管理層發言
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, 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 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% 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 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.
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 industry 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. 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 point 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 to help 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 and into 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, they 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. 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. 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.
分析師問答
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, you may do so.
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.
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 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 cab Ranger 1000 and the XP 1000 at the entry-level. Those drove considerable share points and that drove us above and beyond what the market was doing, which led to the share gains that we had coming into the quarter. The continued strength around things like the Ranger 500, which was the highest selling vehicle across the industry, also contributed. The commercial business continues to operate strong. It is data centers as well as large mega construction projects as firms look for more vehicles to be on-site as those projects start to move forward.
It is tough to say what that trajectory looks like. If you look at broader projections, those markets are expected to continue to grow. We are playing that a little cautiously as we look forward. We have built in what we are expecting in terms of higher demand relative to what they will need for vehicles on-site, but we will continue to learn more as those projects continue to get built out. On the recreational side, it has been a couple of years of weak demand relative to pre-pandemic, given the overall consumer environment. Vehicles are a want, not a need. The good news is people are using the vehicles — it's hard to find a boat slip. Repair order activity in our off-road vehicle business, tire consumption and oil consumption are up; miles ridden are up versus 2019. 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.
High-end customers tend to be more cash buyers and are less impacted. As you get down into the mid and lower ranks of the customer profile, inflation and borrowing costs are more impactful. The good news is inflation is starting to slow, but it is still well above the Fed's 2% target. Interest rate direction and oil price volatility create consumer uncertainty that affects discretionary purchases like recreational vehicles. As we talked about, we have adjusted inventory profiles at dealers: leaned into utility where we see strength and pulled back on recreation where appropriate, ensuring inventory is sized properly. Thanks.
Maybe just one more — operational ORV adjusted gross margin came in better than expected. Could you speak to the operational savings and efficiencies you saw in the quarter and how you think about the opportunity looking ahead? Thanks.
Promo activity in the business has started to come down. We benefited from mix even with some value models selling at a higher rate. NorthStar performance on the utility side brings nice margins. The underlying work in our factories to lean out and prepare for higher volume is paying off, and as volume ramps up in Huntsville and Monterey, you get incremental savings. Company gross margins were up 82 basis points even with a significant year-over-year increase in ongoing tariff expense. We had not incurred much of that ongoing tariff expense in Q2 of last year. This performance is a testament to the work being done across the business. The combination of slight price increases, lower promotional costs and efficiency gains from increased factory throughput creates a strong setup for the second half.
Our next question comes from Joe Altobello with Raymond James. Please go ahead.
Thanks. Good morning. Mike, picking up on the promo environment — you mentioned it was easing. Tariffs are a headwind for you and some competitors more than others. Is that playing a role? Are you seeing any strategic changes from competitors given tariff pressures?
Not really. We announced a factory authorized clearance. Our noncurrent inventory is in an even better spot than last year's, which was already strong, so we do not anticipate a significant increase in promotional activity. Promo remains a good way to drive foot traffic and help dealers clear remaining 2026 vehicles. A couple of competitors have elevated inventory levels, but their promotional activity has been surgical rather than broad and has not had a deep impact on us. We expect promo as a percent of sales to come down slightly in the back half, driven by mix and continued strong inventory velocity. Sales velocity was up 18%, which measures how quickly vehicles retail through dealerships. An 18% improvement means lower floor-plan costs, faster rotation and improved dealer profitability. This reflects getting the right mix of vehicles into the right dealerships heading into the back half.
Got it. One follow-up on guidance: you raised guidance by $0.45 at the midpoint this morning ex-IEEPA refund; you beat the first half by a larger amount earlier in the year. Why the delta between the guidance raise and where you have beaten so far in the first half?
A couple of things. There remains uncertainty entering the back half including tariff policy, the 301 investigation and interest rate dynamics, so we are cautious. Commodity prices are higher than anticipated and while operations offset a significant portion, elevated aluminum, steel and diesel prices dampen the upside we might have otherwise flowed through. We hedge, but that mutes rather than eliminates the impact.
On commodities, the story is mixed. The war in the Middle East pressures oil, which affects diesel and petroleum-based plastics. The bigger pieces are steel, aluminum and copper with steel and aluminum being the largest drivers. The push for U.S. steel has driven pressure on the forward curve. There is some hope this eases in the second half, but by then we will have already bought much of our steel for the year, so relief may not show until next year. Line-haul and trucking costs have also seen pressure from driver shortages, enforcement and large verdicts against brokers, causing price pressure on trucking beyond diesel itself. We hedge roughly 50% of our exposure, but volatility remains higher than expected.
Our next question comes from Craig Kennison with Baird. Please go ahead.
Good morning. Wanted to ask about ORV utility, which was up in the low teens. Can you frame that demand strength in context of consumer buyers versus commercial buyers?
Just to clarify, XD products sold to rental firms are not included in retail. Commercial purchases that go through dealers are not counted as retail either. The bulk of the growth in the quarter is driven by traditional utility buyers such as farmers, ranchers, vineyard owners and large property owners. There is some bleed-over from rental and other commercial activity, but primarily this was driven by the traditional markets.
We have been hearing strength in commercial operations including rentals, data centers and infrastructure projects. Have you framed the total addressable market in commercial, and is there opportunity to focus on that more now that you've simplified the business?
It's a good point. When you look at our commercial, government and defense businesses together, they're roughly the same size that Indian Motorcycle was, but profitable rather than loss-making. As we cleaned up the portfolio, we refocused investment in these categories. Our government and defense business is growing quickly; we have won marine and other contracts and continue to win state, local and federal opportunities for police, fire and border patrol. The commercial business sells into rental agencies supporting construction projects and infrastructure build-outs. We are prioritizing factory capacity, up-fit centers and parts support to maximize uptime for these customers. For data centers specifically, we have visibility into construction timelines, but are still learning the long-term use case and replenishment cycles for vehicles once projects are completed. We'll know more over the coming years.
We have made investments in the parts and support side to maximize uptime. Our experience in military and government vehicle support crosses over to commercial needs — providing staged parts and quick field repair capacity. That is a growing part of the business as installed bases are used more and hours increase, creating parts consumption. We are investing there and see it as an area of opportunity.
Our next question comes from Molly Baum with Morgan Stanley. Please go ahead.
Thanks. You called out traction in value-oriented products, cab utility vehicles and commercial. How are you prioritizing new product development across those opportunities? And related to commercial, are there specific product capabilities you're developing to better position Polaris for commercial applications?
On product prioritization, we've done a lot of work over the past five years to understand product life cycles and customer segmentation. That work drives our development calculus across utility, recreational and entry-level opportunities. We have news coming at our dealer show next week and more early next year. Regarding commercial capabilities, we have tailored products for commercial use cases — diesel powerplants, heavy-duty parts, capped speeds and different seating and safety requirements. We are exploring spare pools and staged parts similar to how aerospace handles engine spares to maximize uptime. Our investments in parts availability and service support aim to ensure high uptime and quick field repairs for commercial customers. These are areas we would not have prioritized previously when we were focused on fixing other parts of the portfolio, but now present meaningful opportunities.
To add, commercial vehicles are purpose-built and often diesel powered with heavy-duty parts. Over time we've learned what breaks and what makes field repair easier. That learning helps us refine commercial product design. We are working with customers to understand data center usage patterns and life cycles so we can tailor products for those specific applications as the opportunity scales.
Our next question comes from Gerrick Johnson with Seaport Research Partners. Please go ahead.
A segue to the Ranger 500 and the 1000 cab units: who is the buyer there? Is there evidence these products are bringing in new customers, replacing previous buyers, or are they more commercial-focused?
We track cannibalization closely. With the Ranger 1000 and XP cab, we have seen some customers move from uncabbed units into cab units because they get better value and more accessories. But the new cab units are driving incremental volume and are not cannibalizing higher-end NorthStar Ultimate buyers. For the Ranger 500, about 70% of customers are new to Polaris. That's important because those are customers we might have lost to low-cost competitors. Once customers enter the Polaris ecosystem, there's opportunity to trade up to higher-trim models. The Ranger 500 and our cab units are still relatively small as a percent of the portfolio, so they are not dilutive to margin. In fact, getting more volume through our factories and maintaining strong mid and high-end mix has supported margin performance.
Some dealers are reticent to sell vehicles with little margin. Is there attach rate data for parts and accessories both at time of sale and aftermarket for these lower-margin units?
There is opportunity for accessory attach on these vehicles, though attach is lower than for high-end models. We made sure at launch that the Ranger 500 had the common accessories customers at that price point look for, giving dealers incremental margin opportunities. We provide tear sheets — one-page accessory recommendations — and use our configurator in-store to help dealers walk customers through typical accessory packages. That helps capture additional margin at sale and supports aftermarket revenue as owners accessorize later and return for service.
There is a bit of retraining: historically we installed many accessories at factory, and now these entry-level vehicles come with fewer factory-installed accessories. We are making it easy for dealers to sell typical accessory bundles at point of sale and following up with marketing to reach buyers post-sale with recommended add-ons. That will help capture aftermarket revenue streams.
Our next question comes from James Hardiman with Citi. Please go ahead.
Good morning. Could you share color around the shape of demand within the quarter? There were a lot of headlines and volatility — how much did that create, and any color on July trends would be great.
There was volatility within the quarter. Headlines do influence consumer behavior — uncertainty around policy, oil price swings and macro headlines create short-term effects. The good news: July has been consistent with Q2 patterns — utility remains strong and recreational demand remains challenged. We expect that dynamic to continue until we see clearer direction on interest rates, inflation and geopolitical stability. We forecast a flattish retail environment for the second half with utility up and rec soft.
Makes sense. Any initial thoughts on 2027 — especially on the tariff piece and the timing of benefits from moving content out of China? Are those more 2028 benefits? Any operational items to consider for 2027?
It's tough to be definitive on tariffs given the ongoing 301 work and USMCA developments. We are moving content out of China rapidly and are slightly ahead of schedule; by year-end we expect China-sourced material COGS to be below 5%. Much of that content will shift to the U.S. and Mexico which helps with USMCA content requirements. We hope to realize tariff refund amounts that remain, but timing depends on supplier recoveries and the filing windows. Volume will be a key driver for 2027; our plants are running at roughly 70% capacity on average, so we have opportunity to increase throughput and operating leverage. The most meaningful benefits from moving out of China will show more in 2028, though some benefit may start to appear in 2027.
On the remaining refund opportunity, roughly $40 million remains. About half we need to collect from suppliers and roughly half requires filings with customs where the filing window isn't open yet. We expect to collect a portion of the supplier refunds and to file for the remaining refunds when permitted, but we will not book those amounts until cash is received or the refund is finalized. Those amounts are not included in current guidance. The tariff picture into next year is mostly unchanged from our published assumptions; we expect to get China spend down below 5% by end of 2027. Meaningful localization benefits will be more visible in 2028.
Just to clarify, you think you'll get the remaining $40 million in cash, but it is not in current guidance?
Correct. We believe we'll receive a portion from suppliers and will file for the remaining refunds, but neither the cash nor P&L impact of those remaining refunds is included in our guidance until the amounts are realized.
Our next question comes from Anthony Bonadio with Wells Fargo. Please go ahead.
You have taken share for five consecutive quarters. Who are the key donors to your share gains and how should we think about possible competitive product responses as the new model-year rolls out?
We are likely to lap tougher compares as our momentum continues, so some of the share gain dynamics will be self-driven. Our product pipeline is strong across categories and we hope the industry remains rational. Most of the industry has normalized inventory levels; a few competitors remain relatively high, but their promotional activity has been limited so far. The products we have coming out and portfolio refreshes position us well to take share, and we are focused on expecting green shoots in the recreational category where we are well positioned with products like Pro R and Expedition.
On commercial, you said commercial is excluded from retail. If you included commercial, how would that affect the mid-single-digit ORV demand growth figure? And can you frame the size of that business?
We don't disclose a combined number that includes commercial in retail. The commercial vehicles we sell are purpose-built and often retired after heavy use on job sites, so they are not a retail channel phenomenon. As mentioned earlier, the commercial, government and defense categories combined are roughly the same size as the Indian Motorcycle business when we divested it, and they are profitable. We see continued room to expand those businesses given their growth and the investments we are making.
Our next question comes from David MacGregor with Longbow Research. Please go ahead.
Hi. This is Joe Nolan on for David. You had initiatives to improve margins, including manufacturing efficiencies. Could you talk about volume leverage and give an update on incremental margins given the work done?
We've done a lot of work but are still in the early innings of our lean journey. I've been encouraged by what the team has delivered, but there's more to do across manufacturing and office processes. With demand stabilizing and matching ship-to-retail, we're getting better opportunities to leverage volume through the factories, driving the strong incrementals referenced in our prepared remarks.
In Q2, excluding tariffs and commodity impacts, incrementals were in the low- to mid-30s. For the full year we expect to be a little better than that, though it is lumpy quarter to quarter due to seasonality and product mix. We're still early in the lean journey — maybe the third inning — and we see additional factory improvement opportunities. Localization of the supply chain further supports those incremental improvements because closer suppliers allow better coordination with our lean flows. If we get higher volume, incrementals should remain strong.
International sales were up 28%. Could you talk about what you're seeing in international markets?
We have become far more focused internationally. Markets differ — Australia sees strong Ranger demand; Europe has more on-road usage patterns; Mexico and other regions have varied preferences. We're tailoring vehicles and approaches to specific markets and adapting vehicles where requirements differ. This more surgical approach is yielding better results internationally.
This concludes our Q&A session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.