폴라리스(PII) 2026년 3분기 실적 발표회: 유틸리티 부문 성장에 가이던스 상향

폴라리스(Polaris Inc., NYSE: PII)는 ORV 점유율 확대, 유틸리티 수요, 견조한 상업·정부·방산 매출에 힘입어 2026 회계연도 3분기 광범위한 성장을 기록했다고 발표했다. 경영진은 원자재 및 물류 비용이 여전히 상당한 역풍으로 작용하고 있다고 경고하면서도, 2026년 들어 세 번째로 연간 실적 전망(가이던스)을 상향 조정했다.

핵심 요약

• 3분기 매출은 전년 동기 대비 11% 증가했으며, 인디언 모터사이클을 제외하면 17% 증가했다. ORV, PG&A, 계절 상품, 마린, 상업·정부·방산 사업 전반에서 성장을 기록했다.
• 조정 EBITDA 마진은 8.8%로 전년 동기 대비 118베이시스포인트(bp) 확대되었다. 1,000만 달러의 관세 환급금 및 관련 이자를 제외하면, 영업 조정 마진은 약 85bp 개선되었다.
• 조정 주당순이익(EPS)은 3분기 관세 환급금을 포함해 1.08달러를 기록했다. 해당 환급금을 제외한 영업 조정 EPS는 전년 동기의 0.41달러에서 0.95달러로 증가했다.
• 북미 ORV 소매 판매는 2% 증가해 업계 평균을 상회했으며, 폴라리스는 6분기 연속 시장 점유율 확대를 달성했다.
• 경영진은 연간 매출 가이던스를 75억 5,000만~76억 달러로, 조정 EPS 가이던스를 3.50~3.60달러로 상향 조정했다.
• 영업 활동 현금 흐름은 약 3억 8,200만 달러를 기록했다. 폴라리스는 총부채를 3억 2,000만 달러 이상 감축했으며, 순차입금 비율(Net Leverage)을 연초 3.4배에서 2.0배로 낮췄다.

주요 재무 데이터

약 0.30달러의 조정 EPS가 4분기에서 3분기로 이전되었다. 폴라리스는 신규 헌츠빌 린(lean) 생산 라인에서의 예상보다 빠른 레인저 생산과 딜러 재고 건전화에 따른 스노모빌의 조기 출하를 원인으로 꼽았다.

사업 및 영업 실적

폴라리스 파워스포츠 매출은 전년 동기 대비 18% 증가했다. ORV 매출은 높은 한 자릿수 비율로 성장했으며, 계절 상품 매출은 2배 이상 늘었다. 상업·정부·방산 부문 역시 높은 두 자릿수 성장을 기록했다.

유틸리티 부문이 회사의 주요 성장 동력으로 유지되었다. 폴라리스는 자사 제품이 농장, 목장, 건설 현장 및 데이터 센터 프로젝트에서의 수요 이점을 누리고 있다고 밝혔다. 정부 및 방산 수요는 미국, 캐나다, NATO 시장에서의 지출 증가로 뒷받침되었다.

북미 ORV 소매 판매는 2% 증가했다. 폴라리스는 6분기 연속 ORV 점유율을 확대하며 2019년 3분기 이후 가장 높은 3분기 ORV 점유율을 기록했다. 레인저 500(RANGER 500)은 중형 레인저 포트폴리오의 세그먼트 점유율을 10%포인트 이상 올리는 데 기여했으며, 레인저 캡(cab) 모델도 점유율을 수 포인트 확대했다. 유틸리티 캡 모델 매출은 2023년 이후 70% 이상 성장했다.

회사는 4분기에 RZR 프로 R 부스트(RZR Pro R Boost), 누마틱스가 적용된 폴라리스 엑스페디션(Polaris Xpedition with Numatix), 스포츠맨 500(Sportsman 500) 등 신제품 3종을 출하한다. 경영진은 RZR 프로 R 부스트와 신형 엑스페디션이 유틸리티 수요에 비해 상대적으로 약세를 보이고 있는 레저 수요를 뒷받침할 것으로 예상한다.

마린 부문 매출은 베닝턴 QX(Bennington QX) 및 고드프리 산판(Godfrey Sanpan) 프리미엄 라인을 중심으로 한 폰툰 제품 믹스 개선에 힘입어 29% 증가했다. 상승한 알루미늄 비용이 부담으로 작용했음에도 불구하고, 마린 매출총이익률은 43bp 개선되었다. 폰툰 소매 판매는 10%대 초반 비율로 감소했지만, 폴라리스는 점유율을 확대했다고 밝혔다.

엑삼(Aixam)과 구필(Goupil) 매출은 딜러 재고를 소매 수요에 맞추기 위해 폴라리스가 엑삼 출하량을 의도적으로 줄이면서 12% 감소했다. 유럽 시장 또한 상대적으로 둔화된 것으로 설명되었다.

전체 딜러 재고는 전년 동기 대비 3% 증가한 반면, 딜러 매출채권 회수기간(DSO)은 100일을 약간 상회하는 수준을 유지하며 과거 평균보다 낮았다. 경영진은 신제품 출시와 관련된 레저용 ORV 재고가 연말까지 정상화될 것으로 예상한다.

경영진 가이던스

연간 조정 EPS 가이던스에는 2분기와 3분기에 계상된 관세 환급금 1.09달러가 포함되어 있다. 이 전망은 추가적인 관세 환급이 없으며, USMCA나 현재 시행 중인 기타 관세 정책에 중대한 변화가 없다고 가정한다.

경영진은 4분기 자체 매출이 거의 보합세를 보일 것으로 예상한다. 소매 판매의 보합세와 스노모빌 출하의 3분기 이전 효과는 마린 부문의 성장으로 일부 상쇄될 것으로 예상된다. 인디언 모터사이클 분리는 조정 EBITDA에 약 5,000만 달러를 추가하는 방향으로 차질 없이 진행 중이며, 그 수혜는 2026년 하반기 및 2027년 1월에 더 크게 나타날 것으로 예상된다.

폴라리스는 순차입금 비율을 2.0배 미만으로 낮추며 2026년을 마무리할 것으로 예상한다. 연말 운전자본은 현재 매출의 마이너스(-) 2%로 예상되어, 이전 전망치 대비 100bp 개선되었다.

2027년에 대해 경영진은 공식 가이던스를 제시하지 않았다. 새로운 정책 조치가 없는 한 관세 부담은 전반적으로 보합세를 유지할 것으로 예상되는 반면, 원자재 및 물류 비용은 계속해서 역풍으로 작용할 가능성이 높다. 회사는 중국산 자재가 매출원가에서 차지하는 비중을 2026년 말 예상치인 9%에서 2027년 말까지 5% 미만으로 낮추는 것을 목표로 하고 있다.

리스크 및 관전 포인트

• 철강, 디젤, 알루미늄 및 트럭 운송이 주요 압박 요인으로 꼽히며, 2026년 원자재 및 물류 비용은 전년 대비 약 7,000만 달러 증가할 것으로 예상된다.
• 최종 결과는 원자재 가격 곡선과 헤징 결정에 따라 달라지겠지만, 경영진은 2027년 상반기에 약 7,000만 달러의 원자재 역풍이 발생할 것으로 예상하고 있다.
• 과잉 제조 능력과 관련된 잠재적인 301조 조치는 여전히 불확실하며 관세 전망을 바꿀 수 있다.
• 레저 수요는 소비자 심리, 생활비, 높은 월 납입금 부담에 따른 구매 주저로 인해 계속 압박받고 있다.
• 유럽 수요는 상대적으로 약세를 보였고, 폴라리스의 폰툰 점유율 확대에도 불구하고 마린 시장은 여전히 도전적인 환경이 지속되었다.
• 추가 관세 환급 가능성이 있지만, 경영진은 공식적인 절차가 마련되어 있지 않아 시기와 금액 모두 불확실하다고 밝혔다.

애널리스트 Q&A 주요 내용

2027년 마진: 경영진은 잠재적인 신규 301조 조치를 제외하면 관세 효과가 전년 대비 전반적으로 중립적일 수 있다고 밝혔다. 영업 효율성 및 린 제조 방식이 마진을 뒷받침할 것으로 보이나, 원자재 및 화물 운임 인플레이션이 주요 상쇄 요인으로 작용하고 있다. 폴라리스는 2027년 마진 전망치를 제시하지 않았다.

수요 전망: 경영진은 유틸리티, 상업용 건설, 정부 및 방산 수요에 대해 자신감을 표명했다. 10월 소매 판매는 회사 예상치에 부합하는 낮은 한 자릿수 성장률을 기록했으나, 임의재 성격의 레저 시장은 여전히 압박을 받았다.

프로모션 활동: 건전한 딜러 재고, 빠른 소매 판매 회전율 및 신제품 출시에 따라 판촉 압력이 제한될 것으로 예상된다. 경영진은 업계의 할인 및 도매 활동이 2년 전보다 더 자제되고 있는 것으로 보인다고 언급했다.

제조 생산성: 헌츠빌 린 생산 라인은 우수한 직행률(first-pass yield)을 보이며 예상보다 빠르게 효율적인 생산 수준에 도달했다. 경영진은 더 광범위한 린 혁신이 아직 초기 단계에 있으며, 추가적인 효율성 개선 기회가 남아있다고 평가했다.

상용 차량 활용: 데이터 센터 및 기타 건설 프로젝트에 투입된 차량은 높은 주행 거리와 가동 시간을 기록한다. 폴라리스는 이와 관련된 부품 수요를 확인하고 있으며, 상당수 차량은 상업적 수명이 2~3년으로 추정되어 재투입되지 않는 것으로 나타났다.

중기 마진: 경영진은 연간 조정 EBITDA 마진이 약 8.5% 수준일 것으로 전망했다. 관세 환급 및 지속적인 관세 비용을 제외한 실질 영업 EBITDA 마진은 약 10%로 추정했다. 폴라리스는 2월 인베스터 데이(Investor Day)에서 10%대 중반 EBITDA 마진 달성을 위한 로드맵의 세부 사항을 공유할 예정이다.

실적 발표 컨퍼런스 콜 전문

전체 실적 발표 컨퍼런스 콜 녹취록

경영진 발표

Operator

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

J.C. Weigelt

Thank you, Chad, and good morning or afternoon, everyone. I'm J.C. Weigelt, Vice President of Investor Relations at Polaris. Thank you for joining us for our 2026 third 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 3rd 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 third 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.

Michael Speetzen

Thanks, J.C. Good morning, everyone, and thank you for joining us. We delivered another strong quarter with results exceeding our expectations and demonstrating that the actions we've taken over the past several years are making Polaris a stronger, more focused and more profitable company. We are the global leader in powersports with leading share in the largest U.S. manufacturing footprint in the industry. Our portfolio serves all who play and work outside. And today, over half of our sales come from customers who buy their vehicles for work, from farms to ranches to commercial job sites as well as government agencies and the military.

I'm proud of how the Polaris team continues to execute. They've stayed focused and have done a great job navigating a dynamic environment. As a result, our dealer inventory remains healthy, we gained share in ORV for the sixth consecutive quarter. And once again, we delivered industry-leading innovative products that were launched at our dealer shows in August. While the consumer environment remains dynamic, we continue to focus on what we can control. That focus is driving share gains translating into stronger operating performance and we believe positioning us to deliver our full year outlook and mid-cycle targets.

Third quarter reported sales increased 11%, and excluding Indian motorcycle from Q3 of 2025, sales grew 17%. Sales growth was driven by high single-digit growth in ORV double-digit growth in PG&A and high double-digit growth in commercial, government and defense and marine as well as over 100% growth in seasonal. Our growth was driven by growing end markets and share gains in ORV. Strong growth in large capital projects such as data centers, increasing the need for our commercial products. Given the level of infrastructure investment we're seeing, we believe this business has a long runway for growth.

Growing government and defense demand supported by increased defense spending across the U.S., Canada and NATO with U.S. manufactured utility and snow products contributing to that growth. robust ridership leading to higher parts and accessories sales, meaningful innovation across ORV and marine and healthy dealer inventory levels, which allowed us to ship in snowmobiles ahead of the season. Growth this broad in a soft consumer market shows the strength of a portfolio built for both utility and recreation.

Turning to margins. Adjusted EBITDA margin improved 118 basis points to 8.8%. Positive contributors to margins were volume, net price and operational efficiencies. As expected, offsetting these gains were higher commodity costs driven by elevated prices for steel, diesel, aluminum and logistics. Our lean work in our manufacturing facilities helped to offset more than half of the commodity pressure. We also recorded $10 million in EPA tariff refunds and related interest during the quarter. As we did last quarter, we have removed these refunds from our adjusted financial metrics, and we'll refer to them as operational adjusted results on today's call and our earnings materials.

Excluding these refunds, our operational performance drove margins higher by approximately 85 basis points. We delivered adjusted earnings per share of $1.08, which includes the pretax $10 million in tariff refunds. Excluding these tariff refunds, operational adjusted EPS was $0.95 compared to $0.41 last year and was well above our expectations. In July, we noted that our earnings split between the third and fourth quarter could shift with the timing of fall and winter shipments, which is a portion of the Q3 overperformance, given higher-than-expected shipments in snowmobile and utility. This year, with snowmobile dealer inventory in good shape, we shipped a portion of those units in the third quarter to ensure dealers had inventory to meet early season consumer demand.

Bob will walk through the details in his remarks. As a result of our third quarter performance and the momentum we are seeing across the business, we are raising guidance for the third time this year. Excluding tariff refunds, we now expect operational adjusted EPS of $2.40 to $2.50, up from our prior guidance of $205 million to $215 million. And while uncertainty remains, October retail is tracking in line with expectations. We still have work ahead of us, but the business is on an increasingly solid footing, and we remain confident that our focus on innovation disciplined inventory management and operational execution positioned Polaris well as we head into 2027.

Moving to our retail performance. Total company retail was flat for the quarter. ORV North American retail was up 2%, outperforming the industry and gaining share for the sixth consecutive quarter. This growth was even more impressive as we were comparing against a very strong third quarter of 2025 and where North American ORV retail grew 9% on the heels of a successful FAC event. [ Transmit ] and ORV remained consistent with recent quarters, with utility growing and recreation seeing pressure from external factors. Because we serve customers who use our vehicles for work as well as for fun, utility growth more than offset softness in more discretionary recreational markets resulting in ORV retail growth. ORV utility continues to be the biggest driver for our business as it represents over 60% of Polaris powersports sales.

From the value tier RANGER 500 and Sportsman 500 to the new Ranger cab units, the premium North Star lines and Ranger XD 1500, we give dealers and customers a broad and innovative utility portfolio. Six straight quarters of share gains reflect that strength. Additional data points that demonstrate our leadership position in ORV include -- this quarter marked our highest third quarter ORV share in the industry since the third quarter of 2019. The RANGER 500 helped our midsized portfolio of Rangers gained more than 10 points of segment share in the quarter. Our Ranger cab units gained multiple points of share in the quarter and still represent over 50% of our Ranger sales.

Cab units with Comfort features such as AC and heat continue to grow faster than the broader industry. For Polaris specifically, we have seen over 70% growth in utility cab units since 2023. We are shipping three new vehicles to dealers in the fourth quarter. The first is the Polaris expedition with Numatix, this is our second-generation expedition while competitors have yet to launch a product that we believe is comparable. The second is the RZR Pro R boost, the industry's most powerful side-by-side with a leading 275-horsepower and 223-pound feet of torque. And third is our new value tier ATV, the Sportsman 500. Our close relationships with dealers is paying off as our survey work reflects an improvement in dealer sentiment over the last 2 years with the recent data set showing us tied for the lead.

And finally, our commercial, government and defense businesses deserve mentioned, Commercial demand is tied to infrastructure and data center construction and these construction contractors rely on our purpose-built vehicles and our parts support to keep their projects running. In Government & Defense, we're seeing growth across a range of customers and applications, supported by increased defense spending across the U.S., Canada and NATO. These customers buy on government budgets and project schedules rather than on consumer confidence, that gives these businesses a different profile through the cycle than recreation. The highlight of the quarter for me was attending the OVM Marine dealer shows and product launches in August.

Nothing is more energizing than seeing our dealers overtaking with excitement for our new products. I'm proud of the products we recently launched, but what makes me even more excited is what's ahead. We have a strong pipeline of innovation -- innovative products planned for the next 3 to 4 years, and I believe the best is yet to come. Turning to Marine. Our third quarter pontoon retail was down low double digits according to the August SSI report. The good news is that we gained pontoon share in the quarter, but that remains -- but it remains a challenging industry. Our intention is to keep innovating to drive consumer interest and ensure we have an attractive portfolio of pontoons and deck boats when the industry recovers. We continue to see healthy dealer inventory levels across our portfolio.

During the third quarter, we again strategically increased inventory in utility given the robust growth we are experiencing in this category. We did see a slight increase in ORV recreational inventory associated with the timing of the new Polaris expedition launch, but expect it to be normalized by year-end. We also continue to take the appropriate actions to rightsize dealer inventory in our seasonal business, and we entered the snowmobile season with dealer inventory in the best position in years. In aggregate, dealer inventory was up 3% in the quarter versus last year. and dealer DSOs are slightly over 100 days, which remains well below historic levels. We remain committed to matching shipments to retail, and we expect dealer inventory to end the year in a healthy position relative to retail.

I'm now going to turn it over to Bob to provide you with more details on the financials and the increase to our full year guidance.

Robert Mack

Thanks, Mike. The strong momentum we saw in the first half of the year continued into the third quarter, and we delivered results well above our expectations across each of our key financial metrics. Sales were up 11% or 17% organically, excluding Indian Motorcycle. As Mike noted, some of the growth came from the earlier timing of vehicle shipments, mainly snowmobiles, which I will walk through shortly. We also saw strong contributions coming from ORV, commercial, government and defense and marine. Total PG&A sales increased 12%, driven by parts and oil which we attribute to strong ridership data and strong sales in apparel ahead of the snow season.

We recognized $10 million of tariff refunds and related interest that was not contemplated in our July outlook. Excluding the refunds, operational adjusted EBITDA margin still increased 85 basis points and operational adjusted EPS was $0.95 versus $0.41 a year ago. Underlying performance was strong in the quarter. In addition, approximately $0.30 of adjusted EPS shifted from the fourth quarter into the third quarter, primarily due to two timing items. First, we were able to ramp up efficient Ranger production on the new lean line in our Huntsville facility earlier than anticipated. When the line opened in early July, we expected the benefits to be more heavily weighted toward the fourth quarter as operators adjusted to the new process. The team progressed more quickly than anticipated allowing us to capture a greater portion of those shipments in the third quarter. Second, healthy snowmobile inventory at our dealers allowed us to ship more product ahead of the season than we have historically. These earlier shipments benefit our dealers by providing additional setup time and allowing them to focus on retail execution during the selling season.

Although these items affected the quarterly cadence, both reflect positive developments, faster progress on our lean initiatives and healthier snowmobile inventory across our dealer network. Turning to our segments. Polaris powersports sales increased 18% year-over-year, with growth across our major product lines. Seasonal, commercial and government and defense delivered particularly strong performances, while ORV also generated high single-digit growth. Overall, it was another strong quarter for the segment. Utility continues to be a key strength and differentiator for Polaris. Our broad Ranger portfolio spans across the value tier through ultra-premium and extreme duty products, complemented by our commercial business, where we continue to see strong demand at large job sites such as data centers.

Utility products represented approximately 60% of Powersports sales and more than 50% of Powersports sales in the quarter. This mix differentiates Polaris from our -- both our direct competitors and the other leisure companies that have greater exposure to discretionary purchases. Many of our customers rely on our industry-leading products to get work done whether on a ranch, a farm, a data center project, a general construction site or at a municipal facility. Powersports PG&A sales were up 19%, driven by factory installed accessories and oil sales providing further evidence that customers continue to ride and use our vehicles.

Commercial PG&A revenues were up significantly, bolstered by parts in factory installed accessories and configurations requested by our commercial customers. Gross profit margin from operations declined 19 basis points. Positive net price and operational efficiencies partially offset a 190 basis point headwind from commodities, logistics and tariff costs. As we discussed last quarter, commodities and logistics continue to be one of the more significant year-over-year pressures in the second half of the year. Marine sales increased 29%, driven by a richer mix of pontoons led by the Beddington QS and Godfrey Sanpan premium lines. Gross margin increased 43 basis points year-over-year, reflecting favorable mix and operational efficiencies. We expect premium mix to remain a positive contributor through the selling season. Higher commodity costs, particularly aluminum, continued to press our margins, and we expect that headwind to persist while aluminum prices remain elevated.

Aixam and Goupil sales declined 12%, affecting our planned reduction in Aixam shipments to better align dealer inventory with retail demand heading into the new year. Gross profit margin declined 47 basis points year-over-year primarily due to these lower planned volumes. Our capital deployment priorities remain unchanged. First, investing in core businesses to drive higher-margin, profitable growth; second, returning capital to shareholders through our dividend; and third, reducing debt. As we expected, cash generation was strong in the third quarter with operating cash flow of approximately $382 million of seasonal working capital unwound.

We used that cash to reduce total debt by more than $320 million mostly by repaying borrowings under our revolving credit facility. Supported by our strong year-to-date operational performance, we reduced our net leverage ratio from 3.4x at the beginning of the year to 2x at the end of the third quarter. We expect to make further progress in Exit '26 with net leverage below 2x. We remain confident in our financial position, and we continue to take a disciplined approach to capital deployment. We plan to continue to strengthen balance sheet flexibility while managing the business in line with investment-grade metrics. We now expect year-end working capital to be negative 2% of sales, a 100 basis point improvement versus prior expectations. We expect working capital reductions to continue into next year as we localize our supply chain in North America, which also reduces tariff exposure to China.

Moving to guidance. We are raising our full year outlook given our third quarter beat and continued strength across the business. This is the third time we have raised guidance this year, demonstrating the consistent operational execution of our teams and the improving earnings power of the business. We now expect full year sales of $7.55 billion to $7.60 billion, representing growth of approximately 6% and with both ends of the range above our prior guidance. Excluding the sale of Indian motorcycle in the first quarter, this range reflects approximately 11% organic sales growth at the midpoint. We expect fourth quarter organic sales to be roughly flat as Q4 retail is expected to be flattish and the shift of snowmobile shipments into the third quarter are partially offset by year-over-year sales growth in marine. We are also narrowing our full year adjusted EBITDA margin outlook to the upper end of our prior range. We now expect adjusted EBITDA margin to increase 270 to 275 basis points.

On an operational basis, excluding tariff refunds, we expect margin expansion of approximately 165 to 170 basis points compared with our prior outlook of 145 to 170 basis points. The primary operational drivers of this year's margin expansion are higher volume, favorable mix and operational efficiencies. These are partially offset by higher commodity and logistics costs which we expect to be approximately $70 million higher than last year. In the fourth quarter, we expect adjusted EBITDA margin to increase by more than 100 basis points primarily due to the benefit from the Indian Motorcycle separation and positive net price. These benefits will be partially offset by higher commodity and logistics costs.

On tariffs, we still expect to pay approximately $215 million this year, unchanged from our prior outlook. This assumes no material change to USMCA or other tariff policies currently in place. 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 and into January '27 due to the seasonality of motorcycle sales. We are also raising full year adjusted EPS guidance to $3.50 to $3.60 from $3 to $3.10. This includes $1.09 from the tariff refunds recorded in the second and third quarters.

Excluding tariff refunds, operational adjusted EPS is expected to be $2.40 to $2.50 compared with our July 28 guidance revision of $2.05 to $2.15. This increase reflects our strong third quarter performance and additional improvement in the underlying business relative to our July expectations. Our guidance does not include any additional tariff refunds. While we believe there may be opportunities to recover additional amounts, a formal process for the next phase of refunds has not been established. The timing and amount of any further recovery is uncertain and certain amounts would need to be recovered from suppliers. Our full year guidance implies fourth quarter adjusted EPS of $0.32 to $0.42, reflecting, in part, the approximately $0.30 of earnings that shifted from the fourth quarter into the third quarter. We expect fourth quarter earnings to be supported by net price in the separation of Indian motorcycle, somewhat offset by higher commodity and logistics costs.

In closing, our strong third quarter results and increased full year outlook reflect the continued momentum across our business and the disciplined execution of our teams. We are delivering meaningful operational margin expansion, strengthening our balance sheet and positioning the company to exit the year with net leverage below 2x. While commodity and logistics costs remain headwinds, we are confident in the underlying fundamentals of the business and the actions we are taking to drive further progress in 2027.

With that, I'll turn the call back over to Mike. Go ahead, Mike.

Michael Speetzen

Thanks, Bob. Before wrapping up, I want to spend a few minutes on how we're thinking about 2027. While it's still early and we're not providing formal guidance today, there are several factors that give us confidence in the continued progress of the business. First, we expect to maintain the same disciplined approach to dealer inventory that has served us well with production and shipments aligned closely with retail demand. At the same time, we are preparing to bring innovative new products to market across our core businesses while continuing to capitalize on the consumer shift toward cab units.

From an operating perspective, we expect commodity costs to be a meaningful headwind given current prices on steel, diesel and aluminum in addition to logistics. But we also see continued opportunities to drive productivity, operational efficiencies and expense leverage to help offset a portion of these elevated costs. Our manufacturing facilities are currently running at roughly 70% of capacity and we continue to expand Lean to improve our efficiency. As volume recover -- as volumes recover, that available capacity should provide a meaningful incremental margin opportunity. We also remain focused on executing our tariff mitigation strategy, including meeting our targets of reducing our exposure to China by the end of 2027.

Finally, we expect our improving earnings and cash flow profile to support a healthy balance sheet, and we intend to manage net leverage within our 1x to 2x target range. Operating within that range gives us more flexibility to enhance our return of capital to shareholders. So while we're operating in an unsettled macroeconomic world, we believe the actions we have taken over the past several years have put Polaris in a much better position to manage through volatility and drive improved financial performance over the long term. With 1 quarter to go, our priorities remain consistent. The overall retail market has played out slightly better than we originally expected.

Growth remains volatile, but utility continues to outperform. We had originally called for the retail environment to be flattish year-over-year, but now expected to grow low single digits. And while uncertainty remains in the broader economy, the trends we have seen through the third week of October give us confidence that we can have a strong ending to the year. We continue to build and ship products at the same pace as retail and expect this strategy to hold true for the foreseeable future. As I noted earlier, we are shipping three important new products this quarter: the RZR Pro R Boost, Polaris Expedition with Numatix and the Sportsman 500. Early feedback from dealers and customers has been very encouraging, and we believe that Pro R Boost and new expedition can help provide a lift in recreational sales.

We remain ahead of our internal targets regarding our tariff mitigation strategy with an expected 9% of material cost of goods sold originating from China by year-end. This is down from approximately 14% at the beginning of the year and our ultimate goal is to have these costs below 5% by year-end 2027. Our focus and execution this year drove these results and allowed us to raise guidance for the third time. Our strategy is unchanged and our foundation is stronger. We are a different company than we were 5 years ago. We are more focused. Our manufacturing facilities are more efficient. Our dealer inventory is healthy, and our portfolio increasingly serves customers who rely on our products for work as well as play.

Dealers see the change as do customers and employees and increasingly, it is showing up in our results. Polaris is the leader in powersports, and I'm confident we have the strategy, portfolio and operating foundation to deliver higher earnings power and stronger returns over time. With that, I'll turn the call over to Chad to open the line for questions.

Operator

[Operator Instructions]. And the first question will be from Joe Altobello from Raymond James.

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Joseph Altobello

First question, I want to kind of talk about your rental margins for next year, right? If we assume modest unit growth, let's say, how do you see incremental margins playing out given all the puts and takes you just laid out, Mike?

Michael Speetzen

Yes. So -- well, first of all, good morning, Joe. The incremental margins were pretty heavily impacted in the third quarter. There was obviously a little bit of incremental tariff costs. Third quarter of last year is when tariff costs had really ramped up for us. The third quarter really saw the impact of commodities. And as we mentioned in the prepared remarks, the commodities really have ramped up and we expect that to be a bit of a headwind as we get into next year.

Now the good news is we've been making substantial improvements in the business in terms of just how efficient the factories are operating. The team, as I indicated in my prepared remarks, has done an excellent job of pulling content out of China. Pulling that supply chain back into North America primarily, which is going to help from a tariff perspective. It's early for us to make a lot of comments around what we expect incrementals to be going into next year. But I think we've -- we've got the business position. I mean it's a bit frustrating because the incremental tariffs, the incremental commodities, those things are eating away at the margins. And I would just remind you that ex the $215 million of tariffs or margins would almost be 2 points higher than where they are today.

And obviously, Bob can fill in some of the blanks that I skipped over.

Robert Mack

Yes, Joe. I mean I think the biggest thing we'll start to lack the tariffs going into next year. And as of right now, we don't expect dramatic changes in the overall tariff load on the company. There's some incrementals. Some of that is going to be offset by the stuff we've moved out of China. So absent any changes, there is still a 301 investigation out there on excess capacity. I don't think anything will happen with that until after the midterms. But once the bid terms are over, I think it's pretty tough to predict where that one will go. But if that doesn't change the picture, I think our tariff picture will be relatively flattish next year as compared to this year. And so the big the bigger headwind is going to continue to be commodities.

And when we say commodities, we include trucking in that because it is a big part of it right now, the linehaul side is almost as big as the diesel side with trucking shortages. So we talked about having about $50 million of headwind in the second half of '26. So most of this really ramped up in the back half of the year. It was about $70 million for the full year. Some of that was offset by hedge. So as we look at the first half of next year, I think the commodity headwind is going to be in that $70 million range. And it's really tough to predict after that. The commodity curves as they sit here today, would show some improvement, particularly in steel and diesel in the back half of the year. But the reality is we've watched those curves push out the last few months. And so we'll just have to see how that early to get into that. But certainly, in the first half of the year, I think we'll see less tariff headwind, a little more commodity headwind than we did this year.

Michael Speetzen

And Joe, the other thing I -- it's obviously not related to cost, but it's a critical component. I mean think about the comments that we've made about the utility portion of our portfolio, the exposure we have. If you look at things like the Dodge Momentum Index, the level of construction activity, commercial construction activity isn't anticipated to abate anytime soon. And increasingly, our vehicles are being used more and more in that type of environment. And we've got a dealer meeting in February of next year. We're also going to have an Investor Day in February of next year, early February of next year. And if you think about that's on the heels of having a dealer meeting in August where we launched three incredible products. So there's more to come.

And I'm convinced with the new products and the exposure we have from a utility standpoint. The business is looking at a good environment as we head into next year despite the fact the discretionary spending pressures still remain and the direct markets could remain under a little bit of pressure. The balance of our portfolio, I think, really helps out and gives us the opportunity to get more volumes through the factories and drive that incremental leverage to help address some of the increasing costs we're seeing that Bob outlined.

Robert Mack

Yes. The other piece to think about is we've had really good operational performance at the factories. I think the what happened in Huntsville in the third quarter, we had hedged our bets a little bit coming into the quarter as we implemented a new lean line there. Mike and I have both been down there. The team did just a great job coming up to speed on that line and getting to some of the highest levels of first pass yield on vehicles that we've seen. So we were able to pull a little bit more Ranger into the quarter. We had thought we were going to be pretty tight on Ranger shipments in the quarter, and we were able to do a little better than that.

But I think it shows that the benefits that we're getting from Lean are real. And like we've talked about, I mean, we're kind of in the World Series time, so we're kind of in the third inning-ish of a 9-inning game. And so there's a lot more to go. So whether we'll be able to fully offset commodities, we'll have to see as we get into budgeting for the full year, but I expect to see continued improvement on that side also.

Joseph Altobello

Very helpful. And just a follow-up and somewhat related. Promotion intensity, is that a good guy or a bad guy next year on margins?

Michael Speetzen

Well, I mean, certainly, the fact that we've continued to keep dealer inventory in a good spot. Retail velocity was up again. This past quarter, we were up about 19%. So we're moving product faster. And I think -- I mean, look, we've done a better job of making sure that we've got the right inventory at the dealers. The current noncurrent mix is incredibly important. And then, quite frankly, having leading innovation takes significant pressure off from a promotional perspective. And so it's early to have a perspective as we head into next year.

But certainly, we're trying to set the business up through a combination of the innovation, the product mix as well as just overall dealer inventory levels that we're going to keep promotional pressure abated and hopefully look to continue to drive that down as a percentage of sales.

Operator

The next question will be from James Hardiman from Citi.

James Hardiman

I wanted to continue along sort of the same lines as we think about 2027, I think I have all the moving pieces, right? Obviously, the three biggest would be the commodity and freight inflation, the efficiencies that you talked about and then tariffs, it sounds like tariffs are basically going to be a wash, right? The annualization is a bad guy. The lower reliance on China is a good guy, and it's a little bit unclear, which is going to be bigger at this point. the inflation versus the efficiencies. I guess, a, is that all right? Is that all accurate?

Because you just gave us a lot of answer to Joe's questions. But then as I just look at The Street for next year, which was assuming a lot of growth on a reported basis and the fact that we need to be backing out sounds like about $1.09 of tariffs. I guess do you think you'll be able to grow on a reported basis next year? Obviously, I think you think you can grow on an operating basis, right, ex tariffs, but I'm just trying to understand if The Street expectation is too aggressive as we sit here today.

Michael Speetzen

Yes, I think -- so James, a couple of comments on the tariffs. I mean I'd remind you there still is an open 301 investigation around excess manufacturing. And so that is an unknown. I think net of anything happening there we look at tariffs as kind of a push. I mean, obviously, we're working hard and we're confident with the work that we've got underway to get sourcing out of China. So that will take some tariff cost out. But obviously, we were in China because the costs were less. So we're moving into areas where it's going to cost a little bit more. So I think it's going to probably be a net push when you look at just the tariff, tariff mitigation, excluding whatever happens on 301 excess manufacturing.

I do think the estimates are high next year. And I think part of that is we know a number of analysts have not backed the AEPA refunds out. And that's obviously a big part of the performance this year in terms of getting the $80-plus million worth of refunds in and the impact that that's had on EPS. When you talk about can we grow next year from a top line standpoint. Obviously, it's early to be giving guidance, but I do feel confident for the factors that I outlined when answering Joe's questions around promo. We've got some incredible new product in the market that we launched this year that obviously will cycle into next year. And then we've got a dealer meeting in February. So that should give you some hints that there's yet more to come.

And I think that, coupled with our exposure to the utility markets and specifically around some of the commercial construction activity that's going on, I feel good about that growth trajectory. It's a bit early Bob gave you some color around the commodity pressure that we're facing. What's tough for us is what's going to happen in the back half of next year from a commodity standpoint, things could move down as quickly as they came up. A lot of that is going to really depend on what's going on in the broader macro and it's anybody's guess where we think things are at. So we're going to continue doing the things that have served us well. We're going to stay focused on everything we can control. We didn't really talk much about it, but in addition to the factories operating better, our quality, we are now either amongst the top, if not the top, in power sports from a quality standpoint. And that serves us incredibly well in terms of taking warranty costs down, improving the satisfaction with customers. And you couple that with all the new products and the exposure to the end markets we have. I feel good about the top line as we head into 2027.

James Hardiman

Got it. That's really helpful. And maybe a simpler question that you may or may not choose to answer, but any color you can give us on sort of as we think about retail, which RVs were up against a really difficult compare last year. Maybe just any color on sort of how that went over the course of the quarter. And then you talked about October being in line with expectations. I don't know where your expectations were, but any color there Obviously, we saw an interest rate hike and consumer confidence. It seems like it's getting worse, but it doesn't sound like you're seeing much of that in the numbers so far here in October.

Michael Speetzen

Yes. I mean think about October in the low single digits, which is aligned with what we were expecting. I think third quarter was a tale of a different journey. I mean we started out with a tough July. I think that was probably something that had been talked about more broadly, not just specific to power sports. And then we picked up momentum as the quarter went on. I think the affordability report that you put out, I think kind of sums it up. I mean, the RV space is facing, I think, a different set of challenges. And then quite frankly, the fact that we've got 60% of our portfolio, that's really outside of the rec exposure category. And that's not to say that people who buy a Ranger on their farm aren't using it to go hunting and fishing. But the vehicle has multiple uses.

And then when you index that with the commercial construction that's going on and the number of vehicles that we have that are being bought by contractors as well as rental companies that are going into their fleets to support the work that they're doing on a range of projects, I think that puts us in a little bit different position. So we're encouraged with what we've seen in October. And as I said in my prepared remarks, we're -- we believe we're set up to have a good strong end to the year.

Operator

The next question is from Gerrick Johnson from Seaport Research Partners.

Gerrick Johnson

I wanted to dig into the shifts between the third and fourth quarter. How much -- you gave us the bottom line impact, but what was the top line impact of snowmobile shipping early as well as the Ranger? And then also on inventory I would expect seasonal inventory to grow at the dealer level. But on Page 5, it looks like it declined. So talk about the dynamics in seasonal inventory and also what inventory would be without snowmobile shipping early in the third quarter.

Robert Mack

Yes. So Gerrick, if you think about the snow and the Ranger timing from a revenue perspective, it's about split in a $30-ish million of snow and a little bit more than that of Ranger. So not massive, but meaningful. And like as we talked about, that was really just performance of the factory and then the fact that we had low seasonal inventory. And the reason inventory -- dealer inventory is down in the quarter is purely seasonal as we cleaned up a fair number of the old model year slides kind of earlier this year. And what we saw in the quarter was some growth in Ranger and a little bit in a channel fill on the rec side, Ranger because of strong sales and really inventory not growing quite as fast as the sales just because we had to deal with the new line in Huntsville, which again performed better than we expected but was still -- we knew we were going to be a little tight on Ranger in the quarter.

And then with the channel fill on expedition, starting to ship Boost, that drove a little bit of rec growth, we think that will level itself out by the time we get to the end of Q4.

Gerrick Johnson

Okay. Great. So on seasonal, it's the fact that you cleared out way more noncurrent than you shipped in currents early leading to...

Michael Speetzen

And we've also seen SnowCheck pickups at a greater pace than I think we were expecting. We were just with the dealer council last week, and they were very appreciative of the fact that we had shipped in early because it allows them to spend time getting the snowmobile set up, getting them to consumers who've preordered. So it worked out well for us all around.

Robert Mack

Yes. I mean, and snowmobile shipping in Q3 is something that kind of the rest of the industry has done for a while. We have not been able to execute to do that in the last few years. And I think now we've got our Roseau facility and snow team running a lot better and that allowed us to pull that up and deliver. Like Mike said, that was possible to be received by the dealers. We still had a pretty small snow build this year, with an effort of trying to keep dealer inventory at the right level and really limit the amount of carryovers we have of -- into the new model year. So the team's executing really well on that side.

Gerrick Johnson

Okay. Understood. And just lastly for me. International seems soft even if you exclude Goupil and Aixam. So why was that underperforming versus North America?

Robert Mack

Yes. I think a lot of challenges. Obviously, a lot of distraction in Europe right now. So the European markets were relatively slow. And then really just a little bit of timing as we get dealer inventory. We're getting more sophisticated about our international dealer inventory and market share and our ability to measure some of that. And so we've really been focused on taking some of what we learned on the U.S. side in terms of sales, inventory and operations planning, taking that to international and making sure we've got dealer inventory rightsized around the world. So some of that had a little bit of timing impact in the quarter.

Operator

The next question is from Craig Kennison from Baird.

Craig Kennison

Mike, what's the latest on consumer usage trends based on RIDE COMMAND, Polaris surveys and other factors?

Michael Speetzen

Continues to be strong. We continue to see parts consumption, oil consumption, wheels, tires, for the vehicles that we can track riding, we're up in the kind of low to mid-single digits, which is encouraging. And that's building on last year, which last year was critical because we saw ridership up above pre-COVID levels. So people are still using the vehicles. We're doing a lot of survey work to talk with consumers, specifically on the rec side -- there's a high level of engagement with the product. And in fact, we're seeing even some pickup in accessories, which means the people are hanging on to these things a little bit longer. And I think a lot of it is they're waiting for the moment to buy.

And I think that has to do more with confidence in the economic backdrop as well as just the cost of living between what it costs to put gas in your vehicle, not necessarily our vehicle, but your main driving vehicle as well as energy costs and groceries, et cetera, things are just expensive. And so taking on a new higher payment right now, which tends to be the predominant Rec customer. It's just not something that they're leaning in hard to. The good news is we're putting new product out. That new Pro R Boost is an incredible machine. The new expedition is getting incredible reviews relative to how quiet the vehicle is and the new Sportsman 500 that provides a nice value entry point.

So we're confident with all the new products we've got coming out, we're going to put enough into the market that could stimulate that rec customer to come back in. It would be helpful to get some help from a macro perspective, but based on where things are at, I'm not expecting that to be a help anytime soon.

Craig Kennison

Do you get data on commercial usage versus consumer usage? And I'm assuming commercial users are much more aggressive with your product and might have a different replacement cycle. So maybe comment on that, if you would, please.

Michael Speetzen

It's a very different use case. We're learning is, especially as these vehicles are deployed on projects like data centers. What I can tell you is they're putting an awful lot of miles on them. They're putting even more hours because a lot of these projects are in areas that leave the vehicle running. We've seen that shown up in our parts data as alternator belts and things like that have to be replaced more frequently. The vehicles are used in conditions where they're not able to be washed frequently. I mean it's just a whole different use case. And so the vehicles, we're watching what redeployment rates look like. That's when a rental fleet will be pulled back in off of one project and redeploy to another. We don't necessarily have a lot of great data yet on some of the new uses.

These vehicles tend to be out in the market 2 to 3 years. If they are salvageable, they tend to be sold for a very, very low price, and they're not a consumer-oriented vehicle, if you will but most of these vehicles are not redeployed. So a lot to be learned. And for us, it's just about staying focused on this commercial build-out. It looks like it's going to go on for a while, and we're making sure that we've got the product that these consumers are looking for tends to be something that has become increasingly more popular, not just having heat but also having air conditioning in the vehicle. So we're working through making sure that we've got that offering as we move forward.

Operator

And the next question will be from Robin Farley from UBS.

Arpine Kocharyan

This is Arpine for Robin. I wanted to go back to the big picture demand drivers for 2027. Usage used shipments should be aligned with retail as we look into next year. And it sounds like we're now looking at roughly maybe slightly better retail for this year. As you look across the consumer business. Does it seem like you should see similar low single-digit improvement and then maybe better shipment than that given commercial business and data center demand and defense budget that seem to be maybe not going down year-over-year. Anything -- any more color on that would be great.

Michael Speetzen

Yes. I don't know that we want to circuiting into specifics around '27. I mean I think I've said an awful lot about our confidence in the products we have. We've effectively got dealer inventory shipments and build aligned this year. So as we head into next year, I don't necessarily see that being a tailwind like it was this year. I think our top line growth will probably be more reflective of what we ultimately see happening from a broader retail as well as what ultimately happens in the commercial construction The Dodge Momentum Index is a good gauge of what's expected in the commercial markets. It's not a one-for-one by any stretch, but it certainly looks encouraging, but we'll have more to say in January when we provide our official guidance on 2027.

Arpine Kocharyan

Okay. And it seemed like adjusted for tariff refunds for base year this year, you should be able to keep margin flattish to a bit better year-over-year next year. Is that -- if you were to sort of dial down what you were trying to say earlier on margin for 2027. Is that a correct conclusion?

Robert Mack

I think tariffs will be generally flat year-over-year unless there's a new 301 tariff, which we certainly don't know and hard to anticipate what that could look like. I think going into the year, we're going to have operational efficiencies as a tailwind in commodities as a headwind. It's pretty difficult to say what full year commodities looks like right now sitting here in October. So I don't think we're giving a forecast on what margins will look like next year. We've given the data we're going to give in terms of the puts and takes, and then we'll update in January once we get closer to the year.

Operator

And the next question will be from Noah Zatzkin from KeyBanc.

Noah Zatzkin

I guess, first, I think you noted $0.30 of pull forward into 3Q from 4Q. But you did raise full year operational EPS guidance by $0.35 at the midpoint. And I think you raised full year sales guidance by $175 million. So is the driver of those increases really the low single-digit retail versus flat prior? Or is there kind of any other dynamics there?

Michael Speetzen

Yes. Yes, it really is just -- it's the strength in utility. So we -- $0.15 of the Q3 beat lives through and then another $0.20 in the fourth quarter. And it's largely driven by the strength we've seen in utility. The Rec side has continued to be a headwind relative to what we expected and are in line with what we expected, but on a year-over-year basis.

Noah Zatzkin

That's helpful. And then I think some of the tariff noise maybe makes it a bit hard to discern the magnitude of operational efficiencies in the results. So wondering if you could help quantify or maybe provide some color around the structural benefits this year and how you're thinking about the remaining opportunity there.

Michael Speetzen

Well, I mean, just think about the fact that our margins would be almost 2 points higher than where they are today if we didn't have tariffs sitting in there. And so it's a meaningful impact. And even the commodities are a pretty substantial drag right now. And we're not seeing necessarily the benefit from a foreign exchange perspective. There is some benefit, but not anywhere near the magnitude of what we're dealing with commodities.

And look, we could sit here and adjust those out and feel great about our results all day long, but the reality is they are here, and we're dealing with them. So Bob mentioned it, the work we've done in Huntsville, the work we're doing in Monterrey. We're transitioning engines out of Wisconsin, both to Osceola and down to Mexico. That work is going well. The focus that the team has around making sure that we've got first pass yield coming out of our factories. It's not to say we don't have issues come up, but the level of performance is like I've never seen come out of this company before.

And so we're going to keep working on that because we can control those far better than I can do anything about commodities. Bob and his team do what they can to hedge, but that only ultimately dampens the volatility. You ultimately end up getting caught up eventually with what's going on in the current markets. And unless we see some sort of resolution that drives oil down I don't expect that to change anytime soon, which is further to the comments Bob made around the first half headwinds that we think we have. But we're going to keep working on the operational activity. And I think the sure fact that we've pulled China content down from 14% down to 9%, and we're on a glide path to be below 5% within a 2-year time period speaks to the capability we've developed inside the company from a supply chain standpoint. So, our teams are working hard, and we're going to do everything we can to get the cost out.

Operator

The next question will be from Molly Baum from Morgan Stanley.

Molly Baum

The first one I wanted to ask is just on the competitive landscape. You've now seen 6 straight quarters of share gains. But are you seeing -- or would you call out any notable changes in the competitive landscape heading into 2027, whether it's from a pricing standpoint? Or are you seeing competitors push further into value or commercial where you've been seeing a lot of success?

Michael Speetzen

I wouldn't say we've seen any huge shifts. I think the -- there's a lot more responsible acting today than there was, say, a couple of years ago. We don't see the massive discounting and wholesaling. I mean there's still some of that activity going on. But we and the #2 player in the industry who make up between the two of us 60%. Both have inventory in a good spot. And I think we're hearing the dealers play back to us that that's putting pressure on the others to do the same. But really, we haven't seen anything from a promo standpoint.

I do think you're seeing a lot of competitors follow the steps we're making from a product standpoint. And we're just going to continue to lead. That's what we do as the leader in powersports and leaves the field wide open for us to drive new product development.

Molly Baum

Got it. That's helpful. And off of that, and I don't want to front-run the Investor Day too much, but where -- where would you say you're prioritizing innovation from a new product standpoint over the next few years? Is it more on the value side, the commercial side? I know you mentioned cab units as well? Or is it kind of across the board?

Michael Speetzen

Yes. I mean, we'll talk obviously more at the Investor Day. But I mean we've really honed our focus as a company over the past several years and we've got cycles within the business. But yes, we have some cool stuff coming. We're excited and looking forward to February.

Operator

And the next question is from Andrew Didora from BOA.

Andrew Didora

I guess, Mike, a lot of questions on margins at this point. But I guess, when we think of -- take a step back and think about kind of medium-term margin potential in like kind of the current state of tariff world, how do you think about the margin potential of the business? And then again to maybe to set the 26 baseline because I think there are a lot of moving parts in terms of sale of Indian, tariff refunds, TSAs, et cetera. Like normalized EBITDA margins this year, closer to 7.5%, and that's what we should base our '27 estimates on? Or are you thinking about that differently?

Michael Speetzen

Yes. I mean, look, I don't want to start trying to throw numbers out. We got a lot of math to go work on and do. We're going to end this year at about 8.5% EBITDA. And if you were to factor out the tariffs, both the AEPA refunds as well as the ongoing tariffs that we're dealing with. I mean the EBITDA margins are up around 10% operationally, organically, if you will. So we're certainly on a good path relative to the mid-cycle targets. The tariff headwind is a bit frustrating. We're doing everything we can to work through. That's obviously going to delay things a little bit as we work through resourcing to get the tariff load down as well as the value engineer to get the incremental cost from the new supplier out. But we feel good.

I mentioned it that we're working hard. We think that the setup of the business is good for the mid-cycle targets. And then obviously, when we are with everybody in February, we'll provide a little bit more context One of the things that Bob and I want to make sure we do is walk analysts through how we get from where we are today up into that mid-teens EBITDA range. And a series of things that need to occur for us to get there and the confidence level we have around that, we'll have more to share when we get to that February meeting.

Robert Mack

Yes. I mean, to Mike's point, we certainly have an ongoing tariff headwind. Hopefully, that's stable for next year, although we certainly don't control that. But we are controlling what we can, moving stuff out of China. Also, there's things that have to move out of Southeast Asia as that's the kind of the next highest level of tariffs. So we continue to focus on that. The other piece, so that stuff happens, we've got to work the cost down. I mean there's a reason everybody was buying stuff in China, that was cheaper. So you don't get as much of an immediate benefit from the tariff relief as you would expect because some of it's offset with higher cost. It just takes some time to work those costs down.

But the positive thing, and if you think about it going further into the future, anything we're designing today and we have such a high degree of innovation, we're designing it with those new suppliers from the start. So as new products continue to roll out over the next few years, you'll have less of that impact of stuff moving from one supplier to a new supplier will have started it with a North American supplier. So I feel like that's going to give us some tailwind as we get further out, but that stuff takes some time. So I think overall, positioned well. I think as Mike said, we'll be kind of ish range for the full year, and I think that's a good place to build from.

Operator

The next question is from Anthony Bonadio from Wells Fargo.

Anthony Bonadio

So just on commodities real quick. I know there's a lot of uncertainty, but just thinking about '27 that seems like a key variable. Can you just talk about the timing of hedging. And I guess if things were to improve, how much is locked in versus how much you benefit and just vice versa, things remain challenged.

Robert Mack

Yes. I mean, we -- we typically try to be about 50% hedged as we go into the year. We are not there yet. And obviously, we're looking at what the commodity curves look like, and we'll make those decisions as we see that unravel through the fourth quarter and into the early part of next year. It's not a hard and fast rule. We try to look at what the market is telling us is going to happen. It's just right now, it's just difficult. You look at the steel curves and the diesel curves and they start to look better in the second half of last year.

But they have pushed quite a bit over the last couple of months. And so we'll continue to pay attention to that and see how that looks, and that will drive how deeply we decide to hedge. But the opportunity if we see decreases in commodities is really going to be more in the back half of the year as you think about the first half of the year between the hedges that are in place and the fact that we're already buying inventory that will roll through COGS next year. Your opportunity to impact the first half starts to really decrease as you get into the end of this year.

Operator

And ladies and gentlemen, this concludes today's question-and-answer session, and thus concludes today's call. We thank you for joining Polaris' third quarter earnings conference call. At this time, you may now disconnect your lines. Take care.