Alimentation Couche-Tard Inc

TSX:ATD

Good morning. My name is Joelle, and I will be your conference operator today. [Foreign Language] I will now introduce Mr. Mathieu Brunet, Vice President, Investor Relations and Treasury at Alimentation Couche-Tard. [Foreign Language]

English will follow. [Foreign Language] Good morning. I would like to welcome everyone to this web conference presenting Alimentation Couche-Tard's financial results for the third quarter of fiscal year 2025. [Operator Instructions] We would like to remind everyone that this webcast presentation will be available on our website for a 90-day period.

Also, please remember that some of the issues discussed during this webcast might be forward-looking statements, which are provided by the corporation with its usual caveats. These caveats or risks and uncertainties are outlined in our financial reporting. Therefore, our future results could differ from the information discussed today. Our financial results will be presented by Mr. Alex Miller, President and Chief Executive Officer; and Mr. Filipe Da Silva, Chief Financial Officer. Alex, you may begin your conference.

Thank you, Mathieu. Good morning, everyone, and thank you for joining us for our presentation of our third quarter results. We are pleased to report positive improvements in the business this quarter. While consumers continue to be cautious in their spending, we are seeing encouraging signs of resilience.

Same-store sales were positive in both Canada and Europe compared to the same quarter last year, and we had sequential improvement in the United States impacted by historic winter storms in our Southern business units. Food continued to grow in the U.S. as our meal deal promotions performed well and have been extended to Canada. In our fuel business, we are maintaining market share in the United States and margins aligned with trends seen in recent quarters.

As inflationary pressure persists, our #1 priority is winning our customers by being ready with the products and services they want at compelling value. Later in this presentation, I will go into more detail on these initiatives as well as on our convenience and mobility results. However, before I do so, I will touch on 2 notable areas of the quarter. Our global efforts to grow the network, both through M&A and organically as well as the impact of the devastating wildfires in Los Angeles and unparalleled winter storms in the southern parts of the U.S.

I want to begin by briefly mentioning our ongoing commitment to acquire Seven & i Holdings. No doubt, you have seen our most recent press releases, giving clarity to our proposal for combination with Seven & i as well as accounts of our visit to Japan last week. For many years, we have firmly believed that there is a unique strategic fit between Couche-Tard and Seven & i and that we can achieve significantly more together than each of our companies can achieve individually, including accelerating the global growth of the iconic 7-Eleven brand and strengthening the Seven & i business in many parts of the world.

We also firmly believe that a combination provides an opportunity for shareholders and stakeholders of both companies to realize significant value. We have reiterated several times over the past few months that we intend to be friendly and persistent in pursuing a transaction, which we believe is in the best interest of all stakeholders. We have done that in the face of significant frustration and distraction. We look forward to fulsome engagement with Seven & i so that we can reach definitive terms and move forward with the transaction that is in the best interest of all stakeholders. It is worth noting that while there has been extensive media coverage Internally, a very small team is involved in our efforts concerning Seven & i as the vast majority of the business is laser-focused on our global operations.

Moving to Europe. This quarter, we reached our 1-year anniversary of acquiring certain assets from TotalEnergies and almost doubling our size in Europe by expanding to 4 new countries. With the 1-year mark, I'm happy to report that we are now reporting synergies from the transaction, which are on track with our expectations, Filipe will cover in more details in his presentation.

We are truly proud of how the new team members have embraced our culture, values and customer-focused approach to retail operations. We continue to see strong progress with store rebranding, both on the physical store layout as well as with product assortment and EV charging dispensers. While discussing M&A, let me briefly mention the good progress we are making with get-go, which we expect to close in the first half of calendar 2025. As we have always done with all of our acquisitions, we have identified local management to lead the business as they know best how to serve local customers. We also continue to be excited about our learning from get-go's extremely popular food and loyalty programs and dedicated team members. In organic growth, we continue to make progress on our 500 new store effort. We've opened 39 stores in Q3, 69 year-to-date and we are on track to open over 100 in North America this fiscal year.

Our recent new stores include dozens of high-speed diesel and rural locations. As of today, we have more than 56 stores currently under construction and about 1,000 sites in our overall real estate development pipeline. The second point I want to acknowledge is the heroic work of our teams in our West Coast business unit to support and serve their communities during the catastrophic wildfires in Los Angeles in January.

While we had a few stores impacted, team members showed incredible courage and dedication by getting out to our locations to provide essential supplies to customers, free beverages and replenishment to first responders. We also had a successful Fuel Day fundraiser from which with the support of our global franchise team, we donated USD 100,000 to the American Red Cross for their continued relief work in the region.

Also in January in the U.S., our Southern business units endured a historic winter storm that in a region completely unaccustomed to accumulation of snow and ice caused widespread power outage and left millions grappling with hazardous road conditions and freezing temperatures. As always, our teams kept stores opened and offered the services and products needed by our customers.

Now let me get back to our quarterly results, starting with convenience. Compared to the same quarter last year, same-store merchandise revenues decreased by 0.1% in the United States increased by 0.2% in Europe and other regions and by 2.8% in Canada. While we had sequential improvement in the U.S. our same-store sales performance was negatively impacted by those winter storms, and Filipe will provide more details on this.

Again, this quarter, as challenging inflationary conditions persisted, we have been relentlessly focused on winning our customers by providing compelling value on products and services. Following our successful launch of meal deals in the U.S. in January, we expanded the line offer across Canada by bundling popular food items, a value pack price to create a satisfying and affordable meal option.

Across North America, we are now at nearly 465,000 meal deals being sold on a weekly basis, and that number is growing materially every week. Our win in food strategy continues to progress with over 5,890 fresh food fast stores opened globally. We recently appointed a new Senior Vice President for Global Food and Marketing. Mette Uglebjerg, who is bringing her decades of experience in our popular European food program to our global operation. Under her leadership and listening closely to customer feedback and data we are focusing now more than ever on value, consistency and having the right products available at the right time.

Turning to our loyalty membership programs. In the U.S., Inner Circle registrations and full enrollments are up 13% from the previous quarter, and we are closing in on 10 million members. We continue doubling down on our personalization efforts, and the team is working on implementing new capabilities to tailor our offers and content to different segments of customers. EasyPay and Inner Circle were successfully linked this quarter, allowing customers a more frictionless, single card experience at both our pumps and in our stores.

We are pleased with the large number of customers already taking advantage of this benefit, unlocking increased personalized value. In Europe, the number of active extra members continues to grow with 1 out of every 2 fuel transactions and nearly 1 out of every 3 merchandising transactions coming from Extra members. We successfully rolled out our new Extra 2.0 loyalty concept in Sweden and are working to expand it to additional European business units later this calendar year.

The new concept is designed to offer rewards across all products and services at our sites whether a customer is looking to fill up with fuel, charge an electric vehicle or grab a snack. This is the first time we have brought our entire offering under one loyalty value proposition and we are seeing a lift in both traffic and increased value per extra member. In our goal of owning thirst, we are excited about our many exclusive product launches in the U.S. including CELSIUS Watermelon Ice during the quarter and our first [ Go's ] brand exclusive this month.

Looking towards the summer, we will have our second Gatorade exclusive cold and frozen dispensed beverages in the U.S. continued impressive double-digit unit growth with margins beginning to normalize following the completion of our summer traffic campaign. In the adult beverage category, it is worth calling out Central Canada business unit's excellence performance in the beer space. Last quarter, following a change in legislation in Ontario, Canada's largest market, we've been able to offer a selection of beer, cider, wine and ready-to-drink alcoholic beverages in our nearly 600 eligible stores. The response has been overwhelming with customers thrilled about the added convenience, wider selection and competitive pricing.

Now close to 50% of beer sales, both in dollars and unit share for the entire country comes from our Central Canada business unit, which also has the highest percentage of sales coming from beer in our entire global network. In the U.S., the overall nicotine performance was slightly negative as lower demand for cigarettes was partially offset by the growth in other nicotine products. However, we continue to outperform the market due to our efforts around price optimization, assortment expansion and the continuation of personalization programs for our age verified customers.

In Europe, we had a strong performance in nicotine products, with growth of OTPs especially e-cigarettes and increased tobacco cigarette sales in the Netherlands, which has new legislations favorable to our industry.

Moving to our fuel business. Same-store road transportation fuel volumes decreased by 3% in the United States by 0.9% in Europe and other regions while it increased by 3.6% in Canada. As I mentioned earlier, we are maintaining market share in the United States and margins aligned with the trends of recent quarters as we continue to work on building value from our fuel supply chain and serving our customers through lower cost sourcing options.

Our Europe B2B fuel business has demonstrated resilience this quarter delivering solid income despite experienced volume volatility across markets. Growing nonfuel income remains a strategic priority for our European B2B and B2B transit charging volumes grew steadily, up 70% year-over-year, contributing approximately 50% of transit charging in our Nordic countries. B2B fuel share in the U.S. continues to grow quarter-over-quarter as we develop customer relationships with fleets of all sizes and implement new strategic partnerships. Our U.S. B2B customers see great value in our ability to offer consistency across the entirety of our network to serve their businesses and provide a great experience for their drivers.

As for our truck segment, we are seeing positive momentum, especially in the Northern United States. We also have nearly 200,000 B2B customers as members of the Inner Circle loyalty program receiving personal rewards for commercial fueling. Our EV fast charging network in Europe now consists of nearly 3,300 charge points in our new mid-European business units, all EV chargers have been rebranded. Perhaps our most exciting recent development in e-mobility has been the opening of our biggest charging hub in Sweden. The site features 26 high-power chargers for both passenger cars and heavy vehicles. It has solar-powered energy integrated into the station's design and a new forecourt concept with drive-thru layout for seamless and efficient charging.

Before I turn the call over to Filipe, I want to mention our positive development and employee retention and engagement. First, I'm very proud of our continuous improvement in bringing down store turnover and increasing new higher retention across the network. We are now at levels that were once hard to imagine and significantly outperformed the industry. We were also just awarded for the fourth consecutive year, the Gallup Exceptional Workplace Award. For me, there is nothing more important than protecting and promoting the strong One Team culture we have at Couche-Tard. We will continue to build on this momentum of engagement and retention ensuring our workplace remains one where our team members can grow and thrive while living our values and embracing our mission to make our customers' lives a little easier every day.

With that, let me turn it over to Filipe to dive deeper into our financial performance this quarter.

Thank you, Alex. Good morning, everyone. We delivered a notable progress this quarter with our most improved performance in over a year as we continue to navigate challenging consumer trends, particularly in the United States. Our results reflect a balanced mix of organic growth and acquisitions, demonstrating the strength of our globally diversified network, the success of our integration activities and our commitment to drive long-term sustainable growth. This quarter also marks the 1-year anniversary of the acquisition of certain assets from TotalEnergies, which is on track for synergy realization and continue to deliver solid results, thanks to the dedicated efforts of all of our team members.

It is important to note that for the overlapping period during the quarter, this acquisition delivered strong mid-single-digit same-store merchandise revenue growth, while same-store road transportation fuel volume were also positive. This further highlights our ability to integrate large acquisition and empower local management to drive results. With regards to synergy realization, so far, we have delivered approximately EUR 30 million on operating expenses as of February 2, 2025.

The synergies run rate is progressing according to plan and is still expected to reach EUR 120 million in fiscal 2027 and EUR 170 million in fiscal 2029. These synergies should result in reductions in operating, selling, administrative and general expenses as well as sales uplift from the introduction of our industry-leading best practices in operations, customer offerings and concepts. As Alex mentioned, our same-store performance in the U.S. was impacted by severe and unusual weather events, particularly in our Southern business units.

Excluding these disruptions, our same-store sales in the U.S. would have been positive as we estimate its impact at nearly 30 basis points. Similarly, same-store road transportation fuel volumes were estimated to have been impacted by approximately 70 basis points. Alex noted earlier that our European business saw positive performance across most categories with same-store sales increasing by 1.3%, excluding the contribution from the 4 new countries.

I also want to highlight that excluding the tobacco category in Hong Kong, the performance of this business unit on same-store sales would have been plus 5.6%, driven by promotional activities around Chinese New Year.

I will now go over some key figures for the quarter. For more details, please refer to our MD&A available on our website. For the third quarter of fiscal 2025 reported and adjusted net earnings attributable to shareholders of the corporation were approximately $641 million or $0.68 per share on a diluted basis representing an increase of 4.6% compared to the corresponding quarter of last year. Adjusted EBITDA for the third quarter of fiscal 2025 increased by just over $167 million or 11.3% compared with the corresponding quarter of fiscal 2024 mainly due to the higher road transportation fuel gross margin, the contribution from acquisitions, which amounted to approximately $104 million and organic growth in our convenience operations, partly offset by softness in fuel demand.

Now let's review detail each of our business segments on an FX-adjusted basis. During the third quarter, merchandise and service revenues increased by approximately $295 million of 5.9%, primarily attributable to the contribution from acquisitions, which amounted to approximately $248 million in organic growth. Merchandise and service gross profit increased by approximately $134 million or 7.8%. This is primarily attributable to the contribution from acquisitions, which amounted to approximately $89 million and improved the merchandise and service gross margin in the United States.

Our merchandise and service gross margin in the United States increased by 0.9% to 34%, sorry, from improved supply conditions while it decreased by 0.2% to 39% in Europe and other regions. In Canada, our merchandise and service gross margin decreased by 1.8% to 32.4%, reflecting a different product mix as new alcohol revenues have a lower margin rate than the other nicotine products that are no longer sold in our stores.

Moving on to the fuel side of our business. Our road transportation fuel gross margin was $0.4428 per gallon in the United States, an increase of $0.109 per gallon. In Europe and other regions, it was USD 0.929 per liter, an increase of USD 0.73 per liter. And in Canada, it was -- sorry, CAD 0.1354 per liter, an increase of CAD 0.55 per liter.

Fuel margins remain healthy throughout our network due to the continued work on the optimization of our supply chain and strong execution in our stores. In addition, fuel margins across Germany have normalized from the lower levels we experienced earlier this year, and we expect this trend to continue.

Now looking at SG&A for the third quarter of fiscal 2025. Normalized expenses increased by 2.6% year-over-year. This is primarily due to inflationary pressure and incremental investments supporting our strategic initiatives, more than offset by our continued effort under the Fit to Serve program. From a productivity standpoint, we continue to refine our cost structure and improve labor efficiency, reducing stores hour by over 2% across our regions, while U.S. store associates over time remains below 3%, outperforming prior year levels.

Within Fit to Serve, we are delivering additional savings by consolidating procurement for goods not for resale and expanding capabilities via our shared service center known as the global capability networks. Initially established to streamline accounting and finance operation, GCM is ramping up nicely, supporting multiple business verticals by centralizing customer care, facility management and back-office HR services.

Our goal is to achieve over $70 million savings over the next 5 years. At the same time, we're advancing technology ecosystem through strategic partners, ensuring we have the right expertise and solutions needed to accelerate our transformation and enhance service levels. By leveraging that analytics and scale Fit to Serve continue to drive cost savings that enable reinvestment in key technologies. One such technology is RELEX, an AI-driven system optimizing product placement, ordering and replenishment.

Following its success in Europe, we are now deploying RELEX in North America to enhance inventory management, reduce stockouts and minimize waste. Pilots will launch in August this year with a full-scale rollout plan for early 2026. Over the past 3 years, we have nearly doubled our technology investment, modernizing infrastructure, digitizing the customer experience and providing store associates with advanced tools. We have identified all the necessary cost reduction to achieve and potentially exceed our $800 million target, allowing us to operate more effectively and at a faster pace while maintaining the same level of output.

All these efforts align closely with our 10 for the Win strategy, reinforcing our ability to execute our long-term objectives. From a tax perspective, the income tax rate for the third quarter of fiscal 2025 was 21% compared with 22% for the corresponding quarter of fiscal 2024. The decrease is mainly stemming from the impact of a different mix in our earnings across the various jurisdictions in which we operate. As of February 2, 2025, we recorded a return on equity at 18.8%, and our return on capital employed stood at 12.3%.

During the fiscal year, our leverage ratio remained at 2.07%. We also had strong balance sheet liquidity with $1.7 billion in cash and an additional $3 billion available through our revolving unsecured operating credit facility.

Turning to the dividend. The Board of Directors declared yesterday a quarterly dividend of CAD 0.195 per share for the third quarter of fiscal 2025 to shareholders on record as of March 27, 2025, and approved its payment effective April 10, 2025.

Let me conclude by briefly highlighting a few key points. Our results reflect a balanced mix of organic growth and acquisition, demonstrating the strength of our globally diversified network and proven operating model. We continue to deliver on synergies and our ability to integrate large acquisition while empowering local management highlights the dedication of our team and the depth of our culture. We remain focused on disciplined growth, leveraging our strong balance sheet and strategic investments to create long-term sustainable value for our shareholders.

I thank you all for your attention. I will turn the call over again to our President and CEO, Alex Miller.

Thank you, Filipe, and I'll be brief to leave time to answer your questions. No doubt, we are living through uncertain times with many geopolitical and economic challenges across our global network. However, what is most important to me is that we stay relentlessly focused on winning our customers by providing compelling value and services and doing the right thing for them and our team members.

As we have done for the last 45 years, I remain confident that by relying on the values we live by, our long-term strategy, global scale and proven ability to successfully grow the network we will continue to move forward in our vision to become the world's preferred destination for convenience and mobility.

On that note, let's turn it over to the operator to answer analyst questions.

[Operator Instructions] Your first question comes from Irene Nattel with RBC Capital Markets.

Alex, you just said that we are living through uncertain times. So how should we be thinking about the evolution of the macro backdrop as we move through Q4, but also into F '26? And how are you positioned in your various geographies to continue to hopefully drive improving trends on a go-forward basis?

Thanks, Irene. I appreciate the question. Good to hear your voice. Certainly, Irene great deal of uncertainty out there for us right now. For us, we continue to see the consumer under pressure perhaps specifically in the United States, but really everywhere in our geographies. And what that means for us is just a relentless focus on our core initiatives focusing on food.

We've reduced our SKU count, focusing on execution, our meal bundles, focusing on our digital platforms. We've got some really exciting things coming up this quarter, specifically in the nicotine space that we'll be launching really controlling cost, Irene, cost and CapEx, we are going to be extraordinarily disciplined. I think we have a pretty strong track record of doing that. I think that's more important than ever in this environment. So I don't pretend to sit here and know what the future is going to hold. There's a lot of uncertainty out there for us. So we are going to focus on the things we can control continue to take market share and be very disciplined with our cost and capital.

That's great. And just as a follow-up, how should we be thinking about how are you trending Q4 to date without perhaps some of the weather distortions that we've seen in the U.S. And how confident are you that you can deliver positive gallons and inside store metrics in F '26.

I think we've seen a similar kind of trend so far in this quarter that we've been seeing. So kind of more of the same is what I would say. Again, without sounding like a broken record, Irene, it is focused on our activities. The things that we think will help us increase our market share, beat our competitors in the market and deliver that topside organic growth that we are looking to deliver, and I know you're looking for from us.

And 1 thing that I could add here, Irene, I think here is it's good to have a diversified geographic presence. And while it's true that we continue to see some challenging environment in U.S. We are very pleased by what we see in Canada and Europe. Canada with this welcome uplift coming from the alcohol category. And Europe is showing a very strong resilience. And we continue to see that in this quarter. So that's good. And again, it helped us to have this balanced portfolio actually.

Your next question comes from Michael Van Aelst with TD Cowen.

Trying to focus more on the acquisition side right now. I know there's headlines that Seven & i has signed a nondisclosure agreement this morning. And I'm curious on a few things. One, our report is accurate that it is just for the assets that would be part of a divestiture to appease the FTC. And then in addition to that, do you feel you're making progress with Seven & i towards a deal?

We have not signed a nondisclosure agreement with Seven & i. Our focus remains on a friendly approach on engaging with Seven & i, highlighting the benefits that we see to both groups of shareholders and all stakeholders understanding and exposing Couche-Tard to the Japanese public who we are, what we stand for, how we take care of communities and take care of people. That's where our focus is.

So the reports of an NDA this morning that seem to have been confirmed by Seven & i, that's -- they were talking about -- I believe they were talking about just the stores that you would have to sell to appease the FTC, but you're saying that you haven't signed anything and to your knowledge, they haven't either.

We are working with Seven & i. We have not disclosed, but we have not signed an NDA with Seven & i. We are working with Seven & i together around marketing package of what a divestment would look like in the United States. That marketing program has begun and there are NDAs being signed by potential buyers in that process.

Okay. That's helpful. And then on the M&A environment as a whole, can you talk a little bit about what that environment looks like in your key geographies? And how active you are on files other than Seven & i? And then, of course, what does that imply about your confidence in getting a deal done with Seven & i.

M&A remains active in our geographies. We continue to look at a number of things. There are some larger transactions in Europe that we continue to stay engaged on. We continue to see pretty heavy deal flow in the United States of all sizes, small, single sites, 10 sites, 100 sites. We continue to engage in that M&A activity as we always would. Our decentralized model enables us to look at a number of different opportunities with our local business teams and our small centralized team here in Laval and there's no change for us in activity, but activity remains robust. And I think with the continued macro challenges that we're seeing, I think we believe we can -- we'll continue to see that.

So doing those types of deals wouldn't preclude you from also pursuing Seven & i?

Today, we cannot discuss any file. We are completely engaged on this Seven & i conversation, as you know. But we don't know what will be the conclusion of this process. So for, I would say, our duty here is to make sure that we explore any file that come to our table. And if it makes sense for us and within our financial framework, we will take the decision that is the right for the company, for the shareholders. So that's I would say, our mindset.

Your next question comes from Mark Petrie with CIBC Capital Markets.

And thanks for the clarification on where you stand with Seven & i. I wanted to ask about the U.S. merch same-store sales performance and specifically across categories. You called out the meal deal promotion and growth in food. But hoping you can give some more color on the performance across your big categories.

And also, if you can quantify the impact of the regulatory changes in the Netherlands on that Europe 5% same-store sales number, that would be helpful.

How about I start with the Netherlands. So the Netherlands enacted legislation that basically disallowed the sale of cigarettes at grocery stores. That, of course, moved a lot of that demand, which was significant demand to other channels with our channel being a big beneficiary of that. Really pleased with our results in mid-Europe. I think this is the first time we had a month of same-store sales. We were positive 5%. The Netherlands is driving same-store sales in the mid-20%, that's largely being driven by cigarettes and the basket that comes with that cigarettes.

In the U.S. I referenced in my speaking notes that tobacco as a whole was negative for us. The cigarette declines. So overall, we were down about 1% in the U.S. in overall tobacco. Sigs down 2.5%, other tobacco or other nicotine up a little more than 3%, but net-net, down 1%.

Food continues to grow, up about 3% for the quarter. Packed bev continues to grow, and we do well in packed bev both. I referenced in my speaking notes that we're really doing well in hot and cold dispensed. We're growing those categories, growing margin in those categories. So they are certainly supporting us.

Your next question comes from Martin Landry with Stifel.

I was wondering if you could refresh us on what's the proportion of food as a total of your merchandise sales in the U.S.? And also if you could discuss your strategy using commissaries to supply your stores? Like how many commissaries do you have right now in the U.S.? And how many do you expect to add in the coming years?

Yes. Thanks. In North America, our food is about 12% of our mix. In Europe, it's 20%, 20% plus. And again, our goal -- our best business unit in the United States is about 20%, and our goal is to get for us as a company up to that 20% and higher. We have 1 commissary in the United States today. We are expanding both our warehouses, our own warehouses. We have 3 under construction today, and we plan to add commissaries in the future to supply our own products.

Your next question comes from Mark Carden with UBS.

So I wanted to get your early read on tariff impacts and the potential for reciprocal tariffs that could come into play in early April. And just how you're thinking about potential impacts on your margin structure? And potential plans to offset it.

Yes, thank you for the question. It's certainly a moving feast as we look to continue to analyze tariffs. I think we've done quite a bit of work -- and the core story, I think we're pretty confident in is that tariffs are not going to have a big impact to our business. We source most of our products in our countries, in those local countries in any tariff application if it was kind of -- it would be the same across all retailers for us to experience that. So we do not see a big impact from tariffs on our underlying business.

I think the larger impact is what it means for inflation and what it means for consumers that are already stretched and really struggling with disposable income. And that's kind of the big unknown that we'll be watching very closely. Yes, I just want to -- for us, it's uncertain times. And this is about bringing value, being really laser-focused on how we can provide value to customers. We are really pleased with our meal deals and our bundles, and we will continue to lean into that to show value to our customers in this environment.

Yes. And Yes. One other example is, again, the trend on the Pride brand. Pride brand is accretive to the box in U.S., in North America on a large extent. So that's also one of the drivers for us to continue to speak about value to our customers.

Your next question comes from Luke Hannan with Canaccord Genuity.

I wanted to ask about some of the changes to the beverage alcohol retail environment within Ontario. You mentioned the positive impact that you had that it had on your results. I just wanted a little bit of clarification. What are you seeing right now for the customer that is coming into the store for those beverage alcohol products? Are they coming in just to buy them are they typically including them as part of a larger basket? And then maybe as a follow-on to that, what exactly are you doing as far as either offers, bundled offers, et cetera, in order to make sure the net impact to you or to your merchandise margins isn't as dilutive as just selling the alcohol products itself?

Thanks for the question. I guess, our Central Canadian business unit, just the execution around the regulatory change in allowing beer and alcohol sales in Ontario. I just could not be more proud. We were ready. We executed straight out of the gate. We literally within the first week at all, but a handful of stores offering product. And that enabled us to take huge share out of the gate. So just a tremendous effort by Steve and our team in Central Canada.

We are learning. So we're learning around what mix to have, how much alcohol to have, how much packed bev to have. And so we will continue to optimize our sets in the space, and it's really exciting candidly for us. What we're seeing, and we're learning about the basket, we are seeing -- I think initially, we saw a lot of solo alcohol purchases. We are seeing that basket start to grow as we put adjacencies to the products the usual things you would expect to see with alcohol, chips, snacks, take home, chips, snacks, some energy drinks, some nicotine with those purchases.

But obviously, our goal is to continue to realize and grow that basket with these increased customers coming into our stores for beer and alcohol.

Your next question comes from Tamy Chen with BMO Capital Markets.

Mine is on the U.S. fuel business. The same-store sale volumes, the comp, I think even adjusted for your estimate of the weather impact, it was worse than your merchandise comp, and I think it was a sequential softening as well. So I'm just wondering if you can elaborate a bit more on that. Are you seeing any change in the competitive dynamics there? What sort of factors would you call out that led to that result?

Yes. Thanks for the question. I think what's happening right now is our geographic mix in the U.S. is hurting us a bit. Our largest states are Florida, Texas and Arizona. Think throughout the quarter, we've seen really heavy inflation in cost of living increases in Florida and Arizona.

As a result, we're seeing fewer snowbirds. I think we're seeing fewer Canadians head to the United States. I think we're seeing that in our Canadian volume. That's been a trend for a couple of years to be frank. And then with the administration change we are seeing softness along the southern border in specifically Texas and Arizona. So those are our 3 biggest states, our 3 largest volume states. They are suffering a bit due to those dynamics I just referenced.

If you look in the middle of the country, we're actually performing quite well. So I think these are near-term challenges and where our mix is hurting us a little bit at the total level. We think this too shall pass. And for us, we are focused on execution of Inner Circle, bringing in additional customers, getting more fills from those customers. We are focused on the deployment of our AI pricing tool that we will continue throughout this quarter and the next fiscal year. And we are doubling down on our growth in B2B in North America as we continue to add resource into those teams and to continue to grow that space of the business.

Your next question comes from Vishal Shreedhar with National Bank Financial.

With respect to the Canadian margin, the year-over-year in merchandising year-over-year weakness, can you help us understand to what extent that was due to the nicotine and to what extent that was due to the mix change associated with alcohol?

Yes. Thanks, Vishal, for the question. I would say the vast majority of this dilution that here is explained by 2 components. The first one is the alcohol category increase in Central, in Ontario. And the second one is the fact that we have to stop the selling of the Zonnic product in Canada that was a high-margin product. So those 2 impacts basically explain the dilution that you have seen in the margin in Canada compared to last year.

Could you help us understand the proportion of the impact from each?

So the -- basically, the one component related to the alcohol explain 60%, roughly 60% of the dilution. And after we have 40% coming from the nicotine one.

Your next question comes from Anthony Bonadio with Wells Fargo.

So I just wanted to ask about U.S. inside margins. That 90 bps of expansion looks like a pretty significant step change in the year-over-year trend from what you guys saw last quarter. I think you mentioned improved supply conditions. But can you just talk a little bit more about what drove that inflection? And then how you're thinking about the durability of that into Q4.

Yes. Thank you. I think I kind of signaled that I thought there was opportunity for us to expand margins. And I'm really pleased to see us kind of execute and deliver on that this quarter. We think there continues to be opportunity there. I think similar to our cost line, is it going to be vertical. It's going to trend up and down to a degree, but we believe that the overall trend should continue to improve. That is due to, as we continue to get better at our food program.

I referenced the rationalization of SKUs. We are focused on driving down spoilage and increasing our margin rates across our food areas. I think I talked last time about our data and analytics capability and how we're analyzing promotions, reducing the number of promotions that we're running. I think we will continue to do that, and we will continue to improve in that analytical capability. And we'll continue to use our global scale and apply our procurement teams with our vendors to try and improve our buying conditions.

And I think when you consider all of these factors coming together, I think we remain pretty bullish on the forward look to improve our merch margins.

Your next question comes from Bobby Griffin with Raymond James.

I just want to dive into the promotional environment here in the U.S. as we head into spring and summer. How do you look at that competitively? And kind of what are your plans around promotions given some of the consumer dynamics that were debating here in the U.S.

Yes. Thanks, Bobby. For us, it's about showing value. It's not more promotions. It's about reflecting value and value that customers perceive and that they recognize and that's going to drive them to come into our stores. So that certainly is on our food products and our meal bundles where I think I've shared previously that we are really hearing from customers. We're watching their behavior. They are seeing the value in what we're offering them for that meal occasion. We continue to grow those sequentially materially kind of week over week, and we will stay laser-focused on that.

We will -- again, the goal is not to run more promotions. It's to run effective promotions where consumers see real value, and we will use our data and analytics to determine what those things are.

I think lastly, I referenced nicotine and digital. It's really about using our data to personalize really understand customers where -- what are they purchasing from us, what is their purchasing behavior, giving them offers that matter to them that get them to come into our stores more and appreciate what we are doing for them, and we will increase the amount of personalization and offers we're making both in the nicotine space but across our Inner Circle in all of our categories.

Thank you for the detail. And best of luck here.

[Operator Instructions] Your next question comes from John Royall with JPMorgan.

So could you talk a little bit about private label and how that's been trending and the rollout of new products there, what's working and what isn't working? And what are you seeing in terms of the customer behavior? Are they still -- do they still have the propensity to trade down into that lower price point with private label? Or is that type of behavior starting to reverse at all?

Yes. On the private label, as I mentioned, yes, we continue to see customers looking for this category. We can talk about all what we have done in the past few months on the cigarette side. We have a really great story there, seeing nice growth there. But it's true and remains true across categories. Reality for us is that penetration is still low. And we have still a lot of opportunities there. So we recently appointed a new leader on this to take care of this category and to make sure that we continue to expand not only in terms of SKU, but making sure that we are present in the relevant category.

So -- because as Alex mentioned, the customer is looking and we continue to look for value. So yes, we see an opportunity across the -- I would say, the geography and across the categories for the next coming months. And we'll make sure that in terms of Pride brand, yes, we continue to expand the SKUs. We have the visibility of at least adding more of our 100 SKUs in the next coming months. So -- so yes, feeling pretty well about the program there and making sure that you will continue to increase penetration.

Your next question comes from Corey Tarlowe Jefferies.

Great. It's really nice to see the momentum in the U.S. merchandise business, specifically around the meal deals. And I know you've expanded it into Canada. I just wanted to ask how you think about further building upon this and where you think the opportunity could be, just specifically as it relates to really driving value with food and fresh food specifically in the U.S. and Canada and globally because that really does seem like a great opportunity for the business as we look ahead.

Thank you. We agree with you. We think it's a tremendous opportunity. And we under SKU, as we've shared with you around our percentages. Our focus today is in North America, we have validated that we have a specific number of SKUs that our customers want to purchase from us. Our focus right now is executing on that program and those SKUs and really targeting our existing customers.

We have hundreds and many stores, we have more than 1,000 customers visiting us every day. All of those customers eat. And our focus is on execution of these core products that we have proven our customers want in demand. I think we will execute that. We will see execution of that. And then we will localize different taste profiles in different geographies. That's true here in Canada. It's also true in the United States. I think we've got to earn the right of execution of the core, then we will localize products to continue to grow our share. That's our plan.

We're going to start with our existing customers. Once we feel like we're good at that, we will expand and start to look to attract new customers.

Great. And then just curious on -- as you think about your sourcing abilities and your -- the opportunity to continue to lower costs, what inning would you say that you're in as you think about the opportunity to continue to lower costs for the business around sourcing capability because that continues to be an opportunity. And obviously, we saw some upside versus consensus on some of the fuel margin numbers. So I'm curious how you think about the continued opportunity in that regard as well as we continue to look ahead.

Yes. I think our global fuel team is certainly more than a decade on their journey. I think we feel really strong about that team, their capabilities. We continue to expand our capability of our Geneva team and our team with Musket down in Houston. I think yes, we will continue to make investments in those relationships. We will continue to advance our ability to realize arbitrage using our own trucking fleet. About half of our gallons in the U.S. are provided by our own trucking fleet. That fleet enables us to capture arbitrage when it exists.

So I think the fuel journey, we feel great about. I think we outperformed OPUS by about $0.03, again, this quarter, and there's still lacks volatility. We will continue to invest in that.

On the merch side, we've had a central globalized procurement team, again, for more than a decade. I think we're making investments into that team. I think there's quite a bit of capability. We're really focused on kind of stepping up our activity in goods not for resale right now, fleet-based kind of owns that and has a team of people. We see a lot of opportunity there. That's part of our Fit to Serve and some of the cost savings we referenced.

I think then more on the merch COGS side, so in fuel, I would say we're in inning 7. If you're talking baseball, which I assume you are. I'd say on the procurement side, we're in inning 5 or 6, and we'll continue to advance, especially GNFR. I think on the merch supply chain, we are going to go deeper into the supply chain here in North America. And I would say we're in inning 1 or 2. We own 3 of our own warehouses today. We have 1 in Texas, 1 in Arizona and 1 here in Montreal. I referenced we're -- we have 3 more under construction right now. We have a plan to really be able to service, call it roughly 75% of our own sites through our own warehouses.

We like what this does for us, both from a COGS perspective as well as an assortment perspective. And per the question earlier, we will be adding additional commissaries besides some of these warehouses to improve our cost of goods in our assortment as we continue to grow food.

There are no further questions at this time. I will now turn the call over to Mathieu for closing remarks.

Thank you, Alex and Filipe. That covers all the questions for today's call. Thank you all for joining us. We wish you a great day and look forward to discussing our fourth quarter 2025 results in June. [Foreign Language]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.