FORM 6-K

U.S. SECURITIES AND EXCHANGE COMMISSION

dated March 26, 2012

  Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.  

PROPOSAL OF THE BOARD OF DIRECTORS TO THE ORDINARY AND EXTRAORDINARY GENERAL MEETING TO BE HELD ON APRIL 24, 2012.

Dear Shareholders,

The Board of Directors of BRF – Brasil Foods S.A. wishes to present Shareholders with the following proposals, the purpose of a deliberation in an Ordinary and Extraordinary General Meeting of the Company , to be held on April 24, 2012:

Em Assembléia Geral Ordinária:

1.               To approve the following appropriation of Net Profit for Fiscal Year 2011 : 

(Attachment 9-1-II, pursuant to CVM Instruction 481)

2. To ratify the decision of the Board of Directors, ad referendum of the General Meeting, approving the payment of R$ 632,100,000.00 (six hundred and thirty-two million, one hundred  thousand Reals), equivalent to R$ 0 ,726723260 per share of the free float, subject to withholding tax of 15%, with the exception of those shareholders immune/exempt, on the shares issued, in the form of interest on capital, pay-out having been made on August 29, 2011 (R$ 0.33591469 per share) and on February 15, 2011 (R$ 0.39080857 per share). The amount distributed to the shareholders, for fiscal year 2011, represented 50% of net adjusted income for the fiscal year, pursuant to Article 202 of Law 6.404/76, for the purposes of the mandatory dividend.

3. To  elect the members of the Fiscal Council/Audit Committee – Term of Office: Until the date of the OGM/EGM of 2013. (Attachment 24, items 12.6 to 12.10, in accordance with CVM Instruction 480)

Effective Members                                              Alternate Members

Attilio Guaspari                                                                   Agenor Azevedo dos Santos

Suzana Hanna Stiphan Jabra                            Manuela Lemos Marçal

Décio Magno Andrade Stochiero                     Tarcísio Luiz Silva Fontenele

Résumés – Effective Members

Attilio Guaspari: An Engineer with a Master’s Degree in Management Sciences. He was Supervisor of the Financial Area and Head of the Audit Department of the National Social and Economic Development Bank - BNDES, as well as Financial-Administrative Director of Embrafilme. Since 1986, he has sat on various boards of directors such as Brasil Ferrovias S.A., FAPES, Indústrias Verolme-Ishibrás and Projeto Jarí. Currently, he is a member of the Fiscal Council of BRF and the Audit Committee of the BNDES. (Independent member)

Agenor Azevedo Santos (alternate) : Accountant and Business Administrator. Mr. Santos is a member of our Supervisory Board alternate.  Accounting manager of the Foundation for Assistance and Social Welfare of BNDES - FAPES.

Susana Hanna Stiphan Jabra: Graduated in Economics with Specialization Course in Financial Administration. She has worked for more than 25 years in large and middle market companies, having participated in important capital market transactions. She worked as an economist at Banco Itaú S.A., Planning and Control Manager at Agência Estado Ltda., Executive Manager for Investments and a member of the Social Responsibility Committee at PETROS. She was effective member of the Board of Directors of CPFL Energia, Companhia Paulista de Força e Luz, Companhia Piratininga de Força e Luz and CPFL Geração de Energia S.A., Telenorte Celular Participações, Bonaire Participações S.A..

Manuela Cristina Lemos Marçal (Alternate) : Economist at the Federal University of Rio de Janeiro, with a postgraduate degree in Corporate Finance and Capital Markets. Was Manager of Market Analysis, and is currently the Executive Manager of Equity Transactions in Petros. It also has experience in the Investment Committees.

Decio Magno Andrade Stochiero: Majored in Business Administrator and MBA in Rating Asset Investment Portfolios and the University of Sao Paulo. Mr. Decio has a long career in Sistel. He is currently Manager of Corporate Planning and Control, on the Board of Directors of the Bonaire Participações SA and Member of the National Technical Governance By ABRAPP.

Tarcisio Luiz Silva Fontenele (alternate):  Law degree and Post Graduate in Civil Procedural Law. Was General Director of Counsel of Americel SA - Cellular Telephone Company. Were Fiscal Director at Embratel Participacoes S.A. and Tele Nordeste Celular Participacoes S.A. and Controller Director at Fiscal Santos Brazil S.A. - Container Port Company. He is a member of the National Commission's Legal ABRAPP - Brazilian Association of Private Pension Closed. Currently holds the position of Legal Manager at Sistel. Alternate Tax Counsel is of Embraer since March 2001.

4.     Ratify the election of an alternate member of the Board of Directors.

Alternate Members

Carlos Fernando Costa

Résumés – Effective Members

Carlos Fernando Costa (Alternate):   Degree in Mathematics at Faculdade de Filosofia, Ciências e Letras de Santo André, with specialization in Financial Management by University of Sao Paulo and Administration from the Ibero-American University. Mr. Carlos is Director of Finance and Investments and Executive Manager of Planning and Investment Market Operations of Petrobras Social Security Foundation - Petros. His act in various committees of Petros, and Coordinate the Technical Committee of the National Investment Abrapp. Mr. Carlos has also great experience in the Board of Directors.

In Extraordinary General Meeting:

1. To approve the total and aggregate compensation for the Members of Management of the BRF - Brasil Foods Companies in the amount of up to R$ 30 million, including additional compensation in the month of December 2012, in the amount corresponding to one month’s salary.   (Attachment 13, pursuant to CVM Instruction 481)
2. Proposed Reform of the bylaws, articles of the following amendment to the present Bylaws:  1º; 3º - incise 1; 5º and paragraph 2º and 3º; 9º; 11; 12 and paragraph 1º to 5º and insertion of subparagraph 6º; 13 and insertion of paragraph; 14 and item 4; 15 – paragraphs 2º and 5º; 16 and paragraphs 1º, 3º; 4º; 5º, 6º and insertion of 7º; 17 – insertion of new paragraphs 2º and 4º; 18 – Items 4,6,7,8,12, 16,17 and insertion of new items 9 and 22; 19 – Items 4º to 9º; 20º - paragraphs 1º to 4º;  22 – relocated; 24 and inclusion of paragraphs 1º and 2º;  25 – inclusion of new paragraph 3º; 26 and paragraph 1º; 26 ; 27; elimination of 29; 33 – inclusion of 2º; 34; 35; insertion of new 35; 36; 37 – paragraph 1º, 2º, 3º, 7º and 10º and elimination of 13º; 38 – insertion of paragraph 1º and 2º; 38 – insertion of paragraph 1º; 39 ; 40 – paragraph 1º and 2º; 42 – insertion of paragraphs 1º and 2º; 43 and paragraph 1º; 44 – unique paragraph; 46; 47;  removal of 50 and 51, as well as its paragraphs as proposed statutory amendment annexed;

3. Extend the Compensation Plan based on Actions and Regulation of the options to another levels of executives of BRF - Brazil Foods SA, without additional dilution.

This is what the Board of Directors has to propose and trusts will be examined and approved by the shareholders.

The Company’s shareholders interested in accessing the information or  clarifying doubts with respect to the aforementioned proposals should contact the Investor Relations area of the Company by calling +55 (11) 2322-5061/5050/5048/5049/5051/5052/5037 or via e-mail: acoes@brasilfoods.com. All documents pertinent to this Meeting are available to the shareholders in the site: www.brasilfoods.com/ri . 

São Paulo (SP), March 22, 2012.

NILDEMAR SECCHES                                                                                                     PAULO ASSUNÇÃO DE SOUSA 

CHAIRMAN                                                                                                                               VICE-CHAIRMAN                                    

ALLAN SIMÕES TOLEDO                                                                                                                       DÉCIO DA SILVA

JOSÉ CARLOS REIS MAGALHÃES NETO                                                       LUÍS CARLOS FERNANDES AFONSO                         

LUIZ FERNANDO FURLAN                                                                                   MANOEL CORDEIRO SILVA FILHO                                                                  

PEDRO DE ANDRADE FARIA                                                                                                 WALTER FONTANA FILHO                                                                  

EDINA BIAVA

SECRETARY

Attachments to the Proposal of the Board of Directors to the Ordinary and Extraordinary General Meeting to be held on April 24, 2012.

(According to CVM Instruction nº 480 and 481)

Attachment 9-1-II

10. Management Comments

Item 10.1.a. Comments of Directors on financial conditions and asset status, capital structure, creditworthiness, financing sources, levels of indebtedness, loan agreement limits.

In 2011, the good operating performance, obtained in our business performance in both segments of the internal market, external and food service, were instrumental in improving the operating cash flow, provide investments in Capital Expenditure to promote organic growth defined and in acquisitions.

Even with the economic scenario experienced and especially waiting for the opinion of the antitrust agency, we close the year with excellent results, which proves our great potential performance going forward. Net revenues totaled R $ 25.7 billion, 13.3% over 2010, ending 2011 at 6.2 million tons of products. Cash flow, as measured by EBITDA, evolved 23.1%, to $ 3.2 billion, with EBITDA margin of 12.6%. Net income registered an increase of 70.1% over the previous year, reaching R $ 1.6 billion, adjusted to the provision of corporate merger of Sadia SA expected to occur in 2012.

Besides having ended the year with good operating margins, the Company recorded positive indicators of liquidity, with $ 2.9 billion in investments and 82% of net debt in the long run. This allows us to comfort with the short-term and reliable for the long term.

Net debt, comprising the total gross debt less financial investments, increased by 48.7%, representing $ 5.4 billion, concentrated in the long run. The expenditure required for investments and acquisitions have resulted in greater use of cash, with gross debt increasing due to currency fluctuations. Thus, the net debt in relation to generation EBITDA was 1.7 times compared to 1.4 times recorded on 31/12/10.

Recent acquisitions have demanded a series of adjustments necessary to reflect the expected return. Moreover, the extreme volatility and uncertainty of foreign markets by the end of the year the administration requested greater prudence. The Company's financial position is safe and comfortable, having been promoted the elongation of short-term debt with maturities bearable planned for 2012 and 2013. Thus allowing the continuity of the plans outlined for investment, providing a continuous and sustained growth, aligned to the Strategic Plan for Long-Term - 15 BRF recovery, albeit slow, in 2010 the international economy and domestic market growth provided a more favorable environment for the Company's business.

The recent acquisitions demanded several necessary adjustments to reflect the expected return. Moreover, the extreme volatile and uncertain market conditions at the yearend demanded more administration caution. The Company financial position is safe and comfortable; it was promoted the short term debt extension, with bearable due dates scheduled for late 2012 and 2013, thus allowing the continuity of investment plans and the continuous and sustainable growth, in line with Strategic Plan for Long-Term - BRF15 recovery, albeit slow, of the international economy in 2010 and growth of the market provided a more favorable environment for the Company's business.

Because of financial discipline adopted in the debt restructuring plan, reductions were observed in the average cost of debt, as well as an extension of average maturity. The Company ended 2010 with 69% of its debt in the long run.

 The net indebtedness of 12/31/10 was 13.2% lower than recorded in 2009, supported by the operating results, even considering the disbursement for investment in capital expenditures, marketing and project synergies.

 The net debt / EBITDA were reduced to 1.38 times due to improved cash generation achieved in the year and the equilibrium level of net debt in relation to the Company's operations. The consolidated foreign exchange exposure was $ 76 million (asset position), contemplating the policy implemented hedge accounting, compared with $ 1.1 billion (liability) recorded in the previous year.

 Debt restructuring of the subsidiary Sadia was made possible by the input of resources from the primary offering of equity issues whose funding totaled U.S. $ 5.3 billion held in July/09. Were transferred U.S. $ 3.5 billion of this amount for Sadia, among AFAC operations and mutual obligations for early and thus reduce the costly short-term debt, of which R $ 1.2 billion was transferred during the year 2010.

 Order to stretch the debt profile and reduce its average cost, were issued on 21/01/10, bonus of 10 (ten) years totaling $ 750 million (bonds), maturing on 1/28/20 and coupon (interest ) of 7.250% per annum (7.375% yield to maturity), which are paid every six months, from July 28, 2010.

In 2009, the BRF – Brazil Foods S.A., a corporation resulting from the merger between the groups Perdigão and Sadia, was born as one of the world leading group in the food industry, taking its products and brands for more than 100 countries.

The success of the shareholding structure that resulted in the BRF creation, besides the fund raising of R$5,3 billion, turned the year of 2009 remarkable for the Brazilian and global food industry.

At operational sphere, the positive spotlight was the good performance of the company in the local market, with 9,5% of growth in revenues of processed products. However, the results and margins were negatively impacted by the international scenario, which showed high exchange volatility, leading to an important drop in the exported products prices. The reduction of consumption in the international market led the company to several adjustments in its production, which reflected in the increase of products cost and increase in the commercial expenses.

Although the adverse scenario, BRF recorded an adjusted net profit of R$360 million and EBITDA of R$1,2 billion in terms of proforma. The net indebtedness increased 14,4% compared to 12.31.08, however, in proforma comparative the drop of indebtedness was supported by the entrance of funds of primary offer of shares issuance, whose raising was of R$ 5,3 billion. From this amount, R$ 2,2 billion were transferred to Sadia, aiming the reduction of the costly short term debt. The relation net debt/EBITDA became 3,6 times, due to the minor cash generation in the year, although the proper level of net indebtedness.

Item 10.1. b. Capital Structure

On 12.31.11, the BRF capital structure is composed of 62,8% in equity capital and 37,2% in debt capital. The company does not have issuance of redeemable stock.

Item 10.1.c Ability to Pay

Considering that 55% of the Gross indebtedness is of long term, that the Company has availability of R$ 2.916 million to pay its short term financial commitments of R$ 2.233 and that we hope a positive cash generation for the year of 2012, based on the continuous improvement of the world economy, the Company considers as comfortable its ability to pay.

Item 10.1.d; e-Sources of Funding for working capital and investments in non-current assets to use for cover liquidity shortfalls.

During 2012, the Company will hire new loans and financing from the financial markets and capital, when identifying the need for additional resources to fund the long-term investments or in order to continue improving the debt profile.

We will keep borrowing costs low and long-term funding as made with the funding agencies such as BNDES (Banco de Desenvolvimento Economico e Social), BNB (Bank of NE) and FINEP (Research and Projects Financing), where resources are used to essentially fixed capital finance, operations and renewals of Rural Credit, which are operations with interest subsidized by the Federal Government, and EGF-like NPR to fund working capital of the company.

During 2012, the Company will hire new loans and financing from the financial markets and capital, when identifying the need for additional resources to fund the long-term investments or in order to continue improving the debt profile .   

Item 10.1. b. Capital Structure

 

On 12/31/11, the capital structure of the BRF is composed of 62.8% equity and 37.2% of debt. The company is not issuing redeemable shares.

Item 10.1.f. Levels of Indebtedness and the features of such debts, also describing

Item 10.1.f. Debt levels and characteristics of these debts are detailed as follows:

Main Financing and Borrowing Contracts:

BFF notes: On 01.28.10, BFF International Limited issued senior notes in the total amount of US$750.000. The securities are guaranteed by the Company and by Sadia, with nominal interest rate of 7,25% per year and due date on 01.28.20.

Sadia Bonds: In the total amount of US$250,000. The securities are guaranteed by the Company and by Sadia, with interest rate of 6,88% per year, with due date on 05.24.17.

Operations with BNDES: On 12.31.11, the Company and its subsidiaries have several outstanding obligations with BNDES. The borrowings were made for the purchase of machinery, equipments and expansion of the productive facilities, besides de special lines for the export financing, with due dates between 2011 and 2015, in the amount of R$ 1,8 billion.

Other long term relationships with financial institutions:

The company has covenants with several Banks where the main objective is to make easier the access to credit to the company partners producers for the construction of battery cages, poultry farms and rules adjustment.

Besides that, the Company has covenants with Banks to make easier the access to credit for the suppliers that wish to anticipate its receivables with the Company.

Finally, the Company has operations with derivatives with the purpose of protecting against the exchange and interest rates variations, with speculative purposes. These operations are accounted by its market value, in accordance with the accounting methodology of hedge accounting.

Level of Subordination among the debts:

The level of subordination is highlighted in the operations having real guarantees, most of all the manufacturing plants contracted along with BNDES.

Eventual restrictions imposed to the issuer, especially regarding the limits of indebtedness and new borrowings contracting, the dividends distribution, divestitures, issuance of new securities and change of company control:

We have some financial covenants such as:

In 2011, the Company renegotiated all financial covenants and 12.31.11 had no financing contract with restrictive clauses (financial covenants).

Item 10.1.g. Usage Limits of the already contracted financing

The company has in a contract with Brazilian Development Bank (BNDES); Brazilian Northeast Bank (BNB), Brazilian Innovation Agency (FINEP), available lines of credit in the amount of R$ 276 million.

Item 10.1.h. significant variations in each item of financial statements

Main variations in the consolidated balance sheet, comparing December 31, 2011 to December 31, 2010.

Current assets

The current asset totalized R$11,123.7 million on December 31, 2011 and R$10,020.6 million on December 31, 2010. The increase of R$1,103 million is primarily represented by the trade accounts receivable and inventories, as a consequence from the organic growth of the Company and its subsidiaries. On December 31, 2011, the current assets represented 37.1% of total assets, compared to 36.1% in the previous year.

Cash and cash equivalents

Cash and cash equivalents presented a decrease of 40.8%, from R$2,310.6 miillion as of December 31, 2010 to R$1,366.8 million as of December 31, 2011. Such decrease is mainly due to the Company’s investment activities.

Trade accounts receivable, net

Trade accounts receivable totaled R$3,207.8 million as of December 31, 2011, increasing 25.1% when compared to December 31, 2010, which totaled R$2,565.0 million. This increase is due to the growth of 12.8% on sales during the 2011 fiscal year.

Inventories

On December 31, 2011, inventories totaled R$2,679.2 million (R$2,135.8 million as of December 31, 2010), increasing 25.4% or R$543.4.million There was a significant variation on the inventory of finished goods, mainly due to the decrease on the external market demand.

Non-current assets

As of December 31, 2011, non-current assets totaled R$18,859.7 million (R$17,730.8 million as of December 31, 2010), increasing R$1,128.9 million. Such variation is a consequence from the net increase in property, plant and equipment and from the increase in other assets group, due to an advanced payment in the amount of R$180.0 million for the acquisition of assets related to the integration, production and porks slaughtering.

Property, plant and equipment, net

On December 31, 2011 property, plant and equipment increased 8.1%, totaling R$9,798.3 million (R$9,066.8 million as of December 31, 2010). Improvement and productivity projects amounted to R$1,125.2 million and were allocated in several plants and regions. The acquisition of Avex, Dánica Group and Heloísa added R$110.6 million to the variation.  Depreciation and amortization amounted to R$425.7 million and there were also disposals in the total amount of R$72.4 million mainly due to sales or obsolescence.

Current liabilities

Current liabilities totaled R$7,987.8 million as of December 31, 2011 (R$5,686.4 million as of December 31, 2010) presenting an increase of 40.5%. Such increase is related to the export credit lines, which increased approximately 160.9%, meaning R$1,097.3  million aiming to finance the Company’s working capital. Current liabilities represented 26.6% of total liabilities, compared to 20.5% from the previous year.

Short-term loans and financing

Short-term debts, including the current portion of long-term debt with financial institutions totaled R$3,452.4 million as of December 31, 2011 (R$2,222.7 million as of December 31, 2010), presenting a growth of 55.0%. The increase of the debts is related to the funding for the export credit lines to finance the Company’s working capital.

Accounts Payable

Debts to suppliers of raw materials, materials and services that are necessary to the operational activities of the Company amounted to R$2,681.3 million as of December 31, 2011 and R$2,059.2 million as of December 31, 2010, increasing 30.2%. This increase is related to the growth of the production and the costs of the main raw materials, such as soybean meal (5.1%).

Non-current liabilities

As of December 31, 2011 non-current liabilities totaled R$8,428.6 million (R$7,885.7 million  as of December 31, 2010), representing a decrease of R$542.9 million during the year, mainly due to the higher amount transferred from long-term to short-term and to the reduction of the provision for civil risks.

Long-term loans and financing

Long-term debts with financial institutions totaled R$4,601.0 million as of December 31, 2011 and R$4,975.2 million as of December 31, 2010, representing a decrease of R$542.9 million. This decrease is a consequence of the transference of the debt from the long-term to the short-term.

Shareholder´s Equity

The shareholders’ equity of 2011 corresponded to R$14,110.0 million (R$13,636.5 million as of December 31, 2010). There was an increase of 3.5% derived from the variation of the following groups: reserve for expansion in the amount of R$305.2 million; reserve for capital increase in the amount of R$265.3 million; legal reserve in the amount of R$68.4 million and reserve for government grants in the amount of R$56.5 million.

Main variations in the consolidated balance sheet, comparing December 31, 2010 to December 31, 2009.

Current Assets

Current assets totaled R$9,852.1 million on December 31, 2010 and R$10,677.9 on December 31, 2009, representing a decrease of R$825.8 million, mainly due to the financial investments in the amount of R$1,481.7 million. The accounts receivable from customers increased R$424.3 million as a consequence of the sales revenue growth. The reduction of financial applications plus the generation of operational cash was allocated primarily to the reduction of loans and increase on the Company’s investments. As of December 31, 2010, current assets represented 35.5% of the total assets, when compared to 37.6% from the previous year.

Cash and cash equivalents

The group presented a decrease of 25.2%, from R$4,243.8 million as of December 31, 2009 to R$3,174.4 million as of December 31, 2010 as a result, mainly to the financial investments redemption utilized for the settlement of the indebtedness from the wholly-owned subsidiary Sadia.

Trade accounts receivable, net

Trade accounts receivable totaled R$2,565.0 million as of December 31, 2010, increasing 19.8% when compared to December 31, 2009, which totaled R$2,140.7 million. Such increase is a consequence of the growth of sales revenue.

Inventories

As of December 31, 2010, inventories amounted to R$2,135.8 million  (R$2,225.5 million as of December 31, 2009), representing a decrease of 5.3%. There was a decrease in finished goods in tem amount of R$216.9 million  due to a better sales performance in the current year, while in the end of the prior year the inventories levels were high due to a lower demand in the foreign market. The remaining inventories items increased R$97.2. million  The poultry, pork and beef in formation to be slaughtered, are classified as biological assets, in the current assets and totalized R$900.7 million on December 31, 2010 (R$865.5 million on December 31, 2009).

The poultry and pork for production, breeding stocks with the purpose of generating new biological assets, are classified as biological assets, in the noncurrent assets and totalized  R$377.7 million on December 31, 2010 (R$391.2 million  on December 31,  2009).

Recoverable taxes

The recoverable taxes balance corresponded to R$695.9 million on December 31, 2010 and R$745,6 million on December 31, 2009. Such credits, which are expected to be compensated in the 2011 fiscal year, basically refers to ICMS, PIS, COFINS, Income Taxes and Social Contribution. The export activity, reduced taxes rates in the domestic market, investments in fixed assets and investments in marketable securities provided credits superior to debits generated in the sales.

Noncurrent assets

The noncurrent assets amounted to R$17,899.4 million on December 31, 2010 and R$17,705.7 million  on December 31, 2009; increasing R$193.7 million . The increase is related to investments in property, plant and equipment and the deferred recoverable taxes, which fluctuations amounted R$368.1 million . On the other hand, there was a reduction of R$299.0 million  in the balance of marketable securities.

Recoverable Taxes

The recoverable taxes balance increased R$114.3 million ; reaching R$767.4 million  on December 31, 2010, as well as, in the current assets refers basically to ICMS, PIS, COFINS, Income Taxes and Social Contribution Taxes, subject to future offsets.

Deferred income taxes

The deferred income taxes balance totalized R$2,487.6 million  on December 31, 2010 and R$2,426.4 million  on December 31, 2009. The balance comprises net operating losses and temporary differences. The realization of such assets will occur as long as the contingencies are settled and profits generated.

Property, plant and equipment

The balance increased R$192.6 million , totalizing R$9,066.8 million  on December 31, 2010 and R$8,874.2 million  on December 31, 2009. The acquisitions amounted to R$693.3 million  disposals, depreciations and the fair value due to business combination with Sadia totalized R$504.1 million . Among the acquisitions the following are highlighted: expansion of R$116.4 million , of Campos Novos - SC R$75.1 million , constructions in progress in Sadia mainly related to the Lucas do Rio Verde and  Vitória de Santo Antão in the amount of R$198.1.

Intangible

The balance totalized R$4,247.3 million  on December 31, 2010 and R$4,276.5 million  on December 31, 2009; and comprises: goodwill in the amount R$2,833.0 and the trademark of R$1,256. million . 

Current liabilities

The current liabilities totalized R$5,621.2 million  on December 31, 2010 and R$6,267.9 million  on December 31, 2009; a reduction of 10.3%, mainly in the debt with financial institutions due to the payment of Sadia’s outstanding loans.

Financing and loans

The short term debt, including the short term portion of non current debt totalized on December 31, 2010 R$2,227.7 million  and on December 31, 2009 R$3,202.7 million , a reduction of 30.4%. The reduction on the debt is mainly due to the payment of Sadia’s outstanding loans.

Suppliers

The suppliers balance R$2,059.2 on December 31, 2010 and R$1,905.4 million  on December 31, 2009, increasing 8.1%, above the increase in the cost of goods sold which increased 33.2% and are related to the purchase policy and the prices behavior of the main raw materials.

Noncurrent liabilities

Totalized R$8,493.8 million  on December 31, 2010 and R$9,120.0 million  on December 31, 2009; reducing 6.9%, mainly due to the payment of Sadia’s outstanding loan.

Financing and loans

The noncurrent debt totalized R$4,975.2 million  on December 31, 2010 and R$5,853.5 million  on December 31, 2009, reducing R$878.3 million , mainly due to the payment of Sadia’s outstanding loan.

Tax, labor and civil contingencies

The tax, labor and civil contingencies totalized R$1,118.9 million  on December 31, 2010 and R$1,031.6 million  on December 31, 2009.  The balance is related to the lawsuits which the outcomes are considered probable, being: tax R$859.9 million , labor R$110.1 million , civil R$148.9 million . 

Deferred income taxes

Totalized R$1,635.7 million  on December 31, 2010 and R$1,456.4 million  on December 31, 2009. The amount of R$1,124.4 million  refers to net operating losses and temporary differences in the amount of R$511.3 million . 

Shareholders’ equity

The shareholders’ equity totalized R$13,636.5, while in the end of the 2010 fiscal year amounted to R$12,995.7 million . There was an increase of 4.9% due to the net profit of R$806.8, reduced by the interest on own capital in the amount of R$262.5 million . 

Main variations in the consolidated balance sheet, comparing December 31, 2009 to December 31, 2008.

Current assets

Our current assets amounted to R$10,677.9 million  on December 31, 2009 up from the R$5,917.4 million  reported the previous year, due to a R$2,267.8 increase in cash & cash equivalents and cash investment accounts derived from the proceeds the Company obtained from a share issue. Trade accounts receivables, inventories and tax credits in general and other current assets grew owing to the business association with Sadia on July 8, 2009. On December 31, 2009, current assets accounted for 37.6% of total assets, against 52.7% in the previous year.

Cash and cash equivalents

Increased 114.8% from R$1,976.0 million  December 31, 2008 to R$4,243.8 million  on December 2009, related to the share issue, net of the amounts transferred to Sadia to settle the subsidiary’s debt.

Trade account receivable, net

Our trade accounts receivables amounted to R$2,140.7 million  on December 31, 2009, up 55.3% from the previous year’s R$1,378.0 million . The increase derives from the business combination with Sadia.

Inventories

Increased 75.5% to R$2,255.5 million on December 31, 2009, from the R$1,285.4 million   reported in the prior year.

Poultry, pork and bovine in formation for slaughter were recorded as biological assets under current assets at a total R$865.5 million on December 31, 2009 (R$427.4 million on December 31, 2008).

Breeding poultry and swine, parents designed to produce new biological assets, were recorded as biological assets under non-current assets at a total R$391.2 million on December 31, 2009 (R$158.8 million on December 31, 2008).

Inventories of finished products, slaughter and breeding animals, raw materials and advances to suppliers grew significantly in the wake of the business combination with Sadia.

Noncurrent assets

Increased R$12,388.9 million, from R$5,316.8 on December 31, 2008 to R$17,705.7 million the following year. The increase results partly from the share issue proceeds (portion recorded in the long-term deposits), as well as tax credits and deferred income tax and the business combination with Sadia.

Recoverable taxes

Increased R$505.6 million  to R$653.0 million on December 31, 2009, due to the business combination with Sadia. These refer basically to credits for ICMS, PIS, COFINS, income tax and social contribution, to be offset in the future.

Deferred income tax

Totalized R$2,426.4 million on December 31, 2009 from the R$550.8 million reported in the prior year. These are income tax and social contribution credits on losses, premiums and other temporary differences. Realization of these deferred assets will occur as contingencies are met and profits flow in. The increase results from the business combination with Sadia

Property, plant and equipment

The property, plant and equipment increased 223% to R$8,874.2 million on December 31, 2009 from the R$2,747.8 million reported in the prior year. The R$5,981.7 million  increase is a result of the business combination with Sadia.

Intangible assets

Amounted to R$4,276.5 million on December 31, 2009 against R$1,557.6 million on December 31, 2008. It refers basically to goodwill and trademarks and the effect of the business combination with Sadia.

Current liability

Increased 98.3% to R$6,267.9 million on December 31, 2009 from the R$3,160.0 million on December 31, 2008, particularly in debt to financial institutions and suppliers in the wake of the business combination with Sadia.

Short-term Loans and Financing

Short-term debt, including the current portion of the long-term debt to financial institutions, amounted to R$3,202.7 million  on December 31, 2009, up 102.8% from the prior year’s R$1,578.9 million. The higher debt is primarily related to the business combination with Sadia.

Trade accounts payable

Trade accounts payables increased 75.9% to R$1,905.4 million  on December 31, 2009 from R$1,083.4 million  on December 31, 2008, as a result of the business combination with Sadia.

Noncurrent Liability

Increased R$4,971.4 million in the current year to R$9,120.1 million  on December 31, 2009 from R$4,148.7 million  on December 31, 2008, due to the business combination with Sadia.

Long-term Loans and Financing

Long-term debt to financial institutions amounted to R$5,853.4 million  on December 31, 2009, an additional R$2,133.7 million from the prior year’s R$3,719.7 million . The debt increase results from the business combination with Sadia.

Tax, labor and commercial contingencies

Increased R$1,031.6 million  on December 31, 2009 from R$ 219.1 million  on December 31, 2008. These are contingency provisions where losses are likely.  The increase results from the business combination with Sadia.

Deferred income tax

Totaled R$1,456.4 million  on December 31, 2009 from R$ 73.3 million  on December 31, 2008. This refers to income tax and social contribution related to business combination with Sadia.

Shareholders’ equity

The shareholders’ equity totalized R$12,995.7 million  on December 31, 2009, up from the previous year’s R$ 3,925.3 million. A growth of 231% was reported particularly following the R$ 5,290.0 million capital injection from the share issue, the R$3,818.4 million paid-in with HFF’s and Sadia’s shares and a  R$ 98.7 million profit from the fiscal year, pared down by the R$100.0 million paid in interest on own capital.

Item 10.2. itens a. b. e c.

Transition to International Financial Reporting Standards

We have changed our consolidated financial reporting from accounting principles generally accepted in Brazilian GAAP to IFRS, as issued by the IASB. We adopted IFRS for the fiscal year ended December 31, 2010 and retrospectively applied IFRS to the fiscal year ended December 31, 2009 for comparative purposes. The transition date for our adoption of IFRS was January 1, 2009, the date on which the opening balance sheets were prepared in accordance with these new accounting practices. IFRS differs in certain significant respects from U.S. GAAP.

Note 3 to our consolidated financial statements describes the accounting pronouncements issued by the Brazilian Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis) and approved by the CVM that govern the transition to IFRS and have been adopted by our company.  Note 3 also contains a reconciliation of shareholders’ equity and net income recorded under Brazilian GAAP as of and for the year ended December 31, 2009 to the amounts recorded under IFRS.

Limitation on Comparability of Our Financial Statements

Business Combination with Sadia – Our results of operations for 2010 include the results of operations of Sadia for the full year.  However, our results of operations for 2009 include the results of operations of Sadia since July 8, 2009 and, therefore, are not fully comparable to our results of operations for the year ended December 31, 2010.  

Sadia’s results of operations were fully consolidated as from July 8, 2009, when the common shareholders of BRF, Sadia and HFF, a holding company formed by the controlling shareholders of Sadia for the purposes of the acquisition, approved our business combination with Sadia. Consequently, our results of operations for the year ended December 31, 2009 include the results of operations of Sadia only for the period subsequent to the July 8, 2009 acquisition date.

For more information on our acquisitions in 2009, including the business combination with Sadia, see “Item 10.3 Events with significant effects occurred and expected in the financial statements and note 7.1 to our consolidated financial statements.

Results of Operations as a Percentage of Net Sales

The following discussion should be read in conjunction with our consolidated financial statements.  The following table sets forth the components of our results of operations as a percentage of net sales for 2011, 2010 and for 2009 on a historical basis. 

Presentation of Net Sales Information

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

 ICMS Taxes — ICMS is a state value-added tax on our gross sales in the domestic market at a rate that varies by state and product sold. Our average ICMS tax rate in 2010 was 8.8%.

PIS and COFINS Taxes — The PIS and the COFINS taxes are federal social contribution taxes on our gross sales in the domestic market at the rates of 1.65% for PIS and 7.60% for COFINS in 2010.

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, 2010 and 2009:

Segment Presentation

We operate in two business segments: the domestic market and the export market. In each market, we produce and distribute:

-  meat products, such as meat cuts (which we refer to as in natura meat), including poultry, pork and beef, and processed meats;

- dairy products, including milk and other dairy products;

- other processed products, such as lasagnas, pizzas and cheese bread; and

- other products, such as soy meal and refined soy flour.

We report net sales by market. Because we use the same assets to produce products for both our domestic and export market, we do not identify assets by market.  See note 6 to our consolidated financial statements for a breakdown of net sales by segment and product line.

Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

The following tables provide a comparison of results of operation on December 31, 2011 and December 31, 2010, based on the consolidated financial statements prepared in accordance with IFRS.

 From the year 2011, the BRF has included a larger opening of market segmentation, as described above.

Net Sales – BRF registered net operating sales of R$ 25.7 billion in the year, 13.3% higher, principally supported by good performance in the domestic market and the Food Service segment. In 4Q11, net operating revenue totaled R$ 7.1 billion, a 10.9% increase, driven by the commercialization of the festive line of products (year-end holiday season). 

Domestic Market

Domestic market sales evolved 14.3% to R$ 11.6 billion, a period marked by lower robust consumption rates compared with 2010. Additionally, the increase in the price of commodities exerted upward pressure on production costs. On the other hand, price and cost management policy, the efforts made to improve sales team productivity and investments in innovation contributed positively to results.

Meats –  Despite an increase in costs – more especially those of grains – the meats segment posted a 18% improvement in revenue with the commercialization of 1.8 million tons in the year. Total revenue was R$ 9 billion.  

Other processed products – In 2011, BRF dedicated special attention to innovation in the frozen product business. The distribution of the Sadia-branded products under the Escondidinho label was expanded throughout Brazil and reported excellent sales performance. The Perdigão Meu Menu line was also expanded, consumer reception being particularly good. Total revenue for the segment was R$ 2.0 billion, a growth of 2.3%. In the quarter, net sales to the domestic market amounted to R$ 3.3 billion, 7.6% higher than recorded in 4Q10. The highlight for the quarter was elaborated/processed products which posted  an increase of 12.5% in revenues and accounted for 59% of the operating margin reported for the quarter in this market, more particularly due to the festive products line (year-end holiday period).

External Market

Operations in the international market developed satisfactorily in 2011. Despite oscillations in foreign exchange rates, the economic crisis in Europe, the Russian trade ban on Brazilian meat imports and the escalating costs of commodities, net sales grew 12.3% to R$ 10 billion, equivalent to a volume of 2.2 million tons, 1.2% lower than the preceding year due to the strategy of prioritizing wider margins.

Some markets such as Europe, Japan, China and Singapore helped drive a positive performance while the Middle East and Egypt, affected by popular uprisings (the Arab Spring), as well as Iraq, reported a weaker business climate. The European Plusfood division turned in results above forecast reflecting strategic changes in the client and product portfolios and the modernization of the industrial unit in the Netherlands.

Market performance

Far East – Volumes grew 4% and revenues, 20.1% in the year despite pressure to reduce prices in the final quarter in the Japanese market, which had performed well up to the end of the first half.  We expect margins to be squeezed in this market until local inventories adjust to demand.

Eurasia – Revenues fell 26.6%, with volumes also down 31.5% due to the Russian ban on imports from the majority of Brazilian exporting plants. The ban has since been lifted and exports should normalize as from February 2012. However, the Ukraine took a large part of the volume originally destined for Russia, alleviating most of the negative impact of these import restrictions.

Europe – In this region, difficulties in some countries, especially Greece, Italy and Portugal have had no impact on our businesses. Sales revenue in this market increased 8.1%, albeit on lower volumes of 9.2% due to the Company’s switch in strategic focus to higher value added particularly in the case of those products made at Plusfood, which expanded its portfolio, doubling our production capacity in Europe.

Middle East – Sales revenue was up 5.7% on stable volume. Margins were squeezed for products such as chicken griller – a heavily demanded product in this market, more especially in the 2H11. However, while our marketing campaigns focused on the religious period of Ramadan with the objective of further enhancing customer loyalty to the Sadia brand - Top of Mind in the region -, it also served to relieve some of the pressure on margins for in natura products. The Company’s objective in this market is to add value by building a new industrial unit in the United Arab Emirates focused on the production of processed products (breaded products, hamburgers, etc.).

South America – Revenues increased 55.2% and volumes 14.8%. In addition to growing demand in these markets, business benefited from the incorporation of the acquired Avex and Dánica operations as from 4Q11 in Argentina.

Africa and other countries – In Africa, the Company continued to pursue its principal objective of improving relationships with some distributors in those regions of the continent considered strategic, the area as a whole growing sales revenue by 32.7%, while in other countries growth was 51.7%

Dairy products – An improved product mix was instrumental in increasing the dairy product sales revenue 9.8% to R$ 2.5 billion. The atypical spike in sugar and the continual upward pressure on milk prices paid to the producers, pressured production costs in the segment.

Some important  steps were taken in remodeling the industrial complex in this segment and launching the Naturis line, Sadia-branded danbo and mozzarella cheeses and the ecologically correct packaging for Batavo milk.

Food Service – In 2011, this segment reported a performance which was better than the average for the market. This reflects the importance of the Food Service business in the Company’s expansion strategy in a process which adds in customer service as a competitive differential. Sales revenue increased 19.7% to R$ 1.4 billion. The result is largely due to the growth in the consumption of away-from-home meals, increased purchasing power nation-wide, more especially the C class, and by the increase in food service chains as a result of a growing number of shopping malls not only in the major cities but also in upcountry areas. The management model for the area contributed to results, reflecting the adoption of processes representing the best practices of both Sadia and Perdigão following the effective merger of the two. Examples are the added value in the delivery of beef and the improved focus on the service provider areas with dedicated portfolio and commercialization areas. In addition, the adding of value in the positioning of the global accounts contributed to the performance of the Food Service segment.

The table below shows the breakdown of average prices for domestic sales on a combined basis.

Cost of Sales – The cost of sales rose 12.4% to R$ 19 billion. Although the cost of the principal raw materials – corn and soybeans – increased 38% for corn and 15% for soybeans during the year and there was also pressure from other costs such as direct raw materials, COGS was 74.1% of net sales, 60 basis points lower than the preceding year, principally due to captured synergies.

In 4Q11, the cost of sales reported a year-on-year 13% increase, representing a 130 basis points rise in COGS from 71.3% to 72.6%.  4Q10 benefited from a well adjusted inventory policy both for raw materials as well as seasonal products, built up to confront grain costs.

Gross Profit and Gross Margin – Gross Profit amounted to R$ 6.7 billion, a gain of 16.2%, reflecting an improvement of 60 basis points, or 0.6 percentage points in gross margin, which increased from 25.3% to reach 25.9% of net sales, supported by revenue performance and synergy gains. In 4Q11, Gross Profit amounted to R$ 1.9 billion – a year-on-year increase of 5.8%, which we consider positive given the excellent performance in 4Q10 when costs were lower.

Operating Expenses – Operating expenses were 10.6% higher due to a rise of 40.2% in fixed commercial expenses and 28.2% in administrative expenses due to investments in the implementation of IT systems and in consultancy work related to the merger. However, variable commercial expenses fell 18.3% thanks to gains in synergies due to a reduction in logistics costs. In 4Q11, operating expenses amounted to R$ 1.2 billion – 17.4% higher, also a reflection of the increase in fixed commercial overheads and administrative expenses/management compensation.

Other Operating Results – The amount of R$ 402.7 million in other operating results is 2.2% higher than the preceding year and incorporates income from the reversal of provisions, recovery of expenses, benefits plan and insurance claims. Expenses include: costs with the pre-operational phase of the new industrial units, loss damages, provision for tax and civil risks. In line with IFRS rules, participations in profits are also booked to this item.

Operating Profit and Margin – The Company recorded an operating margin which was 130 basis points higher – from 6.5% to 7.8%, the operating result indicative of the improvement in business performance. Operating income before financial expenses (EBIT) reached R$ 2 billion, a gain of 34.8%.

However in 4Q11, there was a decline of 9.2% to R$ 508 million in operating profit – EBIT, equivalent to an operating margin of 7.2% (150 basis points below the figure registered in 4Q10). This reflects greater pressures from costs of the principal raw materials, direct materials, exports and a one-off spike in fixed commercial and administrative expenses.

Financial – Net financial expenses totaled R$ 479.5 million (0.7% lower) and remained largely unchanged in relation to the preceding year. While currency volatility during the course of the year had an impact on increased outstanding debt and financial overheads, efficient risk management and the adoption of best practices of hedge accounting mitigated the adverse effects on financial result.

In addition to the foreign exchange translation effect, allocation of cash to investments in Capex  and acquisitions made during the year, increased net debt by 48.7% to R$ 5.4 billion, resulting in a net debt/EBITDA ratio of 1.7 times, with a book currency exposure of US$ 470.7 million.

In 4Q11, financial expenses were 21.6% higher than the same period in 2010 due to the foreign exchange translation effect on loans, financing and other currency denominated liabilities as well as a loss on the conversion of overseas investments.

In the light of the high level of exports, the company conducts operations with the specific purpose of currency hedging. In accordance with hedge accounting standards (CPC 38 and IAS 39), the Company uses financial derivatives (for example: NDF) and non-derivative financial instruments (for example: foreign currency debt) for conducting hedging operations and concomitantly, to eliminate the respective unrealized foreign exchange rate variations from the income statement (under the Financial Expenses line).

The use of non-derivative financial instruments for foreign exchange cover continues to permit significant reduction in the net currency exposure in the balance sheet, resulting in substantial benefits through the matching of currency liability flows with export shipments and therefore contributing to a reduction in the volatility of the financial result.

In 12.31.11, the non-financial derivative instruments designated as hedge accounting for foreign exchange cover amounted to USD 645.2 million with a reduction in currency exposure in the balance sheet of the same value. In addition, the financial derivative instruments designated as hedge accounting according to the concept of a cash flow hedge for coverage of highly probable exports, totaled USD 1,360 million + EUR 316 million + GBP 69,3 million and also contributed directly to the reduction in currency exposure. In both cases, the unrealized result for foreign exchange rate variation was booked to shareholders’ equity, thus avoiding the impact on the Financial Expenses.

Income Tax and Social Contribution – Income tax and social contribution totaled R$ 156.5 million for the year, 20.3% lower, due to differences in tax rates on the earnings of foreign subsidiaries and the foreign exchange translation effect on overseas investments. However, in 4Q11, the Company booked R$ 215 million under this item with respect to the constitution of a provision for losses of income tax and deferred social contribution on tax losses and negative base for social contribution on net income and not to be used following the incorporation of Sadia into BRF, expected for 2012, in line with CPC 24 (Subsequent Events – IAS 10), and CPC 32 (Taxes on Profits – IAS 12). The foregoing value reflects Management’s current best estimates. The final impact of Sadia’s incorporation with BRF will be calculated as at 31 December 2012. The provision will not affect the amount of dividends proposed/distributed relative to fiscal year 2011, and relating to the dividend distribution through the intermediary of payment of interest on shareholders’ equity.

Net Income and Net Margin – Net income was R$ 1.4 billion in the year with a net margin of 5.3%, an increase of 70.1% in relation to the preceding year, reflecting BRF’s good operating performance and synergies captured – this despite the twin challenges of exports and associated currency volatility. In 4Q11, net income reached R$ 121 million, 66.4% down due to the factors explained above.

As mentioned in the previous item, a provision was constituted in 4Q11 for the future incorporation of Sadia. Excluding this effect, the adjusted net income for the year would have been R$ 1.6 billion,  an increase of 96.8%, with a net margin of de 6.2% and R$ 336 million in 4Q11, 6.7% lower and equivalent to net margin of  4.7%.

EBITDA – EBITDA reached R$ 3.2 billion, 23.1% higher, recording a gain of 100 basis points in relation to the preceding year, building in the improvement in results and synergy gains in commercial cost and expense variables. On a year-on-year comparative basis, 4Q11 reported a reduction of 4.1%. In spite of factors already discussed such as: pricing pressure in some export markets, pressure from grain prices – reflecting in higher production costs for the principal raw materials, and strikes in the port of Itajai delaying shipments due to the need for diversion to other port causing the Company to turn in a narrower EBITDA margin, there was significant cash generation in 4Q11.

Comments on the performance of the results for the fiscal year ending December 31, 2010, compared to December 31, 2009.

Net Sales

Our net sales increased 8.3% to R$22.7 billion in 2010 from R$20.9 billion in 2009, primarily due to on a pro-forma basis and 42.6% higher according to CL(Corporate Law) figures considering the incorporation of results for Sadia as from July 2009, partially due to the results in 4Q10.

Net sales reached R$ 6.4 billion in 4Q10, a 20.6% increase and a growth of 12.2% in relation to 3Q10, particularly boosted by the domestic market with sales of year-end holiday products to the Brazilian market and an improved export performance. 

Domestic Market

BRF has successfully maintained its market share for the principal product categories thanks to innovative initiatives, product launches and brand sustainability campaigns in addition to the hands on management of prices and costs. In all segments, including dairy products, BRF has prioritized commercialization margin (value share) over to market share.

Sales to the domestic market totaled R$13.5 billion, a growth of 11.3% against the preceding year. The Company sold 3.8 million tons of product, 4.9% higher than 2009 on a pro-forma basis. Thanks to these results, margins were restored to pre-crisis levels.

In the fourth quarter, domestic market sales posted growth of 22% at R$ 4.0 billion and total volumes 9.8% higher.

The buoyant domestic market associated with an increase in real incomes in a scenario of full employment in conjunction with rising consumption among the emerging social classes, have helped stimulate demand and  sales to all  segments, especially those directed towards lines catering for products traditional to the year–end holiday period.

Meats - The segment posted an increase of 10.5% in sales and 6.6% in volume. The recovery in in natura meat exports helped to steady supplies of product to the domestic market sustaining prices and the sale of items with greater added value. As a result, average prices remained 3.6% above those registered for 2009 on a pro-forma basis while processed products registered an improvement of 690 basis points for the year. 

Due to the excellent demand for traditional year-end holiday products, 4Q10 reported sales 22,9% higher for meats, with a 10,4% increase in volume. The operating margin for higher added value products posted growth of 4.7 percentage points compared with 4Q09.

Dairy Products – Net sales for the dairy product segment in 2010 recovered to 2008 levels ending the period totaling R$ 2.3 billion. Margins were squeezed by high prices paid to milk producers. Average prices continued in the same level of 2009. The year under review did not show the typical pattern of an on- and off-season, a fact that rendered management of costs and inventory even more difficult. Since these problems prevented margins returning to historical levels, BRF pursued a policy of preserving profitability in the segment which translated into a reduced market share for processed items and UHT milks.

Other processed products- Highlights for the year in this segment were Meu Menu, a line of ready-to-eat/cook, frozen and individual dishes for consumers that live alone, and Escondidinho, inspired by traditional recipes of Brazilian cuisine and directed towards the family market. The Company ran campaigns designed to consolidate the brands, taking full advantage of events with major popular appeal such as the World Soccer Tournament. Overall, market share remained stable – with the exception of margarines where there was growth. Total sales for the segment were R$ 2.0 billion, a growth of 25.7% while volume reached 454.9 thousand tons, a rise of 13.1% and 79%, respectively on a pro forma and CL basis. In the fourth quarter, growth was 27.3% and 10.5%, respectively, in sales and volumes.

Food Service – This segment is a strategic one in BRF’s growth plans with the food service market benefiting from a change in the habits of the Brazilian population, growth in incomes and a recovery in employment. According to the IBGE’s Family Budgets Survey, the percentage of expenses on food away from home rose from 24.1% (2002/2003) to 31.1% (2008/2009). Thanks to this trend and BRF’s investments in products and services, the segment posted a year-on-year increase of 13.1% in sales and 15% in volume.

BRF is the leading player in the Brazilian food service business, supplying the largest food service chains and franchises in the country and developing customized solutions for enhancing its services and proximity to the customer. This segment is present in all the major urban centers, BRF using a proprietary and dedicated fleet of delivery trucks in addition to maintaining high standards of quality and reliability.

The following table provides a breakdown of changes in net sales, sales volumes and average selling prices in the domestic market on a combined basis.

Foreign Markets

In line with guidance from the anti-trust authority CADE, the merging of international sales has permitted gains in synergies and scale with better price and portfolio management. The Company has repositioned its brands, benefiting from the segmentation of the markets. Sadia has become a premium brand focused on higher added value and innovation. Perdix is positioned as a mainstream high brand, dedicated to the commercialization of large volumes and products attuned to local tastes. Borella, Halal, Fazenda and others have been maintained as brands which compete with local overseas food product industries.

BRF’s international division, Plusfood, with units in The Netherlands and the United Kingdom, is reinforcing its strategy with the manufacture of items destined for the European market. Examples are Perfect Portions, a standardized line of items for the food service business as well as specific products geared satisfying European consumer demand.

In 2010, export revenue increased 4.3% to R$ 9,2 billion on volumes of 2.3 million tons (5.9% greater) – pro-forma basis and a growth of 40.2% in sales revenue on a CL basis. In the fourth quarter, exports reached R$ 2.4 billion, representing an increase of 18.3%, and 4.2% up in volume.

Pro forma

Meats – During the first half, full inventories in world markets depressed prices. In the light of this scenario, the Company adjusted its portfolio accordingly and by the second half with supply and demand back in balance, conditions had improved. However, the devaluation of US$ dollar against Reais, thus reducing revenues when translated into Reals, without reducing profitability.

Meat exports amounted to R$ 9.0 billion, 5% higher with volumes 6.1% up for the year. In 4Q10, export sales reached R$ 2.3 billion, an increase of 17.4% in export revenues and 3.9% in volume. Average prices in US dollars FOB (Free on Board), were 14% in relation to the preceding year. The appreciation of the real in relation to US Dollars resulted in price decline in terms of Reals and an overall reduction in export revenues also in local currency terms.

Dairy Products - The scenario of weaker international demand restricted sales volume on the overseas market with shipments recording a year-on-year decline of 28%. In the fourth quarter, volumes were 24.9% down, albeit with export revenues 11.2% higher. The Company is shortly to expand its unit in Argentina – a cheese manufacturer – to make it self-sustainable and to source of value-added exports. Argentina offers a stable supply of quality and competitively priced raw materials in addition to enjoying sanitary agreements with European countries making exports to these markets a feasible proposition.

The following table provides a breakdown of changes in net sales, sales volumes and average selling prices in the foreign market.

Europe – The crisis in some countries – Greece, Ireland, Portugal and Spain – weakened the domestic economy and causing considerable instability throughout the year. Operations benefited from the pressure on international quotations for the principal grains (corn and soybeans), permitting an increase in prices to the European market. Expansion at Plusfood was instrumental in BRF enhancing its penetration in the region and the doubling of capacity at the Dutch unit is expected by mid- 2011. Production will be sold to such countries as Spain, Germany, Austria and Poland.

Middle East – These markets were severely pressured in the first half of last year due to high product inventory. Importers remained cautious, but resumed business in the second half. The Middle East continues to be BRF’s principal overseas market. Among the countries where there is major potential are Iraq, Jordan and Iran. In 2010, 15 new products under the Sadia brand name were launched in the region, a trend which is expected to increase in 2011.

Far East – The Japanese market reported an improvement in the prices for imported products with consumption remaining steady. In China, demand for BRF’s products continued strong especially following the opening of the Company’s office in the financial hub of Shanghai. BRF plans to leverage its business on the major growth potential presented by the Chinese market.

Eurasia – Demand from countries in the region remained strong both for poultry meat and pork products, resulting in higher prices and volumes.

Africa, Americas and other countries – There was an increase in the African market, especially for processed products with an improvement in volumes and prices. The region presents major growth potential for BRF’s products, more notably in countries such as Algeria, Tunisia, Egypt and Morocco, Mozambique, South Africa and Namibia as well as Angola.

With a proprietary distribution system in Argentina, Uruguay, Chile and Peru, sales to the region have been particularly strong for a new line of specialty ham products in Argentina and Uruguay, and Qualy light margarine in Chile.

Internationalization Project - BRF is structuring its Long-Term Internationalization Project focused on its international footprint for products with higher added value and distribution in its main operating regions.

Cost of Sales - For the year as a whole, cost of sales was 1.4% higher on a comparative pro-forma basis and 33.2% up on a Corporate Law basis, although also registering gains in the light of stronger proportional growth in net sales vis a vis cost of sales.

Costs of sales were 11.9% higher in 4Q10, the increase being proportionally less than sales revenue. This permitted a gain in gross margin despite the cost pressure from the principal raw materials – breeding stock, corn and soybeans - due to the highly volatile scenario for these commodities.

Taking into account Company performance in 4Q09 – this already a result of synergies arising from the integration of supplies and services – BRF reported a gain of 550 basis points, the cost of sales/net sales ratio increasing from 76.8% to 71.3%.

Gross Profit and Gross Margin – Gross Profits amounted to R$ 1.8 billion, an increase of 49.5% with a gross margin of 28.7 against 23.2%, driven by the growth in sales and the reduction in production costs in 4Q10 compared with 4Q09. For the accumulated period, Gross Profits amounted to R$ 5.7 billion – 35.8% higher on a pro-forma basis and 80.4% higher on a CL basis, reflecting a gradual and consistent recovery in performance.

Operating Expenses – The increase for this item was also proportionally less than that of sales for the quarter although 9.4% higher but taking into account expenses relating to investments in marketing, improvements to the IT system and disbursements with respect to consultancy work on the integration process and  new executive hires. As a result, the operating expenses/net sales ratio improved from 18.2% to 16.5%, a gain of 170 basis points in the quarter.

Consequently, operating expenses totaled R$ 3.9 billion in the year, 11.2% higher on pro-forma basis and 37.7% up on a Corporate Law basis. 

Operating Income and Margin – Operating profit before other results, equity income and financial expenses was R$ 781.1 million, a significant gain of 197.8% on the back of the strong business performance, with an operating margin 730 basis points higher – increasing from 4.9% to 12.2% for the comparative quarters 4Q09/4Q10. The Company also posted a quarter-on-quarter gain of R$ 356 million in operating income. For the accumulated annual period there was a 6.4 percentage points gain in operating margin (pro-forma basis) reflecting the expected and gradual post-crisis recovery in the results, 396.3% up in Corporate Law terms, and with a nominal 378% pro-forma growth reaching R$ 1.8 billion in the operating result for the year.

Financial Results – BRF reported a reduction in the average cost of debt as well as a longer average debt maturity profile thanks to the financial discipline adopted in the debt restructuring plan. Significant reductions in net currency exposure have been possible thanks to the use of non-derivative instruments (currency denominated debt) for foreign exchange protection in line with hedge accounting standards. This has been responsible for major benefits from matching currency liability flows with export shipments. As a consequence of this process there has been a reduction in the volatility of financial expenses on a monthly basis.

Net debt for December 31 2010 was 13.3% less than reported in 2009, supported by operating results despite investments in capex, marketing and for synergy projects.

Net debt/EBITDA ratio fell to 1.38 times from 3.6 due to the improvement in cash generation posted in the year and the equilibrium between the Company’s net debt and operations. Consolidated currency exposure was US$ 76 million (asset position), contemplating the implemented hedge accounting policy, against US$ 1.1 billion (liability position) for the preceding year.

Net financial expenses in the quarter were R$ 152.5 million against a net financial expense of R$ 27.5 million in 4Q09. The result for the previous year was impacted by the positive effect of foreign exchange rate variation on the net currency exposure. On a pro-forma basis for the year, financial expenses amounted to R$ 483.1 million against R$ 617.3 million in financial income, principally due to the positive foreign exchange rate effect on net currency exposure throughout 2009. Meanwhile on Corporate Law basis, financial income accumulated R$ 262.5 million in 2009 due to the incorporation of Sadia’s results in July 2009.

The restructuring of the Sadia subsidiary’s debt was secured with the funds raised from a primary share issue totaling R$ 5.3 billion in July 2009. Of this amount, a total of R$ 3.5 billion was transferred to Sadia in 2009 via an Advance for Future Capital Increases (AFAC) and an intercompany loan, for anticipating payments, and thus reducing short term bank borrowings. A further R$1.2 billion was transferred during 2010.

On January 21 2010, BRF issued (10) ten-year bonds totaling US$750 million (bonds), maturing January 28 2020 and a coupon (interest) of 7.250% per annum (yield to maturity 7.375%), which shall fall due and be payable in semi-annual payments as from July 28 2010. This operation increased average debt maturity by one year.

Other Operating Results – In 4Q10, other operating results totaled R$222.6 million, 24.7% higher, and accumulating R$ 393.9 million for the year, 41.2% higher on a pro-forma basis and 30.1% up on a CL basis. This item largely reflects the costs of idle capacity – due to the pre-operational phase of the new industrial units in: Bom Conselho-PE, Lucas do Rio Verde-MT, Vitória de Santo Antão-PE, Mineiros-GO and Três de Maio-RS.

Income Tax and Social Contribution – Income tax and social contribution for the quarter was R$ 47.7 million against R$ 34.7 million in 4Q09, considering the appropriation of interest on shareholders’ equity declared for the final quarter of 2010. In the year, income tax and social contribution totaled R$196.5 million – 49.5% higher on a pro-forma basis, 120.2% higher in Corporate Law terms, due to the negative result recorded by Sadia in that period and the effects of the results from wholly owned overseas subsidiaries due to the currency translation impact.

Net Income and Net Margin – BRF posted a net income of R$ 360.2 million in the quarter on a net margin of 5.6%, a significant increase of 520 basis points a year on year improvement of 1,537.2%.  The improvement in net result reflects the better operating performance in the quarter. For the full year, net income reached R$ 804.1 million, a 125% increase on a pro-forma basis and 215.3% up on a CL basis based on the adjusted result of R$255 million reported for 2009 (including an additional R$ 132 million  reflecting the incorporation of Perdigão Agroindustrial in 1H09). 

EBITDA – EBITDA reached R$ 959.1 million during 4Q10, registering a gain of 167.2% compared with 4Q09 and reflecting the Company’s consistent and the gradual improvements already incorporated in management forecasts. EBITDA margin was 15% against 6.8% (a significant gain of 820 basis points), with an additional gain of R$ 341.7 million in the quarter compared to 3Q10.

Operating cash generation for 2010 as measured by EBITDA (operating income before expenses, taxes and depreciation) was R$ 2.6 billion, 123.1% better than the same period in 2009 on a pro-forma basis and 202.6% on a Corporate Law basis. Principal factors contributing to this increase were: the larger volume of processed products sold in the domestic market, a gradual recovery seen in some important export markets, the reduction in production costs and commercial expenses and the synergies from the merging of processes already authorized by CADE such as in export business and the domestic market for in natura meat and the acquisition of some raw materials and services.

10.3. Events with significant effects occurred and expected, in the financial statements

a)     addition or elimination of segment information

In order to reflect the organizational changes in the Company, during the last quarter of 2011, the segment information began to be prepared ​​considering 4 reportable segments, as follows: domestic market, foreign markets, dairy products and food service. The reportable segments identified primarily observe division by sales channel.

• Domestic market: includes the Company´s sales for inside the Brazilian territory, except those relating to products in the dairy and the food service channel.

• Foreign market: includes the Company´s sales for exports and those generated outside the national territory, except those relating to products in the dairy and the food service channel.

• Dairy products: includes the Company´s sales of milk and dairy products produced domestically and abroad.

• Food service: includes the Company's sales of all products in its portfolio, except in the category of dairy products, generated in the domestic and foreign customers for food service category that includes bars, restaurants, kitchens, etc.

Hence, these segments are subdivided according to the nature of the products whose characteristics are described below:

• Poultry: involves the production and trade of whole birds and poultry cuts in natura.

• Pork and beef cuts: involves the production and trade of cuts in natura.

• Processed: involves the production and trade of processed foods, frozen and processed derivatives of poultry, pigs and cattle.

• Others processed: involves the production and trade of processed foods like margarine and vegetable products and soy.

• Milk: involves the production and trade of pasteurized and UHT milk.

• Dairy products and other drinks : involves the production and trade of foods milk derivatives, including flavored milk, yogurts, fruit juices, soy-based beverages, cheeses and desserts.

• Others: involves the production and trade of animal feed, soy meal and refined soy flour.

The informations for the year ended December 31, 2011 were restated for comparative purposes

The net sales for each one of the reportable operating segments are presented below:

The operating results before financial income (expenses) and others for each one of the reportable operating segments are presented below:

No customer was individually responsible for more than 5% of the total revenue earned in the twelve month period ended December 31, 2011.

Net revenues from exports originate in the segments of the foreign market, dairy products and food service, as shown below:

Export net revenue by region is presented below:

The goodwill originated from the expectation of future profitability, as well as the intangible assets with indefinite useful life (trademarks and patents), were allocated to the reportable operating segments, taking into account the nature of the products manufactured in each segment (cash-generating unit), and the allocation is presented below: