Polaris Inc. Q2 2026 Earnings Call

Good day, welcome to the Polaris Quarter Two 2026 Earnings Call and Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please go ahead. Thank you, Bailey, good morning or afternoon, everyone.

I'm J.C. Weigelt, Vice President of Investor Relations. Thank you for joining us for our 2026 second quarter earnings call. We will reference a slide presentation today, which is accessible on our website at ir.polaris.com. Joining me on the call today are Mike Speetzen, our Chief Executive Officer, and Bob Mack, our Chief Financial Officer. Both have prepared remarks summarizing our 2026 second quarter results, as well as our expectations for the remainder of 2026. We'll take your questions. During the call, we will be discussing various topics which should be considered forward-looking for the purpose of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those projections in the forward-looking statements. You can refer to our 2025 10-K and our other filings with the SEC for additional details regarding risks and uncertainties.

All references to 2026 second quarter actual results and future period guidance are for our continuing operations and are reported on an adjusted non-GAAP basis unless otherwise noted. Please refer to our Regulation G reconciliation schedules at the end of the presentation and at the end of our earnings deck for the GAAP to non-GAAP adjustments. I will turn the call over to Mike Speetzen. Go ahead, Mike. Thanks, J.C.

Good morning, everyone, thank you for joining us. Strong second quarter results reflect the momentum building across our business. We exceeded expectations across all key metrics, gained share in our ORV business for the fifth consecutive quarter, and continued proving that the strategic actions taken over the last several years are making Polaris a stronger, more focused, and more profitable company. Second quarter reported sales increased 9%. Excluding Indian Motorcycle, sales grew 17%. Sales were driven by double-digit growth in our Powersports segment, led by ORV with our Utility RANGER line and our fast-growing commercial business, where growth is driven by investments in infrastructure and data center projects. We also saw strong contributions from Marine, which grew 16% in the quarter. Across our portfolio, North American retail increased 4% with ORV up 5%. Both measures exclude used vehicles.

We finished the quarter with solid share gains in ORV, reinforcing our belief that our combination of innovative products and strong dealer relationships continue to differentiate Polaris in the marketplace. From a profitability standpoint, our results include a $74 million benefit related to IEEPA refund claims. We have removed these refunds from some of our adjusted financial metrics today to provide the underlying operational performance of our business in the quarter. We refer to these as our operational adjusted results, which exclude the $74 million in tariff refunds but include ongoing tariff expense. Operational margins expanded at both the gross profit and EBITDA levels, even after excluding the tariff refunds. Higher shipments, favorable mix, and positive net pricing more than offset higher commodity costs and the $32 million of ongoing tariff headwind we experienced during the quarter.

Importantly, we continue to realize improved operating leverage from the portfolio optimization and manufacturing efficiency work we've executed over the past several years. We delivered adjusted earnings per share of $1.97, which included the pre-tax $74 million in tariff refunds. Excluding these tariff refunds, operational adjusted EPS was $1.01, well above our target range of $0.70-$0.80. We also saw operational gross profit margin expand by 82 basis points, excluding the tariff refunds and against a second quarter 2025 margin that had little ongoing tariff impact. These results reflect the strength of our execution, the competitiveness of our product portfolio, and the discipline we've maintained across the organization. As a result of our performance, and with the strong momentum we've built through the first half of the year, coupled with tariff refunds, we are raising our full year 2026 guidance.

While there remains uncertainty, we believe Polaris is operating from a position of strength, controlling what we can while navigating a dynamic environment. We have a clear strategy, the best team in Powersports, and a portfolio that continues to resonate with customers around the world. We're continuing to build positive momentum. We're gaining share in our core segment through focused innovation. Dealer relationships are strong and dealer inventory remains healthy. We're beginning to see meaningful benefits from the work we've done to refine our portfolio, simplify our organization, and strengthen our operational execution. Our team is aligned around a common strategy and a goal of strengthening and extending Polaris' leadership position within the Powersports industry. Moving on to our retail performance, ORV North American retail was up 5%, outperforming the industry and gaining share for the fifth consecutive quarter.

Trends within ORV remain consistent with recent quarters. Despite a cautious consumer environment, we're continuing to take share through the strength and breadth of our portfolio and category-defining vehicles. Our utility products make up over 70% of our Powersports segment and remain a clear source of momentum in this environment, with retail up more than 10% and RANGER continuing to outperform the market. We believe that performance reflects both the strength of our product lineup and the value customers see in the Polaris brand. One highlight of the quarter is that the recent industry data shows the RANGER 500 was the fastest growing off-road vehicle in the industry. In addition, our recently launched RANGER cab units, the RANGER 1000 and the RANGER XP 1000, drove multiple points of market share gains in the utility side-by-side market, which is the largest sub-sector of the ORV market.

Not only that, the second quarter marked our highest share in the sub-sector since 2021. We continue to believe there is a long-term trend in the industry, with retail demand shifting to cab units, given their capability, refinement, and features. The second quarter marked the first time when over half of our ORV retail was in cab units. That's proof we deliver innovation customers want and that we are winning in the largest and most important part of the market. On the recreational ORV side of the business, we continue to see a cautious consumer due to macroeconomic factors such as inflation, higher borrowing costs, and negative headlines. These negative factors have been consistent over a couple of years, and our retail outlet for the recreational ORV industry remains pressured. Turning to Marine, our second quarter pontoon retail was down high single digits according to the May SSI data.

Through May, the data reflects the pontoon industry is down approximately 9%. Our pontoon brands continue to perform well at the premium end with the Bennington QX and Godfrey SanPan. Here, consumers are not as sensitive to macro trends and interest rates, while retail at the mid and lower tier pontoons continue to be soft, given a more interest rate sensitive customer. I think it's worth repeating what I said last quarter. What truly differentiates Polaris is the strength of our entire portfolio at the dealership. We are the global leader in powersports, and we operate like it. Look for us to strengthen this leadership position with new product launches at our upcoming dealer events in August of this year and in early 2027. We continue to see healthy dealer inventory levels across our portfolio.

During the second quarter, we strategically increased inventory and utility given the robust growth we are experiencing in this category. At the same time, we have right-sized inventory positions in areas of the business such as ORV Recreation, Seasonal and Marine, given weaker demand. In aggregate, dealer inventory was down 8% in the quarter versus last year, and dealers' DSOs are slightly over 100 days, which remains well below historic levels. We remain committed to matching shipments to retail, and through the first half of this year, we have successfully executed this strategy. Improving our mix at the dealership remains a real opportunity for us, and it's an area we continue to invest in and measure progress against.

Rather than a one size fits all approach, we are tailoring our actions with each dealer to ensure a healthier channel and putting our dealers in the best position for success, such that every dealer carries the right mix and the right number of units for their market. We have already seen positive results with an 18% improvement in sales velocity in the first half of the year, helping our dealers navigate a choppy market. A program like this is a win-win for our dealers and Polaris and reflects our relentless focus on dealer health and stronger operational management. I'm now going to turn it over to Bob to provide you with more details of the financials and the increase to our full year guidance. Bob? Thanks, Mike. We delivered another strong quarter with sales and earnings both above the high end of our expectations.

Sales were up 9% or up 17% organically when excluding Indian Motorcycle. All three of our segments posted top-line growth in the quarter, led by our core powersports segment, where both ORV and commercial lines grew double digits. Marine continues to see a benefit from favorable mix, while PG&A achieved double-digit growth led by higher parts sales and powersports. Aixam and Goupil also grew 6% over the prior year. The underlying performance of the business was well ahead of our expectations. Our reported results and guidance include the tariff refund claims made in the quarter that Mike spoke about. To help evaluate the underlying performance of the business, we are also providing operational margin and EPS metrics that exclude the tariff refunds.

The $74 million of tariff refunds booked in the quarter contributed $0.96 to adjusted EPS. Excluding that benefit, operational adjusted EPS was $1.01, well ahead of the $0.70-$0.80 range we discussed heading into the quarter. Adjusted EBITDA margin from operations, which excludes the tariff refunds, also improved meaningfully by approximately 180 basis points compared to last year, primarily due to higher volumes, positive net price and favorable mix. These positive factors were partially offset by incremental tariffs, higher commodity costs, and a modest increase in operating expenses. Adjusting EBITDA for the separation of Indian Motorcycle, tariffs and commodities, our second quarter EBITDA incrementals would have been over 32%. This rate demonstrates that our strategy to optimize our plants and organization while pruning non-profitable businesses is having its intended outcome of increasing the profitability profile of Polaris.

Turning to our segments, Polaris powersport sales were up 17% year-over-year. RANGER and commercial shipments were significantly above last year's levels, supported by continued strength in utility demand across a range of categories. Commercial remains a clear bright spot, delivering solid revenue growth in the quarter, driven by strong infrastructure-related demand, particularly from data center construction projects. We believe Polaris is well positioned to capitalize on this opportunity through its dedicated commercial dealer network, focused commercial sales approach, and Pro XD lineup purpose-built for demanding work site environments. Given the level of infrastructure investment we are seeing, we believe there is a continuing runway to expand our commercial business at above current powersports industry growth rates. Powersports PG&A sales were up 21%, driven by factory-installed accessories and parts sales.

Commercial PG&A revenues were up significantly, bolstered by strategic investments we made to help maximize the uptime for our commercial customers. Gross profit margin from operations improved 77 basis points, driven by higher net price as promotional activity remained below last year's levels and positive product mix. Adjusted gross profit margin increased 458 basis points, reflecting much of the tariff refunds being recorded in Polaris Powersports. Importantly, these improvements were achieved despite an approximate 100 basis points of commodity cost headwind. Marine sales were up 16%, driven by higher shipments and a richer mix of pontoons, led by the Bennington QX and Godfrey SanPan, the premium lines within each brand. We also saw a modest benefit from net price. Gross profit margin improved 21 basis points year-over-year, again, reflecting favorable mix, which we expect to continue through the selling season, along with higher net price.

Higher commodity costs, particularly aluminum, continued to pressure margins. We expect that dynamic to continue until aluminum pricing retreats from current levels. Aixam and Goupil sales were up 6% as higher Goupil sales more than offset lower shipments within Aixam. Aixam retail was up double digits, which improved dealer inventory in that business. Gross profit margin improved 242 basis points, driven by lower warranty expense and favorable leverage of fixed costs from increased sales volumes. Our capital deployment priorities remain unchanged. First, investing in higher margin profitable growth. Second, returning capital to shareholders through our dividend. Third, paying down debt. With strong operational performance in the second quarter, combined with the $74 million of tariff refunds, our net leverage ratio improved to 2.6 times from 3.6 times at the end of the first quarter, moving back below three turns and well within our covenant requirements.

We expect net leverage to continue to decrease in the second half of the year. We remain very confident in our financial position. Our approach to capital deployment is disciplined. We expect strong cash flow conversion in the second half as seasonal working capital builds unwind. We plan to continue to strengthen the balance sheet flexibility while managing the business in line with investment-grade metrics. Moving to guidance, we are raising our full-year outlook for the second time this year, reflecting both the strong operational performance in the first half of the year and the $74 million of tariff refunds. We now expect sales of $7.3 billion-$7.5 billion, up 2%-5%, compared with our prior guidance of flat to up 2%. Adjusting for the sale of Indian Motorcycle, organic sales are expected to be up approximately 10%.

We expect a flattish retail environment in the second half of the year with a viewpoint that it could be up low single digits if demand holds in the back half. We are prepared to build and ship to those higher levels. Will continue to align with retail to ensure dealer inventory remains healthy. We are also increasing our margin outlook. We now expect adjusted EBITDA margin to increase 250-275 basis points. Operationally, we expect adjusted EBITDA margin to increase 145-170 basis points compared with our prior guidance of 100-140 basis points. Removing the impact from the separation of Indian Motorcycle, tariffs, and commodities, this would translate into EBITDA incrementals of nearly 40% at the high end of our guidance.

The increase reflects the strength of our year-to-date operational performance, even as we continue to manage higher commodity costs, specifically diesel, steel, and aluminum. We now expect a $70 million headwind from those increased commodity costs. The work we have done around Lean is supporting our operating model. Allowing us to drive improved throughput without adding unnecessary costs into our plants. That is creating better operating leverage and underpinning the increase in our margin guidance. On tariffs, we expect to pay approximately $215 million this year, unchanged from our prior outlook. That assumes no material change to USMCA or other tariff policies currently in place. We continue to execute against our tariff mitigation strategy with the goal of reducing our exposure to China and bringing China source material cost of goods sold to below 5% by the end of 2027, from 18% in 2024.

We are ahead of our internal goals today and are making progress identifying alternative suppliers in the U.S. and Mexico, which helps localize our supply chain. The Indian Motorcycle separation remains on track to be accreted by approximately $50 million to adjusted EBITDA, with the benefit weighted more toward the back half of the year, January 2027, due to the seasonality of motorcycle sales. We also raised our adjusted EPS guidance. We now expect 2026 adjusted EPS of $3 to $3.10. Operationally, that translates to $2.05 to $2.15, compared with our March 3rd guidance revision of $1.60 to $1.70. While we expect the ability to recover additional tariff refunds, those are not included in our guidance today because there is not currently a formal process to apply for the next phase of expected refunds and certain amounts must be recovered from suppliers.

We estimate the total potential future refund opportunity to be approximately $40 million. For the quarter, we expect sales to increase 4%-5% compared to last year, with growth driven primarily by commercial, government and defense, and marine. We are also factoring in higher commodity and logistics costs, with offsets from net price improvements. We expect adjusted EPS in the second half of the year to be close to $1 and the quarterly earnings forecast to be evenly weighted between the third and fourth quarters, but may shift based on timing of shipments as we enter seasonality of fall and winter products. Stepping back, we are beginning to see the benefits of the actions we have taken to strengthen our competitive position at dealerships and improve efficiency across our plants.

Our decision to raise guidance reflects the benefit from tariff refunds, it is equally a function of strong year-to-date performance, improved operational execution, and increased confidence in the earnings power of the business. We have momentum across the segments, at our dealers, in our plants, and throughout our teams. There is work ahead, we are executing from a stronger financial position, and I am confident in our ability to keep building on this progress. With that, I'll turn the call back over to Mike. Go ahead, Mike. Thanks, Bob.

In the second half of the year, our priorities remain consistent. We forecast a flattish retail environment for the second half of 2026, with growth expected in the utility category, while recreational offerings are expected to remain soft. We're excited about the second half of the year, given the innovative product launches being announced in August. We expect those products to have a greater impact in the fourth quarter as they arrive at dealerships. We also intend to maintain our commitment to align our build to shipments and shipments to retail to ensure dealer inventory levels remain appropriate. Regarding our tariff mitigation strategy, we are ahead of schedule.

We still await news from a broader 301 investigation and any update to USMCA, but we are taking the appropriate actions to reduce our tariff burden from China. We expect to see meaningful savings over the coming years should tariff policy remain consistent with where things stand today. We're raising guidance because the business is performing better than we expected coming into the year and even relative to three months ago. We're gaining share, dealers are healthy, channel inventory is in the right place. Our operations continue to see efficiencies from our Lean efforts. These fundamental metrics give us confidence in both the remainder of 2026 and reinforce the long-term earnings potential of Polaris. At the halfway point of the year, it's worth stepping back to recognize what we've accomplished. The results we are reporting today were not driven by a single quarter.

They reflect a clear strategy and several years of disciplined execution. Put simply, we are doing what we said we would do. We said we would focus on innovation. We did. With that innovation, we said we would gain share. We have. We said we would improve dealer inventory. We did. We said we would simplify the portfolio and improve manufacturing efficiencies, and we have. Today, those efforts are increasingly visible in both our operating performance and financial results. The progress we've made also reinforces our confidence that Polaris can deliver on its mid-cycle targets of mid-single digit sales growth, mid to high teens EBITDA margins, and double-digit EPS growth. The foundation is stronger today than it was a year ago, and our team is executing well. The work we've done over the last several years is beginning to show in our results.

The job isn't done, but we're building momentum. We're well positioned for the remainder of 2026 and beyond. Polaris is the leader in powersports. I'm confident in our strategy to deliver higher earnings power and stronger returns for our shareholders. It's an exciting time to be a part of the Polaris story. We appreciate your continued support. With that, I'll turn it over to Bailey to open the line for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead. Thanks for taking my questions.

Obviously, UTV was particularly strong in the quarter. Just wondering what drove the sequential retail acceleration there, and was data center construction a meaningful piece of that? How do you think about the opportunity there into the second half? Any line of sight to improvement or green shoots you're seeing in Rec? Thanks. Yeah. Thanks, Noah. A couple of things.

We did see retail accelerate into the second quarter. Remember that there is a level of seasonality that happens as we come out of the first few months of the year. It was also probably a little bit more exaggerated given a late start to the marine season. We saw the retail pickup in pontoons as we came into the second quarter. I'd point to a couple of the new products. The new cabbed RANGER 1000 and the XP 1000 at the entry level. Those drove considerable share points. Obviously that drove us above and beyond what the market was doing, which led to the share gains that we had coming into the first quarter. Obviously the continued strength around things like the RANGER 500, which was the highest selling vehicle across the industry.

Certainly, the commercial business continues to operate strong. It is data center as well as just large mega construction projects, as the firms look for more vehicles to be on site. We'll continue to learn more as we go and those projects continue to get built out. On the rec side, look, it's been a couple of years, feels like even longer.

Just given where we're at in terms of the overall consumer, on the rec side, the vehicles are a want, not a need. The good news is we know people are using the vehicles. It's hard to find a boat slip. You look at repair order activities for our off-road vehicle business. You look at tire consumption, oil consumption where we can track miles ridden, we can see that it's up, it's above where we were back in 2019. That's all good. We see it in parts coming through our PG&A business. The consumer remains somewhat on the sideline especially at the low to middle of the range. The high-end customers I talked about, I don't want to say they're immune, but they tend to be more cash buyers. They've got higher disposable income, and they're not being as impacted.

As you get down into the mid and definitely into the lower ranks of the customer profile, inflation's persistent. The good news is we are seeing at least some initial signs that it's slowing, but it's still well above the Fed's target of 2%. We've moved from interest rate cuts to now a talk of interest rate increases. Oil prices are all over the place given the conflict overseas, and that's created, I think, some concern on the macro side, and I think anything large discretionary is seeing a heavy impact and really that's where our rec business fits in. As we talked about, we've made sure we've continued to make adjustments in our inventory profiles at the dealer where we see strength in the utility side, which makes up 70% of our powersports segment.

We've leaned in heavier to make sure they've got the right inventory, and on the rec side, we've continued to pull back where appropriate, make sure that we've got the inventory sized and in a good spot.

Thanks. Maybe just one more. Operational ORV adjusted gross margin came in better than expected. If you could just speak to the operational savings and efficiencies I guess you've seen in the quarter and then how you think about the opportunity looking ahead. Thanks. Yeah. The promo in the business has started to come down.

We've certainly benefited from mix even with some of our value models selling at a higher rate. We're still doing really well at the high end NorthStar on the utility side, which obviously brings nice margins with it. I think the underlying work we've done in all of our factories to lean out and get the business ready for the volume to come back, and now you're seeing that as the volume ramps up both in Huntsville and in Monterrey you're getting the incremental savings. I was really happy with the performance. I talked about it in my prepared remarks. Our overall company margins were up 82%, gross margins that is 82 basis points. That's with a pretty significant year-over-year increase in the ongoing tariff expense.

We really hadn't incurred much of that in the second quarter of last year. Everything was still ramping into inventory and really hadn't come through the P&L. I think it's just a testament to the work being done inside the business. Obviously, we'll have more to say as we get through the year, but it certainly is a nice to continue to build from. You look at the combination of the slight price increases we've had, lower promo cost, then just efficiencies of getting more volume through the factories. It's a really strong setup for the business as we move into the second half.

Thank you. You bet. Our next question comes from Joe Altobello with Raymond James.

Please go ahead. Thanks. Hey, guys.

Good morning. Mike, I just want to pick up where you left off there regarding the promo environment. You mentioned that it was easing a little bit here and obviously, tariffs are a bad guy for you guys but they're, I think, worse of a bad guy for some of your competitors. Is that playing a role? Are you seeing any changes from a strategic standpoint from your competitive set given those tariff pressures?

Not really. We announced this morning factory authorized clearance. What I will tell you is our non-current inventory is in an even a better spot than last year and last year's was in a great spot. We don't anticipate that moving significant increase in promo. As we've talked in the past, it just becomes a really good way to drive foot traffic as well as help the dealers clear out any of the remaining 2026 vehicles they have. We really haven't seen much broadly in the industry. I would say that we do have a couple of competitors that continue to have elevated inventory levels, but the promo activity associated with that has been a lot more surgical than broad and really hasn't had a deep impact on us and how we're moving forward.

We expect as we get into the back half promo as a percent of comes down slightly. Part of that's the mix of vehicles, but it's also the fact that we continue to run at really strong inventory levels and have the right mix of vehicles at the dealers. I referenced it in my prepared remarks, sales velocity was up 18%, which essentially is us measuring how fast does it take us through our dealerships to retail a vehicle and an 18% improvement means we're paying less in floor plan. It means the dealer's able to rotate more vehicles through. It's good for them. It drives more profitability, and I think it's reflective of the fact that we're getting the right mix of vehicles into the right dealerships as we head into the back half.

Got it. Okay. Just to follow up on that in terms of the guidance. You raised guidance by $0.45 at the midpoint this morning, ex IEEPA refund. If I recall correctly, you beat the first quarter by $0.58, held off on raising. You beat this morning by $0.26 at the midpoint. Why the delta between the guidance raise and where you've beaten so far in the first half?

A couple things. One, you'll hear the same thing from us that you've heard in the past, right? There's an awful lot of uncertainty as we head into the back half. I was encouraged with the fact that USMCA was not canceled, they're also not done with whatever discussions are happening. We're still waiting on some 301 excess capacity investigation work. The interest rate environment, I think, has everybody kind of stepping back. Leaning in from that standpoint doesn't seem to make a lot of sense. Obviously, if things were to continue like they did in the first half, we would obviously do better, we're trying to play that a little bit cautious. The second thing, Bob talked about this in his prepared remarks, commodity prices are through the roof.

The good news is we're offsetting a significant portion of that and driving more than offsetting improvements through operations. That has chewed away at some of the beat we would have essentially flowed through to the back half as we look at higher aluminum and steel. Obviously, oil and diesel. We're hedging, that just tends to mute and dampen the effect as opposed to eliminate it.

As we look at the back half of the year, to Mike's point, with commodities, it's a couple different stories, right? With the war in Iran and the pressure on oil, we see that in diesel, plastics, and other petroleum-based products. That's a decent chunk. The bigger piece is steel, aluminum, copper, with steel and aluminum far and away being the leaders there. Some of that's just driven by the tariff structure now and the push for the use of U.S. steel. We are fortunate in that, as we talked about last quarter, we use U.S. steel in all of our products that are made here in the United States and Mexico and have those contracts in place. You got a lot of people out there scrambling now to buy U.S. steel, and it's putting a lot of pressure on the forward curve on steel.

There's some thought that that's going to return to earth here in the second half of the year. By the time we get to there, we'll already have bought our steel for the year. If there's relief, we won't see much of it until next year. A piece a lot of folks aren't talking about is line haul. It's not really a commodity, we include it as we think about commodities. With all the pressure on both documented drivers and the increased enforcement from the federal officials on that, some of this activity that's been happening with these really large verdicts against all the transportation brokers. There's a tremendous amount of price pressure on the human side of trucking, not just the diesel side. We've got what we can see baked in. Obviously, we're hedged. We hedge about 50% of our exposure.

We're not 100% positive where that goes in the second half of the year. It's certainly been a lot more volatile than we expected when the year started.

Got it. Thank you. Thanks, Joe.

Our next question comes from Craig Kennison with Baird. Please go ahead. Hey, good morning.

Thanks for taking my question. I wanted to ask about ORV utility. It was up in the low teens. Is there a way to frame that demand strength in the context of consumer buyers versus commercial buyers?

Yeah. Just to clarify, the Pro XD products that we sell to the rental firms, those are not included in retail. The commercial stuff that can bleed over into retail is kind of standard product being purchased by rental companies through dealers and things like that. I would say, Craig, the bulk of that growth in the quarter is really driven by primarily utility to the more traditional industries we talk about with utility, where it's farmers, ranchers, vineyard owners, large property owners, things like that. There's probably a little bleed-over impact from rental and commercial in there, just as commercial markets do better because some stuff gets bought at dealers, and we don't see that as much. It's primarily driven by the traditional markets.

We've been hearing more about some of the strength in your commercial operations more recently, including strength with rental companies, data centers, infrastructure projects, as you mentioned. I wonder, have you taken a look at framing the total addressable market you have in that commercial segment? Do you have an opportunity maybe to focus on that more now that you've simplified the business in recent years?

Yeah. It's a good point, Craig, and it's really the point we've tried to get at now for several years. I'll just give you the example we've used with a few investors. When you look at our commercial business and the government and defense business, all those together basically are the same size Indian Motorcycle was, but obviously making a significant amount of profit as opposed to losing money. The reality is, historically, we had not put a lot of time and attention around that, and for obvious reasons, we were focused on trying to get a money-losing business to profitability.

The benefit we've seen as we've cleaned up the portfolio is our ability to really refocus and make sure that we've got investment in those categories. The nice part is, we tend to talk about the commercial side just because it gets more of the attention around some of the commercial build-out, the data center build-out. Our government business, our defense business is growing incredibly fast as well. It was in the news not too long ago about the Marine contract that we won. We continue to win at the state, local, and federal level with vehicles that go to police, fire, border patrol, you name it. Obviously our commercial business has been successful with selling primarily into the rental agencies, rental firms that are supporting a lot of the construction build-out across the country.

We're continuing to make sure we focus and some of that's just good old prioritization in the factory to make sure we've got enough capacity, making sure that our upfit centers, where we do some of the final work to get the vehicles ready, has the right resources, time, and investment. We're going to continue to look for that as an opportunity. The thing we're trying to understand, as it relates to data centers, is what does that look like longer term? We certainly have visibility to what the construction build-out profile is. The use case for the vehicles is something we're continuing to learn.

We'll know more over the coming couple of years as to what the replenishment cycle looks like, what happens once they're done with the construction on the site, and what kind of vehicle requirements do they have at that point in time.

Yeah. One of the things, Craig, as we think about this commercial business and we think about investment, we've made some investments in the last couple of quarters on the parts support side of the business to make sure uptime obviously is super critical to that. We have a lot of experience in that area through our military and government business, particularly military. We do a lot of work with them to make sure they've got staged parts and they can repair vehicles quickly in the field. That same skill set kind of crosses over into the commercial space as we look to make sure that we've got parts in the right places at the right time so that they can quickly repair units and get them back in service. That's another growing part of the business.

We have a big installed base. Now with all these projects, the vehicles are getting used a lot. Hours are up, so it starts to consume parts. We're investing there. We're going to continue to look at what else we can do in that space, definitely an area of opportunity we see going forward.

Thank you. Thanks, Craig. Our next question comes from Molly Baum with Morgan Stanley.

Please go ahead. Hi. Thanks for taking my question.

Maybe a bit of a follow-up from that last one. I don't want to front run the model year launch in August too much. You've called out traction in value-oriented products, cabbed utility vehicles, and then commercial as well. I guess, how are you prioritizing new product development across all three of those opportunities? As a kind of follow-up related to that, you talked about investments in parts support for commercial. Are there any specific capabilities from a product standpoint as you continue to kind of invest and innovate here that could maybe better position Polaris for commercial applications? Thank you. Yeah, maybe I'll talk about the last first.

Bob hit on it. We've developed a model. The use case for the commercial vehicles is very different than what your typical consumer uses. Given our history, we've effectively tailor-made these vehicles. As a result of that, we know exactly what components we need to make sure that we're carrying. Our backorder status, even with all this growth, has dropped significantly. Our ability to deliver on time to these rental agencies, a lot of which do their own repair activity, has hit record levels relative to being able to fulfill the demand that they have. We continue to look for other opportunities. My background was coming out of aerospace. One of the things that we did to ensure uptime on jet engines was to make sure we had spare pools, whether that was complete engines or parts.

Given the growth that we've got in commercial, those are the types of things we're starting to explore, which is really interesting to us. As I mentioned when I was answering Craig's question, something that we probably wouldn't have focused on in the past because we were distracted by things that were probably not making anywhere near the returns that we're getting out of the commercial business. I think that presents a significant opportunity for us. We'll continue to look for ways to grow and build off the high level of support. The fact that we have such a prominent role, I think is reflective of the value that we can bring and the confidence they have both in the vehicle as well as our ability to support their uptime, which is really important.

As far as the product investment prioritization, we've done a lot of work over the past five years to really understand product life cycles, where the consumer is, what the demand profile is. I can tell you that all of that goes into a calculus, I'm not going to get into a lot of the detail here, that both supports the utility and the rec side of the business. As I mentioned, we're going to have some news as we head into next week at our upcoming dealer show. We've got more news coming early next year. It's all exciting stuff. It's based on product cycles, product generation, as well as understanding how the consumers are using the vehicle.

I think as demonstrated by the innovation we've delivered in the last five years, we're hitting the mark and we're hitting it well, and we're going to keep that streak going.

I think just to build on Mike's answer on your commercial question. The vehicles we sell in the commercial space are very customized for that space, and we've been doing this for a long time. Those vehicles are diesel-powered. They have different seating, different seat belts. They are slowed down. They typically are capped at 25 or 35 miles an hour. They have a lot of heavy duty parts that over the last several years we've learned as we've had this experience with the rental houses, these vehicles in these tough environments. We've learned what breaks, what's hard to repair, what makes it easier for them to manage these vehicles in the field. So, it's a fairly different product than our standard RANGER product. So I think that positions us really well, and we're going to continue to build on that.

As one of the things, as Mike said, we're trying to understand is what really is the usage and the life cycle at data centers. There's not a great answer to that question right now because this boon in data center construction is a fairly recent thing. We're working with those customers and those applications to understand, is the vehicle used the same as it is on other big construction projects? Is it different, other specialized things they're going to need? We'll continue to refine that product and make sure we're offering leading product in the industry for those very difficult applications as this rolls out.

Molly, one of the things I failed to mention when I was talking about the product prioritization. You've seen this from us over the past couple of years. We did a lot of work to understand customer segmentation, and one of the things that we became brutally clear on is we, like many others, had chased customers to the high end of the market, and we had left a gap at the lower end. I'm not talking cheap, low entry type stuff. I'm talking just entry level vehicles. You've seen us reprioritize around that. The RANGER 500 is a prime example. That is a customer set we had missed. Clearly, as demonstrated by the demand for that vehicle, there's a desire for people to get into a Polaris at sub-$10,000.

There's a subset of those customers that will eventually trade up, that was what we were missing all along. I would tell you that as we look forward to make sure that across our product portfolio, we're hitting all those customer sets, to ensure that we are cultivating, bringing the new customers in, and then obviously providing them an opportunity to move up the price ladder with Polaris as opposed to a competitive vehicle.

Got it. Thanks so much.

You bet. Our next question comes from Derek Johnson with Seaport Research Partners.

Please go ahead. Good morning.

Thank you. A perfect segue into the question I want to ask about the RANGER 500 and the RANGER 1000 cab units. Those doing well. Who's the buyer there? Is there any evidence now that you've had the RANGER out for about a year, is there any evidence that these are bringing in new customers, or are they enticing maybe replacement buyers or maybe more commercial? Who's the buyer there? Yeah.

One of the things, Derek, that we track is cannibalization. Anytime we introduce a product, especially the RANGER 1000 and XP cabbed, we make some assumptions. The cannibalization has been significantly less. We obviously are seeing people that would have bought an uncabbed unit moving into this category because they would have tended to buy an uncabbed unit, and then buy cab components. They're getting a much better deal when they buy this vehicle, in terms of the additional accessories that do come on it. It is driving incremental volume, it's not just moving people out of that uncapped to the entry level cab. We have not seen cannibalization of people moving from a NorthStar Ultimate down into this category, that's good. On the RANGER 500, I think we've quoted this before.

About 70% of the customers that are buying that vehicle are new to Polaris. That's important because these are customers we would have lost to some of our low-cost players in the industry. The good news is that we know that once we get these people in, there's an opportunity for us to potentially move them up into a RANGER 570 or to an entry level RANGER 1000, as they use the vehicle more and start to realize that maybe they want some of the additional comforts that come with a full cab vehicle. Frankly, if they don't, they stay in the RANGER 500, that's just fine. We've got plenty of accessory offerings there, we like making sure we've got more Polaris customers coming into the fold. Even though it is the fastest growing, as a total percent of our portfolio, these vehicles are still relatively small.

Obviously, given our margin performance, you're not seeing heavy dilution from a margin. In fact, it's good because we're getting more volume through our factories. Our mix at the mid and high end of the category remains strong, margin performance is not much of a concern right now.

Okay. That's great. I just wanted to ask a follow-up on that. Some dealers are a little bit reticent to sell the unit with "no margin" in it. I'd assume that there'd be an attach rate of parts and accessories given that these are bare bones machines. What does the attach rate look like for parts and accessories, both for aftermarket parts and what they add on at the dealership?

Yeah, there certainly is opportunity there, and it's obviously lower level than we see even on a NorthStar Ultimate. Not necessarily something I'm going to get into a lot of the detail on, but it was a big part of when we came out with the RANGER 500 is making sure that we did have the accessories that we knew the customer at that price point would be looking for. That does give the dealer an opportunity to make additional margin. We've spent a lot of time working through how do we help the dealer be successful, developing things like tear sheets that are essentially a one-page document that they can hand to the customer that makes recommendations on the most accessorized components for the vehicle, just so that they're aware.

Certainly, the configurator that we have as a business, which is unique to us relative to many of our competitors, is something that in store the dealer can take the customer through and gives them an opportunity for more accessories. Quite frankly, it's developing the relationship with the customer, both from a service perspective as well as, eventually down the road, if that customer is looking to trade up or continue to replenish the vehicle, that gives them an opportunity for ongoing revenue streams.

Yeah. Garrett, there's a bit of a retraining here. We did such a good job of moving everything to a lot of the factory-installed accessories. It's a bit of a retraining for us and for the dealers, to make sure we've got all those selling processes right in the dealership so that they're offering, to Mike's point, two sheets of different things to make it easy for a salesperson to walk a customer through what the normal accessories or typical accessories are and try to capture those both at the time of sale.

Then, working with the marketing teams to make sure we're at six months down the road, three months down the road, we're popping those opportunities in front of those buyers for things that maybe they didn't want to spend the money on at the time when they bought it or didn't know they need, and make sure they see the accessories they can buy to add to the uses for their vehicle.

Okay, great. Thanks, Bob. Thank you, Mike.

You bet. Our next question comes from James Hardiman with Citi.

Please go ahead. Hey, good morning, guys.

Thanks for taking my questions.

Sure. Wondering if you could share any color around the shape of demand within the quarter.

Obviously, you had, I think, 5% growth in ORV. Just curious, clearly it was a roller coaster ride in terms of headlines over the course of the quarter. Curious just how much volatility that created. Any color on July would be great as well. Thanks. Yeah. There was certainly volatility within the quarter.

I think we talked a little bit about that even coming out of the first quarter. The headlines certainly do drive some consumer behavior, relative to, "Hey, we think we have a resolution, now we don't have a resolution. Oil's up, oil's down." We do see some of that volatility certainly playing out. The good news is, the month of July is playing out consistent with what we saw in the second quarter, which is utility remaining strong, rec remaining challenged. I think that's what we anticipate going forward. As I talked about, obviously first half retail was up. We're expecting second half retail to be flattish.

Obviously, if it's better than that, we're positioned well to take advantage of that, but we think it's prudent to plan that way, and that's really forecasting the utility business to remain up and rec to remain somewhat challenged in that back half. I think until we see clarity around interest rates, we see clarity around inflation, some resolution overseas, and oil start to stabilize, I'm not sure we see that dynamic change much in the near term.

Makes sense. Maybe initial thought, this may be way too early, initial thoughts on 2027. Obviously, you're not going to be giving us guidance here today. At least on the tariff piece, help us with some of the puts and the takes. Obviously, we can peel back the refund piece, and I certainly appreciate the operational numbers that you've given us today. I think I heard Bob say there's maybe $40 million in refunds remaining. I'm assuming that's a 2027 event. You're also getting out of China. I think that's more of a 2028 benefit than 2027 as we think about that. Maybe walk us through some of those moving pieces, and then anything operationally we should be thinking about into 2027 would be great. Thanks. Yeah. It's tough to comment much on tariffs.

There's still uncertainty around where does USMCA go? Where is this next 301 investigation relative to excess capacity? The good news is, to your point, we are driving content out of China at a rapid pace. We're actually slightly ahead of schedule. By the end of this year, we'll be down to less than 5% of our material cost of goods sold coming from China. The good news about that is a good portion of that is coming back to either the U.S. or Mexico, which helps us from a content requirement standpoint. Relative to USMCA, we do think that they'll probably push for higher content requirements, we're making sure we're well-positioned for that as a result of some of the other activities we've got going.

We'll obviously have a fair amount of that worked as we get to the end of the year. As far as the tariff refunds, tough to say. We still have the broad 125 number, of which we've booked a good portion. There's obviously some portion of that that's dependent on our suppliers getting refunds and bringing those back to us that we're working through. I would hope that we could get that accomplished all this year. It's cash we're due back, we're working aggressively to make sure that we get that. As we get into next year, volume's going to be the key question in terms of where do the markets The good news is we've demonstrated getting a little bit of incremental volume to our plants yields pretty strong incremental margins that range anywhere from 30%-40%.

Obviously, we would look and keep that momentum going into next year. Our plans are running at about 70% capacity. That's a pretty broad number. Each plan is obviously different, and that's far from where we view as optimal. That gives us plenty of opportunity to get more operating leverage and margin expansion as we move forward.

Yeah, James, you were correct. The roughly $40 million to go. About half of that we got to collect from suppliers, about half is stuff we've got to file with the government where the window to file isn't open yet. I would share Mike's optimism. A lot of our supplier refunds were stuff they applied for in the first two phases, and we've got good documentation around that, working well with the suppliers to get that back. I think we'll see that over the next couple of quarters. We're not going to book it until it shows up. The stuff that we haven't filed with CBP yet, we'll report as we file. When they open the filing window, we don't know when that'll be. It's been bouncing around quite a bit. Tariff picture headed into next year, to Mike's point, pretty much the same.

We're not expecting big changes. We'll see what happens with USMCA and this other 301 that's out there. We will get the China spend down. That'll really, to your point, be a 2028 thing. We'll be down to sub 5% by the end of 2027. We'll see some benefit from that in 2027. Certainly start to see it show up in working capital as those purchases from more local buyers roll through. There'll be obviously all stuff that we'll talk about as we get closer into next year and start talking about guidance.

Got it. Just point of clarification, you think that you might get the remaining $40 million in the back half, that's not in your current guidance, correct?

It is not in our guidance.

Sure neither the cash nor the P&L impact is in our current guidance.

I think we'll get a chunk of the supply stuff, the stuff that still has to be filed with CBP. I have no view on whether that'll be second half of this year or early next year. It's a pretty complex thing, and there's a lot around them getting organized around the last phase because it's all the more complicated refunds. Fortunately, as Mike said, the bulk of what we are getting back was in phase 2, and we filed that, and we expect to see that cash roll in in Q3.

Got it. Thanks, Bob. Thanks, Mike.

Thank you, both. Our next question comes from Anthony Bonadio with Wells Fargo.

Please go ahead. Yeah. Hey, guys.

Thanks for taking my questions. I just wanted to touch on market share a little bit. I know you guys have taken share for five quarters in a row now. I know some of this is driven by some of the stuff you've done on the innovation front. Can you just maybe talk through who the key donors are there at this point? Maybe how to think about a possible competitive response from a product perspective as the new model year rolls out.

Yeah, I think probably more of our dynamic is we're going to start lapping some tough comparers when we start picking up momentum in the back half of last year. I think the primary challenge will probably be ourselves as we look forward. We got a lot of great new stuff coming out, both in the back half of this year as well as heading into next year. I think the pipeline's really good. I would like to hope that the industry remains rational. We have seen inventory levels come down. The vast majority of the industry has gotten inventory in a good spot. We still have a couple of players who are, on a relative basis, very high. We haven't seen necessarily any significant promo or channel activity related to that. Frankly, that could change tomorrow.

I think given the products that we have coming out, I think the refresh we've done around our products, we've got the broad category covered. I think for me, it's really about hopefully getting some green shoots around the rec of the business, because I think we're positioned really well with the products, the Pro R, the XPEDITION, you name it. We're in a prime spot to really take it in that category.

That's super helpful. Thank you. Not to beat a dead horse on commercial here, if I heard correctly, I think you said commercial is excluded from the retail figure that you guys report. I guess if that's right, what would that mid-single-digit ORV demand growth figure look like if it was included? Just anything you can say to better frame the size of that business for us?

Yeah. Look, I don't want to get into the details of it because it isn't a retail vehicle. As Bob highlighted, this vehicle is purpose-built and once they're done on a job site, most of these vehicles are retired permanently. They're used in a pretty rough environment. The fact that we put Kevlar on the back of the seats and things like that gives you a pretty good idea. We don't talk about the size of the commercial, but I did talk about the size of our commercial gov and defense category, which is essentially vehicles that are being used outside of, call it, the retail environment. In that business, I sized pretty close to what Indian Motorcycles was when we divested the business.

Appreciate it, guys. You bet.

Our next question comes from David MacGregor with Longbow Research. Please go ahead. Hey, good morning.

This is Joseph Nolan on for David.

Hey, Joe. Hey. You guys had a number of initiatives in recent years to improve margins, including Lean manufacturing, production efficiencies, et cetera.

Could you just talk about volume leverage and give an update on incremental margins, given all the work you've done on that front?

Yeah, I'll let Bob get into the incrementals. The one thing I want to remind everybody is, yes, we have done a lot of work. We are still in the early innings. I'm encouraged with what I've seen from the team, but we have much further to go in terms of getting Lean fully adopted in all of our manufacturing facilities, as well as in the front office of our business, because there's opportunities there, especially as we enhance some of our IT systems in the coming couple of years as a business. The good news is, with demand stabilizing, we're not talking about shipping at lower levels.

We're now matching ship to retail, that's giving us a better opportunity to really leverage volume as we get it through the factory, that's obviously driving some pretty strong incrementals that I referenced and Bob referenced during our prepared remarks.

If we think about the incrementals, Q2 was pretty good. If you took out tariffs, both the refunds and net new tariffs and commodities, we'd have been in the low to mid-30s, we'll be a little better than that for the full year. Obviously, it's a little noisy by quarter. You get into Q3, Q4, we start shipping snow, we have other dynamics that make it a little lumpy. I think if you focus on the full year, really solid incrementals. Obviously, commodities are something that we own, we got to go try to overcome. I think it just shows the level of performance coming through the factories. To Mike's point, we're not done.

We're still, I would say, maybe third inning of our Lean journey as a company, I still think there's a lot of factory improvement to drive over the next few years. The localization of the supply chain and moving that stuff out of China, part of the incremental benefit of that is just having those suppliers be a lot closer. We can work better with those suppliers. We can continue to tailor what gets delivered to the plant, how it gets delivered, when it gets delivered to fit into our new Lean flows. I feel really good about the setup and the increasing skill of the team. I do think that there's a few more innings to play out as we continue down our Lean journey.

If we can get some volume, I think the incrementals are going to be really strong and well-received.

Got it. That's helpful detail. It's a smaller part of your business, but international sales were up 28%. Could you just talk about what you're seeing in some of your international markets?

Yeah. Look, we've gotten a lot more focused. We don't talk about this as much as maybe some of the other ones. As we've gotten the portfolio right-sized, we've gotten into a far more surgical approach. International markets for us are challenging because there isn't necessarily a market that looks a lot like the U.S. Whether it's going into Mexico, whether it's going into Australia or Europe, there are very different areas that we need to drill into. Whether it's Australia in terms of success with the RANGER product. Europe, the vehicles get used more in an on-road application, so making sure that we've got accessibility for vehicles like the RANGER 500, which are increasingly popular. Or you get into areas like Mexico, where you're looking at high RANGER, high Pro R volume.

Each of those markets takes a different approach, I think it's just reflective of the fact that we're a heck of a lot more focused than we have been historically. We're making sure that we got vehicles specific to that market. The requirements within market are slightly different, so we have to go through a process to adapt the vehicle and/or have a vehicle that meets the needs in certain parts of the regions. I would say we're doing a much better job, that's showing up in the growth rates that we're seeing internationally.

Got it. That's helpful detail. Thanks. This concludes our question and answer session.

The conference has now concluded. Thank you for attending today's presentation.