20-F 1 brfform20f_2020.htm 20-F

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, 2020
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
(Jurisdiction of Incorporation or Organization)

Av. Das Nações Unidas, 8501 – 1st Floor
Pinheiros – 05425-070

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

Carlos Alberto Bezerra de Moura

Chief Financial and Investor Relations Officer
Telephone. (5511) 2322-5005, Fax (5511) 2322-5740
Av. Das Nações Unidas, 8501 – 1st Floor
Pinheiros – 05425-070

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

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

Title of each 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, 2020, there were 812,473,246 common shares (including treasury 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. ☒

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

Page

PART I INTRODUCTION 1
ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 2
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE 2
ITEM 3.   KEY INFORMATION 2
A.   Selected Financial Data 2
B.   Capitalization and Indebtedness 3
C.   Reasons for the Offer and Use of Proceeds 4
D.   Risk Factors 4
ITEM 4.   INFORMATION ON THE COMPANY 35
A.   History and Development of the Company 35
B.   Business Overview 39
C.   Organizational Structure 60
D.   Property, Plant and Equipment 61
ITEM 4A.   UNRESOLVED STAFF COMMENTS 65
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS 65
A.   Operating Results 65
B.   Liquidity and Capital Resources 85
C.   Research and Development, Patents and Licenses 97
D.   Trend Information 99
E.   Off-Balance Sheet Arrangements 101
F.   Tabular Disclosure of Contractual Obligations 102
G.   Safe Harbor 103
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 103
A.   Directors and Senior Management 103
B.   Compensation 107
C.   Board Practices 108
D.   Employees 112
E.   Share Ownership 112
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 114
A.   Major Shareholders 114
B.   Related Party Transactions 117
C.   Interests of Experts and Counsel 118
ITEM 8.   FINANCIAL INFORMATION 118
A.   Consolidated Statements and Other Financial Information 118
i 
 
B.   Significant Changes 130
ITEM 9.   THE OFFER AND LISTING 130
A.   Offer and Listing Details 130
B.   Plan of Distribution 131
C.   Markets 131
D.   Selling Shareholders 133
E.   Dilution 133
F.   Expenses of the Issue 134
ITEM 10.   ADDITIONAL INFORMATION 134
A.   Share Capital 134
B.   Memorandum and Articles of Association 134
C.   Material Contracts 153
D.   Exchange Controls 153
E.   Taxation 154
F.   Dividends and Paying Agents 165
G.   Statement by Experts 165
H.   Documents on Display 165
I.   Subsidiary Information 165
ITEM 11.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 165
ITEM 12.   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 173
A.   Debt Securities 173
B.   Warrants and Rights 173
C.   Other Securities 173
D.   American Depositary Shares 173
PART II 174
ITEM 13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 174
ITEM 14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 174
ITEM 15.   CONTROLS AND PROCEDURES 165
A.   Disclosure Controls and Procedures 174
B.   Management’s Annual Report on Internal Control Over Financial Reporting 175
C.   Report of the Registered Public Accounting Firm 175
D.   Changes in Internal Control Over Financial Reporting 175
ITEM 16.   [RESERVED] 175
ITEM 16A.   AUDIT COMMITTEE FINANCIAL EXPERT 175
ITEM 16B.   CODE OF ETHICS 176
ITEM 16C.   PRINCIPAL ACCOUNTANT FEES AND SERVICES 176
ii 
 
ITEM 16D.   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 177
ITEM 16E.   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 177
ITEM 16F.   CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 177
ITEM 16G.   CORPORATE GOVERNANCE 177
ITEM 16H.   MINE SAFETY DISCLOSURE 179
PART III 179
ITEM 17.   FINANCIAL STATEMENTS 179
ITEM 18.   FINANCIAL STATEMENTS 179
ITEM 19.   EXHIBITS 179
INDEX TO FINANCIAL STATEMENTS F-1
 
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PART I
INTRODUCTION

Unless otherwise indicated, all references herein to (1) “BRF” are references to BRF S.A., a corporation organized under the laws of the Federative Republic of Brazil (“Brazil”), and its consolidated subsidiaries, (2) the “Company,” “we,” “us,” “our” or “our company” are references to BRF, together with its consolidated subsidiaries, and (3) “common shares” are references to the Company’s authorized and outstanding common stock, designated ordinary shares (ações ordinárias), each without par value. All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “U.S. dollars,” “dollars” or “U.S.$” are to the United States dollar. All references to “euro” or “EUR” 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.

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 (“IFRS”) as issued by the International Accounting Standards Board (“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 constitute 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, 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 economic, financial, political and social effects of the novel coronavirus (“COVID-19”) pandemic (or other pandemics, epidemics and similar crises) particularly in Brazil and to the extent that they continue to cause serious negative macroeconomic effects, thus enhancing the risks described under “Item 3. Key Information—D. Risk Factors,” (ii) general economic, political and business conditions both in Brazil and abroad, including, in Brazil, developments and the perception of risks in connection with ongoing corruption and other investigations and increasing fractious relations and infighting within the administration of President Bolsonaro, as well as policies and potential changes to address these matters or otherwise, including economic and fiscal reforms and in response to the ongoing effects of the COVID-19 pandemic, any of which may negatively affect growth prospects in the Brazilian economy as a whole, (iii) our ability to timely and efficiently implement any necessary measures in response to, or to mitigate the impacts of, the COVID-19 pandemic on our business, operations, cash flows, prospects, liquidity and financial condition, (iv) our ability to predict and efficiently react to the temporary or long-term term changes in our customers’ behavior as a result of the COVID-19 pandemic, even when the outbreak is sufficiently controlled, (v) health and food safety risks related to the food industry, including in connection with

 
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ongoing investigations and legal proceedings, (vi) more stringent trade barriers in key export markets and increased regulation of food safety and security, (vii) the risk of outbreak of animal diseases, (viii) risks related to climate change, (ix) the risk of any shortage or lack of water or other raw materials necessary for our business, (x) compliance with various laws and regulations, (xi) risks related to new product innovation, (xii) the implementation of the principal operating strategies of the Company, including through divestitures, acquisitions or joint ventures, (xiii) the cyclicality and volatility of raw materials and selling prices, including as a result of ongoing global trade disputes, (xiv) strong international and domestic competition, (xv) risks related to labor relations, (xvi) the protection of our intellectual property, (xvii) the potential unavailability of transportation and logistics services, (xviii) the risk that our insurance policies may not cover certain of our costs, (ix) our ability to recruit and retain qualified professionals, (xx) the risk of cybersecurity breaches, (xxi) risks related to our indebtedness, (xxii) risks related to the Brazilian economy and to Brazilian politics, (xxiii) interest rate fluctuations, inflation and exchange rate movements of the real in relation to the U.S. dollar and other currencies, (xxiv) the direction and future operation of the Company, (xxv) the Company’s financial condition or results of operations and (xxvi) other factors identified or discussed under “Item 3. Key Information—D. Risk Factors.”

Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements. The accompanying information contained in this annual report 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, the Company undertakes no obligation to publicly update any forward-looking statement, whether because of new information, future events or otherwise.

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION
A.Selected Financial Data

We present below certain selected financial data derived from our consolidated financial statements as of and for the years ended December 31, 2020, 2019 and 2018, included herein, prepared in accordance with IFRS. IFRS differs in certain significant respects from the accounting principles generally accepted in the United States, or “U.S. GAAP.”

Following the financial and operational restructuring plan initiated in June 2018, we concluded the sale of our operations in Argentina, Europe and Thailand in 2019. The operations in Argentina, Europe and Thailand are reported in our financial statements as discontinued operations for all periods presented.

The selected financial data should be read in conjunction with our consolidated financial statements and the notes thereto contained in this annual report, as well as the information set forth under the heading “Item 5. Operating and Financial Review and Prospects.”

 
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STATEMENT OF INCOME (LOSS) DATA

 

Year Ended December 31,

 

2020

2019

2018

2017

2016

  (in thousands of reais, except share, per share and per ADS amounts and as otherwise indicated)
Statement of Income (Loss) Data          
Continuing Operations          
Net sales 39,469,700 33,446,980 30,188,421 28,314,160 27,883,943
Gross profit 9,470,878 8,076,938 4,867,668 5,712,945 6,949,865
Operating income (Loss)

3,051,229

2,748,337

(206,334)

663,184

1,962,881

Income (Loss) from Continuing Operations

1,524,997

1,078,333

(2,114,506)

(966,765)

(110,991)

           
Income (Loss) from Discontinued Operations

(915,809)

(2,351,740)

(132,089)

(256,348)

Net Income (Loss)

1,524,997

162,524

(4,466,246)

(1,098,854)

(367,339)

Attributable to:          
Controlling shareholders 1,518,492 162,684 (4,448,061) (1,125,572) (372,383)
Non-controlling shareholders

6,505

(160)

(18,185)

26,718

5,044

           
Earnings (Loss) per share - basic from continuing operations 1.88 1.32 (2.61) (1.23) (0.13)
Earnings (Loss) per ADS - basic from continuing operations 1.88 1.32 (2.61) (1.23) (0.13)
Earnings (Loss) per share – basic 1.88 0.20 (5.48) (1.40) (0.46)
Earnings (Loss) per ADS – basic 1.88 0.20 (5.48) (1.40) (0.46)
Weighted average shares outstanding at the end of the year – basic (millions) 809,110,872 811,539,167 811,294,251 803,559,763 801,903,266
Earnings (Loss) per share – diluted 1.87 1.31 (2.61) (1.23) (0.13)
Earnings (Loss) per ADS – diluted 1.87 1.31 (2.61) (1.23) (0.13)
Weighted average shares outstanding at the end of the year – diluted (millions) 811,348,808 813,867,119 811,294,251 803,559,763 801,903,266
Dividends per share 0.76
Dividends per ADS 0.76

 

STATEMENT OF FINANCIAL POSITION DATA

 

 

As of December 31,

 

2020

2019

2018

2017

2016

  (in thousands of reais, except as otherwise indicated)
Statement of Financial Position Data          
Cash and cash equivalents 7,576,625 4,237,785 4,869,562 6,010,829 6,356,919
Trade accounts receivable, net 4,136,421 3,031,046 2,604,928 3,919,022 3,085,147
Inventories 6,802,759 3,887,916 3,877,294 4,948,168 4,791,640
Assets held for sale 186,025 99,245 3,326,305 41,571 26,126
Total current assets 22,911,984 15,045,427 19,030,900 19,185,523 18,893,738
Property, plant and equipment, net 12,215,580 12,276,889 10,696,998 12,190,583 11,746,238
Intangible assets

5,220,102

4,908,079

5,019,398

7,197,636

6,672,554

Total non-current assets

26,752,922

26,724,712

23,351,477

26,042,958

24,051,198

Total assets

49,664,906

41,770,139

42,382,377

45,228,481

42,944,936

Loans and borrowings 1,059,984 3,132,029 4,547,389 5,031,351 3,245,004
Trade accounts payable

8,996,206

5,784,419

5,487,205

6,445,486

5,839,838

Total current liabilities

15,440,328

13,528,441

14,488,640

14,874,377

12,640,423

Loans and borrowings 21,344,442 15,488,250 17,618,055 15,413,027 15,717,376
Total non-current liabilities 25,411,044 20,228,277 20,361,960 18,641,322 18,085,160
Equity          
Capital 12,460,471 12,460,471 12,460,471 12,460,471 12,460,471
Total equity

8,813,534

8,013,421

7,531,777

11,712,782

12,219,353

Total liabilities and equity

49,664,906

41,770,139

42,382,377

45,228,481

42,944,936

 

B.Capitalization and Indebtedness
 
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Not applicable.

C.Reasons for the Offer and Use of Proceeds

Not applicable.

D.Risk Factors

Risks Relating to Our Business and Industry

Pandemics or human disease outbreaks, such as the novel coronavirus (COVID-19), may disrupt consumption and trade patterns, supply chains and production processes, which could materially affect our operations and results of operations.

Pandemics or human disease outbreaks, such as the novel coronavirus (COVID-19) originating in China in late 2019 and declared a global pandemic by the World Health Organization on March 11, 2020, may adversely affect our business and operations. The worldwide spread of COVID-19 has 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. In addition, customers from certain regions in which we operate are being affected, mainly by the measures of social distancing imposed by authorities and restrictions on public gatherings or interactions, which may limit the opportunity for our customers to purchase our products. The consequences of the pandemic could also result in the destabilization of commodity prices or the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and have a material adverse effect on our results of operations. Any deterioration in the credit cycle of our customers as a result of the pandemic or the measures implemented to address it, may adversely affect our results and cash flows in the future.

 

Our operations include global production and distribution facilities, and if there is an outbreak of a human disease such as 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 quarantines or 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.

Since the beginning of the global pandemic, we have continued to operate our plants, distribution centers, logistics, supply chain and administrative offices, although currently we have implemented a remote work program in some of our corporate offices, and we had to close our Lajeado plant for a week in May 2020 and our Rio Verde plant for 14 days in June 2020, in each case as the result of an outbreak. Our operations may be further affected by COVID-19 through reduction of the available labor force, reducing the productivity of manufacturing operations, lack of raw materials and packaging, and delay in line growth and maintenance projects due to reduced availability of third-party suppliers. We have incurred direct and incremental expenditures, mainly related to personnel, prevention, control, logistics and philanthropic donations, as a result of the pandemic in the amount of R$499,299 thousand.

Despite having more visibility on the impact of the pandemic compared to March 2020, we may still suffer changes in 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 a resulting increase in our expected credit losses. The possible deterioration in the credit cycle of our customers may adversely affect our results, financial position and cash flows in the future.

The recent increase in volatility of market risks has significantly affected the fair value of our assets and liabilities, particularly considering wide variations in foreign exchange rates. Additionally, the heightened uncertainty of projections has increased the challenge of accurately measuring certain of our assets and liabilities.

 
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The COVID-19 pandemic also resulted in a widespread health crisis that destabilized commodity prices and the economic conditions and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and have a material adverse effect on our results of operations. The current pandemic and any future pandemics could also adversely affect consumer demand, as quarantines may inhibit consumption, and restrictions on public gatherings or interactions may limit the opportunity for our customers and consumers to purchase our products. In addition, demand for our products has been affected as a result of the COVID-19 pandemic worldwide, especially in our international operations, due to the partial discontinuation of our foodservice channel, weakening of global commercial activities, reduction of population income, and changes in consumption habits. As a result, over the past year we have observed lower average prices as a consequence of relocating production from foodservice to other channels with lower prices and profitability, ultimately having an adverse effect on our results of operations and financial position.

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, 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. These other factors include, among others, fluctuations in local and global poultry and hog production levels, environmental and conservation regulations, economic conditions, Covid-19 Pandemic, weather, animal and crop diseases, cost of national and international freight and exchange rate and interest rate fluctuations. In addition, prices for our raw materials, including corn, soy meal and soybeans, have been affected, and may continue to be affected, by the ongoing trade dispute between the U.S. and China, China soybean and corn purchases and crop results due to the weather conditions, all of them reflecting in the world commodities stock prices. Any changes in the price of raw materials required to produce our products as a result of the foregoing or other factors could have a material impact on our business.

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

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

The prices of our raw materials, including corn, soy meal and soybeans, have been affected, and may continue to be affected, by the ongoing trade dispute between the U.S. and China. It is unclear whether this trade dispute will be resolved and what effects it may have on global political and economic conditions in the long term. For more information on the trade dispute between the U.S. and China, see “—More stringent trade barriers in key export markets may negatively affect our results of operations.” Any changes in the price of raw materials required for our production as a result of the foregoing or other factors could have a material adverse impact on our business.

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, the perceived risk of contamination of our food or related packaging by COVID-19 led to production, shipping and sales disruptions in Brazil and our export markets, particularly in China, in early 2020.

 
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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 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.

On February 13, 2019, we announced a voluntary recall of approximately 164.7 metric tons of fresh chicken meat for the Brazilian domestic market and approximately 299.6 metric tons of fresh chicken meat for the international market due to a potential presence of Salmonella enteritidis. This recall and possible future recalls have resulted and may result, respectively, in increased costs and could negatively affect our brands’ reputation. 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, results of operations, financial condition and prospects.

Even if our own products are not affected by contamination, our industry may face adverse publicity in certain of its markets if the products of other producers become contaminated, which could result in negative public perception about the safety of our products and reduced consumer demand for our products 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.

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 has broken out in Europe and the United States in 1990 and 1985, respectively, the Porcine Epidemic Diarrhea (PEDV), which has broken out in Europe and the United States in 2014 and 2013, respectively, or the African swine fever which broke out in China in 2018, were to break out in Brazil, we could be required to dispose of hogs. While there have been outbreaks of Classical Swine Fever in Brazil, and although none have occurred in the free zones where we source our hogs for production, any such occurrence 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 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.

 
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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, a neighboring country to Brazil, confirmed the occurrence of avian influenza. In 2019 and 2020, several countries within Europe, Asia and Africa reported cases of highly pathogenic avian influenza in poultry. Additionally, Mexico also reported cases in 2019 and the United States also reported cases in 2020.

Even though Brazil has not yet had a documented case of avian influenza, there are concerns that an outbreak of avian influenza may occur in the country in the future. Any outbreak of avian influenza in Brazil could lead to the required disposal of our poultry flocks, which would result in decreased sales in the poultry industry, prevent recovery of costs incurred in raising or purchasing poultry and result in additional expense for the disposal of poultry. In addition, any outbreak of avian influenza in Brazil would likely lead to immediate restrictions on the export of some of our products to key export markets. Preventive actions adopted by Brazilian authorities, if any, may not be effective in precluding the spread of avian influenza within Brazil.

Whether or not an outbreak of avian influenza occurs in Brazil, further outbreaks of avian influenza anywhere in the world could have a negative impact on the consumption of poultry in our key export markets or in Brazil, and a significant outbreak would negatively affect our 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.

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

According to the 16th Global Risks Report published by the World Economic Forum in January 2021, risks related to climate change are considered to be the most concerning for the world in the next 10 years.

 

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 temperature (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 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 have proper 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 such changes 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 and increases in energy costs could result in reduced profits. A significant interruption in energy supply or outright loss of energy at any of our facilities could result in a temporary disruption in production and delivery of products to customers and additional costs, materially adversely affecting our results of operations.

A significant portion of Brazil’s electricity generation capacity is currently dependent on hydroelectric facilities. Hydroelectric production is vulnerable to a variety of factors, including levels of precipitation. There can be no assurance that our efforts to increase our energy efficiency and reduce electricity demand will be successful. If the amount of water available to energy producers becomes increasingly scarce due to drought or diversion for other uses, as has occurred in recent years, our energy expenses may increase, and our results of operations may be materially adversely affected.

 
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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 SDG6 Brief Report, published by United Nations Environment Programme, water scarcity affects more than 40% of the global population and this percentage is expected to increase. Over 1.7 billion people are currently living in river basins where water usage exceeds natural replenishment. 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. As a result, the shortage or lack of water, including the increasing risk of droughts in the regions where we operate, represents 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, 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 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.

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.

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 have been temporarily closed, and our average selling prices for some products and in some markets have decreased. For additional information, see “—Health risks related to our business and the food industry could adversely affect our ability to sell our products” and “—We have been subject to significant investigations relating to, among other things, food safety and quality control, and an adverse outcome of any of these investigations could result in penalties, fines or other forms of liability and could have a material adverse effect on our business, reputation, brand, results of operations and financial condition.”

Some countries, such as Russia and South Africa, have a history of erecting trade barriers to 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. 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. Additionally, in August 2018, Iraq increased the tariff on poultry products from 10% to 60%. The South African producers’ representatives have repeatedly filed requests with local authorities for the opening of an anti-dumping investigation against Brazilian poultry exporters.

Many developed countries use direct and indirect subsidies to enhance the competitiveness of their producers in other markets. In addition, local producers in some markets may exert political pressure on their governments to prevent foreign producers from exporting to their market, particularly during unfavorable economic conditions. Any of the above restrictions could substantially affect our export volumes and, consequently, our export sales and financial performance. If new trade barriers arise in our key export markets, we may face difficulties in reallocating our products to other markets on favorable terms, and our business, financial condition and results of operations might be adversely affected.

 
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Trade disputes between other countries also creates 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 has affected the global economy. 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. A second phase of the agreement is expected to be even more difficult to achieve. There can be no assurances that the trade dispute will be fully resolved and that the global economy will not be further affected by it. The United Sates is expected to maintain the 25% tariffs on a wide range of U.S.$250 billion of Chinese industrial goods and components used by the U.S. manufacturing sector. 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.

However, the current trade deal may not be maintained by the United States under the new Biden administration, especially since it has generally been regarded unfavorably, particularly for U.S. industry. The U.S. agribusiness sector, on the other hand, has 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 120 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.

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. 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 may result in decreased revenues and additional expenses.

In August 2019, Saudi Arabia imposed an embargo on seasoned chicken meat produced in our Kizad facility, in Abu Dhabi, which was restricted from exporting to Saudi Arabia. The embargo was a result of Saudi Arabia’s Vision 2030 plan, announced in April 2016 as a national development plan, which included instruments 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 Kizad facility. In October 2019, we announced that we had executed a non-binding Memorandum of Understanding with the Saudi Arabian General Investment Authority – SAGIA regarding our construction and operation of a poultry processing plant in Saudi Arabia. We estimate that the investment amount will be around R$634 million (U.S.$120 million, translated to reais at the exchange rate of R$5.1967 as of December 31, 2020). The development of this project is currently in the technical specification and financial modelling phase. There can be no assurance that the Saudi Arabian government will not further restrict our ability to export our products to Saudi Arabia, which may result in a material adverse impact on our business, financial condition and results of operations. In February 2020, we received notification from the SFDA, the Saudi Arabian sanitary authority, regarding a report temporarily suspending two of our facilities, the Dois Vizinhos and the Francisco Beltrão plant, both located in the State of Paraná, from exporting chicken meat to Saudi Arabia. The SFDA informed us that the measure is temporary and, among other measures, requested that the Brazilian authorities provide more details about investigations carried out between 2014 and 2018 regarding alleged violations committed by us in the production of animal feed and PREMIX compound. For more information about these investigations, see “—We have been subject to significant investigations relating to, among other things, food safety and quality control, and an adverse outcome of any of these investigations could result in penalties, fines or other forms of liability and could have a material adverse effect on our business, reputation, brand, results of operations and financial condition.” Additionally, the Saudi government has been implementing, since January 2020, a previous import licenses system. 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.

 
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Trade barriers may also be imposed in our key export markets as a result of the COVID-19 pandemic, for example due to outbreaks of COVID-19 in our plants and restrictions that may be imposed on our products because of these outbreaks. For more information, see “—Pandemics or human disease outbreaks, such as the novel coronavirus (COVID-19), may disrupt consumption and trade patterns, supply chains and production processes, which could materially affect our operations and results of operations.”

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 government regulations relating to food safety, including as a result of the COVID-19 pandemic, or animal welfare could require us to make additional investments or incur additional costs to meet the necessary specifications for our products. Our products are often inspected outside of Brazil by foreign food safety officials, and any failure to pass those inspections 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. Although Brazil currently has limited regulations regarding animal welfare, 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. Civil penalties may include fines, the suspension of public subsidies 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). Additionally, pursuant to Brazilian environmental laws, the corporate defendant may be held liable (such that the stockholders of a company will be held liable for its debts) if necessary to guarantee the payment of costs related to the recovery of environmental damage whenever the corporate form is deemed by a court to be an obstacle to obtaining compensation for environmental damage.

We have incurred, and will continue to incur, operating expenses and capital expenditure requirements to comply with these laws and regulations. Because of the possibility of unanticipated regulatory measures or other developments, particularly as environmental laws become more stringent in Brazil, the amount and timing of future expenditures required to maintain compliance 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, are not timely renewed or have their request for renewal rejected by the competent environmental authority, we may incur fines and other administrative penalties, such as suspension of operations or closing of the facilities in question. Those same penalties may also be applicable in the case of a failure to fulfill the conditions of validity in the environmental licenses already held by us. Furthermore, we cannot operate a plant if the required environmental permit is not valid or updated. Currently, some of our environmental licenses are in the renewal process, and we cannot guarantee that environmental agencies will approve our requests for renewal. Brazilian CONAMA (“Conselho Nacional do Meio Ambiente”) Resolution 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.

 
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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.

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. We have observed an increase in cybersecurity attacks worldwide in 2020, and the remote working arrangements that we have implemented due to the COVID-19 pandemic have increased our dependence on information technology systems and infrastructure, and they may further expand our vulnerability to this risk. 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.

 
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The regulatory environment with regard to cybersecurity, privacy and data protection issues is increasingly complex and may have impacts on our business, including increased risk, costs and expanded compliance obligations. 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 (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 Brazil 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, with the exception of the administrative sanctions, which are expected to come into effect in August 2021. 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 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.

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 LGPD came into effect on September 18, 2020, with the exception of the administrative sanctions, which are expected to come into effect in August 2021. The LGPD changed the way the protection of personal data is regulated in Brazil. It establishes a new legal framework to be observed in personal data processing operations and 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 authorization for the creation of the Brazilian National Data Protection Authority (“ANPD”).

On August 26, 2020, the Brazilian government issued Decree No. 10,474/2020 approving the regulatory framework and list of commissioned positions for the ANPD, as well as drafting guidelines and setting forth administrative sanctions for violations of the LGPD. The decree came into effect on October 10, 2020, when the ANPD’s president Waldemar Gonçalves Ortunho Junior was officially appointed.

If we do not comply with the LGPD, 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 our revenue or the revenue of our group or our conglomerate in Brazil in the last year, excluding taxes, up to a total amount of R$50 million per infraction. 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, on account of failure to comply with the obligations set forth by the Brazilian General Data Protection Law.

Therefore, the 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.

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

 
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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 recent years. For additional details on certain of these transactions, see “Item 4. Information on the Company—A. History and Development of the Company.” Divestments, acquisitions, new businesses and joint ventures, particularly those involving sizeable businesses, may present financial, managerial, operational, 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 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;
 
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·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 international antitrust authorities; 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.

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

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

Global economic downturns and related instability in the international financial system have had, and may continue to have, a negative effect on economic growth in Brazil. Global economic downturns reduce the availability of liquidity and credit to fund the continuation and expansion of 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.

Furthermore, because international investors’ reactions to the events occurring in one emerging market country sometimes produce a “contagion” effect, in which an entire region or class of investment is disfavored by international investors, Brazil could be adversely affected by negative economic or financial developments in other countries. Such developments may affect the Brazilian economy in the future and, consequently, our results of operations. For example, the world has recently been affected by the COVID-19 pandemic, which has triggered negative global economic developments, the severity of which we cannot quantify. Accordingly, the purchasing power of the Brazilian population is expected to decrease, which may reduce consumption and investments and adversely affect our business and results of operations.

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

 
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Furthermore, on June 23, 2016, the United Kingdom held a referendum on the United Kingdom’s membership within the European Union, the result of which, known as “Brexit,” favored the exit of the United Kingdom from the European Union. The United Kingdom was initially expected to depart the European Union on March 29, 2019, but on March 21, 2019, the European Union and the United Kingdom agreed to extend the deadline for Brexit. The European Union and the United Kingdom agreed to a further extension on April 10, 2019. On January 31, 2020, the United Kingdom announced it had officially exited the European Union and entered a transition period. Brexit has caused and may continue to cause political and economic uncertainty, including significant volatility in global stock markets and currency exchange rate fluctuations. The effects of Brexit will depend on many factors, including any trade deals that the United Kingdom makes to retain access to European Union markets. Brexit could lead to legal uncertainty and give rise to potentially conflicting national laws and regulations as the United Kingdom determines which laws of the European Union will be replaced or replicated. There could be increased costs from re-imposition of tariffs on trade between the United Kingdom and the European Union, shipping delays because of the need for customs inspections and procedures, and temporary shortages of certain goods. In addition, trade and investment between the United Kingdom, the European Union, Brazil and other countries will be impacted by the fact that the United Kingdom operated under the European Union’s tax treaties. The United Kingdom will need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete. The potential impact of Brexit on our market share, sales, profitability and results of operations is unclear. The economic conditions in the United Kingdom, the European Union and global markets may be adversely affected by reduced growth and volatility. 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. The non-compete provision has partially lapsed for certain products and channels, and in October 2020, we reached a commercial agreement with Tyson International Holding Co. to accelerate our return to the European continent and regain access to other markets through a phased removal of the non-compete restrictions between 2021 and 2024. While we aim to expand our sales to Europe and other international markets as part of our strategy and Vision 2030 Plan, continued uncertainty and market volatility could undermine those expansion plans and have a corresponding adverse effect on our operations and financial results.

We have been subject to significant investigations relating to, among other things, food safety and quality control, and an adverse outcome of any of these investigations could result in penalties, fines or other forms of liability and could have a material adverse effect on our business, reputation, brand, results of operations and financial condition.

Brazilian authorities are investigating Brazil’s meat processing industry in the so-called “Carne Fraca Operation.” The investigation involves a number of companies in the Brazilian industry and, among other things, includes allegations relating to food safety and quality control. On January 22, 2018, the Attorney General’s Office of the Third District of the State of Goiás filed a complaint against the industrial manager of our Mineiros plant at the time of the events subject to investigation in the Carne Fraca Operation, and against the former head of quality control at our Mineiros plant, neither of whom works for us any longer. Both of them were charged for allegedly committing crimes against consumers, as provided in article 7, item II of Law 8,137/90. According to the complaint, laboratory tests (dripping tests) detected excessive levels of water absorbed by the chicken products collected by authorities at our Mineiros plant. The Attorney General’s Office of the Third District of the State of Goiás alleges we produced chicken products with higher quantities of water than the limits permitted by the Brazilian Ministry of Agriculture, Livestock and Food Supply (Ministério da Agricultura, Pecuária e Abastecimento, or “MAPA”), with potential damages to customers, considering they would potentially be acquiring chicken meat products with a weight lower than that indicated on the packaging, since part of the weight of the frozen chicken would consist merely of water contained therein.

On April 20, 2017, based on an investigation by the Brazilian Federal Police, 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). One such employee was acquitted by lower courts of all charges on September 28, 2018, while the other employee was convicted on one charge. The Brazilian federal prosecutors and one of our former employees filed an appeal, which is pending judgment by the court. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for additional information.

On March 5, 2018, we learned of a decision issued by a federal judge of the First Federal Court of Ponta Grossa in the State of Paraná, which authorized the search and seizure of information and documents pertaining to us and certain current and former employees, as well as the temporary detention of certain individuals.  In what media reports have identified as the “Trapaça Operation,” eleven of our current and former employees were temporarily detained for questioning, including former Chief Executive Officer Pedro Faria and former Vice President for Global Operations Helio Rubens.  All such current and former employees were released from custody and those who are still our employees are on leave of absence. A number of our current and former employees were identified for questioning. The primary allegations in the Trapaça Operation involve alleged misconduct relating to quality violations, improper use of feed components and falsification of tests at certain BRF manufacturing plants and accredited labs. 

 
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On October 15, 2018, the Brazilian Federal Police issued the final report on the investigation of the Trapaça Operation, which contained accusations against 43 people, 23 of whom are current or former BRF employees, including former Chief Executive Officer Pedro Faria, former chairman of our board of directors Abilio Diniz, and three former vice presidents. Those who are still our employees are on leave of absence. Allegations against these senior employees generally focused on communications relating to alleged dioxin contamination. Since then, the police investigation has been under review by the Brazilian Federal Prosecutor responsible for the case to determine whether to bring criminal charges. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for additional information.

As a result of the Trapaça Operation, on March 5, 2018, we were notified by MAPA that it immediately suspended exports from our Rio Verde/Goiás, Carambeí/Paraná and Mineiros/Goiás plants to 13 countries with specific sanitary requirements related to Salmonella spp. As a precautionary measure, MAPA also suspended exports from 10 other of our plants to the European Union on March 15, 2018. On May 14, 2018, the European Union announced the decision to suspend 12 of our production facilities in Brazil by revoking the export approval of meat products from such facilities to the European Union’s countries due to increasing pressure from domestic producers’ organizations, supposedly demanding the measure for local market protection. 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 import ban applied to our production facilities, we are unable to export meat from such facilities to the European Union. Our results of operations may be further adversely affected due to the need to redirect the production capacity of such facilities, originally destined for the European Union, to other markets at similar prices or margins.

On December 4, 2019, in the context of the Trapaça Operation, criminal charges were brought against former BRF employees for allegedly committing, with respect to the manufacture of animal feed and PREMIX compound (supplement added to animal feed), aggravated larceny by fraud, false representation, wrapper or container with false labelling, forgery of substance or food product, forgery of product intended for therapeutic or medicinal purposes and criminal association, at least during the period between 2012 and 2018. The complaint was received by the lower court on January 21, 2020. There was no negative decision against any of the defendants during 2020. As of the date of this annual report, some of the defendants have presented their response. On November 4, 2020, also in the context of the Trapaça Operation, a second complaint was filed by the Federal Public Prosecutor’s Office against former and inactive employees of ours for allegedly committing aggravated larceny by fraud, false representation, selling products harmful to health and criminal association, between the years 2012 and 2017, related to the presence of Salmonella on food products. The complaint was received by the lower court on November 20, 2020. As of the date of this annual report, some of the defendants have presented their response. These proceedings are still pending. For additional information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.”

On February 11, 2020, 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) due to the Trapaça Operation. The Saudi Arabian government agency based its decision on news reports relating to the investigations. 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. For additional information, see “—More stringent trade barriers in key export markets may negatively affect our results of operations.”

In June 2018 and in May 2019, we learned of administrative proceedings commenced against BRF by the Brazilian Comptroller General of the Union (Controladoria-Geral da União, or “CGU”), which is 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 in Carne Fraca Operation and Trapaça 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. These CGU administrative proceedings against BRF remain pending without any adverse decision against BRF as of the date of this annual report. See “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for additional information.

 
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Any of these existing investigations and proceedings, as described in “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings,” or any other future investigation or proceeding could result in penalties, fines or other forms of liability and could have a material adverse effect on our business, reputation, brand, results of operations and financial condition.

We may fail to ensure compliance with relevant anti-fraud, anti-corruption, anti-money laundering and other international laws and regulations.

We are subject to anti-fraud, anti-corruption, anti-money laundering and other international laws and regulations. We are required to comply with the laws and regulations of Brazil and various jurisdictions where we conduct operations. In particular, we are subject to the Brazilian Anti-Corruption Law nº 12,846, the U.S. Foreign Corrupt Practices Act of 1977 (“FCPA”) and the United Kingdom Bribery Act of 2010. The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of our business, we may deal with entities and employees that are considered foreign officials for purposes of the FCPA. 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 “Item 3.—D. Risk Factors— Risks Relating to Our Business and Industry—We have been subject to significant investigations relating to, among other things, food safety and quality control, and an adverse outcome of any of these investigations could result in penalties, fines or other forms of liability and could have a material adverse effect on our business, reputation, brand, results of operations and financial condition” and “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings.” As a result of the Carne Fraca Operation and Trapaça Operation and related matters, we incurred expenses in the total amount of R$28,004 thousand in 2020 and R$79,207 thousand in 2019, which negatively impacted our results of operations. Additionally, these or other proceedings may result in penalties, fines, sanctions or other forms of liability. Furthermore, any negative reflection on our image or our brand from these or other activities could have a negative impact on our results of operations, as well as our ability to achieve our growth strategy.

Given the size of our operations and the complexity of our production chain, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate or unlawful practices, including fraud or violations of law or violations of our internal policies and procedures by our employees, directors, officers, partners or any third-party agents or service providers. Furthermore, there can be no assurance that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of applicable laws and regulations) for which we or they may ultimately be held responsible. Violations of anti-fraud, anti-corruption, anti-money laundering or other international laws and regulations could have a material adverse effect on our business, reputation, brand, selling prices, results of operations and financial condition, including as a result of the closure of international markets. We may be subject to one or more enforcement actions, investigations or proceedings by authorities for alleged infringement of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability. Potential negative developments in the Carne Fraca Operation, Trapaça Operation and other investigations may also negatively affect the market price of our common shares and American Depositary Receipts (“ADRs”).

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

We are subject to antitrust and competition laws and regulations in the jurisdictions in which we operate. Consequently, we may be subject to regulatory scrutiny in certain of these jurisdictions. For instance, on March 14, 2019, the Turkish Competition Authority (“TCA”) announced a decision regarding its investigation into our Turkish subsidiary Banvit and other producers for alleged anticompetitive practices in connection with chicken meat production in Turkey. The TCA imposed an administrative fine equivalent to R$22,507 thousand (TRY30,518 thousand, translated to reais at the exchange rate of R$0.7375 as of September 30, 2019), against Banvit. The decision was confirmed on September 17, 2019, and Banvit anticipated the payment of the fine to benefit from a 25% discount available under Turkish law. For additional information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Civil, Commercial and Other Proceedings.”

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

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.

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

Our success in maintaining, extending and expanding our brand image also depends on our ability to adapt to a rapidly changing media environment, including increasing reliance on social media and online dissemination of advertising campaigns. The growing use of social and digital media increases the speed and extent that information or misinformation and opinions can be shared. Negative posts or comments about us, our brands or our products on social or digital media could seriously damage our reputation and brand image. If we do not maintain or improve our brand image, then our sales, financial condition and results of operations could be materially and adversely affected.

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

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

·political instability;
·geopolitical risks and conflicts, such as war, terrorism and civil unrest;
·the imposition of exchange or price controls;
·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;
·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; 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 may be adversely affected, and we may experience significant variability in our revenue from those operations. This risk may be heightened as a result of the COVID-19 pandemic, for example due to outbreaks of COVID-19 in our plants and restrictions that may be imposed on our products because of these outbreaks. For more information, see “—Pandemics or human disease outbreaks, such as the novel coronavirus (COVID-19), may disrupt consumption and trade patterns, supply chains and production processes, which could materially affect our operations and results of operations.” In another trade-related development in 2020, certain member states of the European Union negotiating a trade agreement with the Mercosul trade bloc, of which Brazil is the largest member, indicated that progress would slow in light of concerns over Brazilian environmental protection policies and enforcement in connection with fires in the Amazon rainforest. Such delays 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 on 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.

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

External market sales account for a significant portion of our global net sales, and represented 43.7% of our net sales in 2020, 44.5% of our net sales in 2019 and 43.3% of our net sales in 2018. Our external market is reported within our International business segment, which 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.

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

·exchange rate and interest rate fluctuations and the impact of hyperinflation;
·commodities price volatility;
·deterioration in global economic conditions;
·political risks, such as turmoil and instability, foreign exchange controls and uncertainty regarding government policies;
·decreases in demand, particularly from large markets such as China and Saudi Arabia;
·imposition of increased tariffs, anti-dumping duties or other non-tariff trade barriers;
·restrictions on international trade and financial flows imposed due to balance of payments deficits;
·strikes or other events affecting ports and other transport facilities;
·unpredictable international border closings that restrict products, materials and people;
·compliance with differing foreign legal and regulatory regimes;
·strikes, not only of our employees, but also of port employees, truck drivers, customs agents, sanitary inspection agents and other government agents at the Brazilian ports from which we export several of our products;
·access to adequate infrastructure, which could be affected by flooding or similar events;
·damage to our products;
 
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·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; and
·negative preconceptions influenced by the worsening international reputation of Brazil due to deforestation and other environmental and sustainability issues.

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. 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 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, 2020, we have 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 union agreements, we may become subject to work stoppages or strikes.

Labor costs are among our most significant expenditures. Such costs represented approximately 13.5% of our cost of sales in 2020. In the event of a review of our employee contract structure, 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, including claims directly against us as if we were the direct employer of the outsourced workers. 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 to be core activities, outsourcing may be considered illegal and the outsourced workers may be considered our employees, which would result in a significant increase in our costs and could subject us to administrative and judicial procedures by the relevant authorities and fines. We are also subject to increases in our labor costs due to Brazilian inflation and increases in health insurance 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.

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

We are defendants in civil, administrative, regulatory, environmental, labor and tax proceedings and are also subject to consent agreements (Termo de Ajustamento de Conduta, or “TAC”). Unfavorable decisions in our legal proceedings may reduce our liquidity and have a material adverse impact on our business, results of operations, financial condition and prospects.

With regard to tax contingencies, we are currently defendants in a number of cases, which include, for example, disputes regarding the offset of tax credits and the use of tax incentives in several states that have not yet reached a final ruling in the Brazilian courts. In addition, we may face risks arising from potential impairment of input state value-added tax (“VAT”) that we accumulate on exports.

As of December 31, 2020, we have R$1,702,720 thousand in provisions for contingencies, of which R$343,530 thousand are for civil and other contingencies (including administrative, regulatory and environmental), R$427,302 thousand are for tax contingencies, R$634,706 thousand are for labor contingencies and R$297,182 thousand are for contingent liabilities arising from business combinations.

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

On March 12, 2018, a shareholder class action lawsuit was filed against us, some of our former managers and a current officer of ours in the U.S. Federal District Court in the Southern District of New York. On July 2, 2018, the Court appointed the City of Birmingham Retirement and Relief System lead plaintiff in the action (the “Lead Plaintiff”). On December 5, 2018, the Lead Plaintiff filed an amended complaint that sought to represent all persons and entities who purchased or otherwise acquired our ADRs during the period from April 4, 2013, through and including March 2, 2018. The class action alleges, among other things, that we and certain officers or directors of ours engaged in securities fraud or other unlawful business practices related to the regulatory issues in connection with the Carne Fraca Operation and Trapaça Operation. On December 13, 2019, we and the other defendants filed a motion to dismiss. On January 21, 2020, the Lead Plaintiff filed an opposition motion, and, on February 11, 2020, we and the other defendants filed our response. While the court’s decision on the motion to dismiss was still pending, the parties reached an agreement on March 27, 2020 to settle this class action for an amount equivalent to R$204,436 thousand (U.S.$40,000 thousand, translated to reais at the exchange rate of R$5.1109 as of March 27, 2020). The court approved this settlement on October 23, 2020.

In addition, in 2020 we received a final and unappealable judicial decision regarding the exclusion of ICMS from the tax basis of the social contributions of PIS and COFINS, which permitted us to recognize a significant amount of recoverable taxes, which are described in Note 9.2 to our consolidated financial statements. For a number of procedural reasons involved in finalizing the settlements for these judgments, it could take an extended period of time for us to receive these amounts, either as compensation or through obtaining a court ordered financial obligation (precatório).

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 (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. Because this arbitration proceeding is in its initial stage, 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 we enter into an agreement to settle, there can be no assurance that an unfavorable outcome or settlement would not have a material adverse impact on us.

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

Our principal intellectual property consists of our domestic and international brands. Our ability to compete effectively depends in part on our rights to trademarks, logos and other intellectual property rights we own or license. We have not sought to register or protect every one of our trademarks in every country in which they are or may be used, which means that third parties may be able to limit or challenge our trademark rights there. Furthermore, because of the differences in foreign intellectual property or proprietary rights laws, we may not receive the same level of legal protection in every country in which we operate.

Litigation may be necessary to enforce our intellectual property rights, and if we do not prevail, we could suffer a material adverse impact on our business, goodwill, financial position, results of operations and cash flows. Further, third parties may allege that our intellectual property 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 license agreements, which might not be available under favorable terms. We may also be forced to rebrand or redesign our products to avoid the infringement, which could result in significant costs in certain markets. If we are found to infringe on any third party’s intellectual property 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.

Certain kinds of losses cannot be insured against via third-party insurance, and our insurance policies are subject to liability limits and exclusions. For example, political risks, environmental and climate events, fraud, strike, product recalls, fines and penalties, terrorism, the livestock itself, ammonia leakage, financial risks such decrease in stock prices, cybersecurity risks, sabotage, industrial espionage, natural disasters or other catastrophic events may cause damage or disruption to our operations, international commerce and the global economy, and thus could have a material adverse effect on us. Additionally, we are exposed to certain product quality risks, such as criminal contamination, avian influenza, swine fever, salmonella and other livestock diseases that can impact our operations and which are not covered under insurance. If an event that cannot be insured occurs, or the damages are higher than our policy limits, we may incur significant costs. In addition, we could be required to indemnify parties affected by such an event. Furthermore, even where we incur losses that are ultimately covered by insurance, we may incur additional expenses to mitigate the loss, such as shifting production to different facilities. These costs may not be fully covered by our insurance.

On occasion, our facilities may be affected by fires, such as the fires in our facilities in Arroio do Meio, State of Rio Grande do Sul in 2019, and by flooding, such as the flooding in our facility in Bandirma, Turkey in 2018, as well as by electrical damages or explosion in substations, or widespread truck driver strikes. In addition, our operations were adversely affected by the COVID-19 pandemic, and we may not be able to recover compensation for the resulting losses under our insurance policies. For more information on the effects of COVID-19 on our business, see “—Pandemics or human disease outbreaks, such as the novel coronavirus (COVID-19), may disrupt consumption and trade patterns, supply chains and production processes, which could materially affect our operations and results of operations.” 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, 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 legal costs in general incurred to defend ourselves against legal and administrative proceedings. We have incurred, and expect to continue to incur, significant costs in connection with the Carne Fraca Operation and the Trapaça Operation. The costs associated with these investigations and the costs of defending ourselves against legal and administrative proceedings may not be covered by our insurance policies. Furthermore, there can be no assurance that we will be able to obtain insurance coverage in the future, related to the foregoing or any other matters, on terms acceptable to us. As a result, we may incur significant additional expenses which may adversely impact our financial condition and results of operations.

 
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We depend on members of our senior management and on our ability to recruit and retain qualified professionals to implement our strategy.

We depend on members of our senior management and other qualified professionals to implement our business strategies. Efforts to recruit and retain professionals may result in significant additional expenses, which could adversely affect our results. In addition, loss of key professionals may adversely affect our ability to implement our strategy, as well as expenses associated to these losses can impact our results. In 2017 and 2018, we experienced a significant number of departures of senior management, including two of our previous CEOs, our CFO, our Chief Human Resources Officer (“CHRO”), our Brazil General Manager and our Vice President of Operations. However, since 2019 the stability of our Senior Staff improved significantly, with one departure in 2019 – Mr. Ivan de Souza Monteiro, Chief Financial Officer, who took office on March 11, 2019 and remained in the position until April 25, 2019, and one departure on October 9, 2020 – Mr. Rubens Pereira, who resigned the position of Strategy, Management and Innovation 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.

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, 2020, we acquired 4,709,640 tons of animal byproducts from our integrated producers, corresponding to 97.2% of the raw materials we used during the course of our business.

The selection and retention of farmers and producers is highly competitive, and such competition between integrators has intensified in recent years. Our integrated producers are primarily located near our industrial units, where competing integrators conduct activities similar to the activities 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.

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.

 
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Risks Relating to Our Indebtedness

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

As of December 31, 2020, our total consolidated debt (comprised of loans and borrowings) was R$22,404,426 thousand, and while we have not incurred significant increases in indebtedness resulting from the COVID-19 pandemic since it was declared, 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.

Our cost of funding is affected by our credit ratings and any risks may have an adverse effect on our credit ratings and our cost of funds. Any 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 debt are based on a number of factors, including our financial strength, conditions that generally affect 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.

We cannot assure you that those rating agencies that have a negative outlook with respect to us will revise such outlooks upward. Our failure to maintain favorable ratings and outlooks would likely increase our cost of funding and adversely affect our results of operations.

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

As of December 31, 2020, we have R$1,059,984 thousand of loans and borrowings that matures in 2021, R$2,114,622 thousand of loans and borrowings that matures in 2022, R$2,569,063 thousand of loans and borrowings that matures in 2023, R$1,782,687 thousand of loans and borrowings that matures in 2024, R$599,266 thousand of loans and borrowings that matures in 2025 and R$14,278,804 thousand of loans and borrowings that matures in 2026 and thereafter.

A substantial portion of our outstanding loans and borrowings is denominated in foreign currencies, primarily U.S. dollars. As of December 31, 2020, we have R$15,739,134 thousand of foreign currency loans and borrowings, including R$575,147 thousand of short-term foreign currency 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. In 2020, the real depreciated against the U.S. dollar by 22.4%. Depreciation in the value of the real or any of the other currencies of the countries in which we operate, compared to the U.S. dollar, could adversely affect our ability to service our debt. Foreign currency hedge agreements may not be effective in covering these currency-related risks.

Any future uncertainty in the stock and credit markets could also negatively impact our ability to access additional short-term and long-term financing, which could negatively impact our liquidity and financial condition. If, in 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 any of our debt that becomes due, we could face liquidity problems and may not be able to pay our outstanding debt when due, which could have a material adverse effect on our consolidated business and financial condition.

The terms of our indebtedness impose significant restrictions on us.

The instruments governing our 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:

·borrow money;
·make investments;
·sell assets, including capital stock of subsidiaries;
·guarantee indebtedness;
·enter into agreements that restrict dividends or other distributions from certain subsidiaries;
·enter into transactions with affiliates;
·create or assume liens; and
 
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·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.

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.

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 recent protests against the government;
·strikes, not only of our employees, but also of port employees, truck drivers, other transport facilities, customs agents, sanitary inspection agents and other government agents; and
·other economic, political, diplomatic and social developments in or affecting Brazil, including with respect to alleged unethical or illegal conduct of certain figures in the Brazilian government and legislators, which are currently under investigation.
 
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Following a two-year contraction of 3.5% in GDP both in 2015 and 2016, the Brazilian economy posted moderate increases of 1.0% and 1.1% in 2017 and 2018, respectively, and again of 1.1% in 2019. Due to the global economic downturn triggered by the COVID-19 pandemic, the Brazilian economy in 2020 contracted by 4.1% of GDP. Inflation, measured by the Extended National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or “IPCA”) published by the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística, or “IBGE”), increased to 4.52% in 2020, from 4.31% in 2019 and 3.75% in 2018. Interest rates decreased to 2.0% in 2020, from 4.5% in 2019 and 6.50% in 2018. Unemployment had a slight improvement from 12.3% in 2018 to 11.9% in 2019, but increased to 13.9% in 2020, according to the National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílio) published by the IBGE.

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

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

Amidst this background of political uncertainty, in August 2016, the Brazilian Senate approved the removal from office of Brazil’s then-president, Ms. Dilma Rousseff, following a legal and administrative impeachment process for infringement of budgetary laws. Mr. Michel Temer, the former vice president, who assumed the presidency of Brazil following Rousseff’s ouster, was first arrested on March 2019, having been convicted of the crimes of cartel involvement, active and passive corruption, money laundering and public auction fraud. He was released and arrested again four days later, in May 2019, and then released once again six days later. He continues to be under investigation on corruption allegations. In addition, the former president, Mr. Luiz Inácio Lula da Silva, began serving a 12-year prison sentence on corruption and money laundering charges in April 2018, but he was released from prison in November 2019 following a Federal Supreme Court ruling. Mr. da Silva still faces pending charges and could return to prison if found guilty once all appeals are exhausted. A strong opposition figure, Mr. da Silva’s release from prison could further deepen political tensions in Brazil.

The current Brazilian president, Mr. Jair Bolsonaro, a former member of the military and three-decade congressman, was elected on October 28, 2018 and took office on January 1, 2019. During his presidential campaign, the new Brazilian president was reported to favor the privatization of state-owned companies, economic liberalization and social security and tax reforms. However, there is no guarantee that certain reforms will be approved or even presented to Congress for review, which may further deteriorate the fiscal condition of Brazil and worsen the uncertainty regarding the Brazilian economic. Additionally, statements made by Mr. Bolsonaro during 2020 and 2021, such as the announcement to replace the Chief Executive Officer of Petrobras following disagreements over fuel price policies, contributed to significant market volatility in Brazil and also indicate possible deviations from his campaign promises in favor of liberal economic policies. In addition, the current minister of the economy proposed during the presidential campaign the revocation of the income tax exemption for the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies. This could impact our ability to receive, from our subsidiaries, future cash dividends or distributions net of taxes and also our ability to make distributions to our shareholders net of taxes, which could have a material adverse effect on our results of operations.

 
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Moreover, Mr. Bolsonaro was generally a polarizing figure during his campaign for presidency, particularly in relation to certain of his social views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and the implementation of policies and reforms, all of which could have a negative impact on our business and the price of our common shares and ADRs.

In addition, Mr. Bolsonaro is under criminal investigation due to allegations by former minister of justice Sergio Moro that he had unduly interfered in the activities of the Brazilian Federal Police. According to the former minister, the president asked him to appoint certain officials to positions in the Brazilian Federal Police force. Should it be determined that Mr. Bolsonaro had committed such crimes or impeachable offenses, any resulting consequences, including a potential impeachment, could have significant adverse effects on Brazil’s political and economic environment, as well as on businesses operating in Brazil, including our company. Mr. Bolsonaro has also been criticized in Brazil and internationally in relation to the destabilizing effects of the COVID-19 pandemic and high levels of political uncertainty and instability in Brazil, particularly after the resignation of highly ranked federal ministers, the emergence of corruption allegations against Mr. Bolsonaro and the critical state of the pandemic in Brazil and ensuing aggravated health crisis.

In November 2019, the Brazilian government passed a pension reform after almost nine months of negotiations with Congress. In addition, the Brazilian federal government is expected to propose the general terms of a fiscal reform to stimulate the economy and reduce the forecasted budget deficit for 2021, but it is uncertain whether any such reform would suffice to reduce this budget deficit and improve the Brazilian fiscal condition. Brazil is also expected to continue to run a budget deficit for 2021 and the years going forward. The 2021 budget bill, which was introduced in July 2020, is pending congressional approval. We cannot predict the impact of this budget deficit on the Brazilian economy. The political and economic instability in 2020 has negatively affected consumer confidence in Brazil. The Fundação Getúlio Vargas (“FGV”) Consumer index presented a decrease of 13.1 points, from 91.6 points in 2019 to 78.5 points in 2020.

We cannot predict which policies the Brazilian federal government may adopt or change or the effect that any such policies might have on our business or on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse impact on our business, results of operations, financial condition and prospects. Worsening political and economic conditions in Brazil may increase production and supply chain costs and adversely affect our results of operations and financial condition. Uncertainty as to whether the Brazilian government will implement changes in policies or regulations affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in our production operations.

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 high rates of inflation in the past, while recent downward inflationary pressures caused the Brazilian consumer price inflation rates to reach 3.75% in 2018, 4.31% in 2019 and 4.52% in 2020, according to the IPCA, published by the IBGE. See “Item. 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting Our Results of Operations—Brazilian and Global Economic Conditions” and “—Effects of Exchange Rate Variations and Inflation.”

Although inflation levels have been relatively stable in 2018 and 2019, there can be no assurance that inflation rates will not rise in the near future. Periods of higher inflation slow the growth rate of the Brazilian economy, which may lead to lower growth in consumption of food products. High inflation also puts pressure on industry costs of production and expenses, which may force companies to search for innovative solutions in order to remain competitive. We may not be able to pass any such increase in costs onto our customers and, as a result, it may adversely impact our results of operations and financial condition. In addition, high inflation generally leads to higher domestic interest rates, and, as a result, the costs of servicing our debt may increase. Furthermore, inflation and its effect on domestic interest rates can lead to reduced liquidity in the domestic capital and lending markets, which could affect our ability to refinance our indebtedness and may have an adverse effect on our business, results of operations, financial condition and the market prices of our common shares and ADRs.

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

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.

As of December 31, 2020, 29.7% of our total loans and borrowings of R$22,404,426 thousand was either: (i) denominated in (or swapped into) reais and bears 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 bears floating interest based on the London Interbank Offered Rate (“LIBOR”). Any increase in the CDI, IPCA or LIBOR rates may have an adverse impact on our financial expenses and our results of operations.

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. The real appreciated 16.5% in 2016, and depreciated 1.5%, 17.1%, and 4.0% and 22.4% in 2017, 2018, 2019 and 2020, respectively, against the U.S. dollar. 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. As of December 31, 2020, the real/U.S Dollar exchange rate was R$5.1967.

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$15,739,134 thousand as of December 31, 2020, representing 70.3% of our total consolidated indebtedness at that date. Although we manage a portion of our exchange rate risk through foreign currency derivative instruments and future cash flows from exports in U.S. dollars and other foreign currencies, our foreign currency debt obligations are not completely hedged. A significant devaluation of the real in relation to the U.S. dollar or other currencies would increase the amount of reais that we would need in order to meet debt service requirements of our foreign currency-denominated obligations.

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

The Brazilian government regularly implements changes to tax regimes that may increase our and our suppliers’ and customers’ tax burdens, which may in turn increase the prices we charge for the products we sell, restrict our ability to do business in our existing markets and, therefore, materially adversely affect our results of operations and financial condition.

These changes include modifications in the tax rates and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. In the past, the Brazilian government has presented certain tax reform proposals, which have been mainly designed to simplify the Brazilian tax system, to avoid internal disputes within and between the Brazilian states and municipalities, and to redistribute tax revenues. The tax reform proposals provide for changes in the rules governing the federal Social Integration Program (Programa de Integração Social, or “PIS”) and Contribution for Social Security Funding (Contribuição para o Financiamento da Seguridade Social, or “COFINS”) taxes, ICMS and certain other taxes, such as increases in payroll taxes and in the withholding tax over dividend distributions. It is uncertain whether these proposals will be approved and passed into law and, if approved, whether they will reflect these or any other changes to tax regimes. 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, which has been and is being studied by the new Brazilian government’s financial team. The effects of these proposed tax reform measures and any other changes that could result from the enactment of additional tax reforms have not been, and cannot be, quantified yet due to the uncertainty of whether any changes will be implemented. Some of these measures, if enacted, may result in increases in our overall tax burden, which may adversely affect our overall financial performance. For more information, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Social Contributions.” Moreover, certain tax laws may be subject to controversial interpretation by tax authorities. In the event that tax authorities interpret tax laws in a manner that is inconsistent with our interpretations, we may be adversely affected.

Risks Relating to Our Common Shares and ADRs

Holders of ADRs may find it difficult to exercise voting rights at our shareholders’ meetings.

Holders of ADRs may exercise voting rights with respect to our common shares represented by American Depositary Shares (“ADS”) and evidenced by ADRs only in accordance with the deposit agreement governing the ADRs. Holders of ADRs face practical limitations in exercising their voting rights because of the additional steps involved in our communications with ADR holders. For example, we are required to publish a notice of 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.

 
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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 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 is 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 on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares or 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.

 
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Provisions in our bylaws may prevent efforts by our shareholders to change our control or management.

Our bylaws contain provisions that may discourage, delay or make more difficult a change in control of our company or removal of our directors. Subject to limited exceptions, these provisions require any shareholder that acquires shares representing 33.3% or more of our share capital to disclose such information immediately through a filing with the Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários, or “CVM”) and, within 30 days from the date of such acquisition or event, commence a public tender offer with respect to all of our shares for a price per share that may not be less than the greater of: (i) 140% of the average trading price on the stock exchange trading the greatest volume of shares of our capital stock during the last 120 trading sessions prior to the date on which the public offer became obligatory; and (ii) 140% of the average trading price on the stock exchange trading the greatest volume of shares of our capital stock during the last 30 trading days prior to the date on which the public offer became obligatory.

These provisions of our bylaws may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our shareholders.

Holders of ADRs could be subject to Brazilian income tax on capital gains from sales of ADRs.

Historically, any capital gain realized on a sale or other disposition of ADRs between non-Brazilian holders outside Brazil was not subject to Brazilian income tax. However, a December 2003 Brazilian law (Law No. 10,833, of December 29, 2003) provides that the acquirer, individual or legal entity resident or domiciled in Brazil, or the acquirer’s attorney-in-fact, when such acquirer is resident or domiciled abroad, shall be responsible for the retention and payment of the income tax applicable to capital gains earned by the individual or legal entity resident or domiciled abroad who disposes of property located in Brazil. The Brazilian tax authorities have issued a normative instruction confirming 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. In case of a non-Brazilian holder selling common shares on the Brazilian stock exchange, the withholding tax rate would be 0% (in the case of a non-Brazilian holder registered as such before Brazilian Central Bank (“Bacen”) under the rules of the CMN (“Registered Holder”) and not a resident of a tax haven (“Tax Haven Resident”)), 15% (in the case of a non-Brazilian holder that is not a Registered Holder and not a Tax Haven Resident), or 25% (in the case of a non-Brazilian holder that is a Tax Haven Resident).

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;
 
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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 46.5% of the aggregate market capitalization of the São Paulo Stock Exchange as of December 31, 2020. In addition, the ten most widely traded stocks in terms of trading volume accounted for approximately 39.9% of all shares traded on the São Paulo Stock Exchange in 2020. 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 international economic and market conditions generally, especially economic and market conditions in the United States.  Share prices on the São Paulo Stock Exchange, for example, have historically been sensitive to fluctuations in U.S. interest rates as well as movements of the major U.S. stock indexes.

The COVID-19 pandemic added a new source of uncertainty to global economic activity and has resulted in significantly increased 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, the B3’s circuit breaker was triggered eight times in the month of 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.

Additionally, governmental authorities around the world, including Brazil, have taken measures to try to contain the spread of COVID-19. Restrictions will likely remain in place, suppressing social and economic activity, if the contagion does not subside or is not addressed through vaccination efforts. It is uncertain how long it will take to vaccinate substantial portions of the world’s population as well as the Brazilian population, and delays in vaccination efforts may further increase risks relating to the COVID-19 pandemic. We are unable to estimate or quantify all economic and operational consequences of the COVID-19 pandemic, or the micro and macroeconomic effects this pandemic will continue to have on our business. The materialization of these risks has significantly affected global growth. Measures taken by governmental authorities worldwide, including Brazil, to stabilize markets and support economic growth may not be sufficient to control high volatility or to prevent serious and prolonged reductions in economic activity. In addition, the social distancing measures imposed by governmental authorities to contain the COVID-19 pandemic have resulted in a sharp drop or even a halt in certain activities and economic output. At this moment, there is no way to predict how long these measures will remain in force. These policies and measures have influenced the behavior of the consumer market and the population in general, the demand for services, products and credit.

 
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Developments in other countries and securities markets could adversely affect the market prices of our common shares and ADRs and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

We may become a passive foreign investment company, which could result in adverse U.S. tax consequences to U.S. investors.

Based on our financial statements, relevant market and shareholder data, and the projected composition of our income and valuation of our assets, including goodwill, we do not believe that we were a passive foreign investment company, or “PFIC,” for U.S. federal income tax purposes for 2020, and we do not expect to be a PFIC for 2021, 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 2021 or future taxable years due to changes in our income or asset composition. See “Item 10. Additional Information—E. Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”

ITEM 4. INFORMATION ON THE COMPANY
A.History and Development of the Company

BRF S.A. is a publicly held company in Brazil and is therefore subject to the requirements of Brazilian Corporate Law and the rules and regulations of the CVM and the B3. Our commercial name is “BRF.”

We were founded as Perdigão by the Brandalise and Ponzoni families in 1934 as Ponzoni, Brandalise e Cia. in the southern State of Santa Catarina and remained under the Brandalise family’s management until September 1994. In 1940, we expanded our operations from general trading, with an emphasis on food and food-related products, to include pork processing. During the 1950s, we entered the poultry processing business. During the 1970s, we broadened the distribution of our products to include export markets, starting with Saudi Arabia. From 1980 through 1990, we expanded our export markets to include Japan in 1985 and Europe in 1990. We also undertook a series of acquisitions in the poultry and pork processing business and made investments in other businesses.

From 1990 through 1993, we suffered substantial losses because of increased financial expenses, underinvestment in product development, limited capacity and modest marketing of our products. By September 1994, we faced a liquidity crisis, as a result of which the Brandalise family sold their interest in our company, consisting of 80.68% of our common shares and 65.54% of our preferred shares, to eight Brazilian pension funds. Upon acquiring control of our company, the eight original pension funds hired a new team of executive officers who restructured management and implemented capital increases and modernization programs.

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

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

Business combination with Sadia

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

Corporate Reorganization of One Foods

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

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

Acquisition of Banvit – Turkey

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

Sale of Quickfood

On December 7, 2018, we executed a Share Sale and Purchase Agreement with Marfrig Global Foods S.A. (“Marfrig”) for the sale of our total ownership interest in Quickfood (which constituted 91.89% of the capital stock of Quickfood). Quickfood was our subsidiary in Argentina and operated three beef slaughtering plants with a capacity of 620 heads per day and a processing capacity of approximately 6,000 metric tons per month of hamburgers, franks, cold products and frozen vegetables. The transaction closed on January 2, 2019, for an amount equivalent to R$191,291 thousand (U.S.$49,937 thousand, translated to reais at the exchange rate of R$3.8306 as of January 2, 2019).

 
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Sale of Várzea Grande Plant

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

Sale of Avex

On December 19, 2018, we entered into a Share Sale and Purchase Agreement whereby we agreed to sell all of the issued and outstanding shares of our Argentinian subsidiary, Avex S.A., to Granja Tres Arroyos S.A. and Fribel S.A. Avex S.A. operates three facilities located in Llavalol, Villa Mercedes and Rio Cuarto, in Argentina, for the production of poultry and margarine. This transaction closed on February 4, 2019, for an amount equivalent to R$169,726 thousand (U.S.$44,824 thousand, translated to reais at the exchange rate of R$3.7865 as of February 4, 2019).

Sale of Assets in Europe and Thailand

On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand. This transaction closed on June 3, 2019, for an amount equivalent to R$1,488,033 thousand (U.S.$382,106 thousand, translated to reais at the exchange rate of R$3.8943 as of June 3, 2019).

Other Transactions in 2018, 2019 and 2020

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

On December 18, 2018, we created a Brazilian receivables investment fund (“FIDC”) to acquire trade receivables of commercial transactions entered into by us and our customers in Brazil. The fund has three distinct classes of quotas and may reach an aggregate total volume of R$875 million.

On January 10, 2019, we executed an Asset Sale and Purchase Agreement with BOGS S.A. for the sale of its facility located in the city of Florencio Varela, Argentina, and all assets and liabilities related to it, including the brands “Bocatti” and “Calchaquí,”. The transaction closed on February 28, 2019, for an amount equivalent to R$95,036 thousand (U.S.$26,753 thousand, translated to reais at the exchange rate of R$3.5523 as of February 28, 2019).

On January 10, 2019, we executed a Share Sale and Purchase Agreement with La Piamontesa de Averaldo Giacosa y Compañía S.A. for the sale of all of the capital stock of our Argentine subsidiary, Campo Austral S.A., including its facilities in San Andrés de Giles and Pilar and the brand “Campo Austral.” The transaction closed on March 11, 2019 for an amount equivalent to R$29,359 thousand (U.S.$7,619 thousand, translated to reais at the exchange rate of R$3.8534 as of March 11, 2019).

On August 20, 2019, our wholly-owned subsidiary Badi Limited executed a Share Purchase Agreement with Al Takamul International Company for Commercial Investment Limited for the purchase of the remaining 25% of the capital stock that it did not own in Al Wafi Al Takamul International Company for Food Products Limited (“Wafi”), a company incorporated in the Kingdom of Saudi Arabia responsible for distributing our products in that country. The transaction closed on April 21, 2020 for an amount equivalent to R$100,390 thousand (U.S.$19,000 thousand, translated to reais at the exchange rate of R$5.2837 as of April 20, 2020), at which point Wafi became a wholly owned subsidiary of Badi Limited.

 
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On September 5, 2019, we executed a Share Sale and Purchase Agreement with Sats Food Services Pte Ltd, providing for the terms and conditions for the sale of our interest in Singaporean food company Sats BRF Food Pte Ltd., equivalent to 49% of its capital stock. The transaction was concluded on September 5, 2019, for an amount equivalent to R$51,197 thousand (SGD17,000 thousand, translated to reais at the exchange rate of R$3.0116 as of September 30, 2019) and also encompassed the execution of a new contract for the distribution and licensing of brands owned by us.

On May 7, 2020, our indirect wholly owned subsidiary Badi Limited executed a Share Purchase Agreement with Hungry Bunny Limited and others, setting forth the terms and conditions for the acquisition of 100% of the capital stock of Joody Al Sharqiya Food Production Factory, a food processing company in Dammam, Saudi Arabia. The transaction considered an enterprise value equivalent to R$41,620 thousand (SAR29,793 thousand, translated to reais at the exchange rate of R$1.3970 as of January 18, 2021). This acquisition was concluded on January 18, 2021.

On June 24, 2020, our indirect wholly owned subsidiary BRF FOODS GmbH agreed to sell 70% of the outstanding shares of FFM Further Processing Sdn. Bhd., a company incorporated in Malaysia and owner of a food processing plant in that country, to FFM Berhad, which previously held the remaining 30% of those shares. The transaction was concluded on the same date and BRF FOODS GmbH received the purchase price equivalent to R$38,546 thousand (U.S.$7,350 thousand translated to reais at the exchange rate of R$5.2444 as of June 24, 2020).

On December 17, 2020, Nutrinvestment BV and Banvit Bandirma Vitaminli Yem Sanayii AS, companies indirectly controlled by us, executed a Sale and Purchase Agreement with Aaylex System Group S.A. that provides for the sale of 100% of the shares that the companies hold in Banvit Foods SRL, which produces animal feed and manages an egg hatchery in Romania. The transaction value is EUR 20,300 thousand, equivalent to approximately R$ 129,471 thousand (translated to reais at the exchange rate of R$6.3779 as of December 31, 2020), which will be paid at closing, which is expected to occur after the satisfaction of customary conditions precedent, including the approval of the local antitrust authority.

Acquisition of Remaining Stake in BRF Al Yasra Food K.S.C.C.

On March 9, 2021, we acquired the remaining minority stake that we did not own of 25% of Al Yasra Food K.S.C.C. (“BRF AFC”), located in Kuwait, through our wholly-owned subsidiary One Foods Holdings Ltd., for the amount equivalent to R$238,383 thousand (U.S.$40,825 thousand translated to reais at the exchange rate of R$5.8391 as of March 9, 2021). Following that acquisition, BRF AFC became our wholly-owned subsidiary.

 

Carne Fraca Operation

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

Trapaça Operation

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

Capital Expenditures

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

 
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For the year ended December 31,

 

2020

2019

2018

  (in thousands of reais)
Property, plant and equipment 804,609 417,165 578,037
Biological assets 1,006,222 837,930 845,311
Intangible assets

96,181

64,320

20,535

Total capital expenditures

1,907,012

1,319,415

1,443,883

 

In 2020, we resumed our investment trajectory in growth and innovation projects, in addition to maintaining investments related to compliance with standardization and quality standards of our products.

In 2019, as in the previous year, investments were made a priority to meet the regulation and adaptation of our asset base to safety and quality principles in line with our organizational culture.

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

In 2021, in addition to existing projects, we expect to focus on pursuing our commitment to maximizing the use of our assets by making investments to help eliminate production constraints and increase overall efficiency. In addition, we expect to increase investments to expand our operations in the markets we serve and take advantage of new commercial opportunities.

B.Business 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 7,300 stock keeping units (“SKUs”). 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 prepared entrees, portioned products and sliced products. We also sell margarine, butter, cream cheese, sweet specialties, sandwiches, plant-based products and animal feed. We are the holder of brands such as Sadia, Perdigão, Qualy, Perdix, Confidence and Hilal. For the year ended December 31, 2020, we were responsible for 10.1% of the world’s poultry trade, according to USDA.

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

With 34 industrial facilities in Brazil, as of December 31, 2020, we have among our main assets a distribution network that enables our products to reach Brazilian consumers through more than 547,000 average monthly deliveries and 22 distribution centers in the domestic market.

In the international market, we have a leading brand, Sadia, in various categories in Middle Eastern countries. We maintain over 41 offices outside of Brazil serving customers in 117 countries on five continents. We have one industrial facility in Abu Dhabi, one in Saudi Arabia, two in Romania and three in Turkey. As of December 31, 2020, we also have among our main assets a distribution network that enables our products to reach consumers in the Halal market through more than 250,000 monthly deliveries and 19 distribution centers, in addition to 26 transshipments points.

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).

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

·Meat Products, consisting of in natura meat, which we define as frozen whole chicken and cut chicken, and frozen pork;
 
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·Processed Food Products, including the following:
omarinated, frozen, whole chicken and cut chicken, roosters (sold under the Chester® brand) and turkey;
ospecialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; and
ofrozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs;
·Other Processed Products including the following:
omargarine, butter and cream cheese;
ofrozen prepared entrees, such as lasagna, macaroni and cheese, pies, ready-to-eat meals, Brazilian cheese bread and pizzas, as well as other frozen foods;
oplant-based products, such as nuggets, pies, vegetables and burgers; and
osnacks (salamitos);
ofrozen desserts;
·Other, consisting of soy meal, refined soy flour and animal feed.

In Brazil, we operate 34 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and three soybean crushing plants. All of these industrial facilities are located near our raw material suppliers or main consumer centers. We have an advanced logistics system in our domestic market, with 22 distribution centers, five of which are owned by us and 17 of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our international market, we operate five industrial facilities for meat processing. Additionally, after giving effect to the divestitures made in connection with our financial and operational restructuring plan, we operate 28 distribution centers located in Asia, the Southern Cone, and the Middle East as well as commercial offices on four continents.

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. We have taken steps to address these concerns, for example by entering into a partnership with the World Wide Fund for Nature (WWF) and joined the Collaboration for Forests and Agriculture (CFA) in 2019, with the aim of developing a more sustainable grain supply chain. From 2014 until 2020, we allocated R$1,123.6 million (€321.6 million) to projects with environmental benefits, and we planted a renewable forest covering 30 thousand hectares (the amount referring to the investments made in 2020 is still subject to a second opinion from an external certifier, which may result in an adjustment of this amount).

Our Industry

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

 
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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.

Real GDP in Brazil increased at an average annual rate of 9.0% from 2005 through 2020. For two consecutive years, in 2015 and in 2016, Brazil’s GDP decreased by 3.5%. Reacting to this weak economic environment, the Central Bank lowered the Special System for Settlement and Custody (Sistema Especial de Liquidação e de Custódia, or “SELIC”) interest rate, which is the short-term benchmark interest rate. Overall, the long-term trend remains downward, from 18% as of December 31, 2005 to 2.00% as of December 31, 2020. For the year ended December 31, 2020, the IPCA increased to 4.52% in comparison to 4.31% for the year ended December 31, 2019.

The unemployment rate and consumer confidence levels also have an impact on consumption levels in Brazil. The average unemployment rate for 2020 was 13.9%, an increase of 2.1 percentage points when compared to the 11.8% of 2019. The Consumer Confidence Index for December 2020 was 78.5%, 13.1 percentage points below that in December 2019 of 91.6%.

According to the Brazilian Association of Supermarkets (Associação Brasileira de Supermercados, or “ABRAS”) in December 2020, supermarket sales in real terms (adjusted using the IPCA), increased 11.54% compared to December 2019. For the full year, supermarket sales in real terms rose 9.36% in 2020 as compared to 2019.

Export Markets

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

Brazilian chicken exports increased by 0.2% in the year ended December 31, 2020, compared to the year ended December 31, 2019, in terms of volume. Pork exports registered an increase of 36.9% in volume sold in the year ended December 31, 2020, compared to the year ended December 31, 2019. Beef exports recorded an increase of 9.4% in volume in the year ended December 31, 2020, compared to the year ended December 31, 2019.

Brazilian chicken exports in the year ended December 31, 2020 totaled 4.13 million tons on sales of R$30.9 billion (equivalent to U.S.$5.99 billion). China is the main destination for these exports (16.3%), followed by Saudi Arabia (11.3%), Japan (9.9%) and the United Arab Emirates (7.3%).

The volume of pork exports in the year ended December 31, 2020 totaled 1.01 million tons, representing approximately R$11.6 billion. The leading importers, China, Hong Kong and Singapore represented 50.7%, 16.4% and 5.2%, respectively, of total exports from Brazil.

Beef shipments in the year ended December 31, 2020 totaled 1.85 million tons, with sales of approximately R$ 41.73 billion (equivalent to U.S.$8.09 billion). This increase in volume was driven by exports to China (46.9%), Hong Kong (12.0%) and Egypt (6.6%).

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

Products

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

 
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Poultry

We produce frozen whole and cut poultry. In 2020, we slaughtered approximately 1.54 billion heads of poultry, a 1.3% decrease compared to 1.56 billion in 2019. We sold 1,904 thousand tons of frozen chicken and other poultry products in 2020, compared to 2,018 thousand tons in 2019, excluding our discontinued operations. Most of our poultry sales are to our export markets.

As a result of the trade barriers imposed by the European Union, 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.”

Pork and Beef

In 2020, we slaughtered approximately 10.21 million hogs compared to 9.62 million in 2019. We raise hogs but do not raise cattle at our facilities. Although most of the hogs that we slaughter are used for processed products in the domestic market, we also produce frozen pork and beef cuts, such as loins and ribs, and whole carcasses. In January 2019, following the closing of the transaction in which Marfrig acquired our beef slaughtering facility, we and Marfrig signed a supply agreement under which Marfrig agreed to provide us with finished goods from the Várzea Grande plant. In 2020, we sold 319 thousand tons of pork and beef cuts, excluding our discontinued operations, compared to 270 thousand tons of pork and beef cuts in 2019. We are also further developing our international customer base for pork and beef cuts.

Processed Food Products

We produce processed foods, such as marinated and frozen chicken, Chester® rooster and turkey meat, specialty meats, frozen processed foods, frozen prepared entrees, portioned products and sliced products. Part of our strategy is to develop additional processed food products in these and other categories because these products tend to be less price-sensitive than our frozen poultry and pork products. We sold 1,986 thousand tons of processed foods in 2020, compared to 1,830 thousand tons in 2019, excluding our discontinued operations. Most of our sales of processed foods are to our domestic market. We believe that there are opportunities to market value-added products like these to targeted regions and other market segments in Brazil as well as to expand our sales in the export market.

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

Specialty Meats

We process pork to produce specialty meats, such as sausages, ham products, bologna, frankfurters, salamis, bacon and cold meats. We also process chicken and other poultry to produce specialty meats, such as chicken sausages, chicken hot dogs and chicken bologna.

Frozen Processed Meats

We produce a range of frozen processed poultry, pork and beef products, including hamburgers, steaks, breaded meat products, kibbeh and meatballs.

Marinated Poultry

We produce marinated and seasoned chickens, roosters (under 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.

 
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Halal Products

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

Margarine

We sell margarine under the Qualy, Deline, Claybom and Becel brands. 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.

Butter, Cream cheese and Cheese bread

Qualy, a notable margarine brand in Brazil, expanded its portfolio in 2020 by offering new products such as butter and curd and introducing a line of cheese breads. These new 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. Qualy’s cheese bread line also offers the options of buttered cheese bread and buttered cheese bread with pieces of Sadia ham.

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 the Mac’n Cheese under the Sadia brand. We believe that this new product is an innovative product in the Brazilian market, with greater added value to the ready-to-eat meals sub-category. 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.
·French Fries. We sell frozen French fries, which are imported from Belgium where they 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. Our sales represented 25% of the vegan nuggets segment in Brazil in 2020.

In March 2021, we executed a memorandum of understanding with Aleph Farms, Ltd, an Israeli start-up company that develops laboratory proteins from animal cells. The agreement contemplates: (i) the development and production of cultivated meats using the patented production of Aleph Farms (BioFarm™); and (ii) the distribution of cultivated proteins from Aleph Farms, with exclusivity, in Brazil. In connection with our Vision 2030 Plan, which includes a “meat substitutes” growth segment, this partnership will strengthen our business generation and diversification to meet the growing demand of customers for a wider variety of meat-based products. In addition to addressing the commercial potential of cultivated meat in the Brazilian market, this partnership demonstrates our commitment to sustainability, innovation and food safety.

 
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Frozen desserts

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

·Mousse pie, 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 as a limited edition: condensed milk fudge mousse pie with caramelized nuts and two new hot pie desserts, hazelnut cream and guava paste with cream cheese.

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 2020, we produced 9,669 thousand tons of feed and PREMIX in Brazil, compared to 9,480 thousand tons in 2019, and 820,540 thousand tons in Turkey. We also produce a limited range of soy-based products, including soy meal and refined soy flour.

Vision 2030 Plan

In December 2020, we announced our Vision 2030 Plan, which is a growth strategy that aims for us to reach approximate annual revenue of R$100 billion in the end of next decade. To accomplish this goal, the plan is expected to entail investments of approximately R$55 billion, primarily funded from our own cash flow and debt refinancing, focusing on strengthening our leadership position as a global food company with high added-value, strong brands, high-quality products, and even more admired by consumers, providing increased return and expanded margins. We will also target the establishment of a local presence internationally in some of the world’s largest added-value consumer centers, and to expand our share of the Brazilian market in ready meals, increasing our presence in the high-added value pork and pet markets, in addition to the production of meat substitutes and new sources of protein, in which significant food industry transformation is expected.

Our Vision 2030 Plan also includes a macro-sustainability plan with public commitments involving Environmental, Social and Governance (“ESG”) features. Beginning in 2021, our management has started setting ESG-related goals, and in January 2021, we named a new vice president for Institutional Relations, Reputation and Sustainability to support the advancement of our ESG agenda.

 

One of our key objectives under our Vision 2030 Plan is to become one of the two largest food companies for pets in Brazil. Brazil is the second-largest market in the world for pet products, after the United States, with a market value of R$20 billion in 2020. It is estimated that the market potential for pet products will total approximately R$40 billion by 2030. This growth is driven mainly by the verticalization of cities and by the humanization of animals that brings about different needs for the feed. Premium brands for pet food are expected to be favored the most by consumers. We are already present in that segment for both of the key retail channels, including supermarkets (roughly 30% of the market) through our Balance brand, and the specialized trade channel (remaining 70% of the market) with our Güd brand. Despite regional and still limited distribution for both brands, we enjoyed substantial revenue growth of 416% over the last two years. . To serve this segment, the synergies with our production chain provide us with competitive advantages as to costs and quality. We are already the second-largest producer of feed in the southern hemisphere. We are already a producer of the main ingredients for the formulation of feeds. We expect this fact will assist us with higher efficiency and lower production costs, because of both the scale of our grain purchases and our access to specific materials, such as hydrolyzed protein and special oils, which we produce and distribute to the pet food market. We believe that these synergies provide us with advantages in the pet food market that are difficult for other companies to replicate. Additionally, we have access to the distribution channel of the traditional retail segment, and we plan on developing our capabilities in the specialized retail market and the technical products market.

 
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We also believe that this new growth path anticipated for Brazil can be replicated in other regions and geographies in which we operate, which we expect will offer us new opportunities and new growth avenues in the future.

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

Poultry

Brazil was the third largest producer and the leading exporter of poultry in the world in 2020 based on estimates calculated by the United States Department of Agriculture, or the “USDA.” Brazil’s production, consumption and export volumes for poultry have increased significantly over the past several years. This growth has been driven by the increase of Brazilian companies’ production dedicated to exports as well as by the competitiveness of Brazilian poultry.

According to the USDA, global poultry trade increased 1.0% in 2020 compared to 2019, mainly due to higher exports from the United States (which increased 4.1% in comparison to 2019), Turkey (which increased 11.8% in comparison to 2019) and Russia (which increased 25% in comparison to 2019). According to the Brazilian Association of Animal Protein (Associação Brasileira de Proteína Animal, or “ABPA”), exports of poultry parts increased 1.2% in 2020 compared to 2019, representing 68.7% of the total poultry exported volumes. Whole chicken, which represented 25.3% of the total volume, decreased 2.5% in 2020 compared to 2019. The main destinations in 2020 were China, Saudi Arabia, Japan and United Arab Emirates. In comparison to 2019, in 2020 Saudi Arabia decreased total imports from Brazil by 0.3%, China increased total imports from Brazil by 15.0%, Japan decreased total imports from Brazil by 3.2% and United Arab Emirates decreased total imports from Brazil by 11.2%.

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

  World Chicken Production
Primary Chicken Producers 2020 2019 2018
  (in thousands of tons – “ready to cook” equivalent)
U.S. 20,239 19,941 19,361
China 14,600 13,750 11,700
Brazil 13,880 13,690 13,355
European Union (28 countries) 12,200 12,560 12,260
Russia 4,715 4,668 4,684
India 4,000 4,350 4,062
Mexico 3,725 3,600 3,485
Thailand 3,250 3,300 3,170
Turkey 2,200 2,138 2,157
Argentina 2,190 2,171 2,068
Malaysia 1,790 1,775 1,650
Others 17,624 17,373 16,615
Total 100,413 99,316 94,567

 

Primary Chicken Exporters 2020 2019 2018
  (in thousands of tons – “ready to cook” equivalent)
Brazil 3,760 3,811 3,675
U.S. 3,391 3,259 3,244
European Union (28 countries) 1,450 1,541 1,421
Thailand 855 881 826
Turkey 456 408 418
Others 2,004 1,934 1,712
Total 11,916 11,834 11,296
 
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Primary Chicken Consumers 2020 2019 2018
  (in thousands of tons – “ready to cook” equivalent)
U.S. 16,960 16,702 16,185
China 15,200 13,902 11,595
European Union (28 countries) 11,370 11,743 11,543
Brazil 10,125 9,884 9,683
Russia 4,715 4,713 4,785
Mexico 4,549 4,469 4,301
India 3,999 4,347 4,059
Japan 2,809 2,789 2,761
Thailand 2,385 2,469 2,354
Argentina 2,040 2,021 1,955
South Africa 1,895 1,829 1,877
Others 22,306 22,343 21,466
Total 98,353 97,211 92,564

 

Source: USDA, February 2021.

Pork

Brazil was the fourth largest producer and exporter and the fifth largest consumer of pork in the world in 2020, according to the USDA. Brazil’s production and consumption of pork has increased since 2009. The USDA expects an increase in global production of 6.1% and an increase in pork consumption of 6.0% in 2021. According to the USDA, global pork exports reached 11.34 million tons in 2020. Brazilian pork breeding and slaughtering companies continue to increase their efficiency of production. Research and development has also helped to reduce fat, cholesterol and calories in pork produced in Brazil. These enhancements allow for more efficient production of prime cuts, more meat per carcass and more nutritious and healthier meat. Improved genetic potential of breeders has also contributed to the production increase.

According to the ABPA, as of December 2020, China was Brazil’s primary destination for pork followed by Hong Kong, representing 50.7% and 16.4%, respectively, of total Brazilian pork exports. Chinese and Hong Kong imports from Brazil increased 106% and 2.4%, respectively, from December 31, 2019 to December 31, 2020.

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

  World Pork Production
Main Pork Producers 2020 2019 2018
  (in thousands of tons – weight in equivalent carcass)
China 38,000 42,550 54,040
European Union (28 countries) 24,000 23,956 24,082
U.S. 12,841 12,543 11,943
Brazil 4,125 3,975 3,763
Russia 3,520 3,324 3,155
Vietnam 2,240 2,380 2,811
Others 13,031 13,250 13,146
Total 97,757 101,978 112,940

 

 
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Main Pork Exporters 2020 2019 2018
  (in thousands of tons – weight in equivalent carcass)
European Union (28 countries) 4,350 3,548 2,838
U.S. 3,318 2,867 2,666
Canada 1,525 1,284 1,277
Brazil 1,178 861 722
Mexico 345 234 177
Chile 275 223 190
Russia 110 68 37
Others 238 250 339
Total 11,339 9,335 8,246

 

Main Pork Consumers 2020 2019 2018
  (in thousands of tons – weight in equivalent carcass)
China 43,050 44,866 55,295
European Union (28 countries) 19,668 20,424 21,258
U.S. 10,021 10,066 9,747
Russia 3,420 3,363 3,202
Brazil 2,949 3,116 3,043
Japan 2,685 2,714 2,774
Others 15,364 16,394 16,911
Total 97,157 100,943 112,230

 

Source: USDA, February 2021.

Beef

Brazil was the second largest producer, the fourth largest consumer and the largest exporter of beef in the world in 2020, according to the USDA. From 2020 to 2021, the USDA estimates that there will be an increase in global beef production, consumption and exports of approximately 1.5%, 1.3% and 2.5%, respectively.

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

  World Beef Production
Main Beef Producers 2020 2019 2018
  (in thousands of tons – weight in equivalent carcass)
U.S. 12,381 12,384 12,256
Brazil 10,100 10,200 9,900
European Union (28 countries) 7,800 7,878 8,003
China 6,550 6,670 6,440
India 3,650 4,270 4,240
Argentina 3,210 3,125 3,050
Australia 2,115 2,432 2,306
Mexico 2,090 2,030 1,980
Pakistan 1,820 1,820 1,800
Russia 1,380 1,374 1,357
Others 9,186 9,459 9,339
Total 60,282 61,642 60,671

 

Main Beef Consumers 2020 2019 2018
  (in thousands of tons – weight in equivalent carcass)
U.S. 12,558 12,408 12,181
China 9,258 8,826 7,808
European Union (28 countries) 7,755 7,889 8,071
Brazil   7,611 7,929 7,925
India 2,600 2,776 2,729
Argentina 2,393 2,379 2,568
Others 16,798 17,379 17,375
Total 58,973 59,586 58,657
 
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Main Beef Exporters 2020 2019 2018
  (in thousands of tons – weight in equivalent carcass)
Brazil 2,539 2,314 2,021
Australia 1,455 1,738 1,582
India 1,331 1,373 1,433
U.S. 1,050 1,494 1,511
Argentina 830 763 501
Others 3,298 3,210 3,058
Total 10,503 10,892 10,106

 

Source: USDA, February 2021.

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

Production Process

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

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

Meat Production Chain

Poultry

At the beginning of the broiler production cycle, 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. 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 1.60 billion day-old chicks and 11.4 million day-old turkeys in 2020. We hatch these eggs in our 27 hatcheries (23 broiler, 1 turkey, 3 breeders).

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 6,318 integrated poultry outgrowers. Many of these outgrowers also produce and sell corn that we use to produce animal feed.

 
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As of December 31, 2020, we have a fully automated slaughtering capacity of 33.4 million heads of poultry per week and 190 thousand heads of turkey per week

Pork

We produce the majority of the pork we use in our products. We also purchase pork on the spot market.

Piglet producers either purchase parent breeder hogs produced by 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 a total of 3,282 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, 2020, we had a pork slaughtering capacity of 208,092 heads per week.

Beef

We had a beef slaughtering capacity of 14,400 heads per week until October 1, 2014, when we signed an Investment Agreement with Minerva, pursuant to which we allocated our beef slaughtering plants in Várzea Grande and Mirassol, as well as our employees involved in these activities, to a closed capital company that was incorporated within Minerva. We received an equity interest in Minerva in connection with this transaction. The transaction closed on October 1, 2014. On December 7, 2018, we executed an agreement with Marfrig for its acquisition in the amount of R$100 million of real estate and equipment from our plant located in Várzea Grande in the State of Mato Grosso, which produced approximately 69,000 tons of hamburger meat per year. This transaction closed on January 23, 2019 and, on April 1, 2019, a Supply Agreement with Marfrig became effective, under which Marfrig undertook to provide us with finished goods produced in the Várzea Grande plant, such as hamburgers, meatballs, kibbehs, chicken meat and processed chicken breast products for 60 months.

Processed Foods

We sell a variety of processed foods, some of which contain poultry and pork meat that we produce. We have a total production capacity of 190 thousand tons/month across 16 production units in Brazil (Chapecó, Marau, Capinzal, Toledo, Videira, Lucas do Rio Verde, Rio Verde, Uberlândia, Concórdia, Tatuí, Vitória de Santo Antão, Herval d’Oeste, Lajeado, Ponta Grossa, Paranaguá and Duque de Caxias) processing meat products (such as mortadella, franks, sausage, hamburger and breaded meat) and non-meat products (such as lasagna, ready-to-eat meals and pizzas) for both the domestic and international markets. The company has one plant under construction in Seropedica, in the State of Rio de Janeiro, expected to initiate its operations in 2021. In Tatuí, in the State of São Paulo, we produce ready-to-eat sandwiches, lasagnas, pizzas, cheese breads and other pasta and bakery items. In Ponta Grossa, in the State of Paraná, we produce pizzas, pastas, desserts (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. We purchase most of the remaining ingredients for our lasagnas, pizzas, pies and pastries in the domestic market from third parties. Such seasonings and secondary raw materials are applied to each product type or line according to established criteria and procedures to ensure consistency of color, texture and flavor. The presentation of final products is achieved by shaping, casing, cooking and freezing in special machines. Products are then subjected to quality controls and distributed to the consumer market after having been packaged, labeled and boxed.

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

In January 2021, BRF concluded the acquisition of Joody Al Sharqiya Food Production Factory, its first production plant in Saudi Arabia with a total capacity of 3.6 thousand tons/year. We have an expansion plan to grow the capacity to 18 thousand tons/year of processed chicken products.

We also sell frozen French fries, which are imported from Belgium where they 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 State of Santa Catarina, Dois Vizinhos, in the State of Paraná, and in Toledo, also in the 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. Our sales represented 25% of the vegan nuggets segment in Brazil in 2020.

The raw material for margarine is crude soybean oil, which is subjected to refining and bleaching processes. We produce margarines in our plants in Paranaguá, State of Paraná, Uberlândia, State of Minas Gerais and Vitória de Santo Antão, under the Qualy, Deline and Claybom and Becel brands and in the State of Pernambuco under the brands Qualy and Deline. We sell these products as part of our strategy to diversify our product lines and to take advantage of our distribution network for refrigerated products.

We also sell halal food, which is the food allowed for 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 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. In 2019 and 2020, we also purchased corn from rural producers and small merchants, through cooperatives and from trading companies such as Coamo, Bunge, Cargill and others. The corn is grown primarily in the states of Paraná, Santa Catarina, Rio Grande do Sul, Goiás, Mato Grosso, Mato Grosso do Sul and Minas Gerais. We buy soy meal from major producers such as Bunge, Cargill and Amaggi, primarily pursuant to long-term contracts. The prices of corn, soybeans and soy meal fluctuate significantly, influenced by international quotes and local currency rates. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Principal Factors Affecting our Results of Operations—Commodity Prices.”

 
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Other Raw Materials

We purchase other materials required for our products, such as prepared animal intestines (for sausage casings), cardboard boxes and plastic (for packaging), micronutrients (for animal feed), spices and veterinary drugs from third parties, both in the domestic and international markets.

Suppliers

One of our strategies is to build more efficient relationships with our suppliers by using selection criteria to assess suppliers based on the quality of the product, the product performance and reliability.

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, 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.

In 2019, we created the internal process for suppliers to comply with our Suppliers’ Code of Conduct and established internal procurement standards setting forth this process (“Procurement Standards”). The process was led by an internal working group focused on ensuring effective Suppliers’ Code of Conduct implementation, mitigating our risks and strengthening our relationships with our stakeholders. Beginning in September 2019, all new suppliers are required to confirm compliance with our Suppliers’ Code of Conduct before being registered on our internal systems.

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 legal requirements 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 are in the process of standardizing our monitoring program across all of our departments, but all of our new suppliers are required to follow the Suppliers’ Code of Conduct and the Policy for Related-Party Transactions, whether in connection with a contract or spot purchase.

The evaluation and appropriate selection of suppliers and maintaining relationships with those suppliers is critical to our market competitiveness. The supplier assessment process often involves the simultaneous consideration of various aspects of the supplier’s performance, including price, innovation, delivery time, quality and post-sales support, along with its social and environmental policies and performance. Our process follows established guidelines, supported by systems and rules to be followed by all members of our procurement team. In 2018, we implemented our purchasing system – Ariba SAP, which is an advanced purchasing tool intended to strengthen our compliance function. In 2019, we implemented a new module within the purchasing system, called Ariba Network, which is focused on the relationship between our contract managers and suppliers. This improvement reinforces 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.

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

Brazilian Market

Brazil is the fifth largest country in the world in terms of land and has the sixth largest population on the globe. As of December 31, 2020, Brazil had an estimated population of 211.7 million people, according to figures from the IBGE. Brazil’s GDP amounted to R$6.8 trillion in 2018, R$7.2 trillion in 2019 and R$7.4 trillion in 2020. In 2020, GDP decreased by 4.1% in nominal terms and 0.2% per capita compared to 2019.

Inflation measured by the National Amplified Consumer Price Index (known as the IPCA - Índice Nacional de Preços ao Consumidor Amplo), published by the IBGE, was 3.75% in 2018, 4.31% in 2019 and 4.52% in 2020, following a trend of relatively high rates. The end-of-period exchange rate, as measured by the Brazilian Central Bank, was R$3.87/U.S.$1.00 in 2018, R$4.03/U.S.$1.00 in 2019 and R$5.20/U.S.$1.00 in 2020, with the real depreciating by 22.4% in 2020 compared to 2019.

Brazil is one of the largest meat consumers in the world, with per capita consumption in 2020 of 97.23 kilograms, including beef, chicken and pork products, according to the USDA, a decrease of 2.7% compared to 2019. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. Given the GDP contraction, meat consumption decreased in 2020 compared to 2019. As economic improvement is expected for 2021 in comparison to 2020 (as of March 5, 2021, market analysts consulted by the Central Bank expected that GDP will increase by 3.26%, while inflation is expected to remain low at 3.98%) meat consumption should increase in 2021. 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 Alimentos S.A. (“Seara”) (which was acquired from Marfrig by JBS in 2013), Cooperativa Central Aurora Alimentos (“Aurora”) and JBS. The main producers in the fresh food market face strong competition from a large number of small producers which operate in the informal economy and sometimes offer low quality products at lower prices than those of the large producers. 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.

We estimate the following market information based on available data from A.C. Nielsen, which is reported to them by us and by some of our competitors:

·the Brazilian industrialized food market had revenues of approximately R$26,775 million in 2020 compared to R$21,622 million in 2019;
·the Brazilian frozen food market had revenues of approximately R$5,740 million in 2020 compared to R$4,387 million in 2019; and
·the Brazilian margarine market had revenues of R$4,285 million in 2020 compared to R$3,910 million in 2019.

These figures do not include BRF data by region or category of products that are not covered by the A.C. Nielsen figures.

International Markets

Brazil is a leading producer in global export markets due to its natural advantages (land, water and climate), competitive inputs, costs and increasing efficiencies in animal production. Like other large Brazilian producers, we have capitalized on these advantages to develop the scope and scale of our business.

 
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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.

Sales

We sell our products both in the domestic and export markets around the world. Net sales to the Brazilian market, including most of our processed foods, accounted for 53.2%, 52.3% and 54.0% of our net sales in 2020, 2019 and 2018, respectively. Net sales to international markets, including most of our frozen whole and cut chickens and other poultry and frozen pork cuts and beef cuts, accounted for 43.7%, 44.5% and 43.3% of our net sales in 2020, 2019 and 2018, respectively.

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

 

2020

2019

2018

Brazilian Market      
Poultry 9.5% 11.0% 10.6%
Pork/Beef 3.2% 2.8% 2.7%
Processed food products 40.4% 38.4% 40.7%
Other Sales 0.1% 0.0% 0.1%
Total Brazilian market 53.2% 52.3% 54.0%

 

International Markets

     
Poultry 31.0% 33.7% 33.2%
Pork/Beef 5.9% 3.8% 2.7%
Processed food products 6.0% 6.3% 6%
Other Sales 0.8% 0.5% 1.2%
Total International markets 43.7% 33.7% 33.2%
       
Other Segments      
Poultry 0.0% 0.1% 0.3%
Pork/Beef 0.0% 0.0% 1.8%
Processed food products 0.0% 0.0% 0.5%
Other Sales 3.0% 3.0% 2.6%
Total Other Segments 3.2% 3.2% 2.7%
Total 100% 100% 100%

 

Seasonality

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

Overall Comparison of Our Net Sales for the Years Ended December 31, 2020 and 2019

Brazil

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

 
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Note: There may be small variations in the percentages presented in the chart above when compared with past reports due to rounding and migration of customers between the sales channels.

Our domestic distribution network consists of 22 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 28 transit points, previously referred as cross-docking points, in several areas of the country that enable us to unload products from large refrigerated trucks onto smaller trucks or vans for transportation to our customers. We own five of our distribution centers and lease the remaining 17 centers, which are listed below under “—Property, Plant and Equipment.” We do not own the vehicles used to transport our products—we contract with carriers to provide this service for us on an exclusive basis.

International

We operate in three business segments, which primarily reflect our geographical structure: Brazil, International (including Islamic 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 graphs below set forth a breakdown of our export net sales by segment.

 

Competition

Brazil

Brazil’s domestic market is highly competitive, particularly for fresh food and frozen poultry and pork products. We endeavor 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.

In the processed meat and margarine categories, the most recently available percentage of our market share in Brazil in 2020 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:

 
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Source: A.C. Nielsen Bimonthly Retail – Margarines and Frozen Meals (October/November 2020 survey); Filled and Cold Cuts (September/October 2020 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 competitor 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. (“Pif Paf”) 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 recently 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 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. The initiative has increased our revenue on this portfolio from 1.6% in 2019 to 6.7% in 2020, and we captured opportunities focused on consumer needs for healthy, premium and ready-made products with 27 new products released in 2020. In line with our goal of building stronger margins for in natura meat, we are aiming to increase the per capita consumption of pork cuts in the Brazilian market with a high aggregate value and premium portfolio, capturing bovine meat share of Brazilians consumers.

Considering Brazil’s anticipated economic recovery from the COVID-19 pandemic, with more emphasis from the second half of 2020 onwards, and its positive impact on the consumption of animal protein, the processed food market is growing and the expectations in the medium and long-terms indicate continued expansion. In that context, to take advantage of growth opportunities, we are focused on executing an innovative agenda based on consumer needs for healthy, premium and practical products. We are also focused on expanding to new consumption categories and implementing a targeted brand positioning strategy through communication, activations, brand architecture and portfolio expansion. In addition, to increase our market share, our efforts are related to enhancing brand power and value perception, increasing distribution capacity, expanding the offer of superior quality products and implementing a revenue management strategy.

 
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International

We face significant competition in our international markets, both from Brazilian producers and from producers in other countries. Cooperatives are increasingly relevant competitors, as they have tax advantages and certain mobility to reassign their production to foreign markets at times when exports become more attractive than the domestic market. In addition, JBS is one of our direct competitors in the international market that has many 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$17,240,194 thousand in 2020, an increase of 15.7% from 2019. Despite the still-challenging international market environment in 2020, we believe we export more than our main Brazilian competitors, as we are one of the largest poultry exporters in the world. In 2020, we accounted for 10.1% of the world’s poultry trade, according 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, 2020, we operated 22 distribution centers and 28 transit points.

International Markets

We export our products mainly through the ports of Itajaí, Navegantes and Itapoá in the State of Santa Catarina. We also export our products through Rio Grande in the State of Rio Grande do Sul and Paranaguá in the State of Paraná. We store our products in refrigerated storages that are owned and operated mainly by third parties located at ports in the states of Paraná, Santa Catarina and Rio Grande do Sul. In 2020, we packed more than 60% of our export containers at plants, referred to as loading “fresh frozen products.” We contract with exclusive third-party carriers to transport our products from our production facilities to the ports, and we ship our products to export markets through independent shipping companies.

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

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

Europe. On May 14, 2018, the European Union released its decision to remove 12 of our production facilities in Brazil from the list that permits imports of animal products by the countries in the European Union. Given the ban of imports from our production facilities, we are no longer able to sell our products from such embargoed production plants in the European Union. This suspension on certain products from Brazilian producers caused challenges for our operations in Europe and required us to reorganize our sales and distribution network by strengthening our partnerships with other food processors, food service operators and local distributors. Furthermore, we leveraged our global sourcing network to supply the European market with products produced outside of Brazil. On February 7, 2019, we agreed to sell to Tyson International Holding Co. most of our subsidiaries in Europe, including our Wrexham (UK) and Oosterwolde (Netherlands) processing plants, and our food processing and poultry slaughtering operation in Thailand. This transaction closed on June 3, 2019 for the amount equivalent to R$1,488,033 thousand (U.S.$382,106 thousand, translated to reais at the exchange rate of R$3.8943 as of June 3, 2019). 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 has partially lapsed for certain products and channels. 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. The arrangements with Tyson include a phased removal of the non-compete restrictions in three stages, including our access to (i) B2B, CFR (cost and freight) and wholesalers in Europe by June 2021, (ii) the retail channel in the European market by 2022 and (iii) the Thai market in 2024. By June 2022, we may also invest in businesses that hold import quotas to Europe.

 
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Asia. Asia is a highly diverse continent, both in terms of cultural and economic development characteristics, where we serve over 13 countries, from mainland China to the islands in the South Pacific region. In 2020, China, along with Hong Kong, continued to be our largest market in Asia, led by a strong demand for protein due to the African swine fever crisis affecting the Chinese domestic production. We optimized our production facilities to prioritize the supply of pork cuts, chicken wings and chicken feet to Chinese clients. At the same time, our local distribution operation in Shanghai expanded partnerships with retailers by selling Sadia frozen chicken cuts and by launching a new portfolio of pork cuts to strengthen the Sadia brand presence in China. In Japan, our local level of service, quality standards and product range have made us a preferred supplier of chicken products in the market. In South Korea, we were the first Brazilian producer to export pork cuts to this market, which has provided new business opportunities in this country. In Singapore, we consolidated our Sadia brand presence with our distribution partner and with a new brand campaign, maintaining modern retail prominence in key product categories. Additionally, in Southeast Asia, we developed new channels and clients in Vietnam and the Philippines, serving these markets with a diverse portfolio of chicken and pork cuts. In 2020, we concluded the sale of our stake in the joint venture “FFM Further Processing Sdn. Bhd.,” in Malaysia, while maintaining the export leadership to this country.

Middle East. In the Middle East, Turkey and Malaysia we sell to wholesalers, retailers, small stores (traditional trade), food service providers and processors. In these markets, we primarily sell frozen chicken in three categories: whole, cuts and processed products. We believe we are one of the preferred suppliers of these products in this region due to our quality standards and our long-standing customer relationships. Our biggest brand, Sadia is recognized as the leading food brand in the Middle East and enjoys the highest Top of Mind brand within the frozen meat category, according to a study made by Ipsos Research, a third-party consulting firm. In 2017, we created separate Halal business operations, which was focused 100% in the Halal market. We also announced the completion of the acquisition of Banvit in Turkey, through TBQ Foods GmbH, a joint venture formed with the Qatar Investment Authority in May 2017. See “Item 4. Information on the Company—A. History and Development of the Company—Corporate Reorganization of One Foods.” In 2019, our Halal operations were reincorporated into BRF S.A. as part of our International operating segment, and they are currently operating similarly to how they operated prior to 2017. In 2020, we sold our food processing plant in Malaysia and, in 2021, we concluded the acquisition of a food processing plant in Dammam, Saudi Arabia. See “Item 4. Information on the Company—A. History and Development of the Company—Other Transactions in 2018, 2019 and 2020.”

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. In 2020, 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 South Africa’s main retailers, which we started in 2020.

 
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Americas and Other Countries. We sell our products in the Americas through direct sales to key distributors. Additionally, in 2020, 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,” “Sahtein,” “Unef,” “Hilal,” “Halal & Design,” “Amineau,” “Natvie,” “Gud,” “Onefoods,” and “Deline” brands in our international markets, as described below under “—Marketing.”

We also own several brands for specific products or product lines. In the Brazilian market, these brands include, but are not limited to, “Sadia Bio,” “Sadia Salamitos,” “Sadia Hot Pocket,” “Perdigão Ouro,” “Chester Perdigão,” “Perdigão NaBrasa” 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 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 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-foodservices.com.br” and “brf-global.com.”

Marketing

We maintain an active marketing program using several channels, including television and video, digital, print and brand experiences. Our marketing efforts are based on: (i) adding value to existing categories and diversifying our product lines; (ii) increasing convenience with respect to 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.

In the Brazilian market, we sell our products primarily under the Sadia, Perdigão and Qualy brands. Apart from these major brands, we also sell our products under various Sadia brands, including: Soltíssimo, Nuggets, Frango Fácil and Sadia Speciale. Additionally, we sell products under various Perdigão brands, including Chester, Ouro, Na Brasa and Meu Menu.

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

 
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We sell margarine under the Qualy, Deline, Claybom and Becel brands. 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. In 2019, we launched Qualy Vita, a margarine enriched with Omega 6 and vitamins A, D and E and focused on heart health. Through our technical knowledge combined with a deep understanding of consumers’ preferences, we will seek to maintain our leading market positions.

In 2019, we introduced a new positioning concept for our Sadia brand based on consumer perception of quality, superiority and transparency. Sadia is also the preferred brand in the food market in Brazil according to Kantar Insights – Brand Equity Tracking 2020. Sadia and Perdigão, together, hold 39.9% of the food market preference in Brazil, and Qualy, more than 50% of the margarine market in Brazil, also according to Kantar Insights – Brand Equity Tracking 2020.

The pandemic has 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 48.8 million online visits in 2020, and which featured more than 870 different recipes for our customers who needed to migrate from eating out to preparing homecooked meals. 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 and visits to our websites in 2020 significantly increased, by 186%, compared to the same period in 2019. Even with such substantial growth, we maintained generally positive feedback on these initiatives, with an average NPS of 8.10. We have made important improvements in actively listening to our customers through several consumer and market insight initiatives.

In 2020, Sadia launched new products to enhance occasions for culinary indulgence, such as Mac’n Cheese, two news brands to meet consumer demand, including the plant-based Sadia Veg&Tal sub-brand and organic Sadia Organic in natura meat products, as well as a premium sub-brand, Sadia Speciale. With respect to our communications strategy, Sadia developed ways to help consumers adapt to their new pandemic routines by advertising, e-commerce and the online hub for recipes. Sadia also aired campaigns to promote both its current and new product portfolio. At the end of 2020, Sadia opened its first store, Mercato Sadia, to promote a full brand experience.

Perdigão focused throughout 2020 on different forms of communication for its brands and products, such as co-branded initiatives with McDonalds & Perdigão Ouro and musical and merchandising projects for Perdigão Na Brasa, a line of barbecue products. At the end of 2020, Chester®Perdigão celebrated its 40th anniversary with a strong communications campaign promoting generosity and donations; for example, more than one million Chester® Perdigão brand meats were donated in the last five years). In addition, Perdigão launched two new flavors of Mortadela Ouro Perdigão, new cuts of Perdigão Na Brasa, such as pork filet mignon and chicken boneless leg, sliced bacon, Assa Fácil chicken breast and news Chester® Perdigão flavors at the end of the year.

Qualy started new programs involving its sustainability pillar, reinforcing the reuse of our margarine packaging by launching attractive and resistant collectible containers for our core products, and we also started to extend the Qualy portfolio by entering new product categories, such as butter, “requeijão” and cheese bread balls (both considered to be local delicacies). Beyond innovation, Qualy also launched a new brand positioning under the motto “Fazer com Qualy diz muito” (“To make it with Qualy says/means a lot”), inviting consumers to express their feelings and affection through recipes made with Qualy, facilitated by the launch of our online recipe hub with different ideas for food preparations, which is the most accessed page on brand’s website.

In addition, we relaunched our Claybom brand with modern packaging using a new image, and we introduced a new product for the portfolio by launching a butter-flavored margarine.

Miss Daisy is our frozen dessert product line. We have produced and sold Miss Daisy deserts since 1999. We believe the Miss Daisy brand has a leading market position and has been highly resilient to market changes. We offer a wide variety of products under the Miss Daisy brand, including mousse pie, lemon pie, chocolate and vanilla pie, chocolate and shavings pie, and Dutch pie. In addition, Miss Daisy develops specific products for Christmas kits which have been popular in the Brazilian market. Inspired by seasonal flavors, the Miss Daisy brand also launched three new flavors as a limited edition: condensed milk fudge mousse pie with caramelized nuts and two new hot pie desserts, hazelnut cream and guava paste with cream cheese.

 
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In our Halal markets, our main brands are Sadia and Banvit, which have been leading brands in terms of market share and consumer preference. We also use secondary brands such as Perdix, Hilal and Korpe, as well as other brands such as Confidence, UNEF and Gozde in different countries and distribution channels. The opening of the Abu Dhabi plant in the Middle East and its current expansion, as well as the acquisition of a food processing plant in Dammam, Saudi Arabia in 2021, are important milestones in the expansion of our Halal business. Local production of processed food greatly increases our ability to adapt our products to local preferences and has assisted with the expansion of our product portfolio in the Middle East, as we seek to provide the best food products to our customers.

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

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 units in Brazil. MAPA also oversees our activities through the Department of Agriculture Defense (Secretaria de Defesa Agropecuária) and the Department of Inspection of Animal Products (Departamento de Inspeção de Produtos Animais).

The inspection activity is performed by placing teams from 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 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 of products sold across Brazil.

C.Organizational Structure

We are an operating company incorporated under Brazilian law, and we conduct business through our operating subsidiaries. The following table sets forth our significant subsidiaries.

Entities   Country Main Activity   Interest in Equity as
of December 31, 2020
           
BRF GmbH   Austria Holding   100.00%
BRF Global GmbH   Austria Holding and Trading   100.00%
BRF Austria Gmbh   Austria Holding   100.00%
One Foods Holdings Ltd.   UAE Holding   100.00%
Badi Ltd.   UAE Holding   100.00%
Al-Wafi Al-Takamol International for Foods Products   Saudi Arabia Import and commercialization of products   100.00%
BRF Al Yasra Food K.S.C.C. ("BRF AFC")   Kuwait Import, commercialization and distribution of products   75.00%
BRF Foods GmbH   Austria Industrialization, import and commercialization of products   100.00%
Al Khan Foodstuff LLC ("AKF")   Oman Import, commercialization and distribution of products   70.00%
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%

 

 
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The chart below shows our simplified corporate structure.

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, we operate 34 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and three soybean crushing 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 22 distribution centers, five of which are owned by us and 17 of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our international market, we operate five industrial facilities for meat processing. Additionally, after giving effect to the divestitures made in connection with our financial and operational restructuring plan, we operate 28 distribution centers located in Asia, the Southern Cone, and the Middle East as well as commercial offices on four continents.

The table below sets forth our production facilities in Brazil.

 
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Production Plant

State of Location

Activities

Meat Products:    
Buriti Alegre** Goiás Poultry slaughtering
Campos Novos Santa Catarina Pork slaughtering and animal feed
Capinzal Santa Catarina Poultry slaughtering and industrialized products processing
Carambeí**/**** Paraná Poultry slaughtering, animal feed and hatchery
Chapecó Santa Catarina Poultry slaughtering (including turkey), industrialized products processing, animal feed and hatcheries
Concórdia Santa Catarina Pork and poultry slaughtering, industrialized products processing, animal feed and hatcheries
Dois Vizinhos** Paraná Poultry slaughtering, animal feed and hatcheries
Dourados Mato Grosso do Sul Poultry slaughtering, animal feed and hatchery
Duque de Caxias Rio de Janeiro Industrialized products processing
Francisco Beltrão** Paraná Poultry slaughtering, animal feed and hatcheries
Garibaldi** Rio Grande Sul Poultry slaughtering
Herval D'Oeste Santa Catarina Pork slaughtering, industrialized products and hatchery.
Jataí** Goiás Poultry slaughtering, animal feed and hatchery
Lajeado Rio Grande do Sul Pork, poultry slaughtering and industrialized products
Lucas de Rio Verde Mato Grosso Pork and poultry slaughtering, industrialized products processing
Marau Rio Grande Sul Pork and poultry slaughtering, industrialized products, animal feed and hatcheries
Mineiros***/**** Goiás Poultry and special poultry (Chester®) slaughtering and processing
Nova Marilândia* Mato Grosso Poultry slaughtering
Nova Mutum** Mato Grosso Poultry slaughtering, animal feed and hatchery
Paranaguá Paraná Industrialized products processing
Ponta Grossa Paraná Industrialized products processing
Rio Verde**** Goiás Pork and poultry slaughtering, industrialized products processing
Serafina Corrêa Rio Grande Sul Poultry slaughtering
Tatuí São Paulo Industrialized products processing
Toledo Paraná Pork and poultry slaughtering, industrialized products processing, animal feed and hatcheries
Uberlândia** Minas Gerais Poultry and pork slaughtering, industrialized products processing and hatcheries
Videira Santa Catarina Poultry slaughtering, industrialized products, animal feed and hatcheries.
Vitória de Santo Antão Pernambuco Industrialized products processing
     
Soybean and Margarine Products:    
Paranaguá Paraná Margarine processing
Uberlândia Minas Gerais Margarine processing
Vitoria de Santo Antão Pernambuco Margarine processing
Dois Vizinhos** Paraná Soybean crushing
Videira Santa Catarina Soybean crushing
Toledo Paraná Soybean crushing
 
Production facilities owned and operated by third-party producers who produce according to our specifications.
**Operates in accordance with the Halal requirements.
***The activities of the Mineiros plant were suspended by the MAPA on March 17, 2017 in connection with the Carne Fraca Operation. The plant resumed operations on April 11, 2017. For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings—Carne Fraca Operation.”
 
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****Exports of the Rio Verde and Mineiros plants were suspended by MAPA on March 5, 2018 in connection with Trapaça Operation. For more details, see “Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings— Trapaça Operation. In 2020, Rio Verde plant was withdrawn from the suspension list and started to export again.”

 

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

We operate 22 distribution centers throughout Brazil, as set forth in the table below.

Location

State

Owned or Leased

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

 

We operate 28 transit points in Brazil in the locations set forth in the table below.

Transit Points

State of Location

Owned or Leased

Apucarana  Paraná Leased
Aracajú  Sergipe Leased
Araçatuba  São Paulo Leased
Bauru  São Paulo Leased
Brasília  Distrito Federal Leased
Campo Grande  Mato Grosso do Sul Owned
Campo dos Goytacazes  Rio de Janeiro Leased
Criciúma  Santa Catarina Leased
Governador Valadares  Minas Gerais Leased
Guarulhos  São Paulo Leased
Itabuna  Bahia Leased
Limeira  São Paulo Leased
Macapá  Amapá Leased
Maceió  Alagoas Leased
Marau  Rio Grande do Sul Owned
Monte Claros  Minas Gerais Leased
Parnamirim  Rio Grande do Norte Leased
Paraíso do Tocantins  Tocantins Leased
 
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Transit Points

State of Location

Owned or Leased

Pelotas  Rio Grande do Sul Leased
Pouso Alegre Minas Gerais Leased
Presidente Prudente  São Paulo Leased
Ribeirão Preto  São Paulo Leased
Santa Maria  Rio Grande do Sul Leased
São José do Ribamar  Maranhão Leased
São José dos Campos  São Paulo Owned
Seabra  Bahia Leased
Sorocaba  São Paulo Leased
Teresina  Piauí Leased

 

Environment

Our activities are subject to strict environmental laws and regulations at 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 (SSMA Policy) and the Sustainability Pillar of the BRF Operational Excellence System (“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), with targets that are established on an annual basis. Corrective actions are established to resolve deviations that have been found. An assessment is carried out to make sure that the environmental management system is being observed.

In 2020, 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.

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.

 
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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 of our employees and contractors in Brazil and abroad must follow our safety protocols. In addition, we have hired a consulting firm to assist with further strengthening our health and safety structure, including with respect to ammonia cooling systems, 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. Between 2019 and 2020, we began to create the framework for and implemented the Health and Safety Pillars applicable to our employees and third-party personnel. These pillars are part of the BRF Operational Excellence System. In this way, we plan to reduce the accident frequency rate, calculated based on the Occupational Safety and Health Administration (“OSHA”) requirements, by 56% in three years (2020 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
A.Operating Results

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 7,300 stock keeping units (“SKUs”). 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 prepared entrees, portioned products and sliced products. We also sell margarine, butter, cream cheese, sweet specialties, sandwiches, plant-based products and animal feed. We are the holder of brands such as Sadia, Perdigão, Qualy, Perdix, Confidence and Hilal. For the year ended December 31, 2020, we were responsible for 10.1% of the world’s poultry trade, according to USDA.

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

With 34 industrial facilities in Brazil, as of December 31, 2020, we have among our main assets a distribution network that enables our products to reach Brazilian consumers through more than 547,000 average monthly deliveries and 22 distribution centers in the domestic market.

In the international market, we have a leading brand, Sadia, in various categories in Middle Eastern countries. We maintain over 41 offices outside of Brazil serving customers in 117 countries on five continents. We have one industrial facility in Abu Dhabi, one in Saudi Arabia, two in Romania and three in Turkey. As of December 31, 2020, we also have among our main assets a distribution network that enables our products to reach consumers in the Halal market through more than 250,000 monthly deliveries and 19 distribution centers in addition to 26 transshipments points.

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).

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

·Meat Products, consisting of in natura meat, which we define as frozen whole chicken and cut chicken, and frozen pork;
·Processed Food Products, including the following:
omarinated, frozen, whole chicken and cut chicken, roosters (sold under the Chester® brand) and turkey;
ospecialty meats, such as sausages, ham products, bologna, frankfurters, salami, bacon and other smoked products; and
ofrozen processed meats, such as hamburgers, steaks, breaded meat products, kibbeh and meatballs;
·Other Processed Products including the following:
omargarine, butter and cream cheese;
ofrozen prepared entrees, such as lasagna, macaroni and cheese and pizzas, as well as other frozen foods;
oplant-based products, such as nuggets, pies, vegetables and hamburgers; and
ofrozen desserts;
·Other, consisting of soy meal, refined soy flour and animal feed.

In Brazil, we operate 34 meat processing plants, three margarine processing plants, three pasta processing plants, one dessert processing plant and three soybean crushing plants. All of these industrial facilities are located near our raw material suppliers or main consumer centers. We have an advanced logistics system in our domestic market, with 22 distribution centers, five of which are owned by us and 17 of which are leased from third parties, all of which serve supermarkets, retail stores, wholesale stores, restaurants and other clients.

In our international market, we operate five industrial facilities for meat processing. Additionally, after giving effect to the divestitures made in connection with our financial and operational restructuring plan, we operate 28 distribution centers located in Asia, the Southern Cone, and the Middle East as well as commercial offices on four continents.

 
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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. We have taken steps to address these concerns, for example by entering into a partnership with the World Wide Fund for Nature (WWF) and joined the Collaboration for Forests and Agriculture (CFA) in 2019, with the aim of developing a more sustainable grain supply chain. From 2014 until 2020, we allocated R$1,123.6 million (€321.6 million) to projects with environmental benefits, and we planted a renewable forest covering 30 thousand hectares (the amount referring to the investments made in 2020 is still subject to a second opinion from an external certifier, which may result in an adjustment of this amount).

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;
·disruptions in consumption and trade patterns, supply chains and production processes resulting from the novel coronavirus (COVID-19 virus) pandemic;
·the effect of trade barriers and other restrictions on imports;
·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;
·interest rates; and
·freight costs and volume.

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

Brazilian and Global Economic Conditions

The CMN set the target inflation in Brazil at 4% for 2020, with a potential range of 1.5 percentage points higher or lower than this target. The inflation rate, which had been below the target at 2.95% in 2018, increased to 4.31% in 2019 and to 4.52% in 2020. 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 13.9% in 2020, according to the IBGE’s National Household Sample Survey (Pesquisa Nacional por Amostra de Domicílios, or “PNAD”), which represents a deterioration when compared to the rate of 11.8% in 2019. Additionally, after decreasing to 91.6 points in 2019, Brazilian consumer confidence decreased to 78.5 points in December 2020, according to a Consumer Survey of Fundação Getúlio Vargas (FGV).

 
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Real GDP in Brazil increased at an average annual rate of 9.0% from 2005 through 2020. For two consecutive years, in 2015 and in 2016, Brazil’s GDP decreased by 3.5%. In 2020, GDP decreased by 4.1% compared to 2019. Reacting to this weak economic situation, the Central Bank lowered the SELIC interest rate, which is the short-term benchmark interest rate. Overall, the long-term trend in interest rates remains downward, from 18% as of December 31, 2005 to 2.00% as of December 31, 2020.

The Brazilian real depreciated 22.4% against the U.S. dollar in 2020, from R$4.03 per U.S.$1.00 in December 31, 2019 to R$5.20 per U.S.$1.00 in December 31, 2020.

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), Russia (since 2012) and Mexico (since 2013) 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 (37% to 62%) and boneless (12% to 42%) chicken in South Africa, which had a negative impact on our competitiveness and profitability in the country.

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.

 
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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.

With respect to poultry imports, Russia set a quota of 364,000 tons of meat in total. Of the total quota, 100,000 tons correspond to imports of boneless meat, of which 80,000 tons are allocated to the EU and 20,000 tons are allocated to other countries; 250,000 tons correspond to imports of bone-in products, with no geographical breakdown; and 14,000 tons correspond to boneless and bone-in products allocated to imports from Turkey. The intra-quota tariff is 25% and the extra-quota tariff is 80%. However, not all types of poultry cuts can be imported within the quotas, for example grillers and whole boneless chicken (shawarma). Products that cannot be imported within the quotas are subject to an 80% import tariff.

With respect to beef imports, Russia set a quota of 40,000 tons for chilled beef and of 530,000 tons for frozen beef imports. Of the total quota for chilled beef, 29,000 tons are allocated to the EU and 11,000 tons are allocated to imports from other countries. Of the total quota for frozen beef, 60,000 tons are allocated to the EU, 60,000 tons are allocated to the United States, 3,000 tons are allocated to Costa Rica and 407,000 tons are allocated to imports from other countries. The intra-quota tariff is 15% and the extra-quota tariff is 50%.

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.

Additionally, the Saudi Arabian government has announced the adoption of an import license system, which has not been implemented yet. Once it is implemented, Saudi Arabia may have the ability to strengthen its control over imported volumes and set limitations.

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, State of Goiás, Carambeí, State of Paraná and Mineiros, 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.

Between April 29 and April 30, 2020, our production facility located in Rio Verde, in the State of Goiás, was temporarily suspended in compliance with the determination by the local Federal Inspection Service, or SIF, due to deviations found in the local water supply system.

In 2020, China’s General Customs Administration 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.

In 2020, the Philippines imposed a temporary ban on poultry meat imports from Brazil after two cities in China found traces of COVID-19 in cargoes of imported frozen food, including chicken wings, from Brazil. The Philippines lifted the embargo on imports of Brazilian chicken products in December 2020. Since no other countries followed the Philippine government’s embargo and we have not been notified, whether directly or through the Brazilian government, of other countries adopting a similar position, we believe that it is unlikely that other similar embargos will occur.

 
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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 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. 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, 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, increasing the costs of Halal certification by requiring accreditation at the SFDA Halal Center, and adopting import licenses to control the volume of imports. 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. Saudi Arabia also imposed an informal import ban in 2020 against products originating from Turkey, which affected our subsidiary Banvit’s exports.

Additionally, since 2018, the government of South Africa has threatened to launch an anti-dumping investigation against Brazil related to certain protein cuts allegedly being exported at lower prices than those in the South African domestic market.

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. In 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 production in Turkey.

COVID-19 Pandemic

 
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On March 11, 2020, the World Health Organization declared COVID-19 as a global pandemic. The worldwide spread of COVID-19 has triggered the implementation of significant measures by governments and private sector entities which, 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. In addition, customers from certain regions in which we operate are being affected, mainly by the measures of social distancing imposed by authorities and restrictions on public gatherings or interactions, which may limit the opportunity for our customers to purchase our products. The consequences of the pandemic could also result in the destabilization of commodity prices or the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and have a material adverse effect on our results of operations. Any deterioration in the credit cycle of our customers as a result of the pandemic or the measures implemented to address it, may adversely affect our results and cash flows in the future.

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 quarantines or 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.

Since the beginning of the global pandemic, we have continued to operate our plants, distribution centers, logistics, supply chain and administrative offices, although currently we have implemented a remote work program in some of our corporate offices and we had to close our Lajeado plant for a week in May 2020 and our Rio Verde plant for 14 days in June 2020, in each case as the result of an outbreak. As of the date of this annual report, there has been no significant change in our production plan, operation or commercialization. Our management has 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. Our operation can be affected by COVID-19 through reduction of the labor available by COVID-19, reducing the productivity of manufacturing operations, lack of raw materials and packaging, and delay in line growth and maintenance projects due to reduced availability of third parties suppliers.

However, we have incurred direct and incremental expenditures, mainly related to personnel, prevention, control, logistics and philanthropic donations, as a result of the pandemic in the amount of R$499,299 thousand. We have approved the donation of food, medical supplies and other support to research and social development funds, in an amount equal to approximately R$50 million, 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. However, despite having more visibility on the impact of the pandemic compared to March 2020, we may still suffer changes in our operational performance, which may in turn adversely affect our financial position. In March 2020, we sought to strengthen our liquidity profile in light of prevailing market uncertainty, and, between March 26, 2020 and May 15, 2020, we procured bank loans in Brazil totaling R$2.4 billion, with an average term of approximately one year. During the second half of 2020, we prepaid R$2 billion of these precautionary short-term loans and further extended our average debt maturity profile to 9.9 years as of December 31, 2020. We currently have R$3 billion undrawn and available under a revolving credit facility with Banco do Brasil. We have 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. We consider our liquidity position to be adequate taking into account our payment obligations, including through our capital expenditure plans, in line with our Vision 2030 Plan. We nevertheless 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 a resulting increase in our expected

 
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credit losses. The possible deterioration in the credit cycle of our customers may adversely affect our results, financial position and cash flows in the future.

The recent increase in volatility of market risks has significantly affected the fair value of our assets and liabilities, particularly considering wide variations in foreign exchange rates. Additionally, the heightened uncertainty of projections has increased the challenge of accurately measuring certain of our assets and liabilities. However, the judgments used have not been changed significantly, and we are still able to prepare our financial statements on a timely basis. Our management has taken into account the effects and uncertainties regarding the pandemic in the projections of our results and cash flows. As described in note 13.1 to our consolidated financial statements, no impairment has been recognized to our cash generating units. Due to the high volatility and uncertainty around the length and impact of the pandemic, we will continue to monitor the situation in the markets in which we operate and evaluate any necessary adjustments to the assumptions and estimates we use in preparing our financial statements.

 

The COVID-19 pandemic also resulted in a widespread health crisis that destabilized commodity prices and the economic conditions and financial markets of many countries, resulting in an economic downturn that could affect demand for our products and have a material adverse effect on our results of operations. The current pandemic and any future pandemics could also adversely affect consumer demand, as quarantines may inhibit consumption, and restrictions on public gatherings or interactions may limit the opportunity for our customers and consumers to purchase our products.

In addition, demand for our products has been affected as a result of the COVID-19 pandemic worldwide, especially in our international operations, due to the partial discontinuation of our foodservice channel, weakening of global commercial activities, reduction of population income, and changes in consumption habits. As a result, over the past year we have observed lower average prices as a consequence of relocating production from foodservice to other channels with lower prices and profitability, although we did not register excess inventory.

Effect of Animal Diseases

Avian Influenza

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

Demand for our products can be significantly affected by outbreaks of animal diseases like avian influenza. 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.

Brazil has not yet had a documented case of avian influenza, although there are concerns that an outbreak of avian influenza may occur in the country in the future. Any outbreak of avian influenza in Brazil could lead to the required disposal of our poultry flocks, which would result in decreased sales in the poultry industry, prevent recovery of costs incurred in raising or purchasing poultry and result in additional expense for the disposal of poultry. In addition, any outbreak of avian influenza in Brazil would likely lead to immediate restrictions on the export of some of our products to key export markets. Preventive actions adopted by Brazilian authorities, if any, may not be effective in precluding the spread of avian influenza within Brazil. In addition, any future significant outbreak of avian influenza in Brazil could eventually lead to pressure to dispose of our hogs, even if no link between the influenza cases and pork consumption is shown. Any such disposal of our hogs would result in decreased sales of pork, prevent recovery of costs incurred in raising or purchasing our hogs and result in additional expense for the disposal of hogs.

 
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Other Animal Diseases

In addition, demand in our export markets may similarly be influenced by other animal diseases. For example, pork imports from most Brazilian states were banned in Russia from 2005 to 2007 due to cases of foot-and-mouth disease affecting cattle in the States of Mato Grosso do Sul and Paraná. We do not raise hogs in Mato Grosso do Sul and Paraná. However, these bans have affected Brazilian exports into Russia generally and, at the time, required us to shift pork production for the Russian market to Rio Grande do Sul, the only Brazilian state that was not subject to the ban, until Russia lifted restrictions on imports from an additional eight Brazilian states in December 2007.

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

Outbreaks of African swine fever have been reported in China since August 2018 through 2020. The Chinese market shifted its purchasing as a result of these outbreaks. Consequently, our volumes of pork cuts sold to China increased, and the Brazilian Minister of Agriculture suspended imports of natural pork casings from China. This suspension was precautionary and has since been lifted.

Although all of our hogs are sourced in Brazil from zones free of Classical Swine Fever, there have been a number of recent outbreaks outside of these zones. In October 2018, an outbreak of Classical Swine Fever was confirmed in the Brazilian State of Ceará. Additionally, in 2019, a case of Classical Swine Fever was confirmed in the Brazilian States of Alagoas and Piauí. In 2020, two additional cases were reported in the State of Piauí. Brazil has two zones regarding the sanitary status of Classical Swine Fever, the free zone that is comprised of 16 Brazilian states and includes more than 95% of the Brazilian commercial pork production and a non-free zone, located in the north of Brazil. All three states with confirmed cases of Classical Swine Fever are located outside the Classical Swine Fever-free zone. The Brazilian government also took action to contain the outbreak. No formal commercial embargoes were announced as a result of this outbreak.

Effect of Export Market Demand on the Domestic Market

Demand fluctuations for poultry, pork and beef products in our export markets often have an effect on the supply and selling prices of those products in the Brazilian market. 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.

 
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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).

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.

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 and soybeans represented approximately 32.3% of our cost of production in 2020, compared to 28.1% in 2019. Although we produce most of the hogs we use for our pork products, we also purchased hogs on the spot market in 2020. We purchased 4.9% of the total number of hogs slaughtered in 2020 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 2020, the average corn price in Brazil was 29.95% higher than in 2019. Corn prices in December 2020 were 38.74% higher than in December 2019. In 2020, the average soybean meal price in Brazil was 36.58% higher than in 2019. In December 2020, soybean meal prices in Brazil were 47.07% higher than in December 2019. 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.

For further information about trends in commodity prices in 2020, 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”).

 

2020

2019

2018

Depreciation of the real against the U.S. dollar (22.44%) (4.02%) (17.14%)
Period-end exchange rate (U.S.$1.00) R$5.20 R$4.03 R$3.87
Average (daily) exchange rate (U.S.$1.00)(1) R$5.16 R$3.95 R$3.66
Period-end Basic interest rate SELIC(2) 2.00% 4.50% 6.50%
Inflation (INPC)(3) 5.45% 4.48% 3.43%
Inflation (IPCA)(4) 4.52% 4.31% 3.75%
Inflation (IGP-M)(5) 23.14% 7.30% 7.55%
 

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.
 
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(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$15,739,134 thousand as of December 31, 2020, representing 70.3% 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.

Effects of Interest Rates

Our financial expenses are affected by movements in Brazilian and foreign interest rates. As of December 31, 2020, 29.7% of our total indebtedness of R$22.4 billion was either: (i) denominated in (or swapped into) reais and bears interest based on Brazilian floating interest rates, such as the CDI, an interbank certificate of deposit rate that applies to our foreign currency swaps and some of our other real-denominated indebtedness, or IPCA; or (ii) U.S. dollar-denominated and bears floating interest based on LIBOR. Any increase in the CDI, IPCA or LIBOR 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:

 
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Average Interest for the Year Ended December 31,

 

2020

2019

2018

  (%)
CDI 2.8 4.4 6.4
Six-month LIBOR 0.7 1.9 2.9

 

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 2020, 2019 and 2018, freight costs from our continuing operations represented approximately 5.1%, 5.0% and 5.5% 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. In 2019, shipping lines also started preparing themselves for the implementation of the International Maritime Organization (or “IMO”) Low Sulphur Regulation, which entered into force on January 1, 2020. As a result of the new regulation, our freight levels increased approximately 11% due to the higher cost of VLSFO bunker oil, which has lower Sulphur emission when compared to the previous IFO bunker oil. The new IMO regulation has affected all agents in the shipping industry. Similarly, between March and May 2020, due to uncertainties regarding the effects of the COVID-19 pandemic, oil prices dropped drastically, and our sea freight was adjusted as well using the abovementioned Bunker clause. Oil prices had partly recovered by year-end 2020.

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 reefer containers, we are currently unable to estimate the possible impact on freight volume.

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 2020, 2019 and 2018.

 

Year Ended December 31,

 

2020

2019

2018

  (in thousands of reais) (%) (in thousands of reais) (%) (in thousands of reais) (%)
Continuing Operations            
Net sales 39,469,700 100.0 33,446,980 100.0 30,188,421 100.0
Cost of sales (29,998,822) (76.0) (25,370,042) (75.9) (25,320,753) (83.9)
Gross profit 9,470,878 24.0 8,076,938 24.1 4,867,668 16.1
Operating income (expenses)            
Selling expenses (5,587,488) (14.2) (4,911,666) (14.7) (4,513,594) (15.0)
General and administrative expenses (770,282) (2.0) (615,683) (1.8) (551,165) (1.8)
Impairment loss on receivables (12,137) 0.0 (23,899) (0.1) (46,269) (0.2)
Other operating income (expenses) (49,742) (0.1) 224,384 0.7 19,311 0.1
Income (loss) from associates and joint ventures - 0.0 (1,737) 0.0 17,715 0.1
Operating income (loss) from Continuing Operations

 

3,051,229

 

7.7

2,748,337 8.2 (206,334) (0.7)
Financial expenses (1,889,454) (4.8) (3,096,716) (9.3) (2,130,194) (7.1)
Financial income 420,757 1.1 1,304,187 3.9 869,534 2.9
Foreign exchange and monetary variations (230,298) (0.6) (72,870) (0.2) (980,814) (3.2)
Income (loss) before taxes 1,352,234 3.4 882,938 2.6 (2,447,808) (8.1)
Current income and social contribution tax (77,373) (0.2) (94,699) (0.3) (6,842) (0.0)
Deferred income and social contribution tax 250,136 0.6 290,094 0.9 340,144 1.1
Income (loss) from Continuing Operations 1,524,997 3.9 1,078,333 3.2 (2,114,506) (7.0)
Discontinued Operations            
Loss from Discontinued Operations - 0.0 (915,809) (2.7) (2,351,740) (7.8)
Net income (loss) 1,524,997 3.9 162,524 0.5 (4,466,246) (14.8)
Attributable to            
Controlling shareholders 1,518,492 3.8 162,684 0.5 (4,448,061) (14,7)
Non-controlling shareholders 6,505 0.0 (160) 0.0 (18,185) (0.1)
 
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Unless stated otherwise, the results that we present below do not consider the results from our discontinued operations.

Presentation of Operating Segments and Net Sales Information

In 2019, following the discontinuation of our operations in Argentina, Europe and Thailand and changes in our management structure, we changed our operating segments from those in effect on December 31, 2018 to reflect our business regions. Our current operating segments include: (i) Brazil; (ii) International, which concentrates all of our operations outside Brazil and has absorbed the former Halal and International segments reported in our financial statements as of and for the year ended December 31, 2018; and (iii) Other Segments. As a result, the segment presentations for 2018 were adjusted and restated. These segments include sales through all of our distribution channels and operations, subdivided according to the nature of the following products: (i) poultry (whole poultry and in natura cuts), (ii) pork and others (in natura cuts); (iii) processed foods (processed foods, frozen and processed products derived from poultry, pork and beef, margarine, butter, vegetable and soybean-based products); and (iv) other sales (refined soy flour for food service). Other Segments is divided into commercialization and development of animal nutrition ingredients, human nutrition, plant nutrition (fertilizers) and health care (health and wellness), as well as commercialization of agricultural products. Because we use the same assets to produce products for all our segments, we do not identify assets by segment, except for intangible assets with an indefinite useful life. See Note 2 to our consolidated financial statements for the year ended December 31, 2020 for a breakdown of net sales by segment and product line and for a breakdown of intangible assets by each reportable segment.

We report net sales after deducting taxes on gross sales and discounts and returns. Our total sales deductions can be broken down as follows:

·ICMS Taxes — ICMS is a state value-added tax 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, 2020 was 9.69%. 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, 2020. However: (i) exports are not subject to these taxes; (ii) we currently benefit from a reduction of the tax rate to zero with respect to our in natura pork, poultry and beef cuts; and (iii) our financial revenues had benefitted from a PIS and COFINS tax rate of zero since 2004. However, the enactment of Decree No. 8,426/15 reestablished PIS and COFINS on financial revenues at the rates of 0.65% and 4%, 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 profitability.”
·Discounts, Returns and Other Deductions — Discounts, returns and other deductions are unconditional discounts granted to customers, product returns and other deductions from gross sales.

Most of our deductions from gross sales are attributable to the ICMS, PIS and COFINS taxes. As a result, our deductions from gross sales in the domestic market, which are subject to these taxes, are significantly greater than our deductions from gross sales in our export markets.

The table below sets forth our gross sales and deductions for the years ended December 31, 2020, 2019 and 2018:

 
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Year ended December 31,

 

2020

2019

2018

  (in thousands of reais)
Gross sales      
Brazil 26,017,981 21,645,253 20,659,378
International 18,514,099 16,191,795 14,012,629
Other Segments

1,378,344

1,167,463

941,360

 

45,910,424

39,004,511

35,613,367

Sales deduction      
Brazil (5,032,862) (4,155,774) (4,366,842)
International (1,273,905) (1,292,401) (943,958)
Other Segments

(133,957)

(109,356)

(114,146)

 

(6,440,724)

(5,557,531)

(5,424,946)

Net sales      
Brazil 20,985,119 17,489,479 16,292,536
International 17,240,194 14,899,394 13,068,671
Other Segments

1,244,387

1,058,107

827,214

 

39,469,700

33,446,980

30,188,421

The following discussion provides comparisons of our results of our continuing operations for the years ended December 31, 2020, 2019 and 2018, based on our consolidated financial statements prepared in accordance with IFRS, as issued by the IASB.

Year Ended December 31, 2020 Compared with Year Ended December 31, 2019

Net Sales

Our net sales increased by R$6,022,720 thousand, or 18.0%, to R$ 39,469,700 thousand in 2020 from R$33,446,980 thousand in 2019, primarily due to an expansion of our value-added product mix portfolio in the Brazil and International segments, as well as other drivers described below.

Net Sales by Operating Segments

In 2020, we recorded the following net sales and volumes in our operating segments.

Operating Segments

Volume

Change from 2019

Net Sales

Change from 2019

  (in thousands of tons) (%) (in thousands of reais) (%)
Brazil 2,321 5.7 20,985,119 20.0
International 1,880 (1.5) 17,240,194 15.7
Other Segments 277 3.1 1,244,387 17.6
Total

4,479

2.4

39,469,700

18.0

 

Brazil

Our net sales for our Brazil operating segment increased by R$3,495,640 thousand, or 20.0%, to R$20,985,119 thousand in 2020 from R$17,489,479 thousand in 2019. This is primarily attributable to (i) investments in our brands; (ii) a portfolio expansion of our value-added product mix; (iii) the growth of our presence in new channels and the strengthening of our presence in our existing channels; and (iv) the improvement of the level of service to our customers.

 
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The following table provides a breakdown of our net sales and sales volume for Brazil.

 

Volume

Net Sales

 

2020

2019

Change

2020

2019

Change

  (in thousands of tons) (%) (in thousands of reais) (%)
Poultry 466 504 (7.6) 3,738,560 3,692,377 1.3
Pork and Others 119 117 1.8 1,275,690 943,220 35.2
Total in natura meat 585 621 (5.8) 5,014,250 4,635,597 8.2
Processed foods 1,735 1,574 10.3 15,944,162 12,839,008 24.2
Other sales 1 NM* NM* 26,707 14,874 79.6
Total 2,321 2,195 5.7 20,985,119 17,489,479 20.0

*NM = not meaningful

The following table sets forth our average selling prices in Brazil.

 

Average Selling Prices

 

2020

2019

Change

  (in reais per kg) (%)
Brazil 9.04 7.97 13.4

 

International

Our net sales for our International operating segment increased by R$2,340,800 thousand, or 15.7%, to R$17,240,194 thousand in 2020 from R$14,899,394 thousand in 2019, primarily driven by (i) an increase in the share of our value-added product mix; (ii) an increase in the number of our licensed plants, aiming at strengthening our presence in our existing markets, as well as in new regions and products; (iii) a higher demand from the Asian market due to African swine fever; and (iv) the devaluation of the Brazilian real versus the U.S. dollar that favored prices in reais.

 

Volume

Net Sales

 

2020

2019

Change

2020

2019

Change

  (in thousands of tons) (%) (in thousands of reais) (%)
Poultry 1,435 1,504 (4.6) 12,246,499 11,262,954 8.7
Pork and Others 194 152 27.7 2,324,121 1,342,892 73.1
Total in natura meat 1,629 1,656 (1.7) 14,570,620 12,605,846 15.6
Processed foods 248 252 (1.8) 2,366,204 2,119,918 11.6
Other sales 4 1 NM* 303,370 173,630 74.7
Total 1,880 1,909 (1.5) 17,240,194 14,899,394 15.7

*NM = not meaningful

The following table sets forth our average selling prices for our International operating segment.

 

Average Selling Prices

 

2020

2019

Change

  (in reais per kg) (%)
International 9.17 7.81 17.4

 

Other Segments

Our consolidated net sales for our Other Segments operating segment increased by R$186,280 thousand, or 17.6%, to R$1,244,387 thousand in 2020 from R$1,058,107 thousand in 2019, primarily driven by more favorable prices practiced in our ingredients business and higher volumes marketed in our global desk.

The following table provides a breakdown of our net sales and volumes for Other Segments.

 
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Volume

Net Sales

 

2020

2019

Change

2020

2019

Change

  (in thousands of tons) (%) (in thousands of reais) (%)
Other Segments 277 269 3.1 1,244,387 1,058,107 17.6

 

The following table sets forth our average selling prices for Other Segments.

 

Average Selling Prices

 

2020

2019

Change

  (in reais per kg) (%)
Other Segments 4.48 3.93 14.2

 

Cost of Sales

Cost of sales totaled R$29,998,822 thousand in 2020, representing an increase of 18.2% in comparison to costs of R$25,370,042 thousand in 2019. This was mainly due to higher volumes and an increase in average grains’ prices, as well as the currency devaluation of the Brazilian real that impacted our cost of acquisition of supplies.

Gross Profit

Our gross profit increased by 17.3% in 2020, to R$9,470,878 thousand in 2020 from R$8,076,938 thousand in 2019, with a gross margin of 24.0% in 2020 compared to 24.1% in 2019. This increase was primarily driven by more favorable operational results both in the Brazil and International operating segments.

Operating Expenses

Our operating expenses increased by 20.5% in 2020, to R$6,419,649 thousand in 2020 from R$5,328,601 thousand in 2019, primarily due to the drivers described below.

Selling Expenses

Our selling expenses increased by 13.8% in 2020, to R$5,587,488 thousand in 2020 from R$4,911,666 thousand in 2019, primarily due to (i) costs related to preventing and combatting the effects of the COVID-19 pandemic on our operations; (ii) higher expenses denominated in Brazilian reais, in the international market, due to currency devaluation; and (iii) higher freight expenses in Brazil given the greater supply and demand of trucks.

General and Administrative Expenses

Our general and administrative expenses increased by 25.1% in 2020, to R$770,282 thousand in 2020 from R$615,683 thousand in 2019, mainly due to (i) costs related to preventing and combatting the effects of the COVID-19 pandemic on our operations; and (ii) higher expenses denominated in Brazilian reais, in the international market, due to currency devaluation.

Impairment loss on receivables

Impairment loss on receivables decreased by 49.2% in 2020, to R$12,137 thousand in 2020 from R$23,899 thousand in 2019, primarily due to a general decrease in overdue payments and general default rates of our customers.

Other Operating Income (Expenses), Net

Other operating income (expenses), net decreased by 122.2% in 2020, to an expense of R$49,742 thousand in 2020 from an income of R$224,384 thousand in 2019. This decrease was mainly due to the fact that in 2019 we recognized a gain related to the exclusion of the ICMS from the PIS and COFINS tax assessable basis.

 
80

Income (loss) from associates and joint ventures

Income (loss) from associates and joint ventures increased by 100% in 2020, to R$0 in 2020 from a loss of R$1,737 in 2019, primarily due to the sale of our equity interests in the joint venture Sats BRF Food Pte Ltd. in 2019.

Operating Income (Loss)

As a result of the foregoing, our operating income (loss) before financial expenses increased by 11.0% in 2020, to an income of R$3,051,229 thousand in 2020 from an income of R$2,748,337 thousand in 2019.

The table below sets forth our operating income (loss) on a segment basis.

  Operating Income (Loss) by Segment
  2020 2019 Change
  (in thousands of reais) (%)
Brazil 2,081,150 1,818,813 14.4
International 1,100,212 1,275,285 (13.7)
Other Segments 197,233 109,138 80.7
Subtotal 3,378,595 3,203,236 5.5
Corporate (327,366) (454,899) (28.0)
Total 3,051,229 2,748,337 11.0

 

Financial Income (Expenses), Net

Net financial expenses amounted to R$1,698,995 thousand in 2020, representing a decrease of 8.9% compared to R$1,865,399 thousand in 2019, primarily due to (i) the positive impact of the remeasurement of the put option granted by us in the context of a business combination referring to Banvit in the amount of R$579,946 thousand; and (ii) lower net charges on general obligations and rights.

Income (loss) Before Taxes From Continuing Operations

As a result of the foregoing, our income before taxes from continuing operations was R$1,352,234 thousand in 2020, representing an increase of 53.2% in comparison to R$882,938 thousand in 2019.

Income Tax and Social Contribution

Our income tax and social contribution amounted to R$172,763 thousand in 2020, representing a decrease of 11.6% from R$195,395 thousand in 2019. The effective tax rate in 2020 was (12.8)% compared to an effective rate of (22.1)% in 2019. This variation was primarily due to (i) the effects of differences in tax rates on results of our foreign subsidiaries; (ii) the effect of foreign currency exchange variation in subsidiaries with different functional currencies; and (iii) deferred tax assets not recognized in 2020.

Net Income (loss)

As a result of the foregoing, our net income from continuing operations increased by 41.4% in 2020, to R$1,524,997 thousand in 2020 from R$1,078,333 thousand in 2019. When taking into account discontinued operations, our net income increased by 838.3%, to R$1,524,997 thousand in 2020 from R$162,524 thousand in 2019.

 
81

Year Ended December 31, 2019 Compared with Year Ended December 31, 2018

Net Sales

Our net sales increased R$3,258,559 thousand, or 10.8%, to R$33,446,980 thousand in 2019 from R$30,188,421 thousand in 2018, primarily due to higher average prices (R$/kg), which increased 11.2% and 13.5% in the Brazil and International segments, respectively.

Net Sales by Operating Segments

In 2019, we recorded the following net sales and volumes in our operating segments.

Operating Segments

Volume

Change from 2018

Net Sales

Change from 2018

  (in thousands of tons) (%) (in thousands of reais) (%)
Brazil 2,195 (3.4) 17,489,479 7.3
International 1,909 0.5 14,899,394 14.0
Other Segments 269 0.4 1,058,107 27.9
Total

4,373

(1.5)

33,446,980

10.8

 

Brazil

Our net sales for our Brazil operating segment increased R$1,196,943 thousand, or 7.3%, to R$17,489,479 thousand in 2019 from R$16,292,536 thousand in 2018. This is primarily attributable to the increase in average selling prices (R$/kg) of 11.2% from 2018, which is mainly due to our profitability recovery strategic plan executed throughout the year that contemplates (i) reduction in inventory levels, supporting a more efficient commercial execution; (ii) a more efficient product mix; and (iii) the prioritization of more profitable channels.

The following table provides a breakdown of our net sales and sales volume for Brazil.

 

Volume

Net Sales

 

 

2019

Restated 2018(1)

Change

 

2019

Restated 2018(1)

Change

  (in thousands of tons) (%) (in thousands of reais) (%)
Poultry 504 533 (5.4) 3,692,377 3,198,356 15.4
Pork and Others 117 117 0.0 943,220 800,127 17.9
Total in natura meat 621 650 (4.5) 4,635,597 3,998,483 15.9
Processed foods 1,574 1,623 (3.0) 12,839,008 12,274,681 4.6
Other sales NM NM NM 14,874 19,372 (23.2)
Total 2,195 2,273 (3.4) 17,489,479 16,292,536 7.3

NM = not meaningful

(1) Restated to give effect to the management structure changes that resulted in the new presentation of our operating segments.

The following table sets forth our average selling prices in Brazil.

 

Average Selling Prices

 

2019

2018

Change

  (in reais per kg) (%)
Brazil 7.97 7.17 11.2

 

 
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International

Our net sales for our International operating segment increased R$1,830,723 thousand, or 14.0%, to R$14,899,394 thousand in 2019 from R$13,068,671 thousand in 2018, driven by (i) higher demand from the Asian market on account of African swine fever, especially from China as of the second half of 2019; (ii) higher volume exported by us due to an increased number of licensed plants; (iii) increased chicken leg production volume at our facilities, increasing from lower production in 2018; and (iv) sales expansion to other countries, such as the Philippines and Vietnam, besides different channels.

 

Volume

Net Sales

 

 

2019

Restated 2018(1)

Change

 

2019

Restated 2018(1)

Change

  (in thousands of tons) (%) (in thousands of reais) (%)
Poultry 1,504 1,529 (1.6) 11,262,954 10,021,923 12.4
Pork and Others 152 132 15.2 1,342,892 883,232 52.0
Total in natura meat 1,656 1,661 (0.3) 12,605,846 10,905,155 15.6
Processed foods 252 239 5.4 2,119,918 1,850,614 14.6
Other sales 1 NM NM 173,630 312,902 (44.5)
Total 1,909 1,900 0.5 14,899,394 13,068,671 14.0
               

NM = not meaningful

(1) Restated to give effect to the management structure changes that resulted in the new presentation of our operating segments.

The following table sets forth our average selling prices for our International operating segment.

 

Average Selling Prices

 

2019

Restated 2018(1)

Change

  (in reais per kg) (%)
International 7.81 6.88 13.5
(1) Restated to give effect to the management structure changes that resulted in the new presentation of our operating segments.

Other Segments

Our consolidated net sales for our Other Segments operating segment increased R$230,893 thousand, or 27.9%, to R$1,058,107 thousand in 2019 from R$827,214 thousand in 2018, primarily driven by higher volumes of ingredients sold in 2019.

The following table provides a breakdown of our net sales and volumes for Other Segments.

 

Volume

Net Sales

 

 

2019

Restated 2018(1)

Change

 

2019

Restated 2018(1)

Change

  (in thousands of tons) (%) (in thousands of reais) (%)
Other Segments 269 268 0.4 1,058,107 827,214 27.9
(1) Restated to give effect to the management structure changes that resulted in the new presentation of our operating segments.

The following table sets forth our average selling prices for Other Segments.

 

Average Selling Prices

 

2019

Restated 2018(1)

Change

  (in reais per kg) (%)
Other Segments 3.93 3.09 27.2
(1) Restated to give effect to the management structure changes that resulted in the new presentation of our operating segments.

 

 
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Cost of Sales

Cost of sales totaled R$25,370,042 thousand in 2019, an increase of 0.2% in comparison to costs of R$25,320,753 thousand in 2018. This was primarily due to higher personnel, electricity, maintenance and freight costs, partially offset by the cost reductions program implemented by our management.

Gross Profit

Our gross profit increased 65.9% in 2019, to R$8,076,938 thousand, from R$4,867,668 thousand in 2018, with a gross margin of 24.1% in 2019 compared to 16.1% in 2018. This increase was primarily driven by improved operating results in both the Brazil and International operating segments due to our strategy to stimulate the operation’s profitability through sustainable price management, improved commercial execution, and an optimization of mix of channels, products and countries to which we export.

Operating Expenses

Our operating expenses increased 5.0% in 2019, to R$5,328,601 thousand, from R$5,074,002 thousand in 2018, primarily due to the drivers described below.

Selling Expenses

Our selling expenses increased 8.8% to R$4,911,666 thousand in 2019 from R$4,513,594 thousand in 2018, mainly due to (i) greater marketing investments to strengthen our brands; (ii) higher freight expenses in the international market due to depreciated exchange rates; and (iii) increase in provisions for expenses relating to labor lawsuits in our Brazil operating segment.

General and Administrative Expenses

Our general and administrative expenses increased 11.7% to R$615,683 thousand in 2019, from R$551,165 thousand in 2018, mainly due to increases in inflation and exchange rate variation in our international operations.

Impairment loss on receivables

Impairment loss on receivables decreased 48.4% to R$23,899 thousand in 2019 from R$46,269 thousand in 2018, primarily due to a general reduction in overdue payments and indebtedness ratios of the customers.

Other Operating Income (Expenses), Net

Other operating income (expenses), net increased 1,062.0% to an income of R$224,384 thousand in 2019 from R$19,311 thousand in 2018. This increase was mainly due to a favorable court ruling on a lawsuit filed by Sadia S.A., which recognized the right to exclude ICMS from the calculation basis of PIS/COFINS.

Income (loss) from associates and joint ventures

Income (loss) from associates and joint ventures decreased 109.8% to a loss of R$1,737 thousand in 2019 from an income of R$17,715 in 2018, primarily due to the sale of our equity interests in the joint venture Sats BRF Food Pte Ltd., in Singapore.

Operating Income (Loss)

As a result of the foregoing, our operating income (loss) before financial expenses increased 1,423.0% to an income of R$2,748,337 thousand in 2019 from a loss of R$206,334 thousand in 2018.

The table below sets forth our operating income (loss) on a segment basis.

 
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  Operating Income (Loss) by Segment
  2019 Restated 2018(2) Change
  (in thousands of reais) (%)
Brazil 1,818,813 590,416 208.1
International 1,275,285 23,778 5,263.3
Other Segments 109,138 89,311 22.2
Subtotal 3,203,236 703,505 355.3
Corporate(1) (454,899) (909,839) (50.0)
Total 2,748,337 (206,334) 1,423.0

NM = not meaningful

(1)The significant variation in corporate in 2018 and 2019 is attributable to incurred expenses throughout the years, primarily those in connection with the Carne Fraca and Trapaça Operations, the U.S. class action filed against us in March 2018 and provisions. For more information on Corporate, see Note 24 to our consolidated financial statements.
(2)Restated to give effect to the management structure changes that resulted in the new presentation of our operating segments.

Financial Income (Expenses), Net

Net financial expenses amounted to R$1.9 billion in 2019, a decrease of 16.7% compared to R$2.2 billion in 2018, mainly due to (i) a positive foreign exchange rate variation on assets and liabilities denominated in foreign currency; and (ii) no relevant adjustment in 2019 arising from the expenses associated with the fair value measurement of Total Return Swap derivative instrument, in the amount of R$214 million registered in 2018.

Income (loss) Before Taxes From Continuing Operations

As a result of the foregoing, our income before taxes from continuing operations was R$882,938 thousand in 2019, an increase of 136.1% in comparison to a loss of R$2,447,808 thousand in 2018.

Income Tax and Social Contribution

Our income tax and social contribution amounted to R$195,395 thousand in 2019, a 41.4% decrease from R$333,302 thousand in 2018. The effective tax rate in 2019 was (22.1)% compared to an effective rate of 13.6% in 2018. This variation was primarily due to deferred tax assets that we did not recognize in 2019 because we determined that the realization of these tax assets was not probable.

Net Income (loss)

As a result of the foregoing, our net income from continuing operations increased 151.0% to R$1,078,333 thousand in 2019, from a net loss of R$2,114,506 thousand in 2018. When taking into account discontinued operations, our net income increased 103.6% to R$162,524 thousand in 2019 from a net loss of R$4,466,246 thousand in 2018.

B.Liquidity and Capital Resources

As of December 31, 2020, we held R$7,576.6 million in cash and cash equivalents. Of that amount, R$3,797,3 million, or 50%, was held in jurisdictions outside Brazil. We regularly review the amount of cash and cash equivalents held outside of Brazil to determine the amounts necessary to fund the current operations of our foreign operations and their growth initiatives and amounts needed to service our Brazilian indebtedness and related obligations. If these amounts are moved out of these jurisdictions or repatriated to Brazil, we may be subject to Brazilian taxation upon repatriation.

Our main cash requirements are the servicing of our debt and capital expenditures. Our primary cash sources have been cash flows from operating activities, loans and other financings, offerings of our common shares and sales of marketable securities. Although we have substantial debt that will mature in the next several years (see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Indebtedness—We have substantial debt that matures in each of the next several years”), we believe that our solid position in cash and cash equivalents, along with our cash flows from operating activities and the extension of the maturity of a portion of our current indebtedness will be sufficient to cover our working capital needs and the service of our indebtedness in the ordinary course of our business.

 
85

On December 27, 2019, we entered into a three-year revolving credit facility with Banco do Brasil for a committed maximum amount of R$1.5 billion to provide additional liquidity for working capital needs. As of December 31, 2020, there were no amounts outstanding under this revolving credit facility.

On October 28, 2020, we entered into an additional three-year revolving credit facility with Banco do Brasil for a committed maximum amount of R$1.5 billion. Thus, the total committed amount with Banco do Brasil in the revolving credit facilities is R$3.0 billion. As of December 31, 2020, there were no amounts outstanding under this revolving credit facility. We also carried out, using our own resources, the early repayment of a loan agreement with Banco do Brasil, which would mature between August 2021 and January 2022, the amount of which totals R$1.57 billion.

Cash Flow

The following table sets forth certain consolidated cash flow information for the periods indicated:

 

Year Ended December 31,

 

2020

2019

2018

Cash Flow (in thousands of reais)
Net cash provided by operating activities 4,417,630 2,521,230 295,685
Net cash provided by (used in) investing activities (1,430,989) 1,443,106 (1,415,879)
Net cash provided by (used in) financing activities

(587,042)

(4,817,102)

73,924

Effect on exchange rate variation on cash and cash equivalent

939,241

54,540

71,452

Net increase (decrease) in cash and cash equivalents

3,338,840

(798,226)

(974,818)

 

Cash Flows Provided by Operating Activities

We recorded net cash flows provided by operating activities of R$4,417,630 thousand in 2020, compared to cash flows provided by operating activities of R$2,521,230 thousand in 2019. The increase of R$1,896,400 thousand is mainly due to an increase in our income from continuing operations adjusted for non-cash effects, a decrease of R$294,522 thousand in the payment of tax, civil and labor provisions.

We recorded net cash flows provided by operating activities of R$2,521,230 thousand in 2019, compared to cash flows provided by operating activities of R$295,685 thousand in 2018. The increase of R$2,225,545 thousand is mainly due to an increase in income from continuing operations to R$1,078,333 thousand for the year ended December 31, 2019 (compared to a loss of R$2,114,506 thousand for the year ended December 31, 2018), adjusted by the non-cash inflow effects of R$4,519,842 thousand for the year ended December 31, 2019 (compared to non-cash inflow effects of R$4,425,222 thousand for the year ended December 31, 2018), in addition to an improvement of 9.3 days in the average financial cycle in 2019.

Cash Flows Provided by (Used in) Investing Activities

We recorded net cash flows used in investing activities of R$1,430,989 thousand in 2020, compared to cash flows provided by investing activities of R$1,443,106 thousand in 2019. The decrease of R$2,874,095 thousand is mainly due to the proceeds from the sale of our operations in Europe, Thailand and Argentina in the amount of R$1,664,073 thousand and the price adjustment from the sale of our then dairy segment in the amount of R$242,051 thousand, both in 2019. Additionally, in 2020, we increased our investments in biological assets in the amount of R$168,292 thousand and in property, plant and equipment in the amount of R$387,444 thousand.

We recorded net cash flows provided by investing activities of R$1,443,106 thousand in 2019, compared to cash flows used in investing activities of R$1,415,879 thousand in 2018. The increase of R$2,858,985 thousand is mainly due to the sale of our operations in Europe, Thailand and Argentina in the amount of R$1,664,073 thousand and the price adjustment from the sale of our then dairy segment to Lactalis in 2015 in the amount of R$242,051 thousand.

 
86

Cash Flows Provided by (Used in) Financing Activities

We recorded cash flows used in financing activities of R$587,042 thousand in 2020, compared to cash flows used in financing activities of R$4,817,102 thousand in 2019, mainly due to our refinancing strategy and increase in liquidity for 2020. The amount of proceeds from debt issuance net of repayments in 2020 was of R$172,974 thousand, compared to R$4,081,980 thousand of repayments of debt net of proceeds in 2019.

We recorded cash flows used in financing activities of R$4,817,102 thousand in 2019, compared to cash flows provided by financing activities of R$73,924 thousand in 2018, mainly due to the amount of debt repaid in 2019, which was R$4,081,980 thousand, net of the proceeds from debt issuance, compared to an amount of R$276,139 thousand of debt issuance in 2018, net of repayments.

Dividends and Interest on Shareholders’ Equity

We have not made any distributions for the years ended December 31, 2018 or 2019, and we will propose no distribution of dividends for the year ended December 31, 2020 at our annual shareholders’ meeting to be held in April 27, 2021 because, despite having reported profits for the years ended December 31, 2020 and December 31, 2019, we reported accumulated losses in 2020.

Debt

We use the net proceeds of our indebtedness primarily for capital expenditures, liquidity and the purchase of raw materials. The following table sets forth our 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, 2020

As of December 31,

 

Current

Non-current

2020

2019

  (in thousands of reais)
Total debt

(1,059,984)

(21,344,442)

(22,404,426)

(18,620,279)

Derivative financial instruments, net (7,213) (493) (7,706) 91,703
Cash, cash equivalents and marketable securities and restricted cash        
Local currency 4,091,829 39,401 4,131,230 1,758,495
Foreign currency

3,798,955

329,533

4,128,488

3,501,118

Total

7,890,784

368,934

8,259,718

5,259,613

Net debt

6,823,587

(20,976,001)

(14,152,414)

(13,268,963)

 

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, 2020

2020

2019

  (in thousands of reais)
Development bank credit lines - - - 45,516
Export credit facilities 20,845 2,387,852 2,408,697 1,612,365
Working capital facilities 386,681 - 368,681 3,312,639
PESA loan facility - - - 284,308
Agribusiness Receivables Certificate (1,592) 822,685 821,093 1,597,447
Debentures 52,087 2,969,918 3,022,005 755,760
Other 44,816 - 44,816 5,720
Local currency

484,837

6,180,455

6,665,292

7,613,755

 
87

 

 

Current

Non-current

Total Loans and borrowings as of December 31,

 

As of December 31, 2020

2020

2019

  (in thousands of reais)
         
Export credit facilities 132,801 259,835 392,636 407,275
Bonds 215,218 14,614,775 15,829,993 10,407,484
Working capital facilities

227,128

289,377

516,505

191,765

Foreign currency

575,147

15,163,987

15,739,134

11,006,524

Total:

1,059,984

21,344,442

22,404,426

18,620,279

 

The maturity schedule of our indebtedness is as follows:

 

As of December 31, 2020
(in thousands of reais)

2020 1,059,984
2021 2,114,622
2022 2,569,063
2023 1,782,687
2024 599,266
2025 onwards

14,278,804

Total

22,404,426

 

Our principal debt instruments as of December 31, 2020 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.

Local Currency Debt

Revolving Credit Facilities

Banco do Brasil RCF 2019. On December 27, 2019, we entered into a revolving credit facility with Banco do Brasil for a committed maximum amount of R$1.5 billion to provide additional liquidity for working capital needs. As of December 31, 2020, there were no amounts outstanding under this revolving credit facility.

Banco do Brasil RCF 2020. On October 28, 2020, we entered into a revolving credit facility with Banco do Brasil for a committed maximum amount of R$1.5 billion to provide additional liquidity for working capital needs. As of December 31, 2020, there were no amounts outstanding under this revolving credit facility.

Export Credit Facilities

Export Credit Notes. In September 2019, we refinanced our outstanding export credit facilities with Banco Bradesco, totaling R$2,408,697 thousand as of December 31, 2020. These export credit notes bear interest at floating rates (CDI), with maturity dates from 2022 through 2028. These credit lines are included in the line “Local currency—Export credit facilities” in the table above

Working Capital Facilities

Rural Credit Financing. We have short-term rural credit loans in the amount of R$368,681 thousand as of December 31, 2020 with several commercial banks under a Brazilian federal government program that offers favorable interest rates, as an incentive to invest in rural activities, with maturity in 2021. Generally, the proceeds of such loans are used for working capital. From September to December 2019, we prepaid some of those loans, totaling R$ 2.32 billion. These credit lines are included in the line “Working capital facilities—Local currency” in the table above.

 
88

Tax Incentive Financing Programs

State Tax Incentive Financing Programs. We also had R$44,816 thousand outstanding as of December 31, 2020 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 taxes generated by investments in the construction or expansion of manufacturing facilities in that state. The credit facilities have a 20-year term and fixed or variable interest rates based on the IGP-M plus a margin. This credit line is included in the line “Other—Local currency” in the table above.

Agribusiness Receivables Certificate

Agribusiness Receivables Certificate (“CRA”) 2016. On December 16, 2016, we concluded a CRA issuance related to the public offer of distribution of the first and second series of the first issuance of Vert Companhia Securitizadora, in the amount of R$1.5 billion, net of interest (the “2016 CRAs”). The CRAs of the first series were issued at a cost of 96.00% of the DI rate, with the principal maturing in a single installment on December 16, 2020 and interest paid every eight months. The second series of CRAs were issued at a cost of 5.8970% restated by the variation of the IPCA, with the principal maturing in a single installment on December 18, 2023 and interest paid every 16 or 18 months. On December 31, 2020, the balance of these transactions totaled R$821,093 thousand.

First Issuance of Debentures

On April 30, 2019, we issued 750,000 debentures with a nominal unit value of R$1,000.00, totaling R$750.0 million, in three series. The debentures are simple, non-convertible and unsecured, and they were distributed with restricted placement efforts. The amounts subscribed for the 1st, 2nd and 3rd series were R$70.0 million, R$411.7 million and R$268.3 million, respectively. As of December 31, 2020, the outstanding balance of the debentures totaled R$771,138 thousand.

Second Issuance of Debentures

On July 14, 2020, we concluded a debenture issuance in the amount of R$2.2 billion. We issued 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. 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 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 1st series bear interest equal to IPCA plus 5.30% per year and the debentures of the 2nd series bear interest equal to IPCA plus 5.60% per year. On December 31, 2020, the balance of these transactions totaled R$2,250,867 thousand.

Foreign Currency Debt

Export Prepayment Facility. We had an export prepayment facility in an outstanding amount of R$392,636 thousand as of December 31, 2020. The indebtedness under this facility is denominated in U.S. dollars, with maturity in 2021. Interest under this export prepayment facility accrues at LIBOR plus a spread. Under the facility, we receive a loan secured by the accounts receivable relating to exports of our products to specific customers. The facility is guaranteed by us. The covenants under these agreements include limitations on liens and mergers. These credit lines are included in the line “Export credit facilities—Foreign currency” in the table above.

Working Capital Facilities

Working capital in foreign currency. These are funds obtained from financial institutions, mainly used for working capital and short-term import financing operations of subsidiaries mainly located in Turkey in the amount of R$516,505 thousand. This funding is denominated in Turkish lira and have maturity dates between 2021 and 2023. These credit lines are included in the line “Working capital facilities—Foreign currency” in the table above.

 
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Bonds

BRF Notes 2022: On May 29, 2015, we completed a senior notes offering totaling EUR500.0 million, with principal due on May 3, 2022, which bear interest at a rate of 2.75% per year. On September 18, 2019, an amount equivalent to R$795.9 million (EUR175.2 million) of the BRF Notes 2022 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$39.2 million (EUR8.5 million). The premium paid to holders of existing bonds was recorded as a financial expense. On July 24, 2020, an amount equivalent to R$722.7 million (EUR119.1 million) of the BRF Notes 2022 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$10.8 million (EUR1.8 million). The premium paid to holders of existing bonds was recorded as a financial expense. On September 24, 2020, an amount equivalent to R$253.8 million (EUR39.1 million) of the BRF Notes 2022 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$6.1 million (EUR0.9 million). The premium paid to holders of existing bonds was recorded as a financial expense. As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$1,063,017 thousand (EUR166,672 thousand).

BRF Notes 2022. On June 6, 2012, we issued senior notes in an aggregate amount of U.S.$500.0 million. The bonds were guaranteed by BRF, bear interest at a rate of 5.875% per year and mature on June 6, 2022. Later the same month, we issued an additional U.S.$250.0 million senior notes under the same indenture and with the same terms and conditions (collectively, the “BRF Notes 2022”). On May 28, 2015, an amount equivalent to R$1,832.2 million (U.S.$577.1 million) of the BRF Notes 2022 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$251.9 million (U.S.$79.4 million). On September 21, 2016, we completed a repurchase offer for the BRF Notes 2022 in an amount equivalent to R$175.7 (U.S.$54.2 million), and premium was paid in the transaction, net of interest, in an amount equivalent to R$18.9 (U.S.$5.7 million). The premium paid to holders of existing bonds was recorded as a financial expense. On September 18, 2019, an amount equivalent to R$38.9 million (U.S.$9.4 million) of the BRF Notes 2022 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$1.5 million (U.S.$0.4 million). On July 24, 2020, an amount equivalent to R$141.1 million (U.S.$27.2 million) of the BRF Notes 2022 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$7.1 million (U.S.$1.4 million). On September 24, 2020, an amount equivalent to R$62,366 thousand (U.S.$11,194 thousand), or approximately 13.63% of the principal amount outstanding, of the BRF 2022 Notes was validly tendered, and not validly withdrawn, through an any and all tender offer. The premium paid to holders of existing bonds was recorded as a financial expense. As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$368.6 million (U.S.$70.9 million).

BRF Notes 2023. In May 2013, we issued senior notes in an aggregate amount of U.S.$500.0 million, with principal due on May 22, 2023 and bearing interest at a rate of 3.95% per year (“Senior Notes BRF 2023”). On September 18, 2019, an amount equivalent to R$641.4 million (U.S.$154.0 million) of the BRF Notes 2023 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$7.2 million (U.S.$1.7 million). The premium paid to holders of existing bonds was recorded as a financial expense. On July 24, 2020, an amount equivalent to R$316.0 million (U.S.$60.6 million) of the BRF Notes 2023 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$5.8 million (U.S.$1.1 million). The premium paid to holders of existing bonds was recorded as a financial expense. On September 24, 2020, an amount equivalent to R$286.3 million (U.S.$51.4 million) of the BRF Notes 2023 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$10.4 million (U.S.$1.9 million). The premium paid to holders of existing bonds was recorded as a financial expense. As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$1,216.2 million (U.S.$234.0 million).

BRF Notes 2024. On May 15, 2014, we completed a senior notes offering totaling U.S.$750 million (“Senior Notes BRF 2024”). The principal is due on May 22, 2024 and bears interest at a rate of 4.75% per year. Of the proceeds from the offering, U.S.$470.6 million was used for a debt repurchase tender offer. To implement the tender offer, we made a payment of U.S.$86.4 million (equivalent to R$198.6 million) to the holders of existing bonds, which was recorded as an interest expense. On September 24, 2019, an amount equivalent to R$961.8 million (U.S.$231.0 million) of the BRF Notes 2024 were repurchased through an early capped tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$38.5 million (U.S.$9.2 million). On October 8, 2019, an

 
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amount equivalent to R$4.8 million (U.S.$1.2 million) of the BRF Notes 2024 were repurchased through the final capped tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$0.05 million (U.S.$0.01 million). Both premiums paid to holders of existing bonds were recorded as a financial expense. On July 24, 2020, an amount equivalent to R$334.3 million (U.S.$64.1 million) of the BRF Notes 2024 were repurchased through an any and all tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$10.4 million (U.S.$2.0 million). Both premiums paid to holders of existing bonds were recorded as a financial expense. On September 28, 2020, an amount equivalent to R$881.5 million (U.S.$158.4 thousand) of the BRF 2024 Notes were repurchased through an early capped tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$57.7 million (U.S.$10.4 million). As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$1,534.9 million (U.S.$295.4 million).

BRF Notes 2026. On September 29, 2016, we, through our wholly-owned subsidiary BRF GmbH, issued senior notes in the aggregate amount of U.S.$500.0 million, which bear interest at a rate of 4.35% per year and mature on September 29, 2026. On September 28, 2020, an amount equivalent to R$3.9 thousand (U.S.$0.7 million) of the BRF 2026 Notes were repurchased through an early capped tender offer, and premium was paid in the transaction, net of interest, in the amount equivalent to R$0.151 million (U.S.$0.028 million). As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$2,594.6 million (U.S.$499.3 million).

BRF Notes 2030. On September 24, 2019, we issued senior notes in the aggregate amount of U.S.$750.0 million, which bear interest at a rate of 4.875% per year and mature on January 24, 2030. As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$3,897.5 million (U.S.$750.0 million).

BRF Notes 2050. On September 21, 2020, we issued senior notes in the aggregate amount of U.S.$500.0 million, which bear interest at a rate of 5.750% per year and mature on September 21, 2050. On October 26, 2020, we issued an additional U.S.$300.0 million of senior notes under the same indenture and with the same terms and conditions. As of December 31, 2020, the outstanding notional amount of these notes is equivalent to R$4,157.4 million (U.S.$800.0 million).

Derivatives Financial Liabilities, Net

We entered into foreign currency exchange derivatives with a fair value of R$151,000 thousand, commodity derivatives with a fair value of negative R$144,057 thousand and interest rate derivatives with a fair value of negative R$14,649 thousand, in each case as of December 31, 2020. The counterparties include several Brazilian financial institutions and involve interest rate swaps, and the purchase and sale of currencies and commodities. Their maturity dates vary from 2021 through 2022. Only a small number of these transactions involve asset guarantees, which in each case are in compliance with the rules of the B3. These derivatives are recorded in our balance sheet as other financial assets and liabilities. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

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 2020, total Brazilian sales by quarter were as follows: 52.0% for the first quarter, 51.0% for the second quarter, 53.2% for the third quarter and 55.7% for the fourth quarter.

 
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International

Our sales to international markets as a whole are not materially affected by seasonality, partly because seasonal buying patterns vary according to our international markets. However, net sales in specific markets sometimes vary with the season. In the Halal market, for example, we experience lower net sales during Ramadan and the summer months.

In 2020, total International sales by quarter were as follows: 44.9% for the first quarter, 46.2% for the second quarter, 43.3% for the third quarter and 41.0% for the fourth quarter.

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 bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

All the relevant accounting practices adopted by us are disclosed in Note 3 to our consolidated financial statements. The following is a description of the critical accounting policies, estimates or judgments that are important to the presentation of our consolidated financial statements.

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.

Financial Assets

Financial assets are recognized when the entity becomes a party to the contractual provisions of the instrument and are classified based on the characteristics of their cash flows and on the management model for the asset. The table below shows how financial assets are classified and measured:

 

 

 
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We evaluate 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: comprises the balances of cash, banks accounts 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: we regularly assess the historical losses on the customer portfolios that we have in each region, taking in consideration the dynamics of the markets in which we operate and instruments that we have 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, we evaluate macroeconomic factors that may influence these losses and, if necessary, adjust the calculation model.

Securities receivable with legal proceedings in place are reclassified to noncurrent as well as the related estimated credit losses.

Financial liabilities

Financial liabilities are recognized when the entity becomes a 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.

Adjustment to present value

We measure 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 accounts against the financial result. We adopt the weighted average cost of capital to determine the adjustment to present value of the mentioned assets and liabilities, which corresponded to 9.8% per year on December 31, 2020 (11.3% per year on December 31, 2019).

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 the financial result. 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.

 
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Fair value hedge: the effective portion of the hedge instruments’ 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.

Reference interest rate reform

We do not have transactions designated for hedge accounting that involve operations indexed to the reference interest rates that are the object of reform. Additionally, existing liabilities indexed to the reference interest rates have contractual arrangements foreseeing the replacement for similar rates. Thus, we do not expect any significant impact on us if such interest rates cease to exist or are replaced.

Revenue from contracts with customers

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 our 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 condition is satisfied when the control of the goods is transferred to the client.

We have sales with immediate and deferred payments, for which the adjustment to present value is recognized for the financial component. See Note 3.19.3 to our consolidated financial statements.

Inventories

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, 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.

Income taxes

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. We analyze 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.

 
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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 bases. Deferred income tax assets and liabilities are classified as non-current. When our internal studies indicate that the future use of these credits over a 10-year horizon is not probable, the asset is derecognized. See Note 10.3 to our consolidated financial statements.

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 rates (and tax legislation) that are in force on the financial position date.

In compliance with the interpretation IFRIC 23, we analyzed relevant tax decisions of higher courts and whether they conflict in any way with the positions adopted by us. Regarding the known uncertain tax positions, we 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.

We periodically evaluate the positions assumed in which there are uncertainties about the adopted tax treatment and will set up a provision when applicable.

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.

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.

We annually perform an impairment analysis for our cash-generating units, which include the balances of property, plant and equipment. See Note 13 to our consolidated financial statements.

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).

Leasing

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. We assess 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;
·we have the right to obtain substantially all the economic benefits from using the asset throughout the period of use; and
·we have the right to direct the use of the asset throughout the period of use, which occurs in either of the following situations: (i) we have the right to direct how and for what purpose the asset is used, or (ii) the conditions are predetermined such that we have 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.
 
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At the beginning of the contract, we recognize 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 our 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 us. 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.

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 we 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.

We do 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.

IFRS 16 has been modified for the inclusion of an optional practical expedient related to benefits granted on lease agreements due to the COVID-19 pandemic, effective for periods beginning on or after June 1, 2020. We were not granted benefits in leases related to the pandemic and, therefore, we have not adopted this expedient.

Intangible assets

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. 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. See Note 14 to our consolidated financial statements. We record in this subgroup mainly goodwill and brands, which are expected to contribute indefinitely to its cash flows.

Business combinations

Business combinations are recorded according to the acquisition method, which determines that the cost of an acquisition is measured by the sum of the consideration transferred, assessed based on the fair value on the acquisition date, and the value of any non-controlling interest in the acquired company. We measure the non-controlling interest based on our participation in the net assets identified in the acquired company. Costs directly attributable to the acquisition are recorded as expense when incurred.

 
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Business combinations with related parties are recognized using the acquisition method when the agreements have a substance and at cost when no substance is observed in the transaction.

In the acquisition of a business, our management assesses the acquired assets and liabilities assumed in order to classify and allocate them in accordance with the contractual terms, economic circumstances and relevant conditions on the acquisition date.

Initially, goodwill is measured as the excess of the consideration transferred over the fair value of the net assets acquired (identifiable assets and liabilities assumed, net).

After the initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of testing the recoverable amount, goodwill is allocated to each of the cash-generating units that will benefit from the acquisition.

The IFRS 3 has changed the definition of a business, applicable as from January 1, 2020. This change did not generate impacts on our accounting practices nor our financial statements.

Provision for tax, civil and labor risks and contingent liabilities

The provisions are recognized when we have a present obligation, formalized or not, as a result of a past event, the outflow of resources to settle the obligation is likely to occur and a reliable estimate can be made.

We are 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 evidences, 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.

In cases where there are a large number of lawsuits and the amounts are not individually material, we 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.

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

In 2020, we launched 288 new SKUs for consumers, of which 139 were released for the domestic market and 149 for the international market. Of the international market releases, 54 were in Asia, 36 in the Halal market and 59 in our direct exports operations.

Our Research, Development and Innovation activities (“RD&I”) incorporate agricultural research and innovation, as well as products and processes research and development. The Research and Development of Meat Products’ team is based in Jundiaí city, in the State of São Paulo, where our BRF Innovation Center (“BIC”) is based.

 
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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 have also been developing a robust trainee and internship program as well as encouraging our employees to participate in undergraduate and graduate courses. In 2019, we started a new program called “PhD in Agro,” in which five PhD positions were created to develop specific projects in different areas: nutrition, animal breeding, animal health, swine production and poultry management. As a result, one of these PhD experts has already been invited to join our permanent staff.

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 State of Santa Catarina, with a total of 1,380 experimental pens to evaluate the impact of new technology and innovation in the production chain. We also have nine bromatological laboratories and six receiving and classification laboratories, all equipped with NIR infrared technology, in addition to five animal health laboratories supporting research and operational activities. We expect to enhance our capacity with a new health laboratory in Toledo, in the State of Paraná, in 2021.

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.

Beginning on June 20, 2013, BIC was financed by FINEP for a total amount of R$106.0 million, of which R$53.9 million was used for building the facilities. BIC has total space of 13,500m². The building exemplifies our commitment to investing in 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.

Furthermore, we have our own swine breeding program in eight exclusive farms, which we believe have competitive genetic packages compared to the most significant international breeding programs. The breeding program has a team of seven highly qualified geneticists. In 2020, we incorporated genomic evaluation in our breeding program and in 2021 we expect to start the selection using the genomic breeding values. In order to implement this new technology, we established partnerships with six research centers of the Brazilian Company for Agricultural and Farming Research (Empresa Brasileira de Pesquisa Agropecuária, or “EMBRAPA”), as well as with universities and governmental agencies (including the Brazilian National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social, or “BNDES”), Finep and CNPq).

In recent years, we have established research partnerships on projects funded by EMBRAPA, FINEP, CNPq and BNDES, in different research areas. 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.

 
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The RD&I teams were integrated under the same business unit in 2015 in order to encourage efficiencies among the teams, to increase the speed to market of products and to improve consumer and technological connections.

More than 180 researchers and project managers are dedicated to continuously contributing 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 indulgent snacks. Our main platforms for the Qualy brand are breakfast, new occasions and margarine 2.0. The project managers are now able to navigate through different categories, such as ready meals, cold cuts, 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. Accordingly, we invested R$196 million, R$206.9 million and R$53.5 million in 2020, 2019 and 2018, respectively.

In 2019, we launched multiple pork cuts products in line with our strategy of developing new consumer habits for pork cuts in the Brazilian market. We launched a robust portfolio of pork cuts under both the Sadia and Perdigão brands, including day-by-day pork cuts under the Sadia brand, along with special pork cuts for Christmas and seasoned pork cuts for barbecues under the Perdigão brand. We also launched important sub-brands under our Sadia brand: the Speciale Sadia sub-brand, with a premium cold cuts portfolio that includes raw ham and salami with a pepper border, and the Na receita Sadia sub-brand, with a new line of pre-prepared chicken to be used in various recipes in both the retail and food service markets. Under our Sadia brand, we also focused on refreshing the ready meals and cold cuts categories, including launching a new item, namely Mac’n Cheese, for the retail channel. In addition, we expanded the portfolio of our Perdigão brand through our Ouro sub-brand by launching mini sausages snacks and relaunching our pizza line, which is a volume-driven category that we expect will bring greater visibility to the brand on supermarkets’ gondolas.

In 2020, to reinforce our strategy of developing new consumer habits for pork cuts in the Brazilian market, we expanded our portfolio under the Sadia brand with multiple products, including new formats such as cubes, strips and IQF (individual quick freezing). In order to expand the Sadia brand to encompass associations with natural products, we formed a partnership with a Brazilian co-packer to market a new portfolio of organic chicken cuts. We also launched Sadia Veg&Tal, our sub-brand focused on vegan and vegetarian consumers that offers a product portfolio including plant-based hamburgers, breaded, frozen vegetables and frozen pies. We also extended our premium portfolio under our Sadia Speciale sub-brand with beef and chicken hamburgers, pork cuts and a turkey marinated with sparkling wine for our Christmas campaign. In order to increase the market penetration of our Sadia brand, we expanded our portfolio focused on volumetric categories with new formats of frozen fries and the return of the Sadia brand to the bulk hamburger category. To refresh our breaded portfolio under the Sadia brand, we also launched the Sadia chicken breaded wings, a pioneering product in the Brazilian market. Launched in 2019, Mac'n Cheese Sadia also played an important role in increasing the brand’s market share in the ready meals category. In addition, we expanded the portfolio of our Qualy brand to butter, cheese spread and frozen cheese bread.

D.Trend Information

In addition to the information set forth in this section, additional information about the trends affecting our business can be found in “—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.”

Before the onset of the COVID-19 pandemic, global GDP was expected to grow 2.5% in 2020 after a post-crisis level of 2.4% in 2019, according to a report released in January 2020 by the World Bank. However, due to the global economic downturn connected to the developments of the COVID-19 pandemic, global GDP contracted 4.3% in 2020. Global GDP is expected to grow 4.0% in 2021. For additional information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business and Industry—Pandemics or human disease outbreaks, such as the novel coronavirus (COVID-19 virus), may disrupt consumption and trade patterns, supply chains and production processes, which could materially affect our operations and results of operations.”

 
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A threat to global economic growth is the intensification of protectionist pressures, because of a potential widening of global imbalances coupled with sharp exchange rate movements. According to the International Monetary Fund (“IMF”), 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. The World Bank expects GDP growth of 3.5% in 2021 and 3.3% in 2022 for the U.S. and of 3.6% in 2021 and 4.0% in 2022 for the European Union. For emerging markets and developing countries in 2021, the World Bank expects a growth rate of 5.4% for India, 2.6% for Russia and 7.9% for China. The same report expects Brazil’s GDP to increase 3.0% in 2021 and 2.5% in 2022. The SELIC interest rate (the primary Brazilian interest reference rate) is expected to end 2021 at 4.0%, 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.

Brazilian chicken exports increased by 0.2% in the year ended December 31, 2020, compared to the year ended December 31, 2019, in terms of volume. Pork exports registered an increase of 36.9% in volume sold in the year ended December 31, 2020, compared to the year ended December 31, 2019. Beef exports recorded an increase of 9.4% in volume sold in the year ended December 31, 2020, compared to the year ended December 31, 2019.

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, 2020 totaled 4.13 million tons on sales of R$30.9 billion (equivalent to U.S.$5.99 billion). China is the main destination for these exports (16.3%), followed by Saudi Arabia (11.3%), Japan (9.9%) and the United Arab Emirates (7.3%).

Pork export volume in the year ended December 31, 2020 totaled 1.01 million tons, totaling approximately R$11.6 billion (equivalent to U.S.$2.26 billion). The leading importers, China, Hong Kong and Singapore represented 50.7%, 16.4% and 5.2%, respectively, of total exports from Brazil.

Beef shipments in the year ended December 31, 2020 totaled 1.85 million tons with sales of approximately R$41.73 billion (equivalent to U.S.$8.09 billion). This increase in volume was driven by China (46.9%), Hong Kong (12.0%) and Egypt (6.6%).

According to the West Texas Intermediate index, which benchmarks oil prices, oil prices decreased 30.9% in 2020, from an average of U.S.$57.03 in 2019 to an average of U.S.$39.40 in 2020. Since the start of 2020, oil prices have dropped drastically following from the global economic slowdown brought on by the COVID-19 pandemic as well as an oil supply dispute among key oil producers. A decrease in oil prices will generally result in decreased GDP growth and decreased revenues for oil producing countries, which can devalue the local currency and negatively affect disposable income due to an increase in inflation. In the past, declines in the price of oil reduced the ability of certain countries to import Brazilian products. A price improvement may help protein prices to rise since countries dependent on revenue from oil production will be able to import additional products. Food products are less sensitive than other goods to foreign exchange and to income variations. Rich oil producing countries that are in warm regions with a low availability of grains rely on government subsidies in order to cope with much higher chicken production costs than countries with moderate climates and a high availability of grains, such as Brazil. Thus, falling oil prices will not necessarily lead to lower chicken imports from Brazil as governments might reduce subsidies leading to a decline in local production of chicken.

 
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Brazilian Market

Brazil is one of the largest meat consumers in the world, with per capita consumption in 2020 of 97.23 kilograms, including beef, chicken and pork products, according to the USDA, a decrease of 2.7% compared to 2019. Demand for poultry and pork products in the domestic market is directly affected by the country’s economic conditions. Given the slight economic recovery in 2019, meat consumption increased in 2019 compared to 2018. Before the onset of the COVID-19 pandemic, further economic improvement was expected for 2020, which meant that meat consumption was expected to increase in 2020.

Brazil’s domestic market is highly competitive, particularly for fresh