Northern Foods has issued the following Interim Management Statement for the 13 weeks ended 28 June 2008 (the “first quarter”).

Revenue
First quarter Group revenue increased by 7.6% compared with the corresponding prior year period. Underlying revenue was 3.5% higher and in line with the trend seen in the last financial year. Revenue growth reflected an acceleration in the price recovery of commodity inflation, with average selling prices up 5.5%. This incorporated both the annualisation of successful cost recovery in the prior year and continuing price recovery of additional commodity costs. Group underlying volume was 2.0% lower than the corresponding prior year period, partly reflecting a move away from unprofitable private label business in frozen pizza and biscuits.

As expected, growth in overall chilled food markets has slowed, with a decline in the ready meals market of 2.6% in the first quarter2. By contrast, revenue in Northern Foods’ ready meals business continued to grow in the period, reflecting its market leading product offering. This helped to offset slower growth in sandwiches and salads due to indifferent summer weather. Overall, Chilled division revenue increased by 7.3% while underlying revenue rose by 2.1%. Average prices were 3.0% higher in the first quarter.

In the Frozen division, total revenue rose by 7.8% in the first quarter with 3.5% underlying revenue growth. This reflected significantly higher average prices, 12.1% up year on year. Reduced volume reflected a move away from unprofitable private label business, while the Goodfella’s pizza brand successfully defended its market share. Integration of the recent pastry acquisition continued to make good progress.

In the Bakery division, early results from the relaunch of Fox’s biscuits have been encouraging. In the first quarter, Fox’s year on year brand share increased from 9.2% to 10.0%. Benefiting from the innovative ‘Vinnie’ TV campaign, 1.1 million additional shoppers purchased the brand. Meanwhile, the internet based marketing campaign recorded over half a million ‘hits’ in the first six weeks. Overall, Bakery division revenue grew 8.0% in the first quarter and average prices were 2.5% ahead, with a return to increased selective promotional activity across the biscuit category.

The table below summarises underlying growth against the comparable prior year period:

Commodity costs
Commodity costs have continued to rise in line with expectations, as set out in May 2008. The company anticipates full year commodity costs to increase by approximately £20 million, together with a £12 million increase in utilities.  These cost increases continue to be recovered through pricing negotiations and delivery of ongoing efficiency programmes across the business, whilst working with suppliers to mitigate cost increases where possible.

Investment programmes
Driving a step change in efficiency remains key to delivering future margin improvement across the Group. The mothballing of the Fenland ready meals facility will be implemented in August 2008. Plans to redevelop the facility as a leading state of the art chilled food site, delivering superior products, more efficiently with new customers, continue to be developed. Meanwhile, the Grimsby soup site, acquired in January 2008, has been commissioned and comes on stream during the second quarter of the current financial year.

The biscuits business has identified an opportunity to deliver a step change improvement in operating costs by transitioning from the current three manufacturing sites to two world class facilities. The Board is considering options for either the expansion of an existing site or the development of a new facility. It will now consult with key stakeholders and development agencies, and expect to finalise the preferred business solution by this year end, with the investment planned to be completed in 2011.

Profitability and outlook
Expectations for the current financial year remain unchanged, with profits weighted to the traditionally much stronger second half of the financial year. The first half year will reflect investment in brand relaunches and start up costs.

Financial position
Net debt in the first quarter rose to £227.3 million (prior year end £200.2 million) due to the normal pattern of seasonal working capital build, together with continuation of the share buyback, which has returned £16.3 million to shareholders, representing 4.8% of issued share capital, since December 2007. The combination of strong capital controls, the majority of debt being at fixed rates, and committed long term funding facilities positions the Group well for the challenging market environment.

Stefan Barden, Chief Executive, commented: “The market environment remains challenging but we continue to invest in our brands and own label business, and at the same time drive greater efficiencies. Our investment programme demonstrates our commitment to keeping Northern Foods competitive and delivering leadership in our chosen markets. We have a strong balance sheet and a robust business model, leaving us well positioned to succeed in difficult market conditions.”