UPDATE 4-Brewer Ambev squeezed by Brazil competition, Argentina inflation

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SAO PAULO, Oct 25 (Reuters) - Ambev SA, Latin America’s largest brewer, reported a drop in quarterly earnings on Thursday, hurt by inflation in Argentina and slipping share in key market Brazil, where rival Heineken NV is making serious inroads.

The company, the Latin American unit of Anheuser Busch Inbev NV, posted a 10 percent year-on-year decrease in net profit to 2.89 billion reais ($774 million).

That sent Ambev shares over 5 percent lower in afternoon trade, paring some losses after opening almost 8 percent down. The wider Bovespa stock index was up 2 percent.

Dutch brewer Heineken, which is betting big on the Brazilian beer market, is beginning to take a chunk out of its rival’s business, with volumes growing by double digits, according to analysts.

“Despite easy comps, Brazil beer volumes dropped 3.1 percent year-over-year, although Heineken volumes grew double-digit in Q3,” analysts at UBS wrote in a note to clients, in which they reiterated their ‘sell’ recommendation.

While overall net profit beat the Reuters average estimate of 2.68 billion reais, earnings before interest, taxes, depreciation, and amortization (EBITDA) fell short of estimates, coming in at 4.45 billion reais, well below a Reuters projection of 5.11 billion.

In Brazil, EBITDA ticked up a modest 0.3 percent.

As it seeks to maintain its dominant position in Brazil’s beer market, Ambev said it was pressing on with investment in its more upscale brands, such as Budweiser, Stella Artois, and Corona, as well as Skol Hops, a “core plus” brand it recently rolled out.

The company said those brands reported a solid quarter volume-wise, with sales of Corona surging 75 percent year-on-year and sales of Stella Artois jumping 55 percent. Its lower-end and mainstream beers accounted for the drop in overall volume.

In a call with analysts, Chief Executive Bernardo Paiva said he expected Corona sales to “continue to ramp up at a fast pace,” while preliminary results from Skol Hops were “encouraging.”

In a later call with journalists, executives said they were focused on the premium and mainstream segments, and added that they were examining opportunities to roll out more regionally-focused value beers across Brazil.

Ambev recently launched its mandioca-based Nossa brand, which is sourced and sold only in the northeastern state of Pernambuco.

Brazil’s northeast has also emerged as a focus for Heineken, which has doubled down on its bargain Schin brand in the region.

In the quarter, the company said overall EBITDA took a 574 million-real hit as it adopted hyperinflationary accounting methods in Argentina, in accordance with international standards. Executives said they were committed to that market in the long term.

Across the board, Ambev said, unit production costs climbed 4.7 percent on increased commodity costs as well as Argentine inflation.

The company posted EBITDA growth of 5.8 percent in the Caribbean and Central American region, citing successful branding initiatives. EBITDA in Canada fell about 7 percent on higher input costs, particularly aluminum. ($1 = 3.73 Brazilian reais) (Reporting by Gram Slattery; editing by Dan Grebler and Rosalba O’Brien)