Earnings Call Transcript - ALSN Q4 2025

Operator, Operator

Good afternoon. Thank you for standing by. Welcome to Allison's Fourth Quarter 2025 Earnings Conference Call. My name is Paul, and I will be your conference call operator today. After prepared remarks, Allison executives will conduct a question-and-answer session, and conference call participants will receive instructions at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Jackie Bolles, Executive Director of Treasury and Investor Relations. Please go ahead, Jackie.

Jacalyn Bolles, Executive Director of Treasury and Investor Relations

Thank you, Paul. Good afternoon, and thank you for joining us for our Fourth Quarter 2025 Earnings Conference Call. With me this afternoon are Dave Graziosi, our Chair, President and Chief Executive Officer; Scott Mell, our Chief Financial Officer and Treasurer; Fred Bohley, Allison's Chief Operating Officer; and Allison Transmission business unit leader and Craig Price, Allison Off-Highway business unit leader. As a reminder, this conference call, webcast and this afternoon's presentation are available on the Investor Relations section of allisontransmission.com. A replay of this call will be available through March 9. As noted on Slide 2 of the presentation, many of our remarks today contain forward-looking statements based on current expectations. These forward-looking statements are subject to known and unknown risks including those set forth in our annual report on Form 10-K for the year ended December 31, 2024, and quarterly report on Form 10-Q for the quarter ended September 30, 2025. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove incorrect, actual results may vary materially from those that we express today. In addition, as noted on Slide 3 of the presentation, some of our remarks today contain non-GAAP financial measures as defined by the SEC. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures attached as an appendix to the presentation and to our fourth quarter 2025 earnings press release. Today's call is set to end at 5:45 p.m. Eastern Time. In order to maximize participation opportunities on the call, we'll take just one question from each analyst. Please turn to Slide 4 of the presentation for the call agenda. During today's call, Dave Graziosi will reaffirm strategic opportunities presented by the acquisition of Dana's Off-Highway business and introduce Craig Price, Allison Off-Highway's President. Following remarks from Craig, Dave will present the Allison go-forward business unit reporting structure prior to reviewing highlights from Allison Transmission's full-year 2025 results. Fred Bohley will then review recent announcements across our business. Scott Mell will end the prepared remarks with a review of Allison's Transmission's Fourth Quarter 2025 financial performance and Allison's full-year 2026 guidance prior to commencing the Q&A. Now I'll turn the call over to Dave.

David Graziosi, Chair, President and CEO

Thank you, Jackie. Good afternoon, and thank you for joining us. In January, we announced the completion of our acquisition of the Off-Highway Drive & Motion Systems business of Dana Incorporated. I would like to welcome our new colleagues around the world. We are excited to bring these two world-class businesses together with 14,000 employees operating in 25 countries, creating a truly global leader in the end markets we serve. In late January, we welcomed our new colleagues and celebrated our combined company through nearly 50 events across our global sites. I want to thank everyone who participated in these events marking our first opportunity to come together as one Allison team. The sense of unity across our sites was clear and encouraging. Together, we begin this journey with a substantially expanded market reach, a much broader portfolio of high-quality and reliable products, creating a platform that will continue to deliver strong financial performance from both organic and inorganic growth. Our talented colleagues are dedicated to helping support our customers and their end users as they continue to respond to the global megatrends shaping the modern industrial world. On Slide 5 of the presentation, we outline attributes strengthening our position as a premier industrial company. As a combined company, Allison will leverage an expanded global footprint for more local-for-local production with increased proximity to customers and markets providing advantages in meeting both commercial and government customers' requirements. Allison will also utilize our global technology centers for local development with realization of cost synergies through combined engineering, research and development. We believe that complementary technical knowledge within the combined business in areas such as software and controls, fully-integrated commercial duty propulsion solutions, and electrification will accelerate product innovation and progress on key engineering capabilities and initiatives. We will continue our long history of engineering expertise, delivering products known for quality, reliability and durability across diverse drivetrain components and work solutions. With greater purchasing scale as well as vertical integration opportunities and manufacturing in best-cost countries, Allison expects opportunities for synergy realization and cost reduction initiatives within our operations. Finally, while our focus over the last two months post close has been on the successful combination and integration of our businesses, our teams are working diligently on synergy capture and growth initiatives. In this transformational moment in Allison's history, we are confident in our ability to combine the two businesses while realizing annual run rate synergies, maintaining our focus on solid financial performance, and continued growth as a premier industrial company. With regards to our reporting structure, as described in the press release announcing the acquisition close, the combined company will be comprised of two business units: Allison Transmission and Allison Off-Highway Drive and Motion System. Allison Transmission will be led by Fred Bohley and Allison Off-Highway Drive and Motion Systems will be led by Craig Price, both hold the title of President and Business Unit Leader reporting to me. Fred will continue to serve as Allison's Chief Operating Officer. Craig, if you'd like to say a few words?

Craig Price, President, Allison Off-Highway

Thank you, Dave. Good afternoon, everyone. I'm honored to step into the role of Off-Highway President and excited to be part of this pivotal moment in Allison's history. With the close of the acquisition, we are entering a new chapter focused on sustainable growth, disciplined execution, and long-term value creation. From my earliest conversations with Allison's leadership team, it was clear that our businesses share a strong alignment around innovation, operational excellence, and delivering meaningful value to customers and shareholders. This combination brings together highly complementary strengths. The Off-Highway business contributes deep end-market expertise, a proven track record, and a highly capable, engaged team. Together, we are positioned to leverage enhanced scale, resources, and global platforms to accelerate growth opportunities. As we move forward, our priorities are clear: seamless integration whilst maintaining disciplined execution. We are confident in our ability to implement our plans and look forward to updating you on our progress in the quarters ahead. Dave?

David Graziosi, Chair, President and CEO

Thank you, Craig. Moving on to Allison Transmission's Full Year 2025 performance highlights. Before I begin, please note that these 2025 results do not reflect the financial results of the Off-Highway business we acquired from Dana on January 1. The year began with strong momentum. However, as the year progressed, our performance was negatively impacted by broader macroeconomic factors, including global trade policies, uncertainties, and sluggish economic growth in most of the regions in which we operate. Despite these external headwinds, we remain disciplined, focusing on cost control and execution. Although full year revenue was down 7% year-over-year, we increased full-year adjusted EBITDA margin by 140 basis points year-over-year to 37.5%. With recent events, providing improved clarity on the timing and impact of tariffs and emissions regulations, we are beginning to see early signs of demand improvements within our largest end market, North America On-Highway, and a rebound from the trough in the third quarter of 2025. We entered 2026 confident in our ability to navigate ongoing uncertainty. In addition, we are pleased with the ongoing performance of our defense end market, which for the year increased revenue by 26% to $267 million. We have now achieved our $100 million incremental annual revenue objective for this end market and remain focused on further growth opportunities given substantial increases in global defense spending commitments. Throughout the year, we are also satisfied with our capital allocation priorities. For the full year, we repurchased $328 million of common stock, representing 4% of outstanding shares. We also increased our quarterly dividend in the first quarter of 2025 to $0.27 per share. The ability to complete an acquisition while simultaneously returning capital to shareholders underscores the strength of our balance sheet and the resilience of our cash flow. We remain focused on maintaining our shareholder-aligned capital allocation priorities as we progress with the integration of the Allison Off-Highway business segment. In summary, although 2025 was challenging, we exited the year with reaffirmed confidence in our business, and we look forward to the future as we enter a new chapter in Allison's over 110-year history. Now I'll pass it over to Fred to review recent announcements across our business. Fred?

Fred Bohley, Chief Operating Officer

Thank you, Dave. Good afternoon, everyone. In early December, we outlined our expanding footprint and investment in India with strategic initiatives spanning multiple sectors. Starting with defense, we recently signed a memorandum of understanding with Armoured Vehicles Nigam Limited, a government-owned defense manufacturer. The multiphase agreement marks a significant step towards establishing a maintenance repair and overhaul center in India to service current and future Allison cross-drive transmission programs. This partnership aligns with India's broader defense modernization and localization efforts, including the ongoing future Infantry Combat Vehicle program utilizing our 3040 MX cross-drive transmission. In the Indian mining sector, Allison's industry-leading value proposition continues to drive business expansion by contributing to the nation's infrastructure development and resource extraction efficiency. End users are expanding their fleets of wide-body dump trucks equipped with our 4800 Series fully-automatic transmissions, citing the consistent reliability and performance of Allison products in challenging environments. The integration of local production and global sales is underscored by Allison's strategic position within India's export hub. Daimler India commercial vehicles have begun shipments of Allison's 3000 Series fully-automatic transmissions integrated into FUSO's medium-duty trucks exported to South Africa. These developments are supported by Allison's capital investments in the region. The company's state-of-the-art facility expansion in Chennai announced in late 2024 is operational and will ramp to full capacity in 2027. In addition, we are excited about the opportunities presented by our expanded footprint and presence in India with four manufacturing plants and around 4,000 employees joining Allison from the Off-Highway Drive and Motion System team. Our strategic investments not only reinforce Allison's ability to meet increasing demand across global markets, but it also solidifies the company's role as a key partner in India's industrial growth. With more local-for-local production and partnerships with OEMs supporting the Made in India framework, Allison's opportunities are expanded and our competitive advantages are strengthened. Thank you, and I'll now turn the call over to Scott for a recap of Allison Transmission's Fourth Quarter 2025 financial performance and the introduction of Allison's 2026 guidance.

Scott Mell, Chief Financial Officer

Thank you, Fred. Please turn to Slide 6 of the presentation for the Q4 2025 performance summary. Year-over-year net sales of $737 million were down 7% from the same period in 2024. In the outside North American On-Highway end market, we achieved record fourth quarter revenue leading to record full year revenue of $507 million. In the defense end market, we continue to execute on our growth initiatives with fourth quarter net sales of $73 million up 7% year-over-year. Although fourth quarter net sales were down year-over-year in our North America On-Highway end market, the sequential improvement of 10% from the trough in the third quarter demonstrates the positive impact that improved clarity has had on end user purchasing decisions. Net income for the quarter was $99 million, a decrease of $76 million from $175 million for the same period in 2024. This year-over-year decrease in net income reflects two meaningful one-time items. First, we recorded a $29 million impairment related to our investment in electrification. Second, we incurred approximately $26 million of expenses related to the Dana Off-Highway business acquisition. When adjusting net income for the impairment loss and the acquisition-related expenses, our fourth quarter net income was $141 million, with diluted earnings per share of $1.68. Despite a net sales decrease of 7% year-over-year, adjusted EBITDA margin increased over 200 basis points to 36% for the fourth quarter. Net cash provided by operating activities for the quarter was $243 million, an increase of $32 million from the same period in 2024. The increase was principally driven by lower cash income taxes, reduced engineering R&D spending and lower operating working capital funding requirements, which more than offset lower gross profit and $17 million of payments for acquisition-related expenses. Our cash generation remains a key strength of our business with adjusted free cash flow of $169 million in the fourth quarter. We continue to maintain solid operating cash flow, reflecting the resilience of our operations and disciplined cost management. We expect to continue to generate substantial and sustainable free cash flow as a combined business with our robust cash generation, ensuring our capital allocation priorities remain intact. We will continue to invest in our businesses to drive long-term growth and innovation with accelerated debt reduction, which will allow us to reach our leverage targets in the near term. We have already started to pay down debt incurred for the Off-Highway acquisition, and we'll continue to provide updates as we progress. Importantly, Allison remains fully committed to returning capital to shareholders through ongoing share repurchases and consistent dividend payments, reinforcing our disciplined approach to creating long-term value. A detailed overview of Allison Transmission's net sales by end market and Q4 2025 financial performance can be found on Slides 7, 8, and 9 of the presentation. Please turn to Slide 10 of the presentation for Allison's 2026 guidance. Before I cover our 2026 guidance, I want to highlight that starting with our Q1 2026 10-Q, we will be providing two segment reporting, one for the Allison Transmission business unit, which will, for the most part, reflect the historical Allison transmissions business and one for the Allison Off-Highway Drive and Motion Systems business unit, which will reflect the business acquired from Dana. In addition, we will report financial results for the Allison Group, which will include primarily functional costs that support both business segments. We will provide additional details on this reporting structure as we move forward. For the full year 2026, we are providing the following guidance: Consolidated net sales in the range of $5.575 billion to $5.925 billion. This includes net sales for the Allison Transmission segment in the range of $3.025 billion to $3.175 billion, and net sales for the Allison Off-Highway Drive and Motion Systems segment in the range of $2.550 billion to $2.750 billion. Consolidated net income in the range of $600 million to $750 million, subject to the completion of purchase price accounting associated with the acquisition of the Allison Off-Highway segment. Our net income guidance for 2026 includes approximately $70 million of one-time pretax expenses associated with the separation, integration, and restructuring of the Allison Off-Highway segment. Even with these one-time costs, we expect the Allison Off-Highway acquisition to be accretive to net income and earnings per share in 2026. Further, we expect consolidated adjusted EBITDA in the range of $1.365 billion to $1.515 billion. At the midpoint, this implies a 25% adjusted EBITDA margin. Our adjusted EBITDA margin guidance assumes continued softness in the North America On-Highway end market, particularly for medium-duty trucks with no meaningful recovery model for Class 8 vocational trucks. Also, key Allison Off-Highway end markets are expected to remain at or near trough. As previously communicated, we expect to capture approximately $120 million of annual run rate synergies over the next few years. Once the full synergy capture is realized and we see moderate improvements in end market conditions, we expect consolidated adjusted EBITDA margins in the range of 27% to 29%. For our 2026 cash flow guidance, we anticipate consolidated net cash provided by operating activities in the range of $970 million to $1.100 billion. Consolidated capital expenditures in the range of $295 million to $315 million, including one-time separation and integration CapEx of approximately $45 million and consolidated adjusted free cash flow in the range of $655 million to $805 million. Please note that our consolidated net cash provided by operating activities guidance includes approximately $55 million of one-time cash outlays associated with our acquisition of the Off-Highway Drive and Motion Systems business unit. In addition to our financial guidance, Slides 11 and 12 in the presentation provide commentary on our 2026 outlook for the Allison Transmission and Allison Off-Highway end markets, respectively. This concludes our prepared remarks. Paul, please open the call for questions.

Operator, Operator

Our first question is from Rob Wertheimer with Melius Research.

Robert Wertheimer, Analyst

Could you talk just briefly about what your pricing expectations are for 2026, what your rate of inflation is and just kind of what you embedded in the ever-changing tariff situation? And just for clarity, when you do disclose the segment data, you were doing EBITDA by segment or operating income by segment? And any comments on kind of the core legacy business, whether profits are up or down in your embedded guide?

Fred Bohley, Chief Operating Officer

You want to take the first piece and maybe I'll chime in towards the end.

Scott Mell, Chief Financial Officer

Yes. Yes, I'll take the first question, which I think started with pricing and led into tariffs. So I think as we've talked about before, given our LTA negotiations over the last few years, we expect to continue to see meaningful year-over-year pricing. And I think we've also said it certainly may not be at the rate that we've seen in the last few years. I think somewhere between 250 and 400 basis points of pricing is probably directionally where we'll end up. I think us like others are facing substantial inflationary pressure across not only people costs, but material costs or otherwise. I would point you to sort of what you're seeing in inflationary forward indicators is what we're experiencing. And then obviously, on the tariffs, I haven't been online today, so I'm not sure where we're at, but I think we expect to recover a meaningful amount of our tariff on a year-over-year basis through pricing actions that we've taken. But it certainly will be a net drag on margins on a year-over-year basis. I think that answered the beginning of the question, Fred.

Fred Bohley, Chief Operating Officer

In I guess I would say, to Scott's comments relative to pricing were for the Allison Transmission business unit. We'll obviously be combining looking at pricing in total. And to his point, we do have customers we put on LTAs, and we do expect better than traditional pricing that we've done in the past of 50 to 100 basis points. And then the other question really was on level reporting, Scott, down to...

Scott Mell, Chief Financial Officer

Yes. So I think the expectation is that you'll see from net sales down through an operating profit level with enough detail around depreciation and amortization that you can get to an EBITDA number. So there'll probably be some cash flow metrics as well. But I think you'll certainly have enough detail as we report the first queue here to be able to distinguish between the two business segments.

Operator, Operator

Our next question is from Tim Thein with Raymond James.

Timothy Thein, Analyst

Thank you, and congratulations on completing this extensive work. I understand there are always challenges in aligning to a midpoint. However, if we consider the midpoint EBITDA estimate of $1.4 billion, and assume, possibly incorrectly, that the Allison business remains flat year-over-year despite top-line growth, that suggests the Off-Highway business might be generating around an 11% to 12% EBITDA margin on approximately $2.6 billion in revenue. Are there factors we should consider regarding this? Are there perhaps one-time items affecting this, or could you provide clarity on the implied EBITDA of the acquired business?

Scott Mell, Chief Financial Officer

Well, this is Scott. Thank you for the question. I think as you try to do your math there, I would encourage you to keep in mind that while we're going to have sales growth on the top line as we start to look at the end markets, in particular, the Class 8 straight, we are going to have a substantially different mix than we had in 2025. And as Fred mentioned or Dave mentioned on the call, 2025, the first quarter into the second quarter was stronger in the North America On-Highway end market, and we're as I mentioned in our call, we're not expecting a meaningful improvement, and we're modeling it or we're looking at it closer to kind of where it was in the second half of last year. So that will impact the margin outlook for the traditional Allison Transmission business.

Fred Bohley, Chief Operating Officer

And then we still have to work out.

Timothy Thein, Analyst

Your North America Highway forecast is assuming kind of run rate where you exited the year. Is that right, Scott?

Fred Bohley, Chief Operating Officer

I’ll respond to that, Tim. This is Fred. We are observing very soft conditions, as mentioned in our prepared remarks. We have not anticipated any significant recovery in Class 8 straight trucks. As Scott pointed out, year-over-year, the mix would be negative because the first half was quite strong for Class 8 straight trucks. Analyzing each segment's margins is challenging at this stage due to ongoing work regarding how corporate costs will be allocated, which will still need to be finalized in the first quarter and reflected in the results we release in May.

Operator, Operator

Our next question is from Ian Zaffino with Oppenheimer & Co.

Ian Zaffino, Analyst

I wanted to drill down on the acquisition. I guess you've been operating it for a couple of months now. How should we think about synergies? I think you initially outlined, I think, $120 million or $125 million. How do you feel about it now? And then what amount of that is actually in guidance? And how do we think about kind of the cadence of that?

David Graziosi, Chair, President and CEO

Thank you for the question, Ian. It's Dave speaking. Regarding the synergies mentioned in our earlier comments about the acquisition, we are currently on track with the projected $120 million run rate of synergies, which we anticipate will materialize in a few years. The team, along with both Allison Transmission and the Off-Highway segment, is actively engaged at a functional level, examining the typical aspects of this process. Considering the recent closing and the reorganization of teams, it's been an eventful 40 to 50 days. Nonetheless, I commend the team for their dedication to the synergies outlined. As expected, our focus areas include operations, procurement, engineering, and some SG&A. We are excited about our expanded global presence, particularly in light of current trade policy changes. The team is also looking into broader opportunities. Additionally, we have only begun to explore other synergies. To address your final question, we have not included any synergies in our 2026 guidance at this moment. Scott's comments are crucial for understanding our recurring business guidance and setting future expectations, reflecting the significant effort our global team is putting in this year, especially regarding the investments we've announced.

Operator, Operator

Our next question is from Jerry Revich with Wells Fargo Securities.

Jerry Revich, Analyst

Congratulations on the closing. I want to ask, Fred, as we think about the margin profile for the legacy Allison business going forward, are the 40% EBITDA margins that we saw the business hit in 2018, 2019, are those feasible in this coming cycle, the way you see the business setting up? Can you just give us an update on if we think we can go back to those margin levels? And then Craig, just a follow-up on the last question. Would you mind just sharing your maybe top two or three priorities for the business over the next 12 months?

Fred Bohley, Chief Operating Officer

Jerry, this is Fred. Looking at our performance in 2025, we experienced a 7% decline in revenue, but our EBITDA margin improved by 140 basis points, even with significant cost pressures from tariffs. Despite these challenges, we've made investments to increase our capacity and are expanding our business outside of North America, achieving record revenue there in 2025, although market conditions have been variable. We have great opportunities based on the expanded footprint that Dave mentioned, allowing us to leverage and optimize a larger global presence. Our products continue to be well received, and in North America, our Class 8 straight truck share increased by 1% last year. We have successfully implemented price increases and gained market share, which demonstrates our strong value proposition. Therefore, I wouldn't dismiss the possibility of returning to peak margins of 40%. It's important to note that our peak earnings apply to everything we ship out. Although we faced significant cost increases and couldn't pass on a full $2 for every $1 in rising costs, our absolute margins on sales are at all-time highs. The team is committed to controlling costs, maintaining high quality, and driving growth outside North America, even if it sometimes involves initial lower margins due to penetration pricing. Overall, I believe that a margin of 40% is attainable. However, our primary focus is on the dollar amount of EBITDA generated and how much of that can be converted into cash. That’s truly where the team’s efforts are directed.

David Graziosi, Chair, President and CEO

And Jerry, it's Dave, to your question for Craig. The good news is his top three priorities are the same as everybody else in Allison, which is meeting customer commitments, seamless integration in combination, which is a tremendous amount of work this year, and execution. As Fred mentioned, we're right back into it here, many of the end markets that we're dealing with are at or coming off trough levels. There'll be a fair bit of work continuing to be highly aligned with our customers around return of volume, managing the supply release, etc., and so forth. So a lot of work there to be done this year. But again, it's really back to meeting customer commitments, the separation integration work, most importantly, just execution across the board.

Operator, Operator

Our next question is from Tami Zakaria with JPMorgan.

Tami Zakaria, Analyst

I wanted to clarify two things. The first one on Off-Highway Drive and Motion segment guide. That guidance, the midpoint, how much is Dana Off-Highway growing like-for-like year-over-year embedded in that guide?

David Graziosi, Chair, President and CEO

Tami, it's Dave. If you consider it on a like-for-like basis, while the 2025 results aren't directly comparable to what we have for Allison Off-Highway, I would estimate a mid-single-digit growth rate year-over-year at the top line.

Tami Zakaria, Analyst

Understood. That's helpful. And then the second question, I hear the 25% EBITDA margin guide for the year, how should we model the seasonality between the 4 quarters and related to that, how should gross margin be throughout the year versus the high 40 that you ended with last year?

David Graziosi, Chair, President and CEO

Tami, it's Dave. I'll address the first part, and then Scott can add to it. Regarding seasonality, our guidance this year is relatively even between quarters, considering the two segments we have. If you look at sales in the first half compared to the second half, they are quite similar overall. Historically, Allison has experienced some seasonality in the fourth quarter, but that has shifted in recent years. Overall, as we assess the pace for the year so far, it's relatively stable. Scott, could you elaborate on the margins?

Scott Mell, Chief Financial Officer

Yes, we are aiming for an annual midpoint of 25%. I do not anticipate significant changes in margins, considering the nature of the sales throughout the year. However, as we approach the second half of the year, we are cautiously optimistic about seeing potential improvement in medium-duty demand on the transmission side, which could drive performance in that period.

Operator, Operator

Our next question is from Angel Castillo with Morgan Stanley.

Angel Castillo Malpica, Analyst

Just I was hoping you could unpack the end market guidance in a little bit more detail. I guess, I'm a little bit surprised just the assumptions around no-recovery Class 8 trucks. And I think you mentioned, assuming off-highway remains kind of at or near drop just when I think about versus what we're hearing from either other OEMs on the truck side or even on construction or ag side, it seems like there's a little bit more kind of upbeat sentiment that there could be a little bit more recovery or improvement at least in the second half? And I think you mentioned various soft conditions, I think, in the vocational market. So just to your impact a little bit more, like, to what degree is that you're seeing something in kind of the latest order books that seems to suggest a little bit more cautiousness is warranted versus maybe just being early in the year versus what other people are seeing.

Fred Bohley, Chief Operating Officer

Angel, this is Fred. I’ll cover the Allison Transmission segment first, and then Dave will discuss Allison Off-Highway. Starting with our largest market, North America On-Highway, we’re experiencing very low medium-duty activity, mainly due to the major lease rental companies not reentering the market. Class 8 straight remains stable, but there's significant uncertainty about a potential pre-buy in the latter half of the year, which we haven’t accounted for in our models. Consequently, when comparing year-over-year data, despite the strong performance in the first half, our unit volumes are down. This decline is being balanced by ongoing momentum in defense sales, primarily outside North America, along with non-U.S. government sales to Hanwha in Korea, as well as projects like the Poland Borsuk and Turkey Korkut that have been announced and are now generating revenue. We anticipate that defense will continue to grow. A substantial amount of our planned growth is aimed in this direction. While we are targeting a record in 2025 for areas outside North America, we expect continued growth, especially in vocational trucks in Europe. As Dave mentioned, Japan faced challenges with Australian vehicle regulations, leading to lower activity last year, but some of that volume has now been pushed into 2024, which benefits us, as we hold over 60% market share in certain segments. In China, we are seeing progress in the wide body mining dump sector and vocational hauling. In South America, we have made inroads in school buses and have seen success in vocational trucks. Overall, while end markets outside North America are improving, we are adjusting for lower volume expectations in North America’s on-highway segment. With that, Dave, would you like to share your thoughts on Off-Highway?

David Graziosi, Chair, President and CEO

Angel, it's Dave. So just on Off-Highway, just to level set, if you think about five end markets for off-highway that we list in the call presentation. The largest of those is construction and material handling, that's the right behind that would be service parts, specialty and other and then agriculture and then obviously, in industrial mining. So I think to your comments in terms of what some of our customers are saying in terms of relevant to those individual end markets. I would offer as we think about starting with construction material handling, although construction markets, you're seeing, I would say, a steady level in terms of civil engineering and some of the infrastructure work that's going on. The fact is residential is still relatively weak, as we know, given its rate sensitivity. If you think about the material handling side, again, very much subject to what's been going on in the trade space. As we mentioned earlier, I would certainly provide some backdrop to that by saying the team, I believe, overall, the guidance that we're providing on this call for 2026, we're taking a prudent approach. So I would say the same thing, frankly, when you start thinking about agriculture. A lot of moving pieces there. As you know, if you look through the public comments from customers, there's many assumptions that are going into that at this point. There's bifurcation in terms of equipment sizing, where the market is, where inventory levels are. Commodity prices are certainly a bit challenged right now for a number of reasons. There's some assumptions that some are making around farm subsidies, etc., that drive that market as well, but margins are still very challenged for farming overall. So the team has taken that into account. Beyond that, industrial, they certainly expect to benefit from some of these larger projects that are tied to industrial output and manufacturing. And finally, mining we have some assumptions there around just giving commodity prices for things we find most or at least relevant to our Off-Highway business being gold, copper, rare minerals, etc. We are certainly assuming some growth there, directional with what you've heard from some. But again, that's a bit of a first half, second half story as well in terms of overall approach or expectations for the year.

Operator, Operator

Our next question is from Luke Junk with Baird.

Luke Junk, Analyst

Just hoping we could maybe discuss pricing in the Off-Highway business that you acquired both in the near term, I would assume there's probably some tariff impacts and recovery in the business this year, but also be curious just to get your bigger picture thoughts on aspirations for pricing in that business longer term as well.

David Graziosi, Chair, President and CEO

Luke, I appreciate the question there. So I would say for 2026, as we've done with the Allison Transmission business, as we've discussed the team's approach certainly is to mitigate the tariffs. So that's incorporated into some of the top line changes you see from '26 versus '25. I would say, overall, for the Off-Highway business in totality, price relatively neutral year-over-year with the exception of some of the tariff activity that I mentioned. The approach, as you know, for Allison is to sell our products based on value. I think the off-highway team certainly is aligned with that approach, historically I think some of that, frankly, in terms of our expectations are really tied to overall market conditions. As you know, as we mentioned, relatively trough levels almost across the board. So we would expect commensurate with those market conditions improving some improvement in terms of overall price. But as we again entered the year, top priority being meeting these customer commitments. We're obviously staying close to overall volume expectations and developments.

Operator, Operator

Our next question is from Kyle Menges with Citigroup.

Kyle Menges, Analyst

I was hoping we could revisit the cost synergies. It sounded like that there were no cost synergies embedded in your guidance. I just wanted to clarify that. And then just would love to hear what cost synergies you're targeting for the first 12 months and how to think about the magnitude of impact that could potentially drive.

David Graziosi, Chair, President and CEO

It's Dave. Regarding the synergies, I am very confident in the $120 million annual run rate we discussed. Our global team is working diligently on this, considering the extensive scope due to the number of facilities and different products involved. We are approaching this thoughtfully and systematically by function, such as operations and procurement. This aligns with our 2026 guidance, and we have not included any assumptions for the near term. As we progress further into the year and prepare for the 2027 guidance, we can provide a comprehensive update. However, given the extensive activities around separation, which involve several agreements, there is significant work required. The same team is handling multiple tasks right now, and we are committed to ensuring that we achieve the desired outcomes without question from the Alison team's perspective regarding the delivery of these synergies.

Operator, Operator

Thank you. That is all the time we have for questions today. I would now like to pass the floor back over to David Graziosi for any closing comments.

David Graziosi, Chair, President and CEO

Thank you for your continued interest in Allison and for participating in today's call. Enjoy your evening.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.