BRF S A : Management Report - 2Q19

MANAGEMENT REPORT

SECOND QUARTER RESULTS 2019

Market Capitalization

R$29,5 bi - US$7,5 bi

Stock Prices

BRFS3 R$36,32 - BRFS US$9.20

Base: 08/08/2019

Shares outstanding: 812,473,246 ordinary shares

945,846 treasury shares

Base: 06/30/2019

Conference Call

Friday, 08/09/2019 10:00 a.m. BRT 9:00 a.m. EDT

Dial-in

Brazil:

[phone] or

[phone]

United States:

[phone] or

[phone]

IR Contacts:

Lorival Luz

Global CEO, CFO and

CIRO

Eduardo Takeiti

IRO

Pedro Bueno

IR Manager

[phone] [e-mail]

São Paulo, August 9, 2019 - BRF S.A. (B3: BRFS3; NYSE: BRF) - "BRF" or the "Company" today announced its 2019 second-quarter (2Q19) results. This report includes results in Brazilian Real, in accordance with Brazilian corporate and accounting practices, in compliance with the International Financial Reporting Standards (IFRS), and compared to the same period in 2018, as indicated. The report also reflects adoption of IFRS16, which altered the accounting treatment for leasing. Additionally, the Company opted for a modified retrospective approach without reinstatement of comparative periods.

OPERATING HIGHLIGHTS (Continuing Operations)

• CONSOLIDATED
• • Net revenue of R$8,338 million in 2Q19 (+18.0% y-o-y);
  • Adjusted EBITDA of R$1,547 million in 2Q19 (+333.9% y-o-y); includes a net gain of R$328 million relating to tax proceedings; excluding such gain, Adjusted EBITDA totals R$1,219 million;
  • Adjusted EBITDA Margin of 18.6% in 2Q19 (+13.6 p.p. y-o-y); excluding the net gain from tax proceedings, Adjusted EBITDA margin is 14.6%;
  • Net income of R$191 million in 2Q19 in continuing operations and total corporate net income of R$325 million in 2Q19, versus a net loss of R$1,466 million in 2Q18;
• BRAZIL SEGMENT
• • Net revenue of R$4,082 million in 2Q19 (+10.8% y-o-y);
  • Adjusted EBITDA of R$790 million in 2Q19 (+332.5% y-o-y); excluding the net gain from tax proceedings, Adjusted EBITDA would total R$462 million;
  • Adjusted EBITDA margin of 19.4% in 2Q19 (+14.4 p.p. y-o-y); excluding the net gain from tax proceedings, Adjusted EBITDA margin would be 11.3%;
• INTERNATIONAL SEGMENT
• • Net revenue of R$3,985 million in 2Q19 (+24.1% y-o-y);
  • Adjusted EBITDA of R$693 million in 2Q19 (+288.9% y-o-y);
  • Adjusted EBITDA Margin of 17.4% in 2Q19 (+11.8 p.p. y-o-y).

FINANCIAL HIGHLIGHTS

• Net leverage (net debt/Adjusted EBITDA) of 3.74x in 2Q19;
• Operating cash generation of R$1,162 million in 2Q19;
• Cash position of approximately R$7 billion at the end of 2Q19;
• Financial cycle of 20.1 days at the end of 2Q19, down 4.2 days vs. 2Q18

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Management Report on 2Q19 Results

Disclaimer

The statements included in this report concerning the Company's prospective business, projections and potential growth are merely forecasts based on Management expectations with regards to the future of the Company. These expectations are highly dependent on market changes and the general economic performance of the country, the industry, and the international markets, and are therefore subject to change.

MESSAGE FROM MANAGEMENT

Dear Shareholders,

During the second quarter of 2019 (2Q19), BRF moved on in its turnaround process. Our key financial ratios reveal that our commitments to deleverage, increase margins, operate with excellence and grow with profitability are being achieved.

This quarter, BRF reported an Adjusted EBITDA of R$1,547 million, due to a combination of robust net revenue growth resulting from higher volumes sold in the foreign markets, solid increase of average sales prices across all geographies and improved sales and operational performance. It is worth noting two accounting entries recorded in 2Q19 operating results: one entry was a negative impact from ICMS payments on staple basket products (nearly R$360 million on EBITDA and R$390 million on financial result). The other one, as we noted in our 4Q18 earnings call, is the successful ruling on the exclusion of ICMS from the PIS/COFINS calculation basis (roughly R$690 million on EBITDA and R$340 million on financial result). The net effect of these accounting entries resulted in an approximate gain of R$328 million in Adjusted EBITDA in 2Q19. Even if we exclude these two accounting entries, Adjusted EBITDA this quarter would total R$1,219 million, with an Adjusted EBITDA margin of 14.6%, attesting the strength of our operational results.

Continued Op. - R$mm	1Q18	2Q18	3Q18	4Q18	1Q19	2Q19
Volume (Thousand Tons)	1,085	1,083	1,251	1,283	1,005	1,090
Net Revenues	7,031	7,067	7,802	8,289	7,359	8,338
Gross Margin (%)	19.6%	8.4%	17.0%	18.9%	20.6%	25.1%
Adjusted EBITDA	685	356	581	843	748	1,547
EBITDA Adjusted Margin (%)	9.7%	5.0%	7.4%	10.2%	10.2%	18.6%
Adjusted EBITDA ex-ICMS	685	356	581	617	748	1,219
EBITDA Adjusted Margin ex-ICMS (%)	9.7%	5.0%	7.4%	7.4%	10.2%	14.6%
Net / (Loss) Income	(133)	(1,435)	(860)	313	(113)	191
Net Debt / Adj. EBITDA LTM*	4.44x	5.69x	6.74x	5.12x	5.64x	3.74x

• According to adjustments released in each of the quarters.

We ended 2Q19 with a relevant decrease in our financial leverage, measured by the ratio between net debt and Adjusted EBITDA, which decreased from 5.64x in March 2019 to 3.74x in June 2019. Such a move reflects a disciplined execution of our Operational and Financial Restructuring Plan initiated in the second half of last year, in addition to the Company's higher operational margins, which ended the quarter well above historical levels. This operational performance, coupled with a favorable market scenario, makes us confident on the Company's deleveraging trajectory. We also issued R$750 million1 in debentures with a 7-year term, which contributes to improving and lengthening our indebtedness profile. We ended the quarter with a cash position of approximately R$7 billion, a solid figure that sufficiently covers our financial liabilities over the next 2 years.

1 R$680 million with 7-year term and R$70 million with 3-year term.

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Management Report on 2Q19 Results

Operationally speaking, we continue to roll out our Operational Excellence System (OES) for all the Company's facilities. We are on schedule in this implementation - three pilot plants fully in accordance with operational methodology and another 14 plants in the implementation phase. We are confident that we will reach the target of over 30 manufacturing hubs operating in a single and integrated system, replicating the best practices of Safety, Integrity, Quality, Management and Controls, besides eliminating inefficiencies in our operations. Our frozen raw material inventories remain at the level of 50,000 tons, which helps keeping our working capital at low levels and supporting our sales team in effectively implementing our business strategy.

We also made progress in our +Excellence program, which aims to improve commercial execution by means of a healthy competition among our sales teams, replicating best practices across the Company. All of our branches and distribution centers are already operating under this program, and first results can already be seen, for example, in the number of items per client. Equally important is our Logistics Excellence Program, which significantly improved the efficiency of our logistics network compared to last year.

Taking into consideration the protein price indices2 in the domestic market, we can see a strong increase compared to the same period in 2018: more than 30% for poultry meat and more than 35% for pork meat. Such growth is mainly related to operational adjustments made by the company throughout the second half of 2018 and to the solid reduction in product inventory. Particularly with regard to BRF, our 2018 Operational and Financial Restructuring Plan included vacation shutdown at 7 of our plants, the adoption of layoff benefits, adjustments to our installed capacity for turkey protein production, and a strong reduction in our inventories of frozen raw materials.

In international markets, the effects of the African Swine Fever in several countries have been clearly adverse for the production of the main protein consumed worldwide. Recent information3 indicates reduction of roughly 30% in the Chinese herd, being more than 25% when considering solely breeding females. There are market estimates4 of a drop of around 25% and 35% in the Chinese pork meat production in 2019 and 2020, respectively, compared to nearly 55 million tons produced by China last year. A reduced contingent of breeding females poses a serious challenge to recovery at large farming units, due to the swine cycle duration5 of approximately two to three years. Thus, in our opinion, a rapid supply upswing is practically null in the short term, impacting the protein price projections as from the second half of the year globally. Accordingly, this swine fever outbreak has already started to impact prices in Asia at the end of the quarter. In addition, strong prices in the in natura market also impact processed food prices.

All-in-all, a better balance between supply and demand in the domestic market, more adequate inventory levels and a still mild effect of the African Swine Fever outbreak have been impacting price, leading to an increase in our consolidated average sales price, which went up more than 17% y-o-y in 2Q19. This fact, coupled with a recovery of volumes sold in the period, enabled net revenue to grow nearly 18% y-o-y, significantly contributing to margin expansion during the quarter, without imposing pressure from sales needs.

When we analyze volumes sold in 2Q19, deserves highlight the recovery of our full capacity to serve key markets, such as Saudi Arabia, the standardization of procedures to obtain the International Sanitary Certifications (ISC) and the more strategic business performance in the Company's different regions and sales channels, both in Brazil and international markets.

1. Average 2Q19 vs. 2Q18 CEPEA/ESALQ indexes for whole frozen chicken at wholesale in the greater São Paulo SP and special swine carcass in greater São Paulo, both in R$/kg.
2. H1 Report of China Swine Industry in 2019 - June 2019, Boyar - www.boyar.cn.
3. Pork Quarterly Q3 2019 - July 2019, Rabobank.
4. Considering the cycle of breeding, raising and finishing of parent stock, breeders and livestock slaughter.

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Management Report on 2Q19 Results

High protein prices also have been affecting the livestock industry. Average poultry and swine prices in 2Q19 rose over 35% and 45%6, respectively, compared to the same period last year, thereby presenting higher cost pressure for non-integrated companies. In the case of BRF, we have a highly integrated chain, with 100% integration for poultry and over 95% for swine, eliminating almost all the Company's exposure to the livestock industry. We have also been working to expand the licensing of new plants to serve international markets, and four plants are under an advanced process of analysis and discussion.

When we consider the average quotes for grain prices on the stock exchange in the six months preceding 2Q19, we can still see inflation when compared to the same period last year- roughly 15% y-o-y7. However, we could already see a downturn during the first half of 2019 - a drop of nearly 13%8, which should benefit our cost projections for the second half of the year. We took advantage of such movement in the commodities market to approve a strategy with our Risk Committee to lengthen our inventory positions and raise pricing level, fully compliant with our hedge and risk management limits policies established by our Board of Directors. We do not use these policies as instruments of financial speculation or working capital management, but as tools to ensure an adequate supply of grains to almost 12,000 integrated companies at levels consistent with market realities. We are very disciplined when assessing this issue.

Despite a very solid and positive outlook for 2018/19 grains crops in Brazil and Argentina, the corn crop in the U.S. has posed difficulties, due to constant delays in the planting of crops, as a result of adverse climate events in that region. In any event, we still expect a positive scenario for our main input price, supported by record volume estimates for the Brazilian crop, which should approach the level of 100 million tons this year.

Innovation is at the core of BRF, and for the fourth consecutive year the Company was voted one of the most innovative food companies in Brazil in a survey conducted by PwC. As a key strategic pillar, we set the goal of having around 10% of our revenues coming from innovation by 2023. Accordingly, we had major launches in the quarter, such as the Perdigão Mini Sausages, the Sadia Pork Cuts, Breaded Chicken Burger and the "Sadia na Receita" (chicken cuts ready to be used on recipes), among others.

Lastly, we have been quickly advancing our agenda of employee engagement and company culture. The results obtained so far are only possible thanks to the dedication and commitment of our employees and the partnership of our integrated companies and suppliers. We have been making efforts to turn our essential commitments to Safety, Quality and Integrity, into an integral part of BRF's way of being and way of doing.

Undoubtedly, the work we have done so far is rewarding, but there is still a lot to do. Our achievements put us in a unique position to leverage the excellent opportunities in this upcoming positive cycle, especially in regard to the protein industry, as well as to the more favorable macroeconomic environment for consumption when compared to recent years. Accordingly, we will continue to adhere closely to our profitability turnaround plan.

Lorival Nogueira Luz Jr.

Global CEO

1. Poultry Industry Databank - June 2019, APINCO.
2. Average price variation in the 6 months preceding 2Q18 and 2Q19 - for a composition of 2/3 corn and 1/3 soybean using B3's quotes.
3. Average price variation in the closing quotes of December 2018 and June 2019 - for a composition of 2/3 corn and 1/3 soybean using B3's quotes

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Management Report on 2Q19 Results

HIGHLIGHTS

Key Financial Indicators

The Company notes that it adopted the CPC 06 (R2) / IFRS16 as of 01/01/19, with an impact of R$157 million in the 2Q19 EBITDA. The IFRS16 accounting standard changes the treatment of leasing, and the Company opted for a modified retrospective approach without reinstatement of comparative periods. Further details can be found in Note 3.1 of the Interim Financial Information (ITR).

Exclusion of ICMS (State VAT) from the calculation basis of PIS/COFINS (Federal Revenue Taxes): The Company recorded gains under Other Operating Income totaling R$687 million and R$343 million in Financial Income.These gains mainly result from a favorable court decision on a lawsuit filed by its subsidiary, Perdigão Agroindustrial, recognizing the right to exclude ICMS from the PIS/COFINS calculation basis, as detailed in Note 11 of the Interim Financial Information (ITR).

Provision for ICMS in the Staple Basket: in June 2019, the Brazilian Federal Supreme Court (STF) ruled on a motion for clarification under General Repercussion (appeal) discussing the right to the ICMS (value-added tax) tax holiday on Staple Basket products. This above-mentioned appeal aimed at restraining the effects of such a decision. As a result of the court decision and in analyzing the legal and technical aspects, the Company understands that the effects may result in probable losses. Thus, the Company recorded in 2Q19 negative impact of R$359 million under Other Operating Income and of R$390 million in Financial Expenses,as detailed in Note 26.1 of the Interim Financial Information (ITR).

Highlights	2Q19	2Q18	Chg. y/y	1Q19	Chg. q/q
Volume (Thousand Tons)	1,090	1,083	0.7%	1,006	8.40%
Net Revenues	8,338	7,067	18.0%	7,359	13.3%
Average Price (R$/kg)	7.65	6.52	17.2%	7.32	4.5%
COGS	(6,246)	(6,472)	(3.5%)	(5,842)	6.9%
Gross Profit	2,092	595	251.5%	1,517	37.9%
Net (Loss) Income	191	(1,435)	n.m.	(113)	n.m.
Continued Operations
Net Margin - Continued Op. (%)	2.3%	(20.3%)	22.6 p.p.	(1.5%)	3.8 p.p.
Adjusted EBITDA	1,547	356	333.9%	748	106.7%
EBITDA Adjusted Margin (%)	18.6%	5.0%	13.6 p.p.	10.2%	8.4 p.p.
Adjusted EBITDA ex-ICMS	1,219	356	241.9%	748	62.9%
EBITDA Adjusted Margin ex-ICMS (%)	14.6%	5.0%	9.6 p.p.	10.2%	4.5 p.p.
Cash Generation (Consumption)	1,373	(63)	n.m.	253	443.3%
Net Debt	(13,900)	(15,696)	(11.4%)	(14,238)¹	(2.4%)
Leverage (Net Debt/Adj.EBITDA LTM)	3.74	5.69	(34.3%)	5.64¹	(33.7%)

1 Including the sale of assets in Europe and Thailand (R$1,163 million) and remaining amounts receivable from sale of assets in Argentina (R$96 million)

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