SAO PAULO - Clients of Brazil's Hypermarcas appear likely to increase orders of medicines and beauty care goods in the second half of the year, in a sign that government steps to kick-start the flagging economy could be bearing fruit, a senior executive said on Saturday.

Photo: Hypermarcas

Retailers and drugstores are getting "more enthusiastic" with the outlook for the economy, Chief Financial Officer Martim Mattos said in a phone interview on first-quarter earnings. Profit at the Sao Paulo-based company jumped 24 percent from a year earlier after sales of generic drugs gained traction.

Brazil's economy almost stalled in the past two quarters as rising household debt, a strengthening currency and the euro zone debt crisis negatively impacted manufacturing and business confidence.

Policymakers, who have cut interest rates to near record lows, expect a recovery to gain momentum in the third quarter.

"We haven't experienced yet a significant inflection point in orders, but we sense that the mood among some of our biggest clients is slowly turning a tad more upbeat," Mattos said.

Hypermarcas, the largest Brazilian producer of generic drugs and toiletries, said earlier in the day its net income jumped 24 percent to 40.8 million reais ($21 million) from 32.9 million a year earlier. The result came below the average estimate of 57.3 million reais in a Reuters poll of six analysts.

Net income climbed as Hypermarcas contained sales and administrative expenses and pushed forward with a plan to toughen sales terms for clients.

A decline in local borrowing costs in Brazil and a strengthening of the nation's currency in the first quarter drove financial expenses down, bolstering profits.

Yet, Hypermarcas missed analysts' estimates in the first quarter as marketing expenses rose more than expected amid a gradual recovery in sales.

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Chief Executive Claudio Bergamo is under pressure from investors who want him to focus on pharmaceutical and beauty care products, shed poorly performing brands and integrate more rapidly some of the 23 companies it has taken over in the past four years.

Its stock is down 38 percent over the past year; in 2011, it dropped 64 percent.

Despite Mattos' remarks, it is still unclear whether the improving environment that allowed Hypermarcas to report a gain in profit will prevail in coming quarters, analysts said. The currency is now trading at its lowest level in almost three years while consumer demand in Brazil remains tepid.

Revenue at Hypermarcas, which sells more sweeteners, hangover pills, shaving cream and lotions than anyone else in Brazil, rose 14 percent on a year-on-year basis to 897.1 million reais in the first quarter, beating the average estimate of 846.5 million reais in the Reuters poll.

The gain in revenue was driven by robust growth in its pharmaceutical unit, which expanded 17 percent in the quarter. The consumer unit, which controls sales of beauty care, home cleaning products and processed foods, posted sales growth of 9 percent on an annual basis, the statement said.

"Generics sales were largely much more robust than in any other segment of the business," Mattos said.

The recovery on Hypermarcas' top line also reflected a more rapid inventory turnover, which fell to 135 days at the end of the first quarter, from 193 days a year earlier and 136 days in the fourth quarter.

The ratio will remain stable in coming quarter, Mattos said .

Marketing expenses jumped 15.7 percent from a year earlier, outpacing most estimates, following "a bigger push to market our own brands in a more aggressive way," Hypermarcas said. Sales expenses rose 2.7 percent, while administrative and general expenditures dropped 4.3 percent in the same period.

As revenues rise, "we would expect to have more cash available to spend on marketing," Mattos said. Such expenses may stay around the equivalent of 19 percent of revenue by year-end.

Earnings before interest, tax, depreciation, amortization and other items - a gauge of operational profitability known as adjusted EBITDA - slid 11.2 percent to 192.4 million reais from the year-earlier period.

The result, however, beat the 180.9 million reais estimate in adjusted EBITDA predicted in the Reuters poll. EBITDA surged 43 percent on a quarter-on-quarter basis.

Mattos reaffirmed that accumulated EBITDA will end the year above 850 million reais, in line with the company's guidance.

Net financial expenses dropped 30 percent in the first quarter to 56.4 million reais reflecting lower cost of credit in Brazil and the impact of a 3 percent gain in the real - which slashed the cost of servicing Hypermarcas' dollar-denominated bonds due in 2021, the company said.

Net debt fell by 45 million reais to 2.699 billion reais from the fourth quarter, Hypermarcas said. M attos said he does not expect debt metrics have deteriorated significantly despite the real's 4 percent drop in the quarter.