Image: Philip Morris.

Among U.S. companies, international tobacco giant Philip Morris International (PM 1.04%) has been one of the clearest losers from the strength of the U.S. dollar, as its foreign revenue translates into fewer dollars and weighs down the company's overall results. Yet one thing that few investors expected coming into Thursday morning's first-quarter financial report was that Philip Morris would manage to buck the long-term trend toward falling cigarette demand. Yet that's exactly what it did last quarter, and even though most of the company's headline numbers reflected the huge headwinds from the strong dollar, the underlying fundamentals of the business showed enough strength to impress shareholders. Shares were up 7.8% as of 10:35 a.m. Let's look more closely at exactly how Philip Morris International fared in the first quarter and what it says about the company's future.

Philip Morris vs. the dollar
At a glance, Philip Morris International's numbers looked a bit gloomy. Revenue fell more than 4% to $6.62 billion, and adjusted earnings came in at $1.16 per share, down 2.5% from last year's first-quarter results. Yet the impact of the dollar was huge, cutting $939 million from Philip Morris' revenue and $0.31 per share in earnings. When you back out those figures, Philip Morris posted considerable currency-neutral growth of about 9% in sales and 24% in earnings per share. Moreover, investors had expected the company to produce just $6.13 billion in sales and $1.01 in earnings per share, proving that Philip Morris fared much better than most of those following the company had believed possible.

Image: Debbie Tingzon, Flickr.

Geographically, Philip Morris saw its strongest results from its Asian and Western Hemisphere segments. In Asia, revenue fell 1.2%, but operating company income rose 2.1% even before accounting for a sizable hit from the dollar. On a currency-neutral basis, operating income in Asia jumped 10.7%. Latin America and Canada were even stronger, boasting 1.8% dollar-sales growth and a nearly 14% rise in operating income, even incorporating double-digit percentage currency hits. Even in the European Union and in the Eastern Europe, Middle East, and Africa segment, falling sales and profits were due entirely to currency impacts, with all segments posting reasonably strong results in currency-neutral terms.

The big news for Philip Morris, though, was that cigarette shipment volumes were surprisingly healthy. Worldwide volume rose 1.4% to 198.8 billion units, with the two European segments producing the company's growth by offsetting small declines in Asia and the Western Hemisphere. Specifically, the Marlboro brand saw a 2.1% gain, with France, Italy, and Spain driving a substantial portion of the rise. Market share in the European Union climbed to 39.6%, and Philip Morris continued to play a dominant role in countries across the world, with Argentina, Mexico, the Philippines, and Italy all having more than half their tobacco sales controlled by Philip Morris brands.

Philip Morris International sees a better year ahead
Philip Morris International's results came as something of a surprise to the company. CEO Andre Calantzopoulos commented that "our organic volume and market-share performance was better than we originally forecast" and therefore "our robust business momentum is such that we are raising our guidance for the year."

CEO Andre Calantzopoulos. Image: Philip Morris.

Specifically, Philip Morris raised its full-year 2015 guidance to earnings of $4.32 to $4.42 per share, a nickel higher than the projected figures it gave last quarter. The company still believes that the strong dollar could cost it roughly $1.15 per share, but the resulting growth of 9% to 11% in earnings is a percentage point better than previously expected.

Notably, one element of Philip Morris International's capital management strategy has come to a standstill. The company made no share repurchases in the first quarter, as it remains committed to "managing our cash flow prudently." Given the currency headwinds that the company faces, it's reasonable for Philip Morris to rein in its buyback activity until conditions improve.

Investors in Philip Morris reacted very favorably to the news, as shares jumped Thursday morning. If Philip Morris can keep demand for tobacco strong worldwide, then it will have accomplished a feat many people thought was impossible, which would justify higher share prices for the foreseeable future.