Canopy CEO Ouster Shows Pressure Is Mounting for Pot Profits

(Bloomberg) -- To understand why Bruce Linton was fired as head of Canopy Growth Corp., look to the earnings conference call last month.

Linton was on the defensive as he kicked off the call, after reporting numbers that missed estimates. He told analysts it takes time to turn a profit when you're running the biggest cannabis company in the world.

“We could have stayed there and we would have been a nice tidy little company, probably quite profitable,” he said, referring to the early days before Canopy attracted the $4 billion investment from alcohol giant Constellation Brands Inc. that changed everything. “You need to use that capital to build scale, and we did.”

On the same call, interim Chief Financial Officer Mike Lee, who joined Canopy from Constellation in May, struck a different tone.

“As successful as we've been, we need to continue to challenge ourselves as a company to build out our success,” Lee said, adding that he was focused on improving margins and getting Canopy's Canadian operations to profitability.

Those contrasting views on the path to profit help explain why Linton was unexpectedly ousted Wednesday, less than a year after Constellation made its $4 billion investment. His departure is the latest example of the growing pressure facing pot companies to do more than market themselves and boost their share price. They need to start thinking about making money.

“There was an un-alignment between the Canopy Growth board and Bruce, and obviously that reached a point where the board felt it couldn't continue,” Mark Zekulin, who was co-CEO with Linton and became sole CEO with his ouster, said in a phone interview.

Read more: Canopy's Bruce Linton is Your Friendly Canadian Weed CEO

Linton's departure is “surprising but not shocking” and represents a broader maturation of the pot industry, said investment banker Neil Selfe, founder and CEO of Infor Financial Group Inc., who has led several fundraising rounds for Canopy and has known Linton since the mid-1990s.

“Investors are starting to focus on real profitability metrics and cash flow as opposed to forecasted revenue,” Selfe said in a phone interview. “There's no doubt that as the industry matures there's a different skill set that is required. Some CEOs have that, some don't.”

Constellation's Pick

While Selfe believes Linton had what it took to guide Canopy to profitability, “it's a natural evolution for Constellation to want to bring in somebody of their choosing,” he said. Constellation owns just under 40% of Canopy and holds a majority of its board seats.

Investors took the firing in stride. After falling as much as 5% in early trading, the stock closed 2.5% higher in New York, lifting Canopy's market value to $14.1 billion.

Canopy, founded in 2013, isn't the first large cannabis company to replace its founders with more seasoned management. Former Aphria Inc. CEO Vic Neufeld was replaced by Hain Celestial Group Inc. founder Irwin Simon after short-seller allegations rocked the company. CannTrust Holdings Inc. and Organigram Holdings Inc. have also replaced their original CEOs. With little access to debt markets and limited cash flow, many pot companies went public much sooner than other startups because they needed the shares as currency to do deals and grow.

Linton's exit “is symbolic of a transition for the industry, from its entrepreneurial beginnings to its current opportunity in becoming a significant consumer-goods industry,” said Charles Taerk, CEO of Faircourt Asset Management, which runs the pot-focused Ninepoint Alternative Health Fund and has owned shares of Canopy for about two years.

The latest quarterly results were “the straw that broke the camel's back,” especially now that some other companies in the industry like Organigram have demonstrated they can be profitable, Taerk said. “Now investors are starting to judge the companies a little differently. They're starting to say, ‘Wait a second, how are they profitable and you're so far from profitable?”'

Visible Returns

Canopy lost C$98 million before interest, taxes, depreciation and amortization in its fiscal fourth quarter. It also reported an adjusted gross margin of 16%, down from 43% in the first quarter.

Zekulin said he doesn't plan to stay on after Linton's replacement is found.

“I think it's time to open the tent wide open. There will be great internal candidates and there will be great external candidates,” he said. “I'm committed to being here long enough to make sure everything goes well and we have a smooth transition.”

It's likely Linton won't be the last pot CEO forced out by increasingly impatient shareholders, said Greg Taylor, chief investment officer at Purpose Investments Inc. and manager of the Purpose Marijuana Opportunities Fund, which holds Canopy.

“It is a consumer products industry at the end of the day and we've had a lot of guys that are really stock promoters running these companies,” Taylor said. “A lot of the CEOs are now going to be under the gun to deliver numbers or face something similar.”

Linton, 52, was the face of Canopy and arguably of the global cannabis industry, appearing at conferences and events ranging from the World Economic Forum in Davos, Switzerland to CAGNY, the annual gathering of the food and beverage industry in Boca Raton, Florida.

Even with the hasty firing, Linton has no plans to slow down. He steps aside with Canopy shares worth more than $700 million and expects to work on some tech startups and possibly cannabis companies outside Canada.

“I don't plan to retire today,” he said in an interview with BNN Bloomberg TV. “I suspect if I wanted to be chairman or CEO of a variety of companies around the globe, there's a bunch looking.”

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, David Scanlan, Steven Frank

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