Polaris Inc. (PII) Earnings Call Transcript & Summary

Good day, and welcome to the Polaris Quarter 2 2026 Earnings Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to J.C. Weigelt, Vice President of Investor Relations. Please go ahead.

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

Thanks, 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% Sales were driven by double-digit growth in our Powersports segment, led by ORV with our utility RANGER line and our fast-growing commercial business, where growth is driven by investments in infrastructure and data center projects. We also saw strong contributions from marine, which grew 16% in the quarter. Across our portfolio, North American retail increased 4% with ORV up 5%. Both measures exclude used vehicles. We finished the quarter with solid share gains in ORV, reinforcing our belief that our combination of innovative products and strong dealer relationships continue to differentiate Polaris in the marketplace. From a profitability standpoint, our results include a $74 million benefit related to IEEPA refund claims. We have removed these refunds from some of our adjusted financial metrics today to provide the underlying operational performance of our business in the quarter. We refer to these as our operational adjusted results, which exclude the $74 million in tariff refunds but include ongoing tariff expense. Operational margins expanded at both the gross profit and EBITDA levels even with -- after excluding the tariff refunds. Higher shipments, favorable mix and positive net pricing more than offset higher commodity costs and the $32 million of ongoing tariff headwind we experienced during the quarter. Importantly, we continue to realize improved operating leverage from the portfolio optimization and manufacturing efficiency work we've executed over the past several years. We delivered adjusted earnings per share of $1.97, which included the pretax $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, the competitiveness of our product portfolio and the discipline we've maintained across the organization. As a result of our performance and with the strong momentum we've built through the first half of the year, coupled with tariff refunds, we are raising our full year 2026 guidance. While there remains uncertainty, we believe Polaris is operating from a position of strength, controlling what we can while navigating a dynamic environment. We have a clear strategy, the best team in powersports and a portfolio that continues to resonate with customers around the world. We're continuing to build positive momentum. We're gaining share in our core segment through focused innovation, dealer relationships are strong and dealer inventory remains healthy, and we're beginning to see meaningful benefits from the work we've done to refine our portfolio, simplify our organization and strengthen our operational execution. Our team is aligned around a common strategy and a goal of strengthening and extending Polaris' leadership position within the powersports industry. Moving on to our retail performance. ORV North American retail was up 5%, outperforming the industry and gaining share for the fifth consecutive quarter. Trends within ORV remain consistent with recent quarters. And despite a cautious consumer environment, we're continuing to take share through the strength and breadth of our portfolio and category-defining vehicles. Our utility products make up over 70% of our Powersports segment and remain a clear source of momentum in this environment with retail up more than 10% and RANGER continuing to outperform the market. We believe that performance reflects both the strength of our product lineup and the value customers see in the Polaris brand. One highlight of the quarter is that the recent industry data shows the RANGER 500 was the fastest-growing off-road vehicle in the industry. In addition, our recently launched RANGER cab units, the RANGER 1000 and the RANGER XP 1000, drove multiple points of market share gains in the utility side-by-side market, which is the largest 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 and features. The second quarter marked the first time when over half of our ORV retail was in cab units. That's proof we deliver innovation customers want and that we are winning in the largest and most important part of the market. On the recreational ORV side of the business, we continue to see a cautious consumer due to macroeconomic factors such as inflation, higher borrowing costs and negative headlines. These negative factors have been consistent over a couple of years, and our retail 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's worth repeating what I said last quarter. What truly differentiates Polaris is the strength of our entire portfolio at the dealership. We are the global leader in powersports, and we operate like it. Look for us to strengthen this leadership position with new product launches at our upcoming dealer events in August of this year and in early 2027. We continue to see healthy dealer inventory levels across our portfolio. During the second quarter, we strategically increased inventory in utility, given the robust growth we are experiencing in this category. At the same time, we have rightsized inventory positions in areas of the business such as ORV recreation, seasonal and marine, given weaker demand. In aggregate, dealer inventory was down 8% in the quarter versus last year, and dealers' DSOs are slightly over 100 days, which remains well below historic levels. We remain committed to matching shipments to retail and through the first half of this year, we have successfully executed this strategy. Improving our mix at the dealership remains a real opportunity for us, and it's an area we continue to invest in and measure progress against. Rather than a one-size-fits-all approach, we are tailoring our actions with each dealer to ensure a healthier channel and putting our dealers in the best position for success such that every dealer carries the right mix and the right number of units for their market. We have already seen positive results with an 18% improvement in sales velocity in the first half of the year, helping our dealers navigate a choppy market. A program like this is a win-win for our dealers and Polaris and reflects our relentless focus on dealer health and stronger operational management. I'm now going to turn it over to Bob to provide you with more details of the financials and the increase to our full year guidance. Bob?

Thanks, Mike. We delivered another strong quarter with sales and earnings both above the high end of our expectations. Sales were up 9% or up 17% organically when excluding Indian Motorcycle. All 3 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 also grew 6% over the prior year. The underlying performance of the business was well ahead of our expectations. Our reported results and guidance include the tariff refund claims made in the quarter that Mike spoke about. To help evaluate the underlying performance of the business, we are also providing operational margin and EPS metrics that exclude the tariff refunds. The $74 million of tariff refunds booked in the quarter contributed $0.96 to adjusted EPS. Excluding that benefit, operational adjusted EPS was $1.01, well ahead of the $0.70 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. Adjusting EBITDA for the separation of Indian Motorcycle, tariffs and commodities, our second quarter EBITDA incrementals would have been over 32%. This rate demonstrates that our strategy to optimize our plants and organization while pruning 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, continue 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 3 turns and well within our covenant requirements. We expect net leverage to continue to decrease in the second half of the year. We remain very confident in our financial position and our approach to capital deployment is disciplined. We expect strong cash flow conversion in the second half as seasonal working capital builds unwind, and 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'll continue to align with retail to ensure dealer inventory remains healthy. We are also increasing our margin outlook. We now expect adjusted EBITDA margin to increase 250 to 275 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 motorcycles, tariffs and commodities, this would translate into EBITDA incrementals of nearly 40% at the high end of our guidance. The increase reflects the strength of our year-to-date operational performance even as we continue to manage higher commodity costs, specifically diesel, steel and aluminum. We now expect a $70 million headwind from those increased commodity costs. The work we have done around Lean is supporting our operating model 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 to below 5% by the end of 2027 from 18% in 2024. We are ahead of our internal goals today and are making progress identifying alternative suppliers in the United States and Mexico, which helps localize our supply chain. The Indian Motorcycle separation remains on track to be accretive by approximately $50 million to adjusted EBITDA with the benefit weighted more toward the back half of the year, January 2027, due to the seasonality of motorcycle sales. We also raised our adjusted EPS guidance. We now expect 2026 adjusted EPS of $3 to $3.10. Operationally, that translates to $2.05 to $2.15 compared with our March 3 guidance revision of $1.60 to $1.70. While we expect the ability to recover additional tariff refunds, those are not included in our guidance today because there is not currently a formal process to apply for the next phase of expected refunds and certain amounts must be recovered from suppliers. We estimate the total potential future refund opportunity to be approximately $40 million. For the [ third ] 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, with offsets from net price improvements. We expect adjusted EPS in the second half of the year to be close to $1 and the quarterly earnings forecast to be evenly weighted between the third and fourth quarters, but may shift based on timing of shipments as we enter seasonality of fall and winter products. Stepping back, we are beginning to see the benefits of the actions we have taken to strengthen our competitive position at dealerships and improve efficiency across our plants. Our decision to raise guidance reflects the benefit from tariff refunds, 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'll turn the call back over to Mike. Go ahead, Mike.

Thanks, Bob. In the second half of the year, our priorities remain consistent. We forecast a flattish retail environment for the second half of 2026 with growth in the utility category, while recreational offerings are expected to remain soft. We're excited about the second half of the year, given the innovative product launches being announced in August, 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, but 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're raising guidance because the business is performing better than we expected coming into the year and even relative to 3 months ago. We're gaining share, dealers are healthy, channel inventory is in the right place, and our operations continue to see efficiencies from our lean efforts. These fundamental metrics give us confidence in both the remainder of 2026 and reinforce the long-term earnings potential of Polaris. At the halfway point of the year, it's worth stepping back to recognize what we've accomplished. The results we are reporting today were not driven by a single quarter. They reflect a clear strategy and several years of disciplined execution. Put simply, we are doing what we said we would do. We said we would focus on innovation, we did. With that innovation, we said we would gain share, we have. We said we would improve dealer inventory, we did. We said we would simplify the portfolio and improve manufacturing efficiencies, and we have. And today, those efforts are increasingly visible in both our operating performance and financial results. The progress we've 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've done over the last several years is beginning to show in our results. The job isn't done, but we're building momentum, and we're well positioned for the remainder of 2026 and beyond. Polaris is the leader in powersports, and I'm confident in our strategy to deliver higher earnings power and stronger returns for our shareholders. It's an exciting time to be a part of the Polaris story, and we appreciate your continued support. With that, I'll turn it over to Bailey to open the line for questions.

[Operator Instructions] Our first question comes from Noah Zatzkin with KeyBanc Capital Markets.

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're seeing in rec?

Yes. Thanks, Noah. A couple of things. We did see retail accelerate into the second quarter. Remember that there is a level of seasonality that happens as we come out of the first few months of the year. It was also probably a little bit more exaggerated, given a late start to the marine season. We saw the retail pickup in pontoons as we came into the second quarter. I'd point to a couple of the new products, the new cab RANGER 1000 and 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. It's tough to say what that trajectory looks like. Obviously, if you look at the broader projections, I would say those markets are going to continue to grow. We're obviously playing that a little cautious as we look forward. We've obviously built in what we're expecting in terms of higher demand relative to what they're going to need for vehicles on site, but we'll continue to learn more as we go and those projects continue to get built out. On the rec side, look, it's been a couple of years. It feels like even longer. Just given where we're at in terms of the overall consumer, on the rec side, the vehicles are a want, not a need. And the good news is we know people are using the vehicles. It's hard to find a boat slip. You look at repair order activities for our off-road vehicle business. You look at tire consumption, oil consumption, where we can track miles ridden, we can see that it's up. It's above where we were back in 2019. So that's 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 don't want to say they're immune, but they tend to be more cash buyers. They've got higher disposable income and they're not being as impacted. But 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's slowing, but it's still well above the Fed's target of 2%. We've moved from interest rate cuts to now a talk of interest rate increases. Oil prices are all over the place, given the conflict overseas. And that's created, I think, some concern on the macro side. And I think anything large discretionary is seeing a heavy impact. And really, that's where our rec business fits in. So as we talked about, we've made sure we've continued to make adjustments in our inventory profiles at the dealer where we see strength in the utility side, which makes up 70% of our Powersports segment. We've leaned in heavier to make sure they've got the right inventory. And on the rec side, we've continued to pull back where appropriate to make sure that we've got the inventory sized in a good spot.

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've seen in the quarter and then how you think about the opportunity looking ahead?

Yes. I mean the promo in the business has started to come down. We've certainly benefited from mix. Even with some of our value models selling at a higher rate, we're still doing really well at the high-end NorthStar on the utility side, which obviously brings nice margins with it. I think the underlying work we've done in all of our factories to lean out and get the business ready for the volume to come back, and now you're seeing that as the volume ramps up both in Huntsville and in Monterrey, you're getting incremental savings. 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's with a pretty significant year-over-year increase in the ongoing tariff expense. We really hadn't incurred much of that in the second quarter of last year. Everything was still ramping into inventory and really hadn't come through the P&L. And I think it's just a testament to the work being done inside the business. Obviously, we'll have more to say as we get through the year, but it certainly is a nice [Audio Gap] and continue to build from. And you look at the combination of the slight price increases we've had, lower promo costs and then just efficiencies of getting more volume through the factories, it's a really strong setup for the business as we move into the second half.

Our next question comes from Joe Altobello with Raymond James.

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're, I think, worse of a bad guy for some of your competitors. So is that playing a role? And are you seeing any changes from a strategic standpoint from your competitive set, given those tariff pressures?

Not really. We announced this morning a factory authorized clearance. What I will tell you is our noncurrent inventory is in even a better spot than last year and last year's was in a great spot. So we don't anticipate that moving significant increase in promo. As we've talked in the past, it just becomes a really good way to drive foot traffic as well as help the dealers clear out any of the remaining 2026 vehicles they have. We really haven't seen much broadly in the industry. I would say that we do have a couple of competitors that continue to have elevated inventory levels, but the promo activity associated with that has been a lot more surgical than broad and really hasn't had a deep impact on us and how we're moving forward. And we expect this -- when we get into the back half, promo as a percent of sales comes down slightly. Part of that is the mix of vehicles, but it's also the fact that we continue to run at really strong inventory levels and have the right mix of vehicles at the dealers. I referenced it in my prepared remarks, sales velocity was up 18%, which essentially is us measuring how fast does it take us through our dealerships to retail vehicle. And an 18% improvement means we're paying less in floor plan. It means the dealer is able to rotate more vehicles through. It's good for them. It drives more profitability. And I think it's reflective of the fact that we're getting the right mix of vehicles into the right dealerships as we head into the back half.

Got it. Okay. 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, you beat the first quarter by $0.58, held off on raising. You beat this morning by $0.26 at the midpoint. So why the delta between the guidance raise and where you've beaten it so far in the first half?

Yes. A couple of things. One, it will be the same -- you'll hear the same thing from us that you've heard in the past, right, which is there's an awful lot of uncertainty as we head into the back half. I was encouraged with the fact that USMCA was not canceled, but they're also not done with whatever discussions are happening. We're still waiting on some 301 excess capacity investigation work. And frankly, the interest rate environment, I think, has everybody kind of stepping back. So leaning in from that standpoint, it doesn't 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're 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're 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, oil and diesel. We're hedging, but that just tends to mute and dampen the effect as opposed to eliminate it.

Yes. I mean as we look at the back half of the year, to Mike's point, with commodities, I mean it's a couple of different stories, right? With the war in Iran and the pressure on oil, we see that in diesel, plastics and other petroleum-based products. That's a decent chunk. The bigger piece is steel, aluminum, copper with steel and aluminum far and away being the leaders there. And some of that's just driven by the tariff structure now and the push for the use of U.S. steel. We are fortunate in that, as we talked about last quarter, we use U.S. steel in all of our products that are made here in the United States and Mexico and have those contracts in place. But you've got a lot of people out there scrambling now to buy U.S. steel and puts a lot of pressure on the forward curve on steel. There's some thought that that's going to return to earth here in the second half of the year. But by the time we get to there, we'll already have bought our steel for the year. So if there's relief, we won't see much of it until next year. And then a piece a lot of folks aren't talking about is line haul. We don't -- it's not really a commodity. We don't -- but we include it as we think about commodities. And with all the pressure on both documented drivers and the increased enforcement from the federal officials on that and then some of this activity that's been happening with these really large verdicts against all the transportation brokers, there's a tremendous amount of price pressure on the human side of trucking, not just the diesel side. And so we've got what we can see baked in. Obviously, we're hedged. We hedge about 50% of our exposure, but we're not 100% positive where that goes in the second half of the year. It's certainly been a lot more volatile than we expected when the year started.

Our next question comes from Craig Kennison with Baird.

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

Yes. Just to clarify, the XD products that we sell to the rental firms, those do not -- those are not included in retail. So 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 more traditional industries we talk about with utility, where it's farmers, ranchers, vineyard owners, large property owners, things like that. So there's probably a little bleed-over impact from rental and commercial in there just as commercial markets do better because some stuff gets bought at dealers, and we don't see that as much, but it's primarily driven by the traditional markets.

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

Yes. I mean it's a good point, Craig. And it's really the point we've tried to get at now for several years. We were -- I'll just give you the example we've used with a few investors. I mean when you look at our commercial business and the government and defense business, all those together, basically, are the same size Indian Motorcycles 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've seen as we've cleaned up the portfolio is our ability to really refocus and make sure that we've got investment in those categories. And the nice part is -- and we tend to talk about the commercial side just because it gets more of the attention around some of the commercial build-out, the data center build-out. But our government business, our 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 we're continuing to make sure we focus and some of that's just good old prioritization in the factory to make sure we've got enough capacity, making sure that our upfit centers, where we do some of the final work to get the vehicles ready, has the right resources, time and investment, and we're going to continue to look for that as an opportunity. The thing we're trying to understand, as it relates to data centers, is what does that look like longer term? I mean we certainly have visibility to what the construction build-out profile is. But the use case for the vehicles is something we're continuing to learn. And so we'll know more over the coming couple of years as to what the replenishment cycle looks like, what happens once they're done with the construction on the site and what kind of vehicle requirements do they have at that point in time.

Yes. I mean one of the things, Craig, as we think about this commercial business and we think about investment, we've made some investments in the last couple of quarters on the parts and support side of the business to make sure we -- uptime, obviously, is super critical to that. We have a lot of experience in that area through our military and government business, particularly military. We do a lot of work with them to make sure they've got staged parts and they can repair vehicles quickly in the field. And that same skill set kind of crosses over into the commercial space as we look to make sure that we've got parts in the right places at the right time so that they can quickly repair units and get them back in service. And so that's another growing part of the business. We have a big 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're investing there. We're going to continue to look at what else we can do in that space, but definitely an area of opportunity we see going forward.

Our next question comes from Molly Baum with Morgan Stanley.

Maybe a bit of a follow-up from that last one, and I don't want to front-run the model year launch in August too much. But you've called out traction in value-oriented products, cabbed utility vehicles and then commercial as well. So I guess, how are you prioritizing new product development across all 3 of those opportunities? And then kind of follow-up related to that, you've talked about investments in 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?

Yes. Maybe I'll talk about the last first. Bob hit on it. We've developed a model. The use case for the commercial vehicles is very different than what your typical consumer uses. And so, given our history, we've effectively tailor-made these vehicles. And as a result of that, we know exactly what components we need to make sure that we're carrying. Our back order status, even with all this growth, has dropped significantly. Our ability to deliver on time to these rental agencies, a lot of which do their own repair activity, has hit record levels, relative to being able to fulfill the demand that they have. And we continue to look for other opportunities. My background was coming out of aerospace and one of the things that we did to ensure uptime on jet engines was to make sure we had spare pools whether that was complete engines or parts. And so, given the growth that we've got in commercial, those are the types of things we're starting to explore, which is really interesting to us. And as I mentioned when I was answering Craig's question, something that we probably wouldn't have focused on in the past because we were distracted by things that we're probably not making anywhere near the returns that we're getting out of the commercial business. So I think that presents a significant opportunity for us, and we'll continue to look for ways to grow and build off the high level of support. And the fact that we have such a prominent role, I think, is reflective of the value that we can bring and the confidence they have both in the vehicle as well as our ability to support their uptime, which is really important. As far as the product investment prioritization, we've done a lot of work over the past 5 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'm not going to get into a lot of the detail here. That both supports the utility and the rec side of the business. As I mentioned, we're going to have some news as we head into next week at our upcoming dealer show. We've got more news coming early next year. And it's all exciting stuff. It's 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've delivered in the last 5 years, we're hitting the mark and we're hitting it well, and we're going to keep that streak going.

I think just to build on Mike's answer on your commercial question, the vehicles we sell in the commercial space are very customized for that space. And we've been doing this for a long time. Those vehicles are diesel-powered. They have different seating, different seat belts. They are slowed down. They typically [ operate ] at 25 or 35 miles an hour. And they have a lot of heavy-duty parts and over the last several years, we've learned -- as we've had this experience with the rental houses, these vehicles in these tough environments, we've learned what breaks, what's hard to repair, what makes it easier for them to manage these vehicles in the field. And so it's a fairly different product than our standard RANGER product. And so I think that positions us really well, and we're going to continue to build on that. As one of the things, as Mike said, we're trying to understand is what really is the usage and the life cycle at data centers. And there's not a great answer to that question right now because this boom in data center construction is a recently -- fairly recent thing. So we're working with those customers and those applications to understand is the vehicle used the same as it is on other big construction projects? Is it different? Are there specialized things they're going to need. So we'll continue to refine that product and make sure we're offering leading products 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've seen this from us over the past couple of years. We did a lot of work to understand customer segmentation. And one of the things that we became brutally clear on is we, like many others, had chased customers to the high end of the market and we had left a gap at the lower end. And I'm not talking cheap, cheap low entry-type stuff. I'm talking just entry-level vehicles and you've seen us reprioritize around that. The RANGER 500 is a prime example. That is a customer set we had missed. Clearly, as demonstrated by the demand for that vehicle, there's a desire for people to get into a Polaris at sub-$10,000. There's a subset of those customers that will eventually trade up, and that was what we were missing all along. And I would tell you that as we look forward, we got to make sure that across our product portfolio, we are hitting all those customer sets to ensure that we are cultivating and bringing the new customers in and obviously providing them an opportunity to move up the price ladder with Polaris as opposed to a competitive vehicle.