Dear Shareholders,

After several years of worldwide economic crisis, 2011 was a year of aftershocks; another year in which the resilience and determination of companies in almost every business sector were tested. With our varied business activities that reach across the globe, painful market trends have buffeted Elco from multiple directions. Despite signs that the USA is emerging from the crisis, the repercussions of the Euro zone crisis, of ongoing global business uncertainty and of the consumer protests in Israel were all felt in 2011 and will likely continue to impact us for some time. However, the conservative strategic plan that Elco’s management established in the wake of the 2008 global economic downturn has provided a solid foundation. By continuing to streamline activities and better align our companies’ expenses with their income, the Group has been able to move with the market and achieve relative success, despite the challenging business environment. As elements of this long-term plan are beginning to come to fruition in 2012, Elco is on track for continued and amplified achievements across its operations.

In general, 2011 was a year of recovery for Elco. Throughout the year, we continued to reduce leverage, focused on generating healthier cash flows and where possible reduced risks associated with our portfolio holdings.

As in the previous year, 2011 was marked by mostly solid performances across our various business areas, with the exception of our Airwell holding. Although a considerably downsized production footprint and a new sales strategy together helped to ameliorate the situation, Airwell continued to be negatively impacted by the Euro crisis and the associated continuing slowdown in the residential and commercial air conditioning markets.

Total revenue for Elco Holdings in 2011 amounted to NIS 6,366 million, compared to NIS 6,341 million in the previous year. Likewise, gross profits rose slightly, totaling NIS 1,388 million in 2011, compared with NIS 1,309 in 2010.

We begin 2012 in a stronger position than we started 2011. Based on developments and results to date in this current year, we are proceeding with cautious optimism.

Electra Ltd.

Growing international footprint, record backlog, and high-profile contracts

Electra Ltd., our comprehensive business unit for property development, contracting, electromechanical systems and facility management services, posted strong results in 2011.

Electra is maintaining its position as Israel’s leading electromechanical contractor while evolving into an international facilities management and BOT projects company handling a broad range of buildings and projects. With operations in Israel and throughout Europe and a growing presence in Africa, the company’s footprint has grown significantly over the past year, with continued expansion in Africa projected for 2012 and beyond. Electra won several significant infrastructure contracts in Israel and abroad, and finished the year with a record backlog of NIS 4.17 billion.

Electra’s emphasis over the past two years on building its facilities management business is now beginning to bear fruit, with several major tender wins in 2011 and early 2012. Electra Facility Management (EFM) won several major tenders in 2011, including a contract to manage 200 branches of Bank Hapoalim. Electra is a 30% partner in a consortium with RAD Bynet and Minrav Holdings that in early 2012 won a BOT tender for a government center with 240,000 sqm of buildings, in the south of Israel. With a contract to operate the project for 25 years, the entire deal is worth approximately NIS 7 billion.

In 2011, Electra partnered with Canada Israel to develop a 164-unit residential tower, W Prime, in the prestigious Park Tzameret neighborhood of Tel Aviv. Electra, Eurocom and Canada Israel also jointly won a tender from the Tnuva dairy company to purchase a parcel of land in Tel Aviv for development into a combined residential and office complex. It also partnered with Electra Real Estate and others to construct a mixed use residential, commercial and office space project not far from W Prime.

During 2011, Electra achieved a net profit of NIS 129 million, a decrease of 14% compared to 2010, while revenues rose 5.5% in the same period. In spite of the uncertain environment both EBIT and EBITDA remained fairly stable.

Electra Consumer Products (1970) Ltd.

Expanded retail reach and strategic investments for future growth

Electra Consumer Products (ECP) maintained its leadership position in the Israeli consumer appliances market during 2011. Operating in a generally tumultuous market, ECP was affected both by the nationwide consumer protests and the slowdown in the economy’s growth. Lower revenues, of NIS 2,066 million compared with NIS 2,215 million in 2010, reflect the difficult macro conditions.

Following the shutdown of Airwell’s manufacturing facility in the city of Shenzhen, China, in 2011 ECP began purchasing its residential air conditioning products from alternative suppliers.

In 2011, ECP invested in several growth engines, incurring short-term expenses with a view to long-term benefits. It added a total of 5 new stores to its two electronic appliance retail chains and it became the Israeli representative for the Whirlpool line of appliances. ECP has since further expanded its retail reach through the acquisition from receivership of the nationwide ACE retail DIY chain, in April 2012.

In 2011, ECP expanded into the water purification market, launching the ElectraBar line of counter-top systems. The ElectraBar won a consumers’ choice Product of the Year for innovation award in a competition conducted by an international consumer products organization. An Electra residential air conditioning system won a similar prize.

Also in 2011, ECP acquired a 50% stake in a distributor of Daikin air-conditioning products in Israel, completing our product line in this market.

Electra Real Estate

Continuing caution

In 2011, Electra Real Estate (ERE) continued cautiously due to the ongoing difficult economic climate in Europe. In the face of continuing high vacancy rates, unemployment and significant refinancing challenges, ERE management focused on reducing debt and improving cash flow by selling assets that had realized their full investment potential.

Sales of properties in Tel Aviv and Raanana in Israel and in Winnipeg and Toronto in Canada generated a combined NIS 245 million in gross cash flow in 2011. Since the end of the year, ERE has sold properties in Norfolk, USA and Zurich Switzerland, bringing an additional gross cash flow of NIS 86 million. Part of a long-term plan, the asset reduction program is expected to run through at least 2013, in sync with the completion of several large-scale projects, such as Electra Tower and Sea One.

In terms of rental income, the high-yield mainstay of Electra’s business remained resilient over the year. With an 87% occupancy rate across its widespread international portfolio, the company proved once again that investing in top-tier urban properties that attract reliable, high-end and long-term tenants generates stable income even in challenging economic times.

Occupancy in Electra Tower, an environmentally friendly office tower in Tel Aviv’s downtown business district where leases were first closed in 2010, continued to rise through 2011 and has now reached 94%.

Losses were NIS 55 million compared with a gain of NIS 3 million in 2010. Shareholder equity is currently at NIS 871 million. By year’s end, ERE’s assets included 87 income-producing properties, spanning some 900,000 square meters.

Elco Landmark Residential:

Increasing in size and yields

2011 marked another strong year for Elco Landmark Residential (ELR), our realty investment arm in the multi-family unit rental market in the Southeastern US. Since we acquired a 90% holding in 2008, ELR has stuck to its fundamental strategic model of purchasing underperforming residential complexes at attractive prices, renovating them and increasing the levels of occupancy, all done under the direct management of ELR.

Over the past year and continuing into 2012, ELR has been successfully riding the tailwind of the overall strong multi-family housing market. Fewer new building starts, low interest rates, greater difficulty in getting mortgages, and Generation Y’ers entering the housing market are all contributing factors that make ELR’s market strong, with high occupancy and rising rental prices.

In 2011, ELR’s net operating income rose 13% over the previous year. Its portfolio grew from 8,300 units at the start of the year to 12,100 units at year-end, with 95% occupancy. As of today, the total number of units fully and partially owned by ELR has risen to 13,000. ELR’s management company manages all the ELR owned (fully or partially) assets as well as an additional 5,000 units under contract with third-party owners bringing tangible operational benefits of scale.

ELR’s proven success at identifying buildings primed for purchase and efficiently turning them into reliable income generators has attracted additional investors. Since 2009 outside investment in ELR multi-family property acquisitions has enabled the company to rapidly expand its portfolio. During 2011, the amount of external investment in ELR properties more than doubled, rising from $38 million to $96 million.

Airwell Air Conditioning

Strategic divestures

Airwell continued to struggle as the economic crisis deepened across Europe and residential construction and air conditioning sales continued their decline. Although Airwell’s results were better than the previous year, the company ended 2011 with a loss of €14 million.

A multi-year strategic plan to downsize the business is being implemented. Over the past two years, the number of production facilities was reduced from five to our current two factories in France. Since the beginning of 2012 we have divested two production facilities, the first being our Chiller factory in Barlassina, Italy, and the second our residential air-conditioning  production facility in China.

Revenues from the sale of 70% of our manufacturing facility in China’s Shenzhen were realized in 2011 as part of a real estate development project. Elco retains a 30% interest in the property, which will hopefully appreciate in value over time with  better economic use of the land.

In January 2011, following the shutdown of the Shenzhen factory, we established a new company, Airwell Taicang (ATC) as part of a 67%-33% joint venture with the local government-owned development company of Taicang, a port city strategically situated near Shanghai. In April 2012, Hong Leong Asia, a strong Southeast Asia conglomerate based in Singapore, acquired a majority stake in ATC with Elco as a minority partner. We expect that with Hong Leong Asia at the helm, ATC will grow significantly faster.

As of the end of February 2012, in compliance with regulatory corporate governance requirements, I no longer serve as Chairman of the Board. At this opportunity, I would like to thank our shareholders for the trust they have shown in me over the past 25 years. I remain an active Director and continue to work with the Board to help steer Elco Holdings for continued success.  

As always, I wish to also express my gratitude to the dedicated managers and employees who are key to driving Elco’s diversified businesses forward.

Sincerely yours,

Georg Salkind

Founder and Director, Elco Holdings Ltd.