ANNUAL REPORT & ACCOUNTS 2005

Around the world in 80 years

Contents
1 2 4 10 14 18 20 23 31 37 38 38 39 40 41 42 48 70 71 72 73 77 78 80 Financial highlights Chairmans statement Operating review Financial review Safety, Health and the Environment (SHE) Board of directors Directorsreport Directorsremuneration report Corporate governance Group independent auditors report Group income statement Group statement of recognised income and expense Group balance sheet Group cash flow statement Group cash flow notes Group accounting policies Notes to the Group accounts Company independent auditors report Company balance sheet Company accounting policies Notes to the Company accounts Principal subsidiary companies Shareholder information Five year record

Financial highlights
2005 Revenue continuing operations Profit before tax continuing operations Earnings per share continuing operations Dividends per share Gearing 305.6m 49.2m 24.7p 13.35p 30.0% 2004 280.9m 43.1m 21.2p 12.5p 17.0%

Sales by market 1998 Consumer Care Industrial Specialities

35% 65%

Sales by market 2005* Consumer Care Industrial Specialities

68% 32%

Sales by destination 1998 Europe Americas Asia Rest of World Sales by destination 2005 * Europe Americas Asia Rest of World * Continuing operations

57% 26% 7% 10%

43% 36% 14% 7%

1987

1928

1941

1943

1947

1950

1951

1953

1964

1966

1967

1969

1970

1971

1973

1975

1979

1980

1984

1985

1989

1991

1995

1997

1925

1926

1929

1930

1931

1933

1934

1936

1937

1939

1940

1942

1944

1945

1946

1948

1954

1955

1956

1958

1959

1960

1961

1962

1965

1968

1972

1974

1976

1977

1978

1982

1983

1986

1988

1992

1993

1994

1998

1999

2000

2001

2003

1927

1932

1935

1938

1952

1957

1963

1981

1990

1949

This timeline illustrates the extent of Crodas global reach. Each flag is positioned alongside the year in which the Group established a presence in that country. A key to the flags can be found on the inside back cover.

1996

Financial highlights 1

2002

2004

2005

Chairmans statement
In my first statement as Chairman, I am pleased to be able to report on such an excellent set of full-year results, our first to be prepared under International Financial Reporting Standards.
Overall pre-tax pre-exceptional profits for 2005 were 51.1 million (2004 45.8 million) and on continuing operations were up over 14 per cent at 49.2 million, compared with 43.1 million the previous year, on sales almost 9 per cent ahead at 305.6 million (2004 280.9 million). Following the significant adverse impact of currency movements on our 2004 results, there was little effect in 2005 as the average rate for our main trading currencies, the US Dollar and the Euro, moved less than 1 per cent in our favour. Whilst the mix of our profits resulted in a small increase in our tax rate to 35.8 per cent (2004 35.3 per cent), earnings per share for continuing operations were still up 16.5 per cent at 24.7 pence compared to last years 21.2 pence. Basic earnings per share were 25.6 pence (2004 23.3 pence). Therefore, your Board is recommending a 7.1 per cent increase in the final dividend to 9 pence, giving a 6.8 per cent increase for the year to a total of 13.35 pence. The dividend is covered 1.9 times at this level. Although we spent a net 21.8 million on buying back shares, net debt at the year-end increased by only 9 million, to 24.2 million, as the Group continued its recent record of strong cash generation. The Groups chosen strategy of focusing on its core competencies underpins this years performance, which built on the progress achieved in 2004. The process continued in 2005 as we announced the disposal and closure of our small metal treatments division and commenced the process of selling the shares in our associate company Baxenden Chemicals Limited. Both businesses are treated as discontinued operations in these results. All of our growth in 2005 was organic. However, we continue to evaluate acquisition opportunities in our core business areas. The year saw a number of exciting developments coming forward from our recently established Enterprise Technologies group, the benefits from which we will begin to see in 2006. Elsewhere we continued to launch many new and improved products in response to customer and market needs. Growth was seen in all of the market and geographic segments that we report in our financial statements. Consumer Care sales grew by over 10 per cent to leave operating margins in excess of 21 per cent, with Industrial Specialities seeing a lower but still impressive sales advance approaching 6 per cent. Our sales growth in the Americas was particularly strong at over 14 per cent. On the face of it our growth in Asia was a little disappointing at just under 5 per cent. However, lower sales in Japan masked growth of over 20 per cent and 40 per cent respectively in our fledgling markets of China and India. We are in the process of establishing a wholly owned sales company in China to enhance our existing position in this dynamic market. On the cost side, we saw our energy costs rise sharply towards the end of the year, particularly in the UK, where energy costs are unjustifiably higher than those of our neighbours in Continental Europe. We would like to thank all our employees for their efforts over the last year. We were particularly pleased that so many of our employees were able to benefit from the Companys recent impressive share price performance at the five-year maturity date of their investments in our all-employee share schemes. The Board I should also like to take this opportunity to thank my predecessor as Chairman, Antony Beevor, for his service to Croda. Antony joined the Board in 1996 and became Chairman in 2002 before retiring in September last year. Antony was a committed supporter of Croda and led the Board with great wisdom and foresight through a very successful period for the Company. We are also sorry that we shall be losing the services of Barbara Richmond, our Finance Director, at the end of March. Barbara has done an outstanding job over the last nine years, and has played a major role in the successful development of Croda. We wish her well in her future career. I am pleased to report that David Dunn, our Senior Independent Director, has agreed to continue on the Board for a further three years until 2009. The Board is fortunate to be able to count on Davids continuing advice and support. Outlook This has been an excellent year for the Group and continues to vindicate the strategy we are following. The early signs are that the firm demand witnessed in 2005 has continued into the New Year and we remain confident of delivering further profitable growth in 2006.

Martin Flower Chairman

THIS HAS BEEN AN EXCELLENT YEAR FOR THE GROUP AND CONTINUES TO VINDICATE THE STRATEGY WE ARE FOLLOWING.

Martin Flower Chairman

2 Chairmans statement

Chairmans statement 3

Operating review
Around the world in 80 years
In its 80th year of existence, Croda has become a truly global company.Though founded in 1925, it wasnt until 1968 that Croda became Croda International a name which was, at the time, a triumph of prescience over reality.
Total sales in 1968 were 27m with exports from the UK at 3.2m. Croda operated in eight overseas countries, but two were small raw material depots and one was a nascent joint venture in Japan. The majority of overseas sales were in North America. Today there are Croda operations in 26 countries throughout Europe, the Americas, Asia and Africa. We have modern manufacturing plants in the UK, France, USA, Brazil, Singapore and Japan. For the first time in our history over half of the employees are based outside of the UK. Our highly skilled, technical marketing network is a vital support to our global customer base and is the envy of our competitors. As with all things in Croda, innovation is the key. Our managers are local, speaking the language of the customer in the most important markets of the world. Our communication and distribution network anticipates the globalisation of our target markets, so that we are ready to support and sell into our customers global expansion. Indigenous customers are cherished and are supported with the latest technology wherever they are in the world. Croda exports over 75% of its UK production and overseas sales are now 87% of global turnover. We sell products from UK plants into Japan, from Japan into France, from France into the USA, from the USA into Brazil, from Brazil into Singapore and from Singapore into the UK. We have a global manufacturing footprint and we make products where its best for the business and best for the customer. This global approach has produced a record result for 2005. Sales from continuing operations were up by 8.8% (7.6% in constant currency) and pre-tax profits increased by over 14% to an all time high. In the face of strong headwinds from escalating energy costs and rising raw material prices, we continued to achieve strong margins. Currency was marginally positive to profits. Our investment in new products increased, and the new Enterprise Technologies initiative will launch products in two major new areas in early 2006. These are innovative inorganic sunscreens and a new range of polymers for the Personal and Health Care markets sectors where Croda has no historical position.

China: Wong Shuiling, Managing Director, Croda China

Croda is increasing its global presence in 2006 with the opening of a new sales office in Shenzhen, China, under the management of Wong Shuiling, who is pictured outside the new office building. Establishing a direct presence is critical to Crodas development of this expanding market.

Mike Humphrey Group Chief Executive

We continued our successful cash generation resulting in excellent trading flows and the net 21.8m buy back of shares into treasury. Capital expenditure was unusually low. This is a great tribute to the ingenuity and dedication of our engineering and plant personnel worldwide who managed once again to give the Company all the required extra capacity at very low cost. In support of our many new projects, we anticipate a return to more normal levels of capital expenditure in 2006. Sales in the UK from continuing businesses were flat with sales in the rest of Europe up by nearly 10%, with good growth in the larger markets of Germany, France and Italy. Sales in the Americas were up nearly 15%, with excellent growth in the USA, Brazil and most Latin American destinations. Excluding Japan, Asian sales grew by 17% led by strong performances in China, Korea and India. Sales were down in Japan as we exited some low margin, high volume import business. Sales in the Middle East rebounded from a poor 2004. Our weakest areas were Africa and Australasia and sales were flat in both regions.

TODAY THERE ARE CRODA OPERATIONS IN 26 COUNTRIES THROUGHOUT EUROPE,THE AMERICAS, ASIA AND AFRICA.

4 Operating review

Operating review 5

Global people
Our focus on Personal Care once again proved successful, with excellent growth in our largest sector. Health Care sales grew, but more slowly than previous years due to temporary plant difficulties in the second half of 2005. These were quickly resolved and we expect a return to the high levels of growth seen in recent years. We also achieved welcome growth in Plastics Additives whilst maintaining our improved margins. During the year, we closed the small manufacturing plant at Moss Bank, Widnes and outsourced the manufacture of a minor product range. We also announced that we would exit the Application Chemicals business which operates in the demanding markets of steel and engineering. This will take place during the first half of 2006. We have also begun the process of selling our associate company, Baxenden Chemicals. Following the successful roll-out of our SAP system in the USA, the implementation at Sederma was completed successfully. The global roll-out will be complete when Croda Japan goes live in 2006. This steady and successful ERP implementation is a credit to the talented in-house team. The continuous expansion of our vital R & D teams resulted in more successful new products and processes which will add much value going forward. At the same time we expanded our global sales and marketing network with new management in China and a new operation in Colombia. Consumer Care The core business performed strongly in 2005, with sales up by over 10% and operating profit rising by 8.1%. On continuing operations it accounts for 68% of Group turnover and over 85% of operating profit. The margin of over 21% once again supports our view that it is a true speciality business, driven by innovation and a desire to add value for customers worldwide. This performance is a tribute to the effort of the global teams as it was achieved in the context of a very unfavourable climate of cost increases in energy and a number of key raw materials.

Spain: Jos M Torres, Managing Director, Croda Ibrica

Crodas Spanish operation was established in 1998 with Jos as MD and is located in Barcelona. Jos is pictured standing in front of Antonio Gaudis Casa Batll, which is set to host the In-Cosmetics trade exhibition in April 2006, at which Croda will seek to build upon its ever increasing presence in the global personal care markets.

Personal Care is our largest market sector. There was strong, profitable growth in all our product sectors including Sederma and in all our target geographic markets. A record number of new product launches will support future growth possibilities for this ever changing market. In Health Care, sales were only slightly ahead, due to some plant difficulties leading to supply issues in the third quarter. These problems, relating to higher value products, were resolved and we are back on track for the planned level of growth. There has been much activity at our major target pharmaceutical accounts and we expect more trial results in 2006. A number of new products being launched and new processes being implemented should underpin future new business plans. After the rapid growth in recent times, Home Care sales were also flat. Successful new product launches were counterbalanced by slower sales in some of the more traditional products. New projects underway should return this segment to its recent growth path. In Europe, we moved forward strongly with the notable exception of the UK, where the customer base continues to slowly shrink. In all the other major countries we saw a strong performance. The manufacturing units increased output, improved productivity and kept a close control of costs. The European R & D teams continued their successful record in creating profitable new products and processes.

Latin America: Laura Mills, Sales Director, Croda Miami

Croda Miami opened in 1993 and is responsible for developing and managing Crodas business in Latin America. Laura is pictured in front of La Casa Del Florero, the colonial house in Bogota, Colombia which was the focal point of the fight for Colombian independence in the early 19th century. Having sold in Latin America for over 17 years, Laura is well placed to tap into the undoubted potential of the market.

6 Operating review

Operating review 7

USA: Denise Gabriele, VP Sales and Marketing, Sederma Inc

Global reach
In the USA, sales were pleasingly ahead achieving a new record after a good year in 2004. The successful introduction of SAP will make this unit more efficient and customer responsive as we move forward. Sales in Latin America were excellent, led by Brazil, Colombia and Venezuela. New capacity in our Brazilian plant should enable further gains to be made in 2006. The North American Technical Centre, established in 2004, had a strong year for new product introductions, with an increasing number of projects in the pipeline. In Asia, our Singapore operation had a record year and sales increased across the region apart from in Japan. We exited some high volume, low margin import business which reduced sales. However, an emphasis on higher value products produced a record profit. We accelerated our growth in China. A new management team and the new headquarters and technical support centre to be opened in May 2006 will support future growth. Once again, a number of major consumer care companies increased in size by acquisition. In spite of this, our largest global customer represents less than 3.5% of sales and the top ten customers represent less than 20% of global turnover. Our presence in strong global brands increased and at the same time we sold to more customers as we increased our penetration in developing markets. Industrial Specialities This sector performed well, led by a good result from Plastics Additives. Sales grew by almost 6% and profits on continuing operations grew by 64% as the product mix improved as we continued the move away from lower margin business. In Plastics Additives, sales increased and margins were maintained in a very competitive environment. Selling prices were successfully increased in the wake of soaring energy costs and rising prices for rapeseed oil. The new additive for PET bottles is being trialled at a number of major targets in Europe and Asia, following the achievement of European Food Contact approval. US approval is expected in 2006. Seatons again had a reasonable year with the deliberate loss of low margin, high volume commodities replaced by higher margin, lower volume speciality oils. In Croda Food Services, sales moved forward well, but rising raw material prices kept profits flat. India: Ashish Shinde, Managing Director, Croda India
Croda first established a presence in India in 1995, however this presence was significantly expanded in 2003 with the opening of a new sales office in Mumbai, headed by Ashish Shinde. Ashish is pictured second from right on a recent visit to a Kolkatta based customer with David Cherry, Sales and Marketing Director (Polymer Additives), and two members of the customers buying team.

The Groups purchase of Sederma gave us a dedicated sales presence in the key US market alongside the established oleochemicals business. Denise, pictured outside the Product Evaluation Center in Edison, NJ, joined Sederma Inc in 1988 and has been a key contributor to the divisions growth in recent years.

Summary By every measure of profit, this was a record year for Croda. The strength of the global network, the quality of our R & D, the robustness of our manufacturing units and the dedication of Croda people produced this fine result. With the worldwide focus on innovation in everything we do and impetus from our Enterprise Technologies initiative, we expect more progress in the future. As Barbara Richmond leaves us after nine exciting years, I would just like to thank her on behalf of all at Croda for the fantastic job she has done as Finance Director. We wish her well for the future. On a personal note I will miss her for her hard work, her ingenuity, her sense of fun and her sheer energy. Mike Humphrey Group Chief Executive

8 Operating review

Operating review 9

Financial review
Sales moved ahead again in 2005, by 8.8%, a further year of sales growth by the ongoing businesses.As a consequence of the introduction of IFRS, in 2005 we changed the segmentation of our results in line with the markets we serve and the features of those markets.
The new segments are Consumer Care (comprising Personal Care, Health Care and Home Care) and Industrial Specialities (comprising Plastics Additives and all other markets). These new segments reflect the long term risk and return profiles of the markets in which we operate. Sales in the Consumer Care segment rose 10%, with volumes up by a similar percentage. Personal Care was the principal driver of this growth. As we continue to reduce sales of commodity products, volumes in Industrial Specialities were marginally lower. In value terms, however, sales actually increased by almost 6% due to the consequent improvement in the mix of products we sell. Currency had very little influence on trading in 2005, increasing sales by 1% and having almost no effect on profits.
13.5 26 24 22 20 18 pence 12.0 11.5 11.0 10.5 10.0 01 02 03 04 05 pence 16 14 12 10 8 6 4 01 02 03 04 05
Barbara Richmond Group Finance Director

Taxation The tax rate of 35.8% on continuing operations profits reflects the generation of a significant amount of our earnings overseas in countries where the rate of corporation tax is higher than in the UK. Discontinued operations The discontinued operations comprise two businesses. Firstly our rolling oils and rust preventives business, Croda Application Chemicals, which is in the process of being closed with certain product lines being sold. Secondly, we are in the process of selling the shares in our associate company, Baxenden Chemicals Limited based in Accrington, Lancashire. Dividends As earnings continue to grow strongly and we have good cash generation, we are able again to increase dividends by more than the rate of inflation whilst at the same time increasing our dividend cover. Accordingly, it is proposed the final dividend is increased by 7% to 9p making a total of 13.35p (2004 12.5p). At this level dividend cover in total is raised to 1.9 times from 1.8 in 2004. Cash The combination of good trading performance and lower capital expenditure generated 15.5m of cash in 2005 before taking into account the share buy-back.

We expect capital expenditure to increase to more normal levels in 2006. We also intend to continue the buy-back of shares into treasury in order to improve our cost of capital, whilst at the same time ensuring we have the capacity for appropriate acquisitions, which will deliver shareholder value. Treasury The Groups treasury policies are approved by the Board and subject to regular reporting and review. The main financial risks faced by the Group relate to currency, interest rates and the availability of capital. As far as currency risk is concerned, transaction risk is hedged up to three months forward by the use of foreign currency bank balances and forward currency contracts. Translation currency exposure is not hedged but the risk is reduced by matching interest expense to foreign currency earnings where it is efficient to do so. In terms of interest rate risk, the policy is to maintain at least half of the Groups gross borrowings at floating interest rates, with interest rate swaps being used where appropriate. In 2003 the UK regulations on the market purchase and holding of up to 10% of a companys own shares (Treasury Shares) were amended to enable companies to achieve more flexibility on their levels of debt and equity and thus their cost of capital. This gives us an additional means of managing our balance sheet when considered appropriate by your Board.

Operating margins remained strong in Consumer Care at over 20% and rose in Industrial Specialities as we grew the Plastics Additives business and improved the mix. Interest Net interest expense in 2005 was the same as in 2004, with the benefit of the reduction in net debt in the first half offset by the increase in the second half as our share buy-back progressed.

13.0 12.5

Dividends per share

Earnings per share pre-exceptional

The effect of the share buy-back in 2005 was a purchase of 6.1 million shares at an average price of 398p amounting to 24.5m, offset by 2.7m of cash inflow for shares re-issued under employee share schemes which had been purchased in the market by the Company and held in trust. The net cash outflow in the year from share transactions was, therefore, 21.8m. The total purchased since the buy-back began in 2004 amounts to 30.9m.

10 Financial review

Financial review 11

Global performance
IFRS As you will no doubt be aware, we are now required to produce our accounts in accordance with IFRS. We published a detailed transition statement on IFRS on 1 June 2005 and our half year results were also prepared in accordance with IFRS. The principal impact of the change to IFRS was on the balance sheet, due to the inclusion of the IAS 19 deficit on the pension fund which is explained below. The net impact on pre-tax profits in 2005 of the change to IFRS was only small, with the principal difference being a charge of 1.1m in respect of the Groups employee share schemes (2004 0.6m). Pensions Following the transition to IFRS, this years financial statements recognise pension costs, assets and liabilities in accordance with IAS 19, which provides a very different method of accounting than that previously applied by the Group under UK GAAP Whilst IAS 19 usually . results in a more predictable pension cost at the operating level and, at least for the following year at the financing level, it potentially introduces more volatility in the balance sheet. After providing for the related deferred tax asset, our net IAS 19 pension liability at 31 December 2005 was 74.2m (2004 72.2m). Given the rise in the stock market in 2005 and our trustees policy of investing the majority of our pension funds assets in equities one might have expected to see a reduction in our net pension liability. However, 2005 saw a further significant fall in the corporate bond yield used to calculate our pension liabilities for IAS 19 purposes, which resulted in those liabilities increasing by more than the assets. Although the net liability has increased, our funding level (the ratio of assets to liabilities) has improved from 74% to 77% as measured under IAS 19. By their very nature pension funds are for the long term and the choice of investments and funding decisions should be viewed as such, and not be driven by short term volatility in the value of assets or liabilities. At various times during the year, using the IAS 19 defined rate, our liabilities were up to 55m lower than as measured at 31 December 2005, and indeed were 25m lower as recently as 31 October 2005. As with most UK companies we are currently working with the trustees of our UK defined benefit schemes to agree our scheme specific funding plans and investment policies. These plans will determine the ongoing funding of the schemes and the timing of additional cash contributions for deficit reduction. Once those plans have been finalised the Company will disclose their results. We do not expect the outcome of these discussions to have a material effect on cash flow in the short term as any deficit reduction will be spread over time. Our cash contribution to our pension schemes worldwide in 2005 was 8.7m (2004 9.6m). The income statement charge for 2005 and the estimated charge for 2006 for all our pension schemes are presented in the table below.

26 24 22 20 18 16 % 14 12 10 8 6 4 01 02 03 04 05 m

70 60 50 40 30 20 10 0 01 02 03 04 05

2006 Estimate m Before operating profit Financing Net cost before tax (6.5) 3.0 (3.5)

2005 Actual m (5.9) 0.4 (5.5)

You will note that whilst the reduction in corporate bond yields in 2005 had an adverse impact on our liabilities at the end of that year, the lower rate will benefit our financing cost in 2006. Barbara Richmond Group Finance Director

Returned on capital employed

Net debt

12 Financial review

Financial review 13

Safety,Health and the Environment (SHE)

Croda International Safety, Health and the Environment policy Croda International Plc is a manufacturer of speciality chemicals for the consumer care and industrial specialities markets employing approximately 1,600 people worldwide. The Company operates its business in a manner which actively seeks to prevent or minimise the possibility of its operations causing harm to people, plants or animals. We strive to provide the material and resources to educate and involve every individual in the Company in achieving this objective. It is my belief that aspiring to excellence in the management of Safety, Health and the Environment is vital to ensuring the long term future and profitability of the Company. Principles: 1. We believe that all accidents, incidents and work related ill health are preventable and we will manage our business with this aim, including the provision of adequate resources for the prevention and control of major accidents. 2. Because we are human, mistakes will be made; but because we are committed, intelligent human beings we will investigate to identify the basic causes and take action to prevent these mistakes being repeated. 3. As an absolute minimum we will comply with all national regulations but in addition will set our own demanding internal corporate standards on matters relating to safety, health and the environment and endeavour to comply with them throughout our international operations. 4. Divisional management teams within the Company will be measured for their contribution to the continuous improvement of safety, health and environmental performance in their area of responsibility. 5. We will continue to search out new ways of conserving all the natural resources used in our processes. 6. We will continue to innovate in order to improve our products and processes so that their effect on safety, health and the environment is reduced. 7. We will continue to improve communication and the exchange of views with employees, employee representatives, customers, contractors, suppliers, neighbours and any other individual or organisation affected by our business. We have assessed the significant safety, health and environmental hazards posed by the Companys activities and an appropriate set of arrangements has been implemented to control these hazards. The effectiveness of these arrangements is monitored and reviewed on a regular basis with action taken to redress any deficiencies and ensure continuous improvement. Mike Humphrey Group Chief Executive Director responsible for SHE The Group controls its business by the delegation of much of its management responsibility, including SHE matters, to its divisional managing directors and general managers. The overall strategy, development of policy and review of SHE performance within the Group is controlled by the Group SHE steering committee with assistance from the Group SHE department in setting standards, providing guidance, brokering best practice and auditing the sites against national standards as well as our own internal standards. A Group Environmental Management System (GEMS) was implemented in 1995 to provide sites with a framework upon which their individual environmental management systems could be developed. Sites have been regularly audited for compliance with GEMS and all established manufacturing sites have now been certified to ISO 14001. Similarly a Health and Safety audit based upon Heath and Safety Executive (HSE) guidelines has been performed regularly by Group SHE on all manufacturing sites. The results of these audits are used to focus the Group SHE initiatives and the annual Group SHE objectives. The audit process, used by the Group SHE department to audit the manufacturing sites, has been externally validated by BSI in 2004 as being in accordance with ISO 19011 auditing standards. Indicators of SHE performance The Group SHE department has issued a number of internal Group SHE objectives since 2000 against which the manufacturing sites have been required to produce targets and to report progress at regular intervals. In 2001 the Group published several safety, health and environmental targets. Progress against these targets was discussed in detail in the 2003 annual report and in view of the progress made, the opportunity was taken to withdraw targets achieved or restate original targets with stretch targets and initiate new ones where appropriate. In doing so reference was made to the HSE targets as stated in Revitalising Health and Safety and to the Chemical Industries Association Responsible Care targets. The newly stated targets use the performance in 2003 as the baseline for improvement. Where necessary the objectives and targets have been re-based on current operations manufacturing at the end of 2005. In the situation of one site being assimilated into another, the statistics of both sites combined have been retained.

14 Safety, Health and the Environment

Safety, Health and the Environment 15

Safety,Health and the Environment (SHE)

Indicators of SHE performance (continued) SHE management Objective: To continually improve the effectiveness of our SHE management systems. Target: All manufacturing sites to be certified to OHSAS 18001 by 2009.

Waste disposal Objective: To minimise the quantities of waste disposed to landfill.

Target: All manufacturing sites to halve the amount of waste (kg/tonne manufactured) disposed to landfill in 2003 by 2009.

The initial objective to reduce the amount of waste disposal to landfill by 20% between 2000 and 2003 was achieved with a reduction of 67.1%. In 2004 this was rebased on 2003 and restated to halve the amount of waste per tonne disposed to landfill in the five years to 2009. The waste data relates to waste generated by the manufacturing operations. One off disposals of waste not directly associated with the manufacturing process, for example, construction excavations or contaminated land remediation, are excluded. In 2005 there was an increase in the amount of waste per tonne sent to landfill by the Group overall. However, over 80% of waste disposal to landfill occurs at our USA manufacturing site where the amount requiring disposal increased as a result of a substantial increase in business there. However, globally the current performance still represents an overall decrease of 10% since 2003 when the target was rebased.

All of the sites audited in 2005 showed both improvement in the effectiveness of their SHE management systems and continuing convergence of these systems towards OHSAS 18001 requirements.

Energy consumption Objective: To continually improve the energy efficiency of our manufacturing processes.

Waste water discharges Objective: To reduce the environmental impact the Group has on controlled waters.

Target: To improve energy efficiency (GJ/tonne) at all manufacturing sites by 2% each year until 2010.

Target: All manufacturing sites to achieve greater than 95% compliance with their effluent discharge consents in every year and for year on year continuous improvement towards 100% compliance.

Our initial target of 18% improvement in energy used per tonne of manufactured product between 2000 and 2010 was achieved in 2003 with an overall reduction of 23.9%. In 2005 this reduction was further improved to 38%. Energy savings are also reflected in compliance with UK Climate Change Agreements and the EU Emissions Trading Scheme. Additionally, Croda is undertaking a Carbon Management Programme study in conjunction with the Carbon Trust. The study examines exciting opportunities regarding bio fuels, boiler and combined heat and power options and potential improvements to energy intensive processes common to Crodas global manufacturing operations. The study will also consider the potential opportunities within the Kyoto Protocols Joint Implementation and Clean Development Mechanisms.

The target to improve the level of compliance with our effluent discharge consents to at least 95% was achieved for all current sites in 2003. There have been successive improvements since, with 97.3% compliance being achieved in 2005.

SHE initiatives 2005 Accidents and enforcement action There was a reduction in the reportable accident rate in the Group of 59% in 2005. This performance represents an overall reduction of 74% since 2000. The Group received one enforcement notice in 2005. Our manufacturing site in the USA was issued with a Notice of Violation for the accidental release to air of a controlled chemical. There were no prosecutions in 2005. Soil and groundwater investigations The Group believes it has already identified its major liabilities with regard to historical contamination of the ground and groundwater. To date, remedial strategies are being developed for the cost effective control of this contamination at several sites. Detailed risk assessments by our environmental consultants of the potential threat to human health and controlled waters have not resulted in any immediate action being required. Leading indicators of safety performance The Group recognises that whilst accident rate is a useful indicator of performance, it is also important to monitor those events which might lead to accidents so that action can be taken to reduce their frequency. It is therefore developing a set of leading indicators associated with the safety of its processes in accordance with evolving regulatory guidance. Sustainable Development The Group has demonstrated its commitment to Sustainable Development by formally endorsing the principles developed in cooperation with stakeholders and member companies of the Chemical Industries Association. This endorsement is the start of a process through which the Company aims to become more sustainable. The Company has also renewed its commitment to continuous improvement in safety, health and environmental performance by endorsing the Responsible Care Global Charter agreed amongst the members of the International Council of Chemical Associations.

Air emissions of Volatile Organic Compounds (VOCs) Target: Objective: All manufacturing sites to reduce VOC emissions To minimise the mass of VOCs released (kg/tonne manufactured) by 40% by 2009. to air from our processes. The initial objective to reduce the amount of VOCs released by 20% between 2000 and 2003 was achieved with a reduction of 25.8%. In 2004 this was rebased on 2003 data and restated to reduce the amount of VOCs released per tonne by 40% in the five years to 2009. In 2005 the amount of VOCs released per tonne reduced by 42% against the 2003 baseline.

Consumption of mains water Objective: To reduce the Group requirements for mains water.

Target: All manufacturing sites to reduce the use of mains water by 25% per tonne manufactured by 2009.

This was a new target in 2004 when the consumption of mains water per tonne was reduced by 25.3%.The withdrawal from the manufacture of gelatin is estimated to have contributed 9 percentage points to this improvement. There was a further reduction in consumption of 6% in 2005.

16 Safety, Health and the Environment

Safety, Health and the Environment 17

Mike Buzzacott* BA, FCCA Independent non-executive director, aged 58. Before retiring in 2004 he had spent over 34 years with BP starting in the finance function. Has held a number of senior international roles including Regional Finance and Control Director - Asia, Chief Executive Polymers and Olefins Division and finally Group Vice President Petrochemicals. Appointed a non-executive director of Rexam PLC in 2000 and acts as an advisor to the Ineos Group. Joined the Croda Board in August 2004.

David Dunn* CA Senior Independent non-executive director, aged 61. Has held a number of senior financial and general management positions with UK plcs. Joined Scapa Group plc in 1987 where he served as Finance Director, Chief Executive and non-executive Chairman prior to his retirement in 2002. Non-executive director of FirstGroup PLC and SMG PLC and non-executive Chairman of Brammer PLC. Joined the Croda Board in 2000. Appointed Senior Independent Director and chairman of the remuneration committee at the beginning of 2002.

Michael Ward* FCA, MBA, MCT Independent non-executive director, aged 49. Following an early career in senior financial roles, was appointed Group Managing Director of Lloyds Chemists plc in 1996. Upon the acquisition by Gehe AG in 1997 became Chief Executive Officer of the newly formed AAH/Lloyds Group and was appointed to the Gehe AG Management Board in 1998, as the European retail director. Joined Apax Partners Ltd in January 2004. Appointed to the Croda Board in 2001 and chairman of the audit committee at the beginning of 2002.

Board of directors

Martin Flower BA Non-executive Chairman, aged 59. Formerly held various senior executive positions over 36 years with Coats plc, culminating in a period as Chairman before his retirement in 2004. He is a non-executive director of The Morgan Crucible Company Plc and is Deputy Chairman and Senior Independent Director of Severn Trent Plc. Was appointed to the Croda Board in May 2005 and took over from Antony Beevor as Chairman at the end of September 2005. Chairman of the nomination committee.

Mike Humphrey Group Chief Executive, aged 54. Joined Croda in 1969 as a management trainee. Managing Director Croda Singapore 1988, Croda Application Chemicals 1990 and Croda Chemicals 1991. Was appointed to the Croda Board in 1995 and became Group Chief Executive at the beginning of 1999. Member of the nomination committee.

Barbara Richmond BSc, FCA Group Finance Director, President Active Ingredients and Industrial Chemicals, aged 45. Joined Croda as Group Finance Director in February 1997 from Whessoe Plc, where she was Group Finance Director 1994-1997 and Group Financial Controller from 1992-1994. Appointed President Active Ingredients and Industrial Chemicals September 2002. A non-executive director of Carclo Plc and Scarborough Building Society.

* Member of audit, remuneration and nomination committees.

18 Board of directors

Board of directors 19

Directorsreport
The directors present their annual report and audited financial statements for the year ended 31 December 2005. The report should be read in conjunction with the information set out on pages 2 to 19 and pages 23 to 36. Activities of the Company and subsidiaries Croda International Plc is a holding company operating from its headquarters at Cowick Hall, Snaith, Goole, East Yorkshire, which provides central direction for a speciality chemical group with operations in the main market areas of the world. Further details are given in the operating review on pages 4 to 9. Review of business activities A review of the activities of the two business sectors comprising the Group is given on pages 4 to 9. An analysis of revenue and profits is shown in note 1 on page 48.This report should be read in conjunction with the Chairmans statement and the operating and financial reviews, which include information about Group businesses, the financial performance during the year and likely developments. Results and dividends The results for the year are set out on page 38. The directors recommend a final dividend of 9.0p per share (2004: 8.4p). If approved by shareholders, dividends for the year will amount to 13.35p per share (2004: 12.5p per share). Details of dividends are shown in note 9 on page 53. Acquisitions and disposals No acquisitions or disposals were made by the Group during the year. On 23 January 2006 contracts were exchanged with Shell U.K. Ltd for the sale of the metal treatments business of Croda Application Chemicals Limited. Completion is expected by 31 March 2006 for an initial consideration of 1.5m, together with the value of stocks and debtors at completion, and deferred consideration of 0.8m payable twelve months after completion, conditional on achievement of targeted margin. Directors The present directors of the Company are shown on pages 18 and 19. Martin Flower retires under Article 84 and will be proposed for election at the Annual General Meeting (AGM). No directors will retire by rotation as all the remaining directors have been re-elected within the last two years. Barbara Richmond has resigned as a director of the Company with effect from 31 March 2006. Details of the directors service contracts are given in the directors remuneration report on pages 23 to 30. Apart from the share option schemes, long-term incentive schemes and service contracts no director had any beneficial interest in any contract to which the Company or a subsidiary was a party during the year. A statement indicating the beneficial and non-beneficial interests of the directors in the share capital, including share options, of the Company is shown in the directors remuneration report on page 28. The Companys register of directors interests, which is open to inspection at the registered office, contains full details of directors shareholdings and share options. Community affairs We have continued to support community projects both with donations and with practical help and advice. Many of our employees also devote much of their own time to working with local community groups and to fundraising projects for deserving causes. Our work with schools, colleges and other educational establishments is ongoing. Students learn how our products are used and gain direct experience of product formulation and plant processes. The Group provides placements for university students and post-graduates. Work experience opportunities are provided regularly for students from local schools. These contacts not only assist young people as they make career choices but also provide valuable learning opportunities for our employees through developing their mentoring and interpersonal skills. In the UK the 1% Club enables employees to take 1% of their working time as paid leave to do voluntary community work. During 2005, employees gave time to such diverse projects as redecoration of a hostel for children with learning difficulties, helping produce a newsletter for the Hull Parkinsons Support Group, music coaching for 8-16 year olds, wildflower verge management in a nature reserve and recruitment for a bereavement counselling volunteer service. Employment policies In all Crodas operations around the world relations with employees are based on respect for the dignity and rights of the individual.The Company upholds the principles of socially responsible business practices. In particular, in all countries in which the Company operates, the ILO Declaration on Fundamental Principles and Rights at Work 1998 is met. Namely the Company does not participate in any form of child labour or forced compulsory labour, it maintains freedom of association and the right to collective bargaining and promotes policies and practices designed to eliminate discrimination in respect of employment and occupation. Policies on corporate ethics and whistle blowing are in force throughout the Group. Group employment policies embrace local, national and international best practice worldwide. In this way we ensure that all employees work in an environment which encourages fairness of treatment, respect for the individual and flexibility of approach.The Group welcomes all employees solely on the basis of job suitability so that recruitment and career management are free from discrimination. Diversity is encouraged and the benefits of different perspectives enhance working life.The Company takes a positive approach to disability, considering all applications from disabled people fairly and in the context of job suitability. Adaptations to the working environment are made where appropriate and the disabled are integrated into all areas of working life, both formal and social.Those who suffer illness or injury that has a permanent impact on their physical or mental ability are supported and every effort is made to continue employment through use of flexible working arrangements, training etc. All employees have equal access, based on ability and motivation, to training, career development and promotion. Employees receive training and development to ensure that personal growth and business objectives are achieved successfully. Our leadership development programme has continued to bring together senior managers around the globe who work together on personal and business performance enhancement issues. Furthermore, we aim to nurture and challenge so that the talents, skills and knowledge of all our employees are used positively to mutual benefit.This relies on open and comprehensive communication activities. All divisions provide appropriate forums for two-way communication to keep everyone informed, to consult and to seek contribution. Formal consultation committees operate in all UK divisions and in particular provide valuable dialogue on pension provision. Employee participation has been further enhanced by the introduction in the UK of a formal scheme to enable employees to submit ideas that reduce costs, improve efficiency or customer service or increase market opportunity. Harnessing the experience and knowledge of our employees through listening to their ideas and putting them into practice is fundamental in developing our business. A corporate intranet has been established and is available to all our employees throughout the world.The Company magazine, Croda Way, distributed worldwide, brings together news of the Croda family - both personal and corporate. It provides an insight into the lives of the people working for the Group as well as reporting on Company activities around the world and commenting on full and half year results. Our reward and benefit packages are designed to recognise the contribution of employees, whilst fitting local market conditions and complying with our fair treatment policies.The Company operates a Save As You Earn share scheme in the UK and a similar scheme is available overseas.The Company also offers a Share Incentive Plan in the UK and all employees who have completed 12 months service are eligible to join the plan. Purchase of own shares At the 2004 AGM, the members renewed the Companys authority to purchase up to 10% of its ordinary shares. Pursuant to this authority during the year the Company purchased an aggregate of 6,137,305 ordinary shares of 10p each, having a nominal value of 613,730 (representing 4.5% of the Companys issued share capital as at 1 January 2005) for an aggregate consideration of 24.5m at an average cost of 398p per share.The Company considers that these purchases are beneficial to members as they give the Company more flexibility in the control of its cost of capital. As a result of these purchases, the number of shares in respect of which the Company is now authorised to make market purchases has been reduced to 5,504,295 ordinary shares of 10p each (representing approximately 4.04% of the present issued ordinary share capital of the Company). The current authority given by members at the last AGM for the Company to purchase its own shares expires on 26 April 2006.The Company will be seeking to renew its authority to purchase its own shares. Shares will be purchased only if the Board believes that such purchases will improve earnings per share and be in the best interests of the shareholders generally. It is the Companys intention that any shares purchased will be held as treasury shares.

20 Directors report

Directors report 21

Directorsreport
Supplier payment policy Group policy concerning the payment of suppliers is that each operating unit agrees terms of payment at the beginning of business or makes the supplier aware of the standard payment terms, and pays in accordance with those terms or other legal obligations. At 31 December 2005 the Group had an average of 36 days (2004: 36 days) purchases outstanding in trade creditors.The Companys trade creditors are not material. Charitable and political donations Charitable donations made by the Group in the year amounted to 33,000 (2004: 35,000). No donation was made for political purposes (2004: Nil). Annual General Meeting The AGM will be held at Carlton Towers, Carlton, Goole, East Yorkshire DN14 9LZ on Wednesday, 26 April 2006 at 12 noon. The notice of meeting and explanation of the business to be considered at the AGM are contained in a separate document issued to shareholders with this annual report. Independent auditors Our auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office and, on the recommendation of the audit committee, resolutions regarding their reappointment and remuneration will be submitted to the AGM. Substantial shareholders At 19 February 2006 the Company had been notified of the following substantial interests in its ordinary share capital, excluding shares held in treasury.

Directorsremuneration report
The directors present their remuneration report which covers the remuneration of both executive and non-executive directors and certain senior executives.The first section of the report contains unaudited information and the second section audited information.The report has been approved by the Board and signed on its behalf by the chairman of the remuneration committee.The report will be subject to approval by shareholders at the Annual General Meeting (AGM) on 26 April 2006. Unaudited information The role of the remuneration committee The committee reviews and approves the annual salaries, bonus arrangements, service agreements and other employment conditions of the executive directors and other members of the senior executive management team designated by the Board and approves the awards of long-term incentives. It also approves the design of, and determines targets for, any performance related/bonus pay schemes operated by the Group, approves the total annual payments made under such schemes and reviews the design of all share incentive plans for approval by the Board and shareholders.The full terms of reference of the committee are published on the Companys website. Membership and operation The committee is chaired by David Dunn and all the members are non-executive directors. David Dunn, Michael Ward and Mike Buzzacott were members throughout the year. None of the committee members has any day to day involvement in the running of the Company, nor do they have any business or other relationship that could affect, or appear to affect, the exercise of their independent judgement. The committee met seven times during the year and at each meeting all the members were present except on one occasion when Michael Ward was absent. Other directors and employees of the Company who attended some, or all, of the meetings during the year and provided advice and services to the committee were Mike Humphrey (Group Chief Executive), Antony Beevor (former Chairman), Martin Flower (Group Chairman), Pamela Broughton (Group Personnel Manager) and Roy Ainger (former Company Secretary). All were appointed by the Company and have the appropriate qualifications and experience to advise the committee on aspects of the Groups policies and practices. In addition, the committee appointed and sought advice from Watson Wyatt in relation to the impact of the revised pensions regime and New Bridge Street Consultants (NBSC) on a number of matters including the level of salaries, bonuses and long-term incentive awards and forms of alternative pension provision. Representatives from NBSC attended a committee meeting during the year and their advice was reviewed and assessed by the committee. Policy on directors and senior executives remuneration The key objectives of Crodas executive remuneration policy are:

Shares Fidelity International Ltd Lansdowne Partners Ltd Partnership Legal & General Investment Management By order of the Board 10,237,413 4,468,002 5,284,732

% 7.99 3.49 4.12

Louise Scott Secretary 22 February 2006

to ensure that individual rewards and incentives are comparable with those provided by similar companies having regard
to the Groups revenue, business sector and market worth and the need for skills to manage international businesses

to enable the Group to attract and retain high calibre people to give full consideration to the relevant principles on directors remuneration set out in the 2003 FRC Combined Code to ensure a balance between fixed and performance related remuneration, the latter being related to objective
measurement of the financial performance of the Company. The committee believes that the interests of shareholders and directors are more closely aligned to cash profitability and the control of working capital of the Group, rather than being based on performance relative to peer groups where external factors beyond the control of the directors can have a disproportionate influence on bonus payment, both favourable and adverse. Following the introduction of new employee incentive plans in 2005, the committee undertook a review of the total remuneration packages of the executive directors and members of the executive committee.This considered the impact of the new bonus and long-term incentive arrangements and changes in pensions legislation. Base salaries and bonus levels were reviewed by reference to a benchmarking exercise carried out by NBSC on behalf of the committee. Salaries and bonuses for executive directors were found to be in line with market practice. In order to encourage senior executives to build up a significant shareholding in the Company it was agreed that participants in the long-term incentive schemes would be expected to retain a proportion of the shares resulting from the exercise of options or vesting of share awards. A proposal to offer salary supplements on a cost neutral basis to the Company to executives choosing to withdraw from membership of the Groups pension schemes as a result of legislative changes was approved.

22 Directors report

Directors remuneration report 23

Directorsremuneration report
Components of executive directors remuneration Basic salary The basic salaries of the executive directors are set by reference to those paid by companies comprising the FTSE mid 250 in view of the difficulty in establishing a list of companies who are true comparators with the Companys operations. The salaries are paid monthly in cash and are reviewed annually with effect from 1 January. Performance-related annual bonus The Company operates bonus schemes for its directors and senior executives. Bonus payments are not pensionable. In respect of 2005, the bonuses for executive directors were calculated by reference to base income defined as the Group EBITDA for continuing operations before exceptional items and any charges or credits under IFRS2 less a notional interest charge on working capital employed for the previous year. Bonuses are payable on a graduated scale once base income has been exceeded by UK inflation, with maximum bonuses due at inflation plus 8%. Income is measured after providing for the cost of any bonuses.The maximum amount of bonus payable is 100% of salary with the net element of any bonus in excess of 50% of salary being compulsorily invested in the Croda International Bonus Co-investment Plan (BCIP). Bonuses earned by each director in respect of 2005 are included in the table of directors remuneration on page 27 and represent 100% of basic salary. For 2006 a similar bonus scheme will apply. Long-term incentives Long-term incentives have customarily been provided to executive directors through a series of share option schemes. In April 2005, as a result of a review of the long-term incentive elements of the total remuneration package for executive directors and senior executives, the Company adopted two new long-term incentive plans, the BCIP and the Croda International Long-term Incentive Plan (LTIP). It is the committees policy, subject to unforeseen circumstances, that these will comprise the sole long-term elements of the total remuneration package of executive directors for the foreseeable future. It is also the committees policy to continue exercising its right to decide the number of LTIP awards to be granted to each executive director. BCIP The BCIP operates in conjunction with the annual bonus schemes and allows participants to invest a proportion of their net annual cash bonus in Company shares. It is compulsory for employees whose gross bonus exceeds 50% of their annual salary to invest the excess, net of tax, in shares unless they are within three years of anticipated retirement date. Participants have to agree to hold the invested shares for three years in return for which they receive a conditional award entitling them to additional shares.The maximum number of shares over which an award can be granted to an employee in a single year is limited to shares having a market value not exceeding 100% of the employees salary. The vesting of the award is conditional on Crodas earnings per share before exceptional items exceeding UK inflation over the three year performance period. If the performance target is met the shares will be transferred automatically to the employee. If the employee does not retain his invested shares until the release date his award lapses. LTIP Participation in the LTIP is limited to executive directors and the most senior executives. Annual awards of shares are made based on a percentage of salary with the maximum entitlement being shares having a market value of 100% of the employees salary. Awards are subject to performance conditions measured over a period of not less than three years. The target for awards made in 2005 has been set so that awarded shares will vest if the growth in Crodas earnings per share before exceptional items over the three year performance period exceeds UK inflation plus 9%, with 50% vesting at this level, and the maximum 100% vesting for performance of UK inflation plus 21%. For performance between these two levels, the awards will vest on a straight-line basis. If the performance target is met the shares will be transferred automatically to the employee. Senior Executive Share Option Schemes Following the adoption of the BCIP and the LTIP the operation of the Senior Executive Share Option Schemes has been discontinued except in relation to options already granted. Under the terms of the schemes options were granted subject to performance conditions. Options granted between 1996 and 1999 are exercisable between three and ten years from the date of grant provided the Companys basic earnings per share before exceptional items have increased by more than 2% plus the rate of UK inflation per annum in any period of three consecutive years following the date of grant. Options granted between 2000 and 2003 were awarded annually (in the absence of special circumstances) on a graduated scale to a value of one years salary for the Group Chief Executive, 80% of salary for other executive directors and decreasing percentages for other senior employees. Basic earnings per share before exceptional items must grow at UK inflation plus 7% per annum for 100% of the options allocated to be exercisable. The performance period commences at the date of grant and lasts for a minimum of three years and a maximum of ten years until an average growth rate of at least UK inflation plus 3% per annum over the whole period has been achieved. With earnings per share growth at UK inflation plus 5% per annum 75% of the options are exercisable and at UK inflation plus 3% per annum 50% of the options are exercisable. Details of options granted to directors are shown in the table on page 29. It is the Companys current intention to satisfy awards under the BCIP and the LTIP and the exercise of share options primarily from shares held in the Employee Share Ownership Trust and shares purchased in the market and not by the issue of new shares. Details of shares held for this purpose are given in note 25 on page 66. Pension and other benefits Croda has a number of different pension plans in countries in which it operates. Pension entitlements for Crodas executives are tailored to local market practice, the length of service and age of the participants.The principal pension plans in the UK are defined benefit schemes which provide a pension based on a proportion of final salary.The Company is flexible in the manner in which pension provision is made for executive directors with the aim of balancing the needs of the director against the liability of the Company. Hence, it makes contributions by direct contribution to the Croda defined benefit pension scheme or by way of additional salary to enable the funding of personal pension arrangements. Other customary benefits such as company cars or car allowances, health benefits, the UK Savings Related Share Option Scheme and the Croda Share Incentive Plan (which are available to all eligible UK employees), are made available to executive directors. Benefits in kind are not pensionable.The committee reviews the individual components and the balance of these components from time to time. Components of senior executives remuneration There are four members of the Group executive committee in addition to the two executive directors.The reward structure for these senior executives is similar to that of the executive directors although their level of long-term incentive award differs. Service contracts and external appointments Policy The committees policy on executive directors service contracts is for them to contain a maximum notice period of one year. In respect of termination the committees policy is to deal with each case on its merits, in accordance with the law and any further policy adopted by the committee at the time. In the event of early termination, other than for cause or under the specific termination provision contained in Mike Humphreys contract as described below, the relevant directors then current salary and contractual benefits would be taken into account in calculating any liability of the Company. The principal contractual benefits provided in addition to salary are the provision of a car, pension, medical insurance and life assurance. Annual bonuses and long-term incentives are non-contractual and are dealt with in accordance with the rules of the relevant schemes. Specific contracts Until 21 December 2005 Mike Humphreys service agreement was terminable by him or the Company on six months notice. In addition, if the service agreement was terminated by the Company without just cause, a termination payment equivalent to eighteen months remuneration was payable by the Company. In recognition that such compensation on termination was not in compliance with the provisions of the Combined Code, the committee has agreed revised terms with him. On 21 December 2005 Mike Humphrey entered into a new service contract which is terminable by the Company on one years notice and by Mike Humphrey on six months notice.The Company may also terminate the contract at any time with immediate effect and Mike Humphrey would be entitled to receive compensation equivalent to twelve months salary plus the value of his pension benefits (valued at 20% of basic salary), bonus entitlement (50% based on the assumption that performance targets are deemed to have been achieved) and the value of other benefits, payable in equal monthly instalments for twelve months or, if less, the remaining period of any notice period not yet completed. Such payments would discontinue or reduce to the extent that Mike Humphrey obtained alternative employment. Barbara Richmonds contract contains similar provisions to that of Mike Humphreys pre December 2005 contract. Negotiations for the revision of this contract were underway at the time that she announced her intention to leave the Company but in view of her impending departure were discontinued.

24 Directors remuneration report

Directors remuneration report 25

Directorsremuneration report
External appointments Executive directors are permitted to accept external non-executive appointments with the prior approval of the Board. It is normal practice for executive directors to retain fees provided for non-executive appointments.Throughout 2005 Barbara Richmond was a non-executive director of Carclo Plc for which she received fees of 22,000 (2004: 20,000). She was appointed a non-executive director of the Scarborough Building Society in April 2005 and received fees of 18,000 during the year. Apart from service agreements and share schemes, no director has had any material interest in any contract with the Company or its subsidiaries requiring disclosure under the Companies Act 1985. Policy on non-executive directors remuneration The Board is responsible for determining the policy on, and level of, the remuneration of non-executive directors.The aim is to attract non-executive directors who through their experience can further the interests of the Company through their stewardship and contribution to strategic development.The Boards policy is to provide cash fees at a level commensurate with companies of Crodas size, not to grant share options to non-executive directors, and to encourage non-executive directors to establish a holding of Croda shares. Components of non-executive directors remuneration Non-executives pay comprises cash fees, paid monthly. All non-executive directors are reimbursed for travel and related business expenses reasonably incurred in performing their duties. The Chairmans and non-executive directors fees are determined on the basis of current fee levels in similar businesses. Fees are reviewed by the Board every two years.The fee for the Chairman of 110,000 per annum was negotiated on his appointment as Chairman designate on 16 May 2005. Fees for the non-executive directors were increased to 30,000 with effect from 1 January 2005 following a review of current practice. Supplementary fees are paid for committee chairmanship and for special duties beyond the norm expected of a non-executive director to give total annual fees with effect from 1 January 2006 of 37,500 for David Dunn and 34,500 for Michael Ward. Terms of appointment The Chairman and non-executive directors have letters of appointment for a fixed term as shown below, subject to earlier termination by either party on written notice.They have no entitlement to contractual termination payments. Unexpired at 31 December 2005 2 years 5 months 1 year 7 months 2 months 1 year 4 months
highest paid director appointment extended for a third three year term to 24 February 2009 appointment extended for a further three year term to 24 April 2007

Performance graph Total shareholder return: Croda vs FTSE 250

In the opinion of the directors the FTSE 250 is the most appropriate index against which the total shareholder return of Croda International Plc should be measured because it is an index of similar sized companies to Croda International Plc. Audited information Directors remuneration Basic salary M Humphrey B M Richmond M C Flower (appointed 16 May 2005) M C Buzzacott D M Dunn M A Ward A R Beevor (resigned 28 September 2005) 392,208 271,368 663,576 Bonus 392,208 271,368 663,576 Benefits 26,342 27,865 54,207 Fees 69,246 30,000 45,000 34,500 67,500 246,246 2005 Total 810,758 570,601 69,246 30,000 45,000 34,500 67,500 1,627,605 2004 Total 485,965 347,091 12,083 35,000 32,000 90,000 1,002,139

Appointment date M C Flower M C Buzzacott D M Dunn M A Ward 16 May 2005 2 August 2004 26 April 2000 24 April 2001

Notes 1 Benefits incorporate all assessable tax benefits arising from employment by the Company and relate in the main to the provision of a company car. 2 The bonuses shown relate to the year ended 31 December 2005. Pension rights Mike Humphreys pension benefits are funded under the Croda International Supplemental Scheme (CISS). He will be entitled on retirement at age 60 to a pension equal to two-thirds of his final annual pensionable remuneration.The level of final remuneration (known as the earnings cap) is not subject to limitation because of his length of service with the Group. If directors retire before age 60 a reduced pension is payable unless retiring at the Companys request. In the event of death a pension equal to two-thirds of the directors pension would become payable to the surviving spouse. Pensions in payment are guaranteed to increase in line with the rate of inflation up to a maximum of 10% per annum. During the year, Barbara Richmond was paid 55,632 (2004: 52,476) in addition to her basic salary to enable her to make independent provision for her retirement. Barbara Richmond is also entitled to death in service benefits from the CISS up to the Inland Revenue earnings cap with the balance being administered by the Company, but receives no other benefits from that fund.

26 Directors remuneration report

Directors remuneration report 27

Directorsremuneration report
Defined benefit schemes
Increase in Accrued accrued pension pension during the year2 at 31.12.051 000 000 Increase in accrued pension during the year (excluding inflation)3 000 Transfer value of accrued pension at 31.12.044 000 Transfer value of accrued pension at 31.12.054 000 Increase in Transfer value transfer value of the increase over in the accrued the year5 pension6 000 000

Share options Options are granted over ordinary shares of 10p each under the Senior Executive Share Option Schemes and the Savings-Related Share Option Scheme. Executive share options Earliest exercise date 3 April 1999 4 April 2000 30 March 2002 22 March 2003 7 March 2004 13 March 2005 5 March 2006 Exercise price 337p 307p 228p 256p 258p 261p 230p Number at 1 January 2005 (10p shares) 30,000 60,000 100,000 109,300 116,200 118,300 150,000 683,800 B M Richmond 4 April 1997 30 March 1999 22 March 2000 7 March 2001 13 March 2002 5 March 2003 4 April 2000 30 March 2002 22 March 2003 7 March 2004 13 March 2005 5 March 2006 3 April 2007 29 March 2009 21 March 2010 6 March 2011 12 March 2012 4 March 2013 307p 228p 256p 258p 261p 230p 50,000 100,000 62,500 65,700 66,900 84,870 429,970 Exercised in year 30,000 60,000 100,000 190,000 50,000 100,000 150,000 Number at 31 December 2005 (10p shares) 109,300 116,200 118,300 150,000 493,800 62,500 65,700 66,900 84,870 279,970

Date of Grant M Humphrey 223 22 18 2,661 3,283 598 251 M Humphrey 3 April 1996 4 April 1997 30 March 1999 22 March 2000 7 March 2001 13 March 2002 5 March 2003

Expiry date 2 April 2006 3 April 2007 29 March 2009 21 March 2010 6 March 2011 12 March 2012 4 March 2013

Notes 1 The figure shown represents the amount of annual pension benefits based on service and pensionable earnings which would have been preserved for Mike Humphrey had he left service on 31 December 2005. 2 The figure represents the difference between the total accrued pension at 31 December 2005 and the corresponding pension one year earlier. 3 The figure represents the difference between the total accrued pension at 31 December 2005 and the corresponding pension one year earlier after an adjustment to exclude inflation was provided as required under paragraph 9.8.8 (12) (a) of the Listing Rules. 4 Transfer values are quoted on the basis recommended by the scheme actuary for valuation of accrued benefits if the member had transferred benefits to another approved scheme on the relevant date.The increase in transfer value between 31 December 2004 and 31 December 2005 takes account of changes in market conditions over the period. 5 The figure represents the difference between transfer values of the accrued benefits at 31 December 2005 and 31 December 2004, less contributions paid by Mike Humphrey. 6 This figure represents the transfer values of the increase in accrued benefits over the period, adjusted for inflation, less contributions paid by Mike Humphrey. The Company has contributed to the CISS at the rate of 13.3% of salary with effect from 1 April 2004.This is the average cost of pension accrual based on the demographic profile in the CISS as certified by the actuary, after allowing for members contributions. In addition, the Company contributes 70,000 per month towards elimination of the existing scheme deficit. On an individual basis, the cost to the Company of providing benefits for Mike Humphrey is estimated at 20% of salary. This allows for Mike Humphreys personal contributions, which were increased from 4% to 6% with effect from 1 April 2004. Members of the CISS have the option to pay voluntary contributions. Neither the contributions nor the resulting benefits are included in this table. Directors interests The beneficial interests at 31 December 2005 of the directors of the Company and their families in the shares of the Company are: At 31 December 2005 Ordinary Executive shares options M Humphrey B M Richmond M C Flower M C Buzzacott D M Dunn M A Ward 84,206 37,498 10,000 4,000 8,000 22,500 493,800 279,970 SAYE options 7,254 7,268 SIP ordinary shares 2,766 2,766 At 1 January 2005 or date of appointment Ordinary Executive shares options 52,738 9,079 4,000 8,000 20,060 683,800 429,970 SAYE options 8,384 8,478 SIP ordinary shares 2,002 2,002 -

No further options have been granted under the Senior Executive Share Option Scheme and no other directors hold options granted under the Senior Executive Share Option Scheme. None of the terms and conditions of the share options was varied during the year. All options are subject to performance conditions, details of which are given on pages 24 and 25. SAYE share options Earliest exercise date 1 November 2005 1 November 2006 1 November 2008 1 November 2010 Number at 1 Exercise January 2005 Expiry date price (10p shares) 30 April 2006 30 April 2007 30 April 2009 30 April 2011 186p 186p 230p 328p 2,540 3,629 2,215 8,384 B M Richmond 22 September 2000 21 September 2001 20 September 2002 19 September 2003 22 September 2005 1 November 2005 1 November 2006 1 November 2007 1 November 2008 1 November 2010 30 April 2006 30 April 2007 30 April 2008 30 April 2009 30 April 2011 186p 186p 194p 230p 328p 2,721 1,814 *2,559 *1,384 8,478 Number at 31 December Granted Exercised 2005 in year in year (10p shares) 1,410 1,410 *1,511 1,511 2,540 2,540 2,721 2,721 3,629 2,215 1,410 7,254 1,814 2,559 1,384 1,511 7,268

Date of Grant M Humphrey 22 September 2000 21 September 2001 19 September 2003 22 September 2005

LTIP 93,810 60,850 -

* Since the end of the year B M Richmond has cancelled her SAYE contracts entered into in 2002, 2003 and 2005 and the related options have lapsed. Employees are invited annually to participate in a Save As You Earn Share Option Scheme.The savings contract is over 5 years and the option price is the value of ordinary shares at date of grant discounted by 20%. Options are normally exercisable for a 6 month period following completion of the savings contract.

The first LTIP awards were made in 2005, hence there are no prior year comparatives. No director had any interest in the 5.9%, 6.6% or 7.5% preference shares of the Company. The SIP shares comprise 1,383 Partnership shares (2004: 1,001) and 1,383 Matching shares (2004: 1,001).

28 Directors remuneration report

Directors remuneration report 29

Directorsremuneration report
Gains made on exercise of share options Exercise price (p) 337 307 228 186 Market price (p) 373 373 414 464

Corporate governance
This report is prepared in accordance with the 2003 FRC Combined Code (the Code).The Board is collectively responsible for the success of the Company and is committed to high standards of corporate governance as outlined in the Code. The Company has complied throughout the year with the provisions set out in the Code except where noted on page 35. This statement, together with the directors remuneration report, set out on pages 23 to 30 , describes how the relevant principles of governance are applied to the Company. The Board The Board, which meets at least eight times a year, has a formal schedule of matters specifically reserved to it for decision which is posted on the Companys website. It is primarily responsible for the strategy needed for the successful direction of an international group of companies and currently comprises the Chairman, the Group Chief Executive, the Group Finance Director and three independent non-executive directors. Biographical notes appear on pages 18 and 19. These demonstrate a range of business, financial and international experience which provides an appropriate balance of authority and experience throughout the Board.The Chairman and the Group Chief Executive have written accountabilities that have been approved by the Board. The Board delegates management of the business to the executive committee, headed by the Group Chief Executive. The Board recognise the importance of line management taking ownership, and thereby responsibility, for managing and controlling the risks which may be inherent in their particular area of responsibility. It is the Boards opinion that all non-executive directors who served throughout the period under review were independent in accordance with the Code. At the date of his appointment, the Chairman was independent. Attendance by directors at meetings of the Board and the committees on which they sit is set out below:

Exercise date M Humphrey 28 February 2005 28 February 2005 1 August 2005 4 November 2005

Shares exercised 30,000 60,000 100,000 2,540

Scheme Executive Executive Executive SAYE

Gain () 10,800 39,600 186,000 7,061 243,461

B M Richmond

28 February 2005 14 September 2005 10 November 2005

50,000 100,000 2,721

Executive Executive SAYE

307 228 186

373 425.25 460

33,000 197,250 7,456 237,706 481,167

The gains are calculated according to the market price of Croda International Plc ordinary shares of 10p each on the date of exercise, although the shares may have been retained. The market price of the Companys shares at 31 December 2005 was 461p and the range of market prices during the year was between 318.5p and 477.5p.

No. held

Board No. attended

Nomination committee No. Held No. Attended

Remuneration committee Audit committee No. Held No. Attended No. Held No. Attended

Long-Term Incentive Plan In 2005 the first awards were made under the Croda Long-Term Incentive Plan. Details of the awards are set out below: Market Date price at date awarded of award M Humphrey B M Richmond 25 May 2005 25 May 2005 373p 373p Granted during the year 93,810 60,850 At 31 December 2005 93,810 60,850

Earliest vesting date 25 May 2008 25 May 2008

M C Flower* A R Beevor M Buzzacott D M Dunn M A Ward M Humphrey B M Richmond

* from date of appointment until date of resignation

6 7 9 9 9 9 9

5 6 8 9 7 9 9

1 2 3 3 3 3 -

1 2 3 3 2 3 -

7 7 7 -

7 7 6 -

4 4 4 -

4 4 4 -

Barbara Richmonds LTIP awards lapse on her leaving on 31 March 2006. Share Incentive Plan The Company introduced a Share Incentive Plan (SIP) in 2003. Both Mike Humphrey and Barbara Richmond participate in the Plan saving the maximum of 125 per month permitted under the regulations. Matching shares are allocated on a one for one basis for each Partnership share purchased by the employee. Shares are purchased on a monthly basis. During the year Mike Humphrey and Barbara Richmond each purchased 382 Partnership shares and were allocated 382 Matching shares.The average purchase price was 396p. Since 31 December 2005 Mike Humphrey and Barbara Richmond have each purchased 53 Partnership shares and have been awarded 53 Matching shares under the SIP at an average price of 472p per share. Otherwise there has been no change in the directors interests in shares or options granted by the Company between the end of the financial year and 22 February 2006. On behalf of the Board All directors have attended meetings of the Board and of committees of the Board of which they are members unless prevented from doing so by prior commitments. Under the Companys Articles of Association all directors must offer themselves for re-election at least once every three years. Each of the current directors other than the Chairman has stood for re-election in the past two years and so is not obliged to retire at the AGM. Martin Flower was appointed since the last AGM and so retires under Article 84 and offers himself for election. Details of his election are given in the notice of the AGM which is in a separate document issued to shareholders with the annual report. On an ad hoc basis the Chairman and non-executive directors meet together without the executive directors present and also the non-executive directors meet at least annually without the Chairman present to appraise the Chairmans performance. The Company Secretary would minute any unresolved concerns expressed by any director. Were a director to resign over an unresolved issue, the Chairman would bring the issue to the attention of the Board. There have been no such instances during the year. All members of the Board have full access to the advice and services of the Company Secretary. Where necessary the directors may take independent professional advice at the Companys expense. The Company maintained directors and officers liability insurance cover throughout the year. In furtherance of the principles of good corporate governance, the Board has appointed the following committees. All these committees have written terms of reference. Other executives attend the meetings of these committees when invited to do so by the committee chairman.

D M Dunn Chairman of the remuneration committee 22 February 2006

30 Directors remuneration report

Corporate governance 31

Corporate governance
Executive committee Mike Humphrey (Chairman) David Barraclough Keith Gregersen Keith Layden Kevin Nutbrown Barbara Richmond The executive committee meets every month to deal with all executive business of the Group not specifically reserved to the Board or to any of the committees mentioned below. Among other matters, it reviews investment proposals below the levels which are reserved for Board approval. Audit committee Michael Ward (Chairman) Mike Buzzacott David Dunn The audit committee, which consists of the non-executive directors, meets at least twice a year. It assists the Board in observing its responsibility for ensuring that the Groups financial systems provide accurate and up to date information on its financial position and that the Groups published financial statements represent a true and fair reflection of this position. It also assists the Board in ensuring that appropriate accounting policies, internal financial controls, internal audit activities and compliance procedures are in place. Terms of reference are posted on the Companys website, including its role and the authority delegated to it by the Board. Committee members bring considerable financial and accounting experience to the committees work. Members have recent employment in either finance or accounting roles or comparable experience in corporate activities as set out in their biographies on page 19. Audit independence The committee and Board place great emphasis on the objectivity of the Groups auditors, PricewaterhouseCoopers LLP (PwC), in their reporting to shareholders.The PwC audit partner and manager are present at all audit committee meetings to ensure full communication of matters relating to the audit. The overall performance of the auditors is reviewed annually by the audit committee, taking into account the views of management, and feedback is provided to senior members of PwC unrelated to the audit. This activity also forms part of PwCs own system of quality control. The scope of the forthcoming years audit is discussed in advance by the audit committee. Audit fees are reviewed by the committee and then referred to the Board for approval. Rotation of audit partners responsibilities within PwC is required by their professions ethical standards, is actively encouraged and has taken place. Assignments awarded to PwC have been, and are, subject to controls by management that have been agreed by the committee so that audit independence is not compromised.The chairman of the audit committee is required to give prior approval of work carried out by PwC and its associates in excess of predetermined thresholds; part of this review is to determine that other potential providers of the services have been adequately considered. These controls provide the committee with adequate confidence in the independence of PwC in their reporting on the audit of the Group. Remuneration committee David Dunn (Chairman) Mike Buzzacott Michael Ward The remuneration committee, which consists of the non-executive directors, is responsible for advising on remuneration policy for senior executives and for determining the remuneration packages of the executive directors.The Group Chief Executive normally attends its meetings.The directors remuneration report is set out on pages 23 to 30 and a resolution will be proposed at the AGM to approve the report. Terms of reference are posted on the Companys website. The committee met seven times in 2005. A self evaluation of the effectiveness of the committee was undertaken with no significant issues revealed. Nomination committee Martin Flower (Chairman appointed 28 September 2005) Antony Beevor (Chairman resigned 28 September 2005) Mike Buzzacott David Dunn Michael Ward Mike Humphrey The nomination committee is responsible for nominating, for the approval by the Board, candidates for appointment to the Board. It meets on an ad hoc basis. Terms of reference are posted on the Companys website. During the year the committee met three times; to consider the appointment of Martin Flower as a non-executive director and subsequently as Chairman of the Company in succession to Antony Beevor; to consider the reappointment of David Dunn as a non-executive director for a further term; and to undertake a general review of the balance of skills, knowledge and experience of the Board in accordance with the requirements of the Code. In considering the appointment of Martin Flower, the committee acted under the chairmanship of Michael Ward and Spencer Stuart, an external search consultancy, was engaged to identify candidates. With regard to the reappointment of David Dunn, who completes six years of service as a non-executive director on 24 February 2006, the committee considered that in his role as chairman of the remuneration committee and Senior Independent Director, David Dunn had demonstrated a high level of commitment and expertise and that his continuing contribution to the Board was invaluable. The committee had no hesitation in recommending his reappointment as a non-executive director for a further term of three years from 24 February 2006. David Dunn relinquished the additional post of chairman of the pension trustees with effect from 1 January 2006. The committee is satisfied that the size, structure and composition of the Board is appropriate. All the non-executive directors continue to fulfil the criteria of independence and were able to commit the required time for performance of their duties. A process has commenced for the appointment of a new Group Finance Director following the resignation of Barbara Richmond. Spencer Stuart have been instructed to undertake an executive search based on a detailed role description, considered and approved by the committee. The terms and conditions of appointment of non-executive directors can be inspected during normal business hours at the Companys registered office by contacting the Company Secretary. Training and briefings are available to all directors on appointment and subsequently, as appropriate, taking into account existing experience, qualifications and skill sets.

32 Corporate governance

Corporate governance 33

Corporate governance
Risk management committee Barbara Richmond (Chairman) Keith Layden Graham Myers Kevin Nutbrown The risk management committee evaluates, proposes policies on and monitors processes to control the business, operational and compliance risks faced by the Group. It normally meets four times a year. Membership of the committee rotates annually. With effect from 1 January 2006 David Barraclough has replaced Keith Layden. Routine business committee The routine business committee comprises the two executive directors with the Company Secretary and Group Financial Controller acting as alternates.The committee may make decisions with one executive director and the alternate for the other executive director being present. It attends to business of a routine nature and to the administration of matters, the principles of which have been agreed previously by the Board or the executive committee. Non-executive directors Croda complies with the Code in having experienced non-executive directors who represent a source of strong independent advice and judgement. At present there are four such directors, including the Chairman, each of whom has significant commercial experience. Their understanding of the Groups operations is enhanced by regular divisional presentations and by site visits. No non-executive director nor the Chairman: Internal control The Code principle C.2.1 on internal control requires the directors to conduct, at least annually, a review of the effectiveness of the Groups system of internal control, including financial, operational, compliance and risk management controls, and report to the shareholders that they have done so. In order to discharge this responsibility the directors have utilised an organisational structure with clear operating procedures, lines of responsibility and delegated authority. In particular there are clear procedures for:

capital investment, with detailed appraisal, authorisation and post-investment review financial reporting, within a comprehensive financial planning and accounting framework monitoring of business risks. During the year the Company has continued its formal procedures for the assessment
and review of all business risks under the direction of the risk management committee which reports regularly to the Board. Such procedures have been embedded into the system of internal control. There are also clear procedures for monitoring the system of internal financial control.This is a process which involves:

reports from relevant senior executives and divisional directors concerning the operation of those elements of the
system for which they are responsible, and a report from the Group Financial Controller concerning the operation of the system as a whole

reports from the Group Financial Controller on the work carried out under the annual internal audit plan.The internal
audit work is carried out by both our own employees and personnel seconded from Deloitte & Touche LLP who report through the Group Financial Controller to the audit committee

reports from the external auditors.

The Board has reviewed the effectiveness of the system of internal control in operation throughout the financial year and up to the date of approval of the annual report. The Board acknowledges its responsibility for the Groups system of internal control and for reviewing its effectiveness. Such a system is designed to mitigate rather than eliminate the risk of failure to achieve business objectives and provides reasonable but not absolute assurance against material misstatement or loss. Going concern The financial statements,which appear on pages 38 to 76,have been prepared on a going concern basis as,after making appropriate enquiries, including a review of forecasts, strategic plans and banking facilities, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Compliance The information contained in this report demonstrates how the Company has complied with the Code throughout 2005. The one material exception is that the service agreements of the executive directors provided for pre-determined compensation equivalent to eighteen months remuneration on termination without just cause. The level of compensation on termination was determined when the notice period for directors service agreements was reduced from three years to six months without any payment. Following discussions between the chairman of the remuneration committee on behalf of the committee and the executive directors, Mike Humphrey and Barbara Richmond agreed to accept modifications to their service agreements. On 21 December 2005, Mike Humphrey entered into a new agreement under which the level of compensation is commensurate with a revised notice period of twelve months as described in the directors remuneration report on page 25. In view of Barbara Richmonds impending departure her new agreement was not finalised. New appointees to the Board will be entitled to no more than one years compensation on termination.

has been an employee of the Company or Group has, or has had, a material business relationship with the Group received, or receives remuneration (other than a directors fee) or share options or is a member of the group pension scheme has close family or business ties with any of the Groups advisers, directors or senior employees holds cross directorship or significant links with other directors through involvement in other companies or bodies represents a significant shareholder has served on the Board for more than nine years from the date of their first election.

Details of the professional commitments of the Chairman and the non-executive directors are included in their biographies on pages 18 and 19.The Board is satisfied that these do not interfere with the performance of their respective duties to the Company. Board and committee evaluation During the year a process of self-evaluation has been conducted. This process was organised round a questionnaire used to assess the effectiveness of the Board, the Chairman and each of the committees. Minor shortcomings were identified and addressed. Investor relations The Company recognises the importance of communicating with its shareholders.The Board uses the AGM to communicate with private investors. It is normal practice for all members of the Board to attend the AGM and be available to answer questions raised by shareholders. Major shareholders have been advised that the Chairman and Senior Independent Director are available for personal meetings and discussion with major shareholders.The annual report and accounts including notice of AGM are sent to shareholders at least twenty working days before the meeting. Separate resolutions are proposed at the AGM on each substantially separate issue.The level of proxies lodged on each AGM resolution and the balance for and against each resolution is declared by the Chairman after the resolution has been dealt with on a show of hands providing there has been no call for a poll.When appropriate, meetings are held between the executive directors and institutional investors.There is a separate investor relations section on the Companys website (www.croda.com) which includes, amongst other items, presentations made to analysts.

34 Corporate governance

Corporate governance 35

Corporate governance
Statement of directors responsibilities The following statement, which should be read in conjunction with the report of the auditors set out on page 37, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditors in relation to the financial statements. The directors are required by the Companies Act 1985 to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss for the financial year. The directors consider that, in preparing the financial statements on pages 38 to 76 inclusive, the Company has used appropriate accounting policies, applied in a consistent manner and supported by reasonable and prudent judgements and estimates, that all applicable accounting standards have been followed and that the financial statements comply with IFRS. The directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and the Group and which enable them to ensure that the financial statements comply with the Companies Act 1985. The directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. The directors are responsible for the maintenance and integrity of the Companys website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board

Group independent auditors report

To the shareholders of Croda International Plc We have audited the Group financial statements of Croda International Plc for the year ended 31 December 2005 which comprise the Group income statement, the Group balance sheet, the Group cash flow statement, the Group statement of recognised income and expense, the Group accounting policies and the related notes.These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the parent company financial statements of Croda International Plc for the year ended 31 December 2005 and on the information in the directors remuneration report that is described as having been audited. Respective responsibilities of directors and auditors The directors responsibilities for preparing the annual report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the statement of directors responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).This report, including the opinion, has been prepared for and only for the Companys members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation.We also report to you if, in our opinion, the directors report is not consistent with the Group financial statements, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed. We review whether the corporate governance statement reflects the Companys compliance with the nine provisions of the 2003 FRC Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not.We are not required to consider whether the Boards statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Groups corporate governance procedures or its risk and control procedures. We read other information contained in the annual report and consider whether it is consistent with the audited Group financial statements.The other information comprises only the directors report, the unaudited part of the directors remuneration report, the Chairmans statement, the operating review, the financial review, the corporate governance statement and the safety, health and environmental report.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Groups circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. Opinion In our opinion: the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Groups affairs as at 31 December 2005 and of its profit and cash flows for the year then ended; and

Louise Scott Secretary 22 February 2006

the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and
Article 4 of the IAS Regulation. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Leeds 22 February 2006

36 Corporate governance

Group independent auditors report 37

Group income statement

for the year ended 31 December 2005
Note Continuing operations Revenue Cost of sales Gross profit Operating expenses Operating profit Financial expenses Financial income Profit before tax Tax Profit after tax from continuing operations Profit after tax from discontinued operations Profit for the year Attributable to: Minority interest Equity shareholders 2005 m 305.6 (214.5) 91.1 (40.0) 51.1 (3.8) 1.9 49.2 (17.6) 31.6 1.2 32.8 0.1 32.7 32.8 2004 m 280.9 (198.0) 82.9 (37.9) 45.0 (3.6) 1.7 43.1 (15.2) 27.9 2.8 30.7 0.1 30.6 30.7

Group balance sheet

at 31 December 2005
Note Assets Non-current assets Goodwill Property, plant and equipment Investments Associated undertaking Other Deferred tax assets 2005 m 2004 m

13 14 16 16 6

6.5 122.4 1.4 36.0 166.3

6.5 127.4 9.6 1.3 34.1 178.9 52.0 54.9 32.4 139.3

2 1 4 4 5 7 3

Current assets Inventories Trade and other receivables Cash and cash equivalents Other financial assets Assets classified as held for sale

17 18 20 7

53.4 55.7 39.3 0.1 15.4 163.9

Earnings per share of 10p Basic Total Continuing operations Diluted Total Continuing operations

pence per share 8 8 8 8 25.6 24.7 25.2 24.3

pence per share 23.3 21.2 23.1 21.1

Liabilities Current liabilities Trade and other payables Borrowings and other financial liabilities Current tax liabilities

19 20

(46.6) (24.2) (5.5) (76.3)

(41.0) (15.6) (4.8) (61.4) 77.9 (32.0) (0.9) (104.1) (14.7) (15.5) (167.2) 89.6

Net current assets Non-current liabilities Borrowings and other financial liabilities Other payables Retirement benefit liabilities Provisions Deferred tax liabilities 20 12 21 6

87.6 (39.4) (1.0) (107.1) (9.6) (16.2) (173.3)

Group statement of recognised income and expense

for the year ended 31 December 2005
2005 m Profit for the year Net gains not recognised in income statement: Net exchange adjustments offset in reserves net of tax Actuarial movement on retirement benefit liabilities Deferred tax on actuarial movement on retirement benefit liabilities Total recognised income for the year Attributable to: Minority interest Equity shareholders 32.8 4.7 (5.6) 1.8 0.9 33.7 0.1 33.6 33.7 As set out in the Groups statement of accounting policies, and as allowed under IFRS 1, the Group has not applied IAS 32 and IAS 39 to the 2004 comparative figures included in these financial statements. Had the Group applied these standards to the 2004 figures, there would have been no impact on shareholders equity or profit for the year. 2004 m 30.7 (0.7) (7.8) 2.6 (5.9) 24.8 0.1 24.7 24.8

Net assets Shareholders equity Preference share capital Ordinary share capital Called up share capital Share premium account Reserves Total shareholders equity Minority interest in equity Total equity Signed on behalf of the Board who approved the financial statements on 22 February 2006.

80.6

24 22 25 25 26

1.1 13.6 14.7 34.0 31.0 79.7 0.9 80.6

1.1 13.6 14.7 34.0 40.1 88.8 0.8 89.6

Martin Flower Chairman

Barbara Richmond Group Finance Director

38 Group income statement & Group statement of recognised income and expense

Group balance sheet 39

Group cash flow statement

for the year ended 31 December 2005
Note Cash flows from operating activities Cash generated from operations Interest paid Tax paid Net cash generated from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale of businesses (net of costs) Cash paid against provisions Interest received Discontinued operations Net cash used in investing activities Cash flows from financing activities Additional borrowings Repayment of borrowings Capital element of finance lease repayments Purchase of treasury shares Net proceeds from other transactions in own shares Dividends paid to shareholders Dividends paid to minority shareholders Discontinued operations Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents brought forward Exchange differences Cash and cash equivalents carried forward Cash and cash equivalents carried forward comprise Cash at bank and in hand Bank overdrafts ii 2005 m 67.6 (3.7) (15.9) 48.0 (9.1) 1.4 (5.2) 1.3 (11.6) 15.0 (0.6) (0.1) (24.5) 2.7 (21.7) (29.2) 7.2 17.5 1.7 26.4 2004 m 57.4 (3.4) (12.5) 41.5 (14.7) 1.3 4.6 1.1 (0.2) (7.9) (3.1) (0.1) (6.4) 1.7 (15.6) (0.4) (0.1) (24.0) 9.6 8.5 (0.6) 17.5

Group cash flow notes

for the year ended 31 December 2005
(i) Reconciliation to net debt Note Net increase in cash and cash equivalents Increase in debt and lease financing Change in net debt from cash flows New finance lease contracts Exchange differences Net debt brought forward Net debt carried forward iii iii iii 2005 m 7.2 (14.3) (7.1) (0.2) (1.7) (9.0) (15.2) (24.2) 2004 m 9.6 3.3 12.9 (0.1) 1.5 14.3 (29.5) (15.2)

21 7

(ii) Cash generated from operations Continuing operations Operating profit Depreciation Profit on disposal and write off of fixed assets Pension fund contributions in excess of service cost Share based payments Movement in inventory Movement in receivables Movement in payables Cash generated from continuing operations Discontinued operations

2005 m 51.1 14.0 (2.8) 0.7 (0.7) (0.4) 4.5 66.4 1.2 67.6

2004 m 45.0 14.0 0.1 (3.8) 0.4 (1.8) (1.8) 3.4 55.5 1.9 57.4

22 25 9 9 7

(iii) Analysis of net debt 2005 m Cash and cash equivalents Bank overdrafts Increase in cash and cash equivalents Borrowings repayable within one year Borrowings repayable after one year Finance leases Increase in borrowings and other financial liabilities Total net debt 39.3 (12.9) (11.1) (38.9) (0.6) (24.2)

Cash flow m 5.2 2.0 7.2 0.5 (14.9) 0.1 (14.3) (7.1)

Exchange movements m 1.7 (0.5) (3.0) 0.1 (1.7)

Other non-cash m (10.6) 10.6 (0.2) (0.2)

2004 m 32.4 (14.9) (0.5) (31.6) (0.6) (15.2)

39.3 (12.9) 26.4

32.4 (14.9) 17.5

40 Group cash flow statement

Group cash flow notes 41

Group accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These are the Groups first full year consolidated financial statements prepared under International Financial Reporting Standards (IFRS) and an explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Group is provided in note 27. Basis of preparation The financial statements have been prepared in accordance with IFRS, IFRIC interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS.The standards used are those published by the International Accounting Standards Board (IASB) and endorsed by the EU at the time of preparing these statements (February 2006). A summary of the more important Group accounting policies is set out below. These policies have been consistently applied to all the years presented, except for those relating to the classification and measurement of financial instruments. The Group has made use of the exemption available under IFRS 1 to only apply IAS 32 and IAS 39 from 1 January 2005.The policies applied to financial instruments for 2004 and 2005 are disclosed separately below. Accounting estimates and judgements The Groups critical accounting policies under IFRS have been set by management with the approval of the audit committee. The application of these policies requires estimates and assumptions to be made concerning the future and judgements to be made on the applicability of policies to particular situations. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Under IFRS an estimate or judgement may be considered critical if it involves matters that are highly uncertain, or where different estimation methods could reasonably have been used, or if changes in the estimate that would have a material impact on the Groups results are likely to occur from period to period. The only such critical judgement required when preparing the Groups accounts is with regard to environmental provisions which is discussed in note 21. Early adoption of standards In 2005, the Group has early adopted the amended version of IAS 19 Employee Benefits issued by the IASB in December 2004 and endorsed by the EU in December 2005. The early adoption enables the Group to recognise actuarial gains and losses in respect of its defined benefit pension plans immediately in full in the statement of recognised income and expense.This approach is in line with UK GAAP under FRS 17. New accounting standards and IFRIC interpretations Certain new accounting standards and IFRIC interpretations have been published that are mandatory for accounting periods beginning on or after 1 January 2006.The Groups assessment of the impact of these new standards and interpretations is set out below. It is anticipated that new standards or interpretations not covered specifically below will have no impact on the Groups financial statements. (a) IFRIC 4, Determining whether an Asset Contains a Lease IFRIC 4 is applicable to annual periods beginning on or after 1 January 2006.The Group has not elected to adopt IFRIC 4 early. It will apply IFRIC 4 in its 2006 financial statements and the IFRIC 4 transition provisions. The Group will therefore apply IFRIC 4 on the basis of facts and circumstances that existed at 1 January 2005. Implementation of IFRIC 4 is not expected to change the accounting for any of the Groups current arrangements. Group accounts Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that are presently exercisable or convertible are taken into account.The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Associates Associated undertakings are those companies in which the Group has a beneficial interest of between 20% and 50% in the equity capital and where the Group exercises significant influence over commercial and financial policy decisions. The consolidated income statement includes the Groups share of post-acquisition profits, the consolidated statement of recognised income and expense includes the Groups share of other recognised gains and losses, and the consolidated balance sheet includes the Groups share of the underlying net tangible assets of associated undertakings. Intangible assets Goodwill On the acquisition of a business, fair values are attributed to the net assets acquired. Goodwill arises where the fair value of the consideration given for a business exceeds such net assets. Goodwill arising on acquisitions is capitalised and subject to impairment review, both annually and when there are indications that the carrying value may not be recoverable. Goodwill is allocated to income generating units for the purpose of this impairment testing. Goodwill arising on acquisitions after 31 December 1997 and prior to 1 January 2004 was amortised over its estimated useful life; such amortisation ceased on 31 December 2003. Goodwill arising on acquisitions made prior to 31 December 1997 was written off directly to reserves in the year of acquisition, as a matter of accounting policy, and under IFRS 1 and IFRS 3 such goodwill will remain eliminated against reserves and will not be written back to the income statement in the event of disposal. Research and development Research expenditure, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is charged to income in the year in which it is incurred. Internal development expenditure, whereby research findings are applied to a plan for the production of new or substantially improved products or processes, is charged to income in the year in which it is incurred unless it meets the recognition criteria of IAS 38 Intangible Assets. Measurement and other uncertainties generally mean that such criteria are not met.Where, however, the recognition criteria are met, intangible assets are capitalised and amortised over their useful economic lives from product launch. Intangible assets relating to products in development are subject to impairment testing at each balance sheet date or earlier upon indication of impairment. Any impairment losses are written off immediately to income. Computer software Acquired computer software licences covering a period of greater than one year are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.These costs are amortised over their estimated useful lives (three to five years). Revenue recognition Sales of goods Revenue comprises the fair value for the sale of goods, excludes inter-company sales and value-added taxes and represents net invoice value less estimated rebates, returns and settlement discounts. Group sales are recognised as revenue in the period in which the significant risks and rewards of ownership have been transferred to a third party. Interest and dividend income Interest income is recognised on a time-proportion basis using the effective interest method. Dividend income is recognised when the right to receive payment is established. Segmental reporting A business segment is a group of assets and operations engaged in providing products and services that are subject to risks or returns that are different from those of other segments. A geographical segment operates within a particular economic environment that is subject to different risks and returns from other economic environments. Employee benefits Pension obligations The Group accounts for pensions and similar benefits under IAS 19 Employee Benefits. In respect of defined benefit plans (pension plans that define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation), obligations are measured at discounted present value whilst plan assets are recorded at fair value.The liability recognised in the balance sheet in respect of defined benefit pension plans is the net of the plan obligations and assets. No allowance is made in the past service liability in respect of either the future expenses of running the schemes or for non-service related death in service benefits which may arise in the future.The operating costs of such plans are charged to operating profit and the finance costs are recognised as financial income or expense as appropriate. Service costs are spread systematically over the lives of employees and financing costs are recognised in the periods in which they arise. Actuarial gains and losses are recognised immediately in the statement of recognised income and expense. Payments to defined contribution schemes (pension plans under which the Group pays fixed contributions into a separate entity) are charged as an expense as they fall due. Other post-retirement benefits Some Group companies provide post-retirement healthcare benefits to their retirees.The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans. Actuarial gains and losses are recognised immediately in the statement of recognised income and expense.These obligations are valued annually by independent qualified actuaries.

42 Group accounting policies

Group accounting policies 43

Group accounting policies

Share based payments The fair value of employee share option plans is calculated using the Black-Scholes or binomial model as appropriate. In accordance with IFRS 2 Share-based Payments the resulting cost is charged to the income statement over the vesting period of the options.The value of the charge is adjusted to reflect expected and actual levels of options vesting as the Group does not use market-based performance criteria. Currency translations Functional and presentation currency Items included in the financial statements of each of the Groups entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency).The consolidated financial statements are presented in sterling, which is the Companys functional and presentation currency. Transactions and balances Assets and liabilities are translated at the exchange rates ruling at the end of the financial period. Exchange profits or losses on trading transactions are included in the Group income statement except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges, which, along with other exchange differences arising from non-trading items are dealt with through reserves. Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Taxation The charge for taxation is based on the profits for the year and takes into account taxation deferred because of temporary differences between the treatment of certain items for taxation and for accounting purposes.Temporary differences arise from the inclusion of profits and losses in the accounts in different periods from which they are recognised in tax assessments and primarily arise as a result of the difference between tax allowances on tangible fixed assets and the corresponding depreciation charge, and upon the pension fund deficit. Full provision is made for the tax effects of these differences. No provision is made for unremitted earnings of foreign subsidiaries where there is no commitment to remit such earnings. Similarly, no provision is made for temporary differences relating to investments in subsidiaries since realisation of such differences can be controlled and is not probable in the foreseeable future. Property, plant and equipment The Groups policy is to write off the difference between the cost of all property, plant and equipment, except freehold land, and their residual value on a straight line basis over their estimated useful lives. Reviews are made annually of the estimated remaining lives and residual values of individual productive assets, taking account of commercial and technological obsolescence as well as normal wear and tear, and adjustments are made where appropriate. Under this policy it becomes impractical to calculate average asset lives exactly. However, the total lives range from approximately 15 to 40 years for buildings, and 3 to 15 years for plant and equipment. All individual assets are reviewed for impairment when there are indications that the carrying value may not be recoverable. Non-current assets held for sale and discontinued operations Non-current assets are classified as assets held for sale and stated at the lower of carrying amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. A discontinued operation is a component of the Groups business that represents a separate major line of business or geographical area of operations. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale. Leases Assets acquired under finance leases are included in the balance sheet under tangible fixed assets at an amount reflecting the fair value of the asset and are depreciated over the shorter of the lease term and their estimated useful lives. The capital element of future lease rentals is included in creditors. Finance charges are allocated to the income statement each year in proportion to the capital element outstanding.The cost of operating leases is charged to the income statement as incurred. Financial risk factors The Groups activities expose it to a variety of financial risks: currency risk, interest-rate risk, liquidity risk, and credit risk.The Groups overall risk management strategy is approved by the Board and implemented and reviewed by the risk management committee. Detailed financial risk management is then delegated to the Group Finance department which has a specific policy manual that sets out guidelines to manage financial risk. Regular reports are received from all operating companies to enable prompt identification of financial risks so that appropriate action may be taken. Currency risk The Group operates internationally and is exposed to currency risk arising from various currency exposures, primarily with respect to the US Dollar and the Euro. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. Entities in the Group use forward contracts and foreign currency bank balances to manage their foreign exchange risk arising from future commercial transactions, recognised assets and liabilities.The Groups risk management policy is to hedge transactional risk up to three months forward.The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Groups foreign operations is not specifically hedged but is reduced primarily through borrowings denominated in the relevant foreign currencies where it is efficient to do so. Interest rate risk The Group has both interest bearing assets and liabilities.The Group has a policy of maintaining at least 50% of its gross borrowings at floating interest rates and at 31 December 2005 over 75% of Group borrowings were at floating rates. The Group uses interest rate swaps where appropriate and currently has a single interest rate swap in place as a fair value hedge of a proportion of its fixed rate US Dollar denominated borrowings.The swap is settled on a six monthly basis with the Group paying or receiving interest based on the differential between market rates at the start of each period and the fixed rate. Liquidity risk The Group actively maintains a mixture of long-term and short-term committed facilities designed to ensure the Group has sufficient funds available for operations and planned investments.The Group also has an active share buyback programme which is managed to ensure the efficiency of the Groups funding structure. Credit risk The Group has no significant concentrations of credit risk. It has policies in place to ensure that sales of products are made to customers with an appropriate credit history. Derivative counterparties and cash transactions are limited to high-credit quality financial institutions.The Group has policies that limit the amount of credit exposure to any financial institution.

44 Group accounting policies

Group accounting policies 45

Group accounting policies

Derivative financial instruments The Group uses derivative financial instruments to hedge its exposure to interest rates and short-term currency rate fluctuations. From 1 January 2004 to 31 December 2004 Derivative financial instruments are designated as hedging instruments and are recorded initially at cost. Gains and losses on instruments are included in the income statement on maturity to match the underlying hedged transaction. From 1 January 2005 to 31 December 2005 Financial instruments are recorded initially at cost. Subsequent measurement depends on the designation of the instrument as either: (i) a hedge of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (ii) a hedge of highly probable forecast transactions (cash flow hedge); (i) Fair value hedge Changes in the fair value of derivatives, for example interest rate swaps and foreign exchange contracts, that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. (ii) Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity.The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement. Inventories Inventories are stated at the lower of cost and net realisable amount on a first in first out basis. Cost comprises all expenditure, including related production overheads, incurred in the normal course of business in bringing the inventory to its location and condition at the balance sheet date. Net realisable amount is the estimated selling price in the ordinary course of business less any applicable variable selling costs. Provision is made for obsolete, slow moving and defective inventory where appropriate. Profits arising on intra Group sales are eliminated in so far as the product remains in Group inventory at the year end. Trade and other receivables Trade and other receivables are stated at cost less impairment losses. Cash and cash equivalents Cash and cash equivalents comprises cash balances and short-term deposits. Bank overdrafts that are repayable on demand and form an integral part of the Groups cash management are included as a component of cash and cash equivalents for the purpose of the cash flow statement. Environmental provisions The Group is exposed to environmental liabilities relating to its operations. Provisions are made immediately where a constructive or legal obligation is identified, can be quantified and it is regarded as more likely than not that an outflow of resources will be required to settle the obligation.The environmental provision is not discounted due to the uncertainty surrounding the timing of future cash flows. Share capital (a) Investment in own shares Employee Share Ownership Trusts Shares acquired by the Trustees, funded by the Company and held for the continuing benefit of the Company are shown as a reduction in shareholders funds. Movements in the year arising from additional purchases by the Trustees of shares or the receipt of funds due to the exercise of options by employees are accounted for within reserves and shown as a movement in shareholders funds in the year. Administration expenses of the trusts are charged to the Companys income statement as incurred. Treasury shares Where any Group company purchases the Companys equity share capital as treasury shares, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Companys equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Companys equity holders. (b) Preference share capital Preference share capital is classified as equity as the Group has full discretion over the transfer of benefits associated with the shares. (c) Dividends Dividends on preference shares are recognised as a liability on an accruals basis. Other dividends are recognised as a liability when the liability is irrevocable. Accordingly, final dividends are recognised when approved by shareholders and interim dividends are recognised when paid. Investments Investments in quoted securities are stated at fair value, being the appropriate quoted market value, with movements in the fair value passing through the income statement. Investments in unquoted securities are carried at cost and are subject to impairment testing at each balance sheet date or earlier upon indication of impairment. IFRS transitional arrangements When preparing the Groups IFRS balance sheet at 1 January 2004, the date of transition, the following optional exemptions from full retrospective application of IFRS accounting policies have been adopted:

Business combinations the provisions of IFRS 3 have been applied prospectively from 1 January 2004 Financial instruments the Group has taken the exemption not to restate comparative information with respect
to IAS 32 and IAS 39

Cumulative translation differences the Group has taken the exemption allowing all cumulative translation
differences for all foreign operations to be set to zero at the transition date.

46 Group accounting policies

Group accounting policies 47

Notes to the Group accounts

1. Segmental analysis Primary reporting format business segments At 31 December 2005 the Group is organised on a worldwide basis into two main business segments, relating to the manufacture and sale of the Groups products which are destined for either the Consumer Care market or the market for Industrial Specialities.There is no trade between segments. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
Consumer Care 2005 m Industrial Specialities 2004 2005 m m

1. Segmental analysis (continued) Secondary reporting format geographical segments The Group manages its business segments on a global basis.The operations are based in three main geographical areas as follows: Europe, with manufacturing sites in the UK, the home country of the Company, and France; the Americas, with manufacturing sites in the USA and Brazil; and Asia, with manufacturing sites in Singapore and Japan.
Segment assets 2005 m Capital expenditure 2004 2005 m m

2004 m

Group 2005 m

2004 m

Revenue 2005 m

2004 m

2004 m

Income statement Continuing operations Revenue Expenses Operating profit Profit after tax from discontinued operations Net financial expenses Tax Profit for the year Balance sheet Segment assets Assets classified as held for sale Tax assets Cash, other financial assets and other investments

207.8 (163.9) 43.9 -

188.4 (147.8) 40.6 -

97.8 (90.6) 7.2 1.2

92.5 (88.1) 4.4 2.8

305.6 (254.5) 51.1 1.2 (1.9) (17.6) 32.8

280.9 (235.9) 45.0 2.8 (1.9) (15.2) 30.7

Analysis by geographical origin Continuing operations Europe Americas Asia Rest of World

151.7 104.5 36.1 13.3 305.6

145.9 88.9 33.4 12.7 280.9

138.6 55.5 35.2 8.7 238.0

164.4 45.1 33.3 7.6 250.4

4.6 3.1 1.3 0.3 9.3

10.1 3.5 1.1 0.3 15.0

Analysis by geographical destination Continuing operations Europe Americas Asia Rest of World

131.7 111.5 42.3 20.1 305.6

123.9 97.4 40.5 19.1 280.9

164.8

157.0

73.2

93.4

238.0 15.4 36.0 40.8 330.2

250.4 34.1 33.7 318.2 (41.9) (20.3) (47.6) (14.7) (104.1) (228.6) 89.6 Analysis of net operating expenses by function: Distribution costs Administrative expenses Other operating income Income from investments and properties

2. Net operating expenses

2005 m 15.1 25.0 (0.1) 40.0

2004 m 13.7 24.3 (0.1) 37.9

Segment liabilities Tax liabilities Borrowings and other financial liabilities Provisions Retirement benefit liabilities

(29.9)

(26.5)

(17.7)

(15.4)

(47.6) (21.7) (63.6) (9.6) (107.1) (249.6)

Group net assets Other segmental disclosures Capital expenditure (note 14) Depreciation (note 14)

80.6

Additional information on the nature of operating expenses, including depreciation and employee benefits expense, is provided in note 3.

5.5 9.2

10.8 9.3

3.8 5.1

4.2 5.2

9.3 14.3

15.0 14.5

48 Notes to the Group accounts

Notes to the Group accounts 49

Notes to the Group accounts

3. Profit for the year The Group profit for the year is stated after charging Depreciation (note 14) Owned assets Leased assets Staff costs (note 10) Redundancy costs Inventories Cost recognised as expense in cost of sales Net write down in year Profit on disposal and write off on fixed assets Research and development Hire of plant and machinery Other operating lease rentals Services provided by the Groups auditors During the year the Group (including its overseas subsidiaries) obtained the following services from the Groups auditor as detailed below: Statutory audit Other assurance services Tax compliance services Other services 2005 m 2004 m 5.Tax (continued) (b) Tax on items charged to equity Deferred tax on actuarial movement on retirement benefit liabilities Deferred tax on share based payments 2005 m (1.8) (0.3) (2.1) (c) Factors affecting the tax charge for the year Profit before tax from continuing operations Tax at the standard rate of corporation tax in the UK (30%: 2004 30%) Effect of : Prior years overprovisions Tax cost of remitting overseas income to the UK Expenses and write offs not deductible for tax purposes Effect of higher overseas tax rates 49.2 14.8 (0.4) 0.3 0.1 2.8 17.6 0.4 0.2 0.1 0.7 0.3 0.1 0.2 0.1 0.7 2004 m (2.6) (2.6) 43.1 12.9 (0.3) 0.2 0.3 2.1 15.2

13.8 0.5 59.8 0.6 196.6 0.2 (0.3) 8.9 0.8 1.4

14.1 0.4 53.9 0.7 186.0 1.1 0.1 7.3 0.8 1.4

6. Deferred tax The deferred tax balances included in these accounts are attributable to the following: Deferred tax assets Retirement benefit liabilities Other

2005 m

2004 m

32.9 3.1 36.0

31.9 2.2 34.1 11.7 1.9 1.9 15.5

4. Net financial expenses Financial expenses Bank loans and overdrafts 7.37% guaranteed senior loan notes due 2008

2005 m 1.6 2.2 3.8

2004 m 1.4 2.2 3.6 (0.2) (1.5) (1.7) 1.9

Deferred tax liabilities Excess of capital allowances over depreciation Revaluation gains Other

12.8 1.9 1.5 16.2

Financial income Expected return on pension scheme assets less interest on scheme liabilities (note 12) Bank interest receivable and similar income

(0.4) (1.5) (1.9)

Net financial expenses

1.9

Deferred tax is calculated in full on temporary differences under the liability method at a rate of 30% in the United Kingdom and at rates appropriate to each overseas subsidiary. Deferred tax assets have been recognised in all cases where such assets arise, as it is probable the assets will be recovered. Deferred tax is only recognised on the unremitted earnings of overseas subsidiaries to the extent that remittance is expected in the foreseeable future. If all earnings were remitted, an additional 2.2m of tax would be payable.All movements on deferred tax balances have been recognised in income with the exception of the credits shown in note 5(b) which have been recognised directly in equity.

5.Tax (a) Analysis of charge for the year Continuing operations United Kingdom current tax Corporation tax Relief for overseas taxes on dividends remitted to UK Overseas current corporate taxes Current tax Deferred tax

2005 m

2004 m

7. Discontinued operations During 2005, in continuance of the Groups stated objective to dispose of non-core activities, the Groups metal treatments division was offered for sale. On 23 January 2006, the Group exchanged contracts with Shell UK Ltd for the sale of the majority of the business.The sale does not include the non-current assets of the business, primarily land and buildings, however the Group has received a valuation of the site which is significantly in excess of its carrying value. Accordingly, there has been no re-measurement to fair value less costs to sell. Under the terms of the sale agreement, the transaction will complete on 24 March 2006 following which the Group is committed to a three month period of toll manufacture. Once this period is complete, the directors are confident that the valuation of the site will be realised through its disposal. Also during 2005, the Group commenced the process of selling its holding in the Groups sole associate, Baxenden Chemicals Limited. By the year end the process was well advanced and an active programme to locate a buyer had commenced.The Board are committed to the disposal plan and consider it highly probable that the disposal will have taken place by the end of 2006.Any profit on sale from the above transactions will be recognised in the 2006 accounts. As a consequence of the above, the carrying value of the metal treatments divisions non-current assets (2.1m) and current assets (3.7m), along with the Groups investment in Baxenden (9.6m) have been recategorised within current assets as assets classified as held for sale.
Notes to the Group accounts 51

11.0 (9.6) 1.4 15.4 16.8 0.8 17.6

3.4 (2.3) 1.1 11.5 12.6 2.6 15.2

50 Notes to the Group accounts

Notes to the Group accounts

7. Discontinued operations (continued) The impact of the operations discontinued in 2005 and the Fire Fighting Chemicals and rock anchor manufacturing businesses discontinued during 2004, all of which resided within the Industrial Specialities segment, is as follows: 2005 m Revenue Expenses Share of associates profit before tax Pre tax operating results from discontinued operations Share of associates tax Post tax operating results from discontinued operations Profit or loss on disposal and provision for closure Profit on disposal of fixed assets in discontinued operations Tax Net exceptional gain on disposal Total profit after tax from discontinued operations Cash flows from discontinued operations Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities 8.9 (9.1) 2.1 1.9 (0.7) 1.2 (0.3) 0.3 1.2 1.2 1.2 2004 m 13.5 (13.4) 2.6 2.7 (0.8) 1.9 (0.5) 0.6 0.8 0.9 2.8 1.9 (0.2) (0.1) 1.6 9. Dividends Ordinary Interim 2003 interim, paid January 2004 2004 interim, paid January 2005 2005 interim, paid October 2005 Final 2003 final, paid July 2004 2004 final, paid July 2005 Pence per share 2005 m Pence per share 2004 m

4.10 4.35 8.40 16.85

5.4 5.5 10.7 21.6 0.1 21.7

4.02 7.83 11.85

5.3 10.2 15.5 0.1 0.4 16.0

Preference (paid June and December) Dividends paid to minority shareholders

During 2005, the Company amended the dates on which dividends are paid, bringing forward payment dates for both interim and final dividends by a number of months. As a result, the interim dividends in respect of both the 2004 and 2005 financial years were paid during 2005. The directors are proposing a final dividend of 9p per share, amounting to a total dividend of 11.2m in respect of the financial year ending 31 December 2005. It will be paid on 2 June 2006 to shareholders registered on 5 May 2006.The total dividend for the year ending 31 December 2005 is 13.35p per share (16.7m).

10. Employees 8. Earnings per share

Total 2005 m Continuing Discontinued operations operations 2005 2005 m m Total 2004 m Continuing Discontinued operations operations 2004 2004 m m

2005 m 46.8 1.1 6.0 5.9 59.8

2004 m 42.0 0.6 5.4 5.9 53.9

Profit for the year Minority interests and preference dividend

32.8 (0.2) 32.6

31.6 (0.1) 31.5

1.2 (0.1) 1.1

30.7 (0.2) 30.5

27.9 (0.1) 27.8

2.8 (0.1) 2.7

Group employment costs including directors Wages and salaries Share based payments (note 23) Social security costs Other pension costs (note 12)

Number m

Number m

Number m

Number m

Number m

Number m

Redundancy costs of 0.6m (2004: 0.7m) are excluded from the above analysis. Number Average employee numbers Consumer Care Industrial Specialities Discontinued operations 1,013 539 53 1,605 Number 986 522 77 1,585

Weighted average number of 10p ordinary shares in issue for basic calculation Deemed issue of potentially dilutive shares Average number of 10p ordinary shares for diluted calculation

127.5 2.0 129.5

127.5 2.0 129.5

127.5 2.0 129.5

130.9 1.0 131.9

130.9 1.0 131.9

130.9 1.0 131.9

Pence

Pence

Pence

Pence

Pence

Pence

Basic earnings per share Basic earnings per share from continuing operations Basic earnings per share from discontinued operations Diluted earnings per share Diluted earnings per share from continuing operations Diluted earnings per share from discontinued operations

25.6 24.7 0.9 25.2 24.3 0.9

23.3 21.2 2.1 23.1 21.1 2.0 Key management compensation including directors Wages and salaries Share based payments Social security costs Other pension costs m 3.2 0.3 0.4 0.2 4.1 m 1.9 0.1 0.2 0.2 2.4

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held in the employee share trusts (note 25) and those held as treasury shares (note 22) which are treated as cancelled as, except for a nominal amount, dividends have been waived. For diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares.

52 Notes to the Group accounts

Notes to the Group accounts 53

Notes to the Group accounts

11. Directors remuneration Detailed information concerning directors remuneration, interests and options is shown in the parts of the directors remuneration report subject to audit on pages 27 to 30 which form part of the annual report and accounts. 12. Retirement benefit liabilities (continued) Cumulative acturial losses recognised in equity: Opening balance Net actuarial losses charged in year 2005 m 5.2 3.8 9.0 Total contributions to the schemes in 2006 are expected to be 8.8m. Analysis of amounts recognised in income statement: Charged to operating profit Current service cost Charged to net financial expenses Interest on scheme liabilities Expected return on assets 2005 m Present value of retirement benefit liabilities UK pension schemes US pension and medical schemes Other schemes (443.8) (17.6) (1.8) (463.2) Fair value of scheme assets UK pension schemes US pension schemes Other schemes 347.8 7.3 1.0 356.1 Net liability (107.1) 2004 m (392.0) (14.2) (2.0) (408.2) 297.2 5.9 1.0 304.1 (104.1) The assets in the schemes comprised: The gross liability above includes an amount of 5.9m in respect of unfunded schemes (2004: 3.8m). Equities Government bonds Other bonds Property Cash 2005 % of fair value 71.6 11.6 10.6 4.2 2.0 100.0 For funded schemes throughout the Group, the expected return on scheme assets has been derived as the weighted average of the expected returns from each of the main asset classes.The expected return for each class reflects a combination of historical performance analysis, the forward looking views of the financial markets (as suggested by the yields available) and the views of investment organisations. History of UK schemes deficits and experience gains and losses: Present value of retirement benefit liabilities Fair value of scheme assets Net liability Experience gain on assets Experience loss on liabilities 2005 m (443.8) 347.8 (96.0) 33.2 (18.2) 2004 m (392.0) 297.2 (94.8) 8.5 (0.6) 2004 % of fair value 72.6 10.9 10.8 4.3 1.4 100.0 2004 m 5.2 5.2

12. Retirement benefit liabilities The Group operates a number of retirement benefit schemes throughout the world. The principal schemes are in the UK and cover 95% of the Groups UK employees.These schemes are of the defined benefit type with assets held in separate trustee administered funds and are funded. In the US, the Group operates a funded defined benefit scheme as well as providing unfunded post-retirement medical benefits for employees. In other countries benefits are determined in accordance with local practice and regulations and funding is provided on several bases. Defined benefit schemes The amounts recognised in the balance sheet in respect of these schemes are as follows:

5.4 21.4 (21.8) (0.4)

5.4 20.3 (20.5) (0.2) 5.2

Net charge to income statement before tax

5.0

Of the amount charged to operating profit, 3.8m (2004: 3.7m) was included in cost of sales and 1.6m (2004: 1.7m) was included in administrative expenses. UK pension schemes The financial assumptions used to assess the UK scheme liabilities were: 2005 Valuation method Discount rate Inflation rate Rate of increase in salaries Rate of increase for pensions in payment Expected return on scheme assets
Projected unit

2004
Projected unit

4.75% 2.8% 3.9% 2.8% 7.0%

5.3% 2.7% 4.2% 2.7% 7.2%

2005 m Movement in present value of retirement benefit liabilities in the year: Opening balance Current service cost Interest cost Actuarial loss Contributions paid in Employee Benefits paid Exchange difference on overseas schemes 408.2 5.4 21.4 38.3 1.3 (12.8) 1.4 463.2 Movement in fair value of schemes assets in the year: Opening balance Expected return Actuarial gains Contributions paid in Employee Employer Benefits paid out Exchange differences on overseas schemes 304.1 21.8 32.7 1.3 8.2 (12.8) 0.8 356.1

2004 m 380.3 5.4 20.3 16.3 1.2 (14.2) (1.1) 408.2 279.5 20.5 8.5 1.2 9.1 (14.2) (0.5) 304.1

54 Notes to the Group accounts

Notes to the Group accounts 55

Notes to the Group accounts

12. Retirement benefit liabilities (continued) US pension and post-retirement medical schemes The financial assumptions used to assess the US scheme liabilities were: 2005 Valuation method Discount rate Rate of increase in salaries Expected return on scheme assets Medical cost inflation rate
Projected unit

14. Property, plant and equipment

Land and buildings m 59.2 (0.6) 2.8 (1.2) (1.2) 59.0 59.0 1.3 1.1 (1.9) (1.6) 57.9 19.6 (0.1) 2.5 (0.4) (0.9) 20.7 20.7 0.4 2.4 (0.6) (0.4) 22.5

Plant and equipment m 203.0 (2.4) 12.2 (7.1) (1.9) 203.8 203.8 5.0 8.2 (3.9) (4.0) 209.1 109.3 (1.2) 12.0 (4.0) (1.4) 114.7 114.7 2.1 11.9 (3.5) (3.1) 122.1

Total m 262.2 (3.0) 15.0 (8.3) (3.1) 262.8 262.8 6.3 9.3 (5.8) (5.6) 267.0 128.9 (1.3) 14.5 (4.4) (2.3) 135.4 135.4 2.5 14.3 (4.1) (3.5) 144.6

2004
Projected unit

5.3% 4.2% 8.0% 6.0%

5.8% 4.2% 8.0% 6.0%

Cost At 1 January 2004 Exchange differences Additions Business disposals Other disposals At 31 December 2004 At 1 January 2005 Exchange differences Additions Disposals Reclassified as held for sale At 31 December 2005 Depreciation and impairment losses At 1 January 2004 Exchange differences Charge for year Business disposals Other disposals At 31 December 2004 At 1 January 2005 Exchange differences Charge for year Disposals Reclassified as held for sale At 31 December 2005 Net book amount

A 1% change in the assumed medical cost inflation rate would alter the charge to the income statement by 0.1m. The assets in the schemes comprised: 2005 % of fair value 69.7 10.9 17.9 1.5 100.0 2004 % of fair value 69.9 13.8 8.9 7.4 100.0

Equities Government bonds Other bonds Cash

History of US schemes deficits and experience gains and losses: Present value of retirement benefit liabilities Fair value of scheme assets Net liability Experience loss on assets Experience loss on liabilities

2005 m (17.6) 7.3 (10.3) (0.3) -

2004 m (14.2) 5.9 (8.3) (0.5)

Defined contribution schemes Contributions paid charged to operating profit

2005 m 0.5

2004 m 0.5

At 31 December 2005 At 31 December 2004

35.4 38.3

87.0 89.1

122.4 127.4

The net book value of assets held by the Group under finance leases at 31 December 2005 was 0.6m (2004: 0.6m). The leased equipment secures the lease obligations in note 20. 13. Goodwill Cost and carrying amount At 1 January and 31 December 2005 m 6.5 2004 m 6.5 As disclosed in note 7, agreement has been reached towards the end of 2005 with Shell UK Limited with regard to the disposal of the majority of the Groups metal treatments business. As a result, the property, plant and equipment of this business has been reclassified as held for sale and the recoverable amount of the assets on the basis of fair value less costs to sell has been assessed. Based on this assessment the carrying value has remained unchanged.

The goodwill arose on the Groups acquisition of the trading assets of Westbrook Lanolin in 1998 and has been allocated in full to the Groups UK manufacturing operation and to the Consumer Care segment. The goodwill is tested at each year end for impairment with reference to the above cash-generating units recoverable amount compared to the units carrying value including goodwill.The recoverable amount is based on value in use calculations using discounted cash flow projections based on the Groups strategic plan for the first three years and a growth rate thereafter consistent with that shown by the three year plan.The cash flows have been discounted using the Groups weighted average cost of capital, which for these purposes has been assumed to be approximately 8% after tax. The key assumptions underpinning the strategic plan employed in the value in use calculation are that market share will not significantly change and that gross and operating margins will remain constant.

56 Notes to the Group accounts

Notes to the Group accounts 57

Notes to the Group accounts

15. Future commitments Group capital projects At 31 December 2005 the directors had authorised the following expenditure on capital projects: Contracted but not provided for Authorised but not contracted for 2005 m 2004 m 17. Inventories Raw materials Work in progress Finished goods 2005 m 11.5 1.3 40.6 53.4 The Group consumed 196.6m (2004: 186.0m) of inventories during the period. 1.5 3.3 1.6 6.4 The group leases various buildings, vehicles and other plant and equipment under non-cancellable operating lease arrangements.The leases have various terms, however the terms are typical of lease agreements for the particular class of asset. 1.5 3.1 1.9 6.5 2004 m 13.0 1.6 37.4 52.0

2.7 5.4 8.1

1.2 3.3 4.5

Operating leases - minimum lease payments At 31 December 2005 the Groups future minimum lease commitments were due as follows: Within one year From one to five years After five years

18.Trade and other receivables Amounts falling due within one year Trade receivables Less: provision for impairment of receivables Trade receivables net Other receivables Prepayments

2005 m 52.3 (1.2) 51.1 3.4 1.2 55.7

2004 m 51.5 (1.0) 50.5 2.9 1.5 54.9

16. Investments Investment in associated undertaking As disclosed in note 7, the Groups investment in its associate has been recategorised as an asset held for sale in line with the Groups plans to dispose of the investment. Following an assessment of the fair value of the investment and the likely costs to sell, the value attributed to the investment is its carrying value at 31 December 2005 using the equity method of accounting. Details of the associated undertaking and the Groups share of its issued share capital are as follows: Principal country of operation Baxenden Chemicals Ltd England Share capital held % 46.5

19.Trade and other payables Amounts falling due within one year Trade payables Other taxation and social security Other payables Accruals and deferred income

2005 m 21.1 2.7 7.5 15.3 46.6

2004 m 20.8 1.9 7.2 11.1 41.0

The Groups share of total recognised profit in the above associate for the year was 1.4m (2004: 1.8m).As disclosed in note 7, this profit forms part of the total profit after tax from discontinued operations in the year. Summarised financial information in respect of the associate as a whole is as follows: 2005 2004 m m Assets Liabilities 27.3 (7.5) 19.8 Revenue Expenses Tax 34.9 (30.4) (1.5) 3.0 Other than dividends received there were no other material transactions with the associated undertaking. Other investments Other investments comprise equity securities classified as available-for-sale and are included at cost or, if quoted on an active market, at market value. 28.1 (8.3) 19.8 38.1 (32.5) (1.7) 3.9

20. Borrowings, other financial liabilities and other financial assets Current Assets Interest rate swap Liabilities US$55m 7.37% guaranteed senior loan notes Unsecured bank loans and overdrafts due within one year or on demand Obligations under finance leases

2005 m

2004 m

0.1 10.8 13.3 0.1 24.2

15.4 0.2 15.6

Non-current Liabilities US$55m 7.37% guaranteed senior loan notes Other unsecured bank loans Obligations under finance leases

21.3 17.6 0.5 39.4

28.6 3.0 0.4 32.0

58 Notes to the Group accounts

Notes to the Group accounts 59

Notes to the Group accounts

20. Borrowings, other financial liabilities and other financial assets (continued) Maturity profile of financial liabilities Repayments fall due as follows: Within one year Bank loans and overdrafts Obligations under finance leases 2005 m 2004 m 20. Borrowings, other financial liabilities and other financial assets (continued) Fair values The table below details a comparison of the book and fair values of the Groups financial assets and liabilities. Where there are no readily available market values to determine fair values, cash flows relating to the various instruments have been discounted at prevailing interest and exchange rates to give an estimate of fair value. Book value 2005 m Cash deposits Other investments US$55m 7.37% guaranteed senior loan notes due 2008 Other bank borrowings Obligations under finance leases Interest rate swap 39.3 1.4 (32.1) (30.9) (0.6) 0.1 Fair value 2005 m 39.3 1.4 (32.9) (30.9) (0.6) 0.1 Book value 2004 m 32.4 1.3 (28.6) (18.4) (0.6) Fair value 2004 m 32.4 1.3 (31.1) (18.4) (0.6) 0.6

24.1 0.1 24.2

15.4 0.2 15.6

After more than one year Loans repayable Within one to two years Within two to five years Obligations under finance leases payable between years two and five

10.7 28.2 0.5 39.4

9.9 21.7 0.4 32.0

The minimum lease payments under finance leases fall due as follows: Within one year Within two to five years More than 5 years Future finance charges on finance leases Present value of finance lease liabilities Interest rate and currency profile of Group financial liabilities

0.2 0.5 0.1 0.8 (0.2) 0.6

0.2 0.4 0.2 0.8 (0.2) 0.6

For financial instruments with a remaining life of greater than one year, fair values are based on cash flows discounted at prevailing interest rates.Accordingly, the fair value of cash deposits and short-term borrowings approximates to the book value due to the short maturity of these instruments.The same applies to trade and other receivables and payables excluded from the above analysis. Borrowing facilities As at 31 December 2005 the Group had undrawn committed facilities of 57.5m (2004: 72.5m) expiring in more than two years, and 5.8m (2004: 5.2m) expiring within one year. In addition the Group had other undrawn facilities of 75.4m (2004: 73.3m) available.

Total m Sterling US Dollar Euro currencies Other At 31 December 2005 Sterling US Dollar Euro currencies Other At 31 December 2004 21.3 36.5 3.1 2.7 63.6 3.7 35.4 5.9 2.6 47.6

Fixed m 14.5 14.5 13.0 13.0

Floating m 21.3 22.0 3.1 2.7 49.1 3.7 22.4 5.9 2.6 34.6

Fixed rate Weighted average interest fixed rate period % years 7.37 7.37 7.37 7.37 1.5 1.5 2.5 2.5

21. Provisions for liabilities and charges At 1 January 2005 Charged to income statement Cash paid against provisions At 31 December 2005

Environmental m 13.6 0.1 (5.2) 8.5

Other m 1.1 1.1

Total m 14.7 0.1 (5.2) 9.6

Interest rate risk Since 2002, the Group has held an interest rate swap with a notional value of US$30m.The swap is a designated fair value hedge of $30m of the US$ fixed rate debt above and results in the Company receiving or paying interest on a six monthly basis based on the differential between US LIBOR plus margin and the fixed rate at the commencement of each six month period. As at 31 December 2005, with the exception of the portion of the Groups fixed rate US$ debt not covered by the interest rate swap, all Group debt and cash was exposed to repricing within 12 months of the balance sheet date. At 31 December 2005, the Groups only significant fixed rate debt was at a rate of 7.37% (2004: 7.37%).The Groups floating rate liabilities are predominantly based on LIBOR and its overseas equivalents.

The environmental provision relates to soil and potential ground water contamination on a number of sites, both currently in use and previously occupied, in Europe and the Americas. Other provisions relate primarily to potential amounts payable in respect of ongoing legal claims against the Group. Provisions are made where a constructive or legal obligation can be quantified and whilst the timing of the transfer of economic benefits relating to the provision cannot be ascertained with any degree of certainty the directors consider they will take place within 20 years.The provisions were established in line with UK GAAP and have been reviewed to ensure compliance with IFRS. Based on information currently available, this level of provision is considered appropriate by the directors.

60 Notes to the Group accounts

Notes to the Group accounts 61

Notes to the Group accounts

22. Ordinary share capital Authorised 2005 m Ordinary shares of 10p 17.3 2004 m 17.3 Issued and fully paid 2005 m 13.6 23. Share based payments 2004 m 13.6 With the implementation of IFRS, the Group has to recognise for the first time a charge to the income statement in respect of any share based remuneration schemes.The impact of share based payment transactions on the Groups financial position is as follows: 2005 2004 m m Analysis of amounts recognised in income statement: Charged in respect of equity-settled share based payment transactions Charged in respect of cash-settled share based payment transactions 0.5 0.6 1.1 Analysis of amounts recognised in balance sheet: Liability in respect of cash-settled share based payment transactions 0.5 0.2 0.4 0.6 0.3

There were no changes in the issued ordinary share capital during the year. During the year the Company purchased 6,137,305 shares on the open market with a nominal value of 0.6m to be held as treasury shares for consideration of 24.5m.The Group now holds 8,122,589 shares in total as treasury shares with a nominal value of 0.8m for which a total consideration of 30.9m has been paid.The total market value of treasury shares held at 31 December 2005 was 37.4m (2004: 6.4m).These shares have been deducted from shareholders funds until such time as the Board decides to cancel them, reissue them or utilise them to satisfy share options.The right to receive dividends has been waived. In 2005 options were granted to employees under the Croda Savings-Related Share Option Scheme 1983 to subscribe for 163,462 ordinary shares at an option price of 328p per share and under the International Sharesave Scheme to subscribe for 225,090 shares at an option price of 328p per share. No options were granted in 2005 under the Senior Executive Share Option Schemes. No-cost options to subscribe for 314,373 ordinary shares were granted under the newly established Long-term Incentive Plan during the year. During the year consideration of 5.6m was received on the exercise of options over 2,301,344 shares.The options were satisfied with shares transferred from the Groups employee share trusts. Since the year end a further 34,806 shares have been transferred from the schemes. There are outstanding options to subscribe for ordinary shares as follows: Year option granted Croda Savings-Related Share Options Scheme 2000 2001 2002 2003 2004 2005 Croda International Overseas Sharesave Scheme 2001 2002 2003 2004 2005 Croda International Senior Executive Share Option Schemes 1996 1999 2000 2001 2002 2003 Croda International Long-term Incentive Plan 2005 314,373 Nil 25 May 2008 to 24 May 2009 5,000 45,000 652,100 509,528 375,300 1,105,450 337p 228p 256p 258p 261p 230p 3 April 1999 to 2 April 2006 30 March 2002 to 29 March 2009 22 March 2003 to 21 March 2010 7 March 2004 to 6 March 2011 13 March 2005 to 12 March 2012 5 March 2006 to 4 March 2013 89,118 107,925 74,816 184,584 215,174 186p 194p 230p 226p 328p 1 November 2006 to 30 November 2006 1 November 2007 to 30 November 2007 1 November 2008 to 30 November 2008 1 November 2009 to 30 November 2009 1 November 2010 to 30 November 2010 15,602 301,789 324,728 181,467 186,123 161,145 186p 186p 194p 230p 226p 328p 1 November 2005 to 30 April 2006 1 November 2006 to 30 April 2007 1 November 2007 to 30 April 2008 1 November 2008 to 30 April 2009 1 November 2009 to 30 April 2010 1 November 2010 to 30 April 2011 Number of shares

The key elements of each scheme along with the assumptions employed to arrive at the charge in the income statement are set out below. Croda Savings-Related Share Option Scheme (SAYE) The SAYE scheme, established in 1983, grants options annually in September to employees of the Group at a fixed exercise price being the market price of the Companys shares at the grant date discounted by 20%. Employees then enter into a savings contract over 5 years and, subject to continued employment, purchase options at the end of the 5 year period based on the amount saved. Options are then exercisable for a 6 month period following completion of the savings contract. As the option is equity settled, under IFRS 2 charges are only made in respect of options granted after 7 November 2002. The fair value per option granted and the assumptions used in the calculation of the value are as follows: Grant date Share price at grant date Exercise price Number of employees Shares under option Vesting period Expected volatility Option life Expected life Risk free rate Dividend yield Possibility of forfeiture Fair value per option at grant date A reconciliation of option movements over the period is as follows: 2005 Weighted average exercise price (p) 202 328 219 188 221 2004 Weighted average exercise price (p) 208 226 211 237 202 2005 410p 328p 170 163,462 5 years 30% 6 months 4.2% 3.2% 7.5% p.a. 133p 2004 283p 226p 159 206,080 5 years 30% 6 months 4.9% 4.3% 7.5% p.a. 83p

Price

Options exercisable from

Number Outstanding at 1 January Granted Forfeited Exercised Outstanding at 31 December Exercisable at 31 December Weighted average remaining life at 31 December (years) 1,394,605 163,462 (81,969) (283,136) 1,192,962 16,327 2.9

Number 1,767,790 206,080 (190,829) (388,436) 1,394,605 31,274 3.1

62 Notes to the Group accounts

Notes to the Group accounts 63

Notes to the Group accounts

23. Share based payments (continued) Croda International Overseas Sharesave Scheme (International) The International Scheme, established in 1999, has the same option pricing model, savings contract and vesting period as the SAYE scheme.At exercise, employees are paid a cash equivalent for each option purchased being the difference between the exercise price and market price at the exercise date.As the scheme is cash settled, IFRS 2 applies to all options in existence during the year, regardless of grant date. The fair value per option granted and the assumptions used in the calculation of the value are as follows: Grant date Share price at grant date Exercise price Number of employees Shares under option Vesting period Expected volatility Option life Expected life Risk free rate Dividend yield Possibility of forfeiture Fair value per option at 31 December A reconciliation of option movements over the period is as follows: 2005 Weighted average exercise price (p) 204 328 210 186 249 2004 Weighted average exercise price (p) 211 226 205 242 204 Number Outstanding at 1 January Granted Outstanding at 31 December Weighted average remaining life at 31 December (years) 314,373 314,373 2.4 2005 416p 328p 222 225,090 5 years 30% 1 month 4.2% 3.2% 7.5% p.a. 168p 2004 283p 226p 135 194,862 5 years 30% 1 month 4.9% 4.3% 7.5% p.a. 228p Grant date Share price at grant date Number of employees Shares under option Vesting period Option life Expected life Dividend yield Possibility of forfeiture Fair value per option at grant date A reconciliation of option movements over the period is as follows: 2005 Weighted average exercise price (p) 373 373 25 May 2005 373p 10 314,373 3 years 1 year 3.35% 338p 23. Share based payments (continued) Croda International Long-term Investment Plan (LTIP) The LTIP was established in 2005 and grants no cost options to senior employees which vest after 3 years dependent upon a performance related sliding scale.The LTIP is discussed in detail in the directors remuneration report (page 24). The fair value per option granted and the assumptions used in the calculation of the value are as follows:

Number Outstanding at 1 January Granted Forfeited Exercised Outstanding at 31 December Weighted average remaining life at 31 December (years) 672,716 225,090 (63,565) (157,946) 676,295 3.4

Number 825,861 194,862 (97,805) (250,202) 672,716 3.0

Croda International Share Incentive Programme (SIP) The SIP was established in 2003 and has similar objectives to the SAYE scheme in terms of increasing employee retention and share ownership. Under the SIP scheme employees enter into an agreement to purchase shares in the Company each month. For each share purchased by an employee, the Company awards a matching share which passes to the employee after 3 years service.The matching shares are allocated each month at market value with this fair value charge being recognised in the income statement in full in the year of allocation.

Croda International Senior Executive Share Option Schemes (Executive) The Group previously granted options to senior employees each year which are subject to satisfaction of performance conditions before they can be exercised.The performance conditions are discussed in detail in the directors remuneration report (pages 24 and 25). As with the SAYE scheme the Executive Scheme is equity settled and as a consequence only the options granted in 2003 fall within the scope of IFRS 2. No further options will be granted under this scheme. 2005 Weighted average exercise price (p) 254 275 266 246 2004 Weighted average exercise price (p) 256 315 253 254

24. Preference share capital The authorised, issued and fully paid preference share capital comprises 5.9% preference shares of 1 6.6% preference shares of 1 7.5% preference shares of 1

2005 000 616 499 22 1,137

2004 000 616 499 22 1,137

Number Outstanding at 1 January Forfeited Exercised Outstanding at 31 December Weighted average remaining life at 31 December (years) 4,530,430 (72,183) (1,765,869) 2,692,378 5.9

Number 4,945,370 (160,000) (254,940) 4,530,430 5.9

The preference shares have no redemption rights and carry no voting rights other than in certain circumstances affecting the rights of the preference shareholders, details of which are set out in the Companys articles of association.The three classes of preference shares rank pari passu with each other but ahead of the ordinary shares on winding up. Rights on a winding up are limited to repayment of capital and any arrears of dividends.

64 Notes to the Group accounts

Notes to the Group accounts 65

Notes to the Group accounts

25. Shareholders funds and statement of changes in shareholders equity
Share premium account m

26. Minority interests At 1 January Exchange differences Profit for the year Dividend paid to minority shareholders At 31 December

2005 m 0.8 0.1 0.9

2004 m 1.2 (0.1) 0.1 (0.4) 0.8

Share capital m

Translation reserve m

Retained earnings m

Total m

At 1 January 2004 Total recognised income in the year Dividends (note 9) Share based payments Consideration paid for purchase of treasury shares (note 22) Consideration paid for purchase of own shares (held in trust) Consideration received for sale of own shares (held in trust) At 31 December 2004 At 1 January 2005 Total recognised income in the year Dividends (note 9 ) Share based payments Consideration paid for purchase of treasury shares (note 22) Consideration paid for purchase of own shares (held in trust) Consideration received for sale of own shares (held in trust) At 31 December 2005

14.7 14.7 14.7 14.7

34.0 34.0 34.0 34.0

(0.7) (0.7) (0.7) 4.7 4.0

35.4 25.4 (15.6) 0.3 (6.4) (0.2) 1.9 40.8 40.8 28.9 (21.7) 0.8 (24.5) (2.9) 5.6 27.0

84.1 24.7 (15.6) 0.3 (6.4) (0.2) 1.9 88.8 88.8 33.6 (21.7) 0.8 (24.5) (2.9) 5.6 79.7

27. Explanation of transition from UK GAAP to IFRS As stated in the accounting policies note on page 42, these financial statements are the first prepared by the Group under IFRS.The Groups income statement for 2004 and balance sheets at 1 January 2004 and 31 December 2004 have been restated following adoption of the Groups IFRS accounting policies. In June 2005 the Group published a Statement on the Transition to International Accounting Standards and International Financial Reporting Standards (the transition statement).The transition statement described the likely impact of the transition from UK GAAP to IFRS on the Groups equity, net income and cash flows, as well as providing each of the reconciliations required by IFRS 1. A summary of these reconciliations is provided below. Reconciliation of profit for the year Note Year ended December 2005 m 26.5 (a) (b) (c) 0.6 (0.4) 3.8 0.2 4.2 30.7 At 1 January 2004 m 163.6 (a) (b) (c) (d) (e) (90.6) (0.1) (3.0) 15.5 (0.1) (78.3) 85.3 At 31 December 2004 m 170.9 (95.1) 0.4 (2.8) 16.3 (0.1) (81.3) 89.6

Investments in own shares represent the Croda International Plc Qualifying Share Ownership Trust (QUEST), the Croda International Plc Employee Benefit Trust (CIPEBT) and the Croda International Plc AESOP Trust (AESOP) which each hold shares purchased on the open market to satisfy the future issue of shares under the Groups share option schemes.As at 31 December 2005 the QUEST was financed by a repayable on demand loan from the Company of 2.3m (2004: 2.9m) and held 0.8m (2004: 1.1m) shares at a cost of 2.3m (2004: 2.9m) with a market value of 3.9m (2004: 3.7m).As at 31 December 2005 the CIPEBT was financed by a repayable on demand loan from the Company of 7.7m (2004: 10.0m) and held 2.7m (2004: 3.8m) shares at a cost of 7.7m (2004: 10.0m) with a market value of 12.3m (2004: 12.3m). As at 31 December 2005 the AESOP was financed by contributions from the Company of 0.4m (2004: 0.3m) and held 0.1m (2004: 0.1m) shares at a cost of 0.3m (2004: 0.2m) with a market value of 0.3m (2004: 0.2m).All of the shares held by the QUEST and CIPEBT were under option at 31 December 2005 whilst those held by the AESOP are likely to be issued as matching shares under the Groups Share Incentive Plan within twelve months of the balance sheet date. Except for a nominal amount, the right to receive dividends has been waived.

Profit for the year as previously reported under UK GAAP (before minority interests) Pensions Share based payments Goodwill Other Total net adjustment due to transition to IFRS Profit for the year as restated under IFRS Reconciliation of equity Note Total equity as previously reported under UK GAAP Pensions Share based payments Goodwill Income tax Dividends Other Total net adjustment due to transition to IFRS Total equity as restated under IFRS

66 Notes to the Group accounts

Notes to the Group accounts 67

Notes to the Group accounts

27. Explanation of transition from UK GAAP to IFRS (continued) Explanation of reconciling items (a) Under UK GAAP the Group accounted for pension obligations under SSAP 24 and made disclosure only of the impact of FRS 17, the UK standard for retirement benefits that is similar in many respects to the international standard IAS 19. Both IAS 19 and FRS 17 are significantly different from SSAP 24, most noticeably from a balance sheet perspective with international accounting requiring the Group to recognise a net fair value deficit on its balance sheet, being the excess of the present value of the actuarially valued pension liabilities over the fair value of the assets held to fund these liabilities. As IAS 19 adopts this balance sheet perspective, the move to IFRS will also potentially lead to greater volatility in the statement of recognised income and expense. (b) Under UK GAAP there was no charge against profits in respect of share based payment arrangements such as the option schemes operated by the Group. IFRS 2 requires the Group to recognise such a charge, equating to the fair value of the options granted spread over the relevant vesting period. (c) Under UK GAAP the Group was entitled to amortise purchased goodwill over its useful life.This policy is not allowed under IFRS 3, which instead requires goodwill to be carried at cost and reviewed annually for impairment. Accordingly, the amortisation charge of 0.4m under UK GAAP is removed and the carrying value of goodwill, as allowed under IFRS 1, is frozen at its UK GAAP book value at 1 January 2004. In addition IFRS 3 prohibits the Group from recognising goodwill previously written off to reserves in the income statement upon disposal of the relevant business, thus the UK GAAP exceptional charge of 3.4m in 2004 is removed. (d) IAS 12 requires that deferred tax be provided in respect of revaluation gains on fixed assets, no such provision is required under UK GAAP. In addition the rules with regard to provision of deferred tax on intercompany profit in inventory and unremitted overseas earnings are subtly different under IFRS and give rise to increased deferred tax provisioning. It should also be noted that the inclusion of the pension deficit on the balance sheet gives rise to a significant deferred tax asset and that, under IFRS, deferred tax assets and liabilities cannot usually be netted off, hence there is a degree of balance sheet grossing up in respect of deferred tax. (e) The rules on accounting for post balance sheet events under IFRS are such that dividends can only be recognised when the liability to pay becomes irrevocable. Accordingly, as the Groups final dividends are not approved until the AGM, usually held in April, then the liability cannot be recognised in the period to which the dividend relates. Furthermore, as interim dividends have no such prior approval, they can only be recognised when paid. In addition to the above, a number of presentational changes and additional disclosures are required to comply with IFRS, these are discussed in detail in the transition statement.The Group has also taken the opportunity to review the basis of its segmental reporting in the light of IFRS requirements and the previous segments of Oleochemicals and Other have been replaced by Consumer Care and Industrial Specialities, segments which better reflect the Groups risk and return profiles in the long-term. The Groups cash flow is unchanged as a result of the transition to IFRS, however the categorisation of flows on the cash flow statement is somewhat different.

Croda International Plc

Parent company financial statements
Pages 70 to 76 represent the separate financial statements of Croda International Plc as required by the Companies Act 1985 (the Act). These financial statements have been prepared in accordance with the Act and UK accounting standards and are thus presented separately to the Group financial statements which have been prepared in accordance with international accounting standards.

68 Notes to the Group accounts

Parent company financial statements 69 Independent auditors report

Company independent auditors report

To the shareholders of Croda International Plc We have audited the parent company financial statements of Croda International Plc for the year ended 31 December 2005 which comprise the Company balance sheet, the Company accounting policies and the related notes.These parent company financial statements have been prepared under the accounting policies set out therein.We have also audited the information in the directors remuneration report that is described as having been audited. We have reported separately on the Group financial statements of Croda International Plc for the year ended 31 December 2005. Respective responsibilities of directors and auditors The directors responsibilities for preparing the annual report, the directors remuneration report and the parent company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of directors responsibilities. Our responsibility is to audit the parent company financial statements and the part of the directors remuneration report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).This report, including the opinion, has been prepared for and only for the Companys members as a body in accordance with Section 235 of the Companies Act 1985 and for no other purpose.We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements and the part of the directors remuneration report to be audited have been properly prepared in accordance with the Companies Act 1985.We also report to you if, in our opinion, the directors report is not consistent with the parent company financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed. We read other information contained in the annual report and consider whether it is consistent with the audited Group financial statements.The other information comprises only the directors report, the unaudited part of the directors remuneration report, the Chairmans statement, the operating review, the financial review, the corporate governance statement and the safety, health and environmental report.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements and the part of the directors remuneration report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the Companys circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements and the part of the directors remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements and the part of the directors remuneration report to be audited. Opinion In our opinion:

Company balance sheet

at 31 December 2005
Note Fixed assets Tangible assets Investments Subsidiary undertakings Associated undertaking Other C D E E 2005 m 1.7 121.4 1.6 1.1 125.8 Current assets Debtors Cash at bank and in hand Financial assets F H 2.0 37.6 0.1 39.7 Creditors Falling due within one year Net current assets Creditors Falling due after one year Net assets Capital and reserves Preference share capital Ordinary share capital Called up share capital Share premium account Reserves Shareholders funds (including non-equity interests) Signed on behalf of the Board who approved the financial statements on 22 February 2006. G G (6.5) 33.2 (38.6) 120.4 2004 m
Restated

1.6 126.3 1.6 1.1 130.6 0.7 46.7 47.4 (9.4) 38.0 (41.0) 127.6

24 22 J J

1.1 13.6 14.7 34.0 71.7 120.4

1.1 13.6 14.7 34.0 78.9 127.6

Martin Flower Chairman

Barbara Richmond Group Finance Director

the parent company financial statements give a true and fair view, in accordance with United Kingdom
Generally Accepted Accounting Practice, of the state of the Companys affairs as at 31 December 2005; and

the parent company financial statements and the part of the Directors Remuneration Report to be audited
have been properly prepared in accordance with the Companies Act 1985. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors Leeds 22 February 2006

70 Company independent auditors report

Company balance sheet 71

Company accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. They have all been applied consistently throughout the year and the preceding year. Accounting basis The financial statements are prepared under the historical cost convention, as modified by the previous revaluation of properties, in compliance with the provisions of the Companies Act 1985, the requirements of the Listing Rules of the Financial Services Authority and applicable United Kingdom Accounting Standards.Whilst the consolidated accounts have been prepared under IFRS, as required by European law, the Companys accounts continue to be prepared under UK GAAP as permitted. Land and buildings In the past the Companys principal properties have been valued periodically by professional valuers on an open market, existing use basis. Following the Companys adoption of FRS 15 in 2001, no further revaluations will be carried out and previous book values will be retained. Notwithstanding the requirements of FRS 15 all fixed assets are written down to their recoverable amount in the event that any impairment review carried out in accordance with FRS 11 indicates that the recoverable amount is less than the carrying value.The profit or loss on the disposal of land and buildings included in the profit and loss account represents the difference between the net proceeds of sale and the net book amount. Depreciation Tangible fixed assets are stated at cost or valuation less depreciation. Depreciation is provided at rates calculated to write down the cost of all tangible fixed assets, except freehold land, over their estimated useful lives on a straight line basis. The estimated average life for each major asset category is:

Notes to the Company accounts

A. Profit and loss account Of the Groups profit for the year 35.2m (2004: 2.7m) is dealt with in the profit and loss account of the Company which was approved by the Board on 22 February 2006 but which is not presented as permitted by s.230(3) Companies Act 1985. Included in the Company profit and loss account is a charge of 0.1m (2004: 0.1m) in respect of the Companys audit fee.

B. Retirement benefit obligations The Companys employees are members of the UK defined benefit schemes, details of which are disclosed in note 12. Whilst the Group reports under IFRS, the UK GAAP equivalent figures for the UK schemes would not be significantly different. As the Company is unable to identify its share of the underlying assets and liabilities of of the schemes, due mainly to changes in the Groups corporate structure over the years, the Company has accounted as though the schemes were defined contribution schemes and has charged the contributions paid each year to the profit and loss account.

C.Tangible fixed assets

Land and buildings m 2.0 2.0 0.6 0.6

Plant and equipment m 2.1 0.4 (1.1) 1.4 1.9 0.1 (0.9) 1.1

Total m 4.1 0.4 (1.1) 3.4 2.5 0.1 (0.9) 1.7

Freehold buildings 15 to 40 years Computers and office equipment 3 to 5 years Cars 3 years Plant and machinery 10 to 15 years

Cost or valuation At 1 January 2005 Additions Disposals At 31 December 2005

Leased assets The cost of operating leases is charged to the profit and loss account as incurred. Pensions The defined benefit pension obligations of the Company are financed by contributions to separate funds. As the Company is unable to reliably and consistently measure its share of the underlying assets and liabilities of the funds, the Company accounts as though the funds were defined contribution funds and charges contributions paid directly to the profit and loss account. Currency translations Assets and liabilities are translated at the exchange rates ruling at the end of the financial period. Exchange profits or losses on trading transactions are included in the profit and loss account. Other exchange differences arising from non-trading items are dealt with through reserves. Financial instruments The Company uses derivative financial instruments to hedge its exposure to interest rates and short-term currency rate fluctuations. Receipts and payments on interest rate instruments are recognised on an accruals basis in the profit and loss account over the life of the instrument. Instruments accounted for as hedges are designated as a hedge at the inception of the contract. Gains or losses are recognised on maturity of the underlying transaction. Employee Share Ownership Trusts Shares acquired by the Trustees, funded by the Company and held for the continuing benefit of the Company are shown as a reduction in shareholders funds. Movements in the year arising from additional purchases by the Trustees of shares or the receipt of funds due to the exercise of options by employees are accounted for within reserves and shown as a movement in shareholders funds in the year. Administration expenses of the trusts are charged to the Companys profit and loss account as incurred. Share based payments The fair value of employee share option plans is calculated using the Black-Scholes or binomial model as appropriate. In accordance with FRS 20 Share-based Payment the resulting cost is charged to the income statement over the vesting period of the options.The value of the charge is adjusted to reflect expected and actual levels of options vesting as the Company does not use market-based performance criteria. Dividends Dividends on preference shares are recognised as a liability on an accruals basis. Other dividends are recognised as a liability when the liability is irrevocable. Accordingly, final dividends are recognised when approved by shareholders and interim dividends are recognised when paid.

Depreciation At 1 January 2005 Charge for year Disposals At 31 December 2005 Net book amount At 31 December 2005 At 31 December 2004

1.4 1.4

0.3 0.2

1.7 1.6

2005 m Net book amount of land and buildings Freehold Historical cost of land and buildings Cost 1988 valuations At 31 December Revaluation surpluses Restated to historical cost Depreciation Historical net book amount At 31 December 1.4 0.2 1.9 2.1 (1.1) 1.0 (0.5) 0.5

2004 m 1.4 0.2 1.9 2.1 (1.1) 1.0 (0.5) 0.5

72 Company accounting policies

Notes to the Company accounts 73

Notes to the Company accounts

D. Subsidiary undertakings Cost less amounts written off At 1 January 2005 as previously stated Prior year adjustment FRS 20 (note J) At 1 January 2005 as restated Redemption of preference shares Additions Disposals Amounts repaid Amounts invested At 31 December 2005 The principal subsidiary undertakings are listed on page 77. Shares m 98.2 0.2 98.4 (2.6) 5.4 (18.1) 83.1 Loans m 27.9 27.9 (0.7) 11.1 38.3 Total m 126.1 0.2 126.3 (2.6) 5.4 (18.1) (0.7) 11.1 121.4 Repayments fall due as follows Within one year Bank loans and overdrafts Associated undertaking m Other investments m Total m After more than one year Loans repayable Within two to five years Preference share capital repayable after five years H. Financial instruments The Companys objectives, policies and strategies in respect of financial instruments are outlined in the accounting policies note on page 72 which forms part of the annual report and accounts. short-term debtors and creditors have been excluded from all of the following disclosures. 2005 2004 m m Maturity profile of financial liabilities Bank loans and overdrafts repayable on demand Other bank loans Preference share capital 2.7 17.5 20.2 1.1 21.3 2.1 2.5 4.6 1.1 5.7

2.7

2.1

E. Investments

Cost or valuation of net equity At 1 January 2005 and 31 December 2005 1.6 1.1 2.7

17.5 1.1 18.6

2.5 1.1 3.6

Details of the associated undertaking are provided in note 16. Other investments comprise unlisted investments included at directors valuation based on appropriate attributable net assets.

F. Debtors Amounts owed by Group undertakings Corporate taxation Other debtors Prepayments

2005 m 0.7 1.0 0.1 0.2 2.0

2004 m 0.3 0.1 0.3 0.7

Financial assets The Company holds an interest rate swap to hedge against the Groups US$ fixed rate debt. Details are given in note 20. With the implementation of FRS 26, the fair value of the swap has been recognised on the Company balance sheet at 31 December 2005 and as permitted under the transitional provisions of the standard, prior year comparatives have not been restated. Accordingly, the fair value of the swap at 1 January 2005, 0.6m, is shown in reserves as the impact of adopting the new standard in 2005. I. Share based payments With the implementation of FRS 20, the Company has to recognise for the first time a charge to the profit and loss account in respect of any share based remuneration schemes. The total charge for the year was 0.3m (2004: 0.1m). In addition, as the Company has issued options over its own shares to employees of its subsidiary companies, the Company has to increase the cost of its investment in the relevant subsidiary by the fair value of the options granted. The key elements of each scheme are disclosed in note 23.

G. Creditors Amounts falling due within one year Borrowings (note H) Trade creditors Corporate taxation Other taxation and social security Other creditors Accruals and deferred income Amounts owed to Group undertakings

2005 m 2.7 0.2 0.8 0.5 2.3 6.5

2004 m
Restated

2.1 0.2 0.5 0.7 0.5 0.9 4.5 9.4 2.5 38.5 41.0

Amounts falling due after one year Borrowings (note H) Amounts owed to Group undertakings

17.5 21.1 38.6

74 Notes to the Company accounts

Notes to the Company accounts 75

Notes to the Company accounts

J. Reserves Share premium account m 34.0 34.0 34.0 Revalution reserve m 2.1 2.1 2.1 Profit and loss account m 60.3 0.2 16.3 76.8 0.6 35.2 (21.7) 0.5 (24.5) (2.9) 5.6 69.6 Total m 96.4 0.2 16.3 112.9 0.6 35.2 (21.7) 0.5 (24.5) (2.9) 5.6 105.7

Principal subsidiary companies

Incorporated and/or principally operating in Principal operating companies Croda Application Chemicals Ltd Croda Chemicals Europe Ltd Croda Food Services Ltd* John L Seaton & Co Ltd Baxenden Chemicals Ltd* Croda Argentina SA Croda Australia Croda do Brasil Ltda Croda Canada Ltd Croda Chile Croda Shanghai Croda France SAS Crodarom SAS Sederma SAS Croda GmbH Croda Hong Kong Croda Chemicals (India) Pvt Ltd* Croda Italiana SpA Croda Japan KK Croda Mexico SA de CV Croda Poland Sp z o o* Croda Singapore Pte Ltd* Croda Chemicals (SA) Pty Ltd Croda Korea Croda Oleochemicals Ibrica SA Croda Nordica AB Croda Thailand Croda Inc Croda Miami Croda Zimbabwe (Pvt) Ltd Principal holding companies Croda Chemicals International Ltd* Croda Overseas Holdings Ltd* * Companies owned directly by Croda International Plc. Companies incorporated in the UK are registered in England. Full details of investments in subsidiary and associated undertakings will be attached to the Companys annual return made to the Registrar of Companies.Those not listed above were either not trading or not material. UK UK UK UK UK Argentina Australia Brazil Canada Chile China France France France Germany Hong Kong India Italy Japan Mexico Poland Singapore South Africa South Korea Spain Sweden Thailand USA USA Zimbabwe Managing Director/Executive in charge P J Mullinger S E Foots J Dryden M Coverdale N Gee L Bartsch D Dowdell M de Bellis F J Khory L Dufflocq S L Wong J L Pell A Fournial K Lintner K L Helmdach P Chan A Shinde C V Aggio Y Yamanaka R Yob P Huczkowski C G Nottingham K A Woolward B S Sim J M Torres M Wildt S Chansutkirangkool K F Gallagher L Mills K A Woolward Group beneficial interest % 100 100 100 100 46 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

At 1 January 2005 as previously stated Prior year adjustment - FRS 20 Prior year adjustment - FRS 21 At 1 January 2005 as restated Impact of adopting new standards - FRS 26 Profit for the financial year Dividends Share based payments Consideration paid for purchase of treasury shares (note 22) Consideration paid for purchase of own shares (held in trust) Consideration received for sale of own shares (held in trust) At 31 December 2005 Details of investments in own shares are disclosed in note 25.

Prior year adjustment The adoption of FRS 20 has resulted in an increase in staff costs of 0.3m (2004: 0.1m) and an increase in the cost of investments in subsidiaries arising from options granted to employees of other Group companies of 0.2m (2004: 0.2m). Both of these adjustments give rise to a corresponding charge direct to reserves, totalling 0.5m for the year. After adjusting for the impact of FRS 20 entries directly to reserves in 2004, the impact on reserves at 1 January 2005 is an increase of 0.2m. The adoption of FRS 21 has resulted in an increase in shareholders funds of 16.3m at 1 January 2005 due to the writeback of the dividend proposed at 31 December 2004.

K. Contingent liabilities The Company has guaranteed loan capital and bank overdrafts of subsidiary undertakings amounting to 40.0m (2004: 40.8m).

UK UK

100 100

76 Notes to the Company accounts

Principal subsidiary companies 77

Shareholder information
Sector heads D E Barraclough Oleochemicals Europe K R Gregersen Oleochemicals Americas K Layden Enterprise Technologies K M Nutbrown Global Manufacturing & Oleochemicals Asia Pacific B M Richmond Active Ingredients & Industrial Chemicals Analysis of ordinary shareholders as at 17 February 2006 By size of holding 1 1,000 1,001 5,000 5,001 10,000 10,001 50,000 50,001 100,000 100,001 500,000 500,001 upwards No. of holders 2,207 1,624 222 182 49 92 54 4,430 By type of holder Private holders Institutional and corporate holders Treasury shares Shares held in Croda trusts 3,523 903 1 3 4,430 No. of shares 927,297 3,720,175 1,600,662 4,290,385 3,562,536 22,513,926 99,653,863 136,268,844 8,320,003 116,241,308 8,122,589 3,584,944 136,268,844 % of issued capital 0.68 2.73 1.18 3.15 2.61 16.52 73.13 100.00 6.11 85.30 5.96 2.63 100.00 Capital gains tax The market value of the listed share capital at 31 March 1982 were as follows: Ordinary shares Deferred ordinary shares 5.9% preference shares 6.6% preference shares 7.5% preference shares (estimated) Corporate calendar 2006 Annual General Meeting 2006 Half year results announcement 2006 Full year results announcement 2005 Final ordinary dividend payment 2006 Interim ordinary dividend payment 2006 Preference dividend payments 77.5p 40.5p 42.5p 47.5p 45.0p

26 April 2006 26 July 2006 February 2007 2 June 2006 October 2006 30 June 2006 29 December 2006

Secretary and registered office A L Scott (Secretary) A M McIntyre (Assistant secretary) Cowick Hall, Snaith, Goole DN14 9AA Tel: 01405 860551 Fax: 01405 861767 Website: www.croda.com Registered in England number 206132 Registrars Capita Registrars The Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU Tel: 0870 162 3100 (from UK) 00 44 208 639 2157 (from overseas) Fax: 0208 639 2342 (from UK) 00 44 208 639 2342 (from overseas) Website: www.capitaregistrars.com E-mail: ssd@capitaregistrars.com Auditors: PricewaterhouseCoopers LLP Merchant bankers: UBS Warburg Solicitors: Slaughter and May, Heptonstalls Stockbrokers: Merrill Lynch International, UBS Warburg Pension fund managers: UBS Global Asset Management (UK) Limited Schroder Investment Management Limited Legal & General Investment Management Limited Consulting actuaries: Watson Wyatt Partners LLP

Investor relations Shareholders can now get up to date information on Stock Exchange announcements, the corporate calendar, the Croda share price and brokers estimates by visiting our corporate web site at www.croda.com and clicking on the investor centre. Shareholders can receive shareholder communications electronically in future by registering on our corporate website www.croda.com.To register click on Company, Investor centre followed by Investor alerts by email. Receiving corporate communications by email has a number of benefits including being more environmentally friendly, reducing unnecessary waste, faster notification of information to shareholders and eventually leading to a reduction in Company costs. Shareholders can check their shareholdings on the registrars website, www.capitaregistrars.com. Please note to gain access to this information shareholders will require their investor reference.This is an 11 digit number starting with either five or six zeros and is printed on each dividend warrant. Share dealing A share dealing service is available for UK shareholders from Capita Share Dealing Services to either sell or buy Croda ordinary shares. For further information on this service, please contact: www.capitadeal.com (on-line dealing) 0870 458 4577 (telephone dealing) Share price information As well as being available on our website, for the latest ordinary share price, available on the Financial Times Cityline service, call 0906 003 2278 or access the BBCs broadcast teletext service. The middle market values of the listed share capital at 30 December 2005, or last date traded*, were as follows Ordinary shares 5.9% preference 6.6% preference 461p 99p* 108p*

78 Shareholder information

Shareholder information 79

Five year record

In 2005 the Group has adopted IFRS and in accordance with the requirements of IFRS, 2004 figures have been restated. Restatement of earlier years is not required under IFRS and accordingly the information presented below for 2003 and earlier years is as prepared under UK GAAP.The main adjustment that would be required to comply with IFRS would be with regard to the recognition of pension fund liabilities on the balance sheet.The pension fund prepayment shown on the summarised balance sheet up to and including 2003 would have been replaced with a net liability as measured under IAS 19.

Crodas global presence

Today there are Croda operations in the following 26 countries.The timeline on the inside front cover illustrates when these operations were established.

IFRS Earnings Revenue Operating profit Profit before tax Profit after tax Profit attributable to ordinary shareholders* 2005 m 305.6 51.1 49.2 31.6 32.6 % Operating profit as a % of turnover Return on capital employed* Effective tax rate 16.7 25.6 35.8 pence Earnings per share Dividends per share 25.6 13.35 2004 m 280.9 45.0 43.1 27.9 30.5 % 16.0 22.7 35.3 pence 22.8 12.5 2003 m 303.4 41.6 38.7 25.0 25.0 % 13.7 19.6 35.4 pence 19.2 11.85

UK GAAP 2002 m 313.6 40.5 36.5 23.5 23.4 % 12.9 18.4 35.6 pence 17.8 11.5

2001 m 312.4 37.0 31.7 19.0 18.9 % 11.8 14.8 40.1 pence 14.4 11.3

UK USA ITALY GERMANY JAPAN CANADA AUSTRALIA SOUTH AFRICA ZIMBABWE BRAZIL FRANCE MEXICO SINGAPORE HONG KONG

* Total Group figures, all other IFRS figures are continuing operations only. Earnings exclude exceptional items in order to present a clearer year on year comparison.

Summarised balance sheet Fixed assets Stock Debtors Creditors Assets classified as held for sale Capital employed Dividends, tax and provisions Pension fund liability

2005 m 130.3 53.4 55.7 (47.6) 15.4 207.2 4.7 (107.1) 104.8

2004 m 144.8 52.0 54.9 (41.9) 209.8 (0.9) (104.1) 104.8 88.8 0.8 89.6 15.2 104.8 17.0

2003 m 150.3 51.8 57.3 (47.0) 212.4 (52.9) 33.1 192.6 162.4 1.2 163.6 29.0 192.6 17.7

2002 m 159.0 51.5 57.1 (47.2) 220.4 (52.0) 32.2 200.6 147.4 1.1 148.5 52.1 200.6 35.1

2001 m 180.6 60.5 55.9 (46.4) 250.6 (54.4) 28.7 224.9 160.1 1.2 161.3 63.6 224.9 39.4

SWEDEN POLAND INDIA CZECH REPUBLIC CHINA HUNGARY SPAIN ARGENTINA KOREA CHILE THAILAND COLOMBIA

Shareholders funds Minority interests Net debt

79.7 0.9 80.6 24.2 104.8

Gearing (%)

30.0

80 Five year record

Designed and produced by The Roundhouse Newcastle upon Tyne

Croda International Plc Cowick Hall, Snaith Goole, East Yorkshire DN14 9AA, England Tel: +44 (0)1405 860 551 Fax: +44 (0)1405 861 767 www.croda.com