Votorantim Participações S.A. Consolidated Interim Financial Statements at March 31, 2011 and Independent Auditor s Report

Transcription

1 Consolidated Interim Financial Statements at March 31, 2011 and Independent Auditor s Report

2 Report on Review of Consolidated Interim Financial Statements Introduction We have reviewed the accompanying consolidated interim financial statements of Votorantim Participações S.A. and its subsidiaries ( Consolidated ) for the quarter ended March 31, 2011, comprising the consolidated interim balance sheet and the consolidated interim statements of income, comprehensive income, changes in stockholders equity and cash flows for the quarter then ended. Management is responsible for the preparation and fair presentation of the condensed consolidated interim financial statements in accordance with accounting standards CPC 21, Interim Financial Reporting issued by the the Brazilian Accounting Pronouncements Committee (CPC) and International Accounting Standard (IAS) 34, Interim Financial Reporting issued by the International Accounting Standards Board (IASB). Our responsibility is to express a conclusion on these condensed interim financial statements based on our review. Scope of review We conducted our review in accordance with Brazilian and International Standards on Reviews of Interim Financial Information (NBC TR 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity and ISRE 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity, respectively). A review of interim information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Brazilian and International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial statements referred to above have not been prepared, in all material respects, in accordance with the accounting standards CPC 21 and IAS 34. Other matters Supplemental information - Statement of value added We have also reviewed the consolidated interim statement of value added for the quarter ended March 31, 2010, presented as supplemental information. This statement has been submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that it has not been prepared, in all material respects, in relation to the condensed consolidated interim financial statements taken as a whole. PricewaterhouseCoopers, Av. Francisco Matarazzo 1400, Torre Torino, São Paulo, SP, Brasil , Caixa Postal T: (11) , F: (11) , 2

3 May 27, 2011 Supplemental information Information by industrial and financial segment and by business unit We have also reviewed the supplemental information by industrial and financial segment, as well as by business unit, presented to provide additional information on Votorantim Participações S.A. and its subsidiaries. This information has been submitted to the same review procedures described above and, based on our review, nothing has come to our attention that causes us to believe that it has not been prepared, in all material respects, in relation to the condensed consolidated interim financial statements taken as a whole. Review of comparative information for the quarter ended March 31, 2010 The comparative information for the quarter ended March 31, 2010, was previously reviewed by us in accordance with the auditing standards in effect at the time we issued our unqualified report on May 28, As these auditing standards permitted division of responsibility, the reviews of the financial statements at and for the quarter ended March 31, 2010 of the jointly-controlled entities Votorantim Finanças S.A. and Tivit Terceirização de Processos, Serviços e Tecnologia S.A. were conducted by other auditors and our report thereon, in so far as it refers to the income from these entities for the quarter ended March 31, 2010, of R$ 396 million, is based solely on the reports of those other auditors. São Paulo, May 27,

4 Consolidated Balance Sheets In millions of reais Assets Current assets Cash and cash equivalents Financial assets under repuchase agreement Financial investments Derivative financial instruments Trade accounts receivable Loans and receivable Inventories Taxes recoverable Dividends receivable Other assets Non-current assets Long-term receivables Financial investments Derivative financial instruments Loans and receivables Related parties Deferred taxes Taxes recoverable Call option Other assets Investments Property, plant and equipment Biological assets Intangible assets Total assets Supplemental information Consolidated Industrial Segment Financial Segment Note 3/31/ /31/2010 3/31/ /31/2010 3/31/ /31/ ,718 3,252 3,427 2,674 1, ,629 6,128 6,629 6, ,496 8,096 3,886 5,092 2,379 3,770 1, ,272 2,266 2,272 2, ,185 21,044 26,185 21, ,911 3,717 3,911 3, ,984 1,849 1,490 1, ,765 1, , ,355 48,595 16,400 16,610 38,910 33,059 32,908 36,015 6,549 6,678 26,359 29, ,522 7, ,428 7,708 1,421 1, , ,398 18,460 14,398 18, (b) 4,311 4,226 3,152 3,143 1,159 1, ,352 1,661 1,317 1, ,547 1,744 1, ,826 3,973 3,826 3, ,449 26,269 26,365 26, ,095 1,179 1,095 1, ,238 9,615 9,727 9, ,516 77,051 47,562 47,124 26,954 29, , ,646 63,962 63,734 65,864 62,986 The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 4

5 Consolidated Balance Sheets In millions of reais Liabilities and Stockholders' Equity Current liabilities Financial liabilities at fair value through profit or loss Financial liabilities at amortized cost Financial liabilities associated with transferred assets Loans and financing Borrowings and onlendings Deposits Securities issued Derivative financial instruments Subordinated debt Accounts payable on acquisition of shares Suppliers Accounts payable - Trading Salaries and payroll charges Income tax and social contribution Taxes payable Dividends payable to parent company Dividends payable to non-controlling stockholders Advances from customers Provisions Trade payables and other liabilities Consolidated Industrial Segment Supplemental Information Financial Segment Note 3/31/ /31/2010 3/31/ /31/2010 3/31/ /31/ , ,278 13,698 13,573 13,698 13,573 4,784 4,349 4,784 4, ,296 2,476 2,296 2, ,641 3,169 3,641 3,169 8,709 8,141 9,664 9,087 3,424 2,106 3,424 2,106 1, ,258 2,705 2,258 2, ,572 1, ,893 1,599 46,426 44,165 7,961 8,306 39,419 36,933 The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 5

6 Consolidated Balance Sheets In millions of reais Non-current liabilities Financial liabilities at fair value through profit or loss Financial liabilities at amortized cost Financial liabilities associated with transferred assets Loans and financing Borrowings and onlendings Deposits Securities issued Deferred taxes Provisions Derivative financial instruments Subordinated debt Other liabilities Stockholders' equity Capital Capital reserve Revenue reserves Retained earnings Other comprehensive income Total net equity of controlling stockholders Non-controlling interests Total stockholders' equity Note 3/31/ /31/2010 3/31/ /31/2010 3/31/ /31/ ,434 2,463 2,434 2,463 3,550 3,319 3,550 3, ,677 19,598 19,677 19, ,555 2,459 2,555 2,459 2,674 2,559 2,674 2,559 4,169 4,193 4,169 4, (b) 4,260 4,172 3,531 3, ,292 2,167 1,379 1, , ,713 2,727 2,713 2,727 1,593 1,824 1,565 1, ,947 46,481 26,763 26,620 20,184 19,861 20,000 20,000 16,492 16,492 3,508 3, ,911 14,191 7,238 11,507 2,673 2, ,460 (1,491) 2,511 (1,491) (51) 33,062 32,704 26,801 26,512 6,261 6,192 2,437 2,296 2,437 2,296 Supplemental information Consolidated Industrial Segment Financial Segment 35,499 35,000 29,238 28,808 6,261 6, , ,646 63,962 63,734 Total65,864 liabilities and stockholders' 62,986 equi The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 6

7 Consolidated Income Statements Quarters Ended March 31 In millions of reais Consolidated Industrial Segment Supplemental information Financial Segment Note Net revenue from products sold and services rendered 24 5,627 5,054 5,627 5,054 Income from financial intermediation 24 2,104 2,102 2,104 2,102 Cost of products sold and services rendered (4,018) (3,540) (4,018) (3,540) Expenses from financial intermediation (1,459) (1,479) (1,696) (1,498) Gross profit 2,254 2,137 1,609 1, Operating income (expenses) Selling General and administrative Other operating income (expenses), net (306) (290) (306) (291) (761) (734) (510) (532) (251) (202) , , (53) - (1,012) 740 (778) 994 (234) (255) Operating profit before equity and financial results 1,242 2, , Result from equity investments Equity in earnings of investees Financial income (expenses), net Profit before taxes on income Income tax and social contribution Current Deferred (337) (689) (100) (671) - 20 (a) 993 2, , (300) (217) (192) (121) (108) (96) 47 (391) (18) (438) Net income for the quarter 740 1, , Net income attributable to controlling interests Net income attributable to non-controlling interests Net income for the quarter 687 1, , , , The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 7

8 Consolidated Statements of Comprehensive Income Quarters Ended March 31 In millions of reais Consolidated Net income for the quarter 740 1,727 Other comprehensive income: Foreign exchange gains (losses) on foreign investments (154) 318 Revaluation in subsidiaries and associates (200) (892) Hedge accounting of net foreign investments 41 (68) Hedge accounting of subsidiaries 7 (57) Fair value of available-for-sale financial assets (31) 68 Other comprehensive income for the quarter (337) (631) Total comprehensive income for the quarter 403 1,096 Attributable to: Controlling interests 350 1,086 Non-controlling interests ,096 The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 8

9 Consolidated Statements of Changes in Stockholders Equity In millions of reais, unless otherwise indicated Revenue reserves Other Total net equity of Capital Legal Profit Retained comprehensive controlling stockholders Non-controlling Stockholders' Capital reserve reserve retention earnings income interests interests equity As of December 31, , ,277 17,082 (942) 29, ,058 Adjust the opening balance (Note 23 (e)) (783) (783) 113 (670) Adjusted balances as at 31 December , ,277 16,299 (942) 29, ,388 Total comprehensive income for the quarter Net income for the quarter 1,717 1, ,727 Adjustments to financial instruments - hedge accounting of subsidiaries (57) (57) (57) Revaluation in subsidiaries and associates (892) (892) (892) Foreign exchange gains (losses) on foreign investments Hedge accounting of net foreign investments (68) (68) (68) Fair value of available-for-sale financial assets Total comprehensive income for the quarter 1,717 (631) 1, ,096 Total contributions by stockholders and distributions to stockholders Adjustment to capital gains (losses) from adoption of new CPC s (67) (67) (67) Total contributions by stockholders and distributions to stockholders (67) (67) (67) As of March 31, , ,277 16,299 1,717 (1,640) 30, ,417 The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 9

10 Consolidated Statements of Changes in Stockholders Equity In millions of reais, unless otherwise indicated Revenue reserves Other Total net equity of Capital Legal Profit Retained comprehensive controlling stockholders Non-controlling Stockholders' Capital reserve reserve retention earnings income interests interests equity As of December 31, , ,521 12,670 (1,491) 32,704 2,844 35,548 Adjust the opening balance (Note 23 (e)) (548) (548) Adjusted balances as at 31 December , ,521 12,670 (1,491) 32,704 2,296 35,000 Total comprehensive income for the quarter Net income for the quarter Adjustments to financial instruments - hedge accounting of subsidiaries Revaluation in subsidiaries and associates (200) (200) (200) Foreign exchange gains (losses) on foreign investments (154) (154) (154) Hedge accounting of net foreign investments Fair value of available-for-sale financial assets (31) (31) (31) Total comprehensive income for the year 687 (337) Total contributions by stockholders and distributions to stockholders Acquisition of non-controlling interests Total contributions by stockholders and distributions to stockholders As of March 31, , ,521 12, (1,828) 33,054 2,445 35,499 The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 10

11 Consolidated Statements of Cash Flows Quarters Ended March 31 In millions of reais Supplementary information Consolidated Industrial Segment Financial Segment Note CASH FLOW FROM OPERATING ACTIVITIES Net income before taxes 993 2, , Adjustments to reconcile earnings to cash generated (used) by operating activities Interest and unrealised exchange variation Adjustment by the fair value of derivative (26) (26) Equity in earnings of investees (88) (67) (88) (67) Depreciation, amortization and depletion Low value and biological fixed assets Gain on asset sw ap-cimpor (1,672) (1,672) Other operating income Expenses for loan losses and loss in stock (128) Provision for contingencies and tax liabilities , (227) Changes in assets and liabilities Financial assets (830) (3,775) (830) (3,775) (Increase) decrease in accounts receivable (21) (445) (21) (445) (Increase) decrease in inventories (43) (127) (43) (127) (Increase) decrease in taxes recoverable (45) (Increase) decrease in other assets (350) (1,047) 433 (17) (783) (1,030) Loans and receivables (1,389) (3,609) (1,389) (3,609) Financial liabilities 200 3, ,788 Deposits 686 (679) 691 (679) Borrow ings and onlendings Securities issued 1,295 (102) 1,295 (102) Increase (decrease) in Suppliers (457) (370) (457) (370) Increase (decrease) in accounts payable (128) (128) Increase (decrease) in taxes payable (150) (116) (14) 89 (136) (205) Increase (decrease) in salaries and payroll charges (120) (78) (120) (78) Increase (decrease) in advance fromcustomers Increase (decrease) in other liabilities 972 1, ,104 Increase (decrease) in related parties (4,294) (4,330) Cash fromoperations 2,535 (1,897) 1,953 1, (3,612) Interest paid (211) (298) (211) (298) Income tax and social contribution paid (206) (183) (206) (183) (Increase) decrease in financial applications 1, , (Increase) decrease in derivative financial instruments Net cash provided by (used in) operating activities 3,452 (1,403) 2,682 1, (3,130) The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 11

12 Consolidated Statements of Cash Flows Quarters Ended March 31 In millions of reais (continued) Supplementary information Consolidated Industrial Segment Financial Segment Note CASH FLOW FROM INVESTMENT ACTIVITIES Financial applications-available for sale Acquisition of fixed assets (649) (897) (647) (898) (2) 1 Increase in intangible assets and deferred charges (465) (462) (3) Acquisition of investments, net of cash acquired (30) (685) (30) (685) Goodw ill paid on acquisition of investments (3) (3) Accounts payable for acquisition of shares (245) (278) (245) (278) Participation of shareholders not controllers (346) (346) Receipt of dividends Net cash provided by (used in) investing activities (1,660) (1,613) (1,599) (1,614) (5) 1 CASH FLOW FROM FINANCING ACTIVITIES Loans and financing obtained 1,295 1,047 1,295 1,047 Settlement of loans and financing (1,431) (911) (1,431) (911) Derivative financial instruments (4) (23) (4) (23) Interest in subsidiaries (130) (130) Subordinated liabilities Pagamento de dividendos (192) (1,262) (192) (262) (56) (1,000) Net cash provided by (used) in financing activities (326) (549) (332) (149) (50) (400) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,465 (3,565) 752 (33) 719 (3,529) Effect of exchange rate fluctuations (32) (32) Cash and cash equivalents-beginning of financial year 3,252 7,863 2,674 3, ,667 Cash and cash equivalents-end of the year 4,718 4,301 3,427 3,163 1,476 1,138 The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 12

13 Consolidated Statements of Value Added Quarters Ended March 31 In millions of reais Consolidated Industrial Segment Revenues Sales of products and services 6,681 6,020 6,681 6,020 Income from financial intermediation Other operating income (expenses) 3 1, ,804 (35) 110 Allowance for doubtful accounts (320) (157) (15) 15 (305) (172) 7,133 8,530 6,704 7, Inputs acquired from third parties Cost of products sold and services rendered (3,806) (3,193) (3,806) (3,193) Gross value added 3,327 5,337 2,898 4, Depreciation, amortization and depletion (361) (509) (352) (505) (9) (5) Net value added generated by the Company 2,966 4,828 2,546 4, Value added received through transfer Results from equity investments Financial income 979 1, ,235 1,067 1,276 1,067 1,302 Supplemental information Financial Segment Total value added to distribute 4,033 6,104 3,613 5, Distribution of value added Personnel and payroll charges Direct remuneration Benefits Taxes and contributions Federal State Municipal Deferred tax credits (47) (65) Remuneration on third parties' capital Financial expenses 1,078 1,906 1,078 1,906 Rentals Remuneration on own capital Dividends Non-controlling interests Profits reinvested 515 1, , Value added distributed 4,033 6,104 3,613 5, The accompanying notes are an integral part of these consolidated financial statements and supplemental information. 13

14 1 General Information Votorantim Participações S.A. ("Company", "Parent company" or "VPAR") is a privately-held company controlled by the Ermírio de Moraes family and is the holding of Votorantim companies ("Votorantim"), with headquarters in the city of São Paulo, Brazil. Together with its subsidiaries, jointly controlled and associated companies, the Company is organized into two business segments, as described below: Industrial Segment Includes the companies which operate in capital-intensive base industries: cement and concrete, metals (aluminum, zinc and nickel), steel, pulp and paper, generation of electric power and agribusiness (frozen concentrated orange juice). This segment also includes the "private equity" and "venture capital" portfolios which further diversify Votorantim s businesses. Currently, these portfolios comprise mainly investments in the mineral prospection and chemical (nitrocellulose) industries. Votorantim Finanças ("VF" or Financial Segment ) Votorantim Finanças operates in the wholesale, retail, treasury and asset management financial services segments through various institutions rendering: (i) consumer finance services (especially vehicle financing), (ii) investment banking services and treasury products for corporate customers; (iii) asset management services; (iv) brokerage services; and (v) lease transactions for both corporate clients and individuals. Significant acquisitions and dispositions of businesses in 2010 (there were no significant transactions in 2011): (a) Call Option Pursuant to Fibria's Investment and Shareholders Agreement, VID has the right to acquire up to 11.04% of Fibria's common shares until October 29, The fair value of the "Call Option" at March 31, 2011 is R$ 358 (December 31, R$ 451), recognized in "Stock option" under noncurrent receivables. (b) Sale of ownership interest in Banco Votorantim S.A. On September 28, 2009, the sale of 50.00% of Banco Votorantim S.A. ("BV") to Banco do Brasil S.A. was concluded. This transaction was carried out through the sale of BV shares for R$ 2,970, followed by a subscription by Banco do Brasil S.A. of new preferred shares issued by BV for R$ 1,200 (of which R$ 750 settled on the transaction date and R$ 450 on March 29, 2010). (c) Acquisition of interest in Cimpor On February 3, 2010, VPAR's subsidiary Votorantim Cimentos S.A. ("VCSA") and Companhia Nacional de Cimento Portland ("Lafarge Brasil") entered into a Share Exchange Agreement whereby Lafarge Brasil transferred to VCSA shares of Cimpor Cimentos de Portugal SGPS S.A. ("Cimpor"), representing 17.28% of the capital of this Portuguese-domiciled company, in exchange 14

15 for all shares in a Special Purpose Entity ("SPE") incorporated by VCSA which held certain of VPAR's cement businesses in the Northeastern and Southeastern regions of Brazil. The assets, rights and obligations of the SPE included a cement plant, transferred by Votorantim Cimentos Brasil S.A. - and two cement factories transferred by Votorantim Cimentos N/NE S.A., both VCSA direct and indirect subsidiaries. The transaction was recorded based on the fair values of transferred assets, and the gain of R$1,672, represented by the difference between the cost of assets derecognized and their fair values, was recorded in "Other operating income, net". On February 11, 2010, VCSA acquired from third parties an additional 3.93% participation in Cimpor for R$ 390, now holding 21.21% of Cimpor. (d) Acquisition of control of Compañía Minera Milpo ( Milpo ) On August 3, 2010, the Company, through its subsidiary Votorantim Metais Cajamarquilla S.A., concluded a Public Offering, acquiring a further 16.40% interest in Milpo s capital for R$ 739 (equivalent to US$ 420). Upon concluding this acquisition, the Company acquired the control of Milpo, and now holds a 50.02% interest. Milpo is now fully consolidated in the Company s financial statements. The Company remeasured its prior 33.62% interest in Milpo at fair value at the acquisition date and in 2010 recognized a gain of R$ 840 in "Other operating income (expansives), net". (e) Merger between Citrovita and Citrosuco On May 14, 2010, Votorantim and Fischer Group entered into an agreement to combine their respective orange juice businesses, currently operated through their subsidiaries Citrovita Agroindustrial Ltda. ( Citrovita ) and Fischer S.A. - Comércio, Indústria e Agricultura ("Citrosuco"), respectively, both in Brazil and abroad. The proposed merger will be implemented through a corporate reorganization of Citrovita and Citrosuco and will also depend on the compliance with certain contractual conditions, such as approvals by government authorities, fulfillment of obligations and obtaining statements and guarantees. (f) Increase of interest in Acerbrag S.A. On July 16, 2010, through its subsidiary Votorantim Siderurgia S.A., the Company purchased 80% of Acerholding S.A. s capital for R$ 125. Together with its 99.60% interest in Acergroup S.A. and its 80% interest in Acerholding S.A., the Company holds 99.75% of Acerbrag S.A., a steel business headquartered in Argentina. 2 Presentation of Financial Statements These financial statements were approved for release on May 25, 2011 by the Company's Board of Directors, and include information on subsequent events through such date. 15

16 2.1 Basis of presentation The interim financial statements have been prepared in accordance with Pronouncement CPC 21 Interim Financial Reporting issued by the Accounting Pronouncements Committee ( Comitê de Pronunciamentos Contábeis or CPCs) and International Accounting Standards (IAS) 34 - Interim Financial Reporting issued by the International Accounting Standards Board (IASB). The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4. Consolidated financial statements These consolidated interim financial statements have been prepared on a basis consistent with the consolidation criteria described in Note 2 to the Company s financial statements for the year ended December 31, (a) Companies included in the consolidated financial statements The main subsidiaries and jointly-controlled companies included in the consolidation are as follows: Percentage of total capital March 31, 2011 December 31, 2010 Industrial Segment Cement Acariúba Mineração e Participação Ltda Interávia Transportes Ltda Prairie Material Sales Inc. (United States) Silcar Empreendimentos, Comércio e Participações S.A St. Barbara Cement Inc. (Canada) St. Marys Cement Inc. (Canada and United States) Sumter Cement Co. LLC (United States) Suwannee American Cement, LLC (United States) Trinity Materials LLC (United States) Votorantim Cement North America Inc. (Canada) VCNA Votorantim Cimentos Brasil S.A.(merged in 2010) Votorantim Cimentos N/NE S.A Votorantim Cimentos S.A Metals Companhia Brasileira de Alumínio Indústria e Comércio Metalúrgica Atlas S.A ,86 US Zinc Corporation (United States) USZinc Compañía Minera Milpo S.A.(Peru) Milpo Votorantim Metais - Cajamarquilla S.A. (Peru) Votorantim Metais Ltda Votorantim Metais Níquel S.A Votorantim Metais Zinco S.A

17 Percentage of total capital March 31, 2011 December 31, 2010 Rio Verdinho Energia S.A Campos Novos Energia S.A Steel Acerbrag S.A. (Argentina) Acerías Paz del Río S.A. - "APDR" (Colombia) Usinas Siderúrgicas de Minas Gerais S.A. - Usiminas Votorantim Siderurgia S.A Pulp and Paper Fibria Celulose S.A Agribusiness Citrovita Agro Industrial Ltda Citrovita Agro Pecuária Ltda Holding and trading companies Votorantim G.m.b.H. (Austria) Hailstone Limited (British Virgin Islands) Santa Cruz Geração de Energia S.A The Bulk Service Corporation (Cayman Islands) Votorantim Industrial S.A Votorantim Investimentos Latino-Americanos S.A Votorantim Energia Ltda Voto - Votorantim Overseas Trading Operations III Ltd. (Cayman Islands) Voto - Votorantim Overseas Trading Operations IV Ltd. (Cayman Islands) Voto - Votorantim Overseas Trading Operations V Ltd. (Cayman Islands) Voto Votorantim Ltd. (Cayman Islands) Exclusive funds Odessa Multimercado Crédito Privado Clarion Multimercado Crédito Privado - Fundo de Investimento 100,00 100,00 Fundo de Investimento Pentágono Multimercado Crédito Privado New Businesses Votorantim Novos Negócios Ltda Companhia Nitro Química Brasileira Financial Segment Votorantim Finanças S.A Banco Votorantim S.A BV Participações S.A Votorantim International Business Limited VSP Participações S.A BV Trading S.A BV Empreendimentos e Participações Ltda Banco Votorantim Securities, Inc BV Financeira S.A BV Leasing e Arrendamento Mercantil S.A

18 Percentage of total capital March 31, 2011 December 31, 2010 BV Sistemas de Tecnologia e Informação Ltda CP Promotora de Vendas Ltda Votorantim Asset Management D.T.V.M. Ltda Votorantim Bank Limited Votorantim C.T.V.M. Ltda Votorantim Corretora de Seguros Ltda Votorantim Investment Overseas Ltd Raltic S.A The consolidated financial statements also include the investments funds in which VF and its subsidiaries hold most of the risks and rewards as listed below: Ownership percentage on total quotas March 31, 2011 December 31, 2010 BV Financeira FIDC I BV Financeira FIDC II BV Financeira FIDC III BV Financeira FIDC IV BV Financeira FIDC V Votorantim G&K FIP Fundo de Invest. Sedna Ref. DI VF holds 100% of the subordinated quotas of the related Credit Rights Investment Funds described above. An analysis of the combined assets, liabilities, income and expenses, cash flows and value added is presented as supplemental information, segregating the Company s activities between the Industrial Segment and the Financial Segment, as well as the Company s main Business Units ( BU") (Note 40). In the preparation of the financial information by BU (supplemental information), balances and transactions between the Industrial Segment and the Financial Segment were not eliminated. These eliminations were made only in the consolidated financial statements. 2.2 Derivative instruments and hedging activities In March 1, 2011 hedging transactions and derivative instruments used by the Company are the same as described in the note 4 of December 31, 2010 Consolidated Financial Statements, excepting cash flow hedging described below: Cash flow hedge 18

19 From January 1, 2011 the Company adopted hedge accounting for derivatives contracted in order to mitigate interest rate risk related to loans indexed to Libor rate. 3 Standards, Amendments and Interpretations of Existing Standards that are not yet Effective The following standards and amendments to existing standards have been published and are mandatory for subsequent accounting periods, but the Company has not early adopted them.. IFRS 9, Financial instruments, issued in November This standard is the first step in the process to replace IAS 39, Financial instruments: recognition and measurement. IFRS 9 introduces new requirements for classifying and measuring financial assets. The standard is not applicable until January 1, 2013 but is available for early adoption. No material impacts on the Group s or the parent s financial information are expected. 4 Critical Accounting Estimates and Assumptions The critical accounting estimates and assumptions used in the preparation of these interim financial statements are the same as those described in Note 4 to the Company s financial statements for the year ended December 31, Financial Risk Management For a better understanding of the Company s financial risk management, management policies used by the Industrial and Financial Segments are presented separately. 5.1 Industrial Segment Financial risk factors The Company s activities expose it to a number of financial risks, namely: (a) market risk (currency, commodity price and interest rate); (b) credit risk; and (c) liquidity risk. Many of the products sold by the Company, such as aluminum, nickel, zinc and orange juice are commodities, with prices referenced to international prices and denominated in U.S. dollars. For example, aluminum, nickel and zinc are sold in a global active market and traded on stock exchanges, such as the London Metal Exchange (LME) and the New York Mercantile Exchange. The orange juice is traded on the Intercontinental Exchange (previously known as New York Board of Trade). The Company s costs, however, are mainly denominated in Reais. Therefore, there is a natural mismatch of currencies and prices between the Company s costs and revenues. Additionally, the Company has debts linked to distinct indices and currencies, which may impact is cash flows. The Market Risk Management Policy is complemented by other policies that establish guidelines and rules for: (i) Foreign Exchange Exposure Management, (ii) Interest Rate Exposure Management, (iii) Commodity Price Exposure Management, (iv) Issuers and Counterparties Risk Management, and (v) Financial Indebtedness and Liquidity Management. 19

20 The governance structure includes the Finance, Risk Management and Internal Audit Committee (referred to as the "Finance Committee in this Note) and Treasury Committee. All proposals made to comply with each of the policies are discussed with the Treasury Committee and subsequently submitted for approval of the Finance Committee. The following derivative instruments may be used in the management of foreign exchange exposure, interest rate exposure and commodity price exposure: conventional swaps, purchase of call options, purchase of put options, collars, currency futures contracts, and NDF - Non- Deliverable Forward. Strategies that include simultaneous purchases and sales of options are authorized only when they do not result in a net short position in volatility of the underlying asset. The Company does not enter into transactions involving financial instruments for speculative purposes. (a) Market risk The market risk management process is intended to hedge the Company s cash flow against adverse market events, such as fluctuations in exchange rates, commodity prices and interest rates. The governance and macroguidelines of this process are defined in the Market Risk Management Policy. (i) Foreign exchange risk The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar. The Foreign Exchange Exposure Management Policy establishes guidelines and standards to hedge against fluctuations of foreign currencies that impact the Company s cash flow of the Industrial Segment. The proposals for entering into hedge transactions are prepared by the Treasury Committee for approval by the Finance Committee and are based on the foreign exchange exposure projected through the end of the year subsequent to the benchmark date. Additionally, during the budget preparation, hedging programs may be defined to hedge the Business Units cash flows. In these cases, the Treasury Committee prepares a proposal in coordination with the Business Unit in question, for subsequent approval of the Finance Committee. The Brazilian Real (R$) is the Company s functional currency, and all market risk management process efforts are intended to hedge the cash flow in this currency, to maintain the ability to pay financial obligations, and to comply with liquidity and indebtedness levels defined by management. The Company has certain investments in foreign operations, whose net assets are exposed to foreign exchange risk. The foreign exchange exposure arising from participation in foreign operations is mainly hedged by loans in the same currency of these investments, which are classified as a Hedge of a Net Investment in Foreign Operations, as described in the accounting policies. (ii) Cash flow or fair value risk associated with interest rate As the Company has no significant sales of products with prices indexed to interest rates, the 20

21 Company s income and operating cash flows are substantially independent of changes in the market interest rates. The Company s interest rate risk arises from long-term loans. Loans issued at variable rates expose the Company to cash flow interest rate risk. Loans issued at fixed rates expose the Company to fair value risk associated with interest rate. The Interest Rate Exposure Management Policy establishes guidelines and rules for hedge against fluctuations of foreign currencies that impact the cash flow of the Company and its Business Units. Exposures to each interest rate index (mainly CDI, LIBOR and TJLP) are projected until the end of the effective period of the assets and liabilities linked to such indices. Based on these exposures, the Treasury Committee prepares proposals for entering into hedge transactions and submits them for the approval of the Finance Committee. (iii) Commodity price risk This risk is related to the volatility in the price of the Company s commodities, such as aluminum, nickel, zinc, orange juice and pulp. Prices fluctuate depending on demand, production capacity, producer inventory levels, commercial strategies adopted by large producers, and availability of substitutes for these products in the global market. The Commodity Price Exposure Management Polity establishes guidelines for hedging against fluctuations of commodity prices that impact the cash flows of the BUs. The exposure to each commodity considers the monthly projections of production, purchases of inputs and flows of maturities of hedges associated to them. Hedges contracted are classified into the following types: (a) (b) (c) (d) Fixed price commercial transactions - hedge transactions that switch, from fixed to floating, the price contracted in commercial transactions with customers interested in purchasing products at a fixed price); Hedge for "quotation periods" - hedge that sets a price for the different "quotation periods" between the purchases of certain inputs and the sales of products arising from the processing of such inputs; Hedge for costs of inputs - intended to assure protection against volatility in prices/costs of the BUs in commodities such as oil, natural gas, for example; and Hedge of operating margin - intended to fixate the operating margin for part of the production of certain BUs. (b) Credit risk The derivative financial instruments, time deposits, Bank Deposit Certificates (CDB), and repurchase agreements backed by debentures and federal government securities, create exposure to credit risk of counterparties and issuers. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' are accepted. 21

22 The credit quality of financial assets is disclosed in Note 6. The Company s risk management practice assesses the risks of counterparties in derivative transactions using the pre-settlement risk methodology, which consists in determining the probability (by means of Monte Carlo simulations) of the counterparty not honoring the financial commitments defined in contract. The use of such methodology was approved by the Finance Committee in April The table below shows the distribution of counterparties risks in the related ratings using this methodology: Local Rating Global Rating Rating (*) 3/31/2011 3/31/2011 AAA 628 AA A 113 BBB 106 * Or equivalent to the above described rating In the case of credit risk arising from customer credit exposure, the Company assesses the credit quality of the customer, taking into account mainly the history of relationship and financial indicators defining individual credit limits, which are continuously monitored. The Company recognizes an allowance for doubtful accounts, whenever necessary. The allowance for doubtful accounts is recorded at an amount sufficient to cover expected losses on the collection of trade accounts receivable and is charged to "Selling expenses. Initial customer credit analyses are performed and, when necessary, guarantees or letters of credit are obtained to protect the Company s interests. Also, most sales for export, to the United States, Europe and Asia, are protected by letters of credit and credit insurance. Regarding the risk of private credit concentration, the Company has a policy of working with private issuers that have, at a minimum, an assessment by one of the following rating agencies: Fitch, Moody's or Standard & Poor's. Except in countries whose issuers do not fulfill the minimum credit risk ratings, where shall be applied criteria proposed by the Treasury Committee and approved by the Financial Committee, such as global bank positioning, relationship with the group, local branching, the minimum rating required for counterparts is "A+" (in local scale) or BBB- (in international scale), both with stable or positive prospect, or equivalent. (c) Liquidity risk This risk is monitored by means of the Liquidity and Financial Indebtedness Management Policy, aimed at ensuring sufficient net funds to meet the financial commitments with no additional cost. The main liquidity measurement and monitoring instrument is the cash flow projection, observing a minimum projection period of 12 months from the benchmark date. 22

23 The liquidity and indebtedness management adopts comparable metrics provided by global risk rating agencies for credit risk BB stable or equivalent. The table below analyzes the Company s non-derivative financial liabilities and derivative financial assets and liabilities to be settled by the Company by maturity, corresponding to the remaining period in the balance sheet up to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for an understanding of the temporary cash flows. The amounts disclosed in the table are undiscounted contractual future cash flows (*). Industrial Segment Up to one year Between one and two years Between two and five years Between five and ten years Over ten years As of March 31, 2011 Loans and financing (1,749) (2,260) (6,884) (10,697) (1,629) Accounts payable - Trading (267) Suppliers (2,273) (4,289) (2,260) (6,884) (10,697) (1,629) As of December 31, 2010 Loans and financing (2,658) (2,546) (7,035) (10,353) (1,441) Accounts payable - Trading (395) Suppliers (2,705) (5,758) (2,546) (7,035) (10,353) (1,441) (*) These amounts cannot be directly reconciled to the amounts in the balance sheet for loans and derivative financial instruments Derivatives contracted All derivate instruments contracted by the Company are described below. All derivative transactions were executed in the over-the-counter market. Hedging program for interest rate in U.S. dollar - derivative financial instruments contracted in order to match LIBOR exposure (arising from debt in US dollars indexed to LIBOR floating rates) to the parameters established by the policy. Mitigation of risks is carried out by means of swaps and collars. Hedging program for agribusiness operating margin - derivative financial instruments contracted to mitigate the volatility of cash flows from orange juice operations. This hedge aims at locking in the operating margin for a part of the production, and is attained by selling U.S. dollar forward contracts. Hedging program for the sale of nickel, zinc and aluminum at a fixed price this hedge program aims to convert sales at fixed prices to floating prices in commercial transactions with customers interested in purchasing products at fixed prices. The purpose of this strategy is to maintain the revenue flow of the Business Unit linked to the LME prices. This strategy is achieved by purchasing nickel, zinc and aluminum futures traded on the LME or on the over-the-counter market. 23

24 Hedging program for fuel oil cost - derivatives contracted in order to reduce the volatility of the cash flows of nickel operation, resulting from volatility in oil prices. This hedge is realized by means of the purchase of WTI collars (sales of oil put options and purchase of oil call options). Hedging program for the operating margin of metals - derivative financial instruments contracted in order to reduce the volatility of the cash flows related to zinc, nickel and aluminum. With the purpose of ensuring a fixed operating margin in Reais for a part of the production of metals, this hedge is attained by means of selling forward contracts for each commodity, combined with selling U.S. dollar forward contracts. Hedging program for foreign exchange exposure hedging instruments entered into for adjusting the foreign exchange exposure, according to the limits defined by the Treasury Committee. This hedge is attained by means of selling US dollar and euro forward contracts. Instruments to hedge U.S. dollar-denominated debt - derivative financial instruments contracted in 2007 and 2008 aiming at reducing the cost of debt incurred on the acquisition of foreign investments. In 2009, the contracting of these transactions was discontinued. In the fourth quarter of 2009, the remaining risk associated with foreign exchange options was settled by means of the partial repurchase of positions and contracting of reverse transactions for the remaining portion of the portfolio. Balance sheet hedging instruments - derivatives contracted in order to mitigate balance sheet foreign exchange exposure of the Industrial Segment. Throughout 2007 and 2008, swap transactions of USD vs. floating CDI rate were carried out. These transactions were no longer contracted as from April The following table summarizes the derivative instruments and the underlying hedged item: 24

25 Details of the main derivative programs Program Realized gain Principal Fair value Unit (loss) 3/31/ /31/2010 3/31/ /31/2010 3/31/ Hedge instruments for interest rate in USD Swap floating rate in LIBOR vs. fixed rate in LIBOR; Zero Cost Collar 1,322 1,259 USD MM (42) (71) (21) (34) (15) (7) (1) (42) (71) (21) Sale of nickel, zinc and aluminum at fixed price - Nickel forwards ton 0 - (2) 0 Zinc forwards 7,368 7,289 ton Aluminum forwards 11,625 21,350 ton Fuel oil cost hedge - Collar of WTI 420, ,000 bbl (*) 10 (1) (1) 0 Metal operating margin hedge - Nickel forwards 8,000 8,853 ton (21) (18) (16) (20) (1) Zinc forwards 80,000 53,250 ton 15 - (1) 14 1 Aluminum forwards 193, ,348 ton (71) (34) (11) (63) (8) USD forward contract USD MM (1) Agribusiness operating margin hedge - USD forward contract USD MM Balance sheet hedging USD forward contract 10 - USD MM (0) - (0) (0) Euro forward contract 20 - EUR MM (0) Balance sheet hedging - Swaps USD vs. floating rate in CDI USD MM (475) (435) - (475) - (475) (435) - Debt hedge in USD Financing swap USD MM Subtotal (29) (51) 1 26 (64) (7) (1) 3 12 Stock Market Companies (2) (2) 9 (0) 12 Total Consolidated (66) (9) (*) Oil barrel 25

26 5.1.3 Fair value estimates The carrying amounts of trade accounts receivable, less allowance for doubtful accounts, and of trade accounts payable, approximate their fair values. The main financial instruments and the assumptions for their valuation are described below: Cash and cash equivalents, financial investments, trade accounts receivable and other current assets - considering the nature and the terms, the amounts recorded approximate their realizable values. Financial liabilities - these instruments are subject to usual market interest rates. Market value was based on the present value of expected future cash disbursement, at interest rates currently available for issuance of debts with similar maturity and terms. In relation to carrying amounts, these liabilities totaled a gain of R$ 1,429 for loans and financing in the Industrial Segment, at March 31, 2011 (Note 18(f)). The methods for determining the fair value of derivative instruments used by the Company for hedge transactions were based on the use of well seasoned market methodologies. A summary of the methodologies used for fair value determination purposes by instrument is presented below. (a) Non-Deliverable Forwards (NDF) A projection of the future exchange rate is made, using the exchange coupon for fixed yields in Reais for each maturity date. Then, the difference between such quotation and the rate that was contracted is estimated. This difference is multiplied by the principal amount of each contract and discounted to present value using the fixed yields in Reais. (b) Swap contracts The present value of both the asset and liability leg is estimated through the discount of forecast cash flows using the market interest rate for the currency in which the swap is denominated. The contract fair value is the difference between the asset and liability leg. (c) Stock options Stock options are measured at their fair values, applying the Black-Scholes method. Fair value hierarchy The Company adopted the CPC 40/IFRS 7 for financial instruments that are measured in the balance sheet at fair value; this requires disclosure of fair value measurements by Level of the following fair value measurement hierarchy: Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1). 26