0.5)

June 2016

 

19.0

 

4.1441

 

(0.3)

July 2016

 

19.0

 

4.1867

 

(0.2)

August 2016

 

57.0

 

4.1688

 

(3.1)

  

201.0

 

3.9422

 

(33.8)

       

d.Options

i.Currency options

The Company designates as a cash flow hedge only the variation in the intrinsic value of its options, recognizing the time value of the premium in the financial result. If the hedge is not effective and the option is not exercised due to devaluation of the Brazilian Real, the losses related to the options will be registered as financial expenses in the statement of income.

The Company has designated transactions involving options denominated collar where there is a purchase of a put option ("PUT") and a sale of a call option ("CALL"), simultaneously, such that the premium paid for the put is compensated by the premium received in the call.

When the market price of any of the options is not available in an active market, the fair value is based on an option pricing model (Black-Scholes or Binomial).


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.31.15

R$ x US$

Type

 

Maturities

 

Notional (US$)

 

Average US$

 

Fair value

         

Financial instruments designated as cash flow hedging instruments

Collar - Call (Sale)

 

January 2016

 

(191.0)

 

4.0698

 

(20.7)

Collar - Put (Purchase)

 

January 2016

 

191.0

 

3.7628

 

10.3

Collar - Call (Sale)

 

February 2016

 

(193.0)

 

3.9832

 

(40.8)

Collar - Put (Purchase)

 

February 2016

 

193.0

 

3.6411

 

10.2

Collar - Call (Sale)

 

March 2016

 

(130.0)

 

3.7593

 

(57.9)

Collar - Put (Purchase)

 

March 2016

 

130.0

 

3.4552

 

4.2

Collar - Call (Sale)

 

April 2016

 

(68.0)

 

4.2237

 

(16.2)

Collar - Put (Purchase)

 

April 2016

 

68.0

 

3.6841

 

5.0

Collar - Call (Sale)

 

May 2016

 

(110.0)

 

4.4852

 

(12.6)

Collar - Put (Purchase)

 

May 2016

 

110.0

 

3.8600

 

10.6

Collar - Call (Sale)

 

June 2016

 

(100.0)

 

4.7355

 

(10.1)

Collar - Put (Purchase)

 

June 2016

 

100.0

 

3.8970

 

11.9

Collar - Call (Sale)

 

July 2016

 

(85.0)

 

4.4626

 

(14.0)

Collar - Put (Purchase)

 

July 2016

 

85.0

 

3.7988

 

6.9

Collar - Call (Sale)

 

August 2016

 

(105.0)

 

4.6536

 

(15.6)

Collar - Put (Purchase)

 

August 2016

 

105.0

 

3.8476

 

10.5

Collar - Call (Sale)

 

September 2016

 

(90.0)

 

4.7569

 

(13.6)

Collar - Put (Purchase)

 

September 2016

 

90.0

 

3.8583

 

9.6

Collar - Call (Sale)

 

October 2016

 

(55.0)

 

4.8645

 

(8.2)

Collar - Put (Purchase)

 

October 2016

 

55.0

 

3.8345

 

5.5

Collar - Call (Sale)

 

November 2016

 

(40.0)

 

4.8996

 

(6.3)

Collar - Put (Purchase)

 

November 2016

 

40.0

 

3.7900

 

3.4

Total Option (Collar)

   

-

   

(127.9)

         

Put (Purchase)

 

January 2016

 

30.0

 

3.9200

 

1.5

Put (Purchase)

 

February 2016

 

30.0

 

3.9200

 

1.9

Total Option (Put)

       

3.4

         
        

(124.5)

12.31.15

R$ x EUR

Type

 

Maturities

 

Notional (EUR)

 

Average EUR

 

Fair value

         

Financial instruments designated as cash flow hedging instruments

Collar - Call (Sale)

 

January 2016

 

(8.0)

 

4.9250

 

-

Collar - Put (Purchase)

 

January 2016

 

8.0

 

4.3750

 

1.0

Collar - Call (Sale)

 

February 2016

 

(8.0)

 

4.9475

 

(0.2)

Collar - Put (Purchase)

 

February 2016

 

8.0

 

4.3950

 

1.3

Collar - Call (Sale)

 

March 2016

 

(7.0)

 

4.9894

 

(0.3)

Collar - Put (Purchase)

 

March 2016

 

7.0

 

4.3843

 

1.2

Collar - Call (Sale)

 

April 2016

 

(8.0)

 

5.0395

 

(0.6)

Collar - Put (Purchase)

 

April 2016

 

8.0

 

4.3450

 

1.2

Total Option (Collar)

   

-

   

3.6


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


4.2.2 Breakdown of the balances of non-derivative financial instruments

The position of non-derivative financial instruments is presented as follows:

 

 

 

 

 

 

12.31.15

 

12.31.14

Hedge Instrument

 

Hedge object

 

Reference currency (notional)

 

Value (notional)

 

Fair value
(1)

 

Value (notional)

 

Fair value
(1)

Financial instruments designated as cash flow hedge

            
             

Export prepayment - PPEs

 

Exchange

 

USD

 

300.0

 

1,171.4

 

300.0

 

796.9

Senior unsecured notes - Bonds

 

Exchange

 

USD

 

300.0

 

1,171.4

 

300.0

 

796.9

             
      

600.0

 

2,342.8

 

600.0

 

1,593.8

(1)Reference value converted by Ptax rate in effect at year-end.

a.Export prepayments – PPEs

The position of PPEs is presented as follows:

12.31.15

Hedge Instrument

 

Type of risk hedged

 

Maturities

 

Notional
(US$)

 

Average rate

 

Fair value

           

Export prepayment - PPE

 

US$ (E.R.)

 

02.2017 to 02.2019

 

300.0

 

1.7796

 

1,171.4

b.Senior unsecured notes – Bonds

The position of bonds designated as cash flow hedge is presented as follows:

12.31.15

Hedge Instrument

 

Type of risk hedged

 

Maturities

 

Notional
(US$)

 

Average rate

 

Fair value

           

BRF SA BRFSBZ5

 

US$ (E.R.)

 

06.2022

 

150.0

 

2.0213

 

585.7

BRF SA BRFSBZ3

 

US$ (E.R.)

 

05.2023

 

150.0

 

2.0387

 

585.7

           
      

300.0

 

2.0300

 

1,171.4

4.3.Gains and losses of derivative and non-derivative financial instruments

The unrealized gains and losses of derivative and non-derivative financial instruments designated as cash flow hedge are recorded as a component of other comprehensive income, as set forth below:


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


 

12.31.15

 

12.31.14

Derivatives designated as cash flow hedge instruments

   

Foreign exchange risks

(420.6)

 

(152.7)

Interest risks

(66.6)

 

(59.3)

Commodity risks

3.6

 

-

 

(483.6)

 

(212.0)

    

Non derivatives designated as cash flow hedge instruments

   

Foreign exchange risks

(1,200.0)

 

(450.8)

    

Gross losses

(1,683.6)

 

(662.8)

Deferred taxes on losses

560.4

 

214.1

Losses, net of taxes

(1,123.2)

 

(448.7)

    
    

Change in gross losses

(1,020.8)

 

(162.8)

Income taxes on financial instruments adjustments

346.4

 

55.8

Impact in other comprehensive income

(674.4)

 

(107.0)

    

On December 31, 2015, realized transactions with derivative and non-derivative financial instruments designated as cash flow hedges resulted in a loss of R$476.9 (loss of R$77.1 as offor FX operating exposure on December 31, 2014), composed2018 are set forth below: 

12.31.18

Cash flow hedges - Derivative instruments

 

Hedged object

 

Asset

 

Liability

 

Maturity

 

Notional

 

Average Rate

 

Fair value (R$)

Non-deliverable forward

 

 USD Exports

 

 BRL

 

 US$

 

1st Qtr. 2019

 

   70.0

 US$

 

  3.8642

 

   (1.5)

Non-deliverable forward

 

 USD Exports

 

 BRL

 

 US$

 

2nd Qtr. 2019

 

   20.0

 US$

 

  3.8868

 

   (0.3)

Non-deliverable forward

 

 USD Exports

 

 BRL

 

 US$

 

3rd Qtr. 2019

 

   30.0

 US$

 

  3.9845

 

1.2

Non-deliverable forward

 

 USD Cost

 

 BRL

 

 US$

 

1st Qtr. 2019

 

   54.8

 US$

 

  3.8014

 

   (4.5)

Non-deliverable forward

 

 USD Cost

 

 BRL

 

 US$

 

2nd Qtr. 2019

 

   40.8

 US$

 

  3.9258

 

0.3

Non-deliverable forward

 

 USD Cost

 

 BRL

 

 US$

 

3rd Qtr. 2019

 

   11.7

 US$

 

  4.1418

 

2.3

Non-deliverable forward

 

 USD Cost

 

 BRL

 

 US$

 

4th Qtr. 2019

 

2.5

 US$

 

  3.9441

 

   (0.1)

Non-deliverable forward

 

 EUR Exports

 

 BRL

 

 EUR

 

1st Qtr. 2019

 

   10.0

 EUR

 

  4.4645

 

0.2

Non-deliverable forward

 

 JPY Exports

 

 BRL

 

 JPY

 

1st Qtr. 2019

 

6,365.6

 JPY

 

  0.0351

 

   (1.8)

Collar

 

 USD Exports

 

 BRL

 

 US$

 

1st Qtr. 2019

 

385.0

 US$

 

  3.9664

 

  22.8

Collar

 

 USD Exports

 

 BRL

 

 US$

 

2nd Qtr. 2019

 

180.0

 US$

 

  3.9560

 

3.9

Collar

 

 USD Exports

 

 BRL

 

 US$

 

3rd Qtr. 2019

 

   80.0

 US$

 

  4.0912

 

7.6

Collar

 

 USD Exports

 

 BRL

 

 US$

 

4th Qtr. 2019

 

   35.0

 US$

 

  3.9471

 

   (1.5)

Collar

 

 USD Exports

 

 BRL

 

 US$

 

1st Qtr. 2019

 

   25.0

 US$

 

  3.5172

 

   (7.2)

                

Total

              

  21.4

                
                

12.31.18

Cash flow hedges - Non-derivative instruments

 

Coverage

 

Asset

 

Liability

 

Maturity

 

Notional

 

Average Rate

 

Fair value (R$) (1)

Export prepayment - PPE

 

 USD Exports

 

 -

 

 US$

 

01.2019 to 02.2019

 

   33.3

 US$

 

  1.8758

 

  (129.1)

Bond BRF SA BRFSBZ5

 

 USD Exports

 

 -

 

 US$

 

06.2022

 

118.7

 US$

 

  2.0213

 

  (561.4)

Bond BRF SA BRFSBZ3

 

 USD Exports

 

 -

 

 US$

 

05.2023

 

150.0

 US$

 

  2.0387

 

  (581.2)

                

Total

              

  (1,271.7)

(1)Notional amount converted by the Ptax rate at the end of a net loss amounting to R$469.9 (loss of R$72.3 as of December 31, 2014) recorded as gross revenues and a net loss of R$7.0 (gain of R$4.8 as of December 31, 2014) recorded as financial expenses.the period or partial revocation dates. This amount represents the total that may impact the Company's shareholders' equity.

 

4.4.c.             Breakdown of financial instruments by category – except derivatives

 

12.31.15

 

Loans and receivables

 

Available for sale

 

Trading securities

 

Held to maturity

 

Financial liabilities

 

Total

Assets

           

Amortized cost

           

Marketable securities

-

 

-

 

-

 

70.3

 

-

 

70.3

Restricted cash

-

 

-

 

-

 

1,826.1

 

-

 

1,826.1

Trade accounts receivable

3,880.4

 

-

 

-

 

-

 

-

 

3,880.4

Other credits

534.5

 

-

 

-

 

-

 

-

 

534.5

Other receivables

153.0

 

-

 

-

 

-

 

-

 

153.0

Fair value

           

Marketable securities

-

 

744.8

 

375.6

 

-

 

-

 

1,120.4

            

Liabilities

           

Amortized cost

           

Trade accounts payable

-

 

-

 

-

 

-

 

(4,745.0)

 

(4,745.0)

Supply chain finance

-

 

-

 

-

 

-

 

(1,174.6)

 

(1,174.6)

Loans and financing

           

Local currency

-

 

-

 

-

 

-

 

(3,819.6)

 

(3,819.6)

Foreign currency

-

 

-

 

-

 

-

 

(11,359.7)

 

(11,359.7)

Capital lease payable

-

 

-

 

-

 

-

 

(186.6)

 

(186.6)

 

4,567.9

 

744.8

 

375.6

 

1,896.4

 

(21,285.5)

 

(13,700.8)


BRF S.A.Commodities price risk

 

NotesIn the ordinary course of business, the Company purchases commodities, mainly corn, soybean, soybean meal and soybean oil, individual components of the production costs.

Corn, soy, grain prices are subject to Consolidated Financial Statementsvolatility resulting from weather conditions, harvest productivity, transport and warehouse costs, government agricultural policies, FX rates and international market prices, among other factors.

Years ended

The Risk Policy establishes coverage limits to the flow of purchases of corn, grain and soy with the purpose of reducing the impact due to a price increase of these raw materials. The hedge may be reached using derivatives or by inventory management.

The financial instruments designated as cash flow hedges and fair value hedges for the commodities price exposure on December 31, 2015, 2014 and 20132018 are set forth below:

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-36


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Cash flow hedges - Derivative instruments

 

Hedged object

 

Index

 

Maturity

 

Quantity

 

Average rate (US$/Ton)

 

Fair value (R$)

Non-deliverable forward - buy

 

 Soybean meal purchase - floating price

 

 Soybean meal - CBOT

 

1st Qtr. 2019

 

  6.0

 ton

 

144.56

 

(1.5)

Non-deliverable forward - buy

 

 Soybean meal purchase - floating price

 

 Soybean meal - CBOT

 

2nd Qtr. 2019

 

14.0

 ton

 

128.80

 

(0.7)

Non-deliverable forward - buy

 

 Soybean meal purchase - floating price

 

 Soybean meal - CBOT

 

3rd Qtr. 2019

 

21.0

 ton

 

127.54

 

(0.4)

Non-deliverable forward - buy

 

 Soybean meal purchase - floating price

 

 Soybean meal - CBOT

 

4th Qtr. 2019

 

10.0

 ton

 

127.21

 

(0.1)

Non-deliverable forward - buy

 

 Soybean purchase - fixed price

 

 Soybean - CBOT

 

1st Qtr. 2019

 

17.0

 ton

 

356.46

 

(1.8)

Non-deliverable forward - buy

 

 Soybean purchase - fixed price

 

 Soybean - CBOT

 

2nd Qtr. 2019

 

29.0

 ton

 

342.35

 

(0.9)

Non-deliverable forward - buy

 

 Corn purchase - floating price

 

 Corn - CBOT

 

1st Qtr. 2019

 

15.0

 ton

 

143.04

 

  0.3

Non-deliverable forward - buy

 

 Corn purchase - floating price

 

 Corn - CBOT

 

2nd Qtr. 2019

 

46.0

 ton

 

148.56

 

  0.4

Corn futures - buy

 

 Corn purchase - floating price

 

 Corn - B3

 

1st Qtr. 2019

 

10.8

 ton

 

599.58

 

  -

Corn futures - buy

 

 Corn purchase - floating price

 

 Corn - B3

 

2nd Qtr. 2019

 

23.5

 ton

 

611.43

 

(0.1)

Non-deliverable forward - buy

 

 Soybean oil purchase - floating price

 

 Soybean oil - CBOT

 

1st Qtr. 2019

 

10.0

 ton

 

726.42

 

(4.3)

              

Total

            

(9.1)

              
              
              

12.31.18

Fair value hedges - Derivative instruments

 

Hedged object

 

Index

 

Maturity

 

Quantity

 

Average rate (US$/Ton)

 

Fair value (R$)

Non-deliverable forward - sell

 

 Corn purchase - floating price

 

 Corn - CBOT

 

1st Qtr. 2019

 

  364.7

 ton

 

157.56

 

   14.0

Non-deliverable forward - sell

 

 Corn purchase - floating price

 

 Corn - CBOT

 

2nd Qtr. 2019

 

  263.7

 ton

 

157.28

 

  4.4

Non-deliverable forward - sell

 

 Corn purchase - floating price

 

 Corn - CBOT

 

3rd Qtr. 2019

 

84.3

 ton

 

153.06

 

(0.6)

Non-deliverable forward - sell

 

 Corn purchase - floating price

 

 Corn - CBOT

 

1st Qtr. 2019

 

22.2

 ton

 

157.40

 

  0.1

              

Total

            

   17.9

 

d.Stock price risk

On August 16, 2017, the Company sold shares held in treasury and entered into a Total Return Swap instrument registered in B3, in equivalent amount, settled on February 05, 2019. By this instrument, the paid the variation on the stock price (BRFS3) in exchange for the payment of interest indexed to CDI. This swap does not qualify as hedge accounting and therefore was not designated as such. Additionally, there are securities given as guarantee to the counterparty, as demonstrated in note 15.

The position of the Total Return Swap on December 31, 2018 is set forth below: 

 

 

12.31.14

 

Loans and receivables

 

Available for sale

 

Trading securities

 

Held to maturity

 

Financial liabilities

 

Total

Assets

           

Amortized cost

           

Marketable securities

-

 

-

 

-

 

62.1

 

-

 

62.1

Restricted cash

-

 

-

 

-

 

115.2

 

-

 

115.2

Trade accounts receivable

3,054.6

 

-

 

-

 

-

 

-

 

3,054.6

Other credits

576.7

 

-

 

-

 

-

 

-

 

576.7

Other receivables

195.5

 

-

 

-

 

-

 

-

 

195.5

Fair value

           

Marketable securities

-

 

303.9

 

283.6

 

-

 

-

 

587.5

            

Liabilities

           

Amortized cost

           

Trade accounts payable

-

 

-

 

-

 

-

 

(3,522.2)

 

(3,522.2)

Suplly chain finance

-

 

-

 

-

 

-

 

(455.1)

 

(455.1)

Loans and financing

           

Local currency

-

 

-

 

-

 

-

 

(3,454.4)

 

(3,454.4)

Foreign currency

-

 

-

 

-

 

-

 

(7,596.2)

 

(7,596.2)

Capital lease payable

-

 

-

 

-

 

-

 

(243.8)

 

(243.8)

Fair value

           

Loans and financing - NCE

-

 

-

 

-

 

-

 

(538.7)

 

(538.7)

 

3,826.8

 

303.9

 

283.6

 

177.3

 

(15,810.4)

 

(11,218.8)

12.31.18

Derivative instruments not designated

 

Maturity

 

Asset

 

Liability

 

Notional

 

Fair value (R$)

Total Return Swap

 

02.2019

 

BRFS3

 

110.00% CDI

 

     170.0

R$

 

           (99.2)

            
           

           (99.2)

 

4.5.        DeterminationHedge accounting

4.5.1.Relations designated as hedge accounting

The Company applies hedge accounting rules for derivative and non-derivative financial instruments that qualify as cash flow hedges and fair value hedges, in accordance with the Risk Policy determinations. For all the hedge relations, the hedge index, which represents the proportion of the object hedged by the instrument, is 100%.

The Company formally designates its hedge accounting relations in compliance with IFRS 09 and the Risk Policy. The hedge accounting relations used by the company as of December 31, 2018 and their effects are described below:

F-37


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

i.Cash flow hedge accounting – exports in foreign currencies

The future exports in foreign currencies are highly probable and qualify as hedged object since the Company expects to keep its sales in foreign currencies for future periods, based on sales already committed and historical exports.

The derivative and non-derivative financial instruments used for hedging (detailed in note 4.4.b.ii) have a direct economic relation with the objects risk, since both are transactions in the same currency. The main source of ineffectiveness in this relation is the possible mismatch between the instruments maturity dates and the sales dates. However, this mismatch is limited within the month of designation and it is not expected to compromise the hedge relation.

ii.Cash flow hedge –commodities

The future commodities purchases are highly probable and qualify as hedge object as far as these inputs are essential for the productive process of the Company. The exposure consists of purchases already committed and of historical purchase volumes.

The derivative instruments used as hedge (detailed in note 4.4.c) have a strong economic relation with the objects risk, since the purchase prices negotiated with the suppliers are indexed to the same prices used as coverage. The main source of ineffectiveness is the sales seasonality, which in atypical situations may delay or anticipate the orders. It is not expected that this ineffectiveness may compromise the hedge relation.

iii.Fair value hedge – commodities

The Company has agreements with suppliers for future purchases at fixed prices. These agreements are firm commitments, which the company designates as fair value hedge objects.

The derivative instruments used as hedge (detailed in note 4.4.c) have a strong economic relation with the objects risk, since the purchase prices negotiated with the suppliers are indexed to the same prices used as coverage. There are no identified sources of financialineffectiveness that may compromise the hedge relation.

4.5.2.Gains and losses with hedge accounting instruments

The gains and losses with the instruments designated as cash flow hedge, while unrealized, are registered as a component of other comprehensive income. For hedging instruments designated in fair value hedge relations, the unrealized gains and losses are recorded in inventories, item in which the object will be registered at initial recognition.

F-38


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.31.18

  

Cash flow hedge

 

Fair value hedge

  
  

Interest

 

Foreign exchange

 

Commodities

 

Commodities

  
  

Derivatives

 

Derivatives

 

Non-derivatives

 

Derivatives

 

Derivatives

 

Total

             

Fair value at the beggining of the exercise

  (13.3)

 

   (161.0)

 

(1,679.5)

 

   (8.7)

 

   1.7

 

   (1,860.8)

             

Settlement

 

   5.3

 

576.3

 

647.9

 

  28.4

 

  11.0

 

1,268.9

Inventories

 

-  

 

   -  

 

   -  

 

   (7.5)

 

   4.0

 

   (3.5)

Other comprehensive income

 

   8.5

 

186.0

 

   81.8

 

(11.5)

 

  -  

 

   264.8

Operating result - income

 

-  

 

   (379.8)

 

  (43.9)

 

   -  

 

  -  

 

  (423.7)

Operating result - cost

 

-  

 

(86.1)

 

  (41.9)

 

   (9.8)

 

   1.2

 

  (136.6)

Financial result

 

  (0.6)

 

   (113.9)

 

   (236.2)

 

   -  

 

  -  

 

  (350.7)

  

 

 

 

 

 

 

 

 

 

 

 

Fair value at the end of the exercise

 

 (0.1)

 

  21.5

 

(1,271.8)

 

   (9.1)

 

  17.9

 

   (1,241.6)

4.6.Sensitivity analysis

 

The Company disclosesManagement understands that the most relevant risks that may affect the Company’s income are: volatility of commodities prices, stock prices and foreign exchange rates. Currently the fluctuation of the interest rates do not affect significantly the Company’s results since Management has chosen to keep at fixed rates a considerable portion of its debts.

The scenarios below are compliant with CVM Instruction 475/08 and present the possible impacts of the financial assetsinstruments considering situations of increase and liabilities at fair value,decrease in the selected risk factors. The amounts of exports used correspond to the notional amount of the financial instruments designated for hedge accounting.

The information used in the preparation of the analysis are based on the appropriate accounting standards,position as of December 31, 2018, which referwere described in the items above. The future results to conceptsbe measured may diverge significantly of valuationthe estimated values if the reality presents different than the considered premises. Positive values indicate gains and disclosure requirements.negative values indicate losses.

F-39


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

    

   3.8748

 

   3.4873

 

   2.9061

 

   4.8435

 

   5.8122

Parity - Brazilian Reais x U.S. Dollar

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Designated as hedge accouting

            

Non-deliverable forward

 

Devaluation of R$

 

  4.1

 

93.2

 

  226.8

 

(218.5)

 

(441.2)

Options - currencies

 

Devaluation of R$

 

32.7

 

  278.0

 

  680.9

 

(559.4)

 

(1,242.3)

Export prepayments

 

Devaluation of R$

 

   (66.6)

 

   (53.7)

 

   (34.3)

 

   (98.9)

 

(131.2)

Bonds

 

Devaluation of R$

 

(495.4)

 

(391.3)

 

(235.1)

 

(755.6)

 

(1,015.9)

Exports (object)

 

Appreciation of R$

 

  526.5

 

  117.7

 

(530.5)

 

  1,527.4

 

  2,619.1

Cost (object)

 

Appreciation of R$

 

(1.4)

 

   (43.9)

 

(107.8)

 

  105.1

 

  211.5

Not designated as hedge accouting

            

NDF - Purchase

 

Appreciation of R$

 

(5.1)

 

   (54.3)

 

(128.2)

 

  117.9

 

  240.9

Future purchase - B3

 

Appreciation of R$

 

(2.3)

 

(232.7)

 

(578.4)

 

  573.9

 

  1,150.0

Net effect

   

(7.5)

 

(287.0)

 

(706.6)

 

  691.9

 

  1,390.9

             
             
    

   4.4390

 

   3.9951

 

   3.3293

 

   5.5488

 

   6.6585

Parity - Brazilian Reais x Euro

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Designated as hedge accouting

            

Non-deliverable forward

 

Devaluation of R$

 

  0.3

 

  4.7

 

11.4

 

   (10.8)

 

   (21.9)

Exports (object)

 

Appreciation of R$

 

(0.3)

 

(4.7)

 

   (11.4)

 

10.8

 

21.9

Not designated as hedge accouting

            

NDF - Purchase EUR x US$

 

Devaluation of R$

 

(0.5)

 

   (44.9)

 

(111.5)

 

  110.5

 

  221.5

NDF - Purchase

 

Devaluation of R$

 

   (29.9)

 

(205.7)

 

(469.4)

 

  409.6

 

  849.0

Net effect

   

   (30.4)

 

(250.6)

 

(580.9)

 

  520.1

 

  1,070.5

             
             
    

   4.9617

 

   4.4655

 

   3.7213

 

   6.2021

 

   7.4426

Parity - Brazilian Reais x GBP

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Designated as hedge accouting

            

Non-deliverable forward

 

Devaluation of R$

 

(1.1)

 

   (25.4)

 

   (61.9)

 

59.7

 

  120.4

Net effect

   

(1.1)

 

   (25.4)

 

   (61.9)

 

59.7

 

  120.4

             
             

Parity - Brazilian Reais x JPY

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Designated as hedge accounting

            

Non-deliverable forward

 

Devaluation of R$

 

(1.1)

 

21.4

 

55.0

 

   (57.2)

 

(113.4)

Exports (object)

 

Appreciation of R$

 

  1.1

 

   (21.4)

 

   (55.0)

 

57.2

 

  113.4

Net effect

   

-  

 

-  

 

-  

 

-  

 

-  

             
             
    

   150.60

 

   135.54

 

   112.95

 

   188.25

 

   225.90

Price parity CBOT -  Corn - US$/Ton

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

Decrease 10%

 

Decrease 25%

 

Increase 25%

 

Increase 50%

Designated as hedge accounting

            

Non-deliverable forward - Corn sale

 

Increase in the price of corn

 

18.1

 

60.9

 

  125.3

 

   (89.1)

 

(196.4)

Non-deliverable forward - Corn purchase

 

Decrease in the price of corn

 

 0.8

 

(2.7)

 

(8.1)

 

  9.7

 

18.6

Cost (object)

 

Decrease in the price of corn

 

  (18.9)

 

   (58.2)

 

(117.2)

 

79.4

 

  177.8

Net effect

   

-  

 

-  

 

-  

 

-  

 

-  

             
             
    

   124.99

 

   112.49

 

  93.74

 

   156.24

 

   187.49

Price parity CBOT -  Soybean meal - US$/Ton

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

Decrease 10%

 

Decrease 25%

 

Increase 25%

 

Increase 50%

Designated as hedge accounting

            

Non-deliverable forward - Soybeal meal purchase

 

Decrease in the price of soybean meal

 

(1.0)

 

(3.4)

 

(7.1)

 

  5.2

 

11.4

Cost (object)

 

Increase in the price of soybean meal

 

 1.0

 

  3.4

 

  7.1

 

(5.2)

 

   (11.4)

Net effect

   

-  

 

-  

 

-  

 

-  

 

-  

             
             
    

   332.31

 

   299.08

 

   249.23

 

   415.39

 

   498.46

Price parity CBOT -  Soybean - US$/Ton

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

Decrease 10%

 

Decrease 25%

 

Increase 25%

 

Increase 50%

Designated as hedge accounting

            

NDF - Soybean purchase

 

Decrease in the price of soybean

 

(2.7)

 

(8.6)

 

   (17.5)

 

12.1

 

26.9

Cost (object)

 

Increase in the price of soybean

 

 2.7

 

  8.6

 

17.5

 

   (12.1)

 

   (26.9)

Net effect

   

-  

 

-  

 

-  

 

-  

 

-  

             
             
             
    

   613.99

 

   552.59

 

   460.49

 

   767.48

 

   920.98

Price parity CBOT - soybean oil - US$/Ton

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

Decrease 10%

 

Decrease 25%

 

Increase 25%

 

Increase 50%

Designated as hedge accounting

            

NDF - Soybean oil purchase

 

Decrease in the price of soybean oil

 

(4.4)

 

(6.7)

 

   (10.3)

 

  1.6

 

  7.5

Cost (object)

 

Increase in the price of soybean oil

 

 4.4

 

  6.7

 

10.3

 

(1.6)

 

(7.5)

Net effect

   

-  

 

-  

 

-  

 

-  

 

-  

             
             
    

  21.93

 

  19.74

 

  16.45

 

  27.41

 

  32.90

Price parity - Shares BRFS3 - R$

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

Decrease 10%

 

Decrease 25%

 

Increase 25%

 

Increase 50%

Not designated as hedge accounting

            

Stock swap

 

Decrease in the share price

 

  (99.2)

 

(108.0)

 

(121.3)

 

   (77.0)

 

   (54.8)

Net effect

   

   (99.2)

 

(108.0)

 

(121.3)

 

   (77.0)

 

   (54.8)

 

The Company applies the hierarchy requirements set out in IFRS 13, which involves the following aspects:

F-40


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

4.7.Financial instruments by category

 

12.31.18

 

Amortized cost

 

Fair value through other comprehensive income

 

Fair value through profit and loss

 

Total

  

Equity instruments

 

Debt instruments

  

Assets

         

Cash and bank

               722.9

 

                       -

 

                       -

 

                -

 

          722.9

Cash equivalents

                      -

 

                       -

 

                       -

 

      4,146.7

 

       4,146.7

Marketable securities

               331.4

 

                139.5

 

                  16.4

 

         310.4

 

          797.7

Restricted cash

               861.6

 

                       -

 

                       -

 

                -

 

          861.6

Trade accounts receivable

            2,409.7

 

                       -

 

                       -

 

         203.2

 

       2,612.9

Other credits

               204.1

 

                       -

 

                       -

 

                -

 

          204.1

Derivatives not designated

                      -

 

                       -

 

                       -

 

           41.4

 

            41.4

Derivatives designated as hedge accounting (1)

                     -

 

                       -

 

                       -

 

         140.9

 

          140.9

          

Liabilities

         

Trade accounts payable

           (5,732.3)

 

                       -

 

                       -

 

                -

 

      (5,732.3)

Supply chain finance

              (885.8)

 

                       -

 

                       -

 

                -

 

         (885.8)

Loans and financing

         (22,165.4)

 

                       -

 

                       -

 

                -

 

     (22,165.4)

Finance lease payable

              (215.4)

 

                       -

 

                       -

 

                -

 

         (215.4)

Derivatives not designated

                      -

 

                       -

 

                       -

 

        (124.2)

 

         (124.2)

Derivatives designated as hedge accounting (1)

                      -

 

                       -

 

                       -

 

        (110.8)

 

         (110.8)

 

         (24,469.2)

 

                139.5

 

                  16.4

 

      4,607.6

 

     (19,705.7)

(1)All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.

  

 

12.31.17

 

Amortized cost

 

Fair value through other comprehensive income

 

Fair value through profit and loss

 

Total

  

Equity instruments

 

Debt instruments

  

Assets

         

Cash and bank

            1,670.1

 

                       -

 

                       -

 

                -

 

       1,670.1

Cash equivalents

                      -

 

                       -

 

                       -

 

      4,340.7

 

       4,340.7

Marketable securities

               257.0

 

                328.8

 

                  15.4

 

         196.0

 

          797.2

Restricted cash

               535.6

 

                       -

 

                       -

 

                -

 

          535.6

Trade accounts receivable

            3,925.3

 

                       -

 

                       -

 

                -

 

       3,925.3

Other credits

               229.5

 

                       -

 

                       -

 

                -

 

          229.5

Other receivables

                 28.9

 

                       -

 

                       -

 

                -

 

            28.9

Derivatives not designated

                      -

 

                       -

 

                       -

 

           63.1

 

            63.1

Derivatives designated as hedge accounting (1)

                     -

 

                       -

 

                       -

 

           27.5

 

            27.5

          

Liabilities

         

Trade accounts payable

           (6,642.2)

 

                       -

 

                       -

 

                -

 

      (6,642.2)

Supply chain finance

              (715.2)

 

                       -

 

                       -

 

                -

 

         (715.2)

Loans and financing

         (20,444.4)

 

                       -

 

                       -

 

                -

 

     (20,444.4)

Finance lease payable

              (232.6)

 

                       -

 

                       -

 

                -

 

         (232.6)

Derivatives not designated

                      -

 

                       -

 

                       -

 

          (90.7)

 

           (90.7)

Derivatives designated as hedge accounting (1)

                     -

 

                       -

 

                       -

 

        (208.8)

 

         (208.8)

 

         (21,388.0)

 

                328.8

 

                  15.4

 

      4,327.8

 

     (16,716.0)

·(1)        All derivatives are measured at fair value. Those designated as hedge accounting have their gains and losses also affecting other comprehensive income and inventories.

F-41


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

4.8.Fair value of the financial instruments

The fair value is the price that an asset couldwould be exchanged and a liability could be settled, between knowledgeable willing parties in an arm’s length transaction; and

·Hierarchy on three levels for measurement of the fair value, accordingreceived to observable inputs for the valuation ofsell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Depending on the date of its measurement.

Theinputs used for measurement, the financial instruments at fair value measurement is based onare classified into 3 levels of hierarchy which considers observable and non-observable inputs. Observable inputs reflect market data obtained from independent sources, while non-observable inputs reflect the Company’s valuation methodology. These two types of inputs create the hierarchy of fair value set forth below:levels:

 

·      Level 1 – Prices quoted (unadjusted)(not adjusted) for identical instruments in active markets;markets. In this category are investments in stocks, credit linked notes, savings accounts, overnights, term deposits, Financial Treasury Bills (“LFT”) and investment funds are classified at level 1;

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

·      Level 2 – Prices quoted in active markets for similar instruments, prices quoted for identical or similar instruments in non-active markets and evaluation models for which inputs are observable;observable. Investments in Bank Deposit Certificates (“CDB”) and derivatives, which are measured by well-known pricing models: discounted cash flows and Black-Scholes. The observable inputs are interest rates and curves, volatility factors and foreign exchange rates; and

 

·      Level 3 – Instruments whose significant inputs are non-observable. The Company does not have financial instruments in this classification.

 

The table below presents the overall classification of financial assets and liabilities according toinstruments measured at fair value by measurement hierarchy. For the valuation hierarchy.

For assets and liabilities recognized in the financial statementsperiod ended on a recurring basis, the Company determines if occurred transfers between levels of hierarchy, reassessing the classification (based on lower and significant level of information for measuring fair value) at the end of each reporting period.

During 2015 and 2014,December 31, 2018, there were no transferschanges between the 3 levels 1 and 2 of the fair value measurement hierarchy of the Company.

 

12.31.15

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

       

Financial assets

       

Available for sale

       

Credit linked notes

293.2

 

-

 

-

 

293.2

Brazilian foreign debt securities

65.9

 

-

 

-

 

65.9

Stocks

385.7

 

-

 

-

 

385.7

Held for trading

       

Bank deposit certificates

-

 

42.5

 

-

 

42.5

Financial treasury bills

155.3

 

-

 

-

 

155.3

Investment funds

177.8

 

-

 

-

 

177.8

Other financial assets

       

Derivatives designed as hedges

-

 

98.4

 

-

 

98.4

Derivatives not designated as hedges

-

 

31.0

 

-

 

31.0

 

1,077.9

 

171.9

 

-

 

1,249.8

Liabilities

       

Financial liabilities

       

Loans and financing

-

 

-

 

-

 

-

Other financial liabilities

       

Derivatives designed as hedges

-

 

(656.0)

 

-

 

(656.0)

Derivatives not designated as hedges

-

 

(10.6)

 

-

 

(10.6)

 

-

 

(666.6)

 

-

 

(666.6)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


hierarchy.

 

 

 

12.31.14

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets

       

Financial assets

       

Available for sale

       

Credit linked notes

187.9

 

-

 

-

 

187.9

Brazilian foreign debt securities

92.4

 

-

 

-

 

92.4

Investment funds

23.6

 

-

 

-

 

23.6

Held for trading

       

Bank deposit certificates

-

 

64.8

 

-

 

64.8

Financial treasury bills

218.8

 

-

 

-

 

218.8

Other financial assets

       

Derivatives designed as hedges

-

 

13.8

 

-

 

13.8

Derivatives not designated as hedges

-

 

29.3

 

-

 

29.3

 

522.7

 

107.9

 

-

 

630.6

Liabilities

       

Financial liabilities

       

Loans and financing

-

 

(538.7)

 

-

 

(538.7)

Other financial liabilities

       

Derivatives designed as hedges

-

 

(245.7)

 

-

 

(245.7)

Derivatives not designated as hedges

-

 

(11.7)

 

-

 

(11.7)

 

-

 

(796.1)

 

-

 

(796.1)

 

12.31.18

 

12.31.17

 

Level 1

 

Level 2

 

Total

 

Level 1

 

Level 2

 

Total

Financial Assets

           

Fair value through other comprehensive income

           

Credit linked notes

          16.4

 

               -

 

          16.4

 

          15.5

 

               -

 

          15.5

Stocks

        139.5

 

               -

 

        139.5

 

        328.8

 

               -

 

        328.8

Fair value through profit and loss

           

Savings account and overnight

        401.1

 

               -

 

        401.1

 

        649.6

 

               -

 

        649.6

Term deposits

          21.2

 

               -

 

          21.2

 

        158.0

 

               -

 

        158.0

Bank deposit certificates

               -

 

     3,720.7

 

     3,720.7

 

               -

 

     3,527.8

 

     3,527.8

Financial treasury bills

        295.7

 

               -

 

        295.7

 

        166.3

 

               -

 

        166.3

Investment funds

            3.7

 

               -

 

            3.7

 

          35.0

 

               -

 

          35.0

Derivatives

               -

 

        182.3

 

        182.3

 

               -

 

          90.5

 

          90.5

Financial Liabilities

           

Fair value through profit and loss

           

Derivatives

               -

 

       (235.0)

 

       (235.0)

 

               -

 

       (299.5)

 

       (299.5)

 

        877.6

 

     3,668.0

 

     4,545.6

 

     1,353.2

 

     3,318.8

 

     4,672.0

The following is a description of the valuation methodologies utilized by the Company for measuring financial instruments at fair value:

·Investments in Credit linked notes, Brazilian foreign debt securities, Financial Treasury Notes (“LFT”), investment funds and stocks are classified at Level 1 of the fair value hierarchy, as the market prices are available in an active market;

·Investments in Bank Deposit Certificates (“CDB”) are classified at Level 2, since the determination of fair value is based on the price quotation of similar financial instruments in non-active markets; and

·Derivative financial instruments are valued through existing pricing models widely accepted by financial market and described in appendix III of the Risk Policy. Readily observable market inputs are used, such as interest rate forecasts, volatility factors and foreign currency rates. These instruments are classified at Level 2 in the valuation hierarchy, including interest rates swap and foreign currency derivatives.

4.6.Comparison between book value and fair value of financial instruments

 

Except for the items presentedset forth below, the book value of all other financial instruments approximateapproximates their fair value. The fair value of financial instruments presentedset forth below wasis based in prices observed in active markets, Levellevel 1 of the hierarchy for fair value measurement.hierarchy.

F-42


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

                                   Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

 

12.31.15

 

12.31.14

 

 

12.31.18

 

12.31.17

Maturity

 

Book
value

 

Fair
value

 

Book
value

 

Fair
value

Maturity

 

Book
value

 

Fair
value

 

Book
value

 

Fair
value

BRF bonds

                  

BRF SA BRFSBZ5

2022

 

(656.1)

 

(695.2)

 

(1,995.2)

 

(2,101.5)

2022

 

           (451.5)

 

           (456.2)

 

           (369.6)

 

           (406.7)

BRF SA BRFSBZ4

2024

 

(2,906.4)

 

(2,718.6)

 

(1,961.0)

 

(1,953.9)

2024

 

        (2,898.9)

 

        (2,695.9)

 

                   -

 

                   -

BRF SA BRFSBZ3

2023

 

(1,881.5)

 

(1,781.2)

 

(1,245.0)

 

(1,241.5)

2023

 

        (1,888.8)

 

        (1,754.6)

 

        (1,608.3)

 

        (1,578.7)

BRF SA BRFSBZ7

2018

 

(502.1)

 

(427.0)

 

(501.2)

 

(439.5)

2018

 

                   -

 

                   -

 

           (503.8)

 

           (502.4)

BRF SA BRFSBZ2

2022

 

(2,139.5)

 

(1,990.8)

 

-

 

-

2022

 

        (2,248.5)

 

        (2,190.0)

 

        (1,997.5)

 

        (1,974.5)

BFF bonds

                  

Sadia Overseas BRFSBZ7

2020

 

(475.3)

 

(499.7)

 

(595.4)

 

(679.6)

2020

 

           (343.0)

 

           (349.2)

 

           (292.2)

 

           (299.9)

Sadia bonds

         

Sadia Overseas BRFSBZ6

2017

 

(443.3)

 

(462.0)

 

(427.3)

 

(457.5)

Bonds BRF - SHB

         

BRF SA BRFSBZ4

2024

 

                   -

 

                   -

 

        (2,465.4)

 

        (2,427.8)

Bonds BRF Gmbh

         

BRF SA BRFSBZ4

2026

 

        (1,915.7)

 

        (1,702.2)

 

        (1,628.9)

 

        (1,553.1)

Quickfood bonds

                  

Quickfood

2016

 

(285.7)

 

(285.7)

 

(190.1)

 

(190.1)

2022

 

                   -

 

                   -

 

           (168.0)

 

           (168.0)

Total

  

(9,289.9)

 

(8,860.2)

 

(6,915.2)

 

(7,063.6)

         

Consolidated

  

        (9,746.4)

 

        (9,148.1)

 

        (9,033.7)

 

        (8,911.1)

 

 

4.7.Sensitivity analysis

In preparationOn December 31, 2018, the balance of the sensitivity analysis, Management consideredbond of Quickfood was reclassified to liabilities directly associated with the derivative financial instruments usedassets held for sale, according to mitigate the currency risk and commodities as relevant risks and could impact the Company's results.Currently, Management believes that fluctuations in interest rates do not significantly affect its financial results, since the Company has opted to fix through derivative financial instruments (interest rate swap), a considerable portion of its variable rate.

The table below presents the possible impacts of derivative and non-derivative financial instruments considering scenarios of appreciation and depreciation of the main traded currencies by the Company with respect to its functional currency (Brazilian Real) and changes in corn prices on the Chicago Board of Trade (“CBOT”). The amount of exports utilized corresponds to notional amounts of derivative financial instruments the Company has entered into in order to hedge highly probable transaction.

Quantitative and qualitative information used in preparing these analyzes are based on the position for the year ended December 31, 2015. Future results may differ significantly from those estimated amounts.note 12.

 

 

F-43


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

    

3.9048

 

3.5143

 

2.9286

 

4.8810

 

5.8572

Parity - Brazilian Reais x U.S. Dollar

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Financial instruments designated as hedge accouting

            

Non-deliverable forward

 

Devaluation of R$

 

(13.7)

 

3.5

 

29.2

 

(56.7)

 

(99.6)

Fixed exchange rate

 

Devaluation of R$

 

7.5

 

86.0

 

203.7

 

(188.7)

 

(384.9)

Options - currencies

 

Devaluation of R$

 

-

 

295.2

 

1,013.9

 

647.6

 

1,786.8

Export prepayments

 

Devaluation of R$

 

(637.6)

 

(520.4)

 

(344.7)

 

(930.4)

 

(1,223.2)

Bonds

 

Devaluation of R$

 

(562.4)

 

(445.3)

 

(269.5)

 

(855.3)

 

(1,148.2)

Swaps

 

Devaluation of R$

 

(231.4)

 

(183.2)

 

(111.0)

 

(351.7)

 

(472.0)

Exports

 

Appreciation of R$

 

6.2

 

(384.7)

 

(1,246.9)

 

(402.2)

 

(1,302.3)

Financial instruments not designated as hedge accouting

           

NDF - Purchase

 

Appreciation of R$

 

(8.1)

 

(27.6)

 

(56.9)

 

40.7

 

89.5

Dollar Future sales - BM&FBovespa

 

Devaluation of R$

 

(0.9)

 

73.2

 

184.6

 

(186.4)

 

(371.9)

Net effect

   

(1,440.4)

 

(1,103.3)

 

(597.6)

 

(2,283.1)

 

(3,125.8)

Shareholders' equity

   

(1,431.4)

 

(1,149.0)

 

(725.3)

 

(2,137.4)

 

(2,843.5)

Statement of income

   

(9.0)

 

45.7

 

127.7

 

(145.7)

 

(282.3)

             
             
    

4.2504

 

3.8254

 

3.1878

 

5.3130

 

6.3756

Parity - Brazilian Reais x Euro

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Financial instruments designated as hedge accouting

            

Non-deliverable forward

 

Devaluation of R$

 

1.1

 

14.6

 

34.9

 

(32.7)

 

(66.5)

Currency options

 

Devaluation of R$

 

3.8

 

17.0

 

36.8

 

10.5

 

43.4

Exports

 

Appreciation of R$

 

(4.9)

 

(31.6)

 

(71.7)

 

22.2

 

23.1

Financial instruments not designated as hedge accouting

           

Non-deliverable forward

 

Devaluation of R$

 

1.2

 

(62.5)

 

(158.2)

 

160.6

 

320.0

Net effect

   

1.2

 

(62.5)

 

(158.2)

 

160.6

 

320.0

Shareholders' equity

   

-

 

-

 

-

 

-

 

-

Statement of income

   

1.2

 

(62.5)

 

(158.2)

 

160.6

 

320.0

             
             
    

5.7881

 

5.2093

 

4.3411

 

7.2351

 

8.6822

Parity - Brazilian Reais x GBP

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Non-deliverable forward

 

Devaluation of R$

 

0.5

 

6.9

 

16.4

 

(15.4)

 

(31.3)

Exports

 

Appreciation of R$

 

(0.5)

 

(6.9)

 

(16.4)

 

15.4

 

31.3

Financial instruments not designated as hedge accouting

           

NDF and Deliverable forward (hedge accouting)

 

Devaluation of R$

 

(0.4)

 

(12.0)

 

(29.4)

 

28.5

 

57.5

Net effect

   

(0.4)

 

(12.0)

 

(29.4)

 

28.5

 

57.5

Shareholders' equity

   

-

 

-

 

-

 

-

 

-

Statement of income

   

(0.4)

 

(12.0)

 

(29.4)

 

28.5

 

57.5

             
             
    

0.0324

 

0.0292

 

0.0243

 

0.0405

 

0.0486

Parity - Brazilian Reais x JPY

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

10% appreciation

 

25% appreciation

 

25% devaluation

 

50% devaluation

Non-deliverable forward

 

Devaluation of R$

 

(34.3)

 

(12.2)

 

20.8

 

(89.4)

 

(144.6)

Exports

 

Appreciation of R$

 

34.3

 

12.2

 

(20.8)

 

89.4

 

144.6

Financial instruments not designated as hedge accouting

           

Non-deliverable forward

 

Devaluation of R$

 

3.0

 

24.0

 

55.3

 

(49.3)

 

(101.6)

Net effect

   

3.0

 

24.0

 

55.3

 

(49.3)

 

(101.6)

Shareholders' equity

   

-

 

-

 

-

 

-

 

-

Statement of income

   

3.0

 

24.0

 

55.3

 

(49.3)

 

(101.6)

             
             
    

142.80

 

128.52

 

107.10

 

178.50

 

214.20

Price parity CBOT - US$/Ton

   

Current

 

Scenario I

 

Scenario II

 

Scenario III

 

Scenario IV

Transaction/Instrument

 

Risk

 

Scenario

 

Decrease 10%

 

Decrease 25%

 

Increase 25%

 

Increase 50%

Designated as hedge accounting

            

Non-deliverable forward

 

Increase in the price of corn

 

(11.7)

 

(47.1)

 

(100.0)

 

76.6

 

164.9

Not designated as hedge accounting

            

NDF - Corn purchase

 

Increase in the price of corn

 

2.9

 

6.0

 

10.5

 

(4.7)

 

(12.4)

Net effect

   

(8.8)

 

(41.1)

 

(89.5)

 

71.9

 

152.5

Shareholders' equity

   

(11.7)

 

(47.1)

 

(100.0)

 

76.6

 

164.9

Statement of income

   

2.9

 

6.0

 

10.5

 

(4.7)

 

(12.4)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

5.             SEGMENT INFORMATION

 

The operating segments are reported consistently with the management reports provided to the Chief Decision Maker (“CDM”)chief operating decision maker for assessing the performance of each segment and allocating resources.

 

As disclosedWith the discontinuation of Operations in Note 1, in order to reflectArgentina, Europe and Thailand the changes in the management structure occurred in 2015 the segment information for fiscal years 2015 and 2014 was prepared considering the fiveCompany has changed its operating segments as follows: Brazil, Latin America (“LATAM”), Europe, Middle East and Africa (“MEA”) and Asia, which primarily observe the geographical structureCompany's business areas, being: (i) Brazil; (ii) Halal (formerly One Foods); (iii) International, which absorbed the continued operations formerly reported in the Southern Cone, and no longer presenting operations in Europe and Thailand; and (iv) Other Segments. During the fourth quarter of 2018, the Company. The segment information as of December 31, 2014and 2013Southern Cone was prepared in order to be comparable to the information disclosed as of December 31, 2015.extinct.

 

These segments are disclosedinclude sales of all distribution channels and operations subdivided according to the nature of the products aswhose characteristics are described below:

 

·      Poultry: involves the production and sale of whole poultry and in-natura cuts.

 

·      Pork and beef cutsother: involves the production and sale of in-natura cuts.

 

·      Processed foods: involves the production and sale of processed foods, frozen and processed products derived from poultry, pork and beef, and other processed foods such as margarine, and vegetable and soybean-based products.

 

·      Other sales: involves the production and sale of animal feed, soy meal, refined soy flour.flour for food service and others.

 

Other segments are divided into:

·Ingredients: commercialization and development of animal health ingredients, human nutrition, plant nutrition (fertilizers) and health care (health and wellness).

·Other segments: commercialization of agricultural products.

F-44


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

The net sales for each reportable operating segment are presentedset forth below:

        


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

     

Net sales

 

12.31.15

 

12.31.14

 

12.31.13

Brazil

      

Poultry

 

2,293.4

 

2,044.6

 

1,648.9

Pork and beef

 

733.9

 

1,041.1

 

1,063.2

Processed foods

 

12,227.5

 

11,383.9

 

10,721.5

Other sales

 

782.9

 

954.9

 

1,052.5

  

16,037.7

 

15,424.5

 

14,486.1

       

Europe

      

Poultry

 

854.9

 

483.9

 

667.6

Pork and beef

 

850.4

 

895.6

 

900.6

Processed foods

 

1,934.3

 

1,713.2

 

1,441.4

  

3,639.6

 

3,092.7

 

3,009.6

       

MEA

      

Poultry

 

6,364.9

 

4,909.9

 

4,666.0

Pork and beef

 

150.2

 

253.3

 

322.2

Processed foods

 

582.3

 

546.6

 

269.5

  

7,097.4

 

5,709.8

 

5,257.7

       

Asia

      

Poultry

 

2,834.1

 

2,613.2

 

2,264.6

Pork and beef

 

373.8

 

388.4

 

400.8

Processed foods

 

81.6

 

71.4

 

58.5

  

3,289.5

 

3,073.0

 

2,723.9

  

 

 

 

 

 

LATAM

      

Poultry

 

501.9

 

537.1

 

868.8

Pork and beef

 

294.9

 

313.6

 

275.4

Processed foods

 

1,284.3

 

806.2

 

1,162.8

Other sales

 

51.3

 

49.9

 

3.2

  

2,132.4

 

1,706.8

 

2,310.2

  

32,196.6

 

29,006.8

 

27,787.5

Net sales

 

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

Brazil

      

In-natura

 

            3,996.8

 

            3,489.9

 

            3,109.0

Poultry

 

            3,197.1

 

            2,697.5

 

            2,410.3

Pork and other

 

               799.7

 

               792.4

 

               698.7

Processed

 

           12,271.3

 

           11,681.6

 

           11,600.8

Other sales

 

                 16.7

 

                 17.1

 

                 98.2

  

           16,284.8

 

           15,188.6

 

           14,808.0

       

Halal

      

In-natura

 

            6,685.1

 

            5,588.8

 

            5,584.3

Poultry

 

            6,632.9

 

            5,554.4

 

            5,542.1

Other

 

                 52.2

 

                 34.4

 

                 42.2

Processed

 

            1,295.6

 

               909.7

 

               642.3

Other sales

 

               312.6

 

               195.5

 

                    -  

  

            8,293.3

 

            6,694.0

 

            6,226.6

       
       

International

      

In-natura

 

            4,213.5

 

            4,736.9

 

            5,125.2

Poultry

 

            3,382.4

 

            3,401.4

 

            4,106.5

Pork and other

 

               831.1

 

            1,335.5

 

            1,018.7

Processed

 

               553.4

 

               654.0

 

               863.7

Other sales

 

                   0.3

 

               222.6

 

                 11.2

  

            4,767.2

 

            5,613.5

 

            6,000.1

       

Other segments

      

Ingredients

 

               436.2

 

               269.2

 

                    -  

Other sales

 

               406.9

 

               548.8

 

               849.2

  

               843.1

 

               818.0

 

               849.2

  

           30,188.4

 

           28,314.1

 

           27,883.9

 

 

The operating income for each reportable operating segment is presentedset forth below:

 

  

12.31.15

 

12.31.14

 

12.31.13

       

Brazil

 

1,622.3

 

2,002.0

 

1,440.6

Europe

 

572.2

 

552.6

 

170.6

MEA

 

1,214.2

 

314.6

 

84.7

Asia

 

703.3

 

546.6

 

106.4

LATAM

 

116.4

 

62.5

 

94.1

  

4,228.4

 

3,478.3

 

1,896.4

  

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

Brazil

 

               589.5

 

               960.7

 

            1,012.1

Halal

 

               323.9

 

                   7.5

 

               348.6

International

 

              (287.5)

 

                 46.1

 

               690.5

Other segments

 

                 77.6

 

                 71.9

 

                 20.7

Ingredients

 

               115.0

 

                 52.1

 

                    -  

Other sales

 

                (37.4)

 

                 19.8

 

                 20.7

Sub total

 

               703.5

 

            1,086.2

 

            2,071.9

Corporate

 

              (909.8)

 

              (423.0)

 

              (109.0)

  

              (206.3)

 

               663.2

 

            1,962.9

(1) For comparability of information see note 3.3.

The Corporate line presented above refers to relevant events not attributable to the normal course of its business either to the operating segments. For the year ended December 31, 2018, the main events were R$492.8 related toTrapaça Operation (note 1.2.2), R$225.6 related recognition of PIS/COFINS to be recovered (note 11.2),R$213.5 related to the operational restructuring plan (note 1.4) and R$85.0 related to strike of the truck drivers (note 1.5). For the year ended December 31, 2017, the main events were:R$332.9 in provisions for contingencies, mainly public civil actions, R$157.5 in expenses related toCarne Fraca Operation, R$205.9 provision for adjustment to realizable value of inventories related toCarne Fraca Operation, R$51.9 in business combination costs related to Banvit, R$36.7 in business combination costs related to Lactalis divestiture, R$9.9 in health insurance claims, R$147.7 gain on tax amnesty program and other events of R$31.3. The main events of 2016 are related to losses with contingencies.

F-45


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

No customer was individually or in aggregate responsibleaccounted (economic group) for more than 5% of net sales for the yearsyear ended on December 31, 2015, 20142018, 2017 and 2013.2016.

 

GoodwillThe goodwill and intangible assets with indefinite useful liveslife (trademarks) arising from business combination were allocated to the reportable operating segments, considering the nature of the products manufactured in each segment (cash-generating unit), as presented below:

  


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

Goodwill

 

Trademarks

 

Total

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Brazil

1,151.5

 

1,151.5

 

982.5

 

982.5

 

2,134.0

 

2,134.0

Europe

481.7

 

303.3

 

20.1

 

20.1

 

501.8

 

323.4

MEA

834.4

 

749.7

 

170.4

 

170.4

 

1,004.8

 

920.1

Ásia

78.3

 

78.3

 

-

 

-

 

78.3

 

78.3

LATAM

232.2

 

242.5

 

199.0

 

94.9

 

431.3

 

337.5

 

2,778.1

 

2,525.3

 

1,372.0

 

1,267.9

 

4,150.2

 

3,793.3

            
 

Goodwill

 

Trademarks

 

Total

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Brazil

      1,151.5

 

      1,151.5

 

         982.5

 

         982.5

 

      2,134.0

 

      2,134.0

Halal

      1,465.2

 

      1,388.1

 

         353.7

 

         389.2

 

      1,818.9

 

      1,777.3

International

           78.3

 

      1,345.4

 

              -  

 

           24.5

 

           78.3

 

      1,369.9

Southern Cone

              -  

 

         307.2

 

              -  

 

         253.7

 

              -  

 

         560.9

 

      2,695.0

 

      4,192.2

 

      1,336.2

 

      1,649.9

 

      4,031.2

 

      5,842.1

 

The Company performed the impairment test of the assets allocated to the operating segments, as disclosed in note 19.

 

Information referring to the total assets by operatingreportable segments is not being disclosed, as it is not included in the set of information made available to the CDM,chief operating decision maker, which take investment decisions and determine allocation of assets on a consolidated basis.

 

 

F-46


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

6.              BUSINESS COMBINATION AND ACQUSITION OF EQUITY INTEREST

6.1.Business combination

6.1.1.Business combination – Invicta Food Group Limited (“IFGL”)

On April 22, 2015, BRF, through its wholly-owned subsidiary BRF GmbH, signed with the shareholders (“sellers”) of Invicta Food Group Limited ("IFGL"), the final documents for establishing a new company (denominated BRF Invicta Ltd.), which has as its main objective the distribution of processed food in the United Kingdom, Ireland and Scandinavia.

The sellers contributed its IFGL operations and BRF GmbH contributed its operations in Europe (represented by the business of BRF UK, previously known as Plusfood UK) at BRF Invicta and BRF GmbH paid to the sellers the amount of GBP25.6 (equivalent to R$115.9), consequently BRF GmbH holds an equity interest of 62% of BRF Invicta.

Additionally, BRF GmbH recorded GBP8.0 (equivalent to R$36.3) as contingent consideration, which can be adjusted in a range from GBP4.0 to GBP12.0, based on the business operating performance and the appreciation of the shares of BRF S.A., and will be settled in January 2019.

The agreement signed between BRF GmbH and IFGL also includes a call option held by BRF GmbH, to be exercised from January 01, 2019 to December 31, 2020 and a put option, held by minority shareholders relating to the remaining 38% equity interest, to be exercised from January 01, 2023 to March 31, 2023. BRF recognized a non-current liability, related to the put option in the amount of GBP53.1 (equivalent to R$240.9) referring to the fair value of the exercise price of the put option to reflect the acquisitionof non-controlling interest. This liability corresponds to R$307.3 as of December 31, 2015.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The fair value of the acquired assets and assumed liabilities for the allocation of the purchase price paid by BRF Invicta to acquire IFGL are as follows:

Fair value recognized at the acquisition date

Cash and cash equivalents

25.1

Trade accounts receivable, net

37.6

Inventories

68.3

Property, plant and equipment, net

5.0

Intangible assets

196.2

Customer relationship

147.4

Import quotas

48.8

332.2

Trade accounts payable

30.2

Tax payable

1.1

Other liabilities

2.3

Deferred taxes

39.2

72.8

Net asset acquired

259.4

Fair value of consideration paid

393.1

Goodwill from the acquisition

133.7

The fair value of the consideration paid was determined as follows:

Cash

115.9

Contingent consideration

36.3

Transfer of shares of BRF Invicta at market value(1)

240.9

Fair value of consideration

393.1

(1)A gain of R$111.2 corresponding to the difference of historical cost and market value of BRF Invicta shares was recognized as capital reserve in shareholder’s equity.

BRF Invicta Ltd contributed with net sales of R$393.5 and net profit of R$20.3 from the acquisition date to December 31, 2015 to the consolidated net profit. If the acquisition had occurred at the beginning of year 2015, the consolidated net revenues for this year would be increased by R$109.4 and the consolidated net profit of the year would be increased by R$4.3.

6.2.Acquisition of Equity Interest


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


6.2.1.Acquisition of equity interest of SATS BRF Food Pte. Ltd (“SATS BRF”)

On June 02, 2015, BRF, through its wholly-owned subsidiary BRF GmbH, signed an agreement with Singapore Food Industries Pte. Ltd. (“SFI”) for the formation of a joint venture in Singapore, of which BRF acquired 49%. SFI is a wholly-owned subsidiary of SATS Ltd., which is the leading provider of airport food catering in Asia, and listed on the Singapore Exchange ("SGX").

The joint venture was named SATS BRF Food Pte. Ltd. ("SATS BRF"). The total consideration was SGD26.0 (R$60.6) (see below):

Cash – consideration paid

60.6

Fair value of equity interest at the acquisition date

(54.9)

Goodwill

5.7

SATS BRF will focus on expanding the offer of processed foods and semi-processed of high value added, initially for the Singapore market.

The SATS BRF’s investment is measured based on the equity method and classified as joint venture.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


7.CASH AND CASH EQUIVALENTS

 

Average rate (p.a.)

  

Average rate (p.a.)

  
 

12.31.15

 

12.31.14

 

12.31.18

 

12.31.17

Cash and bank accounts

          

U.S. Dollar

-

 

665.6

 

1,309.8

          -  

 

         118.9

 

         525.1

Brazilian Reais

-

 

65.3

 

101.7

          -  

 

           97.4

 

         135.0

Euro

-

 

556.4

 

311.3

          -  

 

           52.8

 

         181.8

Other currencies

-

 

330.9

 

115.7

          -  

 

         453.7

 

         828.3

  

1,618.2

 

1,838.5

  

         722.8

 

      1,670.2

Highly liquid investments

     

Cash equivalents

     

In Brazilian Reais

          

Investment funds

15.12%

 

14.6

 

13.8

1.80%

 

             3.7

 

             5.3

Interest bearing account

5.66%

 

11.0

 

-

Savings account

2.56%

 

                -

 

             4.0

Bank deposit certificates

14.23%

 

486.0

 

1,644.1

5.75%

 

      3,720.8

 

      3,527.8

  

511.6

 

1,657.9

  

      3,724.5

 

      3,537.1

In U.S. Dollar

          

Fixed term deposit

1.31%

 

2,785.9

 

1,521.4

Term deposit

          -  

 

                -

 

           66.2

Overnight

0.08%

 

430.5

 

901.9

0.54%

 

         401.1

 

         645.6

In Euro

     

Fixed term deposit

-

 

-

 

78.2

Other currencies

          

Fixed term deposit

5.24%

 

16.7

 

9.0

Term deposit

2.68%

 

           21.2

 

           91.7

  

3,233.1

 

2,510.5

  

         422.3

 

         803.5

  

5,362.9

 

6,006.9

  

      4,869.6

 

      6,010.8

 

 

 


BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-47


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

8.7.              MARKETABLE SECURITIES

 

     

Average interest rate (p.a.)

  
 

WATM(1)

 

Currency

  

12.31.15

 

12.31.14

Available for sale

         

Credit linked note(a)

4.41

 

US$

 

3.92%

 

293.2

 

187.9

Brazilian foreign debt securities(b)

2.34

 

US$

 

2.98%

 

65.9

 

92.4

Shares in listed companies(f)

-

 

R$

 

-

 

385.7

 

-

Investment funds(c)

-

 

ARS

 

-

 

-

 

23.6

       

744.8

 

303.9

Held for trading

         

Bank deposit certificates ("CDB")(d)

5.42

 

R$

 

13.97%

 

42.5

 

64.8

Financial treasury bills(e)

4.54

 

R$

 

14.15%

 

155.3

 

218.8

Investment funds(c)

1.00

 

ARS

 

29.31%

 

177.8

 

-

       

375.6

 

283.6

Held to maturity

         

Financial treasury bills(e)

1.72

 

R$

 

14.15%

 

70.3

 

62.1

       

1,190.7

 

649.6

          

Current

      

734.7

 

587.5

Non-current

      

456.0

 

62.1

     

Average interest rate (p.a.)

  
 

WATM (1)

 

Currency

  

12.31.18

 

12.31.17

Fair value through other comprehensive income

         

Credit linked note (a)

1.08

 

US$

 

3.85%

 

         16.4

 

         15.4

Stocks (b)

         -  

 

R$ and HKD

 

            -  

 

       139.4

 

       328.8

       

       155.8

 

       344.2

Fair value through profit and loss

         

Financial treasury bills (c)

5.31

 

R$

 

6.40%

 

       295.7

 

       166.3

Fundo de Investimentos - FIDC (d)

4.96

 

R$

 

            -  

 

         14.7

 

              -

Investment funds

         -  

 

ARS

 

            -  

 

              -

 

         29.7

       

       310.4

 

       196.0

Amortized cost

         

Sovereign bonds and others (c)

3.36

 

AOA and R$

 

3.82% to 6.40%

 

       331.4

 

       257.0

       

       797.6

 

       797.2

          

Current

      

       507.0

 

       228.4

Non-current (2)

      

       290.6

 

       568.8

 

(1)     Weighted average maturity in years.

(2)Maturity within up to September 01, 2024.

 

(a) The credit linked note is a structured transactionoperation with a first-class financial institution that bears periodic interest (LIBOR + spread) and corresponds to a credit note that contemplates the Company’s risk.

 

(b) Brazilian foreign debt securities are denominated in U.S. Dollars and remunerated at pre and post-fixed rates.Is composed as set forth below:

    

Quantity of shares

 

Share value

 

Total

Entities

 

Ticker

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Minerva

 

BEEF3

 

15,204,100

 

26,000,000

 

4.99

 

10.65

 

             75.9

 

            276.9

Cofco Meat

 

1610

 

77,583,000

 

77,583,000

 

HKD1,45 / R$0,72

 

HKD1,58 / R$0,67

 

HKD112,5 / R$55,6

 

HKD122,6 / R$51,9

Eletrobras

 

ELET6

 

275,039

 

0

 

         28.17

 

              -  

 

               7.7

 

                 -  

Engie Brasil

 

EGIE3

 

5,055

 

0

 

         33.02

 

              -  

 

               0.2

 

                 -  

 

(c) The fund in foreign currency is basically represented by public and private securities

(d)Bank Deposit Certificate (“CDB”) investments are denominated in Brazilian Reais and remunerated at rates ranging from 98% to 100%Comprised of the Interbank Deposit Certificate (“CDI”).

(e)Financial Treasury Bills (“LFT”) are remunerated at the rate of the Special System for Settlement and Custody (“SELIC”). and securities of the Angola Government denominated in Kwanzas.

 

(f)(d) This comprisesApplication in junior quotas of the market value of 29,000.0 stocks from Minerva (BEEF3) (note 17.2).Credit rights investment fund (“FIDC BRF”), as described in note 1.6.

 

The unrealized loss dueon the marketable securities measured at fair value through othercomprehensive income, recorded in Shareholders' Equity, corresponds to the changes in fair valueaccumulated amount of the available for sale securities, recorded in other comprehensive income, corresponds to R$8.5,98.5 net of income tax of R$2.0, as of December 31, 201543.8 (loss of R$17.356.3 net of income tax of R$0.223.0 as of December 31, 2014)2017). The loss realized on disposal of these investments, recorded in accumulated losses, is R$64.0. The balance of expected credit losses in marketable securities measured at amortized cost at on December 31, 2018 is R$9.0, of which R$7.6 was recognized in the financial expenses for the year.

F-48


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Additionally, on December 31, 2015, from2018, of the total of marketable securities, R$99.3288.0 (R$32.416.2 as of December 31, 2014)2017) were pledged as collateral (without restrictions foruse)for use) for operations with future contracts denominated in U.S. Dollars, traded on the Futures and Commodities ExchangeB3 S.A.  – Brasil, Bolsa, Balcão (“BM&FBovespa”B3”).


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The Company also has restricted cash of R$1,826.1 on December 31, 2015 (R$115.2 on December 31, 2014), see note 16.

The non-current marketable securities as of December 31, 2015 matures in 2017.

The Company conducted an analysis of sensitivity to foreign exchange rate as disclosed in note 4.7.

 

 

9.8.              TRADE ACCOUNTS RECEIVABLE NET AND NOTES RECEIVABLEOTHER RECEIVABLES, NET

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Trade accounts receivable, net

      

Domestic customers

1,928.2

 

1,476.4

         1,098.7

 

         1,622.8

Domestic related parties

0.6

 

1.6

                   -

 

               2.6

Foreign customers

2,146.0

 

1,693.3

         1,974.0

 

         2,754.0

Foreign related parties

250.8

 

1.3

             59.3

 

             27.2

4,325.6

 

3,172.6

         3,132.0

 

         4,406.6

( - ) Adjustment to present value

(13.2)

 

(10.2)

            (10.3)

 

            (13.7)

( - ) Allowance for doubtful accounts

(432.0)

 

(107.8)

( - ) Expected credit losses

           (508.8)

 

           (467.6)

      

3,880.4

 

3,054.6

         2,612.9

 

         3,925.3

      

Current

3,876.3

 

3,046.9

         2,604.9

 

         3,919.0

Non-current

4.1

 

7.7

               8.0

 

               6.3

      
      

Notes receivable

569.8

 

603.0

            235.4

 

            260.6

( - ) Adjustment to present value

(2.9)

 

(9.6)

              (0.3)

 

              (0.3)

( - ) Allowance for doubtful accounts

(32.4)

 

(16.7)

( - ) Expected credit losses

            (31.0)

 

            (30.8)

      

534.5

 

576.7

            204.1

 

            229.5

      

Current

303.7

 

215.1

            115.1

 

            113.1

Non-current(1)

230.8

 

361.7

             89.0

 

            116.4

(1)Weighted average maturity of 3.182.89 years.

The assignment of credits to FIDC BRF, as presented in note 1.6, reflected in a significant reduction in the amount of accounts receivable - third parties in the country. On December 31, 2008, the amount transferred to the Fund is R$ 643.7.

Part of the balance with foreign related parties is tied to Agribusiness Receivable Certificate (“CRA) operation, as disclosed in the note 19.2.

F-49


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.31.18

Operation

 

Date

 

Maturity

 

Average rate

 

Principal value

 

Updated Value

           

CRA 2019 - 2sd Issue

 

04.19.2016

 

04.19.2019

 

96,5% CDI

 

            1,000.0

 

                      1,026.9

CRA 2020 - 3th Issue

 

12.16.2016

 

12.16.2020

 

96,0% CDI

 

               780.0

 

                         781.7

CRA 2023 - 3th Issue

 

12.16.2016

 

12.18.2023

 

IPCA + 5,90%

 

               720.0

 

                         788.9

        

            2,500.0

 

                      2,597.5

 

On December 31, 20152018 notes receivable are comprised mainly by receivables from the (i) salesales of Ana Rech assets to JBS, of R$101.2; (ii) sale of assets of Vila Anastácio, former headquarters of Sadia, of R$22.2; (iii) sale of Carambeí plant to Seara, of R$88.2 and (iv) disposal of variousseveral other assets and farms with an amount of R$309.2.189.1.

 

The trade accounts receivable from related parties are disclosed in note 30. The consolidated balances, refers to transaction with associates UP!, in the domestic market and with joint ventures AKF and SATS BRF, in the foreign market.

 


BRF S.A.The roll-forward of the allowance for expected credit losses is set forth below:  

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


 

12.31.18

 

12.31.17

Beginning balance

                 (467.6)

 

           (406.5)

Inicial adoption IFRS 9

                   (12.6)

 

                   -

Transfer - held for sale (1)

                      9.0

 

                   -

Business combination

                         -

 

            (11.6)

Provision

                   (46.3)

 

            (75.3)

Write-offs

                    49.5

 

             30.8

Exchange rate variation

                   (40.8)

 

              (5.0)

Ending balance

                 (508.8)

 

           (467.6)

 

 

The rollforward of allowance for doubtful accounts is presented below:

 

12.31.15

 

12.31.14

Beginning balance

107.8

 

107.5

Additions(1)

301.4

 

91.3

Business combination

-

 

2.8

Reversals

(65.8)

 

(57.8)

Write-offs

(30.9)

 

(34.0)

Exchange rate variation

119.5

 

(2.0)

Ending balance

432.0

 

107.8

    

(1) Refers mainlyAmount transferred to doubtful accounts in foreign markets.discontinued operations (note 12).

 

The aging of trade accounts receivable is as follows:

  

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Current

3,483.4

 

2,793.4

         2,451.6

 

         3,272.1

Overdue

      

01 to 60 days

343.2

 

118.9

            133.0

 

            364.3

61 to 90 days

30.3

 

30.0

             25.4

 

             98.9

91 to 120 days

37.7

 

42.1

             10.6

 

             33.7

121 to 180 days

7.0

 

74.0

             27.0

 

             74.6

181 to 360 days

70.8

 

13.8

             36.8

 

            170.8

More than 361 days

353.2

 

100.4

More than 360 days

            447.6

 

            392.2

( - ) Adjustment to present value

(13.2)

 

(10.2)

            (10.3)

 

            (13.7)

( - ) Allowance for doubtful accounts

(432.0)

 

(107.8)

( - ) Expected credit losses

           (508.8)

 

           (467.6)

3,880.4

 

3,054.6

         2,612.9

 

         3,925.3

 

F-50


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

10.9.              INVENTORIES

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Finished goods

2,601.2

 

1,551.4

      2,200.8

 

      2,986.5

Goods for resale

6.0

 

23.0

Work in process

157.8

 

207.0

         140.5

 

         155.0

Raw materials

620.7

 

517.5

         847.5

 

      1,086.3

Packaging materials

83.6

 

96.3

           73.8

 

           87.0

Secondary materials

341.7

 

232.7

         338.0

 

         321.1

Warehouse

173.1

 

164.9

         196.2

 

         239.8

Goods and imports in transit

154.8

 

200.2

Advances to suppliers

8.7

 

10.7

(-) Provision for adjustment to realizable value

(20.0)

 

(1.2)

(-) Provision for deterioration

(49.6)

 

(19.5)

(-) Provision for obsolescense

(12.2)

 

(18.1)

Imports in transit

         103.9

 

         103.9

Other

             9.9

 

           11.4

(-) Adjustment to present value

(32.9)

 

(23.5)

          (33.3)

 

          (42.8)

4,032.9

 

2,941.4

      3,877.3

 

      4,948.2

   

 

The write-offscosts of sales attributed to products sold from inventories to cost of sales during the year ended December 31, 20152018 totaled R$22,107.725,320.8 (R$20,497.4 for the year ended December 31, 201422,601.2 in 2017 and R$20,877.6 for the year ended December 31, 2013)20,934.1 in 2016). Such amounts include the additions and reversals of inventory provisions, presentedset forth in the table below:

   

Provision for adjustment to realizable value

 

Provision for

 deterioration

 

Provision for

obsolescence

 

Total

Provision for adjustment to realizable value

 

Provision for deterioration

 

Provision for obsolescence

 

Total

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Beginning balance

(1.2)

 

(31.6)

 

(19.5)

 

(19.1)

 

(18.1)

 

(5.2)

 

(38.8)

 

(55.9)

   (253.7)

 

(93.5)

 

(66.4)

 

(26.2)

 

   (6.9)

 

   (7.7)

 

   (327.0)

 

   (127.4)

Additions

(18.2)

 

(14.1)

 

(70.6)

 

(48.1)

 

(5.1)

 

(17.1)

 

(93.9)

 

(79.3)

   (317.1)

 

   (240.7)

 

   (153.2)

 

(62.4)

 

(25.2)

 

   (2.4)

 

   (495.5)

 

   (305.5)

Reversals

2.3

 

68.6

 

-

 

-

 

-

 

-

 

2.3

 

68.6

143.4

 

  80.8

 

  -

 

  -

 

  -

 

  -

 

143.4

 

  80.8

Write-offs

-

 

-

 

39.3

 

46.5

 

12.2

 

4.5

 

51.5

 

51.0

342.8

 

  -

 

152.8

 

  22.3

 

  19.9

 

2.2

 

515.5

 

  24.5

Restatement by Hyperinflation

   (4.9)

 

  -

 

   (0.5)

 

  -

 

  -

 

  -

 

   (5.4)

 

  -

Transfer - held for sale (1)

  23.9

 

  -

 

7.2

 

  -

 

0.3

 

  -

 

  31.4

 

  -

Business combination

  -

 

  -

 

  -

 

  -

 

  -

 

0.8

 

  -

 

0.8

Exchange rate variation

(2.9)

 

(24.1)

 

1.2

 

1.2

 

(1.2)

 

(0.3)

 

(2.9)

 

(23.2)

0.1

 

   (0.3)

 

   (0.5)

 

   (0.1)

 

   (0.1)

 

0.2

 

   (0.5)

 

   (0.2)

Ending balance

(20.0)

 

(1.2)

 

(49.6)

 

(19.5)

 

(12.2)

 

(18.1)

 

(81.8)

 

(38.8)

(65.5)

 

   (253.7)

 

(60.6)

 

(66.4)

 

(12.0)

 

   (6.9)

 

   (138.1)

 

   (327.0)

               

(1)Amount arising from the assets held for sale (note 12).

In 2018, the roll-forward of provisions presented above includes the impacts related toTrapaça Operation (note 1.2.2) and Operational restructuring plan (note 1.4), and for 2017 is related toCarne Fraca Operation (note 1.2.1).

 

On December 31, 2015,2018 and December 31, 2017, there were no inventory items pledged as collateral for rural credit operations (R$40.0 in December 31, 2014).collateral.

 

 

F-51


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

11.10.          BIOLOGICAL ASSETS

 

The balance of biological assets is segregated in current and non-current balancesassets are presentedset forth below:

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

      

Live animals

1,329.9

 

1,130.6

             1,513.1

 

             1,510.5

Total current

1,329.9

 

1,130.6

             1,513.1

 

             1,510.5

      

Live animals

530.9

 

460.8

               698.4

 

               639.8

Forests

230.2

 

222.4

               362.9

 

               263.9

Total non-current

761.0

 

683.2

             1,061.3

 

               903.7

2,090.9

 

1,813.8

             2,574.4

 

             2,414.2

   


 

 

BRF S.A.F-52

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The rollforward of biological assets for the year is presentedset forth below:

  

 

Current

 

Non-current

Current

 

Non-current

Live animals

 

Live animals

 

Forests

 

Total

Live animals

 

Total

 

Live animals

 

Forests

 

Total

Poultry

 

Pork

 

Cattle

 

Total

 

Total

 

Poultry

 

Pork

 

Cattle

 

 

 

 

Poultry

 

Pork

 

 

 

Poultry

 

Pork

 

 

 

 

 

 

  

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Beginning balance

516.0

 

531.7

 

614.6

 

586.5

 

-

 

87.7

 

1,130.6

 

1,205.9

 

244.3

 

244.3

 

215.9

 

201.7

 

0.6

 

0.1

 

222.4

 

122.9

 

683.2

 

569.0

   699.9

 

   770.8

 

   810.6

 

   874.3

 

   1,510.5

 

   1,645.1

 

   325.9

 

   349.1

 

   313.9

 

  298.3

 

  263.9

 

  270.0

 

903.7

 

   917.4

Acquisition

183.1

 

146.0

 

1,234.6

 

1,088.4

 

-

 

26.0

 

1,417.7

 

1,260.4

 

32.1

 

27.2

 

142.0

 

124.0

 

-

 

-

 

-

 

-

 

174.1

 

151.2

Fair value measurement(1)

1,336.3

 

1,128.2

 

123.2

 

56.0

 

-

 

0.2

 

1,459.5

 

1,184.4

 

71.1

 

28.0

 

(62.1)

 

(49.4)

 

0.3

 

0.5

 

9.4

 

24.0

 

18.7

 

3.1

Additions/Transfer

   415.4

 

   547.9

 

   1,820.0

 

   1,692.0

 

   2,235.4

 

   2,239.9

 

   246.3

 

  84.3

 

   233.6

 

  203.8

 

   31.9

 

   35.3

 

511.8

 

   323.4

Business combination

-

 

   103.0

 

-

 

-

 

-

 

   103.0

 

-

 

-

 

-

 

   -

 

   -

 

   -

 

  -

 

-

Changes in fair value (1)

   967.0

 

   1,290.4

 

   228.1

 

  88.7

 

   1,195.1

 

   1,379.1

 

(95.9)

 

(31.0)

 

  (144.7)

 

(113.4)

 

  106.9

 

  7.4

 

   (133.7)

 

  (137.0)

Harvest

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(26.6)

 

(23.4)

 

(26.6)

 

(23.4)

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

   -

 

  (36.6)

 

  (41.2)

 

  (36.6)

 

   (41.2)

Write-off

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(2.4)

 

(1.0)

 

(2.4)

 

(1.0)

-

 

-

 

-

 

-

 

-

 

-

 

   (6.2)

 

   (8.4)

 

-

 

  (0.2)

 

(8.1)

 

(3.7)

 

  (14.3)

 

   (12.3)

Transfer between current and non-current

52.6

 

55.3

 

59.8

 

60.4

 

-

 

-

 

112.4

 

115.7

 

(52.6)

 

(55.3)

 

(59.8)

 

(60.4)

 

-

 

-

 

-

 

-

 

(112.4)

 

(115.7)

 65.1

 

  69.9

 

  71.4

 

  78.7

 

   136.5

 

   148.6

 

(65.1)

 

(69.9)

 

   (71.5)

 

   (72.5)

 

   -

 

   -

 

   (136.6)

 

  (142.4)

Transfer of the held for sale

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

27.3

 

99.9

 

27.3

 

99.9

Transfer to inventories

(1,492.3)

 

(1,344.7)

 

(1,297.8)

 

(1,176.6)

 

-

 

(113.9)

 

(2,790.1)

 

(2,635.2)

 

-

 

-

 

-

 

-

 

(0.9)

 

-

 

-

 

-

 

(0.9)

 

-

  (1,539.5)

 

  (2,076.2)

 

  (1,980.5)

 

  (1,921.2)

 

  (3,520.0)

 

  (3,997.4)

 

-

 

-

 

-

 

   -

 

   -

 

   -

 

  -

 

-

Exchange variation

(0.1)

 

(0.6)

 

-

 

-

 

-

 

-

 

(0.1)

 

(0.6)

 

-

 

0.1

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

0.1

(18.7)

 

   (5.9)

 

   (6.5)

 

   (1.9)

 

(25.2)

 

   (7.8)

 

   (3.5)

 

1.8

 

  (5.8)

 

  (2.1)

 

   -

 

   -

 

(9.3)

 

  (0.3)

Restatement by Hyperinflation

-

 

-

 

-

 

-

 

-

 

-

 

0.1

 

-

 

   3.1

 

   -

 

   -

 

   -

 

  3.2

 

-

Transfer to assets held for sale (2)

  (6.4)

 

-

 

(12.8)

 

-

 

(19.2)

 

-

 

(20.1)

 

-

 

   (11.6)

 

   -

 

  4.9

 

(3.9)

 

  (26.8)

 

  (3.9)

Ending balance

595.5

 

516.0

 

734.4

 

614.6

 

-

 

-

 

1,329.9

 

1,130.6

 

294.9

 

244.3

 

236.0

 

215.9

 

-

 

0.6

 

230.2

 

222.4

 

761.0

 

683.2

   582.8

 

   699.9

 

   930.3

 

   810.6

 

   1,513.1

 

   1,510.5

 

   381.4

 

   325.9

 

   317.0

 

  313.9

 

  362.9

 

  263.9

 

  1,061.3

 

   903.7

 

(1)   ThisThe change in the fair value of biological assets includes depreciation of breeding stock and depletion of forests in the amount of R$545.0811.8 (R$526.2 as of December 31, 2014) (fair value is reduced throughout758.7 or the useful lives of the animals).

 F-54


BRF S.A.

Notes to Consolidated Financial Statements

Yearsyear ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


2017).

 

(2)Amount arising from the assets held for sale (note 12).

PurchasesF-53


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The acquisitions of biological assets for           production (non-current) occur when the Company expectsthere is an expectation that the production plan cannot be met with its own animals. Theseanimals and, usually, these acquisitions refer to immature animals in the beginning of the life cycle.

 

LiveThe living animals are classified in the categories ofcomprises poultry and pork and separatedare segregated into consumable and for production.

 

The animals classified as consumables are those intended for slaughtering to produce in-natura meat or processed foods.products. Until they reach the adequate weight for slaughtering, they are classified as immature. The slaughtering and production process occurs sequentially and in a very short period of time, so that only live animals ready for slaughtering are classified as mature.

 

The animals classified as for production (breeding stock) are those that have the function of producing other biological assets. Until they reach the age of reproduction they are classified as immature and when they are able to initiate the reproductive cycle, they are classified as mature.

 

The Company has determined that the cost approach is the most appropriate methodology valuation technique allowed under IFRS 13 for calculatingin order to obtain the fair value measurement of its live animals, as particularly givenanimals. This is mainly due to the short life period of the biological assets,animal, and the price that would be received fromin a sale in an active market participant forthat represent the assets would be based onamount near to the cost to such a participant to raiseproduce an animal toin the same point in its lifecycle. Inlevel of maturity.

For the case of animals held for breeding thisstock the production cost is reduced over time to take account ofthroughout its decline in value overlife considering its useful life. normal devaluation.

The Company has determined that the income approach is the most appropriate valuation technique allowed under IFRS 13 for calculatingmethodology in order to obtain the fair value measurement of its forests, dueas the asset value is correlated to the longer lives of such assets.

The fairpresent value of live animals and forests is determined using inputs that are unobservable, using the best information available infuture cash flows generated by the circumstances for using the assets and therefore are classified in the level 3 category of fair value measurement under IFRS 13.biological asset.

 

 

 

F-54


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.The quantities and balances per live animal assets are set forth below:

    

Notes

 

12.31.18

 

12.31.17

 

Quantity
(thousand of heads)

 

Value

 

Quantity
(thousand of heads)

 

Value

Consumable biological assets

       

Immature poultry

                   188,248

 

                      582.8

 

                   199,337

 

                      699.9

Immature pork

                      4,011

 

                      930.3

 

                      3,987

 

                      810.6

Total current

                   192,259

 

                    1,513.1

 

                   203,324

 

                    1,510.5

        
        

Production biological assets

       

Immature poultry

                      6,538

 

                      134.4

 

                      6,693

 

                      117.2

Mature poultry

                     11,958

 

                      246.8

 

                     11,113

 

                      208.6

Immature pork

                         203

 

                        74.1

 

                         229

 

                        67.8

Mature pork

                         439

 

                      243.1

 

                         445

 

                      246.2

Total non-current

                     19,138

 

                      698.4

 

                     18,480

 

                      639.8

 

                   211,397

 

                    2,211.5

 

                   221,804

 

                    2,150.3

The Company has forests as collateral for loan and tax/civil contingencies in the amount of R$66.3 (R$56.1 as of December 31, 2017).

10.1.Table of sensitivity analysis

The live animals and forests fair value is determined using non-observable information and the best practices and data available at the moment the appraisal is done, being classified as level 3 in the fair value hierarchy.

Impact on fair value measurement

The estimated fair value can be change if:

Asset

Valuation methodology

Non observable  significant inputs

Increase

Decrease

Forests

Income approach

Estimated price of standing wood

Increase in the wood price

Decrease in the wood price

Productivity estimated per hectare

Increase in yield per hectare

Decrease in yield per hectare

Harvest and transport cost

Decrease of harvest cost

Increase of harvest cost

Discount rate

Descrease in discount rate

Increase in discount rate

The assumptions applied include sensitivity to Consolidated Financial Statementsthe prices used in the evaluation and the discount rate used in the discounted cash flow. Prices refer to the prices obtained in the regions in which the Company is located and obtained through market research. The discount rate corresponds to the average cost of capital and other assumptions to a market participant.

Years

The weighted average price used in the appraisal of the biological assets (forests) for the year ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The quantities and fair value2018 was equivalent to R$33.00 (thirty-three Reais) per category of live animals are presented below:   stereo (R$30.00 per stereo at December 31, 2017).

 

 

12.31.15

 

12.31.14

 

Quantity
(million of heads)

 

Fair value

 

Quantity
(million of heads)

 

Fair value

Consumable biological assets

       

Immature poultry

180.0

 

595.5

 

177.9

 

516.0

Immature pork

3.5

 

734.4

 

3.4

 

614.6

Total current

183.5

 

1,329.9

 

181.3

 

1,130.6

        
        

Production biological assets

       

Immature poultry

6.7

 

108.8

 

6.8

 

89.3

Mature poultry

11.4

 

186.1

 

11.5

 

155.0

Immature pork

0.2

 

51.2

 

0.2

 

44.6

Mature pork

0.4

 

184.8

 

0.4

 

171.3

Immature cattle

-

 

-

 

-

 

0.4

Mature cattle

-

 

-

 

-

 

0.2

Total non-current

18.7

 

530.9

 

18.9

 

460.8

 

202.2

 

1,860.8

 

200.2

 

1,591.3

The real discount rate used in the appraisal of the biological assets (forests) for the year ended December 31, 2018 was 7.01% (7.51% at December 31, 2017).

 

 

F-55


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

12.11.          RECOVERABLE AND INCOME AND SOCIAL CONTRIBUTION TAXES

 

12.31.15

 

12.31.14

State ICMS ("VAT")

1,219.7

 

1,048.2

Recoverable taxes

12.31.18

 

12.31.17

ICMS ("State VAT")

      1,632.1

 

      1,681.9

PIS and COFINS ("Federal Taxes to Social Fund Programs")

397.8

 

289.4

        946.4

 

         430.2

Income tax credits

416.6

 

585.2

IPI ("Federal VAT")

60.1

 

59.6

         836.7

 

         791.2

INSS ("Brazilian Social Security")

146.2

 

66.9

         307.9

 

         280.4

Other

131.5

 

105.1

         155.8

 

         123.9

(-) Provision for losses

(171.4)

 

(233.2)

        (176.0)

 

        (160.5)

2,200.5

 

1,921.2

      3,702.9

 

      3,147.1

      

Current

1,231.8

 

1,009.1

         560.4

 

         728.9

Non-current

968.7

 

912.1

      3,142.5

 

      2,418.2

      
   

Income and social contribution tax

   

Income and social contribution tax (IR/CS)

        522.8

 

         528.3

(-) Provision for losses

            (9.0)

 

            (9.0)

         513.8

 

         519.3

Current

         506.5

 

         499.3

Non-current

             7.3

 

           20.0

 

 

The rollforward of the allowanceprovision for losses is presentedset forth below:

 

State ICMS ("VAT")

 

PIS and COFINS ("Federal Taxes to Social Fund Programs")

 

Income and social contribution tax

 

IPI ("Federal VAT")

 

Other

 

Total

ICMS ("State VAT")

 

PIS and COFINS ("Federal Taxes to Social Fund Programs")

 

Income and social contribution tax

 

IPI ("Federal VAT")

 

Other

 

Total

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Beginning balance

(169.5)

 

(175.7)

 

(31.5)

 

(17.7)

 

(9.0)

 

(8.6)

 

(14.7)

 

(14.7)

 

(8.5)

 

(7.8)

 

(233.2)

 

(224.5)

  (122.9)

 

  (114.3)

 

   (19.7)

 

   (19.9)

 

   (9.0)

 

   (9.0)

 

  (13.6)

 

(14.7)

 

   (4.3)

 

   (6.7)

 

  (169.5)

 

  (164.6)

Additions

(17.6)

 

(14.6)

 

(14.5)

 

(13.8)

 

-

 

(0.5)

 

-

 

-

 

(0.7)

 

(1.6)

 

(32.8)

 

(30.5)

   (80.0)

 

(37.7)

 

   -

 

   -

 

  -

 

-

 

  -

 

-

 

   (3.7)

 

   (2.3)

 

   (83.7)

 

(40.0)

Write-offs

73.2

 

20.9

 

20.9

 

-

 

-

 

-

 

-

 

-

 

0.1

 

-

 

94.2

 

20.9

61.9

 

  29.1

 

   2.3

 

   0.2

 

  -

 

-

 

  -

 

1.2

 

0.5

 

4.0

 

64.7

 

  34.5

Exchange rate variation

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

0.4

 

0.9

 

0.4

 

0.9

-

 

-

 

   -

 

   -

 

  -

 

-

 

  -

 

-

 

1.5

 

0.6

 

   1.5

 

0.6

Transfer - held for sale (1)

-

 

-

 

   -

 

   -

 

  -

 

-

 

  -

 

-

 

2.0

 

-

 

   2.0

 

-

Ending balance

(113.9)

 

(169.5)

 

(25.1)

 

(31.5)

 

(9.0)

 

(9.0)

 

(14.7)

 

(14.7)

 

(8.7)

 

(8.5)

 

(171.4)

 

(233.2)

  (141.0)

 

  (122.9)

 

   (17.4)

 

   (19.7)

 

   (9.0)

 

   (9.0)

 

  (13.6)

 

(13.5)

 

   (4.0)

 

   (4.4)

 

  (185.0)

 

  (169.5)

 

(1)     Amount transferred to discontinued operations (note 12).

12.1.11.1.State ICMS (“VAT”)

 

Due to its (i) export activity, (ii) tax benefits, (iii) domestic sales that are subject to reduced tax rates and (iii) purchases(iv) acquisition of in property, plant and equipment, the Company accumulatesgenerates tax credits that are offset against debits generated in sales in the domestic market or transferred to third parties.parties and/or suppliers.

 

The Company has ICMS tax creditscredit balances in the Statesstates of Paraná, Santa Catarina, Mato Grosso do Sul Paraná, Minas Gerais, Santa Catarina and Distrito Federal, forAmazonas, which realization will occurbe carried out in the short orand long term, based on a recoverabilityrecovery study preparedapproved by Management.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

12.2.11.2. PIS and COFINS

 

Tax credits onContribution to the Social Integration Program (“PIS”) and Contribution to Social Fund Programs (“COFINS”)arise from credits on purchases of raw materials usedin the production of exported products or products that are taxed at zero rate, such as in-naturameat margarine and butter.margarine.

F-56


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

In the year 2018, the credits of the company SHB were incorporated into the Parent Company (note 1.7).

On November 27, 2018, the Company, based on a final decision of its merged company Perdigão Agroindustrial, had recognized its right to exclude ICMS from the PIS and COFINS calculation basis from 1992 to 2009. In accordance with the final and unappealable decision of this lawsuit, the Company calculated and accounted for the PIS/COFINS credit, which will be qualified for compensation with federal taxes. The recoveryvalue of the asset recognized is R$557.0, of which the principal amount of R$225.6 was recorded in other operating income, and interest and monetary restatements of R$331.4 recorded in financial income. The Company has other lawsuits of a similar nature in progress, as described in note 26.3.1.

The use of these tax credits can be achieved by offsetting them againstwill occur through compensation with domestic sales operations of taxed products, andwith other federal taxes, and more recently with social security contributions, or compensation claims.even, if necessary, for requests for restitution.

 

12.3.11.3. Income tax creditsand social contribution taxes

 

These correspondCorrespond to withholding taxes on marketable securities, interest and prepayments of income and social contribution taxes, which are realizable by offsetting themcan be offset against other federal taxes.

 

F-57


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

13.12.          ASSETS AND LIABILITIES OF  DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

13.1.Breakdown of the balances

  

12.31.15

 

12.31.14

Assets

    

Current

    

Trade accounts receivable

 

-

 

233.0

Inventories

 

-

 

213.0

Total current assets

 

-

 

446.0

     

Non-current

    

Investments

 

-

 

15.1

Property, plant and equipment, net(1)

 

32.4

 

825.5

Intangible

 

-

 

671.4

Total non-current assets

 

32.4

 

1,512.0

     

Total Assets

 

32.4

 

1,958.0

     

Liabilities

    

Current

    

Trade accounts payable

 

-

 

279.0

Social and labor obligations

 

-

 

14.3

Tax Obligations

 

-

 

14.4

Deferred Taxes

 

-

 

200.6

Total current liabilities

 

-

 

508.3

     

Total Liabilities

 

-

 

508.3

     

Assets and liabilities of discontinued operations and assets held for sale

 

32.4

 

1,449.7

(1)In 2014 it includes R$74.8 related to other assets held for sale, that are not related to the discontinued operations of the dairy segment.

13.2.Discontinued operations

 

On July 01, 2015, BRF concluded with Lactalis (“buyer”)December 7, 2018, the disposalCompany of purchase and sale of its manufacturing facilitiessubsidiary Quickfood S.A. in Argentina, whereby Marfrig agreed to acquire 91.89% of its share capital for US$60.0 (equivalent to R$232.5). In addition, on the same date, it entered into a contract in which Marfrig makes the commitment to purchase certain properties and equipment of the dairy segment,Várzea Grande-MT plant, as well as an agreement for the supply of finished goods for the Company for 60 months. On January 23, 2019, the sale of properties and equipment was concluded for R$100.0.

Following the signing of the commitment contracts of Quickfood S.A. by Marfrig, on January 02, 2019, the sale of the shares representing 91.89% of the subsidiary's capital was completed. On this date, Marfrig paid the amount of US$54.9 (equivalent to R$212.7) to BRF S.A.

On December 19, 2018, the Company entered into an Instrument for the Purchase and Sale of Shares of its subsidiary Avex S.A. in Argentina, whereby Granja Tres Arroyos S.A. and Fribel S.A. agreed to acquire 100% of its share capital for US$50.0 (equivalent to R$193.7). On February 4, 2019 the transaction was completed. The sale value was US$44.8, of which includes: i) manufacturing facilitiesUS$22.5 was paid in cash and US$22.3 through the settlement of liabilities of Avex S.A. with BRF.

During the fourth quarter of 2018, the Company has received binding offers for its subsidiary Campo Austral S.A. in Argentina and on January 10, 2019, a sale agreement has been executed for US$35.5 (equivalent to R$137.6). The transaction consists of (i) the sale of the plant located in the citiesCity 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)Florencio Varela, in Argentina, and Santa Rosa (RS); and (ii)all related assets and liabilities, including the "Bocatti" and "Calchaquí" trademarks, dedicated to such segment (Batavo, Elegêthe Argentinean company BOGS S.A. , Cotoché(ii) the sale of 100% of the shares issued by Campo Austral S.A., including its San Andrés Santa Rosade Giles and DoBon) (“Transaction”)Pilar plants and the Campo Austral trademark, to the Argentinean company La Piamontesa de Averaldo Giacosa y Compañía S.A.. On February 28, 2019 and on March 11, 2019, the sales to BOGS and to La Piamontesa were completed, respectively.

Additionally, the negotiations for the sale of the operations in Europe and Thailand have developed significantly. On February 7, 2019 the Company executed a sale and purchase agreement with Tyson International Holding Co., providing for the terms and conditions for the sale of 100% of the shares held by the Company in subsidiaries located in Europe and Thailand. The amount agreed in this transaction is US$340.0 (equivalent to R$1,317.4).

 

The valueclosing of the transaction was fixedsale of Europe and Thailand businesses is subject to the confirmation of the precedent conditions applicable to transactions of similar nature.

The balances of the assets reclassified to assets held for sale and liabilities directly associated with assets held for sale are reflected below.

F-58


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

  

 

 

 

 

 

12.31.18

 

12.31.17

  

Operations from Argentina

 

Operation from Europe and Thailand

Others

 

Total

 

Others

ASSETS

         

CURRENT ASSETS

         

Cash and cash equivalents

 

             31.7

 

           134.8

             -  

 

           166.5

 

           -  

Marketable securities

 

             68.7

 

                 -  

             -  

 

             68.7

 

           -  

Trade accounts receivable, net

 

           244.7

 

           333.2

             -  

 

           577.9

 

           -  

Inventories

 

           254.1

 

           645.2

             -  

 

           899.3

 

           -  

Biological assets

 

             19.2

 

                 -  

             -  

 

             19.2

 

           -  

Recoverable taxes

 

             59.7

 

             48.7

             -  

 

           108.4

 

           -  

Assets held for sale

 

                 -  

 

               0.4

             -  

 

      ��        0.4

 

           -  

Other current assets

 

             18.1

 

               6.3

             -  

 

             24.4

 

           -  

Total current assets

 

           696.2

 

        1,168.6

             -  

 

        1,864.8

 

           -  

          

NON-CURRENT ASSETS

         

Trade accounts receivable, net

 

               0.6

 

                 -  

             -  

 

               0.6

 

           -  

Deferred income and social contribution  taxes

 

                -  

 

               8.0

             -  

 

               8.0

 

           -  

Biological assets

 

             11.6

 

             20.1

             -  

 

             31.7

 

           -  

Recoverable taxes

 

               4.8

 

                 -  

             -  

 

               4.8

 

           -  

Other non-current assets

 

               7.3

 

               0.5

             -  

 

               7.8

 

           -  

Property, plant and equipment, net

 

          329.6

 

           327.2

       169.8

 

           826.6

 

       41.6

Intangible assets

 

           318.7

 

           263.3

             -  

 

           582.0

 

           -  

Total non-current assets

 

           672.6

 

           619.1

       169.8

 

        1,461.5

 

       41.6

          

TOTAL ASSETS

 

        1,368.8

 

        1,787.7

       169.8

 

        3,326.3

 

       41.6

          

LIABILITIES

         

CURRENT LIABILITIES

         

Short-term debt

 

             88.4

 

                 -  

             -  

 

             88.4

 

           -  

Trade accounts payable

 

           270.8

 

           155.1

             -  

 

           425.9

 

           -  

Payroll and related charges

 

             42.1

 

             42.7

             -  

 

             84.8

 

           -  

Liabilities with related parties

 

               0.2

 

                 -  

             -  

 

               0.2

 

           -  

Employee and management profit sharing

 

              3.0

 

               3.0

             -  

 

               6.0

 

           -  

Tax payable

 

             13.6

 

             24.8

             -  

 

             38.4

 

           -  

Other current liabilities

 

             51.1

 

             95.2

             -  

 

           146.3

 

           -  

Total current liabilities

 

           469.2

 

           320.8

             -  

 

           790.0

 

           -  

          

NON-CURRENT LIABILITIES

         

Long-term debt

 

             67.4

 

                 -  

             -  

 

             67.4

 

           -  

Deferred income and social contribution taxes

 

           142.0

 

             26.2

             -  

 

           168.2

 

           -  

Provision for tax, civil and labor risks

 

             70.6

 

               0.3

             -  

 

             70.9

 

           -  

Other non-current liabilities

 

                 -  

 

             35.0

             -  

 

             35.0

 

           -  

Total non-current liabilities

 

           280.0

 

             61.5

             -  

 

           341.5

 

           -  

          

TOTAL LIABILITIES AND EQUITY

 

           749.2

 

           382.3

             -  

 

        1,131.5

 

           -  

          

Assets and liabilities held for sale

 

           619.6

 

        1,405.4

       169.8

 

        2,194.8

 

       41.6

When reclassifying to assets held for sale, assets began to be measured at the lower of the book value previously recorded and the fair value net of selling expenses. This measurement led to an impairment of these assets in U.S. Dollars (USD) by the amount of US$697.8, at the agreement date (December 12, 2014)R$56.5 in continued operations and was received on July 01, 2015.R$2,476.2 in discontinued operations.

F-59


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

NotesThe consolidated balance of other comprehensive income correlated to Consolidated Financial Statements

Years endedthese operations on December 31, 2015, 20142018 is R$701.0 related to cumulative translation adjustment and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

As the Transaction was fixed in U.S. Dollars (“USD”) and considering that the functional currency of BRF and the buyer is different from USD, an embedded derivative washyperinflation. This balance will be recognized as required by IAS 39. The gain resulting froman expense at the determinationmoment of the fair market value of the embedded derivativetotaled R$194.2 and was recognized as finance income.

BRF recorded a gain of R$212.9 at the completion date of the transaction (note 13.3.1).

The profit (loss) recorded in the periods the segment was considered as discontinued operations and also the cash flows registered until the transaction conclusion (July 01, 2015), as well as the gain recognized in the disposal of the assets related to the dairy segment are presented below:

13.3.Net income (loss) from  discontinued operations

  

12.31.15(1)

 

12.31.14

 

12.31.13

Net Sales

 

1,122.8

 

2,720.4

 

2,733.8

Cost of sales

 

(905.8)

 

(2,111.5)

 

(2,075.5)

Gross Profit

 

217.0

 

608.9

 

658.3

Operating Income (Expenses)

      

Selling

 

(188.2)

 

(424.9)

 

(483.3)

General and administrative

 

(13.5)

 

(30.0)

 

(34.8)

Other operating expenses, net

 

(20.6)

 

(30.6)

 

(77.3)

Equity in income (loss) of associates

 

(1.9)

 

(2.8)

 

0.4

Income (Loss) Before Financial Expense

 

(7.2)

 

120.6

 

63.3

Financial expense

 

(0.3)

 

-

 

-

Income (Loss) Before Taxes

 

(7.5)

 

120.6

 

63.3

Income tax expenses

 

0.4

 

(30.8)

 

(16.2)

Net profit (Loss) from Discontinued Operations

 

(7.1)

 

89.8

 

47.2

       

(1)Correspond to dairy segment operations until June 30, 2015.effective sale.

 

On December 31, 2018 the Argentine, Europe and Thailand operations accomplished the requirements of IFRS 5 and therefore were classified as Discontinued Operations. The statement of income (loss) and statement of cash flow of these operations are as follows:

 

  

 

 

 

 

12.31.18

  

Operations from Argentina

 

Operations from Europe and Thailand

 

Total

       

NET SALES

 

           1,737.4

 

           2,603.2

 

          4,340.6

Cost of sales

 

          (1,691.1)

 

          (2,331.3)

 

        (4,022.4)

GROSS PROFIT

 

                46.3

 

              271.9

 

             318.2

OPERATING INCOME (EXPENSES)

      

Selling expenses

 

             (175.9)

 

             (220.4)

 

           (396.3)

General and administrative expenses

 

               (36.1)

 

               (83.6)

 

           (119.7)

Impairment loss on trade and other receivables

 

                (4.7)

 

                  4.6

 

               (0.1)

Other operating income (expenses), net

 

                 2.7

 

               (36.4)

 

             (33.7)

LOSS BEFORE FINANCIAL RESULTS AND INCOME TAXES

 

            (167.7)

 

               (63.9)

 

           (231.6)

Financial expenses

 

              261.5

 

              132.2

 

             393.7

Financial income

 

                88.3

 

                  1.8

 

               90.1

INCOME BEFORE TAXES

 

              182.1

 

                70.1

 

             252.2

Current income taxes

 

                    -  

 

               (23.0)

 

             (23.0)

Deferred income taxes

 

             (113.3)

 

                  8.5

 

           (104.8)

NET INCOME

 

                68.8

 

                55.6

 

             124.4

Impairment loss on the remesuarement to fair value less cost to sell

 

         (1,060.1)

 

          (1,416.1)

 

        (2,476.2)

LOSS

 

             (991.3)

 

          (1,360.5)

 

        (2,351.7)

  

 

 

 

  

Net loss from discontinued operation attributable to

      

Controlling shareholders

 

             (995.1)

 

          (1,338.0)

 

        (2,333.1)

Non-controlling interest

 

                  3.9

 

               (22.5)

 

             (18.6)

F-60


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

STATEMENTS OF INCOME (LOSS) - DISCONTINUED OPERATIONS

  

 

 

 

 

12.31.17

  

Operations from Argentina

 

Operations from Europe and Thailand

 

Total

       

NET SALES

 

           2,024.9

 

           3,130.3

 

          5,155.2

Cost of sales

 

          (1,845.9)

 

          (2,602.3)

 

        (4,448.2)

GROSS PROFIT

 

              179.0

 

              528.0

 

             707.0

OPERATING INCOME (EXPENSES)

      

Selling expenses

 

             (221.5)

 

             (238.0)

 

           (459.5)

General and administrative expenses

 

               (39.7)

 

               (72.4)

 

           (112.1)

Impairment loss on trade and other receivables

 

                (1.1)

 

                 (6.8)

 

               (7.9)

Other operating expenses, net

 

               (50.5)

 

                 (4.1)

 

             (54.6)

INCOME (LOSS) BEFORE FINANCIAL RESULTS AND INCOME TAXES

 

            (133.8)

 

              206.7

 

               72.9

Financial expenses

 

             (342.9)

 

                65.6

 

           (277.3)

Financial income

 

                71.6

 

                  5.8

 

               77.4

INCOME (LOSS) BEFORE TAXES

 

             (405.1)

 

              278.1

 

           (127.0)

Current income taxes

 

                 (1.3)

 

               (23.2)

 

             (24.5)

Deferred income taxes

 

                  4.0

 

                15.4

 

               19.4

INCOME (LOSS)

 

             (402.4)

 

              270.3

 

           (132.1)

  

 

 

 

  

Net income (loss) from discontinued operation attributable to

      

Controlling shareholders

 

             (389.5)

 

              248.2

 

           (141.3)

Non-controlling interest

 

               (12.9)

 

                22.1

 

                 9.2

 

 

STATEMENTS OF INCOME (LOSS) - DISCONTINUED OPERATIONS

       
  

 

 

 

 

12.31.16

  

Operations from Argentina

 

Operations from Europe and Thailand

 

Total

       

NET SALES

 

           1,994.0

 

           3,854.9

 

          5,848.9

Cost of sales

 

          (1,769.5)

 

          (3,671.6)

 

        (5,441.1)

GROSS PROFIT

 

              224.5

 

              183.3

 

             407.8

OPERATING INCOME (EXPENSES)

      

Selling expenses

 

             (226.4)

 

             (184.7)

 

           (411.1)

General and administrative expenses

 

               (59.9)

 

               (79.5)

 

           (139.4)

Impairment loss on trade and other receivables

 

                 2.7

 

                  0.3

 

                 3.0

Other operating income (expenses), net

 

               10.2

 

               (18.2)

 

               (8.0)

LOSS BEFORE FINANCIAL RESULTS AND INCOME TAXES

 

              (48.9)

 

               (98.8)

 

           (147.7)

Financial expenses

 

             (256.7)

 

               (16.8)

 

           (273.5)

Financial income

 

                74.0

 

                  7.8

 

               81.8

LOSS BEFORE TAXES

 

             (231.6)

 

             (107.8)

 

           (339.4)

Current income taxes

 

                  9.1

 

               (14.2)

 

               (5.1)

Deferred income taxes

 

                79.3

 

                  8.9

 

               88.2

NET LOSS

 

             (143.2)

 

             (113.1)

 

           (256.3)

  

 

 

 

  

Net loss from discontinued operation attributable to

      

Controlling shareholders

 

             (132.0)

 

             (132.6)

 

           (264.6)

Non-controlling interest

 

               (11.2)

 

                19.4

 

                 8.2

13.3.1.Gain on the disposal of discontinued operations

F-61


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

     

 

Proceeds received on 07.01.15

2,153.6

Cash

1,838.1

Restricted cash

315.5

Price adjustment(1)

73.2

Gross revenue

2,226.8

Embedded derivative gain

(194.2)

Net proceeds

2,032.6

Net book value of the discontinued operations

(1,819.7)

Gain on the disposal of discontinued operations

212.9

Embedded derivative gain:

Recognized in 2014

28.0

Recognized in 2015

166.2

194.2

STATEMENTS OF CASH FLOWS - DISCONTINUED OPERATIONS

       
       
       
  

Consolidated

  

12.31.18

 

12.31.17

 

12.31.16

OPERATING ACTIVITIES

      

Loss for the year from discontinued operations

 

     (2,351.7)

 

         (132.1)

 

        (256.3)

Adjustments to reconcile loss to net cash

 

 

 

 

 

 

Depreciation and amortization

 

          228.8

 

          263.8

 

          170.2

Depreciation and depletion of biological assets

 

           27.2

 

            21.9

 

            22.9

Loss on disposals of property, plant and equipments

 

             8.6

 

              8.6

 

            (4.7)

Provision (reversal) for tax, civil and labor risks

 

           (67.0)

 

          134.2

 

            15.2

Impairment

 

       2,476.2

 

                  -

 

                  -

Financial results, net

 

         (483.8)

 

          199.8

 

          179.8

Deferred income tax

 

          104.7

 

           (19.4)

 

          (88.2)

Restatement by hyperinflation

 

         (426.5)

 

                  -

 

                  -

Others

 

           (17.4)

 

           (45.2)

 

          (62.5)

Cash flow (used in) provided by operating activities before working capital

 

         (500.9)

 

          431.6

 

          (23.6)

Trade accounts receivable

 

            37.9

 

         (104.6)

 

       1,133.2

Inventories

 

            71.7

 

         (319.7)

 

          318.2

Biological assets - current assets

 

              3.0

 

              4.9

 

            (1.8)

Trade accounts payable

 

         (269.4)

 

         (161.0)

 

     (2,425.1)

Supply chain finance

 

             (0.4)

 

              0.3

 

                  -

Cash flow used in operating activities

 

         (658.1)

 

         (148.5)

 

        (999.1)

Investments in securities at FVTPL

 

         (403.2)

 

         (321.5)

 

        (682.7)

Redemptions of securities at FVTPL

 

          340.7

 

          322.1

 

          782.6

Interest received

 

                  -

 

                  -

 

              0.3

Interest paid

 

           (29.8)

 

           (45.7)

 

          (65.2)

Other assets and liabilities

 

          617.7

 

          173.2

 

          447.8

Cash flow used in operating activities

 

         (132.7)

 

           (20.4)

 

        (516.3)

       

INVESTING ACTIVITIES

      

Additions to property, plant and equipment

 

          (57.3)

 

           (52.5)

 

        (745.5)

Additions to biological assets - non-current assets

 

          (31.8)

 

           (31.5)

 

          (40.8)

Additions to intangible assets

 

             (0.1)

 

             (0.1)

 

            (0.7)

Business combination, net of cash acquired

 

                  -

 

                  -

 

     (2,078.0)

Net cash used in investing activities

 

           (89.2)

 

           (84.1)

 

     (2,865.0)

       

FINANCING ACTIVITIES

      

Proceeds from debt issuance

 

          821.7

 

       1,678.1

 

          666.4

Repayment of debt

 

         (921.5)

 

      (1,668.7)

 

        (539.9)

Net cash (used in) provided by financing activities

 

           (99.8)

 

              9.4

 

          126.5

Net decrease in cash and cash equivalents

 

         (321.7)

 

           (95.1)

 

     (3,254.8)

At the beginning of the year

 

          488.2

 

          583.3

 

       3,838.1

At the end of the year

 

          166.5

 

          488.2

 

          583.3

         321.7 

         95.1 

         3,254.8 

(1)As determined according to the terms of the contract with Lactalis.

13.3.2.Operational result from the sale of discontinued operations

Operational result from the sale of discontinued operations

Loss from discontinued operations

(7.5)

Current income taxes

0.4

Net loss from discontinued operations

(7.1)

Gain on the disposal of discountinued operations

212.9

Tax on the gain

(22.7)

Net gain on the disposal of discontinued operations

190.2

Income from discontinued operations

183.1


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

13.4.Statements of cash flows of discontinued operations

   

12.31.15(1)

 

12.31.14

 

12.31.13

        

Net profit from discontinued operations

  

183.1

 

89.8

 

47.2

Adjustments to reconcile net income to net cash provided by discontinued operations

  

 

 

 

 

 

Depreciation, amortization and exhaustion

  

4.0

 

67.5

 

58.7

Equity in income of affiliates

  

1.9

 

2.9

 

(0.3)

Deferred income tax

  

(8.9)

 

-

 

-

Gain from discontinued operations

  

(190.2)

 

-

 

-

Trade accounts receivable

  

81.6

 

-

 

-

Inventories

  

(67.5)

 

-

 

-

Trade accounts payable

  

(54.6)

 

-

 

-

Other assets and liabilities

  

53.0

 

-

 

-

Net cash provided by discontinued operating activities

  

2.4

 

160.2

 

105.6

   

 

 

 

 

 

Investing activities from discontinued operations

  

 

 

 

 

 

Acquisition of property, plant and equipment

  

(12.3)

 

(51.2)

 

(87.7)

Net cash used in investing activities of continued operations

  

(12.3)

 

(51.2)

 

(87.7)

   

 

 

 

 

 

Proceeds from debt issuance

  

10.0

 

-

 

-

Advance for future capital increase

  

10.0

 

-

 

-

Net cash provided by financing activities from discontinued operations

  

20.0

 

-

 

-

Net increase in cash and cash equivalents

  

10.2

 

-

 

-

Net cash provided by discontinued operations

  

10.2

 

109.0

 

17.8

(1)Correspond to dairy segment operations until June 30, 2015.

 

 

 

F-62



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF S.A.

Notes to Consolidated Financial Statements

                                   Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

14.13.          INCOME AND SOCIAL CONTRIBUTION TAXES

 

14.1.13.1.     Deferred income and social contribution taxes

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Assets

      

Tax loss carryforwards (corporate income tax)

1,077.6

 

697.8

      1,724.0

 

       1,438.9

Negative calculation basis (social contribution tax)

400.1

 

263.2

         652.4

 

          401.4

1,477.7

 

961.0

   

Temporary differences

      

Provisions for tax, civil and labor risks

220.0

 

204.2

         323.0

 

          398.0

Suspended collection taxes

63.0

 

69.1

            22.9

 

            12.3

Allowance for doubtful accounts

113.1

 

7.7

Expected credit losses

          126.6

 

          116.1

Provision for property, plant and equipment losses

5.5

 

15.5

           37.1

 

             6.3

Provision for losses on tax credits

52.8

 

73.9

           62.7

 

            53.2

Provision for other obligations

93.7

 

52.9

          106.9

 

            92.8

Employees' profit sharing

87.3

 

118.9

Provision for inventory losses

20.0

 

11.6

            39.5

 

            98.6

Employees' benefits plan

101.7

 

106.8

          137.5

 

          127.4

Unrealized losses on derivatives financial instruments

           30.5

 

            80.4

Unrealized losses on inventories

             2.4

 

             4.4

Provision for losses - notes receivables

            6.9

 

            13.7

Business combination - Sadia(1)

451.2

 

583.8

            84.6

 

          206.8

Unrealized losses on derivatives financial instruments

105.4

 

56.6

Provision for losses - notes receivable

11.3

 

8.2

Other temporary differences

85.2

 

51.9

          131.1

 

            96.7

2,887.9

 

2,322.1

       3,488.1

 

       3,147.0

      

Liabilities

   
   

Temporary differences

      

Unrealized gains on fair value

        (101.4)

 

           (38.5)

Difference between tax and accounting basis of goodwill amortization

        (318.5)

 

         (301.8)

Difference between tax and accounting depreciation rate

        (754.1)

 

         (694.2)

Business combination - Sadia(1)

(719.4)

 

(750.5)

         (724.0)

 

         (727.1)

Business combination - AKF

           (19.2)

 

           (17.8)

Business combination - Dánica and Avex

                -

 

            (4.5)

Business combination - Invicta

                 -

 

           (30.9)

Business combination - other companies

(21.6)

 

(75.7)

           (20.4)

 

           (35.8)

Unrealized gains on derivatives

(28.0)

 

(10.6)

Difference between tax basis and accounting basis of goodwill amortization

(206.8)

 

(223.2)

Difference between tax depreciation rate and accounting depreciation rate (useful life)

(601.0)

 

(511.4)

Other - exchange rate variation

           (60.8)

 

           (54.9)

Other temporary differences

(55.1)

 

(36.7)

           (35.8)

 

           (27.4)

(1,631.9)

 

(1,608.1)

      (2,034.2)

 

      (1,932.9)

      

Total net deferred tax assets

1,256.0

 

714.0

Total deferred tax

       1,453.9

 

       1,214.1

      

Business combination - Dánica and Avex

(12.5)

 

(15.6)

Business combination - AFC

(45.2)

 

(34.6)

Business combination - AKF

(5.9)

 

(4.3)

Business combination - Federal Foods

(10.2)

 

(7.8)

Business combination - Invicta

(50.1)

 

-

Other - exchange variation

(64.4)

 

(27.9)

(188.3)

 

(90.2)

   

Total deferred tax

1,067.7

 

623.8

Total Assets

       1,519.7

 

       1,369.4

Total Liabilities

           (65.8)

 

         (155.3)

       1,453.9

 

       1,214.1

 

(1)            The deferred tax asset on the business combination with Sadia is mainly computed on the difference between the goodwill amortization tax basis and goodwill accounting basis identified in the purchase price allocation. Deferred tax liability on business combination with Sadia is substantially represented by the fair value of property, plant and equipment, trademarks and contingent liabilities.

 

 


Parte inferior do formulárioBRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The rollforwardroll-forward of deferred tax is set forth below:

F-63


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

12.31.15

 

12.31.14

    

Beginning balance

623.8

 

645.1

Deferred income taxes recognized in the statement of income

406.6

 

(235.2)

Deferred income taxes - write-off dairy business

(200.6)

 

200.6

Deferred income taxes recognized in other comprehensive income

328.1

 

52.8

Business combination

(39.2)

 

(46.7)

Exchange variation over deferred income taxes related to business combination

(30.3)

 

(0.3)

Other

(20.7)

 

7.5

Ending balance

1,067.7

 

623.8

    
 

12.31.18

 

12.31.17

    

Beginning balance

      1,214.1

 

        947.0

Deferred income and social contribution taxes recognized in the statement of income

       340.1

 

        210.6

Deferred income and social contribution taxes writte-off for fiscal loss and negative calculation basis - PERT

              -

 

         (56.9)

Deferred income and social contribution taxes recognized in other comprehensive income

         (68.7)

 

          15.2

Deferred income and social contribution taxes on disposals of goodwill from BRF Gmbh and Invicta

              -

 

          44.4

Deferred income and social contribution taxes related to discontinued operations

        (35.4)

 

          19.4

Other

            3.8

 

          34.4

Ending balance

      1,453.9

 

      1,214.1

Certain subsidiaries of the Company located in Brazil have tax loss carryforwards of R$16.4 and R$16.2, respectively, (R$16.5 and R$16.3 as of December 31, 2014), for which no deferred tax asset was recorded. If there was an expectation that such tax credits would be realized the amount to be recognized in the balance sheet would be R$5.5 (R$5.6 as of December 31, 2014).

 

 

14.2.13.2.      Estimated time of realization

 

Deferred tax arising from temporary differences that will be realized as theythese differences are settled or realized.settled. The period of the settlement or realization of such differences would not be properly estimatedis uncertain and is subjecttied to several factors that are not under control of the Management.

 

When assessing the likelihood of the realization of deferred tax assets on income tax loss carryforward and negative calculation basis of social contribution tax, Management considers the Company’s budget, strategic plan and projected taxable income.income, which were approved by the Company's Board of Directors and Fiscal Council. Based on this estimate, Management believes that it is probablemore likely than not that the deferred tax will be realized, as shownset forth below:

 

2016

89.6

2017

161.5

2018

228.9

2019

271.6

2020 onwards

726.1

 

1,477.7

2019

                    0.1

2020

                   31.9

2021

                 134.3

2022

                 184.2

2023

                 286.4

2024 to 2026

              1,010.4

2027 onwards

                 729.1

 

              2,376.4

 

 

F-64



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF S.A.

Notes to Consolidated Financial Statements

                                   Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

14.3.13.3.     Income and social contribution taxes reconciliation

       

 

 

12.31.15

 

12.31.14

 

12.31.13

      

Income before taxes from continued operations

2,558.2

 

2,487.6

 

1,148.8

Nominal tax rate

34%

 

34%

 

34%

Expected tax expense at nominal tax rate

(869.8)

 

(845.8)

 

(396.0)

      

Reconciling items:

     

Equity interest in income of subsidiaries, associates and joint venture

(35.3)

 

8.7

 

4.5

Exchange rate variation on net foreign assets

460.2

 

43.1

 

129.9

Difference of tax rates on the results of foreign subsidiaries

641.5

 

150.4

 

(125.4)

Interest on shareholders' equity

305.7

 

250.8

 

246.2

Taxation of foreign profits

(54.6)

 

-

 

(0.6)

Stock options

(20.0)

 

(7.0)

 

-

Transfer price

(8.4)

 

(2.7)

 

(1.0)

Profit sharing

(10.5)

 

(9.0)

 

(11.2)

Penalties

(4.2)

 

(15.1)

 

1.7

Investment grant

44.8

 

47.7

 

41.2

Other permanent differences

(59.8)

 

26.3

 

(18.5)

 

389.6

 

(352.6)

 

(129.2)

      

Current income tax

(17.1)

 

(117.4)

 

(13.1)

Deferred income tax

406.6

 

(235.2)

 

(116.0)

 

389.6

 

(352.6)

 

(129.2)

 

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

      

Loss before income and social contribution taxes - continued operations

        (2,447.8)

 

         (1,218.6)

 

               22.0

Nominal tax rate

34%

 

34%

 

34%

Credit (expense) at nominal rate

            832.3

 

             414.3

 

                (7.5)

      

Reconciling itens

     

Income from associates and joint ventures

           (104.0)

 

             (64.1)

 

               42.3

Exchange rate variation on foreign investments

            110.0

 

              71.7

 

            (224.6)

Difference of tax rates on results of foreign subsidiaries

            389.4

 

            (205.1)

 

            (144.9)

Deferred tax assets not recognized (1)

           (591.7)

 

                    -

 

                    -

Interest on shareholders' equity

                    -

 

                    -

 

             174.5

Stock options

               (5.8)

 

               (7.3)

 

              (14.8)

Transfer price

             (79.0)

 

             (15.8)

 

                (1.5)

Investment grant

              59.2

 

              49.1

 

               41.7

Special Regime for the Reintegration of Tax Values for Exporting Companies (Reintegra)

                2.3

 

                8.4

 

                 1.0

Write-off of unrealized tax assets (2)

            (268.7)

 

                    -

 

                    -

Other permanent differences

             (10.7)

 

                0.6

 

                 0.8

 

             333.3

 

             251.8

 

            (133.0)

      

Current income tax

               (6.8)

 

              41.2

 

            (148.8)

Deferred income tax

             340.1

 

             210.6

 

               15.8

 

(1)Amount referring to the non-recognition of deferred tax on tax loss and negative basis in the amount of R$2,104.8.

Taxable(2)R$ 268.7 related to the write-off of deferred income tax and social contribution due to the merge of SHB.

The taxable income, current and deferred income tax from foreign subsidiaries is presentedset forth below:

 

 

12.31.15

 

12.31.14

 

12.31.13

Taxable income (loss) from foreign subsidiaries

2,064.7

 

576.0

 

(412.6)

Current income tax credit (expense) from foreign subsidiaries

(41.0)

 

(37.6)

 

(19.9)

Deferred income tax from foreign subsidiaries

5.8

 

(8.3)

 

26.2

 

12.31.18

 

12.31.17

 

12.31.16

Taxable income from foreign subsidiaries, before taxes

        1,066.1

 

         (446.7)

 

          (950.3)

Current income tax credit from foreign subsidiaries

              (6.7)

 

          (42.5)

 

            (53.1)

Deferred income tax from foreign subsidiaries

          (247.9)

 

     ��    (37.5)

 

           259.9

 

The Company has determined that the earnings recorded by the holdings of its wholly-owned subsidiaries located abroad will not be distributed. redistributed.

Such resources will be used for investments in the subsidiaries, and thus no deferred income tax was recognized. The total of undistributed earnings corresponds to R$4,950.03,401.4 as of December 31, 20152018 (R$1,896.53,182.4 as of December 31, 2014)2017).

 

Brazilian income taxes are subject to review for a five yearfive-year period, during which the tax authorities might audit and assess the Company for additional taxes and penalties. The subsidiariesSubsidiaries located abroad are taxed in their respective jurisdictions, according to local regulations.

 

 

 

F-65


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

                                   Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

15.14.          JUDICIAL DEPOSITS

 

RollforwardThe rollforward of the judicial deposits is presentedset forth below:

 

Tax

 

Labor

 

Civil, commercial and other

 

Total

Tax

 

Labor

 

Civil, commercial and other

 

Total

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Beginning balance

352.2

 

292.6

 

231.4

 

156.0

 

32.1

 

30.1

 

615.7

 

478.7

  292.5

 

   312.5

 

   360.0

 

   377.4

 

  36.4

 

42.7

 

   688.9

 

   732.6

Additions

28.2

 

42.5

 

131.6

 

111.8

 

8.8

 

7.4

 

168.6

 

161.7

   19.1

 

23.4

 

   181.7

 

   188.3

 

2.9

 

   7.8

 

   203.7

 

   219.5

Transfer - held for sale (1)

(0.1)

 

-

 

  (6.8)

 

-

 

  -

 

-

 

  (6.9)

 

-

Reversals

(31.5)

 

(9.3)

 

(15.9)

 

(13.8)

 

(0.2)

 

(5.3)

 

(47.6)

 

(28.4)

(5.3)

 

   (52.5)

 

   (47.2)

 

   (78.7)

 

   (3.0)

 

  (4.4)

 

   (55.5)

 

  (135.6)

Write-offs

(4.6)

 

(3.7)

 

(59.6)

 

(33.6)

 

(0.1)

 

(1.8)

 

(64.3)

 

(39.1)

  (31.9)

 

  (9.0)

 

  (146.2)

 

  (136.5)

 

   (8.6)

 

   (10.5)

 

  (186.7)

 

  (156.0)

Price index update

32.4

 

30.1

 

24.6

 

10.8

 

3.5

 

2.6

 

60.5

 

43.5

   14.1

 

18.2

 

14.6

 

11.2

 

1.4

 

   0.8

 

30.1

 

30.2

Exchange rate variation

-

 

-

 

(0.9)

 

0.2

 

-

 

(0.9)

 

(0.9)

 

(0.7)

(0.1)

 

  (0.1)

 

  (4.4)

 

  (1.7)

 

  -

 

-

 

  (4.5)

 

  (1.8)

Ending balance

376.7

 

352.2

 

311.2

 

231.4

 

44.2

 

32.1

 

732.1

 

615.7

  288.3

 

   292.5

 

   351.7

 

   360.0

 

  29.1

 

36.4

 

   669.1

 

   688.9

(1)Amount transferred to discontinued operations (note 12).

 

 

16.15.          RESTRICTED CASH

 

     

Average interest rate (p.a.)

  
 

Maturity(1)

 

Currency

  

12.31.15

 

12.31.14

          

Bank deposit certificates(2)

1.49

 

R$

 

13.97%

 

337.0

 

-

National treasury certificates(3)

4.23

 

R$

 

22.54%

 

142.8

 

115.2

Bank deposit(4)

-

 

US$

 

-

 

1,346.3

 

-

       

1,826.1

 

115.2

          

Current

      

1,346.3

 

-

Non-current

      

479.8

 

115.2

 

Maturity (1)

 

Currency

 

Average interest rate (p.a.)

 

12.31.18

 

12.31.17

          

Bank deposit certificates (2)

        1.81

 

R$

 

6.70%

 

       504.5

 

       326.4

National treasury certificates (3)

        1.25

 

R$

 

19.55%

 

       233.7

 

       190.2

Bank deposit (4)

            -  

 

US$

 

                     -  

 

         21.0

 

         19.0

Time Deposit (5)

        1.47

 

US$

 

3.89%

 

       102.4

 

              -

       

       861.6

 

       535.6

          

Current

      

       277.3

 

       127.8

Non-current

      

       584.3

 

       407.8

 

(1)     Weighted average maturity in years.

(2)     The deposit which matures on 2017, was pledged as collateral in the disposal of the dairy segment to Groupe Lactalis (“Parmalat”). with maturity in 2021 and by the transaction of total return swap, with maturity in 2019 (note 4.4.ii.d) and the sale of company Gale.

(3)     The national treasury certificates, which mature onin 2020, are pledged as collateral for the loan obtained through the Special Program Asset Restructuring (“PESA”) (note 20)18).

(4)     Deposit relatedlinked to operations in the business combination with Golden Foods Siam, which was releasedinternational market.

(5)Time Deposit linked to the seller at January 26, 2016 (note 40.3)operations of Credit Export Notes (NCE).

 

 

 

F-66



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

17.16.          INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

16.1.Investments breakdown 

 

12.31.18

 

12.31.17

Investment in associates and affiliates

         70.5

 

          54.1

Goodwill SATS BRF

            7.1

 

            6.1

 

          77.6

 

          60.2

Other investments

            8.4

 

            8.0

 

          86.0

 

          68.2

    

 

 

17.1.Investments breakdown

 

12.31.15

 

12.31.14

Investment in associates and joint ventures

102.5

 

137.4

Goodwill Minerva

-

 

247.3

Goodwill AKF

75.1

 

52.4

Goodwill SATS BRF

6.8

 

-

 

184.4

 

437.1

Other investments

1.5

 

1.4

 

185.9

 

438.4

The exchange rate variation result on the investments in foreign subsidiaries, whose functional currency is Brazilian Reais, resulted in a gain of R$1,353.5 on December 31, 2015 (a gain of R$126.7 for the year ended December 31, 2014 and a gain of 382.2 for the year ended December 31,2013 ), which was recognized as finance income.

On December 31, 2015,2018, these associates, affiliates and joint ventures do not have any restriction to transfer dividends or repay their loans or advances to the Company.

F-67



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

17.2.Summary of financial information of associates

 

K&S

 

Minerva

 

Nutrifont

 

PP-BIO

 

PR-SAD

 

UP!

 

Total

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Current assets

54.7

 

46.1

 

-

 

2,648.9

 

-

 

40.4

 

-

 

-

 

-

 

-

 

79.3

 

73.1

    

Non-current assets

13.2

 

8.9

 

-

 

3,566.3

 

-

 

123.7

 

5.0

 

4.1

 

10.3

 

6.0

 

0.2

 

0.2

    

Current liabilities

(22.3)

 

(18.5)

 

-

 

(1,357.8)

 

-

 

(130.7)

 

-

 

-

 

-

 

-

 

(79.5)

 

(73.3)

    

Non-current liabilities

(0.9)

 

(0.8)

 

-

 

(4,182.3)

 

-

 

(3.1)

 

-

 

-

 

-

 

-

 

-

 

-

    

Shareholder's equity

44.7

 

35.7

 

-

 

675.1

 

-

 

30.3

 

5.0

 

4.1

 

10.3

 

6.0

 

-

 

-

    
                            

% of participation

49.0%

 

49.0%

 

15.1%

 

16.3%

 

50.0%

 

50.0%

 

33.3%

 

33.3%

 

33.3%

 

33.3%

 

50.0%

 

50.0%

    
                            

Book value of investment

21.9

 

17.5

 

-

 

110.0

 

-

 

15.1

 

1.7

 

1.4

 

3.4

 

2.0

 

-

 

-

    

Transfer to held for sale

-

 

-

 

-

 

-

 

-

 

(15.1)

 

-

 

-

 

-

 

-

 

-

 

-

    

Book value of investment

21.9

 

17.5

 

-

 

110.0

 

-

 

-

 

1.7

 

1.4

 

3.4

 

2.0

 

-

 

-

 

27.0

 

130.9

                            

Dividends declared

1.4

 

1.2

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

26.0

 

63.7

 

27.4

 

64.9

                            
                            
 

K&S

 

Minerva

 

Nutrifont

 

PP-BIO

 

PR-SAD

 

UP!

  
 

12.31.15

 

12.31.14

 

12.31.15(1)

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

    

Net revenues

117.6

 

105.3

 

4,049.5

 

981.0

 

-

 

-

 

-

 

-

 

-

 

-

 

192.2

 

212.7

    

Net income (loss)

11.7

 

10.5

 

(830.2)

 

(104.5)

 

(2.6)

 

(5.7)

 

-

 

-

 

-

 

-

 

52.0

 

70.5

    
                            

Equity pick-up

5.7

 

5.1

 

(131.9)

 

(17.0)

 

(1.3)

 

(2.8)

 

-

 

-

 

-

 

-

 

26.0

 

35.3

 

(101.5)

 

20.6

                            

(1)Refers to equity pick up loss booked through October 29, 2015 when the carrying amount of the investment was reclassified to available for sale securities as the investment is no longer qualified as investment in associate upon management decision to dispose of the stocks of Minerva.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

17.3.Summary of financial information of joint ventures

  

AKF

 

Federal Foods

 

Rising Star

 

SATS BRF

 

Total

  

12.31.15

 

12.31.14

 

12.31.14

 

12.31.14

 

12.31.15

 

12.31.15

 

12.31.14

Assets

              

Current

 

138.1

 

73.9

 

-

 

-

 

253.4

    

Cash and cash equivalents

 

27.5

 

8.3

 

-

 

-

 

84.1

    

Prepaid expenses

 

1.6

 

0.1

 

-

 

-

 

0.4

    

Other current assets

 

109.0

 

65.6

 

-

 

-

 

168.9

    

Non-current

 

9.1

 

5.7

 

-

 

-

 

14.4

    

Liabilities

 

-

 

-

 

-

 

-

 

-

    

Current

 

(105.3)

 

(61.0)

 

-

 

-

 

(145.5)

    

Trade accounts payable

 

(4.5)

 

(7.3)

 

-

 

-

 

(126.9)

    

Tax payable

 

(6.0)

 

(3.6)

 

-

 

-

 

-

    

Other current liabilities

 

(94.8)

 

(50.0)

 

-

 

-

 

(18.6)

    

Non-current

 

(3.2)

 

(2.4)

 

-

 

-

 

-

    

Loans and financing

 

-

 

(0.2)

 

-

 

-

 

-

    

Deferred taxes

 

(3.2)

 

(2.2)

 

-

 

-

 

-

    

Shareholder's equity

 

38.7

 

16.2

 

-

 

-

 

122.3

    
               
               

% of equity interest

 

40.0%

 

40.0%

 

49.0%

 

50.0%

 

49.0%

    
               

Book value of investment

 

15.5

 

6.5

 

-

 

-

 

59.9

 

75.5

 

6.5

               
               
  

AKF

 

Federal Foods

 

Rising Star

 

SATS BRF

Total

  

12.31.15

 

12.31.14

 

12.31.14

 

12.31.14

 

12.31.15

 

12.31.15

 

12.31.14

Net sales

 

347.8

 

67.5

 

174.0

 

137.4

 

370.4

    

Depreciation and amortization

 

(3.4)

 

(0.5)

 

(25.2)

 

(5.5)

 

(0.1)

    

Financial expense

 

(0.6)

 

(0.7)

 

-

 

-

 

-

    

Income before taxes

 

9.8

 

0.1

 

5.3

 

(0.9)

 

(9.8)

    

Net income (loss)

 

9.8

 

0.1

 

5.3

 

(0.9)

 

(9.8)

    
               

% of equity interest

 

40.0%

 

40.0%

 

49.0%

 

50.0%

 

49.0%

    
               

Equity pick-up

 

3.9

 

-

 

2.6

 

(0.5)

 

(4.8)

 

(0.9)

 

2.1


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

18.17.          PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment rollforwardroll-forward is presentedset forth below:

 

 

Weighted average depreciation rate (p.a.)

 

12.31.14

 

Additions

 

Additions from discontinued operations

 

Business combinations

 

Disposals

 

Reversals

 

Transfers(1)

 

Exchange rate variation

 

12.31.15

Weighted average depreciation rate (p.a.)

 

12.31.17

 

Additions

 

Disposals

 

Restatement by Hyperinflation (1)

 

Exchange rate variation

 

Transfers (2)

 

12.31.18

Cost

                                  

Land

-

 

545.0

 

0.7

 

-

 

-

 

(11.8)

 

-

 

54.0

 

(3.2)

 

584.7

  -  

 

   706.2

 

  0.1

 

   (25.7)

 

  32.7

 

(17.2)

 

  (159.3)

 

   536.9

Buildings and improvements

-

 

5,099.3

 

8.0

 

-

 

4.7

 

(93.9)

 

-

 

350.5

 

69.4

 

5,437.9

  -  

 

   6,102.8

 

  4.8

 

  (113.4)

 

   205.3

 

   (4.3)

 

   1,251.1

 

   7,446.3

Machinery and equipment

-

 

6,303.4

 

62.7

 

0.1

 

3.2

 

(127.1)

 

-

 

740.8

 

44.2

 

7,027.1

  -  

 

   8,881.2

 

   64.3

 

  (234.5)

 

   346.4

 

(77.8)

 

  (707.2)

 

   8,272.5

Facilities

-

 

1,757.4

 

0.1

 

-

 

-

 

(39.7)

 

-

 

110.1

 

26.5

 

1,854.5

  -  

 

   2,175.0

 

  0.7

 

   (21.1)

 

0.3

 

8.9

 

  (2,019.5)

 

   144.3

Furniture

-

 

100.4

 

1.6

 

0.1

 

-

 

(4.8)

 

-

 

35.3

 

5.3

 

137.9

Furniture and fixtures

  -  

 

   171.5

 

   25.3

 

  (5.6)

 

9.5

 

1.6

 

(42.3)

 

   160.0

Vehicles

-

 

144.0

 

1.0

 

-

 

1.6

 

(6.8)

 

-

 

(110.6)

 

(8.9)

 

20.3

     -  

 

  28.6

 

  3.1

 

  (0.7)

 

2.8

 

0.2

 

(16.5)

 

17.5

Construction in progress

-

 

607.7

 

1,454.4

 

8.1

 

-

 

-

 

-

 

(1,285.9)

 

5.5

 

789.8

  -  

 

   453.9

 

585.4

 

-

 

  15.5

 

(25.2)

 

  (619.9)

 

   409.7

Advances to suppliers

-

 

20.3

 

72.9

 

-

 

-

 

-

 

-

 

(73.0)

 

(1.4)

 

18.8

  -  

 

  13.7

 

  0.4

 

-

 

-

 

1.2

 

  (1.9)

 

13.5

  

14,577.5

 

1,601.4

 

8.3

 

9.5

 

(284.1)

 

-

 

(178.8)

 

137.4

 

15,871.0

  

  18,532.9

 

684.1

 

  (401.0)

 

   612.5

 

  (112.6)

 

  (2,315.5)

 

17,000.7

                                  

Depreciation

                                  

Buildings and improvements

3.05%

 

(1,359.8)

 

(154.9)

 

-

 

(0.2)

 

14.9

 

-

 

(18.2)

 

(7.6)

 

(1,525.9)

3.00%

 

  (1,872.4)

 

   (188.1)

 

28.9

 

(63.5)

 

(12.5)

 

  (471.3)

 

  (2,578.8)

Machinery and equipment

5.82%

 

(2,486.2)

 

(381.5)

 

-

 

(3.0)

 

97.9

 

-

 

4.8

 

(18.0)

 

(2,786.0)

5.95%

 

  (3,656.5)

 

   (562.7)

 

   136.1

 

  (192.7)

 

   (0.2)

 

   655.6

 

  (3,620.4)

Facilities

3.82%

 

(507.9)

 

(73.5)

 

-

 

-

 

13.4

 

-

 

17.8

 

0.4

 

(549.9)

4.49%

 

  (724.5)

 

  (93.8)

 

13.0

 

   (0.2)

 

3.5

 

   778.7

 

   (23.3)

Furniture

7.94%

 

(54.6)

 

(10.5)

 

-

 

-

 

3.7

 

-

 

0.2

 

(3.5)

 

(64.7)

8.09%

 

(77.7)

 

  (17.0)

 

   3.2

 

   (7.0)

 

   (0.7)

 

  28.3

 

   (71.0)

Vehicles

19.97%

 

(59.0)

 

(8.6)

 

-

 

(0.8)

 

3.4

 

-

 

54.1

 

1.9

 

(9.0)

19.91%

 

(11.2)

 

(2.1)

 

   0.5

 

   (2.6)

 

0.9

 

   4.3

 

   (10.2)

  

(4,467.5)

 

(628.9)

 

-

 

(4.1)

 

133.3

 

-

 

58.7

 

(26.9)

 

(4,935.5)

  

  (6,342.3)

 

   (863.7)

 

   181.7

 

  (266.0)

 

   (9.0)

 

   995.6

 

  (6,303.7)

Provision for losses

  

(50.7)

 

(21.8)

 

-

 

-

 

36.4

 

16.2

 

-

 

-

 

(19.8)

  

10,059.3

 

950.7

 

8.3

 

5.5

 

(114.5)

 

16.2

 

(120.2)

 

110.4

 

10,915.8

  

  12,190.6

 

   (179.6)

 

  (219.3)

 

   346.5

 

  (121.6)

 

  (1,319.9)

 

10,697.0

                   

 

(1)     Refers to the price index update as disclosed in note 3.28.

(2)Refers to the transfer of R$70.5122.1 to intangible assets, R$27.331.9 to biological assets and R$22.31,165.8 to assets held for sale.

 

 

  

F-68



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Weighted average depreciation rate (p.a.)

 

12.31.16

 

Additions

 

Business combinations

 

Disposals

 

Transfers

 

Exchange rate variation

 

12.31.17

Cost

               

Land

-  

 

  575.9

 

  6.2

 

  123.5

 

(2.0)

 

  6.1

 

(3.5)

 

  706.2

Buildings and improvements

-  

 

  5,648.6

 

   60.2

 

  258.8

 

  (36.7)

 

  183.6

 

  (11.8)

 

  6,102.8

Machinery and equipment

-  

 

  7,994.1

 

   57.9

 

  389.1

 

(175.4)

 

  569.8

 

   45.7

 

  8,881.2

Facilities

-  

 

  2,047.9

 

   14.8

 

   -

 

  (25.8)

 

  137.3

 

  0.8

 

  2,175.0

Furniture

-  

 

  163.5

 

  2.1

 

16.1

 

(4.2)

 

  5.8

 

  (11.8)

 

  171.5

Vehicles

-  

 

   27.3

 

  0.3

 

   4.8

 

(8.9)

 

  4.8

 

  0.3

 

   28.6

Construction in progress

-  

 

  886.0

 

  693.6

 

13.6

 

(5.6)

 

(1,091.0)

 

  (42.7)

 

  453.9

Advances to suppliers

-  

 

   16.1

 

   15.8

 

   -

 

   -

 

  (17.6)

 

(0.6)

 

   13.7

   

   17,359.4

 

  850.9

 

  805.9

 

(258.6)

 

(201.2)

 

  (23.6)

 

   18,532.9

                

Depreciation

               

Buildings and improvements

3.02%

 

(1,694.4)

 

(184.0)

 

   (11.4)

 

   17.0

 

  3.7

 

(3.4)

 

(1,872.4)

Machinery and equipment

5.93%

 

(3,193.9)

 

(567.2)

 

   (21.0)

 

  107.4

 

  3.5

 

   14.7

 

(3,656.5)

Facilities

3.78%

 

(646.3)

 

  (91.3)

 

   -

 

   10.8

 

  0.5

 

  1.8

 

(724.5)

Furniture

8.05%

 

  (66.5)

 

  (13.4)

 

   -

 

  3.1

 

(0.9)

 

   -

 

  (77.7)

Vehicles

19.99%

 

  (12.1)

 

(3.2)

 

  (2.8)

 

  7.2

 

(1.3)

 

  1.0

 

  (11.2)

   

(5,613.2)

 

(859.1)

 

   (35.2)

 

  145.5

 

  5.5

 

   14.1

 

(6,342.3)

   

   11,746.2

 

(8.2)

 

  770.7

 

(113.1)

 

(195.7)

 

    (9.5)

 

   12,190.6

 

 

 

Weighted average depreciation rate (p.a.)

12.31.13

 

Additions

 

Additions from discontinued operations

 

Business combination

 

Disposals

 

Reversals

 

Transfers

 

Net transfers between held for sale

 

Exchange rate variation

 

12.31.14

Cost

                    

Land

-

567.1

 

7.5

 

-

 

-

 

(3.9)

 

-

 

17.8

 

(39.4)

 

(4.1)

 

545.0

Buildings and improvements

-

5,414.1

 

28.4

 

-

 

2.5

 

(143.3)

 

-

 

249.9

 

(438.5)

 

(13.9)

 

5,099.3

Machinery and equipment

-

6,538.2

 

69.4

 

-

 

6.1

 

(201.6)

 

-

 

496.1

 

(580.0)

 

(24.9)

 

6,303.4

Facilities

-

1,573.3

 

2.8

 

-

 

-

 

(27.1)

 

-

 

212.0

 

(0.9)

 

(2.7)

 

1,757.4

Furniture

-

111.6

 

1.2

 

-

 

1.3

 

(13.9)

 

-

 

4.8

 

(9.2)

 

4.7

 

100.4

Vehicles

-

160.5

 

0.6

 

-

 

20.8

 

(32.9)

 

-

 

(0.1)

 

(3.5)

 

(1.3)

 

144.0

Construction in progress

-

798.4

 

908.4

 

51.2

 

4.0

 

(36.7)

 

-

 

(1,090.3)

 

(36.5)

 

9.2

 

607.7

Advances to suppliers

-

13.8

 

32.7

 

-

 

-

 

-

 

-

 

(27.5)

 

-

 

1.4

 

20.3

  

15,176.9

 

1,051.0

 

51.2

 

34.7

 

(459.3)

 

-

 

(137.3)

 

(1,108.0)

 

(31.5)

 

14,577.5

  

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Depreciation

                    

Buildings and improvements

3.07%

(1,348.2)

 

(133.6)

 

(22.5)

 

(2.4)

 

31.3

 

-

 

16.6

 

98.0

 

0.9

 

(1,359.8)

Machinery and equipment

5.86%

(2,428.0)

 

(362.9)

 

(41.4)

 

(5.5)

 

87.4

 

-

 

34.6

 

222.5

 

6.9

 

(2,486.2)

Facilities

3.89%

(459.2)

 

(64.2)

 

(2.4)

 

-

 

5.6

 

-

 

9.7

 

0.7

 

1.8

 

(507.9)

Furniture

7.94%

(53.4)

 

(7.6)

 

(0.8)

 

(1.2)

 

3.9

 

-

 

0.8

 

3.7

 

(0.1)

 

(54.6)

Vehicles

18.74%

(47.6)

 

(22.6)

 

(0.4)

 

(17.1)

 

22.6

 

-

 

0.5

 

1.7

 

3.9

 

(59.0)

  

(4,336.3)

 

(590.9)

 

(67.5)

 

(26.2)

 

150.8

 

-

 

62.2

 

326.6

 

13.5

 

(4,467.5)

Provision for losses

 

(19.0)

 

(51.0)

 

-

 

-

 

-

 

19.3

 

-

 

-

 

-

 

(50.7)

  

10,821.6

 

409.1

 

(16.3)

 

8.5

 

(308.6)

 

19.3

 

(75.1)

 

(781.4)

 

(18.0)

 

10,059.3

 

F-69


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

Notes to Consolidated Financial Statements

                                   Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The Company has fully depreciated items that are still in operation,operating, which are set forth below:

 

 

12.31.15

 

12.31.14

 

12.31.18

 

12.31.17

Cost

 

 

 

 

    

Buildings and improvements

 

170.0

 

127.2

 

        151.8

 

        138.2

Machinery and equipment

 

752.5

 

671.1

 

        692.1

 

        700.0

Facilities

 

102.0

 

71.7

 

          85.6

 

          74.0

Furniture

 

19.3

 

19.1

Furniture and fixtures

 

          27.3

 

          22.7

Vehicles

 

4.2

 

4.5

 

            5.3

 

            5.3

Others

 

56.2

 

39.9

 

1,104.2

 

933.5

 

        962.1

 

        940.2

 

During the year ended December 31, 2015,2018, the Company capitalized interest in the amount of R$24.319.6 (R$37.7 in33.6 as of December 31, 2014)2017). The weighted average interest rate utilized to determine the capitalized amount was 5.70% (5.98% in3.27% p.a. (7.41% p.a. as of December 31, 2014)2017). The amount related to discontinued operations is R$12.4 on December 31, 2018 (R$1.8 as of December 31, 2017).

 

On December 31, 2015,2018, except for the built to suit agreement mentioned in note 24.2,23.2, the Company had no commitments assumed related to acquisition or construction of property, plant and equipment items.

 

The property, plant and equipment items that are pledged as collateral for transactions of different natures are presentedset forth below:  

 

  

 

 

12.31.15

 

12.31.14

  

Type of collateral

 

Book value of the collateral

 

Book value of the collateral

Land

 

Financial/Tax

 

217.4

 

320.9

Buildings and improvements

 

Financial/Tax

 

1,522.5

 

1,670.5

Machinery and equipment

 

Financial/Labor/Tax/Civil

 

1,774.8

 

2,053.8

Facilities

 

Financial/Tax

 

493.1

 

640.4

Furniture

 

Financial/Tax

 

27.0

 

18.7

Vehicles

 

Financial/Tax

 

2.3

 

10.8

Others

 

Financial/Tax

 

70.1

 

76.9

    

4,107.2

 

4,792.0


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

    

12.31.18

 

12.31.17

  

Type of collateral

 

Book value of the collateral

 

Book value of the collateral

Land

 

Financial/Tax

 

                239.0

 

                330.0

Buildings and improvements

Financial/Tax

 

              1,220.7

 

              1,290.4

Machinery and equipment

 

Financial/Labor/Tax/Civil

 

              1,877.4

 

              2,318.7

Facilities

 

Financial/Tax

 

                579.4

 

                540.9

Furniture and fixtures

 

Financial/Tax

 

                  18.6

 

                  21.9

Vehicles

 

Financial/Tax

 

                    0.6

 

                    1.5

Other

 

Financial/Tax

 

                       -

 

                    0.4

    

              3,935.7

 

              4,503.8

 

 

F-70


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

19.18.          INTANGIBLE ASSETS

 

 

Weighted average amortization rate (p.a.)

 

Cost

 

Accumulated amortization

 

12.31.15

 

12.31.14

Non-compete agreement

2.44%

 

15.7

 

(0.8)

 

14.9

 

-

Goodwill

-

 

2,778.1

 

-

 

2,778.1

 

2,525.3

Import quotas

100.00%

 

62.2

 

-

 

62.2

 

-

Outgrowers relationship

12.50%

 

14.2

 

(5.8)

 

8.4

 

9.7

Trademarks

-

 

1,372.0

 

-

 

1,372.0

 

1,267.9

Patents

17.33%

 

4.9

 

(3.0)

 

1.9

 

2.6

Customer relationship

7.71%

 

620.9

 

(49.8)

 

571.1

 

330.0

Supplier relationship

42.00%

 

9.7

 

(9.7)

 

-

 

2.5

Software

20.00%

 

462.7

 

(260.4)

 

202.3

 

190.6

   

5,340.4

 

(329.5)

 

5,010.9

 

4,328.6

          

The intangible assets rollforwardroll-forward is set forth below:

 

12.31.14

 

Additions

 

Disposals

 

Business combination

 

Transfers

 

Exchange rate variation

 

12.31.15

Weighted average amortization rate (p.a.)

 

12.31.17

 

Additions

 

Disposals

 

Transfers

 

Restatement by Hyperinflation (1)

 

Exchange rate variation

 

Transfer - held for sale (2)

12.31.18

Cost

                             

Non-compete agreement

-

 

62.0

 

33.7

 

   -

 

   -

 

   9.1

 

  (0.1)

 

   (14.7)

90.0

Goodwill

2,525.3

 

-

-

 

330.8

 

(196.2)

 

118.2

 

2,778.1

-

 

  4,192.2

 

   -

 

   -

 

   -

 

  324.0

 

  116.8

 

(1,937.9)

  2,695.1

AKF

-

 

  131.5

 

   -

 

   -

 

   -

 

   -

 

22.5

 

   -

  154.0

Alimentos Calchaquí

-

 

  157.9

 

   -

 

   -

 

   -

 

   0.8

 

   (65.3)

 

   (93.4)

   -

Ava

49.4

 

-

-

 

-

 

-

 

-

 

49.4

-

 

49.4

 

   -

 

   -

 

   -

 

   -

 

   -

 

   -

49.4

Avex

29.0

 

-

-

 

-

 

-

 

(1.4)

 

27.6

-

 

16.1

 

   -

 

   -

 

   -

 

20.7

 

  (6.6)

 

   (30.0)

   0.2

Banvit Bandirma Vitaminli

-

 

  193.8

 

   -

 

   -

 

   -

 

   -

 

   (31.5)

 

   -

  162.3

BRF AFC

138.3

 

-

-

 

-

 

-

 

57.7

 

196.0

-

 

  131.9

 

   -

 

   -

 

   -

 

   -

 

21.6

 

   -

  153.5

BRF Holland B.V.

-

 

26.0

 

   -

 

   -

 

   -

 

   -

 

   3.1

 

   (29.1)

   -

BRF Invicta

-

 

-

-

 

330.0

 

(196.2)

 

36.9

 

170.7

-

 

  131.9

 

   -

 

   -

 

   -

 

   -

 

14.5

 

(146.4)

   -

Dánica

7.4

 

-

-

 

-

 

-

 

(0.4)

 

7.0

-

 

   4.1

 

   -

 

   -

 

   -

 

   5.7

 

  (1.7)

 

  (8.1)

   -

Eclipse Holding Cooperatief

-

 

   1.4

 

   -

 

   -

 

   -

 

94.2

 

  (0.5)

 

   (94.9)

   0.2

Eleva Alimentos

808.1

 

-

-

 

-

 

-

 

-

 

808.1

-

 

  808.1

 

   -

 

   -

 

   -

 

   -

 

   -

 

(111.5)

  696.6

Federal Foods

57.4

 

-

-

 

-

 

-

 

27.0

 

84.4

Federal Foods LLC

-

 

63.9

 

   -

 

   -

 

   -

 

   -

 

10.9

 

   -

74.8

Federal Foods Qatar L.L.C

-

 

  313.2

 

   -

 

   -

 

   -

 

   -

 

53.6

 

   -

  366.8

GFS Group

-

 

  771.6

 

   -

 

   -

 

   -

 

   -

 

  130.3

 

(902.0)

  (0.1)

GQFE - Golden Quality Foods Europe

-

 

   2.8

 

   -

 

   -

 

   -

 

   -

 

   0.3

 

  (3.1)

   -

Incubatório Paraíso

0.7

 

-

-

 

-

 

-

 

-

 

0.7

-

 

   0.7

 

   -

 

   -

 

   -

 

   -

 

   -

 

   -

   0.7

Invicta Food Group

-

 

-

-

 

0.8

 

-

 

0.1

 

0.9

-

 

   0.7

 

   -

 

   -

 

   -

 

   -

 

   0.1

 

  (0.8)

   -

Paraíso Agroindustrial

16.8

 

-

-

 

-

 

-

 

-

 

16.8

-

 

16.8

 

   -

 

   -

 

   -

 

   -

 

   -

 

   -

16.8

Perdigão Mato Grosso

7.6

 

-

-

 

-

 

-

 

-

 

7.6

-

 

   7.6

 

   -

 

   -

 

   -

 

   -

 

   -

 

   -

   7.6

Plusfood

21.1

 

-

-

 

-

 

-

 

6.7

 

27.8

Quickfood

175.6

 

-

-

 

-

 

-

 

(8.6)

 

167.0

-

 

97.1

 

   -

 

   -

 

   -

 

  202.6

 

   (40.2)

 

(259.5)

   -

Sadia

1,214.0

 

-

-

 

-

 

-

 

-

 

1,214.0

-

 

  1,214.0

 

   -

 

   -

 

   -

 

   -

 

   -

 

(201.4)

  1,012.6

Non-compete agreement

0.3

 

21.1

(0.4)

 

-

 

-

 

(5.4)

 

15.6

Universal Meats Ltd.

-

 

52.0

 

   -

 

   -

 

   -

 

   -

 

   5.7

 

   (57.7)

   -

Import quotas

-

 

-

-

 

-

 

48.8

 

13.5

 

62.3

-

 

  111.8

 

   -

 

   -

 

   -

 

   -

 

12.3

 

(124.0)

   0.1

Outgrowers relationship

13.7

 

0.5

-

 

-

 

-

 

-

 

14.2

-

 

15.0

 

   -

 

   -

 

   -

 

   -

 

   -

 

   -

15.0

Trademarks

1,267.9

 

146.0

(1)

-

 

-

 

-

 

(41.9)

 

1,372.0

-

 

  1,649.9

 

   -

 

   -

 

   -

 

  250.7

 

(140.2)

 

(424.3)

  1,336.1

Patents

4.8

 

-

-

 

-

 

-

 

-

 

4.8

-

 

   6.8

 

   -

 

   -

 

  (0.1)

 

   -

 

  (0.2)

 

  (0.6)

   5.9

Customer relationship

351.4

 

-

-

 

-

 

147.4

 

122.0

 

620.8

-

 

  1,220.8

 

   -

 

   -

 

   -

 

  149.1

 

19.3

 

(493.1)

  896.1

Supplier relationship

10.1

 

-

-

 

-

 

-

 

(0.4)

 

9.7

-

 

   2.1

 

   -

 

   -

 

   -

 

   -

 

   0.4

 

  (2.4)

   0.1

Software

453.6

 

37.8

(108.9)

 

-

 

74.1

 

6.3

 

462.9

-

 

  516.3

 

   2.0

 

(121.9)

 

  121.8

 

30.5

 

  (2.4)

 

   (54.5)

  491.8

4,627.1

 

205.4

(109.3)

 

330.8

 

74.1

 

212.3

 

5,340.4

  

  7,776.9

 

35.7

 

(121.9)

 

  121.7

 

  763.4

 

   5.9

 

(3,051.5)

  5,530.2

                            

Amortization

                            

Non-compete agreement

(0.3)

 

(1.1)

0.4

 

-

 

-

 

0.3

 

(0.7)

32.70%

 

   (23.4)

 

   (26.8)

 

   -

 

   -

 

  (5.8)

 

   0.9

 

   9.4

   (45.7)

Import quotas

89.94%

 

   (93.1)

 

   (14.4)

 

   -

 

   -

 

   -

 

   (11.3)

 

  118.8

   -

Outgrowers relationship

(4.0)

 

(1.8)

-

 

-

 

-

 

-

 

(5.8)

13.24%

 

  (9.6)

 

  (2.0)

 

   -

 

   -

 

   -

 

   -

 

   -

   (11.6)

Patents

(2.3)

 

(0.7)

-

 

-

 

-

 

-

 

(3.0)

19.98%

 

  (4.9)

 

  (0.8)

 

   -

 

   -

 

  (0.9)

 

   0.2

 

   1.3

  (5.1)

Customer relationship

(21.4)

 

(31.2)

-

 

-

 

-

 

2.8

 

(49.8)

9.50%

 

(154.5)

 

   (99.7)

 

   -

 

   -

 

   (55.6)

 

   (11.8)

 

  149.1

(172.5)

Supplier relationship

(7.6)

 

(2.8)

-

 

-

 

-

 

0.7

 

(9.7)

5.00%

 

  (0.1)

 

  (0.1)

 

   -

 

   -

 

   -

 

   -

 

   0.2

   -

Software

(262.9)

 

(99.6)

108.3

 

-

 

(3.6)

 

(2.7)

 

(260.5)

19.68%

 

(293.7)

 

(127.4)

 

  121.9

 

   0.3

 

   (27.0)

 

   3.6

 

46.4

(275.9)

(298.5)

 

(137.2)

108.7

 

-

 

(3.6)

 

1.1

 

(329.5)

  

(579.3)

 

(271.2)

 

  121.9

 

   0.3

 

   (89.3)

 

   (18.4)

 

  325.2

(510.8)

4,328.6

 

68.2

(0.6)

 

330.8

 

70.5

 

213.4

 

5,010.9

  

  7,197.6

 

(235.5)

 

   -

 

  122.0

 

  674.1

 

   (12.5)

 

    (2,726.3)

  5,019.4

 

(1)Refers to the trademarks acquisitionprice index update as disclosed in Argentina (see note 1.5)3.28.

(2)Amounts transferred to assets held for sale (note 12).

 

F-71


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

12.31.13

 

Additions

 

Disposals

 

Business combination

 

Transfers

 

Transfer to held for sale

 

Exchange rate variation

 

12.31.14

Weighted average amortization rate (p.a.)

 

12.31.16

 

Additions

 

Disposals

 

Business combination

 

Transfers

 

Exchange rate variation

 

12.31.17

Cost:

               

Goodwill:

3,101.8

 

-

 

-

 

322.3

 

(167.9)

 

(671.4)

 

(59.5)

 

2,525.3

Cost

               

Non-compete agreement

-

 

  51.0

 

  11.5

 

-

 

  0.5

 

-

 

  (1.0)

 

  62.0

Goodwill

-

 

   4,343.5

 

-

 

-

 

    (203.6)

 

-

 

  52.4

 

   4,192.3

AKF

-

 

   129.5

 

-

 

-

 

(2.1)

 

-

 

   4.1

 

   131.5

Alimentos Calchaquí

-

 

   342.0

 

-

 

-

 

(152.3)

 

-

 

(31.8)

 

   157.9

Ava

49.4

 

-

 

-

 

-

 

-

 

-

 

-

 

49.4

-

 

  49.4

 

-

 

-

 

   -

 

-

 

-

 

  49.4

Avex

32.8

 

-

 

-

 

-

 

-

 

-

 

(3.9)

 

28.9

-

 

  18.8

 

-

 

-

 

   -

 

-

 

  (2.7)

 

  16.1

Batavia

133.2

 

-

 

-

 

-

 

-

 

(133.2)

 

-

 

-

Banvit Bandirma Vitaminli

-

 

-

 

-

 

-

 

  203.8

 

-

 

(10.0)

 

   193.8

BRF AFC

-

 

-

 

-

 

274.1

 

(138.5)

 

-

 

2.8

 

138.4

-

 

   162.7

 

-

 

-

 

   (33.4)

 

-

 

   2.6

 

   131.9

Cotochés

39.6

 

-

 

-

 

-

 

-

 

(39.6)

 

-

 

-

BRF Holland B.V.

-

 

  22.5

 

-

 

-

 

   -

 

-

 

   3.5

 

  26.0

BRF Invicta

-

 

   119.0

 

-

 

-

 

   -

 

-

 

  12.9

 

   131.9

Dánica

8.4

 

-

 

-

 

-

 

-

 

-

 

(1.0)

 

7.4

-

 

   4.8

 

-

 

-

 

   -

 

-

 

  (0.7)

 

   4.1

Eclipse Holding Cooperatief

-

 

   209.9

 

-

 

-

 

(202.1)

 

-

 

  (6.4)

 

   1.4

Eleva Alimentos

1,273.3

 

-

 

-

 

-

 

-

 

(465.2)

 

-

 

808.1

-

 

   808.1

 

-

 

-

 

   -

 

-

 

-

 

   808.1

Federal Foods

25.2

 

-

 

-

 

48.2

 

(29.3)

 

-

 

13.4

 

57.5

Heloísa

33.5

 

-

 

-

 

-

 

-

 

(33.5)

 

-

 

-

Federal Foods LLC

-

 

  70.5

 

-

 

-

 

(7.3)

 

-

 

   0.7

 

  63.9

Federal Foods Qatar L.L.C

-

 

   308.4

 

-

 

-

 

   -

 

-

 

   4.8

 

   313.2

GFS Group

-

 

   684.5

 

-

 

-

 

   -

 

-

 

  87.1

 

   771.6

GQFE - Golden Quality Foods Europe

-

 

   2.4

 

-

 

-

 

   -

 

-

 

   0.4

 

   2.8

Incubatório Paraíso

0.7

 

-

 

-

 

-

 

-

 

-

 

-

 

0.7

-

 

   0.7

 

-

 

-

 

   -

 

-

 

-

 

   0.7

Invicta Food Group

-

 

   0.6

 

-

 

-

 

   -

 

-

 

   0.1

 

   0.7

Paraíso Agroindustrial

16.8

 

-

 

-

 

-

 

-

 

-

 

-

 

16.8

-

 

  16.8

 

-

 

-

 

   -

 

-

 

-

 

  16.8

Perdigão Mato Grosso

7.6

 

-

 

-

 

-

 

-

 

-

 

-

 

7.6

-

 

   7.6

 

-

 

-

 

   -

 

-

 

-

 

   7.6

Plusfood

21.1

 

-

 

-

 

-

 

-

 

-

 

-

 

21.1

Quickfood

246.3

 

-

 

-

 

-

 

-

 

-

 

(70.7)

 

175.6

-

 

   113.8

 

-

 

-

 

   -

 

-

 

(16.7)

 

  97.1

Sadia

1,214.0

 

-

 

-

 

-

 

-

 

-

 

-

 

1,214.0

-

 

   1,214.0

 

-

 

-

 

   -

 

-

 

-

 

   1,214.0

Non-compete agreement

0.4

 

-

 

-

 

-

 

-

 

-

 

-

 

0.4

Exclusivity agreement

0.5

 

-

 

(0.4)

 

-

 

-

 

-

 

(0.1)

 

-

Universal Meats Ltd.

-

 

  57.6

 

-

 

-

 

   (10.2)

 

-

 

   4.6

 

  52.0

Import quotas

-

 

  58.2

 

-

 

-

 

42.2

 

-

 

  11.4

 

   111.8

Outgrowers relationship

12.5

 

1.2

 

-

 

-

 

-

 

-

 

-

 

13.7

-

 

  14.7

 

   0.3

 

-

 

   -

 

-

 

-

 

  15.0

Trademarks

1,302.3

 

-

 

-

 

-

 

-

 

-

 

(34.4)

 

1,267.9

-

 

   1,313.2

 

-

 

-

 

  386.9

 

-

 

(50.2)

 

   1,649.9

Patents

5.5

 

0.1

 

(0.8)

 

-

 

-

 

-

 

-

 

4.8

-

 

   6.9

 

-

 

-

 

   -

 

-

 

  (0.1)

 

   6.8

Customer relationship

179.6

 

-

 

-

 

-

 

214.1

 

-

 

(42.3)

 

351.4

-

 

   815.2

 

-

 

-

 

  403.5

 

  10.6

 

  (8.5)

 

   1,220.8

Supplier relationship

146.1

 

-

 

(135.0)

 

-

 

-

 

-

 

(1.0)

 

10.1

-

 

  14.6

 

-

 

  (2.0)

 

   -

 

(10.6)

 

   0.1

 

   2.1

Software

329.3

 

49.1

 

(1.4)

 

2.0

 

78.4

 

-

 

(3.8)

 

453.6

-

 

   504.3

 

  40.3

 

  (176.9)

 

  2.7

 

   146.3

 

  (0.4)

 

   516.3

5,078.0

 

50.4

 

(137.6)

 

324.3

 

124.6

 

(671.4)

 

(141.1)

 

4,627.1

  

   7,121.6

 

  52.1

 

  (178.9)

 

  632.2

 

   146.3

 

   3.7

 

   7,777.0

    ��                         

Amortization:

               

Amortization

               

Non-compete agreement

(0.3)

 

(0.1)

 

-

 

-

 

-

 

-

 

0.1

 

(0.3)

27.59%

 

  (7.6)

 

(16.1)

 

-

 

   -

 

-

 

   0.3

 

(23.4)

Exclusivity agreement

(0.5)

 

-

 

0.4

 

-

 

-

 

-

 

0.1

 

-

Import quotas

73.63%

 

(21.7)

 

(63.5)

 

-

 

   -

 

-

 

  (7.9)

 

(93.1)

Outgrowers relationship

(2.3)

 

(1.6)

 

-

 

-

 

-

 

-

 

(0.1)

 

(4.0)

13.15%

 

  (7.7)

 

  (1.9)

 

-

 

   -

 

-

 

-

 

  (9.6)

Patents

(2.1)

 

(0.6)

 

0.4

 

-

 

-

 

-

 

-

 

(2.3)

27.42%

 

  (3.9)

 

  (1.1)

 

-

 

   -

 

-

 

   0.1

 

  (4.9)

Customer relationship

(11.5)

 

(10.2)

 

-

 

-

 

-

 

-

 

0.3

 

(21.4)

7.59%

 

(81.3)

 

(72.2)

 

-

 

  0.2

 

-

 

  (1.2)

 

  (154.5)

Supplier relationship

(140.5)

 

(2.3)

 

135.0

 

-

 

-

 

-

 

0.2

 

(7.6)

5.00%

 

  (2.0)

 

  (0.1)

 

   2.0

 

   -

 

-

 

-

 

  (0.1)

Software

(162.9)

 

(98.7)

 

1.4

 

(1.4)

 

(1.1)

 

-

 

(0.2)

 

(262.9)

19.93%

 

  (324.8)

 

  (145.0)

 

   175.5

 

   -

 

-

 

   0.6

 

  (293.7)

(320.1)

 

(113.5)

 

137.2

 

(1.4)

 

(1.1)

 

-

 

0.4

 

(298.5)

  

  (449.0)

 

  (299.9)

 

   177.5

 

  0.2

 

-

 

  (8.1)

 

  (579.3)

4,757.9

 

(63.1)

 

(0.4)

 

322.9

 

123.5

 

(671.4)

 

(140.7)

 

4,328.6

  

   6,672.6

 

  (247.8)

 

  (1.4)

 

  632.4

 

   146.3

 

  (4.4)

 

   7,197.7

 

 

Amortization of outgroweroutgrowers relationship and suppliers relationship areis recognized as a cost of sales andin the statement of income (loss), the amortization of customer relationship is recognized asin selling expenses, while non-compete agreement, patents and software amortization is recorded according to its use as cost of sales, administrative or sellingsales expenses.

 

Trademarks contemplate acquired brands as well as brands arisingrecorded in intangible assets come mainly from the business combination with Sadia Quickfood and AvexBanvit and are considered as havingassets with indefinite useful life as they are expected to contribute to the Company’s cash flows indefinitely.life.

 

The goodwill is based on expected future profitability supported by valuation reports, after purchase price allocation.

 

Goodwill and intangible assets with indefinite useful life (trademarks) are allocated to cash-generating units as disclosedpresented in note 5.

 

The Company annually performs an impairment test of its assetsthe cash generating units is performed annually based on the value in use through the discounted cash flow method. In 2015, BRF2018, the Company used itsthe strategic plan as a basis forand annual budget projected until 2023 and the test,average perpetuity of the cash generating units of 3.06% from this date, which considers the future cash flows until 2018 and perpetuity from 2019,was based on historical information, economic and financial projections from each specific market projections ofthat theCompany has operations and information disclosed by independent institutions and government agencies, and associations, such as banks, economic advisories, the International Monetary Fund (IFM)(IMF), Brazilian Central Bank (BACEN), among others. In the Management’s opinion, the use of a three-year projection period is adequate as it provides more reliable information.

Management adopted WACC (14.3% p.a.) as theF-72


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The discount rate foradopted by the development ofdiscounted cash flows and also adoptedManagement varied from 9.33% to 10.22%, depending on the operating segment. The assumptions shown in the table below:


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

below were also adopted: 

 

  

2016

 

2017

 

2018

PIB Brazil-BACEN

 

-2.00%

 

1.50%

 

2.50%

TJLP

 

7.87%

 

8.00%

 

7.79%

IPCA

 

6.50%

 

6.00%

 

6.00%

SELIC

 

14.25%

 

12.00%

 

12.00%

  

2019

 

2020

 

2021

 

2022

 

2023

GDP Brazil

 

2.57%

 

3.05%

 

3.07%

 

2.67%

 

2.63%

GDP Halal

 

3.30%

 

3.20%

 

3.20%

 

3.20%

 

3.20%

Inflation Brazil

 

4.09%

 

4.23%

 

4.00%

 

4.00%

 

4.00%

Exchange rate - BRL / USD

 

3.68

 

3.71

 

3.75

 

3.80

 

3.84

Exchange rate - EUR / USD

 

0.85

 

0.84

 

0.82

 

0.81

 

0.80

 

 

The rates above are predo not consider any tax rates.effect.

 

Based on Managementmanagement analyses performed during 2015,2018, no impairment loss was identified.

 

Management has alsoIn addition to the above-mentioned recovery analysis, management prepared a deterministic sensitivity analysis considering the variations in the EBIT margin and WACCin the discount rate as presented below:

 

 

 

 

Variations

 

 

Apreciation (devaluation)

1.0%

 

0.0%

 

-1.0%

WACC

15.3%

 

14.3%

 

13.3%

EBIT margin

14.2%

 

13.2%

 

12.2%

 

 

 

Variations

 

 

Apreciation (devaluation)

1.0%

 

0.0%

 

-1.0%

BRAZIL

     

Discount rate

11.22%

 

10.22%

 

9.22%

Ebit Margin

10.32%

 

9.32%

 

8.32%

      

INTERNATIONAL

     

Discount rate

10.33%

 

9.33%

 

8.33%

Ebit Margin

11.05%

 

10.05%

 

9.05%

      

HALAL

     

Discount rate

11.17%

 

10.17%

 

9.17%

Ebit Margin

11.42%

 

10.42%

 

9.42%

 

 

Based onThe Company in its sensitivity analysis has not identified possible and reasonable scenarios in which identified the above scenarios,need for impairment in the Company has determined that there is no need to recognize an impairment loss on intangible assets with indefinite useful life.

F-73


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

20.19.          LOANS AND FINANCING

 

      

Charges (p.a.)

 

Weighted average
interest rate (p.a.)

 

WAMT(1)

 

Current

 

Non-current

 

12.31.15

 

Current

 

Non-current

 

12.31.14

Charges (p.a.)

 

Weighted average
interest rate (p.a.)

 

WAMT (1)

 

Current

 

Non-current

 

12.31.18

 

Captured

 

Transfer - held for sale (2)

Amortization

 

Interest paid

 

Interest accrued

 

Exchange rate variation

 

Current

 

Non-current

 

12.31.17

Local currency

                                            
                                            

Working capital

7.24%
(6.26% on 12.31.14)

 

7.24%
(6.26% on 12.31.14)

 

0.5

 

1,169.6

 

-

 

1,169.6

 

1,239.8

 

-

 

1,239.8

 'Fixed rate / 118% of CDI
(7.79% on 12.31.17)

 

 7.78%
(7.79% on 12.31.17)

 

  1.7

 

   1,695.4

 

   4,167.6

 

   5,863.0

 

4,431.1

 

  -

   (1,235.9)

 

   (149.7)

 

262.1

 

-

 

   1,631.5

 

   923.9

 

   2,555.4

                                            

Securitization of agribusiness receivables

96.90% of CDI

 

13.67%

 

2.8

 

33.1

 

992.2

 

1,025.3

 

-

 

-

 

-

Certificate of agribusiness receivables

 96.40% of CDI / IPCA + 5,90%
(96.51% of CDI / IPCA + 5,90% on 12.31.17)

 

 6.08%
(7.41% on 12.31.17)

 

  1.6

 

   1,114.9

 

   1,482.6

 

   2,597.5

 

  -

 

  -

  (997.0)

 

   (223.1)

 

246.0

 

-

 

   1,097.9

 

   2,473.8

 

   3,571.7

                                            

Development bank credit lines

Fixed rate / Selic / TJLP + 1.00%
(Fixed rate / TJLP + 2.50% on 12.31.14)

 

4.57%
(3.89% on 12.31.14)

 

1.8

 

217.4

 

508.9

 

726.3

 

277.9

 

485.8

 

763.7

 Fixed rate / Selic / TJLP + 1.25%
(Fixed rate / Selic / TJLP + 1.48% on 12.31.17)

 

 6.16%
(6.78% on 12.31.17)

 

  1.1

 

   220.4

 

  44.1

 

   264.5

 

  -

 

  -

  (315.1)

 

  (20.3)

 

  29.9

 

-

 

   313.3

 

   256.8

 

   570.1

                                            

Bonds

7.75% (7.75% on 12.31.14)

 

7.75% (7.75% on 12.31.14)

 

2.4

 

4.1

 

497.9

 

502.0

 

4.1

 

497.1

 

501.2

 (7.75% on 12.31.17)

 

 (7.75% on 12.31.17)

 

  -

 

-

 

-

 

-

 

  -

 

  -

  (500.0)

 

  (19.4)

 

  15.6

 

-

 

   503.8

 

-

 

   503.8

                                            

Export credit facility

0.00%
(9.63% on 12.31.14)

 

0.00%
(9.63% on 12.31.14)

 

-

 

-

 

-

 

-

 

967.7

 

-

 

967.7

 109.45% of CDI
(100.35% on 12.31.17)

 

 9.02%
(6.91% on 12.31.17)

 

  3.2

 

  39.3

 

   1,586.0

 

   1,625.3

 

1,621.1

 

  -

   (1,850.0)

 

   (188.7)

 

    153.7

 

-

 

  39.2

 

   1,850.0

 

   1,889.2

                                            

Special program asset restructuring

Fixed rate / IGPM + 4.90%
(Fixed rate / IGPM + 4.90% on 12.31.14)

 

15.44%
(8.54% on 12.31.14)

 

4.2

 

3.3

 

231.5

 

234.8

 

3.9

 

209.6

 

213.5

 Fixed rate / IGPM + 4.90%
(Fixed rate / IGPM + 4.90% on 12.31.17)

 

 12.45%
(4.36% on 12.31.17)

 

  1.4

 

3.8

 

   269.7

 

   273.5

 

  -

 

  -

-

 

   (8.1)

 

  32.2

 

-

 

3.5

 

   245.8

 

   249.3

                 

Other secured debts

8.14% (8.14% on 12.31.14)

 

8.14% (8.14% on 12.31.14)

 

2.7

 

32.6

 

127.1

 

159.7

 

46.0

 

248.7

 

294.7

                                            

Fiscal incentives

2.40%
(Fixed rate / 10.00% IGPM + 1.00% on 12.31.14)

 

2.40%
(1.52% on 12.31.14)

 

0.5

 

1.9

 

-

 

1.9

 

1.9

 

10.6

 

12.5

 2.40%
(2.40% on 12.31.17)

 

 2.40%
(2.40% on 12.31.17)

 

  0.5

 

3.3

 

-

 

3.3

 

  57.2

 

  -

(57.5)

 

   (0.4)

 

0.5

 

-

 

3.6

 

-

 

3.6

                                            
      

1,462.0

 

2,357.6

 

3,819.6

 

2,541.3

 

1,451.8

 

3,993.1

      

   3,077.1

 

   7,550.0

 

  10,627.1

 

6,109.4

 

  -

   (4,955.5)

 

   (609.7)

 

740.0

 

-

 

   3,592.8

 

   5,750.3

 

   9,343.1

                                            

Foreign currency

                                            
                                            

Bonds

5.23%
(5.87% on 12.31.14) + e.r. US$, EUR and ARS

 

5.23%
(5.87% on 12.31.14) + e.r. US$, EUR and ARS

 

6.9

 

159.4

 

8,628.4

 

8,787.8

 

89.9

 

6,324.1

 

6,414.0

 4.07%
(4.08% on 12.31.17) + e.r. US$ and EUR

 

 4.07%
(4.08% on 12.31.17) + e.r. US$ and EUR

 

 4.8

 

  99.5

 

   9,646.9

 

   9,746.4

 

  -

 

  (87.1)

(14.8)

 

   (466.6)

 

506.5

 

   1,278.5

 

   105.1

 

   8,424.8

 

   8,529.9

                                            

Export credit facility

LIBOR + 2.15%
(LIBOR + 2.71% on 12.31.14)
+ e.r. US$

 

2.85%
(3.01% on 12.31.14) + e.r. US$

 

2.0

 

598.8

 

1,553.5

 

2,152.3

 

6.9

 

1,052.5

 

1,059.4

 LIBOR + 0.25%
(LIBOR + 1.85% on 12.31.17)
+ e.r. US$

 

 2.47%
(3.35% on 12.31.17) + e.r. US$

 

  0.8

 

   998.7

 

   384.5

 

   1,383.2

 

8.4

 

  -

   (1,067.4)

 

  (75.9)

 

  67.6

 

   299.7

 

   953.5

 

   1,197.2

 

   2,150.7

                                            

Advances for foreign exchange rate contracts

1.76% + e.r. US$

 

1.76% + e.r. US$

 

0.8

 

391.1

 

-

 

391.1

 

-

 

-

 

-

 4.67% + e.r. US$ 

 

 4.67% + e.r. US$ 

 

  0.8

 

   214.2

 

-

 

   214.2

 

208.5

 

  -

-

 

  -

 

1.1

 

4.6

 

-

 

-

 

-

                                            

Development bank credit lines

UMBNDES + 2.26%
(UMBNDES + 2.22% on 12.31.14)
+ e.r. US$ and other currencies

 

6.34%
(6.34% on 12.31.14)
+ e.r. US$ and other currencies

 

1.2

 

12.6

 

11.6

 

24.2

 

27.3

 

15.1

 

42.4

 (UMBNDES + 1.73% on 12.31.17)
+ e.r. US$ and other currencies

 

 (6.22% on 12.31.17)
+ e.r. US$ and other currencies

 

  -

 

-

 

-

 

-

 

  -

 

  -

   (3.9)

 

   (0.2)

 

0.5

 

-

 

2.6

 

1.0

 

3.6

                                            

Other secured debts

15.09%
(15.08% on 12.31.14)
+ e.r. ARS

 

15.09%
(15.08% on 12.31.14)
+ e.r. ARS

 

0.5

 

3.5

 

-

 

3.5

 

8.0

 

3.6

 

11.6

Working capital

 46.84%
(23.10% on 12.31.17) + e.r. ARS / + e.r US$ 

 

 46.84%
(23.10% on 12.31.17) + e.r. ARS / + e.r US$ 

 

  -

 

-

 

-

 

-

 

813.3

 

  (68.7)

  (898.3)

 

   (3.6)

 

  46.0

 

(56.6)

 

   128.2

 

  39.7

 

   167.9

                                            

Working capital

22.00%
(Fixed rate + LIBOR + 2.71% on 12.31.14) + e.r. US$ and ARS

 

22.00%
(22.97% on 12.31.14) + e.r. US$ and ARS

 

-

 

0.7

 

-

 

0.8

 

65.5

 

3.3

 

68.8

 21.91% (15.95% on 12.31.17) + e.r TRY

 

 21.91% (15.95% on 12.31.17) + e.r TRY

 

  0.7

 

   157.9

 

  36.7

 

   194.6

 

193.1

 

  -

  (216.6)

 

  (21.1)

 

  35.9

 

(46.1)

 

   249.2

 

-

 

   249.2

                                            
      

1,166.1

 

10,193.5

 

11,359.7

 

197.6

 

7,398.6

 

7,596.2

      

   1,470.3

 

  10,068.1

 

  11,538.4

 

1,223.3

 

   (155.8)

   (2,201.0)

 

   (567.4)

 

657.6

 

   1,480.1

 

   1,438.6

 

   9,662.7

 

  11,101.3

      

2,628.2

 

12,551.1

 

15,179.3

 

2,738.9

 

8,850.4

 

11,589.3

      

   4,547.4

 

  17,618.1

 

  22,165.5

 

7,332.7

 

   (155.8)

   (7,156.5)

 

   (1,177.1)

 

1,397.6

 

   1,480.1

 

   5,031.4

 

  15,413.0

 

  20,444.4

 

(1)Weighted average maturity in years.

(2)Amounts transferred to discontinued operations (note 12).

F-74


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

Charges (p.a.)

 

Weighted average
interest rate (p.a.)

 

WAMT

 

Current

 

Non-current

 

12.31.17

 

Captured

 

Business combination

 

Amortization

 

Interest paid

 

Interest accrued

 

Exchange rate variation

 

Price index update

 

Current

 

Non-current

 

12.31.16

Local currency

                               
                                

Working capital

 7.79%
(8.90% on 12.31.16)

 

 7.79%
(8.90% on 12.31.16)

 

   0.8

 

   1,631.5

 

  923.9

 

2,555.4

 

  3,579.4

 

  -

 

  (2,401.0)

 

  (162.2)

 

  213.0

 

-

 

   -

 

   1,326.1

 

-

 

1,326.1

                                

Certificate of agribusiness receivables

 96.51% of CDI / IPCA + 5,90%
(96.50% of CDI / IPCA + 5,90% on 12.31.16)

 

 7.41%
(13.43% on 12.31.16)

 

   2.4

 

   1,097.9

 

  2,473.8

 

3,571.7

 

  780.0

 

  -

 

  (779.2)

 

  (393.8)

 

  334.6

 

-

 

   -

 

   168.1

 

   3,462.0

 

3,630.1

                                

Development bank credit lines

 Fixed rate / Selic / TJLP + 1.48%
(Fixed rate / Selic / TJLP + 0.75% on 12.31.16)

 

 6.78%
(7.93% on 12.31.16)

 

   1.7

 

   313.3

 

  256.8

 

570.1

 

62.4

 

  -

 

  (403.8)

 

(37.3)

 

47.4

 

0.2

 

20.1

 

   381.3

 

   499.7

 

881.0

                                

Bonds

 7.75% (7.75% on 12.31.16)

 

 7.75% (7.75% on 12.31.16)

 

   0.4

 

   503.8

 

   -

 

503.8

 

   -

 

  -

 

-

 

(38.8)

 

46.4

 

-

 

  (6.8)

 

4.1

 

   498.8

 

502.9

                                

Export credit facility

 100.35% of CDI
(13.68% on 12.31.16)

 

 6.91%
(13.68% on 12.31.16)

 

   1.2

 

39.2

 

  1,850.0

 

1,889.2

 

   -

 

  -

 

-

 

  (214.3)

 

  181.2

 

-

 

   -

 

  72.3

 

   1,850.0

 

1,922.3

                                

Special program asset restructuring

 Fixed rate / IGPM + 4.90%
(Fixed rate / IGPM + 4.90% on 12.31.16)

 

 4.36%
(12.09% on 12.31.16)

 

   2.2

 

   3.5

 

  245.8

 

249.3

 

   -

 

  -

 

-

 

   (8.1)

 

  9.7

 

   (1.7)

 

  (2.2)

 

3.5

 

   248.0

 

251.5

                                

Other secured debts

 (8.50% on 12.31.16)

 

 (8.50% on 12.31.16)

 

-

 

-

 

   -

 

  -

 

   -

 

  -

 

  (129.9)

 

   (8.9)

 

  9.2

 

-

 

   -

 

  32.3

 

  97.3

 

129.6

                                

Fiscal incentives

 2.40%
(2.40% on 12.31.16)

 

 2.40%
(2.40% on 12.31.16)

 

   0.5

 

   3.6

 

   -

 

3.6

 

34.4

 

  -

 

   (30.9)

 

   (0.2)

 

  0.2

 

-

 

   -

 

0.1

 

-

 

0.1

                                
       

   3,592.8

 

  5,750.3

 

9,343.1

 

  4,456.2

 

  -

 

  (3,744.8)

 

  (863.6)

 

  841.7

 

   (1.5)

 

11.1

 

   1,987.8

 

   6,655.8

 

    8,643.6

                                

Foreign currency

                               
                                

Bonds

 4.08%
(4.71% on 12.31.16) + e.r. US$, EUR and ARS

 

 4.08%
(4.71% on 12.31.16) + e.r. US$, EUR and ARS

 

  6.0

 

   105.1

 

  8,424.8

 

8,529.9

 

77.1

 

  -

 

 (396.0)

 

  (382.0)

 

  410.4

 

   326.7

 

   -

 

   489.2

 

   8,004.4

 

8,493.6

                                

Export credit facility

 LIBOR + 1.85%
(LIBOR + 2.71% on 12.31.16)
+ e.r. US$

 

 3.35%
(3.85% on 12.31.16) + e.r. US$

 

   2.2

 

   953.5

 

  1,197.2

 

2,150.7

 

  3,576.0

 

  -

 

  (2,981.2)

 

(98.5)

 

  105.5

 

   238.3

 

   -

 

   312.2

 

   998.4

 

1,310.6

                                

Advances for foreign exchange rate contracts

 (2.39% on 12.31.16) + e.r. US$ 

 

 (2.39% on 12.31.16) + e.r. US$ 

 

-

 

-

 

   -

 

  -

 

  4.1

 

  -

 

  (203.4)

 

   (4.7)

 

  0.3

 

   (9.1)

 

   -

 

   212.8

 

-

 

212.8

                                

Development bank credit lines

 UMBNDES + 1.73%
(UMBNDES + 2.10% on 12.31.16)
+ e.r. US$ and other currencies

 

 6.22%
(6.24% on 12.31.16)
+ e.r. US$ and other currencies

 

  1.0

 

   2.6

 

  1.0

 

3.6

 

   -

 

  -

 

  (5.9)

 

   (0.4)

 

  1.2

 

   (0.3)

 

   -

 

5.9

 

3.0

 

8.9

                                

Working capital

 23.10%
(14.28% on 12.31.16) + e.r. ARS / + e.r US$ 

 

 23.10%
(14.28% on 12.31.16) + e.r. ARS / + e.r US$ 

 

  1.5

 

   128.2

 

39.7

 

167.9

 

  1,584.8

 

  -

 

  (1,629.4)

 

(19.8)

 

59.2

 

  (119.7)

 

   -

 

   236.9

 

  55.8

 

292.7

                                

Working capital

 15.95% + e.r TRY

 

 15.95% + e.r TRY

 

   0.1

 

   249.2

 

   -

 

249.2

 

   -

 

389.2

 

   (40.6)

 

-

 

  5.1

 

  (104.3)

 

   -

 

-

 

-

 

  -

                                
       

   1,438.6

 

  9,662.7

 

  11,101.3

 

  5,242.0

 

389.2

 

  (5,256.5)

 

  (505.4)

 

  581.7

 

   331.6

 

   -

 

   1,257.0

 

   9,061.6

 

  10,318.6

       

   5,031.4

 

   15,413.0

 

  20,444.4

 

  9,698.2

 

389.2

 

  (9,001.3)

 

  (1,369.0)

 

  1,423.4

 

   330.1

 

11.1

 

   3,244.8

 

  15,717.4

 

  18,962.2

                                

BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-75


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

20.1.19.1.     Working capital

 

Rural credit: The Company and its subsidiaries entered into rural credit loans with several commercial banks, under a Brazilian Federal government program that offers an incentive topromotes investments in rural activities.

 

Working capital in foreign currency: Refers to credit lines taken from financial institutions and utilized primarily to short term working capital and import operations of subsidiaries located in Turkey. The loans are denominated in Turkish Lira with maturity in 2019 and 2020.

20.2.19.2.     Securitizations ofAgribusiness receivables certificates (“CRA”)

 

Securitizations of Agribusiness Receivables: On September 29, 2015, BRFApril 19, 2016, the Company completed the securitizationCRA issuance related to the public distribution offering of receivablesthe 1st series of the 9th Issue by Octante Securitizadora S.A. (“Securitization Company”) in the amount of R$1,000.0 net of interest, which will mature on October 01, 2018April 19, 2019 and bears interest equivalent to 96.90%were issued with a coupon of 96.50% p.a. of the DI rate, payable every each 9 months. The receivablesCRAs arise from the Company’s exports contracted with BRF Global GmbH and were assigned and/or promised to the Securitization Company.

On December 16, 2016, the Company completed the CRA issuance related to the public distribution offering of the 1st and 2nd series of the 1st Issue by Vert Companhia Securitizadora, in the amount of R$1,500.0 net of interest. The 1st series CRA were issued with a coupon of 96.00% p.a. of the DI rate, with will mature on December 16, 2020 and payable every each 8 months. The 2nd series CRA were issued with a coupon of 5.8970% p.a. updated by the Amplified Consumer Price Index (“IPCA”), with will mature on December 18, 2023 and with interest payable every each 16 or 18 months. The CRAs arise from the Company’s exports contracted with BRF Global GmbH and BRF Foods GmbH.

 

20.3.19.3.     Development bank credit lines

 

The Company and its subsidiaries have several outstanding obligations with National Bank for Economic and Social Development (“BNDES”). The loans were obtained for the acquisition of equipment and expansion of productive facilities.

 

FINEM: Credit lines of Financing for Enterprises ("FINEM") which are subject to the variations of UMBNDES, TJLP and SELIC currency basket. The values ​​of principal and interest amounts are paid in monthly installments, with maturities between 20162019 and 2020 and are secured by pledge of equipment, facilities and mortgage on properties owned by the Company.

 

FINEP: Credit lines of Financial of Studies and Projects (“FINEP”) were obtained with reduced charges for projects of research, development and innovation, with maturities dates between 2016 andmaturity in 2019.

 

F-76


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

20.4.19.4.     Bonds

Sadia Overseas Bonds 2017: In the total value of US$250.0, such bonds are guaranteed by BRF, with an interest rate of 6.88% p.a. and maturing on May 24, 2017. On June 20, 2013, US$29.3 of these senior notes was exchanged by Senior Notes BRF 2023 and on May 15, 2014, US$61.0 was repurchased with part of the proceeds obtained from Senior Notes BRF 2024. On May 28, 2015, the Company concluded a Tender Offer, and repurchased US$47.0 of these bonds, such that the outstanding balance amounted to US $ 112.8 and the premium paid, net of interest, was  US$4.7 (equivalent to R$14.6).

 

BFF Notes 2020: On January 28, 2010, BFF International Limited issued senior notes in the total value of US$750,0, which750.0, whose notes are guaranteed by BRF, with a nominal interest rate of 7.25% p.a. and effective rate of 7.54% p.a. maturing on January 28, 2020. On June 20, 2013, the amount of US$120.7 of these senior notes was exchanged by Senior Notes BRF 2023 and on May 15, 2014, the amount of US$409.6 was repurchased with part of the proceeds obtained from the Senior Notes BRF 2024. On May 28, 2015, the Company concluded a Tender Offer, and repurchasedin amount of US$101.4, of these bonds, such that the outstanding balance amounted to US$118.3 and the premium paid, net of interest, was US$16.0 (equivalent of R$52.0). On September 14, 2016, the Company concluded a Tender Offer, in amount of US$32.2 (equivalent of R$104.9), being the premium paid, net of interest, was US$4.1 (equivalent of R$13.4). The premium paid to R$49.5).holders of existing bonds was recorded as a financial expense.

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Senior Notes BRF2022: On June 6, 2012, BRF issued senior notes of US$500.0, with nominal interest rate of 5.88% p.a. and an effective rate of 6.00% p.a. maturing on June 6, 2022. On June 26, 2012, the Company reopened this transaction for an additional amount of US$R$250.0, with nominal interest rate of 5.88% p.a. and effective rate of 5.50% p.a. On May 28,2015, the Company concluded a Tender Offer, and repurchasedin amount of US$577.1, of these bonds, such that the outstanding balance amounted to US$172.9 and the premium paid, net of interest, was US$79.4 (equivalent of R$258.6). On September 14, 2016, the Company concluded a Tender Offer, in amount of US$54.2 (equivalent of R$176.7), being the premium paid, net of interest, was US$5.7 (equivalent of R$18.6). The premium paid to R$246.2).holders of existing bonds was recorded as a financial expense.

Senior Notes BRF 2022 (“Green Bonds”): On May 29, 2015, BRF concluded a Senior Notes offer of 7 (seven) year in the total amount of EUR500.0, which will mature on May 03, 2022 (“Senior Notes BRF 2022”), issued with a coupon (interest) of 2.75% p.a. (yield to maturity 2.822%), payable annually beginning on June 03, 2016.

 

Senior Notes BRF 2023: On May 15, 2013, BRF completed international offerings of (i) 10 year bonds in the aggregate amount of US$500.0 (the “USD Bonds”), which will mature on May 22, 2023 (“Senior Notes BRF 2023”), issued with a coupon (interest) of 3.95% per year (yield to maturity 4.135%), payable semi-annually beginning on November 2013.

Senior Notes BRF 2018:On May 15, 2013, BRF completed international offering of (i) 5 year bonds in the aggregate amount of R$500.0 (the “BRL Bonds”) which will mature on May 22, 2018 (“Senior Notes BRF 2018”), issued with a coupon (interest) of 7.75% p.a. (yield to maturity 7.75%), payable semi-annually beginning as from November 22, 2013.

 

Senior Notes BRF 2024: On May 15, 2014, BRF completed international offerings of 10 year bonds in the aggregate amount of US$750.0 (the “USD Bonds”), which will mature on May 22, 2024 (“Senior Notes BRF 2024”), issued with a coupon (interest) of 4.75% p.a. (yield to maturity 4.952%), payable semi-annually beginning on November 22, 2014.

 

Senior Notes BRF 2022 (“Green Bonds”)2026: On MaySeptember 29, 2014,2016, BRF through its wholly-owned subsidiary BRF GmbH concluded a Senior Notes offer of 7 (seven)10 years duration in the total amount of EUR500.0, whichUS$500.0, with will mature on May 03, 2022 (“Senior Notes BRF 2022”),September 29, 2026, issued with a coupon (interest) of 2.75%4.35% p.a. (yield(yield to maturity 2.822%de 4.625%), payable annuallysemi-annually beginningon June 03, 2016.March 29, 2017.

F-77


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

20.5.19.5.     Export credit facilities

 

Pre-export facilitiesExport prepayments: Generally are denominated in U.S. Dollars, maturing between 2016 and 2019. Under the terms of each of these credit facilities, the Company entered into loans which must be evidenced subsequently by the trade accounts receivable related to the exports of its products.products, with maturities between 2019 and 2023.

 

Commercial credit lines: Denominated in U.S. DollarsEuros with quarterly interest payments of interest and principal maturing in 20182019 and are utilized for purchases of imported raw materials and other working capital needs.

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


20.6.19.6.     Special Program Asset Recovery (“PESA”)

 

The Company has a loan facility obtained through the Special Program for AssetRecoveryAsset Recovery (“Programa Especial de Saneamento de Ativos”) promoted by the federal government and securitized by commercial financial institutions. Such loan facility is subject to the variations of the General Market Price Index (“IGPM”) plus interest of 4.90% p.a. The principal is payable in a single installment and thewith maturity date isin 2020, being secured by endorsements and pledges of public debt securities (see note 16)(note 15).

20.7.Other secured debts

Industrial credit notes: The Company has issued industrial credit notes, receiving from official funds, such as Fund for Worker Support (“FAT”), Constitutional Fund for Financing the Midwest (“FCO”) and Constitutional Fund for Financing the Northwest (“FNE”). The notes are paid on a monthly basis and have maturity dates between 2016 and 2021. These notes are secured by a pledge of machinery and equipment and real estate mortgages.

 

20.8.19.7.     Rotative credit line (“Revolver Credit Facility”)

 

With the purpose of improving its financial liquidity, the Company and its wholly-owned subsidiary BRF Global GmbH obtained a credit line RevolverRevolving Credit Facility ("Revolver Credit Facility") in the amount of US$1,000.0, with a maturity date in May 2019, from a syndicate comprised of 28 banks. The transaction was structured to allow the Company to utilize the credit line at any time, during the contracted period. Untilperiod.On December 31, 2015,2018 the Company didline was available but not use this credit facility.used and it was terminated on February 22, 2019.

 

20.9.19.8.     Loans and financing maturity schedule

 

The maturity schedule of the loans and financing balances is as follows:

 

 

12.31.15

2016

2,628.2

2017

1,132.5

2018

2,762.0

2019

291.3

2020 onwards

8,365.4

 

15,179.3

 

12.31.18

2019

               4,555.9

2020

               3,395.4

2021

               2,936.0

2022

               3,072.7

2023

               3,399.9

2024 onwards

               4,805.6

 

             22,165.5

 

F-78



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

20.10.19.9.     Guarantees

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Total of loans and financing

15,179.3

 

11,589.3

    22,165.5

 

     20,444.4

Mortgage guarantees

912.0

 

1,102.7

         267.8

 

         577.2

Related to FINEM-BNDES

583.4

 

594.9

         217.6

 

         462.8

Related to FNE-BNB

159.6

 

293.5

Related to tax incentives and other

169.0

 

214.3

          50.2

 

         114.4

   

Statutory lien on assets acquired with financing

0.1

 

1.0

Related to FINEM-BNDES

0.1

 

0.6

Related to financial lease

-

 

0.4

 

The Company is the guarantor of a loan contratedobtained by Instituto Sadia de Sustentabilidade from the BNDES. The loan was obtained with the purpose of allowing the implementation of biodigesters in the farms of the outgrowers which take part in the Company´s integration system, targeting the reduction of the emission of Greenhouse Gases. TheseThe value of these guarantees on December 31, 20152018 totaled R$39.16.0 (R$53.317.3 as of December 31, 2014)2017).

 

The Company is the guarantor of loans related to a special program, which aimed the local development of outgrowers in the central region of Brazil. The proceeds of such loans are utilized by the outgrowers to improve farm conditions and will be paid by them in 10 years, taking as collateral the land and equipment acquired by the outgrowers through this program. The guaranteevalue of these guarantees on December 31, 2018 totaled R$208.829.8 (R$87.1 as of December 31, 2015 (R$280.1 as of December 31, 2014).

The Company has booked a provision related to guarantee arising from business combination with Sadia that totaled R$14.7 as of December 31, 2015 (R$23.0 as of December 31, 2014)2017).

 

On December 31, 2015,2018, the Company contracted bank guarantees in the amount of R$2,086.6784.0 (R$2,048.31,477.8 as of December 31, 2014). The variation occurred in this period is related to bank guarantees2017) offered mainly in litigations involving the Company´s use of tax credits. These guarantees have an average cost of 0.91%1.57% p.a. (0.90%(1.09% p.a. as of December 31, 2014)2017).

 

20.11.19.10.  Commitments

 

In the normal course of the business, the Company enters into agreements with third parties which are mainly related tofor the purchase of raw materials such aswith future delivery, mainly of corn and soymeal,soymeal. The agreed prices in which the agreed pricesthese agreements can be fixed or to be fixed. The Company enters into other agreements, such as electricity, packaging supplies and manufacturing activities.

The amountsamount of the agreements at the date of these agreementsfinancial statements are set forth below:

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

  

12.31.15

2016

 

4,560.9

2017

 

1,274.3

2018

 

237.0

2019

 

229.1

2020 onwards

 

452.2

  

6,753.5

  

12.31.18

2019

 

              4,338.1

2020

 

                527.8

2021

 

                257.5

2022

 

                158.9

2023

 

                111.6

2024 onwards

 

                315.0

  

              5,708.9

 

 

 

F-79


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

21.20.          TRADE ACCOUNTS PAYABLE

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Domestic suppliers

      

Third parties

3,263.2

 

2,737.0

       4,700.8

 

       4,647.7

Related parties

23.4

 

18.8

                 -

 

           16.6

3,286.6

 

2,755.8

       4,700.8

 

       4,664.3

      

Foreign suppliers

      

Third parties

1,496.8

 

794.8

       1,079.4

 

       2,030.7

Related parties

                 -

 

                 -

1,496.8

 

794.8

       1,079.4

 

       2,030.7

      

(-) Adjustment to present value

(38.4)

 

(28.4)

          (48.0)

 

          (52.8)

4,745.0

 

3,522.2

       5,732.2

 

       6,642.2

   

Current

       5,552.4

 

       6,445.5

Non-current

          179.8

 

          196.8

 

In

For the year ended on December 31, 2015,2018, the days of payable of outstanding is 9694 days (70(97 days on December 31, 2014)2017).

 

FromOn the trade accounts payablesuppliers’ balance as of December 31, 2015,2018, R$1,070.61,301.3 (R$659.9 on1,787.7 as of December 31, 2014) relates2017) corresponds to the supply chain finance transactions inon which there were no changes in the payment terms and prices negotiated with the suppliers.

 

The information on accounts payable involving related parties is presentedset forth in note 30. The trade accounts payable to related parties refer to transactions with associates UP! and K&S in Brazil.domestic market.

 

 

22.21.          SUPPLY CHAIN FINANCE

 

12.31.18

 

12.31.17

Supply chain finance - Domestic suppliers

         715.3

 

          518.4

Supply chain finance - Foreign suppliers

         170.5

 

          196.8

 

          885.8

 

          715.2

 

 

 
 12.31.1512.31.14
Domestic market685,6292,7
Foreign market489,0162,4
 1.174,6455,1

The Company has entered into supply chain finance transactionspartnerships with first-classseveral financial institutions that allow the suppliers to borrow against their future receivables. The suppliers have the freedom to choose whether to participate and if so, with which institution. The anticipation allows the suppliers to better manage their cash flow needs. This flexibility allows the Company to intensify its commercial relations with the network of suppliers by potentially leveraging benefits such as preference for supply in order to extend thecase of restricted supply, better price conditions and / or more flexible payment terms, of its purchases of raw material, machinery and equipment, and other inputs from domestic and foreignsuppliers. As such, these transactions are presented in a specific line of the operating cash flow for the year ended 2015.


BRF S.A.among others.

 

Notes to Consolidated Financial StatementsThe Company has not identified a material change in the existing commercial conditions with its suppliers.

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-80


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

On December 31, 2015,2018, the discount rates applied to thesethe supply chain finance transactions agreed between our suppliers and the financial institutions in the domesticinternal market range from 1.10%were set between 0.52% to 1.34%0.75% p.m. (1.00%(0.57% to 1.09%0.84% p.m. on December 31, 2014)2017).

 

On December 31, 2015,2018, the discount rates applied to thesethe supply chain finance transactions agreed between our suppliers and the financial institutions in the foreignexternal market range from 1.5%were set between 0.31% to 2.51%0.50% p.a. (1.01%(0.19% to 1.96% p.a.0.29% p.m. on December 31, 2014)2017).

 

 

F-81


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

23.22.          OTHERDERIVATIVE FINANCIAL ASSETS AND LIABILITIESINSTRUMENTS

 

12.31.15

 

12.31.14

12.31.18

 

12.31.17

      

Derivatives designated as cash flow hedges

   

Derivatives designated as hedge accounting

   

Assets

      

Non-deliverable forward (NDF)

2.2

 

9.7

            16.8

 

            1.1

Currency option contracts

96.2

 

3.2

          101.4

 

          23.5

Deliverable forwards contracts

-

 

0.9

Commodities (corn) non-deliverable forward (NDF)

           22.1

 

            0.8

Corn option contracts - B3

                 -

 

            0.8

Commodities (soybean) non-deliverable forward (NDF)

            0.6

 

            1.1

Commodities (soybean oil) non-deliverable forward (NDF)

                -

 

            0.1

98.4

 

13.8

          140.9

 

          27.4

      

Liabilities

      

Non-deliverable forward of currency (NDF)

(66.7)

 

(77.1)

          (21.0)

 

           (6.8)

Currency option contracts

(217.1)

 

(7.2)

           (75.8)

 

         (25.9)

Deliverable forwards contracts

(33.8)

 

(3.4)

Non-deliverable forward of commodities (NDF)

(11.7)

 

-

Commodities (corn) non-deliverable forward (NDF)

           (3.5)

 

           (4.6)

Corn future contracts - B3

            (0.1)

 

               -

Corn option contracts - B3

                 -

 

           (0.6)

Commodities (soybean) non-deliverable forward (NDF)

           (3.3)

 

               -

Commodities (soybean meal) non-deliverable forward (NDF)

           (2.7)

 

           (3.0)

Soybean meal option contracts

                 -

 

           (1.5)

Commodities (soybean oil) non-deliverable forward (NDF)

           (4.3)

 

           (0.1)

Exchange rate contracts currency (Swap)

(326.7)

 

(158.0)

                -

 

       (166.3)

(656.0)

 

(245.7)

         (110.7)

 

       (208.8)

      

Non derivatives designated as cash flow hedges

   

Derivatives not designated as hedge accounting

   

Assets

      

Non-deliverable forward of currency (NDF)

10.7

 

1.3

            2.4

 

          36.4

Live cattle forward contracts (note 13)

-

 

28.0

Non-deliverable forward of commodities (NDF)

2.2

 

-

Currency option contracts

             2.6

 

            1.5

Exchange rate contracts currency (Swap)

3.5

 

-

           36.4

 

          25.2

Dollar future contracts - BM&F Bovespa

14.6

 

-

31.0

 

29.3

            41.4

 

          63.1

      

Liabilities

      

Non-deliverable forward of currency (NDF)

(3.9)

 

(2.8)

          (12.3)

 

           (2.0)

Exchange rate contracts currency (Swap)

(6.7)

 

(3.2)

Dollar future contracts - BM&FBovespa

-

 

(5.7)

Currency future contracts - B3

            (9.4)

 

           (0.2)

Swap (index / currency / stocks)

            (3.4)

 

           (2.0)

Deliverable forwards contracts

           (99.2)

 

         (86.5)

(10.6)

 

(11.7)

         (124.3)

 

         (90.7)

      

Current assets

129.4

 

43.1

          182.3

 

          90.5

Current liabilities

(666.6)

 

(257.4)

         (235.0)

 

       (299.5)

 

The collateral given in the transactions presentedset forth above are disclosed in note 8.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


7.

 

 

F-82


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

24.23.          LEASES

 

The Company is lessee in several contracts, which arefor the year ended in December 31, 2018 were classified as operating or finance leases.lease. From January 01, 2019 onwards, the accounting policy changed according to the details provided in Note 37.

 

24.1.23.1.     Operating lease

 

The minimum future payments of non-cancellable operating lease are presentedset forth below:

 

 

12.31.15

2016

463.6

2017

101.6

2018

37.6

2019

19.2

2020 onwards

76.3

 

698.3

 

12.31.18

2019

                  421.7

2020

                  103.7

2021

                  108.4

2022

                   49.4

2023

                  157.3

2024 onwards

               1,285.8

 

               2,126.4

 

The payments of operating lease agreements recognized as expensein the statement of income in the year ended December 31, 20152018 amounted to R$296.0480.2 (R$247.7 for289.7 in the same period of the previous year). The amount related to discontinued operations is R$13.7 in the year ended December 31, 2014 and R$283.1 for the year ended2018 (R$17.0 at December 31, 2013)2007).

 

In 2018, Sale-leaseback transaction in the amount of R$175.0, of which R$140.0 refers to the Distribution Center of Vitória de Santo Antão (PE) and R$35.0 related to the Property in Duque de Caxias (RJ). Sales with subsequent rental of the same property, guaranteeing the Purchasers the receipt of the rents for the determined term of 20 years and 10 years respectively, both were classified as operating leases with immediate gain for the Company of R$62.0, recorded in other operating results.

F-83


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

24.2.23.2.     Finance lease

 

The Company enters into finance leases mainly for the acquisitions of machinery, equipment, vehicles, software and buildings, presentedset forth below:

 

Weighted average

interest rate
(p.a.)
(1)

 

12.31.15

 

12.31.14

Weighted average depreciation rate
(p.a.)
(1)

 

12.31.18

 

Restated
12.31.17

Cost

          

Machinery and equipment

  

37.1

 

32.0

  

          129.6

 

                 97.6

Software

  

73.0

 

73.0

  

            68.4

 

                 97.1

Vehicles

  

-

 

28.2

Buildings

  

128.9

 

128.7

  

          214.2

 

               216.6

Facilities

  

            14.5

 

                 14.7

  

239.0

 

261.9

  

          426.7

 

               426.0

          

Accumulated depreciation

          

Machinery and equipment

14.79%

 

(13.2)

 

(16.6)

35.15%

 

           (75.4)

 

                (45.1)

Software

50.00%

 

(51.0)

 

(48.3)

39.85%

 

           (57.5)

 

                (84.6)

Vehicles

-

 

-

 

(8.8)

Buildings

6.94%

 

(32.1)

 

(20.2)

6.75%

 

           (74.5)

 

                (58.8)

Facilities

6.67%

 

            (1.7)

 

                  (0.7)

  

(96.3)

 

(93.9)

  

         (209.1)

 

              (189.2)

  

142.7

 

168.0

  

          217.6

 

               236.8

   

(1)     The period of depreciation of leased assets corresponds to the lowest of term of the contract and the useful life of the asset, as determined by IAS 17.asset.

 

The minimum future payments required for these finance leases are demonstratedsegregated as follows, and were recorded in current and non-current liabilities:

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

12.31.18

 

Present value of minimum payments

 

Interest

 

Minimum future payments

2019

                    64.8

 

                  17.7

 

                  82.5

2020

                    42.1

 

                  14.0

 

                  56.1

2021

                    21.0

 

                    8.6

 

                  29.6

2022

                    16.4

 

                    7.3

 

                  23.7

2023

                    12.8

 

                    6.8

 

                  19.6

2024 onwards

                    58.3

 

                  35.8

 

                  94.1

 

                  215.4

 

                  90.2

 

                305.6

 

 

12.31.15

 

Present value of minimum payments

 

Interest

 

Minimum future payments

2016

45.6

 

13.5

 

59.1

2017

25.1

 

10.7

 

35.8

2018

19.1

 

8.1

 

27.2

2019

16.7

 

7.2

 

23.9

2020 onwards

80.1

 

48.9

 

129.0

 

186.6

 

88.4

 

275.0

 

The contract terms for both modalities, with respect to renewal, adjustment and purchase option, are according to market practices. In addition, there are no clauses of contingent payments or restrictions on dividends distribution, payments of interest on shareholders’ equity or obtaining debt.

 

TheIn addition, the Company also has commitments regarding financial leases, related to a “builtabuilt to suit”suit agreement for the construction of office facilities which will be buildbuilt by third parties. The agreements termsterm will be 1513 years from the signing date as well as the charge of rent expenses. If the Company defaults on its obligations, it will be subject to fines and/or acceleration of outstanding rent outstanding installments falling due, according to the terms of the agreement.contract. The contract was classified as a finance lease.

F-84


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

The estimated schedule of future payments related to this agreement is set forth below:

   

 

  

12.31.15

2016

 

7.9

2017

 

8.4

2018

 

8.9

2019

 

9.4

2020 onwards

 

149.1

  

183.7

  

12.31.18

2019

 

                       9.4

2020

 

                       9.4

2021

 

                       9.4

2022

 

                       9.4

2023 onwards

 

                     84.8

  

                   122.4

 

25.24.          SHARE BASEDSHARE-BASED PAYMENT

24.1.Stock options plan

 

The Company grants stock options to its employees eligible by the Board of Directors, under the terms of thewhich are determined in stock options plans that were approved by aan Ordinary and a Special Meeting of Shareholders on March 31, 2010 (Plan I) and April 08, 2015 (Plan II).

 

Plan I comprises two instruments: (i) annual stock option grant, and (ii) an additional stock option grant, which the employee might adhere using part of its profit sharing bonus. Plan II comprises only the annual grant.

 

The vesting conditions are based on attainment of results and in the value of the Company business.businesses.

The plans include shares issued by the Company up to the limit of 2% of the total stock, and its purpose is to: (i) attract, retain and motivate the beneficiaries, (ii) add value forshareholders, and (iii) encourage the view of entrepreneur of the business.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

The plan isplans are managed by the Board of Directors, within the limits established by the general guidelines of the plan and applicable legislation.

 

The quantity of granted options is determined by the Board of Directors, with an exercise price equivalent to the average amount of the closing price of the Company’s sharesshare at the last twenty trading sessions of the BM&FBOVESPAB3, prior to the grant date. The exercise price is updated monthly by the variation of the Amplified Consumer Price Index (“IPCA”) between the grant date and the month prior to the option exercise notice delivered by the beneficiary.

 

The vesting period ranges fromduring which the participant cannot exercise the purchase of the shares for Plan I is 1 to 3 years and for Plan II is 1 to 4 years, (according to the plan) and will observerespecting the following deadlines from the grant date of the option:option.

F-85


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Plan I

 

Plan II

Quantity

 

Deadline

 

Quantity

 

Deadline

       

1/3

 

1 year

 

1/4

 

1 year

2/3

 

2 years

 

2/4

 

2 years

3/3

 

3 years

 

3/4

 

3 years

-

 

-

 

4/4

 

4 years

 

After the vesting period and within no more than five years for Plan I and six years for Plan II from the grant date, the beneficiary is no longer entitled to the right to the unexercised options. To meetsatisfy the exercise of the options, the Company may issue new shares or use shares held in treasury.

 

The breakdown of the outstanding granted options is presented as follows:

 

Date

Date

 

Quantity

 

Grant(1)

 

Price of converted share(1)

Date

 

Quantity

 

Grant (1)

 

Strike price (1)

Grant date

 

Beginning of the year

 

End of the year

 

Options granted

 

Outstanding options

 

Fair value of the option

 

Granting date

 

Updated IPCA

 

Beggining of exercise

 

End of the exercise

 

Options granted

 

Outstanding options

 

Fair value of the option

 

Granting date

 

Updated IPCA

                            

Plan I

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

05.02.11

 

05.01.12

 

05.01.16

 

2,463,525

 

158,990

 

11.36

 

30.85

 

41.62

05.02.12

 

05.01.13

 

05.01.17

 

3,708,071

 

331,198

 

7.82

 

34.95

 

44.86

05.02.13

 

05.01.14

 

05.01.18

 

3,490,201

 

822,333

 

11.88

 

46.86

 

56.48

04.04.14

 

04.03.15

 

04.03.19

 

1,552,564

 

841,644

 

12.56

 

44.48

 

50.44

 

04.03.15

 

04.03.19

 

   1,552,564

 

   407,556

 

12.56

 

   44.48

 

  58.11

05.02.14

 

05.01.15

 

05.01.19

 

1,610,450

 

1,001,528

 

14.11

 

47.98

 

54.41

 

05.01.15

 

05.01.19

 

   1,610,450

 

   314,113

 

14.11

 

   47.98

 

  62.27

12.18.14

 

12.17.15

 

12.17.19

 

5,702,714

 

5,447,954

 

14.58

 

63.49

 

68.51

 

12.17.15

 

12.17.19

 

   5,702,714

 

1,540,640

 

14.58

 

   63.49

 

  80.27

 

 

 

 

 

18,527,525

 

8,603,647

           

   8,865,728

 

2,262,309

      

 

 

 

 

                        

Plan II

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.01.15

 

10.01.16

 

10.01.21

 

37,570

 

32,490

 

20.64

 

70.09

 

71.38

12.07.15

 

12.06.16

 

12.06.21

 

8,724,733

 

8,724,733

 

17.31

 

56.00

 

56.00

04.26.16

 

04.30.17

 

12.30.22

 

   8,724,733

 

2,375,000

 

9.21

 

   56.00

 

  61.48

05.31.16

 

05.31.17

 

12.30.22

 

   3,351,220

 

1,327,100

 

10.97

 

   46.68

 

  50.85

03.30.17

 

03.30.18

 

12.29.23

 

   863,528

 

   193,045

 

9.45

 

   38.43

 

  40.59

     

8,762,303

 

8,757,223

           

 12,939,481

 

3,895,145

      
     

27,289,828

 

17,360,870

           

 21,805,209

 

6,157,454

      

(1)     ValuesAmounts expressed in Brazilian ReaisReais.


 

24.2.BRF S.A.Restricted shares plan

 

NotesIn 2018, 2,857,394 restricted shares were granted in accordance with the plan that were approved by an Ordinary and a Special Meeting of Shareholders on April 26, 2018. The purpose of this plan is: (i) to Consolidated Financial Statementsstimulate the expansion, success and achievement of the Company's social objectives; (ii) to align the interests of the Company's shareholders with those of the eligible persons; and (iii) to enable the Company and the companies under its control to attract and retain the persons related to it.

Under the terms of the plan, directors may be elected, statutory or not, and people occupying other positions of the Company or subsidiaries. The granting of rights to beneficiaries is conditional on: (i) continuity of the employment relationship with the Company for 3 years after the grant date; (ii) achievement of a minimum shareholder return defined by the Board of Directors in the granting agreements and determined at the end of the vesting period; or (iii) any other conditions determined by the Board of Directors in each grant made.

Each year, or whenever deemed appropriate, the Board of Directors shall approve thegrant of restricted shares, electing the beneficiaries in favor of which the Company will sell the restricted shares, establishing the terms, quantities and conditions of acquisition of rights related to restricted shares.

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)F-86


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

The rollforwardtotal number of restricted shares that may be granted under the plan shall not exceed 0.5% of the registered common, nominative, and uncertificated shares with no par value, representing the Company's total share capital. 

Date

 

Quantity

 

Grant (1)

Grant

 

Term of acquisition of the right

 

Shares granted

 

Outstanding shares

 

Fair value of the shares

Restricted shares plan

 

 

 

 

 

 

 

 

08.31.17

 

08.31.19

 

                  716,846

 

                  250,334

 

                      41.85

04.26.18

 

04.26.20

 

                  276,000

 

                  276,000

 

                      22.29

06.14.18

 

06.14.20

 

                  270,000

 

                  270,000

 

                      20.00

10.01.18

 

10.01.20

 

               2,311,394

 

               2,294,717

 

                      21.44

    

               3,574,240

 

               3,091,051

  

24.3.Roll-forward of the stock options and restricted shares plans

The roll-forward of the outstanding granted options and shares for the year ended December 31, 20152018 is presented as follows:

 

Outstanding optionsoptions/shares as of December 31, 20142017

 

11,390,84612,872,189

Issued - grant of 2015

8,762,303

Exercised:2018

  

 June 2018 - (Restricted shares plan)

              270,000

 April 2018 - (Restricted shares plan)

              276,000

 May 2018

              150,000

 October 2018

           2,311,394

 Antecipated transfer

 Antecipated transfer on april 2018 (Restricted shares plan)

            (200,100)

 Exercised:

 Exercised on December of 2018 (Restricted shares plan)

                  (214)

 Exercised on December of 2017 (Restricted shares plan)

              (76,163)

 Forfeiture:

 Grant of 2018

             (150,000)

 Grant of 2017

             (733,168)

 Grant of 2017 (Restricted shares)

             (396,786)

 Grant of 2016

          (2,976,160)

Grant of 2014

 

(531,930)          (1,917,974)

 Grant of 2014

               (75,645)

Grant of 2013

 

(497,212)

Grant of 2012

(582,370)

Grant of 2011

(242,951)

Grant of 2010

(80,833)

Cancelled:

Grant of 2015

(5,080)

Grant of 2014

(638,092)

Grant of 2013

(168,320)

Grant of 2012

(45,491)             (304,968)

Outstanding optionsoptions/shares as of December 31, 20152018

 

17,360,8709,048,405

 

The weighted average exercise prices of the outstanding options conditioned to services is R$59.27 (fifty nine60.05 (sixty Brazilian Reais and twenty sevenfive cents), and the weighted average of the remaining contractual termvesting period is 5835 months.

 

F-87


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The Company records as capital reserve in shareholders’ equity the fair value of the options in the amount of R$160.3262.3 (R$92.9261.8 as of December 31, 2014)2017). In the statement of income forin the year ended December 31, 20152018 the amount recognized as expense was R$67.40.5 (R$20.7 for the year ended25.6 as of December 31, 2014 and R$26.8 for the year ended December 31, 2013)2017).

 

During the year ended on December 31, 2015 the Company’s executives2018, no executive exercised 1,935,296 (2,596,610 as of December 31, 2014) shares, with an average price of R$42.60 (forty two Brazilian Reais and sixty cents) (R$38.42 as of December 31, 2014) totaling R$82.4 (R$99.8 as of December 31, 2104). In order to comply with this commitment, the Company utilized treasury shares with an acquisition cost of R$63.40 (sixty three Brazilian Reais and forty cents) (R$47.54 as of December 31, 2014), totaling R$122.7 (R$123.4 as of December 2014), recording a loss of R$40.3 (R$23.7 as of December 31, 2014) as capital reserve.stock options.

 

25.1.24.4.     Fair Value Measurement

 

The weighted average fair value of options outstanding as of December 31, 20152018 was R$15.55 (fifteen10.11 (ten Brazilian Reais and fifty fiveeleven cents) (R$13.2011.36 as of December 31, 2014)2017). The fair value of the stock options was measured using the Black-Scholes pricing model, based on the following assumptions:

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

  

12.31.18

  

Plan I

 

Plan II

Expected maturity of the option:

    

Exercise in the 1st year

 

3.0 years

 

3.5 years

Exercise in the 2nd year

 

3.5 years

 

4.0 years

Exercise in the 3rd year

 

4.0 years

 

4.5 years

Exercise in the 4th year

 

            -  

 

5.0 years

Risk-free interest rate

 

5.86%

 

6.34%

Volatility

 

25.38%

 

27.43%

Expected dividends over shares

 

1.16%

 

2.43%

Expected inflation rate

 

4.00%

 

3.89%

 

 

  

12.31.15

  

Plan I

 

Plan II

Expected maturity of the option:

    

Exercise in the 1st year

 

3.0 years

 

3.0 years

Exercise in the 2nd year

 

3.5 years

 

3.5 years

Exercise in the 3rd year

 

4.0 years

 

4.0 years

Exercise in the 4th year

 

-

 

5.0 years

Risk-free interest rate

 

5.06%

 

7.34%

Volatility

 

28.48%

 

25.97%

Expected dividends over shares

 

1.27%

 

1.42%

Expected inflation rate

 

6.70%

 

5.32%

25.2.24.5.     Expected period

 

The expected period is that in which it is believed that the options will be exercised and was determined under the assumption that the beneficiaries will exercise their options at the limit of the maturityexercise period.

 

25.3.24.6.     Risk-free interest rate

 

The Company uses aas risk-free interest rate the National Treasury Bond (“NTN-B”) available on the date of calculation and with maturity equivalent to the terms of the option.

 

25.4.24.7.     Volatility

 

The estimated volatility took into account the weighting of the trading history of the Company’s shares.

 

 

25.5.24.8.     Expected dividends

 

The percentage of dividends used is based on the average payment of dividends pershare in relation to the market value of the shares for the past four years.

F-88


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

25.6.24.9.     Expected inflation rate

 

The expected average inflation rate is based on estimated IPCA by Central Bank of Brazil, considering the remaining average terms of the option.

 

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

26.25.          PENSION AND OTHER POST-EMPLOYMENTEMPLOYEES BENEFITS PLANS

 

26.1.25.1.     Pension plans

 

The Company sponsors pension plans for its employees and executives as detailedpresented below:

 

Plan

 

Modality

 

Adhesions

     

Plan I

 

Variable ContributionDefined Benefit

 

Closed

Plan II

 

Variable ContributionDefined Benefit

 

Closed

Plan III

 

Defined Contribution Plan

 

Open

FAF

 

Defined Benefit Plan

 

Closed

 

These plans are managed by BRF Previdência a pension fund entity of non-economic nature and non-profit, through its Deliberative Board which is responsible for defining pension assumptionspremises and policies, as well as establishing fundamentals guidelines forand organization, operation and rulesmanagement rules. The Deliberative Board is composed of representatives from the plans.sponsor and participants, the proportion of 2/3 and 1/3 respectively.

 

a.              Defined benefit plans

 

Plan I and II are structured as defined contribution plans.benefit during the accumulation of mathematics provisions with option to change the account balance to be applicable in lifetime monthly income on the grant date benefit. The main actuarial risks are (i) survival time over expectedthe ones set out in the mortality tables and (ii) actual return on assetsequity below the actual discount rate.

 

In the plans I and II, the contributions are made on a 1 to 1 basis (the contributions of the sponsor are equal to the basic contributions of the participants). In the Plan FAF, the contribution is made through a percentage actuarially defined for the participant and the sponsor. The actuarial calculations of the plans managed by BRF Previdência are made by independent actuaries, on an annual basis.

The main purpose of FAFFundação Attílio Francisco Xavier Fontana (“FAF”) plan is to supplement the benefit paid by the Brazilian Social Security (“INSS – Instituto Nacional de Securidade Social”), calculated proportionally according to the length of service performed and in line with the type of retirement. The main actuarial risks are (i) survival time over the ones set out in the mortality tables, (ii) turnover lower than expected, (iii) salary growth higher than expected, (iv) actual return on assets below the actual discount rate, (v) amendment of the rules of social security and actual family composition of the retired employee or executive different from the established assumption.

F-89


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

In plans I and II, the contributions performed by the participants are made by the sponsor in equal basic contributions. In the Plan FAF, the contribution is made through a percentage actuarially defined for the participant and the sponsor. The actuarial calculations of the plans managed by BRF Previdência are made by independent actuaries, on an annual basis, according to the rules in force.

 

In case of a plan deficit thisresult in plans, it must be sharedsupported by the sponsor, participants and beneficiaries, in the proportion of their contributions.

 

The economic benefit presented as an asset, considers only the part of the surplus that is actually recoverable. The form of recovery of the surplus of the plans will be through reductions in future contributions.

On December 31, 2018, the Deliberative Council and the competent regulatory body approved the incorporation of Plan I by Plan II, preserving the acquired rights of the assistants linked to the Plans and the accumulated right. The merger was motivated by the fact that the plans have identical structure, are closed for new accessions and considering that the sponsors belong to the same economic group.

b.             Defined contribution plan

 

Plan III is a defined contribution plan, where contributions are known and the benefit amount depends directly on the contributions made by participants and sponsors, time of contribution and of the result obtained through investment of contributions. The contributions are made on a 1 to 1 basis (the contributions of the sponsor are equal to the basic contributions of the participants) and that may vary from 0.7% to 7.0% according to the salary range of the participant. The contributions made by the Company in the years ended December 31, 2015 totaled R$7.5 (R$5.1 on2018 and December 31, 20142017 amounted R$18.7 andR$4.4 on December 31, 2013).17.5 respectively. On December 31, 2015,2018, the plan has 24,98134,975 participants (13,362(33,551 participants as of December 31, 2014)2017).


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

If participants of the plans I, II and III end the employment relationship with the sponsor, the balance offormed by the contributions made byof the sponsor not used for the payment of benefits, will form a fund of surplusoverage of contributions that may be used to compensate the future contributions of the sponsor.

 

c.              Rollforward of defined benefit plans

 

The assets and actuarial liabilities are presented below:

  

F-90


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

 

 

FAF

 

Plan I and II

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Reconciliation of assets and liabilities composition

       

Present value of actuarial liabilities

1,675.4

 

1,644.6

 

12.9

 

13.3

Fair value of assets

(2,419.0)

 

(2,385.2)

 

(21.9)

 

(22.0)

Surplus

(743.6)

 

(740.6)

 

(9.0)

 

(8.7)

Deficit of asset ceiling

743.6

 

740.6

 

4.4

 

3.2

Net acturial asset

-

 

-

 

(4.6)

 

(5.5)

        

Rollforward of surplus of asset ceiling

       

Beginning balance of surplus of asset ceiling

740.6

 

811.3

 

3.2

 

3.0

Interest on surplus of asset ceiling

84.8

 

101.3

 

0.4

 

0.4

Changes in surplus of asset ceiling during the year

(81.8)

 

(172.0)

 

0.8

 

(0.2)

Ending balance of irrecoverable surplus

743.6

 

740.6

 

4.4

 

3.2

        

Changes in actuarial obligation

       

Beginning balance of the present value of the actuarial obligation

1,644.6

 

1,408.0

 

13.3

 

11.0

Interest on actuarial obligations

183.2

 

169.9

 

1.5

 

1.3

Current service cost

27.9

 

16.8

 

-

 

-

Benefit paid

(90.4)

 

(80.4)

 

(1.1)

 

(1.1)

Contributions of the sponsor

0.9

 

-

 

-

 

-

Actuarial gains - experience

107.8

 

11.3

 

0.8

 

1.1

Actuarial gains (losses) - hypothesis

(198.5)

 

119.0

 

(1.6)

 

1.0

Ending balance of actuarial obligation

1,675.5

 

1,644.6

 

12.9

 

13.3

        

Rollforward of assets fair value

       

Beginning balance of the fair value of plan assets

(2,385.2)

 

(2,219.3)

 

(22.0)

 

(18.4)

Interest income on assets plan

(268.0)

 

(271.2)

 

(2.5)

 

(2.4)

Benefit paid

90.4

 

80.4

 

1.1

 

1.1

Contributions paid by the Company

(0.4)

 

(0.4)

 

-

 

-

Contributions paid by the employee

(0.9)

 

-

 

-

 

-

Return on assets higher (lower) than projection

145.1

 

25.3

 

1.4

 

(2.3)

Ending balance of assets fair value

(2,419.0)

 

(2,385.2)

 

(22.0)

 

(22.0)

        

Rollforward of comprehensive income

       

Beginning balance

16.4

 

42.6

 

0.5

 

7.6

Reversion to statement of income

(16.4)

 

(42.6)

 

(0.5)

 

(7.6)

Actuarial gains (losses)

90.7

 

(130.4)

 

0.8

 

(2.0)

Return on assets higher (lower) than projection

(145.1)

 

(25.3)

 

(1.4)

 

2.3

Changes on surplus of asset ceiling

81.8

 

172.0

 

(0.9)

 

0.2

Ending balance of comprehensive income

27.4

 

16.3

 

(1.5)

 

0.5

        

Costs recognized in statement of income

       

Current service costs

(27.9)

 

(16.8)

 

-

 

-

Interest on actuarial obligations

(183.2)

 

(169.9)

 

(1.5)

 

(1.3)

Projected return on assets

268.0

 

271.2

 

2.5

 

2.4

Interest on surplus of asset ceiling

(84.8)

 

(101.3)

 

(0.4)

 

(0.4)

Costs recognized in statement of income

(27.9)

 

(16.8)

 

0.6

 

0.6

        

Estimated costs for next year

       

Costs of defined benefit

(23.4)

 

(27.8)

 

0.6

 

0.6

Estimated costs for next year

(23.4)

 

(27.8)

 

0.6

 

0.6

 

FAF

 

Plan I and II

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Composition of actuarial assets and liabilities

       

Present value of actuarial liabilities

           2,498.6

 

            2,275.9

 

                 17.4

 

                 16.0

Fair value of assets

           (3,193.9)

 

           (3,077.4)

 

                (27.8)

 

                (26.7)

(Surplus) Deficit

              (695.3)

 

              (801.5)

 

                (10.4)

 

                (10.7)

Irrecoverable surplus - (asset ceiling)

               695.4

 

               801.5

 

                   8.5

 

                   8.5

Net actuarial (assets) liabilities

                   0.1

 

                      -

 

                  (1.9)

 

                  (2.2)

        

Rollforward of irrecoverable surplus

       

Beginning balance of irrecoverable surplus

               801.5

 

               838.3

 

                   8.5

 

                   8.1

Interest on irrecoverable surplus

                 78.1

 

                 93.9

 

                   0.8

 

                   0.9

Changes in irrecoverable surplus during the year

              (184.2)

 

              (130.7)

 

                  (0.8)

 

                  (0.5)

Ending balance of irrecoverable surplus

               695.4

 

               801.5

 

                   8.5

 

                   8.5

        

Rollforward of present value of actuarial liabilities

       

Beginning balance of the present value of liabilities

            2,275.9

 

            2,000.3

 

                 16.0

 

                 15.2

Interest on actuarial obligations

               215.4

 

               217.3

 

                   1.5

 

                   1.6

Current service cost

                 28.0

 

                 26.8

 

                      -

 

                      -

Benefit paid

              (129.1)

 

              (117.5)

 

                  (1.3)

 

                  (1.5)

Actuarial losses - experience

                 36.0

 

                (48.7)

 

                   0.8

 

                  (0.6)

Actuarial losses - hypothesis

                 72.4

 

               197.6

 

                   0.4

 

                   1.2

Ending balance of actuarial liabilities

            2,498.6

 

            2,275.8

 

                 17.4

 

                 15.9

        

Rollforward of fair value assets

       

Beginning balance of the fair value of plan assets

           (3,077.4)

 

           (2,838.7)

 

                (26.7)

 

                (26.5)

Interest income on assets plan

              (293.5)

 

              (311.2)

 

                  (2.5)

 

                  (2.9)

Benefit paid

               129.1

 

               117.5

 

                   1.3

 

                   1.5

Return on assets higher (lower) than projection

                 47.9

 

                (45.0)

 

                   0.1

 

                   1.2

Ending balance of fair value assets

           (3,193.9)

 

           (3,077.4)

 

                (27.8)

 

                (26.7)

        

Rollforward of comprehensive income

       

Beginning balance

                 26.8

 

                 23.3

 

                  (1.3)

 

                  (2.1)

Reversal to accumulated losses

                (26.8)

 

                (23.3)

 

                   1.3

 

                   2.1

Actuarial gains (losses)

              (108.4)

 

              (148.9)

 

                  (1.2)

 

                  (0.6)

Return on assets higher (lower) than projection

                (47.9)

 

                 45.0

 

                  (0.1)

 

                  (1.2)

Changes on irrecoverable surplus

               184.2

 

               130.7

 

                   0.8

 

                   0.5

Ending balance of comprehensive income

                 27.9

 

                 26.8

 

                  (0.5)

 

                  (1.3)

        

Costs recognized in statement of income

       

Current service costs

                (28.0)

 

                (26.8)

 

                      -

 

                      -

Interest on actuarial obligations

              (215.4)

 

              (217.3)

 

                  (1.5)

 

                  (1.6)

Projected return on assets

               293.5

 

               311.2

 

                   2.5

 

                   2.9

Interest on irrecoverable surplus

                (78.1)

 

                (93.9)

 

                  (0.8)

 

                  (0.9)

Costs recognized in statement of income

                (28.0)

 

                (26.8)

 

                   0.2

 

                   0.4

        

Estimated costs for the next year

       

Costs of defined benefit

                (28.2)

 

                (28.0)

 

                   0.2

 

                   0.2

Estimated costs for the next year

                (28.2)

 

                (28.0)

 

                   0.2

 

                   0.2

 

 

d.             Actuarial assumptions and demographic data

 

The main actuarial assumptions and demographic data used in the actuarial calculations are summarized below:

  

F-91


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

FAF

 

Plan I e II

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Actuarial assumptions

       

Economic hypothesis

       

Discount rate

9.22%

 

9.74%

 

9.19%

 

9.72%

Inflation rate

4.00%

 

4.25%

 

4.00%

 

4.25%

Wage growth rate

4.68%

 

4.93%

 

N/A

 

N/A

        

Demographic hypothesis

       

Schedule of mortality

AT-2000

 

AT-2000

 

AT-2000

 

AT-2000

Schedule of disabled mortality

RRB-1983

 

RRB-1983

 

RRB-1983

 

RRB-1983

        

Demographic data

       

   Number of active participants

7,137

 

7,924

 

                    -  

 

                    -  

   Number of participants in direct proportional benefit

30

 

10

 

                    -  

 

                    -  

   Number of assisted beneficiary participants

6,498

 

6,233

 

51

 

51

 

 

FAF

 

Plan I and II

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Actuarial assumptions

       

Economic hypothesis

       

Discount rate

12.14%

 

11.45%

 

12.22%

 

11.45%

Projected return on assets

12.14%

 

11.45%

 

12.22%

 

11.45%

Inflation rate

5.00%

 

5.20%

 

5.20%

 

5.20%

Wage growth rate

5.68%

 

6.25%

 

N/A

 

N/A

        

Demographic hypothesis

       

Schedule of mortality

AT-2000

 

AT-2000

 

AT-2000

 

AT-2000

Schedule of disabled mortality

IAPC

 

IAPC

 

IAPC

 

IAPC

        

Demographic data

       

Number of active participants

8,838

 

9,431

 

-

 

-

Number of participants in direct proportional benefit

-

 

22

 

-

 

-

Number of assisted beneficiary participants

5,707

 

5,502

 

52

 

53

 

e.              The composition of the investment portfolioportfolios

 

The composition of the investment portfolios areis presented below:

 

 

FAF

 

Plans I and II

 

FAF

 

Plans I and II

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Composition of the fund's portfolio:

                

Composition of the fund's portfolio

                

Fixed income

 

1,782.8

 

73.7%

 

1,717.4

 

72.0%

 

19.0

 

86.8%

 

18.7

 

85.0%

 

     2,306.7

 

72.2%

 

     2,238.1

 

72.7%

 

         24.0

 

86.4%

 

         23.1

 

86.4%

Variable income

 

331.4

 

13.7%

 

360.2

 

15.1%

 

2.5

 

11.6%

 

3.1

 

14.0%

 

       362.5

 

11.3%

 

       363.6

 

11.8%

 

           2.3

 

8.1%

 

           2.5

 

9.3%

Real estate

 

176.6

 

7.3%

 

179.4

 

7.5%

 

-

 

-

 

-

 

-

 

       271.2

 

8.5%

 

       197.7

 

6.4%

 

            -  

 

            -  

 

            -  

 

            -  

Structured investments

 

113.7

 

4.7%

 

113.5

 

4.8%

 

0.3

 

1.6%

 

0.2

 

1.0%

 

       233.5

 

7.3%

 

       257.5

 

8.4%

 

           1.5

 

5.3%

 

           1.1

 

4.1%

Transactions with participants

 

14.5

 

0.6%

 

14.7

 

0.6%

 

-

 

-

 

-

 

-

 

         20.1

 

0.7%

 

         20.4

 

0.7%

 

           0.1

 

0.2%

 

            -  

 

0.2%

 

2,419.0

 

100.0%

 

2,385.2

 

100.0%

 

21.8

 

100.0%

 

22.0

 

100.0%

 

     3,194.0

 

100.0%

 

     3,077.3

 

100.0%

 

         27.9

 

100.0%

 

         26.7

 

100.0%

                                
                                

% of nominal return on assets

 

11.63%

   

11.63%

   

11.66%

   

11.66%

   

9.36%

   

10.90%

   

7.50%

   

8.92%

  

 

f.               Forecast and average term of payments of obligations

 

The following amounts represent the expected benefit payments for future years and the average termsduration of the plan obligations are represented below:

obligations: 

 

 

FAF

 

Plans I and II

Payments in:

   
    

2016

104.2

 

1.1

2017

111.1

 

1.2

2018

119.4

 

1.2

2019

129.5

 

1.3

2020

139.2

 

1.3

2021 to 2025

881.4

 

7.5

    

Weighted average terms - in years

15.10

 

11.40

 

FAF

 

Plans I and II

    
    

2019

            141.4

 

               1.3

2020

            150.6

 

               1.4

2021

            161.8

 

               1.4

2022

            172.6

 

               1.4

2023

            183.3

 

               1.5

2024 onwards

         1,093.7

 

               8.1

    

Weighted average duration - in years

12.49

 

10.37


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


 

 

g.             Sensitivity analysis of defined benefit plan - FAF

 

The quantitative sensitivity analysis regarding the relevant assumptions of defined benefit plan – FAF on December 31, 2018 is presented below:

 

F-92


  

Assumptions

 

Variation of 1%

 

Variation of actuarial liabilities

Significant hypothesis

 

utilized

 

Increase

Decrease

 

Increase

Decrease

         

Benefit plan - FAF

        

Discount rate

 

12.14%

 

13.19%

11.09%

 

(171.1)

207.5

Wage growth rate

 

5.68%

 

6.73%

5.00%

 

62.6

(31.6)

BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

  

Assumptions utilized

 

Variation of (+1%)

 

Variation of (-1%)

Relevant assumptions

  

Average rate

 

Actuarial liabilities (1)

 

Average rate

 

Actuarial liabilities (1)

           

Benefit plan - FAF

          

Discount rate

 

9.22%

 

10.22%

 

                         (263.1)

 

8.22%

 

                          321.7

Wage growth rate

 

4.68%

 

5.68%

 

                            79.9

 

3.68%

 

                           (54.8)

 

(1)Variation of actuarial liabilities.

 

 

26.2.25.2.     Post-employment plans:Employee benefits: description and characteristics of benefits and associated risks

 

Liabilities

Liabilities

12.31.15

 

12.31.14

12.31.18

 

12.31.17

Medical plan

130.0

 

115.7

Medical assistance

             149.0

 

             132.8

F.G.T.S. Penalty(1)

105.1

 

124.5

            167.6

 

             161.3

Award for length of service

41.5

 

48.3

             55.1

 

              49.3

Other

22.5

 

25.7

              96.4

 

              84.8

299.1

 

314.2

             468.1

 

             428.2

      

Current

67.3

 

56.1

              94.7

 

              85.2

Non-current

231.8

 

258.0

             373.4

 

             343.1

(1)     FGTS – Government Severance Indemnity Fund for Employees

 

The Company offers the following post-employment and other employee benefits plans in addition to the pension plans, which are measured by actuarial calculation.calculation and recognized in the financial statement:

 

a.              F.G.T.S. retirement related penalty

 

As settled by the Regional Labor Court (“TRT”) on April 20, 2007, retirement does not affect the employment contract between the Company and its employees. The benefit paid is equivalent to 50% of F.G.T.S being 40% corresponding to a penalty and 10% of social contribution. Main actuarial risks related are (i) survival time higher than expectedover the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.

 

b.             Medical Plan

 

The Company offers to the retired employee according to the Law No. 9,656/98 a medical plan with fixed contribution, which guarantees to thosethe retired employee that contributed to the health plan by reason of employment relationship, for at least 10 years, the right of maintenance as beneficiary, on the same conditions of coverage conditions prior toenjoyed when the retirement date.employment contract was in force. Main actuarial risks related are (i) survival timehigher thanexpected over the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) medical costs growth higher than expected.

F-93


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

c.              Award for length of service

 

The Company usually rewards employees that attain at least 10 years of services rendered and subsequently every 5 years, with an additional remuneration rangesranging from1 to 5 times current salaries at the date of such achievement.the event (the longer the service time the higher the remuneration), provided they remain as active employees. Main actuarial risks related are (i) survival timehigher thanexpected over the ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


 

d.             Retirement compensation

 

On retirement, employees with over 10 years of service to the Company are eligible for additional compensation offrom 1 to 2 current wages in force at the time of retirement. Main actuarial risks related are (i) survival time higher than expectedthe ones set out in the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.

 

e.              Life insurance

 

The Company offers life insurance benefit to the employees who, at the time of their termination, are retired and during the employment contract opted for the insurance. For the employees with 10-20 years of service, the maintenance period of insurance is 2 years, from 21 years of service, the period is 3 years. Main actuarial risks related are (i) survival time higher than expectedthe ones set out in the mortality tables, (ii) turnover lower than expected and (iii) insurance costssalary growth higher than expected.

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

f.               Rollforward of post-employment plans

 

The rollforward of actuarial liabilities related to other benefits, prepared based on actuarial report reviewed by Management, are as follows:

F-94

  

Medical plan

 

F.G.T.S. penalty

 

Award for length of service

 

Others(1)

  

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Composition of actuarial liabilities

                

Present value of actuarial liabilities

 

130.0

 

115.7

 

105.1

 

124.5

 

41.5

 

48.3

 

22.4

 

25.7

Net liabilities

 

130.0

 

115.7

 

105.1

 

124.5

 

41.5

 

48.3

 

22.4

 

25.7

                 

Rollforward of present value of actuarial liabilities

                

Beginning balance of net liabilities

 

115.7

 

115.5

 

124.5

 

112.0

 

48.3

 

41.4

 

25.7

 

22.3

Interest on actuarial liabilities

 

11.6

 

14.1

 

12.2

 

11.8

 

4.7

 

4.5

 

2.6

 

2.5

Early settlement of obligations

 

(0.3)

 

-

 

(8.0)

 

-

 

(2.1)

 

-

 

(1.3)

 

-

Current service costs

 

0.3

 

0.5

 

6.3

 

6.0

 

1.9

 

1.9

 

1.0

 

1.0

Past service costs - changes in plan

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Past service costs - decrease of plan

 

-

 

-

 

-

 

(1.0)

 

-

 

(0.1)

 

-

 

(0.1)

Benefits paid directly by the Company

 

(1.3)

 

(4.1)

 

(8.8)

 

(7.6)

 

(9.7)

 

(10.1)

 

(4.6)

 

(3.7)

Actuarial (gains) losses

 

20.9

 

(22.4)

 

9.5

 

1.9

 

8.3

 

11.0

 

4.8

 

3.2

Actuarial losses - demographic hypotesis

 

-

 

(0.1)

 

(23.3)

 

(3.1)

 

(6.8)

 

(1.3)

 

(3.8)

 

(0.5)

Actuarial (gains) losses - economic hypothesis

 

(16.9)

 

12.1

 

(7.2)

 

4.4

 

(3.2)

 

1.0

 

(2.0)

 

1.1

Ending balance of net liabilities

 

130.0

 

115.7

 

105.2

 

124.5

 

41.4

 

48.3

#

22.4

 

25.7

                 

Rollforward of assets plan

                

Benefits paid directly by the Company

 

1.3

 

4.1

 

8.8

 

7.6

 

9.7

 

10.1

 

4.6

 

3.7

Contributions of the sponsor

 

(1.3)

 

(4.1)

 

(8.8)

 

(7.6)

 

(9.7)

 

(10.1)

 

(4.6)

 

(3.7)

Ending balance of fair value of assets plan

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

                 

Rollforward of comprehensive income

                

Beginning balance

 

(55.0)

 

(65.4)

 

68.8

 

72.0

 

(24.4)

 

(13.8)

 

(7.9)

 

(4.2)

Actuarial gains (losses)

 

(4.0)

 

10.4

 

21.1

 

(3.2)

 

1.7

 

(10.6)

 

1.0

 

(3.7)

Ending balance of comprehensive income

 

(59.0)

 

(55.0)

 

89.9

 

68.8

 

(22.7)

 

(24.4)

 

(6.9)

 

(7.9)

                 

Costs recognized in statement of income

                

Interest on actuarial liabilities

 

(11.6)

 

(14.1)

 

(12.2)

 

(11.8)

 

(4.7)

 

(4.5)

 

(2.6)

 

(2.5)

Current service costs

 

(0.3)

 

(0.5)

 

(6.3)

 

(6.0)

 

(1.9)

 

(1.9)

 

(1.0)

 

(1.0)

Past service costs

 

-

 

-

 

-

 

1.0

 

-

 

0.1

 

-

 

0.2

Gains on early settlement

 

0.3

 

-

 

8.0

 

-

 

2.1

 

-

 

1.3

 

-

Cost recognizzed in statement of income

 

(11.6)

 

(14.6)

 

(10.5)

 

(16.8)

 

(4.5)

 

(6.3)

 

(2.3)

 

(3.3)

                 

Estimated costs for the next period

                

Current service costs

 

(0.2)

 

(0.3)

 

(4.3)

 

(6.4)

 

(1.4)

 

(2.0)

 

(0.6)

 

(1.1)

Interest on actuarial liabilities

 

(15.4)

 

(13.0)

 

(10.7)

 

(12.1)

 

(4.2)

 

(4.7)

 

(2.4)

 

(2.6)

Estimated costs for the next period

 

(15.6)

 

(13.3)

 

(15.0)

 

(18.5)

 

(5.6)

 

(6.7)

 

(3.0)

 

(3.7)


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

  

Medical plan

 

F.G.T.S. penalty

 

Award for length of service

 

Others (1)

  

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Composition of actuarial liabilities

                

Present value of actuarial liabilities

 

149.0

 

132.8

 

167.6

 

161.3

 

  55.1

 

  49.3

 

  96.4

 

  84.8

Net actuarial liabilities

 

149.0

 

132.8

 

167.6

 

161.3

 

  55.1

 

  49.3

 

  96.4

 

  84.8

                 

Rollforward of present value of actuarial liabilities

                

Beginning balance of present value of actuarial liabilities

 

132.8

 

112.3

 

161.3

 

137.2

 

  49.3

 

  52.0

 

  84.8

 

  82.1

Interest on actuarial liabilities

 

  12.7

 

  12.3

 

  12.2

 

  13.2

 

4.0

 

5.1

 

2.5

 

2.9

Current service costs

 

0.2

 

0.2

 

6.5

 

6.0

 

2.1

 

2.1

 

0.8

 

0.9

Past service costs - changes in plan

 

 -

 

2.9

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

Benefits paid directly by the Company

 

  (6.6)

 

   (1.1)

 

(20.1)

 

(16.6)

 

   (9.7)

 

   (9.5)

 

   (6.7)

 

   (4.1)

Present value of actuarial liabilities calculated in 2018

 

 -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  10.2

 

  -

Actuarial (gains) losses - experience

 

5.4

 

   (5.1)

 

  10.7

 

  14.8

 

9.6

 

  -

 

4.9

 

2.0

Actuarial (gains) losses - demographic hypothesis

 

 -

 

   (2.4)

 

   (5.9)

 

   (4.3)

 

   (0.7)

 

   (1.8)

 

   (0.9)

 

   (0.8)

Actuarial losses - economic hypothesis

 

4.4

 

  13.7

 

2.8

 

  11.1

 

0.6

 

1.4

 

0.9

 

1.7

Ending balance of liabilities

 

148.9

 

132.8

 

167.5

 

161.4

 

  55.2

 

  49.3

 

  96.5

 

  84.7

                 

Rollforward of fair value assets

                

Benefits paid directly by the Company

 

6.6

 

1.1

 

  20.1

 

  16.6

 

9.7

 

9.5

 

6.7

 

4.1

Contributions of the sponsor

 

   (6.6)

 

   (1.1)

 

(20.1)

 

(16.6)

 

   (9.7)

 

   (9.5)

 

   (6.7)

 

   (4.1)

Ending balance of fair value of assets

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

                 

Rollforward of comprehensive income

                

Beginning balance

 

(37.4)

 

(31.2)

 

(86.5)

 

(64.9)

 

(37.5)

 

(38.0)

 

(16.0)

 

(12.9)

Actuarial gains (losses)

 

   (9.8)

 

   (6.2)

 

   (7.6)

 

(21.6)

 

   (9.4)

 

0.5

 

   (4.8)

 

   (3.0)

Ending balance of comprehensive income

 

(47.2)

 

(37.4)

 

(94.1)

 

(86.5)

 

(46.9)

 

(37.5)

 

(20.8)

 

(15.9)

                 

Costs recognized in statement of income

                

Interest on actuarial liabilities

 

(12.7)

 

(12.3)

 

(12.2)

 

(13.2)

 

   (4.0)

 

   (5.1)

 

   (2.5)

 

   (2.9)

Current service costs

 

   (0.2)

 

   (0.2)

 

   (6.5)

 

   (6.0)

 

   (2.1)

 

   (2.1)

 

   (0.8)

 

   (0.9)

Past service costs

 

  -

 

   (2.9)

 

  -

 

  -

 

  -

 

  -

 

  -

 

  -

Cost recognized in statement of income

 

(12.9)

 

(15.4)

 

(18.7)

 

(19.2)

 

   (6.1)

 

   (7.2)

 

   (3.3)

 

   (3.8)

                 

Estimated costs for the next year

                

Current service costs

 

  -

 

   (0.2)

 

   (6.5)

 

   (6.5)

 

   (2.6)

 

   (2.1)

 

   (8.1)

 

   (0.8)

Interest on actuarial liabilities

 

(13.5)

 

(12.7)

 

(11.8)

 

(12.2)

 

   (4.4)

 

   (4.0)

 

   (4.2)

 

   (2.5)

Estimated costs for the next year

 

(13.5)

 

(12.9)

 

(18.3)

 

(18.7)

 

   (7.0)

 

   (6.1)

 

(12.3)

 

   (3.3)

(1)     This considersConsiders the sums of the retirement compensation and life insurance benefits.

 

g.             Actuarial assumptions and demographic data

 

The main actuarial assumptions and demographic data used in the actuarial calculations are summarized below:

  

 

Medical plan

 

F.G.T.S. penalty

 

Award for length of service

 

Others(1)

 

Medical plan

 

F.G.T.S. penalty

 

Others (1)

Actuarial premises

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Actuarial assumptions

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

                            

Economic hypothesis

                            

Discount rate

 

12.14%

 

11.49%

 

12.56%

 

11.27%

 

12.49%

 

11.27%

 

12.48%

 

11.44%

 

9.26%

 

9.76%

 

8.76%

 

9.30%

 

8.76%

 

9.30%

Inflation rate

 

5.00%

 

5.20%

 

5.00%

 

5.20%

 

5.00%

 

5.20%

 

5.00%

 

5.20%

 

4.00%

 

4.25%

 

4.00%

 

4.25%

 

4.00%

 

4.25%

Medical inflation

 

8.15%

 

8.36%

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

7.12%

 

7.38%

 

N/A

 

N/A

 

N/A

 

N/A

Wage growth rate

 

N/A

 

N/A

 

6.05%

 

6.78%

 

6.05%

 

6.78%

 

6.05%

 

6.78%

 

N/A

 

N/A

 

5.18%

 

4.25%

 

5.18%

 

4.25%

F.G.T.S. balance growth

 

N/A

 

N/A

 

4.00%

 

4.00%

 

N/A

 

N/A

                            
                            
 

Medical plan

 

Other benefits

         

Medical plan

 

F.G.T.S. penalty

    

Actuarial premises

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

        

Actuarial assumptions

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

    
                            

Demographic hypothesis

                            

Schedule of mortality

 

AT-2000

 

AT-2000

 

AT-2000

 

AT-2000

         

 AT-2000

 

 AT-2000

 

 AT-2000

 

 AT-2000

    

Schedule of disabled

 

RRB-1944

 

RRB-1944

 

RRB-1944

 

RRB-1944

         

 N/A

 

 N/A

 

 RRB-44

 

 RRB-44

    

Schedule of disabled mortality

 

IAPC

 

IAPC

 

IAPC

 

IAPC

        

Schedule of turnover - BRF's historical

 

2015

 

2014

 

2015

 

2014

         

            2,018

 

             2,017

 

             2,018

 

             2,017

    

Demoraphic data

                            

Number of active participants

 

1,423

 

1,558

 

95,460

 

102,534

         

             1,141

 

             1,287

 

           83,966

 

           86,817

    

Number of assisted beneficiary participants

 

963

 

847

 

-

 

-

        

Number of assisted beneficiary participants

               609

 

                643

 

                  -  

 

                  -  

    

 

(1)     Includes retirement compensation and life insurance benefits.

 

 

 

F-95



BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

h.             Forecast and average termsduration of payments of obligations

 

The following amounts represent the expected benefit payments for future years (10 years), from the obligation of benefits granted and the average duration of the plan terms are presented below:obligations:

  

 

Payments

 

Medical plan

 

F.G.T.S. penalty

 

Award for length of service

 

Others

 

Total

           

2016

 

6.1

 

40.2

 

15.1

 

6.0

 

67.4

2017

 

6.3

 

10.5

 

7.1

 

2.4

 

26.3

2018

 

6.8

 

13.4

 

4.8

 

3.0

 

28.0

2019

 

7.5

 

12.5

 

4.9

 

2.3

 

27.2

2020

 

8.2

 

14.4

 

6.2

 

2.7

 

31.5

2021 to 2025

 

53.9

 

70.6

 

23.4

 

14.2

 

162.1

           

Weighted average term - in years

 

16.94

 

5.83

 

5.03

 

7.30

 

8.71

Payments

 

Medical plan

 

F.G.T.S. penalty

 

Award for length of service

 

Others

 

Total

           

2019

 

6.5

 

64.9

 

10.6

 

12.8

 

94.8

2020

 

7.1

 

15.3

 

8.9

 

7.6

 

38.9

2021

 

7.7

 

17.0

 

8.9

 

8.8

 

42.4

2022

 

8.4

 

15.8

 

6.5

 

8.2

 

38.9

2023

 

9.1

 

18.5

 

7.2

 

8.9

 

43.7

2024 to 2028

 

58.7

 

81.6

 

34.4

 

49.7

 

224.4

           

Weighted average duration - in years

14.00

 

3.78

 

4.26

 

8.25

 

6.71

 

 

i.                Sensitivity analysis of post-employment plans

 

The Company made the sensitivity analysis regarding the relevant assumptions of the plans ison December 31, 2018, as presented below:

 

 

Assumptions

 

Variation of 1%

 

Variation of actuarial liabilities

 

Assumptions utilized

 

(+) Variation

 

(-) Variation

Significant hypothesis

 

utilized

 

Increase

 

Decrease

 

Increase

 

%

 

Decrease

 

%

Relevant assumptions

 

Assumptions utilized

 

Average (%)

 

Actuarial liabilities (1)

 

Average (%)

 

Actuarial liabilities (1)

                      

Medical plan

                        

Discount rate

 

12.14%

 

13.14%

 

11.14%

 

(16.8)

 

-12.90%

 

21.8

 

16.70%

 

9.26%

 

10.26%

 

                           (17.0)

 

8.26%

 

                            20.7

Medical inflation

 

8.15%

 

9.15%

 

7.15%

 

21.6

 

16.60%

 

(17.2)

 

-13.20%

 

7.12%

 

8.12%

 

                            20.3

 

6.12%

 

                           (17.0)

Turnover

 

Historical

 

+3,00%

 

-3,00%

 

(0.2)

 

0.10%

 

0.7

 

0.50%

                        

F.G.T.S. penalty

                        

Discount rate

 

12.56%

 

13.56%

 

11.56%

 

(2.9)

 

-2.30%

 

3.2

 

2.40%

 

8.76%

 

9.76%

 

                             (5.5)

 

7.76%

 

                              6.1

Wage growth rate

 

6.05%

 

7.05%

 

5.05%

 

0.5

 

0.40%

 

(0.5)

 

-0.30%

 

5.18%

 

6.18%

 

                              1.0

 

4.18%

 

                             (0.9)

Turnover

 

Historical

 

+3,00%

 

-3,00%

 

(10.7)

 

-8.20%

 

13.9

 

10.70%

 

Historical

 

+3%

 

                           (18.9)

 

-3%

 

                            25.8

(1)Variation of actuarial liabilities.

 

 

27.26.          PROVISION FOR TAX, CIVIL AND LABOR RISKS

 

The Company and its subsidiaries are involved in certain legal proceedings arising from the normal course of business, which include civil,commercial and other processes (including environmental and regulatory proceedings),administrative, tax, social security and labor claims.risks.

 

The Company classifies the risk of unfavorable decisions in the legal proceedings as “probable”, “possible” or “remote”. The Company records provisions recorded relating to such proceedings isfor losses classified as "probable", as determined by the Company’s management,Management, based on legal advice, and reasonablywhich reflect the estimated probable losses. Contingencies classified as "possible" loss are disclosed (but not provisioned) based on reasonably estimated amounts.

                                  

The Company’s management believes that, based on the elements existing at the basedate of these financial statements, its provision for tax, civil, commercial and other, as well for labor risks, accounted for according to IAS 37 is sufficient to cover estimated losses related to its legal proceedings, as presented below:set forth below.

F-96


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

27.1.26.1.     Contingencies for probable losses

 

The rollforwardroll-forward of the provisions for tax, civil, commercial and other, and labor risks is summarized below:

 

 

Tax

 

Labor

 

Civil, commercial and other

 

Contingent liabilities

 

Total

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Beginning balance

   303.4

 

   281.7

 

   691.7

 

   479.7

 

   407.5

 

   122.5

 

   370.6

 

   499.9

 

  1,773.2

 

  1,383.8

Additions

42.3

 

   177.1

 

   390.9

 

   704.0

 

58.1

 

   164.1

 

-

 

  11.0

 

491.3

 

  1,056.2

Business combination

-

 

-

 

-

 

   1.8

 

-

 

-

 

-

 

-

 

  -

 

  1.8

Reversals

  (128.9)

 

   (50.8)

 

  (325.8)

 

  (270.8)

 

  (169.0)

 

(75.1)

 

  (0.8)

 

  (139.5)

 

   (624.5)

 

   (536.2)

Payments

  (5.0)

 

  (127.0)

 

  (324.6)

 

  (338.9)

 

   (26.0)

 

(43.3)

 

-

 

-

 

   (355.6)

 

   (509.2)

Price index update

39.4

 

26.6

 

   120.5

 

   128.5

 

32.3

 

   242.0

 

-

 

-

 

192.2

 

397.1

Exchange rate variation

  (8.5)

 

  (4.2)

 

   (37.9)

 

   (12.6)

 

  (8.9)

 

   (2.7)

 

  (0.1)

 

   (0.8)

 

  (55.4)

 

  (20.3)

Transfer - held for sale (1)

   (12.6)

 

-

 

   (46.2)

 

-

 

   (12.0)

 

-

 

  (0.1)

 

-

 

  (70.9)

 

  -

Ending balance

   230.1

 

   303.4

 

   468.6

 

   691.7

 

   282.0

 

   407.5

 

   369.6

 

   370.6

 

  1,350.3

 

  1,773.2

                    

Current

                

495.6

 

536.1

Non-current

                

854.7

 

  1,237.1


(1)Amounts transferred to liabilitiesdirectly associated with the assets held for sale (note 12).

BRF S.A.

 

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Tax

 

Labor

 

Civil, commercial and other

 

Contingent liabilities

 

Total

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Beginning balance

252.4

 

141.5

 

330.4

 

276.1

 

57.4

 

48.3

 

545.6

 

553.4

 

1,185.8

 

1,019.3

Additions

24.5

 

130.2

 

217.8

 

272.3

 

33.7

 

77.2

 

-

 

-

 

276.0

 

479.7

Reversals

(37.8)

 

(38.0)

 

(96.1)

 

(101.2)

 

(20.2)

 

(26.7)

 

(23.0)

 

(7.1)

 

(177.1)

 

(173.0)

Payments

(31.6)

 

(48.3)

 

(145.1)

 

(161.9)

 

(17.6)

 

(49.3)

 

-

 

-

 

(194.3)

 

(259.5)

Price index update

32.6

 

67.5

 

71.1

 

46.7

 

12.4

 

8.3

 

-

 

-

 

116.1

 

122.5

Exchange rate variation

0.5

 

(0.5)

 

(1.1)

 

(1.6)

 

-

 

(0.4)

 

-

 

(0.7)

 

(0.6)

 

(3.2)

Ending balance

240.6

 

252.4

 

377.0

 

330.4

 

65.7

 

57.4

 

522.6

 

545.6

 

1,205.9

 

1,185.8

                    

Current

                

231.4

 

243.0

Non-current

                

974.5

 

942.8

27.1.1.26.1.1 Tax

 

The tax contingencies consolidated and classified as probable losses relate to the following main legal proceedings:

 

ICMS: The Company is involved in administrativediscusses administratively and judicial tax disputes associated tojudicially judgments of ICMS arising from the register and/or maintenance of ICMS tax credits on certain transactions, such as exports,mainly related to the acquisition of use and consumption materials, property, plant and monetary correction. The provision amountsequipment, communication service, presumed credit, alleged underpayment of tax rate differential, tax rebate, isolated fine and others, in amount to R$107.7100.7 (R$96.3157.0 as of December 31, 2014)2017).

 

PIS and COFINS: The Company discusses administratively and judicially the use of certain tax credits arising from the acquisition of raw materials to offset federal taxes, which amount is R$77.5125.1 (R$78.9106.5 as of December 31, 2014)2017).

 

Other tax contingencies: The Company recorded other provisions for tax claims related to payment of social security contributions (SAT, INCRA, FUNRURAL, Education Salary), as wellcontributions due to joint liability for services provided by third parties, through assignment

of labor debits included in REFIS with deposit awaiting consolidation and conversion into payment, in addition to debits as tax debts arising from differences of accessory obligations, duties, including legalimport taxes, industrialized products tax, payment of compensation fees and others, totaling a

others. In view of the amnesty payments the provision ofamounted in R$52.0(R$54.347.5 (R$51.6 as of December 31, 2014)2017).

F-97


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

27.1.2.26.1.2 Labor

 

The Company is defendant in several labor claims individual or with the Public Minister, mainly related to overtime, time spent by the workers for changing uniforms, in-commuting hours, rest breaks, occupational accidents, among others. None of these labor claims is individually significant. The Company recorded a provision based on past history of payments.payments and loss prognosis.

 

27.1.3.26.1.3 Civil, commercial and others

 

Civil contingencies are mainly related to claims relating to traffic accidents, moral and property damage, physical casualties, consumer relations, allegations contractual breaches, and other.

allegations of noncompliance with legal obligations, among others.

 


BRF S.A.26.1.3.1 Investigation by the Turkish Competition Board

 

NotesThe Turkish Competition Board (“TCB”) initiated an investigation for the determination of whether the undertakings engaged in the industry of chicken meat production including Banvit, an indirect subsidiary of BRF, violated the Turkish Competition Laws by controlling domestic price levels and volumes, and controlling supply in the Aegean region during the period between November 2013 and July 2017.

The Company has received an investigation report and an additional opinion from the competition authority and has submitted three written defenses. An oral hearing before the Competition Board will be held on February 27, 2019. Following the oral hearing, the Competition Board will issue its short form decision within 15 days and later the reasoned decision, which sets out the grounds for the fine, if applicable.

Based on the evidences that are presented in the Investigation Report, in the Additional Opinion and the continuing stance of the Investigation Committee requesting a fine to Consolidated Financial Statements

Yearsbe imposed on the Company, it can be deemed probable that the Company will receive a fine of some sort. Although on December 31, 2018 there was a wide range of possibilities, unclear elements and significant level of uncertainty regarding the calculation of the potential fine amount. Based on the unclear elements and uncertain variables set out, it was not possible to make a precise estimation regarding the exact magnitude of the fine that would be imposed by the Competition Board in case it ultimately resolves that the Company has violated the Competition Law at the end of the Investigation. Accordingly, in the year ended December 31, 2015, 20142018, no provision related to the subject process was recognized. Additionally, there are clauses in Banvit’s purchase agreement and 2013insurance policy that may cover partially or fully future losses.

(Amounts expressed

On March 14, 2019 the TCB announced a short decision regarding this investigation in millionswhich imposed an administrative fine of Brazilian Reais, unless otherwise stated)TRY 30.5. A reasoned decision is expected to be rendered within the course of 2019. The Company does not expect to have material losses related to this investigation.

F-98


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

27.2.26.2.     Contingencies classified as a risk of possible loss

 

The Company is involved in other tax, civil, labor and social security contingencies, for which losses have been assessed as possible by management with the support from legalcounsel and therefore no provision was recorded. On December 31, 20152018 the total amount of the possible contingencies was R$11,707.313,965.8 (R$9,268.513,278.4 as of December 31, 2014)2017), of which R$522.6369.6 (R$545.6370.6 as of December 31, 2014)2017) was recorded at fair value as a result of business combinations with Sadia, Avex and Dánica, according to the requirements of paragraph 23 of IFRS 3.

Sadia.

27.2.1.26.2.1 Tax

Tax contingencies with a risk of possible loss amounted to R$10,569.912,336.9 (R$8,514.311,469.9 as of December 31, 2014)2017), from which R$511.4369.6 (R$530.1370.2 as of December 31, 2014)2017) was recorded at fair value as a result of business combination with Sadia, Avex and Dánica, according to the requirements of paragraph 23 of IFRS 3.Sadia.

 

The most relevant tax cases are set forth below:

 

Profits earned abroad:abroad: The Company was assessed by the Brazilian Internal Revenue Service for alleged underpayment of income tax and social contribution on profits earned by its subsidiaries located abroad, in a total amount of R$636.5524.5 (R$588.1506.3 as of December 31, 2014)2017).The Company’s legal defense is based on the facts that the subsidiaries located abroad are subject exclusively to the full taxation in the countries in which they are based as a result of the treaties signed to avoid double taxation. The total profits earned abroad are disclosed in note 14.3.13.3.

 

Income Tax and Social Contribution:Contribution: The Company is involved in administrative disputes associated to the usediscusses administratively and judicially several tax assessment notices involving compensation of tax losses, refunds and offset of income and social contribution tax credits against other federal tax debts, including credits arising from thePlano Verão legal dispute. Also, on February 05, 2015 BRF received a tax assessment notice, of R$574.7 related to the compensation of tax loss carryforwards and negative calculation basis above theup to limit of 30% when it has incorporated one of its subsidiaries were merged into the Companygroups entity during calendar year 2012. The contingent liabilities relative to these tax mattersthe subjects discussed totaled R$1,127.71,311.1 (R$482.91,276.4 as of December 31, 2014)2017).

 

ICMS: The Company is involved in the following disputes associated to the ICMS tax: (i) alleged undue ICMS tax credits generated by tax incentives granted by certain State tax authoritiesStates local rules (“guerra fiscal”) in a total amount of R$2,267.71,724.8 (R$1,963.11,690.6 as of December 31, 2014). On December 14, 2015 BRF received a tax assessment notice from the State of Paraná, demanding a reversal of a portion of ICMS credits of R$339.6 (undue credits related to materials consumed in production and over imports)2017); (ii) maintenance of ICMS tax credits on the acquisition of certain products with a reduced tax burden (“cesta básica”) in a total amount of R$547.6816.4 (R$522.0789.9 as of December 31, 2014)2017);  (iii) absence of evidence to prove the balances of exports in the amount of R$324.8396.2 (R$45.6333.8 as of December 31, 2014); 2017)and (iv) R$1,416.92,061.8 (R$1,007.5 1.946.2as of December 31, 2014) 2017)related to other ICMS claims.

 

InRelated to the disputes involving “guerra fiscal” (item i above), on December 18, 2017 was published the Agreement ICMS Nº 190/2017 which regulates a Supplementary Law

F-99


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Nº 160/2017, allowing, after the necessary internal regulations of the States, the remission of the debts assessed/executed. On November 01, 2018 was published new ICMS Agreement nº 109/18 which partially amended ICMS Agreement nº 190/17, extending the deadlines for validating tax incentives and remitting debts to 2019.

Related to the “ICMS cesta básica” (item ii above), in a meeting held on October 16, 2014 with the decision disclosed on February 13,2015, the Brazilian Federal Supreme Court ("STF") found in favorwas favorable to the Tax Authority of State of Rio Grande do Sul, in athe judgment relating toof the extraordinary appeal No.635.688No.635,688 submitted by company Santa Lúcia. The STF ruledcia, understanding as improper the integral maintenance of ICMS tax credits on the reduced tax basis of food products that companies could not recognize full VAT credits relating to products included incomposes the basic food basket which have reduced rate of VAT. As disclosed above, the Companybasket. The decision has a possible loss contingency of R$547.6wide reflection effect (applicable to all taxpayers). However, there is still a claim for clarification waiting to be judged, requesting more details related to the timing of such decision (i.e. whether the decision will have retrospective effects), which suggests the need to wait for this matter as of December 31, 2015.


BRF S.A.

Notesfinal decision to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Although this decision has wide general repercussions and forms a precedent for other taxpayers and courts, there will still be, in accordance with applicable law, a motion for clarification, which will include a determination of the date at whichrecognize the effects of the decision are applicable to the Company. Due to this uncertainty, the Company is unable to reliably measure the effect of the decision or to record the impact in its consolidatedon our financial statements.

 

IPI:IPI: The Company discusses administratively and judicially the non-ratification of compensation of IPI credits resulting from purchases of exempted goods, sales to Manaus Free Zone and purchases of supplies of non-taxpayers with PIS and COFINS debits being some cases having favorable decisions. Such discussed credits totaled the amount of R$453.2445.1 (R$546.2441.7 as of December 2014)31, 2017).

 

IPI Premium Credits:PIS and COFINS: The Company is involved in a judicial dispute related to the alleged undue offsetting of IPI Premium Credits against other federal taxes of R$464.7 (R$420.5 as of December 31, 2014). The Company recorded and used the credits based on a final judicial decision.

PIS and COFINS: The Company is mainly involved in administrative proceedings regarding the(i)  offsetting of credits against other federal tax debts, (ii) disputes about the application (or not) of tax exemptions to some of our products (seasoned meats), iii) levied on the sale of certain types of products (non processed meat), (iv)  Decrees 2.445 and 2.449 (“semestralidade”) and others in the amount of R$3,097.24,363.1 (R$2,572.34,001.2 as of December 31, 2014)2017).

 

Social Security Charges:Taxes: The Company is involved in disputes related to social security chargestaxes allegedly due on payments to service providers as well as joint responsibility with civil construction service providers and others in a total amount of R$194.4244.5 (R$113.3262.9 as of December 31, 2014)2017).

 

Other Contingencies:Contingencies: The Company is involved in other tax contingencies including rural activity, transfer price,proceedings regarding to a requirement of a fine of 50% of the compensation amount of PIS/COFINS and IRPJ not approved awaiting final decision of the processes, basis of calculation of social contribution on net income, tax on services and others of several natures, fees, property tax, import tax, IOF, as well as an isolate fine arising from alleged errors on Digital Fiscal Bookkeeping (“EFD”) on 2012, totaling R$39.0449.3 (R$198.0190.0 as of December 31, 2014)2017).

Additionally, the Company’s management has determined the disclosure of the information about the processes below:

HUAINE: the Company was included as co-responsible in a debt from Huaine Participações Ltda (former holding of Perdigão). In this lawsuit it is being discussed the inclusion of the Company in the liability from the tax execution in the amount of R$625.5 (R$609.3 as of December 31, 2014). BRF presented a guarantee to the debt, which was accepted by the judge and filed a motion, which is awaiting judgment. The Company’s legal advisors classified the risk of losses as remote.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Normative Instruction 86: The Company discusses administratively a fine imposed by the Brazilian Internal Revenue Service resulting from alleged non-compliance with the delivery of 2003 – 2005 magnetic file to the tax authorities, for a total amount of R$237.4 (R$219.4 as of December 31, 2014).  In the year ended December 31, 2014, the Company obtained a favorable decision issued by Administrative Tax Appeals Council (“CARF”), so that this legal dispute is now assessed by our legal counsel as remote risk of loss. The Company is waiting for the judgement of the final appeal in the administrative court.

 

27.2.2.26.2.2 Labor

 

On December 31, 20152017 the contingencies assessed as possible loss totaled R$ 39.2125.5 (R$40.1139.3 as of December 31, 2014)2017).

 

IPCA-E: On August 2015, the Superior Labor Court (“TST”) declared unconstitutional the monetary adjustment of the labor debts by the Referential Rate (“TR”), which was replaced by the IPCA-E (National Index of Price to the Ample Consumer - Special), which will be applicable to all litigations in progress as of June 30, 2009 and from that date on.F-100


On October 14, 2015, the Federal Supreme Court (“STF”) granted an injunction to suspend the decision from TST. In case the injunction is suspended the Company estimates that the result of the monetary adjustment would be approximately R$44.5.

BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

27.2.3.26.2.3 Civil

 

The civil contingencies for which losses were assessed as possible totaled R$1,098.21,503.4 (R$714.21,714.9 as of December 31, 2014)2017) and were mainly related to indemnificationclaims for material anddamages, including moral damages.

damages, arising from work accidents, traffic accidents, consumer relations, allegations of contractual noncompliance, allegations of noncompliance with legal obligations, among others.

 

28.26.2.4Other

The Company has been subject to two external investigations, denominated “Carne Fraca Operation” in 2017 and “Trapaça Operation” in 2018, as well as a shareholders class action also in 2018. The development of these processes and the already incurred effects are described in the notes 1.2 and 1.3.

26.3.Contingent Assets

26.3.1Exclusion of VAT (ICMS) from PIS and COFINS tax base

On March 15, 2017, the Supreme court in the judgment of the Extraordinary Appeal No. 574.706 of the State of Paraná, moved by Import, Export and Oil Industry ("IMCOPA"), established the thesis, with general repercussion, that the ICMS is not part of the tax basis for PIS and COFINS. The judgment of the Extraordinary Appeal it is still pending the assessment of the opposing objections by the Union.

The Company has in its name an estimated contingent asset in the amount of R$954.6,corresponding to PIS / COFINS paid in the past, including ICMS in the calculation basis. In addition, the Company has other actions on the same subject by merged companies, with favorable decisions, whose amounts are already being determined and will be recognized upon final decision (note 11.2).

27.          SHAREHOLDERS’ EQUITY

 

28.1.27.1.     Capital stock

 

On December 31, 2015,2018, the capital subscribed and paid by the Company is R$12,553.4, which is composed of 872,473,246812,473,246 book-entry shares of common stock without par value. The value of the capital stock is net of the public offering expenses of R$92.9.

 

The Company is authorized to increase the capital stock, irrespective of amendment to the bylaws, up to the limit of 1,000,000,000 common shares, in book-entry form without par value.

 

28.2.Interest on shareholders’ equity and dividendsF-101


On February 13, 2015 the payment of R$463.3 was made related to the interest on shareholders’ equity approved by the Management on December 18, 2014 and ratified in the Shareholders Ordinary Meeting on April 8, 2015.

BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

On June 18, 2015, the Board of Directors approved the payment of R$425.9 related to interest on shareholder’s equity, which was settled on August 14, 2015.

On December 17, 2015, the Board of Directors approved the payment of R$473.4 related to interest on shareholder’s equity and R$91.4 related to dividends, which were settled on February 12, 2016.

 

28.3.27.2.     Breakdown of capital stock by nature

 

12.31.15

 

12.31.14

 

12.31.13

12.31.18

 

12.31.17

 

12.31.16

Common shares

872,473,246

 

872,473,246

 

872,473,246

    812,473,246

 

    812,473,246

 

 812,473,246

Treasury shares

(62,501,001)

 

(5,188,897)

 

(1,785,507)

      (1,057,224)

 

      (1,333,701)

 

  (13,468,001)

Outstanding shares

809,972,245

 

867,284,349

 

870,687,739

    811,416,022

 

    811,139,545

 

 799,005,245

 

 

28.4.27.3.     Rollforward of outstanding shares

    

 

Quantity of outstanding of shares

 

Quantity of outstanding of shares

 

12.31.15

 

12.31.14

 

12.31.13

 

12.31.18

 

12.31.17

 

12.31.16

Shares at the beggining of the year

 

867,284,349

 

870,687,739

 

870,073,911

Shares at the beggining of the exercise

 

     811,139,545

 

      799,005,245

 

      809,972,245

Purchase of treasury shares

 

(59,247,400)

 

(6,000,000)

 

(1,381,946)

 

                     -  

 

                     -  

 

       (11,107,600)

Sale of treasury shares

 

1,935,296

 

2,596,610

 

1,995,774

 

                     -  

 

        12,134,300

 

             140,600

Shares at the end of the year

 

809,972,245

 

867,284,349

 

870,687,739

Anticipated transfer of restricted shares

 

            276,477

 

                     -  

 

                     -  

Shares at the end of the exercise

 

     811,416,022

 

      811,139,545

 

      799,005,245

 

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

28.5.27.4.     Shareholders’ remuneration

 

 

12.31.15

 

12.31.14

 

12.31.13

Net profit attributable to controlling shareholders

3,111.2

 

2,225.0

 

1,062.4

Legal reserve (5.00%)

(155.6)

 

(111.3)

 

(53.1)

Dividends calculation base

2,955.6

 

2,113.7

 

1,009.3

Minimum mandatory dividend (25.00%)

738.9

 

528.4

 

252.3

Remuneration of shareholders' exceeding the mandatory minimum

251.8

 

295.8

 

471.7

Total remuneration of shareholders' in the year, as interest on shareholders' equity and dividends (R$91.4 in 2015) and (R$86.5 in 2014)

990.7

 

824.3

 

724.0

Withholding income tax on interest on shareholders' equity

(88.9)

 

(64.2)

 

(60.6)

Remuneration of shareholders', net of withholding income tax

901.8

 

760.1

 

663.4

      

Percentage of calculation base

33.52%

 

38.99%

 

71.73%

Earnings paid per share

1.19979

 

0.94836

 

0.83154

      
      

Payment of interest on shareholders' equity, paid in the year - gross of withholding income tax of R$40.5 in 2015 (R$30.3 in 2014)

(425.9)

 

(361.0)

 

(359.0)

Paid in the previous period - interest on shareholders' equity - gross withholding income tax of R$33.9 in 2014 (R$30.0 in 2013)

(376.7)

 

(365.0)

 

(174.8)

Paid in the previous period - Dividends

(86.5)

 

-

 

(45.3)

Payments made during in the year

(889.1)

 

(726.0)

 

(579.1)

      
      

Total remuneration of shareholders' outstanding

564.8

 

463.3

 

365.0

Withholding income tax on interest on shareholders' equity

(48.3)

 

(33.9)

 

(30.0)

Remaining amounts payable

1.9

 

1.6

 

1.7

Interest on shareholders' equity outstanding

518.5

 

430.9

 

336.7

 

12.31.18

 

12.31.17

 

12.31.16

Net profit (Loss)

       (4,448.1)

 

       (1,125.6)

 

         (372.4)

Dividends calculation base

       (4,448.1)

 

       (1,125.6)

 

         (372.4)

Remuneration of shareholders' exceeding the mandatory minimum

                -

 

                 -

 

          513.2

Total remuneration of shareholders' in the year, as interest on shareholders' equity

                -

 

                 -

 

          513.2

Withholding income tax on interest on shareholders' equity

                 -

 

                 -

 

           (77.0)

Remuneration of shareholders', net of withholding income tax

                 -

 

                 -

 

          436.2

      

Dividends paid per share

                 -

 

                 -

 

       0.76410

      

Payment of interest on shareholders' equity, paid in 2016 - gross of withholding income tax of R$76,982

                 -

 

                 -

 

         (513.2)

Paid in the previous period - interest on shareholders' equity of 2015 - gross withholding income tax of R$48,318

                 -

 

                 -

 

         (473.4)

Dividends paid related to 2015

                 -

 

                 -

 

         (189.7)

Payments made during in the year

                 -

 

                 -

 

       (1,176.3)

      

Remaining amounts outstanding

        1,018.0

 

        1,723.0

 

        2,307.0

Interest on shareholders' equity outstanding

        1,018.0

 

        1,723.0

 

        2,307.0

 

 

28.6.27.5.     Profit distributionLoss absorption

 

    

Income appropriation

 

Reserve balances

  

Limit on

        
  

capital %

 

12.31.15

 

12.31.14

 

12.31.15

 

12.31.14

Actuarial gain FAF

 

-

 

(10.5)

 

(33.2)

 

-

 

-

Dividends

 

-

 

91.4

 

86.5

 

-

 

-

Interest on shareholdes' equity

 

-

 

899.3

 

737.8

 

-

 

-

Legal reserve

 

20

 

155.6

 

111.3

 

540.2

 

384.6

Capital increase reserve

 

20

 

624.3

 

451.6

 

1,898.6

 

1,274.3

Reserve for expansion

 

80

 

1,219.4

 

730.7

 

3,120.8

 

1,901.4

Reserve for tax incentives

 

-

 

131.7

 

140.4

 

517.2

 

385.5

    

3,111.2

 

2,225.0

 

6,076.8

 

3,945.8

    

Loss absorption

 

Reserve balances

  

Limit on

        
  

capital %

 

12.31.18

 

12.31.17

 

12.31.18

 

12.31.17

Actuarial loss FAF

 

                  -

 

                (18.5)

 

                (16.8)

 

                      -

 

                      -

Legal reserve

 

               20

 

              (101.4)

 

              (438.8)

 

                      -

 

               101.4

Capital increase reserve

 

               20

 

                      -

 

                (30.3)

 

                      -

 

                      -

Reserve for tax incentives

 

                  -

 

                      -

 

              (639.7)

 

                      -

 

                      -

    

              (119.9)

 

           (1,125.6)

 

                      -

 

               101.4

F-102


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Legal reserve: It is computed based on five percent (5%) of net profit of each fiscal year as specified in article 193 of Law No. 6,404/76, modified by Law No. 11,638/07, which shall not exceed twenty percent (20%) of the capital stock. On December 31, 2015, this2018, the reserve corresponds to 4.34%was zero, once it absorbed R$101.4, partial amount of capital stock (3.09% as of December 31, 2014).the loss for the year.

 

Reserve for capital increase: it is calculated based on twenty percent (20%) towards the establishment of reserves for capital increase, which shall not exceed twenty percent (20%) of the capital stock. On December 31, 2015 this reserve corresponds to 15.24% of capital stock (10.23% as of December 31, 2014).

Reserve for expansion: Up to 50% (fifty per cent) for the constitution of the reserve for expansion. This reserve should not exceed 80% (eighty per cent) of the capital stock. On December 31, 2015 the balance of this reserve correspond to 25.05% of the capitalstock (15.26% as of December 31, 2014).


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


Reserve for tax incentives: Constituted as specified in article 195-A of the Law No. 6,404/1976, modified by Law No. 11,638/07, based on the amounts of government grants for investment.

28.7.27.6.     Capital reserve

 

28.7.1.27.6.1 Capital reserve

 

   

Capital Reserves

   

12.31.15

 

12.31.14

Gain on disposal of shares

  

(39.0)

 

1.2

Goodwill on the shares issuance

  

174.0

 

62.8

Granted options

  

160.3

 

92.9

Goodwill on acquisition of non-controlling entities

  

(47.4)

 

(47.4)

Acquisition of non-controlling interest

  

(240.9)

 

-

   

7.0

 

109.5

   

Capital Reserves

   

12.31.18

 

12.31.17

 

12.31.16

Result on disposal of shares

  

       (40.7)

 

        (40.7)

 

      (40.7)

Granted shares canceled

  

        (32.4)

 

        (32.4)

 

      (32.4)

Valuation of stock exchange

  

       166.2

 

       166.2

 

     166.2

Shares based payment

  

       262.3

 

       261.8

 

     236.2

Goodwill on acquisition of non-controlling entities

  

       (40.5)

 

        (40.5)

 

      (47.4)

Acquisition of non-controlling entities

  

     (199.3)

 

      (199.3)

 

    (240.9)

Loss on the change in equity interest - Subsidiaries

  

         (0.2)

 

              -

 

            -

   

       115.4

 

       115.1

 

       41.0

 

28.7.2.27.6.2Treasury shares

 

The Company has 62,501,0011,057,224 shares in treasury, shares, with an average cost of R$63.17 (sixty three53.60 (fifty-three Brazilian Reais and seventeensixty cents) per share, with a market value corresponding to R$3,455.7.23.2. 

  

Quantity of outstanding of shares

  

12.31.18

 

12.31.17

Shares at the beggining of the exercise

 

            1,333,701

 

           13,468,001

Sale of treasury shares

 

                        -  

 

          (12,134,300)

Anticipated transfer of restricted shares

 

              (276,477)

 

                          -

Shares at the end of the exercise

 

            1,057,224

 

             1,333,701

27.7Breakdown of the capital by owner

The shareholding position of shareholders holding more than 5% of the voting capital, management and members of the Board of Directors is presented below (unaudited):

F-103


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

  

12.31.18

 

12.31.17

Shareholders

 

Quantity

 

%

 

Quantity

 

%

Major shareholders

        

Fundação Petrobras de Seguridade Social - Petros (1)

 

    93,226,766

 

     11.47

 

    92,716,266

 

     11.41

Caixa de Previd. dos Func. Do Banco do Brasil (1)

 

    86,506,952

 

     10.65

 

    86,605,452

 

     10.66

Management

        

Board of Directors

 

     6,376,083

 

      0.78

 

    41,220,470

 

      5.07

Executives

 

          31,662

 

      0.00

 

        157,546

 

      0.02

Treasury shares

 

     1,057,224

 

      0.13

 

     1,333,701

 

      0.16

Other

 

  625,274,559

 

     76.97

 

  590,439,811

 

     72.68

  

  812,473,246

 

   100.00

 

  812,473,246

 

   100.00

(1)The pension funds are controlled by employees that participate in the respective entities.

 

DuringThe Company is bound to arbitration in the Market Arbitration Chamber, as established by the arbitration clause in its bylaws.

28. LOSS PER SHARE

Continued operations

12.31.18

 

12.31.17

 

12.31.16

Basic numerator

     

Loss for the year attributable to controlling shareholders

      (2,115.0)

 

          (984.2)

 

          (107.8)

      

Basic denominator

     

Common shares

 812,473,246

 

 812,473,246

 

 812,473,246

Weighted average number of outstanding shares - basic
(except treasury shares)

 811,294,251

 

 803,559,763

 

 801,903,266

Loss per share basic - R$

     (2.60691)

 

      (1.22486)

 

      (0.13442)

      
      

Diluted numerator

     

Loss for the year attributable to controlling shareholders

      (2,115.0)

 

          (984.2)

 

          (107.8)

      

Diluted denominator

     

Weighted average number of outstanding shares - basic
(except treasury shares)

 811,294,251

 

 803,559,763

 

 801,903,266

Weighted average number of outstanding shares - diluted

 811,294,251

 

 803,559,763

 

 801,903,266

Loss per share diluted - R$

     (2.60691)

 

      (1.22486)

 

      (0.13442)

F-104


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Discontinued operations

12.31.18

 

12.31.17

 

12.31.16

Basic numerator

     

Loss for the year attributable to controlling shareholders

      (2,333.1)

 

          (141.3)

 

          (264.6)

      

Basic denominator

     

Common shares

 812,473,246

 

 812,473,246

 

 812,473,246

Weighted average number of outstanding shares - basic
(except treasury shares)

 811,294,251

 

 803,559,763

 

 801,903,266

Loss per share basic - R$

     (2.87577)

 

      (0.17588)

 

      (0.32996)

      
      

Diluted numerator

     

Loss for the year attributable to controlling shareholders

      (2,333.1)

 

          (141.3)

 

          (264.6)

      

Diluted denominator

     

Weighted average number of outstanding shares - basic
(except treasury shares)

 811,294,251

 

 803,559,763

 

 801,903,266

Weighted average number of outstanding shares - diluted

 811,294,251

 

 803,559,763

 

 801,903,266

Loss per share diluted - R$

     (2.87577)

 

      (0.17588)

 

      (0.32996)

 

12.31.18

 

12.31.17

 

12.31.16

Basic numerator

     

Loss for the year attributable to controlling shareholders

      (4,448.1)

 

       (1,125.6)

 

          (372.4)

      

Basic denominator

     

Common shares

 812,473,246

 

 812,473,246

 

 812,473,246

Weighted average number of outstanding shares - basic
(except treasury shares)

 811,294,251

 

 803,559,763

 

 801,903,266

Loss per share basic - R$

     (5.48267)

 

      (1.40073)

 

      (0.46437)

      
      

Diluted numerator

     

Loss for the year attributable to controlling shareholders

      (4,448.1)

 

       (1,125.6)

 

          (372.4)

      

Diluted denominator

     

Weighted average number of outstanding shares - basic
(except treasury shares)

 811,294,251

 

 803,559,763

 

 801,903,266

Weighted average number of outstanding shares - diluted

 811,294,251

 

 803,559,763

 

 801,903,266

Loss per share diluted - R$

     (5.48267)

 

      (1.40073)

 

      (0.46437)

Diluted result is calculated considering the numbers of dilutive potential ordinary shares (stock options and restricted shares). However, due to loss disclosed for the year ended December 31, 2015,2018 and 2017, the Company sold 1,935,296 treasurynumbers of dilutive potential ordinary shares due the exercise of stock options by the Company’s executives.

During the year ended December 31, 2015, as authorized by the Board of Directors, the Company acquired 59,247,400 shares of its own shares at a cost of R$3,765.8, with the objective of maintenance of treasury shares for possible compliance with the provisions of the stock option plans(stock options) has antidilutive effect and additional stock option, both approved by the special meeting of Board of Directors held on April 28, August 27 and October 29, 2015 and a special meeting of the Board of Directors on November 09, 2015.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

29.EARNINGS PER SHARE

 

12.31.15

 

12.31.14

 

12.31.13

Basic numerator

     

Net profit for the year attributed to shareholders

3,130.8

 

2,224.9

 

1,066.8

      

Basic denominator

     

Common shares

872,473,246

 

872,473,246

 

872,473,246

Weighted average number of outstanding shares - basic
(except treasury shares)

842,000,012

 

870,412,068

 

870,534,511

Earnings per share basic - R$

3.71836

 

2.55612

 

1.22550

      
      

Diluted numerator

     

Net profit for the year attributed to shareholders

3,130.8

 

2,224.9

 

1,066.8

      

Diluted denominator

     

Weighted average number of outstanding shares - basic
(except treasury shares)

842,000,012

 

870,412,068

 

870,534,511

Number of potential shares (stock options)

401,809

 

411,822

 

907,194

Weighted average number of outstanding shares - diluted

842,401,821

 

870,823,890

 

871,441,705

Earnings per share diluted - R$

3.71659

 

2.55491

 

1.22422

      

Continuing operations

12.31.15

 

12.31.14

 

12.31.13

Basic numerator

     

Net profit for the year attributed to shareholders

2,947.7

 

2,135.0

 

1,019.7

      

Basic denominator

     

Common shares

872,473,246

 

872,473,246

 

872,473,246

Weighted average number of outstanding shares - basic
(except treasury shares)

842,000,012

 

870,412,068

 

870,534,511

Earnings per share basic - R$

3.50091

 

2.45292

 

1.17130

      
      

Diluted numerator

     

Net profit for the year attributed to shareholders

2,947.7

 

2,135.0

 

1,019.7

      

Diluted denominator

     

Weighted average number of outstanding shares - basic
(except treasury shares)

842,000,012

 

870,412,068

 

870,534,511

Number of potential shares (stock options)

401,809

 

411,822

 

907,194

Weighted average number of outstanding shares - diluted

842,401,821

 

870,823,890

 

871,441,705

Earnings per share diluted - R$

3.49924

 

2.45176

 

1.17008

      


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


Discontinued operations

12.31.15

 

12.31.14

 

12.31.13

Basic numerator

     

Net profit for the year attributed to shareholders

183.1

 

89.8

 

47.2

      

Basic denominator

     

Common shares

872,473,246

 

872,473,246

 

872,473,246

Weighted average number of outstanding shares - basic
(except treasury shares)

842,000,012

 

870,412,068

 

870,534,511

Earnings per share basic - R$

0.21744

 

0.10319

 

0.05420

      
      

Diluted numerator

     

Net profit for the year attributed to shareholders

183.1

 

89.8

 

47.2

      

Diluted denominator

     

Weighted average number of outstanding shares - basic
(except treasury shares)

842,000,012

 

870,412,068

 

870,534,511

Number of potential shares (stock options)

401,809

 

411,822

 

907,194

Weighted average number of outstanding shares - diluted

842,401,821

 

870,823,890

 

871,441,705

Earnings per share diluted - R$

0.21734

 

0.10315

 

0.05414

      

On December 31, 2015, from the total of 17,360,870 stock options outstanding (11,390,846 as of December 31, 2014) granted to executives of the Company, 14,205,177 options (8,616,900 as of December 31, 2014) weretherefore was not considered in the calculation of the diluted earningsloss per share due to the fact that the exercise price until the vesting period was higher than the average market price of the common shares during the period, so that they did not cause any dilution effect.share.

 

 

F-105


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

30.29.          GOVERNMENT GRANTS

 

The Company has tax benefits related to ICMS for investments granted by the governments of states ofas follows: Programa de Desenvolvimento Industrial e Comercial de Mato Grosso (“PRODEIC”), Programa de Desenvolvimento do Estado de Pernambuco (“PRODEPE”) and Fundo de Participação e Fomento à Industrialização do Estado de Goiás Pernambuco, Mato Grosso and Bahia.(“FOMENTAR”). Such incentives are directly associated to the manufacturing facilities operations, job generation and to the economic and social development in the respective states. 

 

On December 31, 2015,2018, this ICMS incentive totaled R$131.7174.2 (R$140.4 as of December 31, 2014)144.4 in 2017 and was booked as a reduction of sales taxes.

R$122.6 in 2016).

 

31.30.          RELATED PARTIES

 

As part of the Company’s operations, rights and obligations arise between related parties, resulting from transactions of purchase and sale of products, and loans agreed based on prices and under thecontracts, on market or commutative conditions agreed by the parties.for similar transactions.

 

All the transactions and balances among the Company and its subsidiaries were eliminated in the consolidation and refer to commercial and/or financial transactions.

The price of transactions of the purchase, sale, industrialization, and sharing of costs which are commutative between BRF SA and SHB, were determined based on cost plus tax impacts, in order to preserve the value chain of the companies. As of December 31, 2018, with the merge of SHB by BRF S.A. (note 1.7), these transactions no longer exist.

31.1.30.1.    Transactions and balances

 

All companies presentedset forth in note 1.1, which describes the relationship with BRF as well as the nature of the operations of each entity, are controlled by BRF, except for UP! Alimentos, K&S, PP-BIO PR-SAD, AKF and SATS BRF which are associates or joint ventures.

The Company also recorded a liability in the amount of 8.5R$1.3 (R$10.83.7 as of December 31, 2014)2017) relatedto the fair value of the guarantees offered to BNDES concerning a loan made by Instituto Sadia de Sustentabilidade.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

Due to the acquisition of biodigesters from Instituto Sadia de Sustentabilidade, as of December 31, 20152018 the Company recorded a payable to this entity of R$30.64.7 included in other liabilities (R$39.213.6 as of December 31, 2014)2017).

The Company entered into loans agreement with its subsidiaries. Below is a summary of the balances and rates charged for the transactions at the balance sheet date:  

Counterparty

   

Balance

 

Interest rate (p.a.)

Creditor

 

Debtor

 

Currency

 

12.31.15

 
         

Sadia Overseas Ltd.

 

BRF Global GmbH

 

US$

 

341.2

 

7.0%

BRF Global GmbH

 

BFF International Ltd.

 

US$

 

275.7

 

1.5%

BRF GmbH

 

BRF Foods GmbH

 

US$

 

232.7

 

1.2%

Sadia International Ltd.

 

Wellax Food Logistics

 

US$

 

221.6

 

1.5%

Perdigão International Ltd.

 

BRF Global GmbH

 

US$

 

147.0

 

0.9%

BRF GmbH

 

BRF Holland B.V.

 

EUR

 

96.8

 

3.0%

BRF GmbH

 

BRF Foods LLC

 

US$

 

74.7

 

2.5%

BRF Holland B.V.

 

BRF B.V. (NL)

 

EUR

 

49.6

 

3.0%

Wellax Food Logistics

 

BRF GmbH

 

EUR

 

34.5

 

1.5%

Perdigão International Ltd.

 

BRF S.A

 

US$

 

29.4

 

0.8%

BRF Holland B.V.

 

BRF GmbH

 

EUR

 

17.2

 

1.5%

BRF GmbH

 

AL Wafi

 

US$

 

11.4

 

1.2%

BRF GmbH

 

BRF Global GmbH

 

EUR

 

9.2

 

1.5%

BRF GmbH

 

BRF Singapore

 

SGD

 

5.6

 

1.5%

Perdigão International Ltd.

 

BRF Foods LLC

 

US$

 

4.7

 

1.0%

BRF Holland B.V.

 

BRF Wrexam

 

GBP

 

3.2

 

3.0%

BRF GmbH

 

BRF Foods LLC

 

US$

 

2.7

 

1.6%

Wellax Food Logistics

 

BRF Foods LLC

 

US$

 

2.3

 

7.0%

BRF Holland B.V.

 

BRF Iberia

 

EUR

 

1.9

 

3.0%

 

The Company has entered into transactions with companies that are owned by members of its Board of Directors as demonstrated below:

 

F-106


    

Amounts of revenues (expenses)

Companies

 

Type of transactions

 

12.31.15

 

12.31.14

 

12.31.13

Hortigil Hortifruti S.A. ("Hortigil")

 

BRF sells products to Hortigil

 

15.2

 

14.1

 

12.2

Instituto de Desenvolvimento Gerencial S.A.("Instituto")

 

Instituto provided consulting services to BRF

 

(11.3)

 

(2.9)

 

-

Galeazzi e Associados Consult. Serv. Ltda ("Galeazzi)(1)

 

Galeazzi provided consulting and restructuring services to BRF

 

-

 

(11.6)

 

(7.1)

BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

    

Amounts of revenues (expenses)

Companies

 

Type of transactions

 

12.31.18

 

12.31.17

 

12.31.16

Corall Consultoria Ltda(2)

 

Corall provided consulting services to BRF

 

                      -  

 

                          -  

 

                       (1.8)

Edavila Consultoria Empresarial Eireli(1)

 

Edavila provided consulting services to BRF

 

                      -  

 

                       (0.5)

 

                       (0.3)

Hortigil Hortifruti S.A. ("Hortigil")(2)

 

BRF sells products to Hortigil

 

                      -  

 

                          -  

 

                        3.5

Instituto de Desenvolvimento Gerencial S.A.("Instituto")(2)

 

Instituto provided consulting services to BRF

 

                      -  

 

                       (0.9)

 

                       (5.0)

 

(1)The ownerEntity on which BRF has no equity interest, but have relationship with the Board of this company is no longer a related partyDirectors, and provided services to the Company since December 31, 2014.related international marketing and innovation.


(2)

BRF S.A.

Notes to Consolidated Financial StatementsEntities are no longer related parties, because Board of Director member has no more relationship with them.

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

                                                                ��               

 

31.2.30.2.     Other Related Parties

 

The Company leased properties owned by FAF. For the year ended December 31, 2015,2018, the total amount paid as rent was R$10.116.9 (R$6.2 as15.8 in the same period of December 31, 2014 and R$6.0 as of December 31, 2013)the previous year). The rent value was set based on market conditions.

 

31.3.30.3.     Granted guarantees

 

All granted guarantees on behalf of related parties were disclosed in note 20.10.19.9.

 

31.4.30.4.     Management remuneration

 

TheKey management key personnel include theboard members, statutory directors and officers, members of the executive committee and the head of internal audit. On December 31, 2015, there were 27 professionals (24 professionals as of December 31, 2014).

 

The total remuneration and benefits paid to these professionals are demonstratedset forth below:

    

 

Consolidated

12.31.15

 

12.31.14

 

12.31.13

12.31.18

 

12.31.17

 

12.31.16

Salary and profit sharing

41.9

 

48.1

 

32.8

          40.1

 

          32.8

 

          27.5

Short term benefits

0.7

 

0.9

 

1.3

Pension plan

0.7

 

0.4

 

-

Short term benefits (1)

               -

 

            0.4

 

            0.3

Private pension

            0.6

 

            0.6

 

            0.8

Post-employment benefits

0.2

 

0.2

 

0.2

            0.1

 

            0.2

 

            0.2

Termination benefits

23.6

 

28.4

 

1.9

          10.1

 

            5.8

 

            5.9

Share based payment

13.2

 

8.7

 

8.0

Share-based payment

            5.6

 

          17.0

 

          16.8

80.3

 

86.7

 

44.2

          56.5

 

          56.8

 

          51.5

 

(1)     Comprises:  Medical assistance, educational expenses and others.

 

In addition, the executive officers who are also an integral part of the key management personnel received between remuneration and benefits the total amount of R$38.4 for year ended December 31, 2018 (R$23.0 in 2017 and R$16.0 in 2016).

 

 

F-107


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


 

BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

32.31.          NET SALES

 

 

12.31.15

 

12.31.14

 

12.31.13

Gross sales

     

Brazil

19,867.0

 

18,742.0

 

17,576.9

Europe

3,853.3

 

3,307.5

 

3,260.3

MEA

7,643.1

 

5,909.2

 

5,448.4

Asia

3,432.4

 

3,109.7

 

2,810.7

LATAM

2,438.8

 

1,878.2

 

2,531.9

 

37,234.6

 

32,946.6

 

31,628.2

      

Sales deductions

     

Brazil

(3,829.5)

 

(3,317.6)

 

(3,090.8)

Europe

(213.7)

 

(214.9)

 

(250.7)

MEA

(545.6)

 

(199.3)

 

(190.7)

Asia

(142.8)

 

(36.7)

 

(86.8)

LATAM

(306.4)

 

(171.3)

 

(221.8)

 

(5,038.0)

 

(3,939.8)

 

(3,840.8)

 

 

 

 

 

 

Net sales

     

Brazil

16,037.5

 

15,424.4

 

14,486.2

Europe

3,639.6

 

3,092.6

 

3,009.6

MEA

7,097.5

 

5,709.8

 

5,257.7

Asia

3,289.6

 

3,072.9

 

2,723.9

LATAM

2,132.4

 

1,707.0

 

2,310.1

 

32,196.6

 

29,006.8

 

27,787.5

 

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

Gross sales

     

Brazil

         20,651.2

 

         19,350.0

 

         18,621.1

Halal

           9,040.7

 

           7,494.3

 

           6,877.2

International

           4,963.1

 

           5,796.0

 

           6,289.3

Other segments

             958.4

 

             895.5

 

             941.7

 

         35,613.4

 

         33,535.8

 

         32,729.3

      

Sales deductions

     

Brazil

          (4,366.4)

 

          (4,161.4)

 

          (3,813.1)

Halal

            (747.4)

 

            (800.3)

 

            (650.6)

International

            (195.9)

 

            (182.5)

 

            (289.2)

Other segments

            (115.3)

 

              (77.5)

 

              (92.5)

 

          (5,425.0)

 

          (5,221.7)

 

          (4,845.4)

 

 

 

 

 

 

Net sales

     

Brazil

         16,284.8

 

         15,188.6

 

         14,808.0

Halal

           8,293.3

 

           6,694.0

 

           6,226.6

International

           4,767.2

 

           5,613.5

 

           6,000.1

Other segments

             843.1

 

             818.0

 

             849.2

 

         30,188.4

 

         28,314.1

 

         27,883.9

 

33.32.          RESEARCH AND DEVELOPMENT COSTS

 

Consist of expenditures on internal research and development of new products which are recognized in the statement of income when incurred andincurred. The expenditures amounted to R$227.353.5 for the year ended December 31, 20152018 (R$192.8 as of December 31, 201452.0 in 2017 and R$68.6 as of December 31, 2013)200.2 in 2016).

 

 

F-108


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

34.33.          OTHER OPERATING INCOME (EXPENSES), NET

 

 

12.31.15

 

12.31.14

 

12.31.13

Income

     

Recovery of expenses(1)

241.1

 

63.8

 

44.9

Provision reversal(2)

141.7

 

6.3

 

8.3

Gain on Minerva investment(3)

125.7

 

179.3

 

-

Gain on disposals of property, plant and equipment

-

 

111.4

 

-

Gain on step acquisition of Federal Foods

-

 

25.0

 

-

Other

58.1

 

96.6

 

28.9

 

566.6

 

482.4

 

82.1

      

Expenses

     

Employees profit sharing

(302.8)

 

(356.5)

 

(137.8)

Allowance for doubtful accounts(4)

(196.7)

 

(12.4)

 

-

Restructuring charges

(93.1)

 

(214.7)

 

(103.8)

Idleness costs(5)

(86.1)

 

(54.1)

 

(52.9)

Stock options plan

(58.9)

 

(20.7)

 

(26.8)

Other employees benefits

(52.5)

 

(33.4)

 

(32.5)

Provision for civil, labor and tax risks

(44.8)

 

(163.6)

 

(73.0)

Management profit sharing

(24.9)

 

(14.2)

 

(17.7)

Loss on disposals of property, plant and equipment

(16.4)

 

-

 

(14.1)

Insurance claims costs

(15.1)

 

-

 

-

Other(6)

(120.0)

 

(50.9)

 

(81.5)

 

(1,011.3)

 

(920.5)

 

(540.2)

 

(444.7)

 

(438.1)

 

(458.1)

 

 

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

Income

     

Recovery of expenses (1)

        285.3

 

             119.9

 

               99.9

Provision reversal

          27.9

 

               13.4

 

               56.1

Scrap sales

          14.7

 

               14.5

 

               14.4

Gain on step business combination

              -

 

                    -

 

               59.6

Gain from the disposal of property, plant and equipment

              -

 

                    -

 

               27.2

Tax amnesty program ("PERT")

               -

 

             147.7

 

                    -

Other

          59.8

 

               87.4

 

               19.2

 

        387.7

 

             382.9

 

             276.4

      

Expenses

     

Expenses arising from Trapaça Operation (2)

        (78.9)

 

              (78.3)

 

                    -

Net loss from the disposals of property, plant and equipment

        (59.6)

 

              (21.2)

 

                    -

Rewards and short-term incentive

        (47.0)

 

            (101.5)

 

                (7.0)

Costs on business disposed

         (27.8)

 

              (36.7)

 

                    -

Other employees benefits

         (25.0)

 

              (33.2)

 

              (28.9)

Provision for civil and tax risks

        (18.0)

 

            (180.8)

 

            (109.0)

Restructuring

         (17.8)

 

              (14.9)

 

                    -

Demobilization expenses

         (14.8)

 

              (44.7)

 

                    -

Insurance claims costs

           (9.4)

 

              (25.1)

 

              (32.7)

Expected credit losses

           (2.7)

 

              (13.6)

 

                (5.5)

Management profit sharing

               -

 

                    -

 

                (3.4)

Idleness costs

               -

 

                    -

 

                (0.2)

Other

         (67.4)

 

            (166.3)

 

              (88.7)

 

       (368.4)

 

            (716.3)

 

            (275.4)

 

          19.3

 

            (333.4)

 

                 1.0

(1)        In 2015 itThe balance in 2018 refers mainly to recognition of tax creditsPIS / COFINS to be recoverable in the amount of R$136.9 and gain on a lawsuit regarding the Eletrobras compulsory loan of R$62.2.225.6 (note 11.2).

(2)     In 2015 it refers mainly to reversal of allowance for losses with the ICMS tax credits of R$111.4.2018, expenses arising from

(3)TrapaçaIn 2015 it related to the gain recognized Operation (note 1.2.2) and in the change of accounting treatment of the investment in Minerva, which is being accounted for as available for sale securities, based on the difference of the carrying amount and the fair value of the Minerva stocks at the transfer date2017 expenses arising fromCarne Fraca Operation (note 17.2)1.2.1).

(4)Refers mainly to allowance for doubtful accounts booked in foreign markets.

(5)Idleness cost includes depreciation expense of R$18.3 (R$23.4 as of December 31, 2014 and R$30.3 as of December 31, 2013).

(6)Includes tax notification regarding ICMS in the state of Amazonas of R$27.2 in 2015.

 

F-109


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

35.34.          FINANCIAL INCOME (EXPENSES), NET

 

 

12.31.15

 

12.31.14

 

12.31.13

Financial income

     

Exchange rate variation on net foreign assets(1)

1,353.5

 

126.7

 

382.2

Exchange rate variation on other assets

1,081.0

 

694.4

 

161.2

Exchange rate variation on marketable securities

381.3

 

287.2

 

-

Interest on other assets

235.0

 

251.0

 

133.8

Interest on marketable securities

164.2

 

97.3

 

33.0

Interest on financial assets classified as

     

Held to maturity

55.1

 

22.1

 

23.5

Held for trading

47.4

 

27.9

 

16.6

Available for sale

16.6

 

10.3

 

24.0

Gains from derivative transactions, net(2)

14.8

 

46.3

 

-

Other

6.4

 

17.6

 

43.0

 

3,355.3

 

1,580.8

 

817.3

      

Financial expenses

     

Exchange rate variation on loans and financing

(2,085.8)

 

(648.0)

 

(316.8)

Exchange rate variation on other liabilities

(1,080.5)

 

(582.8)

 

(323.6)

Interest on loans and financing

(819.2)

 

(645.1)

 

(567.4)

Premium paid on the repurchase of bonds (Tender Offer)

(310.3)

 

(198.5)

 

-

Adjustment to present value

(240.1)

 

(154.4)

 

-

Interest on other liabilities

(165.4)

 

(179.9)

 

(170.9)

Financial expenses on accounts payable

(45.5)

 

(24.7)

 

-

Losses on derivative transactions, net(2)

-

 

-

 

(72.4)

Other

(278.7)

 

(138.1)

 

(113.7)

 

(5,025.5)

 

(2,571.5)

 

(1,564.8)

 

(1,670.2)

 

(990.7)

 

(747.5)

 

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

Financial income

     

Interest on assets

             596.4

 

             302.5

 

             313.8

Exchange rate variation on other assets

            404.6

 

                    -

 

             327.7

Exchange rate variation on net assets of foreign subsidiaries (1)

            330.5

 

             213.5

 

                    -

Interest on cash and cash equivalents

            159.3

 

             267.8

 

             188.4

Interests on financial assets classified as

     

Amortized cost

               98.6

 

               61.7

 

               84.8

Fair value throught profit and loss

              14.5

 

               19.8

 

               43.6

Fair value throught other comprehensive income

               0.7

 

                8.2

 

                    -

Exchange rate variation on marketable securities

              45.0

 

                    -

 

               56.2

Tax amnesty program ("PERT")

                    -

 

             302.1

 

                    -

Exchange rate variation on other liabilities

                   -

 

             388.1

 

                    -

Exchange rate variation on loans and financing

                   -

 

                    -

 

          1,322.0

 

          1,649.6

 

          1,563.7

 

          2,336.5

      
      

Financial expenses

     

Interest on loans and financing

        (1,281.8)

 

         (1,367.7)

 

         (1,100.8)

Exchange rate variation on loans and financing

        (1,265.9)

 

            (190.4)

 

                    -

Adjustment to present value

            (277.4)

 

            (283.3)

 

            (353.6)

Interest on liabilities

            (246.0)

 

            (469.2)

 

            (269.6)

Losses on derivative transactions, net

           (212.7)

 

            (117.2)

 

         (1,080.7)

Exchange rate variation on other liabilities

           (169.5)

 

                    -

 

            (514.0)

Losses price to be fixed transactions

           (112.8)

 

              (22.3)

 

              (76.4)

Taxes on financial transactions

              (79.3)

 

              (81.4)

 

                    -

Impairment on marketable securities

               (7.6)

 

                    -

 

                    -

Exchange rate variation on other assets

                   -

 

            (593.5)

 

                    -

Exchange rate variation on marketable securities

                   -

 

              (94.6)

 

                    -

Exchange rate variation on net assets of foreign subsidiaries

                   -

 

                    -

 

            (660.5)

Premium paid for the repurchase of bonds (Tender Offer)

                   -

 

                    -

 

              (31.8)

Others

            (238.1)

 

            (225.9)

 

            (190.0)

 

         (3,891.1)

 

         (3,445.5)

 

         (4,277.4)

 

         (2,241.5)

 

         (1,881.8)

 

         (1,940.9)

 

(1)            Refers to the gaingains and losses on the translation of non-financial assets and liabilities reported by the Company’s subsidiaries whose functional currency is Real.

(2)Includes a gain of R$166.2 (R$ 28.0 in 2014) in the fair value measurement of the embedded derivative transaction the Company has entered into in connection with in the sale of the discontinued operations of dairy segment.

 

 

F-110


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

36.35.          STATEMENT OF INCOME BY NATURE

 

The Company has chosen to disclose its statement of income by function and thus presents below the details by nature:

 

12.31.15

 

12.31.14

 

12.31.13

12.31.18

 

Restated
12.31.17

 

Restated
12.31.16

Cost of sales

     

Costs of goods

15,339.0

 

14,632.9

 

14,998.4

Costs of sales

     

Raw materials and consumables (1)

     17,790.9

 

     15,024.9

 

     14,458.1

Depreciation

1,080.9

 

1,019.4

 

952.4

      1,381.2

 

      1,305.0

 

       1,162.0

Amortization

4.5

 

2.7

 

10.4

           78.6

 

           91.2

 

             5.4

Salaries and employee benefits

3,394.4

 

2,844.5

 

2,704.4

Other

2,288.9

 

1,997.9

 

2,212.0

Salaries and employees benefits

      3,637.7

 

      3,679.9

 

       3,448.9

Others

      2,432.3

 

      2,500.2

 

       1,859.6

22,107.7

 

20,497.4

 

20,877.6

     25,320.7

 

     22,601.2

 

     20,934.0

          

Selling expenses

     

Sales expenses

     

Depreciation

55.3

 

58.4

 

52.2

           69.5

 

           64.1

 

            63.6

Amortization

12.9

 

6.0

 

2.6

           65.6

 

           65.5

 

            12.0

Salaries and employees benefits

1,081.8

 

985.6

 

950.7

      1,190.2

 

      1,210.7

 

       1,133.9

Indirect and direct logistics expenses(2)

2,211.0

 

2,127.4

 

2,182.0

     2,260.4

 

      2,034.6

 

       1,965.0

Other

1,444.9

 

1,039.1

 

953.6

Marketing

         508.0

 

         462.1

 

          709.0

Others

         419.9

 

         371.7

 

          637.7

4,805.9

 

4,216.5

 

4,141.0

      4,513.6

 

      4,208.7

 

       4,521.2

          

General and administrative expenses

     

Administrative expenses

     

Depreciation

20.0

 

15.7

 

17.5

           21.5

 

           28.1

 

            21.0

Amortization

124.7

 

104.8

 

52.0

           78.7

 

           38.3

 

          119.6

Salaries and employees benefits

301.3

 

245.4

 

267.8

         260.6

 

         215.3

 

          191.0

Fees

26.2

 

26.1

 

22.1

           28.6

 

           30.9

 

            28.4

Other

33.9

 

10.1

 

67.9

Others

         161.7

 

         149.9

 

            82.6

506.1

 

402.1

 

427.3

         551.1

 

         462.5

 

          442.6

          

Other operating expenses(1)

     

Impairment Loss on Trade and Other Receivables

     

Impairment Loss on Trade and Other Receivables

          46.3

 

           67.5

 

            53.5

           46.3

 

           67.5

 

            53.5

     

Other operating expenses (3)

     

Depreciation

18.3

 

23.4

 

30.3

           52.1

 

           40.1

 

            26.2

Other

993.0

 

897.0

 

509.9

Others

         316.3

 

         676.2

 

          249.2

1,011.3

 

920.5

 

540.2

         368.4

 

         716.3

 

          275.4

(1)   �� To the year ended December 31, 2018, included expenses in the amount of R$403.3 arising fromTrapaça Operation (note 1.2.2), R$195.7 arising from restructuring plan (note 1.4) and R$72.9 arising from strike of trucker drivers (note 1.5). To the year ended December 31, 2017, included expenses in the amount of R$83.4 arising fromCarne Fraca Operation.

 

(2)To the year ended December 31, 2018, included expenses in the amount of R$12.4 arising from strike of trucker drivers (note 1.5).

(1)(3)     The detailscomposition of other operating expenses areis disclosed in note 34.33.

 

F-111


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

37.36.          INSURANCE COVERAGE

 

The Company´s insurance policy considers the concentration and relevance of the risks identified in its risk management program. Thus, the contracted insurance coverage isare adequate to the Companyentity´s size, and activities and determined byfor amounts considered reasonable byfor Management to cover any damages. The Company also follows the guidanceorientations provided by its insurance advisors.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

 

    

12.31.1512.31.18

Assets covered

 

Coverage

 

Amount of coverage

     

Operational risks

 

Coverage against damage to buildings, facilities, inventory, machinery and equipment, loss of profits

 

2,812.31,067.5

Carriage of goods

 

Coverage of goods in transit and in inventories

 

128.9981.5

Civil responsability

 

Third party claimscomplaints

 

241.6                310.0

Each legal entity has its own coverages, which are not complementary.

37.NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

37.1.IFRS 16 - Leases

The Company has assessed the estimated impact arising from adoption of this pronouncement in its consolidated financial statement, as described below. We emphasize that the effective impact of adoption on January 01, 2019 may change due to:

·the Company is concluding the implementation, testing and assessment of controls over its new IT systems for the management of leasing agreements;

·the discount rate; and

·an assessment whether it will exercise any renewal options and the choice to use practical expedients and recognition exemptions.

IFRS 16 introduces a single model for the accounting of leases for the lessee, for which should be recognized a right-of-use the underlying asset and a lease liability representing its obligation to make payments. Assets classified as short-term lease and lease of low-value items, are exempt from this treatment. The accounting model for lessor remains unchanged, meaning the lessors continue to classify the leases as financial or operating.

For leases in which the Company is a lessee, will be recognize new assets and liabilities arising from lease agreements of lands, outgrowers relationship, offices, distribution centers, vehicles, among others. The nature of expenses related to thoselease agreements will now change because the Company will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities.

F-112


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

Previously, the Company recognised operating lease expense on a straight-line basis over the term of the lease.

Based on information currently available, the Company estimates that it will recognise in its consolidated financial statement a right-of-use asset and a lease liability of approximately R$2,700.0 on January 01, 2019. Given the complexity of the topic, until the initial adoption of this standard there may be a variation in relation to the estimated value which the Company estimates to be up to 20% of the amount disclosed herein. The adoption of IFRS 16 does not affect the Company's ability to comply with any contractual agreements.

At the date of initial adoption, the Company will choose the modified retrospective approach, whose cumulative effect will be recognised as an adjustment to the opening balance of retained earnings on January 01, 2019, with no comparative information.

The Company will choose to use the exemptions provided by the pronouncement for lease agreements whose term expires in 12 months from the date of initial adoption and lease agreements whose underlying asset is low-value.

37.2.IFRIC 23 Uncertainty over Income Tax Treatments

The interpretation IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, the Company shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. The interpretation is valid from January 1, 2019.

The Company is analyzing relevant tax decisions of superior courts and if it conflicts anyhow with the positions adopted by the Company. For already known uncertain tax positions the Company is also reviewing corresponding legal opinions. At present, the Company has not identified any material impact that should be disclosed or recorded.

 

 

38.          NEW ACCOUNTING PRONOUNCEMENTS RECENTLY ADOPTEDTRANSACTIONS THAT DO NOT INVOLVE CASH OR CASH EQUIVALENTS

 

IAS 32 – Offsetting Financial Assets and Financial Liabilities – Amendment

In December 2011, IASB issued an amendment to clarify the meaning of “currently has a legally enforceable right to offset the recognized amounts" and the criteria that would cause theThe following transactions did not simultaneous settlement mechanisms of clearing houses to qualify for offsetting. The Company analyzed the content of this standard and there was no impact on its consolidated financial statements forinvolve cash or cash equivalents during the year ended December 31, 2015.2018:

 

IFRS 10, IFRS 12 and IAS 27 – Investment Entities – Amendment

In October 2012, IASB issued an amendment to introduce a definition for “Investment Entity” and an exception to consolidation, specific for Investment Entity, which requires that such entity measures its investment in a subsidiary at fair value through profit or loss in accordance with IAS 39 – Financial Instruments: Recognition and Measurement in its consolidated and separated financial statements. The Company analyzed the content of this standard and determined that there was no impact on its consolidated financial statements for(i)Capitalized interest arising from loans:  To the year ended December 31, 2015.2018, amounted to R$19.6 (R$33.6 in the same period of the previous year); The amount related to discontinued operations is R$12.4 on December 31, 2018 (R$1.8 at December 31, 2017); and

 

IFRIC 21 – LeviesF-113


BRF S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

In May 2013, the IASB issued IFRIC 21, which provides guidance on when an entity should recognize a liability for a levy in accordance with laws and/or regulations, except for income taxes, in its(ii)      Addition of financial statements. The obligation should only be recognized when the event that triggers such obligation occurs. IFRIC 21 is an interpretation of IAS 37 – Provisions, Contingent Liabilities and Contingent Assets. IAS 37 establishes criteria for the recognition of a liability, one of which is the requirement that the Company has a present obligation as a result of a past event, known as the obligating event. The Company analyzed the content of this standard and determined that there was no impact on its consolidated financial statements forlease:To the year ended December 31, 2015.

IAS 36 – Recoverable Amount Disclosures for Non-Financial Assets – Amendment

On May 2013, IASB issued an amendment2018, amounted to introduceR$48.8 (R$117.3 in the disclosure of fair value hierarchy level for each impairment loss or reversal recognized during thesame period for individual asset, including goodwill or cash generate unit, as well as improvement of


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

wording, aiming a better application of standard in accordance with international financial reporting standards and do not change the meaning of the original text issued. The Company analyzed the content of this standard and determined there was no impact on its consolidated financial statements for the year ended December 31, 2015.

IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting – Amendment

On June 2013, IASB issued an amendment to eases the discontinuation of hedge accounting when the novation of a derivative designated as a hedge meets certain criteria and retrospective application is mandatory. The Company analyzed the content of this standard and determined that there was no impact on its consolidated financial statements for the year ended December 31, 2015.previous year);

 

 

39.          NEW ACCOUNTING PRONOUNCEMENTS NOT ADOPTED

IFRS 9 – Financial Instruments

On July 2014, IASB issued the final version of IFRS 9 – Financial Instruments, which reflects all phases of financial instruments project and replaces IAS 39 – Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new guidance about classification and measurement, impairment loss and hedge accounting. Early adoption is not permitted and is effective from periods beginning on January 1, 2018. Retrospective adoption is mandatory, however, is not required the presentation of comparative information. Early adoption of previous versions of IFRS 9, issued in 2009, 2010 and 2013, is permitted if the initial adoption date is prior to February 1, 2015. The effects related to the adoption of this standard affects only the classification and measurement of financial assets. The Company is evaluating the impact of adopting this standard in its consolidated financial statements.

IFRS 15 – Revenue from Contracts with Customers

On May 2014, IASB issued IFRS 15 that establishes a 5 steps model that will be applied to revenue obtained from a contract with customer. In accordance with this standard, revenues are recognized based on an amount that reflects the consideration which an entity expects to be entitled for the transfer of goods or services to a customer. The guidelines of IFRS 15 consider a more structured approach to measure and recognize revenue.

This standard is applicable to all entities to period beginning on January 1, 2018 and will replace all current requirements related to revenue recognition. Retrospective adoption is mandatory to periods beginning on January 1, 2017 or after. Early adoption is permitted but it is under analysis by regulatory entities in Brazil. The Company is evaluating the impact of adopting this standard in its consolidated financial statements.

IFRS 11 – Accounting for Acquisition of Interests in Joint Operations – Amendment

On May 2014, IASB issued amendments to IFRS 11, which demands that a joint operator that is accounting an acquisition of equity interest in which the joint operationactivity constitutes a business, should apply the guidelines according to IFRS 3 Business Combination. The amendments also clarify that an equity interest previously held in a joint operation is not remeasured on an additional acquisition of interest in the same joint operation while the joint control is held. Additionally, the amendments are not applied when the parties sharing the control, including the reporting entity, are under common control of the parent company.


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

The amendments are applicable to both the acquisition of the final equity interest in a joint operation and on the acquisition of any additional equity interest in the same joint operation. This standard will be in effective prospectively to periods beginning on January 1, 2017 or after. Early adoption in Brazil is not permitted by regulatory entities. The Company is evaluating the impact of adopting this standard in its consolidated financial statements.

IAS 16 and IAS 38 – Clarification of Accountable Methods of Depreciation and Amortization – Amendment

On May 2014, IASB issued amendments to clarify guidelines of IAS 16 and IAS 38 and determined that revenue reflects a model of economic benefits generated from operation of business (of which the asset is a part), instead of economic benefits generated from the use of the asset. As a result, a method based on revenue cannot be used for property, plant and equipment depreciation purposes and may be used only under very limited circumstances to amortize intangible assets. The amendments will be in effective prospectively to amortize intangible assets for fiscal years beginning on January 01, 2016 or after. The Company does not expect impact on its consolidated financial statements, since it has not used a method based on revenue to depreciate non-current assets.

IFRS 16 - Leases

On January 2016, the IASB issued the final version of IFRS 16 – Leases, which superseds IAS 17 – Leases, wich will be applicable to periods beggining on January 01, 2019. Early adoption will be permited for entities which also apply IFRS 15 – Revenue from Contracts with Customers. The adoption of this standard will affect mainly property, plant and equipment and financial liabilities, as the treatment between financial and operational lease will no longer exists, being the leases treated in a similar way of the financial lease as per IAS 17. The Company is evaluating the impact of adopting this standard in its consolidated financial statements


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)


40.SUBSEQUENT EVENTS

40.1.Acquisition of the frozen distribution business of Qatar National Import and Export Co. (“QNIE”)

On October 05, 2015, BRF announced to the market that it had signed a MOU with QNIE for the acquisition of the QNIE’s frozen distribution business in the State of Qatar (the “Business”). QNIE is the distributor of BRF products in Qatar for more than 40 years.

The transaction totaled US$146.2 (equivalent to R$589.1) and was paid in cash. This amount was subject to certain conditions related to the business, which were satisfied and the business has been controlled by BRF since January 01, 2016.

The transaction consists in the acquisition of certain assets from QNIE by Federal Foods Qatar Ltd., which is an indirect subsidiary of BRF. The acquired assets comprises mainly client relationships, finished goods, non-compete agreement and other agreements, which relate to frozen distribution business in the State of Qatar.

In order to meet the requirements of IFRS 3, BRF will prepare a fair value report of the acquired assets and assumed liabilities in order to allocate the purchase price. Management expects to complete this report in 2016, when the final purchase price allocation will be determined.

40.2.Renegotiation of the joint venture with Mondelez Lacta and Mondelez

On January 18, 2016, BRF announced to the Market that it has renegotiated its agreement with Mondelez Lacta Alimentos Ltda. and Mondelez Brasil Ltda. (collectively  Mondelez”) regarding the joint venture K&S Alimentos S.A. (“K&S”), which were subject to the approval of the competent regulatory authorities (obtained on February 02, 2016) and provides that: i) Mondelez will be the entity reponsible for producing the Philadelphia cream cheese; ii) BRF will continue to distribute and sell the Philadelphia cream cheese; and iii) BRF will be the only shareholder of K&S).

40.3.Business combination with Golden Foods Siam (“GFS”)

On December 01, 2015, BRF announced to the market that it has, through its wholly-owned subsidiary BRF Gmbh, signed an agreement to acquire control of GFS (“transaction”). The transaction comprised the acquisition of 100% of equity interest in Golden Foods Sales Ltd. and Golden Foods Siam Europa, both located in the United Kingdom, 48.52% of equity interest in Golden Foods Poultry Ltd. and 73.31% of indirect equity interest in Golden Poultry Siam Ltd., both located in Thailand.

On January 26, 2016 the conditions precedent were satisfied and BRF concluded the transaction in the amount of US$348.7 (equivalent to R$1,411.8), which should be further adjusted according to certain conditions set out in the agreement.

GFS is one of the largest producer of poultry in Thailand, with an integrated operation and present in more than 15 global markets.

In order to meet the requirements of IFRS 3, BRF will prepare a fair value report of the


BRF S.A.

Notes to Consolidated Financial Statements

Years ended December 31, 2015, 2014 and 2013

(Amounts expressed in millions of Brazilian Reais, unless otherwise stated)

acquired assets and assumed liabilities in order to allocate the purchase price. Management expects to complete this report in 2016, when the final purchase price allocation will be determined.

40.4.Business combination with Universal Meats (UK) Ltd. (“Universal”)

On December 01, 2015, BRF announced to the Market that, through its subsidiary BRF Invicta Limited (“BRF Invicta”), has signed a binding Memorandum of Understanding (“MOU”) for the acquisition of 100% of the issue share capital of Universal (“transaction”). Universal is a food distributor in the United Kingdom with focus in the food service segment.

On February 01, 2016 the conditions precedent set out in the MOU were satisfied and BRF concluded the transaction in the amount of GBP31.8 (equivalent to R$182.3), which should be further adjusted according to certain conditions set out in the agreement.

In order to meet the requirements of IFRS 3, BRF will prepare a fair value report of the acquired assets and assumed liabilities in order to allocate the purchase price. Management expects to complete this report in 2016, when the final purchase price allocation will be determined.

41.APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS

 

The consolidated financial statements were approved by the Board of Directors on March 31, 2016.April 25, 2019.

 


 

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