Chief Executive’s Review

Against the backdrop of continued turbulence in connection with the global pandemic, 2021 provided the opportunity to demonstrate the strength of the Melrose “Buy, Improve, Sell” model from a sustainability perspective, whilst still delivering above average returns for shareholders.

Over the course of the year, we sold approximately 20% of the Group. Except for Ergotron, all the businesses from the Nortek acquisition were also sold during the year, putting the Company on track to double shareholders’ investment in that acquisition. Under our ownership, operating margins of these businesses were approximately doubled while we invested heavily in their transformation.

We converted Nortek Control into a technology business through a mix of organic and acquisition actions, while we refocused and completely revitalised the product portfolio of Broan Nutone that reawakened a sleeping giant previously drifting into decline. Most notably, we were instrumental in Nortek Air Management developing and commercialising the revolutionary Statepoint Liquid Cooling technology, capable of delivering 90% water and 30% energy savings for cooling systems servicing the booming data centre market – which quickly became a clear benchmark for the industry. As a result, Nortek Air Management enjoys an enviable and growing order book and customer list that includes all the key global technology companies.

These are examples of the strong targeted investments we make in businesses under own ownership during the “Improve” phase. We are well progressed in this phase for the GKN businesses, having invested over £300m in climate-related research and development over the past two years.

GKN Automotive is also seeing major benefits from the accelerating transition to electric vehicles, and is converting its decades’ long experience in the sector into significant wins on e-Drive platforms for both its 3-in-1 solutions and core sideshaft products for electric vehicles. It was a busy year for production launches and included the award of the first fully outsourced 3-in-1 system for a major German manufacturer. Excluding China, GKN Automotive is now a supplier on seven of the top ten global electric vehicle platforms(1) and has an order book that is matching the market in the shift to electric vehicles.

In 2021, we continued to deliver on our promise to improve our businesses’ longerterm financial and operational performance, while delivering against our four overarching sustainability principles.

Divisional sustainability highlights for 2021

Looking at the largest businesses in the Group:

• GKN Aerospace’s network of Global Technology Centres are a key enabler for Melrose investment into the development of decarbonising technology, like the H2GEAR hydrogen propulsion system and the creation of the first prototype of emission free aircraft such as the Eviation Alice. 
• GKN Automotive saw major benefits from the accelerating transition to electric vehicles in 2021, and is converting its decades’ long experience in the sector into significant wins on e-Drive platforms for both its 3-in-1 solutions and core sideshaft products for electric vehicles. 
• As highlighted in its capital markets day in May 2021, GKN Powder Metallurgy has better clarity on its electric vehicles transition strategy, which is well on the way to execution. It has exited some low margin ICE business and is developing a number of exciting opportunities for e-motors and magnet technology for electric vehicles.
• GKN Hydrogen has been separated from GKN Powder Metallurgy and launched as a standalone business, focusing on commercialising proprietary metal hydride technology to store hydrogen in a safe, compact and green manner.

Further details for each business are included in the Divisional overview on pages 10 to 13 of the 2021 Sustainability Report.

Key 2021 sustainability milestones 

• Reducing the Group’s total absolute Scope 1 and Scope 2 GHG emissions (-14%), energy consumption (-6%) and water withdrawal (-8%). Intensity ratios increased, reflective of the disposals of Nortek Air Management, Brush and Nortek Control during the period. However, we remain on track to meet our targets
• Achieving and maintaining Board gender diversity of 42% female representation (+12%), and achieving the Parker Review target of having one director on the Board from an ethnic minority background. 
• Introducing Group-level sustainability targets and commitments set through extensive consultation with our businesses. Our targets and commitments aim to reduce the environmental impacts of all aspects of our businesses – driving sustainable management of our input resources, improving operational efficiency, and minimising the impact of their inputs and outputs, as well as ensuring a safe working environment for all. Each of our businesses are at a different stage of their respective strategic sustainability improvement journey, and they are at different points in their Melrose ownership. By the very nature of our “Buy, Improve, Sell” strategy, our Group sustainability performance will fluctuate during our investment cycle as we acquire new businesses in need of improvement, and sell businesses that we have improved. These differences among our businesses, and the unique nature of our business model, have been assessed and considered in setting the parameters of the Melrose Group sustainability targets and commitments. 
• Elevating the importance and prominence of Water and Responsible Sourcing across the Group as material group sustainability topics. Both topics will receive greater focus during 2022 and beyond. 
• Improving disclosure through engagement and action resulting in significant improvement in stakeholder awareness. Throughout the year we undertook a major programme of engagement with key ESG benchmarking organisations that our investors rely upon.In October 2021, we received our revised ESG scores from MSCI and Sustainalytics, which both demonstrated notable improvements and highlighted the Group’s increased management focus and delivery of improvement actions to mitigate the impact of sustainability risks. The scores provide a snapshot as at 31 December 2020, meaning that the considerable improvements made throughout 2021 will be reflected next year. 
• Continuous bolstering of our Group sustainability governance framework through the formal compilation of our key environmental and human commitments, within our inaugural Group Environmental and Human Rights policies. In addition, in July 2021 we submitted our inaugural CDP Climate Change questionnaire for which we scored a C rating, which reflects our performance as at 31 December 2020. Our CDP submission enabled us to support a number of our customers by supplying emissions data to enhance their Scope 3 emissions reporting. We look forward to building on this in 2022 and broadening the scope of our engagement with, and submissions to, CDP. 
• Aligning with non-financial reporting frameworks. As a UK premium listed company, Melrose complies with the requirements of the new Listing Rule on climate-related disclosures, reporting against all the key areas recommended by the Task Force on Climate-related Financial Disclosures (“TCFD”). During the second half of 2021, the Melrose senior management team worked with Ernst & Young and the divisional sustainability leaders to carry out a qualitative climate scenario analysis exercise to identify high-level exposure to climate change. Our TCFD disclosures can be found in the Annex of our Sustainability Report. To further enhance the transparency of our non-financial reporting, we have provided additional disclosure on our sustainability performance in line with the Sustainability Accounting Standards Board (“SASB”) requirements for Aerospace and Defence and Auto Parts sector standards, which are referred to in the Annex of our Sustainability Report on pages 56 to 57. 
• Setting business-level sustainability strategies following the establishment and subsequent implementation and embedding of our Group sustainability principles aligned with the UN Sustainable Development Goals in 2020. During 2021, we kick-started our businesses’ formulation of their own sustainability strategies, in pursuit of our Group material sustainability issues, targets and commitments. Their strategies are set in alignment with our Group strategy, and sensitive to the context, needs and priorities of their respective sectors. In line with our decentralised business model, we empower and shape the foundations of our businesses to support sustainability improvements that they can carry forward responsibly and proactively after they inevitably leave the Group, in line with our “Buy, Improve, Sell” strategy.

Simon Peckham
Chief Executive
3 April 2022