Brightstar Lottery PLC Q3 FY2024 Earnings Call

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. The operator provided standard instructions to participants. 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 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.

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 US. 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 operations, 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 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 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 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 and 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 US 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 wagers continue to grow, up approximately 3% in both the third quarter and year-to-date periods. Top three game launches included new instant games like EUR50 and EUR100, which feature bold graphics and an innovative price structure, whereby players win either EUR50 or EUR100 on a EUR10 ticket. We also had a new ticket under the Turista per sempre franchise and continued performance of the EUR20 Ultra Numerissimi game. The launch of the fourth Lotto draw, which now includes the 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 US 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 North Carolina, the Education Lottery has become one of the top 10 most successful lotteries in the US, 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 eInstant 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 eInstant content customers, which has reached 18 jurisdictions worldwide. In the area of instant ticket printing, we have won 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 SAZKA'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, 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 margin 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 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 operations 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 operations. 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; US 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 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 three categories: the US and Canada, Italy and 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 operations 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 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. US 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 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 don't flow 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 US multi-state jackpot activity in the prior year and the inflationary impact on payroll and benefit cost 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 US 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 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 a 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 jeopardize the support of growth initiatives. As a reminder, OPtiMa 3.0 will solely pertain to continuing operations, 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 operations, 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 operations 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 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 operations with the anticipated debt reduction. In September, we successfully refinanced a portion of our debt with the issuance of EUR500 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 US and Canada and continued momentum in Italy, offset by another challenging comparison for US multi-state 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 US multi-state jackpot activity and unfavorable product sales margin mix and the timing of certain operating cost. 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 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.

The operator provided standard instructions to participants. Your first question comes from the line of Barry Jonas with Truist. Your line is open.

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.

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 US 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 to 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.

With regard—yeah, I'll just add in on your second question, with regard to M&A. We feel like our portfolio in both the traditional areas and the growth areas is very solid. Our capabilities are 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 best 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. So I think we have the capabilities, but again, always open towards potential inorganic growth opportunities that we think the balance sheet will allow us to pursue.

Okay. That's great. Thanks for the color, Vince. 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? Thank you.

Yeah. 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 five years or so is sustainable. Since 2019, 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, multi-state 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. When you think about the growth in Italy, a very mature marketplace, I think there's a really exciting opportunity where we have 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, our capabilities and our unique knowledge as an operator enable us to provide quality insights to our customers. We're starting to see instants and draw games, even though we continue to operate in a muted multi-state jackpot environment in North America, be up modestly in the third quarter, and we see those trends continuing into the fourth quarter. We continue to work with our customers around areas of optimizing the instant ticket portfolios as well as incremental automation and more points of sale. There are many good, exciting ticket launches planned going forward into the fourth quarter and into 2025. Also, one of the things that's 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 that they announced, which will likely take place in April of 2025. We think that will be a positive catalyst. It's only the second price adjustment that's taken place since this product was introduced more than 20 years ago. In addition to a higher cost to play, there are several enhancements that the game will have. We believe it will result in larger jackpots that will occur more frequently, grow quicker, and there will be improved opportunities for players to win. On top of that, we've got 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.

That’s great. Appreciate the color. Thank you, again.

The operator provided standard instructions to participants. The next question comes from Jeff Stantial with Stifel. Your line is open.

Hey, great. Good morning, Vince, Max. 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 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.

Yeah. So there's so many variables. There are about eight to ten 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 three to 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 high volatility or low volatility—those things all matter. With a robust portfolio and mixing in different price points—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, at the EUR5 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 and have the capability and ability to win. As I pointed out, the multi-state jackpot is the best advertising in many markets, especially where they have very small marketing budgets. To get that organic recognition through press coverage and news coverage is invaluable and that's become something that's really important for higher levels of play in the multi-state jackpot area. 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. Again, 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, as evidenced by our operation in Italy, where we control the entire player experience in a very mature market and are continuing to see really good growth.

Great. That's helpful. Thanks for that. 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.

Yeah. So I think on the license, just to remind folks, the law has been set. We've got a nine-year nonrenewable 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 and Novomatic—we intend to keep that partnership in place. In terms of 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 that award will take place by the first half of 2025.

Great. Thanks, Vince.

The operator provided standard instructions to participants. The next question comes from Chad Beynon with Macquarie. Your line is open.

Hey, good morning. This is Aaron on 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.

Yeah. So that 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 to $2 for the multi-state jackpots in the United States. That historical experience involved many of the lottery directors who are part of this process. We certainly provide input and support as the commission requests. We do anticipate, based on prior experience, that there is a potential for a decline in ticket sales initially. However, on a net basis, looking at history, that tends to recover over time. More importantly, the increase in revenue associated with the price change has outpaced the initial decline. So net-net, the group anticipates that there will be an increase in absolute dollar sales overall initially, but we can anticipate a decline initially and then a recovery and, based on experience, net-net it's been a very positive impact.

Okay, appreciate the color. Thank you.

The operator provided standard instructions to participants. 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 iron-clad closed?

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.

So current—so it's still the current expectation, but until it's closed, it is what it is. Can we just talk about the US market for a moment. 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 does that— is there anything that can sort of—can or would smooth that out over time?

Yeah, I'll comment and anything Max has to add to that, feel free to jump in, Max. So, yeah, when you look at the recent history, really the last five years, what's driven that roughly 4% to 5% CAGR has been growth in multi-state jackpot games as well as instants. Overall, that's a pretty strong clip considering how large the amount of wagers have grown over decades in North America in particular. We saw some softness in the first half of the year and 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. I do think the states are very focused on new launches; they're focused on the slowdown in instant growth, especially in the really large jurisdictions that move the needle like Texas, California, Florida, New Jersey and Michigan. We expect a recovery and believe we can have sales growth in the instant category in the low to mid-single-digit CAGR over the longer term. On the multi-state jackpot side, it's very hard to predict. We had changes in the construct of the games themselves and the objective of the Powerball and Mega Millions committees was to drive larger jackpots, which by and large has been achieved, aided by the higher interest rate environment over the last couple of years. Primarily driven by those changes, we've seen more frequent $1 billion-plus levels. The increase to $5 on Mega Millions will also facilitate that. An offset could be a future period of decreasing interest rates, so it's hard to predict, but the committees are doing what they should be doing to help sustain higher jackpot levels.

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 represents up to 10% of our total sales. So it's important to put that into perspective. It's a volatile part of our business, but it's a relatively small portion of our total revenue. Second, it's a very cyclical business. From time to time, it expresses some level of fatigue, which is probably what is happening right now as the price doesn't roll for long enough to create that extra level of excitement that drives additional casual players into the game. Long term, as we have seen in the past through innovation on the games—the price point, payout levels and other characteristics—the reset of the price once the jackpot is hit and other mechanics are all meant to create incremental excitement going forward. Despite not forecasting when a large jackpot will be hit, we believe there's potential for that business to improve and return to levels seen in the recent past.

Volatile, so it grows. Perfect. Thank you.

The operator provided standard instructions to participants. The next question comes from 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, and the expectation obviously is that there'll be some slight decline in volume, but the pricing will more than offset and certainly makes a lot of sense that 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 US and Canada growth and I exclude multi-state, just trying to think, you posted, call it, flattish, up slightly 0.2% in the quarter. How to think about the growth within that business going forward? Is it mostly pricing out of your instant business? If you could talk about that a little bit.

Yeah, sure. Mega Millions has made the announcement to increase the price to $5, and as you pointed out, Powerball has not announced a price change; as far as we understand now, they're going to stick with current pricing. So we'll have one of the two multi-state jackpots increasing in price for now. Regarding growth, it's difficult to predict the future. One driver has been significant growth in instants over the last four to five years, which has been a combination of price points and game variety, including games with varying volatility. Players who enjoy more frequent, smaller payouts gravitate toward those games; players who want a more meaningful payout with less frequency gravitate to higher-stakes games. Continued understanding and research that lotteries do—and the insights we provide via our data tools—will enable them to execute effectively and provide the optimum game mix based on sellout levels. Our operating experience in Italy gives us strong insights into portfolio management and cadence, which have impact on maintaining player engagement. We also see opportunity in increasing retail distribution, which has driven increased retail sales performance in mature markets, and there's more room for automation and self-service machines, diagnostics and other retail enhancements that support growth. Overall, nothing we're seeing indicates a negative impact on the long-term growth prospects of state draw and instants outside multi-state jackpots.

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 previously described as maybe a third-quarter 2025 timing for the close of that unit?

Yeah, sure thing. I think we've said in the past we would close sometime in the third quarter; we said by the end of the third quarter of 2025. That closing period is pretty standard for a heavily regulated industry like gaming given the need to receive approvals 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 has announced their shareholder vote coming up in November, and Apollo has experience in this industry and a history of successfully receiving approval. So no modification to that estimated closing date.

Thank you.

The operator provided standard instructions to participants. The next question comes from Domenico Ghilotti with Equita. Your line is open.

Good morning. 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 the lotto business, a special situation, just to renew your existing lottery portfolio, can you provide us some sense of what is the capital intensity we should expect?

Sure. We have gone back a long cycle to come up with a run-rate average of pure CapEx, excluding upfront fees. That 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 about 2x that level for a short period, and then it will come back down into the more normal long-term average of $200 million to $250 million. So that's where we stand right now. That's why it's important for us to keep a close eye on leverage. 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 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.

Vince, I think you're on mute.

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.

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