Playing Chicken.

Poultry and food processor Sadia f lies hard and fast into economic uncertainty.

LUIS FERNANDO FURLAN knows something about adversity. In the last two years, the chairman of Sadia, Brazil's leading poultry producer and food processor, has seen important export markets crumble as major multinationals such as Italy's Parmalat and France's Doux have invaded his home territory. Now, with the local market in ruins, he is guardedly optimistic. "The moment to pick up the results of our efforts has come," Furlan says.

During the tough times, Furlan hacked costs and trimmed the fat from Sadia. The workforce was cut by a third to about 22,000 employees and 10 directorships were scrapped. The company also sold more than half of the firm's soybean-crushing plants in December 1997 to U.S.-based Archer Daniels Midland for $165 million. Last year, the efforts paid off. The company almost tripled profits to US$143 million even as sales plummeted by almost 20% to $2.2 billion. "Our fixed costs have come down and we have greater efficiency," says Furlan.

Now, Sadia is counting on its lean-mean operations to fly hard and fast straight into economic uncertainty. Exports will get a boost from Brazilian currency devaluation and provide a natural hedge to what promises to be a tough year at home.

Thai tested. During the years of a strong currency, many Brazilian companies stopped pushing exports and focused on the rapidly expanding local market. Not Sadia. Exports, which represent about a fifth of the company's total sales, were projected at $350 million last year, but topped $400 million. With the maxi-devaluation of the real, the company expects to increase overseas sales another 10% this year.

After nearly getting plucked in the Thai devaluation in 1997 and again with the Russian ruble collapse last year, Sadia is a tough international operator. It exports to 50 countries. Almost half its exports go to the Middle East, followed by Europe (19%) and Asia (15%). The foreign markets are a "natural hedge" toward paying the company's debt, says Sadia's financial director Luiz Murat. Indeed, much of the company's export sales are tied to foreign credits to reduce financing costs.

Nonetheless, Duff & Phelps and other international credit rating agencies are keeping a close eye on the poultry producer because of its large short-term debts, some $468 million in all. "An economic slowdown may negatively impact on its cash flow," warns Duff & Phelps in a recent report.

The company's recently launched ready-to-eat and frozen foods will probably be hardest hit by the crisis. Sadia has introduced more than 30 new products each year since 1997 in a bid to move into foods with higher margins than chicken and turkey. With the severe economic downturn, though, products like chicken Parmesan and pizzas are liable to be the first to be erased from consumers' shopping lists.

"Sadia has focused on frozen food but has not given up on other products," says Andreia Teixeira, an analyst at investment bank Bozano Simonsen in Rio de Janeiro. "Poultry and pork products are less affected by the economic downturn."

In these products, Sadia is facing some tough competition. The Italian conglomerate Parmalat, which has already bought two local companies, has announced it is going to enter the turkey business next Christmas. The French company Doux is competing on the chicken front, after the acquisition of Sadia rival Frangosul last year. And perhaps worst of all, mom-and-pop production is expected to increase as people seek to supplement incomes selling homegrown chickens on the side. "The worst competition is not Doux or others, but it is rather the informal sector," says Teixeira.

Having weathered economic turmoil on three continents, if the worst this year has in store for Sadia is playing chicken with black-market birds, Chairman Furlan has reason to be optimistic.