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CP executives hitting the road to defend their strategy

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Canadian Pacific Railway Ltd.'s (CP-T) directors and executives will embark on a road show this week in hopes of persuading institutional investors to back CP's efficiency strategy and shun activist investor Bill Ackman's push for a new chief executive officer.

In a letter to employees, CP CEO Fred Green said the Calgary-based railway has a solid plan in place to reduce its operating ratio, a key indicator of productivity that measures costs as a percentage of revenue.

"Starting this week, members of our board and management team are going on the road to meet with investors and discuss the significant progress we made against our multiyear plan," Green said. "In these meetings, we will explain our detailed plan to bring CP's operating ratio down to 70 to 72 percent for 2014."

A lower operating ratio is better, but CP posted a ratio of 81.3 percent last year, lagging rival Canadian National Railway Co.'s (CNR-T) industry-leading 63.5 percent.

In a 23-page slide presentation to be unveiled to institutional shareholders, CP explains that it plans to chop at least 9.3 percentage points over the next three years from its operating ratio by moving more cargo, charging higher freight rates, strengthening its fuel-surcharge program and reducing costs. Headwinds, however, include CP's defined benefit pensions, depreciation from capital investment and investments in information technology.

Ackman, CEO of New York-based hedge fund Pershing Square Capital Management LP, is seeking to replace Green with Hunter Harrison, who retired as CN's CEO at the end of 2009.

Pershing Square is proposing to elect a minority slate of five alternative directors at CP's annual meeting on May 17 in Calgary: Ackman and his Pershing Square colleague Paul Hilal, corporate restructuring specialist Gary Colter, former Onex Corp. executive Anthony Melman and Just Energy Group Inc. executive chairwoman Rebecca MacDonald.

Harrison and the five director-nominees, who will be in Toronto next Monday for Pershing Square's town hall for CP investors, believe CP's operating ratio can be chopped to 65 per cent by 2015.

Pershing Square, CP's largest shareholder, began acquiring CP stock last September and now owns a 14.2-per-cent stake. On Monday, the hedge fund mounted another offensive through a new website called www.CPRising.ca.

Green kept a low profile in the weeks after Pershing Square disclosed its CP investment in late October. But he has now written two memos to employees in the past two weeks to defend CP's efficiency drive.

After $1.1 billion in capital spending last year, CP is budgeting up to $1.2-billion in capital expenditures in each of 2012, 2013 and 2014. The multiyear investment includes upgrades to CP's Edmonton-to-Winnipeg route, new locomotives and improvements to the main line that carries coal to the Port of Vancouver.

The slide presentation defends CP's 15 directors, saying they have the experience required to help guide the railway through its recovery plans.

CP argues that there is a "deep understanding of the business for the eight independent directors that have served over 5-10 years" and "fresh perspectives from the six new external directors in the last four years -- overall average tenure just over five years." Green also serves on the railway's board.

The company emphasizes that it already has its own turnaround strategy, one that began in 2011.

CP's "board fully endorses the multiyear plan and Fred Green and the management team to implement this plan," according to the presentation, adding that once CP achieves an operating ratio that averages between 70 percent and 72 percent for 2014, "we won't stop there."

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