Turpaz Industries : Periodic report for the quarter ended June 30, 2023

Turpaz Industries Ltd.

Periodic report for the quarter

ended June 30, 2023

This is an English translation of a on August 20, 2023 (reference no Version"). This English version an official translation and has no skill have been exercised in the perfectly reflect the Hebrew Version the Hebrew Version and this

Table of Contents

Chapter	Page
A. Board of Directors' Report on the State of the Corporation's Affairs...	A-1
B. Financial Statements as of June 30, 2023	B-1
C. Managers' statements	C-1

Directors' Report on the State of the Corporation's Affairs

For the period ended June 30 2023

The Company's Board of Directors is pleased to submit the Board of Directors' Report on the state of affairs of Turpaz Industries Ltd. (hereinafter - the "Company"), for the six and three months ended June 30 2023, all in accordance with the Securities Regulations (Periodic and Immediate Reports), 1970.

This report was drawn out assuming that the Description of the Corporation's Business chapter as included in Chapter A to the 2022 Periodic Report, which was published on March 27, 2023 (Ref. No.: 2023-01-027910) (hereinafter - the "2022 Periodic Report") is available to the reader. Unless otherwise stated, terms included in this report shall have the meaning assigned to them in the 2022 Periodic Report.

Part A - Board of Directors' Explanations to the State of the Corporation's Affairs, Operating Results, Shareholders' Equity and Cash flows

1. General

The Company was incorporated and registered in Israel as a private company limited by shares on February 10 2011.

On May 23, 2021, the Company completed an IPO, its shares were listed on the Tel Aviv Stock Exchange (hereinafter - the "Stock Exchange"), and it became a publicly-traded company, as this term is defined in the Companies Law, 1999.

The Company operates, independently and through its subsidiaries ("Turpaz" or the "Group"), in the development, production, marketing and sale of fragrances, used in the production of cosmetics, toiletries, personal care, air care & odor neutralizers products; natural and synthetic sweet and savory taste extracts, seasonings, unique functional solutions for the field of banking, and gluten free flours, which are used mainly in the production of food and beverages, specialty fine ingredients for the pharma and the agro and fine chemicals industries, and citrus products and aromatic chemicals for the flavor and fragrance industry.

The Turpaz Group has an extensive and diversified range of products, which are developed and produced in the Group's plants across the world. As of the report's publication date, the Group develops, produces, markets and sells products to more than 2,000 customers in more than 40 countries across the world, and operates approx. 14 manufacturing facilities, including R&D centers, laboratories and sales, marketing and regulation offices in Israel, the USA, Poland, Belgium, Vietnam, Latvia, Romania and Hungary which employ 485 employees.

Set forth below are the key operating results and business environment of Turpaz for the first half and second quarter of 2023:

A - 2

• The complex global economy was characterized by inflation and interest rate hikes in capital markets. The increase in inflation rates, coupled with a lack of economic certainty in the markets, caused customer destocking in the Company's areas of activity, along with a rise in raw material prices worldwide. According to industry projections, these trends are expected to weaken in the coming months .The Company estimates that once customer destocking ends, it will lead to improvement in growth, profit, and profitability.
• In the first half of 2023, Turpaz' sales increased by approx. 6.6% and amounted to USD 61.5 million, compared with a total of USD 57.7 million in the corresponding half last year. The change stems from growth due to acquisition of companies and activities, which were completed since 2022 through the date of this report, and from organic growth1 of 3.6% in the fragrances segment, which was partially offset against an organic decline of 2.5% in the tastes segment, and against an organic decline of 8.8% in the specialty ingredients segment - a total organic decline of 2.7%.
  The decline in the tastes segment arises mainly from the subsidiary SDA; in view of intensified competition and the entry of new players to the market, the company started improvement processes and reduction of sales to customers generating low levels of profitability, alongside destocking among customers in this segment. The decline in the specialty ingredients segment also stems from the continued destocking trend among customers in this segment due to interest rates hikes across the world and the economic uncertainty in the markets.
  In the second quarter of 2023, Turpaz' sales increased by 1.1% and amounted to USD 30.6 million, compared with a total of USD 30.3 million in the corresponding quarter last year. The change stems from growth due to acquisition of companies and activities, which were completed since 2022 and through the date of this report, and from organic growth of 0.1% in the specialty ingredients segment, which was offset against an organic decline2 of 5.6% in the fragrances segment, and against an organic decline of 9.4% in the tastes segment - a total organic decline of 6.6%.
• In the first half of 2023, gross profit increased by 3.0%, and amounted to USD 23.0 million compared with USD 22.4 in the corresponding half last year. In the second quarter of 2023, gross profit decreased by 3.8%, and amounted to USD 11.2 million compared with USD 11.7 million in the corresponding period last year, mainly due to decrease in organic sales, alongside fixed expenses, the increase in energy prices compared with the corresponding quarter last year, and an increase in employees' payroll expenses.

1. Organic growth/decline - after deduction the effect of exchange rates, on a pro-forma basis, assuming that the acquisitions that were completed in 2022 and in the first half of 2023 were consolidated in the financial statements as from January 1 2022.
2. Organic growth/decline - see footnote 1 above.

A - 3

• In the first half of 2023, operating profit decreased by 17.6% and amounted to USD 7.8 million compared with USD 9.5 million in the corresponding half last year. In the second quarter of 2023, operating profit decreased by 25.7% and amounted to USD 3.7 million compared with USD 5.0 million in the corresponding period last year, mainly due to an organic decline in sales and amortization of intangible assets.
• In the first half of 2023, net income decreased by 32.7% and amounted to USD 5.5 million compared with USD 8.2 million in the corresponding half last year. In the second quarter of 2023, net income decreased by 40.7%, and amounted to USD 2.5 million compared with USD 4.2 million in the corresponding period last year.
• In the first half of 2023, adjusted EBITDA3 decreased by 5.2% and amounted to USD 12.6 million compared with USD 13.3 million in the corresponding half last year. In the second quarter of 2023, adjusted EBITDA decreased by 13.8% and amounted to USD 6.0 million compared with USD 7.0 million in the corresponding period last year. The change stems mainly from the organic decline in sales.
• The Group's strong equity structure, low leverage levels, its USD 15.0 million cash balance and low debt level of USD 8.0 million as of June 30, 2023, the USD 5.0 million in cash flow from operating activities for the second quarter of 2023, the backing from leading financial institutions in Israel and across the world, the enhancement of management and the implementation of managerial infrastructures are expected to enable the continued implementation of the Group's combined growth strategy, which is based on organic growth and mergers and acquisitions, which are synergistic to the Group's activity.
• Turpaz acquired two companies since the beginning of 2023 and completed nine acquisitions since its issuance on the Stock Exchange in May 2021.

Turpaz Group is engaged in the following three segments:

The fragrances segment- in this segment, Turpaz Group is engaged in the development, production, marketing and sale of natural and synthesized fragrance extracts for customers in the cosmetics, toiletries, detergents, wet wipes, scented candles, hair care, air care & odor neutralizers industries for hotels and households. Furthermore, Turpaz Group operates to manufacture specialty ingredients of high added value, whose purpose is to conceal bad odors, and give and enhance desired scents in consumer or industrial products. The fragrance extracts developed by the perfumers are tailored to customers' requirements while creating long-term relationship between Turpaz Group and its customers across the world. When they select a supplier, customers focus on the suppliers' innovation capabilities, uniqueness, reliability, the quality and excellence of their

3 Adjusted EBITDA means - earnings before interest, taxes, depreciation and amortization, net of non-recurring expenses in respect of acquisition of companies.