Polaris Inc. (PII) Q2 2026 Earnings Report, Transcript and Summary

Good day. And welcome to the Polaris Second Quarter 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 0. After today's presentation, there will be an opportunity to ask questions. 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, Gary. Good morning or afternoon, everyone. I am 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 second quarter results as well as our expectations for the remainder of 2026, then we will 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 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 Reg G reconciliation schedules at the end of the presentation and at the end of our earnings deck for the GAAP to non-GAAP adjustments. Now I will turn the call over to Mike Speetzen. Go ahead, Mike.

J.C. Good morning, everyone, and 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%. Gains 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, 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 have 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 to $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, competitiveness of our product portfolio and the discipline we have maintained across the organization. As a result of our performance and with the strong momentum we 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 are continuing to build positive momentum We are gaining share in our core segment through focused innovation, dealer relationships are strong and dealer inventory remains healthy and we are beginning to see meaningful benefits from the work we have 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 and despite a cautious consumer environment, we are continuing to take share through the strength and breadth of our portfolio and category-defining vehicles. Our utility products make up more than 70% of our powersports segment, and remain a clear source of momentum in this environment. With retail up more than 10%, 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 subsector of the ORV market. Not only that, the second quarter marked our highest share in the subsector 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 features. The second quarter marked the first time when over half of our ORV retail was in cab units. that is 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 outlook 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 is 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 in 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 dealer DSOs were 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 is 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 for our dealers and Polaris and reflects our relentless focus on dealer health, and stronger operational management. I am 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. Gains 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 in powersports. Aixam-Goupil was up 6% over the prior year. The underlying performance of the business is 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. $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 to $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. Adjusted 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 nonprofitable businesses is having its intended outcome of increasing the profitability profile of Polaris. Turning to our segments, Polaris Powersports 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 worksite 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 and we expect that dynamic to continue until aluminum pricing retreats from current levels. Aixam-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 and 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 2.6x from 3.6x at the end of the first quarter moving back below 3x 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 and 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 to $7.5 billion up 2% to 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 but we 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 50 to 75 basis points. Operationally, we expect adjusted EBITDA margin to increase 145 to 170-basis points compared with our prior guidance of 100 to 140-basis points. Removing the impact from the separation of Indian Motorcycle, tariffs, 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 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 and allowing us to drive improved throughput without adding unnecessary cost 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-sourced material cost of goods sold 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 United States and Mexico helps localize our supply chain. The Indian Motorcycle separation remains on track to be accretive by $50 million to adjusted EBITDA with the benefit weighted more toward the back half of the year during January 2027 due to the seasonality of motorcycle sales. We also raised our adjusted EPS guidance. We now expect 2026 adjusted EPS of $3.00 to $3.10 Operationally, that translates to $2.05 to $2.15 compared with our March 3 guidance revision of $1.00 to $1.70. While we expect the ability to recover additional tariff refunds, 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% to 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 which are offset by net price improvements. We expect adjusted EPS in the second half of the year to be close to $1.00, with 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 but 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, but we are executing from a stronger financial position and I am confident in our ability to keep building on this progress. With that, I will 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 in the utility category while recreational offerings are expected to remain soft. We are excited about the second half of the year given the innovative product launches being announced in August. And 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, we are taking the appropriate actions to reduce our tariff burden from China and we expect to see meaningful savings over the coming years should tariff policy remain consistent. With where things stand today. We are raising guidance because the business is performing better than we expected coming into the year and even relative to three months ago. We are gaining share, dealers are healthy, channel inventory is in the right place and our operations are seeing 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 is worth stepping back to recognize what we have 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. And today those efforts are increasingly visible in both our operating performance and financial results. The progress we have made 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 have done over the last several years is beginning to show in our results. The job is not done, but we are building momentum and we are well positioned for the remainder of 2026 and beyond. Polaris is the leader in powersports and I am confident in our strategy to deliver higher earnings power and stronger returns for our shareholders. it is an exciting time to be a part of the Polaris story and we appreciate your continued support. With that, I will turn it over to Weigelt to open the line for questions.

We will now begin the Q&A session. To ask a question, you may press * then 1 on your touchtone phone. 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. Our first question comes from Noah Zatzkin with KeyBanc Capital Markets. Please go ahead.

Obviously, UTV was particularly strong in the quarter. So just wondering what drove the sequential retail acceleration there And was data center construction a meaningful piece of that? And then how do you think about the opportunity there into the second half? And then any line of sight to improvement or green shoots you are 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 would point to a couple of the new products, the new cab Ranger 1000 and the XP 1000 at the entry-level. Those drove considerable share points and 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. And then 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 as those projects are, starting to move forward. You know, it is tough to say what that trajectory looks like. You know, obviously, if you look at the broader projections, it would say those markets are going to continue to grow. We are obviously playing that a little cautious as we look forward. We have obviously built in what we are expecting in terms of higher demand relative to what they are going to need for vehicles on-site. But we will continue to learn more as we go in those projects continue to get built out. On the rec side, look, it is been a--it is been a couple of years, feels like even longer. Just given where we are at in terms of the overall consumer on the rec side, vehicles are a want, not a need. And, you know, the good news is we know people are using the vehicles. it is 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 written, can see that it is up, it is above where we were back in 2019. So that is all good. We see it in parts coming through our PG&A business. But the consumer remains somewhat on the sideline. Especially at the low to middle of the range. The high end customers I talked about, I do not want to say they are immune, but they tend to be more cash buyers They have got higher disposable income. And they are not being as impacted. But, you know, as you get down into the mid and definitely into the lower ranks of the customer profile, Inflation is persistent. The good news is we are seeing at least some initial signs that it is slowing, but it is still well above the Fed's target of 2%. We have 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 is created I think some concern on the macro side and I think anything large discretionary is seeing a heavy impact and really that is where our rec business fits in. So as we talked about, we have made sure we have 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 have leaned in heavier to make sure they have got the right inventory. And on the rec side, we have continued to pull back where appropriate. Make sure that we have got the inventory sized in a good spot. Thanks.

Maybe just one more operational ORV adjusted gross margin came in better than expected. So if you could just speak to the operational savings and efficiencies I guess, you have seen in the quarter? And then how you think about the opportunity looking ahead? Thanks.

Yeah. I mean, you know, the promo in the business has started to come down. We have certainly benefited from mix even with some of our value models. Selling at a higher rate. We are still doing really well at the high end North Star, on the utility side, obviously brings nice margins with it. You know, I think the underlying work we have done in all of our factories to lean out and get the business ready for the volume to come back, and now you are seeing that as the volume ramps up both in Huntsville and in Monterey. You are getting the incremental savings. You know, I was really happy with the performance. I mean, I talked about it in my prepared remarks. Our overall company margins were up 82%, gross margins that is 82 basis points. And that is with a pretty significant year-over-year increase in the ongoing tariff expense. We really had not incurred much of that in the second quarter of last year. Everything was still ramping into inventory and really had not come through the P&L. And I think it is just a testament to the work being done inside the business. You know, obviously, we will we will have more to say as we get through the year, but, you know, it certainly is a nice to continue to build from and you look at the combination of the slight price increases we have had, lower promo cost and then efficiencies of getting more volume through the factories, it is a really strong setup for the business as we move into the second half.

Thank you. Our next question comes from Joe Altobello with Raymond James. Please go ahead.

Thanks. Hey, guys. Good morning. So, 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 are, I think, worse than a bad guy for some of your competitors. So is that playing a role? And are you seeing any changes from 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 noncurrent inventory is in an even better spot than year and last year's was in a great spot. So, you know, we do not anticipate that moving a significant increase in promo As we have 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 have not 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 has not had a deep impact on us and how we are moving forward. And we expect as we get into the back half promo as a percent of comes down slightly. Part of that is the mix of vehicles, but it is 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, you know, an 18% improvement means we are paying less in, floor plan. It means the dealer is able to rotate more vehicles through. it is good for them. It drives more profitability, and I think it is reflective of the fact that we are getting the right mix of vehicles into the right dealerships. As we head into the back half.

Got it. Okay. And just a follow-up on that in terms of the guidance. So you raised guidance by $0.45 at the midpoint this morning ex-IEEPA refund, if I recall correctly, beat the first quarter by $0.58 held off on raising. You beat this morning by $0.26 the midpoint. So why the delta between the guidance raise and where you have beaten so far in the first half?

Yeah. A couple things. One, it will be the same you will hear the same thing from us that you have heard in the past, right, which is there is an awful lot of uncertainty as we head into the back half. You know, I was encouraged with the fact that USMCA was not canceled, but they are also not done with whatever discussions are happening. We are still waiting on some 301 excess capacity investigation work. And frankly, the interest rate environment I think, has everybody kind of stepping back. So, you know, leaning in from that standpoint does not seem to make a lot of sense. So obviously, if things were to continue like they did in the first half, we would obviously do better, but we are trying to play that a little bit cautious. The second thing, and Bob talked about this in his prepared remarks, commodity prices are through the roof. And the good news is we are offsetting a significant portion of that and driving more than offsetting improvements through operations. But 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, and diesel. You know, we are hedging, but that just tends to mute and dampen the effect as opposed to eliminate it.

Yeah. I mean, as we look at the back half of the year to Mike's point, you know, with commodities, I mean, it is a couple different stories. Right? With the war, in Iran and the pressure on oil, you know, we see that in diesel, plastics and other petroleum based products. that is a decent chunk. The bigger piece is steel, aluminum, copper with steel and aluminum far and away being the leaders there. And some of that is 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, you know, we use U.S. steel in all of our products that are made here in the United States and Mexico and have those contracts place, but you got a lot of people out there scrambling now to buy U.S. steel. it is been a lot of pressure on the forward curve on steel. there is some thought that is going to ease here in the second half of the year. But, you know, by the time we get to there, we will already have bought our steel for the year. So, you know, if there is relief, we will not see much of it until next year. And then, you know, a piece a lot of folks are not talking about is line haul. You know, we do not it is not really a commodity. We do not but we include it as we think about commodities. And with all the pressure on both documented drivers and the increased enforcement, you know, from the federal officials on that. And then some of this activity has been happening with these really large verdicts against all the transportation brokers. there is a tremendous amount of price pressure on the trucking side of trucking, not just the diesel side. And so, you know, we have got what we can see baked in. Obviously, we are hedged. We hedge about 50% of our exposure. But we are not 100% positive where that goes in the second half of the year. it is 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.

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 with, in the context of consumer buyers versus commercial buyers?

Yeah. Just to clarify, the XD products that we sell to the rental firms, those do not 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. So I would say, Craig, the bulk of that growth in the quarter is really driven by primarily utility to the to the more traditional industries we talk about with utility where it is farmers, ranchers, vineyard owners, large property owners, things like that. So, there is 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 you know, we do not see that as much, but it that is primarily driven by the traditional market markets.

And we have 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 and do you have an opportunity maybe to focus on that more now that you have simplified the business in recent years?

Yeah. I mean, it is a good point, Craig. And, you know, it is it is really the point we have tried to get at now for several years We were spending I will just give you the example we have 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, 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. And the benefit we have seen as we have cleaned up the portfolio is our ability to really refocus and make sure that we have got investment in those categories. And you know, the nice part is, and we tend to talk about the commercial side, cause it gets more of the attention around some of the commercial build out, the data center build out, but our government business, defense business is growing incredibly fast as well. I mean 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. And then 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. And so, you know, we are continuing to make sure we focus and, you know, some of that is just good old prioritization in the factory to make sure we have got enough capacity making sure that are up at centers where we do some of the final work to get the vehicles ready has the right resources, time and investment, and going to continue to look for that as an opportunity. The thing we are 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 but the use case for the vehicles is something we are continuing to learn and so we will know more over the coming couple of years as to what the replenishment cycle looks like, what happens once they are done with the construction on the site and what kind of vehicle requirements do they have at that point in time.

Yeah. I mean, one of the things, Craig, as we think about this business and we think about investment, you know, we have made some investments in the last couple quarters. On the parts support side of the business to make sure we are you know, uptime obviously is 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 have got stage parts and they can repair vehicles quickly in the field. And that same skill set, you know, kind of crosses over into the commercial space as we look to make sure that we have got parts in the right places at the right time so that they can quickly repair units and get them back in service. And so that is another growing part of the business. You know, we have a big and installed base and now with all these projects, the base the vehicles are getting used a lot. Hours are up. And so it starts to consume parts. So we are investing there. We are gonna continue to look at what else we can do in that space, but 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 1. And I do not want to front run the model-year launch in August too much. But you have called out traction in value oriented products, cab utility vehicles and then commercial as well. So I guess how are you prioritizing new product development across all three of those opportunities? And then kind of follow-up related to that. You talked about investments parts support for commercial. But 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 will I will talk about the last first. You know, Bob hit on it. You know, we have we have developed a model you know, the use case for the commercial vehicles is very different than what your typical consumer uses. And so, you know, given our history, we have effectively, you know, tailor made these vehicles And as a result of that, we know exactly what components we need to make sure that we are carrying, You know, our back order status even with all this growth has dropped significantly in 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. And we continue to look for other opportunities You know, my background was coming out of aerospace, and one of the things that we did to ensure up uptime on jet engines was to make sure we had spare pools. Whether that was complete engines or parts. And so given the growth that we have got in commercial, those are the types of things we are starting to explore which is which is really interesting to us. And as I mentioned when I was answering Craig's question, something that we probably would not have focused on in the past because we were distracted by things that we are probably not making anywhere near the returns that we are getting out of the commercial business. So I think that presents us an opportunity for us and we will continue to look for ways to grow and build off the high level of support. I mean, the fact that we have such a prominent role, I think, is reflective of the value that we can bring, and the confidence they both in the vehicle as well as our ability to support their uptime, which is really important. As far as the product investment prioritization, you know, we have 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, and I can tell you that all of that goes into a calculus. I am 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 are gonna have some news, as we head into next week at our upcoming dealer show. We have got more news coming early next year. And it is all exciting stuff. it is it is based on product cycles, product generation, as well as understanding how the consumers are using the vehicle. And I think as demonstrated by the innovation we have delivered in the last five years, we are hitting the mark and we are hitting it well and we are gonna keep that streak going.

I think just to build on Mike's, answer on your commercial question, you know, that the, the vehicles we sell in the commercial space are very for that space, and we have been doing this for a long time. You know, those vehicles are diesel powered They have, you know, different seating, different seat belts. They are slowed down. They typically capped at 25 or 35 mph. And they have a lot of heavy duty parts that over the last several years, we have learned as we have had this experience with the rental houses these vehicles in these tough environments. You know, we have learned what breaks, what is hard to repair, what makes it easier for them to manage these vehicles in the field. And so you know, it is a fairly different product than our standard Ranger product. And so, you know, I think that positions us really well, and we are gonna continue to build on that. You know, as one of the things, as Mike said, we are trying to understand is what really is the usage and the life cycle at data centers. Not a great answer to that question right now because this you know, boon in data center construction is a recently re fairly recent thing. So we are working with those customers and those applications to understand, you know, is the vehicle use the same as it is on other big construction projects Is it different other specialized things they are gonna need? So we will continue to refine that product and make sure we are offering leading product in the industry for those very difficult applications. As this rolls out.

And, Molly, one of the things I failed to mention when I was talking about the product prioritization, You have 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. And I am not talking cheap low entry type stuff. I am talking just entry-level tools, and you have 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 is a desire for people to get into a Polaris at sub-$10,000. there is a subset of those customers that will eventually trade up and that was what we were missing all along. And I would tell you that as we look forward to make sure that across our product portfolio, we are hitting all those customer sets to ensure that we are cultivating, bringing the new customers in, 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 Gerrick 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 1000 cab unit those doing well. who is the buyer there? Is there any evidence now that you have had the Ranger out for about a year, is there any evidence that these are bringing in new customers Or are they enticing maybe replacing buyers? Or maybe more commercial? So who is the buyer there?

Yeah. I mean, one of the things, Gerrick, that we track is cannibalization. You know, anytime we introduce a product, especially the Ranger 1000 and XP cab, We make some assumptions. The cannibalization has been significantly you know, 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 cap components, and they are getting a much better deal when they buy vehicle, in terms of the additional accessories that do come on it. But it is driving incremental volume. So it is 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. So that is good. On the Ranger 500, I think we have quoted this before. About 70% of the customers that are buying that vehicle are new to us. that is important because these are customers we would have lost to some of our low-cost players in the industry. And the good news is that we know that once we get these people in, there is an opportunity for us to potentially move them up, into a Ranger 570 or to a, you know, an entry-level 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. And frankly, if they do not, they stay in the Ranger 500, that is just fine. We have got plenty of accessory offerings there and we like making sure we have got more Polaris customers coming into the fold. And even though it is the fastest growing as a total percent of our portfolio, these vehicles are still relatively small. So obviously given our margin performance, you are not seeing heavy dilution from a margin. In fact, it is it is good because we are getting more volume through our factories. And our mix at the mid and high end of the category remains strong. So margin performance is not much of a concern right now.

Okay. that is great. And 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. But I would assume that there would be an attach rate of parts and accessories given that these are bare-bones machines So what does the attach rate look like for parts and accessories both for aftermarket parts and what they add on at the dealership?

Yeah. I mean, there certainly is, opportunity there. And, you know, it is obviously lower level than we see even on a NorthStar Ultimate. Not necessarily something I may get into a lot of the detail on, but, you know, it was a big part of when we came out 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. So that does give the dealer an opportunity to make additional margin. We have spent a lot of time working through how do we help the be successful. Developing things like tear sheets that are essentially a one-page document they can hand to the customer that makes recommendations on kind of the most accessorized components for the vehicle just so that they are 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 access And then, you know, quite frankly, it is developing the relationship with the customer both from a service perspective as well as, you know, eventually down the road if that customer is looking to trade up or continue to replenish the vehicle that gives them an opportunity ongoing revenue streams.

Yes. Know, Gerrick, I mean, there is a bit of a retraining here. You know, we did I guess, such a such a good job of moving everything to a lot of the factory-installed accessories, You know, now we have got these vehicles that come with very few installed accessories. And so it is a it is a bit of a retraining for us and for the dealers know, to make sure we have got all those selling processes right in the dealership so that they are offering, to Mike's point, you know, beats of different things to make it easy for a salesperson to walk a customer through sort of what the normal accessories or typical accessories are and try to capture those both at time of sale. And then, you know, working with marketing teams to make sure we are we are at, you know, six months down the road, three months down the road, we are popping those in front of those buyers for things that maybe they did not wanna spend the money on at the time when they bought it or, or did not know they need it 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. So 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 And then, you know, any color on July would be great as well. Thanks.

Yeah. I mean, there was there was certainly volatility within the quarter. I think we talked a little bit about that even coming out of the first quarter. You know, the headlines certainly do drive, you know, I think, some consumer behavior, relative to, you know, hey. Think we have a resolution. Now we do not have a resolution. Oil's up, oil's down. You know? And so we do we do see some of that volatility certainly playing out. The good news is, month of July playing out consistent with what we saw in the second quarter, which is utility remaining strong, rec remaining challenged. And I think that is kind of what we anticipate going forward. You know, as I talked about obviously, first half retail was up. We are expecting second half retail to be flattish. Obviously, it is better than that, we are positioned well to take advantage of that. But I think it is prudent to plan that way, and that is really, you know, forecasting the utility business to remain up and rec to remain somewhat challenged in that back half. And I think until we see clarity around interest rates, we see clarity around inflation, some resolution overseas. And oil start to stabilize, I am not sure we see that dynamic change much. The near term.

Makes sense. And then maybe initial thoughts. it is way too early initial thoughts on 2027. Obviously, not going to be giving us guidance here today. But at least on the tariff piece, you know, help us with some of the puts and takes. Obviously, we can peel back the refund piece, and I certainly appreciate the operational numbers that you have given us today. I think I heard Bob say there is there is maybe 40 million in refunds remaining. I am assuming that is a 2027 event. Also getting out of China. I think that is 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. I mean, it is tough to comment much on tariffs. I mean, there is 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 are actually slightly ahead of schedule. And the end of this year, we will be down to less than 5% of our material cost of goods sold coming from China. And the good news about that is a good portion of that is coming back to either The US or Mexico, which helps us from a content requirement standpoint relative to USMCA. We do think that they will probably push for higher content requirements. So we are making sure we are well positioned for that as a result of some of the other activities we have got going. So, you know, we will obviously have a fair amount of that worked as we get to the end of the year. You know, as far as the tariff refunds, you know, tough to say. We still have the broad IEEPA 2025 number of which we have booked a good portion there is obviously some portion of that is dependent on our suppliers getting refunds and bringing those back to us, that we are working through. I would hope that we could get that accomplished all this year. You know, it is it is cash we are due back and we are working aggressively to make sure that we get that. And as we get into next year, you know, volume is going to be the key question in terms of where do the markets You know, the good news is we have demonstrated getting a little bit of incremental volume to our plants. Yields pretty strong incremental margins that range anywhere from 30% to 40%. And obviously, you know, we would look and keep that momentum going into next year. Our plants are running at about 70% capacity. that is pretty broad number. Each plant is obviously different. And that is far from where we view as optimal. So that gives us plenty of opportunity to get more operating leverage and margin expansion as we move forward.

Yes, James, you were correct. The roughly $40 million to go and, you know, about half of that we gotta collect from suppliers, about half is stuff we have got to file with the government where the window to file is not open yet. I would share Mike's optimism. You know, A lot of our supplier refunds were stuff they applied for in the first two phases. And, we have got good documentation around that, working well with the part with suppliers to get that back. I think we will we will see that over the next couple quarters. We are not gonna book it until it shows up. And then the you know, the stuff that we have not filed with CBP yet, you know, we will we will report as we file when they open the filing window. We do not know when that will be. it is been bouncing around quite bit.

You know, the tariff picture headed into next year, to Mike's point, pretty much the same. We are not expecting big changes. We will see what happens with USMCA and this other 301 that is out there, but we are we will get the China spend down.

It will really, to your point, be a 2028 thing. You know, we will be down to sub 5% by the end of 2027. We will see some benefit from that in 2027. We certainly start to see a show up more meaningfully as those purchases from more local buyers roll through. And it would be obviously offset that we will 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 but that is not in your current guidance. Correct?

It is not in our guidance; neither the cash nor the, P&L impact is in our current guidance. I think we will get a chunk of the supply stuff, the, stuff that still has to be filed with CBP. I have no view on whether that will be second half of this year or early next year. it is a pretty complex thing, and there is a lot around them getting organized around the last phase because it is all the more complicated refunds. Fortunately, the bulk of, 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. James Hardiman: Got it. Thanks, Bob. Thanks, Mike.

You bet. Our next question comes from Anthony Bonadio with Wells Fargo. Please go ahead.

Yes. Hey, guys. Thanks for taking my questions. So 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. And I know some of this is driven by some of the stuff you have done on the innovation front. But can you just maybe talk through who the key donors are there at this point? And maybe how to think about a possible competitive response from a product perspective? As the new model-year rolls out.

Yeah. I mean, I think probably more of our dynamic is we are gonna start lapping some tough compares when we start picking up momentum in the back half of last year. So 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. So I think the pipeline's really good. You know, and I would like to hope that the industry remains rational. You know, we have seen inventory levels come down. The vast majority of the industry has gotten inventory in a spot. We still have a couple of players who are on a relative basis very high. But we have not seen necessarily any significant promo or channel activity related to that. But know, frankly, that could change tomorrow. I think given the products that we have coming out, I think the refresh we have done around our products we have got the, broad category covered and I think for me it is really about hopefully getting some green shoots around the rec business because I think we are positioned really well with the products, the Pro R, the Expedition, you name it. We are in a prime spot to really take share in that category.

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

Yeah. Yeah, look, I do not want to get into the details of it because, I mean, it is not a retail vehicle you know, as Bob highlighted this vehicle is purpose-built and once they are done on a job site most of these vehicles are retired permanently They are used in pretty rough environment. The fact that we put Kevlar in the back of the seats and things like that gives you a pretty good idea. We do not talk about the size of the commercial, but I did talk about size of our commercial, government and defense category, which is essentially vehicles that are being used outside of, call it, the retail environment. In that business, is sized pretty close to what Indian Motorcycle 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 Joe Nolan on for David. Hey, Joe. Hey. You guys had a number of, initiatives in recent years to improve margins, including manufacturing, production efficiencies, etcetera. Could you just talk about volume leverage and give an update on incremental margins given all the work you have done on that front?

Yeah. I will let Bob kind of get into the incrementals But 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 am encouraged with what I have seen from the team. But we have much further to go in terms of getting lean adopted in all of our manufacturing facilities as well as in the front office of our business because there is 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, you know, we are we are not talking about shipping at lower levels, we are now matching ship to retail. And that is giving us a better opportunity to really leverage volume as we get it through the factory and that is obviously driving some pretty strong incrementals that I referenced and Bob referenced during our prepared remarks.

Yeah. I mean, if we think about the incrementals, Q2 was pretty good if you if you took out tariffs both refunds and kind of net new tariffs and commodities, you know, we would have been, in the in the, low- to mid-30s. And, we will be a little better than that for the full-year. Obviously, it is a little noisy by quarter. You get into Q3, Q4. We start shipping snow, and we have other dynamics. That make it a little lumpy. But I think if you focus on the full-year, really, incrementals and obviously commodities are something that we own and we gotta go try to overcome. But, you know, I think it just shows the level of performance coming through the factory And, you know, to Mike's point, we are not done. You know, we are we are still I would say, maybe third inning of our lean journey as a company. And so I still think there is 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 plan, how it gets delivered, when it gets delivered to fit into our new lean flows. And so, you know, I feel really good about the setup and the increasing skill of the team. And so I do think that there is 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 gonna be really strong and well received.

Got it. that is helpful detail. And then it is a smaller part of your business, but international sales were up 28%. Could you just talk about what you are seeing in some of your international markets?

Yes. I mean, we have gotten a lot more focused We do not talk about this as much as maybe some of the other ones. But, you know, as we have gotten the portfolio right size, we have gotten into a far more surgical approach. I mean, international markets for us are challenging because there is not necessarily a market that looks a lot like The US. And so whether it is going into Mexico, whether it is going into Australia or Europe, there are very different areas that we need to drill into. And you know, whether it is Australia in terms of success with the Ranger product, In Europe, vehicles get used more in an on-road application. So making sure that we have got accessibility for vehicles like the Ranger 500, which are increasingly popular, or you get into areas like where you are looking at you know, high Ranger, high Pro R volume. Each of those markets takes a different approach, you know, I think it is just reflective of the fact that we are a heck of a lot more focused than we have been historically. We are making sure that we have got vehicles specific to that market. You know, 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, and I would say we are doing a much better job and that is showing up in the growth rates that we are seeing internationally.

Got it. That is helpful detail. Thanks.

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