Hello, ladies and gentlemen. Welcome to the Himax Technologies Incorporated Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group. Please go ahead.

Welcome everyone to Himax's fourth quarter 2020 earnings call. Joining us from the company today are Mr. Jordan Wu, President and Chief Executive Officer; Ms. Jessica Pan, Chief Financial Officer; and Mr. Eric Li, Chief IR/PR Officer. After the company's prepared remarks, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today's results, please e-mail HIMX@mzgroup.us. Access the press release on financial portals or download a copy from Himax's website at www.himax.com.tw. Before we begin formal remarks, I'd 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 results or events to differ materially from these described in this conference 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-use application products, the uncertainty of continued success and 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 and its Form 20-F for the year ended December 31, 2019 filed with the SEC in March 2020. Except for the company's full year of 2019 financials, which were provided in the company's 20-F and filed with the SEC on March 25, 2020, 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 been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which we subject our 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. I will now turn the call over to Mr. Eric Li. Eric, the floor is yours.

Thank you, Mark. Thank you and thank you, everybody, for joining us. My name is Eric Li, and I am the Chief IR/PR Officer. Joining me are Jordan Wu, our CEO; and Jessica Pan, our CFO. On today's call, I will first review the Himax consolidated financial performance for the fourth quarter and full year 2020, followed by the first quarter 2021 outlook. Jordan will then give an update on the 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. The impact of COVID-19 has persisted globally. New life science, social activity and economic practice are all dynamically evolving. One of these inferences is the unexpected long-lasting strong demand for electronics device and the component, which is broadly in capacity shortage in semiconductor foundry and began. In such a favorable, but challenging business environment, we continue to steadily implement prudent exclusion and deliver strong business performance along the way. We pre-announced the preliminary key financial result for the first quarter on January 7 with revenues, gross margin and EPS all exceeding the guidance issued on November 12, 2020. Today, our reported result for the revenue, gross margin and EPS are all in line with the preannounced results. Both revenues and the gross margin hit record high in fourth quarter of 2020. For the fourth quarter, we recorded net revenues of $275.8 million, an increase of 14.9% sequentially and an increase of 57.6% compared to the same period last year. The 14.9% sequential increase of revenues exceeded our guidance of an increase of around 10% quarter-over-quarter, thanks to strong momentum across all major business segments. TV, monitor, automotive driver ICs and CMOS image sensor contributed more to the better-than-guided sales…

Thank you, Eric. As we highlighted before on previous earnings call, our capacity shortage appears to be a long-term phenomenon. As we entered the year 2021, the shortage has become even more severe and has extended to backend facilities that include assembly and testing. As a leading industry player with superior resources and engineering capability to diversify and enlarge the vendor pool, along with long-term business relationships with both foundry and backend suppliers, we engaged early and have successfully in securing more capacity for 2021 as compared to the level of Q4 2020 when we reached the recent peak quarterly shipment. In addition, we are also optimizing capacity allocation among our diversified foundry suppliers by making the right products at the right fabs with an aim to fully utilize the capacity accessible to us. Among the product areas for which we have secured a meaningful capacity increase is automotive, where the global shortage for semiconductor supply is overwhelming. We expect the total capacity available to us to increase quarter-by-quarter in 2021 and will continue our efforts in securing further capacity. As far as we can see, the overall semiconductor industry supply will not have any significant increase any time soon while strong demand is likely to persist longer than expected. In such an environment, Himax is a preferred supplier to work with for our sizable scale, diversified vendor pool and extensive product offerings. Our strength in a number of high margin businesses will also help our ongoing margin improvement efforts. For example, with strong demand for tablet expected to remain, are being the preferred vendor for major Android names will ensure the high margin contribution continues. Likewise, our leading position in automotive display represents a solid support for our margins as we anticipate our robust sales growth in this high…

And are we ready to take questions at this time?

Yes.

[Operator Instructions] Your first question comes from the line of Jerry Su with Credit Suisse.

Hi, Jordan and Eric. Thank you for taking my question and congratulations on the good results. I think the first question is surrounding the industry-wide capacity constraint. Can you give us a little bit more color about what is your fulfillment rate right now? And then, I think for - in the next couple of quarters, do you think that the supply constraint can be eased for industry or for Himax? And how should we think about the pricing environment for the upcoming quarters? Thank you.

Thank you, Jerry. Honestly, I rather not give specifics on our so-called fulfill rate, because I guess our customers will be watching and trying to compare their fulfilling rate against our average. So that is kind of a sensitive topic. But I can tell you, it's not very high. Although I have to say, sometimes you wonder if whether 100% of those demands are real demands, whether they are customers inflating their demands because of the shortage, right? And so, I mean, obviously, we try to screen them out. We try to support those demands with solid foundation. But we certainly have some doubts about some of the demands. As far as whether the situation will ease during the year, I think our view is that the industry-wide capacity shortage is going to last at least till the end of this year. Obviously, I'm not an economist, and I cannot really predict how the economy is going to evolve. During this year, with the pandemic and also the vaccination. So I'm putting that, I'm setting that aside, and I'm assuming we're not going to see a very strong rebound during this year. And even with that assumption, I think the capacity constraint is likely to persist for the simple reason that mature technology simply we are not seeing any meaningful increase in capacity, while there are just a ton of new applications queuing up to consume more of those capacities. And we are - I mean, our display driver IC, which always requires high output voltage, and i.e., we have to use mature technology. So, we are certainly one of the major users of those capacity and from our driver ICs' point of view, certainly we are not seeing any sign of the capacity constraint receded anytime soon, certainly not…

Okay, that's great. Thank you. And then, in terms of pricing, how should we think about the pricing going forward? And then, I think you guided gross margin to improve to 37%, 38%, which is about 6, 7 percentage point increase. How much of that is coming from ASP increase?

It's hard - well, firstly, it's confidential. And secondly, it's really hard to compare, because you have to knock down the cost increase as well. I mean, bear in mind cost overall increase rather significantly, as you guys all know. So, without tracing directly, without giving you directly this number, I can share with you, how - why the margin improvement and how the margin outlook is going to be like going forward at least this year, right? So, firstly, in capacity constraint and that certainly means better pricing position for us, right? Meaning, we can very often transfer the cost increase to customers and a bit more. And, we talk about better product mix as well. And I want to probably elaborate a little bit on that, what do we mean by better product mix. It actually comes from several perspectives. Firstly, obviously, when you're facing shortage, you have a tendency to allocate more of your output to higher margin products to make more money, right, that's very obvious. So that's the first most obvious point. And secondly, for similar reason, we also have a tendency, our customers as well, when our total capacity is capped, we want to produce more higher-end products. And that applies to TV, monitor, notebook, smartphone, tablet, automotive, everything, right? And I think, I mean, Himax been the industry leader and our customer recognize that. So when our capacity is capped, they want us to focus more on those higher-end products, while they're probably leaving those low-end products to some of our lesser competitors. So that typically means better profit and better ASP for us. And thirdly, a few sectors which is already happening, which happens to enjoy better margin historically. They are growing our other businesses. And that on a weighted average -…

Yes. Okay. Thank you. Thank you, Jordan.

Thank you, Jerry.

[Operator Instructions] Your next question comes from the line of Tristan Gerra with Baird.

Hi, good evening. Just following up on the prior questions about gross margin, clearly helped by mix and the supply constraint, how should we look at the potential timing of peak? Some companies have talked about supply coming back in the second half of this calendar year, which presumably would alleviate a little bit the constraint. There's also the potential at some point for automotive to slow down, given that there is probably some amount of double ordering, given that the tightness currently in the market. So when I'm trying to get a sense is, when do you think even as supply continues to be constrained? It actually gets less constrained than it is now. And when do you think supply will eventually catch up in automotive, meaning that you're starting to see a bit of a normalization of supply demand? Is there a way to assess whether that's something that may happen in the second half of this year? Or what timing do you have in mind potentially?

I think, my visibility is different for different product segments. And again, I just want to carry on with my previous answer to Jerry's question, the highest degree of confidence for me, will be automotive sector, in which I think there's no sign of receding, and in fact, customers back by the end customers, or panel customers back by tier-1s, which are picked by end customers. They are prepared to place orders from orders, non-cancelable orders way beyond the year end. And now, rather than worry about double ordering, or demand disappearing. I mean, our worry is more on how do we make our shipments in order for the production line not to be suspended. It's pretty serious, honestly, pretty serious. We are talking about - because we don't want single driver IC that cannot ship a cup, because they will have no critical display, right. So for that, I think the visibility is very, very low. And we actually are - we are going through different schemes with different customers and our foundry partners, many of which are with contractual arrangements to secure that throughout the ecosystem. We know what we are doing in our customers, what they're doing and we can just focus on making more outputs and securing more capacities and making sure their production is not suspended. So for automotive, I honestly, I don't worry a bit, but it's certainly harder to say, for example, the IT demand, people are talking about the stay-at-home economy and all that right. So I don't have a crystal ball, I don't know, how that demand is going to evolve with the vaccination and the COVID-19 situation and all that. So what we do is, again, we follow the customer's production orders extremely closely. And one thing, our particular interest…

Okay. That's great color. Thanks for that. And then from a follow-up, a few years ago, you obviously had traction with some early but leading AR device and providers with very high content. You also talked about, and that was maybe up to a year ago about opportunities in holographic displays, given the potential for Apple to launch AR devices by next year, which presumably would trigger, a lot of companies to basically have similar devices over time. How do you feel your position? What type of initial engagement you think you have in both AR and holographic displays? And what's the potential timing and that's leveraging on both [wider on lens] [ph] technology and also your LCOS technology?

Well, thank you for the question, Tristan. A few years back, we talk about that a lot, because there were real major customers and real products. And unfortunately, the launch of those products and the business results is unfolding very well, as we all know, right. And certainly, we continue to play a critical role in terms of providing the micro-display and related optics for AR/VR gadgets, in particular AR, which requires these true feature rather than VR. With VR, your eyesight is blocked by the image, but we say ICs through. So when you see through our technology is needed. So I can say with a good degree of confidence that if this happened in the industry does pick up again - pick up momentum, again, we are going to play a role. But I don't want to be overly optimistic about this, because I think to be honest, I still see lots of both technical and business barriers ahead of us, for the AR goggles to become a real affordable and a real form product for people, in general to want to own. And certainly people are talking about Apple and I don't want to comment our customers whenever the other says in Apple. And so we'll see, but, I mean, certainly you are right, if Apple does launch something successfully, and then other people will follow certainly. But again, I can't comment in the specifics on any specific customers. But I think I want to give a warning that we are not too optimistic about it being the insider in the marketplace. Again, I've seen steel barriers both technically and technically been how to lower the price substantially. I mean, the lessons of the previous products are, they're just way too expensive, right. It's a way beyond…

Great. Well, thanks for the color. Very much appreciate it.

Thank you, Tristan.

Your next question comes from the line of Donnie Teng with Nomura Securities.

Hello, good evening, CEO and Eric. Congratulations on the results. I think I have 2 quick questions. So the first one is that I think people are talking about how tight the capacity will be, and when will it be likely to be used. But in the reality, for example, if we break it down to like 8-inch or 12-inch capacity by different products, which one you think is most likely to be used in the future? For example, it's considering the node migration, as well as the capacity expansion return, what kind of products you think that will be most likely to be used in the future and which one will be the most difficult to be used? So this is the first question.

Okay, Donnie. It's not an easy question. It's a good question. But it's not easy to answer, because I mean, other than automotive which will have makes, and I guess, for the entire industry as well, I'm talking about display driver IC, right, and automotive, which is still strictly exclusively on age for those are either totally 12-inch or combination of 8 plus 12 inches. Now, with automotive, we are moving into TDDI, in which we are the industry lead pioneer leader at the moment, good momentum expected for the next few years. TDDI automotive will be 12-inch as well. So now, so if we - and then 8-inch for automotive, I mentioned earlier. 8-inch is surely tight, but because of our earlier engagement earlier, both engineering and business preparations, we have been able to secure good capacity increase, although is 8-inch, which is super tight. So we all understand. And for 12-inch, if you talk about a 12-inch for Himax, I guess for industry as well. For smartphone and tablet TDDI, it's all 12-inch, because you required a lot of logic processes, right. And in certain cases memory as well. So you do need the 12-inch more advanced nodes. For large panel, though, it is a combination of 8-inch and 12 inch, and large panel has to move to 12-inch primarily, because of capacity constraint of 8-inch, right, and that has started to take place a few years back. So it's not like industry is starting to do this because of this capacity constraints now. A few years ago, the whole industry, Himax certainly is one of the pioneers has been moving very aggressively into 12-inch as a way to alleviate the capacity issue of 8-inch for large display drivers. So, then when we move to 12-inch, we typically…

So, just a quick follow-up, before I asked the second question. Are we able to quantify how much sales that we have right now is from 8-inch and how much is from 12-inch?

I don't have the number in front of me, but certainly our 12-inch is much, much larger than 8-inch right now. I mean, again, other than automotive, which is probably still right now about 15% or less of our total revenue, although is outgrowing - is probably outgrowing the rest. So, that is totally 8-inch, and southern portion of large panel. And large panel represents - large panel in total 30% plus of our total sales, right. And a portion of that is 12-inch. And some other portion is 8-inch. So 8-inch is now relatively small for us. And, small panel they are almost exclusively 12-inch other than automotive, right. I'm talking about tablet and smartphone. And that is combined more than 50% of our sales already and then you have timing controller and all others. They are all 12-inch as well.

Okay. Got it. And second question is on automotive display driver business. As you mentioned, about that, you have secured quite a meaningful capacity already. I think from - at this time point, I would say it's very impressive, because last year large order automotive then conducted companies that pushed all the capacity in the second half last year. So it looks like making a decision at this time point. So could you elaborate more on what kind of trends you are seeing on automotive display driver IC? As you just mentioned the value is migrating to TDDI or if you can give us more color on how structural the growth will be or like how much volume you will grow in every call in terms of the bigger screen size or even a combination of different kind of display inside of the car? Thank you.

Very good question. Firstly, indeed, in the first half of last year, our customers are actually cutting back their orders and forecast. And I remember, we are all showing, and we are going around telling everybody, our tier 1, including even some end-customers, across Europe and U.S. that don't overdo that, because, guess what, you're going to be in such shortage that you're going to kill to get capacity, right. So - and, in fact, during Q1, Q2 last year, we actually are, although our customers are cutting back their forecasts, we didn't really slow down in our inventory preparedness, because it was very obvious to us that it is going to run into bad capacity shortage. And it was also during that time that we started to engage our key foundry supplier for long-term foundry arrangement. And that involves both new process developments, and also porting of certain of our products from fab A to fab B to increase our visibility, when the capacity is tied in individual fabs. And certainly also we enter into contractual arrangement to secure our capacity as well. So, I think we are - thankfully, we make those moves, and now we can go around telling our, even end-customers that we are pretty well prepared. Although we are still suffering from shortage, but I think our customers are very pleased to hear that we can actually enlarge our capacity quarter by quarter in a rather meaningful way all the way to next year. So, I think that is very important at this stage for us. And having said that though, our 8-inch capacity is very tight, and it is going to remain very tight. And I don't have the number exactly as far as the display driver IC content consumption per vehicle, how that…

Yeah, thank you so - yeah, thank you so much, Jordan. Congratulations again.

Thank you.

There are no further questions in queue. I will now hand the conference back over to Mr. Jordan Wu for closing remarks.

As a final note, Eric Li, our Chief IR/PR Officer, who have maintained investor and marketing activities, and continue to attend investor conferences. So we will announce the details as they come about. Thank you and have a nice day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.