Welcome to the International Game Technology Q3 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session, and if you would like to ask a question during that time, simply press star one on your telephone keypad. I would now like to turn the conference over to James Hurley, Senior Vice President of Investor Relations. You may begin.
Thank you, and thank you all for joining us on IGT's Q3 2024 conference call, which is hosted by Vince Sadusky , our Chief Executive Officer, and Max Chiara , our Chief Financial Officer. After some prepared remarks, Vincent 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. I'll turn the call over to Vince.
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 nine 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 nine months of the year, with a margin of 47.3%. This is the first time we're reporting continuing ops, which includes our lottery and 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 two-thirds 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 and digital business to Apollo is expected to close by the end of the Q3 of 2025, we are already taking significant steps to optimize the organizational structure of our lottery and corporate functions with the launch of Optima 3.0. The goal is to right-size costs by realigning and optimizing general 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 nine months of the year, our systems have processed nearly $80 billion in lottery wagers under our operator and FM contracts worldwide. Powerful organic levers such as innovation in game content, portfolio optimization, and expanded distribution strategies have been important drivers of the 3.5% compounded growth achieved over the last five years. The 6% decline in Q3 global same-store sales was a function of unfavorable U.S. multi-state jackpot comparisons. On a year-to-date basis, the unfavorable multi-state jackpot impact is mostly offset by higher revenue from instant and draw games. Q3 sales of instant and draw games, which account for over 90% of our global wagers, were up about 1%, an improvement from being down about 0.5% in the first six 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 Q3 and year-to-date periods. Top three game launches included new instant games like EUR 50 and EUR 100, which feature bold graphics and an innovative prize structure whereby players win either EUR 50 or EUR 100 on a EUR 10 ticket. We also had a new ticket under the Turista per Sempre franchise and continued performance of the EUR 20 Ultra Numerissimi game.
The launch of the fourth Lotto draw, which now includes Numero Oro option, is also driving incremental draw game wagers. Outside Italy, the improvement in Q3 trends came from better instant game sales to some of our largest customers, including Texas, New York, Michigan, and New Jersey in 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 the North Carolina Education Lottery, it has become one 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 vending machines. iLottery continued its high growth with sales up over 26% in the Q3 and year-to-date periods, fueled by our expanding game portfolio. New eInstants such as Lucky Coins, Elephant King, and Sports Stars are among the best-ever new 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 eInstants is based on effectively leveraging data-driven and player insights.
We look forward to bringing these games to new markets with our growing roster of e-instant content customers, which has reached 18 jurisdictions worldwide. In the area of instant ticket printing, we have one new business based upon our innovative game content marketing and other service capabilities. We entered into a three-year primary printing contract with Portugal's Lottery, where we displaced an incumbent in a competitive procurement process. We have been Santa Casa's lottery technology partner for nearly 25 years, and this is an exciting evolution of our long-standing relationship. We also signed a three-year printing contract with FDJ, operator of the French National Lottery, where we will make available our full suite of instant ticket games. We intend to support the anticipated increase in printing volume with a 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 in Paris. The focus was 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 OMNIA, 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, enhance 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 e-instant game portfolio got a lot of attention too, especially Infinity Instants, 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 right-sizing the organization while supporting our long-term growth objectives. Along those lines, we've established a new lottery organizational structure under Renato Ascoli's leadership. This includes the reallocation and acquisition of best-in-class industry talent in key areas such as international sales and operations, iLottery 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.
Thank you, Vince, and hello to everyone joining us today. As you have seen from today's press release, beginning in the Q3, 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 triggers 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 ops 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 will 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 three categories: instant ticket and draw wager-based revenue, U.S.
Multi-state jackpot wager-based revenue, which solely represents activity from the Powerball and Mega Millions franchises, and other service revenue, inclusive of upfront license fee amortization, which is a contra revenue item. Product sales include the sale or 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 three categories: the U.S. and Canada, Italy, and rest of the world. We believe this not only provides better insight into our two 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 this slide. I believe this is a better indicator of the underlying performance of Brightstar Lottery over the nine-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. multi-state jackpot same-store sales declined 23%, driving revenue down $22 million versus the prior year.
Instant 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 non-wager-based service contracts in Europe. And finally, product sales revenue rose $8 million, fueled by higher instant ticket printing services. In the Q3, 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 pre-tax restructuring charge taken in the Q3. 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 weren't foot to the bottom of the income statement. You will find an indication of D&A 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-state jackpot 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.
SG&A 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. multi-state jackpot impact, our EBITDA performance was stable. The adjusted EBITDA margin of 47% for the first nine months showed great resilience despite the tough multi-state jackpot comparison. We are proactively addressing the stranded corporate cost 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 a 3% reduction in the workforce over the next 12 to 18 months, optimization of our real estate footprint, and other efficiencies commensurate with the leaner business profile. The associated $38 million pre-tax restructuring charge, which is $27 million after tax, equivalent to a $0.13 per diluted share impact taken in the Q3, does not impact customer-facing activities, nor does it in any way jeopardize 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 Q3, 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 and digital sale transaction, IGT is 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 2.6 times 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-$690 million, reflecting a low single-digit increase in same-store sales for instant ticket and draw games, which includes improved recovery in the U.S. and Canada and continued momentum in Italy, offset by another challenging comparison for U.S. multi-state jackpots. Significant product sales volume is expected in the fourth quarter, but still below the very high-level experience in the prior year. Adjusted EBITDA is forecasted at $280-$300 million, with profit flow-through reflecting lower U.S. multi-state jackpot activity and unfavorable product sales margin mix and the timing of certain operating costs.
For the full year, revenue is expected to be $2.5-$2.55 billion, with adjusted EBITDA of $1.16-$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 non-cash 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 with a 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 .
Thank you . [Operator's Instruction] Your first question comes from the line of Barry Jonas with Truist. Your line is open.
G ood morning, everyone. Patrick Keough for Barry. Thank you for taking my question. 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? Thank you.
G ood morning. Fi rst 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 cost, 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, provide 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.
Okay, very helpful. And with regard, I'll just add in on your second question with regard to M&A. W e feel like our portfolio in both the traditional areas and the growth areas is very solid. Our capabilities is very solid. We've been investing in these areas for four years. We talked about the investment in our incremental capabilities and capacity around printing, 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.
W e feel like we've got the capabilities, but we also are excited about the good work the company's done over the course of years to get its balance sheet to the position where it currently is. And post-closing, we anticipate having a 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. W e have the capabilities, but again, always open towards potential inorganic growth opportunities, and we think we'll have the balance sheet to be able to do it.
T hat's great. Thanks for the color, Vince. As my follow-up, as you think ahead to guiding for 2025, could you walk through some of the puts and takes for the business you're considering? Thank you.
I f you look forward to 2025, you step back, we'd say the industry dynamics remain intact. We think that the growth that the industry has achieved over the last five years or so has been sustainable. So since 2019, o ur lottery kicker has been somewhere between 3% to 4% and even greater than that in North America. I say this year, certainly multi-state jackpots have gone against us. It's just kind of the luck of the draw without the same level of significant advertised billion-dollar-plus jackpots that we enjoyed over the last several years. But other than that, it 's been very exciting that with that incredible kicker 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, r eally 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, o ur capabilities and our unique knowledge as an operator, r eally enables us to provide quality insights to our customers. And we're starting to see instants in draw games, even though we continue to operate in a muted multi-state jackpot environment in North America, to be up modestly in the Q3, and we see those trends continuing into the fourth quarter. And we continue to work with our customers around areas of optimizing their instant ticket portfolios, as well as incremental automation and more points of sale.
T here's many g ood, exciting ticket launches that are planned going forward into the fourth quarter and into 2025. Also, o ne of the things that'll be an incremental opportunity for the lottery business on a go-forward basis is the increase of Mega Millions from a $2 price point to a $5 price point. They announced that that'll take place likely in April of 2025. So we think that'll be a positive catalyst. And it's only the second price adjustment that's taken place since this product was introduced more than 20 years ago. And in addition to a higher cost to play, t here's several enhancements that the game will have. We believe it'll result in larger jackpots. We think that'll occur more frequently. We think that the jackpots will grow quicker. We also think there's improved opportunities for players to win.
O n top of that, we've got, o ther growth opportunities. We announced some good wins on the printing side, as well as continued high growth outlook for iLottery. A ll those things point to our encouragement, looking out into 2025 around a path to continued growth.
That's great. Appreciate the color. Thank you again.
The next question comes from Jeff Stantial with Stifel. Your line is open.
G ood morning, Vince. Thanks for taking our questions. 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 shift into higher price point games has contributed to the overall rate of growth in instant tickets more recently? Kind of on that subject or as a corollary, have you seen any deceleration or any noteworthy change in terms of trade-offs into higher price point tickets? Just any thoughts there would be helpful. Thanks.
T here's so many variables. There's about 8-10 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's certainly helped to drive play levels over the last three or four or five 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 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, low volatility game.
Those things all matter. And we think with a robust portfolio and mixing in different price points in terms of higher price as well as lower price points, we've had really good growth in Italy, both at the high end and the low end, going back to really innovative games, for example, in the EUR 5 price point. I t'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.
A s I pointed out, the multi-state 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 press coverage, news coverage, It 's just invaluable. And that's become something that's really important f or higher levels of play in the multi-state jackpot area. And as I mentioned, I do think we've just had a bad run here in 2024. And t hat with the increase in Mega's price point, t hat will be super helpful as well going forward. T o answer your question, I t's certainly been an important driver, the higher price point, but it hasn't been the only thing.
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, a very mature marketplace where we've continued to see really good growth.
Great. That's helpful. Thanks for that, Vince. And then for my follow-up, turning to the Italian Lotto 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. Thanks.
O n the license, just to remind folks, I think the insight that we've gotten has been great. The law has been set. We've got a nine-year non-renewable term and a 6% effective rate. So all that's consistent with the past, $1 billion minimum upfront fee. And we've announced our joint venture with our partners, Allwyn, Arianna 2001, Novomatic. 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.
We believe an award will take place by the first half of 2025. Great. Thanks for that. And so back to Lee. The next question comes from Chad Beynon with Macquarie. Your line is open. Hey, good morning. This is Aaron Lee for Chad. Thanks for taking the question. 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? Thanks.
T hat committee is made up of lottery directors from across North America. That body evaluates the performance and makes decisions regarding changes to the game. We certainly know those lottery 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 on lotteries across the world, including the increases from $1-$2 for the multi-state 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 requests.
We do anticipate, just based upon prior experience, that 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. T hat 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't anticipate a decline initially and then a recovery. And again, based upon experience, net-net, it's been a very positive impact.
Okay. Appreciate the color. Thank you.
The next question comes from David Katz with Jefferies. Your line is open.
Morning, everybody. Thanks for working my question in. 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?
W e've disclosed in the past. We have a memorandum of understanding with our existing partners with the expectation that that joint venture will continue.
I t'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. And is that what we should expect if we draw a line out one to three years, that that volatility should remain, right? Or is there anything that can or would smooth that out over time?
I'll comment. Anything Max has to add to that, feel free to jump in, Max. Yeah, when you look at the recent history, really, the last five years, what's driven t hat 4%-5% or so CAGR. It's been the growth really in multi-state jackpot games as well as instants as well. O verall, that's a pretty strong clip considering how large the amount of wagers have grown to over decades in North America in particular. We saw some softness, certainly in the first half of the year. We've seen a bit of a recovery where we're into positive territory on instants in the Q3 and trending into the fourth quarter as well. I do think the states are very focused on new launches.
They're 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. T hat we'll continue to see a recovery. W e do think that we can have sales growth in the instant category in kind of that low, the mid-single digit CAGR over the longer term. And then on the multi-state jackpot side, as we've all experienced, it's very hard to predict. Again, we had a change in the construct of the games themselves. And the objective of the Powerball and Mega Millions 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 p rimarily driven by the changes in the composition now, it is still, of course, a chance. Y ou can't control the frequency of the payout. So we've come to appreciate those higher jackpot levels. And it is, of course, random. However, the changes to the game that have been made in the past have helped to drive more frequent billion-dollar-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 we're likely entering a period of decreasing interest rates. I t's hard to predict, but t he 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.
Yes. I'd just like to add a couple of data points. First of all, with the new disclosure starting this quarter, we wanted to make the point that despite the importance of this part of the business, it just represents up to 10% of our total sales. 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 prize 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. D espite the fact that we don't forecast going forward large jackpot being hit, we obviously appreciate the fact that there is definitely a potential for that business to improve and go back to where it has been for some time in the recent past. Volatile, so it grows.
Perfect. Thank you.
[Operator's Instructions]. Your next question comes from the line of Joe Stauff with Susquehanna. Your line is open.
Thank you. Good morning, Vince and Max. I wanted to ask, in terms of, say, the price increase on multi-state, obviously, Mega is moving. Vince, I heard that the expectation, obviously, is that there'll be some slight decline in volume, but the pricing will more than offset. And it certainly makes a lot of sense that the jackpots will be a lot larger, which triggers volume demand. I was wondering, P owerball has indicated they're not changing price, but if you could update us on what they're thinking? That's number one.
N umber two, if i think a bout, say, the U.S. and Canada growth, and I exclude multi-state, just trying to think, you posted COTA flash up slightly, 0.2% in the quarter. How to think about, say, the growth within that business, say, going forward? 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?
Yeah. M ega Millions has made the announcement of the increase of the $5 price point you 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 one of the two multi-state jackpots increasing in price for now. That's all that's been announced. With regard to growth , 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 instants over the last four or five years. And it's been a combination of, in North America in particular, it's been a combination of price points and game variety, including different games with varying volatility.
P layers 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. T hat the continued understanding and research that the lotteries do, and we provide a terrific amount of insight through our data management tools will continue to enable them to execute with excellence and provide the optimum amount of game mixes based upon sellout levels. And again, as our operating experience of operating one 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. W e'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-multi-state games in the area of state draw and instant. So we think with the right cadence of launches, especially in the significant markets, coupled with retail distribution as well, we've had, again, we've had a great experience in Italy, a very mature market, not only with the games, with great portfolio management and game introductions and cadence, but also by, again, a very mature market continuing to expand the retail distribution, which has really driven increased retail sales performance.
W e've done some of that work recently with our large customers in North America. T here's plenty more opportunity to do those things, including the installation of more self-service machines, things like automation and diagnostics, where we can identify low ticket buy levels and get ahead of replacing those things before sellout occurs. O ur analytical capabilities really help to provide those things. And we're having good conversations with our customers around those increased and enhanced retail activities.
Okay. I appreciate it. Maybe one 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 unit?
W e've said in the past we would close sometime in the Q3. W e said by the end of the Q3 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 gaming 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. Everi announced that they have their shareholder vote coming up pretty soon here, N ovember 14th 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.
Thank you.
Y our final question comes from the line of Domenico Ghilotti with Equita. Your line is open. Good morning.
I have 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 this special situation, so just to renew your existing lottery portfolio, can you provide us some sense of what is the capital intensity that we should expect?
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 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, roundabout, and then we'll come back again down into the more normal long-term average of $200 to 250 million. So that's where we stand right now.
T hat'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.
Okay. Thank you. Very clear.
This concludes the question and answer session. I'll turn the call to CEO Vince Sadusky for closing remarks.
T hank you. 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 continuing 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. Thanks.
This concludes today's conference call. Thank you for joining. You may now disconnect.