As filed with the Securities and Exchange Commission on April 18, 2024.
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
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2023
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)
N/A
(Translation of Registrant’s name into English)
Federative Republic of Brazil D5
(Jurisdiction of Incorporation or Organization)
Av. Das Nações Unidas, 14.401 – 22nd to 25th Floors, Torre Jequitibá
Condomínio Parque da Cidade, Chácara Santo Antônio – 04730-090
São Paulo – SP, Brazil
(Address of principal executive offices)
Fabio Luis Mendes Mariano
Chief Financial and Investor Relations Officer
Telephone. (5511) 2322-5377, Fax (5511) 2322-5740
Av. Das Nações Unidas, 14.401 – 22nd to 25th Floors, Torre Jequitibá
Condomínio Parque da Cidade, Chácara Santo Antônio – 04730-090
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 class Common Shares, no par value* American Depositary Shares (as evidenced by American Depositary Receipts), each representing one share of common stock | Trading Symbol BRFS | Name of each exchange on which registered 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, 2023, there were 1,678,656,067 common shares, with no par value, outstanding. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
Note- Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☒ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| ☐ U.S. GAAP | ☒ International Financial Reporting Standards as issued by the International Accounting Standards Board | ☐ Other |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐ Item 18 ☐.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
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, or Brazil, (2) the “Company,” “we,” “us,” “our” or “our company” are references to BRF, together with its consolidated subsidiaries, and (3) “common shares” are references to the BRF’s authorized and outstanding common stock, designated ordinary shares (ações ordinárias), each without par value. All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to the United States dollar. All references to “euro” or “EUR” or “€” are to euros, the official currency of the Eurozone in the European Union. All references to “TRY” are to the Turkish lira, the official currency of Turkey. All references to “SGD” are to the Singapore Dollar, the official currency of Singapore. All references to “SAR” are to the Saudi riyal, the official currency of Saudi Arabia. All references to “CLP” are to the Chilean Peso, the official currency of Chile.
U.S.$ amounts are disclosed for each transaction at the amount negotiated to be settled in U.S.$ at the initiation date of the transaction.
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 prepared our annual consolidated financial statements included in this annual report in accordance with International Financial Reporting Standards, or IFRS as issued by the International Accounting Standards Board, or IASB. 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 contains information that constitutes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words, such as “believe,” “may,” “aim,” “estimate,” “continue,” “anticipate,” “will,” “intend,” “plan,” “expect” and “potential,” among others. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of future regulation and the effects of competition. They appear in a number of places in this annual report, principally under the captions “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects” and include statements regarding the intent, belief, projections or current expectations of the Company, its directors or its executive officers about future events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements.
These factors include: (i) the risk of outbreak of animal diseases and of pandemics, epidemics and similar crises (like the COVID-19 pandemic) particularly in Brazil and our ability to timely and efficiently implement any necessary measures in response to, or to mitigate the impacts on our business, operations, cash flows, prospects, liquidity and financial condition, (ii) uncertainty, volatility and disruption in the global markets caused by rising inflation, increasing interest rates, supply chain disruptions, tight labor markets, volatility in commodity prices, energy crisis and geopolitical instability resulting, among other things, of the invasion of Ukraine by Russia and the war in the Middle East, (iii) health and food safety risks related to the food industry, (iv) the cyclicality and volatility of raw materials and selling prices, including as a result of ongoing global trade disputes, (v) risks related to climate change, (vi) the risk of any shortage or lack of water or other raw materials necessary for our business, (vii) the risk of cybersecurity breaches, (viii) more stringent trade barriers in key export markets and increased regulation of food safety and security, (ix) compliance with various laws and regulations, (x) general economic, political and business conditions both in Brazil and abroad, including, in Brazil, developments and the perception of risks in connection with corruption and other investigations and uncertainties related to the ability of the elected government to continue promoting economic and financial reforms in the country, any of which may negatively affect growth prospects in the Brazilian economy as a whole, (xi) the potential unavailability of transportation and logistics services, (xii) the implementation of our principal operating strategies, including through divestitures, acquisitions or joint ventures, (xiii) risks related to new product innovation, (xiv) strong international and domestic competition, (xv) risks related to labor relations, (xvi) the protection of our intellectual property, (xvii) the risk that our insurance policies may not cover certain of our costs, (xviii) our ability to recruit and retain qualified professionals, (xix) risks related to our indebtedness, (xx) interest rate fluctuations, inflation and exchange rate movements of the real in relation to the U.S. dollar and other currencies, (xxi) the direction of our future operations, (xxii) the existence of a controlling shareholder, who has the ability to take action not aligned with other shareholders or to dispose of all or any portion of the common shares it holds, and (xxiii) other factors identified under “Item 3. Key Information—D. Risk Factors.”
Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements. The accompanying information contained in this annual report on Form 20-F, including without limitation the information set forth under the heading “Item 5. Operating and Financial Review and Prospects,” identifies important factors that could cause such differences. In light of the risks, uncertainties and assumptions associated with forward-looking statements, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial or that are not presently known to us could also cause the forward-looking events discussed in this annual report not to occur.
Our forward-looking statements speak only as of the date of this annual report or as of the date they are made, and except as otherwise required by applicable securities laws, we undertake no obligation to publicly update any forward-looking statement, whether because of new information, future events or otherwise.
| Item | 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
| Item | 2. OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
| B. | Capitalization and Indebtedness |
Not applicable.
| C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
Risks Relating to Our Business and Industry
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 disease control. 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: (i) in the case of hogs and certain other animals, foot-and-mouth disease, influenza (H5N1) and African swine fever and (ii) in the case of poultry, avian influenza and Newcastle disease. In addition, if the Porcine Reproductive and Respiratory Syndrome (PRRS), which broke out in Europe and the United States in 1990 and 1985, respectively, the Porcine Epidemic Diarrhea (PEDV), which broke 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. There have been outbreaks of classical swine fever in Brazil, and an occurrence of such outbreaks in the free zones where we source our hogs for production could require us to dispose the affected 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. 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.
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, or HPAI, 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. The cases reported were caused by the H5N1 virus. In early 2017, Chile confirmed the occurrence of avian influenza. In 2019 and 2020, several countries within Europe, Asia and Africa reported cases of HPAI in poultry. Additionally, Mexico reported cases in 2019, the United States reported cases in 2020 and Japan, China and certain countries within Europe reported cases in 2021. Finally, in 2022, according to the World Organization for Animal Health, several HPAI subtypes were reported in many countries in Europe, Asia and the Americas, with cases involving poultry and non-poultry birds. In addition, in accordance with information published by the Brazilian Ministry of Agriculture, Livestock and Food Supply (Ministério da Agricultura, Pecuária e Abastecimento), or MAPA, in 2022, cases of HPAI involving poultry and non-poultry birds were reported in countries close to Brazil including Argentina, Chile, Colombia, Ecuador, Peru, Uruguay and Venezuela.
In late 2022, the Americas region experienced an increase in cases of HPAI in some countries, including Canada, United States, Mexico, Colombia, Chile, Venezuela and Peru. In January 2023, the Pan American Health Organization issued an alert in response to the increasing detection of outbreaks of avian influenza in birds in ten countries of the Americas region, considering the confirmation of the case of human infection of avian influenza in South America. According to MAPA, 151 cases of avian influenza were registered in Brazil (148 in wild birds and 3 in subsistence poultry). Thalasseus acuflavidus and Thalasseus maximus, which belong to the tern’s family, were responsible for approximately 75% of the cases in wild birds, majorly diagnosed along the Brazilian coast. However, none have been registered in commercial poultry, and there are no records of contamination from the consumption of properly prepared chicken or eggs, according to the World Health Organization (WHO). As a result of the HPAI outbreak, some countries may suspend imports from Brazil, especially considering that Brazil does not have many regional trade agreements for the sale of poultry. For instance, between June and November 2023, Japan suspended imports of poultry meat, eggs, live poultry and day-old chicks from the states of Espírito Santo, Santa Catarina and Mato Grosso do Sul. All embargoes have been lifted since then. However, Japan adopted a more restrictive import policy, only allowing exports from these states after a period has lapsed without new infection cases and provided that a detailed HPAI report is delivered.
Although there have been no reported cases of avian influenza in commercial production in Brazil, there are concerns that an outbreak of HPAI may occur in the country in the future, considering several outbreaks of HPAI have been reported in wild birds. 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 the export of some of our products to key export markets. Although we have a contingency plan in place, preventive actions adopted by us and by Brazilian authorities, if any, may not be effective in precluding the spread of avian influenza within Brazil.
Whether or not an outbreak of avian influenza occurs in Brazil, further outbreaks of avian influenza anywhere in the world could have a negative impact on the consumption of poultry in our key export markets or in Brazil, and a significant outbreak would negatively affect our 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.
Deterioration of general economic and geopolitical conditions, including due to the ongoing military conflicts between Russia and Ukraine and in the Middle East, could have a material adverse effect on 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. Global markets have experienced economic uncertainty, volatility and disruption following Russia’s invasion of Ukraine on February 24, 2022, the attack by Hamas on Israel on October 7, 2023 and the airstrikes launched by Iran on Irael on April 14, 2024. Although the length and impact of these ongoing military conflicts are highly unpredictable, the conflicts in Ukraine, the Middle East and any other geopolitical tensions could have an adverse effect on the economy and business activity globally and lead to:
| · | credit and capital market disruptions; |
| · | significant volatility in commodity prices (such as grains, fertilizer inputs and oil and gas); |
| · | increased expenses related to direct and indirect materials used in our production process (i.e., packaging, logistics and inputs, among others); |
| · | increased costs of resources (such as energy, biomass, natural gas and coal) for our operations; |
| · | slowdown or disruption of the global and local supply chain, which may lead to shortages and lack of critical materials, commodities and products in the market and a substantial increase in the prices of our raw materials as a result; |
| · | potential appreciation of the U.S. dollar; |
| · | increase in interest rates and inflation in the markets in which we operate, which may contribute to further increases in the prices of energy, oil and other commodities; and |
| · | lower or negative global growth. |
Any such event may increase our costs and adversely affect our business if we are not able to pass such increased costs onto our customers. In addition, in the event there is a slowdown or disruption of the global and local supply chains, we may face interruptions in our production if we are not able to proactively manage our inventory and enter into strategic partnerships with suppliers.
Russia’s prior annexation of Crimea, recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine have led to far-reaching sanctions, export control restrictions and other penalties being levied by the United States, European Union and other countries against Russian entities and individuals, including the agreement to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication, or SWIFT, payment system. Russian military actions, the resulting sanctions and Russian counter measures or retaliatory actions (including cyberattacks and espionage) could adversely affect the global economy and financial markets and lead to further instability and lack of liquidity in capital markets. See “—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.” While our exposure to Russia and Ukraine is limited, current and future sanctions could significantly and adversely affect our business, financial condition and results of operations, including, for example, cancellation and difficulty in exporting goods to Russia, potential sanctions in the marketing of our products to Russia and threats to the safety of our employees in Russia and other locations close to the conflict.
In addition, the invasion of Ukraine by Russia has deeply impacted the whole grains and poultry supply chain worldwide. As one of the largest producers and exporters of wheat and poultry, Ukraine faces severe restrictions in its production and export capacity because of the war, which has contributed to an increase in grain and poultry prices internationally. Ukraine’s production limitations have reduced the international supply of poultry and raw materials essential to our industry, and they have therefore contributed to higher prices worldwide. It is not possible to predict when the war is going to end and, as a result, when the supply chain will stabilize, which events may adversely affect our margins. If the war results in a split in Ukraine’s territory and Russia blocks Ukraine exports through the Black Sea, the global food market could face turmoil.
The conflict between Russia and Ukraine also led to an increase in energy prices in Europe (especially natural gas, electricity and biomass inputs). In particular, the conflict stimulated demand for biomass inputs in the European market, reducing supply to meet international demand and leading to higher prices and, consequently, higher inflation. These conditions generally increased our costs and brought greater volatility to our margins. For example, there was an increase of 19.6% in the cost of biomass inputs in 2023 when compared to 2022, and of 46.4% in 2022 when compared to the previous year. Economic sanctions imposed on Russia also caused an acute shortage in the supply of oil and natural gas in global markets, leading to an increase in energy prices from January 2022 and reaching the highest year-over-year growth since tracking began in 1971 in the Organization for Economic Co-operation and Development, or OECD, in June 2022.
On October 7, 2023, Hamas militants infiltrated Israel’s southern border from the Gaza Strip and conducted a series of terror attacks on civilian and military targets. Thereafter, Hamas launched extensive rocket attacks on Israeli population and industrial centers located along the Israeli border with the Gaza Strip. Shortly following the attack, Israel’s security cabinet declared war against Hamas. Since the beginning of the war, the Lebanese armed group Hezbollah has launched several attacks against Israel in support of Hamas, thus escalating the conflict onto Lebanese and Syrian territories. On April 14, 2024, in response to a suspected Israeli strike on Iran’s consulate in Syria, Iran launched an airstrike on Israel, thus increasing the chances of further escalation of the conflict in the region. The intensity and duration of the war in the Middle East is difficult to predict, and as are such war’s economic implications on our business and operations, as well as on the global geopolitical instability. According to the World Bank, a prolonged Israel-Hamas conflict and an escalation of the conflict in the region could trigger substantial oil and other energy supply disruptions, which would increase production and transportation costs for both food and fertilizers.
Since October 2023, in the aftermath of Israel’s response to the Hamas attack, the Iranian-linked Houthis in Yemen have been launching continuous attacks against vessels sailing in the Red Sea crossing the Bab-El-Mandeb straits, causing cargo flow disruptions, and disrupting global shipping. In response, shipping companies, including those we hire to transport our products, have taken temporary proactive measures to protect their fleet, the vessels and the cargo they are transporting by re-routing vessels on the Suez Canal and the East Mediterranean trade, as permitted by international legislation. According to the United Nations Conference on Trade and Development - UNCTAD, freight going through the Suez Canal dropped by 45% in the last quarter of 2023. The re-routing of vessels significantly increased traffic in bunkering ports on the alternative routes and caused bunker fuel demand on such routes to rise sharply. Shipping companies have been repassing the costs of re-routing vessels to their customers, including us, which significantly increased our freight costs for the shipping of products to Europe or other countries on the same route.
Geopolitical and economic risks have also increased over the past few years as a result of trade tensions between the United States and China, Brexit, and the rise of populism. The complexity of commercial relationships and the change in the tariff policies can result in fluctuations on our transportation and logistics costs. Global supply chains, on which we heavily rely, may also face additional challenges, requiring effective mitigation strategies. Growing tensions may lead, among others, to a deglobalization of the world economy, an increase in protectionism or barriers to immigration, a general reduction of international trade in goods and services and a reduction in the integration of financial markets, any of which could materially and adversely affect our business, financial condition and results of operations.
Economic and political uncertainty and potential interest rate increases in the United States may also create uncertainty in the Brazilian economy. The U.S. presidential and congressional elections are scheduled to take place in November 2024. The relationship between Brazil and the United States can be adversely affected depending on the outcome of the 2024 elections in the United States. Further, the elections may result in significant uncertainty with respect to, and could result in changes in, legislation, regulation and government policy at the federal, state and local levels. Any such changes could significantly impact our business as well as the markets in which we compete in the United States. Specific legislative and regulatory changes that might materially impact us include, but are not limited to, renegotiation of existing trade agreements, changes in import and export regulations and the adoption of new and increased import taxes, tariffs (including a threat of a 10% tariff to be applied across-the-board) and other barriers to import, and customs duties, public company reporting requirements, environmental regulation and antitrust enforcement. Environmental cooperation, in turn, including funds to combat deforestation and other green investments, can also face more difficulties. We cannot give you any assurance as to whether any such changes will occur or as to their timing, nor can we estimate their impact. To the extent changes in the U.S. political environment have a negative impact on us or on our markets, our business, financial condition and results of operations could be adversely affected.
In addition, our results may be adversely affected by global inflation, the continued destabilizing economic and social impact of the COVID-19 pandemic, especially in developing countries, the current trend of high interest rates set by central banks in many countries to deflect the effects of rising prices and a general expectation of a slowdown in global economic growth, driven by the Chinese economy’s low growth prospects for 2024, which in turn can have a negative impact in the growth rates in Brazil. High inflation rates, especially in food prices, tend to impact more drastically—but not exclusively—the lower income classes, resulting in a broad negative impact on purchasing power and consumption levels. Geopolitics instability also can cause volatility in local currencies, which may adversely affect international commercial transactions and industry costs.
We are continuing to monitor the situation in Russia, Ukraine, the Middle East and globally and assess its potential impact on our business. Any of the abovementioned factors could adversely affect our business, prospects, financial condition, and operating results. The extent and duration of the military actions, sanctions and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions may also magnify the impact of other risks described elsewhere in this annual report.
Health and food safety risks related to our business and the food industry could adversely affect our production and shipping processes as well as 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 and sabotage, the possible unavailability and expense of liability insurance, public perception of product safety for both the industry as a whole and also our products specifically, but not exclusively, as a result of disease outbreaks or the fear of such outbreaks, the potential cost and disruption of a product recall and possible impacts on our image and brands. Among such risks are those related to raising animals, including disease and adverse weather conditions. For example, according to the World Organization for Animal Health, in 2022 there was an increase in contamination concerns related to avian influenza and African swine fever, with alert levels considered high. Biosafety concerns could cause certain markets to close and lead to production, shipping and sales disruptions in Brazil and our export markets.
Meat can be subject to contamination during processing and distribution. In particular, processed meat may become exposed to various disease-producing pathogens, including Listeria monocytogenes, Salmonella enteritidis, Salmonella tiphimurium and E. coli O157:H7. These pathogens can also be introduced to our products during production (field, transport or slaughterhouse) 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 transportation systems, is also a risk. The systems we maintain to monitor food safety risks throughout all stages of production and distribution could fail to function properly and product contamination could still occur. Failures in our systems to ensure food safety could result in harmful publicity that could cause damage to our brands, reputation and image and negatively impact sales, which could have a material adverse impact on our business, results of operations, financial condition and prospects.
In the first half of 2022, during routine laboratory analysis of poultry meat produced in our facility, in Dois Vizinhos, in the Brazilian state of Paraná, we identified a significant deviation in the level of dioxin in a sample of poultry meat due to an inadvertent deviation in feed ingredients. After conducting a corresponding risk analysis and laboratory review of the quality of our poultry meat, we started safety procedures to identify possible deviation in other lots of poultry meat and to remedy the source of such deviation. We incurred in substantial costs with laboratory analysis, special work force allocation, replacement of feed ingredients and discarding and transporting certain lots of poultry meat as a result of these safety procedures and commercial costs as a result of shipment delays. In the future, a product that has been actually or allegedly contaminated could result in product withdrawals or recalls, disposal of product inventory, negative publicity, temporary plant closings, substantial cost of compliance or remediation and potentially significant product liability judgments against us. Any of these events could result in a loss of demand for our products, which may have a material adverse effect on our business, brands’ reputation, and results of operations, financial condition and prospects.
Even if our own products are not affected by contamination, our industry may face negative publicity in certain of its markets if the products of other producers become contaminated, which could result in negative public perception about the safety of our products and reduced consumer demand for our products in the affected category. Significant lawsuits, widespread product recalls and other negative events faced by us or our competitors could result in a widespread loss of consumer confidence in the safety and quality of our products. Our sales are ultimately dependent on consumer preferences, and any actual or perceived health risks associated with our products could cause customers to lose confidence in the safety and quality of our products and have a material adverse impact on our business, results of operations, financial condition and prospects.
Our results of operations are subject to cyclicality and volatility affecting the prices of commodities, poultry and pork, which could adversely affect our entire business.
Our business is largely dependent on the cost and supply of corn, soy meal, soybeans, oil, hogs, packaging (resin, petrol), food ingredients, animal feed ingredients 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. For example, the war in Ukraine brought a significant increase in the prices of agricultural commodities such as corn, wheat and soybeans, in part caused by the increase in the use of these commodities for energy generation purposes, reducing the supply for international consumption. This directly affected our costs and increased volatility in our margin. Additionally, the price of poultry also increased as a result of the war, considering Ukraine is an important player in poultry production. Although the prices of grains and animal protein have more recently come down, if in the future the cost of commodities increases more than expected and the price of poultry does not follow the same trend, then we may be adversely affected. The war in the Middle East could further increase production and transportation costs for both food and fertilizers if it causes an oil price spike. Other factors that affect supply and demand include, among others, fluctuations in local and global poultry and hog production levels, environmental and conservation regulations, economic conditions, new variants of COVID-19 and/or a new virus of global magnitude, animal and crop diseases, cost of national and international freight and exchange rate and interest rate fluctuations. In addition, prices are also constantly affected by weather, climate events and seasonality, fertilizers prices, biofuel policies, export taxes, as well as political and trade disputes around the world, expectations and/or uncertainty about the future. Any changes in raw material prices may have major 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 unexpected changes in cyclicality or volatility, which may have an adverse effect on our operations and financial results.
Natural disasters or extreme weather, including floods, earthquakes, 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 poultry and pork or interfere with our operations due to power outages, damage to our production and processing facilities or disruption in transportation channels or information systems. In February 2023, a 7.8 magnitude earthquake occurred in Turkey causing severe damage to infrastructure in various areas of the country. As a result, there have been supply chain and workforce disruptions, which have adversely affected our operations in the country.
Climate change may negatively affect our business and results of operations.
According to the 19th Global Risks Report published by the World Economic Forum in January 2024, risks related to extreme weather are considered to be the most pressing for the world in the short term (i.e., 2024 and 2025) and for the next 10 years. Following the adoption of the Paris Agreement in 2015, measures to reduce greenhouse gases that are seen as the cause of climate change have been promoted globally. As the participating nations agreed on the target to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels at the UN Climate Change Conference in Glasgow (COP26) held in 2021, and such target was reaffirmed at COP27 held in Sharm el-Sheikh in 2022 and again at COP28 held in Dubai in 2023, governments and others have been accelerating their measures to counter climate change. However, according to the First Global Stocktake Report on the implementation of the climate landmark agreement released by UN Climate Change in December 2023, despite increased efforts by some countries, actions carried out so far are insufficient to limit the global temperature rise to within 1.5 degrees Celsius and meet the goals of the Paris Agreement. In an effort to keep this target within reach, nearly 200 parties participating in the COP28, including Brazil, agreed to a deal that calls for transitioning away from fossil fuels in energy systems, so as to achieve net zero by 2050. Therefore, addressing climate change risks, among various environmental and social issues, has become increasingly important.
Brazil’s nationally determined contribution (NDC) is to reduce greenhouse gases by 37% in 2025 and 43% in 2030, in comparison to 2005 levels. New secretariats were created with a focus on the climate agenda, bioeconomy and the fight against deforestation. The goal is to fight climate change, increase the use of sustainable bioenergy and renewable energy sources, define guidelines for Net Zero and implement initiatives for the protection of biodiversity.
Considering that climate change contributes to food production insecurity and threatens community nutrition, we take into consideration the potential effects of climate change on our operations and supply chain, and we recognize vulnerabilities associated with natural resources and agricultural products that are essential for our activities. The main risks to our business that we have identified with respect to climate change relate to the changes in temperatures (global warming) and rainfall, including drought and natural disasters (such as flooding and storms), which may affect agricultural productivity, animal welfare and the availability of water and energy. These changes may adversely affect our operating costs and results of operations, 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 may fail to effectively implement programs or obtain appropriate environmental or sustainability certifications related to reducing our exposure to climate change, which may adversely affect our business and results of operations in the future.
We are also subject to regulatory changes, such as carbon pricing or taxation, and changes in legislation for greenhouse gas emissions at the domestic and international levels. Any changes in carbon pricing or taxation and changes in legislation for greenhouse gas emissions may increase our costs and adversely affect our results of operations.
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 – with significant increases being experienced during droughts or diversion of water for other purposes as the Brazilian energy matrix is mostly supported by hydroelectric power plants – 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 also result in a temporary disruption in production and delivery of products to customers and additional costs, materially adversely affecting our results of operations.
Any shortage or lack of water, and any failure to comply with applicable rules and regulations related to water usage and management, could materially adversely affect our business and results of operations.
In the last century, water use has grown globally. According to the OECD Environmental Outlook to 2050: The Consequences of Inaction – Key Facts and Figures, by 2050 water scarcity will affect more than 40% of the global population, with approximately 2.3 billion people around the world expected to be living in water-stressed areas if no action is taken. Water is an essential resource for our businesses and is used in the production of grains and other agricultural inputs required for our production processes. The industrial use of water may also adversely affect its availability. In some of our units in the Brazilian states of Santa Catarina, Paraná and Goiás and also in our unit in Turkey, we experienced a reduction in water supply in the last ten years. To manage the shortage in water and maintain our regular operations, we incurred incremental costs to obtain water from more abundant river basins that are located further from our production facilities (sometimes using water trucks). For example, in 2023, due to an extreme drought in nearby rivers, we had to activate our contingency plan for water supply in the Concórdia and Chapecó units located in the state of Santa Catarina, which included the use of water trucks to supply water within a range of around 40 kilometers from these units. As a result, the shortage or lack of water, including the increasing risk of droughts in the regions where we operate and associated costs to minimize the impact on our operations, represent a critical risk for our business and may materially and adversely affect our business and results of operations. We are also subject to restrictions on the volume of water that we can collect from the environment under our water usage permits, which may be lower than the actual water demands of our business in these areas. In the event we cannot collect enough water to meet our operational demands, due to restrictions under water permits or otherwise, our business and results of operations may be materially adversely affected.
The procedures that we have developed to reduce our water consumption and increase water reuse in order to comply with applicable rules and regulations, and to minimize our impact on the environment and the community, may prove to be ineffective or insufficient. Additionally, we assess water shortage risks in the locations where we operate in order to understand the specific impacts of our business on these regions and consequently reduce our water consumption and exposure to risks of water shortages in the applicable unit. The river basins in the region of industrial activities and the characteristics of the use of water resources are analyzed in order to understand growth in local demand and anticipate risks. The methods we employ to analyze the water vulnerability of our industrial plants, as well as our assessments of the micro and macro watersheds in the regions in which we operate and the industrial activities and characteristics of the use of water resources, may be inaccurate in understanding local water demand growth. We may also fail to accurately assess the water supply or anticipate water-related risks, and the increased industrial use of water by water intensive businesses may also adversely affect the continuing availability and quality of water in Brazil. This may result in us or our key suppliers encountering water shortages. Any of these factors may materially adversely affect our business and results of operations.
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 and reputation.
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. We also process personal data of our employees and customers. We depend on cryptography technology and electronic authentication programs provided by third parties to securely process the collection, storage and transmission of confidential information, including personal data.
Our information technology systems may be vulnerable to a variety of interruptions and cybersecurity threats and incidents. 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 may 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 may 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 may 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.
Our efforts to monitor, identify, investigate, respond to and remediate security incidents, including those associated with cybersecurity attacks, may not be adequate or sufficient. The measures that we have implemented regarding technology security and disaster recovery plan may not be adequate or sufficient. There can be no assurance that these efforts and measures will be successful in preventing a cybersecurity attack, a general information security incident or a disruption of our information technology systems. The occurrence of any such events may materially adversely affect our operations, business and reputation. 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 regarding cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on our business, including increased risk, costs and expanded compliance obligations. For example, on May 25, 2018, the Regulation (EU) 2016/679 of the European Parliament and of the Council of April 27, 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, or the General Data Protection Regulation or GDPR, became directly applicable in all member states of the European Union. Violations of the GDPR carry financial risks due to penalties for data breach or improper processing of personal data (including a possible fine of up to 4% of total worldwide annual turnover for the preceding financial year for the most serious infringements) and may also adversely affect our reputation and our activities relying on personal data processing. The Brazilian General Data Protection Law (Lei Geral de Proteção de Dados Pessoais), or LGPD, was signed into law in August 2018 and came into effect on September 18, 2020. An increased number of data protection laws around the globe may continue to result in increased compliance costs and risks. See “—We are subject to risks associated with failure to comply with the applicable data protection laws, and we may be negatively affected by the imposition of fines and other types of sanctions.” The potential costs of compliance with or imposed by new or existing regulations and policies that are applicable to us may affect our business and could have a material adverse effect on our results of operations.
More stringent trade barriers in key export markets may negatively affect our results of operations.
Because of the growing market share of Brazilian poultry, pork and beef products in the international markets, Brazilian exporters are increasingly being affected by measures taken by importing countries to protect local producers. The competitiveness of Brazilian companies has led certain countries to establish trade barriers to limit the access of Brazilian companies to their markets. Trade barriers can consist of both tariffs and non-tariff barriers. In our industry, non-tariff barriers are of particular concern, especially sanitary and technical restrictions.
In 2017 and 2018, as a result of the regulators’ inquiries and the public announcement of allegations of wrongdoing involving us and other companies in the Brazilian meat industry in the context of the Carne Fraca Operation and Trapaça Operation, some export markets were temporarily closed and raised additional trade barriers and our average selling prices for some products and in some markets decreased. For instance, the European Union imposed certain commercial sanctions on us due to the abovementioned operations, which caused us to significantly reduce our production of turkey since 2018 as the European Union was our main consumer market for this product. For additional information, see “—Unfavorable outcomes in administrative and legal proceedings may reduce our liquidity and negatively affect us.”
Some countries, such as Russia and South Africa, have a history of erecting trade barriers on imports of food products. Also, the European Union has adopted a quota system for certain poultry 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 European producers. More recently, the European Union and the United Kingdom have been discussing and already applying certain regulations related to sustainability that may result in additional trade barriers, such as the Due Diligence on Deforestation and the Carbon Tax Adjustment Mechanism. There is a trend in relevant markets to enforce environmental-related regulations that might adversely affect our results in the future if we fail to comply with them. The United Kingdom Environment Act was adopted on November 9, 2021, laying down a framework to address deforestation, pursuant to which a regulated person or entity must not use a commodity associated with forest risk or derived product in its commercial activities. Likewise, the EU Deforestation Regulation, which came into force on June 29, 2023, requires companies trading in seven commodities (cattle, cocoa, coffee, oil palm, rubber, soya, and wood) as well as products derived from these commodities to conduct extensive due diligence to ensure deforestation-free supply chains. The U.S. Department of State opened a public consultation, from October to December 2022, entitled “Request for Stakeholder Input on Options for Combating International Deforestation Associated with Commodities”, which may result in the discussion or creation of specific legislation on the matter. The bill of the U.S. FOREST Act of 2021, currently under review by the U.S. Congress, would prohibit the importation of products made wholly or in part of six listed commodities – palm oil, soybeans, cocoa, cattle, rubber, and wood pulp – produced on land illegally deforested after the date the law comes into effect. These regulations or related laws, in particular those included in the “Farm to Fork Strategy” of the European Union, as well as related regulations in other countries inspired by these policies, may impose a greater compliance burden on us and negatively affect our operations and our results.
Other countries have also imposed trade barriers against our products. For example, in August 2017, the Chinese government initiated an antidumping investigation in connection with Brazilian exports of whole chicken and chicken parts, including our exports. The investigation ended in February 2019, and Brazilian exporters agreed to certain minimum export prices for sales to China. In August 2018, Iraq increased the tariff on poultry products from 10% to 60%. In addition, in 2021, the South African government opened up an anti-dumping investigation against certain Brazilian poultry exporters (we are not being investigated), which may result in the imposition of new restrictive measures towards Brazilian exporters. The South African government imposed a 265% provisional tariff for companies that did not file for an individual defense, which was our case. On August 1, 2022 the dispute settlement system of the existing bilateral agreement with the Southern African Customs Union (SACU) decided in favor of the European Union on a dispute against South Africa over a safeguard measure that included an extra import tariff for frozen chicken of 35.3%. After this decision, the South African government decided to suspend the application of the import tariffs under the anti-dumping investigation affecting Brazilian exporters, including us, for a period of 12 months. However, in August 2023 the anti-dumping tariffs on Brazilian chicken were restored, and are currently affecting Brazilian chicken exports to South Africa.
There can be no certainty that local governments will not impose further restriction to poultry and/or food trade. In the Middle East, in Saudi Arabia, one of our main export markets, the Saudi Food & Drug Authority, or the SFDA, tried to decrease imports by reducing the required poultry shelf-life from one year to 90 days. The change in the technical rules for the validity of in-natura frozen chicken and its cuts was notified to the World Trade Organization, or WTO, in May 2021, but Saudi Arabia reversed the change in shelf-life in August 2021. In addition, in March 2021, the SFDA started a reinforced control system on imported meat, resulting in up to three months delays in products clearance at WTO ports and thus negatively affecting our business results. However, the SFDA withdrew the implementation of this measure.
We face other risks from a sanitary perspective. For example, African swine fever or HPAI in some countries in the Americas carry along with them the risk of market closures in case of an outbreak in Brazilian territory. Especially toward the end of 2022, the Americas region experienced an upsurge in cases of HPAI in certain countries, including Canada, the United States, Mexico, Colombia, Chile, Venezuela and Peru. As a result, certain countries suspended imports from Brazil, and there is a possibility that other countries may follow or suspend imports from some Brazilian regions where outbreaks are recorded. If cases of HPAI are confirmed within the Brazilian territory, it is uncertain how our export markets will react, considering that any restriction on imports from Brazil might have a negative impact on our business. For more information, see “—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.”
Many developed countries use direct and indirect subsidies to enhance the competitiveness of their producers in other markets. In addition, local producers, importers and even exporters in some markets may exert political pressure on their governments to prevent some foreign producers from exporting to their market, particularly during unfavorable economic conditions, such as the COVID-19 pandemic. 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.
Trade disputes between other countries also create uncertainties that may adversely affect Brazilian exports and our operations. For instance, the United States and China engaged in a trade dispute for almost 18 months, which affected the global economy and prices of certain of our raw materials, including corn, soy meal and soybeans. On January 1, 2020, the United States and China signed the first phase of a trade agreement expected to alleviate the tensions between the two countries, which expired in December 2021 with almost all of the two sides’ tariffs in place. A second phase of the agreement is expected to be even more difficult to achieve. The Biden administration has not withdrawn tariffs on Chinese imports, and the United Sates is expected to maintain the 25% tariffs on a wide range of US$250 billion of Chinese industrial goods and components used by the U.S. manufacturing sector. There can be no assurances that the trade dispute will be fully resolved and that the global economy (as well as prices of certain of our raw materials) will not be further affected by it. The U.S. agribusiness sector, on the other hand, largely benefited from the agreement, with a significant increase in poultry and pork exports, the reopening of the Chinese market to U.S. poultry exports, which had been halted since 2015 due to an avian influenza outbreak, and the accreditation of over 1,000 U.S. plants. These factors have positively affected the United States’ market share of Chinese agricultural imports, which in turn has negatively affected Brazil’s market share. We cannot control whether commercial tensions between China and the United States will increase again, or whether our business will be adversely affected as a result. Both improvements in the countries’ commercial relations and new mutually beneficial trade agreements at the expense of other countries may have a material adverse effect on our results of operations.
In addition, 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. We, along with other Brazilian companies, were therefore required to migrate our production processes to non-stunning slaughters in order to supply the Saudi Arabian market. More recently, Saudi Arabia instituted additional complex and costly halal compliance requirements. 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 our plants. One of our plants (Lajeado, Rio Grande do Sul), which had previously produced chicken meat for the Saudi Arabian market, was not included as an authorized plant. The continuous shifting of our production of chicken meat for Saudi Arabia to the authorized plants and modifications in our authorized plants’ processes to comply with halal requirements may result in decreased revenues and additional expenses.
Beginning in August 2019, Saudi Arabia banned the import of seasoned chicken meat produced in our Kezad facility, in Abu Dhabi, United Arab Emirates. The embargo was a result of Saudi Arabia’s Vision 2030 Plan, announced in April 2016 as a national development plan, which included policies to reduce the country’s dependence on oil, diversify its economy and substitute imports with local production. Saudi Arabia then expanded the embargo to the other products from our Kezad facility. Although the embargo was partially lifted in July 2022, there can be no assurance that the Saudi Arabian government will not further restrict our ability to export our products to the country, which may result in a material adverse impact on our business, financial condition and results of operations.
Additionally, the Saudi government requires the issuance of an import permit for poultry, its products, eggs and other animal products. In the future, this system may adversely affect our exports to the country, since it might be used by local authorities as a means to control the entry of products and thus, artificially affect demand and offer and, consequently, prices, which run counter to basic principles of international trade rules and regulations.
The Chinese government has in the past suspended exports of poultry and pork from our Lucas do Rio Verde-MT plant and of poultry from our Marau-RS plant. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting our Results of Operations— Effects of Trade and Other Barriers—Non-Tariff Barriers— Sanitary barriers.” Furthermore, China announced the end of the 8% special pork import tariff, implemented in 2019, and the consequent return to the normal 12% tariff as of January 1, 2022. The end of the special tariff was a response of the Chinese government to the return of the local price of hogs to its normal levels. According to Boyar China (data from January 2024), the total volume of pork and its by-products imported by China decreased by 5.3% in 2023 when compared to 2022.
A decrease in our ability to export our products to key markets may result in a material adverse impact on our business, financial condition and results of operations.
We are subject to risks associated with failure to comply with the applicable data protection laws, and we may be negatively affected by the imposition of fines and other types of sanctions.
We are subject to several data protection laws in the jurisdictions in which we operate including, but not limited to, the LGPD, the GDPR, Turkey’s Law on the Protection of Personal Data No. 6698 dated April 7, 2016, or the LPPD and China’s Personal Information Protection Law dated August 20, 2021, or the PIPL. Specifically with respect to Brazil, the LGPD provides, among other things, for the rights of the owners of personal data, the legal bases applicable to the protection of personal data, the requirements for obtaining consent, obligations, requirements regarding security incidents, leaks and data transfers, as well as the creation of the Brazilian National Data Protection Authority, or the ANPD.
Although we seek to make our operations compliant with those laws and enhance the security of our personal data processing activities, if we do not comply with any data protection law to which we are subject, both we and our subsidiaries may be subject to sanctions, either individually or cumulatively, including warnings, obligations to disclose incidents, temporary blocking or deletion of personal data, and penalties of up to 2% of the revenue of our group (limited to R$50.0 million), according to the LGPD, and up to 4% of the revenue of our group according to the GDPR. In addition, we may be held liable for material, moral, individual, or collective damages caused by us, and may be held jointly and severally liable for material, moral, individual or collective damages caused by our subsidiaries.
Failure to protect personal data processed by us and our subsidiaries, as well as the failure to adjust to the applicable legislation, may result in significant fines for us and our subsidiaries, disclosure of any incidents in the media, the deletion of personal data from our database, and the suspension of our activities, which could adversely affect our reputation, business, results of operations and financial condition.
Increased regulation of food safety and animal welfare could increase our costs and adversely affect our results of operations.
Our manufacturing facilities and products are subject to governmental inspections and extensive regulation in the food safety area, including governmental food processing controls in all countries in which we operate. We incur significant costs in connection with our efforts to comply with applicable food safety and processing rules. Changes in regulations required from Brazilian government authorities and the markets in which we operate 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 authorities, and any failure to pass those inspections could result in us being required to return all or part of a shipment to Brazil, recall certain products, dispose of all or part of a shipment or incur costs because of delays in delivering products to our customers. We have adopted various international animal welfare standards to address our customers’ expectations. Any tightening of food safety or animal welfare regulations could result in increased costs and could have a material adverse effect on our business, results of operations, financial condition and prospects.
Environmental laws and regulations require increased 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, such as conservation units, archeological sites and permanent preservation areas, handling and disposing of waste, discharging 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 or 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. Administrative penalties may include fines, the suspension of public subsidies and the temporary or permanent shutdown of activities. Criminal penalties include fines, temporary loss of rights and prison (for individual offenders) and liquidation, temporary loss of rights, fines and community service (for legal entities).
In addition, if we do not comply with environmental protection legislation, we may also be subject to direct and indirect, strict and joint and several liability, being obliged to repair environmental damages, regardless of our fault. The liability of companies does not exclude individuals, offenders, principals or accessories, often times extending the liability for these acts to the members of management of these companies, who took part in decisions or omitted themselves, when they could have avoided the resulting losses. Moreover, Article 4 of the Brazilian Environmental Crimes Law (Law No. 9,605/98) provides for the piercing of the corporate veil whenever it represents an obstacle to the redress related to environmental damage. In this event, shareholders of companies become personally liable for repairing environmental damage.
We have incurred, and will continue to incur, in operating expenses and capital expenditure requirements to comply with these environmental 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 may increase from current levels and may adversely affect the availability of funds for capital expenditures and other priorities. Compliance with existing or new environmental laws and regulations, as well as obligations in agreements with public entities, may result in increased costs and expenses.
Our plants are subject to environmental and operational licensing based on their pollution potential and use of natural resources. If one of our plants is built or expanded without an environmental license, or if our environmental licenses expire, and are not timely renewed or have their request for renewal rejected by the competent environmental authority, we may incur in fines and other administrative penalties, such as suspension of operations or closing of the facilities in question, and in some cases, are subject to civil and/or criminal liabilities. Those same penalties may also be applicable in the case of a failure to fulfill the conditions of validity in the environmental licenses already held by us. Currently, some of our environmental licenses are in the renewal process, and we cannot guarantee that environmental agencies will approve our requests for renewal. Brazilian CONAMA (Conselho Nacional do Meio Ambiente) Resolution No. 237 establishes that renewal of environmental licenses must be requested at least 120 days in advance of their expiration, so that the licenses may be automatically extended until a final decision from the environmental authority is reached. In addition, the environmental agency may condition the renewal on expensive facility upgrades if there have been regulatory changes in the environmental standards that the plant is required to meet, which may result in delays, disruptions or in the denial of the license.
We are also subject to similar environmental laws and restrictions in all jurisdictions where we have plants and operations, which may require us to incur significant costs.
We are subject to third-party transportation and logistics risks, and we rely on a limited number of available third-party suppliers to deliver certain specialized materials that we require for our production activities.
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, deliver eggs, day-old chicks, day-old turkeys and pigs to integrated producers, deliver pigs to slaughterhouses 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 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 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 future strikes if, for instance, there is a steep rise of fuel prices and the Brazilian federal government or any other party involved is unable to meet the demands of the truckers in a satisfactory manner. Any such strike could adversely affect our supply chain or the operation of our production facilities. In addition, a significant increase in fuel prices and transportation service rates as well as any other reduction in the reliability or availability of transportation or logistics services, including as a result of, among other things, flooding in ports, warehouse fires, global shipping container shortages, or labor strikes, could adversely affect our ability to satisfy our supply chain requirements and deliver our products to our customers in a commercially viable manner. 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.
On June 30, 2023, the Brazilian Federal Supreme Court, or STF, rendered null and void certain parts of Law No. 13,103/2015, or the Truck Driver’s Law, relating to working hours and daily and weekly resting periods. This decision has increased truck drivers’ hiring costs and as a result we expect will cause a raise in freight costs, which will require additional fleet to support our operations and have an adverse impact in transportation productivity and in our operating results.
In addition, some of our production activities require specialized materials that we acquire from a limited number of available third-party suppliers. For example, we rely on purchases of genetic material used in our livestock breeding programs from a very small number of livestock genetics companies. If any of these suppliers is not able to supply the materials in the quantity and at the frequency that we normally acquire them, and we are not able to replace the supplier on acceptable terms or at all, we may be unable to maintain our usual level of production and sales in the affected category of product, which may have a material adverse effect on our business and operations and, consequently, on our results of operations.
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 assess and pursue opportunities to focus or generate synergies in our business through divestitures or expansions through acquisitions, joint ventures and other initiatives. We have completed several divestitures and acquisitions in the past years, including Banvit Foods SRL, companies that compose the Hercosul Group, or Hercosul, Mogiana Alimentos S.A., or Mogiana Alimentos, and joint ventures with AES Brasil Energia S.A., or AES, Intrepid Participações S.A., or Intrepid, and Halal Products Development Company. For additional details on certain of these transactions, see “Item 4. Information on the Company—A. History and Development of the Company—Other Transactions in 2021, 2022 and 2023.” Divestments, acquisitions, new businesses, and joint ventures, particularly those involving sizeable businesses, may present financial, managerial, operational, legal, compliance and reputational 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 in 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; |
| · | 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; |
| · | challenges in receiving the necessary approvals from governments and national and international antitrust authorities, including the Administrative Council of Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE; and |
| · | restrictions imposed by local regulators, which were not identified before completion of the transaction. |
The strategic benefits from our divestitures or acquisitions may not materialize 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.
Pandemics or human disease outbreaks, such as the coronavirus (COVID-19), may adversely affect our business and operations.
Our operations include global production and distribution facilities, and if there is an outbreak of a highly pathogenic human disease worldwide, including in our facilities or the communities where we operate and distribute our products, our production, operations, employees, suppliers, customers and distribution channels could be severely impacted. Ports and other points of entry may be closed or operate at only limited capacity, as workers may be prohibited or otherwise unable to report to work and means of transporting products within regions or countries may be limited for the same reason, along with the potential for transport restrictions related to travel bans. In addition, countries to which we export our products may institute bans on the importation of our products, products produced by our partners or on all or some food products from Brazil in general based on perceived concerns about such human disease. Any future pandemic or spread of a highly pathogenic human disease could also adversely affect consumer demand, as restrictions on public gatherings or interactions may limit the opportunity for our customers and consumers to purchase our products in certain channels. At the same time, we may experience increases in general customer default rates and, as a consequence, be subject to increasingly higher credit losses. The possible deterioration of the credit cycle of our customers may adversely affect our results, financial position and cash flows in the future.
In 2020, the worldwide spread of COVID-19 triggered the implementation of significant measures by governments and private sector entities that, in turn, disrupted consumption and trade patterns, supply chains and production processes on a global scale and specifically relating to our business, including with respect to product shipments. The COVID-19 pandemic affected our operations through reduction of the available labor force, reduction of the productivity of our manufacturing operations, lack of raw materials and packaging, and maintenance projects due to reduced availability of third-party suppliers. As a result of the pandemic, especially during 2020 and 2021, we incurred expenditures that were incremental and directly attributable to the impacts of the COVID-19 pandemic, mainly related to personnel, prevention, control, logistics and philanthropic donations. The COVID-19 pandemic and related social and economic disruptions also destabilized commodity prices and the macroeconomic conditions of many countries. Demand for our products was affected by the COVID-19 pandemic and related disruptions worldwide, as well as the weakening of global commercial activities, reduction of household incomes and changes in consumption habits. The increase in volatility of market risks resulting from the COVID-19 pandemic significantly affected the fair value of our assets and liabilities in 2020 and 2021, particularly considering wide variations in foreign exchange rates. For further information about the impact of the COVID-19 pandemic on our operations, see “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting our Results of Operations—COVID-19 Pandemic”.
Our failure to continuously 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. The resources that we devote to new product development and product extensions may be insufficient and 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 may negatively affect not only our ability to generate innovative solutions, but also the in-market success of any such products. Additionally, our employees working on innovation and research and development may move to one of our competitors, which would compromise our ability to deliver new and innovative products and may 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 may have a material adverse effect on our business, results of operations, financial condition and prospects.
We also seek to maintain and extend the image of our brands through marketing, including advertising 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 may adversely affect our brand image or lead to stricter regulations and greater scrutiny of food marketing practices. For instance, new nutritional labeling rules for packaged foods will require us to change 100% of our packaging labels in Brazil by October 2024, so that labels present on the front panel the levels that our products exceed the established daily limits of sodium, added sugars and saturated fats as well as an adjustment to our form of nutritional table. Therefore, 2024 will be a year of transition to evaluate consumption rates and consumer perception. We are also expecting to face some regulatory changes that will impact the classification of certain product categories. In other Latin America countries where these types of health-related regulations are already in place we observed that sales volumes of processed foods was negatively affected and the same may occur in the Brazilian market.
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 face situations of conflict of interest in transactions with related parties. Non-observance of commutative conditions in these transactions may adversely affect our results of operations.
We have contracts with our controlling shareholder, Marfrig Global Foods S.A., or Marfrig, and certain subsidiaries involving, for example, the purchase and sale of goods. Situations may arise in which conflicts of interest occur in the relationship between us and such related parties.
If the contracts between us and our related parties are not negotiated and executed on an arm’s-length basis, our results of operations may be adversely affected. Furthermore, if we fail to comply with the rules applicable to transactions with related parties, our operations and management involved may be subject to questioning and penalties by applicable authorities and competent governmental bodies.
For more information regarding our transactions with related parties, see “Item 7. Major Shareholders and Related Party Transactions⸻ B. Related Party Transactions” and note 29 of our consolidated financial statements.
We may experience difficulties in expanding our products or in expanding into new lines of business, industries and/or foreign markets.
We may face challenges in connection with the expansion of our products as well as our expansion into new lines of business, industries and/or new geographic regions within or outside of Brazil, in which we may have limited or no experience and in which our business may not be well known. In particular, as we expand into new lines of business we may face challenges in the integration of newly acquired companies to our existing operations or in addressing the learning curve associated with entering into a new line of business. Offering new products and services or offering existing products in new industries or new geographic regions may require substantial expenditures and takes considerable time, and we may not recover our investments in new markets in a timely manner or at all. For example, we may be unable to attract customers, fail to anticipate competitive conditions or fail to adapt and tailor our services to different markets.
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, or 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. In addition, we participate in certain public tenders and competitive bidding rounds for contracts involving public authorities in Brazil and potentially in other markets where we operate, which activities are typically subjected to heightened regulatory scrutiny and often require compliance with specific anti-fraud, anti-corruption, anti-money laundering and other international laws and regulations.
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 the Carne Fraca Operation, Trapaça Operation and other investigations. For more details, see “—Unfavorable outcomes in administrative and legal proceedings may reduce our liquidity and negatively affect us,” “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.”
As a result of the Carne Fraca Operation and Trapaça Operation and related matters, we incurred expenses in the total amount of R$1,111 thousand for the year ended December 31, 2023, R$4,797 thousand for the year ended December 31, 2022 and R$9,003 thousand for the year ended December 31, 2021, which negatively impacted our results of operations. Additionally, on December 28, 2022, we entered into a leniency agreement with the Brazilian Comptroller General of the Union (Controladoria-Geral da União), or CGU, and the Attorney General’s Office (Advocacia Geral da União), or the Leniency Agreement, in connection with those proceedings and, among other commitments, we undertook to pay approximately R$583,977 thousand in connection with the settlement, which was fully paid on June 30, 2023, including interest, by offsetting tax credits, as described in note 1.2 to our consolidated financial statements. 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.
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 and may also negatively affect the market price of our common shares and American Depositary Receipts, or 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, in September 2019, our Turkish subsidiary Banvit and other producers were charged by the Turkish Competition Authority, or TCA, with an administrative fine for alleged anticompetitive practices in connection with chicken meat production in Turkey. There can be no assurance that our internal policies and procedures designed to ensure compliance with applicable antitrust and competition laws and regulations 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.
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, territories, individuals and entities. Export controls restrict the export or transfer of certain goods, technology, and software (collectively, “goods”) to certain end-users or locations. Economic sanctions and export controls are complex, frequently changing, and often increase in number, and may impose incremental prohibitions, fines, restrictions on dealings with or involving additional countries, territories, individuals, entities or items or compliance obligations on our dealings in certain countries and territories or involving certain items. 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, the European Union, 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 sanctioned countries and/or other sanctions targets, and we could potentially become targeted by sanctions as a result of such business even where such business was conducted in compliance with applicable laws and regulations. If we are found to be in violation of applicable sanctions or export controls laws or regulations or to have engaged in sanctionable conduct, 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 or export controls laws and regulations or engage in sanctionable conduct. We may ultimately be held responsible for any such violation of sanctions or export controls laws and regulations, or sanctionable conduct, 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. Also, see “—Deterioration of general economic and geopolitical conditions, including due to the ongoing military conflicts between Russia and Ukraine and in the Middle East, could have a material adverse effect on our business.”
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.
Our International operating segment accounts for a significant portion of our global net sales, and represented 44.5% of our net sales in 2023, 44.8% of our net sales in 2022 and 44.5% of our net sales in 2021. Our International operating segment comprises Islamic markets (including Turkey, North of Africa, Gulf Cooperation Council (GCC) and Malaysia), Asia, Europe, Eurasia, Africa and Americas, where we are subject to many of the same risks described herein 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.
Since we have business operations around the world, we are subject to a variety of risks that may adversely affect our financial results, including, among others:
| · | political instability, such as social unrest, turmoil, foreign exchange controls and uncertainty regarding government policies; |
| · | global economic and geopolitical risks and conflicts, such as war, terrorism and civil unrest; |
| · | the imposition of exchange or price controls; |
| · | restrictions on international trade and financial flows imposed due to balance of payments deficits; |
| · | the imposition of restrictions on exports of our products or imports of raw materials necessary for our production processes, including embargoes from countries where we undergo production or distribution activities; |
| · | the fluctuation of global currencies against the real; |
| · | interest rate fluctuation and the impact of hyperinflation; |
| · | commodities price volatility; |
| · | decreases in demand, particularly from large markets such as China and Saudi Arabia; |
| · | the nationalization of our property; |
| · | political influence by local governments in communities where we operate requiring investments or other expenditures; |
| · | increases in export tax and income tax rates for our products; |
| · | imposition of increased tariffs, anti-dumping duties or other non-tariff trade barriers; |
| · | unpredictable international border closings that restrict products, materials and people; |
| · | free trade agreements between countries and regions excluding Brazil; |
| · | compliance with differing foreign legal and regulatory regimes, and change in regulations of the markets to which we export; |
| · | 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; |
| · | negative media exposure related to the Brazilian agriculture or meat processing industries, particularly in connection with the Carne Fraca Operation, Trapaça Operation or other investigations; |
| · | negative preconceptions influenced by Brazil’s worsening international reputation due to deforestation and other environmental and sustainability issues; |
| · | unpredictable or uncontrollable epidemics and pandemics, either affecting both human and/or animal life; |
| · | lack of transparency and/or bribery or any illegal gains’ attempted by foreign officials; and |
| · | institutional and contractual changes unilaterally imposed by governments, 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 and in our export markets may be adversely affected, and we may experience significant variability in our revenue from those operations.
In 2019, the European Union reached a trade agreement in principle with the Mercosul trade bloc, of which Brazil is the largest member, subject to being finalized and ratified by the EU member states. However, since then, the deal has faced opposition of certain members of the EU and national parliaments in light of concerns over Brazilian environmental protection policies and enforcement, and due to certain parties taking a protectionist stance. The political negotiations of the deal are expected to be resumed after the European Union parliamentary elections in June and depending on its results. The delay or failure to finalize and ratify the deal could undermine efforts to expand our access to European markets. Additionally, several countries in Asia currently do not tax the importation of poultry and pork meat, which increases our products’ competitiveness in these countries. However, we understand that this import tax regulation may be changing in the near future. We are unable to control any such change in import tax regulation, which may have a material adverse effect on our products’ competitiveness. The impact of these changes on our ability to deliver our planned projects and execute our strategy cannot be ascertained with any degree of certainty, and these changes may adversely affect our operations and financial results.
Additionally, specific trade deals between key markets and other competing exporting countries may negatively affect our results of operations and competitiveness. For example, the U.S.-South Korea free trade agreement and economic partnership agreement reduced the import tariff on European and U.S. livestock products in 2022. These agreements caused an impact on our competitiveness in the region and put additional pressure on our market share.
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 both the domestic and external markets. In addition, we compete with foreign producers in our external markets. The Brazilian market for whole poultry, poultry and pork cuts is highly fragmented. Small producers, some of which operate in the informal economy, are able to offer lower prices by meeting lower quality standards. For example, farming livestock cooperatives are increasingly significant competitors in our markets, as they have certain tax advantages and generally enjoy greater mobility in directing their production to foreign markets at times when exports become more attractive than their respective domestic market. With respect to exports, we compete with other large, vertically integrated producers that have the ability to produce quality products at similarly low costs.
In addition, the size and growth potential of the Brazilian market for processed food, poultry, pork and beef, combined with Brazil’s low production costs are attractive to international competitors. The main barrier impeding these companies from entering the Brazilian market has been the need to build a comprehensive distribution network, including a network of outsourced farmers, known as outgrowers. Nevertheless, foreign competitors with significant resources could undertake to build or acquire 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, with strong brands, consumers may choose to purchase other products or brands. We expect to 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 in responding to product, pricing and other strategies by competitors may negatively affect our financial performance.
Our business depends on the supply of raw materials produced by farmers and integrated producers, and our performance depends on our ability to attract and retain a network of qualified farmers and integrated producers.
We are a vertically integrated producer of food products, and we depend on a large number of raw materials of animal origin, or animal byproducts, to conduct our business. A substantial portion of the animal byproducts we use to conduct our business is produced by a network of integrated farmers and producers with whom we have entered into integrated production contracts. Such integrated producers are responsible for managing and raising the poultry and pork that we, as integrators, supervise. For the year ended December 31, 2023, we acquired approximately 3,289.6 tons of broilers, 133.7 tons of turkey and 1,276.9 tons of pork from our integrated producers.
The selection and retention of farmers and producers is highly competitive, and such competition between integrators has intensified in recent years. Most of our integrated producers are located close to our industrial units, and in some units we compete for integration with regional players who carry out activities similar to those we conduct. We may be unable to select and retain such farmers and producers, particularly as a result of greater competition, or we may be obligated to pay higher prices for such byproducts or offer greater benefits to retain such farmers and producers. Our inability to retain an adequate number of such farmers and producers may negatively impact our strategic plans and operational performance.
In addition, our integrated producers are mostly financed through rural credit financing that they contract directly with financial institutions. Such rural credit financing are offered in the context of financial collaboration agreements that we enter into with the respective financial institutions, which establish obligations related to: (i) selecting integrated producers suitable for obtaining financing; (ii) maintaining a sufficient payment stream to such integrated producers to amortize and settle the financial installments granted within the scope of such financial collaboration agreements; and (iii) supervising the application of the financial resources granted to such integrated producers. In exceptional cases, such as the operational suspension, sale or lease of one of the industrial units that we use to purchase the production of our integrated producers financed through such financial collaboration agreements, we may be obligated to prepay the financing obtained by our integrated producers, or we may be required to maintain a sufficient payment stream to such integrated producers to amortize and settle the financial installments until a new integrator succeeds the affected industrial unit with respect to the integrated production contracts, which may adversely affect our results.
Our performance depends on favorable labor relations with our employees, our compliance with labor laws and the safety of our facilities. Any deterioration of those relations, increases in labor costs or injuries at our facilities could adversely affect our business.
As of December 31, 2023, we had approximately 100,000 employees worldwide. Our production employees in Brazil and in countries where organized labor is prevalent are generally represented by labor unions. Upon the expiration of existing collective bargaining agreements or other collective labor agreements, we may be unable to reach new agreements with the labor unions and any such agreements may not be on terms satisfactory to us, which could result in higher payments of wages or benefits to union workers. Additionally, if we are unable to negotiate acceptable collective bargaining agreements, we may become subject to work stoppages or strikes, which could adversely affect our business.
Our negotiations with labor unions may become more challenging and we may be subject to higher wages and more work stoppages or strikes if the new Brazilian federal government is successful in implementing changes in the labor laws and increasing funds to labor unions. As part of the labor law reform in 2017, or the Labor Reform, union financing by workers is no longer mandatory in Brazil. However, in October 2022, Brazilians reelected Mr. Luiz Inácio Lula da Silva as president, and he took office in January 2023. Mr. Lula da Silva began his career as a trade unionist and was elected president of Brazil for the first time in 2002, remaining in office from January 2003 until December 2010. If the Lula da Silva administration guides changes to the Labor Reform and the return of mandatory financing of unions and related administrative bodies (such as labor union centers, federations and confederations), such entities may improve the bargaining power for further workers’ demands, including our Brazilian employees. As a result, unions may be able to pursue more aggressive negotiations for wage increases, including minimum wages above inflation. For example, their influence over collective bargaining in the short term may result in the increase in the Brazilian national minimum wage above inflation. Consequently, regional minimum wages could also be raised above inflation. Labor costs are among our most significant expenditures. Such costs represented 11.5% of our cost of sales in the year ended December 31, 2023. In the event of a review of our employee contract structure and an increase in wages, additional operational expenses could be incurred.
Additionally, in the ordinary course of business, we outsource some of our labor force, which subjects us to claims that may arise from these relationships. In the event that a significant amount of these claims results in an unfavorable outcome against us, we may be held liable for amounts higher than our provisions, which may have a material adverse effect on our business, financial and operational condition and results of operations. In addition, if the outsourced activities are deemed by the authorities as employment relationships, outsourcing may be considered illegal and the outsourced workers may be considered our employees, which would result in a significant increase in our costs and could subject us to administrative and judicial procedures by the relevant authorities and fines. We are also subject to increases in our labor costs due to Brazilian inflation and increases in health insurance costs. Material increases in our labor costs could have a material adverse effect on our business, results of operations and financial condition and prospects.
In addition, we face risks related to the safety of our 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.
We cannot guarantee that our suppliers will not engage in irregular practices.
We cannot guarantee that our suppliers will not have issues regarding working conditions, sustainability, outsourcing of the production chain and improper safety conditions and/or corruption. If any of our suppliers engage in these practices, our reputation may be harmed and, consequently, our customers’ perception of us may be adversely affected. Also, depending on the irregularity attributed to the supplier, if it has acted for our benefit, whether exclusively or not, we may be subject to the sanctions provided for in the applicable anti-corruption law. Although we have an internal integrity system that follows the best national and international compliance practices, which is applicable to all our suppliers and business partners, there is no assurance that we will be able to timely identify and/or prevent any such violations by our suppliers.
We may be liable for environmental damage caused by our suppliers.
If the companies that provide us outsourced services do not meet the requirements of the applicable legislation, we may be considered liable for the environmental damage caused by these companies.
Additionally, environmental damage in Brazil implies strict and joint liability. This means that the obligation to repair the degradation caused may affect all those who, directly or indirectly, contributed to the occurrence of environmental damage, regardless of the agents’ guilt, which may adversely affect our results and activities. Also, the hiring of third parties to carry out any management of our activities, such as management of contaminated areas, renovations or final disposal of waste, does not exempt us from liability for any environmental damage caused by a supplier engaged by us. If we are held liable for any such damages, our results and image may be adversely affected.
We depend on the operating results of our subsidiaries.
In addition to having our own operations, we hold equity interests in other companies. Therefore, in addition to the results generated by our own operation, we also depend on the operating results of our subsidiaries and controlled companies. Our ability to meet our debts and other obligations depends not only on our cash flow generation, but also on the cash flow generation of our subsidiaries, controlled companies and affiliates and their ability to make cash available to us in the form of payment of interest on equity, payment of debt, dividends, among others.
Any adverse change in the financial condition or results of operations of our subsidiaries, controlled companies and affiliates could materially and adversely affect our business, financial condition or results of operations.
Also, the income tax exemption on the distribution of dividends provided for in current Brazilian legislation may be reviewed and dividends may become taxable in the future, negatively impacting us, as a holding company, given that taxes may be due on the distribution of dividends by our subsidiaries to us.
In addition to the risk factor above, subsidiaries that carry out our significant operations are subject to the same risks applicable to us.
Unfavorable outcomes in administrative and legal proceedings may reduce our liquidity and negatively affect us.
We and some members of our management are defendants in civil, administrative, regulatory, environmental, labor and tax proceedings and we are also subject to consent agreements (Termo de Ajustamento de Conduta, or TAC). Unfavorable decisions in such administrative and legal proceedings may reduce our liquidity and have a material adverse impact on our business, results of operations, financial condition and prospects. In addition, our management and employees may be subject to judicial, arbitral and/or administrative investigations, inquiries, proceedings and claims.
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 value-added tax, or VAT, that we accumulate on exports.
As of December 31, 2023, we have R$1,203,170 thousand in provisions for contingencies, of which R$352,414 thousand are for civil and other contingencies (including administrative, regulatory and environmental), R$321,995 thousand are for tax contingencies, R$435,929 thousand are for labor contingencies and R$92,832 thousand are for contingent liabilities recognized at fair value as of the acquisition date, arising from the business combinations with Sadia, Hercosul and the Mogiana Group. Proceedings classified as possible losses, as of December 31, 2023, totaled R$18,627,512 thousand, which could adversely affect our financial situation in the event of change in circumstances in the classification of probability of loss, due to the complexity and discretion involved in the assessment, measurement and definition of the time of recognition and disclosure of legal claims between the various spheres in which they are processed.
In addition, in 2017 and 2018, we were involved in significant investigations and legal proceedings in connection with the Carne Fraca Operation and the Trapaça Operation, respectively. On December 28, 2022 we entered into the Leniency Agreement, which extinguished all CGU administrative proceedings against BRF related to such operations. Among other commitments, we undertook to pay approximately R$583,977 thousand to Brazilian authorities in connection with the settlement, which was fully paid on June 30, 2023, including interest, by offsetting tax credits, as described in note 1.2 to our consolidated financial statements.
For more information about “Carne Fraca Operation,” “Trapaça Operation” and other proceedings, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”
In March 2020, three confidential arbitration proceedings were brought against us in the Market Arbitration Chamber (Câmara de Arbitragem do Mercado) of the B3 S.A. – Brasil, Bolsa, Balcão, or the B3 or the São Paulo Stock Exchange, in Brazil by investors that had purchased our shares traded on the B3, seeking recovery from alleged losses incurred by them, due to the price fall of our shares, during the period starting from April 4, 2013 and afterwards. In September 2020, the Chairman of the Market Arbitration Chamber of B3 decided to consolidate these three arbitrations into a single arbitration proceeding. In November 2022, the arbitral tribunal was convened, and in December 2022, we formally commenced the arbitration proceedings. In November 2023, a partial arbitral award was rendered recognizing the procedural regularity of some of the claimants (there was no decision on the merits of the arbitration proceedings). BRF filed a motion for clarification against the partial arbitral award, which is awaiting judgement. We believe the possible loss or range of losses, if any, cannot be estimated. In the event that this litigation or arbitration proceeding is decided against us, or if we enter into a settlement agreement, there can be no assurance that an unfavorable outcome or settlement would not have a material adverse impact on us.
We cannot guarantee that any ongoing and/or new proceedings or investigations will have favorable outcomes for us and our management. 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. With respect to proceedings to which we are a party, we cannot guarantee the dimension of the impacts that the results may have on our business, financial condition and/or reputation, or that we maintain or will maintain provisions in sufficient amount to cover all liabilities that may arise from these proceedings. In addition, we cannot guarantee that any person, directly or indirectly related to us, whether shareholder, employee, officer, director, supplier, service provider, subcontractors or alike, will not be involved in legal, administrative or arbitration proceedings, investigations or police inquiries. Our or any such person’s involvement in material legal, administrative or arbitration proceedings, investigations or police inquiries could have a material adverse effect on our business, financial condition, results of operations, prospects and reputation.
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, patents and designs. Our ability to compete effectively depends in part on our rights to trademarks, designs and other intellectual property rights we own or license. We have not sought and it is not always possible 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 claim that our intellectual property 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 or enter into joint licensing, coexistence or intellectual property sharing 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 rights, we could suffer a material adverse impact on our reputation, business, financial position, results of operations and cash flows.
Damages not covered by our insurance policies might result in losses for us, which could have an adverse effect on our business.
While we believe that the extent of our insurance coverage is consistent with industry practice, such coverage does not cover all losses we may incur, even in areas for which we have coverage, and our insurance policies are subject to liability limits and exclusions. For instance, on occasion, our facilities may be negatively affected by fires, explosions, electrical damages and other similarly destructive events. Our facilities in Vitória de Santo Antão, in the Brazilian state of Pernambuco, suffered from fires in 2022, and there were explosions in our facilities in Lucas do Rio Verde, in the Brazilian state of Mato Grosso, in 2022, and in Uberlândia, in the Brazilian state of Minas Gerais, in 2021. Our substation facility in Concordia, in the Brazilian state of Santa Catarina, collapsed in 2021. The resulting losses in connection with these events were not fully covered by our insurance policies.
Political risks, environmental and climate events, fraud, strike, product recalls, fines and penalties, terrorism, the livestock itself, ammonia leakage, financial risks such as decrease in stock prices, cybersecurity risks, sabotage, industrial espionage, natural disasters or other catastrophic events may cause damage or disruption to our operations and are not fully covered by our insurance policies. Additionally, we are exposed to certain product quality risks, such as criminal contamination, avian influenza, swine fever, salmonella and other livestock diseases that can impact our operations and which are not covered under insurance. See “—Health and food safety risks related to our business and the food industry could adversely affect our production and shipping processes as well as our ability to sell our products.”
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 third 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.
Our business interruption insurance may not cover all of our direct and indirect costs and intangible costs in connection with disruptions to our operations. For example, the negative impacts on our business from the 2018 Brazilian truckers’ strike and the trucker’s protests associated with the Brazilian elections in 2022, 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 effect on our business, results of operations, financial condition and prospects.
Moreover, our insurance policies may not cover costs incurred to defend ourselves against legal and administrative proceedings. In recent years, we incurred significant costs with investigations and the costs of defending ourselves against legal and administrative proceedings in connection with the Carne Fraca Operation and the Trapaça Operation, and may not be fully reimbursed for such costs under our insurance policies.
Any claim we make may not be honored by our insurance providers fully, in a timely manner, or at all, and we may not have purchased sufficient insurance to cover all losses incurred. If we were to incur substantial liabilities or if our business operations were interrupted for a substantial period of time, we could incur costs and suffer losses. Additionally, in the future, insurance coverage may not be available to us at commercially acceptable premiums, or at all.
We depend on members of our senior management and on our ability to recruit and retain qualified professionals to implement our strategy.
We depend on members of our senior management and other qualified professionals to implement our business strategies. Efforts to recruit and retain professionals may result in significant additional expenses, which could adversely affect our results. In addition, loss of key professionals may adversely affect our ability to implement our strategy, as well as expenses associated to these losses can impact our results. We had the departure of a Vice President in 2021. During 2022 the global geopolitical challenges impacted our performance and resulted in important changes in our strategy and leadership team. In April 2022 we announced the departure of our then Chief Financial Officer and our then Brazil Vice-President, and the appointment of our current Chief Financial Officer, Mr. Fabio Luis Mendes Mariano and our current Brazil Commercial Vice-President, Mr. Manoel Reinaldo Manzano Martins Junior. In July 2022, our then Institutional Relations & Sustainability Vice-President left her position. In August 2022, we announced the departure of our then Chief Executive Officer, who was replaced with our current Chief Executive Officer, Mr. Miguel de Souza Gularte. In January 2023, we announced the appointment of Mr. Artemio Listoni as our new Industrial Operations and Logistics Vice-President. 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.
General labor shortages, our inability to recruit or retain workers for our industrial plants and increased competition with other businesses for workers may negatively affect our results of operations.
To support the operations of our industrial plants, we must hire and retain a sufficient number of workers and pay them sufficient compensation. The continuous operations of our industrial plants at target activity levels could be interrupted by our failure to recruit or retain the necessary number of workers. If it becomes necessary for us to operate our facilities significantly below the corresponding installed capacity, then our results of operations may be adversely affected. In addition, if we operate with a reduced number of workers, we may need to choose a product mix that requires fewer workers in the production line, but which may not represent the most profitable alternative among our productive capacity options, which could have a negative impact on our results of operations.
We have been experiencing a general labor shortage in our facilities located in the Brazilian states of Mato Grosso and Santa Catarina. In these locations, where the prevailing unemployment rate could be lower than 4%, the number of residents in the workforce may be limited. To reduce the negative impact on our operations, we bring workers from other regions of the country where unemployment rates are higher, which results in additional costs related to relocation. For example, in the Brazilian state of Mato Grosso, approximately 70% of our workers come from the North or Northeast regions of Brazil or are refugees or immigrants from neighboring countries.
These conditions increase the competition we face for workers from other industries, and they may force us to raise our compensation package to retain workers and properly manage excessive turnover. This directly impacts our production process and may lead to an increase in our production costs. The agribusiness sector is one of the fastest growing businesses in Brazil, and there is significant competition for workers. For example, in October and November 2023, JBS announced the inauguration of two factories in Rolandia, Paraná, and the reopening of a slaughterhouse in Mato Grosso after a fire. The factories and slaughterhouse are expected to generate 1,500 and 1,600 new jobs in the regions, respectively. These industrial units will compete for workers with our industrial plants in Paraná and Mato Grosso. We may be unable to retain an adequate number of workers, particularly as a result of greater competition, or may incur higher costs in our operations to offer higher compensation than our competitors. Our inability to offer attractive compensation or to properly meet our workforce demand because of the labor shortage may negatively impact our strategic plans and operational performance.
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.
Part of our activities are carried out in third-party properties. If we are unable to maintain or renew our lease agreements or to enter into new agreements under conditions that are commercially adequate for us, we may be adversely affected.
Part of our activities are developed in third-party real estate properties which are subject to lease agreements.
In accordance with applicable Brazilian law, generally, either party may request in a judicial lawsuit the review of the rental price if there is a material adverse change that causes an imbalance in the parties’ economic rights and obligations under the agreement. A significant increase in the amount of the rent as a result of such lawsuits’ review could adversely affect our financial position and our operating result.
In addition, our lease agreements provide that the rents will be annually adjusted by an official inflation index. In a scenario of hyperinflation, such adjustments may adversely affect our financial results.
If, for any reason, we are unable to (i) maintain our lease agreements; (ii) enter into new agreements; or (iii) renew them under conditions that we deem appropriate, we may have our activities interrupted and/or be adversely impacted, due to (i) costs arising from the reallocation of our operations, and (ii) loss and/or decrease in revenue, including if we are not able in a timely manner to relocate our activities to suitable properties and/or take a long time to rent any such properties or if we rent them at high prices. In any such cases, our financial condition and results of operations may be adversely affected.
Failure to comply with, obtain or renew the licenses required of the real estate properties where we develop our activities may have a material adverse effect on us.
Our activities depend on several registrations, authorizations, federal, state and municipal licenses and permits, including inspection records issued by Fire Departments (Autos de Vistoria do Corpo de Bombeiros), certificates of occupancy (habite-se) of the facilities we use and operating licenses issued by the respective municipalities in order to carry out our operations. Most of these licenses have an expiration term and must be timely renewed, and may be subject to the payment of renewal fees. In addition, any irregularities or alterations to the facilities of the properties may also have an adverse effect on the maintenance of such real estate licenses. The expansion of our operations and/or changes in applicable legislation may also require new licenses, grants, authorizations, permits and/or registrations to be requested before the competent authorities.
We cannot assure that such licenses have been or will be obtained with respect to each property whereby we carry out our activities or that they have been or will be regularly maintained in force or timely renewed. The lack or the irregularity of our licenses could result in the imposition of infraction notices and fines by the competent authorities. If we are unable to remedy any irregularities in our licensing process in a manner that leads to an interruption or suspension of our operations or that would require us to make significant and unexpected investments, this could result in a material adverse effect on our business, financial situation, reputation and results of operations. Also, we may have to incur with unexpected costs with the reallocation of establishments, in case of the impossibility to obtain or renew any of these licenses. These scenarios may negatively affect our business.
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.
As of December 31, 2023, our total consolidated debt (comprised of current and noncurrent loans and borrowings) was R$20,095,548 thousand. An increase in our leverage could result in adverse 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; |
| · | 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; and |
| · | 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. |
If one or more of these consequences or limitations were to materialize, they could adversely affect our results of operations and financial position.
A downgrade in our credit rating would likely increase our cost of funding and adversely affect our results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our long-term and short-term debt are based on a number of factors, including our cash generating capability, levels of indebtedness, policies with respect to stockholder distributions and financial strength generally, as well as factors beyond our control, such as the conditions generally affecting the meat processing industry and the economic environment in which we operate. In view of our current credit metrics and according to the policies and guidelines set by rating agencies in order to evaluate a company’s creditworthiness, as well as other factors, our credit rating is currently rated below “investment grade” by all of the rating agencies that rate us. On March 15, 2023, Moody’s downgraded our credit rating from “Ba2” to “Ba3.” Any further downgrade of our credit ratings by a credit rating agency, whether as a result of our actions or factors which are beyond our control, can increase our future borrowing costs, impair our ability to access capital and credit markets on terms commercially acceptable to us or at all and result in a reduction in our liquidity. Our borrowing costs and access to capital markets also can be adversely affected if a credit rating agency announces that our ratings are under review for a potential downgrade. An increase in our borrowing costs, limitations on our ability to access the global capital and credit markets or a reduction in our liquidity can adversely affect our financial condition, results of operations and cash flows.
We have substantial debt that matures in each of the next several years.
As of December 31, 2023, we had R$2,073,011 thousand outstanding in principal amount of loans and borrowings that matures in 2024, R$1,355,195 thousand outstanding in principal amount of loans and borrowings that matures in 2025, R$2,929,729 thousand outstanding in principal amount of loans and borrowings that matures in 2026, R$2,984,936 thousand outstanding in principal amount of loans and borrowings that matures in 2027, R$939,150 thousand outstanding in principal amount of loans and borrowings that matures in 2028 and R$9,574,333 thousand outstanding in principal amount of loans and borrowings that matures in 2029 and thereafter.
A substantial portion of our outstanding loans and borrowings is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2023, we had R$11,093,385 thousand outstanding in principal and interest of foreign currency loans and borrowings, of which R$1,521,567 thousand is classified as short-term debt. Our U.S. dollar-denominated loans and borrowings must be serviced by funds generated from sales by our subsidiaries, the majority of which are not denominated in U.S. dollars. Consequently, when we do not generate sufficient U.S. dollar revenues to cover that debt service, we must use revenues generated in reais or other currencies to service our U.S. dollar-denominated debt. As of December 31, 2023, the real appreciated against the U.S. dollar by 7.2% compared to December 31, 2022.
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. Additionally, the environment of rising interest rates could cause changes in financing availability, the cost of debt, and exchange rate fluctuations.
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 coming 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 or repay any of our outstanding debt that becomes 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 existing indebtedness impose significant restrictions on us, and the instruments governing any indebtedness we may incur in the future may also impose the same or additional restrictions on us. The existing restrictions limit, and any future restrictions may limit, directly or indirectly, our ability, among other things, to undertake the following actions:
| · | sell assets, including capital stock of subsidiaries; |
| · | 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 currently 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.
Fluctuations or changes in, or the replacement of, interest rates could impact the cost of servicing our debt or reduce our financial revenue, affecting our financial performance.
Our financial expenses are affected by changes in the interest rates that apply to our floating rate debt. As of December 31, 2023, 49% of the outstanding amount of principal and interest of our loans and borrowings of R$20,095,548 thousand was either: (i) denominated in (or swapped into) reais and bearing interest based on Brazilian floating interest rates, such as 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 the IPCA; or (ii) U.S. dollar-denominated and bearing floating interest based on the Secured Overnight Financing Rate, or SOFR, or the Emirates Interbank Offered Rate, or EIBOR. Any increase in the CDI, IPCA, SOFR or EIBOR rates may have an adverse impact on our financial expenses and our results of operations.
The CDI and the IPCA rates have fluctuated significantly in the past in response to the expansion or contraction of the Brazilian economy, inflation, Brazilian government policies and other factors. See “—Risks Relating to Brazil.” A significant increase in any of these interest rates could adversely affect our financial expenses and negatively affect our overall financial performance.
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 ADRs.
According to the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, in 2021, 2022 and 2023, the Brazilian economy showed signs of recovery after the COVID-19 pandemic, as measured by its GDP, which increased 4.6%, 2.9% and 2.9% year-on-year according to IBGE. As of December 31, 2023, unemployment decreased to 7.4%, from 7.9% in 2022 and 11.1% in 2021, according to the National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílio) published by the IBGE.
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 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 the uncertainties involving the administration of president Luiz Inácio Lula da Silva; |
| · | 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 members of the Brazilian government. |
Various investigations into allegations of money laundering and corruption conducted by the Office of the Brazilian Federal Prosecutor, including the largest of such investigations, known as the “Lava Jato Operation,” adversely affected the image and reputation of companies that were implicated as well as 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 investigations or allegations against government officials will arise in the future.
The President of Brazil has the power to determine policies and issue governmental acts related to the conduct of the Brazilian economy and, consequently, affect the operations and financial performance of companies, including ourselves. We cannot predict which policies the Brazilian federal government may adopt or change to promote macroeconomic stability, fiscal discipline and adequate levels of domestic and foreign investment, or the effect that any such policies might have on our business or on the Brazilian economy. For instance, the Ministry of Economy, Mr. Fernando Haddad, has a critical view on tax incentives to certain economic sectors and had suggested cutting some of these incentives. In 2024, we expect an increase in tax collection and in the medium term an increase in government spending.
In March 2021, in order to pay for emergency aid to the low-income population, the Brazilian National Congress approved a constitutional amendment that changed the government budget rules. From 2022 onwards, Brazilian states, cities and municipalities that reach the indebtedness limit of 95% of their income have had their fiscal and financial incentives granted reduced by 10%. Furthermore, in December 2021, the Brazilian National Congress approved a constitutional amendment to change the rules of credit payments (precatórios) between Brazilian states, cities and municipalities. The time limit for such payments was postponed for up to fifteen years. The pressure in local governments across the country generated by the new rules resulted in tax increases.
In December 2022, even before his inauguration, President Lula obtained congressional approval for a waiver in the fiscal spending limitations and for the enactment of new regulations allowing the new fiscal anchor to be submitted through supplementary legislation, requiring a lower quorum for approval in 2024. There are no guarantees that this or similar policies will not have a negative impact in our business in the future.
Uncertainty as to whether the Brazilian government will implement significant reforms 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. Worsening political and economic conditions in Brazil may increase production and supply chain costs and adversely affect our business, results of operations and financial condition.
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 ADRs.
Brazil has experienced hyperinflation in the past. Brazilian inflation rates, as measured by the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, published by the IBGE, decreased to 4.62% accumulated over the last twelve months prior to December 31, 2023, from 5.79% in 2022, 10.06% in 2021, 4.52% in 2020 and 4.31% in 2019. 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.”
There can be no assurance that inflation rates will decrease nor stabilize. Although inflation levels have been relatively stable from 2018 to 2020, Brazil experienced an abrupt increase in inflation levels during 2021 reaching the highest levels since 1994. 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 ADRs.
Fluctuations in interest rates may have an adverse effect on our business, financial condition and the market prices of our common shares and ADRs.
As of December 31, 2023, the Special System for Settlement and Custody (Sistema Especial de Liquidação e de Custódia, or “SELIC”), the Brazilian primary reference interest rate, decreased to 11.75%, from 13.75% in 2022, 9.25% in 2021, 2.0% in 2020 and 4.5% in 2019. As of the date of this annual report, the SELIC was 10.75%. The Brazilian 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 a rising interest rate is that a greater return is paid in respect of government securities, which may impact other investments by making them less attractive by comparison. As a result, there may be additional investment in public debt, which absorbs money that could otherwise fund the private sector.
Exchange rate fluctuations 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. Following the start of the COVID-19 pandemic, the real depreciated significantly against the U.S. dollar, reflecting low interest rates, a deteriorating economic environment and a political crisis. The real depreciated by 7.4% in 2021 against the U.S. dollar, and appreciated 6.5% in 2022 and 7.2% in 2023, reflecting higher interest rates in Brazil and higher prices for commodities exports. As of December 31, 2023, the real/U.S. dollar exchange rate was R$4.8413 to US$1.00 and as of April 17, 2024, the real/U.S. dollar exchange rate was R$5.2469 to US$1.00.
Appreciation of the Brazilian real against the U.S. dollar may lead to a dampening of export-driven growth. Our production costs are denominated in reais, but our international sales are mostly denominated in U.S. dollars. Revenues generated by exports are reduced when translated to reais in the periods in which the real appreciates in relation to the U.S. dollar. Any appreciation could reduce the competitiveness of our exports and adversely affect our net sales and our cash flows from exports. On the other hand, a depreciation of Brazilian real against the U.S. dollar may lead to higher exports and revenues, but costs may be higher.
Costs are also directly impacted by exchange rates. Any depreciation of the real against the U.S. dollar could create additional inflationary pressures in Brazil by increasing the price of imported products and requiring deflationary government policies. In addition, the prices of soy meal and soybeans, 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 the real depreciates against the U.S. dollar, the cost in reais of our U.S. dollar-linked raw materials and equipment increases, and these increases could materially adversely affect our results of operations. 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 loans and borrowings in an aggregate amount of R$11,093,385 thousand as of December 31, 2023, representing 55% of our total consolidated indebtedness at that date. Although we manage a portion of our exchange rate risk through foreign currency derivative instruments and future cash flows from exports in U.S. dollars and other foreign currencies, our foreign currency debt obligations are not completely hedged. A significant devaluation of the real in relation to the U.S. dollar or other currencies would increase the amount of reais that we would need in order to meet debt service requirements of our foreign currency-denominated obligations.
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, the enactment of taxes with proceeds earmarked for designated governmental purposes.
On December 15, 2023, the Brazilian Congress passed the tax reform bill (PEC 45/2019), which will come into effect within a 7-year transition period starting from 2026. The bill aims to simplify the Brazilian tax framework. It provides for the merger of five taxes, including the state value-added tax, or ICMS, 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, into two new value-added taxes: the state Tax on Goods and Services (Imposto sobre Bens e Serviços, or IBS) and the federal Contribution on Goods and Services (Contribuição sobre Bens e Serviços, or CBS). Tax collection on the new value-added taxes, or VAT, will be a tax on consumption (rather than a tax on production, as in the prior system). According to PEC 45/2019, the CBS and IBS shall be regulated via a supplementary law, which is yet to be drafted and approved. Different IBS and CBS rates may apply to specific goods and services listed in the Brazilian Constitution, with 42 tax reductions included in the bill. Although it is still not possible to calculate the actual IBS and CBS rates, they are projected to reach up to 28%, which would be the highest VAT rate in the world. The bill also sets forth a new tax (Imposto Seletivo, or IS) that can be considered as a penalty tax for the production, sale and import of goods and services that are harmful to human health and the environment. In addition, it established a 90-day period for the Brazilian government to submit a bill addressing the income tax reform and another bill addressing the payroll tax reform, which did not occur. Other tax regimes, such as the research and development tax incentive program (Lei do Bem) and the deduction of interest on shareholders’ equity, may be revoked to increase the government’s revenues in light of a possible reduction in the income tax rate. The effects of the tax reform measures and any other changes that could result from the enactment of new and additional tax regulations have not been, and cannot be, quantified yet. We cannot guarantee that the IBS and CBS rates will not be higher than the levies currently applied to our business, that the Brazilian government will not impose penalty taxes to certain of our raw materials, or that the new tax regulations to be passed by the Congress will not have a material adverse effect on our business, financial condition, results of operation and prospects.
On December 29, 2022, the Brazilian government published Provisional Measure No. 1,152 (“MP 1,152”), which introduces changes to the legislation on corporate income tax and provides for new transfer pricing rules aiming to align the country’s rules with international standards as proposed by the OECD. On May 2023, the Brazilian Senate approved MP 1,152, later sanctioned by the Brazilian President. The new rules became effective in 2024 and are expected to increase our taxation.
In addition, in May 2018, Law No. 13,670/18 reestablished the permission for companies to replace the payment of a 20% social contribution fee over payroll with the payment of a fee ranging from 1% to 4.5% (depending on the industry) over gross operating revenues until December 2020. Such term was subsequently postponed to December 2023 by Laws 14,020/20 and 14,288/21. On December 28, 2023, the Brazilian Congress enacted Law 14,784/23 extending this term to December 31, 2027. On the same day, the Brazilian president issued provisional measure (medida provisória) No. 1,202/23 revoking such permission and applying gradually increasing fees starting from 10%-15% (depending on the industry) from April 1, 2024 and reaching 20% in 2028. MP 1,202/23 also restricted the use of tax credits with an amount of R$10.0 million or higher, despite such use being previously allowed by final and unappealable judicial decisions. According to MP 1,202/23, taxpayers must use such tax credits within a minimum period of 12 to 60 months depending on the amounts involved. Such restrictions may adversely affect our results of operations. On February 28, 2024, the Brazilian president enacted MP 1,208/24, which partially revoked MP 1,202/23 and reestablished the deduction permission for certain industries limiting the use of credits resulting from tax procedures. Concurrently, the Ministry of Finance introduced bill of law 493/24 to the Brazilian Congress to foster discussions about a new legislation on this subject matter. Further discussions between the Senate, the Ministry of Finance and other lawmakers are expected, to seek alternative sources of revenue as a way to finance the payroll tax reduction policy. We cannot assure that the current relief will remain in place if a new law is approved, or that we will be able to fully use our outstanding tax credits when and as expected.
Changes in Brazilian state tax legislation may also have a negative impact on our business and financial results, especially considering the results of the 2022 Brazilian elections, in which various elected or re-elected state governors made campaign promises to pursue greater fiscal discipline and balanced budgets for their respective states. The most negative effects of the pandemic in Brazil have been gradually improving, but Brazilian states still need to address the increase in social policy demands and the reduction in tax revenues caused by the limited application of ICMS on fuel, electricity and telecommunications services. These circumstances, coupled with the amended criteria for collection of IBS, have motivated proposals for increased ICMS taxation in states, such as has been observed in the Brazilian states of Pernambuco, Paraná, Rio de Janeiro and Goiás. State governors may adopt more extreme measures to increase tax revenues for the states. This situation has been further exacerbated by the uncertainties related to the compensation of losses in tax revenues of the states by the federal government, and in particular in the states of Rio de Janeiro, Rio Grande do Sul and Minas Gerais, which are currently subject to the fiscal recovery regime.
Some of these measures, if enacted, may result in increases in our overall tax burden, which may adversely affect our overall financial performance. 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.
The Federal Supreme Court’s decisions in the judgments on topics 881 and 885 may be unfavorable to us and may adversely impact our financial condition.
On February 8, 2023, the STF unanimously ruled that a final decision favorable to companies on taxes collected on a continuous basis will become invalid if the STF subsequently issues a contrary decision.
Topic 881 refers to an extraordinary appeal challenging the limit of res judicata with respect to tax matters, particularly in the case of a taxpayer that has been granted a final decision by lower courts declaring the inexistence of a certain tax obligation, where such tax obligations is thereafter declared constitutional by the STF.
Topic 885 refers to an extraordinary appeal that discusses whether and how the erga omnes decisions of the STF on constitutional controversies may suspend the future effect of a res judicata in tax matters, in cases resolved based on the constitutionality or unconstitutionality of the tax obligation.
We analyzed the subject matter of these decisions involving social contribution on net income. We further analyzed other taxes covered by the definition in the decision rendered and, to date, we have identified no cases with final decisions favorable to us that may be affected by unfavorable decisions in the STF. However, we cannot guarantee that future decisions issued by the STF with respect to tax matters will not have a material adverse effect on our financial condition, results of operations and cash flows.
Risks Relating to Our Common Shares and Our 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, or ADSs, and evidenced by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of our shareholders’ meetings in specified newspapers in Brazil. Holders of our common shares are able to exercise their voting rights by attending a shareholders’ meeting in person or virtually (whenever the shareholders’ meeting is held under a partial or 100% digital format), by means of the distance voting form (boletim de voto a distância) or by 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.
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 Brazilian Law No. 6,404, dated December 15, 1976, as amended, or Brazilian Corporate Law.
Our corporate affairs are governed by our bylaws and Brazilian Corporate 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 Brazilian Corporate 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 non-Brazilian 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, non-Brazilian holders of ADRs or common shares may face greater difficulties in protecting their interests in the case of actions by us or our directors or executive officers than would shareholders of a U.S. corporation.
Judgments of Brazilian courts with respect to our common shares may be payable only in reais.
If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we may not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect (1) on the date of actual payment, (2) on the date on which such judgment is rendered or (3) on the date on which collection or enforcement proceedings are commenced. 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 common shares represented by ADRs.
Holders of ADRs and non-Brazilian holders of our common shares may be unable to exercise preemptive rights and tag-along rights with respect to our common shares underlying the ADSs evidenced by their ADRs.
Holders of ADRs and non-Brazilian holders of our common shares may be unable to exercise the preemptive rights and tag-along rights relating to our common shares (including common shares underlying the ADSs evidenced by their ADRs) unless a registration statement under the U.S. Securities Act of 1933, as amended, or the “Securities Act,” is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, a holder may receive only the net proceeds from the sale of his or her preemptive rights or tag-along rights, or if these rights cannot be sold, they will lapse and the holder will receive no value from them.
Our controlling shareholder may take actions which are not necessarily in our interest or in the interest of our other holders of common shares or ADRs.
In 2023, Marfrig increased its equity stake in us through open market acquisitions of common shares. Marfrig beneficially owns common shares representing 50.08% of our total outstanding common shares and ADRs, based on the reported data included in the Management and Related Parties’ Securities Negotiation Form dated March 2024, as filed with the Brazilian Securities Commission (Comissão de Valores Mobiliários), or the CVM, pursuant to the CVM Resolution No. 44, dated August 23, 2021, or CVM Resolution No. 44. Accordingly, Marfrig controls and is expected to control the outcome of most matters submitted to our shareholders for the foreseeable future, including the election and removal of directors, who in turn appoint executive management, certain amendments of our organizational documents, approval of corporate and management policies, potential mergers or acquisitions, payment of dividends, asset sales and other significant corporate transactions. This control also gives Marfrig the ability to bring matters to a shareholder vote that may not be in the best interest of our other shareholders or stakeholders, or to prevent or postpone certain transactions or business strategies that our other shareholders may view favorably.
Also we are party to certain financing agreements containing default, acceleration, cross-default, cross- acceleration and/or termination provisions in case a change in control is deemed to have occurred, including as a result of Marfrig’s recent increased stake in our share capital. In any such case, we may not be able to timely obtain waivers of such provisions from the respective contractual counterparties. Marfrig also has the ability to dispose of all or any portion of our common shares it holds, which could trigger certain such change of control provisions. Default, acceleration, cross-default, cross-acceleration and/or termination of a relevant number of our financing agreements may adversely affect our financial condition and may materially adversely affect us.
Additionally, Marfrig is a public company with shares listed on the B3, and any development unfavorable to Marfrig, including business, industry social, economic or political developments, which result in a decline on the trading price of Marfrig’s common shares or lead to a deterioration of the value of Marfrig’s brands could have a negative effect on the trading price of our common shares and ADRs and on our financial condition, results of operations, credit ratings or reputation.
See “Item 7. Major Shareholders and Related Party Transactions— A. Major Shareholders” for further information regarding our controlling shareholder and other major 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 their intention to assess income tax on capital gains earned by non-Brazilian residents whose assets are located in Brazil. It is unclear whether ADSs representing our common shares and evidenced by ADRs, which are issued by the ADR depositary outside Brazil, will be deemed to be property located in Brazil for purposes of this law. Accordingly, we cannot determine whether Brazilian tax authorities will attempt to tax any capital gains arising from the sale or other disposition of the ADRs, even when the transaction is consummated outside Brazil between non- Brazilian residents.
Brazilian taxes may apply to a gain realized by a non-Brazilian holder on the disposition of common shares to another non-Brazilian holder.
The gain realized by a non-Brazilian holder on the disposition of common shares to another non-Brazilian holder (other than a disposition of shares held pursuant to Resolution No. 4,373, as amended of the Brazilian National Monetary Council (Conselho Monetário Nacional), or CMN) is generally viewed as being subject to taxation in Brazil. Pursuant to Article 26 of Law No. 10,833/03, Brazilian tax authorities may assess income tax on capital gains earned by non-Brazilian residents in transactions involving assets that are located in Brazil. Under Brazilian law, the rules and applicable rates of the withholding income tax on such gains can vary depending on the domicile of the non-Brazilian holder (if the non-Brazilian holder is or is not resident or domiciled in a tax haven jurisdiction, i.e., a country: (i) that does not impose income tax or whose income tax rate is lower than 20%; or (ii) that does not permit disclosure of the identity of shareholders of entities organized under its jurisdiction), the type of registration of the investment held by the non-Brazilian holder with the Brazilian Central Bank and how the disposition is carried out. Capital gains are subject to withholding income tax at a rate of up to 25%, depending on the specific case applicable.
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 an individual or legal entity 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 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 47% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2023. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 35% of all shares traded on the São Paulo Stock Exchange as of December 31, 2023. These market characteristics may substantially limit the ability of holders of 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 markets, 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 degree, by global economic downturns and related instability in the international financial system, 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.
Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of our 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. See “—Deterioration of general economic and geopolitical conditions, including due to the ongoing military conflicts between Russia and Ukraine and in the Middle East, could have a material adverse effect on our business.”
Additionally, uncertainties related to global economic activity may result in significant volatility in both Brazilian and international financial markets and economic indicators, including exchange rates, interest rates and credit spreads. For example, as a result of heightened volatility generated by the onset of the COVID-19 pandemic and its perceived future impact on global economic activity, the B3’s circuit breaker was triggered eight times in March 2020.
Any significant change in the global financial markets or the Brazilian economy may decrease the interest of investors in assets from Brazil and other countries in which we do business, including our common shares, which may adversely affect the trading price of our common shares and ADRs, or decrease liquidity of our common shares and ADRs generally in addition to hindering our access to the equity capital markets and to financing 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 2023, and we do not expect to be a PFIC for 2024, 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 percentage of our assets (which includes cash) by value (determined on the basis of a quarterly average) 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 (including goodwill and certain intangible 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 2024 or future taxable years due to changes in our income or asset composition.
We may need to raise additional funds in the future and may issue additional common shares or convertible securities, which may result in a dilution of interest in our common shares and ADRs. A dilution of interest in our common shares and ADRs may also occur in the event of our merger, consolidation or any other corporate transaction of similar effect in relation to companies that we may acquire in the future.
We may have to raise additional funds in the future through private or public offerings of shares or other securities convertible into shares issued by us. The funds we raise through the public distribution of shares or securities converted into shares may be obtained with the exclusion of right of first refusal of our existing shareholders, including investors in our ADRs, as provided by the Brazilian Corporate Law, which may dilute the interest of our then-existing investors. In addition, a dilution of interest in our common shares and ADRs may occur in the event of merger, consolidation or any other corporate transaction of similar effect in relation to companies that we may acquire in the future.
Our shareholders may not receive dividends or interest on capital.
Pursuant to our bylaws, we must pay our shareholders at least 25% of our annual net income, calculated and adjusted in accordance with the Brazilian Corporate Law, in the form of dividends or interest on equity. Our net income may be capitalized, used to offset losses or retained in accordance with the Brazilian Corporate Law and, therefore, may not be fully available for the payment of dividends or interest on equity. In addition, the Brazilian Corporate Law allows a company not to make such mandatory distribution of dividends in a given fiscal year, if it is incompatible with its financial situation. For more information, see “Item 10. Additional Information––B. Memorandum and Articles of Association––Description of Share Capital”, “—Allocation of Net Income and Distribution of Dividends” and “—Payment of Dividends and Interest on Shareholders’ Equity”. In the last seven fiscal years, we did not distribute dividends or paid interest on shareholders’ equity. We may only distribute dividends after offsetting the accumulated losses with operating profits or using reserves, in accordance with the Brazilian Corporate Law. In the year ended December 31, 2023, we offset accumulated losses in full with capital reserves in the amount of R$4,375,112 thousand. If we accumulate losses in the future or if for any other reason our net income is not available, holders of our common shares may not receive dividends or interest on shareholders’ equity.
Finally, the income tax exemption on the distribution of dividends and the taxation currently levied on the payment of interest on equity provided for in current legislation may be reviewed and both received and distributed dividends may become taxed and/or, in the case of interest on equity, have its taxation increased in the future, impacting the net amount to be received by our shareholders as profit sharing.
Holders of ADRs who surrender the ADRs and withdraw common shares risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.
Holders of ADRs benefit from the electronic certificate of foreign capital registration obtained by the custodian for our common shares underlying the ADSs in Brazil, which permit the custodian to convert dividends and other distributions with respect to common shares into non-Brazilian currency and remit the proceeds abroad. If holders of ADRs surrender their ADRs and withdraw common shares, they will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of distributions relating to our common shares, unless such holders obtain their own electronic certificate of foreign capital registration, or qualify under Brazilian foreign investment regulations that entitle certain foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration, such holders would not be able to remit non-Brazilian currency abroad. In addition, if such holders do not qualify under the foreign investment regulations, they will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our common shares.
We and the depositary are entitled to amend the deposit agreement and to change the rights of ADR holders under the terms of such agreement, and we may terminate the deposit agreement, without the consent of the ADR holders.
We and the depositary are entitled to amend the deposit agreement and to change the rights of the ADR holders under the terms of such agreement, without the consent of the ADR holders. We and the depositary may agree to amend the deposit agreement in any way we decide is necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADR program, legal developments affecting ADRs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are disadvantageous to ADR holders, ADR holders will only receive 30 days’ advance notice of the amendment, and no consent of the ADR holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility at any time for any reason. For example, terminations may occur when we decide to list our shares on a non-U.S. securities exchange and determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private transaction. If the ADS facility is to be terminated, ADR holders will receive prior notice, but no consent is required from them. In the event that we decide to make an amendment to the deposit agreement that is disadvantageous to ADR holders or terminate the deposit agreement, the ADR holders may choose to sell their ADRs or surrender their ADRs and become direct holders of our underlying common shares, but will have no right to any compensation whatsoever.
| 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 Brazilian Corporate Law and the rules and regulations of the CVM and the B3. Our commercial name is “BRF.”
Our principal executive offices are located at Av. das Nações Unidas, 14,401 – 22nd to 25th Floors, Torre Jequitibá, Condomínio Parque da Cidade, Chácara Santo Antonio, 04730-090, São Paulo, SP, Brazil, and our telephone number at this address is +55-11-2322-5377. 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 us, that file electronically with the SEC. Our internet address is https://www.brf-global.com/. On occasion, we may use our website as a channel of distribution of material company information. Financial and other material information regarding us is routinely posted on and accessible at https://ri.brf-global.com. The information posted on our website or that could be accessed through our website is not an integral part of, or attached to or incorporated by reference into, this annual report.
We were founded as Perdigão by the Brandalise and Ponzoni families in 1934 as Ponzoni, Brandalise e Cia. in the Brazilian 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 and also undertook a series of acquisitions in the poultry and pork processing business and made investments in other businesses.
The company's headquarters are located in the city of Itajaí, in the state of Santa Catarina.
Business combination with Sadia
On September 22, 2009, we concluded the business combination between Sadia S.A. and Perdigão S.A., and Sadia S.A. became our wholly owned subsidiary. On December 31, 2012, we merged Sadia S.A. 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 our current name, BRF S.A.
Investment into TBQ and Acquisition of Banvit – Turkey
In 2017, our subsidiary TBQ Foods GmbH, or TBQ, a joint venture formed by us through our subsidiary BRF Foods GmbH (60% equity interest) with the Qatar Investment Authority, or QIA, (40% equity interest), acquired, through a purchase and sale transaction and subsequent tender offer, an aggregate of 91.71% of the shares issued by Banvit Bandirma Vitaminli Yem Sanayi Anonim Şirketi, or Banvit, which is the largest poultry producer in Turkey, has fully integrated operations and owns one of the most recognized brands in Turkey. The total value of the transaction (including the purchase price paid in connection with the tender offer) was R$1,277,739 thousand. On December 13, 2021, we executed an amendment to TBQ’s joint venture and shareholders’ agreement providing for new terms and conditions for our partnership in TBQ while terminating the put option then available to QIA and granting further alternatives to liquidate its investment in Banvit. As of the date of this annual report, we and QIA continue to hold 60% and 40% of TBQ’s equity interests, respectively, and TBQ continues to hold 91.71% of Banvit’s equity interest.
Other Transactions in 2021, 2022 and 2023
On January 18, 2021, our indirect wholly owned subsidiary Badi Limited acquired, from Hungry Bunny Limited and others, 100% of the capital stock of Joody Al Sharqiya Food Production Factory, a food processing company in Dammam, Saudi Arabia for R$41,620 thousand (SAR29,793 thousand, translated to reais at the exchange rate of R$1.3967 as of January 18, 2021) paid in cash.
On March 9, 2021, we acquired the remaining minority stake in Al Yasra Food K.S.C.C., or BRF AFC, located in Kuwait, through our wholly-owned subsidiary One Foods, representing 25% of BRF AFC’s capital stock, for the amount equivalent to R$238,421 thousand (US$40,828 thousand translated to reais at the exchange rate of R$5.8391 as of March 9, 2021). Following that acquisition, BRF AFC (renamed BRF Kuwait W.L.L.) became our wholly-owned subsidiary.
On May 4, 2021, Nutrinvestment BV and Banvit, companies indirectly controlled by us, sold 100% of their shares in Banvit Foods SRL, a company which produces animal feed and manages an egg hatchery in Romania, to Aaylex System Group S.A., for an amount equivalent to R$132,425 thousand (EUR 20,300 thousand translated to reais at the exchange rate of R$6.5234 as of May 4, 2021). In June 2021, the parties established a price adjustment due to net debt and working capital changes, increasing the purchase price by an amount equivalent to R$13,059 thousand (EUR2,157 thousand translated to reais at the average exchange rate of R$6.0542 as of June 2021), which was fully paid by Aaylex System Group S.A.
On August 2, 2021, our subsidiary BRF Pet S.A., or BRF Pet, acquired 100% of the capital stock of Gewinner Participações Ltda. and 99% of Hercosul International S.R.L. (BRF S.A. holds the remaining 1%), each a company dedicated to the development, production and distribution of dry and wet food for dogs and cats and part of the Hercosul Group, or Hercosul. In addition, on September 1, 2021, BRF Pet acquired 100% of Paraguassu Participações S.A., or Paraguassu, and Affinity Petcare Brasil Participações Ltda., or Affinity, the holders of 100% of the capital stock of Mogiana Alimentos S.A., or Mogiana Alimentos, and, together with Paraguassu and Affinity, the Mogiana Group. Mogiana Alimentos specializes in animal nutrition products for dogs and cats. The aggregate purchase price to be paid in connection with the Hercosul and Mogiana Group transactions is R$1,294,356 thousand, subject to customary purchase price adjustments.
On August 16, 2021, we executed an investment agreement with a subsidiary of AES to incorporate an entity for the joint construction of a wind farm dedicated to self-generation within the Cajuína wind complex, located in the Brazilian state of Rio Grande do Norte, with an installed capacity of 160MW generating 80MW average to be supplied through a 15-year power purchase agreement. On March 14, 2022, we subscribed shares of the incorporated entity, Potengi Holdings S.A., or Potengi. In 2022, we made capital contributions to Potengi in an aggregate amount of R$92,091 thousand. The energy farm complex started operating in 2023 and started supplying energy in January 2024. The estimated joint investment in this project is approximately R$985,000 thousand (R$6,000 thousand/MWp installed), which includes our abovementioned investment in Potengi.
In addition, on September 16, 2021, we executed a power purchase agreement with Intrepid to form a joint venture for the construction of a self-generated solar energy plant in Mauriti and Milagres, in the Brazilian state of Ceará, Brazil, with an installed capacity of 320MWp (megawatt-peak), on average half of which would be sold to us, in accordance with a 15-year power purchase agreement. The solar energy plant is expected to be fully operational by the end of 2025.
On February 4, 2022, we concluded our equity follow-on offering of 270,000,000 common shares in a global offering consisting of (i) an international offering of common shares, including common shares represented by ADSs, outside Brazil and (ii) a concurrent restricted public offering of common shares in Brazil. The international offering included a registered offering in the United States. As a result of this equity follow-on offering, we received net proceeds (after expenses and deducting underwriting commissions) of R$5,275,444 thousand (or US$998,948 thousand, translated to reais at the exchange rate of R$5.2810 as of February 1, 2022).
Also, on October 24, 2022, we announced to the market that we executed a joint-venture agreement with Halal Products Development Company, or HPDC, a wholly-owned subsidiary of the Public Investment Fund, or PIF, that aims to support the development of the Halal industry in Saudi Arabia by fostering innovation and driving growth across the Halal ecosystem. On August 1, 2023, we announced the fulfillment of all conditions precedent to the joint venture under the joint venture agreement. On December 10, 2023, we and PIF incorporated BRF Arabia Holding Company, or BRF Arabia, in Saudi Arabia with an ownership of 70% by us and 30% by HPDC. BRF Arabia is expected to hold assets in the entire chicken production chain in Saudi Arabia and promote the sale of fresh, frozen and processed products. BRF Arabia will have a combined investment of US$500,000 thousand (or R$2,420,650 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), of which (i) US$125,000 thousand (or R$2,928,987 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023) were contributed by us and by HPDC upon the incorporation of the joint venture; and (ii) the remainder will be contributed pursuant to the investment plan to be prepared by BRF Arabia’s shareholders.
In February 2023, we announced our plan for the sale of our pet food operation through a competitive bid. However, in November 2023, our management strategically opted for retaining the business.
Recent Significant changes in our Major Shareholders
In July 2023, we carried out an offering, or the 2023 Equity Offering, of 600,000,000 newly issued common shares, including (i) an offering in Brazil subject to automatic registration (Rito de Registro Automático de Distribuição) pursuant to the CVM rules and regulations, and (i) an international private placement (a) in the United States, in reliance on section 4(a)(2) of the Securities Act, and (b) in other countries outside of Brazil and the United States, in reliance on Regulation S under the Securities Act and exemptions from United States securities registration requirements. As a result of this equity follow-on offering, we received net proceeds (after expenses and deducting underwriting commissions) of R$5,313,241 thousand (or US$1,106,050 thousand, translated to reais at the exchange rate of R$4.8038 as of July 13, 2023).
Between May 2021 and March 2024, Marfrig and its affiliates acquired the beneficial ownership of a significant percentage of our common shares in the open market. Based on the reported data included in the Management and Related Parties’ Securities Negotiation Form dated March 2024, as filed with the CVM pursuant to the CVM Resolution No. 44, Marfrig beneficially owns common shares representing 50.08% of our total outstanding common shares.
See “Item 7. Major Shareholders and Related Party Transactions⸻ A. Major Shareholders.”
Capital Expenditures
The table below sets forth our capital expenditures with respect to operations for the periods indicated:
| | For the year ended December 31, |
| | 2023 | 2022 | 2021 |
| | (in thousands of reais) |
| Property, plant and equipment | 791,817 | 1,452,733 | 1,555,426 |
| Biological assets | 1,457,174 | 1,387,669 | 1,239,746 |
| Intangible assets | 167,601 | 228,734 | 179,632 |
| Total capital expenditures | 2,416,592 | 3,069,136 | 2,974,804 |
Our principal capital expenditures currently in progress include increasing capacity in feed mills, pig slaughter, and by-products meal production, with greater efficiency in animal food conversion and manufacturing processes. Our principal divestitures of property, plant and equipment, biological assets and intangible assets currently in progress include non-industrial real estate.
In 2024, we plan to continue to apply expenditures that enable us to access new markets and improve efficiency of our assets and core operations.
In 2023, we adapted our plants and production processes to certain market qualifications, which included production, flexibilization, and adherence to regulatory requirements, improving food safety and product quality. Capital expenditures were also employed in feed mills, slaughterhouses, and by-products factories to improve process yield through assets revamping and technological upgrade.
In 2022, we resumed our trajectory of investment in demand, efficiency, quality, compliance and people. We continued investments to expand our production capacity and implement projects to automate our production lines. We also invested in operational improvements to increase the yield of processes, raw materials and products, cost optimization and technological efficiency of industrial and corporate processes through the Digital Journey strategy. We also invested in adapting our structures and processes to improve the quality of our products, compliance with standards and legislation, the safety of our operations and our employees at our meat packing plants, feed mills and distribution centers, and in improving cyber security and information security.
In 2021, we focused on pursuing our commitment to maximizing the use of our assets by making investments to help eliminate production constraints and increase overall efficiency.
Our continued efforts in innovation, efficiency and high value-added industrialized products have led to the inauguration of our Seropédica plant, in the Brazilian state of Rio de Janeiro, in July 2021, which was built upon the concept of Industry 4.0 (automation and data exchange in manufacturing). Additionally, we have expanded internationally with strategic investments in Turkey, in December 2021, and Saudi Arabia, in October 2022, in order to enhance our footprint in the region. See “Item 4. Information on the Company— A. History and Development of the Company—Investment into TBQ and Acquisition of Banvit – Turkey” and “Item 4. Information on the Company—A. History and Development of the Company—Other Transactions in 2021, 2022 and 2023.”
Launch of Efficiency Plan
Our Board of Executive Officers is focused on implementing our efficiency plan, or the BRF+ Efficiency Plan, which was established in the third quarter of 2022 with the goal to: (i) conduct in-depth diagnosis of opportunities for improvement; (ii) establish commitments linked to executive compensation; (iii) add new commitments to the 2023 budget; and (iv) systematically monitor the evolution of the plan implementation. We developed several workflows and priorities that have been generating positive results.
Our BRF+ Efficiency Plan includes the following workflows and priorities: (i) costs with animals: improve hatching and reduce feed conversion and mortality rate; (ii) industrial: optimize total yield;
(iii) logistics: improve service levels and reduce cost of service, (iv) Brazil: improve efficiency and productivity and gain market share; (v) International: improve market share and access new markets; (vi) Halal DDP: consolidate market share, expand portfolio of value-added items and expand our offer of Premium Griller (whole poultry) according to local preference; (vii) Losses: reduce complaints and insurance claims and reduce losses in logistics and commercial activities; (viii) Inventory: optimize inventory levels and destock.
In 2023, BRF+ Efficiency Plan generated gains of R$2,163,000 thousand, above the target set for the year. The focus on the consumption of alternative grains and direct producer purchases represented relevant gains in BRF+, while agricultural key performance indicators, such as hatching, feed conversation rate and mortality, reached or surpassed 2019 levels. On the industrial activities, we improved our in-natura yield. Improvements in service level, with the optimization of the cost to serve, positively impacted our customers’ NPS levels, while actions to achieve a greater balance between production and sales resulted in a reduction in first in, first out levels. Increases in export volume resulted in an improvement of our market share and new accreditations contributed to expand our brands’ international presence. In Losses, we managed to reduce numbers by focusing on actions across all steps of our chain. There was also a reduction in inventory levels of finished goods and raw materials.
As part of our annual continuous improvement exercise, we launched the BRF+ 2.0 for 2024, which was developed with a similar format to its predecessor. We defined internal and historical benchmarks and analyzed longer periods than those previously adopted to expand the horizon of potential operational results in different scenarios. In addition, comparisons between units, regions and markets allowed us to identify opportunities for increasing average performance levels. Based on those analyses’ results, our senior leadership defined the targets and commitments for 2024. These commitments were incorporated into our annual budget and will be monitored throughout the year.
BRF S.A. is one of the largest producers of fresh and frozen protein foods in the world in terms of production capacity, according to WattAgNet, with a portfolio of approximately 5,500 stock keeping units, or SKUs, as of December 31, 2023, serving more than 350,000 consumers in more than 120 countries. We operate in a large and growing market supported by positive demographic growth trends. 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. Our processed products include marinated and frozen chicken, Chester® rooster and turkey meats, specialty meats, frozen processed meats, frozen ready meals, portioned products and sliced products, among others. We also sell margarine, butter, cream cheese, sweet specialties, sandwiches, plant-based products, animal feed and pet food. We are the holder of brands such as Sadia, Perdigão, Qualy, Sadia Halal, Banvit, Perdix, Confidence and Hilal, among other regional brands. For the year ended December 31, 2023, we were responsible for 10% of the world’s poultry trade, according to the United States Department of Agriculture, or the USDA.
We operate through a fully integrated value chain, with vast control in all steps of the production process, to deliver solutions from farm to table (i.e., from animal raising to the sale of products to end consumers) with increased efficiency and improved consumer experience.
Our portfolio strategy is focused on creating new, convenient, accessible, healthy and sustainable products for our consumers based on their needs and habits, combining practicality and adaptability to regional culture. We seek to achieve that goal by investing in innovation to increase our offer of high-value-added products, which represented 76.7% of total sales in Brazil in 2023. We believe that our vast portfolio based on high-value-added products is what makes us stand out from our competitors, strengthen our brands and build customer loyalty.
Our strategy also focus on diversification through the operation of complementary business units, such as Ingredients and Pet Food, which foster full integration of our business from farm-to-table. Through innovation, efficiency and sustainability, our independent Ingredients business unit generates high-performance agricultural raw materials to be used by us and our markets and is an important source of business integration, revenues maximization and efficiency. We operate four Pet Food factories distributed across the states of São Paulo, Rio Grande do Sul and Paraná, in Brazil, and Paraguay, producing a broad portfolio of products and brands such as Biofresh, Guabi Natural, Giran Plus, Balance, Three Dogs, Three Cats, PrimoCão, PrimoGato, Faro, Bônos, Apolo and Átila.
We have been a public company since 1980. Our shares have been listed on the Novo Mercado of the São Paulo Stock Exchange as BRFS3 since 2006, and ADRs representing our common shares are traded on the New York Stock Exchange, or “NYSE” (ADR level III).
Operating Segments
We divide our operations in three operating segments: Brazil, International and Other Segments. Each segment is further described below.
Brazil
The Brazil segment accounted for 50.1% of our net sales in 2023. In Brazil, as of December 31, 2023, we operated 38 production facilities, which comprise in the aggregate 31 slaughtering and industrialized products plants, three margarine processing plants (one of which processes exclusively margarine), three soybean crushing plants, four animal feed meal plants and four pet food plants, all of which are located near our raw material suppliers or the main consumer centers. To ensure efficiency, all these industrial plants are located near our raw material suppliers or main consumer centers. See “Item 4. Information on the Company—D. Property, Plant and Equipment—Production.”
We have an advanced logistics system in our domestic market, with a vast distribution network comprised of 53 distribution centers and transit points as of December 31, 2023, five of which are owned by us and 48 of which are leased from third parties. Our distribution network is fully prepared to serve supermarkets, retail stores, wholesale stores, restaurants, and other clients. Our capillarity enables our products to reach Brazilian consumers countrywide. Through our extensive logistics network strategically revolved around the largest consumer markets, comprising a fleet of approximately 5,300 vehicles, we perform approximately 500,000 deliveries per month, serving 95% of Brazilian municipalities. Daily, our fleet travels a distance correspondent to 7 laps on Earth.
We adopt an omnichannel strategy to provide top-notch consumer experience, including the offering of digital platforms focused on the end consumer (Mercato em Casa) and on business-to-business, or B2B, customers (Central BRF), through which we suggest purchase orders to customers based on the characteristics of their point of sale, increasing sale efficiency.
In Brazil, we serve more than 280,000 customers as of December 31, 2023. The growth of our customer base is supported by a combination of strong capillarity and our sales promotion team efforts. Our logistics network operates through traditional trade (sales to local markets and stores), modern trade (national and regional supermarkets) and food service (restaurants and fast food stores) channels, which represented, respectively, 53.4%, 39.2% and 7.4% of our net revenue for 2023. Within the modern trade channel, our sales promoters are present in 73% of all stores in Brazil.
International
The International segment accounted for 44.5% of our net sales in 2023. We serve approximately 70,000 clients in more than 120 countries, including the Gulf Cooperation Council, or GCC, countries, Turkey, China, Japan, Singapore and Chile.
As of December 31, 2023, this operating segment operated five industrial facilities for meat processing. Additionally, this operating segment operated 50 distribution centers and transit points in the Middle East and the Americas as well as commercial offices on four continents.
Our international reach and strong logistics capabilities enable us to be a leading poultry exporter from Brazil to Japan and Singapore and pork exporter from Brazil to the South Cone, Singapore and Vietnam, as well as responsible for approximately 10.0% of total global poultry exports in 2023.
Our Halal business unit operates in Turkey and the GCC countries. We began our operations in the region during the 70’s, with the launch of Sadia brand in the GCC countries, then aired the first television commercial in the region during the 80’s and established our first regional office in Dubai in 2002. In Turkey and in the GCC, value added products accounted for 21.1% and 18.5% of our net sales in 2023, respectively. We have been focusing on the logistics for the region since 2009, with the implementation of an integrated distribution process in Saudi Arabia and in the United Arab Emirates in 2013-2014.
In the GCC countries and Turkey, we also benefit from a robust logistics and distribution capacity comprised of approximately 780 trucks, 46 distribution centers and transit points, which deliver approximately 62,500 tons of products per month to approximately 70,000 customers, as of December 31, 2023.
In 2023, we obtained 66 additional authorizations to export to new markets.
Other Segments
Other Segments accounted for 5.4% of our net sales in 2023. This segment includes complementary businesses such as Ingredients and Pet Food. We operate three plants in Brazil and one in Paraguay exclusively dedicated to pet food. Additionally, we also produce pet food in our facility located in Francisco Beltrão-PR.
Additional Information
A breakdown of our products is as follows, which are sold both in Brazil and to our international customers:
| · | Market Goods, including the following: |
| o | in-natura meat, which we define as frozen whole chicken and cut chicken, as well as frozen pork and turkey; |
| o | halal products for Islamic markets in accordance with the Halal method of animal slaughtering; |
| · | Processed Food Products, including the following: |
| o | marinated, frozen, seasoned whole chicken and cut chicken, roosters (sold under the Chester® brand); |
| o | specialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; |
| o | frozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs; |
| o | frozen prepared meals, such as lasagna, macaroni and cheese, pasta, pies, ready-to-eat meals and pizzas, as well as other frozen foods; |
| o | plant-based products, such as nuggets, pies, vegetables and burgers; |
| o | frozen desserts and cheese bread; and |
| o | spreads, like margarine, cream cheese and pate. |
| · | Other, consisting of soy meal, refined soy flour, animal feed and pet food. |
We are also focused on addressing the impact of climate change on the environment and our business. Among the initiatives that 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 our purchasing decisions, as well as anticipating price movements in the commodity markets. Other initiatives include technological innovations in our animal-raising facilities to improve efficiency and safeguard animal welfare. In addition, we recognize that consumers, investors and other stakeholders are more conscious of social and environmental aspects of the production chain. The commitment assumed by us to achieve Net Zero by 2040, established in 2021, was an important step in the climate agenda. We have identified a set of initiatives on four priority fronts for our value chain, which include fostering low-carbon agriculture, increasing the use of renewable energy and increasing operational efficiency, guaranteeing a deforestation-free direct and indirect supply chain by 2025, and expanding our commitment to grain traceability to 100% of the biomes where we operate. We have adopted the Sustainable Grain Purchase Policy, which establishes guidelines with regard to commitments and principles to be applied in the business, with a focus on incorporating environmental, social and sustainable practices to manage our production chain. We also invested in clean energy in partnerships formed in 2021 with AES and Intrepid, with which we expect will be possible to reach almost 90% of electricity from clean sources in our operations in Brazil. In 2023, we received a monthly average of 14MW of clean energy generated by our wind farm in partnership with AES, and we expect to reach an average of 80MW per year in 2024. The solar energy plant under construction in partnership with Intrepid is expected to be fully operational by the end of 2025. In 2022, we allocated R$92,091 thousand in clean energy projects and in 2023 we planted a renewable forest covering approximately 3.3 thousand hectares. In 2024, we plan to invest R$13,800 thousand in clean energy self-generation projects.
Strategically, we are focused on improving results, consolidating our leadership positions and achieving growth while preserving profitability. This strategy includes: (i) maximizing return on investment of our existing assets; (ii) allocating capital wisely; (iii) optimizing footprint and capturing efficiencies throughout the value chain and (iv) connecting with consumers’ needs and improving our mix of channels and products. In Brazil, we are focused on ensuring progress in commercial execution and providing high quality service. In International, we plan to consolidate leadership and expand our value-added portfolio in the regions covered by the Halal DDP business unit, as well to regain leadership, expedite licenses and qualification requirements and develop business alternatives in the Direct Exports and Asia business unit.
A Fully Integrated and Global Platform
We offer a fully integrated food platform, present in all stages of the complex value chain in which we operate, involving a number of partners selected based on sustainable criteria as well as our integrated farmers and outgrowers, production facilities, distribution centers, and omnichannel sales. Our robust operations include approximately 100,000 employees, 9,000 integrated farmers, 44 industrial plants across the Americas, Africa, Asia, Europe, Eurasia and the Middle East, 103 logistics centers, 120 countries, and sales channels that vary between traditional retail and other innovative omnichannel formats, such as Mercato em Casa, Mercato Sadia, online marketplaces and store-within-a-store concept.
Source: Company
(1) Direct grain suppliers of the Cerrado and Amazon regions.
Efficiency and Cost Control
A pursuit for high-precision cost control culture is increasingly important in order to navigate periods of exacerbated cost pressure and ensure profitability throughout the cycle. An important tool to perpetuate our pursuit for excellence is what we call “SEO” – Sistema de Excelência Operacional (Operational Excellence System). The SEO intends to improve productivity and reduce costs worldwide as it is replicable in several geographies and ties into our digital processes by monitoring crops and estimating timing for potential price increases. Beginning in 2022 we implemented changes to simplify the SEO increasing efficiency and performance through production process indicators. In addition, we sought synergies between the SEO and +Excelência programs looking to integrate logistics processes on SEO and optimize our production chain costs.
Also in 2022, we implemented a management model focused on operational efficiency and profitability that is already bringing positive results. This management model was put in practice through the BRF+ Program, which included robust plans to capture operational gains in the various business areas, routines for our senior leadership to monitor the status of these plans and our main key performance indicators, and a cultural transformation movement to establish principles of simplicity, agility and efficiency. As a result, in 2023 we generated savings across the whole value chain of BRF. By systematically monitoring technical and financial key performance indicators, we reached results 21% above the defined target by the end of the year. The plan continues in 2024 as BRF+ 2.0, which includes new benchmarks, with benchmark analyses covering longer periods and exploring comparisons between units. The new targets for 2024 were approved by our senior leadership and incorporated into our annual budget.
Omnichannel Strategy
We aim to continuously improve our collaborations with brick-and-mortar and digital initiatives, while advancing with our Omnichannel Strategy. With Mercato Sadia and Mercato em Casa, we have made considerable progress integrating customer online and offline experience, which strengthened our digital and physical channels’ direct-to-consumer relationship.
Our sales strategy is focused on keeping consumers as the central point, providing top-notch services and offering a diversified portfolio to customers, including value-added products. We believe that, as a result of our sales strategy, we are able to keep high net promoter score (NPS) for services at our stores. Clients can buy a product online and pick up or have it delivered from a store (either expedite or scheduled delivery), which improves service quality.
In addition to Mercato Sadia and Mercato em Casa, we have partnerships with pure players (i.e., digital business only), which we believe play a key role in leveraging their current number of customers into having exposure to the BRF brands. Ongoing partnerships include iFood, Rappi, Daki, and others.
Additionally, we continue to accelerate our store-within-a-store concept with more than 220 partner stores including large retail chains in Brazil. We believe that this strategy provides our products with greater visibility and demand stimulation.
Besides that, in the B2B market, we are expanding our “Central BRF” platform by increasing our points of sales (convenience retail, restaurants and traditional retail) and extending the reach of our portfolio to a wider array of points of sales.
Environmental, Social and Governance (ESG) – Sustainability in Everything We Do
Our intention to offer quality food in a way that improves people’s lives is connected to our commitment to society and the planet. One of our principles is to ensure the sustainable growth of our chain and we expect our efforts toward sustainability to be stronger by 2030.
We expect that by 2025 approximately 90% of our energy requirement in Brazil will be supplied by clean and renewable sources (wind and solar). For instance, we entered into agreements for the implementation of clean energy projects, including (i) a joint venture for the construction and operation of a self-generated wind energy farm complex with AES, which is currently in operation and we expect will provide an average of 80MW of clean energy per year in 2024, and (ii) a joint initiative with Intrepid to implement a park for self-generation of solar energy in the Brazilian state of Ceará, which we expect will be concluded by the end of 2025. Additionally, in partnership with Banco do Brasil, we have committed to facilitate access to loans for the financing of solar panel installation to integrated farmers with whom we trade. As of December 31, 2023, 57% of the volume of poultry produced came from integrated farms with photovoltaic energy on their properties. We are confident that our producers and partners will remain devoted to this project, and together with Banco do Brasil, we expect to build solar farms to further reduce indirect emission.
As to social aspects, we seek to maintain an open dialogue with society, and expect to keep developing the communities where we operate and encouraging innovation and knowledge. We value education and inclusion, and we expect to keep contributing to the development of communities where we operate. We are one of the largest employers of refugees in Brazil, employing over 7,000 people displaced by war, conflict or persecution.
With respect to governance practices, we seek to maintain a clear link between ESG targets and our variable compensation programs, especially for the senior executives that are driving our long-term strategy. New policies are already in place to ensure that we comply with guidelines regarding human rights, sustainability, including the sustainable purchase of grains moving forward.
We have a sustainability committee that advises our board of directors on topics related to sustainability, monitors the progress of our ESG strategy and the implementation of ESG practices. In 2022, we also established an Internal Net Zero Committee composed of leaders from strategic areas, which monitors the performance of our greenhouse gas targets and the planned projects and initiatives.
We are one of the 27 founders of the Brazilian GHG Protocol Program, and for over a decade, we have been publishing greenhouse gas emissions inventories in the Public Emissions Registry. Over ten years, our inventory has held the Gold Seal by the Brazilian GHG Protocol Program, certifying us with the highest level of the program, providing transparency and reliability in the reported data. In 2023, we made progress in mapping the value chain emissions (scope 3), which includes producers and other suppliers. Through the scope 3 mapping, we identified that the greatest greenhouse gas emissions impact is within the supply chain. Among the main sources are land use in grain production, waste management in animal farming through the integration system, and transportation throughout the chain.
In 2023 we delivered 100% traceability of grains from direct suppliers and 79% traceability of indirect suppliers. We reduced absolute greenhouse gas emissions by 21% in scope 1 (our direct emissions) and scope 2 (indirect emissions from energy acquired for our use) compared to the base year (2019) and achieved an 8% reduction in water consumption per ton produced compared to the base year (2020). This reduction was reported in our last inventory, which was subject to external audit by Instituto Totum.
We invest in actions that reinforce the respect to the environment throughout the production chain. We are a signatory of the Global Pact of U.N. and are also listed in B3 in the corporate sustainability index (ISE). We also started reporting Sustainability Accounting Standards Board - SASB indicators in the Integrated Report of 2021, in the category Food & Beverage - Meat, Poultry & Dairy. We connect our strategic plan to our sustainable development goals by creating an agenda to fight hunger, sanitation, biodiversity and ethics, among others.
Our ESG commitments are highlighted below:
Animal Welfare
| · | Ensure at all times that no antibiotics growth promoter is used in the livestock chain. |
| · | We are strictly committed to zero tolerance to animal mistreatment, whether through abuse or neglect. |
| · | In 2021, we fulfilled our commitments to ensure that (i) 100% of the pigs raised by us do not undergo the clipping or trimming of teeth and (ii) 100% of the swine farmed by us are not identified using procedures involving mutilation. |
| · | In 2022, we fulfilled our commitments to ensure that no male swine be surgically castrated. |
| · | In the first half of 2023, we fulfilled our commitment to have 100% of the poultry in the integration system cage-free globally by 2023. |
| · | Ongoing commitments include: |
| o | Certify by third-party audits 100% of the plants in Animal Welfare by 2025, duly respecting the religious and/or cultural requirements demanded by our customers. |
| o | Only use cage-free chicken eggs in the industrial food process globally by 2025. |
| o | Ensure the use of painkillers in 100% of the tail docking procedures by 2025. |
| o | Use environmental enrichment in 100% of the integration of poultry and swine by 2025. |
| o | To implement collective gestation stalls at 100% of sow breeding facilities. |
Commodities
| · | Ensure 100% traceability of grain acquired from the Brazilian Amazon and the Brazilian Cerrado by 2025 from direct suppliers and 77% traceability from indirect suppliers, which we achieved in 2023. |
Communities
| · | Invest R$400,000 thousand in communities by 2030. |
Food Waste
| · | Promote education to reduce food waste to 1.5 million people globally by 2030. |
Diversity
| · | Achieve 30% of women in top leadership by 2025. We joined the Equity is Priority movement, which is part of the UN Brazil Global Compact Network that reinforces this commitment. |
| · | Public commitment to fight racism in our industry. |
Packaging
| · | Have 100% recyclable, reusable or biodegradable packaging by 2025. |
Greenhouse Gases
| · | In 2021, we achieved our goal with the launch of Brazil’s first carbon-neutral plant-based chicken. In line with our Net Zero strategy and aiming to expand the marketing of plant-based products, in 2023 Sadia’s portfolio expanded to include three carbon-zero items: cauliflower wings, vegetable nuggets, and plant-based protein nuggets. |
| · | Net Zero by 2040. Reduction of greenhouse gas emissions in production processes. In 2023, there has already been a significant reduction in emissions, with a 21% reduction in greenhouse gas emissions in scopes 1 and 2, which refer to direct emissions and purchase and consumption of energy of our operations. We have also been working on reducing scope 3 emissions. |
Natural Resources
| · | Reduce our water consumption indicator by 13% by 2025 – in 2023, we reduced water consumption per produced ton by 8% compared to 2020. |
| · | Increase electricity from clean sources by 50% by 2030. |
Our Products
We are a food company that focuses on the production and sale of branded in-natura and processed food, poultry and pork products as well as pet food.
In-natura
In-natura products include whole and cut poultry, as well as pork and other cuts. Our net sales from in-natura products in the year ended December 31, 2023 was R$25,803,614 thousand, compared to R$26,021,670 thousand in 2022 and R$24,215,273 thousand in 2021. Most of our poultry sales are to our export markets.
As a result of the commercial sanction imposed by the European Union on us, we have significantly reduced our production of turkey since 2018, as the European Union was our main consumer market for this product. For additional information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—More stringent trade barriers in key export markets may negatively affect our results of operations.”
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 Brazilian market, we also produce frozen pork and beef cuts, such as loins and ribs, and whole carcasses. In January 2019, following the closing of the transaction in which Marfrig acquired our beef slaughtering facility in Várzea Grande, we and Marfrig signed a supply agreement under which Marfrig agreed to provide us with finished goods from the Várzea Grande plant.
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. Our net sales of processed foods was R$24,367,209 thousand in 2023, compared to R$24,557,930 thousand in 2022 and R$21,685,117 thousand in 2021. 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, salami, 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 the Chester® brand) and turkeys. We originally developed the Chester® breed of rooster to maximize the yield of breast and leg cuts. In 2004, we sold our rights to the Chester® breed of rooster to Cobb Vantress, a U.S. poultry research and development company engaged in the production, improvement and sale of broiler breeding stock, and we entered into a technology agreement under which Cobb Vantress manages the Chester® breed of rooster. We continue to oversee the production of Chester® roosters in Brazil from hatching to distribution, and we own the trademarks for the Chester® line of products. In 2020, Perdigão launched a new edition of Chester® to celebrate the brand’s 40th anniversary.
Halal Products
We offer poultry products for Islamic markets in accordance with the Halal method of animal slaughtering.
Margarine
We sell margarine under the Qualy, Deline, Claybom and Sofiteli brands and also distribute margarine products of the third-party brand Becel. We maintain our leading market position with the Qualy 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 the Qualy 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, and in 2022 we launched Qualy “Vegê,” the first clean label margarine in Brazil.
Cream cheese and Cheese bread
Qualy, a notable margarine brand in Brazil, expanded its portfolio in 2020 by offering new products such as curd and introducing a line of cheese breads. These products have been available since December 2020 and are consistent with Qualy’s pursuit to become the leading brand in breakfast and afternoon meals, which are relevant markets for the brand.
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. In 2019, we expanded our portfolio in this category by launching new products, such as Mac’n Cheese under the Sadia brand. Inspired by one of the favorite dishes in the United States, the Sadia Mac’n Cheese was launched in October 2019 with three variants: Mac’n Cheese Cheddar, Mac’n Cheese Cheddar with Bacon and Mac’n Cheese Cheddar with Sausage. In 2023, we launched Hot Bowls under the Sadia brand, which ranked second in the most innovative product category of the 2023 Fi Innovation Awards promoted by Fi South America. Hot Bowls are ready-made pasta bowls that come in three flavors: carbonara, mini meat balls and broccoli and bacon. We believe that this product is an innovative product in the Brazilian market, with greater added value to the ready-to-eat meals sub-category. They are made on the same production line as Mac’n Cheese, which optimized our factory’s occupancy. |
| · | French Fries. We sell frozen French fries that are produced and packaged for us by third parties. |
| · | 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. |
Plant-based products
In 2020, we launched Sadia Veg&Tal, our brand for vegan and vegetarian frozen food, including hamburgers, nuggets and pies categories. We also started to expand the Veg&Tal frozen food portfolio in 2020 and launched frozen vegetables, including broccoli, cauliflower, peas and French beans. It is officially the first line of plant-based carbon neutral chickens on the Brazilian market, and the totality of the production chain emission is neutralized through the purchase of carbon credits from forest conservation projects.
In 2023, we have revamped our Veg&Tal portfolio to offer a broader range of products, including through a partnership with PlantPlus Foods, a plant-based food tech joint venture between Marfrig and Archer-Daniels-Midland, or ADM. Moving forward, while PlantPlus Foods will strengthen its presence in the meat-like market, Sadia Veg&Tal will focus on veggie-forward products. The Veg&Tal currently features cauliflower wings, pumpkin&chickpea and broccoli&spinach burgers, and vegetable nuggets. Additionally, we have three zero-carbon items in line with our commitment to becoming Net Zero by 2040. Our Veg&Tal’s cauliflower wings won the 2023 Fi Innovation Awards promoted by Fi South America as the most innovative product (tied with another product).
In November 2023, we launched a 100% plant-based butter under the Becel brand.
Frozen desserts
We have produced and sold Miss Daisy desserts 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, lemon pie, chocolate and vanilla pie, and mousse pie with chocolate shavings, and Dutch pie.
Inspired by seasonal flavors, the Miss Daisy brand also launched three new flavors in 2020: hazelnut cream, guava paste with cream cheese and a limited edition of condensed milk fudge mousse pie with caramelized nuts.
Pet Products
In 2021, we concluded the acquisition of the Mogiana Group and the Hercosul Group, adding strong and traditional brands, robust industrial facilities and expertise in the specialized pet products. Our portfolio includes dry and wet food, snacks in a wide range of standard to super premium brands such as: Biofresh, Guabi Natural, GranPlus, Three Dogs, Three cats, Faro, Primocão, Primogato and our native brand Balance.
In February 2023, we announced our plan for the sale of our pet food operation through a competitive bid. However, in November 2023, our management strategically opted for retaining the business.
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 2023, through Banvit, we produced 9,565 thousand tons of feed and PREMIX in Brazil, compared to 9,088 thousand tons in 2022 and 10,071 thousand tons in 2021, and 726 thousand tons in Turkey, compared to 809 thousand tons in 2022. We also produce a limited range of soy-based products, including soy meal and refined soy flour.
Our 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 pet food and distribute unprocessed and processed products throughout Brazil and in our export markets.
Poultry
At the beginning of the production cycle of broiler chicken (i.e., chicken that is bred and raised specifically for meat production), we purchase day-old grandparent’s breeder chicks from Aviagen of Brazil. We send these birds to our grandparent stock farms, forming our grandparent breeding stock, which will later generate our chicken cuts production. With respect to turkeys, we purchase hatched grandparent’s eggs and then send those eggs to our grandparent stock hatchery, where the eggs are hatched, and the chicks are raised, forming 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, Cobb Vantress. The parents produce the hatchable eggs that result in day-old chicks that are ultimately used in our poultry products. We produced 1,719 billion day-old chicks and 12,774 million day-old turkeys in 2023. In Brazil we produced 1,552 billion day-old chicks and 12,647 million day-old turkeys. In Turkey we produced 167,142 million day-old chicks and we purchased 127 thousand day-old turkeys. We hatch these eggs in our 30 hatcheries (26 broiler, 1 turkey, 3 breeders), with 3 broilers in Turkey and the other hatcheries in Brazil. In March 2023, we deactivated our day-old turkey production operations in Turkey.
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 6,000 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.
As of December 31, 2023, we have a fully automated slaughtering capacity of 35.8 million heads of poultry per week and 277 thousand heads of turkey per week.
Pork
We produce the vast majority of the pork we use in our products. We also purchase pork on the spot market. In 2023, we purchased 2.24% of the total pork slaughtered from the spot market.
Piglet producers either purchase parent breeder hogs produced by us 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 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, 2023, we had a pork slaughtering capacity of 193.1 thousand heads per week.
Processed Foods
We sell a variety of processed foods, some of which contain poultry and pork meat that we produce. We have a total production capacity of 195.3 thousand tons/month across 16 production units in Brazil (Capinzal, Chapecó, Concórdia, Herval D’Oeste, Lajeado, Lucas de Rio Verde, Marau, Paranaguá, Ponta Grossa, Rio Verde, Seropédica, Tatuí, Toledo, Uberlândia, Videira and Vitória de Santo Antão) processing meat products (such as mortadella, franks, sausage, hamburger and breaded meat) and non-meat products (such as lasagna, ready-to-eat meals and pizzas) for both the domestic and international markets. We completed the construction of one plant in Seropédica, in the Brazilian state of Rio de Janeiro, and began operations in July 2021. In Tatuí, in the Brazilian 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 Brazilian state of Paraná, we produce pizzas, pastas, desserts (such as 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.
In 2019, Marfrig acquired our beef slaughtering facility in Várzea Grande, and we and Marfrig signed a supply agreement, which was subsequently amended, under which Marfrig agreed to provide us with finished goods from the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products until August 1, 2024. 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.
We also operate a plant in Turkey, with a total capacity of 93 thousand tons/year, aiming to supply the local Middle Eastern market, Europe and Asia. This plant produces franks, breaded meat, hamburger, mortadella and marinated chicken breast.
In January 2021, we concluded the acquisition of Joody Al Sharqiya Food Production Factory, our first production plant in Saudi Arabia with a total capacity of 3.6 thousand tons/year. In October 2022 we implemented an expansion plan to grow the capacity to 18 thousand tons/year of processed chicken products. We also operate a facility in the United Arab Emirates, in Kezad, with total capacity of 70 thousand tons/year of processed products.
We also sell frozen French fries that are produced and packaged for us by third parties. In addition, we produce soy-based products, such as soy meal and refined soy flour, at our plants in Videira, located in the Brazilian state of Santa Catarina, Dois Vizinhos, in the Brazilian state of Paraná, and in Toledo, also in the Brazilian state of Paraná. In 2020, we launched Sadia Veg&Tal, our brand for vegan and vegetarian frozen food, including hamburgers, nuggets, and pies categories. We also started to expand the Veg&Tal frozen food portfolio in 2020 and launched frozen vegetables, including broccoli, cauliflower, peas and French beans.
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, in the Brazilian state of Paraná, Uberlândia, in the Brazilian state of Minas Gerais and Vitória de Santo Antão, in the Brazilian state of Pernambuco, under the Qualy, Deline and Claybom and Becel brands. 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 and 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 the MAPA may establish additional requirements for halal food production that we must comply with. We are 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 24 feed and PREMIX production plants in Brazil and three feed production plants in Turkey. Additionally, we lease three feed plants from third parties that are 100% dedicated to our operations and one PREMIX production plant that is not 100% dedicated to our operations. The basic raw materials used in animal feed production are corn and soy meal mixed with preservatives and micronutrients. We also purchase 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 Brazilian 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.”
Pet Food
Our pet food portfolio consists of a wide variety of dry and wet food and snacks. All dry and wet food are produced internally, in our production plants. We own four production plants in Brazil (Campinas – Sao Paulo, Bastos – Sao Paulo, Ivoti – Rio Grande do Sul, Francisco Beltrao – Parana) and one production plant in Paraguay, which counts on a high level of industrial automation. The snacks portfolio is 100% produced by and purchased from co-manufacturers.
The basic raw materials used in pet food production are grains (such as corn, wheat and rice), fat (animal or vegetal) and animal proteins (mainly chicken, meat and fish), with the addition of vitamins and minerals premix. For dry pet food, the ingredients are processed through extrusion, and for wet pet food, there is a sterilization process in autoclave equipment. The corn is grown primarily the South and Mid-West regions of Brazil. We buy soy meal from major national producers and the prices of corn, soybeans and soy meal are influenced by international quotes and local currency rates. The animal proteins are bought from BRF and other large producers in Brazil, and their prices are correlated to corn and soybean prices, in addition to meat production.
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.
We have a Chain Monitoring System 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 and requiring supplier adherence to our Suppliers’ Code of Conduct, running approval assessments, establishing internal procurement standards, or the Procurement Standards, following the Policy for Related-Party Transactions, consulting public data and also including certain related obligations in our contracts with suppliers. Our Suppliers’ Code of Conduct, 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. We are focused on a stronger risk management approach, especially with respect to quality, integrity and safety, as well as sustainability and compliance.
The Procurement Standards provide for certain exceptions to the rule requiring suppliers to accept our Suppliers’ Code of Conduct. For example, suppliers are not required to accept our Suppliers’ Code of Conduct if they are a public entity connected to the government or if they have their own code of conduct, in which case they may fill out a short form indicating the website where their code of conduct is available or attaching it to the form. If a supplier refuses to accept our Suppliers’ Code of Conduct and does not fall into the exceptions set forth by the Procurement Standards, the situation will be directed to our internal critical committee for analysis. Our critical committee consists of members from the legal, compliance and procurement departments. If our critical committee is unable to reach a decision, the matter is referred to our executive committee for resolution.
For cases 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 sanctions lists (such as those set forth by IBAMA and by the Brazilian national registry of ineligible and suspended entities (Cadastro Nacional de Empresas Inidôneas e Suspensas, or CEIS), which lists companies that have suffered punishments provided for in the Brazilian Anti-Corruption Law) or our 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 have a standard supplier procurement process across all departments. All our new suppliers are required to accept and follow the Suppliers Code of Conduct and the Policy for Related-Party Transactions, whether in connection with a contract or spot purchase. Suppliers who do not accept the Suppliers Code of Conduct while registering in our system are automatically blocked. During the homologation process, if necessary, the supplier must answer additional questions in connection with the Policy for Related-Party Transactions, the maintenance of certain certificates, adoption of social practices, among other relevant information.
The evaluation and appropriate selection of suppliers and our 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. Our advanced purchasing systems (Ariba SAP and Ariba Network) reinforce our commitment to compliance and transparency in our routine processes by ensuring an accurate evaluation of our contracted services and facilitating robust communication between our suppliers and our systems.
Tracking and auditing are continually monitored through internal and external audits and controls in compliance with the Sarbanes-Oxley Act to ensure that our processes are constantly improving and aligned with our Procurement Standards and codes, compliance and sustainability efforts.
Sales
We sell our products both in the domestic and export markets around the world. We operate in three operating segments, which primarily reflect our geographical structure: Brazil, International (including Halal markets in the Middle East, North Africa, Malaysia and Eastern Europe, as well as Africa, Asia, Europe, Eurasia and the Americas) and Other Segments.
The table below sets forth the percentage of our net sales by category in the Brazilian segment, International segment, and Other Segments for the periods indicated:
| | 2023 | 2022 | 2021 |
| Brazilian Market | | | |
| In-Natura | 11.0% | 11.1% | 12.4% |
| Processed Food Products | 38.4% | 38.8% | 38.7% |
| Other Sales | 0.6% | 0.3% | 0.2% |
| Total Brazilian market | 50.1% | 50.2% | 51.3% |
| International Markets | | | |
| In-Natura | 37.1% | 37.3% | 37.7% |
| Processed Food Products | 7.0% | 6.8% | 6.1% |
| Other Sales | 0.4% | 0.7% | 0.7% |
| Total International markets | 44.5% | 44.8% | 44.5% |
| Other Segments | 5.4% | 5.0% | 4.2% |
| Total | 100% | 100% | 100% |
| | | | |
Seasonality
See “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Seasonality” for information regarding seasonality.
Our Industry
We manage our business to target both the Brazilian market and export 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 affect our production levels and revenues.
Brazil is the fifth largest country in the world in terms of land and has the seventh largest population on the globe. Brazil had an estimated population of approximately 214.8 million people in 2022, projected to grow to 216.3 in 2023, according to the OECD.
Brazil’s real gross domestic product, or GDP, amounted to US$2.2 trillion in 2023, US$1.9 trillion in 2022 and US$1.7 trillion in 2021. Brazilian GDP increased at an average annual rate of 5.1% from 2005 through 2023. Reacting to a weak economic environment in 2015 and 2016, 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 from a 13.75% SELIC interest rate as of December 31, 2016 to 2% as of December 31, 2020. Between 2021 and 2023, reacting to a higher inflation, the Central Bank raised the SELIC interest rate from 2% to 13.75% to control inflationary pressures in the aftermath of COVID-19. Since August 2023, the Central Bank has been lowering the SELIC interest rate once again. As of December 31, 2023 the SELIC interest rate was 11.75% and, as of the date of this annual report, the SELIC interest rate was 10.75%. For the year ended December 31, 2023, the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, inflation index decreased to 4.62% in comparison to 5.79% and 10.06% for the years ended December 31, 2022 and 2021, respectively. The end-of-period exchange rate, as measured by the Brazilian Central Bank, was R$4.84/US$1.00 as of December 31, 2023, R$5.22/US$1.00 as of December 31, 2022 and R$5.58/US$1.00 as of December 31, 2021, with the real appreciating by 7.2% as of December 31, 2023, compared to 2022.
Brazil’s demographic dynamics is expected to stimulate the market, considering the projected population increase and projected GDP per capita CAGR of 5.7% between 2023 and 2028, according to OECD, IBGE and IMF data.
Brazilian Population Projection
(millions of inhabitants)
Source: OECD, March 2024.
Brazil GDP Per Capita Projection
(US$ thousands per inhabitant)
Source: OECD, IBGE, IMF, March 2024.
The unemployment rate and consumer confidence levels also have an impact on consumption levels in Brazil. According to the National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílio) published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the average unemployment rate for 2023 was 7.4%, a decrease of 0.5 percentage points, or p.p., when compared to 7.9% in 2022. The Consumer Confidence Index, or ICC, published by the Fundação Getúlio Vargas, or FGV, for December 2023 was 93.3, an increase of 5.3 p.p. in comparison to 88.0 in December 2022.
According to the Brazilian Association of Supermarkets (Associação Brasileira de Supermercados), or ABRAS, in December 2023, Brazilian household consumption (former supermarket sales) in real terms (adjusted using the IPCA inflation index), increased by 10.73% compared to December 2022. For the full year, supermarket sales in real terms rose by 3.09% in 2023 as compared to 2022.
Brazil is one of the largest meat consumers in the world, with per capita consumption in 2023 of 95.9 kilograms, including beef, chicken and pork products, according to the OECD, an increase of 0.3% compared to 2022. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. Given the meat price decreases and economic recovery, meat consumption increased in 2023 compared to 2022. A slight economic improvement is expected for 2024 in comparison to 2023. An increase in animal protein consumption in Brazil of 5.7% for poultry and 4.3% for pork is expected, considering the period between 2023 and 2028, as these are the preferred sources of animal protein for Brazilians, according to OECD.
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 since the consumption of these foods has been growing substantially among Brazilian consumers (CAGR projected between 2024 and 2028 of 4.87% according to Statista data), with further potential for expansion. The growing size of the ready-to-eat meal market in Brazil is also noticeable in the per capita consumption of ready-to-eat meals and has potential to grow even further. When compared to other countries such as the United States and Japan, which consume 2.5x and 3.7x more than Brazil, consumption in Brazil in at an initial stage.
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, as of November-December of each year:
| · | the Brazilian industrialized food market had revenues of approximately R$34,942 million in 2023 compared to R$33,389 million in 2022; |
| · | the Brazilian frozen food market had revenues of approximately R$8,353 million in 2023 compared to R$7,841 million in 2022; and |
| · | the Brazilian margarine market had revenues of R$7,475 million in 2023 compared to R$7,257 million in 2022. |
These figures do not include BRF data by region or category of products that are not covered by the A.C. Nielsen figures.
Export 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: (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.
The information set forth below in this “Export Markets” subsection is derived from the Brazilian Secretary of Foreign Trade (Secretaria de Comércio Exterior), or SECEX, and relates to Brazilian exports as a whole and not only to exports of our company.
Brazilian chicken exports in the year ended December 31, 2023 totaled 5.0 million tons, with sales amounting to US$9,632,245 thousand (or R$46,632,589 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), compared to exports of 4.7 million tons with sales of US$9,535,096 thousand (or R$49,751,272 thousand, translated to reais at the exchange rate of R$5.2177 as of December 31, 2022) in 2022. In 2023, China has been the main destination for these exports (13.6%), followed by the United Arab Emirates (8.8%), Japan (8.6%) and Saudi Arabia (7.5%).
The volume of Brazilian pork exports in the year ended December 31, 2023 totaled 1.2 million tons, with sales amounting to US$2,799,966 thousand (or R$13,555,476 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), compared to exports of 1.1 million tons with sales of US$2,547,565 thousand (or R$13,292,428 thousand, translated to reais at the exchange rate of R$5.2177 as of December 31, 2022) in 2022. In 2023, the leading importers, China, Hong Kong and Philippines represented 32.0%, 10.4% and 10.4%, respectively, of total exports from Brazil.
Brazilian beef shipments in the year ended December 31, 2023 totaled 2.3 million tons, with sales amounting to US$10,452,590 thousand (or R$50,604,125 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), compared to exports of 2.2 million tons with sales of US$12,882,871 thousand (or R$67,218,954 thousand, translated to reais at the exchange rate of R$5.2177 as of December 31, 2022) in 2022. In 2023, the leading importers, China, the United States and Hong Kong, represented 52.9%, 6.1% and 4.7%, respectively, of total exports from Brazil.
For a discussion on the global economic conditions and further information on the conditions of our export markets and the Brazilian market, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information.”
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 2023 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. USDA indicates a 3.0% increase in the Brazilian poultry production for 2023 when compared to 2022.
According to the USDA, global poultry trade decreased 0.1% in 2023 compared to 2022, mainly due to lower exports from Turkey (which decreased 30.3% in comparison to 2022), Argentina (which decreased 33.0% in comparison to 2022) and Chile (which decreased 47.9% in comparison to 2022). According to the SECEX, exports of poultry parts increased 9.9% in 2023 compared to 2022, representing 73.3% of the total poultry exported volumes. Whole chicken, which represented 21.2% of the total volume, increased 4.5% in 2023 compared to 2022. The main destinations of total exports in 2023 were China, United Arab Emirates, Japan and Saudi Arabia. In comparison to 2022, in 2023 China increased total imports from Brazil by 26.3%, United Arab Emirates decreased total imports from Brazil by 1.0%, Japan increased total imports from Brazil by 3.2% and Saudi Arabia increased total imports from Brazil by 10.8%.
The following tables identify Brazil’s position within the global poultry industry for the years indicated:
| | World Chicken Production |
| Primary Chicken Producers | 2023 | 2022 | 2021 |
| | (in thousands of tons – “ready to cook” equivalent) |
| U.S. | 21,095 | 20,992 | 20,391 |
| Brazil | 14,900 | 14,465 | 14,500 |
| China | 14,300 | 14,300 | 14,700 |
| European Union (27 countries) | 11,150 | 10,870 | 10,840 |
| Russia | 4,875 | 4,800 | 4,600 |
| Mexico | 3,855 | 3,763 | 3,665 |
| Thailand | 3,450 | 3,300 | 3,220 |
| Argentina | 2,330 | 2,319 | 2,290 |
| Turkey | 2,250 | 2,418 | 2,246 |
| Colombia | 1,890 | 1,893 | 1,773 |
| United Kingdom | 1,865 | 1,840 | 1,841 |
| Others | 20,429 | 20,880 | 20,994 |
| Total | 102,389 | 101,840 | 101,060 |
| | | | |
| Primary Chicken Exporters | 2023 | 2022 | 2021 |
| | (in thousands of tons – “ready to cook” equivalent) |
| Brazil | 4,770 | 4,447 | 4,226 |
| U.S. | 3,300 | 3,316 | 3,353 |
| European Union (27 countries) | 1,715 | 1,725 | 1,839 |
| Thailand | 1,105 | 1,021 | 907 |
| China | 545 | 532 | 457 |
| Turkey | 450 | 646 | 559 |
| Others | 1,674 | 1,887 | 1,967 |
| Total | 13,559 | 13,574 | 13,308 |
| Primary Chicken Consumers | 2023 | 2022 | 2021 |
| | (in thousands of tons – “ready to cook” equivalent) |
| U.S. | 17,874 | 17,673 | 17,167 |
| China | 14,535 | 14,401 | 15,031 |
| European Union (27 countries) | 10,180 | 9,849 | 9,648 |
| Brazil | 10,132 | 10,023 | 10,279 |
| Mexico | 4,836 | 4,666 | 4,575 |
| Russia | 4,805 | 4,750 | 4,632 |
| Japan | 2,829 | 2,877 | 2,848 |
| United Kingdom | 2,590 | 2,477 | 2,173 |
| Thailand | 2,325 | 2,310 | 2,280 |
| Argentina | 2,206 | 2,138 | 2,116 |
| Colombia | 1,940 | 1,970 | 1,869 |
| Philippines | 1,920 | 1,919 | 1,781 |
| Peru | 1,880 | 1,882 | 1,846 |
| South Africa | 1,811 | 1,842 | 1,888 |
| Others | 20,068 | 20,496 | 20,453 |
| Total | 99,931 | 99,273 | 98,586 |
Source: USDA, 2023.
Among the poultry consumer market, global consumption growth is largely led by product importing countries. According to the Organization for Economic Co-operation and Development, or OECD, it is estimated that the ten main importing countries, together, will account for 23.7% of the consumption growth in the global market projected for 2022 to 2031:
Consumption Growth Projected in the Top Ten Poultry Importers (2022-2031)
Pork
Brazil was the fourth largest producer and third largest exporter and the sixth largest consumer of pork in the world in 2023, according to the USDA. In 2023, Brazilian production increased by 2.9% when compared to the previous year, according to the USDA. According to the USDA, global production of pork increased by 0.6% and pork consumption increased by 1.1% in 2023. According to the USDA, global pork exports reached 10,007 million tons in 2023. Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. Research and development have 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 SECEX, as of December 2023, China was Brazil’s primary destination for pork followed by Hong Kong, representing 32.0% and 10.4%, respectively, of total Brazilian pork exports in 2023. Chinese imports from Brazil decreased by 15.6%, and Hong Kong imports increased by 29.3%, from 2022 to 2023.
The following tables identify Brazil’s position within the global pork industry for the years indicated:
| | World Pork Production |
| Main Pork Producers | 2023 | 2022 | 2021 |
| | (in thousands of tons – weight in equivalent carcass) |
| China | 56,900 | 55,410 | 47,500 |
| European Union (27 countries) | 20,850 | 22,277 | 23,615 |
| U.S. | 12,391 | 12,252 | 12,560 |
| Brazil | 4,475 | 4,350 | 4,365 |
| Russia | 3,950 | 3,910 | 3,700 |
| Vietnam | 3,511 | 3,313 | 3,084 |
| Others | 13,138 | 13,021 | 13,130 |
| Total | 115,215 | 114,533 | 107,954 |
| Main Pork Exporters | 2023 | 2022 | 2021 |
| | (in thousands of tons – weight in equivalent carcass) |
| European Union (27 countries) | 3,100 | 4,175 | 4,993 |
| U.S. | 3,070 | 2,878 | 3,186 |
| Brazil | 1,414 | 1,319 | 1,321 |
| Canada | 1,300 | 1,416 | 1,483 |
| Chile | 260 | 230 | 268 |
| Mexico | 260 | 285 | 319 |
| Russia | 210 | 170 | 158 |
| United Kingdom | 180 | 261 | 256 |
| Others | 213 | 209 | 236 |
| Total | 10,007 | 10,943 | 12,220 |
| Main Pork Consumers | 2023 | 2022 | 2021 |
| | (in thousands of tons – weight in equivalent carcass) |
| China | 58,733 | 57,434 | 51,724 |
| European Union (27 countries) | 17,855 | 18,223 | 18,720 |
| U.S. | 9,876 | 9,957 | 9,919 |
| Russia | 3,755 | 3,758 | 3,558 |
Vietnam | 3,606 | 3,415 | 3,258 |
| Brazil | 3,063 | 3,033 | 3,047 |
| Others | 17,597 | 17,416 | 17,019 |
| Total | 114,485 | 113,236 | 107,245 |
Source: USDA, 2023.
In the pork market, the main importing countries are still responsible for most of the consumption growth in the global market projected for 2022 to 2031, accounting for 81.8% of consumption growth:
Consumption Growth in the Top Ten Pork Importers (2022-2031)
Beef
Brazil was the second largest producer, the third largest consumer and the largest exporter of beef in the world in 2023, according to the USDA. From 2023 to 2024, the USDA estimates that there will be an increase in global beef production and exports of approximately 0.2% and 1.3%, respectively, while consumption is expected to reduce by 0.2%.
The following tables identify Brazil’s position within the global beef industry for the years indicated:
| | World Beef Production |
| Main Beef Producers | 2023 | 2022 | 2021 |
| | (in thousands of tons – weight in equivalent carcass) |
| U.S. | 12,287 | 12,890 | 12,734 |
| Brazil | 10,560 | 10,350 | 9,750 |
| China | 7,500 | 7,180 | 6,980 |
| European Union (27 countries) | 6,430 | 6,722 | 6,883 |
| India | 4,435 | 4,350 | 4,195 |
| Argentina | 3,300 | 3,140 | 3,000 |
| Mexico | 2,220 | 2,177 | 2,129 |
| Australia | 2,215 | 1,878 | 1,895 |
| Canada | 1,340 | 1,412 | 1,385 |
| Russia | 1,320 | 1,320 | 1,380 |
| Others | 7,767 | 7,862 | 8,030 |
| Total | 59,374 | 59,281 | 58,361 |
| Main Beef Exporters | 2023 | 2022 | 2021 |
| | (in thousands of tons – weight in equivalent carcass) |
| Brazil | 2,898 | 2,898 | 2,320 |
| Australia | 1,570 | 1,238 | 1,291 |
| India | 1,420 | 1,442 | 1,397 |
| U.S. | 1,367 | 1,608 | 1,555 |
| Argentina | 875 | 823 | 735 |
| Others | 3,802 | 4,021 | 4,142 |
| Total | 11,932 | 12,030 | 11,440 |
| | | | |
| Main Beef Consumers | 2023 | 2022 | 2021 |
| | (in thousands of tons – weight in equivalent carcass) |
| U.S. | 12,645 | 12,799 | 12,717 |
| China | 11,057 | 10,662 | 9,987 |
| Brazil | 7,717 | 7,524 | 7,492 |
| European Union (27 countries) | 6,180 | 6,468 | 6,529 |
| India | 3,015 | 2,908 | 2,798 |
| Argentina | 2,428 | 2,324 | 2,273 |
| Others | 14,791 | 14,752 | 15,079 |
| Total | 57,833 | 57,437 | 56,875 |
Source: USDA, 2023.
Global trends favorable to our markets
The expected CAGR for global GDP per capita between 2023 and 2028 of 4.1% suggests a potential increase in income, which tends to boost protein consumption.
World GDP Per Capita Forecast
(US$ thousands per inhabitant)
Source: IMF, October 2023.
With a larger population and higher disposable income, protein consumption is expected to increase significantly over the next few years, with a projected CAGR of total protein volume between 2023 and 2028 of 1.0%. Among the protein sources, poultry and pork, precisely our markets, should stand out, as shown in the chart below:
Growth in Global Protein Consumption (2023-2028 volume CAGR)
Source: OECD, February 2023.
Thus, it can be concluded that the global market for our products is supported by positive trends in demographic growth and that we are well positioned in the sector, both geographically and in terms of product portfolio.
With emphasis on the Halal market, in which we have established a footprint for decades, significant trends in population and GDP growth can be noted, which tend to stimulate protein consumption. In the coming years, significant population and GDP growth is expected in Middle Eastern countries. The evolution of women’s rights and the growing economic openness of countries like Saudi Arabia are positively impacting the consumption habits of the population in the region. Such changes in demographics and in the pattern of consumption should encourage the appeal of practicality in food, increasing the demand for chilled and frozen proteins. The graphs below present the average population projection and the GDP per capita projection of the Middle East, evidencing the expected population increase of 21.9 million and GDP per capita with a CAGR of 2.6% between 2023 and 2028.
Middle East Population Projection
(millions of inhabitants)
Source: IMF, October 2023.
Middle East GDP Per Capita Projection
(US$ thousands per inhabitant)
Source: IMF, October 2023.
Competition
Brazil
Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. We seek to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands we own, such as Sadia and Perdigão.
The processed food sector is more concentrated than the fresh food sector in terms of the number of competitors. In the processed meat and margarine categories, the most recently available percentage of our market share in Brazil in 2023 as reported by A.C. Nielsen shows that we have significant representation in the domestic market, as demonstrated in the graph below, which is separated by retail categories:
Market Share in 2023
Source: A.C. Nielsen Bimonthly Retail – Margarines and Frozen Meals (November/December 2023 survey); Sausages and Cold Cuts (November/December 2023 survey)
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.”
Nationally, our main competitors within the Brazilian market for the processed meat segment is JBS (which owns the brands Seara and Rezende) followed by Aurora. The remainder of the market is represented by several small producers, such as Pif Paf Alimentos S.A. and Frimesa, which have relevant performance in the Southeastern and Southern regions of the country, respectively.
In the margarine market, we maintained a leading position with the Qualy brand by a wide margin. Our main competitor is also JBS, which acquired Bunge’s margarine operation (consequently becoming the owner of the brands Delicia and Primor, as well as their previous brands, such as Doriana), followed by Vigor Alimentos S.A.
In the Brazilian market for in-natura meat (whole poultry, poultry and pork cuts), we face competition from a large number of small producers, some of which operate in the informal economy and offer lower quality products at lower prices. The in-natura meat market is volatile and cyclical (higher costs and protein offer). In order to prevent low margins by competing with small producers and keep a stronger market presence, we have changed our price strategy and developed a high aggregate value and innovative portfolio. Our main focus in the Brazilian market is to meet consumer needs focusing on increasing value-added products which represented more than 76% of our sales in 2023.
The pet industry in Brazil, which has been growing quickly in the last years, is composed of pet food, veterinary medicines and pet general care, which encompasses pet health care and hygiene. The global pet food market size was valued at US$103.3 billion in 2023, and is projected to reach US$139.3 billion by 2030 according to Grand View Research, with Brazil playing a key role in this growth. The country has the second largest population of dogs in the world and is the third largest country in total pet population, which market represents 0.386% of total Brazilian GDP, according to Vetnil, based on indicators from the World Bank and Euromonitor data from 2023.
International
We face significant competition in our international markets, both from Brazilian producers and from producers in other countries. For example, farming livestock cooperatives are increasingly significant competitors in our markets, as they have certain tax advantages, and generally enjoy greater mobility in directing their production to foreign markets at times when exports become more attractive than their respective domestic market. In addition, JBS is one of our direct competitors in the international market that has many of the same competitive advantages that we have over producers in other countries, including natural resources and competitive input costs.
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$23,851,764 thousand in 2023, a decrease of 1.0% (R$24,103,135 thousand) from 2022. In 2023, the variation in the price of chicken protein was mainly influenced by the imbalance between supply and demand at a global level, putting pressure on the sector's margins. The first cases of avian influenza in Brazil also had a negative impact on the prices of Brazilian chicken exports, even though the disease did not affect any commercial farms. Despite these factors, in 2023 we increased our sales volume in the international segment by 10.8% as a result of our strategy of reducing idleness, factory occupancy and a greater number of sales destinations (authorizations), along with the strategy of reducing capital employed, which impacted mostly lower inventories. We obtained 66 new authorizations during the year, which gave us the flexibility to capture market opportunities in a challenging year for the protein sector. Despite the challenging international market environment, we still believe we are one of the largest poultry exporters in the world. In 2023, we accounted for 10% of the world’s poultry trade, according to USDA.
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, 2023, our domestic distribution network consisted of 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 33 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 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 Markets
We export our products mainly through the ports of Itajaí, Navegantes and Itapoá, in the Brazilian state of Santa Catarina. We also export our products through Rio Grande, in the Brazilian state of Rio Grande do Sul and Paranaguá, in the Brazilian state of Paraná. We store our products in refrigerated storages that are owned and operated mainly by third parties located at ports in the Brazilian states of Paraná, Santa Catarina and Rio Grande do Sul. In 2023, we packed 65.3% 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, Chile, China, Japan, Kingdom of Saudi Arabia, Kuwait, Oman, Qatar, Russia, Singapore, South Africa, South Korea, Turkey, United Arab Emirates, Uruguay and Vietnam. 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. Since 2018, the European Union suspension on certain products from Brazilian producers has 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. In June, 2019, we sold 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, to Tyson International Holding Co. We have undertaken, in the share purchase agreement entered into with Tyson International Holding Co., not to do business or otherwise compete in the sale of poultry products for human consumption in certain jurisdictions in Europe, including the European Economic Area (EEA) and the United Kingdom. That non-compete provision lapsed in 2022 and we no longer have any restrictions to sell in Europe. In October 2020, after reaching a commercial agreement with Tyson International Holding Co., we resumed the export of poultry breast cuts to Europe, accelerating our return to the continent. We are awaiting the result of the systemic audit mission by DG Santé (the European Union’s health authority) to the Brazilian health system, which took place at the end of 2023, with the expectation that if the European authorities give a positive assessment, BRF will be able to resume access to the European market. We currently sell only chicken breast and raw material for the pet food industry in the European Union.
The United Kingdom is a country dependent on foreign food, and had problems with supply shortages in 2023, which made its need to import food increasingly relevant. In July 2023, as a result of an audit mission to the Brazilian health system carried out at the end of 2022, the United Kingdom announced the signing of a pre-listing agreement and the end of reinforced controls with Brazil. As a result, in 2023 our industrial units located in Marau-RS and Toledo-PR were authorized to export poultry breast cuts and processed poultry products to the United Kingdom. Additionally, in January 2024, our units in Chapecó-SC, Francisco Beltrão-PR and Capinzal-SC were also authorized to export to the United Kingdom.
Asia. Asia is a highly diverse continent, both in terms of cultural and economic development characteristics, where we serve several countries, from mainland China to the islands in the South Pacific region. In 2022, we closed our local distribution operation in Shanghai, but China was our largest market in 2023. In 2023, Japan was our second largest market in Asia, where our local level of service, coupled with quality standards and product range have made us a preferred supplier of chicken products in the market, according to Datamar. According to the ABPA, in South Korea, we were one of the first Brazilian producers to export pork cut providing new business opportunities. In Singapore, we consolidated the Sadia brand with a diverse portfolio and brand campaigns, maintaining our presence in modern retails in key products categories. Additionally, in Southeast Asia, we expanded to new countries and clients, serving these markets with a diverse portfolio of chicken, pork and processed meat. In addition, the arrangements with Tyson include a removal of the non-compete restrictions in the Thai market by 2024.
Middle East. In the Middle East and Turkey 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 have as well launched new products adjacent of the chicken category, such as Frozen French Fries and Frozen Vegetables. 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 poultry brand in the Gulf Cooperation Council and has the highest preference level within the poultry category based on the weighted market volume size of each country, according to a study made by Ipsos Research, a third-party consulting firm, in 2023. We operate a Halal business focused 100% in the Halal market, which has strong demand in the region. In Turkey, we distribute our products through TBQ Foods GmbH, a joint venture formed with the Qatar Investment Authority in May 2017, which owns a 91.71% equity interest in Banvit. Banvit is the number one brand in Turkey in the chicken category, leading with a preference score of 51% according to a study made by Ipsos in 2023. See “Item 4. Information on the Company—A. History and Development of the Company— Investment into TBQ and Acquisition of Banvit – Turkey.” In 2021, we concluded the acquisition of a food processing plant in Dammam, Saudi Arabia, which reinforced our production capabilities in the region. On December 10, 2023, we and PIF incorporated BRF Arabia Holding Company, or BRF Arabia, in Saudi Arabia with an ownership of 70% by us and 30% by HPDC. BRF Arabia is expected to hold assets in the entire chicken production chain in Saudi Arabia and promote the sale of fresh, frozen and processed products. See “Item 4. Information on the Company—A. History and Development of the Company—Other Transactions in 2021, 2022 and 2023.”
Africa. Our strategy in Africa has focused on unlocking a number of in-market opportunities that fall under the attractive and affordable processed foods category, but also value-added opportunities in key markets. From 2021 to 2023, we focused on strengthening our partnerships in the region, further improving our leadership position in exports of processed foods to the continent. Our approach to exports in Africa targets sales to distributors with the widest possible distribution. The Sadia and Perdix brands 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 and Mauritius through our facilities in Turkey. Going forward, we will continue to carefully consider future growth markets. Furthermore, our next phase of development 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, for example by expanding our portfolio of breaded items in Ghana, Angola and the Democratic Republic of the Congo, which we started in 2020.
Americas and Other Countries. We sell our products in the Americas through direct sales to key distributors. Additionally, in 2023, we continued selling chicken cuts, including breasts and wings, to processing companies in Canada, and processed items to the Caribbean. Additionally, Sadia and Qualy are established brands that enjoy significant market shares in Chile and Uruguay, where we maintain local distribution operations, and in Paraguay, where we operate through consolidated local distributors. An example of our commercial strength in the Americas is our leadership in the margarine segment in Chile with our brand Qualy and in the breaded and ready meals segments in Chile and Uruguay with Sadia.
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 “BRF Ingredients,” “Perdix,” “Perdigão,” “Sadia,” “Confidence,” “Qualy,” “Borella,” “Hilal,” “Balance,” “Onefoods,” “Banvit” 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 Veg&Tal,” Sadia Livre&Lev,” “Sadia Hot Pocket,” “Perdigão Ouro,” “Chester Perdigão,” “Perdigão NaBrasa”, “Kidelli” and “Claybom.” The “Sadia” trademark is registered in various forms in more than 110 countries. In the Middle East, “Sadia” is registered in various forms in countries such as Saudi Arabia, the United Arab Emirates, Egypt, Jordan, Bahrain, Yemen, Iran, Lebanon, Qatar, Kuwait, and Oman, as well as in countries in Europe, the Caucasus, Asia, Africa and Latin America. The Sadia 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.
In addition, we have patents registered in Brazil and more than 10 other countries. We have applied to have the Sadia, Perdigão and Qualy trademarks recognized as “well known trademarks” by the Brazilian National Institute for Industrial Property (Instituto Nacional de Propriedade Industrial – INPI), which granted us that recognition for Sadia and Perdigão in June 2011 (later renewed in September 2018) and for Qualy in August 2019. We have also applied for our corporate trademark “BRF” (and accompanying design) to be registered in over 100 countries in North and South America, Europe, Asia, Africa and the Middle East.
Lastly, we own several internet domain names, registered with the competent authorities, such as “perdigao.com.br,” “claybom.com.br,” “qualy.com.br,” “sadia.com.br,” “brf.com,” “brf-global.com,” “banvit.com,” “banvitas.com,” “deline.com.br” and “kidelli.com.br.”
Marketing
As one of Brazil’s leading food companies our ambition is to expand to new categories and consumption categories with high added value, recognized and desired brands. With this in mind our marketing efforts are based on: (i) adding value to existing categories and diversifying our product lines; (ii) increasing convenience with respect to our in-natura meat 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. We also have an active marketing program using several channels, including television, streaming platforms, video, digital, social media, print and brand experiences.
In the Brazilian market, we sell our products primarily under the Sadia, Perdigão and Qualy master brands. Apart from these major brands, we also sell our products under various Sadia lines, including: Sadia Veg&Tal, Sadia Bio, Sadia Orgânico and Sadia Speciale. Additionally, we sell products under various Perdigão lines, including Chester, Ouro, Na Brasa and Meu Menu.
Sadia is the Brazilian most valuable food brand according to Kantar Insights Division’s Brand Tracking – Food Category, Q4 2023 and holds a leading position in the market. Perdigão leads core volumetric occasions in the Brazilian food market, including in the processed food segment and was the food brand most chosen in Brazil according to Kantar Brand Foodprint. Chester is a Perdigão line well-known for its Christmas products. Sadia and Perdigão, together, hold 47.1% of the food market preference in Brazil, according to Kantar Insights Division’s Brand Tracking – Food Category, Q4 2023.
We sell spreads under the Qualy, Deline, Sofiteli and Claybom brands. We maintain our leading market position with Qualy by pioneering the margarine market for the last 30 years with consumer centric innovations and progressive positioning that generates consumer connection. According to Kantar Insights Division’s Brand Tracking – Margarine Category FY 2023, Qualy is an absolute leader in market share and in brand preference. It is one of the very few iconic margarine brands in Brazil with power share (3% of brands are in this classification, with indexes above 150 in the three dimensions of brand power). Deline, a regional brand focused on the North and Northeast regions of Brazil, was the second best-selling brand in Brazil in 2023 based on sales volume despite being a regional brand, according to Nielsen. Qualy, Deline and Claybom hold together 54.8% of the margarine market preference in Brazil, according to Kantar Insights Division’s Brand Tracking – Margarine Category FY 2023.
Our brands are also amongst the consumers most chosen fast-moving consumer goods, or FMCG, brands: Perdigão holds the third most preferred position (first in food brands), Sadia the sixth (third in food brands) and Qualy 15th according to Kantar Division Worldpanel’s Brand Footprint 2022.
In 2020, the COVID-19 pandemic brought about important changes to our customer’s routines, which have required significant shifts in our brand strategy. Among them, we highlight the development of a website designed as a recipe hub, which registered 4.3 million online visits in 2023, and which featured more than 5,000 different recipes for our customers to help them during their journeys. In addition, the visibility of our brands significantly increased on our commercial partners’ e-commerce platforms as well as on delivery platforms through partnerships. The number of interactions on social networks in 2023 increased by 7.5%, compared to the same period in 2022, and in 2022 increased by 14.3%, compared to the same period in 2021. Even with such growth, we maintained generally positive feedback on these initiatives, with an average NPS of 8.77 in 2023 (7.3% higher than in 2022). We have made important improvements in actively listening to our customers through several consumer and market insight initiatives.
In 2023, Sadia launched Hot Bowls, ready-made pasta bowls that come in three flavors: carbonara, mini meat balls and broccoli and bacon, expanded Na receita Sadia with new cuts of pork in-natura helping customers in day-to-day meals, and improved accessibility to core cold cuts, ham and bologna. In the plant-based business, we have revamped our Veg&Tal portfolio to offer a broader range of products, including through a partnership with PlantPlus Foods, a plant-based food tech joint venture between Marfrig and Archer-Daniels-Midland, or ADM. Moving forward, while PlantPlus Foods will strengthen its presence in the meat-like market, Sadia Veg&Tal will focus on veggie-forward products. The Veg&Tal currently features cauliflower wings, pumpkin&chickpea and broccoli&spinach burgers, and vegetable nuggets. Additionally, we have three zero-carbon items in line with our commitment to becoming Net Zero by 2040.
To help consumers in their daily routine, Sadia continued to improve its recipe platform in television and digital. In the last three years, the brand also continued to sponsor the U.S. National Basketball Association, or NBA and the Lollapalooza music festival. In the second half of 2023, Sadia announced its new brand positioning as a partner that customers can count on in various occasions. Additionally, Sadia introduced a new visual identity, including the launch of the new packaging, and engaged in campaigns exploring the concept of “AI – Inteligência Amorosa” (“AI – Affectuous Intelligence”), through which it showcased the convenience of its portfolio through “Click to Whatsapp”, a chatbot that garnered over 200,000 users in two months. These users were offered a variety of recipes for different consumption occasions. During Christmas, over 40,000 personalized videos were generated to congratulate friends and family, using an innovative format on WhatsApp known as reels dump. Sadia also put together a campaign encouraging people to come together around the Christmas table.
Perdigão launched new cuts of bacon in 2023 and two new pie flavors under the Chester brand specially developed for Christmas time. Perdigão kept its robust always-on brand strategy, both online and offline. The brand started the year with a strong campaign for Mortadela Ouro, celebrating the city of São Paulo’s birthday with Mortadela Week resulting in the Guinness World Record for the largest mortadella subway sandwich in the world. This brand activation was awarded with an Effie Brazil Award in 2023 as the best brand experience product of the year. The brand also continues with Ivete Sangalo, a famous and prize-winning Brazilian singer, as ambassador for the 360 core campaign, entitled “o Sabor da marca de alimentos mais escolhida.” We also expanded the partnership sponsoring the TV show “Masked Singer”. For online broadcast, the brand continued with an online show called “Receitas com Calabresa – temporada 2” that fortified the main core recipes and cooking moments of the brand. The Chester communication campaign “Celebrar junto tem sabor de Perdigão” highlights the moments that we celebrate at Christmas and start slicing the main course, the Chester. Finally, Perdigão announced the sponsorship of the Brazilian Northeast soccer cup in 2024 and the U.S. National Football League, or NFL, in Brazil, which has a strong appeal for sales of Perdigão NaBrasa products line. This sponsorship will enable the presentation of the extensive barbecue portfolio to consumers through game broadcasts, along with an event in São Paulo for sports enthusiasts to watch the Super Bowl together.
In 2023, Qualy maintained the focus on the brand’s latest launch Qualy Vegê, the first 100% plant -based margarine offered in Brazil. In the first half of 2023, Qualy continued it “Cafés da Manhã Inesperados” succesful campaign, and in the second half it launched a new campaign (“Com Qualy é outra Qualydade”) focused on culinary use, which featured celebrities Leo Santana and Suzana Vieira. Qualy has also embraced the sustainability pillar, both by reinforcing the reuse of margarine package and by committing to the recycling of 100% of the Polypropylene material used in its packages (for each sold Qualy pack, another one is recycled). This is viable due to the partnership with “eureciclo” and the review of the process by an independent audit firm. Qualy launched a special edition celebrating 12 thousand tons of plastic recycled and aired a TV and digital campaign starring singer Carlinhos Brown to promote our recycling efforts.
During the year, Deline launched commemorative packages for regional festivities, including the month of Cuscuz (traditional Northeast and North dish), São João do Nordeste (from May to July), and promoted marketing activation in the North and Northeast regions, such as the participation at the Cirio de Nazaré, traditional religious festival in Belém do Pará, state of Pará.
In addition, our Claybom brand launched a new recipe with cream and a revamped “Nhac Girls” campaign adding four new characters with different features designed to represent diversity and inclusion.
Regulation
MAPA, which is the principal governmental authority overseeing our business, is responsible for the regulation and inspection of activities related to animal health, technical components (including labeling) and quality criteria related to the production of animal food products in all industrial sites 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 official veterinaries from SIF/MAPA in our facilities. Their scope of work includes all stages of the production process (including receipt of raw materials, production, labeling and storage) and they can identify noncompliance with applicable rules, with penalties ranging from a warning to a fine and to permanent suspension of business activities.
We are also subject to oversight from a number of other international and Brazilian governmental authorities at the federal, state and municipal levels, which include 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 food safety and nutritional value of products sold across Brazil.
We use technological tools to monitor regulatory changes and ensure compliance. We are also members of several associations in Brazil, such as ABPA (Animal Protein Brazilian Association) and ABIA (Brazilian Association of Food Industries) and actively participate in the drafting of new legislation by the Brazilian congress.
| 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, 2023 |
| BRF GmbH | Austria | Holding | 100.00% |
| BRF Global GmbH | Austria | Holding and Trading | 100.00% |
| BRF Shanghai Trading Co. Ltd. | China | Import, export and commercialization of products | 100.00% |
| Sadia Chile SA | Chile | Import, export and commercialization of products | 100.00% |
| One Foods Holdings Ltd. | UAE | Holding | 100.00% |
| Al Wafi Food Products Factory LLC | UAE | Import, export, industrialization and commercialization of products | 100.00% |
| Badi Ltd. | UAE | Holding | 100.00% |
| Al-Wafi Al-Takamol International for Foods Products | Saudi Arabia | Import and commercialization of products | 100.00% |
| Joody Al Sharqiya Food Production Factory | Saudi Arabia | Import, industrialization and commercialization of products | 100.00% |
| BRF Kuwait Food Management Company WLL | Kuwait | Import, commercialization and distribution of products | 49.00% |
| BRF Foods GmbH | Austria | Industrialization, import and commercialization of products | 100.00% |
| Al Khan Foodstuff LLC | Oman | Import, commercialization and distribution of products | 70.00% |
| TBQ Foods GmbH | Austria | Holding | 60.00% |
| Banvit Bandirma Vitaminli | Turkey | Import, industrialization and commercialization of products | 91.71% |
| Federal Foods LLC | UAE | Import, commercialization and distribution of products | 49.00% |
| Federal Foods Qatar | Qatar | Import, commercialization and distribution of products | 49.00% |
| BRF Pet S.A. | Brazil | Industrialization, commercialization and distribution of feed and nutrients for animals | 100.00% |
| Sadia Uruguay S.A. | Uruguay | Import, export and commercialization of products | 100.00% |
The charts below shows our corporate structure by region.
_______________________
* BRF S.A. has a representative office in Moscow, Russia.
_______________________
* BRF Global GmbH has a representative office in Ho Chi Minh City, Vietnam
_______________________
* BRF Foods GmbH has a branch in Dubai, UAE
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 two regions: Brazil and International (consisting of the Middle East, North Africa, Malaysia, Africa, Asia, Europe, Eurasia and the Americas).
In Brazil, as of December 31, 2023, we operated 38 production facilities, which comprise in the aggregate 31 slaughtering and industrialized products plants, three margarine processing plants (one of which processes exclusively margarine), three soybean crushing plants, four animal feed meal plants and four pet food plants, all of which are located near our raw material suppliers or the main consumer centers. We have an advanced logistics system in our domestic market, with 53 distribution centers and transit points, five of which are owned by us and 48 of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.
In our international market, as of December 31, 2023, we operated five industrial facilities for meat processing and one for pet food. Additionally, we operated 25 distribution centers (14 in the Middle East, seven in Turkey, three in Chile and one in Uruguay), 25 transit points (18 in Turkey and 7 in the Middle East) as well as commercial offices on four continents.
The table below sets forth our production facilities in Brazil and abroad.
Production Plant | State / Country
of Location | Activities |
| Meat Products (Brazil): | | |
| Bugio* | Santa Catarina | Pork slaughtering (partnership) |
| 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 |
| Francisco Beltrão** | Paraná | Poultry 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 |
| Lajeado Minuano* | Rio Grande do Sul | Poultry slaughtering (exclusive partnership) |
| 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 |
| Master | Santa Catarina | Pork slaughtering (partnership) |
| Mineiros | Goiás | Poultry and special poultry (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 |
| Seropédica | Rio de Janeiro | Sausage Factory |
| Tatuí | São Paulo | Industrialized products processing |
| Toledo | Paraná | Pork and poultry slaughtering, industrialized products processing, animal feed and hatcheries |
| Uberlândia** | Minas Gerais | Poultry 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 |
| | | |
| Meat Products (International): | | |
| Abu Dhabi | UAE | Industrialized products processing |
| Damman | Saudi Arabia | Industrialized products processing |
| Bandirma | Turkey | Poultry slaughtering and industrialized products processing |
| Elazig | Turkey | Poultry slaughtering |
| Izmir | Turkey | Poultry slaughtering |
| | | |
| Soybean and Margarine Products (Brazil): | | |
| Paranaguá | Paraná | Margarine processing |
| Uberlândia | Minas Gerais | Margarine processing |
| Vitória de Santo Antão | Pernambuco | Margarine processing |
| Dois Vizinhos** | Paraná | Soybean crushing |
| Videira | Santa Catarina | Soybean crushing |
| Toledo | Paraná | Soybean crushing |
| | | |
| Animal Feed (Brazil): | | |
| Arroio do Meio | Rio Grande do Sul | Animal feed |
| Catanduvas | Santa Catarina | Animal feed |
| Faxinal dos Guedes | Santa Catarina | Animal feed |
| Gaurama | Rio Grande do Sul | Animal feed |
| | | |
| Pet Food/Feed Meal (Brazil): | | |
| Bastos | São Paulo | Feed meal / pet food (Mogiana) |
| Campinas | São Paulo | Feed meal / pet food (Mogiana) |
| Ivoti | Rio Grande do Sul | Feed meal / pet food (Hercosul) |
| Francisco Beltrão | Paraná | Feed meal / pet food |
| | | |
| Pet Food/Feed Meal (Internacional): | | |
| Juan Léon Mallorquín | Paraguay | Feed meal / pet food (Hercosul) |
____________________
* Production facilities owned and operated by third-party producers who produce according to our specifications.
** Operates in accordance with the Halal requirements.
Part of our real estate assets are subject to liens incurred in connection with financing agreements, payment of taxes and lawsuits, as described in note 13 to our consolidated financial statements.
Distribution Centers and Transit Points
We operate 53 distribution centers and transit points throughout Brazil and 50 distribution centers and transit points abroad, as set forth in the tables below.
Category | Location | State | Owned or Leased |
| Brazil | | | |
| Distribution Center | Aparecida de Goiânia | Goiás | Leased |
| Transit Point | Aracaju | Sergipe | Leased |
| Transit Point | Araçabuta | São Paulo | Leased |
| Transit Point | Bauru | São Paulo | Leased |
| Distribution Center | Benevides | Pará | Leased |
| Transit Point | Brasília | Distrito Federal | Leased |
| Transit Point | Campo Grande | Mato Grosso do Sul | Leased |
| Transit Point | Campos dos Coyatazes | Rio de Janeiro | Leased |
| Distribution Center | Duque de Caixas | Rio de Janeiro | Leased |
| Distribution Center | Embu das Artes | São Paulo | Leased |
| Transit Point | Farroupilha | Rio Grande do Sul | Leased |
| Transit Point | Foz do Iguaçu | Paraná | Leased |
| Transit Point | Governador Valadares | Minas Gerais | Leased |
| Transit Point | Guarulhos | São Paulo | Owned |
| Transit Point | Içara | Santa Catarina | Leased |
| Transit Point | Itabuna | Bahia | Leased |
| Distribution Center | Itaitinga | Ceará | Leased |
| Distribution Center | Itajaí | Santa Catarina | Leased |
| Transit Point | Juiz de Fora | Minas Gerais | Leased |
| Distribution Center | Jundiaí | São Paulo | Leased |
| Transit Point | Limeira | São Paulo | Leased |
| Distribution Center | Londrina | Paraná | Leased |
| Transit Point | Maceió | Alagoas | Leased |
| Distribution Center | Manaus | Amazonas | Leased |
| Distribution Center | Marau | Rio Grande do Sul | Owned |
| Transit Point | Maringá | Paraná | Leased |
| Transit Point | Montes Claros | Minas Gerais | Leased |
| Distribution Center | Nova Santa Rita | Rio Grande do Sul | Leased |
| Transit Point | Palhoça | Santa Catarina | Leased |
| Transit Point | Paraíso do Tocantins | Tocantins | Leased |
| Transit Point | Parnamirim | Rio Grande do Norte | Leased |
| Transit Point | Pelotas | Rio Grande do Sul | Leased |
| Transit Point | Ponta Grossa | Paraná | Owned |
| Transit Point | Pouso Alegre | Minas Gerais | Leased |
| Transit Point | Presidente Prudente | São Paulo | Leased |
| Distribution Center | Ribeirão das Neves | Minas Gerais | Leased |
| Transit Point | Ribeirão Preto | São Paulo | Leased |
| Distribution Center | Salvador | Bahia | Leased |
| Transit Point | Santa Maria | Rio Grande do Sul | Leased |
| Transit Point | Santa Rosa | Rio Grande do Sul | Leased |
| Transit Point | Santos | São Paulo | Leased |
| Transit Point | São José de Ribamar | Maranhão | Leased |
| Transit Point | São José dos Campos | São Paulo | Leased |
| Distribution Center | São José dos Pinhais | Paraná | Leased |
| Transit Point | Seabra | Bahia | Leased |
| Transit Point | Sorocaba | São Paulo | Leased |
| Transit Point | Teresina | Piauí | Leased |
| Distribution Center | Uberlândia | Minas Gerais | Owned |
| Distribution Center | Várzea Grande | Mato Grosso | Leased |
| Distribution Center | Viana | Espírito Santo | Leased |
| Distribution Center | Videira | Santa Catarina | Owned |
| Distribution Center | Vitória de Santo Antão | Pernambuco | Leased |
| Distribution Center | Xerém | Rio de Janeiro | Leased |
Category | Location | Country | Owned or Leased |
| International | | | |
| Transit Point | Adana | Turkey | Leased |
| Transit Point | Ankara (Ankara) | Turkey | Leased |
| Transit Point | Ankara (Esenboğa) | Turkey | Leased |
| Transit Point | Antalya | Turkey | Leased |
| Transit Point | Aydin | Turkey | Leased |
| Distribution Center | Bandirma (Hicri Ercili) | Turkey | Leased |
| Distribution Center | Bandirma (Natura) | Turkey | Owned |
| Distribution Center | Bandirma (Fpp) | Turkey | Owned |
| Transit Point | Bursa | Turkey | Leased |
| Transit Point | Edirne | Turkey | Owned |
| Distribution Center | Elaziğ | Turkey | Owned |
| Transit Point | Istanbul (Ayazağa) | Turkey | Leased |
| Transit Point | Istanbul (Kartal) | Turkey | Leased |
| Transit Point | Istanbul (Kadıköy) | Turkey | Owned |
| Transit Point | Istanbul (Hadımköy) | Turkey | Leased |
| Distribution Center | Izmir (Hitit) | Turkey | Leased |
| Distribution Center | Izmir (Irmak) | Turkey | Leased |
| Distribution Center | Izmir (Natura) | Turkey | Owned |
| Transit Point | Izmir (Pınarbaşı) | Turkey | Leased |
| Transit Point | Izmir (Sarnıç) | Turkey | Leased |
| Transit Point | Kayseri | Turkey | Leased |
| Transit Point | Muğla (Fethiye) | Turkey | Leased |
| Transit Point | Muğla (Bodrum) | Turkey | Leased |
| Transit Point | Muğla (Muğla) | Turkey | Leased |
| Transit Point | Samsun | Turkey | Leased |
| | | | |
| Distribution Center | Kuwait City | Kuwait | Leased |
| Transit Point | Al Khamil | Oman | Leased |
| Distribution Center | Muscat | Oman | Leased |
| Transit Point | Nizwa | Oman | Leased |
| Distribution Center | Salalah | Oman | Leased |
| Transit Point | Sohar | Oman | Leased |
| Distribution Center | Doha | Qatar | Leased |
| Distribution Center | Buraidah | Saudi Arabia | Leased |
| Distribution Center | Dammam | Saudi Arabia | Leased |
| Distribution Center | Jeddah | Saudi Arabia | Leased |
| Distribution Center* | Joody | Saudi Arabia | Owned |
| Distribution Center* | Joody | Saudi Arabia | Owned |
| Distribution Center | Khamis (Alshahrani) | Saudi Arabia | Leased |
| Distribution Center | Khamis (Al-Fouad) | Saudi Arabia | Leased |
| Transit Point | Madinah | Saudi Arabia | Leased |
| Distribution Center | Riyadh | Saudi Arabia | Leased |
| Transit Point | Abu Dhabi | United Arab Emirates | Leased |
| Transit Point | Ajman | United Arab Emirates | Leased |
| Transit Point | Al Ain | United Arab Emirates | Leased |
| Distribution Center | Dubai (ADP KLP1) | United Arab Emirates | Leased |
| Distribution Center | Dubai (GSL) | United Arab Emirates | Leased |
| | | | |
| Distribution Center | San Bernardo | Chile | Leased |
| Distribution Center | San Bernardo | Chile | Leased |
| Distribution Center | Quilicura | Chile | Leased |
| Distribution Center | Montevideo | Uruguay | Leased |
____________________
* Partnership ended in April 2024.
Environment
Our activities are subject to strict environmental laws and regulations at the municipal, state and federal levels, which regulate aspects related to water, effluents, solid waste, atmospheric emissions, noise and smells. Our operations are also subject to environmental licensing procedures at the federal, state 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 fines, the suspension of subsidies by public bodies and the temporary or permanent shutdown of commercial activities. Criminal penalties include fines, temporary loss of rights and prison (for individual offenders) and liquidation, temporary loss of rights, fines and community service (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 form of a company will be disregarded if necessary, to guarantee the payment of costs related to environmental damages.
In our Sustainability Policy, our Health, Safety and Environmental Policy, or the SSMA Policy, and the Sustainability Pillar of the BRF Operational Excellence System, or the SEO”, we established guidelines for environmental management based on national and international references. These instruments seek 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 our environmental management. The monitoring of implementation of these standards is undertaken through technical indicators, such as the Environmental Sustainability Index (ISA) applied to agricultural and industrial plants, 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. Since 2021 BRF started reporting Sustainability Accounting Standards Board – SASB indicators in the Integrated Report, in the category Food & Beverage - Meat, Poultry & Dairy.
In 2023, we maintained four plants with ISO 14001 certification, all of which are located in Brazil. These plants were audited by regulatory bodies and undergo regular recertification.
Environmental management is part of our daily operations. Our internal controls are built to improve sustainability in our operations. We also develop projects and take part in initiatives to monitor and control environmental matters, and we focus on developing alternative technologies for the generation and use of sustainable energy and the sustainable use of water. The diversification of the energy matrix through the inclusion of clean energy sources, such as solar and wind, is among our most relevant initiatives to mitigate the possible negative impact of climate change on energy availability. Additionally, we analyzed the water vulnerability of our industrial plants by applying two complementary analytical approaches: an internal operational analysis, related to the operations, and an environmental, external analysis, linking the characteristics of the hydrographic basin where the plant is located to the multiple uses of water in the region.
Ultimately, the indicators from these approaches are integrated, allowing us to quantitatively review the plant’s water vulnerability.
In 2021, we announced the commitment to be Net Zero in greenhouse gas (GHG) emissions by 2040, both in our operations and in our chain. Actions will be implemented to reduce, by 2030, emissions generated by our operations (Scope 1 & 2) and indirect emissions in the chain (Scope 3), in addition to neutralizing residual emissions by 2040. With the advancement of this journey, we joined Science Based Targets (SBTi), a global initiative that provides guidelines for setting science-based targets.
We identified a set of initiatives on four priority fronts in the value chain, which include the Sustainable Purchase of Grains, promotion of Low-Carbon Agriculture, increased use of Renewable Energy and increased Operational Efficiency. Since 2022, in partnership with Fundação Getúlio Vargas, we have developed a carbon pricing methodology, allowing us to capture the financial impact of emissions in projects and helping to assess risks and opportunities on the global scenario, making it possible to evaluate, compare and prioritize strategic investments under this optic. The tool continues to be improved to furnish practical knowledge and provide greater adaptability for a future scenario where this pricing may become mandatory.
We use our partnerships with integrated producers to leverage standards in our activities and those of our suppliers. We provide technical support and guidance to help our integrated producers to properly address environmental issues. Additionally, we have structured a program with our integrated producers to collect animal health waste.
We have professional environmental technicians and have trained them in the main aspects of environmental regulations. Our plants are built in line with the applicable environmental regulations. Our environmental structure is composed of experts, engineers and environmental analysts to assist with the implementation and monitoring of legal requirements and internal guidelines. We also have the support of our environmental legal department for legal assistance.
Despite our efforts to comply with the legislation and the environmental regulations, we have occasionally been required to sign environmental agreements with the Brazilian federal and local government related to the non-compliance with environmental licensing requirements. We are required under these agreements 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. Financial Information—A Consolidated Statements and Other Financial Information—Legal Proceedings—Civil, Commercial and Other Proceedings” for additional information.
Health and Safety
We are committed to the safety of our facilities. All our employees and contractors in Brazil and abroad must follow our safety protocols. In addition, we have hired consulting firms to assist with further strengthening our health and safety structure, including with respect to ammonia cooling systems, fire prevention and other health and safety improvements. Our health and safety policies aim to reduce lost time and non-lost time accidents, occupational illnesses and material loss incidents. With our Health and Safety Management System, we continue to reduce our accident frequency rate, calculated based on the Occupational Safety and Health Administration (“OSHA”) requirements, by 19% in three years (2021 to 2023), which we believe demonstrates our commitment to safety.
Insurance Coverage
We purchase insurance to cover our plant assets, equipment and inventory. Our insurance coverage includes comprehensive general liability insurance coverage for operations, executives and employer’s liability, products liability 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.
| item | 4A UNRESOLVED STAFF COMMENTS |
None.
| Item | 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
Overview
BRF S.A. is one of the largest producers of fresh and frozen protein foods in the world in terms of production capacity, according to WattAgNet, with a portfolio of approximately 5,500 stock keeping units, or SKUs, as of December 31, 2023, serving more than 350,000 consumers in more than 120 countries. We operate in a large and growing market supported by positive demographic growth trends. 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. Our processed products include marinated and frozen chicken, Chester® rooster and turkey meats, specialty meats, frozen processed meats, frozen ready meals, portioned products and sliced products, among others. We also sell margarine, butter, cream cheese, sweet specialties, sandwiches, plant-based products, animal feed and pet food. We are the holder of brands such as Sadia, Perdigão, Qualy, Sadia Halal, Banvit, Perdix, Confidence and Hilal, among other regional brands. For the year ended December 31, 2023, we were responsible for 10% of the world’s poultry trade, according to the United States Department of Agriculture, or the USDA.
We operate through a fully integrated value chain, with vast control in all steps of the production process, to deliver solutions from farm to table (i.e., from animal raising to the sale of products to end consumers) with increased efficiency and improved consumer experience.
Our portfolio strategy is focused on creating new, convenient, accessible, healthy and sustainable products for our consumers based on their needs and habits, combining practicality and adaptability to regional culture. We seek to achieve that goal by investing in innovation to increase our offer of high-value-added products, which represented 76.7% of total sales in Brazil in 2023. We believe that our vast portfolio based on high-value-added products is what makes us stand out from our competitors, strengthen our brands and build customer loyalty.
Our strategy also focus on diversification through the operation of complementary business units, such as Ingredients and Pet Food, which foster full integration of our business from farm-to-table. Through innovation, efficiency and sustainability, our independent Ingredients business unit generates high-performance agricultural raw materials to be used by us and our markets and is an important source of business integration, revenues maximization and efficiency. We operate four Pet Food factories distributed across the states of São Paulo, Rio Grande do Sul and Paraná, in Brazil, and Paraguay, producing a broad portfolio of products and brands such as Biofresh, Guabi Natural, Giran Plus, Balance, Three Dogs, Three Cats, PrimoCão, PrimoGato, Faro, Bônos, Apolo and Átila.
We have been a public company since 1980. Our shares have been listed on the Novo Mercado of the São Paulo Stock Exchange as BRFS3 since 2006, and ADRs representing our common shares are traded on the New York Stock Exchange, or “NYSE” (ADR level III).
Operating Segments
We divide our operations in three operating segments: Brazil, International and Other Segments. Each segment is further described below.
Brazil
The Brazil segment accounted for 50.1% of our net sales in 2023. In Brazil, as of December 31, 2023, we operated 38 production facilities, which comprise in the aggregate 31 slaughtering and industrialized products plants, three margarine processing plants (one of which processes exclusively margarine), three soybean crushing plants, four animal feed meal plants and four pet food plants, all of which are located near our raw material suppliers or the main consumer centers. To ensure efficiency, all these industrial plants are located near our raw material suppliers or main consumer centers. See “Item 4. Information on the Company—D. Property, Plant and Equipment—Production.”
We have an advanced logistics system in our domestic market, with a vast distribution network comprised of 53 distribution centers and transit points as of December 31, 2023, five of which are owned by us and 48 of which are leased from third parties. Our distribution network is fully prepared to serve supermarkets, retail stores, wholesale stores, restaurants, and other clients. Our capillarity enables our products to reach Brazilian consumers countrywide. Through our extensive logistics network strategically revolved around the largest consumer markets, comprising a fleet of approximately 5,300 vehicles, we perform approximately 500,000 deliveries per month, serving 95% of Brazilian municipalities. Daily, our fleet travels a distance correspondent to 7 laps on Earth.
We adopt an omnichannel strategy to provide top-notch consumer experience, including the offering of digital platforms focused on the end consumer (Mercato em Casa) and on business-to-business, or B2B, customers (Central BRF), through which we suggest purchase orders to customers based on the characteristics of their point of sale, increasing sale efficiency.
In Brazil, we serve more than 280,000 customers as of December 31, 2023. The growth of our customer base is supported by a combination of strong capillarity and our sales promotion team efforts. Our logistics network operates through traditional trade (sales to local markets and stores), modern trade (national and regional supermarkets) and food service (restaurants and fast food stores) channels, which represented, respectively, 53.4%, 39.2% and 7.4% of our net revenue for 2023. Within the modern trade channel, our sales promoters are present in 73% of all stores in Brazil.
International
The International segment accounted for 44.5% of our net sales in 2023. We serve approximately 70,000 clients in more than 120 countries, including the Gulf Cooperation Council, or GCC, countries, Turkey, China, Japan, Singapore and Chile.
As of December 31, 2023, this operating segment operated five industrial facilities for meat processing. Additionally, this operating segment operated 50 distribution centers and transit points in the Middle East and the Americas as well as commercial offices on four continents.
Our international reach and strong logistics capabilities enable us to be a leading poultry exporter from Brazil to Japan and Singapore and pork exporter from Brazil to the South Cone, Singapore and Vietnam, as well as responsible for approximately 10.0% of total global poultry exports in 2023.
Our Halal business unit operates in Turkey and the GCC countries. We began our operations in the region during the 70’s, with the launch of Sadia brand in the GCC countries, then aired the first television commercial in the region during the 80’s and established our first regional office in Dubai in 2002. In Turkey and in the GCC, value added products accounted for 21.1% and 18.5% of our net sales in 2023, respectively. We have been focusing on the logistics for the region since 2009, with the implementation of an integrated distribution process in Saudi Arabia and in the United Arab Emirates in 2013-2014.
In the GCC countries and Turkey, we also benefit from a robust logistics and distribution capacity comprised of approximately 780 trucks, 46 distribution centers and transit points, which deliver approximately 62,500 tons of products per month to approximately 70,000 customers, as of December 31, 2023.
In 2023, we obtained 66 additional authorizations to export to new markets.
Other Segments
Other Segments accounted for 5.4% of our net sales in 2023. This segment includes complementary businesses such as Ingredients and Pet Food. We operate three plants in Brazil and one in Paraguay exclusively dedicated to pet food. Additionally, we also produce pet food in our facility located in Francisco Beltrão-PR.
Additional Information
A breakdown of our products is as follows, which are sold both in Brazil and to our international customers:
| · | Market Goods, including the following: |
| o | in-natura meat, which we define as frozen whole chicken and cut chicken, as well as frozen pork and turkey; |
| o | halal products for Islamic markets in accordance with the Halal method of animal slaughtering; |
| · | Processed Food Products, including the following: |
| o | marinated, frozen, seasoned whole chicken and cut chicken, roosters (sold under the Chester® brand); |
| o | specialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; |
| o | frozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs; |
| o | frozen prepared meals, such as lasagna, macaroni and cheese, pasta, pies, ready-to-eat meals and pizzas, as well as other frozen foods; |
| o | plant-based products, such as nuggets, pies, vegetables and burgers; |
| o | frozen desserts and cheese bread; and |
| o | spreads, like margarine, cream cheese and pate. |
| · | Other, consisting of soy meal, refined soy flour, animal feed and pet food. |
We are also focused on addressing the impact of climate change on the environment and our business. Among the initiatives that 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 our purchasing decisions, as well as anticipating price movements in the commodity markets. Other initiatives include technological innovations in our animal-raising facilities to improve efficiency and safeguard animal welfare. In addition, we recognize that consumers, investors and other stakeholders are more conscious of social and environmental aspects of the production chain. The commitment assumed by us to achieve Net Zero by 2040, established in 2021, was an important step in the climate agenda. We have identified a set of initiatives on four priority fronts for our value chain, which include fostering low-carbon agriculture, increasing the use of renewable energy and increasing operational efficiency, guaranteeing a deforestation-free direct and indirect supply chain by 2025, and expanding our commitment to grain traceability to 100% of the biomes where we operate. We have adopted the Sustainable Grain Purchase Policy, which establishes guidelines with regard to commitments and principles to be applied in the business, with a focus on incorporating environmental, social and sustainable practices to manage our production chain. We also invested in clean energy in partnerships formed in 2021 with AES and Intrepid, with which we expect will be possible to reach almost 90% of electricity from clean sources in our operations in Brazil. In 2023, we received a monthly average of 14MW of clean energy generated by our wind farm in partnership with AES, and we expect to reach an average of 80MW per year in 2024. The solar energy plant under construction in partnership with Intrepid is expected to be fully operational by the end of 2025. In 2022, we allocated R$92,091 thousand in clean energy projects and in 2023 we planted a renewable forest covering approximately 3.3 thousand hectares. In 2024, we plan to invest R$13,800 thousand in clean energy self-generation projects.
Strategically, we are focused on improving results, consolidating our leadership positions and achieving growth while preserving profitability. This strategy includes: (i) maximizing return on investment of our existing assets; (ii) allocating capital wisely; (iii) optimizing footprint and capturing efficiencies throughout the value chain and (iv) connecting with consumers’ needs and improving our mix of channels and products. In Brazil, we are focused on ensuring progress in commercial execution and providing high quality service. In International, we plan to consolidate leadership and expand our value-added portfolio in the regions covered by the Halal DDP business unit, as well to regain leadership, expedite licenses and qualification requirements and develop business alternatives in the Direct Exports and Asia business unit.
Principal Factors Affecting Our Results of Operations
Our operating results, financial condition and liquidity have been and will continue to be influenced by a broad range of factors, including:
| · | economic conditions in Brazil and globally; |
| · | the effect of trade barriers and other restrictions on imports; |
| · | disruptions in consumption and trade patterns, supply chains and production processes, including as a result of the coronavirus (COVID-19 virus) pandemic; |
| · | concerns over African swine fever, avian influenza and other diseases of human and animal origin; |
| · | sensitivity of the domestic market to changes in global demand, including the impact of decisions by our main Brazilian competitors and temporary increases in supply from producers in other countries; |
| · | changes in commodity prices; |
| · | fluctuations in exchange rates and inflation; |
| · | freight costs and volume. |
We present a more detailed description of each of these factors below.
Brazilian and Global Economic Conditions
Brazilian inflation rates, as measured by the IPCA, published by the IBGE, decreased to 4.62% accumulated over the last twelve months prior to December 31, 2023, from 5.79% in 2022 and 10.06% in 2021. Price increases generally reduce consumers’ purchasing power, particularly among the lower income class, and ultimately limit consumption.
The Brazilian labor market registered an average unemployment rate of 7.4% in 2023, according to the IBGE’s National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílios, or “PNAD”), which represents an improvement when compared to the rates of 7.9% in 2022 and 11.1% in 2021. Additionally, after decreasing to 75.5 points in 2021, Brazilian consumer confidence increased to 88.0 points in December 2022 and further increased to 93.3 in December 2023, according to the Consumer Confidence Index, or ICC, published of Fundação Getúlio Vargas (FGV).
Real GDP in Brazil increased at an average annual rate of 5.1% from 2005 through 2023. Economic activity in Brazil recovered in 2021, 2022 and 2023, with the real GDP increasing 4.6%, 2.9% and 2.9% year-on-year, respectively. Between 2021 and 2023, reacting to a higher inflation, the Brazilian Central Bank raised the SELIC interest rate from 2% to 13.75% to control inflationary pressures in the aftermath of COVID-19. Since August 2023, the Central Bank has been lowering the SELIC interest rate once again. As of December 31, 2023 the SELIC interest rate was 11.75% and, as of the date of this annual report, the SELIC interest rate was 10.75%.
The Brazilian real appreciated 7.2% against the U.S. dollar in 2023, to R$4.84 per US$1.00 in December 31, 2023 from R$5.22 per US$1.00 in December 31, 2022.
For additional information on risks related to the Brazilian and global economic conditions, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry— Deterioration of general economic and geopolitical conditions, including due to the ongoing military conflicts between Russia and Ukraine and in the Middle East, could have a material adverse effect on our business” and “Item 3. Key Information—D. Risk Factors—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 ADRs.
For a discussion on the global economic conditions and further information on the conditions on our export markets and the Brazilian market, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information.”
Effects of Trade and Other Barriers
Global demand for Brazilian poultry and pork products is significantly affected by trade barriers, including: (i) tariff barriers, which ultimately protect certain domestic markets; and (ii) non-tariff barriers, mainly including import quotas, sanitary barriers 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. We continuously monitor trade barriers and other import restrictions, either directly or through specialized consultancy firms, in the global poultry, pork and beef markets, since these restrictions significantly affect the demand for our products and the levels of our exports. For more information about risks relating to trade barriers, see “Item 3. Key Information—D. Risks Factors Risks—Relating to Our Business and Industry—More stringent trade barriers in key export markets may negatively affect our results of operations.” Certain examples of these barriers are described below.
Tariff barriers
The EU (since 2007) and Russia (since 2012) have protected their meat industries by applying import quotas and high tariffs 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 2020, the South African government announced increases in import tariffs, applied to imports of bone-in (from 37% to 62%) and boneless (from 12% to 42%) chicken in South Africa, which had a negative impact on our competitiveness and profitability in the country. In February 2021, the South African Government announced the beginning of an anti-dumping investigation against certain Brazilian poultry exporters (we are not being investigated), for frozen bone-in chicken. In December 2021, the decision was published in the local official gazette on the provisional anti-dumping tariffs to be enforced immediately in South Africa (bone-in chicken). The South African government imposed a 265% provisional tariff for companies that did not file for an individual defense, which was our case. On August 1, 2022 the dispute settlement system of the existing bilateral agreement with the Southern African Customs Union (SACU) decided in favor of the European Union on a dispute against South Africa over a safeguard measure that included an extra import tariff for frozen chicken of 35.3%. After this decision, the South African government decided to suspend the application of the import tariffs under the anti-dumping investigation affecting Brazilian exporters, including us, for a period of 12 months. In August 2023, South Africa restated the antidumping tariffs, which have been applied to bone-in cuts.
In December 2016, Saudi Arabia increased its import tariff for poultry meat from 5% to 20%, which was followed, in 2020, by an increase in VAT applicable to poultry and poultry parts, from 5% to 15%.
In August 2017, the Chinese government initiated an antidumping investigation in connection with Brazilian exports of whole chicken and chicken parts, including our exports. In the 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.
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 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 imports of poultry and beef. As part of the negotiations surrounding its accession to the WTO, Russia made some changes to its quota system in 2013. It abolished its quotas for pork on January 1, 2020. As a result, imports of pork are subject to a 25% flat import tariff.
On November 23, 2021, the Russian federal service for veterinary and phytosanitary surveillance approved the export to Russia from 4 out of 9 of our pork plants from Brazil. The Brazilian Ministry of Agriculture announced Russian plans to set a duty-free import quota for up to 100,000 tons of pork meat to be imported in the first half of 2022, along with 200,000 ton duty-free import quota for beef, in order to boost domestic supply. In December 2023, the Russian government renewed a quota of 364 kt for poultry meat and, in addition, a quota of 140 kt for chicken meat imports by processors. The intra-quota tariff is zero, while the extra-quota tariff is 65%. For poultry meat positions not covered by quotas, the import tax is 25%.
Our historical exposure to Russia has been limited to frozen chicken, frozen pork and pet food, representing less than 0.4% of our global revenues in the year ended December 31, 2023. See “Item 3. Key Information—D. Risks Factors— Risks Relating to Our Business and Industry—Deterioration of general economic and geopolitical conditions, including due to the ongoing military conflicts between Russia and Ukraine and in the Middle East, could have a material adverse effect on our business.” for further information regarding the impact of the ongoing war between Russia and Ukraine in our business.
In December 2017, Mexico renewed its import poultry meat quota of 300,000 tons, which expired in October 2019. No subsequent negotiations have taken place since the expiration. As a result, during 2020, we were unable to export poultry meat to the Mexican market due to the absence of import quotas. In September 2021, the Mexican government announced an additional quota of 30,000 tons of exports of chicken from Brazil. In May 2022, Mexico removed tariffs and quotas applied on poultry meat imports. Since then, this measure has been renewed annually. This renewal is not automatic, but rather depends on the Mexican government’s decision.
Additionally, the Saudi Arabian government has been adopting import licenses to control the volume of imports, and requires the issuance of an import permit for poultry, its products, eggs and other animal products. The import license requirements have not yet been fully implemented, and we do not know if the Saudi government will use this tool as a trade barrier. We have incurred, and expect to incur, additional costs in connection with these requirements for exporting to Saudi Arabia.
In June 2021, over 12 companies, including us, were invited to attend a meeting with the undersecretary of the Oman Ministry of Agriculture. In the meeting we were informed about a quota program which the Oman government is planning to implement to protect local production. According to this program, they will decrease 10% from the total import of whole poultry of each company that export whole poultry to their country. The Oman Ministry of Agriculture sent a communication to all companies confirming the implementation of this program as of January 1, 2022. The 10% will be calculated based on an average of imports over the past 3 years.
Sanitary barriers
Despite progress in trade negotiations, several major markets are not yet open to Brazilian meat products due to sanitary barriers, including the European Union and Colombia for pork, and Taiwan and Panama for chicken.
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, in the Brazilian state of Goiás, Carambeí, in the Brazilian state of Paraná and Mineiros, in the Brazilian state of Goiás 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 need to direct excess production capacity resulting from such suspension to other markets, which may not occur at similar prices or margins.
In 2020, China’s General Customs Administration, or GACC, suspended the authorization for chicken and pork exports from two BRF plants, located in Dourados (SIF 18) and Lajeado (SIF 3975). The suspension was due to alleged concerns over COVID-19 in Brazil. These two plants had their suspensions reversed by the Chinese authorities later in 2020, and they received clearance to resume exports. On August 3, 2021, we became aware through a publication on the website of the GACC of the suspension of the export to China of pork meat from our Lucas do Rio Verde-MT pork plant as of that date. The alleged reason was the malfunctioning of the refrigerating system of one single pork meat container, which was later demonstrated through the transporter’s system log to be the transporter’s sole responsibility and fault. On December 16, 2021, we were also informed by MAPA and GACC of the suspension of the export to China of poultry meat from Marau-RS under the allegation of the finding of content improper for human consumption in a batch of poultry feet. On March 4, 2022, we were informed by GACC that it was suspending, as of March 5, 2022, the export to China of poultry meat from our Lucas do Rio Verde-MT plant as well. The alleged reason for this suspension were certain nonconformities identified during a videoconference audit executed by GACC, such as the occurrences of COVID-19 infections among our employees that were not disclosed to it and the lack of disinfection tank and detections of salmonella above the maximum limit in the reception of live poultry and in the processing of poultry products. On March 24, 2023, we received authorization from GACC to resume the export to China of poultry meat from Marau, and on May 16, 2023, the export of pork and poultry meat from our Lucas do Rio Verde-MT plant.
Further, on May 6, 2021, the Saudi Arabian Food and Drug Authority (SFDA) notified the WTO Committee on Sanitary and Phytosanitary Measures with respect to a change of the regulation for expiration dates, consisting of a reduction of the shelf-life of in-natura frozen chicken from 1 year to 3 months from the date of slaughter. In March 2021, the SFDA started a reinforced control system on imported meat, resulting in up to 3 months delays in products clearance at WTO ports and thus negatively affecting our business results. However, the SFDA withdrew the implementation of this measure, but there is no assurance that this will not be reinstated in the future.
Technical barriers
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 non-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. We, along with other Brazilian companies, were therefore required to migrate our 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 our plants. One of our plants (Lajeado, in the Brazilian state of Rio Grande do Sul) which 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. We also 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.
In 2020, Saudi Arabia continued its practice of creating import barriers, such as by suspending imports from the Francisco Beltrão (SIF 2518) and Dois Vizinhos (SIF 1985) plants in February 2020 without providing technical justifications, and increasing the costs of Halal certification by requiring accreditation at the SFDA Halal Center. Saudi Arabia also imposed an informal import ban in 2020 against products originating from Turkey, which affected our subsidiary Banvit’s exports. In 2021, the country suspended other 11 Brazilian plants, but none of them pertains to us. In March 2022, some of these banned companies were approved to export chicken cuts to Saudi Arabia again.
In 2020, the Indonesian government appealed a WTO decision in a case filed by the Brazilian government against chicken import restrictions imposed by Indonesia. The WTO’s appellate body’s activities are suspended waiting the appointment of judges to the appellate body. As a result, we are unable to estimate when this case may be resolved. Since 2020, we have also observed increased efforts in Malaysia in enforcement activities concerning the Halal certificate regulations, resulting in increased difficulty in fulfilling all the requirements. Although, as of the date of this annual report, we have been able to overcome these difficulties for cargo release, we anticipate that this trend may continue in Malaysia, with the imposition of trade barriers.
Angola also imposed certain controls over the issuance of import licenses in 2020 as a way of reducing imports. Angola is facing a foreign currency shortage, mainly U.S. dollars, which has impacted their import volumes. Additionally, also in 2020, Iraq imposed technical barriers by means of a ban on importing poultry parts. In 2019, Iraq had already banned the imports of whole poultry.
In Turkey, there is a risk related to the expiration and non-renewal of the license relating to the validity of transgenic events, which would impact Turkish imports of transgenic soybeans, thereby affecting the cost of our local production. Also in Turkey, in 2023 chicken exports to some countries were banned due to HPAI outbreaks in the country.
COVID-19 Pandemic
The worldwide spread of COVID-19 triggered the implementation of significant measures by governments and private sector entities that, in turn, have disrupted consumption and trade patterns, supply chains and production processes on a global scale and specifically relating to our business, including with respect to product shipments.
Our operations include global production and distribution facilities, and if there is an outbreak of COVID-19 in our facilities or the communities where we operate and distribute our products, our production, operations, employees, suppliers, customers and distribution channels could be severely impacted. Ports and other channels of entry may be closed or operate at only a portion of capacity, as workers may be prohibited or otherwise unable to report to work, and means of transporting products within regions or countries may be limited for the same reason, along with the potential for transport restrictions related to travel bans. In addition, countries to which we export our products may institute bans on the importation of our products, products produced by our partners or on all or some food products from Brazil in general based on perceived COVID-19 concerns.
Our management developed and implemented contingency plans to maintain the operations and monitors the effects of the pandemic through a permanent multidisciplinary monitoring committee, formed by executives, specialists in the public health area and consultants. We implemented a comprehensive testing program using RT-PCR and serological methodologies as part of the actions to prevent the spread of the virus in our plants and during 2023, our working arrangements remained under a hybrid system of remote work and in-office work in some of our corporate offices. However, the COVID-19 pandemic affected our operations through reduction of the available labor force, reduction of the productivity of our manufacturing operations, lack of raw materials and packaging, and maintenance projects due to reduced availability of third-party suppliers. As a result of the pandemic, especially during 2020 and 2021, we incurred expenditures that were incremental and directly attributable to the impacts of the COVID-19 pandemic, mainly related to personnel, prevention, control, logistics and philanthropic donations.
We have incurred direct and incremental expenditures, mainly related to personnel, prevention, control, logistics and philanthropic donations. We donated food, medical supplies and other support materials to research and social development funds, in order to contribute to the efforts to combat the effects of the COVID-19 pandemic, including support to hospitals, philanthropic entities, social assistance organizations and health professionals in the states and municipalities in which we operate.
Overall, we have not experienced significant negative financial effects arising from the COVID-19 pandemic since it was declared. Despite having more visibility on the impact of the pandemic compared to March 2020 (which marked the beginning of the pandemic for us), other COVID-19 variants and outbreaks may still impact our operational performance, which may in turn adversely affect our financial position. We also recognize that unfavorable operating results may have an adverse impact on our financial metrics, such as leverage. At the same time, we may experience increases in general customer default rates in connection with the pandemic and, as a consequence, be subject to increasingly higher credit losses. The possible deterioration of the credit cycle of our customers may adversely affect our results, financial position and cash flows in the future. We currently have R$1,500,000 thousand undrawn and available loan capacity under a revolving credit facility with Banco do Brasil. We adopted several guidelines, as part of our Financial Risk Management Policy, to ensure that we maintain an appropriate level of liquidity by setting minimum cash and liquidity requirements depending on future expectations and obligations.
The COVID-19 pandemic and related social and economic disruptions also destabilized commodity prices and the macroeconomic conditions of many countries, resulting in downturns that could affect the demand for our products and have a material adverse effect on our results. Any future pandemic could also adversely affect consumer demand, as restrictions on public gatherings or interactions may limit the opportunity for our customers and consumers to purchase our products in certain channels. In addition, demand for our products has been affected by the COVID-19 pandemic and related disruptions worldwide, as well as the weakening of global commercial activities, reduction of household incomes and changes in consumption habits.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry— Pandemics or human disease outbreaks, such as the coronavirus (COVID-19), may adversely affect our business and operations.”
Effect of Animal Diseases
Avian Influenza
Avian influenza has captured the attention of the international community over the years with outbreaks in poultry having serious consequences on both livelihoods and international trade in many countries. In addition, although most avian influenza viruses do not infect humans, some, such as avian influenza H5N1 and H7N9, are well known to the public because of their implication in serious and sometimes fatal infections in people. However, currently there are no records of contamination from the consumption of properly prepared chicken or eggs, according to the World Health Organization (WHO).
Demand for our products can be significantly affected by outbreaks of animal diseases like avian influenza. If significant numbers of new avian influenza cases were to develop in humans, even if they do not occur in any of our markets, the demand for our poultry products both inside and outside Brazil would likely be negatively affected and the extent of the effect on our business cannot be predicted. Even isolated cases of avian influenza in humans could negatively impact our business due to the public’s sensitivity to the disease. Especially toward the end of 2022, the Americas region experienced an upsurge in cases of HPAI in certain countries, including Canada, the United States, Mexico, Colombia, Chile, Venezuela and Peru. In January 2023, the Pan American Health Organization issued an alert in response to the increasing detection of outbreaks of avian influenza in birds in ten countries of the Americas region, considering the confirmation of the case of human infection of avian influenza in South America.
In Brazil, according to MAPA, several cases of avian influenza were registered in subsistence poultry and wild birds; however, none have been registered in commercial poultry. As a result, there is a possibility that certain countries may suspend imports from Brazil or from some Brazilian regions where outbreaks are recorded. For instance, between June and November 2023, Japan suspended imports of poultry meat, eggs, live poultry and day-old chicks from the states of Espírito Santo, Santa Catarina and Mato Grosso do Sul as these states registered HPAI outbreaks in subsistence birds. All embargoes have been lifted since then. MAPA has been working to develop agreements with importing countries to mitigate the risk of total bans of Brazilian chicken exports in case of HPAI in commercial birds.
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, even if MAPA is succesful in negotiating agreements with importing countries, some countries are stricter on HPAI, and as a consequence any new outbreak of avian influenza in Brazilian poultry would likely lead to immediate restrictions on the export of some of our products to these stricter markets. We have established a Contingency Plan for Avian Influenza and Newcastle Disease, according to which we have isolated the affected region within a 10km radius from the focal point, with any production inside this area designated to internal market only. We are mapping solutions to compensate any volume loss and ensure all necessary communications with stakeholders and investors. Preventive actions adopted by us and by Brazilian authorities, if any, may not be effective in precluding the spread of avian influenza within Brazil.
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 Brazilian states of Mato Grosso do Sul and Paraná, since the disease affects cloven-hoofed animals, such as swine.
Other diseases have affected the international trade, as a viral disease called porcine epidemic diarrhea, or PED, diagnosed in North America and Asia in the last years. The disease was characterized by diarrhea, dehydration, wasting and or growth/retardation and high mortality in suckling pigs. Consequently, the disease has caused a huge economic impact in the swine industry. Biosecurity and sanitation are the most effective measures to prevent the introduction and spread of the virus.
Besides PED, outbreaks of African swine fever, or ASF, has been reported in many swine farms in China since August 2018. Beyond China, many countries from Europe and more recently, the Dominican Republic, also detected the disease. At the national level, one major consequence of ASF is the loss of status of export, apart from the cost of implementing drastic measures to control the disease.
In addition to PED and ASF, classical swine fever, or CSF, is considered one of the most important diseases of swine. Although all our hogs are sourced in Brazil from zones free of CSF, there have been a few recent outbreaks outside of these zones. In October 2018, an outbreak of CSF was confirmed in the Brazilian state of Ceará. Additionally, in 2019, a case of CSF was confirmed in the Brazilian states of Alagoas and Piauí. In 2020, two additional cases were reported in the Brazilian state of Piauí. In 2022, Ceará registered an additional case of PSC. In 2023, one more outbreak was registered in Piauí. Brazil has two zones regarding the sanitary status of CSF, the free zone that is comprised of 16 Brazilian states and includes more than 99% of the Brazilian commercial pork production, and a non-free zone, located in the north of Brazil. All Brazilian states with confirmed cases of CSF are located outside the CSF-free zone. The Brazilian government also took actions to contain the outbreaks when they occurred. No formal commercial embargoes were announced as a result of these outbreaks.
Meat can be subject to contamination during processing and distribution. In particular, processed meat may become exposed to various disease-producing pathogens, including Listeria monocytogenes, Salmonella enteritidis, Salmonella tiphimurium and E. coli O157:H7. These pathogens can also be introduced to our products during production (field, transport or slaughterhouse) or as a result of improper handling by third-party food processors, franchisees, distributors, foodservice providers or consumers. We have a strong and robust monitoring system especially about Salmonella and all its serotypes. We monitor Salmonella since our grandparents’ flocks, through the production flow, to hatcheries, feed mills, broiler breeder farms, broiler live production and at all our processing plants. Our monitoring system complies with legal requirements and follow all protocols included in our Poultry Health National Program (Programa Nacional de Sanidade Avícola). When there is a positive result in a flock, we immediately start to investigate the source of contamination in the farm. If we confirm a public-health importance serotype, such as Salmonella Enteritidis and Salmonella Typhimurium, or other relevant serotypes to our farms, such as Salmonella Minnesota and Salmonella Heidelberg, we immediately run a protocol called “Epidemiologic Mapping”, pursuant to which we collect dozens of samples inside and outside the affected farm, to help building the investigation process. The sample result, combined with the veterinarian anamnesis, aims at mapping all the possible causes of the infection so as to build an accurate action plan and mitigate infection rates.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry— 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.”
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. Brazilian exporters generally redirect the products for international markets to the domestic market, increasing the supply of those products domestically and often negatively impacting the selling price. This consequently affects our net sales in the domestic market.
For example, in 2017, Russia banned the imports of pork meat from Brazil, alleging the presence of ractopamine in the animals’ 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 contributed to the decrease in pork carcass prices in 2018.
In August 2017, the Chinese government initiated an antidumping investigation in connection with Brazilian exports of whole chicken and chicken parts, including our exports. In the 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.
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. We, along with other Brazilian companies, were therefore required to migrate our production processes to non-stunning slaughters in order to supply the Saudi Arabian market.
In 2019, Chinese demand for imported protein increased significantly because of African swine fever, a deadly virus that reduced drastically the local supply of pork meat and, consequently, increased local and global protein prices. In 2019, China enabled nine poultry plants, six pork plants and 22 bovine plants from Brazil to increase their import volumes and to address the local protein scarcity. However, in August 2021, China’s GACC suspended the export to China of pork meat from our Lucas do Rio Verde plant. On December 16, 2021, we were also informed by MAPA and GACC of the suspension of the export to China of poultry meat from Marau under the allegation of the finding of content improper for human consumption in a batch of poultry feet. On March 4, 2022, we were informed by GACC that it was suspending, as of March 5, 2022, the export to China of poultry meat from our Lucas do Rio Verde-MT plant as well. The alleged reason for this suspension were certain nonconformities identified during a videoconference audit executed by GACC, such as the occurrences of COVID-19 infections among our employees that were not disclosed to it and the lack of disinfection tank and detections of salmonella above the maximum limit in the reception of live poultry and in the processing of poultry products. On March 24, 2023, we received authorization from GACC to resume the export to China of poultry meat from Marau, and on May 16, 2023, the export of pork and poultry meat from our Lucas do Rio Verde-MT plant.
In 2020, as a result of the Trapaça Operation, the Saudi Food & Drug Authority (“SFDA”) temporarily suspended the export authorization of two of our plants, Dois Vizinhos (SIF 2518) and Francisco Beltrão (SIF 1985). The Saudi Arabian government agency based its decision on news reports relating to the investigation. The case has been brought by Brazil as a Specific Trade Concern (“STC”) in the 4th meeting of the Sanitary and Phytosanitary Measures (“SPS”) Committee at the World Trade Organization (“WTO”), held in November 2020. Similarly, in the same year, we have received governmental approval from China to export from two of our plants, Dourados (SIF 18) and Lajeado (SIF 3975).
In 2021, Saudi Arabia banned the imports of chicken from some Brazilian slaughterhouses. This ban only affected the competition, while we continued to be able to export. In addition, Russia and other countries in the region increased their quotas for Brazilian pork imports, creating greater opportunities for international negotiations. In relation to China, the country banned beef imports from Brazil from September to December 2021, in addition to banning the import of pork meat from Germany due to ASF cases.
We monitor the actions of our domestic competitors since they are also impacted by external market changes and may react accordingly, redirecting their products to the domestic or external markets. In addition, we monitor fluctuations in supply generated by producers in China, the U.S., the European Union and other regions, since fluctuations in production in those markets can lead to variations in supply in other countries.
Between June and November 2023, Japan temporarily suspended imports of poultry meat, eggs, live poultry and day-old chicks from production plants located in the states of Espirito Santo, Santa Catarina and Mato Grosso do Sul due to such states having detected HPAI virus on backyard chickens. All embargoes have been lifted since then. However, Japan adopted a more restrictive import policy, only allowing exports from these states after a period has lapsed without new infection cases and provided that a detailed HPAI report is delivered.
Commodity Prices
Many of our raw materials are commodities whose prices consistently fluctuate in response to market forces of supply and demand. We purchase large quantities of corn, soybean meal, vegetable oils and soybeans (grain), which we use to produce substantially all of our own animal feed. For the most part, the commodities we purchase are priced in reais. While input costs are denominated in real, the prices of the commodities we purchase tend to follow international prices and are influenced by exchange rate fluctuations. Purchases of corn, soybean meal, vegetable oils and soybeans (grains) represented approximately 41.4% of our cost of production in 2023, compared to 47.3% in 2022 and 46.5% in 2021. Although we produce most of the hogs we use for our pork products, we also purchased hogs on the spot market in 2023. We purchased 0.4% of the total number of hogs slaughtered in 2023 on the spot market.
In addition, the selling prices for many of our products, including substantially all our export products, are highly sensitive to the market price of those commodities and fluctuate with them. In 2023, the average corn price in Brazil was 25.0% lower than in 2022. In 2023, the average soybean meal price in Brazil was 8.6% lower than in 2022. In 2023, the average vegetable oils price in Brazil was 33.1% lower than in 2022. The effect of decreases or increases in prices of raw materials on our gross margin is greater for fresh products relative to 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 fresh products. see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Our results of operations are subject to cyclicality and volatility affecting the prices of commodities, poultry and pork, which could adversely affect our entire business.”
For further information about trends in commodity prices in 2023, see “Item 5. Operating and Financial Review and Prospects—D. Trend Information––Raw Materials.”
Effects of Exchange Rate Variations and Inflation
The table below sets forth, for the periods indicated, the fluctuation of the real against the U.S. dollar, the period-end and average daily exchange rates and Brazilian inflation as measured by the National Index of Consumer Prices (Índice Nacional de Preços ao Consumidor, or “INPC”), IPCA and the General Market Price Index (Índice Geral de Preços do Mercado, or “IGP-M”).
| | 2023 | 2022 | 2021 |
| Appreciation (depreciation) of the real against the U.S. dollar | 7.2% | 6.5% | (7.4%) |
| Period-end exchange rate (US$1.00) | R$4.84 | R$5.22 | R$5.58 |
| Average (daily) exchange rate (US$1.00)(1) | R$5.00 | R$5.17 | R$5.40 |
| Period-end Basic interest rate SELIC(2) | 11.75% | 13.75% | 9.25% |
| Inflation (INPC)(3) | 3.71% | 5.93% | 10.16% |
| Inflation (IPCA)(4) | 4.62% | 5.79% | 10.06% |
| Inflation (IGP-M)(5) | (3.18%) | 5.45% | 17.78% |
____________________________
Sources: IBGE, Fundação Getúlio Vargas and the Brazilian Central Bank.
| (1) | | The average (daily) exchange rate is the sum of the daily exchange rates based on PTAX 800 Option 5, divided by the number of business days in the period. |
| (2) | | The SELIC (Sistema Especial de Liquidação e de Custódia) interest rate is the primary Brazilian reference interest rate. |
| (3) | | INPC is published by the IBGE, measuring inflation for families with income between one and eight minimum monthly wages in 11 metropolitan areas of Brazil. |
| (4) | | IPCA is published by IBGE, measuring inflation for families with income between one and 40 minimum monthly wages in eleven metropolitan areas of Brazil. |
| (5) | | The IGP-M gives different weights to consumer prices, wholesale prices and construction prices. The IGP-M is published by the Getúlio Vargas Foundation (Fundação Getúlio Vargas), a private foundation. |
Our results of operations and financial condition are significantly affected by movements in the exchange rate of reais to the U.S. dollar, the euro and the Turkish lira. Outside of Brazil, we invoice our sales primarily in U.S. dollars or U.S. dollar equivalents such as Saudi riyal and Emirati dirham, as well as in Euros and Turkish liras, but we report our results of operations in reais. Appreciation of the real against those currencies decreases the amounts we receive in reais and therefore our net sales from exports, and the opposite occurs when the real depreciates against those currencies.
The prices of soy meal and soybeans, which are important ingredients for our animal feedstock, are closely linked to the U.S. dollar. The price of corn, another important ingredient for our feedstock, is also linked to the U.S. dollar, albeit to a lesser degree than the price of soy meal and soybeans. In addition to soy meal, soybeans and corn, we purchase sausage casings, mineral nutrients for feed, packaging and other raw materials, as well as equipment for use in our production facilities, from suppliers located outside Brazil whom we must pay in U.S. dollars or other foreign currencies. When the real depreciates against the U.S. dollar, the cost in reais of our U.S. dollar-linked raw materials and equipment increases, and such increases could materially adversely affect our results of operations. Although the appreciation of the real has a positive effect on our costs because part of our costs is denominated in U.S. dollars, this reduction in U.S. dollar costs because of the appreciation of the real does not immediately affect our results of operations because of the length of our production cycles for poultry and pork.
We had total foreign currency-denominated loans and borrowings in an aggregate amount of R$11,093,385 thousand as of December 31, 2023, representing 55% of our total consolidated indebtedness on that date. Although we manage a portion of our exchange rate risk through foreign currency derivative instruments and future cash flows from exports in U.S. dollars and other foreign currencies, our foreign currency debt obligations are not completely hedged. A significant devaluation of the real in relation to the U.S. dollar or other currencies would increase the amount of reais that we would need in order to meet debt service requirements of our foreign currency-denominated obligations.
Historically, our results of operations and financial condition have been affected by inflation rates in Brazil. Demand for our products in the domestic market is sensitive to inflation in consumer prices, as reflected in variations in the INPC and IPCA inflation indexes, and most of our costs and expenses are incurred in reais. Because long-term contracts with suppliers and customers are not customary in our industry and prices are generally negotiated monthly or quarterly, increases in inflation have a rapid impact on our net sales and costs.
The IGP-M index is often used as an inflation reference rate in negotiating prices we pay to suppliers. In addition, we buy energy to run our production facilities pursuant to long-term contracts that contain periodic inflation adjustments according to the IGP-M index.
In terms of personnel costs, Brazilian salaries are adjusted only once a year, based on collective agreements between employers’ syndicates and unions. Generally, unions follow the INPC as a parameter for their negotiations.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil— Exchange rate fluctuations may adversely affect our financial condition and results of operations” and “Item 3. Key Information—D. Risk Factors—Risks Relating to Brazil— 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 ADRs.”
Effects of Interest Rates
Our financial expenses are affected by movements in Brazilian and foreign interest rates. As of December 31, 2023, 49% of the outstanding amount of principal and interest of our loans and borrowings of R$20,095,548 thousand was either: (i) denominated in (or swapped into) reais and bearing interest based on Brazilian floating interest rates, such as (a) 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 (b) the IPCA; or (ii) U.S. dollar-denominated and bearing floating interest based on (a) the Secured Overnight Financing Rate, or SOFR, or (b) the Emirates Interbank Offered Rate, or EIBOR. Any increase in the CDI, IPCA, SOFR or EIBOR rates may have an adverse impact on our financial expenses and our results of operations.
The table below shows the average interest rates to which we were exposed in each of the years as follows:
| | Average Interest for the Year Ended December 31, |
| | 2023 | 2022 | 2021 |
| | | (%) | |
| CDI | 13.2 | 12.5 | 4.5 |
| Six-month LIBOR (January 1 – September 16, 2022)(1) | 5.6 | 2.1 | 0.2 |
| Three-month EIBOR | 3.4 | - | - |
| Six-month SOFR | 5.2 | - | - |
(1) All LIBOR-based loans were terminated in the first quarter of 2023.
See “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry— Fluctuations or changes in, or the replacement of, interest rates could impact the cost of servicing our debt or reduce our financial revenue, affecting our financial performance.”
Freight Costs and Volume
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 2023, 2022 and 2021, freight costs from our continuing operations represented approximately 6.2%, 6.1% and 5.1% of our net sales, respectively. For our export goods, we ship many of our goods CFR (cost and freight), CIF (cost, insurance and freight) or DDP (delivered duty paid), including the payment of freight and insurance costs. In recent years, due to global political instability that could affect oil prices, we have included in our agreement with shipping lines a bunker oil (the fuel utilized in vessels) adjustment factor. Despite persistent threats, such as the ongoing war in Ukraine, the growing world population continues to drive demand for perishable goods. As a result, the reefer sector has proven resilient with every trade route posting year-on-year growth in early 2023 for the first time in more than 24 months.
Regarding the Israel-Hamas war in Gaza that started in 2023, the main risk to our business is the Yemen’s Houthi movement targeting ships heading to Israel regardless of their nationality and threatening international shipping companies against dealing with Israeli ports. Houthi’s continuous attacks against vessels sailing in the Red Sea crossing the Bab-El-Mandeb straits have caused cargo flow disruptions and disrupted global shipping. However, the impact of the ship route diversions was minimal by the end of 2023.
Global protein and all other refrigerated cargo demand are also expected to exert pressure on freight volume and restrict container availability, especially in shipping routes with restricted capacity such as the one from South America to Asia. Due to the uncertainty of this increase in global demand and limited offer of refrigerated containers, in 2022 we suffered pressure in logistics around the world, and our sea freight expenses in 2022 increased approximately 75.5%. However, in 2023 the scenario changed. The fees were renegotiated and declined by approximately 40% due to market adjustments of supply and demand for export volumes, despite little variation in the bunker price.
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 2023, 2022 and 2021.
| | Year Ended December 31, |
| | 2023 | 2022 | 2021 |
| | (in thousands of reais) | (%) | (in thousands of reais) | (%) | (in thousands of reais) | (%) |
| Continuing operations | | | | | | |
| Net sales | 53,615,440 | 100.0 | 53,805,028 | 100.0 | 48,343,305 | 100.0 |
| Cost of sales | (44,781,739) | (83.5) | (45,672,376) | (84.9) | (38,650,772) | (80.0) |
| Gross profit | 8,833,701 | 16.5 | 8,132,652 | 15.1 | 9,692,533 | 20.0 |
| Operating income (expenses) | | | | | | |
| Selling expenses | (7,454,163) | (13.9) | (7,067,148) | (13.1) | (6,058,250) | (12.5) |
| General and administrative expenses | (757,836) | (1.4) | (644,827) | (1.2) | (822,960) | (1.7) |
| Impairment loss on trade receivables | (32,809) | (0.1) | (12,772) | — | (12,799) | 0.0 |
| Other operating income (expenses), net | 250,512 | 0.5 | (545,270) | (1.0) | 211,263 | 0.4 |
| Income from associates and joint ventures | (3,264) | — | 1,076 | — | — | 0.0 |
| Income (loss) before financial results and income taxes | 836,141 | 1.6 | (136,289) | (0.3) | 3,009,787 | 6.2 |
| Financial income | 1,202,520 | 2.2 | 1,082,935 | 2.0 | 537,736 | 1.1 |
| Financial expenses | (4,136,312) | (7.6) | (3,585,765) | (6.7) | (3,331,615) | (6.9) |
| Foreign exchange and monetary variations | 112,945 | 0.1 | (165,925) | (0.3) | (250,696) | (0.5) |
| Loss before taxes | (1,984,706) | (3.7) | (2,805,044) | (5.2) | (34,788) | (0.1) |
| Income taxes | 115,854 | 0.2 | (285,634) | (0.5) | 552,102 | 1.1 |
| Income (loss) from continuing operations | (1,868,852) | (3.5) | (3,090,678) | (5.7) | 517,314 | 1.1 |
| Loss from discontinued operations | — | — | (50,948) | (0.1) | (79,930) | (0.2) |
| Income (loss) for the year | (1,868,852) | (3.5) | (3,141,626) | (5.8) | 437,384 | 0.9 |
| Attributable to | | | | | | |
| Controlling shareholders | (2,028,559) | (3.8) | (3,166,403) | — | 419,455 | 0.9 |
| Non-controlling shareholders | 159,707 | 0.3 | 24,777 | — | 17,929 | 0.0 |
Unless stated otherwise, the results that we present below do not consider the results from our discontinued operations.
Presentation of Net Sales Information per Operating Segment
Our operating segments include: (i) Brazil; (ii) International, which concentrates all of our operations outside Brazil; and (iii) Other Segments. These segments include sales through all of our distribution channels and operations. The Brazil and the International segments are subdivided according to the nature of products, as follows: (i) in-natura (production and sale of whole poultry and cuts and pork and other cuts) (ii) processed (production and sale of processed food, frozen and processed products derived from poultry, pork and beef, margarine, vegetables and soybean-based products); and (iii) other sales (sale of flour for food service and others). Other Segments is comprised of commercialization and development of animal nutrition ingredients, human nutrition, plant nutrition (fertilizers), healthcare (health and wellness) and pet food, as well as commercialization of agricultural products. See note 24 to our audited consolidated financial statements for the year ended December 31, 2023 for a breakdown of net sales by segment.
We report net sales after deducting taxes on gross sales and discounts and returns. Our total sales deductions for 2023, 2022 and 2021 can be broken down as follows:
| · | ICMS Taxes — ICMS is a state value-added tax on our gross sales in the Brazilian market at a rate that varies by state and product sold. Our average ICMS tax rate for the year ended December 31, 2023 was 9.37%. 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 revenues from the Brazilian market at the rates of 1.65% for PIS and 7.6% for COFINS for the year ended December 31, 2023. However, (1) exports are not subject to these taxes, (2) we currently benefit from a reduction of the tax rate to zero with respect to our in-natura pork and poultry cuts and (3) our financial revenues are subject to PIS and COFINS at tax rates of 0.65% and 4.0%, respectively. For more information, see “Item 3. Key Information—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 results of operations and financial condition.” |
| · | 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.
On December 15, 2023, the Brazilian Congress passed the tax reform bill (PEC 45/2019), which will come into effect within a 7-year transition period starting from 2026. The bill aims to simplify the Brazilian tax framework. It provides, among other matters, for the merger of five taxes, including the ICMS, PIS and COFINS, into two new value-added taxes: the state Tax on Goods and Services (Imposto sobre Bens e Serviços, or IBS) and the federal Contribution on Goods and Services (Contribuição sobre Bens e Serviços, or CBS). Tax collection on the new value-added taxes, or VAT, will be a tax on consumption (rather than a tax on production, as in the prior system). According to PEC 45/2019, the CBS and IBS shall be regulated via a supplementary law, which is yet to be drafted and approved. Different IBS and CBS rates may apply to specific goods and services listed in the Brazilian Constitution, with 42 tax reductions included in the bill, including tax reduction for the acquisition of agribusiness inputs and the sale of staple food. We expect to benefit from these tax reductions, as they will reduce tax costs for the production and sale of several of our products, such as in-natura meat and products targeting low-income households. However, the effects of the tax reform measures and any other changes that could result from the enactment of new and additional tax regulations have not been, and cannot be, quantified yet. We will only be able to fully assess the impact of such tax reforms upon enactment of the applicable laws and regulations. We cannot guarantee that the IBS and CBS rates will not be higher than the levies currently applied to our business, that the Brazilian government will not impose penalty taxes to certain of our raw materials, or that the new tax regulations to be passed by the Congress will not have a material adverse effect on our business, financial condition, results of operation and prospects. See “Item 3. Key Information—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 results of operations and financial condition.”
The table below sets forth our gross sales and deductions for the years ended December 31, 2023, 2022 and 2021:
| | Year ended December 31, |
| | 2023 | 2022 | 2021 |
| | (in thousands of reais) |
| Gross sales | | | |
| Brazil | 32,922,332 | 33,325,565 | 30,700,510 |
| International | 25,203,968 | 22,253,452 | 22,959,318 |
| Other Segments | 3,494,983 | 3,305,974 | 2,319,991 |
| | 61,621,283 | 61,884,991 | 55,979,819 |
| Sales deduction | | | |
| Brazil | (6,063,414) | (6,327,777) | (5,891,621) |
| International | (1,352,204) | (1,150,317) | (1,444,614) |
| Other Segments | (590,225) | (601,869) | (300,279) |
| | (8,005,843) | (8,079,963) | (7,636,514) |
| Net sales | | | |
| Brazil | 26,858,918 | 26,997,788 | 24,808,889 |
| International | 23,851,764 | 24,103,135 | 21,514,704 |
| Other Segments | 2,904,758 | 2,704,105 | 2,019,712 |
| | 53,615,440 | 53,805,028 | 48,343,305 |
The following discussion provides comparisons of our results of our continuing operations for the years ended December 31, 2023, 2022 and 2021, based on our consolidated financial statements prepared in accordance with IFRS, as issued by the IASB.
Year Ended December 31, 2023 compared with Year Ended December 31, 2022
Net Sales
Our net sales decreased by R$189,588 thousand, or 0.4%, to R$53,615,440 thousand in the year ended December 31, 2023 from R$53,805,028 thousand in the year ended December 31, 2022. This reduction is mainly justified by (i) the impact of global oversupply, mainly chicken protein, which persisted for most of 2023, reducing the average price by 2.5%, and (ii) the appreciation of the real against the dollar (average Ptax in 2022 of R$5.17 compared to R$5.00 in 2023), which reduced our revenue in reais in the international markets. These impacts were partially offset by a 2.2% increase in sales volume. We present below an explanation for the net sales performance for each segment.
Net Sales by Operating Segments
In 2023 and 2022, we recorded the following net sales in our operating segments.
| | Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | (in thousands of tons) | | (%) |
| Brazil | 26,858,918 | | 26,997,788 | | (0.5) |
| In-natura | 5,914,882 | | 5,976,960 | | (1.0) |
| Processed | 20,601,576 | | 20,878,697 | | (1.3) |
| Other Sales | 342,460 | | 142,131 | | 140.9 |
| International | 23,851,764 | | 24,103,135 | | (1.0) |
| In-natura | 19,888,732 | | 20,044,710 | | (0.8) |
| Processed | 3,765,633 | | 3,679,233 | | 2.3 |
| Other Sales | 197,399 | | 379,192 | | (47.9) |
| Other Segments | 2,904,758 | | 2,704,105 | | 7.4 |
| Total | 53,615,440 | | 53,805,028 | | (0.4) |
In 2023 and 2022, we recorded the following average prices in our operating segments:
| | Average Prices Year Ended December 31, |
| | 2023 | | 2022 | | Change |
| | (in reais per kg) | (%) |
| Brazil | 12.05 | | 11.87 | | 1.5 |
| International | 10.99 | | 12.46 | | (10.7) |
| Other Segments | 6.38 | | 5.20 | | 22.5 |
| Total | 11.05 | | 11.32 | | (2.5) |
Brazil Segment
Net sales from our Brazil segment decreased by R$138,870 thousand, or 0.5%, to R$26,858,918 thousand in the year ended December 31, 2023 from R$26,997,788 thousand in the year ended December 31, 2022, mainly due to a 2% reduction in volumes sold, which was partially offset by a 1.5% increase in average prices driven mainly by the performance of our processed portfolio, as the in-natura products in the domestic market also suffered from the effects of the chicken oversupply, which was further aggravated by the temporary ban imposed by Japan.
International Segment
Net sales from our International segment decreased by R$251,371 thousand, or 1.0%, to R$23,851,764 thousand in the year ended December 31, 2023 from R$24,103,135 thousand in the year ended December 31, 2022, primarily due to (i) a 10.7% reduction in the average prices of products sold in the foreign market, mainly due to the global oversupply of chicken; (ii) the appreciation of the real against the dollar, which impacted our revenue from this segment; which were partially offset by a 10.8% increase in sales volumes (or 212.2 thousand tons) in 2023 compared to 2022, as a result of the evolution of the industrial yield indicator of our efficiency program, BRF+, and the market diversification strategy. We won 66 new authorizations over the year of 2023 for new destinations in Latin America, Asia, Europe and South Africa, which gave us flexibility to capture market opportunities in a challenging year for the protein sector.
Other Segments
Net sales from Other Segments increased by R$200,653 thousand, or 7.4%, to R$2,904,758 thousand in the year ended December 31, 2023 from R$2,704,105 thousand in the year ended December 31, 2022, mainly as a result of (i) a greater share of hydrolysates, a product with high added value, in the Ingredients portfolio, (ii) the growth in the super premium natural segment in Pet Food, reflecting a higher price premium, and (iii) the execution of one-off arbitrage operations involving the sale of grains between regions as a result of a more active role in identifying market opportunities that allow a reduction in origination costs. Another relevant factor was the increase in export destinations, especially exports to Norway in Ingredients and to Ecuador and the United Arab Emirates in Pet Food, as a result of our market diversification strategy.
Cost of Sales
Cost of sales totaled R$44,781,739 thousand in the year ended December 31, 2023, a decrease of 2.0% compared to R$45,672,376 thousand in the year ended December 31, 2022. This reduction is mainly explained by (i) the effect of lower grain prices in 2023 due to a larger harvest in Brazil, which, given the cycle of our chain, began to impact our results in the third quarter of 2023; in the fourth quarter, the variation in the six-month moving average of the price of corn fell by 30.6% year-over-year and soybean meal fell by 13.4% year-over-year; (ii) the reduction in the price of oils used as raw materials in margarines, with the most relevant effect being soybean oil, which fell by 30.5% year-over-year; (iii) the effects of the efficiency program, BRF+, which impacted our results mostly through cost reductions. During the year, BRF+ made consistent progress on virtually all fronts, the most relevant of which, with the greatest impact on results, being the agricultural indicators of hatching, which rose 5.6 p.p. year-over-year, chicken feed conversion, which improved 2.5% year-over-year and mortality, which improved 2.0 p.p. year-over-year for chicken and 0.7 p.p. for pork. Also noteworthy is the industrial yield indicator, which rose by 5.0 p.p. year-over-year (5.6 p.p. year-over-year for chicken yields and 3.5 p.p. year-over-year for pork yields). BRF+ was responsible for capturing gains of R$525,400 thousand in the quarter and R$2,163,000 thousand in the year.
Gross Profit
Our gross profit increased by R$701,049 thousand, or 8.6%, to R$8,833,701 thousand in the year ended December 31, 2023 from R$8,132,652 thousand in the year ended December 31, 2022, with a gross margin of 16.5% in the year ended December 31, 2023 compared to 15.1% in the year ended December 31, 2022. This performance is the result of the reduction in our average unit cost, due to the fall in the price of grains and oils used in our chain and the effects of our efficiency program, BRF+.
The following table provides a breakdown of our gross profit for each segment and for Corporate.
| | Year Ended December 31, |
| Gross profit | 2023 | 2022 | Change |
| | (in thousands of reais, except where indicated) | (%) |
| Brazil | 5,916,699 | 3,892,719 | 52.0 |
| International | 2,121,851 | 3,523,769 | (39.8) |
| Other Segments | 764,791 | 716,164 | 6.8 |
| Corporate | 30,360 | — | — |
| Total | 8,833,701 | 8,132,652 | 8.6 |
Operating Income (Expenses)
Our operating income (expenses) decreased by 3.3% in the year ended December 31, 2023, to operating expenses of R$7,997,560 thousand in the year ended December 31, 2023 from operating expenses of R$8,268,941 thousand in the year ended December 31, 2022, primarily due to the drivers described below.
Selling Expenses
Our selling expenses increased by R$387,015 thousand, or 5.5%, to R$7,454,163 thousand in the year ended December 31, 2023 from R$7,067,148 thousand in the year ended December 31, 2022, as a result of the payment of variable remuneration to salespeople (RVV) due to the achievement of established targets, the effect of annual salary adjustments and higher freight costs, mainly in Brazil. Our selling expenses represented 13.9% of the net sales in the year ended December 31, 2023, an increase of 0.8 p.p. compared to 13.1% in the year ended December 31, 2022.
General and Administrative Expenses
Our general and administrative expenses increased by R$113,009 thousand, or 17.5%, to R$757,836 thousand in the year ended December 31, 2023 from R$644,827 thousand in the year ended December 31, 2022. The increase was mainly due to expenses related to digital transformation, the payment of variable remuneration and annual salary adjustments.
Other Operating Income (Expenses), Net
Other operating income (expenses), net, amounted to an income of R$250,512 thousand in the year ended December 31, 2023, as compared to an expense of R$545,270 thousand in the year ended December 31, 2022. This variation in performance is mainly explained by the recovery of expenses, contingencies and gains on the sale of assets. In 2022, the result was mostly impacted by the expenses related to the Carne Fraca and Trapaça operations.
Income (Loss) Before Financial Results and Income Taxes
As a result of the foregoing, we accounted an income before financial results and income taxes of R$836,141 thousand in the year ended December 31, 2023 from a loss of R$136,289 thousand in 2022.
The table below sets forth our income (loss) before financial results and income taxes for each segment and for Corporate.
| | Income (loss) before financial results and income taxes |
| | 2023 | 2022 | Change |
| | (in thousands of reais) | (%) |
| Brazil | 1,602,298 | (352,138) | (555.0) |
| International | (1,214,167) | 403,661 | (400.8) |
| Other Segments | 357,720 | 440,062 | (18.7) |
| Subtotal | 745,851 | 491,585 | 51.7 |
| Corporate | 90,290 | (627,874) | (114.4) |
| Total | 836,141 | (136,289) | (713.5) |
Financial Income (Expenses), Net
Financial income (expenses), net increased by R$152,092 thousand, or 5.7%, to an expense, net of R$2,820,847 thousand in the year ended December 31, 2023 from an expense, net of R$2,668,755 thousand in the year ended December 31, 2022. This increase is mainly due to an increase in the cost of servicing debt due to increased interest on loans and financing of R$305,198 thousand as a result of a higher gross debt balance for most of the year, combined with higher interest rates (accumulated CDI rate of 13.04% in 2023 compared to 12.38% in 2022), which was partially offset by a R$119,582 thousand increase in interest revenues mainly due to higher interest income on investments resulting from a higher cash position, especially after the 2023 Equity Offering in July 2023, and an increase of R$150,509 thousand in net monetary gain predominantly from hyperinflation in Turkey.
Loss Before Taxes
As a result of the foregoing, our loss before taxes amounted to R$ 1,984,706 thousand in the year ended December 31, 2023, representing a decrease in loss in comparison to a loss of R$2,805,044 thousand in 2022.
Income Taxes
Our income taxes amounted to a benefit of R$115,854 thousand in the year ended December 31, 2023, representing an increase in benefit of 140.6% from an expense of R$285,634 thousand in 2022. Our effective tax rate in 2023 represented a benefit of 5.8% compared to an effective tax rate that represented an expense of 10.2% in 2022. This change was primarily due to the effects of the foreign exchange variation on our investments in foreign subsidiaries, difference in tax rates on results of subsidiaries and tax losses generated in 2022 without the recognition of deferred tax assets compared to a tax profit generated in 2023.
Loss from Continuing Operations
As a result of the foregoing, our loss from continuing operations was R$1,868,852 thousand in the year ended December 31, 2023, representing a decrease of 39.5% in comparison to a loss of R$3,090,678 thousand in 2022.
Loss from Discontinued Operations
Loss from discontinued operations amounted was nil in the year ended December 31, 2023, as compared to R$50,948 thousand in the year ended December 31, 2022, mainly due to the conclusion of certain disputes related to losses incurred by the divested entities in Europe and Thailand in 2018 and 2019, as well as tax contingencies in connection with other prior periods to such divestments.
Loss for the Year
As a result of the foregoing, our loss for the year was R$1,868,852 thousand in the year ended December 31, 2023, compared to a loss for the year of R$3,141,626 thousand in 2022, a decrease of 40.5%.
Year Ended December 31, 2022 compared with Year Ended December 31, 2021
Net Sales
Our net sales increased R$ 5,461,723 thousand, or 11.3%, to R$53,805,028 thousand in the year ended December 31, 2022 from R$48,343,305 thousand in the year ended December 31, 2021. We present below an explanation for the increase in net sales for each segment.
Net Sales by Operating Segments
In 2022, we recorded the following net sales in our operating segments.
| | Year Ended December 31, |
| | 2022 | | 2021 | | Change |
| | (in thousands of tons) | | (%) |
| Brazil | 26,997,788 | | 24,808,889 | | 8.8% |
| In-natura | 5,976,960 | | 6,002,585 | | (0.4%) |
| Processed | 20,878,697 | | 18,729,686 | | 11.5% |
| Other Sales | 142,131 | | 76,618 | | 85.5% |
| International | 24,103,135 | | 21,514,704 | | 12.0% |
| In-natura | 20,044,710 | | 18,212,688 | | 10.0% |
| Processed | 3,679,233 | | 2,955,431 | | 24.5% |
| Other Sales | 379,192 | | 346,585 | | 9.4% |
| Other Segments | 2,704,105 | | 2,019,712 | | 33.9% |
| Total | 53,805,028 | | 48,343,305 | | 11.3% |
In 2022, we recorded the following average prices in our operating segments:
| | Average Prices Year Ended December 31, |
| | 2022 | | 2021 | | Change |
| | (in reais per kg) | (%) |
| Brazil | 11.87 | | 10.78 | | 10.1% |
| International | 12.46 | | 10.99 | | 13.4% |
| Other Segments | 5.20 | | 5.57 | | (6.6%) |
| Total | 11.32 | | 10.46 | | 8.2% |
Brazil Segment
Net sales from our Brazil segment increased R$2,188,899 thousand, or 8.8%, to R$26,997,788 thousand in the year ended December 31, 2022 from R$24,808,889 thousand in 2021, primarily due to investments in our brands, expansion of our portfolio of products with high added value, which resulted in an 11.5% revenue increase in processed products, growth in our operations to new channels and strengthening such channels in which we already operated, as well as improvement to our customer experience and services. Despite the consumption scenario in Brazil continuing to be pressured mainly by the high level of household indebtedness and high inflation, we had (i) positive trend for our margins in the domestic market, (ii) market share gain in all subcategories, (iii) leadership in customer preference and (iv) execution of marketing campaign through disciplined monitoring at the point of sale and improvement of service levels. In quantitative terms, growth in net sales is mainly explained by an increase of 10.1% in average prices per kilogram (in Brazilian reais) in 2022 compared to 2021.
International Segment
Net sales from our International segment increased R$2,588,431 thousand, or 12%, to R$24,103,135 thousand in the year ended December 31, 2022 from R$21,514,704 thousand in 2021, primarily due to (i) an increase in the share of high value-added products; (ii) increase in the number of licenses and plant certifications, aiming to maximize the markets in which we operate, as well as new geographies and products; and (iii) the appreciation of the Brazilian real versus the U.S. dollar, which favored prices in reais. In 2022, the Asia Segment had a decrease of 6.5% in net sales, explained by lower export volumes to China and a 4.6% appreciation of the Brazilian real, which were partially offset by higher chicken meat prices in Japan, South Korea and China. On the other hand, the Halal DDP and Direct Exports Segments had an increase in annual net sales. The Halal DDP Segment increased by 23.1% its net sales due to (i) a 15.1% increase in sales volume; (ii) increase in the share of high value-added products; and (iii) higher prices in the region due to fluctuations in the supply of local chicken meat, offset by the appreciation of the Brazilian real against the U.S. dollar. The net sales in Direct Exports segment increased by 19.4% due to (i) an increase in the share of high value-added products; (iii) higher prices for GCC and the Americas, due to the restriction of Ukrainian exports to the Middle East and outbreaks of avian flu in the United States which resulted in increase of export prices to Mexico and Chile, offsetting the negative effect of the appreciation of the Brazilian currency and (iv) increase in the number of plant certifications, aiming to leverage the markets in which we operate, as well as new geographies and products. In quantitative terms, growth in net sales is mainly explained by an increase of 13.4% in average prices per kilogram (in Brazilian reais) in 2022 compared to 2021.
Other Segments
Net sales from Other Segments increased R$684,393 thousand, or 33.9%, to R$2,704,105 thousand in the year ended December 31, 2022 from R$2,019,712 thousand in the year ended December 31, 2021, mainly driven by (i) higher prices in the BRF Ingredients division, (ii) higher volumes commercialized, and (iii) the consolidation of the Pet Food operations.
Cost of Sales
Cost of sales totaled R$45,672,376 thousand in the year ended December 31, 2022, an increase of 18.2% compared to R$38,650,772 thousand in the year ended December 31, 2021. This increase in cost of sales for the year ended December 31, 2022 is mainly attributable to an increase in the prices of soybeans (+9.7%) and soybean meal (+17.7%), increase in labor costs (accumulated INPC inflation index of 12.0% during the period of negotiations with labor unions), higher fuel prices (diesel ANP (Agência Nacional do Petróleo, or the Brazilian National Oil Agency) +23.8% and Brent +16.0% year on year), and an increase in the production costs of chicken and pork by 6.2% and 16.9% quarter on quarter, respectively, mainly as a result of an increase in costs in the nutrition and labor production lines.
Gross Profit
Our gross profit decreased R$1,559,881 thousand, or 16.1%, to R$8,132,652 thousand in the year ended December 31, 2022 from R$9,692,533 thousand in the year ended December 31, 2021, with a gross margin of 15.1% in the year ended December 31, 2022 compared to 20.0% in the year ended December 31, 2021. This decrease in gross margin was driven primarily by an increase in the prices of soybeans and soybean meal, in labor costs and higher fuel prices.
The following table provides a breakdown of our gross profit for our Brazil, International and Other Segments.
| | Year Ended December 31, |
| Gross profit | 2022 | 2021 | Change |
| | (in thousands of reais, except where indicated) | (%) |
| Brazil | 3,892,719 | 5,350,075 | (27.2) |
| International | 3,523,769 | 3,767,331 | (6.5) |
| Other Segments | 716,164 | 575,127 | 24.8 |
| Total | 8,132,652 | 9,692,533 | (16.1) |
Operating Income (Expenses)
Our operating income (expenses) increased by 23.7% in the year ended December 31, 2022, to operating expenses of R$8,268,941 thousand in the year ended December 31, 2022 from operating expenses of R$6,682,746 thousand in the year ended December 31, 2021, primarily due to the drivers described below.
Selling Expenses
Our selling expenses increased R$1,008,898 thousand, or 16.7%, to R$7,067,148 thousand in the year ended December 31, 2022 from R$6,058,250 in the year ended December 31, 2021, primarily as a result of an increase in direct and indirect logistics expenses and an increase in marketing and trade marketing expenses in connection with sponsorship of the World Cup.
General and Administrative Expenses
Our general and administrative expenses decreased by 21.6% in 2022, to R$644,827 thousand in 2022 from R$822,960 thousand in 2021 because of a corporate reorganization. This reduction helps to partially mitigate inflationary movements of costs and services, through our internal systems developed to manage expenses (Matrix Management of Expenses).
Other Operating Income (Expenses), Net
Other operating income (expenses), net, amounted to expense of R$545,270 thousand in the year ended December 31, 2022 as compared to an income of R$211,263 thousand in the corresponding period in 2021. This increase in expenses is mainly attributable to the impact of R$588,774 thousand related to the Leniency Agreement, referred to in note 1.2 of our consolidated financial statements.
Income (Loss) Before Financial Results and Income Taxes
As a result of the foregoing, we accounted a loss before financial results and income taxes of R$136,289 thousand in 2022 from an income of R$3,009,787 thousand in 2021.
The table below sets forth our income (loss) before financial results and income taxes for each segment and for Corporate.
| | Income (loss) before financial results and income taxes |
| | 2022 | 2021 | Change |
| | (in thousands of reais) | (%) |
| Brazil | (352,138) | 1,583,899 | (122.2) |
| International | 403,661 | 942,006 | (57.1) |
| Other Segments | 440,062 | 393,477 | 11.8 |
| Subtotal | 491,585 | 2,919,382 | (83.2) |
| Corporate | (627,874) | 90,405 | (794.5) |
| Total | (136,289) | 3,009,787 | (104.5) |
Financial Income (Expenses), Net
Financial income (expenses), net decreased by R$375,820 thousand, or 12.3%, to an expense of R$2,668,755 thousand in the year ended December 31, 2022 from an expense of R$3,044,575 thousand in the year ended December 31, 2021. Despite an increase in interest expenses due to higher accumulated CDI interest for the year, which increased the interest in reais (accumulated CDI was 12.4% in 2022 compared to 4.39% in 2021), this effect was compensated by the income generated by infrequent events in 2022, mostly by: (i) the net monetary gain of R$ 399,809 thousand from Hyperinflation in Turkey and; (ii) premium gains from bond repurchase, carried out in the second semester, of R$275,917 thousand, which also contributed to a decrease in foreign currency interest.
Loss Before Taxes
As a result of the foregoing, our loss before taxes was R$2,805,044 thousand in 2022, representing an increase in loss in comparison to a loss of R$34,788 thousand in 2021.
Income Taxes
Our income taxes amounted to an expense of R$285,634 thousand in 2022, representing an increase in expense of 151.7% from a benefit of R$552,102 thousand in 2021. The effective tax rate in 2022 represented an expense of 10.2% compared to an effective rate that represented a benefit of 1,587.1% in 2021. This variation was primarily due to (i) the effects caused by the differences in tax rates on the results of foreign subsidiaries, (ii) the effect of exchange variations in foreign currency in connection with subsidiaries operating with different functional currencies, and (iii) the write-off of deferred tax assets on tax losses carryforward of R$78,000 thousand in 2022 as compared to R$1,025,000 thousand recognized in 2021 (as per the accounting policy disclosed in note 3.9 in the Financial Statements).
Income (Loss) from Continuing Operations
As a result of the foregoing, our loss from continuing operations was R$3,090,678 thousand in 2022, representing a decrease of 697.4% in comparison to income of R$517,314 thousand in 2021.
Loss from Discontinued Operations
Loss from discontinued operations amounted to R$50,948 thousand in the year ended December 31, 2022, as compared to R$79,930 thousand loss from discontinued operations in the year ended December 31, 2021, mainly due to the conclusion of certain disputes related to losses incurred by the divested entities in Europe and Thailand in 2018 and 2019, as well as tax contingencies in connection with other prior periods to such divestments.
Income (Loss) for the Year
As a result of the foregoing, our loss for the year was R$3,141,626 thousand in 2022, compared to an income for the year of R$437,384 thousand in 2021, a decrease of 818.3%.
| B. | Liquidity and Capital Resources |
As of December 31, 2023, we held R$9,264,664 thousand in cash and cash equivalents. Of that amount, R$4,222,817 thousand, or 45.6%, 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 subsidiaries and their growth initiatives as well as 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, capital expenditures relating to expansion programs and acquisitions, and the payment of dividends and interest on shareholders’ equity. Our primary cash sources have been cash flows from operating activities, loans and other financings and sales of marketable securities. Although we have substantial debt that will mature in coming years, we believe that our current cash and cash equivalents, along with our cash flows from operating activities will be sufficient to cover our working capital needs and the service of our indebtedness in the ordinary course of our business.
As of December 31, 2023, we did not have off-balance sheet arrangements that have or are reasonably likely to have effects on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditure or capital resources that are material to investors, except for the commitments for purchases of goods and services in the total amount of R$5,023,227 thousand as of December 31, 2023. For more information see note 31 to our audited financial statements.
The following table summarizes significant contractual obligations and commitments due by period, as of December 31, 2023. ***
| | Payments Due by Period |
Obligation | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (in thousands of reais) |
| Loans and borrowings(1) | | 19,856,354 | | 2,073,011 | | 4,284,924 | | 3,924,086 | | 9,574,333 |
| Interest on loans and borrowings (2) | | 9,383,130 | | 1,287,501 | | 1,962,136 | | 1,368,032 | | 4,765,461 |
| Lease liabilities | | 4,661,489 | | 1,009,012 | | 1,407,222 | | 953,211 | | 1,292,044 |
| Total | | 33,900,973 | | 4,369,524 | | 7,654,282 | | 6,245,329 | | 15,631,838 |
(1) Includes both current and non-current loans and borrowings.
(2) Represents expected interest obligations on the loans and borrowings set forth in the table above, assuming the interest rates in effect on each facility as of December 31, 2023.
We also recorded R$1,203,170 thousand as contingencies with probable losses as of December 31, 2023.
Cash Flow
The following table sets forth certain consolidated cash flow information for the periods indicated:
| | Year Ended December 31, |
| | 2023 | 2022 | 2021 |
| Cash Flow | (in thousands of reais) |
| Net cash provided by operating activities | 3,939,397 | 1,876,384 | 3,923,636 |
| Net cash used in investing activities | (2,113,844) | (3,258,787) | (3,548,791) |
| Net cash provided by (used in) financing activities(1) | (861,837) | 2,255,538 | (572,476) |
| Effect of exchange rate variation on cash and cash equivalent | 170,019 | (271,026) | 149,826 |
| Net increase (decrease) in cash and cash equivalents | 1,133,735 | 602,109 | (47,805) |
Cash Flows Provided by Operating Activities
We recorded net cash flows provided by operating activities of R$3,939,397 thousand in 2023, compared to cash flows provided by operating activities of R$1,876,384 thousand in 2022. This increase of R$2,063,013 thousand is mainly due to a decrease in inventory (amounting to R$1,248,897 thousand) and in derivative financial instruments losses (amounting to R$953,702 thousand).
We recorded net cash flows provided by operating activities of R$1,876,384 thousand in 2022, compared to cash flows provided by operating activities of R$3,923,636 thousand in 2021. This decrease of R$2,047,252 thousand is mainly due to a decrease of R$1,457,966 thousand in the cash effect of derivatives, a decrease of R$106,867 thousand in payments of tax, civil and labor provisions, and a decrease of R$1,985,696 thousand in income from continuing operations adjusted for non-cash effects partially compensated by an increase in other operational assets and liabilities of R$1,139,789 thousand.
Cash Flows Used in Investing Activities
We recorded net cash flows used in investing activities of R$2,113,844 thousand in 2023, compared to net cash flows used in investing activities of R$3,258,787 thousand in 2022. This decrease of R$1,144,943 thousand in cash flows used in investing activities is mainly related to a reduction in investment in property, plant and equipment and to the fact that there was no significant capital increase in affiliates in 2023.
We recorded net cash flows used in investing activities of R$3,258,787 thousand in 2022, compared to net cash flows used in investing activities of R$3,548,791 thousand in 2021. The decrease of R$290,004 thousand is mainly due to the positive effect of less investments in business combinations (Hercosul Group and Mogiana Alimentos S.A.), compared to the previous year, in the amount of R$827,291 thousand, partially compensated by an increase in investments in fixed, intangible and biological assets in the amount of R$45,230 thousand.
Cash Flows Provided by (Used in) Financing Activities
We recorded net cash flows used in financing activities of R$861,837 thousand in 2023, compared to net cash flows provided by financing activities of R$2,255,538 thousand in 2022. This decrease of R$3,117,375 thousand is mainly a reflection of (i) the repurchase of US$200,000 thousand in aggregate principal amount of our 4.350% senior notes due 2026 under a tender offer, (ii) the make-whole redemption of our 4.750% senior notes due 2024 for an aggregate amount of US$300,546 thousand, and (iii) the payment of the agribusiness receivables certificate (CRA) at maturity in the amount of R$1,018 million, in each case carried out in the second half of 2023.
We recorded net cash flows provided by financing activities of R$2,255,538 thousand in 2022, compared to net cash flows used in financing activities of R$572,476 thousand in 2021. This variation is mainly due to the equity issuance (follow-on offering) of R$5,275,444 thousand concluded in February 2022.
Dividends and Interest on Shareholders’ Equity
We have not made any distributions for the years ended December 31, 2023, 2022 or 2021.
Our Indebtedness
We use the net proceeds of our indebtedness primarily for capital expenditures and expenditures associated with the production process and for maintaining liquidity.
The following table sets forth our net indebtedness (according to the type of debt and currency) net of cash, cash equivalents, marketable securities, restricted cash and derivative financial instruments for the periods indicated.
| | As of December 31, |
| | 2023 | | 2022 |
| | Current | | Non-current | | Total | | Total |
| | (in thousands of reais) |
| Total loans and borrowings | 2,451,838 | | 17,643,710 | | 20,095,548 | | 23,517,000 |
| Local currency | 930,271 | | 8,071,892 | | 9,002,163 | | 10,967,819 |
| Foreign currency | 1,521,567 | | 9,571,818 | | 11,093,385 | | 12,549,181 |
| Derivative financial instruments, net | (32,282) | | (470,011) | | (502,293) | | 126,019 |
| Cash, cash equivalents and marketable securities and restricted cash | (9,726,356) | | (392,390) | | (10,118,746) | | (9,045,421) |
| Local currency | (5,503,519) | | (88,885) | | (5,592,404) | | (4,435,686) |
| Foreign currency | (4,222,837) | | (303,505) | | (4,526,342) | | (4,609,734) |
| Net Debt (Cash)(1) | (7,306,800) | | 16,781,309 | | 9,474,509 | | 14,597,596 |
| (1) | We define Net Debt as total loans and borrowings (current and non-current) plus derivative financial instruments, net (current and non-current) minus cash and cash equivalents (including marketable securities, current and non-current, and restricted cash, current and non-current). Net Debt is a supplemental measure of our financial condition and used in making certain management decisions. It is not a prescribed measure under IFRS. |
Our Net Debt as of December 31, 2023 was R$9,474,509 thousand, a decrease of 35.1% with respect to December 31, 2022, mainly as a result of the 2023 Equity Offering carried out in the second half of 2023.
The table below provides a further breakdown of our indebtedness by the type of debt.
| | Current | | Non-current | Total loans and borrowings as of December 31, |
| | As of December 31, 2023 | | 2023 | | 2022 |
| | (in thousands of reais) |
| Working capital | 777,528 | | — | | 777,528 | | 409,186 |
| Certificate of Agribusiness Receivables | — | | — | | — | | 999,646 |
| Debentures | 139,881 | | 6,494,553 | | 6,634,434 | | 5,940,146 |
| Export credit facility | 6,258 | | 1,577,339 | | 1,583,597 | | 3,613,555 |
| Fiscal incentives | 6,604 | | — | | 6,604 | | 5,286 |
| Total local currency | 930,271 | | 8,071,892 | | 9,002,163 | | 10,967,819 |
| Bonds | 132,502 | | 7,427,060 | | 7,559,562 | | 11,902,290 |
| Export credit facility | 1,031,738 | | 1,404,913 | | 2,436,651 | | 132,887 |
| Advances for foreign exchange rate contracts | 158,420 | | — | | 158,420 | | 0,00 |
| Working capital | 198,907 | | 739,845 | | 938,752 | | 514,004 |
| Total foreign currency | 1,521,567 | | 9,571,818 | | 11,093,385 | | 12,549,181 |
| Total | 2,451,838 | | 17,643,710 | | 20,095,548 | | 23,517,000 |
The maturity schedule of the principal amount of our loans and borrowings is as follows:
| | As of December 31, 2023 (in thousands of reais) |
| 2024 | 2,073,011 |
| 2025 | 1,355,195 |
| 2026 | 2,929,729 |
| 2027 | 2,984,936 |
| 2028 | 939,150 |
| 2029 onwards | 9,574,333 |
| Total | 19,856,354 |
| | |
Our principal debt instruments as of December 31, 2023 are described below. For more information on these facilities, including information on average interest rates and weighted average maturities, see note 15 to our consolidated financial statements.
For more information regarding out indebtedness, see note 23.1(i) to our consolidated financial statements.
Local Currency Debt
Working Capital Facilities
Rural Credit Financing. We had rural credit loans in the amount of R$773,840 thousand as of December 31, 2023 with Santander and Banco Inter under a Brazilian federal government program that offers favorable interest rates as an incentive to invest in rural activities, with maturity in 2024. We generally use the proceeds of these loans for working capital purposes. These credit lines are included under “Working capital” in the table above.
Other Working Capital Facilities. We had other working capital facilities in the amount of R$3,687 thousand as of December 31, 2023 with several commercial banks, with maturity in 2024. We generally use the proceeds of these loans for working capital. These credit lines are included under “Working capital” in the table above.
Debentures
On July 1, 2019, we completed a public offering in Brazil of non-convertible unsecured debentures in the aggregate amount of R$750,000 thousand—R$70,000 thousand aggregate principal amount of which bear interest based on a rate of CDI plus a spread of 0.8% per year and matured in 2022, R$411,732 thousand aggregate principal amount of which bear interest based on the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo) published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística) rate plus a spread of 5.5% per year and mature in 2025 and 2026 and R$268,268 thousand aggregate principal amount of which bear interest based on the CDI rate plus a spread of 1.45% per year and mature in 2025 and 2026. As of December 31, 2023 the outstanding principal and interest amount of the debentures was R$830,144 thousand.
On July 14, 2020, we concluded a debenture issuance in the amount of R$2,200,000 thousand. We issued in two series 2,200,000 non-convertible unsecured debentures with nominal unit value of R$1,000.00, which were privately placed with VERT Companhia Securitizadora to back its 46th issuance of CRAs. A description of the series of this debenture issuance is below:
| · | First Series: The principal amount of the 705,000 debentures of the 1st series matures in a single installment on July 15, 2027, with interest payable every six months. The debentures of the 1st series bear interest equal to IPCA plus 5.30% per year; and |
| · | Second Series: The principal amount of the 1,495,000 debentures of the 2nd series matures in three installments, the first on July 17, 2028 (33.33% of the updated outstanding principal amount), the second on July 16, 2029 (50% of the updated outstanding principal amount) and the third on July 15, 2030 (100% of the updated outstanding principal amount), with interest payable every six months. The debentures of the 2nd series bear interest equal to IPCA plus 5.60% per year. |
As of December 31, 2023 the outstanding principal and interest amount of the debentures was R$2,681,294 thousand.
On June 2, 2021, we concluded a debenture issuance in the amount of R$1,000,000 thousand. We issued 1,000,000 non-convertible unsecured debentures with nominal unit value of R$1,000.00, which were privately placed with VERT Companhia Securitizadora to back its 60th issuance of CRAs. The principal amount matures in a single installment on May 14, 2031, with interest payable every six months. The debentures bear interest equal to IPCA plus 4.7843% per year. As of December 31, 2023, the outstanding principal and interest amount of the debentures was R$1,214,044 thousand.
On July 13, 2022, we concluded a debenture issuance in the amount of R$1,700,000 thousand. We issued in two series 1,700,000 non-convertible unsecured debentures with nominal unit value of R$1,000.00, which were privately placed with VERT Companhia Securitizadora to back its 78th issuance of CRAs. A description of the series of this debenture issuance is below:
| · | First Series: The principal amount of the 710,000 debentures of the 1st series matures in a single installment in 2027, with interest payable every six months. The debentures of the 1st series bear interest equal to CDI plus 1.25% per year; and |
| · | Second Series: The principal amount of the 990,000 debentures of the 2nd series to be paid in three installments, the first in 2030, the second in 2031, and the third in 2032, with interest payable every six months. The debentures of the 2nd series bear interest equal to IPCA plus 6.83% per year. |
As of December 31, 2023 the outstanding principal and interest amount of the debentures was R$1,908,952 thousand.
Export Credit Facilities
Export Credit Notes. We have export credit notes in local currency, totaling R$1,583,597 thousand as of December 31, 2023. These notes bear interest at CDI rates, and mature in 2027. These credit lines are included under “Export credit facilities” in the table above.
Other
State Tax Incentive Financing Programs. We also had R$6,604 thousand outstanding as of December 31, 2023 under credit facilities offered by the State of Goiás under tax incentive programs to promote investments in 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 that state. The credit facilities have a 20-year term from 2019 and fixed or variable interest rates based on the IGP-M plus a margin. This credit line is included under “Other” in the table above.
Foreign Currency Debt
Bonds
2026 Notes. On September 29, 2016, our wholly-owned subsidiary BRF GmbH issued senior notes in the aggregate principal amount of US$500,000 thousand, or the 2026 Notes. The 2026 Notes bear interest at a rate of 4.35% per year and mature on September 29, 2026. In September 2020 and September 2023, we repurchased US$718.0 thousand and US$200,000 thousand, respectively, in aggregate principal amount of the 2026 Notes in tender offers. As of December 31, 2023, the outstanding principal and interest amount of the 2026 Notes amounted to R$1,453,806 thousand.
2030 Notes. On September 19, 2019, we issued senior notes in an aggregate principal amount of US$750,000 thousand, or the 2030 Notes. The 2030 Notes bear interest at a rate of 4.875% per year and mature on January 24, 2030. In June 2021, we repurchased US$59,402 thousand in aggregate principal amount of the 2030 Notes in a tender offer. As of December 31, 2023, the outstanding principal and interest amount of the 2030 Notes amounted to R$2,896,104 thousand.
2050 Notes. We issued senior notes in an aggregate principal amount of US$500,000 thousand on September 21, 2020 and additional senior notes in an aggregate principal amount of US$300,000 thousand on October 26, 2020 (collectively, the 2050 Notes) for an aggregate amount of the series of US$800,000 thousand. The 2050 Notes bear interest at a rate of 5.750% per year and mature on September 21, 2050. As of December 31, 2023, the outstanding principal and interest amount of the 2050 Notes amounted to R$3,209,652 thousand.
Export Credit Facilities
We have export credit facilities with a balance of R$2,436,651 thousand as of December 31, 2023. Our indebtedness under these facilities is denominated in U.S. dollars and mature from 2024 to 2028. We were granted a loan from one or more creditors, which is guaranteed by receivables related to the export of our products in the ordinary course.
Exchange Contract Advance
The indebtedness under these facilities is denominated in U.S. dollars, with maturity dates in 2024. Interest under these facilities accrues at a fixed rate. These facilities are generally guaranteed by BRF S.A. As of December 31, 2023, the outstanding principal and interest amount of these facilities totaled R$158,420 thousand.
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 principally located in Turkey and the United Arab Emirates. This funding is denominated in Turkish lira and Dirham, with remaining maturity dates from 2024 through 2027. As of December 31, 2023, the aggregate principal amount outstanding under these working capital facilities was equivalent to R$938,752 thousand.
Derivatives
Within the scope of our Financial Risk Management Policy, we entered into currency derivative contracts with a fair value receivable of R$107,001 thousand and fair value payable of R$13,717 thousand, commodity derivative contracts that had positive fair value of R$5.509 thousand and negative fair value of R$14,363 thousand, and interest rate derivative contracts that had fair value receivable of R$529,829 thousand and fair value payable of nil with various financial institutions and different maturity dates, in each case as of December 31, 2023. The counterparties include several Brazilian financial institutions and involve interest rate swaps, the purchase and sale of non-deliverable forwards and options of currencies and commodities. The derivatives mature between 2024 and 2032. These derivatives are recorded in our statement of financial position as derivative financial instruments.
Other Lines of Credit
In order to maintain a conservative and sustainable short-term liquidity position, on December 27, 2019, we contracted with Banco do Brasil a revolving credit line in the amount of up to R$1,500,000 thousand, maturing in three years, and renewed in October 2022 for additional two years. This line of credit may be fully or partially disbursed at our discretion. On December 31, 2023, the line was available, but had not been used.
Investment Fund in Credit Receivables
On December 7, 2023, we established a new credit receivables investment fund (Fundo de Investimento em Direitos Creditórios Clientes BRF II de Responsabilidade Limitada), or FIDC BRF II. We assign to the FIDC BRF II, and its sole objective is to acquire, from time to time, our receivables generated from commercial transactions between us and our customers in Brazil. The FIDC BRF II is a closed-ended fund and its quotas shall be repaid within three years. As of December 31, 2023, the FIDC BRF II held receivables in the amount of R$16,490 thousand.
Covenants and Covenant Compliance
Several of the instruments governing our indebtedness contain limitations on liens, and some of the instruments governing our indebtedness contain other covenants, such as limitations on mergers and sales of assets and transactions with affiliates, and include provisions regarding disposal of corporate control and change of control. As of December 31, 2023, we were in compliance with the covenants contained in our debt instruments. Our debt instruments include customary events of default. The instruments governing a substantial portion of our indebtedness contain cross-default or cross-acceleration clauses, such that the occurrence of an event of default under one of those instruments could trigger an event of default under other indebtedness or enable a creditor under another debt instrument to accelerate that indebtedness.
Seasonality
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 other quarters due to increased demand for our products during the holiday season, particularly turkeys, 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 2023, total Brazilian net sales by quarter were as follows: 23.9% for the first quarter (compared to 21.8% in 2022), 24.2% for the second quarter (compared to 24.2% in 2022), 24.4% for the third quarter (compared to 25.2% in 2022) and 27.5% for the fourth quarter (compared to 28.8% in 2022).
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 Halal market, for example, we experience lower net sales during summer months.
In 2023, total International net sales by quarter were as follows: 25.7% for the first quarter (compared to 22.8% in 2022), 21.4% for the second quarter (compared to 23.8% in 2022), 26.9% for the third quarter (compared to 27.2% in 2022) and 26.0% for the fourth quarter (compared to 26.2% in 2022).
Capital Expenditures
See “Item 4. Information on the Company—A. History and Development of the Company—Capital Expenditures.”
| C. | Research and Development, Patents and Licenses, etc. |
In 2023, we launched 138 new SKUs for consumers, of which 72 were released for the domestic market and 66 for the international market (five in the Halal market). We also launched 34 SKUs in our Pet segment.
Our Research, Development and Innovation activities, or 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 Brazilian state of São Paulo, where our BRF Innovation Center, or BIC, is based.
BIC has total space of 13,500m². The building exemplifies our commitment to investing in RD&I in order to create and add value in our products, processes and services. Its structure, which was developed to set technological development standards in the food industry, includes research and development areas for meat, pasta, margarine, vegetables, packaging, graphic arts, visual standardization of packaging, supplier quality, regulatory matters, sustainability, and animal welfare. 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 spaces for brainstorming and benchmarking with potential partners.
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.
The agricultural RD&I area aims to strengthen our international competitiveness through the continuous introduction of new technologies. The goal of these activities is to reduce production costs, improve product quality and client satisfaction and meet consumer demands. For this purpose, we maintain a qualified and experienced team of specialists to experiment with new products and innovations. This team includes highly qualified researchers with advanced degrees, specialists working in animal production, researchers, veterinarians, agronomists and technical support. In addition, we have collaborative arrangements with several universities, government research institutions and innovative private companies, and we use several research incentives made available by government research and development agencies.
We believe we have one of the largest poultry and swine agricultural experimental research facilities in the world. Our research system includes one experimental feed meal plant and 19 experimental barns, which are distributed across four experimental farms in the Brazilian state of Santa Catarina, with a total of 1,392 experimental pens to evaluate the impact of new technology and innovation in the production chain. We also have nine bromatological laboratories and four receiving and classification laboratories, all equipped with NIRS (Near Infrared Spectroscopy) technology, in addition to five animal health laboratories supporting research and operational activities.
In 2017 we implemented a real-time feed formulation technology, also known as NIRS in-line. This technology uses real-time analysis of raw materials in the production line through NIRS, and integrates the data generated with an optimization software of feed formulation that optimizes the feed formula to be produced in each batch of feed. This process improves the precision and quality of the feeds produced and is aligned with our commitment to quality throughout our process. BRF was one of the pioneers in the use of this technology in Brazil. In the next years, the objective is continuing to expand the technology into the company.
In addition to our formal research department, we have field research initiatives in the production system that allows us to evaluate all technologies under real production conditions. We also use this field research to calculate the productivity and financial impact of innovations and establish the appropriate moment to introduce a technology. We believe that the field research system provides us with an advantage in relation to other research centers and other companies in the sector. With respect to RD&I product projects, we have ongoing research projects on the reduction of additives in meat products, natural solutions for ingredients to extend the products’ due date with the food safety guarantee, new packaging and the reduction in the use of packaging materials. Another important front on research projects is related to cost reduction and cost optimization on products formulation, always balancing the affordability, sensory and nutritional aspects with the consumer demands.
Furthermore, we have a large proprietary swine breeding program in seven nucleus farms and one backup farm, with a competitive genetic package compared to the most important global breeding programs, which supply 70% of our annual demand. The breeding program incorporated latest statistical models to categorical traits, uses genomic information and efficient software for the routine genetic analysis. The team is highly qualified and includes geneticists, specialists in reproduction, management, and meat quality. In 2023, we have started to test in field the conditions of a new male hog (male used in the final mating) developed during the last years and have adjusted the breeding objectives for the female line. Additionally, we started developing a new female line that will be tested in field conditions in 2025.
Since 2009, we have been benefiting from tax credits from the Science, Technology and Innovation Ministry (Ministério da Ciência, Tecnologia e Inovação) to incentivize innovation research, called Lei do Bem. This program supports technological innovation based on the development of new products and new manufacturing processes and incremental improvement in actual products or processes. In recent years, we have established research partnerships on projects funded by EMBRAPA, FINEP, CNPq and BNDES, in different research areas.
We have researchers and project managers that are dedicated to continuously contributing with innovative ideas to the RD&I pipeline, while running cost, process and formulation optimization. We have 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 view.
We define our growth platforms based on consumer preferences. Our main platforms for the Sadia brand are day-by-day meals, helpers, happy meals, well-being, premium and special dates. Our main platforms for the Perdigão brand are day-by-day meals, barbecue, Christmas and premium Ouro. Our main platforms for the Qualy brand are breakfast, new occasions and culinary. The project managers are able to navigate through different categories, such as ready meals, cold cuts, sausages, in-natura meat, spreads, snacks and even food services, to design and apply solutions that either fulfill an unmet need or enhance a specific consumer preference.
During 2021, in addition to strengthening and expanding the lines launched in the last two years (such as the Speciale Sadia, Na receita Sadia, Sadia Mac’n Cheese, Perdigão Ouro and Sadia Veg&Tal), we maintained our strategy of building increasingly segmented consumer platforms. A highlight in 2021 was the launch of Livre&Lev, a sub-brand of Sadia, which focuses on well-being and is characterized as a line free of excesses and light in ingredients, specially developed to deliver more naturalness through fewer, well-known ingredients, free of additives. Composed of cold cuts (ham and turkey breast) and ready meals (portioned meals, which allow for different combinations and wraps). Another important initiative was the launch of the 100% Vegetable Chicken line by Sadia Veg&Tal, composed of 3 SKUs (shredded chicken, in strips and cubes), which is the first line of plant-based carbon neutral chickens on the market, and which emissions are neutralized from the grain to the point of sale through the purchase of carbon credits from forest conservation projects. The announcement of the 100% Vegetable Chicken line by Sadia Veg&Tal was made during the COP26 climate conference in Scotland. The new line of Sadia Veg&Tal was awarded First Place in the ESG Category and Winner of the Impact Projects Category 2021, both handed out by Grow Innovation Awards.
During 2022, we maintained our strategy of building increasingly segmented consumer platforms, strengthening our core portfolio and discontinuing less representative products. We highlight the launch of “Empanadíssimo”, whole chicken breast strips that are crispy on the outside and juicy on the inside (2 SKUs), Speciale sausages inspired by German cuisine (3 SKUs), and Qualy “Vegê” - the first clean label margarine in Brazil (1 SKU). In addition, taking advantage of the World Cup event and the high seasonality in Brasil of fresh sausage, we completed the Perdigão NaBrasa sausage line with additional 6 different types and flavored products. Another important initiative was the Chester pies that complement Christmas dinners, bringing an expansion of the Chester brand portfolio. Our continuous search for innovation and launches were awarded third place in the Food, Beverages and Ingredients sector and 35th in the general ranking carried out by Valor Econômico and Strategy and the TOP 100 Open Corps 2022 award from the Ranking 100 Open Startups 2022. We were in the TOP 3 in the Consumer Goods and Food category and enter the TOP 50 Open Corps ranking.
During 2023, we focused on simplifying and strengthening our core portfolio. Our portfolio rationalization agenda allowed our sales and production teams to focus on executing and building our growth platforms. We launched the Sadia “Hot Bowls” line, which includes ready meals sold in a practical bowl packaging (4 SKUs). In addition, we expanded Na receita Sadia with new in-natura pork cuts to expedite day-by-day meals (7 SKUs), launched new cold cuts from Sadia (2 SKUs) making certain of the brand’s core products more accessible, and expanded the Chester pie line (2 SKUs). In Sadia, we also focused on the growth of small dinner portions (4 SKUs). Another important initiative launched in 2023 was the new recipe of Claybom (6 SKUs), which improves the line with a new cream touch. In the Plant-Based line, we have revamped our Sadia Veg&Tal portfolio to offer a broader range of products, including cauliflower wings, pumpkin&chickpea and broccoli&spinach burgers, and vegetable nuggets (12 SKUs). This includes a partnership with PlantPlus Foods, a plant-based food tech joint venture between Marfrig and Archer-Daniels-Midland, or ADM. Moving forward, while PlantPlus Foods will strengthen its presence in the meat-like market, Sadia Veg&Tal will focus on veggie-forward products. Additionally, we have three zero-carbon items in line with our commitment to becoming Net Zero by 2040. Our continuous research and innovation efforts were awarded fourth place in the Food, Beverages and Ingredients sector of the Innovation Award carried out by Valor Econômico and Strategy, and third place in the consumer goods and food sector of the TOP 100 Open Corps 2023 award from the Ranking 100 Open Startups. Our Sadia Veg&Tal cauliflower wings and our Sadia Hot Bowls ranked first and second in Food Ingredients South America’s 2023 Innovation Awards in the innovative products category. In addition, we won the smart/practical packaging category of the Plástico Sul 2023 award with Sadia’s rebranding (BRF + IQX case).
In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “—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 “Risk Factors, particularly, Item 3. Key Information—D. Risks Factors— Risks Relating to Our Business and Industry—Deterioration of general economic and geopolitical conditions, including due to the ongoing military conflicts between Russia and Ukraine and in the Middle East, could have a material adverse effect on our business,” and “Item 3. Key Information—D. Risks Factors—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 ADRs.”
Global GDP is expected to have grown 4.3% in 2023 after a growth of 3.8% in 2022, according to the International Monetary Fund, or IMF, and global GDP is expected to grow 5.0% in 2024. 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 IMF, increased restrictions on global trade and migration would hurt productivity and incomes and have an immediate impact on market sentiment. Another potential risk discussed by the IMF is a tightening of global financing terms. IMF expects GDP growth of 3.8% in 2024 and 3.9% in 2025 for the U.S. and of 5.4% in 2024 and 4.8% in 2025 for the European Union. For emerging markets and developing countries in 2024, the World Bank expects a growth rate of 10.2% for India, 2.2% for Russia and 4.9% for China. The same report expects Brazil’s GDP to increase 4.4% in 2024 and 4.0% in 2025. The SELIC interest rate (the primary Brazilian interest reference rate) is expected to end 2024 at 9.0%, according to reports by Focus.
Exports
Brazil is a leading producer in global export markets due to its natural advantages (land, water, and climate), competitive input 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.
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 continue to account for a 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, 2023 totaled 5.0 million tons, with sales amounting to US$9,632,245 thousand (or R$46,632,589 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), compared to exports of 4.7 million tons with sales of US$9,535,096 thousand (or R$49,751,272 thousand, translated to reais at the exchange rate of R$5.2177 as of December 31, 2022) in 2022. In 2023, China has been the main destination for these exports (13.6%), followed by the United Arab Emirates (8.8%), Japan (8.6%) and Saudi Arabia (7.5%).
The volume of Brazilian pork exports in the year ended December 31, 2023 totaled 1.2 million tons, with sales amounting to US$2,799,966 thousand (or R$13,555,476 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), compared to exports of 1.1 million tons with sales of US$2,547,565 thousand (or R$13,292,428 thousand, translated to reais at the exchange rate of R$5.2177 as of December 31, 2022) in 2022. In 2023, the leading importers, China, Hong Kong and Philippines represented 32.0%, 10.4% and 10.4%, respectively, of total exports from Brazil.
Brazilian beef shipments in the year ended December 31, 2023 totaled 2.3 million tons, with sales amounting to US$10,452,590 thousand (or R$50,604,125 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), compared to exports of 2.2 million tons with sales of US$12,882,871 thousand (or R$67,218,954 thousand, translated to reais at the exchange rate of R$5.2177 as of December 31, 2022) in 2022. In 2023, the leading importers, China, the United States and Hong Kong, represented 52.9%, 6.1% and 4.7%, respectively, of total exports from Brazil.
Considering that countries in the Middle East are relevant importers of Brazilian chicken, it is likely that there is a positive correlation between oil prices (as this commodity is a key driver for the local economy and, consequently, for demand) and volume exported from Brazil to the region. In the past, declines in the price of oil reduced the ability of certain countries to import Brazilian products.
In the beginning of 2020, oil prices dropped drastically following the global economic slowdown brought on by the COVID-19 pandemic as well as an oil supply dispute among key oil producers. However, oil prices increased during 2021, surpassing pre-pandemic levels. According to the West Texas Intermediate index, which benchmarks oil prices, oil prices decreased by 17.7% in 2023 and increased by 38.4% in 2022, from an average of US$68.13 in 2021 to an average of US$94.31 in 2022 and an average of US$77.66 in 2023. Conflicts in the Middle East and in Ukraine-Russia are likely to cause price volatility, which may also may impact chicken demand from Middle East countries.
Brazilian Market
Brazil is one of the largest meat consumers in the world, with per capita consumption in 2023 of 95.9 kilograms, including beef, chicken and pork products, according to the OECD, an increase of 0.3% compared to 2022. Based on OECD data, pork consumption per capita decreased from 17.8 kg in 2022 to 17.5 kg in 2023. Chicken consumption per capita increased from 50.7 kg in 2022 to 51.0 kg in 2023. In 2023, beef and veal consumption increased to 27.4 kg per capita, from 27.0 kg in 2022.
Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. Besides us, there are many large producers, including Seara (which was acquired from Marfrig by JBS in 2013), 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. We seek to develop quality products, focusing on innovative solutions that meet clients’ needs and capture value for the strong brands we own, such as Sadia and Perdigão.
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.
Raw Materials
In 2023, Brazil harvested its 154.6 million tons of soybean, according to the Brazilian National Food Supply Agency (Companhia Nacional de Abastecimento). Average soybean prices in Brazil decreased by 20.2% in 2023 compared to 2022, while soybean prices on the Chicago Board of Trade (“CBOT”) decreased by 8.6% in 2023 compared to 2022.
In the Brazilian market, average corn prices decreased by 25.0% in 2023 compared to 2022, driven by the increase in Brazilian corn production. According to the Brazilian National Food Supply Agency, the corn crop totaled 131.9 million tons in 2022/23, compared to 113.1 million tons in 2021/22. In the international market, corn crop in the United States in 2022/23 totaled 346.7 million tons, compared to 381.5 million tons in 2021/22.
Social Contributions
In May 2018, Law No. 13,670/18 reestablished the permission for companies to replace the payment of a 20% social contribution fee over payroll with the payment of a fee ranging from 1% to 4.5% (depending on the industry) over gross operating revenues until December 2020. Such term was subsequently postponed to December 2023 by Laws 14,020/20 and 14,288/21. On December 28, 2023, the Brazilian Congress enacted Law 14,784/23 extending this term to December 31, 2027. On the same day, the Brazilian president issued provisional measure (medida provisória) No. 1,202/23 revoking such permission and applying gradually increasing fees starting from 10%-15% (depending on the industry) from April 1, 2024 and reaching 20% in 2028. MP 1,202/23 also restricted the use of tax credits with an amount of R$10.0 million or higher, despite such use being previously allowed by final and unappealable judicial decisions. According to MP 1,202/23, taxpayers must use such tax credits within a minimum period of 12 to 60 months depending on the amounts involved. On February 28, 2024, the Brazilian president enacted MP 1,208/24, which partially revoked MP 1,202/23 and reestablished the deduction permission for certain industries limiting the use of credits resulting from tax procedures. Concurrently, the Ministry of Finance introduced bill of law 493/24 to the Brazilian Congress to foster discussions about a new legislation on this subject matter. Further discussions between the Senate, the Ministry of Finance and other lawmakers are expected, to seek alternative sources of revenue as a way to finance the payroll tax reduction policy. We cannot assure that the current relief will remain in place if a new law is approved, or that we will be able to fully use our outstanding tax credits when and as expected.
| E. | Critical Accounting Policies |
We have prepared our consolidated financial statements included in this annual report 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. Our management evaluates its estimates and judgments on an ongoing basis and supports 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.
All the relevant accounting practices adopted by us are disclosed in note 3 to our consolidated financial 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. At least two members, or 20% of our board of directors, whichever is greater, must be independent under the Novo Mercado rules. Our board members are elected at Ordinary General Shareholders’ Meetings for a two-year term and may be reelected. Our bylaws require that the board of directors consist of at least seven and up to ten members. Our board of directors currently consists of nine members. Our bylaws do not contemplate alternates to board members. There 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 the positions on the board of directors are vacant at the same time, then an extraordinary shareholders’ meeting shall be called within 30 days counted from such vacancy event.
Our current board of directors was elected at the Ordinary General Shareholders’ Meetings held on March 28, 2024. The following table sets forth information about our current Board members:
Name | | Position Held | | Appointment Date | | Term | | Age |
| Marcos Antonio Molina dos Santos | | Chairman | | March 28, 2024 | | 2 years | | 54 |
| Marcia Aparecida Pascoal Marçal dos Santos | | Vice-Chairman | | March 28, 2024 | | 2 years | | 51 |
| Sérgio Agapito Lires Rial | | Board Member | | March 28, 2024 | | 2 years | | 63 |
| Augusto Marques da Cruz Filho(1) | | Board Member | | March 28, 2024 | | 2 years | | 71 |
| Marcos Fernando Marçal dos Santos | | Board Member | | March 28, 2024 | | 2 years | | 28 |
| Flávia Maria Bittencourt(1) | | Board Member | | March 28, 2024 | | 2 years | | 54 |
| Márcio Hamilton Ferreira | | Board Member | | March 28, 2024 | | 2 years | | 52 |
| Pedro de Camargo Neto(1) | | Board Member | | March 28, 2024 | | 2 years | | 75 |
| Eduardo Augusto Rocha Pocetti(1) | | Board Member | | March 28, 2024 | | 2 years | | 69 |
(1) Independent member (as defined in the Brazilian Novo Mercado regulations).
Below is a summary of the professional experience and areas of activity of our current board members.
Marcos Antonio Molina dos Santos – Mr. Molina is the chairman of Marfrig’s board of directors. He has over 30 years of experience in the food sector, having started his professional career at the age of 16, when he opened his first business, a food distribution company. Mr. Molina is also a partner and the chief executive officer of MMS Participações Ltda., which is the parent company of Marfrig, our controlling shareholder. See “Item 7. Major Shareholders and Related Party Transactions⸻ A. Major Shareholders.”
Marcia Aparecida Pascoal Marçal dos Santos – Ms. Marçal dos Santos has been a member of Marfrig’s board of directors since March 2007. She has extensive experience at Marfrig, having been responsible for the financial department from 2000 to 2006 and for the internal audit team from 2000 to 2006. In addition, Ms. Marçal dos Santos actively participates in the Marfrig Fazer e Ser Feliz Social Responsibility Institute, as its chief executive officer. She is also a partner and vice-president of MMS Participações Ltda., which is Marfrig’s parent company.
Sergio Agapito Lires Rial – Mr. Rial’s professional career includes the positions of chief executive officer of Marfrig, executive vice-president and chief financial officer of Cargill and president of Banco Santander Brasil. He was also a member of Cargill’s board of directors for nine years. Mr. Rial was president of Seara Alimentos S.A., managing director at Bear Stearns & Co. in New York, director of ABN AMRO Bank and member of the board of directors of ABN AMRO Bank in the Netherlands, as well as a member of the board of directors of Mosaic Fertilizers. He holds a degree in law from the Universidade Federal do Rio de Janeiro and in economics from Universidade Gama Filho, as well as an MBA from IBMEC, in São Paulo and specializations from Harvard Business School, Wharton School of Business, University of Pennsylvania and INSEAD, in France.
Augusto Marques da Cruz Filho – Mr. Cruz Filho is the Vice-Chairman of our Board of Directors. Mr. Cruz Filho holds a PhD in Economic Theory from the Institute of Economic Research (IPE) of the University of São Paulo, graduated in Economic Sciences from the Economic and Administration University of the University of São Paulo (FEA-USP) and attended the development abroad course at INSEAD – Executive Program at Institut Européen d’Administration des Affaires. Mr. Cruz Filho worked at Grupo Pão de Açúcar for 11 years holding the positions of executive officer, administrative and financial officer and, for over two years, CFO, until leaving the position in 2005. Between 2005 and 2010, Mr. Cruz Filho was member of the Board of Directors and Audit Committee of B2W. From April 2016 to August 2019, Mr. Cruz Filho acted as the Chairman of the Board of Directors of BR Distribuidora. He is also member of the Board of Directors of SIMPAR S.A. (former Grupo JSL S.A.), and General Shopping. Mr. Cruz Filho also acts as the Coordinator of our Audit and Integrity Committee.
Marcos Fernando Marçal dos Santos – Mr. Marçal dos Santos holds a degree in business administration from Fundação Armando Alvares Penteado – FAAP. He is currently taking the preparatory course “Jornada Sucessor” sponsored by Consultoria Falconi and is a member of the Compensation, Corporate Governance and Human Resources Committee of Marfrig. He has a solid professional experience in the agribusiness sector, having held the positions of Auditor (2015 – 2018), Commercial (2018), General Manager at the Bataguassu Unit – MS (2018 – 2019) and General Manager at the Várzea Grande Unit at Marfrig – MT (2019-2021). Mr. Marçal dos Santos currently holds the position of Supply Chain Director at Marfrig.
Flávia Maria Bittencourt – Ms. Bittencourt holds a degree in Chemical Engineering from the Federal University of Rio de Janeiro – UFRJ, a postgraduate degree in Marketing at Escola Superior de Propaganda e Marketing – ESPM and an Executive MBA from Fundação Dom Cabral. Ms. Bittencourt served at Oi – Telemar for more than 10 years, in positions such as Product Manager (2001 – 2003), General Marketing Manager (2003 – 2005) and Executive Director of Marketing (2005 – 2011). In addition, she was Marketing Director at Lácteos Brasil, co-founder of STORIES4FUN and Senior Vice President of Latin America at Sephora Brasil. Ms. Bittencourt served as a consultant at the Carlyle Group from 2012 to 2013 and as a member of the Board of Directors of Lojas Marisa, between 2018 and 2019. She is currently CEO of Adidas and a member of the Board of Directors of Tim Brasil. In addition to being a member of our Board of Directors, Ms. Bittencourt is also a member of the People, Governance, Organization and Culture Committee and of the Sustainability Committee.
Márcio Hamilton Ferreira – Mr. Ferreira worked for more than 30 years at Banco do Brasil (1986-2019), where he held the position of Director of Capital Markets and Investments (2009), Director of Finance (2009-2012), Director of Credit (2012-2014), Chief Executive Officer of BB Asset (2015-2017) and, from January 2017 onwards, he held the positions of Vice-President of Internal Controls and Risk Management and Vice-President of Wholesale Business. Mr. Ferreira was the Chief Executive Officer of the Brasilprev pension plan in 2020, served as Chief Executive Officer of BB Seguros in 2020-2021 and as Executive Vice-President of ELO Serviços in 2021-2022. He also served as a member of the board of directors of the Guarulhos Airport Concessionaire (2016-2017), Invepar (2016-2017), QUOD - Gestora de Crédito (2017-2019), Banco Patagonia (2019-2020) and Vale (2019), as chairman of the board of directors of Brasilcap Capitalização S.A. (2017-2019), as president and member of the board of directors of Neoenergia S.A (2015-2016 / 2017-2019 / 2020-2021), as chairman of the board of directors of BB DTVM (2017-2020), and as president and member of the board of directors of Brasilprev Seguros Previdência (2020-2021). In addition, Mr. Ferreira was a member of the executive board of Febraban (2017-2020), Anbima (2016-2017) and Fenaprevi (2020). He currently serves as a member of the board of directors of Livelo Gerdau and Metalúrgica Gerdau. Mr. Ferreira holds a business degree from the Business school of the Brasília Federal University (UNB); a post-graduation degree in Training for Senior Executives at Fundação Getúlio Vargas (FGV) and is certified as Board Member by the Brazilian Institute of Corporate Governance (IBGC).
Pedro de Camargo Neto – Mr. Camargo is a civil engineer graduated from the Universidade de São Paulo (1972). He has a master of science from the Massachusetts Institute of Technology (1974) and a PhD in production engineering from the Universidade de São Paulo (1984). Mr. Camargo has been a farmer and rancher in the Brazilian states of São Paulo, Mato Grosso do Sul and Piauí for the last 40 years. He was a business consultant, secretary of production and marketing at MAPA, from 2001 to 2002 and president of the Brazilian Rural Society from 1990 to 1993 and vice-president from 2017 to 2019.
Eduardo Augusto Rocha Pocetti – Mr. Pocetti served as a member of the fiscal council of Marfrig from 2014 to 2022. As an accountant, he holds an MBA in Business Administration from Fundação Getúlio Vargas. Mr. Pocetti was a partner at KPMG Auditores Independentes Ltda. and president of the national board of officers (2013 to 2015) and member of the board of directors of IBRACON – Instituto dos Auditores Independentes do Brasil (2016 to 2021). He has 30 years of experience in auditing companies. From 2004 to 2011, he was president of BDO RCS Auditores Independentes S.A., where he represented the name of BDO Brasil for all member firms of the international BDO network. He has extensive experience in finance, accounting, independent auditing, economic-financial planning and coordination at the management and board level in several large national and multinational companies in the industrial and financial sector. Mr. Pocetti worked in several IPO transactions and special corporate finance projects for the purchase and sale of companies. Mr. Pocetti is also a member of the board of directors of the publicly-held company Mahle Metal Leve S.A. and a member of the fiscal council of Camil Alimentos S.A. and coordinator of the advisory board of the CIEE – Centro de Integração Empresa Escola.
See “Item 3. Key Information—D. Risk Factors— Our controlling shareholder may take actions which are not necessarily in our interest or in the interest of our other holders of common shares or ADRs.”
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 bylaws require that the board of executive officers consist of a Global Chief Executive Officer, a Chief Financial and Investor Relations Officer and up to 13 additional 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. Our board of directors may remove any executive officer from office at any time with or without cause. Under Brazilian Corporate Law, our executive officers must be residents of Brazil but do not need to be our shareholders. Our executive officers hold ordinary monthly meetings, as well as extraordinary meetings, when called by our Chief Executive Officer. The following table sets forth the name, position and the applicable date of appointment of each of our current executive officers, all of which were appointed for a fixed term expiring on April 15, 2026.
Name | | Position Held | | Appointment Date | | Age |
| Miguel de Souza Gularte | | Global Chief Executive Officer | | April 15, 2024 | | 65 |
| Fabio Luis Mendes Mariano | | Chief Financial and Investor Relations Officer | | April 15, 2024 | | 43 |
| Artemio Listoni | | Industrial Operations and Logistics Vice-President | | April 15, 2024 | | 63 |
| Manoel Reinaldo Manzano Martins Junior | | Brazil Commercial Vice-President | | April 15, 2024 | | 46 |
| Alessandro Rosa Bonorino | | People, Sustainability and Digital Transformation Vice-President | | April 15, 2024 | | 54 |
| Leonardo Campo Dall’Orto | | International Markets and Planning Vice-President | | April 15, 2024 | | 50 |
| Fabio Duarte Stumpf | | Agribusiness and Quality Vice-President | | April 15, 2024 | | 42 |
| Marcel Sacco | | Marketing and New Businesses Vice-President | | April 15, 2024 | | 57 |
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.
Miguel de Souza Gularte – Mr. Gularte has a degree in veterinary medicine from URCAMP (RS) and has more than 40 years of experience in the meat industry. He started his professional career at Cooperativa Industrial de Carnes e Derivados (Cicade), where he held several positions, such as Quality Control Manager, Manager and Industrial Director. In 1996, Mr. Gularte joined the PUL meatpacker in Uruguay, where he worked as a Commercial Director, General Director, President and partner. In 2011, he led the sale of the PUL meatpacker to Minerva Foods, becoming Minerva’s International Vice President, a position he held until June 2013. From 2013 to 2016, Mr. Gularte served as President of JBS Mercosul responsible for the Meat, Leathers and New Business divisions in Brazil and for JBS Argentina, Uruguay and Paraguay. From 2018 to 2022, he served as the CEO of South America at Marfrig.
Fabio Luis Mendes Mariano – Mr. Mariano holds a degree in Business Administration and a postgraduate degree in Banking from Universidade Presbiteriana Mackenzie, an MBA from the University of Pittsburgh Katz Graduate School of Business and a specialization in financial markets from Fundação Getúlio Vargas – FGV. Mr. Mariano has 23 years of professional experience in companies such as Bank Boston, Dupont do Brasil, and BRF, where he has served for 15 years including as CFO LATAM and General Manager of BRF Alimentos Calchaquí, in Argentina. In 2017, he returned to Brazil as our Financial Executive Officer and, since 2019, he has served as Vice-Chairman of the Board of BRF Previdência. Since 2022, Mr. Mariano serves as our Chief Financial and Investor Relations Officer.
Artemio Listoni – Mr. Listoni has more than 40 years of experience in agribusiness. He started his career at the former Sadia Alimentos S.A., where he worked from 1981 to 1995, having returned to BRF from 2006 to 2008 and once again in 2023 as our Industrial Operations and Logistics Vice-President. With experience in technical assistance for animal producers, he also held the position of President at JBS in Argentina, Paraguay and Uruguay and director of South American Operations at Marfrig.
Manoel Reinaldo Manzano Martins Junior – Mr. Martins Junior graduated in Business Administration from the Pontifical Catholic University of São Paulo, PUC/SP, with a specialization in Marketing and Retail from FIA/USP and ESPM, respectively. He has 24 years of professional experience in the consumer goods industry, in the domestic and international market (Middle East and Latin America). Prior to joining us, Mr. Martins Junior worked in companies such as Perdigão, Associate British Food and JBS. Since 2022, Mr. Martins Junior serves as our Brazil Commercial Vice-President.
Alessandro Rosa Bonorino – Mr. Bonorino graduated in Economics from the Federal University of Rio de Janeiro – UFRJ, and holds an Executive MBA from the Dom Cabral Foundation. He has more than 30 years of professional experience, having spent the past 23 years in executive positions. Mr. Bonorino started his career as an auditor at KPMG. In the human resources field, he began his career at IBM in 1992, where he worked for 23 years. He led transformation projects across multiple areas of human resources on a national, regional and global scale. Recognized for several years as one of the top human resources professionals in Brazil by industry publications, Mr. Bonorino has had extensive experience in multiple cultures and countries as a human resources leader. His leadership positions include serving at IBM as the Global Vice President, Human Resources Services Delivery Division from 2015 to 2017 and Global VP Recruitment, located in China, from 2010 to 2014. Previously, Mr. Bonorino led the human resources department in Latin America from 2008 to 2010, served as the head of human resources for Brazil from 2005 to 2008 and led the human resources department for South America in Argentina at IBM from 2002 to 2005. In 2017, he joined our company as People, Management and Digital Transformation Vice-President.
Leonardo Campo Dall’Orto – Mr. Dallorto holds a degree in Mechanical Engineering from the Federal University of Espírito Santo, with a master’s degree and a doctorate in industrial engineering from the Pontifical Catholic University of Rio de Janeiro (PUC-RJ) and a MBA from the Dom Cabral Foundation. He has 21 years of experience, the last 13 years of which holding executive positions. Mr. Dallorto began his career at Vale in 2002 in the Railway and Port Logistics area, and he took part in their international expansion, working in projects in Canada, India and Africa. Between 2007 and 2011, he served with the consulting firm McKinsey & Company, focused on Supply Chain, Procurement, Strategy and M&A of companies across different sectors in Latin America. Mr. Dallorto joined BRF in 2011, occupying many positions including as head of Supplies and Integrated Planning, as Brazil Commercial Vice-President (in which he led the Logistics and South Region units, developing customer relationship programs, GTM strategies and the review of distributors’ role in the region) and as Industrial Operations Officer (in which he took part in defining our manufacturing footprint and led our productivity project (Guide)). Mr. Dallorto has served as our International Markets and Planning Vice-President since 2018.
Fabio Duarte Stumpf – Mr. Stumpf holds a graduate degree in Veterinary Medicine from the University of Passo Fundo in Rio Grande do Sul. He has 20 years of experience in Agribusiness. Mr. Stumpf began his career at Sadia/BRF, holding various positions within the company’s Agricultural and Industrial Operation. From 2017 to 2021, he worked as Industrial Director and General Director of Agriculture. In 2021, he was appointed as Executive Director of Agriculture and Global Quality at BRF. Since 2022, Mr. Stumpf has served as our Agribusiness and Quality Vice President.
Marcel Sacco – Mr. Sacco holds a bachelor’s degree in Marketing from Escola Superior de Propaganda e Marketing (“ESPM”) and a master’s degree in Business Administration with emphasis in Finance from Fundação Getúlio Vargas (FGV). He also completed specializations in Advanced Marketing Management at IMD in Switzerland, in Advanced General Management at INSEAD, in France, as well as the Leadership Program at the Institute for Creative Leadership in San Diego, California. In addition, Mr. Sacco completed the Councilor Development Program at Fundação Dom Cabral. In 2008, he was nominated as one of the three best marketing professionals in Brazil by Prêmio Caboré. Mr. Sacco has worked in companies such as Parmalat Brasil, Telefônica, Schincariol and Bauducco. Prior to joining us as Vice-President of New Businesses in 2021, he served with The Hersey Company as General Manager Brazil & LatAm from 2019 to 2021, and previously as General Manager Brazil & South America from 2013 to 2019. Currently, Mr. Sacco also serves as a member of the Board of Directors at the non-governmental organization Gerando Falcões.
The total salary and profit sharing payments, as described below, paid by us to all our executive officers and members of our board of directors, fiscal council and audit and integrity committee for their services for the year ended December 31, 2023 was R$61,427 thousand.
The amount of variable compensation paid to each executive officer in any year pursuant to our profit-sharing plan is primarily related to financial and non-financial results such as EBITDA, net income, cash flow, safety index, KPIs related to ESG and quality. It is also based on an assessment of individual performance of each officer conducted by the CEO and members of Board of Directors. This methodology follows best market practices and provides reasonable maximum amounts while ensuring our market competitiveness in terms of compensation and retention.
Our executive officers are also eligible to participate in our Restricted Stock Plan. As of December 31, 2023, a total of 2,647,632 stock options, RSUs and PSUs were held by our executive officers, with a cost to us of R$24,206 thousand. In 2023, a total of 2,155,759 shares of restricted stock were granted to our executive officers. For additional information regarding our Stock Option Plan and Restricted Stock Plan, see “—E. Share Ownership— Stock Options Plan, Performance Shares Plan and Restricted Stock Plan.”
The table below shows information about the stock options and RSUs granted to executive officers of BRF in 2023 and in previous years that were outstanding as of December 31, 2023:
Grant | # Options / Restricted Stock Units | Grant Price(1) | Strike Price as
of December 31, 2023 | Expiration Date |
| | | | | |
| 2021 (Restricted Stock and Performance Share Units) | 93,699 | R$28.58 | N/A | July 1, 2024 |
| 2022 (Restricted Stock and Performance Share Units) | 398,174 | R$14.11 | N/A | July 1, 2025 |
| 2023 (Restricted Stock and Performance Share Units) | 2,155,759 | R$7.38 | N/A | June 1, 2026 |
| Total | 2,647,632 | | | |
(1) The grant price refers to the average stock price at the B3 of the last 20 trading days before the grant date.
Our executive officers receive certain additional benefits generally provided to 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 2023, the amount paid as benefits and private pension plan to the executive officers totaled R$1,066 thousand.
Our executive officers and the members of our board of directors, audit and integrity committee and fiscal council are not parties to employment agreements or other contracts providing for benefits upon the termination of employment. However, non-compete agreements may be entered into with executive officers departing our company. In 2023, we paid severance benefits to former executive officers in the amount of R$8,413 thousand.
For information about the date of expiration of the current term of office and the period during which each member 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 Brazilian Corporate Law, a company’s fiscal council is a corporate body independent of the company’s management and external auditors, and 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 ordinary general shareholders’ meeting, with terms lasting until the succeeding ordinary general shareholders’ meeting with reelection being permitted.
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 |
| Marco Antônio Peixoto Simões Velozo(1) | President of the Fiscal Council | March 28, 2022 | 56 |
| Attilio Guaspari(1) | Alternate | April 29, 2005 | 78 |
| Ricardo Florence dos Santos | Member of the Fiscal Council | - | 69 |
| Antonio Mathias Nogueira Moreira | Alternate | - | 46 |
| Alexandre Eduardo de Melo | Member of the Fiscal Council | - | 47 |
| José Luiz de Souza Gurgel | Alternate | - | 58 |
(1) Independent Member (as defined under the Brazilian Novo Mercado rules).
Below is a summary of the professional experience and areas of activity of our current fiscal council members:
Marco Antônio Peixoto Simões Velozo – Mr. Velozo holds a degree in economics and accounting from Faculdades Integradas Cândido Mendes, and an MBA in corporate finance from IBMEC. He has extensive experience as a technical assistant in judicial disputes and in arbitration, including as a technical assistant or as an expert at the Arbitral Tribunal, at the CBMA and at the FGV Chamber of Conciliation and Arbitration, and has been an independent auditor of various companies since 1989. Mr. Velozo is a founding partner of Vértice Auditoria, where he is responsible for the technical area and audit methodology.
Attilio Guaspari — Mr. Guaspari is a civil engineer graduated from Escola Politécnica of USP and holds a Master’s degree in Management Sciences from Coppe/AD of UFRJ. He served as Chief Financial Officer, Audit Superintendent and member of the Audit Committee at BNDES and as Financial-Administrative Director at Embrafilme. Mr. Guaspari has served on several Boards of Directors since 1986, such as those of Brasil Ferrovias S.A., FAPES, Indústrias Verolme-Ishibrás, and Projeto Jarí. He has also been Chairman of the Fiscal Council of Perdigão, with Audit Committee attributions, since 2005, and as a member of our Fiscal Council since 2018. Mr. Guaspari has extensive professional experience in positions such as Internal Audit Committee Head, Financial Director and member of boards of directors. Mr. Guaspari qualifies as an independent member of the Fiscal Council under the Novo Mercado rules.
Ricardo Florence dos Santos – Mr. Florence dos Santos has acted as an independent member of the board of directors of Movida Rental Car, S.A. since 2016 and as a member of the fiscal council of CPFL Energia since 2017. He is also a member of the Movida audit and financial committees. Mr. Santos served as the vice president of finance of Marfrig between 2013 and 2016 and as executive director of investor relations between 2007 and 2014. Previously, he worked at Grupo Pão de Açúcar for 16 years (1984-2000), including as a director of strategic planning, finance and executive director of investor relations. Mr. Santos was also responsible for the investor relations area of UOL Inc. (Grupo Folha de São Paulo – 2000/2001) and Brasil Telecom (2005-2007). He has participated in several IPO processes, mergers, acquisitions and sales of assets in the companies where he worked. Mr. Santos served on the boards of directors of Grupo Pão de Açúcar (1995-1999), UOL – Grupo Folha (2001) and IBRI – Brazilian Institute of Investor Relations (1998-2001 and 2014-2019), where he also served as chief executive officer from 2010 to 2013, as well as in the Dentalcorp S.A. Advisory Board (2002 to 2006). Mr. Santos is a chemical engineer graduated from the Polytechnic School of USP and holds a business administration degree from Universidade Mackenzie, as well as an MBA in strategy and finance from IBMEC-SP.
Antonio Mathias Nogueira Moreira – Mr. Nogueira Moreira is chairman of the board of directors of Valec Engenharia, Construções e Ferrovias S.A. (Infra S.A.), appointed by the Ministry of Transport, a member of the strategic business committee of ELO Serviços S.A., appointed by Caixa Cartões Holding S.A., and the executive director of governance, integrity and risks at Caixa Cartões Holding S.A. Mr. Nogueira Moreira holds a degree in financial management from the Catholic University of Brasília - UCB, a postgraduate degree in people management from the Anísio Teixeira College - FAT, and a master’s degree in business administration (governance, risk management and compliance) from the Center for the Study of Law and Business - CEDIN.
Alexandre Eduardo de Melo – Mr. Melo works as a financial, accounting and tax consultant, providing services in Brazil, the United States and European Union. He served as chief financial officer at Agropecuária Jacarezinho between 2016 and 2019 and controller director at Marfrig from 2005 to 2013, with more than 12 years experienced in controlling, finance and accounting. Previously, Mr. Melo served as auditor and senior tax advisor at BDO Auditores e Consultores Independentes between 2000 a 2004. Mr. Melo is an accountant, graduated at University of São Paulo – USP and affiliated to the Regional Council of Accounting in São Paulo, Brazil. He also holds a postgraduate degree in tax law from São Judas University in São Paulo, Brazil.
José Luiz de Souza Gurgel – Mr. Souza Gurgel is currently a member of the fiscal council of Marfrig, a position he has held since 2022. Since 2022, he has chaired the statutory audit committee of Indústrias Nucleares do Brasil - INB, in addition to being a member of the people, eligibility, succession and remuneration committee of the same company. In 2021 and 2022, Mr. Souza Gurgel served as a member of the supervisory Board of the SOMA Group. Between April 2011 and May 2019, he was an audit partner at KPMG in Rio de Janeiro. From July 2001 to March 2011, Mr. Souza Gurgel was an audit partner at BDO, where he also served as a member of the organization's executive committee from 2008 to 2010. Between 2004 and 2008, Mr. Souza Gurgel was the head partner at the BDO’s Rio de Janeiro office. Mr. Souza Gurgel holds a degree in economics from UERJ and in accounting sciences from Faculdade da Cidade, a postgraduate degree in business management from Cândido Mendes and a master's degree in Accounting Sciences (2018) from FUCAPE-RJ.
Audit and Integrity Committee
Our shareholders approved the establishment of a 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 voted to rename the committee as the Audit and Integrity Committee. The Audit and Integrity Committee is composed of three to five members, a majority of whom must be independent members, one of whom cannot be a member of the board of directors and none of whom may be an executive officer (in accordance with the independence standards of the CVM, in particular CVM Resolution No. 80/22).
The members of the Audit and Integrity Committee must be appointed by the board of directors for terms of two years, but for a total period not to exceed ten years. They are subject to removal from their positions by the board of directors at any time. The members of the Audit and Integrity Committee who are also members of the board of directors shall terminate concomitantly with his or her termination as a board member.
Our Audit and Integrity Committee complies with CVM Resolution No. 80 of March 29, 2022, as amended, 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 Audit and Integrity committee is not the equivalent of, or wholly comparable to, a U.S. audit committee.
On September 25, 2020, our board of directors, with the recommendation of the Audit and Integrity Committee, approved the Extra-Audit Services Hiring Policy with the following objectives: (i) to ensure that any extra-audit services that may compromise the independence of our independent auditors are not engaged; (ii) to set forth minimum standards required by us, pursuant to applicable law, to engage such services or other services provided by consulting companies formed by our independent auditors; and (iii) to ensure the independence of our independent auditors so that they can provide audit services objectively and issue an impartial opinion, contributing to the formation of an environment of trust and credibility among managers, employees, shareholders and other interested parties.
The following table sets forth information with respect to the current members of our Audit and Integrity Committee.
Name | Position Held | Current Position Held Since | Term | Age |
| Augusto Marques da Cruz Filho(1) | Coordinator | April 30, 2020 | 2 years(2) | 70 |
| Eduardo Augusto Rocha Pocetti | Member | April 6, 2022 | 2 years(2) | 68 |
| Esmir de Oliveira | External Member | April 15, 2024 | 2 years | 73 |
| | | | | |
| | (1) (2) | Independent Member (as defined under the Brazilian Novo Mercado rules). Reelected on April 15, 2024. |
Below is a summary of the professional experience and areas of activity of our current members of the Audit and Integrity Committee:
Augusto Marques da Cruz Filho – see “—A. Directors and Senior Management—Board of Directors” for the biographical information of Mr. Cruz Filho.
Eduardo Augusto Rocha Pocetti – see “—A. Directors and Senior Management—Board of Directors” for the biographical information of Mr. Pocetti.
Esmir de Oliveira – Mr. de Oliveira has more than 40 years of experience in planning and conducting financial auditing services, both in accordance with U.S. GAAP and IFRS, in several industries such as agrobusiness, tech, healthcare, manufacturing, telecom, and retail. He began his career at PricewaterhouseCoopers and since 1985 he is a partner at BDO, where he also serves as a member of the executive committee in Brazil. Mr. de Oliveira is a member of IBGC - Instituto Brasileiro de Governança Corporativa (where he previously served as a member of the Finance and Accounting Committee), Instituto dos Auditores Independentes – IBRACON, LACC Latin America Coordinate Committee and ICBR – Instituto dos Contadores do Brasil. He has a degree in economics and accounting from Universidade Mackenzie and holds a certification in Audit Committee and Fiscal Council from IBGC- Instituto Brasileiro de Governança Corporativa. Mr. de Oliveira is certified as an independent accountant with the CVM, the Cadastro Nacional de Auditores Independentes – CNAI and the Brazilian Central Bank.
For more information about the Audit and Integrity Committee, see “Item 10. Additional Information –– B. Memorandum and Articles of Association––Audit and Integrity Committee.”
Advisory Committees for our Board of Directors
Under our bylaws, our board of directors may, for advisory purposes, set up technical or consultative committees, of a non-deliberative nature, to undertake special tasks or general activities of interest to us.
In addition to the Audit and Integrity Committee, we have three other advisory committees for our board of directors: (i) Finance and Risk Management Committee; (ii) People, Governance, Organization and Culture Committee; and (iii) Sustainability Committee. They are composed of members of our board of directors, as well as other professionals.
The People, Governance, Organization and Culture Committee is responsible for advising the board of directors in establishing the compensation of our executives and employees. This committee also provides our executive officers support in the assessment, selection and development of top leadership, and advises our board of directors in the formulation and practice of our corporate culture in order to monitor and encourage the proper behavior of our leaders. Further, it proposes actions to align the expectations of our shareholders and executives. This committee is not the equivalent of, or wholly comparable to, a U.S. compensation committee.
The Finance and Risk Management Committee is responsible for evaluating recommendations to our board of directors concerning our financial and risk policies; analysis of financial information, issuing recommendations in accordance with the annual plan of objectives and goals, and taking into consideration our more material risks; follow-up regarding financial statements, financial operations and M&A transactions, report to the board of directors the limits of our risk exposures and request adjustments, when applicable.
The Sustainability Committee is responsible for: (i) evaluating and providing recommendations for the long term sustainability goals; (ii) monitoring and improving the five sustainability pillars (development of partners and community, promotion of knowledge and innovation, promotion of animal welfare, diversity and pluralism and environment protection); (iii) evaluating actions and relationship with stakeholders related to sustainability and monitoring our adherence to market standards (i.e. Dow Jones Sustainability Index (DJSI), Enterprise Sustainability Index (Índice de Sustentabilidade Empresarial or ISE), CDP, Business Benchmark for Animal Welfare (BBFAW), etc.); (iv) following-up on compliance matters regarding ISO standards and sustainability; (v) proposing and validating our commitment to national and global voluntary corporate sustainability initiatives; and (vi) monitoring, revising and validating our Sustainability Policy and Sustainability Communication Plan.
The table below sets forth the number of our employees by primary category of activity as of the dates indicated:
| | As of December 31, |
| | 2023 | | 2022 | | 2021 |
| Administration | 20,425 | | 20,297 | | 20,906 |
| Production | 76,242 | | 75,962 | | 79,270 |
| Total | 96,667 | | 96,259 | | 100,176 |
All of our employees listed above are located in Brazil, except for 6,675 employees in 2023 (7,040 in 2022 and 7,184 in 2021) who are located abroad, mainly in our offices and processing plants in Europe, 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 employees in Brazil are represented by labor unions and each location has a different union. 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 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. In other countries, where applicable, a union represents our employees and all of them are covered by collective bargaining agreement. We believe that our relations with our employees and their labor unions are 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 competitive benefit plans for each office around the world. In Brazil, the main benefits are: (i) the private pension plan, administered by BRF Previdência (formerly BFPP – Brasil Foods Sociedade de Previdência Privada); (ii) a credit cooperative that offers to the associated employee credit lines with attractive interest rates; (iii) supplementary health plan that allows the employee to use the network agreements with costs subsidized by us; (iv) meals, offered in our own restaurants or restaurant cards for subsidies of up to 80% by us; (v) basic consumer products granted to employees with salary of up to five times the minimum wage and 80% subsidized by us; and (vi) a collective insurance life policy.
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 systems linked to targets for operating, sales personnel and staff. 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.
Share Ownership of Directors, Executive Officers and Members of the Fiscal Council and the Audit and Integrity Committee
As of March 31, 2024, members of our board of directors, our executive officers and members of our Fiscal Council (and alternates) and 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, Executive Officers and Members of the Fiscal Council (and Alternates) and the Audit and Integrity Committee | | Common Shares | | % |
| Members of the Board of Directors | | | | |
| Marcos Antonio Molina dos Santos | | 0 | | 0.00 |
| Marcia Aparecida Pascoal Marçal dos Santos | | 0 | | 0.00 |
| Sérgio Agapito Lires Rial | | 4,300 | | 0.00 |
| Augusto Marques da Cruz Filho | | 0 | | 0.00 |
| Marcos Fernando Marçal dos Santos | | 0 | | 0.00 |
| Flávia Maria Bittencourt | | 0 | | 0.00 |
| Márcio Hamilton Ferreira | | 0 | | 0.00 |
| Pedro de Camargo Neto | | 0 | | 0.00 |
| Eduardo Augusto Rocha Pocetti | | 0 | | 0.00 |
| Subtotal | | 4,300 | | 0.00 |
| Executive Officers (1) | | | | |
| Miguel de Souza Gularte | | 69,000 | | 0.00 |
| Fabio Luis Mendes Mariano | | 36,283 | | 0.00 |
| Artemio Listoni | | 18,400 | | 0.00 |
| Manoel Reinaldo Manzano Martins Junior | | 77,500 | | 0.00 |
| Alessandro Rosa Bonorino | | 242,000 | | 0.01 |
| Leonardo Campo Dall’orto | | 48,824 | | 0.00 |
| Fabio Duarte Stumpf | | 66,121 | | 0.00 |
| Marcel Sacco | | 18,107 | | 0.00 |
| Subtotal | | 576,235 | | 0.03 |
| Fiscal Council (and alternates) | | | | |
| Marco Antônio Peixoto Simões Velozo | | 0 | | 0.00 |
| Attilio Guaspari | | 29,400 | | 0.00 |
| Ricardo Florence dos Santos | | 0 | | 0.00 |
| Antonio Mathias Nogueira Moreira | | 0 | | 0.00 |
| Alexandre Eduardo de Melo | | 0 | | 0.00 |
| José Luiz de Souza Gurgel | | 0 | | 0.00 |
| Subtotal | | 29,400 | | 0.00 |
| Audit and Integrity Committee (1) | | | | |
| Esmir de Oliveira | | 0 | | 0.00 |
| Subtotal | | 0 | | 0.00 |
| Total | | 609,935 | | 0.04 |
(1) The other members of the audit and integrity committee, Augusto Marques da Cruz Filho and Eduardo Augusto Rocha Pocetti, are members of the Board of Directors whose share ownership is already included above.
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 Options Plan, Performance Shares Plan and Restricted Stock Plan
We have a long-term incentive program for our executive officers and other employees. 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 long-term incentive program is available for our executive officers, directors and executive managers, such as plant managers. It is a significant element of our compensation strategy, and we rely more on this long-term compensation component than our direct competitors or the overall food industry in Brazil. For senior leadership roles, over 1/3 of their direct compensation is based on the long-term incentive program, which is the element with the heavier weight in their compensation mix.
Our current long-term incentive plan based on stock options (“Stock Option Plan”) was approved at the shareholder meeting held on April 8, 2015 and updated at the shareholder meeting held on April 27, 2020.
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 for the 20 trading days preceding the grant date. Exercise prices are adjusted monthly based on the IPCA.
On April 8, 2015, a restricted stock unit program (“Restricted Stock Plan”) was also approved at our shareholder meeting and its latest update was approved at the shareholder meeting held on April 27, 2021). This change in the long-term incentive program was proposed to align it with best market practices with the objective to retain and align the interests of top management and our shareholders. Since then, no more stock options units were granted by us under our long-term incentive program.
There are currently two programs under our Restricted Stock Plan, the Restricted Share Units program (“RSU”) mentioned above and the Performance Share Units program (“PSU”). The Restricted Stock Plan enables us to make a partial grant in RSUs and a partial grant in PSUs. Our board of directors approves annual grants under the Restricted Stock Plan. As of 2023, the RSU grant represented 68% and the PSU grant represented 32%. The amount to be granted to a particular executive is subject to programs rules, based on market practices, company and individual performance evaluation, and it is submitted to our Board of Directors for approval. Vesting conditions are time-based and performance based for RSUs and for PSUs, respectively, and our Board of Directors sets forth the collective goals for the performance indicators, which is currently ROIC (Return on Invested Capital) and TSR (Total Shareholder Return).
With respect to our Stock Option Plan, as of December 31, 2023, there were no outstanding options. During the year ended December 31, 2023, no options were granted or exercised.
With respect to the Restricted Stock Plan, the RSU and PSU programs are managed by our board of directors. As administrator of the Restricted Stock Plan, our board of directors approves the program rules, eligibility, payment levels, severance rules of the Restricted Stock Plan, to guarantee the program competitiveness and the alignment of interests with shareholders. The total number of shares of restricted stock that may be granted under the RSU and PSU programs shall not exceed 2.5% of the common stock, with no par value, representing our total capital stock. As of December 31, 2023, a total of 6,841,736 RSU/PSUs had been granted and was held by 232 people.
| F. | Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation |
Not applicable.
| Item | 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
Our capital stock is comprised of common shares. As of March 31, 2024, we had outstanding 1,668,436,467 common shares, or 99.17% of our total common shares (excluding 14,036,779 common shares held in treasury), of which 130,067,902 or 7.80%, correspond to ADRs. As of March 31, 2024, we had approximately 67,329 shareholders, including approximately 130 registered U.S. resident holders of our common shares (including The Bank of New York Mellon, as depositary).
The following table sets forth certain information as of March 31, 2024 (except to the extent disclosed below), with respect to any person known to us to be the beneficial owner of more than 5% of our common shares (including treasury shares and American depositary shares).
Major Shareholders | Common Shares | % |
| Marfrig Global Foods S.A.(1) | 842,547,574 | 50.08 |
| SALIC International Investment Company(2) | 180,000,000 | 10.70 |
| Kapitalo Investimentos Ltda.(3) | 107,982,757 | 6.42 |
| Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI(4) | 103,328,121 | 6.14 |
| (1) | Marfrig, our controlling shareholder, is a corporation with principal offices at Avenida Queiroz Filho, n. 1.560, Bloco 5 (Torre Sabiá), 3º andar, sala 301, Vila Hamburguesa, São Paulo, SP, 05319-000, Brazil. Marfrig’s controlling shareholders are Marcia Aparecida Pascoal Marçal dos Santos, Marcos Antonio Molina dos Santos and MMS Participações Ltda., which in turn is 100% owned by Marcia Aparecida Pascoal Marçal dos Santos and Marcos Antonio Molina dos Santos. |
| (2) | Based on Schedule 13D filed by SALIC International Investment Company, or SALIC Investment, Saudi Agricultural and Livestock Investment Company, or SALIC, and The Public Investment Fund, or PIF, with the SEC on September 21, 2023, SALIC Investment is wholly owned by SALIC, which in turn is wholly owned by PIF. As a result of this relationship, each of SALIC and PIF may be deemed to share beneficial ownership of the common shares held of record by SALIC Investment. Each of SALIC Investment, SALIC and PIF is organized under the laws of the Kingdom of Saudi Arabia. The business address of each of SALIC Investment and SALIC is Business Gate, Building No. 6, 7452 Airport Branch, Qurtubah Road, Riyadh 13244 – 2327, Kingdom of Saudi Arabia. The business address of PIF is P.O. Box 6789, Riyadh 13519, Kingdom of Saudi Arabia. The present principal business of SALIC Investment and SALIC is investing in agricultural and livestock businesses. The present principal business of PIF is serving as the sovereign wealth fund of the Kingdom of Saudi Arabia. |
| (3) | Represents the aggregate amount of common shares held by investment funds Kapitalo Alpha Global Master FIM, Kapitalo Gaia Master FIM, Kapitalo K10 Master FIM, Kapitalo Master I FIM, Kapitalo Master II FIM, Kapitalo Master V FIM, Kapitalo Sigma LLC, Kapitalo Kappa Previdenciario II Master, Kapitalo K10 Previdenciario II Master, Kapitalo Tarkus Master FIA, Kapitalo Zeta Meridia Master FIM and NW3 Master Plus FIM, all of which are managed by Kapitalo Investimentos Ltda., which has discretionary management and voting power over our common shares held by such funds. Kapitalo Investimentos Ltda. is a limited liability company headquartered at Avenida Brigadeiro Faria Lima No. 3,144, 11th floor, Jardim Paulista, in the city and state of São Paulo, 01451-000, Brazil. |
| (4) | Caixa de Previdência dos Funcionários do Banco do Brasil – PREVI is a pension fund sponsored by Banco do Brasil S.A. and controlled by participating employees of Banco do Brasil S.A. The Brazilian government owns a majority of the voting capital of Banco do Brasil S.A.. |
Our controlling shareholder and other major shareholders do not have differing voting rights.
Changes in Ownership
Significant changes in the percentage ownership held by our controlling shareholder and other major shareholders since January 1, 2021 are described below.
| · | On January 22, 2021, Kapitalo Investimentos Ltda., on behalf of some of its clients and as their investment fund manager, informed us that it had acquired our common shares, and that, on January 21, 2021, their interests in us reached, on an aggregated basis, 40,784,398 common shares and ADSs, representative of common shares, corresponding to approximately 5.02% of our share capital. |
| · | On January 27, 2021, Fundação Petrobras de Seguridade Social (Petros) informed us that it had sold our common shares, and that, on January 27, 2021, its interests in us reached 80,447,828 common shares and ADSs, representative of common shares, corresponding to approximately 9.90% of our share capital. |
| · | On May 25, 2021, JPMorgan Chase & Co. informed us that its aggregate shareholding position had reached 58,109,075 common shares or other securities and derivatives referred in such shares, representing approximately 7.15% of our share capital as of May 20, 2021. |
| · | Between May and June 2021, Marfrig and its affiliates acquired the beneficial ownership of a significant percentage of our common shares and ADSs. Pursuant to the Schedule 13D/A filed by Marfrig with the SEC on March 1, 2022, Marfrig beneficially owned in the aggregate 359,933,582 of our common shares, representing 33.25% of our outstanding common shares. |
| · | On February 4, 2022, BlackRock, Inc. informed us that its shareholding position reached 40,199,394 common shares and 2,632,816 ADRs, representing approximately 3.95% of our total common shares and 67,983 cash-settled derivative financial instruments referenced in our common shares. |
| · | On February 10, 2022, JPMorgan Chase & Co. informed us that they hold a derivative financial instrument that represents a synthetic exposure to less than 5.00% of our share capital. |
| · | On March 9, 2022, BlackRock, Inc. filed a Schedule 13G/A reporting beneficial ownership of 48,860,579 of our common shares, representing 4.50% of our share capital. |
| · | On March 10, 2022 Marfrig acquired 200,000 of our common shares, pursuant to the information disclosed in their most recent financial statements reaching an aggregate of 360,133,580 of our common shares, representing 33.27% of our outstanding common shares. |
| · | On September 14, 2022 Fundação Petrobras de Seguridade Social (Petros) informed us that it had sold our common shares, and that, on September 14, 2022, its interests in us reached 53,801,228 common shares and ADSs, representative of common shares, corresponding to approximately 4.97% of our share capital. |
| · | On February 24, 2023, BlackRock, Inc. filed a Schedule 13G/A reporting beneficial ownership of 57,179,383 of our common shares, representing 5.30% of our share capital. |
| · | On March 8, 2023, BlackRock, Inc. filed a Schedule 13G/A reporting beneficial ownership of 39,173,855 of our common shares, representing 3.60% of our share capital. |
| · | On July 6, 2023, BlackRock, Inc. informed us that its shareholding position reached 50,029,300 common shares and 4,416,627 ADRs, representing approximately 5.03% of our total common shares and 8,353,388 cash-settled derivative financial instruments referenced in our common shares, representing approximately 0.77% of our share capital. |
| · | On July 19, 2023, (i) BlackRock, Inc. informed us that its interests in us reached 53,294,995 common shares and 4,400,885 ADRs, representing approximately 3.43% of our total common shares and 8,363,626 cash-settled derivative financial instruments referenced in our common shares, representing approximately 0.50% of our share capital; and (ii) SALIC subscribed for 180,000,000 common shares representing 10.70% of our share capital; |
| · | Between September 2023 and March 2024, Marfrig, our controlling shareholder, filed five Schedule 13D/A and notified us it had increase its equity stake in us through open market acquisitions of common shares, reaching a beneficial ownership of 842,547,574 common shares representing 50.08% of our share capital. |
| B. | Related Party Transactions |
From time to time we have entered into transactions with related parties, including with entities involving certain members of our board of directors or senior management.
We have a Related Party Transactions Policy which sets forth rules and principles to ensure transparency and arm’s-length terms in our transactions with related parties and other situations of potential conflicts of interest. The definition of related party is based on applicable accounting standards and on this internal policy, which may be more restrictive than applicable laws and regulations under certain circumstances. This policy establishes the corporate body responsible for approving related party transactions. Our Audit and Integrity Committee is also responsible for, among other things, reviewing whether the procedures set forth in the Related Party Transactions Policy are followed. For further details regarding our related party transactions, see note 29 to our consolidated financial statements included elsewhere in this annual report.
None of the members of our board of directors, our executive officers or close members of their families has had any direct interest in any transaction we effected that is or was unusual in its nature or conditions, or material to our business during the year, and which remains outstanding or unperformed. In addition, we have not entered into any transaction with related parties which is or was unusual in its nature or conditions during the current or the three immediately preceding financial years, nor is any such transaction proposed, that is or would be material to our business. Our Related Party Transactions Policy prohibits us from extending loans or guarantees to the members of our board of directors, our executive officers, our key management personnel or any close member of their families.
Arrangements with BRF Previdência
We make contributions related to the post-employment benefit plans of our employees to BRF Previdência, which holds these plans. See notes 19 and 29 to our consolidated financial statements included elsewhere in this annual report. Additionally, we lease properties owned by BRF Previdência, and for the year ended December 31, 2023, the total amount of lease payments was R$21,936 thousand (R$22,241 thousand for the year ended on December 31, 2022). The rent value was set based on market conditions.
Agreements with Marfrig Global Foods S.A.
On August 19, 2019, our subsidiary Al Wafi Food Products Factory – Sole Proprietorship LLC (“Al Wafi Factory”), headquartered in the United Arab Emirates and belonging to our Halal corporate structure, entered into an agreement with our controlling shareholder Marfrig, which has been subsequently amended, for the supply by Marfrig of raw materials (deboned and frozen beef) to our factory in Abu Dhabi. The agreement currently expires on August 19, 2025. The transaction represents a routine raw material supply operation, carried out within the normal course of our business, with no exclusivity to either party, or a minimum volume to be supplied. The estimated total value of the contract is US$27,000 thousand per year.
On April 28, 2022, our subsidiary Al Wafi Al Takamol International for Food Products, headquartered in Saudi Arabia, entered into a distribution agreement with Marfrig, which has been subsequently amended, to distribute Marfrig beef products in the country. The agreement currently expires on April 27, 2025.The distribution is part of a wider ongoing business model in the Middle East region, with no exclusivity to either party, or a minimum volume commitment. The estimated total value of the contract is US$5,000 thousand per year.
On July 27, 2022, BRF entered into an agreement with Quickfood S.A. (which we sold to Marfrig on January 2, 2019), as distributor, and Marfrig, as guarantor, for the distribution of “Sadia” branded products in Argentina, which expired on January 1, 2023. Despite the absence of the execution of an amendment with the extension of the term, Quickfood S.A. and BRF still perform the supply and distribution upon the originally agreed terms. The parties are procuring necessary approvals and negotiating the terms and conditions of the extension of the distribution agreement. The total amount of this transaction is approximately US$10,000 thousand per year.
On December 19, 2022, our subsidiary Federal Foods LLC, headquartered in the United Arab Emirates, entered into a distribution agreement with Marfrig, which has been subsequently amended, to distribute Marfrig beef products in the United Arab Emirates. The agreement currently expires on December 19, 2025. The distribution is part of a wider business model in the Middle East region, with no exclusivity to either party, or a minimum volume commitment. The estimated total value of this agreement is US$1,700 thousand per year.
On December 19, 2022, our subsidiary Federal Foods LLC Qatar, headquartered in Qatar, entered into a distribution agreement with Marfrig, which has been subsequently amended, to distribute Marfrig beef products in the country. The agreement currently expires on December 19, 2025. The distribution is part of a wider business model in the Middle East region, with no exclusivity to either party, or a minimum volume commitment. The estimated total value of the contract is US$1,400 thousand per year.
BRF also supplies raw material to Quickfood S.A. for the production and commercialization of ham in Argentina under the “Sadia” brand pursuant to spot transactions. The parties are procuring necessary approvals and negotiating the terms and conditions of the applicable license and supply agreement. The total amount of this transaction is approximately US$10,000 thousand per year.
In addition, BRF and Marfrig have a distribution operation in Uruguay with its respective affiliates, Sadia Uruguay S.A. and Dicasold S.A., in which Dicasold S.A. is responsible for the distribution of “Sadia” branded products in certain channels in Uruguay. The total amount of this transaction is approximately US$8,000 thousand per year. BRF also sells certain products to Dicasold S.A. on a spot basis, amounting to approximately US$4,500 thousand per year. The parties are procuring necessary approvals and negotiating the terms and conditions of the distribution agreement.
BRF and Marfrig also have a distribution operation in Chile through its respective affiliates, Sadia Chile SpA and Marfrig Chile S.A., in which Marfrig Chile S.A. is responsible for the distribution of “Sadia” branded products in certain regions and channels in Chile. The total amount of this transaction is approximately US$800,000 per year. Considering the historical volumes, operational restrictions and that the parties have not agreed minimum volume and/or exclusivity provisions for this commercial relationship, currently there is no written agreement in place between the parties.
Guarantee for Obligations of Potengi
On December 16, 2022, we issued a guarantee to the promissory commercial notes issued by Potengi. The promissory commercial notes were offered through a public offering with limited distribution efforts, and mature in 18 months from their issue date, or the Offer. The total amount of the Offer was R$700,000 thousand. We issued a joint guarantee limited to the amount corresponding to 24% of the Offer amount, whilst AES issued a joint guarantee covering the remaining amount. There is no joint liability between us and AES.
On August 14, 2023, we provided financing guarantees to Potengi for the opening of a fixed credit line with Banco do Brasil S.A. up to a limit of R$144,000, to be funded with ordinary resources from the Fundo de Desenvolvimento do Nordeste – FDNE, to finance the implementation of the Cajuína 1 Wind Generating Plant, located in Rio Grande do Norte.
On January 19, 2024, we provided a limited guarantee in favor of holders of the 300,000 simple, non-convertible debentures issued by Potengi in a single series, with a maturity period of 18 years. The nominal unit value of each debenture is R$1,000. Our guarantee is for an amount corresponding to 24% of the issue price, whilst AES issued a joint guarantee covering the remaining amount.
On March 27, 2024, we provided a limited guarantee in favor of holders of the second issuance of 2,100,000 simple, non-convertible debentures issued by Potengi in a single series, with a maturity period of 18 years and six months. The nominal unit value of each debenture is R$100. Our guarantee is for an amount corresponding to 24% of the issue price, whilst AES issued a joint guarantee covering the remaining amount.
Joint Venture with The Public Investment Fund
On October 24, 2022, we executed a joint-venture agreement with Halal Products Development Company, or HPDC, a wholly-owned subsidiary of PIF, which aims to support the development of the Halal industry in Saudi Arabia by fostering innovation and driving growth across the Halal ecosystem. On August 1, 2023, we announced the fulfillment of all conditions precedent to the joint venture under the joint venture agreement. On December 10, 2023, we and PIF incorporated BRF Arabia Holding Company, or BRF Arabia, in Saudi Arabia with an ownership of 70% by us and 30% by HPDC. BRF Arabia is expected to hold assets in the entire chicken production chain in Saudi Arabia and promote the sale of fresh, frozen and processed products. BRF Arabia will have a combined investment of US$500,000 thousand (or R$2,420,650 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023), of which (i) US$125,000 thousand (or R$605,162 thousand, translated to reais at the exchange rate of R$4.8413 as of December 31, 2023) were contributed by us and by HPDC upon the incorporation of the joint venture; and (ii) the remainder will be contributed pursuant to the investment plan to be prepared by BRF Arabia’s shareholders.
Other transactions with related parties
We maintain other transactions with related parties resulting from guarantees, transfers and donations to related associations and institutes, as well as leasing and other commercial transactions with
related parties, both individuals and entities. Such transactions are compliant with our Related Party Transactions Policy and are not material, individually or in the aggregate.
Indemnification Agreements
We have entered into indemnification agreements with our board members and 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 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.
| C. | Interests of Experts and Counsel |
Not applicable.
| Item | 8. FINANCIAL INFORMATION |
| A. | Consolidated Statements and Other Financial Information |
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 and statistical models. 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 adverse 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 administrative and legal proceedings may reduce our liquidity and negatively affect us.”
Tax Proceedings
Contingencies for Probable Losses
We are engaged in 1,358 legal proceedings with Brazilian tax authorities, mainly related to the payment of ICMS, PIS and COFINS, income tax and social contribution. As of December 31, 2023, our provision for such tax proceedings with probable losses is R$321,995 thousand, compared to R$399,675 thousand as of December 31, 2022.
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 related to payment of ICMS tax on the acquisition of goods for consumption and fixed assets, presumed credit, credit on electrical energy consumed in distribution center, lack of proof of export within the legal deadline, defeat, tax substitution, isolated fines, rate increase and others. The provisioned amount is R$87,661 thousand as of December 31, 2023 (R$64,088 thousand as of December 31, 2022). |
| · | PIS and COFINS: We are involved in administrative and judicial tax disputes related to the use of federal PIS and COFINS tax credits from the acquisition of supplies to offset other federal taxes, in the amount of R$131,271 thousand as of December 31, 2023 (R$157,121 thousand as of December 31, 2022). |
| · | Other tax contingencies: We recorded other provisions for tax claims related to the payment of social security contributions under various Brazilian government programs (INCRA, FUNRURAL, SESI/SENAI/SEBRAE), debts included in a refinancing program (REFIS) with deposits that await consolidation and conversion into payment, in addition to debts arising from divergence in accessory obligations, income tax revenue omission, import tax, IOF, industrialized products tax and others. The provisioned amount is R$103,063 thousand as of December 31, 2023 (R$178,466 thousand as of December 31, 2022). |
Contingencies for Possible Losses
The amount of tax contingencies for which the probability of loss is classified as “possible” is R$$16,082,532 thousand as of December 31, 2023 (R$13,247,512 thousand as of December 31, 2022).
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 discussing the differences charged under PIS and COFINS taxes on (i) sales of seasoned meats, pasta and pies; (ii) presumed ICMS credits; (iii) disallowances of presumed credits from agro-industrial activities; (iv) credit disallowance on freight on transfer; (v) disallowances of credits for various inputs and services in view of the restriction by the Receita Federal do Brasil on the concept of inputs; extemporaneous and other credits. Such proceedings amount to R$8,740,838 thousand as of December 31, 2023 (R$7,055,855 thousand as of December 31, 2022). |
| · | ICMS: We are involved in a number of disputes relating to the ICMS tax, including: (i) non-acceptance of ICMS credits in interstate sales from states that unilaterally granted fiscal benefits without the approval of the National Finance Policy Council, or CONFAZ, the so-called “guerra fiscal” in the amount of R$17,464 thousand (R$24,370 thousand as of December 31, 2022); (ii) lack of evidence of exports in the amount of R$67,766 thousand (R$77,163 thousand as of December 31, 2022); (iii) infraction notices from the State of Rio de Janeiro, for the period from 2014 to 2018, related to the alleged non-compliance of agreement terms regarding tax benefits, in the amount of R$680,058 thousand (R$621,261 thousand as of December 31, 2022); (iv) Public Civil Action in Rio de Janeiro due do the use of tax benefits, in the amount of R$306,060 thousand (R$276,521 thousand as of December 31, 2022); (v) infraction notice about ICMS in Goiás relating to the disallowance of ICMS credit for the acquisition of inputs as the tax authorities understand that we made outflows subject to non-incidence, in the amount of R$210,876 thousand (R$190,198 thousand as of December 31, 2022); and (vi) R$2,760,221 thousand (R$1,973,524 thousand on December 31, 2022) related to other claims, including claims related to (a) alleged differences in tax substitution, in the amount of R$673,579 thousand; (b) disallowance of presumed ICMS credit arising from tax benefit provided for in PRODEPE due to alleged non-compliance with ancillary obligations, in the amount of R$309,704 thousand; (c) disallowance of presumed credit on transfers as the tax authorities understand that the PRODEIC benefit only applies to sales transactions, in the amount of R$220,523 thousand; (d) disallowance of ICMS credit on entries for transfer of goods intended for commercialization on the grounds that the calculation basis used would have been higher than the production cost defined in complementary law 87/96 (art. 13, § 4), in the amount of R$239,020 thousand and (e) disallowance of ICMS credit on intermediate materials that the tax authorities classified as use and consumption, in the amount of R$ 273,644 thousand. |
| · | Profits earned abroad: We were assessed by the Brazilian Federal Revenue (Receita Federal do Brasil) for alleged underpayment of income tax and social contribution on profits earned by subsidiaries established abroad. The total amount is R$837,060 thousand as of December 31, 2023 (R$779,018 thousand as of December 31, 2022). We have presented our defense based on the fact that our subsidiaries located abroad are only subject to full taxation in the countries in which they are based as a result of treaties regarding double taxation. The Superior Administrative Court (CSRF) issued a final decision unfavorable to us, the tax enforcement has started, and we have offered a guarantee and filed an appeal, which was granted by the lower court. The Brazilian Federal Revenue appealed to the Federal Regional Court – 4th Region against the lower court’s decision and we are currently awaiting such court’s decision. |
| · | Income tax and social contribution: We are involved in administrative and judicial disputes regarding refunds and credits to offset other federal tax debts, including credits generated by legal disputes related to the Plano Verão, an economic stabilization plan from 1989. In addition, on February 5, 2015, we received a tax assessment notice related to the compensation of tax loss carryforwards and negative calculation basis up to a limit of 30% from when we incorporated one of the group’s entities during calendar year 2012. The Superior Administrative Court (CSRF) issued a final decision unfavorable to us, the tax enforcement has started, and we have offered a guarantee and filed an appeal. We are awaiting a decision by the Federal Regional Court – 4th Region on the appeal filed in connection with this proceeding. The income tax and social contribution disputes total R$1,468,810 thousand as of December 31, 2023 (R$1,408,391 thousand as of December 31, 2022). |
| · | IPI: We are involved in administrative and judicial disputes 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 or intermediate products. The amount involved in such proceedings was R$168,212 thousand as of December 31, 2023 (R$187,371 thousand as of December 31, 2022). |
| · | Social security charges: We are involved in disputes related to social security charges on payroll compensation, our profit-sharing plan, additional payments of GILRAT to finance employee’s special retirement, SAT/RAT, among other cases, in the aggregate amount of R$671,699 thousand as of December 31, 2023 (R$482,687 thousand as of December 31, 2022). |
| · | Other contingencies: We are involved in other tax contingencies involving a variety of matters, including cases related to the isolated fine for alleged non-compliance with ancillary obligations, customs fine on importation, alleged lack of proof of drawback, disallowance of reinstatement credit, and alleged differences in property tax, fees and services tax, totaling R$153,469 thousand as of December 31, 2023 (R$171,153 thousand as of December 31, 2022). |
As noted above, we are involved in other lawsuits for which we classify our risk of loss as remote, and the amounts involved in certain of those proceedings are substantial.
Labor Proceedings
As of December 31, 2023, we were involved in 11,403 ongoing judicial and administrative labor claims and 5,037 temporarily filed labor claims. These labor claims are mainly related to overtime, work in hazardous conditions, rest breaks set forth article 253 of the Brazilian Labor Code (Consolidação das Leis Trabalhistas), work illnesses and work accidents. Labor claims are being processed mainly at the Brazilian lower court level. Our provisions for “probable” losses from these labor claims are recorded in the amount R$435,929 thousand on December 31, 2023, compared to R$526,710 thousand on December 31, 2022. These provisions were recorded based on our past historical payments, and the opinions of our legal counsel. Labor claims classified as “possible” losses totaled R$304,133 thousand on December 31, 2023, compared to R$257,365 thousand on December 31, 2022. We believe none of such labor claims is individually significant.
Included in these proceedings is a series of judicial proceedings filed by the Office of the Public Labor Prosecutors or workers unions related to overtime, mandatory rest breaks and other labor-related issues. Of the 69 cases pending, some have no assigned value and the largest – a public civil action relating to in itinere working hours in the unit of Chapecó, Santa Catarina – has a value of approximately R$42,916 thousand. The second largest is a collective action filed by the Union of Carambeí, Paraná, with a value of R$19,898 thousand, claiming the payment of night shift allowance, among other claims. We are also a party to a collective action filed by the Union of Concórdia, Santa Catarina, with a value of R$10,107 thousand, relating to in itinere working hours. All the abovementioned amounts are included in the total amount disclosed in the paragraph above as of December 31, 2023. We are currently disputing such claims and the court decisions in connection therewith.
In addition, on September 1, 2017, we executed a TAC with the Office of the Public Labor Prosecutors regarding working hours in our poultry and pork slaughterhouses. Fulfilment of the TAC’s requirements is still underway.
Civil, Commercial and Other Proceedings
As of December 31, 2023, we were defendants in 4,000 civil, commercial, environmental, regulatory, administrative and other proceedings. These claims are related to, among other things, alleged breach of contracts, alleged breach of civil, environmental, administrative, regulatory and commercial law. We have recorded provisions for probable losses in the amount of R$352,414 thousand in connection with our pending civil, commercial and other proceedings as of December 31, 2023 (R$358,304 thousand as of December 31, 2022). We recorded these provisions based on our historical payments and on the inputs of our external legal advisors.
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 we (previously Perdigão Alimentos S.A.) did not comply with the three contracts executed by 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 lower court decision against us, and an order to indemnify Ipiranga for the damages related to the project. The São Paulo Court of Appeals reversed the trial court’s judgment only to establish different criteria for the calculation of liquidated damages. In June 2009, Ipiranga started the liquidation stage, and an accounting expert was initially named to analyze the parameters set forth in the final judgment. However, considering there were unaccounted items to be calculated by the expert, the forensic accountant informed of his inability to perform these tasks. Afterwards, an engineering expert was indicated to proceed with the asset liquidation. The opinion of the court-appointed engineering has already been presented twice, but Ipiranga contested the results in both instances. The appeals filed by Ipiranga aimed at the revision of the expert report were partially granted by the Court, which determined the calculation review of some unaccounted items as well the adjustment of amounts for inflation. In January 2024, the Court rejected the merits of the latest appeals filed by both Ipiranga and BRF disputing the Court’s decision. We have filed an appeal to the Superior Court of Justice requiring the maintenance of the expert report. The President of the Private Law Section of the Court upheld the contested decision and ordered the remittance of the case records to the Superior Court of Justice. We are awaiting a decision by the Superior Court of Justice.
On October 7, 2004, a public civil action was filed by the Federal Public Prosecutor’s Office against us and other parties seeking moral and material damages resulting from the integrated production contracts executed with public resources of an agricultural fund. In July 2014, we were ordered to pay an award with respect to the material damages, but this decision was suspended by the Court of Appeals in June 2015. We filed an appeal to the Superior Court of Justice on September 8, 2015. On March 13, 2020, our appeal was dismissed and, on April 24, 2021, we filed a new appeal, which was challenged by the Federal Public Prosecutor’s Office on September 8, 2021. On September 8, 2022 our new appeal was admitted, although on October 3, 2022, an unfavorable decision was issued against us. We filed a motion to reverse this decision, but the motion was denied on December 14, 2022. The Court of Appeals decision was affirmed by the Superior Court of Justice, and the action awaits the calculation of liquidated damages, to be determined by a court-appointed expert. In July 2023 and August 2023, the Federal Public Prosecutor’s Office and us, respectively, filed a request for additional technical forensics for the calculation of the liquidated damages.
In 2012, 2018 and 2022, the Federal Public Prosecutor’s Office filed three public civil actions in order to obtain a judicial decision compelling BRF not to use overweight trucks on federal highways and sought indemnification for collective damage. With respect to the 2012 public civil action, on September 3, 2019, the Superior Court of Justice, by a majority decision, granted the special appeal filed by the Federal Public Prosecutor’s Office and found that the public civil action had merit and ordered (i) BRF to pay indemnification for collective damages in an amount to be determined; and (ii) BRF not to use overweight trucks on federal highways, subject to a penalty of R$20 thousand for each new infringement. BRF filed appeals against such decision, which were denied by the Superior Court of Justice and the Federal Supreme Court. The decision rendered by the Superior Court of Justice with respect to the 2012 public civil action against us became final and unappealable. On July 25, 2022 the case was remanded to the lower court for calculation of liquidated damages. The Federal Public Prosecutor’s Office filed a motion for summary judgement, claiming the historic amounts of (i) R$6,630 thousand for material damages caused to federal highways; (ii) R$ 1,989 thousand for environmental and other economic related damages; and (iii) R$ 4,641 thousand for collective damages. Each of these three damages would be subject to the SELIC interest rate adjustment until payment. The Federal Public Prosecutor’s Office requested that the highway police and national traffic department inform the court of any further occurrence of overweight truck usage against BRF since the action was first filed so that the penalty of R$20 thousand per occurrence would be levied. We are currently waiting for the court to determine the liquidated damages. Additionally, on August 2023, we filed a motion to set aside judgment and are currently awaiting a decision thereof. With respect to the public civil action filed in 2018, the lower court decision was favorable to us and we are currently awaiting a decision by the Court of Appeals on the appeal filed by the Federal Public Prosecutor’s Office. With respect to the public civil action filed in 2022, on October 5, 2022, the lower court denied the preliminary injunction and scheduled a court hearing. The Federal Public Prosecutor’s Office filed an interlocutory appeal of this decision. On November 2022, we filed our counterarguments to the pleadings, and the Federal Public Prosecutor’s Office filed their answer on January 2023. On November 2023, the court issued a decision for the production of evidence. On December 2023, the Federal Public Prosecutor’s Office (i) requested the suspension of the proceeding until the Superior Court of Justice renders a decision on Special Appeals 1,908,497 and 1,913,392 concerning the merits of repetitive proceedings on this subject-matter and (ii) informed the court that it will not submit additional evidence. We are currently awaiting a decision by the court either suspending the proceedings or granting an early judgment. An unfavorable outcome may result in payment of actual damages, to be determined by the court in an amount equal to or higher than R$1,040,366.63 and for collective damages in the amount of R$5,000 thousand.
On August 20, 2008, the Federal Public Prosecutor’s Office filed a public civil action against us due to alleged damages to consumers related to the excess of water absorbed by the chicken products manufactured at Francisco Beltrão, in the Brazilian state of Paraná, and Dois Vizinhos, in the Brazilian state of Paraná. The Federal Public Prosecutor’s Office requested that we individually indemnify all consumers who acquired products with any quality issues related to water in excess, that we pay collective damages and that we publicly disclose this problem via newspaper, radio and other means. On September 10, 2009, a partially unfavorable judgment was issued ordering us and the other defendants to: (i) indemnify consumers for the irregularity of the products; (ii) pay R$700 thousand as collective damages; and (iii) publicly disclose a message describing this matter via local media (newspaper, radio and other means). We, along with the other defendants, filed our respective appeals, which the Court of Appeal rejected in 2011. On January 30, 2012, we filed an appeal to the Superior Court. On July 1, 2022 the Superior Court partially reversed the lower courts decisions to (i) determine the applicability of the statute of limitations for any claim before August 20, 2003 and (ii) cancel the initial lower court decision and remand the action to the lower court for the production of evidence requested by the defendants. On August 2022, the Federal Public Prosecutor’s Office filed an appeal against the Superior Court decision, which was denied on october 2022. On January 2023, the case was remanded to the lower court for the production of evidence. We are currently awaiting a decision by the lower court.
On January 28, 2009, Valore Participações e Empreendimentos Ltda. and Ama Participações e Empreendimentos filed an execution proceeding against us based on an extrajudicial title requesting the payment of the fifth and sixth installments of their industrial plant sales contract signed with us. On May 26, 2022, the court decided in favor of BRF and dismissed the execution proceeding. On June 2022, the plaintiffs appealed to the Court of Appeals. We presented our counterarguments to the appeal on August 2022. The decision by the Court of Appeals is still pending.
On September 21, 2011, the Association of the Villagers of Paraíba and Mudau River Ares filed an action against us, the Municipality of Bom Conselho and the State of Pernambuco, seeking indemnification for moral and material damages due to the “Açude das Nações” dam rupture. Expert evidence was ordered by the court and presented in May 2022. The expert was subpoenaed by the court to be deposed on September 15, 2022. On October 17, 2022, the court ordered the parties to present their pleadings as to the expert testimony. On June 2023, the State of Pernambuco filed a motion to dismiss based on lack of juridiction by the State of Alagoas to render a decision on a case involving the State of Pernambuco. We are currently awaiting a decision on such motion to dismiss.
We had a leasing contract with WJ Produtos Alimentícios Ltda., or WJ, for an industrial plant, which was terminated by us. On April 11, 2012, WJ filed a lawsuit to require our compliance with the leasing contract and pay an early termination fine of R$3,700 thousand and material damages of up to R$5,000 thousand. On May 2019, the court decided in favor of WJ and ordered us to pay for the losses and damages caused by the early termination of the leasing contract, including R$28,614 thousand calculated by the expert. The court ruled that another expert assessment is necessary to determine the total loss value in the execution stage of the proceeding. We filed appeals against such decision, which were rejected by the São Paulo State Court, confirming all the terms of the decision rendered by the lower court judge. On September 2022, we filed an appeal with the Superior Court of Justice. The decision on the appeal is still pending. The risk of loss in this proceeding has been classified as possible. Such amount does not consider the losses and damages that still need to be estimated in the execution stage.
On October 17, 2013, Mr. Marcus Macedo Cazarré filed an indemnification action as a result of our alleged exploitation of his Patent MU 8300298-7 in the biodigesters used in farms. Mr. Cazarré requested damages of over R$306,900 thousand. An expert report favorable to us was issued, which indicated that there was no violation of Mr. Cazarré’s patent. On September 2017, the lower court judge dismissed the requests made by Mr. Cazarré. On December 2017. On June 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 we were ordered to pay material damages (in an amount to be calculated in the execution proceedings) and R$150 thousand for moral damages. On February 2019, we filed an appeal with the Court of Appeals to elevate the proceeding to the Superior Court of Justice. On April 2019, the Court of Appeals ruled dismissing our appeal. On May 2019, we filed an appeal directly to the Superior Court of Justice and on June 2019, Mr. Cazarré presented his defense. On July 2019, the Court of Appeals reviewed its decision and admitted our appeal, determining that the proceeding’s records be sent to the Superior Court of Justice. On April 2020, we filed a petition requesting the suspension of the lawsuit until the decision on the merits of the nullity action filed by us against Mr. Cazarré and Instituto Nacional de Propriedade Industrial-INPI (BPTO) before the Federal Court of Rio de Janeiro becomes final. On April 2021, the court rendered a decision staying the infringement action for a year, due to the ongoing nullity action. On November 2021, we filed a new brief informing the court that a decision was published in the Official Gazette n. 2.652 dated November 3, 2021, in which the Brazilian PTO invalidated patent MU8300298-7 during the post-grant opposition procedure. Considering the patent in question is no longer valid, we requested that the decision be overruled in order to reject Mr. Cazarré’s infringement pleadings. Despite the invalidation of the patent by BPTO, the Superior Court of Justice dismissed our appeal on October 2022, holding that it was not timely filed. We filed another appeal to reverse that decision, which were dismissed on March 2023. On April 2023, the decision became final and unappealable. On August 2023, the court ordered that the plaintiff proceed with the execution of the decision.
On April 24, 2014, we executed a TAC with the Public Prosecutors’ office of the Brazilian state of Goiás because of irregularities in our treatment of soil in the facility located in Rio Verde. Under the TAC, we are required to pay a fine of R$1.4 million, among other obligations. Fulfilment of the TAC’s requirements is still underway.
On March 24, 2014, we executed a TAC with the Consumer Protection Agency of the Municipality of Rio de Janeiro, or Procon Carioca, due to problems with the distribution of skimmed UHT milk in Rio de Janeiro. Because of that agreement, we paid a fine of R$150 thousand and undertook other obligations that have already been fulfilled by us. On October 23, 2014, the Consumer Protection Agency of the State of Rio de Janeiro, or Procon Estadual, filed a civil action against us related to a similar claim with respect to the distribution of skimmed milk. In May 2016, a judgment was issued recognizing that we had diligently taken all necessary actions to mitigate damages on this case, including executing a TAC on the matter. Nevertheless, the lower court determined that any consumers that manage to prove they suffered material losses as a result of the milk shall be reimbursed on the ground of compensation for special damages. The Procon Estadual appealed the decision and their appeal was dismissed, but they filed a Special Appeal which was granted, and we were also ordered to pay R$100 thousand on the ground of compensation for general damages. On October 28, 2020, we paid R$215 thousand related to the condemnation to pay general damages plus monetary remeasurement and penalty interest, as well as legal fees. On August 2023, Procon Estadual requested the liquidation of special damages.
On October 23, 2015, Perdue Foods LLC, or Perdue, filed an enforcement lawsuit against us. Perdue sought an order for us to comply with the obligations undertaken in the Coexistence Agreement, as amended, entered into by both parties related to the trademarks of Perdue and our trademark Perdix. In the event that we do 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. The case is currently pending judgment on the merits in the lower court. In September 2021, we filed an appeal to the Court of Appeals against the decision which denied BRF’s argument regarding the applicability of the statute of limitations, which was dismissed. Between January and November 2022, we filed new appeals before the Court of Appeals and the Superior Court of Justice, all of which were dismissed. On April 2023, we filed a special appeal with the Superior Court of Justice, which decision is still pending.
On September 18, 2015, we executed a TAC with the Public Prosecutors’ Office of the Brazilian state of Rio de Janeiro, in order to restore an environmental license of our facility located in Duque de Caxias. Fulfilment of the TAC’s obligations was completed on September 20, 2023 and we are currently awaiting its filing.
On December 14, 2015, the Public Prosecutors’ Office of the Brazilian state of Pernambuco filed a public civil action against us in connection with alleged irregularities identified on dairy products sold by us. On March 19, 2019, the plaintiff’s claims were partially granted and we were ordered to: (i) pay collective damages in the amount of R$1,000 thousand; (ii) under the penalty of payment of a R$5,000 thousand fine for each instance of non-compliance, (a) recall the batches of sausages that presented risk to consumers’ health - in spite of the fact that the class action handles of alleged irregularities related to dairy products, the sentence also have mentioned issues regarding the sausages; such inaccuracy is object of the appeal we have filled against it and (b) provide a public notice regarding such recall on our 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 thousand daily-fine for non-compliance; and (iv) pay 50% of the court fees. On April 23, 2019, we filed an appeal to the Pernambuco Court of Appeals. The appeal is still pending a decision on its merits.
On March 17, 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 us to insert the following warning on the package of our products: “CONTAINS GLUTEN – gluten is harmful to celiac patients” or another similar alert to demonstrate how gluten can be harmful to consumers. After we presented our defense, a state court decision was rendered on September 2016 ordering us to include such information on the package of all of our products that contain gluten. We filed an appeal and on December 2019, the Federal Regional Court (TRF3) ruled that the Superior Court of Justice is the competent authority to rule on this proceeding. The proceeding was removed to the Superior Court of Justice to determine if that court had jurisdiction to hear the proceeding. On March 2021, the Superior Court of Justice determined they did not have jurisdiction, and on August 2022, a decision found that the Federal Regional Court was the competent authority, and the state court decision was cancelled. On October 2023, the Federal Regional Court ordered that Anvisa be added as a defendant in the action. On November 2023, we required that Anvisa be notified of the court order. The action is pending trial before the Federal Regional Court.
On April 4, 2016, we executed a TAC with the Public Prosecutor’s Office of the Brazilian state of Goiás 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 certain obligations of the TAC is in progress.
On May 9, 2018, the Public Prosecutors’ Office of the Brazilian state of Pernambuco filed a public civil action against us in connection with alleged irregularities identified in meat products (sausages) sold by us. On February 2019, the court rendered a decision granting the injunction requested by the Public Prosecutors’ Office to order us to, under the penalty of a R$5,000 thousand fine for each instance of non-compliance: (i) cease commercialization of sausages with irregularities; (ii) comply with the legislation on sausage manufacturing; (iii) cease using deteriorated or mislabeled ingredients in sausage manufacturing; (iv) recall the batches of sausages that present risk to consumers’ health; (v) provide a public notice regarding such recall on our website and social media. On April 2019, we filed an interlocutory appeal with a request for an interim relief in order to stay the injunction. The court decided to evaluate the suspensive effects after Public Prosecutors’ Office of the Brazilian state of Pernambuco filed its counterarguments. On May 2019, we filed our defense. On December 2022, we declared our intention to proceed with our appeal and presented new facts, which were then contested by the Public Prosecutors’ Office of the Brazilian state of Pernambuco and responded by us. Since November 2023, the case is on hold pending negotiations of a TAC between us and the Public Prosecutors’ Office of the Brazilian state of Pernambuco.
On June 6, 2022, Mr. Marcus Macedo Cazarré filed a civil action to annul the administrative decision of the Instituto Nacional de Propriedade Industrial-INPI (BPTO) published in the Official Gazette n. 2,652 dated November 3, 2021, in which BPTO invalidated his patent MU8300298-7. Mr. Cazarré filed an injunction to suspend the effects of the BPTO decision, but his request was denied by the Federal Court on June 2022. We filed a motion to join the proceeding as an interested third party on June 2022, and both BRF and BPTO filed our counterclaims to maintain the invalidation of the patent. On September 2022, Mr. Cazarré filed an interlocutory appeal to reverse the decision that denied the injunction. On April 2023, the court rendered a decision, among other things, approving our joinder as an interested party and dismissing the request by Mr. Cazarré to add an expert opinion as evidence. Mr. Cazarré appealed against such decision, which was dismissed. In May 2023, the parties produced evidence and Mr. Cazarré filed new appeals, which decisions are currently pending. In September 2023, Mr. Cazarré requested that Agcert do Brasil be added as a defendant in the action. The outcome of this proceeding may directly impact the decision of the related lawsuit filed against us by Mr. Cazarré on October 17, 2013, as described above.
On March 27, 2020, we filed confidential arbitration proceedings against two energy generation companies and one energy trading company with Fundação Getúlio Vargas (FGV) Arbitration Chamber (Câmara de Mediação e Arbitragem da FGV). The proceedings involve two electric power purchase agreements, executed in 2007 and expiring in 2025, and the amount at issue in the case related to possible losses and damages will depend on the decision of the arbitral tribunal. The arbitration proceeding is currently pending. In the executory proceedings, all amounts have been deposited and may be reimbursed in case the Arbitral Chamber rules in our favor.
On August 1, 2022, we filed a confidential arbitration proceeding involving the offset of the purchase price paid by BRF in the acquisition of quotas of certain subsidiaries and the loss incurred by us arising from undisclosed defects in the formulation of the product during the negotiation of the Quota Purchase Agreement, or QPA. We retained the payment required under the QPA once we learned about the defects, and we requested a price adjustment to rebalance the obligations under the QPA. In case we are not successful, we may incur financial costs (i.e. interest and inflation adjustment, among others) related to the retention of the purchase price.
In March 2017, an administrative proceeding was filed by the National Consumer Secretariat (SENACON – Ministério da Justiça) in order to ascertain whether there were violations of consumer law by us, in view of the findings by the MAPA, in 2017, regarding excess of water in frozen chicken carcasses. In May 2017, we presented our preliminary defense, and in December 2020, we presented our final brief in our defense. In January 2021, the Secretariat ruled against us, finding that we breached consumer law, and it imposed a fine of approximately R$5,383 thousand. On February 8, 2021, we filed an administrative appeal, which is still pending review. In July 2021, we filed a petition expressing interest to execute a TAC, in which we commit to pay a certain amount, with no admission of guilt or liability in that proceeding. On September 30, 2021, we filed a non-binding draft of a TAC, along with a judicial decision given by the Federal Regional Court in Goiás in our favor against MAPA. On January 10, 2023, SENACON requested additional financial information from us before the administrative proceeding was filed. The TAC is currently under review by SENACON, with its decision subject to judicial review.
Controladoria-Geral da União (CGU) Proceedings
In June 2018 and in May 2019, we learned of administrative proceedings commenced against us by the Brazilian Comptroller General of the Union (Controladoria-Geral da União), or CGU, which were primarily related to alleged irregularities in connection with conduct that could represent harmful acts to the public administration under the Brazilian Anti-Corruption Law and other applicable laws, as described below in “Carne Fraca Operation”, “Trapaça Operation” and “Romanos Operation”. The CGU is an internal control body of the Brazilian federal government responsible for carrying out activities related to the defense of public property and the increase of management transparency, through actions of public audit, correction, prevention and combat of corruption, among others.
On December 28, 2022, we entered the Leniency Agreement to settle and extinguish all CGU administrative proceedings against BRF related to “Carne Fraca Operation”, “Trapaça Operation” and “Romanos Operation”. CGU agreed not to file lawsuits against BRF based on claims related to the matters covered by the Leniency Agreement.
Pursuant to the Leniency Agreement, BRF has undertaken the following commitments: (a) to remediate the identified practices and adopt measures to prevent that such practices happen again; (b) to pay the total amount of approximately R$583,977 thousand (which was fully settled in 2023); and (c) to continuously improve its integrity program with the support and monitoring of the CGU. During the year ended December 31, 2023, all aforementioned commitments were fulfilled and we continue to maintain our public commitment to pursue the process of continuous improvement of our corporate governance and compliance practices.
The Leniency Agreement is the result of an extensive and detailed internal investigation, conducted beginning in 2018, which was carried out by us with the support of external independent advisors, to identify past practices of our employees. It is also the result of the cooperation established in mid-2018 between BRF and the Brazilian and United States authorities, which process was disclosed to the market from the outset. The internal investigation resulted in a series of administrative measures, including the dismissal of former employees involved in the identified illegal practices, improvement of our corporate governance and integrity system, voluntary cooperation with Brazilian and foreign authorities and, ultimately, the negotiation of the Leniency Agreement.
As of December 31, 2023, there was no pending procedure in connection with the Leniency Agreement. For additional information about the Leniency Agreement, see note 1.2 to our consolidated financial statements.
Carne Fraca Operation
The “Carne Fraca Operation” investigation involved a number of companies in the Brazilian meat processing industry and, among other things, included allegations relating to food safety, quality control and misconduct related to improper offers or promises made to government inspectors.
On April 20, 2017, based on the Brazilian Federal Police investigation, Brazilian federal prosecutors filed several charges against two of our former employees (one of our regional manufacturing officers and one of our corporate affairs managers). On January 22, 2018, the Attorney General’s Office of the Third District of the Brazilian state of Goiás filed a criminal complaint against the industrial manager of our Mineiros plant at the time of the events subject to investigation in the Carne Fraca Operation, and against the former head of quality control at our Mineiros plant. Both were charged for allegedly committing crimes against consumers, as provided in article 7, item II of Law 8,137/90. The complaint does not contain any allegations of corruption.
We informed certain regulators and governmental entities of the Carne Fraca Operation, including the SEC and the U.S. Department of Justice (DOJ). On February 25, 2021, we were informed by the SEC that it had concluded its investigations with respect to the Carne Fraca Operation, and based on the information reviewed, the SEC Division of Enforcement did not recommend any enforcement action against us. On May 5, 2021, we were informed by the DOJ of the conclusion of its investigations against us pursuant to the Carne Fraca Operation and Trapaça Operation (described below), based on the information it had received until that date. No enforcements or remedies were imposed against us. We continue to cooperate with all applicable authorities.
The outcome of the Carne Fraca Operation was memorialized by the Leniency Agreement, as described above. With respect to the Carne Fraca Operation, CGU agreed not to file future lawsuits against BRF based on claims related to the matters covered by the Leniency Agreement.
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” and “Item 3. Key Information—D. Risk Factors— Risks Relating to Our Business and Industry——Unfavorable outcomes in administrative and legal proceedings may reduce our liquidity and negatively affect us.”
Trapaça Operation
On March 5, 2018, we learned of a decision issued by the 1st Federal Court of Ponta Grossa in the Brazilian 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.”
We informed certain regulators and governmental entities of the Trapaça Operation, including the SEC and the DOJ. On February 25, 2021, we were informed by the SEC that it had concluded its investigations with respect to the Trapaça Operation, and based on the information reviewed, the SEC Division of Enforcement did not recommend any enforcement action against us. On May 6, 2021, we were also informed by the DOJ that it also had concluded its investigations and did not recommend enforcement action against us or our executives. We continue to cooperate with all applicable authorities.
The outcome of the Trapaça Operation was memorialized by the Leniency Agreement, as described above. With respect to the Trapaça Operation, CGU agreed not to file future lawsuits against BRF based on claims related to the matters covered by the Leniency Agreement.
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” and “Item 3. Key Information—D. Risk Factors— Risks Relating to Our Business and Industry——Unfavorable outcomes in administrative and legal proceedings may reduce our liquidity and negatively affect us.”
Romanos Operation
On October 1, 2019, we became aware of a decision held by a federal judge of the 1st Federal Court of Ponta Grossa in the in the Brazilian state of Paraná, which authorized a search and seizure operation of information and documents to be carried out against federal inspectors from MAPA in several of our production locations. A limited number of inspectors were still located in our production units. None of our employees were involved in this search and seizure operation and neither we nor our employees are a party to such operation and investigation. On July, 27, 2021, the court overturned the federal judge’s decision made on October 1, 2019 and the proceeding relating to the search and seizure operation was filed and dismissed on August 17, 2021. The outcome of the Romanos Operation was established through the Leniency Agreement, as described above.
Brazilian Investor Arbitrations
In March 2020, three confidential arbitration proceedings were brought against us in the Market Arbitration Chamber (Câmara de Arbitragem do Mercado) of the B3 in Brazil by investors that had purchased our shares traded on the B3, seeking recovery from alleged losses incurred by them, due to a drop in our share price. In September 2020, the Chairman of Market Arbitration Chamber of B3 decided to consolidate these three arbitrations into a single proceeding. In November 2022, the arbitral tribunal was convened, and in December 2022, we formally commenced the arbitration proceeding. In November 2023, a partial arbitral award was rendered recognizing the procedural regularity of some of the claimants (there was no decision on the merits of the arbitration proceedings). BRF filed a motion for clarification against the partial arbitral award, which is awaiting judgment. In the event that this proceeding is decided against us, or we enter into an agreement to settle, there can be no assurance that an unfavorable outcome or settlement 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 Brazilian Corporate Law and our bylaws to hold by April 30 of each year. When we declare dividends, we are generally required to pay them within 60 days of declaring them unless the shareholders’ resolution establishes another payment date. In any event, if we declare dividends, we must pay them by the end of the fiscal year in which they are declared.
As permitted by Brazilian Corporate 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 Brazilian Corporate 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: (i) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain associated companies; and (ii) 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.
During the years ended December 31, 2023, 2022 and 2021, no dividends and interest on shareholders’ equity were paid to holders of our common shares.
Any decision to declare and pay dividends 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 annual report entitled “Item 10. Additional Information––B. Memorandum and Articles of Association––Description of Share Capital” contains a description of the calculation and payment of dividends and interest on shareholders’ equity under Brazilian Corporate Law. See “Item 10. Additional Information––B. Memorandum and Articles of Association––Allocation of Net Income and Distribution of Dividends” and “Item 10. Additional Information––B. Memorandum and Articles of Association––—Payment of Dividends and Interest on Shareholders’ Equity.”
Disclosure pursuant to Section 13(r) of the Exchange Act
Section 13(r) of the Securities Exchange Act of 1934 requires issuers to make specific disclosure in their annual reports of certain types of dealings with Iran, including certain transactions or dealings with persons or entities who meet the definition of Government of Iran pursuant to 31 C.F.R. § 560.304. In 2023, we shipped 29,112 tons of whole chicken to companies in the UAE, which these UAE companies subsequently shipped to a government entity in Iran. This limited business was conducted by a non-U.S. affiliate of our company. The gross revenues from these sales amounted to US$55,449,000, representing less than 0.44% of our global revenue for the year ended December 31, 2023. Sales may continue. Prior to these sales, we obtained halal certification for the products, which required inspection by the World Halal Center EIRELI at our facilities in Brazil and subsequent certification by the Iranian Veterinarian Association (IVO) (affiliated with Iran’s Ministry of Agriculture), to certify that products are produced as per Halal practices. We received no revenue (and therefore no profit) from the regulatory inspection and approval process.
In addition to Section 13(r) of the Exchange Act, U.S. law generally restricts dealings by persons subject to U.S. jurisdiction with certain countries or territories that are the target of comprehensive sanctions, currently Crimea, Cuba, Iran, North Korea, Syria, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic. We do business, via non-U.S. entities (which are not owned or controlled by U.S. entities), in certain of these jurisdictions. While we strive to comply in all material respects with all applicable U.S. sanctions, such laws are complex and continue to evolve rapidly.
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. As of March 31, 2024, there were 1,668,436,467 common shares without par value issued and outstanding (excluding 14,036,779 common shares held in treasury), and 130,067,902 ADRs outstanding.
Not applicable.
Our common shares trade on the São Paulo Stock Exchange. ADRs representing our common shares trade on the NYSE.
Trading on the B3
The B3 is a public company which resulted from the merger among Bolsa de Mercadorias e Futuros (BM&F, the Brazilian commodities and futures exchange), Bolsa de Valores de São Paulo (“Bovespa”), Companhia Brasileira de Liquidação e Custódia (“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. 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 the B3.
Settlement of transactions conducted on the São Paulo Stock Exchange is affected three business days after the trade date without any adjustment for inflation. Delivery of and payment for shares is made through Central Depositária, the São Paulo Stock Exchange’s securities clearing system. The seller is ordinarily required to deliver the shares to the exchange on the third 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 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. 4,373 of September 29, 2014 of the CMN, as amended (“Resolution No. 4,373”). Resolution No. 4,373 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. In addition, Resolution No. 4,373 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. 4,373 to other non-Brazilian holders through private transactions. For more information, see “Item 10. Additional Information––B. Memorandum and Articles of Association––Regulation of Foreign Investment.”
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. The Central Bank, on the other hand, has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities market is governed by Brazilian Law No. 6,385/76, as amended, and by Brazilian Corporate Law and other CVM rulings and regulations.
Under Brazilian Corporate 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, Brazilian Corporate Law and regulations issued by the CVM provide for, among other things, disclosure obligations, restrictions on insider trading and price manipulation and protections for minority shareholders. However, the Brazilian securities markets are not as highly regulated and supervised as securities markets in the United States and some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Brazil than in the United States, which may put holders of our common shares and ADRs at a disadvantage. Corporate disclosures also may be less complete than for public companies in the United States and certain other jurisdictions.
São Paulo Stock Exchange Corporate Governance Standards
The São Paulo Stock Exchange has listing segments:
| · | The Bovespa Mais Level 2; |
| · | Corporate Governance Level 1; |
| · | Corporate Governance Level 2; and |
| · | The Novo Mercado (New Market) of the B3. |
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 Brazilian Corporate Law. The inclusion of a company in any of the new segments requires adherence to a series of corporate governance rules. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations.
In April 2006, we entered into a listing agreement with the São Paulo Stock Exchange, under which we agreed to comply with stricter corporate governance and disclosure requirements established by the São Paulo Stock Exchange in order to qualify as a company admitted to the Novo Mercado.
As a company listed on the Novo Mercado and subject to its regulations, we agreed, among other things, to:
| · | maintain a share capital structure composed exclusively of common shares; |
| · | ensure the free float of shares representing at least 25% of our total outstanding share capital or 15%, in case of average daily trading volume greater than R$25 million; |
| · | adopt offering procedures that favor widespread ownership of shares whenever making a public offering; |
| · | comply with minimum quarterly disclosure standards; |
| · | disclose the following policies, approved by the Board of Directors: |
| o | Management Compensation Policy; |
| o | Appointment Policy for Members of the Board of Directors, of the Advisory Committees and of the Board of Executive Officers; |
| o | Financial Risk Management Policy; |
| o | Related Party Transactions Policy; and |
| o | Securities Trading Policy 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 according to CVM and Novo Mercado rules; |
| · | present an annual balance sheet prepared in accordance with, or reconciled to, IFRS; |
| · | 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 involving our company, members of our board of directors, board of executive officers, fiscal council and audit and integrity committee or shareholders relating to the application, validity, efficacy, interpretation, violation or effect of the Novo Mercado listing agreement and rules, our bylaws, Brazilian Corporate 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 executed a management compliance statement (Termo de Anuência dos Administradores) under which they take personal responsibility for compliance with the Novo Mercado listing agreement, the rules of the Market Arbitration Chamber and the Novo Mercado rules.
Not applicable.
Not applicable.
Not applicable.
| Item | 10. ADDITIONAL INFORMATION |
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), Brazilian Corporate Law, the rules and regulations of the CVM and the rules of the Novo Mercado. We have described some of the amendments below.
Under the Novo Mercado listing agreement that 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 a publicly held corporation (sociedade por ações de capital aberto) incorporated under the laws of Brazil. Our headquarters are located in Itajaí, in the Brazilian state of Santa Catarina. We are duly registered with the Junta Comercial do Estado de Santa Catarina under NIRE 42.300.034.240 and with the CVM under No. 01629-2.
As of the date of this annual report, our paid-in capital was R$13,653,417,953.36, which is composed of 1,682,473,246 book-entry common shares without par value. The Board is authorized to increase our capital stock up to 2,103,000,000 common shares.
Corporate Purpose
Article 3 of our bylaws provides that our corporate purpose consists of:
| · | the manufacture and sale, both in the retail and wholesale sectors, and transaction of business relating to food in general, particularly animal protein by-products and food items that use the cold chain for support and distribution; |
| · | the manufacture and sale of animal feed, nutrients and food supplements; |
| · | the provision of food services in general; |
| · | the manufacture, refining and sale of vegetable oils, fats and dairy products; |
| · | the production, conservation, storage, silage and sale of grains, their derivatives and by-products; |
| · | the sale on the retail and wholesale market of consumer and production goods, including equipment and vehicles for the development of its logistical activity; |
| · | the export and import of production and consumer goods; |
| · | the provision of services of transport, logistics and distribution of freight and food in general; |
| · | holding equity stakes in other companies, with the aim of achieving the corporate purposes to the fullest extent; |
| · | the participation in any projects needed for the operation of our business; |
| · | the manufacture on its own or on demand, commercialization, export and import of pharmaceutical products derived from animal slaughter; |
| · | the manufacture and commercialization of organic chemical products derived from animal slaughter; |
| · | the manufacture, distribution and export of pharmaceutical ingredients derived from animal slaughter; |
| · | intermediation and agency of services and business in general, except real estate; |
| · | provision of administrative services to third parties; and |
| · | provision of laboratory and technical analysis services to third parties. |
We may further engage directly, or indirectly through other companies, in any support activities for the core business described above, such as:
| · | administrative, technical or operational support activities, aimed at creating conditions to improve our core business; |
| · | transport services, in general; |
| · | product storage and stocking services and other related ancillary services; |
| · | activities to promote and replace our products in the retail market and at points of sale exposed to the final consumer, including the support needed by clients to allow the packaging and visualization of the products; |
| · | services for receiving and allocating raw materials to be used in production; |
| · | the provision of machine and vehicle repair, maintenance and overhaul services; |
| · | the promotion of the growth of agribusiness in Brazil through programs, technical assistance and supply; |
| · | the manufacture, development and sale of packaging products of any kind; |
| · | the processing and raising of livestock in general; |
| · | 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 |
| · | services to supply fuel for our own fleet or outsourced service providers, particularly freight, transport, logistics and distribution. |
Our bylaws prohibit our managers from engaging in any practices that involve us in matters or activities inconsistent with our corporate purpose and core business or contrary to our bylaws. Any such practices shall be null and void and may result in civil or criminal liability, as the case may be, of the individuals involved.
Rights of Common Shares
At our shareholders’ meetings, each share of our common stock is entitled to one vote. Pursuant to our bylaws and to the Novo Mercado listing agreement, we may not issue shares without voting rights or with restricted voting rights. In addition, our bylaws and Brazilian Corporate 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. Holders of our common shares have, except in certain circumstances listed in Brazilian Corporate 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.
According to Brazilian Corporate 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 Corporate Law described under “—Preemptive Rights”; |
| · | the right to monitor our management in accordance with the provisions of Brazilian Corporate Law; and |
| · | the right to withdraw from our company in the cases specified in Brazilian Corporate Law, which are described under “—Withdrawal Rights.” |
Meeting of Shareholders
Under Brazilian Corporate 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 board members typically takes place at the annual shareholders’ meeting, every two years, although under Brazilian Corporate Law it may also occur at an extraordinary shareholders’ meeting. Members of the fiscal council (conselho fiscal) 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 Brazilian Corporate Law, the following actions, among others, may be taken only at a shareholders’ meeting:
| · | amendment of our bylaws; |
| · | election and dismissal, at any time, of the members of our board of directors and fiscal council and approval of their aggregate compensation; |
| · | approval of management accounts and our audited financial statements; |
| · | granting stock awards and approval of stock splits or reverse stock splits; |
| · | approval of stock option plans for our management and employees or individuals who provide services to us, as well as those of companies directly or indirectly controlled by us; |
| · | authorization of the issuance of convertible debentures exceeding the authorized capital stock; |
| · | suspension of the rights of a shareholder; |
| · | approval of the distribution of our profits and payment of dividends, as well as the establishment of any reserve other than the legal reserve; |
| · | acceptance or rejection of the valuation of in-kind contributions offered by a shareholder in consideration for issuance of shares of our share capital; |
| · | approval of our transformation, merger, consolidation, spin-off; |
| · | approval of any dissolution or liquidation, and the appointment and dismissal of a liquidator, as well as the members of our fiscal council, which shall be installed in the event of our liquidation if it does not already exist at the time; |
| · | authorization to delist from the Novo Mercado, as well as the approval of the 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. |
Quorum
As a general rule, Brazilian Corporate 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, virtually (whenever the shareholders’ meeting is held under a partial or 100% digital format), by means of the distance voting form (boletim de voto a distância) or represented by proxy at a shareholders’ meeting is required to approve any proposed action, and blank votes are not counted as shares present in person or represented by proxy. However, the affirmative vote of shareholders representing not less than one-half of our issued and outstanding shares is required to, among other measures:
| · | reduce the percentage of mandatory dividends; |
| · | change our corporate purpose; |
| · | consolidate with or merge our company into another company; |
| · | spin off assets of our company; |
| · | approve our participation in a centralized group of companies; |
| · | apply for cancellation of any voluntary liquidation; and |
| · | approve our dissolution. |
A quorum smaller than the quorum established by Brazilian Corporate Law may be authorized by the CVM for a public company with widely traded shares and that has had less than half of the holders of its voting shares in attendance at its last three shareholders’ meetings.
Notice of Shareholders’ Meetings
Under Brazilian Corporate Law, notice of our shareholders’ meetings must be published at least three times in a widely circulated newspaper in the state of the location of our head office, which is currently the Valor Econômico.
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 Brazilian Corporate Law, the first notice must be published at least 21 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 except as provided under applicable legislation, Brazilian issuers of depositary receipts, such as our company, must call their shareholders’ meetings not less than 30 days prior to the 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 us, up to the end of the suspension period, about the reasons why it believes that a proposed resolution violates legal or regulatory provisions.
Location of Shareholders’ Meetings
Our shareholders’ meetings take place at our head offices in the city of Itajaí, in the Brazilian state of Santa Catarina. Brazilian Corporate Law allows our shareholders to hold meetings in another location in the event of force majeure, provided that the meetings are held in the same city in which our head office is located and the relevant notice includes a clear indication of the place where the meeting will occur.
Additionally, CVM Resolution No. 81 of March 29, 2022, as amended, permits our shareholders’ meeting to be held under a total or partial digital format.
Calling of Shareholders’ Meetings
Our board of directors may call shareholders’ meetings. Shareholders’ meetings also may be called by:
| · | any shareholder, if our board of directors fails to call a shareholders’ meeting within 60 days after the date it is required to do so under applicable law and our bylaws; |
| · | shareholders holding at least 5% of our 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. |
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 holder.
Pursuant to our bylaws, to ensure the efficiency of the works during our shareholders’ meetings shareholders attending a shareholders’ meeting are 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) or an extract evidencing the holding of registered shares. Notwithstanding the above and in accordance with Brazilian Corporate Law and our bylaws, shareholders who are able to make proof of their status as our shareholders may participate and vote at our shareholders’ meeting.
In addition, shareholders may vote by sending the distance voting form or by public request for proxy made available by us, duly filled and signed directly to us at Av. Das Nações Unidas, No. 14401, 22nd to 25th Floor, Jequitibá Tower, Chácara Santo Antônio, 04730-090, São Paulo – SP – Brazil, to the attention of the Corporate Legal Department and Investor Relations Department, with copies of the following documents:
| · | certified copies of an identification document with a photo for individuals and the bylaws, corporate and proxy documents and an identification document with a photo 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 administrator, according to the voting policy of the fund, corporate and proxy documents and an identification document with a photo of the proxy holder. |
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 accompanied by a sworn translation.
The holders of ADRs will be represented by The Bank of New York Mellon, in its capacity as a depository institution within the terms of the Deposit Agreement signed with us.
Shareholders may also vote by means of instruction transmitted to our 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 our shares, 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.
The shareholders 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 exercised by the shareholders according to the procedures adopted by their custodian agents.
In case a shareholders’ meeting is held under a total or partial digital format, we will fully disclose the conditions of admission on the documents related to the referred to shareholders’ meeting.
Board of Directors
Under our bylaws, our board of directors is composed of at least seven and up to ten members. The members of our board of directors are elected at the shareholders’ meeting for a period of two years and may be reelected. Our 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 the Novo Mercado 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. In case of any vacancy, the remaining members will nominate an alternate director who will serve until the next shareholders’ meeting, when shareholders shall elect another director to serve for the remaining term of office. If more than 1/3 of the seats on the board of directors are vacant at the same time, then an extraordinary shareholders’ meeting shall be called within 30 days counted from such vacancy event to elect the substitutes for such positions, who will serve for a term of office coinciding with the term of the other members.
Pursuant to our bylaws, whenever the shareholders’ meeting is convened to elect the board of directors, the board members are required to vote on and submit to the shareholders’ meeting a slate with candidates for all of the vacant board seats, including for the positions of chairman and vice chairman of the board. A shareholder who intends to nominate one or more members that are not on the slate prepared by the board must notify us, preferably in writing, at least five days prior to the shareholders’ meeting at which the members of the board of directors will be elected, providing us with the name, a complete list of qualifications and resume of the candidate. If we receive such a notification, we will be responsible for immediately disclosing this information through a Shareholders’ Notice to be posted on the CVM website and our website.
Brazilian Corporate 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 and to give each share the right to vote cumulatively for only one candidate or to 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 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. Pursuant to our bylaws, if a shareholder requests the adoption of the cumulative vote system, as provided by Section 141, paragraph one of Brazilian Corporate Law, we must disclose our receipt and the contents of such notification immediately through a Shareholder Notice, available on the CVM website or in accordance with applicable laws or CVM rules.
For further information, see “Item 6. Directors and Senior Management and Employees—A. Directors and Senior Management—Board of Directors.”
Board of Executive Officers
Our bylaws provide for a board of executive officers composed of at least two and no more than 15 members, comprised of a Global Chief Executive Officer, a Chief Financial and Investor Relations Officer and all other members as Vice Presidents. 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 with or without cause. Under Brazilian Corporate Law, our executive officers need not be shareholders of our company.
In accordance with the Brazilian Corporate Law, Novo Mercado rules and our bylaws, the position of Chairman 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, we 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.
Fiscal Council
Under Brazilian Corporate Law, the fiscal council is an auditing body independent from our 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. Brazilian Corporate Law and our bylaws provide that, if there is a controlling shareholder, then minority shareholders jointly representing 10% or more of our shares will have the right to elect, in a separate vote, one member of the fiscal council and one alternate.
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. Brazilian Corporate Law also requires that members of the fiscal council receive compensation, at a minimum, in the amount of 10% of the average compensation paid to our officers, excluding other benefits.
Audit and Integrity Committee
At our shareholders’ meeting held on April 3, 2014, our shareholders approved the establishment of a permanent audit and integrity committee. Our bylaws provide that the permanent audit and integrity committee shall be comprised of a minimum of three and a maximum of five members, provided that: (i) the majority of the members shall be independent; (ii) at least one of the independent members of the board of directors shall be a member of the 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 audit and integrity committee are designed to comply with CVM Resolution No. 23, of February 25, 2021, as amended, and to allow 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 Exchange Act. See “Item 16D. Exemptions from the Listing Standards for Audit Committees.”
The audit and integrity committee are an advisory body directly linked to the board of directors. The members of the audit and integrity committee are 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 audit and integrity committee must be a financial specialist, having knowledge of corporate accounting, auditing and finance.
Our audit and integrity committee have 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; |
| · | monitor the activities of: (i) the independent external auditors to evaluate their independence, the quality and suitability of the services rendered and the annual work plan; (ii) our internal controls department; (iii) our internal audit department; and (iv) 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; |
| · | 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, and integrity (compliance) practices; |
| · | evaluate and monitor, jointly with management and the internal audit department, the policy, suitability and reasoning of transactions with related parties, and internal policies; |
| · | evaluate, monitor and recommend to the board of directors the remediation or improvement of our internal policies, including our Related Parties Transactions Policy; |
| · | evaluate our 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 audit and integrity committee in relation to our financial statements. |
The audit and integrity committee must also have mechanisms to receive, retain and respond to whistleblower complaints, including of a confidential nature, on matters related to the scope of our internal or external activities, related to the violation of legal provisions and rules applicable to us (including those of an accounting, internal controls and auditing 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.
The audit and integrity committee have 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, Brazilian Corporate Law prohibits a member of the board of directors or board of executive officers from intervening in any transaction that conflicts with our interests.
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 consideration by our shareholders.
Brazilian Corporate 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 bylaws provide that the shareholders may allocate the participation of directors, executive officers and employees on our net profits 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 in any particular year. This dividend is limited to the realized portion of our net profits, which amount is the minimum mandatory dividend. Such amount must be calculated after excluding the allocation of profits to employees 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 Brazilian Corporate Law.
Profit Reserve Accounts
The financial statements of corporations constituted under Brazilian law include two principal reserve accounts: profit reserves and capital reserves. Except for the legal reserve, allocations to any reserve are subject to the approval of our shareholders at our annual shareholders’ meetings.
Profit Reserves
Under Brazilian Corporate 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 the company’s shareholders at the annual shareholders’ meeting.
Legal Reserve
Under Brazilian Corporate Law and our bylaws, we are required to maintain a legal reserve to which we must allocate 5% of net profits for each fiscal year until the aggregate amount in the reserve equals 20% of share capital. However, we are not required to make any allocations to legal reserve in a fiscal year in which the legal reserve, when added to the established capital reserves, exceeds 30% of total capital. The amounts to be allocated to such reserve may only be used to increase share capital or to absorb losses but are not available for distribution. This amount must be calculated after excluding the allocation of profits to employees, officers and directors. As of December 31, 2023, we did not have a legal reserve.
Unrealized Profit Reserve
Under Brazilian Corporate Law, the amount by which the distributable amount exceeds realized net profits in a given fiscal year may be allocated to unrealized profits reserves. Brazilian Corporate Law defines realized net profits as the amount by which net profits exceed the sum of: (i) 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 (ii) 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. As of December 31, 2023, we did not have an unrealized profits reserve.
Contingency Reserve
Under Brazilian Corporate 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. As of December 31, 2023, we did not have a contingency reserve.
Bylaw Reserves
Under Brazilian Corporate 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. This amount must be calculated after excluding the allocation of profits to employees, officers and directors. As of December 31, 2023, we did not have increases in capital reserve. |
| · | Expansion reserves. Shareholders 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. This amount must be calculated after excluding the allocation of profits to employees, officers and directors. This reserve is intended to ensure investment in fixed assets or the increase in our working capital. As of December 31, 2023, we did not have an expansion reserve. |
In addition, under the Brazilian Corporate Law, shareholders may decide at a meeting to retain the portion of net profits arising from government donations or subsidies for investment and allocate them to a reserve for tax incentives. This reserve can be excluded from the calculation basis of the mandatory minimum dividends. As of December 31, 2023, we did not have a reserve for tax incentives.
Retained Earnings Reserves
Under Brazilian Corporate 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. As of December 31, 2023, we did not have a retained earnings reserve.
Capital Reserves
Under Brazilian Corporate 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. 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. As of December 31, 2023, we had a capital reserve of R$2,763,364 thousand.
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 Brazilian Corporate 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 Brazilian Corporate 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 Brazilian Corporate Law and our bylaws to hold an annual shareholders’ meeting no later than the fourth month following the end of each fiscal year at which, among other things, the shareholders must vote to declare an annual dividend. The annual dividend is calculated based on our audited financial statements prepared for the immediately preceding fiscal year.
Any holder of shares on the date the dividend is declared is entitled to receive the dividend. Under Brazilian Corporate 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: (i) 50% of our net profits (after deduction of social contribution and before payment of any interest or any deduction for income taxes) relating to the period to which the payment is made; and (ii) 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 Long-Term Interest Rate (Taxa de Juros de Longo Prazo, or “TJLP”) 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 Tax Haven Resident. A tax haven jurisdiction is a country: (i) that does not impose income tax or whose income tax rate is lower than 20%; or (ii) 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.
Statute 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 Brazilian Corporate Law, a shareholder’s withdrawal rights may be exercised in the following circumstances, among others:
| · | spin-off (as described below); |
| · | reduction in our mandatory dividends; |
| · | change in our corporate purpose; |
| · | consolidation with or merger into another company; |
| · | participation in a group of companies (as defined in Brazilian Corporate Law); or |
| · | the acquisition by us of the control of any company if the acquisition price exceeds the limits established in the second paragraph of Article 256 of Brazilian Corporate Law. |
However, under Brazilian Corporate Law, a spin-off will not trigger withdrawal rights unless, as a result:
| · | there is a change in our corporate purpose, except to the extent that the principal business purpose of the entity to which the spun-off assets and liabilities were transferred is consistent with our business purpose; |
| · | there is a reduction in our mandatory dividend; or |
| · | we are made part of a centralized group of companies, as defined in Brazilian Corporate Law. |
In cases where we:
| · | merge into or consolidate with another company; |
| · | participate in a group of companies (as defined in Brazilian Corporate 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 Brazilian Corporate Law. |
Our shareholders will not be given withdrawal rights if our shares: (i) 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; or (ii) 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.
Redemption
Under Brazilian Corporate 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 Brazilian Corporate Law and our bylaws, our board of directors may 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.
Restriction on Certain Transactions by Controlling Shareholders, Directors and Officers
We are subject to the rules of CVM Resolution 44, of August 23, 2021, as amended, relating to the trading of our securities.
Any person, with the purpose of obtaining an advantage, for himself or for others, who has knowledge of material information and knows it has not been disclosed to the market, must abstain from trading our securities, prior to the disclosure of such material information to the market.
For the purposes of CVM Resolution 44, it is assumed that:
| · | the person who traded securities having material information not yet disclosed made use of such information in said trade; |
| · | we, our direct or indirect controlling shareholders, directors, members of our board of directors and of the fiscal council, in relation to business with securities issued by us, have access to all material information not yet disclosed; |
| · | we, our direct or indirect controlling shareholders, directors, members of our board of directors and of the fiscal council, as well as those who have a commercial, professional or trusting relationship with us, having had access to material information not yet disclosed, they know that it is privileged information; |
| · | a member of our management, who leaves our company with relevant and not yet disclosed information makes use of such information if he trades securities issued by us within a period of 3 months from his departure; |
| · | from the moment in which studies or analyzes related to the matter are initiated, information about merger operations, total or partial spin-off, transformation, or any form of corporate reorganization or business combination, change in control, including through the execution, amendment or termination of a shareholders’ agreement, decision to cancel our registration or change in the environment or trading segment of the shares issued by us, are considered material information; and |
| · | requests for judicial or extrajudicial recovery and bankruptcy made by us, from the moment studies or analyzes related to such request are initiated, are considered material information. |
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, Brazilian Corporate Law, the rules published by the CVM, the other rules applicable to the Brazilian capital markets in general, other 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
We may become private if our controlling shareholder or any company which controls us, directly or indirectly, as the case may be, conducts a public tender offer to acquire all of our outstanding shares in accordance with the rules under the Novo Mercado rules. The offered price per share must be fair and shareholders holding more than 33.33% of the outstanding shares must agree to the public tender offer or otherwise expressly agree to voluntarily exit the Novo Mercado without the effective sale of shares. The voluntary exit from the Novo Mercado may occur regardless of the public tender offer, if approved by shareholders in a meeting pursuant to the rules and conditions of the Novo Mercado rules.
The compulsory exit from the Novo Mercado must be preceded 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 the event the minimum percentage for delisting is not reached after completion of the public tender offer. In addition, we will remain subject to other penalties that may be imposed by B3.
Delisting from the Novo Mercado
Our delisting from the Novo 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 the Novo Mercado, provided that a public tender offer for the acquisition of our outstanding shares is carried out.
Such 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 offered shall be fair, and a request of new valuation of us shall be in the form established in Brazilian Corporate Law; and (ii) shareholders holding more than 1/3 of the outstanding shares shall accept the tender offer or expressly agree with the delisting from the Novo Mercado without the effective sale of the shares.
The voluntary delisting from the Novo 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 the Novo Mercado. The compulsory delisting from the Novo 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 42 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, we will remain subject to other penalties that may be imposed by B3.
Change of Control
Under the rules of the Novo Mercado, the direct or indirect sale of our control, in one transaction or in a series of transactions, creates an obligation by the acquirer to complete, subject to applicable regulations, a public tender offer for the acquisition of all other outstanding shares on the same terms and conditions granted to the selling controlling shareholder.
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 Brazilian Corporate Law and in the Novo Mercado rules.
The acquirer must take all necessary measures to reconstitute the minimum percentage of the free float required under the Novo Mercado regulations within eighteen months of the acquisition.
Purchases of Our Shares by Our Company
Our bylaws entitle our board of directors to approve the acquisition of our 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:
| · | be used to purchase shares of the controlling shareholder; |
| · | be carried out in organized markets at a price greater than market price; |
| · | be carried out during a public tender offer for the acquisition of shares issued by us; |
| · | require the use of resources greater than those available, pursuant to the 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; or |
| · | be carried out when there is a material information not yet disclosed to the market. |
The decision to purchase our own shares, when taken by the board of directors, which must specify, among other information: (i) the purpose and economic effects of the purchase; (ii) the amount of shares to be purchased; (iii) price; (iv) impacts on the shareholding structure; (v) maximum term for the liquidation of the purchase; (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 mandatory dividends.
We cannot hold in treasury more than 10% of our total shares, including the shares held by our subsidiaries and affiliates.
Reporting Requirements
We are subject to the reporting requirements established by Brazilian Corporate Law and the regulations of the CVM. In addition, as a result of our listing on the Novo Mercado, we must meet the reporting requirements of the Novo 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, 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 the Demonstrações Financeiras Padronizadas (a report on a standard form containing financial information derived from our financial statements required to be filled out by us and filed with the CVM); |
| · | notices of our annual shareholders’ meeting on the date of its publication; |
| · | a summary of the decisions taken at the annual general shareholders’ meeting on the day the meeting is held; |
| · | 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 Referência – a report on a standard form containing annual corporate, business, and selected financial information, five months from the end of our fiscal year; |
and we must update this document in accordance with Resolutions 80 and 81 of the CVM, as amended;
| · | Informações Trimestrais – ITR (a report on a standard form containing quarterly corporate, business and financial information), together with a special review report issued by our independent auditor, within 45 days from the end of each quarter (except for the last quarter of each year) or upon disclosure of such information to the public if it occurs within 45 days from the end of the relevant quarter. |
In addition to the foregoing, we must also file with the CVM and the São Paulo Stock Exchange the following information, 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; |
| · | information on any filing for plan of reorganization, as well as a copy of any judicial decision on such request, on the same date it is filed and, on the date, we take notice of the judicial decision, respectively; |
| · | request for bankruptcy, on the same day that we become aware of such requests; and |
| · | a copy of any judicial decision granting a bankruptcy request and appointing of a bankruptcy trustee, on the date we become aware of it. |
Information Required by the São Paulo Stock Exchange from Companies Listed on the Novo Mercado
Our shares have been listed to trade on the Brazilian Securities and Derivatives Stock Exchange special listing segment named Novo Mercado, of B3. Accordingly, we, our shareholders, directors, officers and members of our fiscal council (if active) are bound by B3’s Novo Mercado Listing Rules. Whenever a provision of our bylaws is detrimental to our shareholders who may benefit from any tender offer, the Novo Mercado Regulations shall prevail over the provisions of the bylaws.
As a Novo Mercado company, we must observe the following additional disclosure requirements, among others:
| · | we must publish the internal rules of our board of directors and its advisory committees, and of the fiscal council; |
| · | we must inform the 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 results in English; |
| · | we must make a public presentation on our quarterly results and on our financial statements within five days of their publishing; and |
| · | we must make a calendar available up to December 10th each year with the dates of the following events: (i) publishing of our financial statements and our standardized financial statements (DFP); (ii) publishing of our quarterly information (ITR); (iii) ordinary general shareholders’ meeting; and (iv) filing of our Formulário de Referência (FR). |
Information Regarding Any Trading Carried Out by Any Controlling Shareholders, Members of Our Board of Directors, Our Board of Executive Officers or Members of Our Fiscal Council
Pursuant to the rules of the CVM and the Novo Mercado, any controlling shareholders, officers, directors, members of the fiscal council, if active, and members of any other technical or advisory committee created by our bylaws, must disclose to us, the CVM and the São Paulo Stock Exchange information in connection with the total amount and characteristics of our securities owned, directly or indirectly, or any derivatives with reference to such securities, as well as any subsequent trading of such securities and derivatives. In the case of individuals, this information must also include securities held by the spouse, companion or dependents of such persons and be included in the annual income tax statement of the controlling shareholder, officer, director or member of the fiscal council. This information must be communicated to the CVM and the São Paulo Stock Exchange by the Investor Relations Officer within ten days after the end of each month.
In addition, 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 represent our capital 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, 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, class and type of the benchmarked shares; |
| · | the reason and purpose of the acquisition containing, if applicable, statement that such negotiations do not intend to modify our equity or management structure; |
| · | information on any agreement regarding the exercise of voting rights or the purchase and sale of our securities; and |
| · | in case the shareholder is resident or domiciled abroad, the name or corporate name and the Taxpayer enrollment number of its attorney or legal representative in the country. |
Disclosure of Material Developments
According to Law No. 6,385 of December 7, 1976 and subsequent amendments, the rules published by the CVM, and our Policy on Disclosure of Material Acts or Facts and Trading of Securities 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.
Annual Calendar
Novo Mercado regulations require that companies and their management, by December 10 of each year, disclose an annual calendar, and send a copy to the São Paulo Stock Exchange, containing the 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 filing of our Formulário de Referência (FR). Amendments to the calendar must be communicated to the São Paulo Stock Exchange.
Trading on Stock Exchanges
Our shares trade on the Novo Mercado segment of the São Paulo Stock Exchange under the symbol “BRFS3.” The CVM and the São Paulo Stock Exchange have discretionary authority to suspend trading of the shares of a particular issuer under certain circumstances.
The São Paulo Stock Exchange operates a central clearing system. A holder of our 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 (through a Brazilian institution duly authorized by the Central Bank and with a clearing account with the São Paulo Stock Exchange). The fact that those shares are held in the custody of the São Paulo Stock Exchange will 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 will be treated in the same way as registered shareholders.
Agreements within Our Group
According to CVM Resolution No. 80, as amended, 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.
The information disclosed should include a description of the purpose of the material contract, 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. 4,373 and CVM Resolution No. 13, of November 18, 2020, as amended.
With certain limited exceptions, Resolution No. 4,373 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. 4,373 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. 4,373 investor, an investor residing outside Brazil must:
| · | appoint at least one representative in Brazil who will be responsible for complying with registration and reporting requirements and procedures with the Central Bank and the CVM, which shall be a financial institution or institution authorized by Central Bank to operate in Brazil. |
| · | register as a foreign investor with the CVM; and |
| · | appoint at least one custodian duly authorized by CVM. |
Securities and other financial assets held by foreign investors pursuant to Resolution No. 4,373 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 are generally restricted to transactions on the São Paulo Stock Exchange or in organized over-the-counter markets licensed by the CVM.
For the two years immediately preceding the publication of this annual report, we were not a party to any material contract outside the ordinary course of business, except for the M&A contracts described in Item 4. Information on the Company—A. History and Development of the Company and loans and financing agreements described in Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Our Indebtedness.
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, with 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 with Brazilian government directives. There can be no assurance, however, that the Brazilian government may not take similar measures in the future.
There are no restrictions on ownership of our capital share by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of common 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 registration under the Resolution No. 4,373. Under such resolution, qualified foreign investors registered with the CVM and acting through authorized custody accounts managed by local agents may buy and sell shares on Brazilian share exchanges without obtaining separate electronic registration for each transaction. Investors under the Resolution No. 4,373 are also generally entitled to favorable tax treatment.
Electronic registrations by the Brazilian Central Bank have been issued in our name with respect to our ADRs. Pursuant to the electronic registration, the custodian will be able to convert dividends and other distributions with respect to the shares represented by our ADRs into foreign currency and remit the proceeds outside Brazil.
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 of this annual report, 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 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 in 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 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 information below is based on Brazilian law as currently in effect. Any change in that law may change the consequences described below.
Income Tax
Dividends. Dividends paid by a Brazilian corporation, such as ourselves, 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 to make distributions to shareholders of interest on shareholders’ equity. These distributions may be paid in cash. Such payments represent a deductible expense from the payer’s corporate income tax and social contribution on net profits tax basis. For tax purposes, this interest is limited to the daily pro rata variation of the TJLP (the Brazilian government's long-term interest rate), as determined by Brazilian Central Bank from time to time, and may not exceed the greater of:
| · | 50% of net income (after the social contribution on net profits tax, and before the provision for corporate income tax and the amounts attributable to shareholders as interest on shareholders’ equity) for the period in respect of which the payment is made; and |
| · | 50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made. |
Payment of interest to a Non-Resident Holder is subject to withholding income tax at the rate of 15%, or 25% if the Non-Resident Holder is resident of a tax 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 as part of mandatory dividends.
We recommend prospective investors to consult their own tax advisors from time to time to verify any possible tax consequences arising from Normative Instruction No. 1,037/2010, which provides an exhaustive list of all jurisdictions considered by Brazilian 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.
Gains
According to Law No. 10,833/03, capital gains recognized by Non-Resident Holders on the disposition of assets located in Brazil, such as common shares are subject to income tax in Brazil. This rule is applicable regardless of whether the disposition is conducted in Brazil or abroad or if the disposition is or is not made to an individual or entity resident or domiciled in Brazil.
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 following taxes:
| · | 0% income tax with respect to gains realized by a Non-Resident Holder that (i) is a Registered Holder (according to Resolution 4,373 from Brazilian Central Bank) and (ii) is not a Tax Haven Resident; |
| · | income tax at a rate of 15% with respect to gains realized by a Non-Resident Holder that is neither a Registered Holder nor a Tax Haven Resident. |
| · | income tax at a rate of 15% with respect to gains realized by a Non-Resident Holder that is a Tax Haven Resident if such holder is a Registered Holder. For Non-Registered holders domiciled in a Tax Haven withholding income tax should be applied at a 25% rate. In addition, a withholding income tax of 0.005% will apply and can be offset against any income tax due on the capital gain, except in the case of a 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 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: |
| 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 Non-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 reais is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the above-mentioned progressive rate, 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. 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.
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 4,373, which will entitle them to the tax treatment discussed above.
Gains on the Exchange of Common Shares for ADRs
The deposit of common shares in exchange for 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. 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 the above-mentioned progressive rate from 15% to 22.5%, or 25% for Tax Haven Residents.
Tax on Foreign Exchange and Financial Transactions (“IOF”)
Brazilian law imposes a tax on financial transactions involving foreign exchange, securities, credit and insurance. The rate of IOF applicable on foreign exchange transactions (“IOF exchange”) involving common shares is currently 0%, but the Minister of Finance is permitted to prospectively increase such rate at any time up to 25%.
IOF may also be levied on transactions involving bonds and securities (“IOF securities”), including those carried out on a Brazilian stock, futures or commodities exchanges. The rate of the IOF securities applicable to most transactions involving common shares is currently 0%, but the Brazilian government may also prospectively increase the rate of the IOF up to 1.5% per day at any 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, beneficial ownership and disposition of our common shares and ADRs as of the date of this annual report.
Except where noted, this summary deals only with U.S. holders (as defined below) that hold our common shares or ADRs as capital assets for U.S. federal income tax purposes (generally, property held for investment). As used in this summary, the term “U.S. holder” means a holder of our common shares or ADRs that is for U.S. federal income tax purposes:
| · | an individual citizen or resident of the United States; |
| · | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia; |
| · | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
| · | a trust, if it (i) is subject to the primary supervision of a U.S. court and one or more U.S. persons have the authority to control all substantial decisions of the trust; or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a 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; |
| · | a holder who holds our common shares or ADRs in a retirement account or other tax-deferred account; |
| · | a tax-exempt organization; |
| · | a holder who holds our common shares or ADRs as part of a hedging, integrated or conversion transaction or a straddle; |
| · | a holder 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 holder liable for alternative minimum tax; |
| · | a holder who owns or is deemed to own 10% or more of our 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 holder whose “functional currency” for U.S. federal income tax purposes is not the U.S. dollar. |
The discussion below is based upon the provisions of the Code, existing and proposed income tax regulations issued under the Code and judicial decisions and administrative rulings thereunder, all as of the date of this annual report. All of the foregoing is subject to be replaced, revoked or modified at 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 of an investment in our common shares or 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 partnership or 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, beneficial ownership or disposition of our common shares or ADRs, you should consult your own tax advisors concerning the U.S. federal income tax consequences to you in light of your particular situation, as well as any consequences arising under the laws of any other taxing jurisdiction.
ADRs
If you hold ADRs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying common shares that are represented by the ADSs evidenced by ADRs. Accordingly, deposits or withdrawals of common shares for ADRs will not be subject to U.S. federal income tax.
Taxation of Dividends
Subject to the discussion under “—Passive Foreign Investment Company” below, if you are a U.S. holder, the gross amount of distributions on 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. To the extent that the amount of any distribution 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 ADRs or common shares (but not below zero), 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 Dispositions”). 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.
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 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 so long as certain holding period and other requirements are met. Subject to certain limitations, a foreign corporation generally is treated as a qualified foreign corporation if its shares (or ADRs backed by such shares) are readily tradable on an established securities market in the United States, such as the NYSE, and such corporation is not a PFIC (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 our 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 our ADRs will be considered readily tradable on an established securities market in later years. Additionally, even if we are a qualified foreign corporation, the reduced rates on dividends will apply only if such dividends are paid with respect to the ADRs that a 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 apply if a non-corporate U.S. holder elects to treat the dividend income as “investment income” for purposes of the investment interest expense limitations of Section 163(d) of the Code. In addition, the rate reduction will not apply to a dividend if the recipient of the dividend is obligated (whether pursuant to a short sale or otherwise) 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. The dividend rules are complex, and you should consult your own tax advisors regarding the application of these rules given your particular circumstances.
The amount of any dividend paid in reais will equal the U.S. dollar value of the reais received calculated by reference to the exchange rate in effect on the date the dividend is received by you, in the case of common shares, or by the depositary, in the case of ADRs, regardless of whether the reais are converted into U.S. dollars. If the reais received as a dividend are converted into U.S. dollars on the date they are received, you generally will not be required to recognize foreign currency gain or loss in respect of the dividend income. If the reais received as a dividend are not converted into U.S. dollars on the date of receipt, you will have a basis in the reais equal to their U.S. dollar value on the date of receipt. Any gain or loss of a U.S. holder realized on a subsequent conversion or other disposition of the reais generally 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 may 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 ADRs or our common shares will be treated as income from sources outside the United States and will generally constitute passive category income. Treasury Regulations addressing foreign tax credits (the “Foreign Tax Credit Regulations”) impose additional requirements for foreign taxes to be eligible for a foreign tax credit and there can be no assurance that those requirements will be satisfied. However, recent notices from the IRS provide temporary relief by allowing taxpayers that comply with applicable requirements to apply many aspects of the foreign tax credit regulations as they previously existed (before the release of the Foreign Tax Credit Regulations) for taxable years ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance). Instead of claiming a credit, you may be able to deduct such otherwise creditable Brazilian withholding taxes in computing your taxable income, but only for a taxable year in which you elect to do so with respect to all foreign income taxes paid or accrued in such taxable year and subject to generally applicable limitations under U.S. law. The rules governing foreign tax credits are complex. You are urged to consult your tax advisors regarding the Foreign Tax Credit Regulations (and the related temporary relief in the IRS notices) and the availability of a foreign tax credit or a deduction under your particular circumstances.
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.
Taxation of Dispositions
For U.S. federal income tax purposes, a 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 the U.S. holder’s adjusted tax basis in the common shares or ADRs, both determined in U.S. dollars. Subject to the discussion under “—Passive Foreign Investment Company” below, such gain or loss will generally be capital gain or loss. Capital gains of U.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 a U.S. holder will generally be treated as U.S. source gain or loss. Consequently, in the case of gain from the disposition of common shares or ADRs, U.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. However, pursuant to the Foreign Tax Credit Regulations, any such Brazilian income tax would generally not be a foreign income tax eligible for a foreign tax credit (regardless of any other income that you may have that is derived from foreign sources). In such case, the non-creditable Brazilian income tax may reduce the amount realized on the sale or other taxable disposition of the common shares or ADRs. As discussed above, however, recent notices from the IRS provide temporary relief by allowing taxpayers that comply with applicable requirements to apply many aspects of the foreign tax credit regulations as they previously existed (before the release of the current Foreign Tax Credit Regulations) for taxable years ending before the date that a notice or other guidance withdrawing or modifying the temporary relief is issued (or any later date specified in such notice or other guidance). If a Brazilian income tax is imposed on the sale or other taxable disposition of the ADRs or common shares and you apply such temporary relief, such Brazilian income tax may be eligible for a foreign tax credit or deduction, subject to the applicable conditions and limitations.
A U.S. holder’s initial tax basis on our common shares or ADRs will be the U.S. dollar value of the reais denominated purchase price determined on the date of purchase. With respect to the sale, exchange or other taxable disposition of common shares or ADRs, the amount realized generally will be the U.S. dollar value of the payment received determined on: (i) the date of actual or constructive receipt of payment in the case of a cash basis U.S. holder; or (ii) the date of disposition in the case of an accrual basis U.S. holder. If the common shares or ADRs are traded on an “established securities market,” a cash basis U.S. holder, or an electing accrual basis U.S. holder, will determine the U.S. dollar rate of the cost of the common shares or the amount realized based on the exchange rate on the settlement date of the sale. If a U.S. holder sells or otherwise disposes of our common shares or ADRs in exchange for currency other than U.S. dollars, any gain or loss that results from currency exchange fluctuations during the period from the date of the sale or other disposition until the date that the currency is converted into U.S. dollars generally will be treated as ordinary income or loss and will not be eligible for the reduced tax rate applicable to long-term capital gains. Such gain or loss generally will be U.S.-source income or loss. If the currency is converted into U.S. dollars on the date of receipt, a U.S. holder generally would not be required to recognize foreign currency gain or loss in respect of the amount realized. U.S. holders are urged to consult their own tax advisors regarding the treatment of any foreign currency gain or loss realized with respect to any currency received in a sale or other disposition of the common shares or ADRs that is converted into U.S. dollars (or otherwise disposed of) on a date subsequent to receipt.
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.
Passive Foreign Investment Company
The 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 sales, exchanges and other dispositions, including pledges, of, shares of stock (or ADRs backed by such shares) in a 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 (based on the average of the fair market values of the assets determined at the end of each quarterly period) of our assets is attributable to assets that produce or are held for the production of passive income. |
For this purpose, passive income generally includes dividends, interest, royalties, 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 (directly or indirectly) 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 2023, and we do not expect to be a PFIC for 2024, 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 a U.S. holder holds our ADRs or common shares, such 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 the U.S. holder’s holding period for ADRs or common shares will be treated as excess distributions. Under these special tax rules:
| · | the excess distributions and gains are allocated ratably to each day of the U.S. holder’s holding period during which we were a PFIC, |
| · | amounts allocated to the taxable year in which the excess distribution or disposition occurs and amounts allocated to any period in the U.S. holder’s holding period before the first day of the first taxable year that we were a PFIC will be treated as ordinary income (rather than capital gain) earned in the taxable year of the excess distribution or 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, 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 gain, even if the U.S. holder held such common shares or ADRs as capital assets. |
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 (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-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, a 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 the U.S. holders of ADRs, because our ADRs are listed on the NYSE, which constitutes a qualified exchange, although there can be no assurance that our ADRs will be “regularly traded” for purposes of the mark-to-market election. It should also be noted that only our ADRs and not our common shares are listed on the NYSE. Our common shares are listed on the Novo Mercado (New Market) of the São Paulo Stock Exchange, which must meet certain trading, listing, financial disclosure and other requirements to be treated as a qualified exchange under applicable Treasury regulations for purposes of the mark-to-market election, and no assurance can be given that the common shares will be “regularly traded” for purposes of the mark-to-market election.
If a U.S. holder makes a valid mark-to-market election for the first taxable year in which such U.S. holder holds (or is deemed to hold) our 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 an amount equal to the excess, if any, of the fair market value of the common shares or ADRs that the U.S. holder owns as of the close of the taxable year over the U.S. holder’s adjusted tax basis in the common shares or ADRs. The U.S. holder will be entitled to deduct the excess, if any, of the U.S. holder’s adjusted tax basis in the common shares or ADRs over their fair market value as of the close of the taxable year, but only to the extent of the net mark-to-market gains with respect to the common shares or ADRs included by the U.S. holder in prior taxable years as a result of the mark-to-market election. If the U.S. holder makes a valid mark-to-market election, in each year that we are a PFIC amounts included in income of such U.S. holder pursuant to a mark-to-market election, as well as gain on the sale, exchange or other disposition of its 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.
If a U.S. holder makes a valid mark-to-market election, its adjusted tax basis for 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. Any distributions made by us in a year in which we are a PFIC and a mark-to-market election is 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 ordinary gain or loss 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 it is made and all subsequent taxable years unless the common shares or ADRs are no longer regularly traded on a qualified exchange or the IRS 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 (or permit the deduction of loss) 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.
Additionally, if we are a PFIC and have any non-U.S. subsidiaries that are PFICs (each a “Subsidiary PFIC”), a U.S. holder will be treated as owning its proportionate amount (by value) of the common shares of each such Subsidiary PFIC and will be subject to the PFIC rules with respect to each such Subsidiary PFIC. A U.S. holder may not make a mark-to-market election with respect to the common shares of any Subsidiary PFIC. Thus, the mark-to-market election is not available to mitigate the adverse tax consequences attributable to any Subsidiary PFIC.
Alternatively, the excess distribution rules may be avoided if a U.S. holder makes a qualified electing fund (“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 with respect to such U.S. holder. However, the QEF election is not available to our U.S. holders because we do not intend to comply with the requirements necessary to permit our U.S. holders to make this election.
U.S. holders are urged to consult their tax advisors as to our status as a PFIC, and, if we are treated as a PFIC, as to the effect on them of, and 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.
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 US$50,000 at the end of the taxable year or US$75,000 at any time during the taxable year 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 distributions 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 other disposition of common shares or ADRs by a non-corporate U.S. holder to or through a U.S. office of a broker. Payments made (and sales or other dispositions effected at an office) outside the U.S. will be subject to information reporting in limited circumstances.
In addition, backup withholding of U.S. federal income tax may apply to such amounts if the U.S. holder fails to provide an accurate taxpayer identification number (or otherwise fails to establish, in the manner provided by law, an exemption from backup withholding) or to report dividends 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 the amount of any backup withholding from a payment to a U.S. holder will be allowed as credit against the U.S. holder’s U.S. federal income tax liability provided that the appropriate returns are timely filed.
A non-U.S. holder generally may eliminate the requirement for information reporting and backup withholding by providing a properly completed and duly executed certification of its foreign status to the 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, beneficial 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, beneficial 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.
Not applicable.
We make our filings in electronic form under the EDGAR filing system of the SEC. Its filings are available through the EDGAR system at www.sec.gov. In addition, our filings are available to the public over the Internet at our web site at https://ri.brf-global.com/en/. Such filings and other information on its website are not incorporated by reference in this annual report. You may request a copy of this filing, and any other report, at no cost, by contacting us at:
Investor Relations Department BRF S.A.
Avenida das Nações Unidas, 14.401 – 22nd to 25th Floors, Torre Jequitibá
Condomínio Parque da Cidade, Chácara Santo Antonio
04730-090 – São Paulo – SP – Brazil
Telephone: +55 11 2322-5377
E-mail: acoesri@brf.com
See note 1.1 to our consolidated financial statements for a description of our subsidiaries.
| J. | Annual Report to Security Holders |
Not applicable.
| 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 in 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 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 Finance and Risk Management Committee, our board of executive officers and our board of directors.
Our risk management department is responsible for monitoring, evaluating and reporting our financial risk. Our board of directors is responsible for approving our risk policy and periodically evaluating improvements to it, defining the limits of risk tolerance for different types of risks to which we are exposed and defining action plans to align the risks within these limits. Our Finance and 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 23 to our consolidated financial statements.
The following section describes the significant market risks associated with 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 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 CDI rate, the IPCA index, the SOFR and the EIBOR. We also have indebtedness denominated in reais and U.S. dollars that bear interest at fixed rates. With respect to our marketable securities, our principal exposure is to the CDI rate for investments in the Brazilian market. Our marketable securities in foreign markets are generally U.S. dollar instruments at a fixed coupon.
The table below provides information about our financial instruments that are sensitive to changes in interest rates as of December 31, 2023. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in real equivalents. The instruments’ actual cash flows are denominated in U.S. dollars, euro and reais, as applicable, once these currencies are subject to interest rate risks. See also “—Foreign Exchange Risk” below, which describes our foreign exchange derivatives. Even though these derivatives were entered into primarily to manage foreign exchange risk, they may also have an interest rate risk component because certain derivatives are linked to variable interest rates such as the CDI rate.
To facilitate the analysis of market risk, the table below includes cash, cash equivalents and debt (amounts in millions of reais, except weighted average annual interest rates).
Financial Instruments | All-in weighted average annual interest rate | Short Term | 2025 | 2026 | 2027 | 2028 | Thereafter | Fair value |
| Assets – Short/Long-term | | 9,690.6 | 59.5 | — | — | — | — | 9,750.2 |
| Fixed rate | | | 3,446.7 | — | — | — | — | — | 3,458.8 |
| In U.S. dollars | | 5.78% | 2,087.1 | — | — | — | — | — | 2,099.2 |
| In U.S. dollars | | Overnight rate | 670.9 | — | — | — | — | — | 670.9 |
| In EUR | | 0.27% | 16.0 | — | — | — | — | — | 16.0 |
| Other currencies | | 9.21% | 672.8 | — | — | — | — | — | 672.8 |
| Variable rate | | | 5,302.8 | — | — | — | — | — | 5,333.7 |
| In Reais | | 100.61% of CDI | 4,890.7 | — | — | — | — | — | 4,921.6 |
| In Reais | | 100.00% of SELIC | 412.1 | — | — | — | — | — | 412.1 |
| Floating rate | | | 4.7 | — | — | — | — | — | 21.2 |
| In Reais | | Floating rate | 4.7 | — | — | — | — | — | 21.2 |
| MTM | | — | — | — | — | — | — | — | — |
| Other currencies | | — | — | — | — | — | — | — | — |
| Without rate | | — | 936.4 | — | — | — | — | — | 936.4 |
| In Reais | | — | 160.3 | — | — | — | — | — | 160.3 |
| In Euros | | — | 122.5 | — | — | — | — | — | 122.5 |
| Other currencies | | — | 653.6 | — | — | — | — | — | 653.6 |
| Liabilities – Short/Long-term | | — | (169.4) | (2,987.1) | (3,154.8) | (1,235.5) | (10,096.9) | (20,095.5) |
| Fixed rate | | | (2,105.6) | — | (1,441.8) | (17.0) | (1,235.5) | (5,985.3) | (10,785.1) |
| In U.S. dollar | | 5.15% | (1,123.2) | — | (1,441.8) | — | (1,235.5) | (5,985.3) | (9,785.7) |
| In Euros | | 0.00% | — | — | — | — | — | — | — |
| In Reais | | 12.15% | (784.1) | — | — | — | — | — | (784.1) |
| In Turkish Lira | | 33.31% | (198.3) | — | — | (17.0) | — | — | (215.2) |
| Variable rate | | | (346.3) | (169.4) | (1,545.3) | (3,137.8) | — | (4,111.6) | (9,310.5) |
| In Reais | | | (51.5) | — | (267.9) | (2,276.6) | — | — | (2,596.1) |
| In Reais | | | (94.7) | — | (554.6) | (861.2) | — | (4,111.6) | (5,622.0) |
| In Reais | | 0.00% | — | — | — | — | — | — | — |
| In U.S. dollar | | 7.86% | 199.5) | (169.4) | — | — | — | — | (368.9) |
| In UAE Dirham | | 7.13% | (0.6) | — | (722.9) | — | — | — | (723.5) |
| Net | | | 7,238.8 | (109.9) | (2,987.1) | (3,154.8) | (1,235.5) | (10,096.9) | (10,345.4) |
Foreign Exchange Risk
In managing our foreign exchange risk, we seek 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 and euro. We usually enter into derivative instruments, mainly local short-term swaps, to manage such foreign exchange
risk, but these derivatives generally do not cover all of the principal amount of our U.S. dollar-denominated obligations.
The table below provides information about our financial instruments and presents such information in real equivalents as of December 31, 2023. The table summarizes information on instruments and transactions that are sensitive to foreign currency exchange rates. The table presents principal cash flows and related weighted average interest rates by expected maturity dates (amounts in millions of reais, except average annual interest rates).
On-balance Sheet Financial Instruments | Short Term | 2025 | 2026 | 2027 | 2028 | Thereafter | Fair value |
| U.S. dollar instruments | 1,435.3 | (157.3) | (1,441.8) | — | (1,235.5) | (5,985.3) | (7,384.6) |
| Assets | 2,758.0 | 12.1 | — | — | — | — | 2,770.1 |
| Short/Long-term investments | 2,087.1 | 12.1 | — | — | — | — | 2,099.2 |
| Average annual interest rate | 5.79% | — | — | — | — | — | 5.75% |
| Liabilities | (1,322.7) | (169.4) | (1,441.8) | — | (1,235.5) | (5,985.3) | (10,154.6) |
| Short/Long-term debt | (1,322.7) | (169.4) | (1,441.8) | — | (1,235.5) | (5,985.3) | (11,559.5) |
| Average annual interest rate | 7.46% | — | 4.37% | — | 12.02% | 5.44% | 6.26% |
| Euro instruments | 138.5 | — | — | — | — | — | 138.5 |
| Assets | 138.5 | — | — | — | — | — | 138.5 |
| Short/Long-term investments | 138.5 | — | — | — | — | — | 138.5 |
| Average annual interest rate | 0.49% | — | — | — | — | — | 0.49% |
| Liabilities | — | — | — | — | — | — | — |
| Short/Long-term debt | — | — | — | — | — | — | — |
| Average annual interest rate | — | — | — | — | — | — | — |
| Other Currencies instruments | 1,127.5 | — | (722.9) | (17.0) | — | — | 387.6 |
| Assets | 1,326.4 | — | — | — | — | — | 1,326.4 |
| Short/Long-term investments | 1,326.4 | — | — | — | — | — | 1,326.4 |
| Average annual interest rate | 4.67% | — | — | — | — | — | 4.67% |
| Liabilities | (198.9) | — | (722.9) | (17.0) | — | — | (938.8) |
| Short/Long-term debt | (198.9) | — | (722.9) | (17.0) | — | — | (938.8) |
| Average annual interest rate | 34.43% | — | — | 19.00% | — | — | 7.64% |
(1) Includes overnight deposits, time deposits, long-term Brazilian government bonds, credit linked notes and other short-term investments.
(2) Denominated in 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 | 2025 | 2026 | 2027 | 2028 | Thereafter | Fair value |
| Total Notional | | 5,348.5 | — | 260.0 | — | 258.8 | — | (117.2) |
| Cross currency swaps: | 418.8 | — | 260.0 | — | 258.8 | — | (229.4) |
| Receive US Dollar Pay Real | | | | | | | |
| Notional amount | | 258.8 | — | — | — | 258.8 | — | (117.432) |
| Average interest received in US Dollar | — | — | — | — | — | — | — |
| Average interest paid in CDI+ | — | — | — | — | — | — | — |
| Duration | | 4.81 | — | — | — | — | — | 2.4 |
| Notional amount | | 160.0 | — | 260.0 | — | — | — | (112.0) |
| Average interest received in US Dollar | — | — | — | — | — | — | — |
| Average interest paid in Real | — | — | — | — | — | — | — |
| Duration | | 0.24 | — | — | — | — | — | 0.09 |
| Non-deliverable forward: | 1,624.6 | — | — | — | — | — | 94.500 |
| Receive Reais Pay US Dollar | | | | | | | |
| Notional amount | | 1,215.3 | — | — | — | — | — | 78.3 |
| Average interest received in reais | — | — | — | — | — | — | — |
| Average interest paid in US dollar | 4.70% | — | — | — | — | — | 4.70% |
| Duration | | 0.3 | — | — | — | — | — | — |
| Receive Reais Pay Euros | | | | | | | |
| Notional amount | | — | — | — | — | — | — | — |
| Average interest received in reais | — | — | — | — | — | — | — |
| Average interest paid in euros | — | — | — | — | — | — | — |
| Duration | | — | — | — | — | — | — | — |
| Receive US Dollar Pay Euros | | | | | | | |
| Notional amount | | — | — | — | — | — | — | — |
| Average interest received in US dollar | — | — | — | — | — | — | — |
| Average interest paid in euros | — | — | — | — | — | — | — |
| Duration | | — | — | — | — | — | — | — |
| Receive Yen Pay Euros | | | | | | | |
| Notional amount | | — | — | — | — | — | — | — |
| Average interest received in yen | — | — | — | — | — | — | — |
| Average interest paid in euros | — | — | — | — | — | — | — |
| Duration | | — | — | — | — | — | — | — |
| Receive Turkish Lira Pay US dollar | | | | | | | |
| Notional amount | | 409.3 | — | — | — | — | — | (1.5) |
| Average interest received in Turkish lira | — | — | — | — | — | — | — |
| Average interest paid in USD | 38.82% | — | — | — | — | — | — |
| Duration | | — | — | — | — | — | — | — |
| FX Options | | 3,305.1 | — | — | — | — | — | 17.707 |
| Notional amount US dollar | 3,305.1 | — | — | — | — | — | 17.7 |
| Duration | | 0.1 | — | — | — | — | — | 0.1 |
| FX Futures | | — | — | — | — | — | — | — |
| Notional amount US dollar | — | — | — | — | — | — | — |
| Duration | | — | — | — | — | — | — | — |
The table below provides further detail on our foreign currency-denominated assets and liabilities as of the dates indicated below. Further details are provided in note 23.2.1.i to our consolidated financial statements.
| | As of December 31, |
| | 2023 | | 2022 |
| | (in thousands of R$) |
| Cash and cash equivalents | 2,970,268 | | 3,691,668 |
| Trade accounts receivable | 4,788,635 | | 6,013,713 |
| Trade accounts payable | (1,195,133) | | (1,484,810) |
| Loans and borrowings | (8,715,484) | | (12,241,309) |
| Other assets and liabilities, net | (30,310) | | 35,371 |
| Exposure of assets and liabilities in foreign currencies | (2,182,024) | | (3,985,367) |
| Derivative financial instruments (hedge) (1) | 2,033,346 | | 3,721,930 |
| Foreign exchange exposure | (148,678) | | (263,437) |
(1) Swaps, foreign currency futures and non-deliverable forwards not designated as hedge accounting instruments, which impact our financial results.
The table below presents a sensitivity analysis relating to our foreign exchange risk that considers six scenarios in the next twelve months for the variations in exchange rates between the real and the U.S. dollar, the real and the euro, the real and the Japanese yen, the real and the Turkish lyra, and the real and the Angolan kwanza (amounts in thousands of reais). We have adopted what we believe is the most likely scenario shown in the table (the Base scenario). 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.
| | Scenario |
| | Remote | Possible | Probable | Possible | Remote |
| Exchange rate - Balance | - 30% | - 15% | | + 15% | + 30% |
| USD | 3.5000 | 4.2500 | 5.0000 | 5.7500 | 6.5000 |
| Monetary Assets and Liabilities | 741,601 | 326,928 | (87,745) | (502,418) | (917,091) |
| Derivative Instruments - Not designated | (599,427) | (264,252) | 70,923 | 406,098 | 741,273 |
| Net effect | 142,174 | 62,676 | (16,822) | (96,320) | (175,818) |
| EUR | 3.9690 | 4.8195 | 5.6700 | 6.5205 | 7.3710 |
| Monetary Assets and Liabilities | 13,385 | 5,151 | (3,082) | (11,316) | (19,550) |
| Derivative Instruments - Not designated | (6,913) | (2,661) | 1,592 | 5,844 | 10,097 |
| Net effect | 6,472 | 2,490 | (1,490) | (5,472) | (9,453) |
| Japanese Yen | 0.0263 | 0.0319 | 0.0375 | 0.0431 | 0.0488 |
| Monetary Assets and Liabilities | 289 | 85 | (119) | (323) | (526) |
| Net effect | 289 | 85 | (119) | (323) | (526) |
| Turkish Lira | 0.1149 | 0.1395 | 0.1641 | 0.1887 | 0.2133 |
| Monetary Assets and Liabilities | (52,450) | (26,118) | 214 | 26,546 | 52,878 |
| Derivative Instruments - Not designated | 29,584 | 14,731 | (121) | (14,973) | (29,825) |
| Net effect | (22,866) | (11,387) | 93 | 11,573 | 23,053 |
| Angolan Kwanza | 0.0041 | 0.0049 | 0.0058 | 0.0067 | 0.0075 |
| Monetary Assets and Liabilities | (45,655) | (22,124) | 1,406 | 24,936 | 48,467 |
| Derivative Instruments - not designated | 17,061 | 8,268 | (525) | (9,319) | (18,112) |
| Net effect | (28,594) | (13,856) | 881 | 15,617 | 30,355 |
| ARS | 0.0019 | 0.0023 | 0.0027 | 0.0031 | 0.0035 |
| Monetary Assets and Liabilities | 2,160 | 1,949 | 1,738 | 1,527 | 1,316 |
| Net effect | 2,160 | 1,949 | 1,738 | 1,527 | 1,316 |
| CLP | 0.0038 | 0.0047 | 0.0055 | 0.0063 | 0.0071 |
| Monetary Assets and Liabilities | (66,315) | (33,358) | (400) | 32,557 | 65,515 |
| Net effect | (66,315) | (33,358) | (400) | 32,557 | 65,515 |
| | | | | | |
| | Scenario |
| | Remote | Possible | Probable | Possible | Remote |
| Exchange rate – Operating results | - 30% | - 15% | | + 15% | + 30% |
| USD | 3.5000 | 4.2500 | 5.0000 | 5.7500 | 6.5000 |
| Revenue in USD | (770,577) | (339,702) | 91,173 | 522,048 | 952,923 |
| NDF | 321,241 | 141,616 | (38,009) | (217,634) | (397,259) |
| Collar | 442,768 | 191,518 | (12,307) | (208,500) | (459,750) |
| Net effect | (6,568) | (6,568) | 40,857 | 95,914 | 95,914 |
Commodity Price Risk
In the normal course of our operations, we purchase commodities, including 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 is determined by supply and demand in the international market, among other factors.
Our risk policy provides guidelines to hedging against increases in the price of corn and soy meal. We use 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:
Exchange/Interest rate derivatives | Short Term | 2025 | 2026 | 2027 | 2028 | Thereafter | Fair value |
| Commodities Futures | 139,410.3 | — | — | — | — | — | 139,410.3 |
| Receive Corn Pay U.S. dollar | | | | | | | |
| Notional amount | 71,700.8 | — | — | — | — | — | 71,700.8 |
| Duration | 0.7 | — | — | — | — | — | 0.7 |
| Receive Soy Oil Pay U.S. dollar | | | | | | | |
| Notional amount | 11,021.5 | — | — | — | — | — | 11,021.5 |
| Duration | 0.5 | — | — | — | — | — | 0.5 |
| Receive Corn Pay in reais | | | | | | | |
| Notional amount | 56,835.0 | — | — | — | — | — | 56,835.0 |
| Duration | 0.3 | — | — | — | — | — | 0.3 |
| Receive Soy Oil Pay U.S. dollar | | | | | | | |
| Notional amount | — | — | — | — | — | — | — |
| Duration | — | — | — | — | — | — | — |
| Receive U.S. dollar Pay Soy | | | | | | | |
| Notional amount | — | — | — | — | — | — | — |
| Duration | — | — | — | — | — | — | — |
| Corn Futures | | | | | | | |
| Notional amount (Ton.USD) | (147.0) | — | — | — | — | — | (147.0) |
| Duration | 0.1 | — | — | — | — | — | 0.1 |
The table below presents a sensitivity analysis relating to our commodity price risk that considers six scenarios in the next twelve months for the variations in corn, soybean meal and soybean prices (amounts in thousands of reais).
| | Scenario |
| | Remote | Possible | Probable | Possible | Remote |
| Operating results - Commodities | - 30% | - 35% | | + 15% | + 30% |
| Soybean Meal - CBOT - USD/Ton | 289 | 350 | 412 | 474 | 536 |
| Cost of Sales | 5,440 | 2,720 | - | (2,720) | (5,440) |
| Collar | (4,628) | (2,079) | - | 359 | 1,831 |
| NDF | (496) | (248) | - | 248 | 496 |
| Net effect | 316 | 393 | - | (2,113) | (3,113) |
| | | | | | |
| Soybean Oil - CBOT - USD/Ton | 835 | 1,014 | 1,193 | 1,372 | 1,551 |
| Cost of Sales | 3,579 | 1,789 | - | (1,789) | (3,579) |
| NDF | (3,579) | (1,789) | - | 1,789 | 3,579 |
| Net effect | - | - | - | - | - |
| | | | | | |
| Corn - CBOT - USD/Ton | 139 | 169 | 199 | 228 | 258 |
| Cost of Sales | 26,323 | 13,162 | - | (13,162) | (26,323) |
| Collar | (3,755) | (1,412) | - | 343 | 2,282 |
| NDF | (21,476) | (10,738) | - | 10,738 | 21,476 |
| Net effect | 1,092 | 1,012 | - | (2,081) | (2,565) |
| | | | | | |
| Corn - B3 - BRL/Ton | 756 | 918 | 1,079 | 1,241 | 1,403 |
| Cost of Sales | 21,911 | 10,955 | - | (10,955) | (21,911) |
| Collar | (15,696) | (349) | - | 12,520 | 38,068 |
| Future | 22,039 | 11,019 | - | (11,019) | (22,039) |
| Net effect | 28,254 | 21,625 | - | (9,454) | (5,882) |
| Item | 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not applicable.
Not applicable.
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
| Rates and Fees | Service |
| 1. US$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$0.02 (or less) per ADR | Any cash distribution to ADR holders. |
| 3. US$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 our 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 3 and 8 of the table above may, at the depositary’s discretion, be billed to the holders of ADRs or deducted from one or more cash dividends or other cash distributions.
For the year ended December 31, 2023, pursuant to a letter agreement between us and The Bank of New York Mellon, they reimbursed us for fees, expenses and related taxes in the gross amount of US$2,023,784.63 or net amount of US$ 1,416,649.24.
A form of the Deposit Agreement is filed as Exhibit 2.02 to this annual report. 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 |
On July 3, 2023, we held an extraordinary general meeting pursuant to which the majority of our shareholders approved (i) an increase in our authorized capital to up to 1,825,000,000 common shares and (ii) the deletion of article 41 of our bylaws, conditioned upon the closing of an eventual capital increase through the issuance of new shares by us. Article 41 set forth an anti-takeover provision requiring any shareholder who became the holder of 33.33% 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. On July 18, 2023, the common shares issued under the 2023 Equity Offering were settled, and as a result, the approval of the article 41 suppression came into effect.
| Item | 15. CONTROLS AND PROCEDURES |
| A. | Disclosure Controls and Procedures |
As of the end of the period covered by this annual report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective. For information about the significance of these entities, see “—B. Management’s Annual Report on Internal Control Over Financial Report.” Based on our management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
| B. | Management’s Annual Report on Internal Control Over Financial Reporting |
There were no significant changes in our controls that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management is responsible for establishing and maintaining adequate internal control over our financial reporting. 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, 2023, based on criteria in Internal Control-Integrated Framework, issued by the COSO (2013).
Grant Thornton Auditores Independentes Ltda., an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this annual report, has issued a report on management’s assessment of our internal control over financial reporting.
| C. | 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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have not made any significant change in internal controls over financial reporting during the year ended December 31, 2023.
| item | 16A AUDIT COMMITTEE FINANCIAL EXPERT |
The Board of Directors has determined that Mr. Augusto Marques da Cruz Filho, a member of our Audit and Integrity Committee, is an “audit committee financial expert,” as such term is defined in the SEC rules. Mr. Augusto Marques da Cruz Filho is independent, as such term is defined in the Novo Mercado listing rules. We have determined that Mr. Augusto Marques da Cruz Filho is independent under the standards of the NYSE listing rules and Rule 10A-3 under the Exchange Act that would apply if we were not relying on the exemption provided in paragraph (c)(3) of Rule 10A-3, as described in “Item 16D. Exemptions from the Listing Standards for Audit Committees.” See “Item 6. – A. Directors, Senior Management and Employees—C. Board Practices” for information regarding the experience of Mr. Augusto Marques da Cruz Filho.
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 Decree 11,129/2022, article 57, 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 at https://www.brf-global.com/wp-content/uploads/2023/04/manual-transparencia-2023.pdf. Information on our website is not incorporated by reference in this annual report. Copies of our “Code of Ethics and Conduct” are also available without charge upon request to our Investor Relations Office.
| item | 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by the independent auditors responsible for auditing the financial statements included in the annual report, which was Grant Thornton Auditores Independentes Ltda. for the fiscal year ended December 31, 2023 and KPMG Auditores Independentes Ltda. for the fiscal years ended December 31, 2022. No payments of consultancy fees were made to the independent auditors during 2023 and 2022. The hiring of our auditors for consultancy services is subject to the approval of our Board of Directors and Audit and Integrity Committee 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 Grant Thornton Auditores Independentes Ltda. for the years ended December 31, 2023 and 2022, respectively, were:
| | Year Ended December 31, |
| | 2023 | 2022 |
| | (in thousands of reais) |
| Audit fees(1) | 8,455 | — |
| Audit-related fees(2) | 284 | — |
| Tax fees(3) | — | — |
| All other fees(3) | — | — |
| Total fees | 8,740 | — |
| | | |
| (1) | Audit fees 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. |
| (2) | Audit-related fees refer to services related to equity offerings. |
| (3) | There were no other fees in 2023 or 2022. |
Aggregate fees for professional services rendered to us by KPMG Auditores Independentes Ltda. for the years ended December 31, 2023 and 2022, respectively, were:
| | Year Ended December 31, |
| | 2023 | 2022 |
| | (in thousands of reais) |
| Audit fees(1) | — | 12,397 |
| Audit-related fees(2) | 1,262 | 222 |
| Tax fees(3) | — | — |
| All other fees(3) | — | — |
| | | |
| Total fees | 1,262 | 12,618 |
| (1) | Audit fees 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. |
| (2) | Audit-related fees refer to services related to debt and equity offerings and to sustainability annual report and BACEN Turkey (new regulations). |
| (3) | There were no other fees in 2023 or 2022. |
| item | 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
Our 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 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 audit and integrity committee under our bylaws to the extent permitted by Brazilian law, we believe that its corporate governance system, taken as a whole, is materially equivalent to a system having an audit committee functioning as a committee of its board of directors. Accordingly, we do not believe that our reliance on the exemption in paragraph (c)(3) of Rule 10A-3 materially adversely affects the ability of the audit and integrity committee to act independently and to satisfy the other requirements of Rule 10A-3 to the extent permitted by Brazilian Corporate Law.
| item | 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
On December 7, 2023, our board of directors approved a share buyback program for an aggregate amount of up to 14,000,000 common shares, to be repurchased during an 18-month period ending on June 7, 2025. There were no share buybacks in 2023. On April 2, 2024, we had repurchased 14,000,000 common shares under the program and, as a result, the program was canceled. The common shares acquired under the program are currently held in treasury and may be canceled or resold in the future, or used to comply with the obligations assumed by us under the Stock Option Plan and the Restricted Stock Plan, which are further described under “Item 6. Directors, Senior Management and Employees—E. Share Ownership— Stock Options Plan, Performance Shares Plan and Restricted Stock Plan.”
| item | 16F CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
On February 28, 2023 our Board of Directors approved the appointment of Grant Thornton Auditores Independentes Ltda., or Grant Thornton, to act as our independent public accounting firm for the fiscal year ended December 31, 2023, and dismissed KPMG Auditores Independentes Ltda., or KPMG, which served as our independent public accountants for the fiscal year ended December 31, 2022. For additional information, see “Item 16F” of our Annual report on Form 20-F for the year ended December 31, 2022, as filed with the SEC on April 28, 2023.
| 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 B3’s Novo Mercado (2006), which requires us to comply with stringent regulations, including, among them, diffused control, protection mechanisms and equality of rights among shareholders. In addition, we have adhered to Level A of the Global Reporting Initiative guidelines for the publication of our annual reports under Brazilian law.
Further information concerning our corporate governance practices and applicable Brazilian law is available on our website (https://ri.brf-global.com). Information on our website is not incorporated by reference in this annual report.
Under Section 303A.11 of the NYSE 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 LCM, except that we are required to have a qualifying audit committee under Section 303A.06 of the LCM or avail ourselves of an appropriate exemption. As a foreign private issuer, we have established an 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—Audit and Integrity 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 LCM. We are also required under Section 303A.12(c) of the LCM to submit an annual written affirmation of compliance with applicable provisions of the rules and, under certain circumstances, an interim written affirmation.
On December 27, 2023, we were included in the 19th B3 Corporate Sustainability Index – ISE portfolio. The index, pioneer in Latin America, is a tool for comparative analysis of the performance of the companies listed on the B3 from the standpoint of corporate sustainability, based on economic efficiency, environmental equilibrium, social justice and corporate governance. The current portfolio will remain valid from January 2, 2024, through December 31, 2024 and is comprised of 78 shares of B3 listed companies.
Majority of Independent Directors
Under Section 303A.01 of the LCM, each U.S. listed company must have a majority of independent directors. Under the Novo Mercado rules, at least two 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 LCM are different from the independence standards under the Novo Mercado rules.
Separate Meetings of Non-Management Directors
Under Section 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 Section 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 People, Governance, Organization and Culture Committee composed of independent members according to Novo Mercado rules. This committee is not the equivalent of, or wholly comparable to, a U.S. nominating/corporate governance committee.
Compensation Committee
Section 303A.05 of the LCM requires each U.S. listed company to have a compensation committee composed entirely of independent directors and contains 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 establishing the compensation of our executives and employees. This committee also provides our executive officers support in the assessment, selection and development of top leadership, and advises our board of directors in the formulation and practice of our corporate culture in order to monitor and encourage the proper behavior of our leaders. Further, it proposes actions to align the expectations of our shareholders and executives. This committee is not the equivalent of, or wholly comparable to, a U.S. compensation committee.
In accordance with the Brazilian Corporate Law and with our Management Compensation Policy, our shareholders approve the aggregate compensation of the members of our board of directors and fiscal council for each fiscal year. Our board of directors then decides the allocation of the compensation among its members and the members of the fiscal council. In addition, our board of directors is directly responsible for employee and executive compensation and recruitment, incentive compensation and related matters.
Audit and Integrity Committee
Under Section 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 with the requirements of Rule 10A-3. In addition, the audit committee must have a written charter compliant with the requirements of 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 established the Audit and Integrity Committee upon approval at the Annual and Extraordinary General Meeting held on April 3, 2014. Our 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 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.
Corporate Governance Guidelines
Under NYSE Rule 303A.09, each U.S. listed company must adopt and disclose their corporate governance guidelines. We do not have a similar requirement under Brazilian law. However, we have listed our common shares on the Novo Mercado of the São Paulo Stock Exchange, which requires adherence to the corporate governance standards described under “Item 9. The Offer and Listing—C. Markets —São Paulo Stock Exchange Corporate Governance Standards.” In addition, we have adopted a Policy on Disclosure of Material Acts or Facts and Trading of Securities.
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 annual report.
| item | 16H MINE SAFETY DISCLOSURE |
Not applicable.
| item | 16I DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS |
Not applicable.
| item | 16J INSIDER TRADING POLICIES |
Not applicable.
We are committed to our goal to protect sensitive business-related and personal information, as well as our information systems. Due to the size and scope of our global operations, we are subject to numerous and evolving cybersecurity risks that could adversely and materially affect our business, financial condition and results of operations.
Governance
Our cybersecurity department is responsible for identifying, managing and mitigating cybersecurity risks that may adversely affect the confidentiality, integrity and availability of our data. The cybersecurity strategy and plans to promptly mitigate any identified cybersecurity risks are prepared, assessed and monitored by the Risk Management, Internal Controls and Controllership Global Office in accordance with our Corporate Risk Management Policy.
The structure of our Risk Management, Internal Controls and Controllership Global Office includes:
| (i) | our Board of Directors, responsible for overseeing and monitoring risks reported by the Finance and Risk Management and the Audit and Integrity Committees, as further explained below in “—Risk Management and Strategy”; |
| (ii) | the Finance and Risk Management Committee, which is an advisory committee for our Board of Directors, composed of directors and executive officers from our information technology, risk management and internal controls, compliance, legal and audit committee departments, and responsible among other things for assessing and monitoring risks and defining action plans, monitoring compliance with board recommendations, guaranteeing the implementation of an efficient risk management model and supervising its evolution, monitoring indicators and mitigation strategies, evaluating, at least annually, the risk management’s maturity evolution presented by the cybersecurity department and reporting such evolution to the Board of Directors, and guaranteeing an adequate structure of human and financial resources and systems involved in the risk management process; |
| (iii) | the Audit and Integrity Committee, which is an advisory committee for our Board of Directors, responsible among other things for discussing risk evaluation and management policies and procedures, evaluating and monitoring risk exposure and monitoring actions plans for risk mitigation and control; and |
| (iv) | cybersecurity employees responsible for and with authority to manage cybersecurity risks, who must identify and systematically monitor such risks, timely report to the Finance and Risk Management Committee any events, occurrences or situations that may result in a cybersecurity threat, define and implement corrective or mitigating actions and monitor such actions, implement and monitor key indicators. |
Additionally, we have a Cybersecurity Executive Committee, which is formed by members of the cybersecurity department as well as executive managers from the Risk Management, Internal Controls and Controllership Global Office, including (i) the executive manager responsible for planning and executing cybersecurity and IT governance strategies, who has approximately ten years of experience in this field within our Company and has obtained a specialization in network management and system security as well as many certifications in this area, including Information Security Officer, ISO 27001, COBIT, ASM, ITIL and CLOUDF; and (ii) our Digital Transformation Vice President who has been dedicated to the technology area for the last 7 years within our Company. The Cybersecurity Executive Committee meets once every quarter to discuss cybersecurity risk key indicators gathered as discussed in “—Key Management and Strategy” below.
Risk Management and Strategy
Cybersecurity risk management is overseen both as a critical component of our overall risk management program and as a standalone program. We have implemented a risk-based, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.
We assess, identify, and manage risks from cybersecurity threats through various mechanisms. First, employees in our cybersecurity department monitor cybersecurity risks and incidents by monthly analyzing certain key indicators. These key indicators are gathered from various sources, including our cybersecurity reporting channel through which anonymous reports may be made, reports via email or incident registration portal (ticketing system), as well as our Security Operations Center (SOC) third party services. Any material developed by and furnished to our Cybersecurity Executive Committee is also used as evidence in our external audits required by Section 404 of the Sarbanes-Oxley Act.
We have a Cybersecurity Incident Response Plan to provide the organizational and operational structure, processes, and procedures for investigating, containing, documenting and mitigating cybersecurity incidents, and providing a coordinated response across all our cybersecurity areas to any such incidents.
Upon the occurrence of an incident, our cybersecurity assesses its scope and origin, collects data, determines the risk level and, depending on how critical the incident is deemed, gathers additional forensic data and images, analyses logs, volatile data, checks the incident timeline, and looks for any related threats. Once the analysis is concluded, we take immediate action to contain the risk from further spread and adopt the appropriate short- and medium-term measures to make sure the incident does not happen again, in accordance with the Cybersecurity Incident Response Plan.
Cybersecurity risks and incidents are reported at the quarterly meetings of our Cybersecurity Executive Committee. In case of a material incident, the Cybersecurity Executive Committee must report this incident to the Finance and Risk Management Committee, which in turn must prepare an action plan and escalate to the Board of Directors depending on its severity. The Board of Directors must assess the risk and approve the action plan to be implemented by the cybersecurity team.
In addition, once a year, our Internal Audit Office conducts cybersecurity audits. This process is part of our financial management and international audits and is submitted for approval by the Audit and Integrity Committee. The audit is conducted by internal auditors with expertise in information technology with the support of external advisors, in particular with respect to complex technical issues such as vulnerability and intrusion tests.
We also regularly review and assess our government processes related to controls of third parties with whom we share data, including our main business partners. Such process is conducted via internal audits or independent reviews to identify improvements and vulnerabilities. At the end of the audit, we prepare system and organization controls, or SOC, reports to make sure we are following best cybersecurity governance practices.
Besides conducting risk management processes audits and preparing SOC reports in connection with our main IT partners, our cybersecurity department also (i) hires external advisors to perform periodic vulnerability tests, (ii) uses threat management tools to continuously monitor the cyber environment and (iii) regularly performs crisis management simulations together with the Risk Management, Internal Controls and Controllership Global Office.
We have a cybersecurity training and compliance program in place whereby our employees receive training and are tested routinely through simulated phishing attempts.
As of the date of this annual report, no risks from cybersecurity threats have materially affected, nor have we identified any specific risks from known cybersecurity threats that are reasonably likely to materially affect, us, including our business strategy, results of operations or financial condition. Please see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—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 and reputation.”
PART III.
| Item | 17. FINANCIAL STATEMENTS |
Not applicable.
| Item | 18. FINANCIAL STATEMENTS |
See our consolidated financial statements beginning at page F-1.
The agreements and other documents filed as exhibits to this annual report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and for the benefit of the other parties to the agreements and they may not describe the actual state of affairs as of the date they were made or at any other time.
The total amount of our long-term debt authorized under each instrument does not exceed 10% of our total assets and its subsidiaries on a consolidated basis. We undertake to furnish to the SEC any instruments relating to our long-term debt and that of our subsidiaries upon request by the SEC.
The following are filed as exhibits hereto:
Exhibit Number | | Description |
| 1.01 | | Amended and Restated Bylaws of the Registrant, approved at the ordinary and extraordinary general shareholders’ meeting held on March 28, 2024 (incorporated by reference to Exhibit 99.1 to the Report on Form 6-K filed on March 29, 2024, SEC File No. 001-15148). |
| 2.01* | | Description of Securities registered under Section 12 of the Exchange Act. |
| 2.02 | | 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). |
| 2.03 | | 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 Grant Plan of BRF S.A., approved at the ordinary and extraordinary general shareholders’ meeting held on April 27, 2020 (incorporated by reference to Exhibit 1 to the Report on Form 6-K filed on April 28, 2020, SEC File No. 001-15148). |
| 4.02 | | Restricted Stocks Plan of BRF S.A., approved at the ordinary and extraordinary general shareholders’ meeting held on April 27, 2021 (incorporated by reference to Exhibit 1 to the Report on Form 6-K, filed on April 28, 2021, SEC File No. 001-15148). |
| 4.03 | | Management Compensation Policy of the Registrant, approved at the ordinary meeting of the board of directors held on November 26, 2020 (incorporated by reference to Exhibit 1 to the Report on Form 6-K, filed on December 14, 2020, SEC File No. 001-15148). |
| 8.01* | | List of 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. |
| 15.01* | | Consent of Grant Thornton Auditores Independentes Ltda. |
| 15.02* | | Consent of KPMG Auditores Independentes Ltda. |
| 97 | | Incentive Compensation Clawback Policy. |
| 101 | | eXtensible Business Reporting Language (XBRL). |
| ** | Furnished herewith. 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. |
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant, BRF S.A., hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of São Paulo, in the state of São Paulo, Brazil, on April 18, 2024.
BRF S.A.
By: /s/Miguel de Souza Gularte
Name: Miguel de Souza Gularte
Title: Chief Executive Officer
By: /s/Fabio Luis Mendes Mariano
Name: Fabio Luis Mendes Mariano
Title: Chief Financial and Investor Relations Officer
INDEX TO FINANCIAL STATEMENTS
| Consolidated Financial Statements: | |
| | |
| Independent Auditors’ Report on Individual and Consolidated Financial Statements (Grant Thornton Auditores Independentes Ltda., São Paulo, Brazil, Auditor Firm ID: 5270) | R-1 |
| Independent Auditors’ Report on Internal Control Over Financial Reporting (Grant Thornton Auditores Independentes Ltda., São Paulo, Brazil, Auditor Firm ID: 5270) | R-4 |
| Report of Independent Registered Public Accounting Firm (KPMG Auditores Independentes Ltda., São Paulo, Brazil, Auditor Firm ID: 1124) | R-6 |
| Consolidated Statements of Financial Position as of December 31, 2023 and 2022 | F-4 |
| Consolidated Statements of Income (Loss) for the Years Ended December 31, 2023 and 2022 | F-5 |
| Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2023 and 2022 | F-6 |
| Consolidated Statements of Changes in Equity for the Years Ended December 31, 2023 and 2022 | F-7 |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 | F-9 |
| Notes to the Consolidated Financial Statements | F-10 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of
BRF S.A.
Opinion on the consolidated financial statements
We have audited the accompanying consolidated balance sheet of BRF S.A. and subsidiaries (the “Company”) as of December 31, 2023, and the related statements of loss, comprehensive loss, changes in shareholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 18, 2024, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and 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.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 supporting the amounts and disclosures in the consolidated financial statements. Our audit 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. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Impairment of cash-generating units – Notes No. 3.10, 3.11, 13, 14 and 14.1
The Company has significant amounts recorded under property, plant and equipment and intangible assets on December 31, 2023, in the amounts of R$14.6 billion and R$6.1 billion, respectively. The international financial reporting standards (IFRS) requires the Company to annually test the recoverability of amounts recorded as intangible assets with no defined useful life and/or assets with indicators of recoverability losses.
As mentioned in Explanatory Note 14.1, impairment test involves a high degree of subjectivity and judgment on the part of management, based on the discounted cash flow method, considering complex subjective and significant assumptions such as sales revenue, commodity costs, discount rate, inflation projection, economic growth, among others.
Therefore, the use of different assumptions can significantly modify the perspective of recoverability of these assets and the possible need to record an impairment adjustment, with a consequent impact on the consolidated financial statements, having been considered an area of risk due to the uncertainties inherent in the process of determining the estimates and judgments involved. Due to these aspects, this topic was considered one of the critical audit matters in our audit of the current year.
The primary procedures we performed to address this critical audit matter included:
| · | Evaluating and testing the design and operating effectiveness of internal controls related to impairment testing; |
| · | Utilizing our internal valuation professionals with specialized skills and knowledge to evaluate the reasonableness of the model and performing sensitivity analysis over the significant assumptions used in management’s assessment; |
| · | Discussion with management about the business plan and testing the significant judgments and estimates utilized in the models, which included comparing management’s judgments and estimates to historical, industry and market data; |
| · | Assessment of the adequacy of the Company's disclosures regarding certain sensitive assumptions used in the impairment test, that is, those with a significant effect on determining the recoverable amount of the assets subject to the impairment test; and |
| · | Evaluation if the disclosures in notes are consistent with the information and representations obtained from management. |
Recoverability of the deferred tax asset – Notes No. 3.7.2 and 10
As of December 31, 2023, the Company has balances of deferred income tax and social contribution assets substantially related to tax losses carryforwards and temporary differences in the amount of R$ 2.1 billion, recognized as non-current assets. These balances were recognized based on studies prepared by management that contain projections of future taxable income. The annual study of the recoverability of such assets involves, among others, the use of critical judgments that imply subjectivity in relation to taxable income projections and may differ from the actual data and amounts realized.
Therefore, the use of different assumptions and respective uncertainties (such as revenues and cost of commodities) may significantly change the expected realization of these assets and may require recognition of impairment, which would consequently impact the consolidated financial statements. Due to these aspects, this issue was considered a critical audit matter in our audit for the current year.
The primary procedures we performed to address this critical audit matter included:
| · | Evaluating and testing of the design and operating effectiveness of internal control related to the estimate of future taxable income to support the recoverability of deferred income tax and social contribution assets; |
| · | Utilizing our internal valuation professionals with specialized skills and knowledge to evaluate the reasonableness of the Company’s forecast of the future taxable income; |
| · | Discussion with management about the studies on taxable estimation income and challenge of the assumptions used by management to corroborate if there were assumptions not consistent and/or that required review; |
| · | Involvement of our internal professionals specialized in income taxes to evaluate and revise the calculation bases of tax losses carryforwards, and analyze its compliance with tax legislation, as well as temporary differences used by the Company, comparing them with the corresponding tax records; |
| · | Evaluation if the disclosures in notes are consistent with the information and representations obtained from management. |
/s/ Grant Thornton Auditores Independentes Ltda.
We have served as the Company’s auditor since 2023.
São Paulo, Brazil
April 18, 2024
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of
BRF S.A.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of BRF S.A. and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of the Company as of and for the year ended December 31, 2023, and the related notes, and our report dated April 18, 2024, expressed an unqualified opinion on those consolidated financial statements.
Basis for opinion
The Company’s management is responsible 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’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Grant Thornton Auditores Independentes Ltda.
São Paulo, Brazil
April 18, 2024
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
BRF S.A.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statement of financial position of BRF S.A. and subsidiaries (the Company) as of December 31, 2022, 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, 2022, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with International Financial Reporting Standards, as issued by the International Accounting Standards Board.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. 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.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit 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 audit 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. We believe that our audit provides a reasonable basis for our opinion.
/s/ KPMG Auditores Independentes Ltda.
We served as the Company’s auditor from 2017 to 2022.
São Paulo, Brazil
April 28, 2023
Índex
Consolidated Statements of Financial Position
| | | | | | |
| ASSETS | Note | | 12.31.23 | | 12.31.22 |
| CURRENT ASSETS | | | | | |
| Cash and cash equivalents | 4 | | 9,264,664 | | 8,130,929 |
| Marketable securities | 5 | | 447,878 | | 418,373 |
| Trade receivables | 6 | | 4,766,071 | | 4,187,756 |
| Notes receivable | 6 | | 64,731 | | 27,351 |
| Inventories | 7 | | 6,628,890 | | 8,660,891 |
| Biological assets | 8 | | 2,702,164 | | 3,151,551 |
| Recoverable taxes | 9 | | 1,249,458 | | 1,229,272 |
| Recoverable income taxes | 9 | | 268,090 | | 173,596 |
| Derivative financial instruments | 23 | | 109,222 | | 120,865 |
| Prepaid expenses | | | 166,230 | | 109,716 |
| Advances | | | 123,319 | | 187,342 |
| Restricted cash | | | 13,814 | | - |
| Assets held for sale | | | 7,204 | | 21,909 |
| Other current assets | | | 142,527 | | 84,795 |
| Total current assets | | | 25,954,262 | | 26,504,346 |
| | | | | | |
| NON-CURRENT ASSETS | | | | | |
| LONG-TERM RECEIVALBLES | | | | | |
| Marketable securities | 5 | | 319,995 | | 406,402 |
| Trade and other receivables | 6 | | 5,897 | | 5,307 |
| Notes receivable | 6 | | 1,530 | | 11,092 |
| Recoverable taxes | 9 | | 4,832,170 | | 4,926,945 |
| Recoverable income taxes | 9 | | 168,570 | | 244,899 |
| Deferred income taxes | 10 | | 2,113,108 | | 2,566,461 |
| Judicial deposits | 11 | | 415,718 | | 450,676 |
| Biological assets | 8 | | 1,858,316 | | 1,649,133 |
| Derivative financial instruments | 23 | | 529,830 | | 10,283 |
| Restricted cash | | | 72,395 | | 89,717 |
| Other non-current assets | | | 153,052 | | 162,628 |
| Total long-term receivables | | | 10,470,581 | | 10,523,543 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Investments | 12 | | 97,895 | | 101,064 |
| Property, plant and equipment | 13 | | 14,608,914 | | 14,290,884 |
| Intangible assets | 14 | | 6,140,438 | | 6,434,610 |
| | | | | | |
| | | | | | |
| Total non-current assets | | | 31,317,828 | | 31,350,101 |
| TOTAL ASSETS | | | 57,272,090 | | 57,854,447 |
| | | | | | |
| LIABILITIES | Note | | 12.31.23 | | 12.31.22 |
| CURRENT LIABILITIES | | | | | |
| Loans and borrowings | 15 | | 2,451,838 | | 3,879,874 |
| Trade accounts payable | 16 | | 12,592,006 | | 14,128,765 |
| Lease liability | 17.2 | | 944,326 | | 676,864 |
| Payroll, related charges and employee profit sharing | | | 984,457 | | 720,799 |
| Taxes payable | | | 585,129 | | 522,846 |
| Derivative financial instruments | 23 | | 76,940 | | 82,468 |
| Provision for tax, civil and labor risks | 20 | | 720,187 | | 867,294 |
| Employee benefits | 19 | | 86,423 | | 64,367 |
| Customer advances | | | 290,279 | | 75,832 |
| Other current liabilities | | | 658,763 | | 1,278,830 |
| | | | | | |
| | | | | | |
| | | | | | |
| Total current liabilities | | | 19,390,348 | | 22,297,939 |
| | | | | | |
| NON-CURRENT LIABILITIES | | | | | |
| Loans and borrowings | 15 | | 17,643,710 | | 19,637,126 |
| Trade accounts payable | 16 | | 422 | | 7,459 |
| Lease liability | 17.2 | | 2,777,521 | | 2,368,070 |
| Taxes payable | | | 90,669 | | 97,735 |
| Provision for tax, civil and labor risks | 20 | | 482,983 | | 548,243 |
| Deferred income taxes | 10 | | 60,125 | | 111,463 |
| Employee benefits | 19 | | 454,398 | | 456,945 |
| Derivative financial instruments | 23 | | 59,819 | | 174,699 |
| Other non-current liabilities | | | 668,439 | | 331,899 |
| | | | | | |
| | | | | | |
| Total non-current liabilities | | | 22,238,086 | | 23,733,639 |
| | | | | | |
| EQUITY | 21 | | | | |
| Capital | | | 13,349,156 | | 12,835,915 |
| Capital reserves | | | 2,763,364 | | 2,338,476 |
| Other equity transactions | | | (70,106) | | (77,825) |
| Accumulated losses | | | - | | (2,363,073) |
| Treasury shares | | | (96,145) | | (109,727) |
| Other comprehensive loss | | | (1,022,841) | | (1,353,758) |
| Attributable to controlling shareholders | | | 14,923,428 | | 11,270,008 |
| Non-controlling interests | | | 720,228 | | 552,861 |
| Total equity | | | 15,643,656 | | 11,822,869 |
| TOTAL LIABILITIES AND EQUITY | | | 57,272,090 | | 57,854,447 |
The accompanying notes are an integral part of the financial statements.
(In thousands of Brazilian Reais)
Consolidated Statements of Income (Loss)
| | | | | | | | |
| | Note | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| CONTINUING OPERATIONS | | | | | | | |
| NET SALES | 25 | | 53,615,440 | | 53,805,028 | | 48,343,305 |
| Cost of sales | 28 | | (44,781,739) | | (45,672,376) | | (38,650,772) |
| GROSS PROFIT | | | 8,833,701 | | 8,132,652 | | 9,692,533 |
| OPERATING INCOME (EXPENSES) | | | | | | | |
| Selling expenses | 28 | | (7,454,163) | | (7,067,148) | | (6,058,250) |
| General and administrative expenses | 28 | | (757,836) | | (644,827) | | (822,960) |
| Impairment loss on trade receivables | 6 | | (32,809) | | (12,772) | | (12,799) |
| Other operating income (expenses), net | 26 | | 250,512 | | (545,270) | | 211,263 |
| Income from associates and joint ventures | 12 | | (3,264) | | 1,076 | | - |
| INCOME (LOSS) BEFORE FINANCIAL RESULTS AND INCOME TAXES | | | 836,141 | | (136,289) | | 3,009,787 |
| Financial income | | | 1,202,520 | | 1,082,935 | | 537,736 |
| Financial expenses | | | (4,136,312) | | (3,585,765) | | (3,331,615) |
| Foreign exchange and monetary variations | | | 112,945 | | (165,925) | | (250,696) |
| FINANCIAL INCOME (EXPENSES), NET | 27 | | (2,820,847) | | (2,668,755) | | (3,044,575) |
| LOSS BEFORE TAXES | | | (1,984,706) | | (2,805,044) | | (34,788) |
| Income taxes | 10 | | 115,854 | | (285,634) | | 552,102 |
| INCOME (LOSS) FROM CONTINUING OPERATIONS | | | (1,868,852) | | (3,090,678) | | 517,314 |
| | | | | | | | |
| LOSS FROM DISCONTINUED OPERATIONS | | | - | | (50,948) | | (79,930) |
| INCOME (LOSS) FOR THE YEAR | | | (1,868,852) | | (3,141,626) | | 437,384 |
| | | | | | | | |
| Income (loss) from Continuing Operation Attributable to | | | | | | | |
| Controlling shareholders | | | (2,028,559) | | (3,115,455) | | 499,385 |
| Non-controlling interest | | | 159,707 | | 24,777 | | 17,929 |
| INCOME (LOSS) FROM CONTINUING OPERATIONS | | | (1,868,852) | | (3,090,678) | | 517,314 |
| | | | | | | | |
| Net Loss From Discontinued Operations Attributable to | | | | | | | |
| Controlling shareholders | | | - | | (50,948) | | (79,930) |
| Non-controlling interest | | | - | | - | | - |
| LOSS FROM DISCONTINUED OPERATIONS | | | - | | (50,948) | | (79,930) |
| | | | | | | | |
| INCOME (LOSS) PER SHARE FROM CONTINUED OPERATIONS | | | | | | | |
| Weighted average shares outstanding - basic | | | 1,360,268,402 | | 1,052,606,000 | | 807,709,278 |
| Income (loss) per share - basic | 22 | | (1.49) | | (2.96) | | 0.62 |
| Weighted average shares outstanding - diluted | | | 1,360,268,402 | | 1,052,606,000 | | 807,709,278 |
| Income (loss) per share - diluted | 22 | | (1.49) | | (2.96) | | 0.62 |
| | | | | | | | |
| LOSS PER SHARE FROM DISCONTINUED OPERATIONS | | | | | | | |
| Weighted average shares outstanding - basic | | | 1,360,268,402 | | 1,052,606,000 | | 807,929,481 |
| Loss per share - basic | 22 | | - | | (0.05) | | (0.10) |
| Weighted average shares outstanding - diluted | | | 1,360,268,402 | | 1,052,606,000 | | 807,929,481 |
| Loss per share - diluted | 22 | | - | | (0.05) | | (0.10) |
The accompanying notes are an integral part of the financial statements.
(In thousands of Brazilian Reais)
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | |
| | Note | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Income (loss) for the year | | | (1,868,852) | | (3,141,626) | | 437,384 |
| Other comprehensive income (loss), net of taxes | | | | | | | |
| Gain (loss) on foreign currency translation of foreign operations | | | (309,065) | | 96,523 | | (403,475) |
| Gain (loss) on net investment hedge | | | 145,328 | | 87,929 | | (96,555) |
| Cash flow hedges – effective portion of changes in fair value | 23 | | 130,600 | | 49,292 | | (121,303) |
| Cash flow hedges – reclassified to profit or loss | 23 | | 242,776 | | 226,290 | | (26,201) |
| Items that are or may be reclassified subsequently to profit or loss | | | 209,639 | | 460,034 | | (647,534) |
| Equity investments measured at FVTOCI - changes in fair value (1) | 5 | | - | | - | | 26,030 |
| Actuarial gains (losses) on pension and post-employment plans | 19 | | (42,225) | | 44,725 | | 130,671 |
| Items that will not be reclassified to profit or loss | | | (42,225) | | 44,725 | | 156,701 |
| Comprehensive income (loss) for the year | | | (1,701,438) | | (2,636,867) | | (53,449) |
| Attributable to | | | | | | | |
| Controlling shareholders | | | (1,681,122) | | (2,691,426) | | (52,127) |
| Non-controlling interest | | | (20,316) | | 54,559 | | (1,322) |
| Total comprehensive income (loss), net of taxes | | | (1,701,438) | | (2,636,867) | | (53,449) |
| (1) | FVTOCI: Fair Value Through Other Comprehensive Income. |
Items above are stated net of deferred taxes on income and the related taxes are disclosed in note 10.
The accompanying notes are an integral part of the financial statements.
(In thousands of Brazilian Reais)
Consolidated Statements of Changes in Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Attributed to controlling shareholders |
| | | | | | | | | | | | Other comprehensive income (loss) | | | | | | | | |
| | | | Capital | | Capital reserves | | Other equity transactions | | Treasury shares | | Accumulated foreign currency translation adjustments | | Gains (losses) on marketable securities at FVTOCI (2) | | Gains (losses) on cash flow hedge (1) | | Actuarial gains (losses) | | Accumulated losses | | Total equity | | Non-controlling interest | | Total shareholders' equity
(consolidated) |
| BALANCES AT DECEMBER 31, 2020 | | | 12,460,471 | | 141,834 | | 246 | | (123,938) | | (678,969) | | 7,016 | | (438,221) | | (188,627) | | (2,594,028) | | 8,585,784 | | 227,750 | | 8,813,534 |
| Comprehensive income (loss) (1) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Losses on foreign currency translation of foreign operations | | | - | | - | | - | | - | | (386,542) | | - | | - | | - | | - | | (386,542) | | (16,933) | | (403,475) |
| Losses on net investment hedge | | | - | | - | | - | | - | | (96,555) | | - | | - | | - | | - | | (96,555) | | - | | (96,555) |
| Marketable securities at FVTOCI (2) - changes in fair value | | | - | | - | | - | | - | | - | | 26,030 | | - | | - | | - | | 26,030 | | - | | 26,030 |
| Unrealized losses in cash flow hedge | | | - | | - | | - | | - | | - | | - | | (145,683) | | - | | - | | (145,683) | | (1,821) | | (147,504) |
| Actuarial gains (losses) on pension and post-employment plans | | | - | | - | | - | | - | | - | | - | | - | | 131,168 | | - | | 131,168 | | (497) | | 130,671 |
| Income for the year | | | - | | - | | - | | - | | - | | - | | - | | - | | 419,455 | | 419,455 | | 17,929 | | 437,384 |
| SUB-TOTAL COMPREHENSIVE INCOME (LOSS) | | | - | | - | | - | | - | | (483,097) | | 26,030 | | (145,683) | | 131,168 | | 419,455 | | (52,127) | | (1,322) | | (53,449) |
| Marketable securities at FVTOCI (2) - realized gain | | | - | | - | | - | | - | | - | | (33,046) | | - | | - | | 33,046 | | - | | - | | - |
| Employee benefits remeasurement - defined benefit | | | - | | - | | - | | - | | - | | - | | - | | (9,297) | | 9,297 | | - | | - | | - |
| Appropriation of income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends | | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | (80) | | (80) |
| Share-based payments | | | - | | - | | (8,762) | | (3,348) | | - | | - | | - | | - | | - | | (12,110) | | - | | (12,110) |
| Acquisition of non-controlling interests (3) | | | - | | - | | (79,673) | | - | | - | | - | | - | | - | | - | | (79,673) | | (157,918) | | (237,591) |
| Write-off of put option held by minority shareholders (4) | | | - | | - | | 20,658 | | - | | - | | - | | - | | - | | - | | 20,658 | | 294,661 | | 315,319 |
| BALANCES AT DECEMBER 31, 2021 | | | 12,460,471 | | 141,834 | | (67,531) | | (127,286) | | (1,162,066) | | - | | (583,904) | | (66,756) | | (2,132,230) | | 8,462,532 | | 363,091 | | 8,825,623 |
| Monetary correction by Hyperinflation | | | - | | - | | - | | - | | - | | - | | - | | - | | 216,193 | | 216,193 | | 135,260 | | 351,453 |
| Comprehensive income (loss) (1) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain on foreign currency translation of foreign operations | | | - | | - | | - | | - | | 49,240 | | - | | - | | - | | - | | 49,240 | | 47,283 | | 96,523 |
| Gain on net investment hedge | | | - | | - | | - | | - | | 87,929 | | - | | - | | - | | - | | 87,929 | | - | | 87,929 |
| Unrealized gains (losses) in cash flow hedge | | | - | | - | | - | | - | | - | | - | | 276,515 | | - | | - | | 276,515 | | (933) | | 275,582 |
| Actuarial gains (losses) on pension and post-employment plans | | | - | | - | | - | | - | | - | | - | | - | | 61,293 | | - | | 61,293 | | (16,568) | | 44,725 |
| Income (loss) for the year | | | - | | - | | - | | - | | - | | - | | - | | - | | (3,166,403) | | (3,166,403) | | 24,777 | | (3,141,626) |
| SUB-TOTAL COMPREHENSIVE INCOME (LOSS) | | | - | | - | | - | | - | | 137,169 | | - | | 276,515 | | 61,293 | | (3,166,403) | | (2,691,426) | | 54,559 | | (2,636,867) |
| Employee benefits remeasurement - defined benefit | | | - | | - | | - | | - | | - | | - | | - | | (16,009) | | 16,009 | | - | | - | | - |
| Capital increase through issuance of shares | | | 500,000 | | 4,900,000 | | - | | - | | - | | | | - | | - | | | | 5,400,000 | | - | | 5,400,000 |
| Expenses with public exchange offer of shares | | | (124,556) | | - | | - | | - | | - | | - | | - | | - | | - | | (124,556) | | - | | (124,556) |
| Appropriation of income (loss) | | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends | | | - | | - | | - | | - | | - | | - | | - | | - | | - | | - | | (49) | | (49) |
| Compensation of accumulated losses with capital reserve | | | - | | (2,703,358) | | - | | - | | - | | - | | - | | - | | 2,703,358 | | - | | - | | - |
| Share-based payments | | | - | | - | | (10,294) | | 17,559 | | - | | - | | - | | - | | - | | 7,265 | | - | | 7,265 |
| BALANCES AT DECEMBER 31, 2022 | | | 12,835,915 | | 2,338,476 | | (77,825) | | (109,727) | | (1,024,897) | | - | | (307,389) | | (21,472) | | (2,363,073) | | 11,270,008 | | 552,861 | | 11,822,869 |
| (1) | All changes in other comprehensive income are presented net of taxes. |
| (2) | FVTOCI: Fair Value Through Other Comprehensive Income. |
| (3) | Acquisition of remaining participation in the subsidiary BRF Kuwait WLL (note 1.1.1. of Consolidated Financial Statements as of December 31, 2021). |
| (4) | Recognition in Other Equity Transactions of the difference between the amount of the put option liability held by non-controlling interests and the book value of the non-controlling interest in TBQ Foods GmbH in the amount of R$20,658, and recognition of the Non-controlling Interest on the net assets of TBQ Foods GmbH in the amount of R$294,661, (note 1.1.3. of Consolidated Financial Statements as of December 31, 2021). |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | Attributed to controlling shareholders |
| | | | | | | | | | | | Other comprehensive income (loss) | | | | | | |
| | | | Capital | | Capital reserves | | Other equity transactions | | Treasury shares | | Accumulated foreign currency translation adjustments | | Gains (losses) on cash flow hedge (1) | | Actuarial gains (losses) | | Accumulated losses | | Total equity | | Non-controlling interest | | Total shareholders' equity
(consolidated) |
| BALANCES AT DECEMBER 31, 2022 | | | 12,835,915 | | 2,338,476 | | (77,825) | | (109,727) | | (1,024,897) | | (307,389) | | (21,472) | | (2,363,073) | | 11,270,008 | | 552,861 | | 11,822,869 |
| Comprehensive income (loss) (1) | | | | | | | | | | | | | | | | | | | | | | | |
| Loss on foreign currency translation of foreign operations | | | - | | - | | - | | - | | (169,326) | | - | | - | | - | | (169,326) | | (139,739) | | (309,065) |
| Gain on net investment hedge | | | - | | - | | - | | - | | 145,328 | | - | | - | | - | | 145,328 | | - | | 145,328 |
| Unrealized gains in cash flow hedge | | | - | | - | | - | | - | | - | | 372,958 | | - | | - | | 372,958 | | 418 | | 373,376 |
| Actuarial gains on pension and post-employment plans | | | - | | - | | - | | - | | - | | - | | (1,523) | | - | | (1,523) | | (40,702) | | (42,225) |
| Income (loss) for the year | | | - | | - | | - | | - | | - | | - | | - | | (2,028,559) | | (2,028,559) | | 159,707 | | (1,868,852) |
| SUB-TOTAL COMPREHENSIVE INCOME (LOSS) | | | - | | - | | - | | - | | (23,998) | | 372,958 | | (1,523) | | (2,028,559) | | (1,681,122) | | (20,316) | | (1,701,438) |
| Employee benefits remeasurement - defined benefit | | | - | | - | | - | | - | | - | | - | | (16,520) | | 16,520 | | - | | - | | - |
| Capital increase through issuance of shares (note 21.1) | | | 600,000 | | 4,800,000 | | - | | - | | - | | - | | - | | | | 5,400,000 | | - | | 5,400,000 |
| Expenses with public exchange offer of shares (note 21.1) | | | (86,759) | | - | | - | | - | | - | | - | | - | | - | | (86,759) | | - | | (86,759) |
| Capital increase in subsidiaries | | | - | | - | | - | | - | | - | | - | | - | | - | | - | | 187,777 | | 187,777 |
| Appropriation of income (loss) | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends | | | - | | - | | - | | - | | - | | - | | - | | - | | - | | (94) | | (94) |
| Compensation of accumulated losses with capital reserve (note 21.3) | | | - | | (4,375,112) | | - | | - | | - | | - | | - | | 4,375,112 | | - | | - | | - |
| Share-based payments | | | - | | - | | 7,719 | | 13,582 | | - | | - | | - | | - | | 21,301 | | - | | 21,301 |
| BALANCES AT DECEMBER 31, 2023 | | | 13,349,156 | | 2,763,364 | | (70,106) | | (96,145) | | (1,048,895) | | 65,569 | | (39,515) | | - | | 14,923,428 | | 720,228 | | 15,643,656 |
| (1) | All changes in other comprehensive income are presented net of taxes and the related taxes are disclosed in note 10. |
The accompanying notes are an integral part of the financial statements.
(In thousands of Brazilian Reais)
Consolidated Statements of Cash Flows
| | | | | | | |
| | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Income (loss) from continuing operations | | (1,868,852) | | (3,090,678) | | 517,314 |
| Adjustments for: | | | | | | |
| Depreciation and amortization | | 1,834,232 | | 1,777,703 | | 1,715,863 |
| Depreciation and depletion of biological assets | | 1,390,550 | | 1,214,002 | | 1,030,491 |
| Result on disposal of property, plant and equipments and intangible | | (63,229) | | 3,985 | | (141,211) |
| Write-down of inventories to net realizable value | | (96,094) | | 56,337 | | 128,680 |
| Provision for tax, civil and labor risks | | 271,063 | | 341,038 | | 116,144 |
| Income from investments under the equity method | | 3,264 | | (1,076) | | - |
| Financial results, net | | 2,820,850 | | 2,668,755 | | 3,044,575 |
| Tax recoveries and gains in tax lawsuits | | (173,404) | | (39,547) | | (108,785) |
| Deferred income tax | | (244,172) | | 208,060 | | (807,744) |
| Employee profit sharing | | 173,064 | | (10,190) | | 170,425 |
| Gratuities for the employees | | 108,803 | | - | | - |
| Other provisions (1) | | (172,117) | | 554,460 | | 2,793 |
| Cash flow provided by operating activities before working capital | | 3,983,958 | | 3,682,849 | | 5,668,545 |
| Changes in assets and liabilities: | | | | | | |
| Trade accounts and notes receivables | | (606,550) | | (144,597) | | 386,889 |
| Inventories | | 1,961,810 | | 712,913 | | (2,878,507) |
| Biological assets - current | | 385,027 | | (296,934) | | (815,699) |
| Trade accounts payable | | (3,295,127) | | (1,366,667) | | 2,210,960 |
| Cash generated by operating activities | | 2,429,118 | | 2,587,564 | | 4,572,188 |
| | | | | | | |
| Redemptions (investments) in securities at FVTPL (2) | | 18,768 | | 4,093 | | 30,012 |
| Interest received | | 455,827 | | 281,989 | | 106,388 |
| Dividends and interest on shareholders' equity received | | (851) | | - | | - |
| Payment of tax, civil and labor provisions | | (397,872) | | (292,385) | | (399,252) |
| Derivative financial instruments | | (237,773) | | (1,191,475) | | 266,491 |
| Other operating assets and liabilities | | 1,672,180 | | 486,598 | | (652,191) |
| Net cash provided by operating activities | | 3,939,397 | | 1,876,384 | | 3,923,636 |
| | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | |
| Redemption (additions) on investments in securities at amortized cost | | (60,711) | | 1,111 | | 162,052 |
| Redemption (additions) on investments in securities at FVTOCI (3) | | - | | - | | 73,193 |
| Redemption of restricted cash | | 12,851 | | (2,074) | | 400 |
| Additions to property, plant and equipment | | (791,817) | | (1,452,733) | | (1,555,426) |
| Additions to biological assets - non-current | | (1,457,174) | | (1,387,669) | | (1,239,746) |
| Proceeds from disposals of property, plant, equipments and investment | | 167,704 | | 62,545 | | 58,836 |
| Additions to intangible assets | | (167,601) | | (228,734) | | (179,632) |
| Business combination, net of cash | | - | | (158,348) | | (985,639) |
| Sale of participation in subsidiaries with loss of control | | - | | - | | 132,951 |
| Capital increase in affiliates | | (768) | | (92,885) | | 1,770 |
| Capital increase in subsidiaries | | 183,672 | | - | | - |
| Net cash used in investing activities | | (2,113,844) | | (3,258,787) | | (3,531,241) |
| Net cash used in investing activities from discontinued operations | | - | | - | | (17,550) |
| Net cash used in investing activities | | (2,113,844) | | (3,258,787) | | (3,548,791) |
| | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | |
| Proceeds from debt issuance | | 3,836,483 | | 3,392,613 | | 2,990,782 |
| Repayment of debt | | (6,889,936) | | (3,984,422) | | (1,395,347) |
| Payment of interest | | (1,679,825) | | (1,518,301) | | (1,193,367) |
| Payment of interest derivatives - fair value hedge | | (699,345) | | (252,662) | | (2,975) |
| Capital increase through issuance of shares | | 5,313,241 | | 5,275,444 | | - |
| Treasury shares acquisition | | - | | - | | (27,721) |
| Acquisition of non-controlling interests | | - | | (7,288) | | (238,421) |
| Payment of lease liabilities | | (742,455) | | (649,846) | | (705,427) |
| Net cash provided (used in) by financing activities | | (861,837) | | 2,255,538 | | (572,476) |
| | | | | | | |
| Effect of exchange rate variation on cash and cash equivalents | | 170,019 | | (271,026) | | 149,826 |
| Net increase (decrease) in cash and cash equivalents | | 1,133,735 | | 602,109 | | (47,805) |
| Balance at the beginning of the year | | 8,130,929 | | 7,528,820 | | 7,576,625 |
| Balance at the end of the year | | 9,264,664 | | 8,130,929 | | 7,528,820 |
| (1) | In 2022 includes the amount of R$583,977 relating to the Leniency Agreement (note 1.2) and R$4,797 related to other expenses related to investigations. |
| (2) | FVTPL: Fair Value Through Profit and Loss. |
| (3) | FVTOCI: Fair Value Through Other Comprehensive Income. |
The accompanying notes are an integral part of the financial statements.
(In thousands of Brazilian Reais)
BRF S.A. (“BRF”), and its subsidiaries (collectively the “Company”) is a publicly traded company, listed on the segment Novo Mercado of Brasil, Bolsa, Balcão (“B3”), under the ticker BRFS3, and listed on the New York Stock Exchange (“NYSE”), under the ticker BRFS. The Company’s registered office is at 475 Jorge Tzachel Street, Fazenda District, Itajaí - Santa Catarina and the main business office is in the city of São Paulo.
BRF is a Brazilian multinational company, with global presence, which owns a comprehensive portfolio of products, and it is one of the world’s largest companies of food products. The Company operates by raising, producing and slaughtering poultry and pork for processing, production and sale of fresh meat, processed products, pasta, margarine, pet food and others.
The Company holds as main brands Sadia, Perdigão, Qualy, Chester®, Kidelli, Perdix, Banvit, Biofresh and Gran Plus, present mainly in Brazil, Turkey and Middle Eastern countries.
| Schedule of equity interest | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | % equity interest | | |
| Entity | | | Main activity | | Country (1) | | 12.31.23 | | 12.31.22 | | Equity interest |
| BRF GmbH | | | Holding | | Austria | | 100.00 | | 100.00 | | Direct |
| BRF Arabia Holding Company | (h) | | Holding | | Saudi Arabia | | 70.00 | | - | | Indirect |
| BRF Foods UK Ltd. | (i) | | Administrative and marketing services | | England | | 100.00 | | - | | Direct |
| BRF Foods GmbH | | | Industrialization, import and commercialization of products | | Austria | | 100.00 | | 100.00 | | Indirect |
| Al Khan Foodstuff LLC ("AKF") | (b) | | Import, commercialization and distribution of products | | Oman | | 70.00 | | 70.00 | | Indirect |
| TBQ Foods GmbH | | | Holding | | Austria | | 60.00 | | 60.00 | | Indirect |
| Banvit Bandirma Vitaminli | | | Import, industrialization and commercialization of products | | Turkey | | 91.71 | | 91.71 | | Indirect |
| Banvit Enerji ve Elektrik Üretim Ltd. Sti. | (a) | | Generation and commercialization of electric energy | | Turkey | | 100.00 | | 100.00 | | Indirect |
| Nutrinvestments BV | (a) | | Holding | | The Netherlands | | 100.00 | | 100.00 | | Indirect |
| Banvit ME FZE | (d) | | Marketing and logistics services | | UAE | | - | | 100.00 | | Indirect |
| BRF Foods LLC | (k) | | Import, industrialization and commercialization of products | | Russia | | 100.00 | | 100.00 | | Indirect |
| BRF Global Company Nigeria Ltd. | | | Marketing and logistics services | | Nigeria | | 100.00 | | 100.00 | | Indirect |
| BRF Global Company South Africa Proprietary Ltd. | | | Administrative, marketing and logistics services | | South Africa | | 100.00 | | 100.00 | | Indirect |
| BRF Global GmbH | | | Holding and trading | | Austria | | 100.00 | | 100.00 | | Indirect |
| BRF Japan KK | | | Marketing and logistics services, import, export, industrialization and commercialization of products | | Japan | | 100.00 | | 100.00 | | Indirect |
| BRF Korea LLC | | | Marketing and logistics services | | Korea | | 100.00 | | 100.00 | | Indirect |
| BRF Shanghai Management Consulting Co. Ltd. | | | Provision of consultancy and marketing services | | China | | 100.00 | | 100.00 | | Indirect |
| BRF Shanghai Trading Co. Ltd. | | | Import, export and commercialization of products | | China | | 100.00 | | 100.00 | | Indirect |
| BRF Singapore Foods PTE Ltd. | | | Administrative, marketing and logistics services | | Singapore | | 100.00 | | 100.00 | | Indirect |
| Eclipse Holding Cöoperatief U.A. | | | Holding | | The Netherlands | | 100.00 | | 100.00 | | Indirect |
| Buenos Aires Fortune S.A. | (m) | | Holding | | Argentina | | 100.00 | | 100.00 | | Indirect |
| Eclipse Latam Holdings | | | Holding | | Spain | | 100.00 | | 100.00 | | Indirect |
| Perdigão Europe Lda. | | | Import, export of products and administrative services | | Portugal | | 100.00 | | 100.00 | | Indirect |
| ProudFood Lda. | | | Import and commercialization of products | | Angola | | 100.00 | | 100.00 | | Indirect |
| Sadia Chile S.A. | | | Import, export and commercialization of products | | Chile | | 100.00 | | 100.00 | | Indirect |
| Wellax Food Logistics C.P.A.S.U. Lda. | (g) | | Import, commercialization of products and administrative services | | Portugal | | - | | 100.00 | | Indirect |
| One Foods Holdings Ltd. | | | Holding | | UAE | | 100.00 | | 100.00 | | Indirect |
| Al-Wafi Food Products Factory LLC | | | Import, export, industrialization and commercialization of products | | UAE | | 100.00 | | 100.00 | | Indirect |
| Badi Ltd. | | | Holding | | UAE | | 100.00 | | 100.00 | | Indirect |
| Al-Wafi Al-Takamol International for Foods Products | | | Import and commercialization of products | | Saudi Arabia | | 100.00 | | 100.00 | | Indirect |
| Joody Al Sharqiya Food Production Factory LLC | | | Import and commercialization of products | | Saudi Arabia | | 100.00 | | 100.00 | | Indirect |
| BRF Kuwait Food Management Company WLL | (b) | | Import, commercialization and distribution of products | | Kuwait | | 49.00 | | 49.00 | | Indirect |
| One Foods Malaysia SDN. BHD. | (j) | | Marketing and logistics services | | Malaysia | | - | | 100.00 | | Indiretc |
| Federal Foods LLC | (b) | | Import, commercialization and distribution of products | | UAE | | 49.00 | | 49.00 | | Indirect |
| Federal Foods Qatar | (b) | | Import, commercialization and distribution of products | | Qatar | | 49.00 | | 49.00 | | Indirect |
| Establecimiento Levino Zaccardi y Cia. S.A. | (f) | | Industrialization and commercialization of dairy products | | Argentina | | - | | 100.00 | | Indirect |
| BRF Energia S.A. | | | Commercialization of eletric energy | | Brazil | | 100.00 | | 100.00 | | Direct |
| BRF Pet S.A. | (e) | | Industrialization, commercialization and distribution of feed and nutrients for animals | | Brazil | | 100.00 | | 100.00 | | Direct |
| Hercosul Alimentos Ltda. | (e) | | Manufacturing and sale of animal feed | | Brazil | | 100.00 | | 100.00 | | Indirect |
| Hercosul Distribuição Ltda. | (e) | | Import, export, wholesale and retail sale of food products for animals | | Brazil | | 100.00 | | 100.00 | | Indirect |
| Hercosul International S.R.L. | (e) | | Manufacturing, export, import and sale of feed and nutrients for animals | | Paraguay | | 100.00 | | 100.00 | | Indirect |
| Hercosul Soluções em Transportes Ltda. | (e) | | Road freight | | Brazil | | 100.00 | | 100.00 | | Indirect |
| Mogiana Alimentos S.A. | (e) | | Manufacturing, distribution and sale of Pet Food products | | Brazil | | 100.00 | | 100.00 | | Indirect |
| Potengi Holdings S.A. | (c) | | Holding | | Brazil | | 50.00 | | 50.00 | | Affiliate |
| PR-SAD Administração de bem próprio S.A. | | | Management of assets | | Brazil | | 33.33 | | 33.33 | | Affiliate |
| PSA Laboratório Veterinário Ltda. | (n) | | Veterinary activities | | Brazil | | 100.00 | | 100.00 | | Indirect |
| Sadia Alimentos S.A. | (l) | | Holding | | Argentina | | 100.00 | | 100.00 | | Direta |
| Sadia Uruguay S.A. | | | Import and commercialization of products | | Uruguay | | 100.00 | | 100.00 | | Direct |
| Vip S.A. Empreendimentos e Participações Imobiliárias | (n) | | Commercialization of owned real state | | Brazil | | 100.00 | | 100.00 | | Direct |
| BRF Investimentos Ltda. | | | Holding, management of companies and assets | | Brazil | | 100.00 | | 100.00 | | Indirect |
| (1) | UAE – United Arab Emirates. |
| (a) | Dormant subsidiaries. The Company is evaluating the liquidation of these subsidiaries. |
| (b) | For these entities, the Company has agreements that ensure full economic rights, except for AKF, in which the economic rights are of 99%. |
| (c) | Affiliate in partnership with a subsidiary of AES Brasil Energia S.A. in which the economic participation is 24% (note 12). |
| (d) | On March 21, 2023, the subsidiary Banvit ME FZE was dissolved. |
| (e) | The competitive process for the possible sale of these companies, which began on February 28, 2023, was closed on November 13, 2023, with the option of keeping these entities in operation and, therefore, no impact was recorded. |
| (f) | On July 7, 2023, the subsidiary Establecimiento Levino Zaccardi y Cia. S.A. was dissolved. |
| (g) | On July 21, 2023, the subsidiary Wellax Food Logistics C.P.A.S.U. Lda. was dissolved. |
| (h) | On December 11, 2023 the company BRF Arabia Holding Company was incorporated, located in Saudi Arabia. |
| (i) | On October 5, 2023 the company BRF UK Foods Ltd. was incorporated, located in England. |
| (j) | On December 27, 2023 the subsidiary One Foods Malaysia SDN BHD was dissolved. |
| (k) | On January 15, 2024 the subsidiary BRF Foods LLC was dissolved. |
| (l) | On December 31, 2023, BRF S.A. began to hold the entire share capital of the subsidiary Sadia Alimentos S.A. |
| (m) | On March 19, 2024 the subsidiary Buenos Aires Fortune S.A. was dissolved. |
| (n) | On March 28, 2024 the subsidiaries BRF VIP S.A. e a PSA Laboratório Veterinário Ltda. were incorporated by BRF S.A. |
On December 28, 2022, BRF has entered into a Leniency Agreement with the Brazilian authorities – Controladoria Geral da União (“CGU”) and the Advocacia Geral da União (“AGU”) (as note 1.3 of financial statements of the year ended on December 31, 2022), in which it assumed the commitment to pay the amount of R$583,977. That amount, updated according to the agreement, was settled on June 30, 2023, as follows: (i) 70% with tax losses in the amount of R$435,128 (Note 10.1); (ii) 30% with PIS and COFINS and IRPJ tax credits in the amount of R$186,483 (Note 9.4).
Additionally, the Company assumed the following qualitative commitments: a) to remediate the identified practices and to adopt preventive measures to prevent that such practices could happen again and b) to continuously improve its integrity program with the support and monitoring of the CGU.
During the year ended on December 31, 2023, all aforementioned commitments were fulfilled and the Company continues to maintain its public commitment to pursue the process of continuous improvement of its corporate governance and compliance practices.
| 2. | Basis of Preparation and Presentation of Financial Statements |
The Consolidated financial statements were prepared in accordance with international financial reporting standards (“IFRS”), issued by International Accounting Standards Board (“IASB”). All the relevant information applicable to the financial statements, and only them, are being evidenced and correspond to those used by administration in its Management.
The Consolidated financial statements are expressed in thousands of Brazilian Reais (“R$”), unless otherwise stated. For disclosures of amounts in other currencies, the values were also expressed in thousands, unless otherwise stated.
The preparation of the Consolidated financial statements requires Management to make judgments, use estimates and adopt assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, as well as the disclosures of contingent liabilities. The uncertainty inherent to these judgments, assumptions and estimates could result in material adjustments to the carrying amount of certain assets and liabilities in future periods.
Any judgments, estimates and assumptions are reviewed at each reporting period.
The Consolidated financial statements were prepared based on the recoverable historical cost, except of items held at fair value as described in Note 3.2.
The Company prepared Consolidated financial statements under the going concern assumption and disclosed all relevant information in its explanatory notes, in order to clarify and complement the accounting basis adopted.
| 3. | Material Accounting Policies |
The Consolidated financial statements include BRF and the subsidiaries (note 1.1) of which BRF has direct or indirect control, obtained when the Company is exposed to or has right to variable returns and has the power to influence such subsidiaries.
The financial information of all consolidated entities was prepared using the same accounting policies.
All transactions and balances between BRF and its subsidiaries have been eliminated upon consolidation, as well as the unrealized profits or losses arising from these transactions, net of taxes. Non-controlling interests are presented separately.
Except for the associates PR-SAD Administração de bem próprio S.A. and Potengi Holdings S.A., in which the Company recognizes the investments by the equity method, all other entities presented in note 1.1 were consolidated.
| 3.2. | Accounting judgments, estimates and assumptions |
The Management made the following judgments which have a material impact on the amounts recognized in the financial statements:
Main judgments:
| » | | determination of the moment when control is transferred for revenue recognition (note 25); |
| » | | determination or change of the probability of exercise of a renewal option or anticipated termination of the lease agreements (note 17). |
Main estimates:
| » | | determination of fair value of financial instruments due to significant unobservable inputs (note 23); |
| » | | determination of recoverable amount non-financial assets. Main assumptions: discount and growth rates (note 14); |
| » | | determination of loss rate in the measurement of expected credit losses (notes 3.18 and 6); |
| » | | determination of fair value of biological assets due to significant unobservable inputs (note 8); |
| » | | determination of the term on the analysis of taxes (note 9 and 10); |
| » | | reduction factor on technical useful lives such as deterioration, obsolescence and influence of external factors when determining the useful lives of property, plant, equipment and intangible assets with definite useful life (note 13 and 14); |
| » | | actuarial assumptions on measurement of employee benefits liabilities (note 19); |
| » | | assessment of the loss probability and liability measurement on provision for tax, civil and labor risks (note 20). |
The Company reviews the estimates and underlying assumptions used in its accounting estimates in each reporting period. Revisions to accounting estimates are recognized in the period in which the estimates are revised.
| 3.3. | 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 with functional currency different from Reais are translated into Brazilian Reais, under the following criteria:
| » | assets and liabilities are translated at the closing exchange rate; |
| » | income and expenses are translated at the monthly average rate; |
| » | the cumulative effects of gains or losses upon translation are recognized in Other Comprehensive Income, within equity. |
Goodwill arising from business combinations with foreign entities is expressed in the functional currency of that entity and translated by the closing exchange rate for the reporting currency of the acquirer, with the exchange variation effects recognized in Other Comprehensive Income.
The transactions in foreign currency follow the criteria below:
| » | non-monetary assets and liabilities, as well as incomes and expenses, are translated at the historical rate of the transaction; |
| » | monetary assets and liabilities are translated at the closing exchange rate; |
| » | the cumulative effects of gains or losses upon translation of monetary assets and liabilities are recognized in the statements of income (loss). |
| 3.4. | Hyperinflationary economies |
The Company has subsidiaries in Turkey and in Argentina, which are considered a hyperinflationary economy, and are subject to the requirements of IAS 29 – Hyperinflationary Economies. For these subsidiaries the accounting policies below are adopted:
Non-monetary items, as well as income and expenses, are adjusted by the changes in the inflation index between the initial recognition date the closing date, so that the subsidiaries' financial information is presented at current value.
When an economy become hyperinflationary the cumulative adjustments related to prior periods are recorded in accumulated profit and losses in equity, considering that the Controlling entity is not in a hyperinflationary economy.
The translation of the balances of the subsidiary in hyperinflationary economy to the reporting currency was made at the closing rate of the reporting period for both financial position and income statement balances.
3.4.1. Turkey
Levels of inflation in Turkey have been high in the recent years and exceeded 100% for the three-year cumulative inflation, according to the Turkish Statistical Institute.
The price index used for the year ended December 31, 2023 was 65% (64% for the year ended December 31, 2022). In the Consolidated financial information for the year ended December 31, 2023, the inflation adjustment affected the Loss before financial results and income taxes in R$(306,213) (R$(188,251) for the year ended on December 31, 2022), and decreased the Financial Result in the amount of R$560,665 (R$400,763 for the year ended December 31, 2022) and the Loss from continuing operations in the amount of R$210,603 (R$196,953 for the year ended on December 31, 2022).
3.4.2. Argentina
The inflation rates used in 2023 and 2022 were, respectively, 160,9% and 95.49%. In the Consolidated financial information for the year ended December 31, 2023, the inflation adjustment decreased the Loss before financial results and income taxes in the amount of R$1,474 (R$(227) increased the Loss before financial results and income taxes for the year ended December 31, 2022), increased the loss of the Financial Result in the amount of R$(11,961) (R$(7,343) for the year ended December 31, 2022) and increased the Loss from continuing operations in the amount of R$(12,089) R$(7,570) for the year ended December 31, 2022).
Inventories are measured at the lower of the average cost of acquisition or production of finished products and the net realizable value. The cost of finished products includes purchased raw materials, labor, production costs, transportation and storage and non-recoverable taxes, which are related to all the processes necessary for bringing the products to sales conditions. Write-down to net realizable value due to obsolescence, impaired items, slow-moving and realizable value through sale are evaluated and recorded in each reporting period, as appropriate. Normal production losses are included in the production cost for the respective month, while abnormal losses, if any, are expensed in Cost of sales without movement through inventories.
The consumable and production biological assets (live animals) and forests are measured at their fair value, using the cost approach technique to live animals and the revenue approach for forests. In determining the fair value of live animals, all losses inherent to the breeding process are already considered.
3.7.1. Current
In Brazil it comprises income tax (“IRPJ“) and social contribution on profit (“CSLL“), which are calculated monthly based on taxable profit, after offsetting tax losses and negative social contribution base, limited to 30% of the taxable income, applying the rate of 15% plus an additional 10% for the IRPJ and 9% for the CSLL.
The results obtained from foreign subsidiaries are subject to taxation by the countries where they are based, according to applicable rates and legislation. In Brazil, these results suffer the effects of taxation on universal basis established by the Law No. 12,973 / 14. The Company analyzes the results of each subsidiary for the application of its Income Tax legislation, in order to respect the treaties signed by Brazil and avoid double taxation.
3.7.2. Deferred
Deferred taxes represent credits and debits on unused tax losses carried forward and negative CSLL base, as well as temporary differences between the tax and accounting basis. Deferred income tax assets and liabilities are classified as non-current. When the Company’s internal studies indicate that the future use of these credits over a 10-year horizon is not probable, the asset is derecognized (note 10.1).
Deferred tax assets and liabilities are presented net if there is enforceable legal right to be offset, and if they are under the responsibility of the same tax authority and under the same taxable entity.
Deferred tax assets and liabilities must be measured at the rates applicable in the period in which the asset is realized or the liability is settled, based on the tax rates that have been enacted or substantively enacted by the end of the reporting period.
In compliance with the interpretation ICPC 22 / IFRIC 23, the Company analyzed relevant tax decisions of higher courts and whether they conflict in any way with the positions adopted by the Company. Regarding the known uncertain tax positions, the Company reviewed the corresponding legal opinions and jurisprudence and did not identify impacts to be recorded, since it concluded that the tax authorities are not likely to reject the positions adopted.
The Company periodically evaluates the positions assumed in which there are uncertainties about the adopted tax treatment and will set up a provision when applicable.
| 3.8. | Assets held for sale and discontinued operations |
Assets held for sale are measured at the lower of the book value and the fair value less selling costs and are not depreciated or amortized. Such items are only classified under this item when its sale is highly probable and they are available for immediate sale in their current conditions.
Losses due to impairment are recorded under Other operating expenses.
The statement of income and cash flows are classified as discontinued operations and presented separately from continued operations of the Company when the operation represents a separate major line of business or geographical area of operations.
The prior periods of the statement of income (loss) and of the statement of cash flows are restated for comparative purposes. The statement of financial position remains as disclosed in prior periods.
Investments classified in this group are: i) in associated companies, that are entities over which the Company has significant influence, which is the power to participate in decisions on the investee’s financial and operational policies, but without individual or joint control of these policies; and ii) in joint ventures, in which the control of the business is shared through contractual agreement and decisions about the relevant activities require the unanimous consent of the parties.
Investments are initially recognized at cost and subsequently adjusted using the equity method.
| 3.10. | Property, plant and equipment |
Property, plant and equipment are measured by the cost of acquisition, formation, construction or dismantling, less accumulated depreciation. Loans and borrowings costs are recorded as part of the costs of property, plant and equipment in progress, considering the weighted average rate of loans and borrowings effective on the capitalization date (note 13). Subsequent costs are capitalized only when it is probable that future economic benefits associated with the expenses will be earned by the Company.
Depreciation is recognized based on the estimated economic useful life of each asset using the straight-line method. The estimated useful life, residual values and depreciation methods are reviewed annually and the effects of any changes in estimates are accounted for prospectively. Land is not depreciated.
The Company annually performs an impairment analysis for its cash-generating units, which include the balances of property, plant and equipment (note 13).
Gains and losses on disposal of property, plant and equipment are determined by comparing the sale value with the residual book value and are recognized in the statement of income on the date of sale under Other operating income (expense).
Acquired intangible assets are measured at cost at initial recognition, while those arising from a business combination are recognized at fair value on the acquisition date. After initial recognition, are presented at cost less accumulated amortization and impairment losses, when applicable. Internally generated intangible assets, excluding development costs, are not capitalized and the expense is recognized in the income statement when incurred.
Intangible assets with definite useful lives are amortized on a straight-line basis over their economic useful lives (note 14.1). The amortization period and method for an intangible asset with definite life are reviewed at least at the end of each year, and any changes observed are applied prospectively. The amortization of intangible assets with finite lives is recognized in the income statement in the expense category related to their use.
Intangible assets with indefinite useful lives are not amortized, but are tested annually for impairment, being allocated to the cash-generating units (note 14.1). The Company records in this subgroup mainly goodwill and brands, which are expected to contribute indefinitely to its cash flows.
Contingent assets are possible assets to which existence needs to be confirmed by the occurrence or not of one or more uncertain future events. The Company does not record contingent assets, however when the inflow of economic benefits is more likely than not to occur, the contingent assets are disclosed.
A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Company assesses whether:
| » | the contract involves the use of an identified asset, which may be explicit or implicit, and may be physically distinct or represent substantially the entire capacity of a physically distinct asset. If the supplier has a substantial right to replace the asset, then the asset is not identified; |
| » | the Company has the right to obtain substantially all the economic benefits from using the asset throughout the period of use; and |
| » | the Company has the right to direct the use of the asset throughout the period of use, which occurs in either of the following situations: |
| o | the Company has the right to direct how and for what purpose the asset is used, or |
| o | the conditions are predetermined so as the Company has the right to operate the asset or has designed the asset in a way that predetermined how and for what purpose it will be used. |
At the beginning of the contract, the Company recognizes a right-of-use asset and a lease liability, which represents the obligation to make payments related to the underlying asset of the lease.
The right-of-use asset is initially measured at cost and comprises: the initial measurement of the lease liability adjusted for any payment made at or before the commencement date, less any incentive received; any initial direct costs incurred; and an estimate of costs in dismantling and removing the asset, restoring the site on which it is located or restoring the asset to the condition required by the terms of the lease. Renewal or early termination options are analyzed individually considering the type of asset involved as well as its relevance in the Company’s production process.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date until the end of the useful life of the right-of-use asset or until the end of the period of the lease. The estimated useful life of the right-of-use asset is determined on the same methodology used for the assets owned by the Company (note 3.10). Additionally, the right-of-use asset is adjusted by the subsequent measurement of the lease liability and when applicable, an impairment is recognized.
The lease liability is initially measured at the present value of the future lease payments using the incremental borrowing rate, and subsequently, measured at amortized cost using the effective interest method, which are recorded against Financial expenses.
The liability is remeasured when there is a change in (i) future payments resulting from a change in index or rate, (ii) the amount expected to be payable under a residual value guarantee, or (iii) the assessment of whether the Company will exercise the purchase, renewal or termination option.
When the lease liability is remeasured, the corresponding adjustment is recorded in the book value of the right-of-use asset, or in the statement of income if the book value of the right-of-use asset has been reduced to zero.
The Company does not apply lease accounting model to leases with a term of 12 months or less and that do not contain a purchase option; and leases for which the underlying asset is of low value. For these exemptions, the lease payments are recognized as an expense on a straight-line basis over the lease term.
Additionally, contracts with indefinite term and no fixed payments are expensed as incurred.
The Company sponsors supplementary defined benefit and defined contribution pension plans, as well as other post-employment benefits for which an actuarial appraisal is annually prepared by an independent actuary and is reviewed by Management. The cost 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 the limit on contributions and returns on the plan assets and are recognized in the financial position against Other Comprehensive Income when incurred, except Award for Length of Service, which its recognition occurs against statement of income. These measurements are not reclassified to statement of income in subsequent periods.
The Company recognizes the net defined benefit asset when:
| » | controls the resource and has the ability to use the surplus to generate future benefits; |
| » | the control is the result of past events; |
| » | future economic benefits are available for the Company in the form of a reduction in future contributions or cash refunds, either directly to the sponsor or indirectly to another loss-making fund. The effect of the asset limit (irrecoverable surplus) is the present value of these future benefits. |
Past service costs are recognized in income for the year on the following dates, whichever comes first:
| » | date of changing the plan or significantly reducing the expected length of service; |
| » | date in which the Company recognizes the costs related to restructuring. |
The cost of services and net interest on the value of the defined benefit liability or asset are recognized in the expense categories related to the function the beneficiary performs and to the financial result, respectively.
| 3.15. | Share based payments |
The Company offers to its executives restricted stock plans of its own issuance. The Company recognizes as expense the fair value of the shares, measured at the grant date, on a straight-line basis during the period of service required by the plan, with a corresponding entry: i) to the shareholders’ equity for plans exercisable in shares; and ii) to liabilities for cash exercisable plans. When the conditions associated to the right to restricted stocks are no longer met, the expense recognized is reversed, so that the accumulated expense recognized reflects the vesting period and the Company’s best estimate of the number of shares to be delivered.
The expense of the plans is recognized in the statement of income (loss) in accordance with the function performed by the beneficiary.
| 3.16. | Employee and management profit sharing |
Employees are entitled to profit sharing based on certain targets agreed upon on an annual basis, whereas directors are entitled to profit sharing based on the provisions of the bylaws, proposed by the Board of Directors and approved by the shareholders. The profit-sharing amount expected to be paid is recognized by function in the statement of income (loss), according to the probability of the target´s achievement.
| 3.17. | Provision for tax, civil and labor risks and contingent liabilities |
The provisions are recognized when the Company has: i) a present obligation, formalized or not, as a result of a past event, ii) the outflow of resources to settle the obligation is likely to occur and iii) a reliable estimate can be made.
The Company is involved in several legal and administrative procedures, mainly in Brazil. Assessments of the likelihood of loss in these lawsuits include an analysis of the available evidence, the hierarchy of laws, the available jurisprudence, the most recent court decisions and their relevance in the legal system, as well as the assessment of outside lawyers. Provisions are reviewed and adjusted to reflect changes in circumstances, such as the applicable limitation period, conclusions of tax inspections or additional exposures identified based on new matters or court decisions. Furthermore, provisions are monetarily adjusted against Financial expenses.
In cases where there are a large number of lawsuits and the amounts are not individually relevant, the Company use historical studies to determine the probability and amounts of losses.
Contingent liabilities from business combinations are recognized if they arise from a present obligation that arose from past events and if their fair value can be measured reliably. The initial measurement is done by the fair value and subsequent measurements by the higher value between: the fair value on its acquisition date; and the amount by which the provision would be recognized.
| 3.18. | Financial instruments |
Financial instruments are contracts that give rise to a financial asset for one entity and a financial liability or equity instrument for another. Their presentation in the statement of financial position and explanatory notes takes place according to the characteristics of each contract.
3.18.1. Financial assets
Financial assets are recognized when the entity becomes party to the contractual provisions of the instrument and classified based on the characteristics of its cash flows and on the management model for the asset. The table below shows financial assets are classified and measured:
| | | | | |
| Category | | Initial Measurement | | Subsequent Measurement |
| Amortized cost | | Accounts receivable from clients and other receivables: billed amount adjusted to present value and, when applicable, reduced by expected credit losses
For other assets: fair value less costs directly attributable to its issuance, reduced by expected credit losses | | Interest, changes in amortized cost and expected credit losses recognized in the income statement. |
| Fair value through profit and loss (“FVTPL”) | | Fair value | | Variation on the fair value recognized in the income statement. |
| Fair value through other comprehensive Income (“FVTOCI”). | | Fair value less costs directly attributable to its issuance. | | Changes in fair value recognized in other comprehensive income. Upon settlement or transfer, accumulated gains or losses are directly reclassified to Retained earnings or accumulated losses. |
The Company evaluates expected credit losses in each reporting period for instruments measured at amortized cost and for debt instruments measured at Fair value through Other Comprehensive Income. Losses and reversals of losses are recorded in the income statement.
The interests of financial assets are recorded on Financial income (expenses), net.
A financial asset is only derecognized when contractual rights expire or are effectively transferred.
Cash and cash equivalents: comprise the balances of cash, banks and securities of immediate liquidity whose maturities, at the time of acquisition, are equal to or less than 90 days, readily convertible into a known amount of cash and which are subject to an insignificant risk of change in value. Securities classified in this group, by their very nature, are measured at fair value through profit or loss.
Expected credit losses in accounts receivable from customers and other receivables: the Company regularly assesses the historical losses on the customer portfolios it has in each region, taking in consideration the dynamics of the markets in which it operates and instruments it has for reducing credit risks, such as: letters of credit, insurance and collateral, as well as identifying specific customers whose risks are significantly different than the portfolio, which are treated according to individual expectations.
Based on these assessments, estimated loss factors are generated by portfolio and aging class, which, applied to the amounts of accounts receivable, generate the expected credit losses. Additionally, the Company evaluates macroeconomic factors that may influence these losses and, if necessary, adjusts the calculation model.
Securities receivable with legal proceedings in place are reclassified to noncurrent as well as the related estimated credit losses. The securities are written off against the estimated loss when the Management considers that they are no longer recoverable after taking all appropriate actions to collect them.
Restricted cash: the Company has restricted cash arising from business combinations to guarantee certain indemnity events. The classification of cash between current and non-current assets takes place in accordance with the contractual rules for releasing the amounts to each party (note 23.6).
3.18.2. Financial liabilities
Financial liabilities are recognized when the entity becomes party to the contractual provisions of the instrument. The initial measurement is at fair value and subsequently at amortized cost using the effective interest rate method. The interests of financial liabilities are recorded on Financial income (expenses), net.
A financial liability is only derecognized when the contractual obligation expires, is settled or canceled.
3.18.3. Adjustment to present value
The Company measures the adjustment to present value on short and long-term balances of accounts receivable, suppliers and other obligations, being recognized as a deduction in the asset and liability accounts against Financial expenses. The rate used by the Company represents the average of Interbank Certificates of Deposit plus a spread representing the Company’s average credit rating. On December 31, 2023 this rate corresponds to 13.13% per year on December 31, 2022 (15.72% p.a. on December 31, 2022).
3.18.4. Hedge accounting
Cash flow hedge: the effective portion of the gain or loss on the hedge instrument is recognized under Other Comprehensive Income and the ineffective portion in Foreign exchange and monetary variations. Accumulated gains and losses are reclassified to the Income statement or statement of financial position when the hedge object is recognized, adjusting the item in which the hedge object was accounted for.
When the instrument is designated in a cash flow hedge relationship, changes in the fair value of the future element of the forward contracts and the time value of the options are recognized under Other Comprehensive Income. When the instrument is settled, these hedge costs are reclassified to the income statement together with the intrinsic value of the instruments.
A hedging relationship is discontinued prospectively when it no longer meets the criteria for qualifying as hedge accounting. Upon discontinuation of a cash flow hedge relationship in which the hedged future cash flows are still expected to occur, the accumulated amount remains under Other Comprehensive Income until the flows occur and are reclassified to income.
Fair value hedge: the effective portion of the hedge instrument’s gain or loss is recognized in the Income Statement or statement of financial position, adjusting the item under which the hedge object is or will be recognized. The hedge object, when designated in this relationship, is also measured at fair value.
Net investment hedge: the effective result of the exchange variation of the instrument is recorded under Other Comprehensive Income, in the same item in which the accumulated translation adjustments of the investments (hedge objects) are recognized. Only when the hedged investments are sold, the accumulated amount is reclassified to the income statement, adjusting the gain or loss on the sale.
An operating segment is a component of the Company that develops business activities to obtain revenues and incur expenses. The operating segments reflect the way in which the Company’s management reviews the financial information for decision making. The Company’s management identified the operating segments, which meet the quantitative and qualitative parameters of disclosure, pursuant its current management model (note 24).
| 3.20. | Revenue from contracts with customers |
Revenues from sales comes from commercialization and distribution of in-natura meat, processed products, pasta, margarine, pet food and others.
Sales revenues are recognized and measured observing the following steps: (i) identification of the contracts with customers, formalized through sales orders; (ii) identification of the performance obligations in the contract; (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations in the contract; and (v) revenue recognition as it satisfies the performance obligations.
Revenues are recognized by the amount that reflects the Company’s expectation to receive for the sale of products, net of applicable taxes, returns, rebates and discounts.
The sales process begins with sales orders. The discounts and rebates may be negotiated on a spot basis or may have its conditions formally defined in the agreements, generally signed with large retail and wholesale chains. In all cases, the performance obligation is satisfied when the control of the goods is transferred to the client, which will depend on the type of freight contracted by the customer.
The Company has sales with immediate and deferred payments. The deferred payments are adjusted to present value to recognize the financial component (note 3.18.3).
Government grants are recognized at fair value when there is reasonable assurance that the conditions established will be met and the benefit will be received.
| 3.22. | Earnings (loss) per share |
The basic earnings (losses) per share are calculated by dividing the earnings (losses) attributable to the owners of ordinary shares, by the weighted average quantity of ordinary shares outstanding during the year.
The diluted earnings (losses) per share are calculated by dividing the earnings (losses) attributable to the owners of ordinary shares by the weighted average quantity of ordinary shares outstanding during the year summed to the weighted average quantity of ordinary shares that would be available on the conversion of all potential dilutive ordinary shares (restricted shares within the share-based payment plans).
| 3.23. | Standards issued but not yet effective |
The following amendments to standards have been issued by IASB but are not effective for the 2023 year:
| · | Amendment to IAS 1- Classification of Liabilities as Current or Non-Current – implementation in 2024; |
| · | Amendment to IAS 7 and IFRS 7 - Suppliers financing agreements – implementation in 2024; |
| · | Amendment to IFRS 16: Leasing liabilities in a Sale and Leaseback – implementation in 2024; |
| · | Amendment to IAS 21(CPC 02 (R3)) - The Effects of Changes in Foreign Exchange Rates and Conversion of Financial Statements – implementation in 2025. |
Are not expected to have a significant impact on the Company’s financial statements.
| · | IFRS S1 General Requirements for Disclosure of Sustainability and IFS S2 Climate-related disclosures: |
In June 2023, the International Sustainability Standard Board (“ISSB”) issued the standards IFRS S1 – General Requirements for Disclosure of Sustainability – related Financial Information and IFRS S2 – Climate-related Disclosures, which provide new disclosure requirements on, respectively, risks and opportunities related to sustainability and specific climate-related disclosures.
The Brazilian Securities Commission (“CVM”) approved the resolution that establishes the voluntary option of disclosing financial information reports related to sustainability, for listed companies, investment funds and securitization companies, from years beginning on or after January 1st, 2024.
The Company is evaluating the potential impacts arising from these standards, the adoption of which is required for years beginning on or after January 1st, 2026.
| 4. | Cash and cash equivalents |
| (1) | Weighted average annual rate. |
| (2) | Amounts are substantially denominated in Turkish Lira (TRY) at a weighted average annual rate of 43.00% (14.79% on December 31, 2022). |
| Schedule of marketable securities | | | | | | | | | |
| | | | | | Average rate (2) | | | | |
| | WAM (1) | | Currency | | | 12.31.23 | | 12.31.22 |
| Fair value through other comprehensive income | | | | | | | | | |
| Equity securities (3) | - | | USD | | - | | 12,103 | | 11,752 |
| Fair value through profit and loss | | | | | | | | | |
| Financial treasury bills | 0.79 | | R$ | | 13.05% | | 412,107 | | 364,543 |
| Investment funds - FIDC BRF and FIDC II | 1.09 | | R$ | | - | | 16,490 | | 15,505 |
| Repurchase agreement | 0.05 | | R$ | | 10.49% | | 35,751 | | 53,809 |
| Other | 0.08 | | R$ / ARS | | - | | 20 | | 21 |
| | | | | | | | 464,368 | | 433,878 |
| Amortized cost | | | | | | | | | |
| Sovereign bonds and other (4) | 2.48 | | AOA | | | | 291,402 | | 379,145 |
| | | | | | | | 767,873 | | 824,775 |
| Current | | | | | | | 447,878 | | 418,373 |
| Non-current (5) | | | | | | | 319,995 | | 406,402 |
| (1) | Weighted average maturity in years. |
| (2) | Weighted average annual rate. |
| (3) | It’s comprised of Aleph Farms Ltd. stocks. |
| (4) | It’s comprised of private securities and sovereign securities of the Angola Government and are presented net of expected credit losses in the amount of R$16,466 (R$15,231 on December 31, 2022). Amounts are substantially denominated in Angolan kwanza (AOA) and correspond to Time Deposit and Bond at a weighted average annual rate of 11.75% and 16.50% respectively. They also include marketable securities indexed to the U.S. Dollar at a weighted average annual rate of 6.34% and Bonds in U.S. Dollar at a weighted average annual rate of 5.90%. |
| (5) | Maturity until March of 2026. |
On December 31, 2023, the amount of R$9,179 (R$92,857 on December 31, 2022) classified as cash and cash equivalents and marketable securities were pledged as guarantee, with no use restrictions, for future contracts traded on B3.
| 6. | Trade accounts receivable and other receivables |
| Schedule of trade accounts receivable, net and notes receivable | | | | |
| | | | | |
| | | 12.31.23 | | 12.31.22 |
| Trade accounts receivable | | | | |
| Domestic market | | | | |
| Third parties | | 1,860,089 | | 1,473,921 |
| Related parties | | 8,419 | | 11,566 |
| Foreign market | | | | |
| Third parties | | 3,496,442 | | 3,315,772 |
| Related parties | | 27,781 | | 20,789 |
| | | 5,392,731 | | 4,822,048 |
| ( - ) Adjustment to present value | | (29,284) | | (24,818) |
| ( - ) Expected credit losses | | (591,479) | | (604,167) |
| | | 4,771,968 | | 4,193,063 |
| Current | | 4,766,071 | | 4,187,756 |
| Non-current | | 5,897 | | 5,307 |
| | | | | |
| | | | | |
| Notes receivable | | 83,863 | | 54,472 |
| ( - ) Adjustment to present value | | (2,223) | | (386) |
| ( - ) Expected credit losses | | (15,379) | | (15,643) |
| | | 66,261 | | 38,443 |
| Current | | 64,731 | | 27,351 |
| Non-current (1) | | 1,530 | | 11,092 |
| (1) | Weighted average maturity of 1.31 year. |
The Company performs credit assignments with no right of return to the BRF Clients’ Credit Rights Investment Fund, which has the sole purpose to acquire credit rights arising from commercial transactions carried out between the Company and its clients in Brazil.
The first structuring occurred on December 18, 2018 and lasted five years, with final amortization in December 2023 (“FIDC BRF”).
On December 6, 2023, the Company structured a new fund (“FIDC BRF II”) to replace and continue the operations carried out by FIDC BRF.
On December 31, 2023, FIDC BRF II had an outstanding balance of R$1,072,964 (R$947,488 on December 31, 2022, referring to FIDC BRF) related to such credit rights, which were written-off of the Company’s statement of financial position when the credits were sold.
On December 31, 2023, other notes receivables are mainly represented by receivables from the sale of farms and various properties not linked to production.
The movements of the expected credit losses are presented below:
| Schedule of allowance for doubtful accounts | | | | | | | |
| | | | | | | | |
| | | | | | 12.31.23 | | 12.31.22 |
| Beginning balance | | | | | (604,167) | | (638,583) |
| (Additions) reversals | | | | | (32,809) | | (12,772) |
| Write-offs | | | | | 8,539 | | 10,744 |
| Exchange rate variation | | | | | 36,958 | | 36,444 |
| Ending balance | | | | | (591,479) | | (604,167) |
The aging of trade accounts receivable is as follows:
| Schedule of aging of trade accounts receivable | | | | | | | |
| | | | | | | | |
| | | | | | 12.31.23 | | 12.31.22 |
| Not overdue | | | | | 4,515,445 | | 4,045,146 |
| Overdue | | | | | | | |
| 01 to 60 days | | | | | 225,135 | | 125,082 |
| 61 to 90 days | | | | | 46,347 | | 7,629 |
| 91 to 120 days | | | | | 15,248 | | 17,084 |
| 121 to 180 days | | | | | 11,101 | | 18,536 |
| 181 to 360 days | | | | | 22,116 | | 17,902 |
| More than 360 days | | | | | 557,339 | | 590,669 |
| ( - ) Adjustment to present value | | | | | (29,284) | | (24,818) |
| ( - ) Expected credit losses | | | | | (591,479) | | (604,167) |
| | | | | | 4,771,968 | | 4,193,063 |
| Schedule of inventories | | | | | | | |
| | | | | | | | |
| | | | | | 12.31.23 | | 12.31.22 |
| Finished goods | | | | | 3,564,379 | | 4,885,465 |
| Work in progress | | | | | 378,788 | | 435,018 |
| Raw materials | | | | | 1,675,323 | | 2,086,963 |
| Packaging materials | | | | | 150,444 | | 181,193 |
| Secondary materials | | | | | 546,213 | | 705,692 |
| Supplies | | | | | 216,998 | | 230,092 |
| Imports in transit | | | | | 150,947 | | 230,133 |
| Other | | | | | 75,646 | | 111,648 |
| (-) Adjustment to present value (1) | | | | | (129,848) | | (205,313) |
| Total | | | | | 6,628,890 | | 8,660,891 |
| (1) | The adjustment refers to the counter-entry of the adjustment of present value from trade accounts payable and is carried out for cost according to inventories turnover. |
The movements in the write-down of inventories to the net realizable value, for which the additions, reversals and write-offs were recorded against Cost of Sales, are presented in the table below:
| Schedule of cost of sales | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Realizable value through sale | | Impaired inventories | | Obsolete inventories | | Total |
| | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Beginning balance | (66,671) | | (31,026) | | (73,694) | | (54,015) | | (9,944) | | (11,654) | | (150,309) | | (96,695) |
| Reversals | 504,860 | | 304,977 | | - | | - | | - | | - | | 504,860 | | 304,977 |
| Write-offs | - | | - | | 164,245 | | 173,648 | | 10,603 | | 11,075 | | 174,848 | | 184,723 |
| Monetary correction by Hyperinflation | - | | (22) | | (208) | | (311) | | (7) | | (170) | | (215) | | (503) |
| Exchange rate variation | (3,124) | | 3,139 | | 46 | | 24 | | (13) | | 63 | | (3,091) | | 3,226 |
| Ending balance | (26,308) | | (66,671) | | (22,981) | | (73,694) | | (8,232) | | (9,944) | | (57,521) | | (150,309) |
The live animals are represented by poultry and pork and segregated into consumables and animals for production. The rollforward of the biological assets are presented below:
| (1) | The change in the fair value of biological assets includes depreciation of breeders and depletion of forests in the amount of R$1,390,550 (R$1,214,002 in the same period of the previous year). |
The estimated quantities of live animals on December 31, 2023 are 198,729 thousand heads of poultry and 4,866 thousand heads of pork (213,491 thousand heads of poultry and 4,885 thousand heads of pork on December 31, 2022).
The Company has forests pledged as collateral for financing and tax and civil contingencies on December 31, 2023 in the amount of R$71,399 (R$59,388 on December 31, 2022).
The fair value of animals and forests is determined using unobservable inputs, therefore, it is classified in the Level 3 of the fair value hierarchy. The main assumptions used in the measurement of the fair value and their impact on measurement are presented below:
| | | | | | | The estimated fair value can change if: |
| Asset | | Valuation methodology | | Non observable significant inputs | | Increase | | Decrease |
| Forests | | Income approach | | Estimated price of standing wood | | Increase in the price of wood | | Decrease in the price of wood |
| | | Productivity per hectare estimated | | 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 |
| Live animals | | Cost approach | | Price of the feed inputs | | Increase in feed cost | | Decrease in feed cost |
| | | Storage costs | | Increase in storage cost | | Decrease in storage cost |
| | | Outgrowers cost | | Increase in outgrowers cost | | Decrease in outgrowers cost |
The prices used in the valuation are those practiced in the regions where the Company is located and were obtained through market research. The discount rate corresponds to the average cost of capital and other economic assumptions for a market participant.
The weighted average price used in the valuation of biological assets (forests) on December 31, 2023 was equivalent to R$76.22 per stere (R$54.12 per stere on December 31, 2022). The real discount rate used in the valuation of the biological asset (forests) on December 31, 2023 was 8.1% p.a. (7.89% p.a. on December 31, 2022).
| (1) | This amount comprises: impairment over ICMS and VAT R$(126,918); PIS and COFINS R$(12,407) and other taxes R$(95) (respectively (R$(126,229); R$(14,228) and R$(1,549) as of December 31, 2022). |
| 9.1. | ICMS – tax on movement of goods and services and VAT – value added taxes |
As result of the activity, the Company generates recoverable ICMS balances that are offset against ICMS payables arising from sales in the domestic market or that are transferred to third parties.
The Company has recoverable ICMS balances in the States of Paraná, Santa Catarina, Mato Grosso do Sul, Minas Gerais and Amazonas, which will be realized in the short and long term, based on the recoverability study reviewed and approved by the Management.
In other jurisdictions outside Brazil, value added taxes (VAT) are due in regular operations of the Company with goods and services, with expectations of achievement in the short and long term.
| 9.2. | PIS and COFINS – social integration plan and contribution for social security |
The accumulated recoverable PIS and COFINS balances arise from taxes on raw material purchases subsequently used in the production of exported products or products for which sale is not taxed, as well as recoverable taxes on commercial and labor expenses. The realization of these balances usually occurs through the offsetting with taxes payable on sales of taxed products in the domestic market, with other federal taxes and social security contributions payable, or even, if necessary, through refund or reimbursement requests.
As of December 31, 2023, the updated balance of the processes related to the exclusion of the ICMS from the PIS and COFINS calculation basis recognized by the Company is R$2,013,799 (R$2,091,340 as of December 31, 2022) including R$235,164 relating to residual credits based on enacted legislation in 2023. The monetary update of balances is recognized against Financial income.
The amount of R$396,095 related to these credits was offset against other federal taxes for year ended on December 31, 2023 (R$384,956 for the year ended December 31, 2022), of these, R$48,612 relating to residual credits. Additionally, the amount of R$81,334 was used to settle the Leniency Agreement (note 1.2).
| 9.3. | IPI – industrialized product tax |
The Company recognized tax assets as result of gains from lawsuits related to IPI, specially “crédito prêmio”. The balance referring to these assets on December 31, 2023 is R$1,110,006 (R$1,030,940 at the year ended December 31, 2022), of which R$1,087,749 (R$1,008,683 at the year ended December 31, 2022) is recorded as Recoverable Taxes and the remainder, referring to cases in which the government will reimburse in cash, is recorded as Other Non-Current Assets, in the amount of R$22,257 (R$22,257 at the year ended December 31, 2022). The monetary update of balances is recognized against Financial income.
The accumulated recoverable income taxes arise, mostly, from withholding taxes on securities, interest and prepayments of income tax and social contribution in Brazil. The realization occurs through the offset with federal taxes and contributions payable. Additionally, the amount of R$105,149 was used to settle the Leniency Agreement (note 1.2).
| 9.5. | Realization of Brazilian federal tax credits |
The Company used PIS, COFINS, IPI, and other recoverable taxes to offset federal taxes payable such as INSS, Income Taxes and other in the amount of R$1,414,273 for year ended on December 31, 2023 (R$924,027 for the year ended December 31, 2022), preserving its liquidity and optimizing its capital structure.
| (1) | The deferred tax liability on business combination is substantially represented by the allocation of goodwill to property, plant and equipment, brands and contingent liabilities. |
The Company has tax losses of Income Tax (IRPJ) and negative bases Contributions on the Net Profit (CSLL) in Brazil, which at current tax rates represent R$6,632,460 on December 31, 2023 (R$7,131,786 on December 31, 2022). Within this amount, R$3,394,679 on December 31, 2023 and (R$3,768,459 on December 31, 2022) are recognized as an asset, according to the recoverability expectation. The recoverability study uses financial projections made by Management for operational and financial results, which are in line with the recoverability test for cash-generating units (note 14.1).
The roll-forward of deferred income taxes, net, is set forth below:
| Schedule of deferred income taxes, net | | | | | | | |
| | | | | | | | |
| | | | | | 12.31.23 | | 12.31.22 |
| Beginning balance | | | | | 2,454,998 | | 2,917,560 |
| Deferred income taxes recognized in income from continuing operations | | | | | 244,172 | | (208,060) |
| Deferred income taxes recognized in other comprehensive income | | | | | (217,297) | | (175,110) |
| Deferred income and social contribution taxes used in the leniency agreement (1) | | | | | (435,128) | | - |
| Deferred taxes recognized in accumulated losses - monetary correction by hyperinflation | | | | | - | | (32,655) |
| Other | | | | | 6,238 | | (46,737) |
| Ending balance | | | | | 2,052,983 | | 2,454,998 |
| (1) | In June 2023, the Company used deferred taxes on tax losses in the amount of R$435,128 to settle the debt resulting from the Leniency Agreement entered into with the Federal Government (note 1.2). |
| 10.2. | Effective income tax rate reconciliation |
| Schedule of effective income tax rate reconciliation | | | | | | | | |
| | | | | | | | | |
| | | | | 31.12.23 | | 31.12.22 | | 31.12.21 |
| | | | | | | | | |
| Loss before taxes - continued operations | | | | (1,984,706) | | (2,805,044) | | (34,788) |
| Nominal tax rate | | | | 34% | | 34% | | 34% |
| Benefit at nominal rate | | | | 674,800 | | 953,715 | | 11,828 |
| Adjustments to income taxes | | | | | | | | |
| Income from associates and joint ventures | | | | (1,110) | | 366 | | 8,626 |
| Difference of tax rates on results of foreign subsidiaries | | | | (536,428) | | 212,753 | | 244,822 |
| Difference of functional currency of foreign subsidiaries | | | | (190,743) | | (538,002) | | (129) |
| Deferred tax assets not recognized (1) | | | | - | | (967,103) | | (840,457) |
| Recognition of tax assets from previous years | | | | 61,348 | | (77,964) | | 1,025,000 |
| Interest on taxes | | | | 140,056 | | 83,235 | | 104,789 |
| Profits taxed by foreign jurisdictions | | | | (110,655) | | (31,400) | | (33,455) |
| Transfer price | | | | (101,554) | | (24,995) | | (71,634) |
| Tax paid on international subsidiaries | | | | 26,416 | | 21,061 | | - |
| Investment grant | | | | 118,793 | | 114,913 | | 109,591 |
| Other permanent differences | | | | 34,931 | | (32,213) | | (6,879) |
| Total | | | | 115,854 | | (285,634) | | 552,102 |
| | | | | | | | | |
| Effective rate | | | | 5.8% | | -10.2% | | 1587.0% |
| | | | | | | | | |
| Current tax | | | | (128,318) | | (77,574) | | (255,642) |
| Deferred tax | | | | 244,172 | | (208,060) | | 807,744 |
| (1) | Amount related to the non-recognition of deferred tax on tax losses carryforward, due to limited capacity of realization. |
Income tax returns in Brazil are subject to review by the tax authorities for a period of five years from the date of their delivery. The Company may be subject to additional collection of taxes, fines and interest as a result of these reviews. The results obtained by subsidiaries abroad are subject to taxation in accordance with the tax laws of each country.
The rollforward of the judicial deposits is set forth below:
| Schedule of judicial deposits | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Tax | | Labor | | Civil, commercial and other | | Total |
| | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Beginning balance | 191,161 | | 259,468 | | 194,906 | | 246,007 | | 64,609 | | 44,844 | | 450,676 | | 550,319 |
| Additions | 8,816 | | 3,628 | | 68,124 | | 88,489 | | 5,679 | | 24,644 | | 82,619 | | 116,761 |
| Release in favor of the Company | (17,692) | | (74,677) | | (28,419) | | (34,602) | | (1,202) | | (780) | | (47,313) | | (110,059) |
| Release in favor of the counterparty | (4,417) | | (12,402) | | (87,114) | | (116,258) | | (5,533) | | (6,315) | | (97,064) | | (134,975) |
| Interest | 14,793 | | 15,144 | | 8,770 | | 11,295 | | 3,263 | | 2,216 | | 26,826 | | 28,655 |
| Exchange rate variation | - | | - | | (26) | | (25) | | - | | - | | (26) | | (25) |
| Ending balance | 192,661 | | 191,161 | | 156,241 | | 194,906 | | 66,816 | | 64,609 | | 415,718 | | 450,676 |
| Schedule of composition of the investments | | | | | | | |
| | | | | | | | |
| | | | | | 12.31.23 | | 12.31.22 |
| Investment in affiliates | | | | | 97,134 | | 100,481 |
| Other investments | | | | | 761 | | 583 |
| Total | | | | | 97,895 | | 101,064 |
| 13. | Property, plant and equipment |
The rollforward of property, which include right-of-use assets balances (note 17.1), plant and equipment is set forth below:
| (1) | Weighted average annual rate. |
| (2) | Refers to the transfer of R$9,929 to intangible assets and R$34,183 to assets held for sale, when the assets were reduced to their recoverable value, generating an expense of R$33,499, recorded in other operating results (note 26). |
| (3) | Land depreciation refers to right-of-use assets (note 17.1). The amount of R$3,061 of depreciation was recognized in the cost of formation of forests and will be realized in the result according to the depletion.
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Average rate (1) | | 12.31.21 | | Additions | | Disposals | | Monetary correction by Hyperinflation | | Transfers | | Exchange rate variation | | 12.31.22 |
| Cost | | | | | | | | | | | | | | | |
| Land | | | 710,017 | | 10,289 | | (10,715) | | 56,130 | | 7,601 | | (21,771) | | 751,551 |
| Buildings, facilities and improvements | | | 11,294,650 | | 922,240 | | (130,814) | | 90,634 | | 513,309 | | (69,191) | | 12,620,828 |
| Machinery and equipment | | | 8,735,375 | | 21,913 | | (242,875) | | 281,368 | | 1,035,129 | | (100,872) | | 9,730,038 |
| Furniture and fixtures | | | 150,865 | | 1,141 | | (5,855) | | 26,735 | | 23,238 | | (8,515) | | 187,609 |
| Vehicles | | | 384,289 | | 246,491 | | (7,080) | | 7,141 | | 10,589 | | (13,758) | | 627,672 |
| Construction in progress | | | 1,144,725 | | 1,420,309 | | (2,279) | | 11,632 | | (1,456,540) | | (22,704) | | 1,095,143 |
| Advances to suppliers | | | 33,109 | | 8,651 | | - | | - | | (135) | | (9,739) | | 31,886 |
| | | | 22,453,030 | | 2,631,034 | | (399,618) | | 473,640 | | 133,191 | | (246,550) | | 25,044,727 |
| | | | | | | | | | | | | | | | |
| Depreciation | | | | | | | | | | | | | | | |
| Land | 15.34% | | (36,788) | | (12,410) | | 2,401 | | 1,090 | | (4) | | 1,277 | | (44,434) |
| Buildings, facilities and improvements | 3.59% | | (4,494,435) | | (752,798) | | 114,639 | | 8,968 | | (25,989) | | 19,239 | | (5,130,376) |
| Machinery and equipment | 6.25% | | (4,612,648) | | (556,013) | | 208,582 | | (105,534) | | (105,596) | | 49,452 | | (5,121,757) |
| Furniture and fixtures | 6.64% | | (72,820) | | (9,549) | | 3,883 | | (13,210) | | (2,913) | | 4,066 | | (90,543) |
| Vehicles | 22.85% | | (195,477) | | (166,428) | | 5,797 | | (6,175) | | (8,607) | | 4,157 | | (366,733) |
| | | | (9,412,168) | | (1,497,198) | | 335,302 | | (114,861) | | (143,109) | | 78,191 | | (10,753,843) |
| | | | 13,040,862 | | 1,133,836 | | (64,316) | | 358,779 | | (9,918) | | (168,359) | | 14,290,884 |
| (1) | Weighted average annual rate. |
The amount of capitalized borrowing costs during the year ended December 31, 2023 was R$56,871 (R$93,261 during the year ended December 31, 2022).
The weighted average rate used to determine the amount of borrowing costs subject to capitalization during year ended December 31, 2023 was 10.44% p.a. (9.55% p.a. during the year ended December 31, 2022).
The book value of the property, plant and equipment items that are pledged as collateral for transactions of different natures are set forth below:
| Schedule of book value of the property, plant and equipment | | | | | | | | | | |
| | | Type of collateral | | | | | | 12.31.23 | | 12.31.22 |
| Land | | Financial/tax | | | | | | 87,530 | | 90,757 |
| Buildings, facilities and improvements | | Financial/tax | | | | | | 1,395,846 | | 1,298,326 |
| Machinery and equipment | | Financial/labor/tax/civil | | | | | | 1,464,229 | | 1,376,186 |
| Furniture and fixtures | | Financial/tax | | | | | | 15,102 | | 15,632 |
| Vehicles | | Financial/tax | | | | | | 109 | | 160 |
| | | | | | | | | 2,962,816 | | 2,781,061 |
The intangible assets rollforward, which include right-of-use assets balances (note 17.1), is set forth below:
| Schedule of intangible assets | | | | | | | | | | | | | | | |
| | Average rate (1) | | 12.31.22 | | Additions | | Disposals | | Transfers | | Monetary correction by Hyperinflation | | Exchange rate variation | | 12.31.23 |
| Cost | | | | | | | | | | | | | | | |
| Goodwill | | | 3,474,103 | | - | | - | | - | | 96,843 | | (180,008) | | 3,390,938 |
| Trademarks | | | 1,881,199 | | - | | - | | - | | 114,516 | | (122,462) | | 1,873,253 |
| Non-compete agreement | | | 57,426 | | 465 | | - | | - | | - | | (2,999) | | 54,892 |
| Outgrowers relationship | | | 517 | | - | | - | | - | | - | | - | | 517 |
| Patents | | | 4,878 | | - | | (675) | | - | | 1,335 | | (1,409) | | 4,129 |
| Customer relationship | | | 1,340,251 | | - | | - | | - | | 156,141 | | (278,650) | | 1,217,742 |
| Software | | | 930,090 | | 140 | | (357,470) | | 214,757 | | 33,916 | | (34,385) | | 787,048 |
| Intangible in progress | | | 77,263 | | 166,995 | | (2,757) | | (204,828) | | (657) | | (537) | | 35,479 |
| | | | 7,765,727 | | 167,600 | | (360,902) | | 9,929 | | 402,094 | | (620,450) | | 7,363,998 |
| | | | | | | | | | | | | | | | |
| Amortization | | | | | | | | | | | | | | | |
| Non-compete agreement | 46.01% | | (39,336) | | (11,353) | | - | | - | | - | | 2,848 | | (47,841) |
| Outgrowers relationship | 16.45% | | (347) | | (72) | | - | | - | | - | | - | | (419) |
| Patents | 8.52% | | (3,824) | | (448) | | 675 | | - | | (834) | | 1,236 | | (3,195) |
| Customer relationship | 6.67% | | (622,106) | | (101,575) | | - | | - | | (48,487) | | 136,513 | | (635,655) |
| Software | 43.58% | | (665,504) | | (226,029) | | 356,053 | | - | | (21,656) | | 20,686 | | (536,450) |
| | | | (1,331,117) | | (339,477) | | 356,728 | | - | | (70,977) | | 161,283 | | (1,223,560) |
| | | | 6,434,610 | | (171,877) | | (4,174) | | 9,929 | | 331,117 | | (459,167) | | 6,140,438 |
| (1) | Weighted average annual remaining rate. |
| | | | | | | | | | | | | | | | | | |
| | Average rate (1) | | 12.31.21 | | Additions | | Disposals | | Business combination | | Transfers | | Monetary correction by Hyperinflation | | Exchange rate variation | | 12.31.22 |
| Cost | | | | | | | | | | | | | | | | | |
| Goodwill | | | 3,425,183 | | - | | - | | (4,026) | | - | | 171,880 | | (118,934) | | 3,474,103 |
| Trademarks | | | 1,733,335 | | - | | - | | - | | - | | 203,246 | | (55,382) | | 1,881,199 |
| Non-compete agreement | | | 110,208 | | 19,609 | | (69,950) | | - | | - | | - | | (2,441) | | 57,426 |
| Outgrowers relationship | | | 4,740 | | - | | (4,223) | | - | | 11 | | - | | (11) | | 517 |
| Patents | | | 3,518 | | - | | (1) | | - | | - | | 1,978 | | (617) | | 4,878 |
| Customer relationship | | | 1,119,534 | | - | | - | | - | | - | | 381,289 | | (160,572) | | 1,340,251 |
| Software | | | 770,399 | | 118 | | (92,163) | | - | | 240,679 | | 19,111 | | (8,054) | | 930,090 |
| Intangible in progress | | | 98,716 | | 209,007 | | - | | - | | (224,769) | | 525 | | (6,216) | | 77,263 |
| | | | 7,265,633 | | 228,734 | | (166,337) | | (4,026) | | 15,921 | | 778,029 | | (352,227) | | 7,765,727 |
| | | | | | | | | | | | | | | | | | |
| Amortization | | | | | | | | | | | | | | | | | |
| Non-compete agreement | 62.71% | | (106,749) | | (5,023) | | 69,950 | | - | | - | | - | | 2,486 | | (39,336) |
| Outgrowers relationship | 19.48% | | (4,425) | | (145) | | 4,223 | | - | | - | | - | | - | | (347) |
| Patents | 8.08% | | (2,928) | | (475) | | - | | - | | - | | (715) | | 294 | | (3,824) |
| Customer relationship | 6.92% | | (437,774) | | (102,727) | | - | | - | | - | | (147,827) | | 66,222 | | (622,106) |
| Software | 52.04% | | (563,943) | | (175,768) | | 79,091 | | - | | (5,972) | | (4,925) | | 6,013 | | (665,504) |
| | | | (1,115,819) | | (284,138) | | 153,264 | | - | | (5,972) | | (153,467) | | 75,015 | | (1,331,117) |
| | | | 6,149,814 | | (55,404) | | (13,073) | | (4,026) | | 9,949 | | 624,562 | | (277,212) | | 6,434,610 |
| (1) | Weighted average annual remaining rate. |
14.1 Impairment test
The impairment test of assets is carried out annually based on the discounted cash flow method, which is prepared in order to determine the value in use of the Company’s cash-generating units (“CGU”), which were defined in line with the management format. In 2023, the Company used its budget, strategic and financial planning with projections until 2028 and average perpetuity of the cash generating units of 3.5% p.a., based on the history of recent years, as well as in the economic and financial projections of each market in which the Company operates, in addition to official information from independent and governmental institutions.
The discount rate used by Management to prepare discounted cash flows varied from 11.89% p.a. to 13.62% p.a. according to the CGU. The assumptions presented in the table below were also adopted:
| Schedule of assumptions | | | | | | | | | | |
| | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 |
| Inflation Brazil | | 4.00% | | 3.50% | | 3.50% | | 3.40% | | 3.40% |
| Inflation - United States | | 2.21% | | 2.16% | | 2.16% | | 2.16% | | 2.16% |
| Exchange rate - BRL / USD | | 5.00 | | 5.06 | | 5.13 | | 5.10 | | 5.10 |
The rates presented above don’t consider the effects of income taxes.
Based on Management’s analysis, no impairment adjustments were identified.
In addition to the analysis mentioned above, Management prepared a sensitivity analysis, in which increases and decreases 2 p.p. the operating margin1 (operating income over net sales) and the nominal discount rate and did not identify any scenarios in which an impairment was necessary.
| (1) | The main assumptions contained in the margin include the projected net sales and commodity cost value. |
| (1) | Weighted average annual rate. |
| (2) | Weighted average maturity in years. |
| (3) | Includes interest amounts, monetary restatement of the principal coupon and mark-to-market for debts hedged object to fair value hedge protection. |
| (4) | The Certificates of Agribusiness Receivables (“CRA”) issued by the Company are backed by receivables of BRF S.A. from certain subsidiaries abroad. |
| (5) | The Company, reclassified the export credit facility issued in Reais simultaneously and in connection with a foreign exchange rate swap, resulting essentially in a net cash flow in U.S. Dollars. |
| | | | | | | | | | | | | | | | | | | | |
| | Charges (p.a.) | | Average rate (1) | | WAMT (2) | | 12.31.21 | | Borrowing | | Amortization | | Interest paid | | Interest accrued | | Exchange rate variation | | 12.31.22 |
| Local currency | | | | | | | | | | | | | | | | | | | |
| Working capital | Fixed / CDI | | 10.72%
(5.24% on 12.31.21) | | 0.6 | | 406,962 | | 386,844 | | (392,684) | | (18,473) | | 26,902 | | (365) | | 409,186 |
| Certificate of agribusiness receivables | IPCA | | 11.80%
(16.57% on 12.31.21) | | 1.0 | | 967,948 | | (242) | | - | | (86,620) | | 118,560 | | - | | 999,646 |
| Development bank credit lines | TJLP / TLP/ IPCA / FINAME | | (3.12% on 12.31.21) | | - | | 7,679 | | - | | (6,328) | | (1,472) | | 121 | | - | | - |
| Debentures | CDI / IPCA | | 12.09%
(15.54% on 12.31.21) | | 8.5 | | 4,210,015 | | 1,649,905 | | (70,000) | | (258,593) | | 408,819 | | - | | 5,940,146 |
| Export credit facility | Fixed / CDI | | 9.05%
(10.87% on 12.31.21) | | 5.3 | | 3,516,273 | | 637,000 | | (415,706) | | (272,642) | | 290,544 | | (141,914) | | 3,613,555 |
| | | | | | | | | | | | | | | | | | | | |
| Fiscal incentives | Fixed | | 2.40%
(2.40% on 12.31.21) | | - | | 3,601 | | 100,326 | | (98,667) | | (827) | | 853 | | - | | 5,286 |
| | | | | | | | 9,112,478 | | 2,773,833 | | (983,385) | | (638,627) | | 845,799 | | (142,279) | | 10,967,819 |
| | | | | | | | | | | | | | | | | | | | |
| Foreign currency | | | | | | | | | | | | | | | | | | | |
| Bonds | Fixed / FX USD and EUR | | 4.91%
(4.82% on 12.31.21) | | 11.0 | | 15,544,012 | | - | | (2,416,162) | | (793,711) | | 724,476 | | (1,156,325) | | 11,902,290 |
| Export credit facility | Fixed / LIBOR / FX USD | | 7.10% (3.43% on 12.31.21) | | 0.2 | | 311,385 | | - | | (170,051) | | (7,119) | | 7,609 | | (8,937) | | 132,887 |
| Advances for foreign exchange rate contracts | Fixed / FX USD | | - | | - | | 3,103 | | - | | (2,766) | | - | | (53) | | (284) | | - |
| Working capital | Fixed / FX TRY and USD | | 16.83% (13.35% on 12.31.21) | | 0.7 | | 485,052 | | 618,780 | | (412,058) | | (78,844) | | 74,581 | | (173,507) | | 514,004 |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | 16,343,552 | | 618,780 | | (3,001,037) | | (879,674) | | 806,613 | | (1,339,053) | | 12,549,181 |
| | | | | | | | 25,456,030 | | 3,392,613 | | (3,984,422) | | (1,518,301) | | 1,652,412 | | (1,481,332) | | 23,517,000 |
| | | | | | | | | | | | | | | | | | | | |
| Current | | | | | | | 3,203,068 | | | | | | | | | | | | 3,879,874 |
| Non-current | | | | | | | 22,252,962 | | | | | | | | | | | | 19,637,126 |
| (1) | Weighted average annual rate. |
| (2) | Weighted average maturity in years. |
The maturity schedule of the loans and borrowings is presented on note 23.1.
On December 31, 2023 and on December 31, 2022 the Company did not have any financial covenant clauses related to its loans and borrowings agreements.
| 15.1. | Revolving credit facility |
With the purpose of maintaining a prudential and sustainable short term liquidity position, in line with the adoption of measures to extend its average debt maturity and reduce the cost of debt, on December 27, 2019 the Company retained from Banco do Brasil a revolving credit facility up to the limit of R$1,500,000 for a period of three 3 years, being renewed for another two 2 years on October 26, 2022. The referenced credit facilities can be withdrawn totally or partially, at the Company’s will, whenever necessary. As of December 31, 2023, the credit facilities were available, but unused.
15.2. Guarantees
On December 31, 2023, the amount of bank guarantees contracted by the Company was of R$207,006 (R$447,736 as of December 31, 2022) which were offered mainly in litigations involving the Company’s use of tax credits. These guarantees have an average cost of 1.64% p.a. (1.92% p.a. as of December 31, 2022).
| 15.3. | Repurchase of senior notes |
During the year ended on December 31, 2023, the Company repurchased the following senior notes: 4.75% Senior Notes due in 2024 and 4.35% due in 2026. The result of the repurchases is set forth below:
| | | | | | | | | | | | | |
| Instrument | | Currency | | Maturity | | Notional repurchased | | Outstanding notional (1) |
| | | | (loan currency) | | (Reais) (2) | | (loan currency) | | (Reais) (3) |
| | | | | | | | | | | | | |
| BRF S.A. - BRFSBZ 4.75 | | USD | | 2024 | | 295,363 | | 1,521,887 | | - | | - |
| BRF S.A. - BRFSBZ 4.35 | | USD | | 2026 | | 200,000 | | 984,580 | | 299,282 | | 1,448,914 |
| (1) | Outstanding notional after the tender offer. |
| (2) | Represented by the amount in the original loan currency, translated by the foreign exchange rate at the settlement date of the repurchase. |
| (3) | Represented by the amount in the original loan currency, translated by the foreign exchange rate at the settlement date 12.31.23. |
The Company paid the amount equivalent to R$2,515,194 for the repurchase these liabilities, which includes notional, interest, premium and taxes. The repurchase generated a financial income in the amount of R$46,768 referring to the discount on the repurchase and financial expenses of R$2,175 related to financial taxes and R$9,034 with the write-off of the costs of issuance.
| 16. | Trade accounts payable |
The Company has agreements with several financial institutions that allow the suppliers to anticipate their receivables and, therefore, transfer the right to receive invoices with financial institutions (“Supply Chain Finance” or “Program”). The suppliers may choose whether to participate and if so, with which financial institution, with no participation by BRF.
The Program can generate benefits in the commercial relations of BRF and its suppliers, such as preference and priority of supply in case of restricted supply, better commercial conditions, among others, without modification to the commercial essence of the transaction.
Invoices included in the Program are paid according to the same price and term conditions negotiated with its suppliers, without incurring any charge to the Company, so that there are no changes in commercial conditions after negotiation and invoicing of goods or services.
Invoices included in the Supply Chain Finance were R$4,941,716 on December 31, 2023 (R$5,794,841 on December 31, 2022).
The Company measures and record the adjustment to present value for all its commercial operations carried out in installments, specifying financial and operational components.
As from 2023, including the December 31, 2022 comparative in the amount of R$1,393,137, the Company presents all balances under the supply chain finance program within Trade accounts payable on the balance sheet, with disclosure of such balances in the note herein.
The Company is lessee in several lease agreements for forest lands, offices, distribution centers, outgrowers, vehicles, among others. Some contracts have a renewal option for an additional period at the end of the agreement, established by contractual amendments. Automatic renewals or renewals for undetermined periods are not allowed.
The contract clauses mentioned, with respect to renewal, readjustment and purchase option, are contracted 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.
The right-of-use assets as set forth below are part of the balances of property, plant and equipment and intangible assets (notes 13 and 14).
| Schedule of right-of-use assets | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Average rate (1) | | 12.31.22 | | Additions | | Disposals | | Transfer | | Monetary correction by Hyperinflation | | Exchange rate variation | | 12.31.23 |
| Cost | | | | | | | | | | | | | | | |
| Land | | | 139,740 | | 9,330 | | (11,883) | | - | | 1,286 | | (8,401) | | 130,072 |
| Buildings, facilities and improvements | | | 4,031,143 | | 1,031,073 | | (675,341) | | (27,655) | | 12,940 | | (26,825) | | 4,345,335 |
| Machinery and equipment | | | 47,688 | | 241,292 | | (18,148) | | 27,655 | | 575 | | (514) | | 298,548 |
| Vehicles | | | 602,116 | | 138,388 | | (294,854) | | - | | 4,992 | | (28,084) | | 422,558 |
| Software | | | 12,303 | | - | | (12,303) | | - | | - | | - | | - |
| | | | 4,832,990 | | 1,420,083 | | (1,012,529) | | - | | 19,793 | | (63,824) | | 5,196,513 |
| | | | | | | | | | | | | | | | |
| Depreciation | | | | | | | | | | | | | | | |
| Land | 7.37% | | (44,006) | | (10,680) | | 11,405 | | - | | 277 | | 1,554 | | (41,450) |
| Buildings, facilities and improvements | 13.56% | | (1,784,777) | | (574,800) | | 597,221 | | 15,686 | | (3,786) | | 14,260 | | (1,736,196) |
| Machinery and equipment | 19.40% | | (27,283) | | (52,424) | | 14,795 | | (15,686) | | (1,957) | | 605 | | (81,950) |
| Vehicles | 35.27% | | (346,907) | | (179,841) | | 289,744 | | - | | (7,879) | | 17,973 | | (226,910) |
| Software | - | | (10,814) | | (1,487) | | 12,301 | | - | | - | | - | | - |
| | | | (2,213,787) | | (819,232) | | 925,466 | | - | | (13,345) | | 34,392 | | (2,086,506) |
| | | | 2,619,203 | | 600,851 | | (87,063) | | - | | 6,448 | | (29,432) | | 3,110,007 |
| (1) | Weighted average annual rate. |
| | | | | | | | | | | | | | |
| | Average rate (1) | | 12.31.21 | | Additions | | Disposals | | Monetary correction by hyperinflation | | Exchange rate variation | | 12.31.22 |
| Cost | | | | | | | | | | | | | |
| Land | | | 145,394 | | 732 | | (2,489) | | 3,534 | | (7,431) | | 139,740 |
| Buildings | | | 3,223,625 | | 927,818 | | (116,707) | | 18,933 | | (22,526) | | 4,031,143 |
| Machinery and equipment | | | 117,412 | | 4,086 | | (74,193) | | 815 | | (432) | | 47,688 |
| Vehicles | | | 369,979 | | 246,075 | | (5,477) | | 6,279 | | (14,740) | | 602,116 |
| Software | | | 79,731 | | - | | (67,428) | | - | | - | | 12,303 |
| | | | 3,936,141 | | 1,178,711 | | (266,294) | | 29,561 | | (45,129) | | 4,832,990 |
| | | | | | | | | | | | | | |
| Depreciation | | | | | | | | | | | | | |
| Land | 8.95% | | (36,439) | | (12,334) | | 2,401 | | 1,090 | | 1,276 | | (44,006) |
| Buildings | 5.16% | | (1,383,968) | | (510,875) | | 104,540 | | (10,225) | | 15,751 | | (1,784,777) |
| Machinery and equipment | 25.60% | | (73,385) | | (27,726) | | 74,111 | | (475) | | 192 | | (27,283) |
| Vehicles | 23.19% | | (189,817) | | (161,992) | | 4,383 | | (5,496) | | 6,015 | | (346,907) |
| Software | 76.58% | | (61,193) | | (3,998) | | 54,377 | | - | | - | | (10,814) |
| | | | (1,744,802) | | (716,925) | | 239,812 | | (15,106) | | 23,234 | | (2,213,787) |
| | | | 2,191,339 | | 461,786 | | (26,482) | | 14,455 | | (21,895) | | 2,619,203 |
| (1) | Weighted average annual rate. |
17.2. Lease liabilities
| Schedule of lease liabilities | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Weighted average
interest rate (p.a.) | | WAM (1) | | 12.31.22 | | Additions | | Payments | | Interest paid | | Interest accrued | | Disposals | | Exchange rate variation | | 12.31.23 |
| Land | - | | - | | 112,476 | | 9,330 | | (6,844) | | (9,404) | | 9,404 | | (1,792) | | (6,475) | | 106,695 |
| Buildings, facilities and improvements | - | | - | | 2,634,074 | | 1,031,073 | | (530,779) | | (142,245) | | 268,659 | | (77,896) | | (8,024) | | 3,174,862 |
| Machinery and equipment | - | | - | | 22,565 | | 241,292 | | (34,756) | | (28,660) | | 28,660 | | (3,533) | | (296) | | 225,272 |
| Vehicles | - | | - | | 274,215 | | 138,388 | | (168,473) | | (16,677) | | 16,677 | | (16,841) | | (12,271) | | 215,018 |
| Software | - | | - | | 1,604 | | - | | (1,604) | | (45) | | 45 | | - | | - | | - |
| | 7.5% | | 7.6 | | 3,044,934 | | 1,420,083 | | (742,456) | | (197,031) | | 323,445 | | (100,062) | | (27,066) | | 3,721,847 |
| | | | | | | | | | | | | | | | | | | | |
| Current | | | | | 676,864 | | | | | | | | | | | | | | 944,326 |
| Non-current | | | | | 2,368,070 | | | | | | | | | | | | | | 2,777,521 |
| (1) | Weighted average maturity in years. |
| | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Weighted average
interest rate (p.a.) | | WAM (1) | | 12.31.21 | | Additions | | Payments | | Interest paid | | Interest accrued | | Disposals | | Exchange rate variation | | 12.31.22 |
| Land | - | | - | | 126,293 | | 732 | | (7,709) | | (9,653) | | 9,653 | | (166) | | (6,674) | | 112,476 |
| Buildings | - | | - | | 2,095,375 | | 935,916 | | (458,434) | | (102,740) | | 191,431 | | (19,395) | | (8,079) | | 2,634,074 |
| Machinery and equipment | - | | - | | 45,218 | | 4,086 | | (25,609) | | (2,709) | | 2,709 | | (10) | | (1,120) | | 22,565 |
| Vehicles | - | | - | | 192,694 | | 246,075 | | (153,992) | | (15,830) | | 15,830 | | (1,362) | | (9,200) | | 274,215 |
| Software | - | | - | | 19,666 | | - | | (4,102) | | (249) | | 249 | | (13,960) | | - | | 1,604 |
| | 7.2% | | 7.3 | | 2,479,246 | | 1,186,809 | | (649,846) | | (131,181) | | 219,872 | | (34,893) | | (25,073) | | 3,044,934 |
| | | | | | | | | | | | | | | | | | | | |
| Current | | | | | 471,956 | | | | | | | | | | | | | | 676,864 |
| Non-current | | | | | 2,007,290 | | | | | | | | | | | | | | 2,368,070 |
| (1) | Weighted average maturity in years. |
| 17.3. | Lease liabilities maturity schedule |
The maturity schedule of the minimum required future payments is presented below:
| Schedule of Lease liabilities maturity | | | |
| | |
| | | | |
| | | | 12.31.23 |
| Current | | | 944,326 |
| Non-current | | | 2,777,521 |
| 2025 | | | 686,951 |
| 2026 | | | 510,645 |
| 2027 | | | 425,753 |
| 2028 | | | 285,951 |
| 2029 onwards | | | 868,221 |
| | | | 3,721,847 |
| 17.4. | Amounts recognized in the statement of income |
The amounts directly recognized in the statement of income presented below relate to items not capitalized, including: low-value assets, short-term leases and leases with variable payments.
| Schedule of amounts recognized in the statement of income | | | | | | |
| | | | | | | |
| | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Variable payments not included in the lease liabilities | | 186,146 | | 217,498 | | 282,732 |
| Expenses related to short-term leases | | 97,511 | | 124,451 | | 171,733 |
| Expenses related to low-value assets | | 26,454 | | 13,469 | | 4,681 |
| Amounts recognized in the statement of income | | 310,111 | | 355,418 | | 459,146 |
18. Share-based payment
The Company grants to its eligible employees, restricted stocks, ruled by plans approved at the General Shareholder’s Meeting, with the purpose of: (i) stimulating the expansion, success and achievement of the Company’s social objectives; (ii) aligning the interests of the Company’s shareholders with those of the eligible employees; and (iii) enabling the Company and its subsidiaries to attract and retain the employees. The limit of grants is 2.5% of the common, registered, book-entry shares with no par value, representative of the Company’s total capital stock.
Annually, or whenever it deems appropriate, the Board of Directors approves the grant of restricted stocks, electing the beneficiaries in favor of which the Company will transfer the restricted stocks, establishing the terms, quantities and conditions of acquisition of rights related to restricted stocks.
The vesting is conditional to the: (i) continuity of the employment relationship with the Company for three years after the grant date; (ii) achievement of a minimum shareholder return defined by the Board of Directors in the granting agreements and measured at the end of the vesting period; or (iii) any other conditions determined by the Board of Directors in each grant.
The breakdown of the outstanding shares granted is set forth as follows:
| Schedule of breakdown of the outstanding shares granted | | | | | | | | |
| Date | | Quantity | | Grant (1) |
| Grant | | Vesting date | | Shares granted | | Outstanding shares | | Fair value of the shares |
| | | | | | | | | |
| 07/01/21 | | 07/01/24 | | 2,883,737 | | 368,287 | | 28.58 |
| 07/01/22 | | 07/01/25 | | 4,703,472 | | 2,056,022 | | 14.11 |
| 06/01/23 | | 06/01/26 | | 4,726,960 | | 4,726,960 | | 7.38 |
| 07/01/23 | | 07/01/26 | | 2,108,504 | | 2,082,859 | | 8.98 |
| | | | | 14,422,673 | | 9,234,128 | | |
| (1) | Amounts expressed in Brazilian Reais. |
The rollforward of the granted options and shares for the year ended on December 31, 2023, is presented as follows:
| Schedule of roll forward granted options | | |
| | | |
| | | |
| Outstanding stocks as of December 31, 2021 | | 5,395,519 |
| Granted | | |
| Restricted stocks - July 2022 | | 4,703,472 |
| Exercised / Delivered: | | |
| Restricted stocks – grant of June, 2021 | | (189,285) |
| Restricted stocks – grant of June, 2020 | | (317,386) |
| Restricted stocks – grant of July, 2019 | | (83,175) |
| Restricted stocks – grant of June, 2019 | | (107,309) |
| Forfeiture (1) : | | |
| Restricted stocks – grant of July, 2022 | | (947,335) |
| Restricted stocks – grant of July, 2021 | | (1,554,424) |
| Restricted stocks – grant of June, 2020 | | (1,425,333) |
| Restricted stocks – grant of September, 2019 | | (22,867) |
| Restricted stocks - grant of July, 2019 | | (237,142) |
| Restricted stocks – grant of June, 2019 | | (82,203) |
| Outstanding stocks as of December 31, 2022 | | 5,132,532 |
| Granted | | |
| Restricted stocks - July 2023 | | 2,108,504 |
| Restricted stocks - June 2023 | | 4,726,960 |
| Exercised / Delivered: | | |
| Restricted stocks – grant of July, 2022 | | (282,887) |
| Restricted stocks – grant of July, 2021 | | (106,713) |
| Restricted stocks – grant of June, 2020 | | (149,618) |
| Forfeiture (1) : | | |
| Restricted stocks – grant of July, 2023 | | (25,645) |
| Restricted stocks – grant of July, 2022 | | (1,417,225) |
| Restricted stocks – grant of July, 2021 | | (463,260) |
| Restricted stocks – grant of June, 2020 | | (288,520) |
| Outstanding stocks as of December 31, 2023 | | 9,234,128 |
| (1) | The forfeitures are related to the resignation of eligible executive before the end of the vesting period. |
The Company has registered under shareholders’ equity, the fair value of share-based compensation plans in the amount of R$203,374 (R$195,655 as of December 31, 2022) and in the amount of R$19,821 under non-current liabilities (R$15,584 of December 31, 2022). In the statement of income for the year ended on December 31, 2023 the amount recognized as expense was R$38,499 (R$29,390 for the year ended December 31, 2022).
| 19.1. | Supplementary pension plans |
The Company is the sponsor of the following pension plans for its employees and executives: i) Plan II – Variable Contribution with Defined Benefit option – closed for admissions; ii) Plan III – Defined Contribution – open for admissions; and iii) FAF Plan – Defined Benefit - closed for admissions.
These plans are managed by BRF Previdência, a closed supplementary pension entity, of non-economic and non-profit nature, and through its Deliberative Board, is responsible for defining pension objectives and policies, as well as establishing fundamental guidelines aa well as organization, operation and management rules. The Deliberative Board is composed of representatives from the sponsor and participants, in the proportion of 2/3 and 1/3 respectively.
| 19.1.1. | Defined benefit plans |
The Plan II is a variable contribution plan structured as defined contribution during the accumulation of mathematic provisions and at the benefit grant date the beneficiary may choose to convert the accumulated balance in a lifetime monthly income (defined benefit). The main related actuarial risks are (i) survival rates above the mortality tables and (ii) actual return on equity below the actual discount rate.
The FAF (Fundação Attílio Francisco Xavier Fontana) Plan aims to complement the benefit paid by the Brazilian Social Security (“INSS – Instituto Nacional de Seguridade Social”). The benefit is calculated based on the
income of the participant and the amounts vary according to the type of the retirement and other criteria defined by the plan. The main actuarial risks related are: (i) survival rates above the mortality tables, (ii) turnover lower than expected, (iii) salary growth higher than expected, (iv) actual return on equity below the actual discount rate, (v) changes to the rules of social security, and (vi) actual family composition of the retired employee or executive different than the established assumption.
The actuarial calculations of the plans managed by BRF Previdência are prepared annually by independent specialists and reviewed by Management, according to the rules in force.
In the case of a deficit in the plans results, in amounts higher than those defined by legislation, the sponsor, the participants and the beneficiaries, must support the plan according to the proportion of their contributions.
The economic benefit presented as an asset considers only the portion of the surplus that is actually recoverable. The recovery of the surplus on the plans is through reductions in future contributions.
| 19.1.2. | Defined contribution plan |
The Plan III is a defined contribution plan, in which the contributions are known and the benefit depends directly on the contributions made by participants and sponsors, on the contribution time and on the returns obtained through the investment of the contributions. The contributions made by the Company in the year ended December 31, 2023 amounted R$26,911 (R$25,507 for the year ended December 31, 2022). On December 31, 2023, the plan had 35,644 participants (39,715 participants as of December 31, 2022).
When the participants of the Plans II and III terminate the employment relationship with the sponsor, the unused balance of the contributions made by the sponsor forms a surplus fund that may be used to compensate future contributions of the sponsor.
| 19.1.3. | Rollforward of defined benefit and variable contribution |
The assets and actuarial liabilities, as well as the movement of the related rights and obligations are presented below:
| Schedule of assets and actuarial liabilities | | | | | | | |
| | FAF | | Plan II |
| | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Composition of actuarial assets and liabilities | | | | | | | |
| Present value of actuarial liabilities | 3,348,786 | | 3,121,348 | | 21,789 | | 20,822 |
| Fair value of assets | (3,647,431) | | (3,603,611) | | (22,845) | | (22,745) |
| (Surplus) Deficit | (298,645) | | (482,263) | | (1,056) | | (1,923) |
| Irrecoverable surplus - (asset ceiling) | 298,645 | | 482,263 | | 1,056 | | 1,923 |
| Net actuarial (assets) liabilities | - | | - | | - | | - |
| | | | | | | | |
| Rollforward of irrecoverable surplus | | | | | | | |
| Beginning balance of irrecoverable surplus | 482,263 | | 207,230 | | 1,923 | | - |
| Interest on irrecoverable surplus | 47,021 | | 18,152 | | 187 | | - |
| Changes in irrecoverable surplus during the year | (230,639) | | 256,881 | | (1,054) | | 1,923 |
| Ending balance of irrecoverable surplus | 298,645 | | 482,263 | | 1,056 | | 1,923 |
| | | | | | | | |
| Rollforward of present value of actuarial liabilities | | | | | | | |
| Beginning balance of the present value of liabilities | 3,121,348 | | 3,340,497 | | 20,822 | | 23,981 |
| Interest on actuarial obligations | 293,231 | | 283,241 | | 1,935 | | 1,997 |
| Current service cost | 18,153 | | 23,189 | | - | | - |
| Benefit paid | (233,865) | | (213,804) | | (1,947) | | (1,838) |
| Actuarial losses - experience | 81,782 | | (36,292) | | 460 | | (1,358) |
| Actuarial (gains) losses - economic hypotheses | 68,137 | | (242,957) | | 519 | | (1,414) |
| Actuarial (gains) losses - demographic hypothesis | - | | (32,526) | | - | | (546) |
| Ending balance of actuarial liabilities | 3,348,786 | | 3,121,348 | | 21,789 | | 20,822 |
| | | | | | | | |
| Rollforward of the fair value of the assets | | | | | | | |
| Beginning balance of the fair value of plan assets | (3,603,611) | | (3,547,727) | | (22,745) | | (22,298) |
| Interest income on assets plan | (340,252) | | (301,394) | | (2,122) | | (1,851) |
| Benefit paid | 233,865 | | 213,804 | | 1,947 | | 1,838 |
| Return on assets higher (lower) than projection | 62,567 | | 31,706 | | 75 | | (434) |
| Ending Balance of the fair value of the assets | (3,647,431) | | (3,603,611) | | (22,845) | | (22,745) |
| | | | | | | | |
| Rollforward of comprehensive income | | | | | | | |
| Beginning balance | 23,190 | | 26,741 | | 3,385 | | (2,485) |
| Reversion to accumulated losses | (23,190) | | (26,741) | | (3,385) | | 2,485 |
| Actuarial gains (losses) | (149,919) | | 311,776 | | (979) | | 2,772 |
| Return on assets higher (lower) than projection | (62,567) | | (31,705) | | (75) | | 434 |
| Changes on irrecoverable surplus | 230,639 | | (256,881) | | 1,054 | | 179 |
| Ending balance of comprehensive income | 18,153 | | 23,190 | | - | | 3,385 |
| | | | | | | | |
| Costs recognized in statement of income | | | | | | | |
| Current service costs | (18,153) | | (23,190) | | - | | - |
| Interest on actuarial obligations | (293,231) | | (283,241) | | (1,935) | | (1,997) |
| Projected return on assets | 340,252 | | 301,394 | | 2,122 | | 1,851 |
| Interest on irrecoverable surplus | (47,021) | | (18,153) | | (187) | | - |
| Costs recognized in statement of income | (18,153) | | (23,190) | | - | | (146) |
| | | | | | | | |
| Estimated costs for the next year | | | | | | | |
| Costs of defined benefit | (19,226) | | (18,153) | | - | | - |
| Estimated costs for the next year | (19,226) | | (18,153) | | - | | - |
| 19.1.4. | Actuarial assumptions and demographic data |
The main actuarial assumptions and demographic data used in the actuarial calculations are presented below:
| 19.1.5. | The composition of the investment portfolios |
The composition of the investment portfolios is presented below:
| Schedule of composition of the investment portfolios | | | | | | | | | | | | | | | | |
| | | FAF | | Plan II |
| | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Composition of the fund's portfolio | | | | | | | | | | | | | | | | |
| Fixed income | | 2,607,913 | | 71.5% | | 2,385,591 | | 66.2% | | 20,629 | | 90.3% | | 19,969 | | 87.8% |
| Variable income | | 339,211 | | 9.3% | | 421,622 | | 11.7% | | 937 | | 4.1% | | 1,115 | | 4.9% |
| Real estate | | 368,391 | | 10.1% | | 342,343 | | 9.5% | | 23 | | 0.1% | | 23 | | 0.1% |
| Other | | 331,916 | | 9.1% | | 454,055 | | 12.6% | | 1,256 | | 5.5% | | 1,638 | | 7.2% |
| | | 3,647,431 | | 100.0% | | 3,603,611 | | 100.0% | | 22,845 | | 100.0% | | 22,745 | | 100.0% |
| % of nominal return on assets | | 9.44% | | | | 8.50% | | | | 9.33% | | | | 8.30% | | |
| 19.1.6. | Expected benefit payments and average term of payments |
The following amounts represent the expected benefit payments for future periods and the average duration of the plan’s obligations:
| 19.1.7. | Sensitivity analysis of the defined benefit plan - FAF |
The quantitative sensitivity analysis regarding the relevant assumptions of defined benefit plan – FAF on December 31, 2023 is presented below:
| Schedule of quantitative sensitivity analysis regarding the relevant assumptions of defined benefit plan FAF | | | | | | | | | | |
| | | Assumptions utilized | | Variation of (+1%) | | Variation of (-1%) |
| Relevant assumptions | | | Average rate | | Actuarial liabilities | | Average rate | | Actuarial liabilities |
| Benefit plan - FAF | | | | | | | | | | |
| Discount rate | | 9.54% | | 10.54% | | 3,031,526 | | 8.54% | | 3,729,735 |
| Wage growth rate (1) | | 1.06% | | 2.06% | | 3,373,686 | | 0.06% | | 3,322,461 |
(1) Actual rate.
| 19.2. | Employee benefits: description and characteristics of benefits and associated risks |
| Schedule of employee benefits | | | | | | | |
| | | | Liabilities |
| | | | | | 12.31.23 | | 12.31.22 |
| Medical assistance | | | | | 66,245 | | 119,729 |
| F.G.T.S. Penalty (1) | | | | | 70,535 | | 60,657 |
| Award for length of service | | | | | 125,991 | | 112,225 |
| Other | | | | | 278,050 | | 228,701 |
| | | | | | 540,821 | | 521,312 |
| | | | | | | | |
| Current | | | | | 86,423 | | 64,367 |
| Non-current | | | | | 454,398 | | 456,945 |
| (1) | FGTS – Government Severance Indemnity Fund for Employees. |
The Company has the policy to offer the following post-employment and other employee benefits plans in addition to the pension plans, which are measured by actuarial calculation and recognized in the financial statement:
19.2.1. Medical plan
The Company offers a medical plan with fixed contribution to the retired employees according to the Law No. 9,656/98.
It is ensured to the retired employee that has contributed to the health plan during the employment relationship for at least 10 years, the right of maintenance as beneficiary, on the same conditions of coverage existing when the employment contract was in force. The main related actuarial risks are (i) survival rates above the mortality tables, (ii) turnover lower than expected and (iii) medical costs growth higher than expected.
19.2.2. F.G.T.S. penalty by dismissal on retirement
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. However, when the employee is retired through INSS and is dismissed from the Company, the Company may, in certain cases, enter into a mutual agreement granting the payment of the benefit equivalent to the 20% penalty on the F.G.T.S. balance. The main related actuarial risks are: (i) survival rates above the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
19.2.3. Award for length of service
The Company has the policy to reward active employees that attain at least 10 years of services rendered and subsequently every 5 years, with an additional remuneration. The main related actuarial risks rare, (i) turnover lower than expected, (ii) salary growth higher than expected and (iii) survival rates above the mortality tables.
19.2.4. Other - Brazil
| i. | Retirement compensation |
On retirement, employees with more than 8 years of services rendered to the Company are eligible for additional compensation. The main actuarial related risks are (i) turnover lower than expected, (ii) salary growth higher than expected and (iii) survival rates above the mortality tables.
The Company offers life insurance benefits to the employees who, at the time of their termination, are retired and during the employment contract opted for the insurance, with the period of benefit varying from 2 to 3 years. The main related actuarial risks are (i) survival rates above the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
19.2.5. Other – foreign entities
The Company has a liability recorded for defined benefit plans to certain subsidiaries located in Turkey, Saudi Arabia, Qatar, United Arab Emirates, Oman and Kuwait, related to end of service payments when certain conditions are met, which varies based on the labor laws for each country. The main related actuarial risks
are: (i) survival rates above the mortality tables, (ii) turnover lower than expected and (iii) salary growth higher than expected.
19.2.6. Rollforward of actuarial liabilities
The rollforward of actuarial liabilities related to other benefits, which was prepared based on actuarial report reviewed by the Management, are as follows:
| (1) | Considers the sum of the retirement compensation, life insurance benefits and compensation for time of service granted in certain subsidiaries of Company. |
19.2.7. Actuarial assumptions and demographic data
The main actuarial assumptions and demographic data used in the actuarial calculations are summarized below:
| Schedule of main actuarial assumptions and demographic data | | | | | | | | | | | | |
| | | Medical plan | | F.G.T.S. penalty | | Other (1) |
| Actuarial assumptions | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Economic hypothesis | | | | | | | | | | | | |
| Discount rate | | 9.61% | | 9.73% | | 9.42% | | 9.66% | | 13.77% | | 8.71% |
| Inflation rate | | 3.50% | | 3.50% | | 3.50% | | 3.50% | | 11.75% | | 4.88% |
| Medical inflation | | 6.60% | | 6.60% | | N/A | | N/A | | N/A | | N/A |
| Wage growth rate | | N/A | | N/A | | 3.50% | | 3.50% | | 8.34% | | 4.88% |
| F.G.T.S. balance growth | | N/A | | N/A | | 3.41% | | 3.70% | | N/A | | N/A |
| Demographic hypothesis | | | | | | | | | | | | |
| Mortality schedule | | AT-2000 Basic by gender | | AT-2000 Basic by gender | | AT-2000 Basic by gender | | AT-2000 Basic by gender | | | | |
| Disability entry schedule | | N/A | | N/A | | Vindas Álvaro's attenuated 30% | | Vindas Álvaro's attenuated 30% | | | | |
| Schedule of turnover - BRF's historical | | 2023 | | 2022 | | 2023 | | 2022 | | | | |
| Demoraphic data | | | | | | | | | | | | |
| Number of active participants | | 1,015 | | 13,776 | | 92,120 | | 91,490 | | | | |
| Number of assisted beneficiary participants | | 1,415 | | 1,610 | | - | | - | | | | |
19.2.8. Expected benefit payments and average duration 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 obligations:
| Schedule of future payments | | | | | | | | | | |
| Payments | | Medical plan | | F.G.T.S. penalty | | Award for length of service | | Other | | Total |
| | | | | | | | | | | |
| 2024 | | 2,016 | | 20,718 | | 20,704 | | 42,985 | | 86,423 |
| 2025 | | 2,350 | | 4,955 | | 16,507 | | 19,058 | | 42,870 |
| 2026 | | 2,773 | | 5,652 | | 16,355 | | 20,007 | | 44,787 |
| 2027 | | 3,212 | | 6,385 | | 15,453 | | 21,680 | | 46,730 |
| 2028 | | 3,603 | | 6,237 | | 18,939 | | 22,861 | | 51,640 |
| 2029 to 2033 | | 25,324 | | 41,929 | | 86,808 | | 221,431 | | 375,492 |
| Weighted average duration - in years | | 15.62 | | 5.59 | | 5.15 | | 9.61 | | |
19.2.9. Sensitivity analysis of post-employment plans
The Company prepared sensitivity analysis regarding the relevant assumptions of the plans as of December 31, 2023, as presented below:
| Schedule of sensitivity analysis post-employment plans | | | | | | | | | | |
| | | Assumptions utilized | | (+) Variation | | (-) Variation |
| Relevant assumptions | | | Average (%) | | Actuarial liabilities | | Average (%) | | Actuarial liabilities |
| Medical plan | | | | | | | | | | |
| Discount rate | | 9.61% | | 10.61% | | 56,322 | | 8.61% | | 78,929 |
| Medical inflation | | 6.60% | | 7.60% | | 78,902 | | 5.60% | | 56,260 |
| Award for length of service | | | | | | | | | | |
| Discount rate | | 9.42% | | 10.42% | | 120,327 | | 8.42% | | 132,249 |
| Turnover | | Historical | | +3% | | 107,233 | | -3% | | 151,251 |
| F.G.T.S. penalty | | | | | | | | | | |
| Discount rate | | 9.42% | | 10.42% | | 67,125 | | 8.42% | | 74,375 |
| Wage growth rate | | 3.50% | | 4.50% | | 71,226 | | 2.50% | | 69,899 |
| Turnover | | Historical | | +3% | | 59,720 | | -3% | | 86,071 |
20. Provision for tax, civil and labor risks
The Company and its subsidiaries are involved in certain legal matters arising in the normal course of business, which include tax, social security, labor, civil, environmental, administrative and other processes.
Company’s Management believes that, based on the elements existing at the base date of these financial statements, the provision for tax, labor, civil, environmental, administrative and other risks, is sufficient to cover eventual losses with administrative and legal proceedings, as set forth below.
The rollforward of the provisions for tax, labor, civil, environmental, administrative and other risks, classified as with probable loss, and contingent liabilities is presented below:
| Schedule of provisions for tax | | | | | | | | | | | | | | | | | | | |
| | Tax | | Labor | | Civil and other | | Contingent liabilities (1) | | Total |
| | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Beginning balance | 399,675 | | 400,101 | | 526,710 | | 628,767 | | 358,304 | | 357,013 | | 130,848 | | 131,751 | | 1,415,537 | | 1,517,632 |
| Additions | 100,454 | | 116,269 | | 359,512 | | 408,903 | | 55,734 | | 59,302 | | - | | - | | 515,700 | | 584,474 |
| Reversals | (66,405) | | (86,165) | | (240,152) | | (332,819) | | (48,480) | | (67,826) | | (38,016) | | (903) | | (393,053) | | (487,713) |
| Payments | (164,104) | | (75,249) | | (270,771) | | (311,047) | | (43,045) | | (41,064) | | - | | - | | (477,920) | | (427,360) |
| Interest | 52,426 | | 44,714 | | 62,135 | | 133,987 | | 30,128 | | 50,911 | | - | | - | | 144,689 | | 229,612 |
| Exchange rate variation | (51) | | 5 | | (1,505) | | (1,081) | | (227) | | (32) | | - | | - | | (1,783) | | (1,108) |
| Ending balance | 321,995 | | 399,675 | | 435,929 | | 526,710 | | 352,414 | | 358,304 | | 92,832 | | 130,848 | | 1,203,170 | | 1,415,537 |
| | | | | | | | | | | | | | | | | | | | |
| Current | | | | | | | | | | | | | | | | | 720,187 | | 867,294 |
| Non-current | | | | | | | | | | | | | | | | | 482,983 | | 548,243 |
| (1) | Contingent liabilities recognized at fair value as of the acquisition date, arising from the business combination with Sadia, Hercosul and Mogiana. |
| 20.1. | Contingencies with probable losses |
20.1.1. Tax
The tax contingencies classified as probable losses relate to the following main legal proceedings:
ICMS: The Company is involved in administrative and judicial disputes related to the ICMS tax on the acquisition of goods for consumption and fixed assets, presumed credit, credit on electrical energy consumed in distribution center, lack of proof of export within the legal deadline, defeat, tax substitution, isolated fines, rate increase and others, in the amount of R$87,661 (R$64,088 on December 31, 2022).
PIS and COFINS: The Company is involved in administrative and judicial disputes related to the use of certain tax credits arising from the acquisition of supplies to offset federal taxes payable, in the amount of R$131,271 (R$157,121 as of December 31, 2022).
Other tax contingencies: The Company has other provisions for tax claims related to the payment of social security contribution, INCRA, debts included in the government regularization program (REFIS) with deposits awaiting consolidation and conversion into payment, differences in supplementary fiscal obligations, disputes related to presumed IPI credit, revenue omission - IRPJ estimate, import taxes, IOF and others, in the amount of R$103,063 (R$178,466 as of December 31, 2022).
20.1.2. Labor
The Company is defendant in several labor claims either filed by individuals or by the Public Prosecutors Office, mainly related to overtime, thermal rest, unhealthy environment, occupational accidents, among others. None of these claims is individually significant. The Company recorded a provision based on past history of payments, statistical models and on prognosis of loss.
20.1.3. Civil and others
Civil and other (environmental, administrative, regulatory, real estate, intellectual property, etc.) contingencies are mainly related to litigations containing allegations of contractual breaches and noncompliance of legal obligations of several natures as disputes arising from contracts in general, intellectual property disputes, regulatory issues, environmental and real state, consumer relations, among others. The claims are mostly for compensation of losses and damages, application of penalties and compliance with obligations to do or not to do. None of these claims is individually significant.
| 20.2. | Contingencies with possible losses |
The Company is involved in contingencies for which losses are possible, in accordance with the assessment prepared by Management with support from legal advisors. On December 31, 2023, the total amount of contingencies classified as possible was R$18,627,512 (R$15,343,060 as of December 31, 2022), of which solely the ones arising from the business combination with Sadia, Hercosul and Mogiana are provisioned, measured by the estimated fair value at the business combination date: R$92,832 (R$130,848 as of December 31, 2022). The remaining possible contingencies are presented below.
20.2.1. Tax
The tax contingencies for which losses have been assessed as possible amounted to R$16,082,532 as of December 31, 2023 (R$13,247,512 as of December 31, 2022). The most relevant cases are set forth below:
PIS and COFINS: The Company discusses alleged differences charged under PIS/COFINS on (i) sales of seasoned meats, pasta and pies; (ii) presumed ICMS credits; (iii) disallowances of presumed credits from agro-industrial activities; (iv) credit disallowance on freight on transfer; (v) disallowances of credits for various inputs and services in view of the restriction by the Receita Federal do Brasil (“RFB”) on the concept of inputs; extemporaneous and other credits, totaling R$8,740,838 (R$7,055,855 on December 31, 2022).
ICMS: The Company is involved in disputes processes totaling R$4,042,445 (R$3,163,037 as of December 31, 2022) related to: (i) non-acceptance of ICMS credits in interstate sales from states that unilaterally granted fiscal benefits without the approval of the National Finance Policy Council (“CONFAZ”), the so-called “guerra fiscal” in the amount of R$17,464 (R$24,370 as of December 31, 2022); (ii) lack of evidence of exports in the amount of R$67,766 (R$77,163 as of December 31, 2022); (iii) infraction notices from State of Rio de Janeiro, for the period from 2014 to 2018, related to the supposed non-compliance of Agreement Terms (“TARE”) regarding tax benefits, in the amount of R$680,058 (R$621,261 as of December 31, 2022); (iv) Public Civil Action in Rio de Janeiro due do the use of tax benefits, in the amount of R$306,060 (R$276,521 as of December 31, 2022); (v) infraction notice about ICMS in Goiás relating to the disallowance of ICMS credit for the acquisition of inputs as the Tax Authorities understand that the Company made outflows subject to non-incidence, in the amount of R$210,876 (R$190,198 as of December 31, 2022); and (vi) R$2,760,221 (R$1,973,524 on December 31, 2022) related to other claims, highlighting the debts related to (a) supposed differences in tax substitution in the amount of R$673,579; (b) disallowance of presumed ICMS credit arising from tax benefit provided for in PRODEPE due to alleged non-compliance with ancillary obligations in the amount of R$309,704; (c) disallowance of presumed credit on transfers as the Tax Authorities understand that the PRODEIC benefit only applies to sales transactions in the amount of R$220,523; (d) disallowance of ICMS credit on entries for transfer of goods intended for commercialization on the grounds that the calculation basis used would have been higher than the production cost defined in complementary law 87/96 (art. 13, § 4) in the amount of R$239,020 and (e) disallowance of ICMS credit on intermediate materials that the Tax Authorities classified as use and consumption in the amount of R$ 273,644.
Income Tax and Social Contribution (IRPJ and CSLL): The Company is involved in administrative and judicial disputes related to refunds and compensation of negative income tax and social contribution balances, including credits arising from the Plano Verão and requirement of IRPJ and CSLL related to the compensation of tax loss carryforwards above the limit of 30% in the incorporation of entities. The contingencies related to these taxes totaled R$ 1,468,810 (R$1,408,391 as of December 31, 2022).
Profits earned abroad: The Company was assessed by the Brazilian Federal Revenue for alleged underpayment of income tax and social contribution on profits earned by its subsidiaries located abroad, in a total amount of R$ 837,060 (R$779,018 as of December 31, 2022). The Company’s legal defense is based on the facts that the subsidiaries located abroad are subject exclusively to the full taxation in the countries in which they are based as a result of the treaties signed to avoid double taxation.
IPI: The Company disputes administratively and judicially the denial of compensation of presumed IPI credits resulting from purchases of duty-free goods and secondary items. Such discussed cases totaled the amount of R$ 168,212 (R$187,371 as of December 31, 2022).
Social security taxes: The Company disputes cases related to the charges of social security on payroll, employees profit sharing, GILRAT additional for special retirement financing, SAT/RAT, as well as other cases, in a total amount of R$ 671,699 (R$482,687 as of December 31, 2022).
Other contingencies: The Company disputes cases related to the isolated fine for alleged non-compliance with ancillary obligations, customs fine on importation, alleged lack of proof of drawback, disallowance of reinstatement credit, and alleged differences in property tax, fees and services tax totaling R$153,469 (R$171,153 as of December 31, 2022).
20.2.2. Labor
On December 31, 2023 the labor contingencies assessed as possible loss totaled R$304,133 (R$257,365 as of December 31, 2022).
20.2.3. Civil and others
Civil and other (environmental, administrative, regulatory, real estate, intellectual property, etc.) contingencies for which losses were assessed as possible totaled R$2,240,847 (R$1,838,183 as of December 31, 2022) and are mainly related to litigations containing allegations of contractual breaches and noncompliance of legal obligations of several natures as disputes arising from contracts in general, intellectual property disputes, administrative and regulatory issues, environmental and real state, consumer relations, among others. The claims are mostly for compensation of losses and damages, application of penalties and obligations to do or not to do.
21.1. Capital Stock
On July 3rd, 2023 an Extraordinary General Shareholders’ Meeting was held and approved the amendment to the limit of authorization for capital increase by the Board of Directors, from 1,325,000,000 common shares to 1,825,000,000 common shares.
On July 13, 2023 the Company's Board of Directors approved: (a) the issuance of 600,000,000 new common shares, all registered, book-entry and without par value, free and clear of any liens or encumbrances; (b) the fixing of the price per share in the amount of R$9.00. The issuance totaled R$5,400,000, of which R$600,000 will be allocated to the capital stock and R$4,800,000 will be allocated to the capital reserve. In this transaction, issuance costs in the amount of R$86,759 were recorded.
On December 31, 2023, the subscribed and paid capital of the Company was R$13,653,418, which is composed of 1,682,473,246 common book-entry shares with no par value. The value of the capital stock is net of the public offering expenses of R$304,262.
| 21.1.1. | Breakdown of capital stock by nature |
The shareholding position of the shareholders holding more than 5% of the voting stock, management and members of the Board of Directors is presented below:
| Schedule of breakdown of capital stock by nature | | | | | | | | |
| | | 12.31.23 | | 12.31.22 |
| Shareholders | | Quantity | | % | | Quantity | | % |
| Major shareholders | | | | | | | | |
| Marfrig Global Foods S.A. | | 842,165,702 | | 50.06 | | 360,133,580 | | 33.27 |
| Salic | | 180,000,000 | | 10.70 | | - | | - |
| Kapitalo Investimentos Ltda. | | 107,982,757 | | 6.42 | | 55,730,079 | | 5.15 |
| Caixa de Previd. dos Func. do Banco do Brasil | | 103,328,121 | | 6.14 | | 67,560,738 | | 6.24 |
| Management | | | | | | | | |
| Board of Directors | | 518,900 | | 0.03 | | 518,900 | | 0.05 |
| Executives | | 626,458 | | 0.04 | | 655,163 | | 0.06 |
| Fiscal Council | | 32,700 | | 0.00 | | 3,407 | | 0.00 |
| Treasury shares | | 3,817,179 | | 0.23 | | 4,356,397 | | 0.40 |
| Other | | 444,001,429 | | 26.38 | | 593,514,982 | | 54.83 |
| | | 1,682,473,246 | | 100.00 | | 1,082,473,246 | | 100.00 |
| 21.1.2. | Rollforward of outstanding shares |
Outstanding shares are determined by the number of common shares reduced by the number of shares held in treasury.
| Schedule of roll forward of outstanding shares | | | | |
| Quantity of outstanding of shares |
| | | 12.31.23 | | 12.31.22 |
| Beginning balance | | 1,078,116,849 | | 807,419,692 |
| Issue of shares on 07.13.23 and 02.01.22 | | 600,000,000 | | 270,000,000 |
| Delivery of restricted shares | | 539,218 | | 697,157 |
| Ending balance | | 1,678,656,067 | | 1,078,116,849 |
| 21.2. | Capital reserves and other equity transactions |
The capital reserves contemplate the balances related with results on the sale, issue and exchange of stocks, in compatibility with the Law 6.404/1976 (“Lei das S.A”) – Brazilian Corporate Law.
| Schedule of capital reserve and other equity transactions | | | | |
| | | | | |
| | | 12.31.23 | | 12.31.22 |
| Capital reserves | | 2,763,364 | | 2,338,476 |
| Other equity transactions | | (70,106) | | (77,825) |
| Share-based payments | | 203,374 | | 195,655 |
| Acquisition of non-controlling interest | | (273,260) | | (273,260) |
| Capital transactions with controlled entities | | (220) | | (220) |
| 21.3. | Absorption of accumulated losses |
On December 31, 2023 the Company offset accumulated losses with capital reserves, as provided in Law 6.404/1976 (“Lei das S.A”) – Brazilian Corporate Law in the amount of R$ 4,375,112.
The Company has 3,817,179 shares held in treasury, recorded at average cost of R$25.19, expressed in Reais, per share and corresponding market value of R$52,715 on December 31, 2023.
| Schedule of treasury shares | | | | |
| Quantity of outstanding of shares |
| | | 12.31.23 | | 12.31.22 |
| Shares at the beggining of the year | | 4,356,397 | | 5,053,554 |
| Delivery of restricted shares | | (539,218) | | (697,157) |
| Shares at the end of the year | | 3,817,179 | | 4,356,397 |
On December 7, 2023 the Company's Board of Directors approved the creation of a new program for the acquisition of shares issued by the Company up to the limit of 14,000,000 common shares, within a maximum period of 18 months. There were no share buybacks in 2023 under this program. In 2024, until the date of approval of these Financial Statements, 14,000,000 shares were repurchased at an average cost of R$14.01, totaling R$196,137.
| 22. | Earnings (loss) per share |
| Schedule of earning loss per share | | | |
| | Continued operations |
| | 12.31.23 | | 12.31.22 |
| Basic numerator | | | |
| Net loss for the period attributable to controlling shareholders | (2,028,559) | | (3,115,455) |
| Basic denominator | | | |
| Weighted average number of outstanding shares - basic | 1,360,268,402 | | 1,052,606,000 |
| Net loss per share basic - R$ | (1.49) | | (2.96) |
| | | | |
| Diluted denominator | | | |
| Weighted average number of outstanding shares - diluted (1) | 1,360,268,402 | | 1,052,606,000 |
| Net loss per share diluted - R$ | (1.49) | | (2.96) |
| (1) | Shares linked to share-based payment plans have an anti-dilutive effect in the years. |
| | | | |
| | Discontinued operations |
| | 12.31.23 | | 12.31.22 |
| Basic numerator | | | |
| Net loss for the year attributable to controlling shareholders | - | | (50,948) |
| Basic denominator | | | |
| Weighted average number of outstanding shares - basic | 1,360,268,402 | | 1,052,606,000 |
| Net loss per share basic - R$ | - | | (0.05) |
| | | | |
| Diluted denominator | | | |
| Weighted average number of outstanding shares - diluted (1) | 1,360,268,402 | | 1,052,606,000 |
| Net loss per share diluted - R$ | - | | (0.05) |
| (1) | Shares linked to share-based payment plans have an anti-dilutive effect in the years. |
| | | | |
| | Continued and discontinued operations |
| | 12.31.23 | | 12.31.22 |
| Basic numerator | | | |
| Net loss for the period attributable to controlling shareholders | (2,028,559) | | (3,166,403) |
| Basic denominator | | | |
| Weighted average number of outstanding shares - basic | 1,360,268,402 | | 1,052,606,000 |
| Net earnings (loss) per share basic - R$ | (1.49) | | (3.01) |
| | | | |
| Diluted denominator | | | |
| Weighted average number of outstanding shares - diluted (1) | 1,360,268,402 | | 1,052,606,000 |
| Net loss per share diluted - R$ | (1.49) | | (3.01) |
| (1) | Shares linked to share-based payment plans have an anti-dilutive effect in the years. |
| 23. | Financial instruments and risk management |
In the ordinary course of business, the Company is exposed to credit, liquidity and market risks, which are actively managed in compliance with the Financial Risk Management Policy (“Risk Policy”) and internal guidelines and strategic documents subject to such policy. The Risk Policy was approved by the Board of Directors on December 7, 2023, valid for one year and is available at the Company’s website.
The Company’s risk management strategy, guided by the Risk Policy, has as main objectives:
| » | To protect the Company’s operating and financial results, as well as its equity from adverse changes in the market prices, particularly commodities, foreign exchange and interests; |
| » | To protect the Company against counterparty risks in existing financial operations as well as to establish guidelines for sustaining the necessary liquidity to fulfil its financial commitments; |
| » | To protect the cash of Company against price volatilities, adverse conditions in the markets in which the Company acts and adverse conditions in its production chain. |
The Risk Policy defines the governance of the bodies responsible for the execution, tracking and approval of the risk management strategies, as well as the limits and instruments that can be used.
Additionally, the Management of the Company approved the following policies on November 10, 2021, which are available at the Company’s website:
| » | Financial Policy, which aims to: (i) establish guidelines for the management of the Company's financial debt and capital structure; and (ii) guide the Company's decision-making in connection with cash management (financial investments). |
| » | Profit Allocation Policy, which aims to establish the practices adopted by the Company regarding the allocation of its profits, providing, among others, the periodicity of payment of dividends and the baseline used to establish the respective amount. |
i) Indebtedness
The ideal capital structure definition at BRF is essentially associated with (i) strong cash position as a tolerance factor for liquidity shocks, which includes minimum cash analysis; (ii) net indebtedness; and (iii) minimization of the capital opportunity cost.
On December 31, 2023, the non-current gross debt, as presented below, represented 87.65% (83.75% as of December 31, 2022) of the total gross debt, which has an average term higher than eight years.
The Company monitors the gross debt and net debt as set forth below:
| Schedule of monitors the gross debt and net debt | | | | | | | |
| | 12.31.23 | | 12.31.22 |
| | Current | | Non-current | | Total | | Total |
| Foreign currency loans and borrowings | (1,521,567) | | (9,571,818) | | (11,093,385) | | (12,549,181) |
| Local currency loans and borrowings | (930,271) | | (8,071,892) | | (9,002,163) | | (10,967,819) |
| Derivative financial instruments, net | 32,282 | | 470,011 | | 502,293 | | (126,019) |
| Gross debt | (2,419,556) | | (17,173,699) | | (19,593,255) | | (23,643,019) |
| | | | | | | | |
| | | | | | | | |
| Cash and cash equivalents | 9,264,664 | | - | | 9,264,664 | | 8,130,929 |
| Marketable securities | 447,878 | | 319,995 | | 767,873 | | 824,775 |
| Restricted cash | 13,814 | | 72,395 | | 86,209 | | 89,717 |
| | 9,726,356 | | 392,390 | | 10,118,746 | | 9,045,421 |
| Net debt | 7,306,800 | | (16,781,309) | | (9,474,509) | | (14,597,598) |
ii) Derivative financial instruments
Summarized financial position of derivative financial instruments, that aim to protect the risks described below:
| Schedule of financial position of derivative financial instruments | | | | | | | | |
| | | | | | | |
| | Note | | | | | 12.31.23 | | 12.31.22 |
| Assets | | | | | | | | |
| Designated as hedge accounting | | | | | | | | |
| Foreign exchange risk on operating income | 23.2.1 ii) | | | | | 103,558 | | 8,726 |
| Commodities price risk | 23.2.2 | | | | | 5,510 | | 108,966 |
| Interest rate risk | 23.2.3 | | | | | 529,830 | | 9,517 |
| Not designated as hedge accounting | | | | | | | | |
| Foreign exchange risk on statement of financial position | 23.2.1 i) | | | | | 154 | | 3,939 |
| | | | | | | 639,052 | | 131,148 |
| | | | | | | | | |
| Current assets | | | | | | 109,222 | | 120,865 |
| Non-current assets | | | | | | 529,830 | | 10,283 |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Designated as hedge accounting | | | | | | | | |
| Foreign exchange risk on statement of financial position | 23.2.1 i) | | | | | (52,149) | | (84,633) |
| Foreign exchange risk on operating income | 23.2.1 ii) | | | | | (7,600) | | (17,551) |
| Commodities price risk | 23.2.2 | | | | | (14,363) | | (26,730) |
| Interest rate risk | 23.2.3 | | | | | - | | (122,002) |
| Not designated as hedge accounting | | | | | | | | |
| Foreign exchange risk on statement of financial position | 23.2.1 i) | | | | | (62,647) | | (6,251) |
| | | | | | | (136,759) | | (257,167) |
| | | | | | | | | |
| Current liabilities | | | | | | (76,940) | | (82,468) |
| Non-current liabilities | | | | | | (59,819) | | (174,699) |
| | | | | | | | | |
| Position of derivative financial instruments - net | | | | | | 502,293 | | (126,019) |
iii) Financial commitments
The table below summarizes the significant commitments and contractual obligations that may impact the Company’s liquidity:
| Schedule of significant commitments and contractual obligations | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | 12.31.23 |
| | Book
value | | Contractual cash flow | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | 2029 onwards |
| Non derivative financial liabilities | | | | | | | | | | | | | | | |
| Loans and borrowings | 20,095,548 | | 29,239,484 | | 3,360,512 | | 2,381,197 | | 3,865,863 | | 3,784,178 | | 1,507,940 | | 14,339,794 |
| Principal | | | 19,856,354 | | 2,073,011 | | 1,355,195 | | 2,929,729 | | 2,984,936 | | 939,150 | | 9,574,333 |
| Interest | | | 9,383,130 | | 1,287,501 | | 1,026,002 | | 936,134 | | 799,242 | | 568,790 | | 4,765,461 |
| Trade accounts payable | 12,592,428 | | 12,758,551 | | 12,757,347 | | 175 | | 1,029 | | - | | - | | - |
| Lease liabilities | 3,721,847 | | 4,661,489 | | 1,009,012 | | 784,287 | | 622,935 | | 554,953 | | 398,258 | | 1,292,044 |
| Derivative financial liabilities | | | | | | | | | | | | | | | |
| Financial instruments designated hedge accounting for protection of: |
| Foreign exchange risk | 59,749 | | 59,749 | | 59,749 | | - | | - | | - | | - | | - |
| Commodities price risk | 14,363 | | 14,363 | | 14,363 | | - | | - | | - | | - | | - |
| Financial instruments not designated as hedge accounting for protection of: |
| Foreign exchange risk | 62,647 | | 18,732 | | - | | - | | - | | 18,732 | | - | | - |
The Company does not expect that the cash outflows to fulfill the obligations shown above will be significantly anticipated by factors unrelated to its best interests, or have its value substantially modified outside the normal course of business.
| 23.2. | Market risk management |
| 23.2.1. | Foreign exchange risk |
The risk is the one that may cause unexpected losses to the Company resulting from volatility of the FX rates, reducing its assets and revenues, or increasing its liabilities and costs. The Company’s exposure is managed in three dimensions: statement of financial position exposure, operating income exposure and investments exposure.
i) Statement of financial position exposure
The Risk Policy regarding statement of financial position exposure has the objective to balance assets and liabilities denominated in foreign currencies, hedging the Company’s statement of financial position by using natural hedges, over-the-counter derivatives and exchange traded futures.
Assets and liabilities denominated in foreign currency for which the exchange variations are recognized in the Financial Results are as follows, summarized in Brazilian Reais:
| Schedule of assets and liabilities | | | | |
| | | | | |
| | | 12.31.23 | | 12.31.22 |
| Cash and cash equivalents | | 2,970,268 | | 3,691,668 |
| Trade accounts receivable | | 4,788,635 | | 6,013,713 |
| Trade accounts payable | | (1,195,133) | | (1,484,810) |
| Loans and borrowings | | (8,715,484) | | (12,241,309) |
| Other assets and liabilities, net | | (30,310) | | 35,371 |
| Exposure of assets and liabilities in foreign currencies | | (2,182,024) | | (3,985,367) |
| Derivative financial instruments (hedge) | | 2,033,346 | | 3,721,930 |
| Exposure in result, net | | (148,678) | | (263,437) |
The net exposure in Reais is mainly composed of the following currencies:
| Schedule of net exposure | | | | |
| Net Exposure (1) | | 12.31.23 | | 12.31.22 |
| Chilean Pesos (CLP) | | | 256,121 |
| Euros (EUR) | | (25,050) | | (43,445) |
| Angolan kwanza (AOA) | | 97,368 | | 53,723 |
| Yen (JPY) | | (1,241) | | (3,268) |
| Argentinian Peso (ARS) | | (3,146) | | (4,614) |
| Turkish Liras (TRY) | | 76,439 | | 214,936 |
| U.S. Dollars (USD) | | (513,164) | | (736,890) |
| Total | | (148,678) | | (263,437) |
| (1) | The Company is exposed to other currencies, although they have been grouped in the currencies above due to its high correlation or for not being individually significant. |
The Company holds more financial liabilities in foreign currencies than assets and, therefore, holds derivative financial instruments to reduce such exposure.
As a result of this protection strategy the Company recognized as Financial income (expenses), net an expense of foreign exchange of derivatives of R$312,201 and an expense of R$284,720 of interest and fair value of derivatives, totaling an amount of R$596,921 for the year ended on December 31, 2023 (expense of R$1,038,171 during the year ended on December 31, 2022). This derivative result offsets a foreign exchange income over assets and liabilities of R$161,162 for the year ended on December 31, 2023 (R$474,052 during the year ended on December 31, 2022).
The derivative financial instruments acquired to hedge the foreign currency statement of financial position exposure on December 31, 2023 and are set forth below:
| Schedule of derivative instruments not designated | | | | | | | | | | | | | |
| 12.31.23 |
| Derivative instruments not designated | | Asset | | Liability | | Maturity | | Notional | | Exercise rate | | Fair value (R$) |
| Futures | | BRL | | USD | | 1st Qtr. 2024 | | USD | (224,250) | | 4.8690 | | (3,289) |
| Futures | | USD | | BRL | | 1st Qtr. 2024 | | USD | 224,250 | | 4.8690 | | 3,444 |
| Swap | | USD + 4,35% p.a. | | 86,52% of CDI | | 3rd Qtr. 2026 | | USD | 145,000 | | N/A | | (41,087) |
| Swap | | USD + 4.35% p.a. | | CDI - 0,51% p.a. | | 3rd Qtr. 2026 | | USD | 115,000 | | N/A | | (18,732) |
| Non-deliverable forward | | EUR | | TRY | | 1st Qtr. 2024 | | EUR | 5,000 | | 31.1500 | | 460 |
| Non-deliverable forward | | USD | | TRY | | 1st Qtr. 2024 | | USD | 14,900 | | 30.6070 | | (2,008) |
| Non-deliverable forward | | USD | | AOA | | 1st Qtr. 2024 | | USD | 10,000 | | 860.5000 | | (1,041) |
| Non-deliverable forward | | USD | | AOA | | 2nd Qtr. 2024 | | USD | 2,000 | | 893.0000 | | (241) |
| Total | | | | | | | | | | | | | (62,494) |
| Schedule of derivative instruments designated - Fair value hedge | | | | | | | | | | | | | | | |
| 12.31.23 |
| | | | | | | | | | | | | | Fair value (R$) |
| Derivative instruments designated - Fair value hedge | | Hedged Object | | Maturity | | Asset | | Liability | | Notional | | Instrument | | Object (1) |
| | | | | | | | | | | | | | |
| FX and interest rate swap | | USD debt | | 1st Qtr. 2024 | | FX + 7,33% p.a. | | 100% CDI + 2.20% p.a. | | 30,000 | USD | | (17,201) | | (80,378) |
| FX and interest rate swap | | USD debt | | 2nd Qtr. 2024 | | FX + 6.32% p.a. | | 100% CDI + 1,61% p.a. | | 130,000 | USD | (34,948) | | 80,534 |
| | | | | | | | | | | 160,000 | | | (52,149) | | 156 |
| (1) | Corresponds to the accumulated amount of fair value hedge adjustments on the hedged items, included in the carrying amount of the senior unsecured notes. |
ii) Operating income exposure
The Risk Policy regarding 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 relations as cash flow hedges.
The Company has more sales in foreign currency than expenditures and, therefore, holds derivative financial instruments to reduce such exposure.
As a result of this protection strategy the Company recognized in the Net Revenue an income of R$303,837 for the year ended on December 31, 2023 (R$202,655 during the year ended on December 31, 2022).
The derivative financial instruments designated as cash flow hedges for foreing exchange operating income exposure on December 31, 2023 are set forth below:
| Schedule of cash flow hedge to derivative instruments | | | | | | | | | | | | | | | |
| 12.31.23 |
| Cash flow hedge - Derivative instruments | | Hedged object | | Asset | | Liability | | Maturity | | Notional | | Designation rate | | Fair value (1) |
| Non-deliverable forward | | USD Exports | | BRL | | USD | | 1st Qtr. 2024 | | USD | 128,500 | | 5.2959 | | 52,159 |
| Non-deliverable forward | | USD Exports | | BRL | | USD | | 2nd Qtr. 2024 | | USD | 65,500 | | 5.1633 | | 14,564 |
| Non-deliverable forward | | USD Exports | | BRL | | USD | | 3rd Qtr. 2024 | | USD | 45,500 | | 5.2487 | | 11,528 |
| Collar | | USD Exports | | BRL | | USD | | 1st Qtr. 2024 | | USD | 295,000 | | 5.0122 | | 15,693 |
| Collar | | USD Exports | | BRL | | USD | | 2nd Qtr. 2024 | | USD | 40,000 | | 5.0151 | | 2,014 |
| | | | | | | | | | | | 574,500 | | | | 95,958 |
| (1) | Correspond to the not realized portion of the hedge which is registered in Other comprehensive income. |
During the 2nd quarter of 2023, the Bond BRF SA BRFSBZ 3.95 loan, designated as an export protection instrument, was settled and the amount of R$(548,639) previously accumulated in Other Comprehensive Income was reclassified to income for the year under Net Revenue.
iii) Investments exposure
The Company holds both investments (net assets) and loans (financial liabilities) denominated in foreign currency. To balance the accounting effects of such exposures, some non-derivative financial liabilities are designated as hedging instruments for the investments exposure.
As a result of this strategy, the Company recognized revenue of R$145,328 under Other comprehensive income for the year ended on December 31, 2023 (R$87,929 during the year ended on December 31, 2022).
The non-derivative financial instruments designated as net investment hedge instruments on December 31, 2023 are set forth below:
| Schedule of net investment hedge to non derivative instruments | | | | | | | | | | | | | |
| 12.31.23 |
Net investment hedge -
Non-derivative instruments | | Object (Investment) | | Liability | | Maturity | | Notional | | Rate | | Exchange variation (1) |
| Bond - BRF SA BRFSBZ 4.35 | | Federal Foods LLC | | USD | | 3rd Qtr. 2050 | | USD (2) | 44,158 | | 3.7649 | | (82,409) |
| Bond - BRF SA BRFSBZ 4.35 | | BRF Kuwait Food Management Company WLL | | USD | | 3rd Qtr. 2050 | | USD (2) | 88,552 | | 3.7649 | | (96,199) |
| Bond - BRF SA BRFSBZ 4.35 | | Al Khan Foodstuff LLC | | USD | | 3rd Qtr. 2050 | | USD (2) | 53,446 | | 3.7649 | | (70,185) |
| Bond - BRF SA BRFSBZ 4.35 | | BRF Foods GmbH | | USD | | 3rd Qtr. 2050 | | USD (3) | 170,721 | | 5.1629 | | 33,138 |
| Bond - BRF SA BRFSBZ 4.35 | | Al-Wafi Al-Takamol International for Foods Products | | USD | | 3rd Qtr. 2050 | | USD (3) | 23,426 | | 5.1629 | | 8,639 |
| | | | | | | | | | 380,303 | | | | (207,016) |
| (1) | Corresponds to the effective portion of the hedge result accumulated in Other Comprehensive Income. |
| (2) | Designated on August 1st, 2019. |
| (3) | Designated on November 9, 2022. |
| 23.2.2. | Commodities price risk |
The Company uses commodities as production inputs and is exposed to commodities price risk arising from future purchases. The management of such risk is performed through physical inventories, future purchases at fixed price and through derivative financial instruments.
The Risk Policy establishes coverage limits to the flow of purchases of corn, meal and soy, soybeans and soybean oil 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.
As a result of this protection strategy the Company recognized in the Cost of goods sold an expense of R$103,305 for year ended on December 31, 2023 (expense of R$437,324 during the year ended on December 31, 2022).
The Company performs purchases at variable prices in future and spot markets and, to hedge such exposure, it holds derivative financial instruments in long position (buy) to fix these prices in advance.
The financial instruments designated as cash flow hedges for the variable commodities price exposure on December 31, 2023 are set forth below:
| Schedule of cash flow hedges for the variable commodities price | | | | | | | | | | | | | |
| 12.31.23 |
| Cash flow hedge - Derivative instruments | | Hedged object | | Index | | Maturity | | Quantity | | Exercise price (1) | | Fair value |
| Non-deliverable forward - buy | | Soybean meal purchase - floating price | | Soybean meal - CBOT | | 1st Qtr. 2024 | | 4,000 | ton | | 445.83 | | (390) |
| Collar - buy | | Soybean meal purchase - floating price | | Soybean meal - CBOT | | 1st Qtr. 2024 | | 8,000 | ton | | 458.42 | | (357) |
| Collar - buy | | Soybean meal purchase - floating price | | Soybean meal - CBOT | | 2nd Qtr. 2024 | | 31,992 | ton | | 460.11 | | (3,009) |
| Non-deliverable forward - buy | | Corn purchase - floating price | | Corn - CBOT | | 2nd Qtr. 2024 | | 119,944 | ton | | 198.28 | | (2,154) |
| Non-deliverable forward - buy | | Corn purchase - floating price | | Corn - CBOT | | 3rd Qtr. 2024 | | 119,944 | ton | | 198.57 | | (1,633) |
| Non-deliverable forward - buy | | Corn purchase - floating price | | Corn - CBOT | | 4th Qtr. 2024 | | 119,944 | ton | | 200.93 | | (1,509) |
| Collar - buy | | Corn purchase - floating price | | Corn - CBOT | | 2nd Qtr. 2023 | | 82,008 | ton | | 199.53 | | (1,153) |
| Collar - buy | | Corn purchase - floating price | | Corn - B3 | | 1st Qtr. 2024 | | 49,545 | ton | | 1,136.19 | | 1,106 |
| Non-deliverable forward - buy | | Soybean oil purchase - floating price | | Soybean oil - CBOT | | 2nd Qtr. 2024 | | 6,001 | ton | | 1,107.23 | | (918) |
| Non-deliverable forward - buy | | Soybean oil purchase - floating price | | Soybean oil - CBOT | | 3rd Qtr. 2024 | | 4,001 | ton | | 1,094.04 | | (451) |
| Collar - buy | | Corn purchase - floating price | | Corn - B3 | | 2nd Qtr. 2024 | | 87,750 | ton | | 1,178.85 | | 2,207 |
| | | | | | | | | 633,129 | | | | | (8,261) |
| (1) | Base price of each commodity in USD/ton, except for Corn – B3 denominated in R$/ton. |
In certain cases, the Company performs futures purchases at fixed prices and, to hedge such exposure, it holds derivative financial instruments in short position (sell) to keep these prices at market value. The financial instruments designated as fair value hedges for the fixed commodities price exposure on December 31, 2023 are set forth below:
| Schedule of financial instruments commodities price | | | | | | | | | | | | | |
| 12.31.23 |
| Fair value hedge - Derivative instruments | | Hedged object | | Index | | Maturity | | Quantity | | Exercise price (1) | | Fair value |
| Corn future - sell | | Corn purchase - fixed price | | Corn - B3 | | 3rd Qtr. 2024 | | 69,633 | ton | | 1,199.42 | | (592) |
| | | | | | | | | 69,633 | | | | | (592) |
| (1) | Base price of each commodity in USD/ton, except for Corn – B3 denominated in R$/ton. |
The open and liquidated derivative financial instrument still generate impacts in the statement of financial position of: i) Inventory a debit in the amount of R$95,986 on December 31, 2023 (R$18,853 on December 31, 2022); ii) Other comprehensive income a credit amount of R$322 on December 31, 2023 (credit of R$43,398 on December 31, 2022).
| 23.2.3. | Interest rate risk |
The interest rate risk may cause economic losses to the Company resulting from volatility in interest rates that affect its assets and liabilities.
The Company’s Risk Policy does not restrict exposure to different interest rates, neither establishes limits for fixed or floating rates. However, the Company continually monitors the market interest rates in order to evaluate any need to enter into hedging transactions to protect from the volatility of such rates and manage the mismatch between its financial assets and liabilities.
As a result of this protection strategy the Company recognize in the Financial Income (Expenses), Net an income of R$328,121 for the year ended on December 31, 2023 (expense of R$281,453 during the year ended on December 31, 2022).
The derivative financial instruments used to hedge the exposure to interest rates as of December 31, 2023 are presented in the table below:
| Schedule of derivative financial instruments used to hedge the exposure to interest rates | | | | | | | | | | | | | | | |
| 12.31.23 |
| | | | | | | | | | | | | | Fair value (R$) |
| Fair value hedge - Derivative instruments | | Hedged Object | | Maturity | | Asset | | Liability | | Notional | | Instrument | | Object (1) |
| | | | | | | | | | | | | | |
| Interest rate swap | | Debenture - 1st issue - 3rd series - IPCA + 5.50% p.a. | | 2nd Qtr. 2026 | | IPCA + 5.50% p.a. | | CDI + 0.57% p.a. | | 200,000 | BRL | 30,943 | | 8,710 |
| Interest rate swap | | Debenture - 1st issue - 3rd series - IPCA + 5.50% p.a. | | 2nd Qtr. 2026 | | IPCA + 5.50% p.a. | | 100% of CDI | | 200,000 | BRL | 25,580 | | 10,238 |
| Interest rate swap | | Debenture - 2nd issue - 1st series - IPCA + 5.30% p.a. | | 3rd Qtr. 2027 | | IPCA + 5.30% p.a. | | CDI + 2.20% p.a. | | 400,000 | BRL | 63,003 | | (15,575) |
| Interest rate swap | | Debenture - 2nd issue - 2nd series - IPCA + 5.60% p.a. | | 3rd Qtr. 2030 | | IPCA + 5.60% p.a. | | CDI + 2.29% p.a. | | 595,000 | BRL | 80,526 | | (89,632) |
| Interest rate swap | | Debenture - 3rd issue - single series - IPCA + 4.78% p.a. | | 2nd Qtr. 2031 | | IPCA + 4.78% p.a. | | CDI + 0,12% a.a. | | 1,000,000 | BRL | 177,896 | | 54,509 |
| Interest rate swap | | Debenture - 1st issue - 1ª series - IPCA + 6.83% p.a. | | 3rd Qtr. 2032 | | IPCA + 6.83% p.a. | | 109,32% of CDI | | 990,000 | BRL | 151,881 | | 130,182 |
| | | | | | | | | | | 3,385,000 | | | 529,829 | | 98,432 |
| (1) | Corresponds to the accumulated amount of fair value hedge adjustments on the hedged items, included in the carrying amount of the debentures. |
| 23.3. | Credit risk management |
The Company is exposed to the credit risk related to the financial assets held: trade and non-trade accounts receivable, marketable securities, derivative instruments and cash and equivalents. The Company’s credit risk exposure can be assessed in notes 4, 5 and 6.
| 23.3.1. | Credit risk in accounts receivable |
The credit risk associated with trade accounts receivable is actively managed through specific systems and is supported by internal policies for credit analysis. The significant level of diversification and geographical dispersion of the customer portfolio significantly reduces the risk. However, the Company chooses to complement the risk management by contracting insurance policies for specific markets. The impairment of these financial assets is carried out based on expected credit losses.
| 23.3.2. | Counterparty credit risk |
The credit risk associated with marketable securities, cash and cash equivalents and derivative instruments in general is directed to counterparties with Investment Grade ratings. The maintenance of assets with counterparty risk is constantly assessed according to credit ratings and the Company’s portfolio concentration, aligned with the applicable impairment requisites.
| 23.4. | Capital management and liquidity risk |
The Company is 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 volatility scenarios of results as well as simulations of sectorial and systemic crisis. It is grounded on allowing resilience in scenarios of capital restriction.
| 23.5. | Sensitivity analysis |
Management believes that the most relevant risks that may affect the Company’s results, for which it uses derivative financial instruments to protect, are the volatility of commodities prices, foreign exchange rates and interest rates.
For the reasonably possible scenario of commodities, Management uses as a reference the future value of assets on December 31, 2023 and therefore understands that there will be no changes in the results of operations. As for the exchange rate, the likely scenario is referenced by external sources such as the Central Bank of Brazil (“BACEN”) and Bloomberg Focus report based on the exchange rate forecast for next year or in the absence of the latest available date.
In the possible and remote scenarios, both positive and negative variations of 15% and 30% respectively were considered in both cases from the reasonably possible scenario. Such sensitivity scenarios originate from information and assumptions used by Management in monitoring the previously mentioned risks.
The information used in the preparation of the analysis is based on the position as of December 31, 2023, which has been described in the items above. The estimated values may differ significantly to numbers and results that will be effectively registered by the Company. Positive values indicate gains and negative values indicate losses.
| Schedule of quantitative and qualitative information | | | | | | | | | | |
| | | Scenario |
| | | Remote | | Possible | | Reasonably | | Possible | | Remote |
| Exchange rate - Balance | | - 30% | | - 15% | | Possible | | + 15% | | + 30% |
| USD | | 3.5000 | | 4.2500 | | 5.0000 | | 5.7500 | | 6.5000 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | 741,601 | | 326,928 | | (87,745) | | (502,418) | | (917,091) |
| Derivative instruments - not designated | | (599,427) | | (264,252) | | 70,923 | | 406,098 | | 741,273 |
| Net effect | | 142,174 | | 62,676 | | (16,822) | | (96,320) | | (175,818) |
| | | | | | | | | | | |
| EUR | | 3.9690 | | 4.8195 | | 5.6700 | | 6.5205 | | 7.3710 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | 13,385 | | 5,151 | | (3,082) | | (11,316) | | (19,550) |
| Derivative instruments - not designated | | (6,913) | | (2,661) | | 1,592 | | 5,844 | | 10,097 |
| Net effect | | 6,472 | | 2,490 | | (1,490) | | (5,472) | | (9,453) |
| | | | | | | | | | | |
| JPY | | 0.0263 | | 0.0319 | | 0.0375 | | 0.0431 | | 0.0488 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | 289 | | 85 | | (119) | | (323) | | (526) |
| Net effect | | 289 | | 85 | | (119) | | (323) | | (526) |
| | | | | | | | | | | |
| TRY | | 0.1149 | | 0.1395 | | 0.1641 | | 0.1887 | | 0.2133 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | (52,450) | | (26,118) | | 214 | | 26,546 | | 52,878 |
| Derivative instruments - not designated | | 29,584 | | 14,731 | | (121) | | (14,973) | | (29,825) |
| Net effect | | (22,866) | | (11,387) | | 93 | | 11,573 | | 23,053 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| AOA | | 0.0041 | | 0.0049 | | 0.0058 | | 0.0067 | | 0.0075 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | (45,655) | | (22,124) | | 1,406 | | 24,936 | | 48,467 |
| Derivative instruments - not designated | | 17,061 | | 8,268 | | (525) | | (9,319) | | (18,112) |
| Net effect | | (28,594) | | (13,856) | | 881 | | 15,617 | | 30,355 |
| | | | | | | | | | | |
| ARS | | 0.0019 | | 0.0023 | | 0.0027 | | 0.0031 | | 0.0035 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | 2,160 | | 1,949 | | 1,738 | | 1,527 | | 1,316 |
| Net effect | | 2,160 | | 1,949 | | 1,738 | | 1,527 | | 1,316 |
| | | | | | | | | | | |
| CLP | | 0.0038 | | 0.0047 | | 0.0055 | | 0.0063 | | 0.0071 |
| | | | | | | | | | | |
| Monetary assets and liabilities | | (66,315) | | (33,358) | | (400) | | 32,557 | | 65,515 |
| Net effect | | (66,315) | | (33,358) | | (400) | | 32,557 | | 65,515 |
| | | | | | | | | | | |
| | | Scenario |
| | | Remote | | Possible | | Reasonably | | Possible | | Remote |
| Exchange rate - Operating results | | - 30% | | - 15% | | Possible | | + 15% | | + 30% |
| USD | | 3.5000 | | 4.2500 | | 5.0000 | | 5.7500 | | 6.5000 |
| | | | | | | | | | | |
| Revenue in USD | | (770,577) | | (339,702) | | 91,173 | | 522,048 | | 952,923 |
| NDF | | 321,241 | | 141,616 | | (38,009) | | (217,634) | | (397,259) |
| Collar | | 442,768 | | 191,518 | | (12,307) | | (208,500) | | (459,750) |
| Net effect | | (6,568) | | (6,568) | | 40,857 | | 95,914 | | 95,914 |
| | | | | | | | | | | |
| | | Scenario |
| | | Remote | | Possible | | Reasonably | | Possible | | Remote |
| Exchange rate - Operating results | | - 30% | | - 15% | | Possible | | + 15% | | + 30% |
| Soybean meal - CBOT | | 289 | | 350 | | 412 | | 474 | | 536 |
| | | | | | | | | | | |
| Cost of sales | | 5,440 | | 2,720 | | - | | (2,720) | | (5,440) |
| Collar | | (4,628) | | (2,079) | | - | | 359 | | 1,831 |
| NDF | | (496) | | (248) | | - | | 248 | | 496 |
| Net effect | | 316 | | 393 | | - | | (2,113) | | (3,113) |
| | | | | | | | | | | |
| Soybean oil - CBOT | | 835 | | 1,014 | | 1,193 | | 1,372 | | 1,551 |
| | | | | | | | | | | |
| Cost of sales | | 3,579 | | 1,789 | | - | | (1,789) | | (3,579) |
| NDF | | (3,579) | | (1,789) | | - | | 1,789 | | 3,579 |
| Net effect | | - | | - | | - | | - | | - |
| | | | | | | | | | | |
| Corn - CBOT | | 139 | | 169 | | 199 | | 228 | | 258 |
| | | | | | | | | | | |
| Cost of sales | | 26,323 | | 13,162 | | - | | (13,162) | | (26,323) |
| Collar | | (3,755) | | (1,412) | | - | | 343 | | 2,282 |
| NDF | | (21,476) | | (10,738) | | - | | 10,738 | | 21,476 |
| Net effect | | 1,092 | | 1,012 | | - | | (2,081) | | (2,565) |
| | | | | | | | | | | |
| Corn - B3 | | 756 | | 918 | | 1,079 | | 1,241 | | 1,403 |
| | | | | | | | | | | |
| Cost of sales | | 21,911 | | 10,955 | | - | | (10,955) | | (21,911) |
| Collar | | (15,696) | | (349) | | - | | 12,520 | | 38,068 |
| Future | | 22,039 | | 11,019 | | - | | (11,019) | | (22,039) |
| Net effect | | 28,254 | | 21,625 | | - | | (9,454) | | (5,882) |
| 23.6. | Financial instruments by category |
| Schedule of financial instruments by category | | | | | | | |
| | 12.31.23 |
| | Amortized cost | | FVTOCI (3) | | Fair value through profit and loss | | Total |
| | | Equity instruments | | |
| Assets | | | | | | | |
| Cash and bank | 1,607,257 | | - | | - | | 1,607,257 |
| Cash equivalents | - | | - | | 7,657,407 | | 7,657,407 |
| Marketable securities | 291,402 | | 12,103 | | 464,368 | | 767,873 |
| Restricted cash | 86,209 | | - | | - | | 86,209 |
| Trade accounts receivable | 4,434,070 | | - | | 337,898 | | 4,771,968 |
| Notes receivables | 66,261 | | - | | - | | 66,261 |
| Derivatives not designated | - | | - | | 154 | | 154 |
| Derivatives designated as hedge accounting (1) | - | | - | | 638,898 | | 638,898 |
| | | | | | | | |
| Liabilities | | | | | | | |
| Trade accounts payable | (12,592,428) | | - | | - | | (12,592,428) |
| Loans and borrowings (2) | (15,074,206) | | - | | (5,021,342) | | (20,095,548) |
| Derivatives not designated | - | | - | | (62,647) | | (62,647) |
| Derivatives designated as hedge accounting (1) | - | | - | | (74,112) | | (74,112) |
| | (21,181,435) | | 12,103 | | 3,940,624 | | (17,228,708) |
| (1) | All derivatives are classified at fair value through profit and loss. Those designated as hedge accounting instruments have their gains and losses also affecting Equity and Inventories. |
| (2) | The part of the loans and borrowings that is object in a fair value hedge is classified as Fair value through profit and loss. The rest of the loans and borrowings balance is classified as amortized cost and those designated as cash flow or net investment hedge accounting instruments have their gains and losses also affecting Equity. |
| (3) | FVTOCI: Fair Value Through Other Comprehensive Income. |
| | | | | | | | |
| | 12.31.22 |
| | Amortized cost | | FVTOCI (3) | | Fair value through profit and loss | | Total |
| | | Equity instruments | | |
| Assets | | | | | | | |
| Cash and bank | 1,865,077 | | - | | - | | 1,865,077 |
| Cash equivalents | - | | - | | 6,265,852 | | 6,265,852 |
| Marketable securities | 379,145 | | 11,752 | | 433,878 | | 824,775 |
| Restricted cash | 89,717 | | - | | - | | 89,717 |
| Trade accounts receivable | 3,918,570 | | - | | 274,493 | | 4,193,063 |
| Other receivables | 38,443 | | - | | - | | 38,443 |
| Derivatives not designated | - | | - | | 3,939 | | 3,939 |
| Derivatives designated as hedge accounting | - | | - | | 127,209 | | 127,209 |
| | | | | | | | |
| Liabilities | | | | | | | |
| Trade accounts payable | (14,136,224) | | - | | - | | (14,136,224) |
| Loans and borrowings | (16,055,704) | | - | | (7,461,296) | | (23,517,000) |
| Derivatives not designated | - | | - | | (6,251) | | (6,251) |
| Derivatives designated as hedge accounting | - | | - | | (250,916) | | (250,916) |
| | (23,900,976) | | 11,752 | | (613,092) | | (24,502,316) |
| 23.7. | Fair value of financial instruments |
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Depending on the inputs used for measurement, the financial instruments at fair value may be classified into 3 hierarchy levels:
| » | Level 1 - Uses quoted prices (unadjusted) for identical instruments in active markets. In this category are classified investments in stocks, savings accounts, overnights, term deposits, Financial Treasury Bills (“LFT”) and investment funds; |
| » | Level 2 - Uses 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. In this level are classified the 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; |
| » | Level 3 - Instruments for which significant inputs are non-observable. The Company does not have financial instruments in this category. |
The table below presents the overall classification of financial instruments accounted at fair value by measurement hierarchy. For year ended December 31, 2023, there were no changes among the 3 levels of hierarchy.
| Schedule of classification of financial instruments accounted at fair value | | | | | | | | | | | |
| | 12.31.23 | | 12.31.22 |
| | Level 1 | | Level 2 | | Total | | Level 1 | | Level 2 | | Total |
| Financial Assets | | | | | | | | | | | |
| Fair value through other comprehensive income | | | | | | | | | | | |
| Stocks | 12,103 | | - | | 12,103 | | 11,752 | | - | | 11,752 |
| Fair value through profit and loss | | | | | | | | | | | |
| Savings account and overnight | 17,570 | | - | | 17,570 | | 12,720 | | - | | 12,720 |
| Term deposits | 2,758,300 | | - | | 2,758,300 | | 2,495,438 | | - | | 2,495,438 |
| Bank deposit certificates | - | | 4,876,861 | | 4,876,861 | | - | | 3,754,202 | | 3,754,202 |
| Financial treasury bills | 412,107 | | - | | 412,107 | | 364,543 | | - | | 364,543 |
| Investment funds | 21,186 | | - | | 21,186 | | 19,018 | | - | | 19,018 |
| Trade accounts receivable | - | | 337,898 | | 337,898 | | - | | 274,493 | | 274,493 |
| Derivatives | - | | 639,052 | | 639,052 | | - | | 131,148 | | 131,148 |
| Other titles | 35,751 | | - | | 35,751 | | 53,809 | | - | | 53,809 |
| Financial Liabilities | | | | | | | | | | | |
| Fair value through profit and loss | | | | | | | | | | | |
| Derivatives | - | | (136,759) | | (136,759) | | - | | (257,167) | | (257,167) |
| Loans and borrowings | - | | (5,021,342) | | (5,021,342) | | - | | (7,461,296) | | (7,461,296) |
| | 3,257,017 | | 695,710 | | 3,952,727 | | 2,957,280 | | (3,558,620) | | (601,340) |
Except for the items set forth below, the fair value of all other financial instruments is approximate to their book value. The fair value of the bonds set forth below is based on prices observed in active markets, level 1 of the fair value hierarchy, while the debentures are based on level 2 and are measured by discounted cash flows.
| Schedule of financial instruments of book value | | | | | | | | | | | | |
| | | | | | | 12.31.23 | | 12.31.22 |
| | | Currency | | Maturity | | Book
value | | Fair
value | | Book
value | | Fair
value |
| BRF S.A. | | | | | | | | | | | | |
| BRF SA BRFSBZ 4 3/4 | | USD | | 2024 | | - | | - | | (1,525,727) | | (1,513,221) |
| BRF SA BRFSBZ 3.95 | | USD | | 2023 | | - | | - | | (1,185,479) | | (1,209,990) |
| BRF SA BRFSBZ 4 7/8 | | USD | | 2030 | | (2,896,104) | | (2,506,390) | | (3,119,390) | | (2,602,599) |
| BRF SA BRFSBZ 5 3/4 | | USD | | 2050 | | (3,209,653) | | (2,398,081) | | (3,463,081) | | (2,503,033) |
| Debenture - 1st issue | | BRL | | 2026 | | (830,144) | | (853,640) | | (768,428) | | (756,718) |
| Debenture - 2nd issue | | BRL | | 2027 - 2030 | | (2,681,294) | | (3,048,882) | | (2,355,427) | | (2,366,883) |
| Debenture - 3rd issue | | BRL | | 2031 | | (1,214,044) | | (1,214,044) | | (1,013,639) | | (877,103) |
| Debenture - 4rd issue | | BRL | | 2027 - 2032 | | (1,908,952) | | (2,032,361) | | (1,802,652) | | (1,717,004) |
| BRF GmbH | | | | | | | | | | | | |
| BRF SA BRFSBZ 4.35 | | USD | | 2026 | | (1,453,805) | | (1,360,530) | | (2,608,613) | | (2,367,075) |
| | | | | | | (14,193,996) | | (13,413,928) | | (17,842,436) | | (15,913,626) |
The operating segments are reported consistently with the management reports provided to the main strategic and operational decision makers for assessing the performance of each segment and allocation of resources. The operating segments information is prepared considering three reportable segments, being: Brazil, International and Other segments.
The operating segments include the sales of all distribution channels and are subdivided according to the nature of the products, for which the characteristics are described below:
| » | In-natura: production and sale of whole poultry and cuts and pork and other cuts. |
| » | Processed: production and sale of processed food, frozen and processed products derived from poultry, pork and beef, margarine, vegetables and soybean-based products. |
| » | Other sales: sale of flour for food service and others. |
Other segments are comprised of commercialization and development of animal nutrition ingredients, human nutrition, plant nutrition (fertilizers), healthcare (health and wellness), pet food, as well as commercialization of agricultural products.
The items not allocated to the segments are presented as Corporate and refer to relevant events not attributable to the operating segments.
The net sales by nature for each reportable operating segment is set forth below:
| Schedule of net sales by nature for each reportable operating segment | | | | | | |
| | | | | | | |
| Net sales | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Brazil | | | | | | |
| In-natura | | 5,914,882 | | 5,976,960 | | 6,002,585 |
| Processed | | 20,601,576 | | 20,878,697 | | 18,729,686 |
| Other sales | | 342,460 | | 142,131 | | 76,618 |
| | | 26,858,918 | | 26,997,788 | | 24,808,889 |
| | | | | | | |
| International | | | | | | |
| In-natura | | 19,888,732 | | 20,044,710 | | 18,212,688 |
| Processed | | 3,765,633 | | 3,679,233 | | 2,955,431 |
| Other sales | | 197,399 | | 379,192 | | 346,585 |
| | | 23,851,764 | | 24,103,135 | | 21,514,704 |
| | | | | | | |
| Other segments | | 2,904,758 | | 2,704,105 | | 2,019,712 |
| | | 53,615,440 | | 53,805,028 | | 48,343,305 |
The gross profit and income (loss) before financial results for each segment and for Corporate are set forth below:
| Schedule of operating income for each operating segment | | | | | | | | | | | | |
| | | Gross profit | | Income (loss) before financial results and income taxes |
| | | 12.31.23 | | 12.31.22 | | 12.31.21 | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Brazil | | 5,916,699 | | 3,892,719 | | 5,350,075 | | 1,602,298 | | (352,138) | | 1,583,899 |
| Margin (%) | | 22.0% | | 14.4% | | 21.6% | | 6.0% | | -1.3% | | 6.4% |
| International | | 2,121,851 | | 3,523,769 | | 3,767,331 | | (1,214,167) | | 403,661 | | 942,006 |
| Margin (%) | | 8.9% | | 14.6% | | 17.5% | | -5.1% | | 1.7% | | 4.4% |
| Other segments | | 764,791 | | 716,164 | | 573,738 | | 357,720 | | 440,062 | | 393,477 |
| Margin (%) | | 26.3% | | 26.5% | | 28.4% | | 12.3% | | 16.3% | | 19.5% |
| Subtotal | | 8,803,341 | | 8,132,652 | | 9,691,144 | | 745,851 | | 491,585 | | 2,919,382 |
| Corporate | | 30,360 | | - | | 1,389 | | 90,290 | | (627,874) | | 90,405 |
| Total | | 8,833,701 | | 8,132,652 | | 9,692,533 | | 836,141 | | (136,289) | | 3,009,787 |
| Margin (%) | | 16.5% | | 15.1% | | 20.0% | | 1.6% | | -0.3% | | 6.2% |
The margins in the table above were obtained by dividing the value indicated by the net revenue of the corresponding segment.
The composition of selected items that were not allocated to the Company’s operating segments as they are not linked to its main activity and, therefore, were presented as Corporate is set forth below:
| Schedule of composition allocated to the company operating segments | | | | | | |
| | | | | | | |
| Corporate | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Results with sale and disposal of fixed assets | | 86,475 | | 3,582 | | 65,884 |
| Reversal/(provision) for tax and civil contingencies | | 21,707 | | (50,397) | | 30,587 |
| Gains (losses) with demobilization | | (277) | | 1,398 | | (6,814) |
| Investigations involving the Company | | (1,111) | | (588,774) | | (9,003) |
| Result in the sale of investments | | - | | - | | 76,148 |
| Other | | (16,504) | | 6,317 | | (66,397) |
| | | 90,290 | | (627,874) | | 90,405 |
No customer individually or in aggregate (economic group) accounted for more than 5% of net sales for the years ended on December 31, 2023 and 2022.
The goodwill arising from business combinations and the intangible assets with indefinite useful life (trademarks) were allocated to the reportable operating segments, considering the economic benefits generated by such intangible assets. The allocation of these intangible assets is presented below:
| Schedule of goodwill and intangible assets arising from business combination | | | | | | | | | | | |
| | Goodwill | | Trademarks | | Total |
| | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Brazil | 1,151,498 | | 1,151,498 | | 982,478 | | 982,478 | | 2,133,976 | | 2,133,976 |
| International | 1,783,873 | | 1,865,390 | | 415,904 | | 423,846 | | 2,199,777 | | 2,289,236 |
| Other segments | 455,567 | | 457,215 | | 474,871 | | 474,875 | | 930,438 | | 932,090 |
| | 3,390,938 | | 3,474,103 | | 1,873,253 | | 1,881,199 | | 5,264,191 | | 5,355,302 |
Information related to total assets by reportable segment is not disclosed, as it is not included in the set of information made available to the Company’s management, which makes investment decisions and determine allocation of resources based on information about the assets.
25. Net sales
| Schedule of net sales | | | | | | | |
| | | | | | | | |
| | | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Gross sales | | | | | | | |
| Brazil | | | 32,922,332 | | 33,325,565 | | 30,700,510 |
| International | | | 25,203,968 | | 25,253,452 | | 22,959,318 |
| Other segments | | | 3,494,983 | | 3,305,974 | | 2,319,991 |
| | | | 61,621,283 | | 61,884,991 | | 55,979,819 |
| | | | | | | | |
| Sales deductions | | | | | | | |
| Brazil | | | (6,063,414) | | (6,327,777) | | (5,891,621) |
| International | | | (1,352,204) | | (1,150,317) | | (1,444,614) |
| Other segments | | | (590,225) | | (601,869) | | (300,279) |
| | | | (8,005,843) | | (8,079,963) | | (7,636,514) |
| | | | | | | | |
| Net sales | | | | | | | |
| Brazil | | | 26,858,918 | | 26,997,788 | | 24,808,889 |
| International | | | 23,851,764 | | 24,103,135 | | 21,514,704 |
| Other segments | | | 2,904,758 | | 2,704,105 | | 2,019,712 |
| | | | 53,615,440 | | 53,805,028 | | 48,343,305 |
26. Other operating income (expenses), net
| Schedule of other operating income (expenses) | | | | | |
| | | | | | |
| | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Recovery of expenses | 52,600 | | 128,895 | | 135,662 |
| Provision reversal | 3,434 | | 1,462 | | 1,143 |
| Scrap sales | 16,416 | | 16,226 | | 12,763 |
| Provision for civil and tax risks | 146,423 | | (102,539) | | 33,311 |
| Other employees benefits | (18,265) | | (19,519) | | (52,521) |
| Insurance claims costs | (18,878) | | (22,366) | | (35,102) |
| Gains (losses) on the disposal and write-off of non-financial assets (1) | 63,229 | | (3,985) | | 141,211 |
| Demobilization expenses | (277) | | 1,398 | | (6,814) |
| Expenses with investigations | (1,112) | | (588,774) | | (9,003) |
| Expected credit losses in other receivables | (1,481) | | 102 | | (579) |
| Other | 8,423 | | 43,830 | | (8,808) |
| Other operating income (expenses), net | 250,512 | | (545,270) | | 211,263 |
| (1) | Includes gain on disposal of properties linked to production and expenses of R$33,499 relating to the impairment of property, plant and equipment reclassified to assets held for sale. |
| 27. | Financial income (expenses), net |
| Schedule of finance income | | | | | | | | | |
| | | | | | | | | | |
| | Note | | | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Financial income | | | | | | | | | |
| Interest on cash and cash equivalents | 4 | | | | 544,009 | | 309,162 | | 118,393 |
| Income with marketable securities | 5 | | | | 93,410 | | 126,106 | | 79,425 |
| Fair value through profit and loss | | | | | 66,868 | | 70,939 | | 45,093 |
| Amortized cost | | | | | 26,542 | | 55,167 | | 34,332 |
| Interest on recoverable taxes | 9 | | | | 434,737 | | 307,313 | | 289,772 |
| Interest and financial income on other assets (3) | | | | | 130,364 | | 340,354 | | 50,146 |
| Financial income | | | | | 1,202,520 | | 1,082,935 | | 537,736 |
| Financial expenses | | | | | | | | | |
| Interests on loans and borrowings | 15 | | | | (2,156,842) | | (1,851,643) | | (1,635,604) |
| Interest on contingencies | 20 | | | | (144,281) | | (138,433) | | (239,174) |
| Interest on leases | 17 | | | | (323,452) | | (220,406) | | (226,444) |
| Interest on actuarial liabilities | | | | | (53,193) | | (47,385) | | (46,741) |
| Taxes on financial income | | | | | (49,531) | | (26,245) | | (27,755) |
| Put/call options result - business combinations | | | | | - | | - | | (278,618) |
| Adjustment to present value (2) | 6 and 16 | | | | (1,001,451) | | (976,104) | | (634,047) |
| Other financial expenses | | | | | (407,562) | | (325,549) | | (243,232) |
| Financial expenses | | | | | (4,136,312) | | (3,585,765) | | (3,331,615) |
| Foreign exchange, prices and monetary variations | | | | | | | | | |
| Exchange rate variation on monetary assets and liabilities and prices | | | | | 161,162 | | 474,052 | | (407,472) |
| Foreign exchange of derivatives | | | | | (312,201) | | (554,217) | | 405,139 |
| Interest and fair value of derivatives | | | | | (284,720) | | (483,954) | | (247,566) |
| Derivative results | | | | | (596,921) | | (1,038,171) | | 157,573 |
| Net Monetary Gains or Losses (1) | | | | | 548,704 | | 398,194 | | (797) |
| Foreign exchange, prices and monetary variations | | | | | 112,945 | | (165,925) | | (250,696) |
| Financial income (expenses), net | | | | | (2,820,847) | | (2,668,755) | | (3,044,575) |
| (1) | Effects of monetary correction resulting from operations in hyperinflationary economy. |
| (2) | The adjustment to present value considers the balances of trade accounts receivable and trade accounts payable and the rate used for the year ended on December 31, 2023 was 13.13% p.a. (15.72% p.a. for the year ended on December 31, 2022 and 9.3% on December 31, 2021). |
| (3) | Includes financial income in the amount of R$46,768 (R$275,917 on December 31, 2022) relating repurchase of senior notes (note 15.2). |
The Company discloses its statement of income by function and thus presents below the details by nature:
| | | | | | | | | |
| | | | | | | | | |
| | | | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Costs of sales | | | | | | | | |
| Raw materials and supplies | | | | 33,474,310 | | 34,930,469 | | 29,279,943 |
| Salaries and employees benefits | | | | 5,161,849 | | 4,690,868 | | 4,280,574 |
| Depreciation | | | | 2,448,711 | | 2,319,631 | | 2,080,306 |
| Amortization | | | | 210,288 | | 185,852 | | 150,514 |
| Other | | | | 3,486,581 | | 3,545,556 | | 2,859,435 |
| Cost of sales | | | | 44,781,739 | | 45,672,376 | | 38,650,772 |
| | | | | | | | | |
| Sales expenses | | | | | | | | |
| Indirect and direct logistics expenses | | | | 3,691,443 | | 3,415,266 | | 2,698,526 |
| Marketing | | | | 802,754 | | 801,194 | | 718,151 |
| Salaries and employees benefits | | | | 1,697,652 | | 1,548,788 | | 1,480,314 |
| Depreciation | | | | 382,267 | | 341,009 | | 345,624 |
| Amortization | | | | 82,911 | | 68,317 | | 94,332 |
| Other | | | | 797,136 | | 892,574 | | 721,303 |
| Sales expenses | | | | 7,454,163 | | 7,067,148 | | 6,058,250 |
| | | | | | | | | |
| Administrative expenses | | | | | | | | |
| Salaries and employees benefits | | | | 366,142 | | 319,187 | | 395,892 |
| Fees | | | | 65,417 | | 46,602 | | 68,378 |
| Depreciation | | | | 41,710 | | 33,896 | | 35,193 |
| Amortization | | | | 58,894 | | 43,000 | | 40,385 |
| Other | | | | 225,673 | | 202,142 | | 283,112 |
| Administrative expenses | | | | 757,836 | | 644,827 | | 822,960 |
The Company incurred in expenses with internal research and development of new products of R$48,041 for the year ended December 31, 2023 (R$33,389 for the year ended December 31, 2022).
29. Related parties
| Schedule of transaction and balances of other parties | | | | | | | |
| | Accounts receivable | | Trade accounts payable |
| | 12.31.23 | | 12.31.22 | | 12.31.23 | | 12.31.22 |
| Marfrig Global Foods S.A. | 7,945 | | 11,251 | | (24,838) | | (26,970) |
| Marfrig Chile S.A. | 2,563 | | 2,258 | | (195) | | (42) |
| Quickfood S.A. | 24,852 | | 18,531 | | - | | - |
| Marfrig Alimentos S.A. | - | | 98 | | - | | - |
| Weston Importers Ltd. | 366 | | - | | - | | - |
| MFG Agropecuária Ltda. | 1 | | - | | - | | - |
| Pampeano Alimentos S.A. | 473 | | 217 | | (112) | | - |
| Total | 36,200 | | 32,355 | | (25,145) | | (27,012) |
| | | | | | | | | | | | | |
| | Sales | | | Purchases |
| | 12.31.23 | | 12.31.22 | | 12.31.21 | | | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Marfrig Global Foods S.A. | 61,320 | | 76,553 | | 89,311 | | | (472,903) | | (572,357) | | (328,956) |
| Marfrig Chile S.A. | 12,790 | | 15,273 | | 4,866 | | | (1,290) | | (1,187) | | (93) |
| Quickfood S.A. | 95,631 | | 84,875 | | 38,058 | | | - | | - | | - |
| Marfrig Alimentos S.A. | - | | 242 | | 139 | | | - | | - | | - |
| Weston Importers Ltd. | 1,536 | | - | | - | | | - | | - | | - |
| Pampeano Alimentos S/A | 866 | | 237 | | - | | | (112) | | - | | - |
| Total | 172,143 | | 177,180 | | 132,374 | | | (474,305) | | (573,544) | | (329,049) |
The subsidiaries of the Company enter into loan agreements pursuant its cash management strategy respecting market conditions. As of December 31, 2023 the balance of these transactions was R$1,132,634 (R$2,156,987 as of December 31, 2022).
The Company made contributions related to the post-employment benefit plans of its employees to BRF Previdência, which holds these plans (note 19). Additionally, the Company leased properties owned by BRF Previdência, and for the year ended December 31, 2023 the total amount of lease payments was R$21,936 (R$22,241 for the year ended December 31, 2022).
The Company maintains other transactions with related parties resulting from guarantees, transferences and donations to related associations and institutes, as well as leasing and other commercial transactions with related people and entities. Such transactions are compliant with the Related Party Transactions Policy and are not relevant, individually or in aggregate.
On December 16, 2022, BRF issued a guarantee to the promissory commercial notes issued by Potengi, public offering with limited distribution efforts with maturity in eighteen (18) months. The total amount of the Offer is R$700,000. BRF issued a joint guarantee limited to the amount corresponding to 24% of the Offer amount.
On August 14, 2023, BRF provided financing guarantees to Potengi, with Banco do Brasil S.A., through the opening of fixed credit up to a limit of R$144,000, coming from ordinary resources from the Fundo de Desenvolvimento do Nordeste – (“FDNE”), transferred to finance the implementation of the Cajuína 1 Wind Generating Plant, located in Rio Grande do Norte.
On January 19, 2024, BRF provided guarantees with the purpose of ensuring compliance with the main and additional obligations undertaken by Potengi at its first issue of 300,000 simple debentures, not convertible
into shares, in a single series, with a maturity period of eighteen (18) years. The nominal unit value is R$1, with BRF providing a personal guarantee for the amount corresponding to 24% of the issue value.
On March 27, 2024, BRF provided guarantees with the purpose of ensuring compliance with the main and additional obligations undertaken by Potengi at its second issue of 2.100,000 simple debentures, not convertible into shares, in a single series, with a maturity period of eighteen (18) years. The nominal unit value is R$0,1, with BRF providing a personal guarantee for the amount corresponding to 24% of the issue value.
| 29.1. | Management remuneration |
The total remuneration and benefits expense with board members, statutory directors and the head of internal audit are set forth below:
| Schedule of total remuneration and benefits paid to professionals | | | | | |
| | | | | | |
| | 12.31.23 | | 12.31.22 | | 12.31.21 |
| Salary and profit sharing | 61,427 | | 35,547 | | 61,088 |
| Short-term benefits (1) | 266 | | 1,263 | | 1,149 |
| Private pension | 800 | | 834 | | 1,189 |
| Termination benefits | 8,413 | | 1,237 | | 2,118 |
| Share-based payment | 14,923 | | 27,210 | | 29,198 |
| Total remuneration and benefits paid to professionals | 85,829 | | 66,091 | | 94,742 |
| (1) | Comprises: medical assistance, educational expenses and others. |
In addition, the executive officers (non-statutory) received among remuneration and benefits the total amount of R$16,917 for the year ended December 31, 2023 (R$18,072 for the year ended December 31, 2022).
The Company has tax benefits related to ICMS granted by the state governments as 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 (“FOMENTAR”). Such incentives are directly associated to the manufacturing facilities operations, job generation and to the economic and social development.
For the year ended December 31, 2023, the government grants totaled R$349,390 (R$337,980 for the year ended December 31, 2022), which were registered in the statement of income (loss) as Net sales, Cost of sales and Other operating income (expenses), net, according to the nature of each grant.
In the normal course of the business, the Company entered into long-term agreements with third parties, which mainly include purchase of, secondary materials, energy inputs, storage and industrialization services, among others to support its activities. In these agreements, the prices agreed may be fixed or to be fixed. These agreements contain termination clauses for non-compliance with essential obligations and the minimum contractually agreed is generally purchased and, for this reason, there are no liabilities recorded in addition to the amount that is recognized on an accrual basis. On December 31, 2023, firm purchase commitments totaled R$5,023,227.
The Company’s policy for insurance considers the concentration and relevance of the risks identified in its risk management program.
| Schedule of insurance coverage | | | | |
| | | | | 12.31.23 |
| Assets covered | | Coverage | | Amount of coverage |
| | | | | |
| Operational risks | | Coverage against damage to buildings, facilities, inventory, machinery and equipment, loss of profits. | | 3,368,290 |
| Transport of goods | | Coverage of goods in transit and in inventories. | | 783,019 |
| Civil responsability | | Third party complaints. | | 387,304 |
Each legal entity has its own coverages, which are not complementary.
| 33. | Transactions that do not involve cash |
The following transactions did not involve cash or cash equivalents during the year ended December 31, 2023:
| (i) | Capitalized loan interest: for the year ended December 31, 2023 amounted to R$56,871 (R$93,261 for the year ended December 31, 2022). |
| (ii) | Addition of lease by right-of-use assets and respective lease liability: for year ended on December 31, 2023 amounted to R$1,420,083 (R$1,178,711 for the year ended December 31, 2022). |
| (iii) | Leniency Agreement: in the 2nd quarter of 2023, the amount of Leniency Agreement, updated according to the agreement, was settled, as follows: (i) 70% with tax losses in the amount of R$435,128 (note 10.1); (ii) 30% with PIS and COFINS and IRPJ tax credits in the amount of R$186,483 (notes 9.2 and 9.4). |
| 34. | Approval of the Financial Statements |
The financial statements were approved and the issuance authorized by the Board of Directors on April 18, 2024.
