Good morning, ladies and gentlemen and welcome to Himax's Technologies First Quarter 2019 Earnings Conference Call. At this time, all lines are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference to your host Mr. John Mattio, US Investor Relations. Sir?

Thank you, operator. Welcome everyone to Himax’s first 2019 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer; and Ms. Jackie Chang, Chief Financial Officer. After the company’s prepared comments, we’ve allocated time for questions in the Q&A session. If you have not yet received a copy of today’s results release, please email jmattio@lamniaintl.com or access the press release on financial portals or download a copy from Himax’s website at himax.com.tw. Before we begin the formal remarks, I would like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. Factors that could cause actual events or results to differ materially from those described in this call include, but are not limited to, general business and economic conditions, the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by Himax, demand for end-used application products, the uncertainty of continued success in technological innovations, as well as other operational and market challenges and other risks described from time to time in the company’s SEC filings, including those risks identified in the section entitled Risk Factors in its Form 20-F for the year ended December 31, 2018, filed with the SEC in March 2019. Except for the company’s full year of 2017 financials, which were provided in the Company’s 20-F and filed with the SEC on March 28, 2019, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not yet been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which the company subjects its annual consolidated financial statements and may vary materially from the audited consolidated financial information for the same period. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Now, I’d like to turn the call over to Ms. Jackie Chang, Jackie, the floor is yours.

Thank you, John, and thank you, everybody for joining us. Our outline for today’s call is first to review Himax’s consolidated financial performance for the first quarter, followed by the second quarter 2019 outlook. Jordan will then give us an update status of our business, after which we will take questions. We will review our financials on both IFRS and non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition related charges. Our fourth quarter 2019 revenues, gross margin and EPS all met our guidance issued on February 19. For the first quarter we recorded net revenues of $163.3 million, a decrease of 14.5% sequentially and an increase of 0.3% year-over-year. The first quarter is traditionally the bottom of the year in terms of sales because it has fewer working days due to the Lunar New Year holidays. Customers’ inventory correction on smartphone and the worldwide sluggish automotive sales also negatively impacted our first quarter revenues. Gross margin was 22.6%, down 170 basis points sequentially due to less favorable product mix. IFRS loss per diluted ADS were $0.013, in line with the guidance range of $0.01 to $0.03. Non-IFRS loss per diluted ADS were $0.011, in line with the guidance range of $0.008 to $0.028. Revenue from large display drivers was $70 million, down 5.7% sequentially, and up 18% year-over-year. The sequential decline reflected the impact of seasonality, while the year-over-year increase was driven by higher ASP and more 4K TV shipment. Large panel driver ICs accounted for 42.9% of our total revenues for the first quarter, compared to 38.9% in the fourth quarter of 2018 and 36.4% a year ago. Revenue for small and medium-sized display drivers came in at $67.6 million, down 15.4% sequentially and down 5.8% year-over-year. The driver ICs for the segment accounted for 41.4% of…

Thank you, Jackie. As Jackie just mentioned in the guidance, we expect the second quarter gross margin to decline around 3% with slightly increasing revenues from the previous quarter. We fully realize that this quarter will mark a second consecutive quarter that we were [indiscernible] the first in our corporate history. While we remain committed to our big picture strategy, we are actively taking measures to get back to steady profitability. I will talk to you on the few of growth areas as I go through the outlook discussion below. The second quarter gross margin will decline for three major reasons. Firstly, the higher material cost of the large panel driver IC resulting from an industry-wide material shortage will lead to lower gross margin. Our large-size panel customers are going through a difficult period of increasing supply and lackluster demand right now. We thought it was prudent not to pass on the rising material cost to our customers during this quarter as we used to for the consideration of long term relationship. Secondly, the gross margin of the WLO business would also fall because of reduced shipment per an anchor customer’s demand which will lead to lower capacity utilization. We do expect the gross margin of WLO to return to a much-improved level in the second half when orders are expected to come back strongly, reflecting the anchor customer’s demand seasonality. I will elaborate on this a bit later in the [indiscernible] business discussion. Finally, smartphone segment gross margin would likely shrink a little for product mix change. We anticipate significant sequential increase in the second quarter shipment of TDDI for lower-end market and certain traditional discrete driver IC for smartphones. Both will generate gross margins lower than the corporate average. Okay, and I will provide more detail later. Based…

Thank you. [Operator Instructions] Our first question is going to be from the line of Tim Savageaux with Northland Capital. Your line is open.

Hello. Question on the WLO. I wondered if you could provide any color on the kind of nature of the change, whether this was kind of a competitive situation that you’re able to recoup or any change on the customer's part, I mean, in terms of their technology direction? And then with WLO coming back into the model, I wondered if you have any comments on the trajectory of overall gross margins and toward the second half of the year, I imagine that would provide an uplift to margins relative…

Thank you, Tim Yes, WLO business now very concentrated on one single end customer's business. Obviously we are working very hard to try to diversify into more projects within the customer and also process from other customers. That's something we are working on now. Now, with the transition of one single customer, in fact one single product the fluctuation does have a major impact on our gross margin because the whole production line is the depreciation and overhead charge are per unit basis with one – the fluctuations of one single product, certainly its – it can be very easily get impacted. So you are right in saying that the second half with WLO volume expected to increase substantially for the first half, there will be a gross margin uplift in this regard. As to why and how the customer changes direction or change decision, we are very much bound by the NDA, so I'm afraid we cannot comment much further, other than what I just described in the prepared remarks.

Okay. And if I could follow up briefly. As you look and - I guess you’re sizing that opportunity similar to what you saw last year, ostensibly that have the 3D sensing, the large number of units this year. I wonder if you could comment on any pricing pressure or other dynamics in the WLO market? Thanks.

Again, the pricing is ongoing subject with the customer, right. So I think we've been treated fairly and we have been making a reasonable profit from the production of the last - over the last couple of years and we anticipate the same going forward for the next - for the next product for cycle. And again, certainly we cannot predict precisely the volume, but when we say, we expect our comparable volume compared to last year, I think what we indicated is that we are in the same position in the product ecosystem or we are in the same position as a vendor this year and next year as were at last year.

Okay. Thanks very much.

Thank you, Tim.

Next question comes from the line of Jaeson Schmidt with Lake Street. Your line is open.

Hey. Thanks for taking my questions. Jordan, just wondering if you could comment on what you're seeing from a pricing standpoint in the TDDI market?

Certainly the volume showed up very fast and very quickly. And also on the other hand, by saying volume, I mean, penetration, market penetration on TDDI technology to smartphone. It showed up probably faster than anybody thought. And also the current market condition of smartphone being really rather sluggish. So yes, they are pricing competition and there are price pressure for everybody. And so we are not immune to that. We are certainly hoping that - you know, we are - I mean, admittedly we are playing catch up, right. So we certainly have to be - we cannot be too conservative on pricing. We have to go up there and compete, luckily, certainly this last year and probably the both business I suppose for every major participant, so are set for us. But yes, there are pricing pressure.

Okay. And then as a follow up, I think last call you mentioned the target of reaching 10 million units per month as far as TDDI capacity goes in the back half of this year. Just curious if you could update us on what you're thinking from a capacity standpoint within the TDDI business?

We no longer have concern on capacity, the capacity constraint, ever since we successfully switch into a new boundary offers abundant supply of capacity. So that is of our list already. So now the concern is the demand and I also think, we all know how the smart market is going right now. So despite the market uncertainty, I think both the macro level and also on a more micro level the - you know, people are changing, they are replacing their smartphones slower than while used to be and so on. So despite all this market uncertainty we still anticipate its significance of sequential growth in the second quarter and also the second half for TDDI. I noted that we are still playing catch up against the current market. So in addition to winning more projects from major customers we are looking towards bringing our next generation solutions into mass production ASAP. So I think smartphone market is not going anywhere, right. So its a marathon, its not a [indiscernible] So we have learned the lesson from the exclusive mistakes this time and that is why we are - we are fully behind compared to the lead in - the market either at the moment. So we are trying to win big on market share and we said before that our target is to reach our 10 million ICs of shipment towards the end of the year. We are still holding - we are still holding that pocket unchanged. Having said that, you know, I have to be cautious about the - again the smartphone market be rather sluggish and also the additional macro uncertainty. So - but again that is still our target. We just have to see how it goes. Thank you, Jaeson.

All right. Thank you.

Our next question comes from the line of Jerry Su with Credit Suisse. Your line is open.

Hi, Jordan thanks for taking my questions. So on term wise fee side, could you elaborate a little bit for the reason for the second quarter large [indiscernible] to decline sequentially, because I think your peers or the panel makers are expecting volume to grow. And then for TDDI, I think in the prepared remarks you mentioned that the gross margin is below corporate average. It seems like - it sounded that way, but I think for your peers, their margin seems to be above corporate average which is around 30% plus, can you also give a little bit color on that as well? Thank you.

Firstly, on second quarter, large panel, guidance - of declining guidance, I think we are one of the market share leaders you know, worldwide in large display market with some countries some percent market share, I suppose. So we are not immune market weakness overall. And I think second half – a second quarter compared to first quarter, we all know the large panel market is going through oversupply and sluggish demand right now. And I think I think at the same time you know, we mentioned repeatedly in the last few earnings calls, you know, starting from foundry shortage and thereafter COF material shortage. So I think a few of our major customers seen the – our shortage situation, they probably prepare their inventory a bit early in Q1 or arguably end of Q4. So I think that explains how our anticipated revenue declined, slight revenue decline during Q2. Having said that, I think you know, quite a few our major customers and us together we all feel that there's a reasonably likelihood for the market rebounded in the second half and that is why I think we are working probably positive in anyone in terms of getting ourselves prepared in securing those necessary materials in particular COF. And we have actually been requested by a number of our customers to also secure capacity for them, and even in the second half to prepare some inventory for them inside of the potential market rebound in the second half. Meaning, prepare you know, inventory slightly higher than normal during Q2 in preparation for the second half potential rebound. As for TDDI margin, I want to emphasize. Yes, we are - we said the additional shipment of TDDI in Q1 resulted in margin pressure because largely slower than corporate average. We are referring to HD+ low end TDDI products for HD+ margin is higher. And I would say if you have a more like balanced portfolio in between HD and full HD, you will have a breakdown similar to the market breakdown that your TDDI business gross margin will certainly be higher than our corporate average for sure. But it just happens that in Q1 we depend on largely on end customer because of capacity constraints that we spent, right. So beside the customer we shift basically only the high end full HD TDDI. But second, that end customer has a major inventory correction. And then we have the second major end customer coming in which are – or which are shipping lower end HD plus TDDI. So low end is lower margin and that explains our second quarter lower margin for TDDI compared to corporate average. I hope that explains your – if that answers your question.

Yes. Okay. Thank you. And then a follow up, if I may. On the SliM part, second generation of SLiM. Can we give us a little bit color on the what's the - you know, what's the improvement you're expecting for this product?

As I said we learning from the lessons, right of the first generation. We are now a lot more cautious than before. I think we- in the first generation we were looking back, we were probably a bit too off - too enthusiastic or optimistic, right. So we put together the solution and then we tried to provide the solution, you know, thinking that - you know, Apple is the market leader, its already doing 3D sensing you know, Socialite and Android market would have to follow. And certainly you know for the – for little reasons we explained in the past and this time in our prepared remarks, there are reasons why Android market turn out to be a lot more cautious than we anticipated. So I think we realized the cost would be much lower. But certainly regardless of how much we do, our cost is still higher than other [indiscernible] yes, no doubt, right. So if display unlock and facial recognition and online payment remains to be the only application over life from facing Socialite 3D sensing, then I can tell you the customer will still be challenging our costs and comparing our costs to those – the still much lower costs of the other display fingerprint. So that is one thing. Although we have been able to substantially bring down the cost compared to this was one thing although we have been able to sometimes really bring down the cost compared to Jin Won [ph] we are still not certain whether this is sufficient, especially if under the assumption that you know, unlocking still the main function that he can do. We are aware of our customers and others are looking on new applications, but what we don't know is how quickly this new application will…

Thank you. And our next question comes from the line of Donnie Teng with Nomura. Your line is open.

Hi, Jordan and Jackie. Thank you for taking my question. My first question is regarding to your anchor customers decision to let you back into second half. What kind of reason behind and does that mean we still have a chance to further expand our projects in the future, because previously I felt that we are a little bit negative on the future cooperation with the anchor customer, but at current end point, do you feel more opportunities in next year or in the future?

I am afraid, Donnie, I think you’re a previous thinking this misconception. Yes, they did inform us about the replacement decision. But even at that point in time we never ever had any doubt about the future potential and for the active projects that we are working with them are extremely closely as we speak and they actually at the time assured us repeatedly that this does not impact the long term collaboration, opportunity or relationship. And certainly we are - we certainly feel better about the short term change. As far as why they are making such decision and how and that is something and again I am afraid, I cannot share. And I think in that regard, I've said just above everything, I can say in my prepared remarks, all right. But I want to emphasize, we feel there is a great opportunity - there's a great area of opportunity out there in our WLO business [indiscernible] and certainly others, as well, going forward in the next few years.

Got it. And my second question is regarding to TDDI. So do you have any following forecast in the second half or next year? And what kind of gross margin trend we are thinking right now, if we are seeing more TDDI shipment in the second half and next year, should it led us to have better gross margin on small and medium display local [ph] IC business?

Given the uncertainty in the smartphone market right now and certainly in the macro economy and also the fact that we are in close discussion with a number of major customers on a number of major projects. They are not - they are not the – so they are they are probably greater deals for us certainly than usual at this point for us to make a more credible prediction on the shipment volume, in the remainder of the year, that will mention next year. So I will reserve - I would not comment on that. Other than to say that we are very committed. Q3 we’ll see a substantial growth from Q2 and Q4, another substantial growth from Q3, and that I think we are confident about. But you know, we now losing one or two major projects can change a lot, given our current status in terms of value prediction. So I think we just have to give you updates as we go along. As far as margin is concerned, as I said earlier, once we reach a more balanced portfolio of customers and projects and higher end and lower end TDDI solutions, I think the overall margin will be better than corporate average for sure. And also once we start production for the next generation TDDI products which evolve far a better call it co-functionality, obviously because it does enable our better, now better design for our customers and also its lower cost for us and therefore hopefully better margin as well. So again TDDI or smartphone market has a long way to go. So we recognize that we have a major setback in the first round if you like and we are determined to get it back. And I think both in terms of volume and gross margin.

Got it…

And certainly TDDI [indiscernible] gross margin is a long term – it’s a long term trend, it should be better than a straightforward driver IC for large panel. That's for sure.

Got it. My third question is housekeeping question, maybe for Jackie. So what's our OpEx guidance in the second quarter and this year and next year according your current forecast? And also playing [ph] on the share buyback, I know previous the Chairman announced the share buyback and I'm wondering what kind of price level that we will engage for? Thank you.

Okay. Hi, Donnie. Your first question, okay. In our Q2 guidance what's in the operating phase is right now we are projecting about $39.4 million dollars, okay, around that range and looking forward for this year, so we reported in the prepared remarks our total operating expense will not exceed the level from last year with the exception of the depreciation. So now in our net-net we're looking at probably around $158 million for the year based on the current forecast. And the answer to your second question is, its really not the corporate share buyback right, it’s the Chairman’s own share buyback that she announced November of last year and we really cannot comment on the detail because she has a 10B-5 purchase plan that she is currently executing. And at the end of the day the purchase plan we will have to file with the SEC to conclude and announce that the buyback has been completed, but its ongoing right now.

Yeah, the total is set to reach $5 million, all we can share is that she is buying shares according to [indiscernible] And we certainly cannot - it will be unfair to him, right, before the program can come to conclusions, to release further details. But its all in accordance with the law regulations and regulations and she is buying – he is buying shares for sure.

Got it. Thank you so much.

And you know, based on the regulation, she can only buy shares pretty much you know with the market, basically she cannot pay values the market. So that is pretty much the rule - the spirit of the rule. Next question?

Thank you. And this does conclude our allocated time for Q&A. And I'll now turn the call back over to management for closing remarks.

So if I don't know Jackie I'll see forward, and would maintain this market activities and continue to attend investor conferences, we'll announce the details as they come about. Thank you and have a nice day.

Ladies and gentlemen, this does conclude the program. You may now disconnect.