Another Miss Highlights Frothy Expectations Around PMI

For the second consecutive quarter,

The greatest negative impact in the quarter came from currency, although on an underlying basis, volumes across the board appeared slightly soft. In Asia, in particular, volumes did not improve sequentially as we had expected, falling 9.8%, with PMI citing excise-tax-driven price increases and an increase in illicit trade as the drivers. This trickled through the income statement, and currency-neutral operating income growth slowed to 6%, down from 11% in full-year 2016.

In an environment of very sluggish consumer staples growth, this was still a decent performance, and although the company may not be meeting the market's aggressive expectations, there are several reasons not to panic. First, the U.S. dollar has weakened against the euro in recent weeks, which should provide some respite from currency headwinds in the second half of the year. Second, much of the volume shortfall appears to have been driven by the economy end of the market, which has limited impact on profitability. Third, sales of HeatSticks are picking up some of the slack. The company reported 6.3 billion in HeatStick shipments in the second quarter, up 43% sequentially from the first quarter. The impressive uptake rates iQOS has generated since last year supports our thesis that heated tobacco has a strong chance of gaining critical scale.

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