BRAZIL: Forex, commodity costs hit Brasil Foods profits

Dear Shareholders,

The merger operation announced by BRF in May 2009 continues to proceed successfully. As forecast for 2012, we are in the process of complying with the agreement – signed with the Brazilian anti-trust authority, CADE, in June 2011 – which requires the suspension of some categories of certain brands and the sale of plants and distribution centers. All these complex operations – necessary to fulfill the terms and conditions agreed – are being executed in line with our plan and absolutely on schedule.

These requirements, implying transitory costs and provoking a temporary shortfall in operating  efficiency, together with the challenging economic environment, both negatively impacted our result for the period. 

In the second quarter of 2012, we reported a growth of 8.7% in net sales, reaching R$ 6.8 billion and a sales volume of 1.5 million tons. Net income was R$ 6.4 million, corresponding  to a 0.1% net margin while the EBITDA result reached R$ 565 million, representing 8.3% of the Company’s net sales.

BRF was able to record a positive evolution in volume although price increases to date have been insufficient to offset rising costs, principally those related to spiraling grain prices. Again, in addition to the impacts of the Performance Commitment Agreement  – TCD  already mentioned, domestic market business suffered from a surplus of  in natura meat diverted from export markets.

As anticipated in the first quarter results report, export markets saw a gradual improvement in results, also receiving a welcome boost from the devaluation of the Real. However, on a year-on-year comparative basis,  2Q12 margins narrowed due to the situation in key markets such as the Middle East and Japan, both of which still in a recovery mode.

During the second quarter, BRF – through its leading brands - launched 168 products, the focus being on a range of different channels: Brazilian retail, food service, international market, both in the meats segment as well as dairy products. In this way the Company meets the objectives for bolstering its product lines with added value items  and as a means of refocusing its market once all the terms and conditions of the TCD have been satisfied.

During the period, we concluded a ten-year overseas notes offering for a total of US$ 750 million and at historically low costs. This offering has enabled the Company to refinance its 2012 maturities, at the same time lengthening its debt profile and reinforcing liquidity. 

We reiterate our confidence in improved results going forward on the back of measures already adopted to reverse the effects of the adverse scenario. In addition, we shall gradually restore operating efficiency levels once the conditions of the TCD have been satisfied. 

We are enhancing our long-term strategic focus to achieve the objectives of BRF 15, expanding our global presence, reducing the volatility of margins and consolidating the Brazilian market. However, over the short term and in the light of a continuing adversity, we are taking steps to implement strict measures to restore profitability. These measures we believe will bring gradual benefits and strengthening the Company’s competitiveness in the global food market.

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Original source: Brasil Foods