BRF(BRFS) - 2023 Q1 - Quarterly Report

Management Message This section outlines the agenda and key proposals for the upcoming Ordinary and Extraordinary General Shareholders' Meeting, including financial statement review, compensation, and bylaw amendments Meeting Overview and Agenda The Ordinary and Extraordinary General Shareholders' Meeting (OEGM) on April 12, 2023, will address 2022 financial statements, compensation, and bylaw amendments - The Ordinary and Extraordinary General Shareholders' Meeting (OEGM) is scheduled for April 12, 2023, at 11:00 hours, and will be conducted exclusively in a virtual format[11] - Key topics for the Ordinary General Assembly include reviewing 2022 financial statements, setting 2023 management and Fiscal Council compensation, and electing Fiscal Council members[7] - The Extraordinary General Shareholders' Meeting agenda includes amending the company's corporate purpose and updating Audit and Integrity Committee articles to align with B3's Novo Mercado Regulations[12][13] Guidelines to Participate in the Ordinary and Extraordinary General Shareholders' Meeting This section details the procedures and requirements for shareholder attendance and remote voting in the upcoming Ordinary and Extraordinary General Shareholders' Meeting Attendance in the Virtual Meeting Shareholders must request virtual meeting access by April 10, 2023, with specific documentation required based on shareholder type - The OEGM will be held exclusively online, and shareholders must send a request for access to the digital platform by 11:00 a.m. on April 10, 2023, two days before the meeting[15] - Documentation requirements vary by shareholder type: Individuals need a photo ID and shareholding statement; Corporate entities need bylaws and proof of representation; Proxies require a power of attorney granted within the last year; and Foreign shareholders must provide sworn translations of their documents[19][15][16] - ADR holders will be represented by The Bank of New York Mellon and are not permitted to participate directly in the OEGM through the digital platform[22] Participation by Distance Voting Form Shareholders can vote remotely via a Distance Voting Form submitted by April 5, 2023, through various channels, with no changes allowed after the deadline - Shareholders must submit their Distance Voting Form at least 7 days before the OEGM, with a deadline of April 5, 2023[184][30] - Voting instructions can be transmitted through the company's bookkeeper (Itaú Corretora), custodian agents (for shares at B3), or sent directly to BRF via email[175][194][62] - After the April 5, 2023 deadline, shareholders cannot alter their remote voting instructions[24] Quorums Applicable to the OEGM The meeting requires specific quorums for installation and deliberation, with higher thresholds for bylaw amendments on the first call - Installation Quorum (First Call): Requires shareholders representing at least 1/4 of the voting capital stock; for bylaw amendments, this increases to 2/3 of the voting capital[57][58] - Installation Quorum (Second Call): The meeting can be held with any number of shareholders present[57][58] - Deliberation Quorum: Approval of agenda items requires a favorable vote from the absolute majority of votes present, excluding blank votes[28] Conflict of Interests Shareholders are prohibited from voting on resolutions where they have a conflict of interest or could receive a particular benefit - Shareholders may not vote on matters where they have a conflict of interest or could receive a particular benefit, in accordance with Brazilian Corporate Law[31] Management Proposal This section outlines the Board of Directors' proposals for the Ordinary and Extraordinary General Shareholders' Meetings, covering financial approvals, compensation, and bylaw amendments Ordinary General Shareholder's Meeting Management proposes approving 2022 financial statements, setting 2023 compensation for the Board and Executive Officers at R$109.9 million, and electing Fiscal Council members - The management proposes the approval of the management accounts and financial statements for the fiscal year ended December 31, 2022[186] Compensation Proposal (in thousands of BRL) | Compensation Proposal (in thousands of BRL) | Approved 2022 | Realized 2022 | Proposal 2023 | | :--- | :--- | :--- | :--- | | Board of Directors | 18,821 | 10,739 | 9,738 | | Fees + Benefits | 16,983 | 9,491 | 9,738 | | Stock-based compensation | 1,837 | 1,249 | 0 | | Statutory Board of Executive Officers | 91,078 | 42,208 | 100,160 | | Fees + Benefits | 42,579 | 24,025 | 45,403 | | Stock-based compensation | 23,229 | 18,184 | 20,609 | | Profit Sharing | 25,269 | 0 | 34,147 | | TOTAL | 109,898 | 52,947 | 109,898 | Fiscal Council Compensation (in thousands of BRL) | Fiscal Council Compensation (in thousands of BRL) | Approved 2022 | Realized 2022 | Proposal 2023 | | :--- | :--- | :--- | :--- | | Fees | 877 | 576 | 877 | | Total Fiscal Council | 877 | 576 | 877 | - The proposal includes the election of Bernardo Szpigel, Marco Antônio Peixoto Simões Velozo, and Attilio Guaspari as effective members of the Fiscal Council, with their respective alternates[188] Extraordinary General Meeting Management proposes amending the Bylaws to expand corporate purpose, align the Audit and Integrity Committee with Novo Mercado regulations, and consolidate all changes - Proposes amending Article 3 of the Bylaws to include "intermediation and agency of services and business in general, except real estate" and "provision of administrative services to third parties" in the corporate purpose[189] - Proposes amending Article 33 to align with B3's Novo Mercado Regulation, allowing a member of the Audit and Integrity Committee to be both a financial specialist and an independent director, and defining the coordinator's functions in the internal regulations[190] - Proposes the consolidation of the Company's Bylaws to reflect all approved amendments[190] Annex I – Management Comments on the Company's Financial Situation This annex provides management's detailed commentary on the company's 2022 financial performance, including revenue, debt, operational income, and strategic initiatives General Financial and Equity Conditions BRF reported R$53.8 billion in net revenue and a R$3.14 billion net loss in 2022, with net debt decreasing but leverage increasing to 3.75x Financial Highlights (R$ thousands) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net Revenue (R$ thousands) | 53,805,028 | 48,343,305 | +11.3% | | Net Loss (R$ thousands) | (3,141,625) | (437,384) | -618.3% | | Net Debt (R$ thousands) | 14,597,598 | 17,331,927 | -15.8% | | Leverage (Net Debt/Adj. EBITDA) | 3.75x | 3.12x | +0.63x | - The company's capital structure improved, with equity comprising 33.3% of total capital in 2022, up from 25.6% in 2021, while third-party capital (gross debt) decreased to 66.7% from 74.4%[44][198] - Key operational highlights in 2022 include expanding presence in the Halal market, forming a joint venture with AES Brasil for wind energy self-generation, and concluding a Leniency Agreement with Brazilian authorities regarding past investigations[43] - Total loans and financing decreased to R$23.5 billion in 2022 from R$25.5 billion in 2021, with a notable reduction in foreign currency debt from R$16.3 billion to R$12.5 billion[39] Debt Levels and Characteristics BRF's total loans and financing decreased to R$23.5 billion in 2022, with 53.4% in foreign currency and R$3.0 billion in unused revolving credit lines Debt Composition as of 12/31/2022 (R$ thousands) | Debt Type | Balance as of 12/31/2022 (R$ thousands) | | :--- | :--- | | Debentures | 5,940,146 | | Bonds | 11,902,290 | | Development Bank Credit Lines | 3,613,555 | | Export Credit Lines (National Currency) | 409,186 | | Export Credit Lines (Foreign Currency) | 132,887 | | Agribusiness Receivables Certificate (CRA) | 999,646 | | Working Capital Lines | 514,004 | | Total | 23,517,000 | - The company has several outstanding Senior Notes issues maturing between 2023 and 2050, with a total balance of R$11.9 billion as of year-end 2022[84][79] - BRF has four series of debentures outstanding, with balances totaling R$5.94 billion at the end of 2022, maturing between 2022 and 2032[67][68] - The company maintains R$3.0 billion in available, undrawn revolving credit facilities with Banco do Brasil to ensure short-term liquidity[80][89] Comments on Income of Operations Consolidated net revenue grew 11.3% to R$53.8 billion in 2022, but gross profit fell 16.1% due to higher costs, resulting in a R$3.14 billion net loss Income Statement Highlights (R$ thousands) | Income Statement Highlights (R$ thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Revenue | 53,805,028 | 48,343,305 | 11.3% | | Cost of Goods Sold | (45,672,376) | (38,650,772) | 18.2% | | Gross Profit | 8,132,652 | 9,692,533 | -16.1% | | Profit (Loss) before Financial Income | (136,289) | 3,009,787 | -104.5% | | Net Financial Expenses | (2,668,755) | (3,044,575) | -12.3% | | Net Loss for the Year | (3,141,626) | 437,384 | -818.3% | - Net revenue in Brazil grew 8.8% to R$27.0 billion, attributed to brand investments and portfolio expansion, while international net revenue increased 12.0% to R$24.1 billion, driven by higher prices and growth in the Halal DDP and Direct Exports segments[91] - The cost of goods sold rose 18.2%, mainly due to a 19.3% increase in raw material and input costs, reflecting higher grain prices and exchange rate impacts[100] - Cash flow from operating activities decreased by 52.2% to R$1.88 billion in 2022, while cash flow from financing activities was a positive R$2.26 billion, primarily due to a capital increase, compared to a R$572 million outflow in 2021[115][116] Factors Materially Affecting Operating Income Operating income is significantly impacted by economic conditions, geopolitical events, animal diseases, trade barriers, commodity prices, and exchange rate fluctuations - Key factors affecting income include economic conditions, geopolitical issues, animal diseases (Avian Influenza, African Swine Fever), trade barriers, commodity prices, exchange rates, inflation, interest rates, and freight costs[124] - Trade barriers such as import quotas and tariffs in the European Union, Russia, Mexico, and South Africa impact export volumes and profitability, with South Africa imposing provisional anti-dumping tariffs of up to 265% on Brazilian chicken in 2021[122] - Sanitary barriers and suspensions from countries like China and Saudi Arabia, often related to concerns over Salmonella or COVID-19, have temporarily halted exports from specific plants, requiring production redirection[131][139] - The cost of corn and soybean meal represented approximately 47.3% of the production cost in 2022, and sea freight costs increased by approximately 75.5% in 2022 due to global demand and limited container availability[147][146] Non-Accounting Measurements BRF uses Adjusted EBITDA and Net Debt to assess performance, with Adjusted EBITDA at R$3.90 billion and leverage at 3.75x in 2022 Non-Accounting Metric (in millions of BRL) | Non-Accounting Metric (in millions of BRL) | 12/31/2022 | 12/31/2021 | | :--- | :--- | :--- | | Net Debt | 14,597.6 | 17,331.9 | | Adjusted EBITDA | 3,896.3 | 5,558.7 | | Leverage (Net Debt / Adjusted EBITDA) | 3.75x | 3.12x | | Adjusted EBITDA Margin | 7.2% | 11.5% | - Adjusted EBITDA is calculated by starting with net income and adding back taxes, net financial expenses, depreciation & amortization, and then adjusting for several items including impacts from investigations (Weak Meat/Cheating), tax recoveries, hyperinflation effects, and restructuring costs[176][172] - Management uses these non-accounting measures as complementary tools to evaluate financial performance, operating cash generation potential, and financial condition, acknowledging they are not substitutes for IFRS metrics[179] Business Plan BRF invested R$3.07 billion in 2022, focusing on capacity expansion, R&D, and ESG, while also reviewing its long-term plan and selling its pet food operation Investments (in thousands of R$) | Investments (in thousands of R$) | 2022 | 2021 | | :--- | :--- | :--- | | Fixed assets | 1,452,734 | 1,555,426 | | Biological assets | 1,387,669 | 1,239,746 | | Intangible Assets | 228,733 | 179,632 | | Total | 3,069,136 | 2,974,804 | - The company has initiated a competitive process, with Banco Santander as its financial advisor, for the sale of its pet food operation[356] - In 2022, R$242 million was invested in Research, Development & Innovation (RD&I), resulting in 192 new SKU launches (101 in Brazil, 91 international)[363][361] - BRF has committed to be Net Zero by 2040 and has established a Sustainable Grain Purchase Policy, achieving 100% traceability of direct suppliers in the Amazon and Cerrado[365] Other Relevant Factors BRF signed a Leniency Agreement on December 28, 2022, committing to pay R$584 million over five years to resolve past investigations - On December 28, 2022, BRF signed a Leniency Agreement with the CGU and AGU to resolve issues from the 'Weak Meat' and 'Cheating' operations[217] - The agreement includes a payment of R$583,977 thousand to the Federal Government, payable in five annual installments starting June 30, 2023[217] - As part of the agreement, BRF will continuously improve its integrity program under CGU monitoring, and in return, the authorities will file related administrative proceedings and refrain from new lawsuits on the matter[217][366] Annex II – Information on the Compensation of the Directors and the Fiscal Council This annex details BRF's compensation policy for directors and the Fiscal Council, including fixed, variable, and stock-based components, and recognized compensation figures Compensation Policy Description BRF's compensation policy aims to attract and retain talent by aligning management interests with shareholder goals through fixed, short-term, and long-term incentives - The compensation policy aims to attract and retain qualified professionals by aligning their incentives with the company's short and long-term strategic interests[220] - Compensation is composed of fixed pay, short-term variable pay (Profit Sharing Program - PLR), and long-term variable pay (stock option and restricted stock plans)[234][235] - Performance indicators for variable compensation include financial metrics (EBIT, ROIC, cash flow) and ESG goals (reduction of water consumption, GHG emissions, and increasing women in senior leadership)[246] Compensation Proportion - 2022 | Compensation Proportion - 2022 | Fixed | Variable (PLR) | Post-employment | Stock-based | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Board of Directors | 88% | - | - | 12% | 100% | | Statutory Board of Executive Officers | 44% | 0% | 13% | 43% | 100% | Compensation Recognized in Income Total realized compensation for 2022 was R$10.7 million for the Board, R$42.2 million for Executive Officers, and R$576 thousand for the Fiscal Council Total Compensation Realized - 2022 (in BRL) | Total Compensation Realized - 2022 (in BRL) | Board of Directors | Statutory Board of Executive Officers | Fiscal Council | | :--- | :--- | :--- | :--- | | Total | 10,739,285 | 42,208,168 | 576,000 | Total Compensation Forecast - 2023 (in BRL) | Total Compensation Forecast - 2023 (in BRL) | Board of Directors | Statutory Board of Executive Officers | Fiscal Council | | :--- | :--- | :--- | :--- | | Total | 9,738,450 | 100,159,752 | 876,798 | Stock-Based Compensation Plan The company offers Stock Option and Restricted Stock/Performance Stock Grant Plans, covering up to 2.5% of total shares, with vesting and performance conditions - The company has a Stock Option Plan and a Restricted Stock/Performance Stock Grant Plan, with a combined limit not to exceed 2.5% of the company's total shares (27,061,831 shares as of Dec 31, 2022)[259][265][251] - Under the Stock Option Plan, options vest in four equal tranches annually (25% per year) and the exercise price is based on the average stock price in the 20 trading sessions prior to the grant date[255][256][254] - The Restricted Stock/Performance Stock Plan grants shares at no cost to beneficiaries, contingent on continued service and, potentially, the achievement of performance indices defined by the Board of Directors[274][273] Annex III – Information on Candidates for the Fiscal Council This annex provides information on the proposed candidates for the Fiscal Council, highlighting their professional experience and qualifications Composition and Professional Experience of the Fiscal Council Proposed Fiscal Council members bring extensive experience in finance, management, and auditing, with no criminal convictions or conflicts of interest - The proposed effective members for the Fiscal Council are Bernardo Szpigel, Marco Antônio Peixoto Simões Velozo, and Attilio Guaspari[320] - The proposed alternate members are Valdecyr Maciel Gomes, Luis Fernando Prudêncio Velasco, and Marcus Vinicius Dias Severini[319] - All candidates have declared no criminal convictions or adverse administrative proceedings in the last five years and are not considered Politically Exposed Persons[331][324] Company Bylaws and Proposed Changes This annex presents the company's Bylaws, emphasizing proposed amendments related to corporate purpose, general meeting quorums, administration, and the Audit and Integrity Committee Article 3. Corporate Purpose A proposed amendment to Article 3 expands the corporate purpose to include intermediation, agency, and administrative services to third parties, aiming to increase revenue - The primary corporate purpose is the industrialization, commercialization, and exploitation of food products, especially those derived from animal protein[334] - A key proposed amendment to Article 3 is the addition of activities for "intermediation and agency of services and business in general, except real estate" and "provision of administrative services to third parties"[334][335][494] General Meeting The General Meeting, the highest governing body, requires specific quorums for installation and deliberation, and is responsible for approving financial statements and compensation - The Ordinary General Meeting is held annually within the first four months after the fiscal year-end[392] - The quorum for installation on the first call is 25% of voting capital, except for bylaw amendments which require 2/3, while on the second call, any number of shareholders constitutes a quorum[383][384] - Key responsibilities include approving accounts, setting management compensation, deciding on profit allocation, and approving stock plans[420][389] Administration The company is managed by a Board of Directors (9-11 members, 20% independent) and an Executive Board (2-15 members), with distinct roles for Chairman and CEO - The Board of Directors is composed of 9 to 11 members with a unified 2-year term, and at least 20% of the members must be Independent Directors[533][526] - The Board of Directors' duties include establishing business orientation, electing and dismissing Executive Board members, supervising management, and approving budgets, major investments, and debt operations[381][538] - The Executive Board is composed of 2 to 15 members, led by a Global Chief Executive Officer, and is responsible for the company's regular operations; the positions of Chairman of the Board and Global CEO cannot be held by the same person[412][413] Audit and Integrity Committee The permanent Audit and Integrity Committee, with 3-5 members (majority independent, one financial expert), will align with Novo Mercado rules regarding member roles and coordinator functions - The Audit and Integrity Committee is a permanent body with 3 to 5 members, a majority of whom must be independent, and at least one must be a financial expert[440] - A proposed amendment to Article 33, Paragraph 2, will expressly permit the same member to be both a financial expert and an independent director, aligning with new Novo Mercado rules[449][490] - Another proposed amendment to Article 33, Paragraph 7, will require the committee's internal regulations to define the functions and activities of its Coordinator[451][490]