Updated version 2 - Kimberly-Clark faces diaper sales challenges in the Chinese market but maintains its annual performance outlook

Paragraph 3 adds more detail, paragraph 4 includes the CFO's comments, and paragraph 7 contains the CEO's comments

Alexander Marrow/Koyena Das

Reuters, November 5 - Kimberly-Clark KMB.O, maker of "Huggies," maintained its annual sales and profit forecasts on Thursday and blamed a decline in organic sales on false allegations regarding its diaper quality in the Chinese market.

The diaper issue began in June when China's State Administration for Market Regulation (link) launched an investigation after reports claimed that diapers sold by "Huggies" and Chinese brands "Baobaole" and "Bibibaobei" contained formamide—a substance that can irritate skin, eyes, and the respiratory system.

Although Chinese regulators announced in October (link) that Kimberly-Clark's products met standards and found no formamide—effectively refuting the false accusations circulating on social media—the incident, which has impacted the company for the past two quarters, could have lingering effects.

"Recent test results from Chinese regulators confirm the safety of our products with no evidence supporting the initial allegations," CFO Nelson Urdaneta said. "While recovery will take time, we are confident in the long-term healthy development of 'Huggies' in the Chinese market."

The Kleenex tissue maker expects its annual organic sales growth to trail the weighted average growth rate of its categories and countries by about 100 basis points. Kimberly-Clark said this mainly reflects an approximately 100 basis point negative impact from volatility in the Chinese market.

The company recently completed its roughly $40 billion acquisition of Tylenol manufacturer Kenvue and expects high single-digit annual growth in adjusted earnings per share at constant currency.

"We still expect fourth-quarter business performance to be relatively sluggish," CEO Mike Hsu said.

Like many peers, Kimberly-Clark is pushing innovation, such as adding a special layer in "Pull-Ups" training pants to help children distinguish wet from dry, but rising costs may become a drag.

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Hit by a 270 basis points impact from China-related claims and changes in North American retailer inventory levels, organic sales dropped 1.3% in the third quarter.

In the quarter ended September 30, North American sales grew by 2%, while volumes in international personal care business units fell by 4.6%.

Urdaneta, in prepared remarks, said improved productivity was partly offset by heightened inflation from Middle East conflicts and higher spot freight rates.

Adjusted gross margin was 35.5%, down 130 basis points from a year earlier, mainly because, despite higher input costs and increased supply chain investment, product prices still declined by 1.1%.

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