BRFS BRF SA

     BRF is one of the largest food companies in the world and is the result of the merger between Perdigão and Sadia. It operates in the segments of poultry meats, pork and beef, industrialized meats, margarines, pastas, pizzas and frozen vegetables as well as being one of the leading milk collectors and dairy product processers in Brazil. It operates 61 plants in Brazil, five in Argentina, two in Europe (Plusfood) and, by the end of 2012, is expected to unveil a processed products plant in the Middle East. Its operational structure is supported by 42 distribution centers of refrigerated and frozen products supplying 98% of the country as well as consumers in 140 countries. BRF also has 19 overseas commercial offices and a portfolio of clients across the five continents. |GRI 2.1, 2.3, 2.7, 2.5|
     The Company is a leader in the production of chilled and frozen foods and has a portfolio of three thousand items. Its principal raw material inputs are grains, live animals and milk. From these protein-based products are manufactured for example: in-natura meats, prepared and processed products, ready-to-eat meals, processed dairy products, pastas, pizzas and other processed items including margarines and frozen vegetables which bear the names of household brands such as Sadia, Perdigão, Batavo, Elegê and Chester among others. |GRI 2.2|
     The third largest exporter in Brazil and a leader in world sales of chicken meats, the Company confirms its vocation as a major currency generator for Brazil. Total sales amounted to 6.2 million tons of products and net sales of R$ 25.7 billion, 60% originating from domestic market business and 40%, exports. BRF is also notable for being one of the largest employers in Brazil, ending the year with 120 thousand direct employees. |GRI 2.8|
      In parallel to the merger between Sadia and Perdigão, there were developments in the international segment of the business during the year. In Argentina, the Company acquired corporate control of Avex, with operations in poultry farming, and the Dánica Group, which operates two plants and has activities in the markets for margarines, mayonnaise, sauces and yeasts as well as baking additives and creams, and specific hydrogenated vegetable oils for the food industry. |GRI 2.9|

     A publicly listed company since 1980, BRF’s shares (BRFS3) began trading on BM&FBovespa’s Novo Mercado in 2006, a segment which lists those companies with high standards of corporate governance, mechanisms for protecting shareholders and absolute compliance with the best practices in information disclosure. The Company’s securities are also traded on the New York Stock Exchange (NYSE – BRFS, Level III ADRs). Given BRF’s commitment to sustainability of the businesses, it has been a component of BM&FBovespa’s Corporate Sustainability Index (ISE) since 2005. |GRI 2.6|

Association of BRF and Sadia |GRI 2.9|

     BRF received approval for this association from the Brazilian anti-trust authorities - the Administrative Council for Economic Defense (CADE) - on July 13, 2011. Approval was made conditional on compliance with the Performance Commitment Agreement (TCD) for the sale of assets consisting of ten processed food and four animal ration plants, two pork and two poultry meat processing units, 12 chicken breeder stock farms, two poultry hatcheries and eight distribution centers.
      The agreement also requires that the Company sell the Rezende, Wilson, Texas, Tekitos, Patitas, Escolha Saudável, Light Elegant, Fiesta, Freski, Confiança, Doriana and Delicata brands. In addition, BRF has undertaken to temporarily suspend the commercialization of the Perdigão and Batavo brands for some product categories. Based on analysis of results announced for 2010, the agreement with CADE to sell assets and brands represents revenue of R$ 1.7 billion with a corresponding volume of 456 thousand tons of in natura, elaborated and processed products together with items in the festive products line and margarines. Suspension of categories of the Perdigão and Sadia brands represents further sales revenue of R$ 1.2 billion.
      In December 2011, these assets were acquired by Marfrig, the asset exchange agreement being signed on March 20, 2012. In exchange, BRF will receive total shareholding control of Quickfood S.A. (which will be restructured in accordance with the agreement) in Argentina, equivalent to 90.05% of the capital stock, and an additional cash payment of R$ 350 million.

      From the point of view of organizing our operations, the year was particularly notable for the unification and modernization of IT systems (SAP). We have also standardized processes and implemented a structure to monitor projects/synergies (PMO), which has permitted us to make advances in the merger process and to effectively operate as a single company with all that this represents in the administrative, commercial, manufacturing, human and behavioral areas.

      We have made progress in the capture of synergies post merger, achieving a gross gain of R$ 702 million in 2011 (R$ 562 million of net synergies before tax and participations) in a period in which we were still operating with the companies on only a partially unified basis.

      New challenges lie ahead, inherent to the current stage of our business and arising from a macroeconomic scenario which remains volatile, principally in the overseas market. However, in the domestic market we see a positive outlook both in the traditional retailing area as well as in the food service business, notwithstanding the first half of 2012, when we expect to see continued adaptations due to the implementation of the Performance Commitment Agreement with CADE.

      In parallel, we will continue to pursue projects which seek to capture synergies and efficiency gains while investing substantially in improvements to the commercial, logistics and innovation areas. We will be working on this in juxtaposition with the formation of the new Company’s internal culture which also involves the integration of customs, values and credos of the countries where we are developing new businesses.

      Again, we are developing our commitment to building a better society, implementing at all stages of the production chain the mission to promote sustainability and improve the relationship with our stakeholders. It is in this spirit that we are developing actions of socio-environmental responsibility notably in the form of control of emissions, reduced water consumption and an enhanced relationship with the communities surrounding our operations. Our commitment is to local development based on initiatives identified and conducted jointly with community representatives. Such initiatives are in alignment with the principles of the Global Compact, to which the Company subscribes, in relation to human rights, labor rights, the environment and combating corruption.

      The Company has improved the opening of the segments in which it operates segregating those for the domestic market, export market, food service and dairy products in line with its governance policy, the objective of which is transparency of the businesses and accountability in the rendering of corporate information.

      Results to date show that we are on the right track and prepared to overcome the challenges that we will certainly face if we are to achieve our ambitions. In pursuit of these conquests, we are counting on a team driven by a commitment to the Company and guided by the ethical convictions which are enshrined in our organizational culture. These are characteristics which make the difference in scaling even greater heights in the global food market.

Nildemar Secches

Chairman of the Board of Directors

José Antonio do Prado Fay

Chief Executive Officer

Internationalization is at the core of the Company’s strategic plan with a combination of organic growth and acquisitions.

      The Company’s strategic direction is a function of the BRF 15 plan which sets out the objectives to be reached by 2015. The core objective at the end of the period is to be one of the largest world class international food companies, admired for its brands, innovation and results.

      For this reason, BRF has to build a global culture and a broad portfolio of products able to meet the needs of the consumer in all the countries in which it operates. The Company’s aim is to participate in the lives of people by offering them tasty food with quality, innovation and at accessible prices on a worldwide basis.

      Concomitantly, the Company expects to double its sales in relation to 2010, equivalent to about R$ 50 billion in revenue.

     The core of BRF 15 is represented by premium brands and products, a diversified product portfolio, a continuing advance up the value chain, a high performance corporate culture, ample access to consumers, operational efficiency, an increase in the scale and scope of the business, financial discipline, total adherence to corporate governance standards, an integrated business model, experienced managers and unbeatable leadership in costs.

Growth

     The Company’s development will be through a combination of organic growth and acquisitions – focusing principally on the overseas market where a number of opportunities for expansion have been identified. Investments in expansion are currently

underway in a number of strategic countries in the Middle East, Latin America, Europe, Asia and Africa. Specific plans have been prepared for each region and in order to diminish the volatility of export margins.

      BRF aims to underscore its leadership position in the domestic market through the consolidation of the current businesses and especially through innovation. It will be revising the business model for some of the areas, redefining the portfolio of the sales team as well as maximizing the flexibility of the brands to expand the product mix in line with the Performance Commitment Agreement (TCD) signed with CADE.

Sustainability integrated to strategy |GRI 1.2| 
     For BRF, sustainability is an integral part of its strategy and is incorporated into its mission statement, vision and its values. More than just preserving the environment or generating employment, the Company believes that it must act in a differentiated manner in the market, working daily on the basis of a set of guidelines, practices and initiatives for achieving positive results simultaneous to economic-financial, environmental and social aspects.
     In the light of this vision, BRF has established six priority pillars which permeate its business strategies, contributing to the construction of a global food company. The pillars were defined by taking into consideration BRF’s principal impacts on society as well as its ambitions aligned to the BRF 15 strategic plan. These are: 1)Total commitment to sustainability; 2)Increasing the focus of sustainability in the value chain; 3)Engagement with stakeholders 4) Promoting sustainable consumption; 5)Enhancing human capital; and 6)Adaptation to climate change. The pillars were also adopted as a reference for organizing the content of this report.

Ethics, transparency and equitability are the pillars of the corporate governance model based on the best international practice.

     BRF was the first company in the food and beverages sector to adopt BM&FBovespa’s Novo Mercado regulations. Its corporate governance model rests on the three pillars of ethics, transparency and equitability. The Company adheres to best practices by maintaining exclusively common shares; equality of rights, a premium in the event of public offerings of shares and mechanisms for investor protection; prohibition on shareholders and executives exploiting advantages arising from access to insider information; securities trading and disclosure of material facts policies and arbitration as a more agile and specialized manner for solving conflicts of interest. |GRI 4.6|
       BRF signed up to BM&FBovespa Novo Mercado regulations on April 12, 2006, adhering to the Market Arbitration Panel as enshrined in the commitment clause in its Bylaws.
     To prevent the concentration of shareholding, the Bylaws establish a requirement for a shareholder or a group of shareholders that comes to control a volume of shares in excess of 20% of the total to initiate a public tender offer. Once this is done, each acquired share will give to the holder an additional remuneration of 35% over the average value quoted over the 30 days prior to the making of the offer. The offer price can also be based on the economic value determined in a valuation report, or else, 135% of the issue price of the shares in capital increases over the last 24 months, whichever represents the greater value. |GRI 4.6|
      BRF is a widely-held company with securities trading on the São Paulo (BM&FBovespa – BRFS3) and New York (Level III ADRs -BRFS) stock exchanges. Given its presence in two markets, the Company’s financial statements comply with international accounting principles (IFRS) and the Financial Report Internal Control System (SCIRF) based on the Sarbanes-Oxley (SOX) Act.
     The Board of Directors approves the Company’s results quarterly and these are published according to IFRS accounting principles. The Board of Executive Officers meets monthly to monitor overall performance on the basis of indicators proposed by Brazilian and international institutions such as Global Reporting Initiative (GRI) guidelines. BRF has a Governance, Sustainability and Strategy Committee, which advises the Board of Directors, and an Executive Sustainability Committee manned by presidents for evaluating and monitoring performance in addition to sustainability risks and opportunities. |GRI 4.9|

      The Company seeks to ensure transparency in the relationship with the market by offering a continually updated investor relations website (www.brasilfoods.com/ri), disclosure of material information, promotion of meetings under the auspices of associations such as Apimec – Association of Capital Markets Analysts and Investment Professionals. BRF also holds quarterly conference calls, national and international road shows, one-on-one meetings, attends requests from the principal financial institutions for investor meetings and maintains a specialized team for handling personal investors.
     Governance bodies include the General Shareholders’ Meeting, the Board of Directors, the Fiscal Council which accumulates the functions of an Audit Committee, advisory committees to the Board of Directors and the Board of Executive Officers. |GRI 4.1|

Shareholders’ meetings

     The meetings are held with quorums in excess of 70% of shareholders. Participation is encouraged by a direct approach to the investors and by the dispatch of the reference manual in which the reasons for the meeting are listed together with an explanation of the importance of shareholder participation and general guidance on the process. The shareholders’ meetings approve financial statements, incorporations and other matters, elect the Board of Directors and the Fiscal Council and approve management compensation, among other activities. |GRI 4.4|

Fiscal Council/Audit Committee

      Made up of three members, one of whom a financial specialist, this committee meets monthly and when necessary, participates in joint meetings with the Board of Directors. In accordance with United States legislation, the Fiscal Council also performs the role of Audit Committee.

      BFR deems issues such as integrity, ethics and the combat of any type of corruption as extremely important. In this context, its operations are guided by a Code of Ethics and Conduct revised and republished in early 2012 following the merger of Perdigão and Sadia. In this publication, the Company sets out clearly what it expects in the conduct of each professional, encouraging members of management and staff to adopt behavior and attitudes guided by basic values and ethical guidelines. Such guidelines cover questions of conflicts of interest, use of proprietary information, relationship with internal partners, suppliers and clients, among other themes.

      Infringements of the Code’s ethical principles and guidelines may be communicated through the Whistle-blowing Channel –e-mail: denuncia@brasilfoods.com and by calling: 0800.702.7014 (in Brazil) and 55.11.3466.8510 (international). Any type of alleged infringement may be communicated anonymously irrespective of its nature: corruption, improper behavior, drug or alcohol abuse or any other problem which might threaten the integrity of BRF and its stakeholders.

      Whistle-blowing on matters covered by the Sarbanes-Oxley Act with respect to possible irregularities or improprieties in accounting records, internal controls of an accounting nature and auditing matters must be submitted directly to the Company’s Audit Board by e-mail to comitedeauditoria@brasilfoods.com , or via correspondence.

      The conduct expected of each one is also shown and explained in the New Employees Induction Program when time is allocated for raising the matter of the Code of Ethics. All employees sign an undertaking accepting responsibility for complying and ensuring full and permanent adherence to the guidelines and ethical principles on which in-house and external relations are based. |GRI SO3|

     The Internal Audit assesses the suitability of internal controls and investigates allegations and/or evidence of eventual procedures not in accordance with normal practices and the Code of Ethics and Conduct at the business units (143 at the end of 2011 involving the processing plants, distribution branches, dairy product units and animal feed plants). In 2011, the Internal Audit area undertook work involving about 100 of the Company’s sites. Completion of inspections at the remaining units involves a schedule which could take more than a year albeit these units are subject to remote ongoing surveillance throughout the year. |GRI SO2|

      In 2011, a specific Code of Conduct was published for suppliers. It consolidates the separate guidelines of Perdigão and Sadia in a single document and clarifies the expected behavior of a company wishing to become a BRF partner. The target is to end 2012 with the leading 40% of key suppliers fully aware of the new norms and by 2015, to have 80% of the group in these conditions.

Conformity

      In 2011, the Company reported 39 events related to environmental issues of which five involve judicial processes. Over the course of the year, BRF was sentenced to pay fines amounting to R$ 714 thousand due to 16 administrative sanctions. It received two warnings (non-pecuniary sanctions) and signed four Conduct Adjustment Agreements (TAC), of which two resulted in fines totaling R$ 768 thousand. |GRI EN28| In December 2011, the Company began a Regularization of Obligations Project for verifying and regularizing all unit licenses including environmental licenses and related conditions. As a result, eventual non-conformities will be verified and handled accordingly by setting criteria and deadlines for resolving the problems.

      In the light of labor actions, the Company received fines amounting to R$ 4.2 million, R$ 2.7 million being paid during 2011. No sanctions of a non-monetary nature arising from actions of this nature were recorded. |GRI SO8|

To underscore its commitment with sustainability, the Company participates in initiatives promoted by organizations, institutes and entities aligned to its six pillars of sustainability.

     Among these names the following are of special note:
     Global Compact (UN) – BRF is a signatory of Global Compact, which encourages the business sector to adopt corporate accountability practices to promote a more inclusive and sustainable economy. The Compact is an initiative of the United Nations (UN) in partnership with United Nations agencies as well as social entities. It sets out ten principles related to the areas of human rights, labor rights, environmental protection and anti-corruption being reconfirmed. The participation in the initiative initially began through Sadia and was formalized by BRF in 2011, when the Company sent its first consolidated Communication on Progress (COP) (2010 Annual Report for Perdigão and Sadia practices) and collaborated in the Global Compact Implementation Survey 2011 questionnaire.
     Millennium Development Goals (UN) – In line with Global Compact, this UN initiative consolidates world challenges to be overcome by 2015 through specific actions of governments and society. The eight objectives are: eradication of hunger and poverty; quality education for all; non-discrimination; reduction in infant mortality; improve maternal health; combating disease; quality of life and respect for the environment; and establishing a global partnership for development. BRF considers these to be priority issues in its sustainability management.
     Business Compact for Integrity and Fighting Corruption – As a voluntary commitment to ethical conduct in business, the compact defines standards for the corporate relationship with government. It is an initiative of the Ethos Institute, in partnership with United Nations Development Program (UNDP), United Nations

Associations
     In addition, BRF participates in the following organisms and associations: |GRI 4.13|
       Brazilian Business Council for Sustainable Development (CEBDS) – A coalition of the leading domestic business groups, it is the Brazilian representative of the World Business Council for Sustainable Development (WBCSD). It incorporates 185 multinational groups, members of a global network of 50 national councils which are working to disseminate a new way of doing business around the world. The Company became a member in January 2012.
     Institutes, Foundations and Companies (Gife) – A network of organizations of business, family, independent and community origin which invests in projects of a community nature. It contributes to sustainable development in Brazil through political-institutional support and sponsoring of strategic actions of private sector corporate investors. BRF has been a member through the Sadia Institute since 2007.
     Ethos Institute for Companies and Social Responsibility – A not-for-profits organization for fostering socially responsible business management with a view to a fair and sustainable society. The Ethos Institute provides a medium for exchanging knowledge and experiences and the development of tools for assisting companies to analyze their management practices and enhance their commitment with social responsibility and sustainable development.
     Comunitas – In 2011, the BRF Institute became a member of this organization which is designed to promote the social development of Brazil through the engagement of various sectors of society, stimulating and encouraging collective activities for confronting the challenge of social inequality and the promotion of a more sustainable Brazil. The initiative is aligned with the objectives of collaborating with community development.

Management practices and policies and minimization of the effect of risk factors on results.

      The policy is conducted in a participative manner involving all areas and is constantly updated – reflecting a market in continuous transformation. Regular reports are supplied to the Board of Directors which evaluates and approves content and establishes strategic guidelines.

BRF launched 228 products during the year in its different business segments, a reflection of the emphasis on development and innovation.

Sectorial scenario

      Global economy - The economies of the leading emerging market economies continued to expand, sustaining world growth in spite of uncertainties in the Eurozone and slower growth in the developed economies. The International Monetary Fund’s (IMF) latest updates are projecting world GDP at 3.8% for 2011, a 1.6% growth for developed economies and 6.4% for the emerging market economies group for the same year.

      The Fund sees a slower global economy in 2012 albeit this far from classifying as a recession. The outlook is for the developed countries to maintain their investments in the emerging market economies and the Eurozone to intensify its efforts to resolve the crisis in the area.

      Eurostat, the region’s statistics agency, reported that Eurozone GDP shrank by 0.3% in 4Q11, compared with 3Q11 and rose 0.7% against the same period for the preceding year. The IMF is predicting a “slight”recession in the Eurozone in 2012, while the German and French economies are expected to continue growing.

      Meanwhile, the Chinese economy is expected to grow 9.2% in 2011 (IMF data). The country has suffered the threat of slowing exports in the face of global uncertainty, but despite lower expected growth rates for this year, the IMF is forecasting that “China has space for an anti-cyclic fiscal response and should use this space” to stimulate domestic demand and expects a recovery in growth of about 9.0% for 2012.

      Domestic economy – The deceleration in the Brazilian economy in 2H11 was more than expected, principally reflecting monetary and fiscal tightening in early 2011 and the deterioration in world markets. Brazilian GDP at market prices reported a variation of 1.3% in 4Q11 versus 2.1% in 3Q11. In December/11, volumes of restricted retail sales (which do not include vehicles, parts and building materials) reported a year-on-year increase of 6.7%. Hyper- and supermarket segments posted a 4.0% increase in sales, below the 9.0% for 2010 versus 2009. This more modest showing can be attributed to factors such as the increase in the cost of food as well as a delayed response to the sharp deceleration in real incomes in the final months of the year. For 2012, prospects are for a recovery in consumption at the retail level driven by the expressive hike in the minimum wage that should favorably impact lower income families.

      In 2012, the outlook is that interest rate cuts, the nominal increase of 14% in the minimum wage and the expected dilution of international tension could all have a beneficial impact on the Brazilian economy. Low unemployment rates and rising consumption are expected to act as drivers of Brazilian growth. More specifically, the consumption of basic items and foodstuffs at the retail level are forecast to record increasing growth in 2012 thanks to higher purchasing power in lower income households. IMF forecasts indicate an evolution in Brazilian GDP of 3.0% in 2012, rising 4.9% in 2013.

      Brazilian exports – In 4Q11, the volume of Brazilian chicken exports was 7.7% higher than 3Q11. Compared with the same quarter of 2010, this increase was 7.9%. Revenue from chicken exports in US$ was 8.9% higher in 4Q11 against 3Q11 and more than 20% against 4Q10. According to the Brazilian Poultry Farmers Union -UBABEF/Secex data, chicken export volume in 2011 was 3.2% higher than the preceding year (with a revenue increase of 21.2%). The progressive opening of the Chinese market, which begun in 2011, will be crucial to providing growth momentum in Brazilian exports over the next few years.

      The performance in the pork meat segment was less vigorous in 4Q11 as well as the year as a whole. Export volumes in 4Q11 versus 3Q11 rose just 2.2% while revenue increased more than 12.0% on the same comparative basis. However, in relation to 4Q10, export volume in the final quarter of 2011 was 1.6% down, although revenue increased 11.5%. Export volumes ended 2011 with a decline of 4.4% compared to 2010 and an increase of revenue of 7.0%. With the Russian trade ban on Brazilian meat in 2011, which had a major negative impact on the segment, the expectation for the pork processing industry is for diversification of export destinations in 2012. Asia represents the best prospects for sustaining Brazilian overseas sales in 2012, with promising business in markets such as Hong Kong, China and South Korea. Recent approval for pork shipments by the US could help open up markets such as Japan and South Korea. For the president of Abipecs, (Brazilian Pork Production Industry and Exporters Association) these Asian markets are important for the quantity of meat consumed and the demand for better quality and higher value-added products. The measure could also open up exports to Europe, another market where sanitary rules are particularly demanding.

      In relation to beef (in natura and industrialized), total export tonnage in 4Q11 increased 2.6% against 3Q11 (revenues increasing 1.8% in the same period). In relation to 4Q10, there was growth in export volume of 10.9% and an increase in revenue of 26.1%. Exported volumes of beef fell 10.8% in 2011 against 2010. On the other hand, revenue was 11.7% over 2010, driven by higher meat export prices and exchange rates for the US dollar.

      In general, 2012 is shaping up to be a positive year for Brazilian meat exports. Expectations of opening of new markets, the recovery in traditional ones and the growth in demand coming from emerging markets should lift the volume of Brazilian meat exports during 2012, more especially chicken meat which will benefit from the impact of higher beef prices.

      Raw material – The average price of a sack of corn on the domestic market fell 4.4% in 4Q11 versus 3Q11 due to the reduction of 12.3% in export volume in relation to the preceding year. Compared with 4Q11 and 4Q10, domestic corn prices remained 4.9% higher due to the sharp rise in prices on the international commodities markets (+ 10.5% above 4Q10) partly offset by final inventory 2.2% higher in Brazil when compared with the previous year. Soybean prices on the Brazilian market suffered a decline of 3.7% in 4Q11 versus 3Q11 with the outlook of a record area under this crop in Brazil and Argentina in addition to greater supplies coming onto the US market in September/October. Compared with 4Q11 and 4Q10, prices on the domestic market fell 6.0% due to higher year-on-year inventory. Prices on the international soybean market rose 5.5% compared with 4Q11 and 4Q10 due to a decline in output in US production of 90.6 in 2010 to 83.2 million tons in 2011 (-8.2%). In the year 2011, corn increased 37.5% and soybeans, 14.7% in the Brazilian market, while international prices registered an increase of 59% for corn and 25.9% for soybeans.

Cash generation, expressed as EBITDA, reached R$3.2 billion, an increase of 23.1%, indicative of improved earnings and capture of synergies.

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

Net sales – BRF registered net operating sales of R$ 25.7 billion in the year, 13.3% higher than 2010, principally supported by good performance in the domestic market and the Food Service segment. In 4Q11, the good performance was obtained by the commercialization of the festive line of products (year-end holiday season).

      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.

      Operating expenses – Operating expenses were 10.6% higher due to investments in the implementation of IT systems and in consultancy work related to the merger. Besides that, we obtained 60 basis points of gains.

      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%.

      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 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).

  At the States Level, where they are engaged in manufacturing activity, BRF companies enjoy incentives relating to the Tax on the Distribution of Goods and Services (Imposto sobre Circulação de Mercadorias e Serviços ICMS), generally through the granting of presumed credits or participation in programs created by local administrations to attract investments, such as Fundopem (RS-Rio Grande do Sul), Prodeic (MT-Mato Grosso) e Fomentar (GO-Goiás), among others.

      In 2011, BRF set up the Agricultural Innovation Department to develop and manage animal comfort-oriented projects (such as poultry farm climate control and animal stewardship), hog genetics and reduced animal manure generation.

      Strict standards are adopted for the correct transport and handling of animals, with the use of exclusive vehicles suited to the activity and the work of trained operators. Training sessions are conducted annually in the poultry producing units, including the outsourced ones. During the past year, 23 incident cases were opened involving non-compliance with laws and regulations related to animal transportation practices, one of which resulted in a warning and 11 in the application of financial penalties. Another 11 cases were the result of a discrepancy in the documentation submitted. |GRI FP13|

     Poultry Heaters, ventilators and atomizers are used to increase animals thermal comfort and daily temperature and water consumption controls are in force.

      The production units meet the criteria of density, elimination, environment and transport, as set out by the Ministry of Agriculture, Livestock and Supply (Ministério da Agriculture, Pecuária e Abastecimento - MAPA). The units producing for export likewise conform to the health directives of the European Union and the requirements of certain customers.

      Chickens and turkeys are raised on a commercial line |GRI FP11| that is labor intensive for adapting handling so as to eliminate the beak trimming procedure (aimed at preventing the cannibalism among the birds). This process is only followed in the (male) chicken matrices and in the production of turkeys (animals with a greater proclivity towards cannibalism). |GRI FP10|

     The use of hormones is prohibited in the production of animals for slaughter under Brazilian legislation; moreover it is not technically and commercially viable (requires individual injection), and there is no scientific evidence that the use of such substances is economically advantageous. Under current legislation, antibiotics are to be used when prescribed by veterinarian, considering the positive lists and waiting periods relating to the maximum legal residue limits. Anticoccidials (substances that control microscopic parasites that attack animal intestines) are permitted in poultry production, provided that approved products are used and the maximum residue limits are observed. Anti-Inflammatories are not used. |GRI FP12|

      Caudectomy (a practice adopted by all countries or companies engaged in intensive commercial production, which is described in the Manual of Good Practices on Swine Production - Embrapa Technical Circular of December 2006) is used to prevent cannibalism. Techniques such as ear tags, notching or tattooing are used to identify piglets. |GRI FP10| The Company respects the minimum spacing standards in stalls and in troughs and 100% of its pigs of commercial or in-house genetic lineage are bred in the typical industrial system, in multiple sites. |GRI FP11| BRF follows a list of drugs which are permitted under Brazilian law and by the markets for which their production is intended, with a breakdown of the information relating to the channel, application dose and waiting

period. |GRI FP12|

      Beef cattle Ranches and cattle confinement facilities meet animal well-being standards (there is no specific legislation, BRF has a standard of Animal Well-Being that is respected by all farms supplying the Company), and comply with best production practices, with appropriate means in place to enable cattle to express their natural behavior (specific training in these standards is provided to the ranch hands). All beef cattle are kept in third party farms or feedlots, fed and supplied with products from and under the technical guidance of BRF until they reach slaughter weight. All ranches where cattle confinement is practiced have valid environmental licenses to operate, animals are registered with the Sisbov system (allowing traceability) and the ranches undergo bimonthly audits by the inspection authority. For dairy cattle, the Company purchases milk on the spot market, there being no producer integration/loyalty system. |GRI FP10, FP11, FP12|

Commitment to healthiness is expressed in products with reduced sodium and fat content and enriched with nutrients.

2011, research projects that began in the preceding year were implemented to reduce the sodium content of Perdigão-branded products Turma da Mônica line, including breaded items and sausages. Several projects similar in scope are in progress for other brands, as are studies for the replacement of additives with natural ingredients.

      Trans fats reduction has been studied since 1999 and, in 2005, in a pioneering move in Brazil, the Company released its first trans fat-free margarines. This was expanded to include every item in the Qualy line as well as those intended for the international market. Again in 2005, the company began reducing the use of trans fats in industrialized meats and pasta and in 2011, this was extended to frozen desserts. |GRI FP6|

       The same concern also applies to the development of school meal products. In 2011, the Company put into place certain conditions for these products, such as: a sodium content ceiling of 500 mg/100g, absence of allergenics, vitamin and/or mineral enrichment and the presence of fiber.

      The Company also observes additional nutritional profile criteria in tender bids, such as: minimum protein and maximum fat and sodium content, ingredient types, absence of chilli and food colorings. BRF serves the São Paulo State Government supplying more than 2 thousand schools and more than 100 city halls in the state, and has also begun operating in the state of Paraná. |GRI FP4|

     In addition, the Company develops products with higher fiber content and enriched with vitamins and minerals in its retail and food services lines. Whole flour, wheat meal and whole grains are used to enrich baked and pasta products with fibers. With the addition of vitamins and minerals to products in general, use is made of purified ingredients obtained from certified suppliers. The minimum dosage added to the products complies with the legal limits and takes into account the conditions of product processing and storage to guarantee alignment with contents declared on the labels. |GRI FP7|
      The dairy products area has redesigned its portfolio with regard to sugar, sodium, fat and synthetic ingredients (such as flavors and colors) content and has developed innovative products with natural ingredients as a means of meeting contemporary nutritional consumer demand. The labels carry clear information on product composition and comparisons with other items to help consumers decide what line best represents their lifestyles. One step in this direction came with the 2011 bolstering of the Batavo Naturis Soja line s market communications with the announcement of 100% vegetable-based and lactose, cholesterol, trans fat and sodium-free products.

      In order to provide guidance and educate consumers about the healthy movement, the packaging for breaded products by Perdigão Turma da Mônica line indicates the recommendation to use roasting as the main method of preparation, instead of frying (second option). The use of the oven makes food consumption healthier. The same advice is given to consumers in Europe and Africa.

The Company has a close relationship with key stakeholders in order to identify relevant themes and improve the management of sustainability.

      BRF is improving its level of stakeholder engagement, increasing the quality and quantity of consultations to predict the relevance (materiality) of sustainability-related matters for stakeholders and to improve management. In 2011, the Company intensified the debate on the six pillars of sustainability established for its business by consulting employees, senior management, suppliers, clients, consumers, the communities contiguous to its plants, government representatives and organized society. |GRI 4.14, 4.15|

     The company held three on-site panels for an in-depth analysis and to validate the matters deemed relevant for each sustainability pillar. Each panel consisted of an average of 20 members. In São Paulo, one of the meetings was addressed to an in-house audience of managers while another had representatives from all groups regarded as essential to the Company s engagement efforts. In relation to 2010, consultations were expanded with the holding of a multi-stakeholder panel in Chapecó (SC).

      During the panel sessions, participants presented their views on progress made in handling sustainability as applied to the business and quality of reporting. The sessions also highlighted current and future challenges associated with the pillars, as well as opportunities for improvement in the provision of information on the relevant aspects. Ten of the Company s leaders were also consulted with the purpose of identifying the most relevant aspects to be emphasized in the 2011 Annual and Sustainability Report. |GRI 4.16, 3.5|

     The following are among the main expectations given for the sustainable management of BRF:

     More than 80 initiatives were taken over the course of approximately four months, involving 700 volunteers and 81 local partners with 225 hours of activities and benefits to 27 thousand people.

      Of the actions implemented, those concerned with infrastructure contributed to the upgrading of the facilities of seven social organizations serving the residents of Bom Conselho (PE), Capinzal (SC), Herval D Oeste (SC), Lucas do Rio Verde (MT), Rio Verde (GO), Salto Veloso (SC) and Uberlândia (MG), and renovating five public areas (parks and public squares) in the municipalities of Francisco Beltrão (PR), Mineiros (GO), Uberlândia (MG), Lajeado (RS) and Videira (SC), with a direct impact on residents quality of life. |GRI EC8| In 2012, volunteer actions will start in 13 new cities. |GRI EC8|

Support for municipalities

      Social Action The program, led by the human resources department of the company, aims to facilitate access to services in the areas of health (medical, dental and nutritional guidelines), citizenship (withdrawal and/or legalization of documents, legal advice) and education, and provide cultural, leisure and sports activities in the cities where BRF has production units. The Company, in partnership with local companies and institutions (such as Sesi, with Cozinha Brasil), acts as an agent for social change, encouraging employees and town unions to exercise citizenship, solidarity and volunteering, working for the social development of the region and country. In 2011, the initiative took place in the cities of Mirassol D Oeste (MT), Cruzeiro do Sul (RS), Caiaponia (GO), Videira (SC), Itumbiara (GO), Ijuí (RS) and Carambeí (PR), with 92,316 beneficiaries. Since its inception in 2003, the program has accomplished nearly 450 thousand actions.

      Support for entities R$ 500,000 was donated to the Fundação Luverdense de Saúde for the expansion and modernization of the São Lucas Hospital in Lucas do Rio Verde (MT), for which BRF provides maintenance services. The project, already under implementation, provides for increased hospital facilities, with the inclusion of 20 new beds, as well as the acquisition of new equipment for diagnosis and treatment given to patients. |GRI EC8| In addition, the Company donated R$ 100,000, to the Fundo Estadual dos Direitos da Criança e do Adolescente de Pernambuco [State Fund for the Rights of Children and Adolescents of Pernambuco], via Tax Incentive Law (Law 8.069/1990), which was directed to the Pernambuco Project to Fight Sexual Violence, led by Childhood Brasil.

Sport

      Sadia-sponsored investments in sport are driven by two elements: high performance and engagement. With the former, which involves sponsoring confederations, athletes and high-performance events, the Company intends to maintain its close ties with sport helping develop several different sporting activities in Brazil. The second focus engagement reflects the belief that food and life must be good, encouraging sport through outreach events and guidance towards adopting new attitudes. From the Company s perspective, sport should not be viewed as an obligation but as the most entertaining way of leading a healthy and balanced life.

      The Sadia Platform includes the following programs: sponsorship of the Brazilian Judo Confederation; support for the Brazilian Water Sports Confederation; rhythmic junior and high-performance gymnastics in Toledo (PR); and the Sadia Family (a group of sponsored athletes). The main objectives are getting the public to engage in sporting activities and fostering healthier and more balanced lifestyles for those practicing sport and for the population in general and not forgetting its importance in the light of the approaching 2016 Summer Olympics to be held in Brazil.

      Brazilian Judo Confederation (CBJ) Sadia is the main sponsor and exclusive provider of food for the Confederation. In Brazil, there are 3 million judo practitioners and 700,000 national athletes. The sport has earned the country 15 medals in Olympic Games and 28 medals in world championships. The sponsorship highlights Sadia in all development initiatives of the sport, especially with the Olympic Games in Rio de Janeiro in 2016.

      Brazilian Aquatic Sports Confederation (CBDA) Sadia is a supporter of the Brazilian Aquatic Sports Team and the exclusive supplier of food for the Confederation. There are about 11 million players and 100,000 national athletes in five sports: swimming, marathon swimming, diving, water polo and synchronized swimming. Brazil won 11 Olympic medals in this sport and 12 awards in world championships. As in judo, these sports will be highlighted in the 2016 Olympics.

Development of the new BRF Culture was a central theme in the process of consolidation of values principles and beliefs.

      At an early stage in the Culture Project in September 2011, the Company held a Leaderships Meeting when 600 executives from all our installations were encouraged to reflect on the subject. All the managers, officers, vice presidents and the CEO took part, beginning a process intended to make the Company a bellwether in personnel management.

      International expansion and the BRF 15 strategic plan stand as additional challenges in the construction of the new culture. Besides preparing the Brazilian domestic stakeholders for this change, the Company will have to meet the challenge of understanding overseas customs and integrating employees from different backgrounds. Even before the merger was approved, a robust communication plan was developed to quickly and efficiently keep employees abreast of details for implementing the new culture pre- and post CADE approval.

      At year-end 2011, BRF had 132,696 on its payroll, of which 118,859 were direct employees under open-ended labor contracts, 1,237 were direct employees with a set duration, 12,301 were outsourced and 299, interns.

      The Company sought to keep its team motivated throughout 2011 by dealing with aspects which had been identified as having room for improvement such as people attraction and retention. In this context, the jobs of employees at the production units were standardized according to market benchmarks, compensation brackets made more attractive and aligned with the local market conditions and an assiduity plan was implemented to reduce absenteeism. The initiative s impacts translated into a year-on-year reduced consolidated rate of turnover (monthly average), which dropped to 2.07% from 2.33%, and lower absenteeism to 3.25% from 3.38%, both factors being instrumental in improved compliance with production plans.

     Local hiring and the priority of promotion of employees are the pillars of human resources policy of BRF. Accordingly, in 2011, partnerships were strengthened with regional entities to train professionals for future hiring and maintaining the program I recommend , by which employees indicate candidates for employment opportunities. During the year, 25% of vacancies were filled by people coming from the initiative, which seeks to attract potential candidates for open positions.

      On another front, there was an upgrade from the internal screening program, aiming at encouraging employees to seek professional development and growth in the Company. Indicators were structured to follow, starting in 2012, the percentage of professionals recruited via internal selection. Established targets of internal recruitment already exist for positions of leadership, which represented 78 % of open vacancies in 2011. |GRI EC7| Women are encouraged to develop professionally, and their share in leadership posts has increased from 15% in 2010 to 19% in 2011.

      The Company also endeavors to increase hiring and retaining of professionals with special needs. During the year, agreement with the Labor Prosecutor s Office was signed whereby the Company will meet its legal quota in five years, subject to extension for an additional five as long as 50% of the requirement is met at the end of the first five years. Since 2007, BRF has promoted, in partnership with SESI, the Educational Center for Persons with Disabilities, whose goal is to provide primary and secondary education and training for entry into the labor market. The course includes classes in Braille (visually impaired), sign language (hearing deficiency), digital education, job training, arts and art therapy. In 2011, the Videira Centre (O Centro Videira - SC) received 60 students and the Center of Marau (RS) has prepared 53 students.

      The inclusion of indigenous peoples in the labor market is also promoted, aiming at the development and generation of employment and income. At the end of 2011, the company had on its staff, some 458 indigenous persons. According to BRF s Code of Ethics and Conduct, all employees receive equal treatment in the Company.