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International Game Technology Plc(NYSE: IGT)
Q3 2024 Earnings Call
Nov 12, 2024, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello and welcome to the International Game Technology third quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [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 -- Senior Vice President, Investor Relations
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 will 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.
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And now, I'll turn the call over to Vince.
Vince Sadusky -- Chief Executive Officer
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 third quarter 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 rightsize 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 evidenced 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. multistate jackpot comparisons. On a year-to-date basis, the unfavorable multistate jackpot impact is mostly offset by higher revenue from instants 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 wagers continued to grow, up approximately 3% in both the third quarter and year-to-date periods. Top three game launches included new instant games like 50 euro & 100 euro, which features bold graphics and an innovative price structure whereby players win either 50 euros or 100 euros on a 10-euro ticket.
We also had a new ticket under the Turista per Sempre franchise and continued performance of the 20-euro 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 in some of our largest customers, including Texas, New York, Michigan, and New Jersey in the U.S. and Poland in 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 third quarter 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 a 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 the eInstant 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 recruiting 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 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 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 eInstant 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 rightsizing 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.
Max Chiara -- Executive Vice President, Chief Financial Officer
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 triggers certain changes to classifications within our financial statements.
Results 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 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 three categories: instant ticket and draw wager-based revenue; U.S. multistate jackpot wager-based revenue, which solely represents activity from the Powerball and Mega Million franchises; and other service revenue, inclusive of upfront license fee amortization, which is a contra revenue item. Product sales include the sale of -- 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 the rest of 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 RemainCo 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. multistate 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 services 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 pre-tax 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 won't show to the face of the income statement. You will find an indication of D&A by major income statement line item in the footnotes 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. multistate 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 continued to invest in growth initiatives.
Net of the year-over-year U.S. multistate jackpot impact, our EBITDA performance was stable. The adjusted EBITDA margin of 47% for the first nine months showed great resilience despite the tough multistate jackpot 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 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 third quarter 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 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 are 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 the 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 million to 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. multistate 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. multistate 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 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 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.
Questions & Answers:
Operator
Thank you. [Operator instructions] Your first question comes from the line of Barry Jonas with Truist. Your line is open.
Patrick Keough -- Truist Securities -- Analyst
Hey. Good morning, everyone. Patrick Keough on 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.
Max Chiara -- Executive Vice President, Chief Financial Officer
Yeah. So, hi. Good morning. 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 and 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'll continue to be very much focused on our balanced approach to capital allocation.
Patrick Keough -- Truist Securities -- Analyst
OK. Very helpful. Thank you.
Vince Sadusky -- Chief Executive Officer
And with regard -- yeah, just to add in on your second question with regard to -- yeah, with regard to M&A. So, yeah, we 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. So, we feel like we've got the capabilities, but we also are excited about the good work the company has done over the course of years to get its balance sheet to the position where it currently is. And post-closing, we anticipate having, you know, 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. So, I think we have the capabilities.
But again, always open toward potential and organic growth opportunities, and we think we'll have the balance sheet to be able to do it.
Patrick Keough -- Truist Securities -- Analyst
OK. That'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.
Vince Sadusky -- Chief Executive Officer
Yeah. So, I think -- you know, if you look forward to 2025, you know, you step back, you know, we 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 -- 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 say, you know, this year, certainly, multistate jackpots have gone against us. It's just, you know, 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, 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, you know, when you think about the growth in Italy, a very mature marketplace, I think a 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 instant and draw games, even though we continue to operate in a muted multistate jackpot environment in North America, you know, 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 their instant ticket portfolios, as well as incremental automation and more points of sales. And there's many, I think, good exciting launches -- ticket launches that are planned going forward into the fourth quarter and into 2025.
Also, I think one of the things that will 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 will take place likely in April of 2025. So, we think that will 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, I think there are several enhancements that the game will have.
We believe it will result in larger jackpots. We think that will occur more frequently. We think that the jackpots will grow quicker. We also think, you know, 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.
Patrick Keough -- Truist Securities -- Analyst
That's great. I appreciate the color. Thank you again.
Operator
The next question comes from Jeff Stantial with Stifel. Your line is open.
Jeff Stantial -- Stifel Financial Corp. -- Analyst
Hey. Great. Good morning, Vince and Max. Thanks for taking our questions.
Maybe starting off as a follow-up to Patrick's second question there on -- focusing on the North American lottery business. I'm just curious how much mix shift into higher price point games has contributed to the overall rate of growth in instant 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-ups into higher price point tickets? Just any thoughts there would be helpful. Thanks.
Vince Sadusky -- Chief Executive Officer
Yeah. So, you know, there's so many variables. You know, each week, there's about eight 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 has 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 and 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, you know, kind of a high-volatility, low-volatility game, you know, those things all matter. And we think, you know, with a robust portfolio and mixing in different price points in terms of higher price, as well as lower price points, we've -- you know, 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 5-euro price point. So, I think it's really continuing to refresh the portfolio, make it interesting for your players, and ensure that, you know, 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 press coverage, news 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, you know, 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 is a very mature lottery, a very mature marketplace where we've continued to see really good growth.
Jeff Stantial -- Stifel Financial Corp. -- Analyst
Great. That's helpful. Thanks for that. And then from a 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.
Vince Sadusky -- Chief Executive Officer
Yeah. So, I think, you know, on the license, just to remind folks, I think it's -- you know, the insight that we've gotten has been great, that the law has been set. We've got a nine-year nonrenewable term and a 6% effective rate. So, that's consistent with the past.
One billion dollar minimum upfront fee. And we've announced our joint venture with our partners Allwyn, Arianna, and Novomatic. That's -- 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 an award will take place by the first half of 2025.
Jeff Stantial -- Stifel Financial Corp. -- Analyst
Great. [Technical difficulty]
Operator
The next question comes from Chad Beynon with Macquarie. Your line is open.
Unknown speaker -- -- Analyst
Hey. Good morning. This is Aaron on for Chad. Thanks for taking the question.
As you noted, Mega Millions is making some changes, and 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.
Vince Sadusky -- Chief Executive Officer
Yeah. So, that committee is made up of lottery directors from across North America. That body evaluates their performance and makes decisions regarding changes to the game. We certainly have -- know those lottery directors well and, you know, interact with them on a frequent basis.
You know, 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 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, you know, we -- again, we certainly provide input and support as the commission requests. We do anticipate, just based upon last -- prior experience, that there will be -- there is the 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.
Unknown speaker -- -- Analyst
OK. I appreciate the color. Thank you.
Operator
The next question comes from David Katz with Jefferies. Your line is open.
David Katz -- Analyst
Good morning, everybody. Thanks for taking my question. I did want to just double-click on the Italian lotto updates. You know, you had given out some information early on, you know, that your expectation for the partnership structure would remain as prior.
Is that still the expectation or is that a -- an open matter or is that ironclad closed?
Vince Sadusky -- Chief Executive Officer
Yeah. I think we've disclosed in the past we have a memorandum of understanding with our existing partners, with the expectation that that joint venture will continue.
David Katz -- Analyst
So, current -- so it's still the current expectation, but, you know, 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, you know, big -- bigger picture question, right, there's always been sort of large jackpot volatility over the years. And, you know, is that what we should expect, you know, if we draw a line out, you know, one to three years, that volatility should remain, right, or, you know, does that -- is there anything, you know, that can sort of -- can or would smooth that out over time?
Vince Sadusky -- Chief Executive Officer
Yeah, I'll comment, and anything Max has to add to that will be -- feel free to jump in that. So, yeah, when you look at the recent history, really, the last five years, what's driven, I think, that, you know, 4% to 5% or so CAGR, it's been the growth, really, in multistate jackpot games, as well as instants as well. And I think, overall, that's a pretty strong clip, considering how large the amount of wagers 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 instants in the third quarter and trending into the fourth quarter as well. And 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.
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 that 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 Powerball and Mega Millions 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 driven by the changes in the composition. Now, it is still, of course, a game of chance. So, you can't control the frequency of the payouts.
So, we've come to appreciate those higher jackpot levels. And, you know, it is, of course, random. However, the changes to the game that have been made in the past has 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. 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 to add.
Max Chiara -- Executive Vice President, Chief Financial Officer
Yes, I'd just like to add a couple of data points. So, first of all, with the new disclosures 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 express 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 prize 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 jackpots 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.
David Katz -- Analyst
Volatile, so it grows. Perfect. Thank you.
Operator
[Operator instructions] Your next question comes from the line of Joe Stauff with Susquehanna. Your line is open.
Joe Stauff -- Susquehanna International Group -- Analyst
Thank you. Good morning, Vince and Max. I wanted to ask, you know, in terms of, say, the price increase on multistate. Obviously, Mega is moving.
You know, Vince heard that you -- or the expectation, obviously, is that, you know, 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 know, 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 -- you know, 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.
Vince Sadusky -- Chief Executive Officer
Yeah. Sure thing. So, yeah, Mega Millions has made the announcement of the increase to the $5 price point, as 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 multistate jackpots increasing in price for now. That's all that's been announced. With regard to growth, yeah, I think -- again, you know, the future is hard to predict. So, you know, 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. And so, players that enjoy more frequent smaller payouts gravitate toward those games. Players who really want a more meaningful payout with less frequency -- you know, are willing to trade off frequency for that and aren't 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, 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, you know, we're able to provide these insights and we're able to see that great portfolio management, you know, 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, you know, there are certainly time periods in the evolution of this business where we've seen there's been a kind of consolidation of play levels, and I think we're seeing that at the moment. But nothing we're seeing indicates that the -- there's a negative impact in the overall long-term growth prospects of nonmultistate gains in the area of state draw and instant.
So, we think, you know, with the right cadence of launches, especially in the significant markets, coupled with retail distribution as well, you know, we've had -- again, we've had a great experience in Italy, a very mature market, not only with the gains, with great portfolio management and gain introductions and cadence, but also by, you know, again, a very mature market, continuing to expand the retail distribution, which has really drove -- driven increased retail sales performance. And so, you know, 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 things, including the installation of more self-service machines, things like automation and diagnostics, where we can identify low ticket volume levels and get ahead of replacing those things before a sellout occurs. And I think, you know, our analytical capabilities, I think, really help to provide those things, and, you know, we're, I think, having good conversations with our customers around those increased and enhanced retail activities.
Joe Stauff -- Susquehanna International Group -- Analyst
OK. I appreciate that. 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, you know, what you, I think, previously described as maybe an August 2025 timing in terms of the close of that unit?
Vince Sadusky -- Chief Executive Officer
Yeah. Sure thing. Yeah, I think we've said in the past we would close sometime in the third quarter. We -- I think we said by the end of the third quarter of 2025.
You know, 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 the different gaming jurisdictions in the United States and around the world. You know, we don't have any modification of that date. You know, we continue going through the regulatory approval process. Everi has announced that they have their shareholder vote coming up pretty soon.
I think November 14th or so. And, you know, Apollo is -- they've been in this industry, so they do have a history of successfully receiving approval. So, no modification to that estimated closing date.
Joe Stauff -- Susquehanna International Group -- Analyst
Thank you.
Operator
And your final question comes from the line of Domenico Ghilotti with Equita. Your line is open.
Domenico Ghilotti -- Equita -- Analyst
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 the lotto, this is a 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?
Max Chiara -- Executive Vice President, Chief Financial Officer
So, sure. And 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 roundabout, and then will 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.
Domenico Ghilotti -- Equita -- Analyst
OK. Thank you. Very clear.
Operator
This concludes the question-and-answer session. I'll turn the call to CEO, Vince Sadusky, for closing remarks.
James Hurley -- Senior Vice President, Investor Relations
Vince, I think you're on mute.
Vince Sadusky -- Chief Executive Officer
Thanks, Jim. 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.
Thanks.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
James Hurley -- Senior Vice President, Investor Relations
Vince Sadusky -- Chief Executive Officer
Max Chiara -- Executive Vice President, Chief Financial Officer
Patrick Keough -- Truist Securities -- Analyst
Jeff Stantial -- Stifel Financial Corp. -- Analyst
Unknown speaker -- -- Analyst
David Katz -- Analyst
Joe Stauff -- Susquehanna International Group -- Analyst
Domenico Ghilotti -- Equita -- Analyst
Jim Hurley -- Senior Vice President, Investor Relations
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