International Game Technology PLC

NYSE:IGT

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the International Game Technology Third Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the conference over to James Hurley, Senior Vice President of Investor Relations. You may begin.

[James Hurley, executive]

Thank you, and thank you all for joining us on IGT's Third Quarter 2024 Conference Call, which is hosted by Vince Sadusky, our Chief Executive Officer; and Max Chiara, our Chief Financial Officer. After some prepared remarks, Vince and Max will be available for your questions. We are presenting from multiple locations this morning, so please bear with us if we encounter any technical difficulties.

During today's call, we will be making some forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. The principal risks and uncertainties that could cause our results to differ materially from our current expectations are detailed in our latest earnings release and in our SEC filings.

During this call, we will discuss certain non-GAAP financial measures. You'll find additional disclosures regarding these non-GAAP measures, including reconciliations with comparable GAAP measures in our press release, the slides accompanying this webcast and our filings with the SEC, each of which is posted on our Investor Relations website.

And now I'll turn the call over to Vince.

[Vincent Sadusky, executive]

Thank you, Jim, and hello to everyone on the call. Our Q3 and year-to-date results highlight the scale and attractive margin structure of our business. We generated revenue of $1.9 billion in the first 9 months of the year, driven by sustained growth in Italy and improved Q3 trends for instant ticket and draw games in the U.S. That translated into solid profit margins and cash flow, including adjusted EBITDA of $880 million for the first 9 months of the year with a margin of 47.3%. This is the first time we've reported continuing ops, which includes our lottery corporate functions as a result of the announced transaction to sell the gaming and digital business to Apollo.

Some key observations include continuing operations generated 2/3 of the $725 million year-to-date cash flow from operations and over 85% of the $445 million of consolidated free cash flow. The results highlight the solid financial performance and scale of our lottery business. Although the sale of our gaming digital business to Apollo is expected to close by the end of the third quarter of 2025. We are already taking significant steps to optimize the organizational structure of our lottery corporate functions with the launch of OPTIMA 3.0.

The goal is to rightsize costs by realigning and optimizing general and administrative activities while supporting key long-term growth objectives and without sacrificing our superior customer service standards. In fact, we are reallocating resources and investing in new talent to support key areas such as iLottery, instant ticket printing, international sales development and field services. Our lottery industry leadership is evident in the scale of our operations. In the first 9 months of the year, our systems have processed nearly 80 billion modern [indiscernible] under our operator and FM contracts worldwide.

Powerful organic levers such as innovation at [ GaveConten ], portfolio optimization and expanded distribution strategies have been important drivers of the 3.5% compounded growth achieved over the last 5 years. The 6% decline in Q3 global same-store sales was a function of unfavorable U.S. multistate jackpot comparisons.

On a year-to-date basis, the unfavorable multistate jackpot impact is mostly offset by higher revenue from instant and draw games. Q3 sales of incident drill games, which account for over 90% of our global wages were up about 1%, an improvement from being down about 0.5% in the first 6 months of the year. This reflects good growth in Italy and improved trends in the United States. Italy wages continue to grow up approximately 3% in both the third quarter and year-to-date periods. Top 3 game launches included new instant games like EUR 50 and EUR 100, which features bold graphics and an innovative product structure whereby players win either EUR 50 or EUR 100 on a EUR 10 ticket. We also had a new ticket under the Turista [indiscernible] franchise and continued performance of the EUR 20 ultranumerousme game.

The launch of the fourth Latotral, which now includes [indiscernible] option is also driving incremental drug game wagers. Outside Italy, the improvement in Q3 trends came from better instant game sales in some of our largest customers, including Texas, New York, Michigan and New Jersey and the U.S. and Poland and Europe. We continue to lead the industry with our lottery technology as evidenced by the 10-year facilities management contract extension we secured in North Carolina. In the nearly 20 years serving in North Carolina Education Lottery has become 1 of the top 10 most successful lotteries in the U.S., raising more than $1 billion annually for the state's educational system. We are excited to support them on the next phase of growth with our high-performing Aurora central system, up to 8,500 new retailer Pro S2 terminals and hundreds of new self-service sending machines, iLottery continued its high growth with sales up over 26% in the third quarter and year-to-date periods, fueled by our expanded game portfolio. Newly incidents such as Lucky clients, Elephant King and sports stars are among the best ever due launches for us. In Georgia, Elephant King achieved the best ever performance of any game during its first 30 days. The success of our new instances based on effectively leveraging data-driven and player insights. We look forward to bringing these games to new markets with our growing roster of entity content customers, which has reached 18 jurisdictions worldwide.

In the area of instant ticket printing, we have 1 new business based upon our innovative game content, marketing and other service capabilities. We entered into a 3-year primary printing contract with Portugal lottery where we displaced an incumbent in a competitive procurement process. We have been Santo Casa's lottery technology partner for nearly 25 years, and this is an exciting evolution of our long-standing relationship. We also signed a 3-year printing contract with FDJ operated with the French National Lottery, where we will make available our full suite of its addictive games. We intend to support the anticipated increase in printing volume with the new press scheduled to become operational early next year. It will be the industry's most state-of-the-art press that will increase our production capacity by more than 50%.

Our future forward growth-driven global lottery leadership is on display at recent industry events, including the North American Association of State and Provincial Lotteries Annual Conference in Kansas City and the World Lottery Summit at Paris. The focus is on land-based and digital solutions that provide lottery operators the tools they need to run their business today and into the future. Highlights included our connected play capabilities enabled by [indiscernible] our integrated lottery solution that provides valuable insights to help drive improved marketing, product offerings and increased sales.

Our suite of land-based solutions is designed to modernize the retail environment, enhanced player engagement and bring games closer to players. iLottery was another important focus, especially our updated cloud-based player portal, top-rated mobile app and enhanced mobile features. Of course, our high-performing retail and EMC portfolio got a lot of attention too, especially in Infinity instance, player favorite licensed brands and omnichannel games. Our executive and operational leadership will remain largely intact following the sale of our digital and gaming assets.

The launch of OPtiMa 3.0 and the associated Q3 restructuring charge aims at rightsize the organization while supporting our long-term growth objectives. Along those lines, we've established a new lottery organizational structure under Renato Ascoli leadership. This includes the reallocation and acquisition of best-in-class industry talent in key areas such as international sales and operations, high lottery technology, instant ticket printing and strategic market development initiatives.

We are excited about the solid foundation we can build upon as we transform into a leading lottery pure-play company. Our global scale, complemented by strong profit margins and cash generation positions us to capitalize on attractive lottery industry dynamics. We remain committed to innovating and developing strategic product initiatives to drive revenue and profit growth for ourselves and our customers. At the same time, we are proactively building a leaner, more focused and stronger organization.

And with that, I will turn the call over to Max.

[Unknown Executive]

Thank you, Vince, and hello to everyone joining us today. As you have seen from today's press release, beginning in the third quarter, we have moved to presenting our financial results on a continuing operations basis. Not only is this a requirement under generally accepted accounting principles, but it also provides information needed to understand the dynamics of the pure-play lottery business going forward.

The agreement to sell IGT gaming and digital assets trigger certain changes to classifications within our financial statements. Result of operations, cash flows and assets and liabilities related to gaming and digital are now presented as discontinued adopts or items held for sale. A few items of particular note are that separation and divestiture costs, purchase price amortization related to gaming intangible assets and interest expense associated with a committed $2 billion debt reduction following the close of the sale are now included in discontinued ops.

Therefore, the results being presented during today's earnings call reflect continuing operations unless otherwise noted. The summary results presented on Slide 12, reflect the operations of an integrated lottery pure-play business. In that regard, we are presenting some financial information a bit differently and we'll be focusing on drivers like gross profit, SG&A and R&D to provide a better appreciation of the business going forward. Service revenue will be parsed into 3 categories: instant ticket and draw wager based revenue.

U.S. multistate jackpot wager based revenue, which solely represent activity from the Powerball and Mega Million franchises and other service revenue, inclusive of upfront license fee amortization, which is a control revenue item. Product sales include the sale of our license of intellectual property, system sales, terminal sales and instant ticket printing revenue.

In addition, we have modified the geographic breakdown of the same-store sales KPI into 3 categories: the U.S. and Canada, Italy and rest of world. We believe this not only provides better insight into our 2 main markets, but is also aligned with how we are managing the business. extensive recast financials, including KPIs can be found in today's Q3 earnings press release. I'm going to walk you through the year-over-year changes in revenue and profit using detailed bridges on the next couple of slides.

But before moving off this page, I would like to highlight the $0.46 per diluted share achieved in the year-to-date period with an 11% increase in year-to-date adjusted EPS from continuing ops that you see in the bottom right-hand portion of the slide. I believe this is a better indicator of the underlying performance of Remainco over the 9-month period as it removes volatility related to adjustments that are not reflective of ongoing recurring operational activities such as an $0.11 impact from foreign exchange and $0.13 from restructuring in the year-to-date period.

On a year-to-date basis, revenue grew from $1.849 billion to $1.861 billion. U.S. multistage atport same-store sales declined 23%, driving revenue down $22 million versus the prior year. Insta ticket and draw game revenue grew $16 million, driven by a 3.1% same-store sales growth in Italy. Other service rose $8 million primarily due to revenue associated with nonwager-based service contracts in Europe. And finally, product sales revenue rose $8 million, fueled by higher instant ticket printing services.

In the third quarter, the timing impact of elevated jackpot activity in the prior year was more pronounced. On a year-to-date basis, we generated operating income of $507 million compared to $555 million in the prior year, primarily due to a $38 million pretax restructuring charge taken in the third quarter. This charge is related to OPtiMa 3.0, which I will discuss in more detail in a bit. Given investor focus on adjusted EBITDA, we have added this KPI to the discussion of our financial performance to accommodate that interest. I would also like to point out that the categories presented on this bridge exclude the depreciation and amortization component.

So they want food to the face of the income statement. You will find an indication of DNA by major income statement line item in the footnote to the financial statements in the 6-K to be filed later today. Year-to-date adjusted EBITDA of $880 million declined from $898 million in the prior year. Service gross margin declined $24 million, primarily driven by the high profit flow-through from the elevated U.S. multi-stage airport activity in the prior year and the inflationary impact on payroll and benefit costs in the current year.

As expected, product sales gross margin was $6 million lower, driven by product mix. improved $17 million, reflecting continued discipline around cost management and reduced legal expense, while R&D was slightly higher as we continue to invest in growth initiatives. Net of the year-over-year U.S. multistage airport impact, our EBITDA performance was stable. The adjusted EBITDA margin of 47% for the first 9 months showed great resilience despite the tough multistage export comparison. We are proactively addressing the stranded corporate costs associated with the sale of Gaming and Digital, realigning and optimizing general and administrative activities with the launch of OPtiMa 3.0. This program targets $40 million in annualized cost savings by the end of 2026, half of which we expect to be realized by the end of next year.

The key areas of focus include the 3% reduction in the workforce over the next 12 to 18 months, optimization of our real estate footprint and other efficiencies commensurate with a leaner business profile. The associated $38 million pretax restructuring charge which is $27 million after tax equivalent to a $0.13 per diluted share impact taken in the third quarter does not impact customer-facing activities nor does it in any way geopardise the support of growth initiatives.

As a reminder, OPtiMa 3.0 will solely pertain to continuing Ops, whereas the very successful initiatives under OPtiMa 1.0 and 2.0 were primarily focused on gaming and digital efficiencies. In the third quarter, we generated $173 million in cash from operations from continuing operations, bolstered by strong working capital performance. Year-to-date, cash from ops, which includes both continuing operations and discontinued operations, reached approximately $725 million, closely tracking to the initial $1 billion target set for the full year. We're also tracking to the $500 million in free cash flow, which was implied in that initial outlook.

As Vince mentioned in his opening remarks, the vast majority of cash flows are driven by continuing ops which accounted for more than 85% of year-to-date consolidated free cash flow. Shareholder returns remain a key focus of our balanced capital allocation strategy as reflected in the $121 million of cash dividends paid to shareholders so far this year. Following the closing of the Gaming & Digital sales transaction, IGTs to receive gross proceeds of $4.05 billion, as previously communicated, we intend to allocate the cash proceeds in a balanced manner with significant portions being used to repay debt and to return capital to shareholders.

We have committed to $2 billion in debt reduction, which will significantly strengthen our balance sheet and further improve our debt maturity profile. Pro forma for this debt reduction, net debt leverage is 2.6x using debt balances as of September 30, 2024. It makes sense to look at leverage on a pro forma basis through the closing of the gaming transaction in order to properly align adjusted EBITDA from continuing ops with the anticipated debt reduction. In September, we successfully refinanced a portion of our debt with the issuance of $500 million, 4.25% senior secured notes due 2030 and subsequent redemption of $500 million 6.5% notes due 2025.

Liquidity is solid at $1.9 billion, consisting of $500 million in unrestricted cash and $1.4 billion in undrawn capacity under our credit facilities. For the first time, we are introducing an outlook for the fourth quarter and full year 2024 on a continuing operations basis. Q4 revenue is expected to be $640 million to $690 million, reflecting a low single-digit increase in same-store sales for instant ticket and draw gains, which includes improved recovery in the U.S. and Canada and continued momentum in Italy, offset by another challenging comparison for U.S. multi-stage jackpots. Significant product sales volume is expected in the fourth quarter, but still below the very high level experienced in the prior year. Adjusted EBITDA is forecasted at $280 million to $300 million, with profit flow-through reflecting lower U.S. multistage airport activity and unfavorable product sales margin mix and the timing of certain operating costs.p

For the full year, revenue is expected to be $2.5 billion to $2.55 billion with adjusted EBITDA of $1.16 billion to $1.18 billion. We are providing an outlook for adjusted EBITDA, both due to the market interest in this metric and because we believe it is a more reliable forward-looking proxy for cash profit given that it removes volatility related to adjustments that are not reflective of ongoing operational activities such as restructuring activities as well as noncash items like D&A and stock compensation.

To summarize, we continue to deliver strong financial results are proactively taking steps to align our cost structure smaller and more simplified business profile and are well positioned to capitalize on opportunities with a strong balance sheet, low pro forma leverage profile and robust cash flows.

This concludes my prepared remarks. Operator, please open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Barry Jonas with Truist.

[Unknown Analyst]

Patrick [indiscernible] on for Barry. Could you just talk a little bit about your post-deal capital allocation strategy and touching on how you're thinking about the dividend and share repurchases moving forward? Also, what would or could an M&A strategy look like for just a lottery focused company.

[Unknown Executive]

Yes. So -- so again, First of all, let me wrap up again. We continue to believe that we are focused with a balanced capital allocation approach. And we highlighted the fact that through the proceeds of the sale, we expect to repay $2 billion of debt which will put ourselves in a very strong position from a balance sheet perspective going forward to support our upcoming CapEx cycle, which is expected to last at least a couple of years in front of us as a result of the renewal of large contracts in the U.S. and in Italy.

We also mentioned that the preponderant portion of the remaining cash proceeds after paying transaction costs tax leakage and cash conveyance to the buyer will be allocated to shareholder returns. We think it's a bit preliminary to be more specific about that. We would like to get closer to the closing provides some additional inputs around that process before we can fully disclose and elaborate our strategy in terms of cash return to shareholders. But again, going forward, we continue to be very much focused on our balanced approach to capital allocation.

[Vincent Sadusky, executive]

With regard -- yes, I'll just add in your second question yes, with regard to M&A. So we feel like our portfolio in both the traditional areas and the growth areas is very solid. Our capabilities. It's very how we've been investing in these areas for 4 years. We talked about the investment in our incremental capabilities and capacity putting the continued investment in iLottery and we continue to look at other growth areas as well, including enhancing our capabilities internationally on the product sales side.

So we feel like we've got the capabilities, but we also are excited about the the good work the company has done over the course of the year is to get its balance sheet to the issue where it currently is. And post closing, we anticipate having very, very reasonable leverage level that will enable us to potentially engage in M&A if we see there's an opportunity where there's an ROI that makes sense for us.

So I think we have the capabilities, but again, always open towards potential inorganic growth opportunities that we think on the balance sheet to be able to do it.

[Unknown Analyst]

Okay. That's great. As my follow-up, I think I had the guidance for 2025. Could you walk through some of the puts and takes for the business you're considering?

[Vincent Sadusky, executive]

Yes. So I think if you look forward to 2025, you step back, we say the industry dynamics remain intact. We think that the growth that the industry has achieved over the last 5 years or so has been -- is sustainable.

So since '19 I think our lottery CAGR has been somewhere between 3% and 4% and even greater than that in North America. I'd say, this year, certainly, multistate jackpots have gone against us. It's just kind of the luck of the draw without the same level of significant advertised, $1 billion plus jackpots that we enjoyed over the last several years. But other than that, I think it's been very exciting that with that incredible CAGR since 2019 that we've been able to maintain that level of sales consolidating. And when you think about the growth in Italy, a very mature marketplace, I think really exciting opportunity where we have a significant influence over lottery operations to really drive that growth. And I believe that in markets where we don't run and operate the lottery.

I think our capabilities and our knowledge as our unique knowledge as an operator, I think, really enables us to provide quality insights to our customers. And we're starting to see instance drug games, even though we continue to operate in a muted multistage jackpot [indiscernible] in North America to be up modestly in the third quarter, and we see those trends continuing into the fourth quarter. And we continue to work with our customers around areas of optimizing the [indiscernible] ticket portfolios as well as incremental automation and more points of sales. And there's many, I think, good, exciting launches, ticket launches at our plant going forward in the fourth quarter and into 2025.

Also, I think one of the things that's -- that will be an incremental opportunity for the lottery business on a go-forward basis is the increase of megamillion from from a $2 price point to a $5 price point, they announced that, that will take place likely in April of 2025.

So we think -- I think that will be a positive catalyst. And it's only the second price adjustment that's taken place since this product has introduced more than 20 years ago. And in addition to a higher cost to play. I think there's several enhancements that the game will have. So we believe will result in larger jackpots. So we think that will occur more frequently. We think that the jackpots will grow quicker. We also think there's improved opportunities for players to win. And then on top of that, we've got, I think, other growth opportunities we announced some good wins on the printing side as well as continued high growth outlook for iLottery.

So I think all those things point to our encouragement looking out into 2025 around the path to continued growth.

[Operator]

The next question comes from Jeff Stantial with Stifel.

[Jeffrey Stantial, analyst]

Maybe starting off as a follow-up to Patrick's second question there. Focusing on the North American lottery business. I'm just curious how much mix shift into higher price point gains has contributed to the overall rate of growth in tickets more recently and kind of on that subject or as a corollary, have you seen any deceleration or any, call it, noteworthy change in terms of trade up into higher price point tickets? Just any thoughts there would be helpful.

[Unknown Executive]

Yes. So there's so many variables each -- there's about 8 to 10 markets that are significant in the states, and they've all had different timing of new game launches, especially for high-priced tickets in the $20 to $50 price point range. That certainly helped to drive play levels over the last 3 or 4 or 5 years. But we've also noted in the games where we really have terrific insight where we operate lotteries in places like Indiana, New Jersey and, of course, in our experience in Italy, that changing -- constantly changing and refreshing the instant ticket portfolio, including payout levels as well as the frequency of wins, whether it's kind of a high volatility local or [indiscernible] game. Those things all matter. And we think with a robust portfolio and mix again, different price points in terms of higher price as well as lower price points. We've had really good growth in Italy both on the high end and the low end going back to really innovative games, for example, in the EUR 5 price point.

So I think it's really continuing to refresh the portfolio, make it interesting for your players and ensure that they're getting good entertainment value, they've got the capability and ability to win. And again, as I pointed out the multistate jackpot the super large jackpots have been our best advertising, especially so many markets in the United States have very small marketing budgets. So to get that organic recognition through price coverage and [indiscernible] coverage, I think is just invaluable and that's become something that's really important, I think, for higher levels of play in the multistate Jackpot area. And as I mentioned, I do think we've just had some bad run here in 2024 and I think that with the increase in Mega's price point, I think that will be super helpful as well going forward. So to answer your question, I think it's certainly been an important driver, the higher price point. But it hasn't been the only thing. And I guess I'd kind of say again, in conclusion, the proper launch cadence of different price points at the high end and low end. As well as different experiences for the players to win is certainly something we've learned can absolutely sustain growth, again, as evidenced by our operation in Italy, where we control the entire player experience, and this is a very mature lottery and a very mature marketplace, where we just continue to see really good growth.

[Jeffrey Stantial, analyst]

Great. That's helpful. And then for a follow-up, turning to the Italian lottery contract, could you just update us on your latest expectations for when you expect that RFP to be issued? And that's all from us.

[Vincent Sadusky, executive]

Yes. So I think on the license, just to remind folks, I think it's -- the insight that we've gotten has been great that the law has been set. We've got year nonrenewable term and a 6% effective rate. So that's consistent with the past $1 billion minimum upfront fee, and we've announced our joint venture with our partners, [indiscernible] Mariano Novomatic, perhaps we intend to keep that partnership in place. In terms of the timing, we think the next phase, where we'll be able to see the requirements will come out either by the end of this year 2024 or early into 2025. And we believe that award will take place by the first half of 2025.

[Operator]

The next question comes from Chad Beynon with Macquarie.

[Aaron Lee, analyst]

This is Aaron on for Chad. As you noted, Mega Millions is making some changes. There's a pretty significant increase in the ticket price from $2 to $5. Did you have any input in that process as they were contemplating those changes? And do you think there will be some digestion period as consumers get used to the new price before the positive impacts start flowing through.

[Jeffrey Stantial, analyst]

Yes. So that committee is made up of lottery directors from across North America. That body evaluates the performance and make decisions regarding changes to the game. We certainly have -- I know that a lot of our directors well and interact with them on a frequent basis. They digest a lot of research and information based upon past lottery price increases and the impact and lotteries across the world, including the increases from $1 to $2 for the multistate jackpots in the United States that historical experience, of which many of the lottery directors were part of that process in the past. And again, we certainly provide input and support as the commission request.

We do anticipate, just based upon last prior experience that there will be, there is a potential for a decline in ticket sales initially. However, on a net basis, if you look at the history, that's recovered over time. But more importantly, the increase in revenue associated with the increase in ticket sales has outpaced, has been in excess of the decline. So I think that net-net, the group anticipates that there will be an increase in sales volume, the absolute dollar value of sales overall initially, but we can anticipate a decline initially and then a recovery and again, based upon experience net-net, it's been a very positive impact.

[Operator]

The next question comes from David Katz with Jefferies.

[David Katz, analyst]

I did want to just double-click on the Italian Lotto updates. You had given out some information early on that your expectation for the partnership structure would remain as prior.

Is that still the expectation? Or is that an open matter or is that IronClad closed.

[Vincent Sadusky, executive]

Yes. I think we've disclosed in the past, we have a member end of understanding with our existing partners with the expectation that, that joint venture will continue.

[David Katz, analyst]

So it's still the current expectation, but until it's closed, it's right, it is what it is. Can we just talk about the U.S. market for a moment. And bigger picture question, right? There's always been sort of large jackpot volatility over the years.

Is that what we should expect if we draw a line out 1 to 3 years, that volatility should remain right? Or does that -- is there anything that can sort of -- can or would smooth that out over time.

[Vincent Sadusky, executive]

Yes, I'll comment and anything Max has to add to that feel free to jump it back. So Yes. When you look at the recent history, really the last 5 years. What's John -- what's driven, I think, that 4% to 5% or so CAGR. It's been the growth really in multistage jackpot games as well as instant as well. And I think, overall, that's a pretty strong clip considering how large the amount of wages have grown to over decades in North America in particular. And we saw some softness certainly in the first half of the year. We've seen a bit of a recovery we're into positive territory on instance in the third quarter and trending into the fourth quarter as well. And I do think the states are very focused on new launches to very focused on the slowdown in instant growth, especially in the really large jurisdictions that really move the needle like Texas, California, Florida, New Jersey, Michigan.

So I think that we'll continue to see a recovery, and we do think that we can have sales growth in the instant category in kind of that low to mid-single-digit CAGR over the longer term. And then on the multistate jackpot side, as we've all experienced, it's very hard to predict. We had a change in the construct of the games themselves and the objective of the powerful and maybe [indiscernible] committees was to drive larger jackpots. And that by and large has been achieved, also of course aided by the higher interest rate environment as well over the last couple of years. but I think primarily dropping by the changes in the composition. Now still, of course, get a chance.

So you can't control the frequency of the payout. So we come to appreciate those higher jackpot levels it is, of course, random. However, the change to the game that have been made in the past has helped to drive more frequent $1 billion-plus levels. And I do think on the mega side, the increase to $5 will also facilitate in that as well. And then the offset, of course, would be likely entering a period of decreasing interest rates. So I think it's hard to predict, but I think the organization is doing what it should be doing to help to sustain the higher jackpot levels.

Max, I don't know if you have anything.

[Unknown Executive]

Yes, I'd just like to add a couple of data points. So first of all, with the new disclosure starting this quarter, we wanted to make the point that despite of the importance of this part of the business, it just represents up to 10% of our total sales. So it's important to put that into perspective.

So again, it's a volatile part of our business, but it's a small portion of our total revenue. The second point is that it's a very cyclical business. From time to time, it expressed also some level of fatigue, which is probably what is happening right now as the price doesn't roll for long enough time to create that extra level of excitement that drives additional casual players into the game. But again, long term, we believe, as we have seen in the past, through innovation on the games, which are made up by different components, including the price point at which the game is sold, but also payout levels and other characteristics. The reset of the price once the jackpot is hit and so on and so forth that are all meant to create incremental excitement going forward.

So again, despite the fact that we don't forecast going forward, large export being hit, we obviously appreciate the fact that there is definitely a potential for that business to improve and go back to what it has been for some time in the recent past.

[Operator]

[Operator Instructions] Your next question comes from the line of Joe Stauff with Susquehanna.

[Joseph Stauff, analyst]

Vince and Max. I wanted to ask in terms of, say, the price increase on multistate, obviously, Mega is moving, Vince heard that you -- or the expectation obviously is that there'll be some slight decline in volume, but the pricing will more offset and certainly makes a lot of sense that the pots, the jackpots will be a lot larger, which triggers volume demand.

I was wondering, I think Powerball has indicated they're not changing price, but if you could update us on what they're thinking. That's number one. And then number two, if I think about, say, the U.S. and Canada growth and I exclude multistate, just trying to think, you posted, call it, flattish, up slightly 0.2% in the quarter. How to think about, say, the growth within that business, say, going forward? Is it where do you get most of the growth within that, say, segment? Is it mostly, say, pricing out of your instant business? If you could talk about that a little bit.

[Vincent Sadusky, executive]

Yes, sure thing. So yes, Mega Millions has maybe announcement of the increase of the $5 price points you've point out and Powerball has not. So as far as we understand at this point, they're going to stick with the current pricing. So we'll have 1 of the 2 multi-stage jackpot increase in price for now, that's all that's been announced.

With regard to growth, yes, I think, again, the future is hard to predict. So we look at a couple of things. One is the pretty significant growth that's been achieved in instance over the last 4 or 5 years, and it's been a combination of -- in North America, in particular, it's been a combination of price points and game for IoT including different games with varying volatility. And so players that enjoy more frequent, smaller payouts, gravitate towards those games.

Players who really want a more meaningful payout with less frequency are willing to trade off frequency for that and are really interested in things like stakes games.

So I think that the continued understanding and research that the lotteries do, and we provide a terrific amount of insight through our data management tools. I think we'll continue to enable them to execute with excellence and provide the optimum amount of game mixes based upon saleout levels and again, as our operating experience of operating 1 of the largest lotteries in the world in Italy, we're able to provide these insights, and we're able to see that great portfolio management really has an impact on keeping the experience fresh and interesting for your most important players, those frequent players.

So as Max pointed out earlier, there are certainly time periods in the evolution of this business where we've seen there's been a kind of a consolidation of play levels. And I think we're seeing that at the moment. But nothing we're seeing indicates that there's a negative impact on the overall long-term growth prospects of non multistate games in the area of state drag and instance. So we think with the right cadence of launches, especially in the significant markets, coupled with retail distribution as well, we -- we've had -- again, we've had a great experience in Italy, a very mature market, not only with the games with great, great portfolio management and game introduction to Cadex but also by, again, in a very mature market, continuing to expand the retail distribution, which has really driven increased retail sales performance. And so we've done some of that work recently with our large customers in North America. But I think there's plenty more opportunity to do those days, including the installation of more self-service machines, things like automation, diagnostics, where we can identify low ticket volume levels and get ahead of replacing those things before sellout occurs and I think our analytical capabilities, I think, really helped to provide those things. And we're, I think, having good conversations with our customers around those increased and enhanced retail activities.

[Joseph Stauff, analyst]

Okay. I appreciate it. Maybe 1 quick follow-up just on timing for the close of the gaming sale. Is there anything to suggest that maybe things are ahead or behind in terms of what you, I think, previously described as maybe an August 2025 timing in terms of the close of that units.

[Vincent Sadusky, executive]

Yes, sure thing. I think we've said in the past, we would close sometime in third quarter, we -- I think we said by the end of the third quarter of 2025, that closing period, we think, is pretty standard for a heavily regulated industry like gaming and the fact that we have to receive approval from many different name jurisdictions in the United States and around the world. We don't have any modification of that date. We continue going through the regulatory approval process.

Every has announced that they have their shareholder vote coming up pretty soon, I think, November 14 or so. And Apollo's they've been in this industry. So they do have a history of successfully receiving approval. So no modification to that estimated closing date.

[Operator]

And your final question comes from the line of Domenico Ghilotti with Equita.

[Domenico Ghilotti, analyst]

I had a question on the capital intensity. You were mentioning the renewal cycle affecting your free cash flow over the next couple of years. So if I take out a lot of the special situation, so just to renew to to renew your existing lottery portfolio. Can you provide us some sense of what is the capital intensity we should expect?

[Vincent Sadusky, executive]

So sure. We have gone back a long cycle to kind of come up with a run rate average of CapEx, pure CapEx, excluding upfront fees, that kind of -- it runs around $200 million to $250 million per year. We see right now going forward, a couple of years where that number is probably going to run at 2x around about, and then we'll come down back again down into the more normal long-term average of 200 up to 250.

So that's where we stand right now. So that's why it's so important for us to keep a close eye on the leverage. And it's important also to highlight the fact that as a result of the transaction, we expect to be below the levels we are today so that we can factor in and absorb the incremental CapEx and still maintain our target of below 3x on a run rate basis through the CapEx cycle going forward, including the potential for the upfront fees coming up.

[Operator]

This concludes the question-and-answer session. I'll turn the call to CEO, Vince Sadusky, for closing remarks.

[Vincent Sadusky, executive]

Thank you all very much for your interest in IGT. I think as we've discussed in the past, we believe very strongly in the capability of lottery to continue to grow. And we're very excited about our separation activities and our pure-play entity on a go-forward basis.

So we look forward to updating you again soon.

[Operator]

This concludes today's conference call. Thank you for joining. You may now disconnect.