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Fitch Affirms Sadia's `BB+' Rating.

Business Editors


Fitch has affirmed the `BB+` local currency rating and the `BB-` foreign currency rating of Sadia S.A. (Sadia). The Rating Outlook on both ratings remains Stable. Sadia is the largest producer of processed food in Brazil and the largest exporter of poultry in the country.

Sadia's credit ratings are supported by the company's solid business profile. The company's competitive advantages include the strong brand equity of its products within Brazil and its comprehensive refrigerated distribution network within the country. The company also generates dollar-based cash flows from its exports. Sadia's local currency rating is constrained at the current level due to the company's dependence on commodity meat products, with 42% of revenues derived from low margin meat products, relatively high debt levels, and exposure to the Brazilian economy, with 70% of revenues earned in the domestic market. The company's foreign currency rating is constrained at the current level due to Fitch's sovereign rating of Brazil.

During the first half of 2000, Sadia operated under a difficult environment that included low prices, weak demand and higher costs of energy and raw materials. These adverse conditions resulted in a significant decline in Sadia's profitability, with the EBITDA margin dropping from 11% in 1999 to 8% in 2000. Over the past nine months, however, Sadia has experienced a turnaround in its operations, triggered by improving demand conditions in the domestic and foreign markets, a better pricing environment and significant cost cutting efforts on behalf of management. As a result, operating margins and credit protection measures are approaching historical levels. For the quarter ended March 31, 2001, Sadia's EBITDA-to-interest expense ratio was 2.4 times (x) and its net Debt-to-EBITDA ratio was 2.7x - consistent with the rating category.

The company's resurgence in 2001 is expected to be driven by improvements in both the export and domestic market. In 2000, exports reached $448 million, or 30% of total revenues. The vast majority of exports (approximately 83% in 2000) consisted of poultry products, with the balance comprised primarily of processed products. During 2001, the company's exports are expected to increase by 20%. This growth should be driven from increased demand for poultry in Europe, which has resulted from the outbreak of `mad cow' and `foot and mouth' diseases in the beef industry, as well as from the company's recently formed export partnership with Perdigao, its main competitor in Brazil.

In the domestic market, Sadia's operational improvements should be driven by the company's expanding processed food products business, which grew by 12.3% in 2000. The processed products division accounted for 50% of total sales in 2000 and is expected to continue to be Sadia's main growth vehicle in the future.

Fitch believes that the recent energy rationing measures in Brazil will not have a material impact on Sadia's performance. From a production standpoint, the company is somewhat isolated from the crisis because most of its plants are located in Southern Brazil, in geographic areas where energy rationing is not expected to be implemented. Production at plants where export goods are produced will not be affected by the rationing. To respond to changes in consumer behavior Sadia is adjusting its logistics and distribution systems for more frequent deliveries and focusing on the production of refrigerated products as opposed to frozen products. The company counts with the flexibility in its production lines to adjust to changing market trends.
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Publication:Business Wire
Date:Jul 10, 2001
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