Sadia S.A.

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Sadia S.A.

Rua Fortunato Ferraz, 659
Vila Anastácio
05093-901 Sao Paulo
Brazil
Telephone: (+55) 11-3649-3552
Fax: (+55) 11-3649-1785
Web site: http://www.sadia.com

Public Company
Incorporated: 1971 as Sadia Concórdia S.A. Indústria e Comércio
Employees: 32,184
Sales: R 4.69 billion ($1.18 billion) (2002)
Stock Exchanges: Brazil New York
Ticker Symbol: SDA
NAIC: 311611 Animal (Except Poultry) Slaughtering; 311119 Other Animal Food Manufacturing; 311211 Flour Milling; 311612 Meat Processed from Carcasses; 311615 Poultry Processing

Sadia S.A. is one of Brazil's leading food processing companies and the country's top producer in a number of food categories, including domestic poultry and pork, and poultry exports—the company ships to more than 50 countries worldwide, and counts among its customers such food chains as Arby's, McDonald's, and others. It is also one of the largest poultry brands in the Middle East, for which it operates special Halal-certified slaughterhouses in Brazil. Altogether, exports represented 42 percent of Sadia's nearly R 4.7 billion ($1.2 billion) in revenues in 2002. Sadia is a vertically integrated food producer, forming long-term and exclusive contracts with more than 9,000 Brazilian farmersuppliers. The company operates 12 production plants throughout Brazil, processing more than 850,000 tons of poultry and 350,000 tons of pork each year, as well as pasta, margarine, and dessert and dairy products, the latter under the Miss Daisy brand. Since the 1990s, Sadia has emphasized a transition toward value-added processed foods, including frankfurters, sausages, and its own lines of ready-cook meals. Sadia (the name means "Healthy" in Portuguese) is listed on the Brazil stock exchange and trades its ADRs on the New York Stock exchange as well. The company remains controlled by the founding Fontana family, represented by Chairman Luiz F. Furlan and CEO Walter Fontana Filho.

Healthy Beginnings in the 1940s

Attilio Fontana, son of Italian immigrants, began his professional career as a grocer. Yet Fontana also operated a small side business selling livestock, and it was this activity that brought him in contact with the owners of a grain mill and meat-packing plant in the town of Concordia, in Brazil's southern state of Santa Catarina. The owners of the plant, who had begun constructing a cold-room facility in the early 1940s, had fallen into financial difficulties and approached Fontana with the offer to sell him half of the business. Fontana agreed, and took over the direction of the slaughterhouse as well. Just one year later, Fontana bought out the original owners, and changed the company's name to Sadia—adding the "dia" from Concordia to SA (the equivalent to "Inc.") to produce the Portuguese word for "healthy."

Sadia started small, milling flour and wheat bran. Fontana reinvested those earnings and soon after was able to complete construction of the unfinished cold storage room. Sadia began processing pork, and by 1946, the company production topped 100 head per day. To its grain sales, Sadia now added a variety of pork cuts and other finished pork products, including lard, sausages, ham, salami, and other cured meats. Fontana, joined by son Omar, had already begun to think on a national level, and in 1947 the company opened its first sales office, in Sao Paulo.

If Concordia and the surrounding region became one of the fastest-growing economic areas of Brazil, in the early 1950s the region remained remote and difficult to access. Transporting goods was hampered by a poorly developed road network. In response, Omar Fontana launched a new venture, leasing an airplane from the Brazilian airline Panair and beginning air transports of Sadia's products to Sao Paulo in 1952. The move enabled Sadia to expand its distribution, and notably of its fresh meats. In 1953, the company adopted the highly popular motto: "Pelo ar Para Seu Lar" (translatable as "From the Air to Your Lair"). Omar Fontana later expanded the group's air transport operation, which grew into the Transbrasil airline.

In 1953, Sadia also opened its first new meat processing plant, in Sao Paulo. The company then began expanding its commercial operation, opening sales and distribution centers in Bauru, Campinas, Ribeirao Preto, and Rio de Janeiro. Sadia also expanded its product line, adding chicken processing in 1956.

In order to ensure its livestock supply, and to guarantee quality standards, Sadia developed its own vertical integration model, based on partnerships with livestock producers. Launched in 1961, the program later grew to include more than 9,000 farmers in Brazil, who, in exchange for meeting Sadia's quality standards, received feed and technical assistance, and a steady sales outlet.

Sadia expanded again in 1964, founding Frigobrás Companhia Brasileira de Frigoríficos, a cold storage food processing specialist that enabled the company to enter the branded processed and frozen meats market. Sadia launched a number of product lines, including, in 1969, its highly successful hamburger.

Growth and Diversification in the 1970s

Sadia continued to diversify its product offerings, testing turkey products in the 1960s, before rolling out its own range of fresh and processed turkey meats in early 1973. In the mid-1960s, Sadia also began its first export operations. Then in 1967, it added beef slaughtering and processing. In that same year, the company created a dedicated sales and marketing unit, Sadia Comercial Ltda., which took over its growing network of sales offices. By then, the company had opened offices in Porto Alegre, Erechim, Porto Uniao, Blumenau, Foz do Iguaçu, Curitiba, Londrina, Belo Horizonte, and Brasília.

Sadia's strong growth through the 1960s and its plans for future expansion brought it to the stock market in 1971, when it listed its stock on the Sao Paulo exchange. At that time, the company changed its name to Sadia Concórdia S.A. Indústria e Comércio. Yet Sadia remained controlled by the Fontana family, which held a majority of the company's voting rights.

Sadia's expansion continued through the 1970s and into the 1980s, as the company acquired a number of new meatpacking plants around the country. The company also opened plants in Toledo and Dois Vizinhos. In 1978, Sadia created its own research and development laboratory, Sadia Agropastoril. The following year, the company opened a new production plant in Rio de Janeiro. That same year, it acquired a soy milling and oil operation in Joaçba.

In the 1970s, Sadia stepped up its export operations, and especially, starting in 1975, sales of frozen chickens to the Middle East. For this effort, the company readily adapted itself, adding Halal-certified slaughtering facilities and developing chickens specifically for Middle Eastern tastes—which favored a smaller, single serving-sized bird. In this way, Sadia—which enjoyed the added benefit that its name closely resembled the Arabic word for "happiness"—quickly became the second largest poultry brand in the region. Sadia also enjoyed strong penetration into the European and U.S. markets, particularly through its pork and beef exports.

With its domestic profits eaten up by the hyper-inflation and uncertain currencies of the 1980s, Sadia focused on stepping up its export sales—a more reliable source of profits for the company. Sadia set up a dedicated international sales subsidiary, Sadia Trading, which enabled it to enter a number of new markets, and especially the Far East. Those regions, and particularly Japan, Hong Kong, and China, presented a similar profile to the Brazilian market, where rising spending power encouraged consumers to shift from largely grain-based diets to protein-heavy eating habits. Closer to home, the company shifted into neighboring Latin American markets, including Argentina, where the company began distributing its products in 1992. Yet the Middle East remained the group's strongest foreign market.

Supporting its growing markets, both at home and abroad, Sadia opened a series of new production facilities, including a soy processing center in Paranaguá in 1983 and another in Rondonópolis in 1986; a beef plant in Barra do Garças in 1985 and two more, in Andradina and Araçatuba in 1989. By then, the company had also opened a new pork packing plant in Três Passos in 1985.

Leading the Domestic Market in the New Century

Attilio Fontana died in 1989, leaving behind a sprawling empire of more than 20 companies. By then, Sadia's sales had topped $1 billion, and the company had succeeded in establishing itself among the leaders in the Brazilian food production market and particularly as the country's leading food exporter. The Sadia family, which by then was represented by seven—at times, squabbling—branches, chose Fontana's grandson Luiz Furlan to lead the company into the new century.

The introduction of the Real Plan inaugurated a new era in the Brazilian economy. With a new, more stable Real—the Brazilian currency—the domestic market entered a new era of fast growth. The stability of the market led Sadia to focus more of its efforts on domestic expansion, and into the mid-1990s, its exports levels actually dropped off somewhat in favor of sales at home. At the same time, the new access to foreign capital encouraged the company to expand rapidly—taking on a high foreign debt load. Unlike many of its competitors, however, Sadia recognized the risk in time, and began cutting its dollar debt, shielding the company from the worse effects of the country's economic slump in the late 1990s.

Company Perspectives:

Mission: Sadia's mission is to satisfy the food requirements of human beings through tasty and healthy products, creating value for shareholders and for consumers and contributing to the growth and happiness of people. Vision: Sadia will distinguish itself through its brand image, through the excellence of its services, innovation and quality of its products.

Sadia was not alone in its domestic expansion—indeed, competition among Brazil's food producers intensified during the 1990s, slashing into the company's margins. In response, Sadia began a cost-cutting effort, including the shedding of some one-third of its payroll, that enabled it to become one of the lowest-cost producers not only at home, but abroad as well. Another feature of the cost-cutting effort was the streamlining of the company's organizational structure, which ultimately resulted in the creation of a single group, Sadia S.A.

Sadia's restructuring continued into the late 1990s. On the one hand, the company streamlined its focus into the pork, poultry, and processed foods segments. As part of that effort, the company sold off its noncore operations, including its soybean processing wing, which was acquired by Archer Daniels Midland at the end of 1997 for $165 million. The company also sold its 12 grain storage and distribution centers, exiting that market as well.

Instead, Sadia concentrated its effort on expanding its range of value-added food products, including new lines of ready-toeat and frozen meals. As such, the company's processed foods division became its fastest-growing in the early 2000s. Between 1999 and 2001 alone, Sadia launched more than 250 different products. As part of its new focus on value-added foods, Sadia made two important acquisitions during this period, buying the Miss Daisy line of frozen desserts and the poultry and pork producer Granja Rezende, with that company's strong line of branded products.

With competition growing in Brazil—particularly following the entrance of Italy's Parmalat and France's Doux—Sadia's export operations, now filled out with its processed foods lines, once again became the company's motor of growth. Exports showed a steady rise at the turn of the century, building from less than 27 percent of sales in 2000 to more than 42 percent of total group revenues in 2002. Aiding this effort were a number of partnerships, such as the creation in 2000 of U.K.-based Concordia Foods Limited in a joint venture with Cargill, which began supplying chicken for the McDonald's network in the United Kingdom.

Sadia stepped up its international stature in 2001 when it listed its shares as ADRs on the New York Stock Exchange. That year, also, the company joined with chief Brazilian rival Perdigao to create the export group BRF International Foods with the aim of developing markets in Russia and Eastern Europe and elsewhere. That partnership proved short-lived, however, and Perdigao took full control of BRF the following year.

A more fruitful partnership came when Sadia joined with France's Accor Group and Brazilian wholesale group Grupo Martins to establish Apprimus. That operation gave Sadia an entrance into the foodservice sector. Also in 2002, Sadia established a new Austrian subsidiary, Sadia GmbH, in order to enhance its exports to the European Community markets.

After abandoning Argentina in 2002, amidst that country's economic crisis, Sadia announced its intention to re-enter that market in 2003. Meanwhile, at home, Sadia prepared to launch a new product line, ice cream, under its Miss Daisy brand. The move marked a new highlight in Sadia's transition from pork and poultry specialist into a global branded food products group for the new century.

Key Dates:

1942:: Attilio Fontana acquires 50 percent of small grain mill in Concordia, Brazil.
1944:: Fontana buys other half of business, which he renames Sadia.
1946:: Sadia enters pork slaughtering and processing.
1951:: Sales office opens in Sao Paulo.
1953:: Shipments begin by air, a move that leads to creation of Transbrasil airline; meat processing plant opens in Sao Paulo.
1956:: Chicken slaughtering begins.
1961:: Vertical integration is introduced through contract partnerships with farmers.
1964:: Frigobras, a cold storage and frozen meats specialist, is founded.
1971:: Sadia goes public and changes its name to Sadia Concórdia S.A. Indústria e Comércio.
1973:: Company begins turkey meat production.
1975:: Exports begin to Middle East, which becomes the company's largest export market.
1979:: Acquisition of soy milling and oil operation is completed.
1989:: Attilio Fontana dies and grandson Luiz Furlan takes over as head of the now $1 billion company.
1992:: Sadia enters Argentina as part of South American expansion.
1997:: Sadia restructures, expanding its processed foods operations, and selling off soybean and beef businesses.
1999:: Frozen desserts brand Miss Daisy and pork and poultry products producer Rezende are acquired.
2000:: Sadia forms Concordia Foods Ltd. joint venture in United Kingdom with Cargill Foods.
2001:: Company forms BRF International export joint venture with Perdigao, but exits partnership the following year.
2002:: Sadia creates Apprimus foodservice joint venture with Accor and Grupo Martins.
2003:: After exiting Argentina market, Sadia announces plans to reenter Argentina; launches new ice cream line under Miss Daisy brand.

Principal Subsidiaries

Churrasq. Beijing (China; 50%); Concórdia Foods Ltd. (U.K.; 50%); Concórdia S.A.; Concórdia S.A. (Grand Cayman); EzFood Serviços S.A. (aka Apprimus; 33.33%); Laxness F.C.P.A.Lda.; Rezende Mkt. e Comunic. Ltda.; Rezende Oleo Ltda.; Sadia Argentina; Sadia Chile (60%); Sadia Europe Ltd. (U.K.); Sadia G.M.B.H. (Austria); Sadia Internatlional Ltd.; Sadia Itália; Sadia Uruguay.

Principal Competitors

Cargill Inc.; Tyson Foods Inc.; ConAgra Foods Inc.; Smithfield Foods Inc.; Orkla ASA; Hillsdown Holdings Ltd.; Nutreco Holding NV; Alfa S.A. de C.V; QP Corp.; Maple Leaf Foods Inc.; ContiGroup Companies Inc.; Protinal/Proagro CA; Keystone Foods L.L.C.; Perdue Farms Inc.; Perdigao SA.