Polaris Inc. (PII) Earnings

Management highlights

- Overall Company Performance * Polaris exceeded consensus expectations across all key metrics in Q2 2026, with reported total sales up 9% year-over-year (17% growth excluding the pending separation of Indian Motorcycle). * Adjusted EPS was $1.97 including a $74 million pre-tax IEPA tariff refund; operational adjusted EPS (excluding the refund) was $1.01, well above the prior guided range of $0.70 to $0.80. * Operational gross profit margin expanded 82 basis points year-over-year, even after excluding the tariff refund and absorbing $32 million in ongoing tariff expenses and higher commodity costs. * Polaris gained ORV market share for the fifth consecutive quarter, and reached its highest share in the large utility side-by-side subsector since 2021. - Product and Retail Trends * Utility ORV, which makes up over 70% of the PowerSport segment, grew retail more than 10% year-over-year. Cabbed utility ORV drove multiple share points, and for the first time ever made up over half of total ORV retail, matching long-term industry demand trends for more capable, refined vehicles. * Recreational ORV retail remains pressured by macroeconomic headwinds including inflation, higher borrowing costs, and consumer caution for large discretionary purchases, particularly at the mid and lower price tiers. * In Marine, premium pontoons outperformed mid/lower-tier models, which face more pressure from interest rate sensitivity. - Channel and Dealer Health * Aggregate dealer inventory was down 8% year-over-year, with dealer DSOs of just over 100 days, well below historic averages. The company strategically increased inventory for high-growth utility ORV while right-sizing inventory for slower growth categories (recreational ORV, Marine, seasonal products). * Polaris's tailored inventory and mix optimization program drove an 18% improvement in retail sales velocity in H1 2026, reducing dealer floorplan costs and improving dealer profitability. - Strategic Progress * Polaris's tariff mitigation and China supply chain localization program is ahead of internal schedule, targeting COGS sourced from China to fall below 5% by the end of 2027, down from 18% in 2024. * Years of portfolio optimization, lean manufacturing implementation, and organizational simplification are delivering meaningful operating leverage and incremental margins, with Q2 2026 adjusted EBITDA incrementals of over 32% after adjusting for one-time items. * The separation of Indian Motorcycle remains on track, expected to be accretive to annual adjusted EBITDA by ~$50 million, with the majority of benefits realized in H1 2027.

Guidance

- Polaris raised full-year 2026 guidance for the second time in 2026, driven by stronger than expected H1 operational performance and the $74 million Q2 tariff refund. - Full-year 2026 sales are now guided to $7.3 billion to $7.5 billion, representing 2% to 5% year-over-year growth, up from the prior guidance of flat to 2% growth. Organic sales (excluding Indian Motorcycle separation) are expected to grow ~10% year-over-year. - Full-year adjusted EBITDA margin is now expected to increase 250 to 275 basis points year-over-year, with operational adjusted EBITDA margin (excluding tariff refunds) guided to increase 145 to 170 basis points, up from the prior guidance of 100 to 140 basis points. After adjusting for Indian Motorcycle separation, tariffs, and commodities, full-year EBITDA incrementals will be nearly 40% at the high end of guidance. - Full-year 2026 adjusted EPS is guided to $3.00 to $3.10, with operational adjusted EPS (excluding tariff refunds) of $2.05 to $2.15, up from the prior operational guidance of $1.60 to $1.70. - Management expects a flattish retail environment in H2 2026, with upside potential to low single-digit growth if demand holds, and the company is positioned to increase shipments if needed while maintaining healthy dealer inventory. Q3 2026 sales are expected to grow 4% to 5% year-over-year, and H2 2026 adjusted EPS is expected to be close to $1.00, evenly split between Q3 and Q4 2026. - Full-year 2026 commodity cost headwinds are now estimated at $70 million, up from prior projections. Tariff expense for 2026 remains guided at $215 million, unchanged from prior guidance. Potential future additional tariff refunds of ~$40 million are not included in current guidance due to uncertainty around filing timelines and collection.

Segment performance

1. Polaris PowerSport: Sales were up 70% year-over-year, contributing ~80% of total company revenue. Double-digit growth was led by the Utility Ranger line and the commercial business, which saw strong demand from infrastructure and data center construction projects. PowerSport PG&A sales grew 21% year-over-year, driven by higher factory installed accessories and parts sales, with commercial PG&A growing significantly to support customer vehicle uptime. Operational gross profit margin improved 77 basis points, while adjusted gross profit margin (including tariff refunds) increased 458 basis points, even after absorbing a 100 basis point commodity cost headwind. 2. Marine: Sales increased 16% year-over-year, contributing ~12% of total company revenue. Growth was driven by higher shipments and a favorable product mix, with strong performance from premium pontoon lines (Bennington QX and Godfrey Sandpan) that are less sensitive to macroeconomic headwinds. Gross profit margin improved 21 basis points year-over-year due to favorable mix and positive net pricing, though higher aluminum commodity costs continue to pressure margins. 3. Ex-Im and Goupil (global off-highway vehicles): Sales increased 6% year-over-year, contributing ~8% of total company revenue. Higher Goupil sales more than offset lower Ex-Im shipments, while Ex-Im retail grew double digits which improved dealer inventory positions. Gross profit margin improved 242 basis points year-over-year driven by lower warranty expense and fixed cost leverage from increased sales volumes.

Risks & headwinds

- Macroeconomic headwinds including persistent inflation above the Federal Reserve's 2% target, volatile interest rates, and volatile oil/diesel prices driven by geopolitical conflict are negatively impacting consumer demand for large discretionary recreational products, and create uncertainty for H2 2026 performance. - Elevated commodity prices for steel, aluminum, diesel, and petroleum-based inputs continue to pressure margins, with more volatility than expected at the start of 2026. Hedging only mitigates part of this exposure, not all of it. - Trucking and logistics costs are rising due to driver shortages, increased regulatory enforcement, and legal pressure on transportation brokers, creating additional unexpected cost pressure. - Uncertainty remains around potential changes to USMCA trade rules and the outcome of the Section 301 excess capacity investigation, which could impact future tariff costs. - Recreational ORV and mid/lower-tier pontoon demand remains soft, and requires ongoing inventory management to avoid channel imbalance. - While the commercial and data center construction market is growing currently, the long-term demand profile and replenishment cycle for commercial vehicles in this segment is still being evaluated, creating some uncertainty around long-term growth projections.

Analyst Q&A

• Q: What drove Q2 ORV retail acceleration, how meaningful is data center construction growth, and are there green shoots in recreational ORV demand?

  A: Q2 acceleration was partially driven by normal seasonality and delayed spring demand. New cabbed Ranger 1000 and XP 1000 models drove significant market share gains, and the Ranger 500 remains the industry's fastest growing ORV. Data center and large construction projects are a meaningful source of commercial demand growth, which management expects to continue, though they are planning cautiously. On the recreational side, vehicle usage (tracked via part consumption) is above pre-pandemic levels, but consumers remain on the sidelines especially at lower price tiers due to persistent inflation and macro uncertainty, with only very early signs of slowing weakness.

• Q: Why raise guidance now after beating consensus but holding guidance steady after the first quarter beat? What downside risks are you building into the new guidance?

  A: Management maintains a cautious approach to guidance due to ongoing macro uncertainty, including unresolved trade policy discussions, volatile interest rates, and spiking commodity prices. Higher steel, aluminum, and diesel prices have eaten into some of the first half beat that would otherwise flow to the second half. Logistics costs are also more volatile than expected, so management baked in visible cost increases into guidance to avoid overestimating full year profits, even with the strong first half performance.

• Q: What share of ORV utility growth is retail vs. commercial, and is commercial a larger strategic priority after portfolio simplification?

  A: The bulk of ORV utility growth is traditional retail customers: farmers, ranchers, large property owners. Commercial sales (to data centers, construction firms, rental companies) are a fast-growing adjacent segment that is now a larger strategic priority, after Polaris simplified its portfolio by divesting the unprofitable Indian Motorcycle business. The total commercial/government/defense business is now roughly the same size as Indian Motorcycle was, but it is consistently profitable. Polaris is investing in parts inventory and customized products to serve this segment, where uptime is critical, leveraging existing expertise from military/government contracts.

• Q: The entry-level Ranger 500 is performing very well: what is the customer profile, is it attracting new customers, and what are the margin and accessory attach dynamics?

  A: Approximately 70% of Ranger 500 buyers are new to Polaris, customers that would have otherwise bought from low-cost competitors, filling a gap in Polaris's product portfolio that was previously unaddressed. Cannibalization of higher-priced Polaris models has been negligible, so the model is driving incremental volume. While it is an entry-level vehicle, dealer margin is supplemented by strong accessory attach rates, and Polaris has supported dealers with sales tools to drive accessory sales at the point of sale and post-purchase. The incremental volume from the model improves factory operating leverage without diluting overall segment margins, as the mid and high-end mix remains strong.

• Q: Can you update on incremental margin performance from your lean manufacturing initiatives, and what is the long-term upside?

  A: After adjusting for tariffs and commodity headwinds, Q2 2026 incremental EBITDA margins came in at the low-to-mid 30% range, with full year 2026 incrementals expected to be slightly higher. Polaris is still only in the third inning of its company-wide lean transformation, with additional improvement opportunities in manufacturing and back office operations still ahead. Localizing supply chain out of China to the US/Mexico also supports lean flows by enabling closer collaboration with suppliers, further driving incremental margin improvement as volume grows.