Sadia – Credit Analysis
Industry and Market Description
The meat and processed foods businesses have some peculiar perspectives for the years ahead.
Regardless of the organic foods movement, the trend is definitively pointing toward much higher
consumption of processed and convenience foods worldwide as it continues to spread to growing
lower middle class areas in Asia, South America and elsewhere. Add that to the fact that higher
standards of living internationally almost certainly will bring higher protein consumption.
The global trend for pork consumption has been increasing at 2% a year overall and for 2007
exports forecasts to an increase of almost 3% due to largely US and Brazilian trades (much of this
increase is due to China which accounts for more than a half of total pork production). Russia was
the primary market for Brazilian pork exports in 2005, accounting for 67%. From January to July
2006, Brazilian pork exports to Russia where down 44% from the same period in 2005. However, in
the same period, exports were higher for non-traditional markets such as Hong Kong, Singapore
and Ukraine, maintaining Brazil as the third exporter in the world.
Pork production in Brazil will probably increase by 8% in 2007 after current decline of 2% in 2006.
The main factor is the recovery of the export market combined higher domestic demand and
projection of a moderate devaluation of Brazilian currency that will make the product more
competitive worldwide.
About 45% of Brazil’s pork production is concentrated among 10 large players: Sadia accounts for
11% of production, followed by Perdigão with 8%, Aurora with 7% and Seara with 5%. Although
Seara only accounts for 5%, the company alone accounts for 25% of all pork exports.
As the currently world leader, Brazilian poultry exports are expected to decrease in 2006 due to
weakening demand in some of its major exports markets, after a succession of annual increases in
exports from1999 to 2005, when Brazil achieved the second place in poultry world production. This
decrease is a result of the strengthening of the Real against major currency and Avian Influenza
(AI) concerns which led consumers in importing countries to substitute other meat and protein
sources for poultry. As a result, Brazil’s poultry sector was facing an oversupply situation.
For 2007 Brazil’s poultry meat exports are forecast to increase 2% as a result of increased
consumer demand as AI concerns decline, increased sales in Russia, and aggressive marketing.
Beef’s world supply continues to be tight due to negative impacts of bovine spongiform
encephalopathy (BSE) and foot and mouth disease (FMD)-related made significant trade
restrictions as some countries are recovering from these restrictions as Brazil which still holds the
world leadership in exports.
Beef production and consumption in selected countries is forecast to increase in 2007 by just over
2%. China, Brazil and US are forecast to make the largest gains in production. Production growth in
Brazil forecast at 3% in 2007 driven by strong domestic demand but also full and partial lifting of
trade bans. Brazil lost significant exports in Russia, its major market, as well as to Chile and the EU
during the first half of 2006 however it was compensated by expanding sales to Egypt, Saudi
Arabia, Israel, Romania and several other smaller markets.
Company Description
Sadia S.A. is a public held company, incorporated in Brazil on June 7, 1944. Currently it is the
largest, leading and most trusted (associated with quality, tradition and value) Brazilian food
products company and a significant export business worldwide that primarily produces and sell

poultry, pork, premium beef cuts and processed products. The processed products segment
comprises a range of products, including: frozen products, refrigerated products and margarine.
The company owns nine plants that manufacture processed products, eight of which are dedicated
to meat processing and one to margarine production. Sadia owns eight chicken slaughterhouses,
three turkey slaughterhouses, and four pork slaughterhouses. In addition, the company has one
beef slaughterhouse in the state of Mato Grosso, which became operational as of November 2005.
These plants are located close to their suppliers of raw materials or to the main domestic centres of
consumption in Brazil and abroad.
Domestically, Sadia is primarily a seller of frozen and refrigerated processed food. The export
business, in contrast, is largely in lower-margin products like commodity poultry and pork products.
Sadia is slowly adjusting this situation and trying to introduce its value-added processed foods in
foreign markets.
The company's sales are roughly evenly divided between domestic consumption and exports -
exports are a bit low at 44% of the total for the third quarter 2006, thanks to the situations
mentioned before, but the management definitely noted that and they see the balance returning to
the 50/50 margin, as they prefer.
Financial Highlights
From 2004 to 2005, Sadia’s sales increased consistently as a result of company’s increase in
domestic participation with new products as well as the international market prices scenario were
very favourable. The company also had an increase in net profit, which allowed the operational
activities cash generation to be addressed to investments in fixed assets from 2004 to capital
expenditures blueprints for 2007.
2006 was a hard year to Sadia thanks to some problems with the strong Brazilian currency (which
compressed products margins) and weakness in some of their exports (the AI, a dip in poultry
demand, and a Russian ban on Brazilian pork were negatives in the recent past). But management
believes that the third quarter 2006 is the beginning of their export and sales growth rebound. Also
the holiday season that currently represents 15% of the total fourth quarter sales will probably
increase 8% to 10% compared to the period in 2005, which might be a sign of a good future ahead.
The management sees continued opportunity for margin growth as they build and invest in their
business, with a goal of seeing EBITDA margins increase to 13% by 2007 and 17% by 2010 - that
would be remarkably high for these businesses segments, and Sadia's operating margins are
already significantly better than many competitors.
Gross margins slid dramatically earlier this year compared to 2003 and 2004 historical
performances, as the fall in the stock price indicates, but have already begun a rebound and ought
to return and achieve a real growth of 9% to 11% for 2007 as the management forecasts an
increase in sales in 8% to 10% domestically and 10% to 12% abroad.
Since 2004 the company has a high debt level, but it has been able to honour its bank debts in
short and long-term with continued solid sales and growth that ought to be manageable, and the
debt is helping to finance needed expansion. Right now, as the company believes they are
recovering sales and margins, net debt to equity is at 53% on the third quarter of 2006, just above
the board-mandated maximum of 50%.
There is also always a possibility that Sadia will make big acquisitions either domestically or
internationally - they tried and failed to take over their major competitor Perdigão earlier this year
that has the same market share of 25% in processed food as Sadia - and have been trying to build

up their pork and beef operations, partly as a way to diversify away from potential avian flu
exposure as the company announced that will invest R$ 800 million in 2007 to increase its installed
capacity in current and new units – including a factory in Russia. The sources for these investments
will be from Sadia cash generation, BNDES and pre-export financing.
Strengths, Weaknesses, Opportunities and Threats
The opportunities for increasing sales of processed foods to the growing economies of South
America, and the likelihood of increased protein consumption worldwide provide some real
opportunity for Sadia as Brazil has some natural advantages in this business: inexpensive and
available feed grains, inexpensive labour compared to US and Europe and a very good agricultural
climate. Sadia has relied on that combination of factors for many years to build both a dominant
food company in Brazil and a significant export business to the rest of the world.
Positive cash flow and under domestic and international market capacity suggest great growth
potential, including the new line of beef products. The company is a long-term player with global
reach and Middle East is one of their largest markets as well as Asia. Therefore geopolitical
tensions pose some downside risk.
Other risks involve the possibility of AI in their poultry, bovine diseases, more bans or restrictions in
many countries and continued strength of the Real can hurt Sadia export performance, and a return
to high inflation or a wildly turn by the government might be disastrous.
Rising minimum wages and inflation that will be hopefully under control should allow for more
consumption of prepared foods, but the risks with this volatile economy are certainly nothing to
disregard.
Brazilian food producers, including Sadia, are subject to stringent federal, state and local
environmental laws and regulations concerning, among other things, human health, the handling
and disposal of wastes and discharges of pollutants to the air and water that the company should
have in mind to avoid future risks.