Frutarom Industries Ltd. Annual Report 2016 Dear Shareholder, We are pleased to sum up another record year for Frutarom – a year in which we achieved another substantial quantum leap in our journey of rapid and profitable growth, and in positioning ourselves as a leading global player in the fields of Flavors and specialty and natural Fine Ingredients. The continued successful implementation of our strategy, combining rapid and profitable organic growth with strategic acquisitions, has led to our having grown since 2000 at an average annual rate of 18%, our Flavors activity growing at an annual average rate of 24%, our EBITDA growing at an average annual rate of 21% and net income at an average annual rate of 24%. Frutarom revenues have meanwhile risen by a factor of over 14, from $81 million of revenues with EBITDA at $9 million in 2000 to record high revenues and earnings this year of approximately $ 1,147 million and EBITDA of $ 194 million, with net income reaching $ 111 million - more than double net income for 2012. During the past two years we have quickened our pace of strategic acquisitions, acquiring 20 companies which, combined with continued accelerated internal growth, has already brought us to an annual rate of sales of over $ 1.2 billion. * Annual rate of sales assuming the acquisitions performed and completed in 2016 had been consolidated in the reports since 1.1.16. The rapid and profitable growth trend in the results of our core businesses, which include the Flavors and Specialty Fine Ingredients activities, continues. We are confident in our ability to continue attaining our ambitious strategic goal and strengthen our position, achieve higher rates of growth than those of the markets in which we operate, continue improving our profits and profitability and to realize our strategic plan for the upcoming four years which includes a sales target of at least $ 2 billion with an EBITDA margin of above 22% in our core businesses by 2020*. * Given current product mix Our strategic plan includes continuing to focus on five main areas: a. Continued improvement of our product mix along with sustained rapid growth in the more profitable Flavors activity as well as in the Specialty Fine Ingredients activity, with a focus on unique and innovative natural products that combine taste and health and address the current and future preferences of billions of consumers worldwide; b. Focusing on developing and providing unique added-value solutions to our large multinational customers, and providing a full and comprehensive portfolio of solutions in the fields of taste and health to medium-sized and locally-based customers and to the private label sector; c. Continued improvement in our geographic sales mix while substantially increasing sales in North America and the expanding emerging markets (with emphasis on Southeast Asia, Latin America and Africa); d. Reaping maximum benefit from the many cross-selling opportunities among our diverse operations, to which the acquisitions we performed and will perform also contribute; e. Continued improvement in our profit margins and profits through maximum utilization of our resources, including resources gained through the acquisitions, along with the generating of significant operational savings, the building up a of global procurement system, and the reinforcing of our competitiveness. The successful implementation of our strategy to significantly increase the profitable of our activities, has led to Flavors making up a 74% share of total Frutarom sales in 2016 compared with 33% in 2000, while achieving internal growth rate exceeding the growth rate in markets where we operate, along with continued improvement in profits and margins. *net of non-recurrent expenses Through the expansion of our Flavors activity and the contributions coming from the acquisitions we made in recent years, we have established market leadership in the field of savory taste solutions for which demand climbs as long as the shift to convenience foods continues. In recent years we have focused on developing and expanding the portfolio of natural products we offer our customers in response to consumer demand and prevalent trends in the global food industry towards healthier and more natural foods. This field is growing at a rapid pace and our unique capabilities in developing innovative and unique natural products geared to both taste and health give us a clear cut competitive edge: We have continued expanding the portfolio of specialty natural products with healthy attributes that we offer our customers through our in-house R&D as well as through collaborations with universities, research institutes and startups, and also through acquisitions; We have entered the growing field of natural colors; We significantly expanded our activities in the growing field of Natural Solutions for Food Protection (natural antioxidants that promote food protection); We have continued deepening our expertise in citrus-based products and in specialized biotechnologies for producing natural ingredients important in the production of flavors, foods and beverages, and have built a citrus excellence center in Florida. We have invested in biotechnology to expand our product portfolio into functional foods, dietary supplements and natural algae-based products. Today over 70% of Frutarom sales consist of natural products. Frutarom's rapid expansion in North America and the fast-growing emerging markets was implemented with the support of profitable internal growth and strategic acquisitions, with a focus on the continued improvement in Frutarom’s geographic reach: * The annual rate of sales assuming the acquisitions performed and completed in 2016 had been consolidated in the reports since January 1, 2016. In the last three years we have more than doubled our sales in emerging markets and their proportion of Frutarom’s overall sales has risen from 27% in 2010 to 41% this year. At the same time our sales in North America, the world's largest market for flavors, grew four-fold while our Flavors activity in North America, on which we put special focus, grew eight-fold. We built a growing activity in Flavors in Central and South America, Africa, India and in Southeast Asia, and have established market leadership in Eastern and Central Europe. We have also worked and will continue to work on focused reinforcement of our R&D, production, and sales and marketing platforms in our strategically targeted countries. We built a new and advanced plant in China, which includes state-of-the-art laboratories for R&D and applications, and for the first time we also the capability of developing and producing savory flavors locally in China. Furthermore, this year we established a new modern plant in South Africa that serves the entire growing Sub-Saharan region and at the beginning of 2017 we made another strategic acquisition in South Africa with activity in additional important emerging markets in the Sub- Saharan region like Ghana, Malawi, Zimbabwe and Mozambique. Strategic acquisitions and their contribution towards achieving profitable growth – Over the years we have developed extensive and successful experience performing mergers and acquisitions and are working towards integrating the acquisitions and exploiting the many commercial and operational synergies they provide in order to achieve maximum benefit from the cross-selling opportunities, cost savings and continuing improvement to our profit margins and competitive capabilities. After carrying out 14 acquisitions from 2011 to 2014 which have been successfully integrated into our global activities and are contributing to sales growth as well as to improved profits and margins, we have continued pursuing our acquisitions strategy by purchasing 20 more companies since the beginning of 2015. In choosing which companies to acquire, we focused on penetrating new territories and on strengthening our position in strategically important and growing territories of operation while increasing our market share in North America and in growing emerging markets. We also focused on acquisitions that enable us to significantly expand our Flavors activity and our new and unique product and technology offerings, putting the emphasis on natural products that combine taste and health, natural colors and Natural Solutions for Food Protection. Strategy Implementation - Expanding Geographic Reach and Focus on Natural Products in Carrying out Acquisitions (2013-2017) As part of the expansion of our Flavors activity, we have followed a planned course over the past decade to build up global market leadership in the field of savory taste solutions as an important and strategic growth engine for us. We have acquired leading companies in their fields which have natural, healthy, innovative and unique solution and high added-value products, along with strong positioning in strategic target markets. The global savory taste solutions market is growing due to the rising standard of living and lifestyle and changes in consumer habits which have brought an increase in demand for processed and convenience foods both in home consumption and in eating out. Creating savory solutions leadership Frutarom's rapid sales growth in recent years has also translated into a significant increase in profits, profit margins and a strong cash flow: In 2016 the gross margin for our core activities (Flavors Consistent rising trend In EPS and Specialty Fine Ingredients) reached 40.4%. Operating profits for core activities rose 28.3% and reached a record level $172.2 million with an operating margin of 16.1%. EBITDA rose 29% to a record $214.9 million on a margin of 20.1%1. Net income and earnings per share climbed 16.6% and 15.6% respectively to reach $129.2 million and $2.16 per share compared with $96 million and $1.87 per share in 2015. Net margin reached 11.3%1. This year the Board of Directors decided on a dividend distribution of NIS 0.44 ($ 0.121) per share, reflecting a 7.3% increase from last year. We are continuing to generate a strong cash flow from operating activities: The cash flow this year grew by 36% to reach a record $124.6 million.