March 2, 2017 / 2:38 PM / in 9 months

UPDATE 2-Weak Brazil beer sales hit Ambev earnings, shares down

(Adds conference call details, paragraphs 2-3, 5-6)

SAO PAULO, March 2 (Reuters) - Shares of Ambev SA tumbled on Thursday after the drinks company reported weak quarterly earnings, hit by declining sales and rising costs in its main market of Brazil, where it hopes for a rebound as economic conditions improve.

The Sao Paulo-based subsidiary of Anheuser-Busch InBev NV reported a 7.3 percent drop in Brazilian beer volumes in the fourth quarter from a year earlier, dragging net revenue in the country 9.7 percent lower and reducing Ambev’s share of the beer market to 66.3 percent in 2016.

In a conference call to discuss results, management said it aims to restore market share to the 67-69 percent range of quarters past, which Ambev considers “an optimum” level.

Ambev’s income rose 13.5 percent to 4.834 billion reais ($1.56 billion) due to a tax benefit from a restructuring of international subsidiaries. Removing such one-time effects, net income fell 15.9 percent to 3.656 billion reais.

“We are nothing but disappointed with our performance in Brazil,” Chief Financial Officer Ricardo Rittes said in a conference call. As last year proved to be challenging, Ambev is “cautiously optimistic” for the Brazilian beer industry in 2017.

“The company’s market share is increasing and showing a positive trend in early 2017,” Chief Executive Officer Bernardo Paiva said in the call, adding unemployment should stop rising thus increasing families’ disposal income, especially in the second half of the year.

Ambev shares fell 3.8 percent to 17.23 reais in Sao Paulo trading, on track for their worst drop since October 2015.

The tough year for Ambev underscores challenges in Brazil, where rival Heineken NV is buying the local operations of Japan’s Kirin Holdings Co Ltd, ramping up competition in the world’s No. 3 beer market.

The struggles in Brazil last year contributed to the first decline in core earnings at parent company AB InBev since it was formed more than a decade ago.

The company said it expects the growth of costs by volume in Brazil to slow over the course of this year as the local currency rebounds from near-record weakness a year ago, which drove up the cost of importing ingredients.

Costs by volume in Brazil are expected to grow from a year ago by double digits in the first half of 2017, compared to single-digit growth or stability in the second half, Ambev said. ($1 = 3.1055 Brazilian reais) (Reporting by Ana Mano; editing by Brad Haynes, Bill Trott and Bernard Orr)

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