BRFS BRF SA

Published at the beginning of 2012, the new BRF Ethics and Code of Conduct is a compendium of best practices inherited from the former Perdigão and Sadia companies clearly explaining the behaviors and attitudes the Company expects from all of its employees. The Code sets forth guidelines for topics such as integrity, ethics and relationships with coworkers, suppliers and customers, among others.

Conduct under the Code is expected from all employees, who are trained in anti-corruption practices in the New Employee Induction Program. In addition, whistle blowing policies and a channel for this purpose are available on the Intranet/Internet with Internal Audit in charge of establishing the facts. In 2012, Auditors evaluated 45 percent of the 211 locations (units) identified as showing the highest corruption-related risk. Over the course of the year, non-compliance with corporate policies led to the termination of 45 employees and the discontinuation of business with 13 service suppliers. |GRI SO3, SO2, SO4|

HUMAN RIGHTS

The Employee Induction Program addresses the subject of human rights as they relate to ethical behavior. In 2012, 36,092 people attended the program (31 percent of all employees), corresponding to a total 12,030 hours dedicated to the subject. Leaders training totaled 780 hours with human rights-related content, where 195 individuals (0.17 percent of the workforce) received instruction on the application of disciplinary measures; labor law; civil, criminal and labor liability of managers; moral and sexual harassment. With the updated Ethics and Conduct Code, the Company held orientation sessions on the new version of the document for 11,186 participants (9 percent of all employees) summing a total of 11,186 hours devoted to the topic. |GRI HR3|

R ISK MANAGEMENT |GRI 1.2|

The risk management policy is developed in a participative manner that involves all of the Company’s areas, under the lead of a specialized unit. This unit is responsible for providing the entire Company with a risk dashboard to assist in understanding the importance of the factors and the cost of their mitigation. Preventive action involves comprehensively and continuously monitoring factors capable of interfering with business or a ecting results.

Following the strengthening of financial and operational aspects, risk management at BRF is now evolving towards a more business and strategy-oriented approach, in a gradual reformulation process, so that factors that are already managed at the sectorial level may be managed in an integrated manner. The objective is to reach the Expanded Corporate Risk Management stage by

2015, with maximum decision-making transparency. The aspects currently regarded as most relevant include: Financial – The Financial Risk Management Committee is responsible for evaluating full compliance with the Financial Risk Management policy and proposing applicable alternatives. In addition, the Committee has the authority to veto proposed operations that it may deem inappropriate to BRF at the time of their evaluation.

Supplier chain – In 2012, the Company expanded its Supplier Chain Monitoring Program to identify and mitigate risk controlled by third parties that may influence the business. These factors include, for example, discontinuing relationships with suppliers in breach of human rights or suppliers contributing to deforestation in the Amazon region.

Operational – Operational risks at the manufacturing units and distribution centers have been mapped based on 144 risk inspections, complete with determination of impact and probability of occurrence. The Operational Risk Management Project ( “Projeto de Gestão de Risco Operacional” – PGR) was adopted in 2010, and focuses on preventing potential damage to assets, involving several areas. In 2012, the Company installed its Operational Control Center in Curitiba (PR) where employees from di erent areas proactively manage potential issues a ecting operational continuity, productivity and eciency . BRF embraces the Precautionary Principle, according to which the absence of scientific certainty must not be used as justification for failing to prevent serious or irreversible damage to the environment or human health. The principle is observed in the product development, conception, manufacturing and distribution phases. |GRI 4.11|

Sanitary control – Permanent updates on practices used in proprietary and integrated outgrowers’ operations, process improvements and a strict industrial operations system comprise the set of steps taken to eliminate or minimize risk of this kind.

Slaughtering units are strategically spread across di erent regions in Brazil and abroad to reduce the impacts arising from sanitary issues or eventual international embargoes against imports from any one region.

Food safety – Items produced at any unit can be traced from the breeding stock to animal rearing farms through to products distributed to end consumers. This process includes controls on livestock feed and medication and the use of metal detectors and X-ray machines at the plants. All suppliers sign agreements with clauses guaranteeing the safety of the products we market.

Commodities – The commodities risk policy is discussed monthly at meetings of the Executive Board meeting and the Financial Risks Committee based on the monitoring of the entire production chain in an attempt to anticipate shifts that may have a positive or negative impact on operation costs. Used to maximum e ect, these strategies mitigated the impact of the rising cost of grains in 2012 to a significant extent.

Image and reputation – With a clear image and reputational risk policy adjusted to every business and segment, BRF seeks to maintain its image associated with sound corporate governance and values such as trust, ethics and transparency. Standards for commercial areas also cover relationships with strategic international partners. In addition, the Company acts in all cases where events may expose the Company’s image and its relationship with stakeholders.

Environmental – Every manufacturing unit has technical teams specialized in environmental issues and capable of improving procedures as required, as well as to operate correctly and e ectively under emergency circumstances.

Legal/Tax – Ethical standards attempt to safeguard the Company from the risk of failure to comply with laws and regulations at the federal, state and local levels. In this sense, the Committee permanently monitors any aspects questioned by government authorities, thus reducing the potential for administrative and court claims.

Climate change – BRF also takes the impact of climate change into consideration as part of the overall interaction with other business risks. One particular concern relates to the supply of commodities (grains, beef and milk); the availability of water and power; and logistics. To this end, the company adopts preventive practices such as regional procurement, research into new ways of using water, reuse and treatment technologies, power generation, reduced emission of greenhouse gases, verticalization of the supply chain, among others. |GRI EC2|

Net Operating Sales

BRF reported net operating sales of R$ 28.5 billion in the year, a growth of 10.9% the result of organic growth, the incorporation of companies acquired in Argentina, more especially Quickfood, and an expanded portfolio thanks to innovation with the launch of various products and categories designed to cushion the impact of asset transfers in 3Q12 in accordance with the agreement signed with Cade (TCD).

Cost of sales rose 15.8% year-on-year to R$ 22.1 billion, reporting an increase proportionally greater than sales revenue, squeezing margins during the year. The principal impacts on costs of products sold were: 1) the significant increase in the cost of the principal raw materials – corn and soybeans due to failure in the American grain crop; 2) readjustments in the industry as a whole as a result of collective wage bargaining; 3) an increase in items restated against the foreign exchange rate such as: packaging, freight, vitamins; 4) temporary spike in production costs due to the breakup of certain parts of the Company with the implementation of the TCD process.

Gross Profit and Gross Margin

Gross Profit amounted to R$ 6.5 billion, a 3.1% reduction in the year with a gross margin 3.3 percentage points lower than reported for 2011, declining from 25.9% to 22.6%. In spite of the positive commercial performance in sales, margins remained under pressure from rising costs.

Operating Expenses

Thanks to e orts to reduce overall expenses, BRF was able to maintain operating expenses at the same level as 2011 at 16.5%.

Commercial expenses increased 12.5%, reflecting the growth of variable expenses due to: 1) investments in the development of new lines and products (innovation), product launches and marketing campaigns; 2) an increase of operations in the logistics chain, which was also significantly impacted by the TCD process (transfer of assets and repositioning of the portfolio and distribution channels); 3) port and truck driver strikes.

Administrative expenses and fees fell 8.9% due to the simplification of the administrative structure of the relationship between BRF and its subsidiaries and the lower disbursements of consultancy fees in the quarter (in 2011, there were significant payments to consultancies advising the Company in its negotiations with CADE for approving the merger).

Production structure – The operational structure is distinguished by the geographic location of its production units, which, in line with the agreement with Cade and the implementation of a unified manufacturing management model, mark the beginning of a new phase of optimized production capacity. The new model was responsible for defining and implementing identical procedures and practices for all operations and will be replicated in the dairy products area during 2013. The high level of automation at our plants and our skilled labor force are additional competitive advantages, further improved in 2012 with the introduction of new technology intended to automate repetitive processes.

Logistics and distribution network – BRF’s supply chain is one of the largest operations of its kind among Brazilian companies. Products are shipped from 52 units in 11 states and are distributed to 150 thousand points of sale across Brazil. The physical distribution matrix and the production system are synchronized such that production is able to meet demand in terms of quantity, quality and range of orders. Logistics is responsible for making deliveries at the precise place and time agreed. BRF employs practically every mode of transportation to get its products to the points of sale. In the domestic market, most of the cargo is shipped by trucks of various sizes (an outsourced fleet of 8 thousand vehicles) and rail although there was an increase in the use of coastal shipping in 2012. Distribution will become even more synergistic and ecient in 2013 with deliv eries of all segments and brands made possible from a single truck and also as a result of the integration of warehouses. Internationally, the development of the distribution network is a challenge. In 2012, progress was made in distribution in Saudi Arabia: with the incorporation of the joint venture partner responsible for importing and distributing our products in the local market, BRF gained more than 2 thousand points of sale. Again, in May 2012 the joint venture in Asia also helped boost retail and food service distribution in Hong Kong, Macao and Continental China.

Human capital – All employees at BRF are critical to the Company’s expansion and consolidation process and regarded as its most important intangible asset. With a team of experienced, professional executives, the Company maintains training courses that include a leadership program which serves as a forum for the exchange of experiences. Although employee profiles change from one job position to another, our human capital is made up of people who are aligned with the Company’s values, adaptable to a constantly changing arena and committed to the results and goals set out in the BRF 15 Plan.

Management – BRF’s management model focuses on planning and is aligned with the best transparency practices in the market. Its main distinction lies in the ability to execute and maintain operations under complex scenarios. The major work done in 2012 to comply with the conditions in the agreement with Cade is proof of the Company’s managerial efficiency.

In 2012, BRF expanded its initiatives under the Supply Chain Monitoring Program. The aim is to identify and minimize the principal social and environmental risks by reducing impacts, developing new operational opportunities, disseminating sustainability and improving the relationship with suppliers on six fronts: beef, grains/meal/oil, logistics, ranching, supplies and dairy products.

The Program’s focus was on the training and raising the awareness among negotiators and suppliers of the standards of sustainability. Participants are able to understand the details and targets for meeting the requirements of the Program, involving the signature to the Code of Conduct, the execution of socio-environmental evaluations and audits. These actions cover 50% of the negotiators in the supplies and grains, meal and oils departments, a total of 90 people, and should reach 100% of the group in 2013.

The Company began disseminating the Code of Conduct for Suppliers in early 2012 to reiterate the commitment to responsible management and sustainability. The document was sent to 893 suppliers and, by the end of December, 209 (10% of suppliers) had returned the Instrument of Awareness and Agreement. The self-evaluation questionnaire was sent to 232 suppliers of which 162 replied to the socio- environmental questions (such as the combat of child or forced labor, freedom of association and correct environmental management). The target for 2013 is to have a 60% acceptance rate among critical suppliers for the Code of Conduct

As a practice, BRF does not enter relationships with suppliers that do not comply with the minimum standards of human rights (child or forced labor), labor rights (freedom of association) and respect for the environment. In 2012, none of these risks was identified in the Company’s operations although there were some cases where contracts were terminated with suppliers (integrated outgrowers, suppliers of grains, meal and oil and freight services) not in compliance with a given item of the Procurement Policy (example: absence of an environmental license). |HR5, HR6, HR7, GRI FP1|

The principal highlights on the labor front in 2012 were:

Logistics – Expansion of the Occupational Health, Security and Environment Program for transportation companies. This initiative is developed through the Excellence in Logistics Program with the objective of promoting logistics chain sustainability. Standards are monitored using the Suppliers Integrated Management system, which classifies and awards partners on the basis of the criteria of quality, cost competitiveness, sustainability of the business and care with people and the environment. As part of the commitment under the In the Right Direction Program against sexual exploitation of children and adolescents on Brazilian highways, 1,050 outsourced drivers and assistants were trained to become protection agents and co-responsible in the elimination of the problem.

Ranching – More than 800 agricultural extension agents periodically evaluate and guide conditions at the integrated outgrowers and at third parties on the care taken with animal production and slaughter of poultry. In 2012, the Suppliers Code of Conduct was included as an attachment to the integrated outgrowers production contracts and implemented at all producers where hogs are reared through to the final slaughtering phase (approximately 4.5 thousand producers). The target is to extend the Code of Conduct to the other animal categories by December 2013.

Beef Cattle – Technical personnel addressed and visited more than 300 producers in the state of Mato Grosso providing guidance on procedures for maintaining high levels of quality and compliance with all legal requirements.

Grains, meal and oil – Given the use of family labor in agriculture, all contracts carry specific clauses on the requirement not to employ those under the age of 18 or maintain any working condition which does not comply with the prevailing legislation.

Supplies – In 2012, two procurement negotiators training programs were o ered to 44 employees, for presenting BRF’s Sustainability Management strategy and the Suppliers Monitoring Program. In 2013, onsite audits of suppliers are scheduled.

Dairy Products – Pilot project at 32 properties, the Good Practices on the Farm Program evaluates quality, sustainability and human rights aspects such as child and forced labor. The Company plans to expand the program to its remaining milk producers.