Operational and Financial Indicators 2002

Transcription

1 Operational and Financial Indicators 2002 Mission International Competitiveness Corporate Profi le / Values Message from the Management Business Performance Economic and Financial Performance Investments Capital Markets Corporate Governance Risk Management Outlook Human Resources Social Action Management Corporate Information 2002 Annual Report

2 Operational and Financial Indicators 2002 As one of the largest Latin American food companies, Perdigão continually invests in technological innovation and environmental preservation initiatives. Meat Production (In thousand tons) Pork Poultry Productive/Commercial Structure Industrial Units (Meats) 13 Industrial Units (Soybean) 2 Shareholders` Payout (In millions of Brazilian Reais) Feed Plants 6 Hatcheries Poultry Outgrowers 3,973 Hog Outgrowers 1,752 Employees 24,163 Distribution Centers 20 Offices Abroad Outsourced Distributors Active Domestic Customers 63,000 Active International Customers 350 Grain Purchasing Branches 25 Net Income (In millions of Brazilian Reais) Shareholders` Equity (In millions of Brazilian Reais)

3 EBITDA (In millions of Brazilian Reais) 17.3% Gross Sales (In millions of Brazilian Reais) 6.9% EBITDA Margin EBITDA 9.0% % 8.3% % % % % Exports Domestic Market , , , , , , , , ,789 1,035 1, ,342 1,206 2, Meats Sold (In thousand tons) Number of Employees Exports Domestic Market ,259 12,515 14,313 14,353 15,192 16,649 19,291 22,377 24, Productivity per Employee (In tons) Elaborated/Processed Products Sold (In thousand tons) Including Meat and Other Processed Products

4

5

6

7

8 of new products to be launched in In view of the new opportunities identifi ed in the Russian market, we acquired the shares held by Sadia in the capital of BRF Trading S.A., the later becoming BFF Trading S.A. (Brazilian Fine Foods), and beginning to operate independently in that country. A large part of this operating performance was achieved due to the investments in productivity gains and technological innovation. The investments reached R$ million in the Rio Verde Agroindustrial Complex, in the State of Goiás; the modernization of other industrial units; product launches; upgrading of processes and increased production capacity. In spite of this progress, net income was R$ 8.2 million, 95.1% less than 2001, with the EBITDA margin falling year over year from 17.3% to 10.1%. Several factors infl uenced this result. In the domestic market, the increase in the major raw material prices had a strong impact on costs. In the face of weaker consumer demand, it was not possible to fully pass on increased costs to price, thus resulting in rather fi ner margins. In overseas markets, there was an over-supply of chicken - due to the increase in the worldwide production and a resumption in demand for beef and pork meat, notably in Europe - following the end of the mad cow and foot and mouth diseases. Additionally, European Union changes in the criteria for enforcing sanitary controls and new import regulations on salted products took us by surprise. These diffi culties contrived to reduce exports, increase the tax burden and reduce the competitiveness of Brazilian products. In 2003, we will continue to focus our efforts on increasing the Company s international presence by widening our market for more elaborated products and by improving our production and distribution structure. Domestically, we are also well placed to satisfy stronger demand for more basic items. Our objective is to continue to grow in both domestic and international markets without losing our agility and fl exibility, which have characterized Perdigão s performance. We also intend to continue contributing to the preservation of the environment as well as the development of our employees and the communities in which we operate. Message from the Management 06 / 07 Last year Perdigão grew 13% in spite of having to manage the adversities which affl icted both the sector and the Company. Eggon João da Silva, Chairman of the Board of Directors Perdigão / Annual Report 2002

9 Food Safety Perdigão has today the most comprehensive product traceability process system in the Brazilian market enabling it to identify food origin and the various processing phases within a maximum 24 hour period. Since 2002, the Company has had complete control over the production chain due to the installation of a bar coding system printed on food packaging. By reading these codes, it is possible to obtain all information relating to each stage of the production process (producer, parents, feedstock, animal medication, quality testing, temperature during transportation, among others). All this information is stored in the SAP R3 system. Besides guaranteeing greater consumer safety, the Company gains in response time for implementing the necessary actions and corrective measures.

10

11 Business Performance Perdigão signifi cantly increased its sales volume in 2002 due to its strategy of launching higher value added products, expanding the business into new segments, increasing production, penetrating into more distant regions of the country and expanding the overseas structure. Sales volume of meat products increased 13.2% over 2001, while frozen meats and frozen pasta items grew 14.1% and 31.4% respectively. Domestic market In the domestic market, the appreciation of the dollar against the Real produced a reduction in purchasing power and higher infl ation, provoking a sharp fall in domestic consumption. In spite of this, Perdigão reported a 10.9% growth in meat sales volume and 21.7% in total revenues following the good market receptivity to product launches and the expansion in the distribution network. During the year, the Company launched the sweet pizza segment and was the fi rst major industry to enter the market for fl aky pastries. Additionally it began to produce pies, thus offering the consumer more practical, quality and tasty items. These products, incorporated in the Apreciatta and Perdigão lines, were the leading highlights among the more than 40 new product launches in The sweet pizzas launch received the Destaque Award - Marketing 2002 prize, in the product category, awarded by the Instituto de Marketing e Negócios, and it also featured prominently in the Tendencies and Innovations list of the International Food Fair (SIAL) held in Paris (France), the most important event in the world food industry. Thanks to innovative products and an enhanced distribution network, we posted signifi cant growth both in domestic sales and in the market share of the Company s strategic segments. We implemented a larger, more effi cient overseas structure, principally to support our European business. João Rozário da Silva, Chief Sales Offi cer

12 New items were also added to the Toque de Sabor, Chester, Light & Elegant, Breaded Products, Ready-to-Eat Dishes, Turma da Mônica, Evidence and Borella lines. According to the AC Nielsen survey, the Company retained its leadership for the third consecutive year in the specialty meat segment, expanding its market share from 24.6% in 2001 to 25.2%. It also improved its participation in the frozen meat market from 31.1% to 33.4%. Meanwhile, frozen pastas, a market that the Company entered in 1998, jumped from 32% to a 37.8% market share. Besides that, Perdigão topped the ranking in the meat nuggets segment in the last two months of the year with 37.2% of the Brazilian market. The Batavo brand also registered signifi cant growth in the frozen meat segment, increasing its penetration from 2.1% to 4.3%. As part of its efforts to improve consumer relationships, Perdigão implemented CRM (Customer Relationship Management), a system that consolidates a large database that facilitates identifi cation of consumer preferences. On the sales front, the Company was awarded the Platinum Meeting Point trophy by Abras (Brazilian Supermarkets Association) in recognition of its customer relationships. Business Performance Channels of Distribution (In volumes) 10 / 11 Institutional 8.0% Institutional 8.6% Wholesale 10.1% Wholesale 11.8% 2002 Small Stores 17.0% 2001 Small Stores 17.0% Supermarket 64.9% Supermarket 62.6% Market Share (%) Specialty Meats Frozen Meats Frozen Pastas % % 25.1% Source: AC Nielsen LAST TWO MONTHS/02 Perdigão / Annual Report 2002

13 In tune with reality During the year, Perdigão set up an Internal Committee for Sanitation and Food Safety comprised of two professors from the Federal University of Viçosa (State of Minas Gerais) and São Paulo University (USP) and one researcher from the United Kingdom. Their project is to closely monitor the world market for changes in the legislation and methodologies for detecting food contamination. Reexamination of processes In 2002, Perdigão signed a partnership agreement with the Federal University of Santa Catarina, supported by FINEP s Green-Yellow Fund involving a project for re-examining all the Company s processes considered to be bottlenecks and improvements to be made through the introduction of technological innovations. The project will be executed between 2003 and 2004 and will involve university personnel working full time at Perdigão to identify problems and indicate solutions.

14 Production As a result of projects developed during the year, in the industrial area there was a 14.7% year over year growth in meat production. The most important of these projects was the conclusion of the fi rst phase of the Rio Verde Agroindustrial Complex, in the State of Goiás. This plant is already producing 60,000 tons of chicken, 30,000 tons of pork and 90,000 tons of processed products annually, distributed to the domestic market and also exported to 14 countries. The Complex occupies an area of 2 million square meters consisting of two slaughterhouse facilities (one for poultry and the other for hogs), animal feed plant, hatchery, a meat processing unit and another for pasta. The Complex uses state-of-the-art technology and the project was structured on the basis of innovative functionality and production fl ow systems. The area of the Complex dedicated to farming and cattle raising consists of poultry breeding farms, an artifi cial insemination center and more than 900 modules for preparing poultry and pork for slaughter. At the Carambeí unit, in the State of Paraná, production also posted signifi cant progress, increasing from 73,000 tons in 2001 to 93,000 tons in 2002, while lower value added lines were shut down and the production of frozen products was intensifi ed. Distribution Perdigão is investing in the continual upgrading of its distribution network to match the growth in installed capacity and to offer more effi cient services to retailers. The Company is currently able to supply medium to large municipalities throughout the country within 24 hours. There are 30 distribution centers, of which 20 are wholly owned and 10 outsourced, and 12 cross-docking points (areas where large trucks can transfer goods to smaller vehicles for distribution). In 2002, the Company expanded its coverage of the more far-fl ung regions of the country. With the increased production from the Rio Verde facility, it began to operate more intensively in the Midwest, North and Northeast, where it registered sales growth of 10.2%, above the Brazilian average. Perdigão also began installing OmniSAT - a satellite communications, monitoring and tracking system - in its outsourced truck delivery fl eet. This extremely advanced system enables the Company to identify the exact location of the trucks (through a GPS receiver - Global Positioning System), thus not only maintaining on-line contact with the drivers but also monitoring and correcting cargo Annual Grain Consumption (In thousand tons) Soybean Corn , , , ,057 1, ,287 2, , Perdigão / Annual Report / 13 Business Performance

15 temperatures. As a result of this initiative, Perdigão expects to improve quality, ensuring that products arrive at their destinations under ideal conditions. The Company also expects to cut delivery times since the system allows trucks in transit to be rerouted in accordance with requirements. Exports In 2002, exports grew 16.5% in volume, in spite of the diffi culties in the European market. Beef and pork consumption recovered in Europe with the end of the mad cow and foot and mouth diseases. The result was a surplus of chicken in world markets, which led to a 20% decline in prices in dollar terms. Additionally, the European Union introduced new criteria for sanitary controls as well as changes in regulations for imported salted products. The outcome was a reduction in the exports and higher logistical and warehousing costs for the Company. On the other hand, Perdigão increased its sales of basic products to the Russian market. Since this market has proven to have more than suffi cient scope for both Perdigão and Sadia to operate independently, the companies decided to terminate the partnership established in Perdigão acquired Sadia s investments in BRF Trading S.A., which has now been renamed BFF Trading S.A. (Brazilian Fine Foods). The Perdix trademark, which was created in 2001 to attend exports, was consolidated with the prospecting and development of products to be launched on the market in The Company has developed 15 items, among which are breaded products, frankfurters, hamburgers, meat balls and chicken cuts which will be sold to Europe, the Middle and Far East. Structural changes were also introduced in Europe through the Projeto Exporta Sim (Export Yes Project) with the purpose of improving effi ciency in the Company s European operations and to reduce costs. From 2003, Perdigão will have two offi ces, one in the Netherlands and the other in the United Kingdom. The Distribution Center, which was established in Italy in 2001, is being transferred to the Netherlands because of its more strategic location and better port infrastructure. BFF continues to be a registered corporation in Russia but will be operated out of the Netherlands. In order to optimize the product development, professionals in areas such as Assured Quality and Product Development, will join the European Offi ces. Exports by Region (In revenues) Other Countries 2% Other Countries 2% Eurasia 23% Eurasia 15% Middle East 20% Middle East 19% Far East 25% Far East 28% Europe 30% Europe 36%

16 Anticipating tendencies In 2003, Perdigão will form a Technical-Scientifi c Committee in order to be on the leading edge of state-of-the-art product development and manufacturing. The Committee members will be world reknowed research scientistis, three from Brazil and three from overseas, who will examine areas of interest of the Company. The exchange of ideas and experiences will involve courses and onsite visits. The Company intends to match its level of product research with the best in the world, in so doing, anticipating solutions and tendencies. Partnerships with universities Perdigão has ongoing agreements with the Brazilian Research and Agriculture Company - Embrapa, with the Federal University of Viçosa (State of Minas Gerais) and the Federal University of Rio Grande do Sul (UFRGS) for monitoring its products and production processes.

17 Economic and Financial Performance Sales Perdigão reported gross sales of R$ 3.3 billion in 2002, a year over year increase of 19.8%. Net sales exceeded R$ 2.9 billion, an increase of 19.9% compared to the previous year, a refl ection of higher value added products sales in the domestic market. Exports also contributed to the overall sales fi gure, accounting for 41% of the total and representing R$ 1.2 billion. Cost of sales While the 52% devaluation of the Real against the dollar boosted exports, it also had a strong impact on the prices of the Company s main raw materials - corn and soybeans - used in the preparation of poultry and pork feedstock. Grain prices rose as high as 47%, refl ecting a combination of foreign exchange rate devaluation and increased quotations of these commodities in the worldwide market together with the Brazilian corn crop, which was insuffi cient to satisfy demand. The appreciation of the dollar also impacted the costs of other raw materials which are imported or which are indexed to the currency, such as packaging, animal medical supplies and seasoning, among others. Operating expenses The impact of the exchange rate devaluation was also refl ected in the increased selling expenses with shipping and land transport, storage, insurance and port services. Additionally, changes in European Union sanitary regulations further infl ated logistical costs due to returned shipments and the substitution of exported goods. The surplus of chicken on the European market also contributed to lower prices. At the end of 2002, the Company implemented its Export Yes Project, designed to reduce costs and improve export volumes and logistics in The approval of preferred share tag-along rights represented one more important step forward in our corporate governance policy. Our investments and effort on obtaining positive results are both refl ected in the best shareholder return in the Brazilian market over the past decade. Wang Wei Chang, Chief Financial Offi cer

18 Results In spite of the adverse factors prevailing during the year, the good performance increased sales volume, better sales mix and the anticipated purchase of corn resulted in an operating margin of 7.3% and an operating income of R$ million before interest. Net income was R$ 8.2 million, 95.1% down from R$ 168 million recorded in The net margin was 0.3% against 6.9% in the previous year, largely due to the impact of the exchange rate devaluation. Perdigão s EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) was R$ 293 million, with the EBITDA margin declining from 17.3% to 10.1%. Debt Net debt increased due to the foreign exchange rate devaluation, capital expenditures and additional working capital in order to increase the inventories of raw material, livestock and fi nished product. Gross accounting debt was R$ 1.8 billion with cash investments of R$ million, resulting in a net debt of R$ million, representing 132.2% of shareholders equity compared with 85.6% in The Company continued the policy of reducing its foreign currency exposure, recording a net amount of US$ 57.6 million on December 31, 2002, down year over year by 41.8%. Exchange rate devaluation also contributed to an 81.5% increase in net fi nancial expenses for the year. The effect of the anticipated fi nancial expenses over the results is offset by the increased revenue from future exports. 16 / 17 Economic and Financial Performance Sales and Volumes In thousand tons In millions of Brazilian Reais % Ch % Ch. Domestic Market In Natura Poultry (0) Pork/Beef (2) Elaborated/Processed ,497 1, Total Meats ,694 1, Soybean (17) Other Processed Others Total ,136 1, Exports In Natura Poultry Pork Elaborated/Processed (15) Total Meats ,205 1, Total ,206 1, Total Sales Meats ,899 2, Other Processed Products Soybean/Others (17) Total 1,112 1, ,342 2, Perdigão / Annual Report 2002

19 Debt Profile (In millions of Brazilian Reais) Short Term Long Term Total Debt in Foreign Currency ACC Advances on Exports Import. Financ I.F.C RESOLUTION EXIM-BNDES Others (73) 2 (71) Subtotal ,163 Debt in Local Currency Working Capital Loans POC/FINEM (BNDES) EXIM - BNDES (TJLP) Debentures (BNDES) Others Subtotal Gross Debt 1, ,793 Cash Investments Cash Investments in Foreign Currency Cash Investments in Local Currency Total Investments Net Debt Breakdown of Net Sales Domestic Market Domestic Market Export Market Whole Chiken 10.3% Export Market Whole Chiken 10.5% Poultry Cuts 14.3% Poultry Cuts 13.5% Poultry Elab./Proces. 9.9% Poultry Elab./Proces. 11.6% Pork Cuts 6.6% Pork Cuts 6.8% Whole Chicken 0.5% Proces. Pork/Whole Chicken 0.4% Poultry Cuts 4.2% Poultry Cuts 5.1% 2002 Poultry Elab./Proces. 11.8% 2001 Poultry Elab./Proces. 11.3% Pork Cuts 1.2% Pork Cuts 1.4% Pork/Beef Proces. 28.1% Pork/Beef Proces. 27.6% Other Proces. 3.3% Other Proces. 3.0% Soybean/Others 9.8% Soybean/Others 8.8%

20 Quality transportation In 2002, the Company began the installation of a transportation monitoring system via satellite in response to the need to conserve fi nal product quality. The unique aspect of this system is the on-line control of internal temperatures throughout the entire transportation process. Perdigão is able to constantly check that its goods are being carried in accordance with the required refrigeration and freezing specifi cations determined by the Company and, should this not be the case, take immediate remedial action. The system also has the additional advantage of reinforcing driver security and reducing the dangers of highway robberies. Genetic development Perdigão is the only company in the domestic market involved with the genetic development of the quail and chukar, a type of partridge, which also represents an important technological evolution. Twenty years ago, the Company launched the chester, a pure pedigree bird developed in-house.

21 Investments In 2002, Perdigão invested R$ million in expanding installed capacity, new technology, process improvement and product development. Part of these investments (R$ 22.5 million) was funded through the BNDES (National Economic and Social Development Bank) and the Banco do Brasil (FCO-Constitutional Fund for the Midwest), the rest being fi nanced from own resources. In 2002, R$ 26 million was invested in the Rio Verde Agroindustrial Complex, in the State of Goiás, the most modern of its type in Brazil, in addition to the approximately R$ 400 million invested since the start of the project in A total of R$ 14 million was spent in the set up of the fl aky pastry production line installations, one of the Company s most important launches during the year, thanks to an exclusive recipe and the use of imported equipment, which resulted in products of unique quality and taste. The Capinzal unit, in the State of Santa Catarina, received investments of R$ 4 million for the construction of a new sector for processing poultry, breaded and cooked products, which is already operating. These investments freed up space for product packaging thus helping to broaden the scope for selling into the international market. A new chicken cuts line was installed at the Serafi na Corrêa unit, in the State of Rio Grande do Sul, thus boosting output. A further R$ 5 million was used to increase productivity through process automation in the areas of packaging, ham slicing, classifi cation and separation of chicken cuts and of poultry from the slaughter line to the processing line. The Company invested R$ 3.8 million in environmental protection activities, the focus being on the implementation of the environmental management system at the industrial units and research into new ways of reducing industrial waste and using it to generate energy. Perdigão also spent R$ 45.8 million in social programs. We met our production growth goals with the continued expansion of the Rio Verde Agroindustrial Complex, the expansion of other plants and their adaptation to maximize installed capacity. Changes in our product mix also played a signifi cant role towards growth. Paulo Ernani de Oliveira, Chief Operating Offi cer

22 Investments (In millions of Brazilian Reais) Rio Verde Frigorifi co Batávia S/A Agroindustrial Complex (Rio Verde - GO) The Rio Verde Agroindustrial Complex s main competitive advantage is that from its inception it was based on the concept of guaranteeing food safety from the origins at the farm all the way through to the fi nal consumer. The plant can be considered the most modern in the world since it controls production from the fi rst to the last link in the production chain. Genetic diffusion New Projects Optimization Project In 2002, Perdigão concluded the installation of a genetic diffusion system with its own insemination centers that supply the Company s entire pork semen requirement. The system means that the Company can always count on at least a 50% genetic renewal in its animal inventory, translating into greater quantities of meat, more productive feed conversion and greater homogeneity. The genetic diffusion center also evaluates the best male reproducers as well as the crossbreeding

23 Capital Markets Perdigão was ranked as the company that has best remunerated its shareholders over the past decade ( ), according to the GVA-50 study by Getúlio Vargas Foundation and by the Boston Consulting Group. The criterion used was the Total Shareholders Return, which takes into account not only profi t but also the investments and efforts made by the Company, among other factors. The result represents the weighting between total dividend payout and the share price fl uctuations on the São Paulo Stock Exchange (Bovespa). On this basis, for each R$ 1.00 invested in the Company s shares, the average return was R$ 0.25/year. In 2002, the Company s shares were affected by the year s results, the instability on world capital markets as well as the diffi cult Brazilian economic environment due to the increase in the sovereign risk. Stock Market PRGA Share Price* R$ 12.2 R$ 15.0 Traded Shares (Volume) 12.3 million 11.7 million Performance (18.7%) 0.7% Bovespa Index (17.0%) (11.0%) IGC (Brazil Corp. Gov. Index)** 1.6% 1.0% * Closing Price at the end of the year. * * Started at June 26 th PDA Share Price* US$ 7.0 US$ 12.7 Traded ADRs (Volume) thousand thousand Performance (44.9%) (13.1%) Dow Jones Index (16.8%) (7.1%) * Closing Price at the end of the year. Sensory analysis In 2002, sensory analysis of the Company s products at each unit has now been reinforced to a per shift daily basis. The goal in 2003 is to extend this analysis beyond the industrial units with the establishment of the Company s own product test groups through home-based testing of suitably profi led consumers, in order to identify their needs and expectations. World standards All of Perdigão s plants operate in a accordance with international standards of quality and are thus able to supply food products to all world markets. The Salto Veloso (State of Santa Catarina), Marau (State of Rio Grande do Sul) and Capinzal (State of Santa Catarina) units have ISO 9001 certifi cation. The latter two, with substantial exports to Europe, are also certifi ed by the European Food Safety Inspection System - EFSIS.

24 Shares Performance compared with Bovespa Index (JAN/98=100) Perdigão PN Bovespa Index 5 years series Capital Markets JAN-98 JUN-98 DEC-98 JUN-99 DEC-99 JUN-00 DEC-00 JUN-01 DEC-01 JUN-02 DEC-02 Last Price ADR Performance compared with Dow Jones Index (OCT/00=100) PDA Dow Jones Since 2000 (beggining of trade) 22 / OCT-00 DEC-00 FEB-01 APR-01 JUN-01 AUG-01 OCT-01 DEC-01 FEB-02 APR-02 JUN-02 AUG-02 OCT-02 DEC-02 Last Price Shareholders` Value (In millions of Brazilian Reais) Book Value Market Capitalization Last Price Perdigão / Annual Report 2002

25 Corporate Governance In 2002, Perdigão took a further step forward in its corporate governance practices with the approval at the General Shareholders Meeting of tag along rights for preferred shares. This gives preferred shareholders the right to be included in public offering for the sale of the Company s control, assuring them a minimum price of 80% of the value paid for each voting share comprising the controlling block. Perdigão was also one of the fi rst companies to qualify for the new listing on the São Paulo Stock Exchange (Bovespa) by adhering to the Corporate Governance Level I ranking in In the previous year, the Company was the fi rst in the Brazilian food industry to launch a Level II ADR program on the New York Stock Exchange. Currently, the Company is jointly controlled by eight pension funds which are all parties to the shareholders agreement. The Board of Directors comprises seven members and its Chairman is a minority shareholder. All members act externally to the Company and meet on a monthly basis. The Fiscal Council consists of three members representing the controlling shareholders, one representing the minorities and one representing the preferred shareholders. The Committee meets monthly and, whenever necessary, deliberates jointly with the Board of Directors. All Executive Offi cers are market professionals. Following a decision made in 2002, the Management has been restructured to include the consolidation of the Vice-Presidency for Operations and the Supply Chain Division. The Vice-Presidency for Operations involves the entire production sector - regional divisions, industrial units, farming and cattle raising units, planning and engineering management areas. The Supply Chain Division has a strategic position in the Company, reports directly to the CEO and is responsible for the logistics, grains, transport and procurement areas. The changes are designed to encourage productivity and further technological development. The Company also expanded its communication channels with the capital markets in 2002 with the development of an Investor Relations website ( The market relationship entails meetings with investment analysts at all Abamec s (Brazilian Association of Capital Market Analysts) regional meetings as well as quarterly conference calls, domestic and overseas road shows and one-on-one meetings with investors and investment analysts. During the year, the Board of Directors also approved the Policy for Negotiation of Securities and for Disclosure of Company Acts and Relevant Facts as well as a new Code of Ethics - which has been updated and improved. Recent changes in United States legislation established by the Sarbanes-Oxley Act are under study for implementation in accordance with Securities and Exchange Commission (SEC) regulations.

26 The results of all wholly-owned subsidiaries are consolidated with those of Perdigão S.A. and are audited by the same internationally recognized company responsible for examining the Company s accounts. In the second quarter of 2002, in line with the rules for the periodic substitution of consultancy service providers, the Board of Directors contracted Ernst & Young Auditores Independentes S/C. In 2002, Perdigão was awarded the Ouro Abamec-SP prize for the eighth consecutive year of Abamec meeting, in recognition of its market transparency, while its investor relations website was the seventh-most voted in Latin America in the Pop prize, awarded by the consultants, MZ Consult. Corporate Governance Shareholders` Composition Previ 15.3% BNDES/FAPES 9.9% Petros 9.3% Sistel 6.5% 24 / 25 Valia 4.1% Real Grandeza 3.5% Telos 1.5% Previ/Banerj 1.5% Weg 7.5% Bradesco Companies 6.4% Domestic Investors 21.3% ADRs (NYSE) 1.7% Foreign Investors 11.0% Treasury Shares 0.3% Capital Stock: R$ 490 million Number of Shares: 15,471,957 common 29,180,427 preferred 44,652,384 total Perdigão / Annual Report 2002

27 Risk Management Perdigão seeks to reduce its exposure to the market risks inherent in its activities by basing the Company s management on the controlled use of working capital and analysis of the economic and political scenario. This refl ects the fact that its business is vertical in nature and requires up-front programming, given the time span required for preparing poultry and hogs for processing. Market/Price Perdigão depends on commodities (soybeans and corn) for animal feedstock, a market where the law of supply and demand prevails. For the Company to minimize the impacts on costs, it closely monitors domestic production while seeking to protect itself by holding suitable inventory levels. Additionally, Perdigão has a strategically located industrial unit in Brazil s Midwest Region, the country s new agricultural frontier, where grain prices are lower due to distance from the ports. Due to its highly competitive cost structure and focus on seeking improved operating effi ciency, the Company is able to operate its business effectively even during unfavorable periods. Its presence not only in the domestic market but also in different geographic regions of the world gives added protection in the event of localized instability. Sanitary barriers Perdigão is becoming one of the best-prepared companies in the world food sector for dealing with eventual sanitary control restrictions in the international market. This has been made possible through the installation of a traceability system which tracks the entire production chain from the origin of the poultry and pork parents through the fi nal consumer. Foreign exchange rate Perdigão uses fi nancial hedge instruments to cover part of its debt and has an inherent natural protection provided by export revenues which are proportional to its foreign currency fi nancial liabilities. Interest rate In spite of restrictions in 2002 on international credit, the Company continued to have access to export credit lines to fund its working capital requirements. Credit Perdigão operates a sophisticated credit system - with a low level of non-performing receivables - which completely controls the fl ow of information on a real-time basis. Insurance The Company s installations and their respective contents are insured for material damage and loss of income. In addition, the transportation of goods is insured for highway risk while products and operations are covered for civil liability risks.

28 Total quality The Rio Verde plant, which was conceived and constructed according to the most modern standards of technology, safety and innovation, can easily duplicate its slaughtering capacity. With the improvement in processing, the fi nal production cost can be reduced and total quality targets can be easily met. The pyramid concept With the new technology adopted at Rio Verde, each integrated outgrower operates with a minimum of 100,000 chickens. In addition, the Company uses the pyramid concept, through which each integrated outgrower is supplied with animals originating from the same lots of parents. With no mixing of lots, it is easy to identify and isolate possible problems, thus ensuring total control over the production chain.

29 Outlook During 2003, Perdigão will continue its sustained growth project - developed over the past eight years - to achieve the best results for the Company, its employees, shareholders and the community. The Company is forecasting investments of R$ 100 million, an 8% increase in meat production and the creation of an additional 1,600 direct jobs. Approximately 30 new products will be on food retailers shelves, the priority being given to higher value added items, albeit without neglecting the demands of lower income groups. The Company is to upgrade investment in marketing, especially to increase brand recognition throughout the country. The sales sector is to be restructured with the emphasis on specialization by outlet - small, medium and large retail and food service. The construction of a new Distribution Center is to begin in Curitiba (State of Paraná), and existing centers in São Paulo (State of São Paulo), Belo Horizonte (State of Minas Gerais), Rio Verde (State of Goiás), Videira (State of Santa Catarina) and Rio de Janeiro (State of Rio de Janeiro) will be expanded. The Rio Verde plant will operate at its full capacity projected for the fi rst phase - 260,000 tons of meat. By 2007, the plant will receive another R$ 200 million, to be invested equally by the Company and the integrated outgrowers. The Company is planning to install new product lines for pastas, hamburgers, frankfurters and breaded products as well as expanding the production of smoked sausage, fresh sausages, bologna sausage and hams. Total annual slaughtering is to grow by 28 million poultry/year and 850,000 pork/year. Perdigão is also to increase annual production of processed products by an additional 46,000 tons. The Company will continue to bolster its presence in the international market by focusing on the sale of higher value added products to Europe. The target is for a 16% growth in total export volume in Through its total control of the production system, Perdigão will have an important competitive edge in selling products with guaranteed quality. Exports will grew more vigorously while cost reductions - fruit of the Export Yes Project implemented in November will also show results in Increase of Production Capacity Capacity Ch. % 2000/03 Poultry Slaughter (thousand heads/week) 2,715 6,540 7,119 8,200 9, Hog Slaughter (thousand heads/week) Poultry Meats (thousand tons/year) Pork Meats (thousand tons/year) Total Meats (thousand tons/year) ,020 43

30 Temperature control The refrigeration system at Rio Verde complies with European Union standards. The system is fully automated, controlling temperature and humidity distribution in each area and therefore guaranteeing product standardization as well as registering operating conditions throughout the unit s different areas. Technology Center Innovation is one of Perdigão s key characteristics. Over the past eight years, the Company has launched between 20 and 40 products annually, many of them pioneers in the domestic market. The Company s Technology Center in Videira researches into product development and the steps necessary for guaranteeing quality while also undertaking the analysis of microbiological contamination, sodium levels, and waste materials, among others. The Center also operates a pilot plant for small-scale test runs as the basis for new product launches.

31 Human Resources Perdigão s Human Resources policy is focused on employee development by providing opportunities to grow both professionally and personally. This policy also incorporates a concern for the quality of life both in the workplace as well as at home and in the local community. The result is a motivated and experienced labor force, a factor that is considered to be key in reaching the objectives of growth and excellence. In 2002, the Company created 1,786 jobs, ending the year with 24,163 employees and once more ranking it as one of the country s largest employers. During the same period, productivity improved from 37.3 to 39.6 tons/employee/year. Automation has not resulted in job losses since the Company s growth rates have been more than enough to relocate labor to other areas. In 2002, Perdigão conducted an Organizational Climate Survey throughout its entire labor force to detect the aspects of the Company with which employees are most satisfi ed and those where there is room for improvement. Among the items with the highest approval ratings are team spirit, working conditions and the Company s efforts to meet and exceed customer expectations, the motivation of employees to maximize growth opportunities and fi nally, Perdigão s Total Quality Program. Employees also indicated their pride in working for the Company and said they would recommend it to friends and family members. Profi le The degree of satisfaction, for example is indicated by the average turnover rate for the Company, approximately 1.5% per month, very low considering that about 83% of the labor force works on the production lines. Currently, around 90% of all executives have been appointed from within the Company. In 2002, there were 2,535 promotions at all levels and 10 promotions to executive positions. The age profi le indicates a focus on youth allied to experience and maturity. About 78% of the employees are up to 35 years old, and the remaining 22% are more than 36. The Employee Profi t Sharing (PLR), implemented in 2000, distributes 6% of profi ts among its employees, the emphasis being particularly on the lower income groups (the Agreement consists of a fi xed portion and the remainder, variable in accordance with wages). Besides routine promotions, Perdigão gives annual merit increases for those in all areas with outstanding performances. Another way of recognizing employee dedication is through the Programa Nossa Gente, Nossa História (Our People, Our History Program), created to honor those with more than ten years of service with the Company.

32 Training Perdigão offers a wide range of training programs to ensure that the process of upgrading the skills of its professionals is continuous. In 2002, the Company provided an average of 83 hours of training for each executive level employee and 77.5 hours for other employees. Among the main programs is Total Quality Perdigão, which focuses on productivity growth and improved quality, and offered 17,806 opportunities in There is also On-the-Job Training, which is designed to prepare employees for fully exercising their functions. Additionally, the Company operates a program of in-house instructors based on the learning organization for preparing professionals from various areas for technical and interpersonal skills training such as In-house Skills and Induction for New Employees courses. Perdigão has also foreign language courses - with 159 employees participating in for supporting its international activities. Human Resources Education About 2,700 employees take part in the Education Program, which is also extended to the unemployed and self-employed in each region. This initiative has already enabled 2,996 students/ employees to complete a primary school course and 1,171 to obtain a high school qualifi cation. At the higher education level, the Company provides an MBA course through an agreement with the Getúlio Vargas Foundation and the São Paulo University. There are currently 118 professionals completing this course and a further 74 have already obtained their qualifi cations. To attract new talents, Perdigão runs an Internship Program through agreements with various Brazilian universities. In 2002, 586 positions being offered in various areas of the Company, and in 2003, Perdigão expects to offer 727 places. In addition to this, through the Production Assistant Program, training is offered to promising members of the community with a view to future hiring. Perdigão / Annual Report / 31

33 A pioneer unit The Rio Verde unit is also pioneer in Brazil in using CO 2 gas for stunning pork. This results in a carcass with a more homogeneous color and has also contributed to the improvement of the conditions under which the animal is slaughtered. Besides that, each production process area (slaughtering, cutting and packaging) at the unit is independent and sealed to avoid cross contamination, which can occur when the product is transferred from one area of the plant to the other.

34 Benefi ts The benefi ts are extended to all employees and their families. Besides on-site meals, employees receive a basic basket of food items. The Programa Novo Ser (New Being Program) offers guidance to expectant mothers who are employees, on antenatal and postnatal treatment and health care advice for both mother and baby. Health workers and social assistants carry out this monitoring process. All employees receive medical and dental care at the Company s internal health clinic and the benefi ts from agreements to use hospitals and consult doctors are extended to the family. The initiative is centralized by the Perdigão Health Program, managed by the Company and covers 57,131 users through accredited hospitals and doctors. The Company also runs preventive campaigns aimed at improving employee health. For example, in the Quitting Smoking Together Program, apart from its awareness initiatives on the dangers of tobacco, Perdigão contributes 80% of the cost of treatment for those prepared to stop smoking. Of the 1,157 employees enrolled in the program, 364 have already managed to overcome the addiction. The Infl uenza Prevention Program was responsible for the vaccination of 12,416 employees in Initiatives for raising the awareness of the dangers of HIV-Aids as well as its prevention and other sexually transmitted diseases are also extended to contracted road freight carriers. Perdigão s Mutual Savings and Credit Cooperative - Crediperdigão - offers personal credit lines at below-market interest rates. In 2002, 13,167 fi nance operations were concluded. Founded in 1997, Prohab - Perdigão Housing Program, also in partnership with Crediperdigão, has already built homes at cost for 557 families. In 2002, 82 were delivered and a further 28 are under construction. The Perdigão Private Pension Plan provides a retirement pension complementary to that provided by the Federal Social Security Service. The Plan has 20,044 members and in 2002, a further 1,947 joined the plan. For each Real paid in by the member, the Company contributes on average another twice this amount. All retired employees enjoy the benefi ts of a group life insurance plan, medical care, gifts at the end of the year and the purchase of products at lower prices in Perdigão s Stores. Currently, 1,083 former employees receive pensions under the Plan. Sport and Culture Physical activity is also part of the Company s daily routine. Apart from regular exercise in all sectors, various units have fully equipped Keep-Fit Centers, with specialized instructors that are available free of charge during leisure hours.

35 Social Actions Aware of its social responsibility, especially as in many regions it is the major economic growth driver, Perdigão places considerable emphasis on the development of the communities in which it is located. In 2002, the Company invested R$ 45.8 million % more than the previous year - in social programs with an added value of R$ million. Perdigão represents 85% of the local economy in Marau (State of Rio Grande do Sul), 90% in Capinzal, 75% in Herval D` Oeste and 70% in Videira, in the State of Santa Catarina. Global Action One of the highlights of 2002 was the Company s participation in Global Action, volunteer services provided on a community-wide basis, and sponsored annually by Sesi (Social Service for Industry) and by the Globo TV Network. In a pioneering initiative, Perdigão participated in the coordination and organization of the event which was held in the cities of Capinzal and Videira, both in the State of Santa Catarina. During a single day, more than 25,000 consultations were made involving medical care, issue of documents and social inclusion and entertainment. Atende Project In Rio Verde (State of Goiás), the Company continues to prioritize the Atende (Assist) Project, in which R$ 1.2 million has already been invested in partnership with the BNDES. The Project is designed to supplement shortcomings in the health and public security infrastructure. The Company has already helped in the construction of nine integrated public assistance posts, each one with 200 square meters and fully furnished and equipped, an auxiliary fi re service station, a mobile rescue unit and two ambulances. Also concluded in 2002 were two day-care centers for employees children and the community as a whole, involving an additional investment of R$ 500,000. Additionally in Rio Verde, Perdigão helped fi nance the reconstruction of classrooms and the purchase of equipment at the Rio Verde Youth Assistance Institute - IAM. Added Value Distribution Total: millions of Brazilian Reais; a decrease of 3.5% compared to 2001 Human Resources 41.9% Human Resources 34.1% Taxes 34.6% Taxes 36.2% Interest 22.5% Interest 10.3% Dividends 0.6% Dividends 5.4% Retention 0.3% Retention 12.7% Employees Profi t Sharing 0.1% Employees Profi t Sharing 1.5%

36 Culture In Videira and Rio Verde, Perdigão has sponsored the VIP Space Project (Important Perdigão Visitor) for the promotion of regional and national arts, which involves cultural activities throughout the year. These activities are also open to the community. In Carambeí (State of Paraná), the Citizen of the Future Project is designed to stimulate youth to read newspapers. To encourage reading generally, Perdigão has also distributed 35,000 children s books in partnership with the Educar Dpaschoal Foundation for employees children and more than 100 schools throughout the country. Social Actions Education The free Education Program for Youth and Adults, initially just for employees, was extended to communities and designed to encourage the resumption of interrupted studies. Perdigão pays for the running costs, while the local municipal or state authorities provide teachers and pedagogical resources. Technical Assistance The Perdigão Rural Total Quality Program is aimed at integrated outgrowers and offers technical and economic advice on the management of properties on the basis of the total quality concepts. This program already involves more than 2,000 properties employing about 13,000 people. 34 / 35 The 5 S Program Total quality concepts are also the theme of the 5 S Project. Perdigão s employees, on a voluntary basis, teach students in the states of Santa Catarina and Rio Grande do Sul ways of applying these 5 S concepts in both the school and family environment. Consumer Services are also provided to the community through the Consumer Services Center. In the Cuisine Center, Perdigão offers courses for children, adolescents and adults, teaching different techniques and ways of preparing dishes. About 14,000 consumers took part in the courses during Volunteer work Perdigão also encourages voluntary work on the part of its employees through work in orphanages, day-care centers, senior citizen rest homes and other entities. At Christmas time, there is a concerted effort to collect toys and other donations for needy families. In 2003, the Pro- Citizenship Program is to be launched to cover all employee volunteer activities, thus expanding even further the interaction with the community. Awards Perdigão received some important awards in 2002 for its activities: the Social Responsibility Prize awarded for the second consecutive time to Perdigão by the Assembléia Legislativa of Rio Grande do Sul (Legislative Assembly); Brazil Citizenship Export Award (Exporter of the Year category); The Citizen Company Award, conferred by the Instituto de Marketing e Negócios during the 5 th National Forum for Corporate Citizenship. Perdigão / Annual Report 2002

37