Northern Foods has reported a 37.7% increase in half-year pre-tax profit to £20.1m, but warns the market remains “challenging” due to rising commodity costs.

The food manufacturer, which has been carrying out a radical review of its business for the past year, said sales for the 26 weeks to 29 September rose 2.5% to £438.6m.

Underlying revenue in its chilled division rose 5.4%, but fell 2.3% in its frozen division because of a disappointing performance from its Dalepak meat grills business. Its bakery division returned to growth with underlying sales up 2.8%.

Northern Foods also warned commodity prices continued to rise - especially in cereals, dairy, cocoa and fats.

“With significantly higher commodity costs expected for the remainder of this financial year, material costs are now expected to be approximately 4 to 5% higher than the prior year, representing an annualised impact of approximately 8 to 10% of our materials cost base,” the company said.

“The impact of these cost increases has been recovered for the second half through selling price increases to customers, although the extent to which customers pass these onto consumers and the resultant potential impact on future sales volumes remains unclear.”