Things haven't gone perfectly for Philip Morris International (PM -0.14%) for a long time, and the Marlboro maker has had to deal with tough conditions in the tobacco industry across the globe. Regulatory threats have become increasingly common, and Philip Morris has had to work hard to respond to the changing behavior among smokers who are moving away from traditional cigarettes toward alternatives that they see as less harmful and potentially more socially acceptable.

Coming into Thursday's first-quarter financial report, Philip Morris investors hoped that a good earnings report would help the stock bounce back from pressure early in 2018. Yet even though the company said that lower taxes would help boost its bottom line throughout the year, and despite reports of long-awaited positive currency impacts, ongoing declines in sales volume stressed Philip Morris' long-term challenges. This showed shareholders that Philip Morris still has a lot of work to do in order to make a full transition toward its stated goal of phasing out traditional cigarettes entirely.

Two hands holding an iQOS heated tobacco unit.

Image source: Philip Morris International.

How Philip Morris began 2018

Philip Morris International's first-quarter results presented some surprises on multiple fronts. Revenue growth was much weaker than most had expected, with net revenue coming in at just $6.90 billion. That was higher by nearly 14% from year-earlier levels, but was lower than the consensus forecast for more than $7 billion in sales. GAAP net income was down 2% to $1.56 billion, but adjusted earnings of $1 per share grew slightly from the first quarter of 2017 and were far better than the $0.90 per share that those following the stock had expected to see.

What was most interesting to see was how factors that have worked against Philip Morris for so long actually helped to boost its performance during the first quarter. On the currency front, a weaker U.S. dollar helped to lift revenue by $327 million, representing more than 5 percentage points of sales growth. Organic revenue would have risen just 8.3% without the currency boost. Similarly, currencies added $0.03 per share to Philip Morris' bottom line, without which the tobacco giant would have suffered a slight drop in adjusted earnings per share.

Fundamentally, Philip Morris still faces the secular decline of the traditional cigarette business worldwide. After a pause last quarter, cigarette shipments fell more sharply during the period, with a 5.3% decline to 164.3 billion units. The worst performance came from the new East Asia and Australia segment and from Eastern Europe, both of which saw double-digit percentage declines. Shipment volumes for Marlboro were down 7% worldwide, while strong performance for Chesterfield and Dji Sam Soe only partly offset declines for L&M, Sampoerna, and Bond Street.

Helping Philip Morris to weather the cigarette storm was good performance by its iQOS heated tobacco products. Year over year, Philip Morris saw shipment volume of heated tobacco more than double to 9.57 billion units, with Japan and other areas in East Asia and Australia making up about three-quarters of that number. Yet sequentially, iQOS shipments were down sharply from the 15.72 billion units shipped during the fourth quarter of 2017.

Overall, Philip Morris saw the best revenue gains in the European Union, where the strong euro created a 14 percentage point tailwind from what would otherwise have been flat performance on the top line. The Latin America and Canada region and the East Asia and Australia segment were the best performers overall, with solid gains in both sales and operating income that saw few supports from currencies.

Can Philip Morris pick up the pace?

CEO Andre Calantzopoulos seemed pleased with the performance. "We began the year with strong, currency-neutral net revenue growth of more than 8% in the quarter," Calantzopoulos said, "driven by higher volume for heated tobacco units and iQOS devices, coupled with higher pricing from our combustible product portfolio." He also expressed confidence generally in Philip Morris' growth prospects.

Yet some of Calantzopoulos' comments were disturbing. In referring to slower-than-expected growth in iQOS sales in Japan, the CEO said that "we are now reaching more conservative adult smoker segments that may require, at least at first, slightly more time for adoption." Philip Morris still expects worldwide sales in its heated tobacco unit to double in 2018, but it's unclear whether that will be enough to offset falling cigarette demand.

Philip Morris did boost its earnings projections for the full year, citing tax impacts as the sole driver of the guidance increase. The new forecast for $5.25 to $5.40 per share in earnings is $0.05 higher than the previous range, with expectations that the company will be able to grow currency-neutral sales by 8%.

Philip Morris shareholders didn't like the trends they saw, and the stock dropped more than 4% in pre-market trading following the announcement. In order to regain confidence, Philip Morris will have to redouble its efforts to push iQOS forward worldwide and do a better job of making up the ground it's losing from negative trends in traditional cigarettes.