The outlook revision follows our review of the ratings on ITV in the context of lower expectations for U.K. TV advertising spend in 2017 and stabilization in 2018. ITV's net advertising revenues (NAR) still account for a significant share of about 55% of the group's external revenues (or about 47% including internal revenues) and showed a 2.7% decline in 2016 and 6% decline in the first four months of 2017.
Strong growth of about 23% in Online, Pay & Interactive in 2016 helped to offset the decline in NAR. However, slower growth in studios due to weak performance in the U.S. hit by three big shows not returning in 2016, resulted in overall external revenue growth of 3% (including a positive foreign exchange effect) compared with our expectation of 5% growth.
We have revised downward our assumptions for 2017 with regards to NAR growth and now expect it to decline by 5%-6% year-on-year.
Nevertheless, we expect ITV to maintain its profitability and cash flow generation and keep the credit metrics at current levels.
Our view of ITV's business risk profile reflects its solid share of about 47% of the U.K. TV advertising market; its established and popular programming; and the strong profitability underpinned by ITV Studios, the company's content production arm.
At the same time, we maintain our view that ITV's business risk profile remains constrained by its significant exposure to the volatile U.K. TV advertising market, and limited, although improving, business and geographic diversity.
In addition, we consider that, in the short-to-medium term, the risks related to more investment in original drama series offset a related increase in geographical diversification and into non-advertising-related segments. Among such risks is a possible increase in ITV's earnings volatility because it is self-funding the deficit in producing new shows early in their life cycle, as well as needing to invest more in working capital, which affects cash conversion potential. Our assessment of ITV's financial risk profile takes into account the group's solid credit metrics and strong cash flow generation.
In particular, we anticipate that the company will post an S&P Global Ratings-adjusted debt-to-EBITDA ratio below 2.0x and free operating cash flow (FOCF)-to-debt ratio of about 30%-35% in the next two years.
In the past, acquisitions and shareholder remuneration have either consumed a material part of ITV's discretionary cash flow or exceeded it.
We anticipate that this will continue in the medium term, taking into account ITV's publicly stated financial policy and its appetite for acquisitions in the TV production business, which we consider could result in credit metrics weaker than we currently forecast. Our base case assumes: GDP growth of approximately 1.7% in 2017 and 1.2% in 2018 in the U.K.Decline in the U.K. TV advertising market in the low-to-mid-single digits in 2017 with stabilization in 2018.Flat revenues in 2017 mainly due to further mid-single-digit decline in NAR outweighed by growth in other non-NAR revenues from Online, Pay & Interactive and studios divisions.
Thereafter, growth is assumed at 2%-4%, mostly because of the unpredictable TV advertising market.S&P Global Ratings-adjusted EBITDA margin to be broadly flat at around 30% supported by the positive mix effect of Online, Pay & Interactive segment growth as well as cost saving initiatives. Ordinary dividend payments to increase by 15% over the next two years.
Special dividend of £200 million in 2017, up to £100 million thereafter.Small bolt-on acquisitions of up to £100 million a year in the following two years.Based on these assumptions, we arrive at the following credit measures for the next two years: An adjusted debt-to-EBITDA ratio of 1.7x-1.8x.An adjusted FOCF-to-debt ratio of 30%-35%.The stable outlook reflects our view that despite cyclicality in the advertising segment, ITV is becoming more resilient due to increasing the proportion of its earnings that stem from non-advertising revenues.
We expect that the company is able to manage dividends and potential acquisitions such that it preserves adjusted leverage sustainably below 3x and FOCF to debt of more than 15%. We could raise the ratings if we saw ITV's business risk profile strengthening by demonstrating resilience in its onscreen performance, further enhancing its Online, Pay & Interactive segment, and strong growth within ITV Studios. Geographical diversification outside ITV's main market, the U.K., would also underpin a positive rating action.
We could also raise the ratings if the company adopts a more conservative financial policy that leads to markedly stronger credit metrics on a sustainable basis, such that S&P Global Ratings-adjusted leverage is below 1.5x. We do not expect to lower the ratings in the next 24 months because of ITV's resilient performance and financial policy.
That said, a material and prolonged decline in profitability or a stronger decline in advertising revenues than we anticipated, resulting in adjusted debt to EBITDA above 3x and FOCF to debt below 15%, could cause us to lower the ratings. Likewise, if ITV deviated from its current financial policy, this could put a strain on the ratings
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