Hello, ladies and gentlemen. Welcome to the Himax Technologies, Inc. First Quarter 2022 Earnings Conference Call. [Operator Instructions] 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.

Thank you, operator. Welcome everyone to Himax’s first quarter 2022 earnings call. Joining us from the company 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 comments, we have allocated time for questions in a Q&A. If you have not yet received a copy of today’s results release, 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. Unless otherwise specified, we will discuss our financials based on non-IFRS measures. You can find the related reconciliation to IFRS on our website. Before we begin the 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. A list of risk factors can be found in the company’s SEC filings, Form 20-F for the year ended December 31, 2021, in the section entitled Risk Factors as may be amended. Except for the company’s full year of 2021 financials, which were provided in the company’s 20-F and filed with the SEC on March 23, 2022, 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 would now like to turn the call over to Mr. Eric Li. Eric, the floor is yours.

Thank you, Thank you Mark and thank you everyone for joining us. My name is Eric Li, Chief IR/PR Officer at Himax. On today’s call, I will first review the Himax consolidated financial performance for the first quarter 2022, followed by our second quarter 2022 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Historically our first quarter sales are seasonally the low point of year due to the Lunar New Year holidays. This year, starting from end of February, additional factors also weighed in, mainly new lockdowns in China to contain the spread of the Omicron variant and geographical conflict erupting in Ukraine, both causing major disruptions to our supply chain. Despite these additional challenges, our first quarter revenues, gross margin and EPS were all in line with the guidance range issued on February 17th, 2022. First quarter net revenues of $412.8 million decreased 8.6% sequentially, within our guidance of down 5% to 9%. Yet Q1 sales were up 33.6% on a year over year basis. Our gross margin came in at 47.0%, a decrease from the record high of 51.8% in the fourth quarter last year, but within our guidance of around 46% to 48%. Non-IFRS profit per diluted ADS was 69.7 cents, at mid-range of the guidance of 67.0 to 73.0 cents, but significantly up 81.5% from same period last year. IFRS profit per diluted ADS was 66.3 cents, at mid-point of the guidance of 63.5 to 69.5 cents, but significantly up 73.1% year-over-year Revenue from large display drivers was $110.6 million in Q1, a decrease of 11.5% sequentially but an increase of approximately 60% year-over-year. TV revenue was flat sequentially, anchored by high-end and large-sized TV IC shipments to key accounts despite the first quarter being…

Thank you, Eric. Looking ahead to the second quarter, a host of geopolitical, macroeconomic and pandemic related factors are creating challenges and impairing our near-term outlook. The war in Ukraine, rising inflation and rolling lockdowns throughout China have significantly impacted the supply chain and consumer electronics demand, leading to a particularly abnormal business environment. Murky order visibility is leading to smaller and shorter demand forecasts by leading global brands. In response, starting at the end of Q1, panel makers began taking aggressive measures in an attempt to quickly reduce their IC inventories. Against the backdrop of challenging market conditions and short-term uncertainty, for the second quarter we expect a sequential decline in gross margin mainly because our cost of goods sold this quarter represents pricing from previous quarters when foundries were still raising their prices. We also have some mild price adjustments in support of our non-automotive customers amidst soft demand worldwide. However, with both foundry and backend pricing already stabilizing, our cost of goods sold moving into the second half will unlikely continue its upward trend over the first half of the year. As Covid-induced lockdowns begin to fade and supply chain disruptions are alleviated, visibility will improve and ultimately lead to a rebound in market demand. We anticipate Q2 sales to be the low point of this year. For full year, despite the murky short-term market condition, we remain upbeat about our top line for 2022, supported by the automotive business and two new revenue streams which all enjoy solid business visibility. We now expect our 2022 full year sales to stay at approximately the same high level of 2021. For the automotive business, regardless of the macroeconomic concerns, we are targeting sales to double from last year which already more than doubled from the year before. Meanwhile,…

[Operator Instructions] Your first question comes from the line of Donnie Teng from Nomura. Your line is open. Please ask your question.

Thank you, Jordan and Eric for taking my question. My first question is regarding to your comment on the sales pattern into the second half. So I'm just curious, I know second quarter looks like to be a dip. But for the recovery of third quarter and fourth quarter, you are seeing more like a shipment driven or more like ASP recovery? That's my first question

I think it's primarily shipment driven. Donnie, I think we actually mentioned that we feel confident that we should be able to achieve at least a flat 2022 total revenue versus the high level of last year. Now how do we arrive at that number and how do we get our confidence? I guess this is another way of addressing your question. Actually, we can conceptually divide our products into 2 groups. The first group being the one with high visibility. They are automotive, obviously, timing controller, which has very strong visibility. And also, there are the second group. Sorry, that's the first group, right? The first group includes these 2 existing product lines with very strong visibility. And also, we have 2 major new revenue stream, kind of product lines, right, being AMOLED drivers or related products and also ultralow power AI sensing. These are new revenues, which didn't exist the year before. So that is the first group, right? They enjoy good visibility because of the nature of our product in the industry or because of the fact that they are actually new revenue streams in which we are always the sole source provider where the customer is launching new products. So the visibility for their business plan is actually quite good. Now there are also the second group of products, which are primarily all the consumer electronics, the TVs, computers, cell phones and the like. Honestly, the visibility currently is lower than usual, right? But if I take my existing projection for my customer for the first group, and I put in a number into my whole year's projection. And if I assume my whole year revenue to be flat compared to last year, then that implies the second group, i.e., the low visibility group, the revenue…

Thank you. It’s so nice, very comprehensive. And the follow-up should be on the gross margin side because it seems like you are like positive from a volume recovery and potentially, as you mentioned, like the first group product like long visibility as well. But for the ASP side or for foundry cost perspective, are we able to like pass the cost to customers or to negotiate the new price with foundries or what kind of normalized gross margin you're expecting for the second half?

Well, thank you, Donnie. Again, to follow my previous analysis of the second group versus the first group as in second group, the high visibility and low visibility. On the high visibility area, we are certainly not lowering our price in any meaningful way because of the simple fact that we have a very, very strong position and as I said earlier, the demand still outpaces supply. So there's no reason for us to lower our price, right? The second group, low visibility, is harder to say, to be honest. Now if I look at the supply side, we have been through at least half year, two full quarters of rising cost of goods sold that leads directly to our gross margin erosion. So if you look at our second quarter guidance, I can tell you, our guided gross margin decline is pretty much the same as our expected cost of goods sold increase percentage-wise, right? Now, how is the cost of goods sold going to be like in the second half? I think we are seeing very much foundry prices have stabilized. And the fact that is that our Q1 and Q2, those are prices fixed much earlier. But because of the production lead time, we are making shipments of those products where the prices were actually fix much earlier when the foundry prices was on its way up constantly. But I mean, foundry people also realize the fact that the market is soft right now, the demand is weak. So through our discussions with foundries, we are not seeing, we are not expecting any meaningful foundry price increase. The same for back-end. And if anything, I think we and our peers will try to get a better price for the second half. I mean, certainly, a lot of…

Got it. May I ask one last follow-up is that, what’s the sales breakdown you are expecting for the group one and group two this year? Thank you.

Okay, about 40% to 60%. Group 1 being 40%, and group 2 being 60%. Let me have a small correction. 40% to 60% being in the first half, that's the actual number. And in the second half, the first group will outgrow the second group based on our current projection pipeline. So the first group will rise to somewhere around 45%. So it's going to be 45 against 55. So the whole year will be 40-plus something against 50-plus something.

Great. Thank you so much for that.

[Operator Instructions] Your next question comes from the line of Jerry Su from Credit Suisse. Your line is open. Please ask your question.

I think my first question is regarding your -- I think, Jordan you had mentioned quite a few times about the inventory level as your customers has been -- could be -- go to a pretty low level by the end of this quarter. But when we look at your inventory level in Q1, I think inventory has increased another 25% from 4Q and then more than double from a year ago. So how should we think about your inventory exceeding the second quarter? Are you taking any further steps to control your inventory or you are comfortable with your current inventory level?

Thank you, Jerry. Let me just say it's not a good idea to compare the inventory level with those of last year because last year was unhealthy in the sense that we had literally no finished goods inventory, and our customers are chasing us for shortage like on a daily basis, right, from everywhere. So last year's inventory was unusually low and actually unhealthily low. If you look at our history, let's say, we look at the past 5 -- excluding last year, right, our last 5 to 10 years, our inventory days, meaning inventory compared to cost of goods sold, the range is in between 90 to about 110 days. And if you look at our end of Q1, it's 104 days, slightly on the upside, but still within the range, right? So we are not worried about our Q1 inventory because particularly given the fact that we still feeling the capacity, foundries capacity will remain short at least in the next year or 2. Now with the expected dip of Q2 revenue, our end of Q2 inventory will still be higher than those of the end of the first quarter. But I said earlier, on the other hand, our customers' inventory level, IC inventory level will be lower than usual. So I think we are hoping in Q3 or Q4, our inventory level with the 2 factors combined, will get back to a more normal status. So for now, we are watching our inventory level, like we are monitoring our -- I mean, I myself am monitoring our inventory level at least weekly basis. So I'm not saying I'm not worried. We are watching it very closely, but there's nothing to indicate that we are reaching an unhealthy level, so to speak. And in fact, we think it's probably still appropriate that we take a slightly more aggressive inventory preparation approach compared to normal, given our view that the foundry capacity in any foreseeable future will still remain tight.

Okay. Thank you, guys. Very helpful. And then just to follow-up on your comments on the foundries. If the foundry supply is going to remain tight for the next few years, why the foundry pricing will not further increase in the second half? Especially I think in the past few days, we have saw the news about one of the largest foundry in the world has been raising the price in 2023. So what is your view on the foundry pricing maybe into the second half of next year? Do you expect even if it's going to be flattish later in the year, it could further increase in the longer term??

I know you're talking about TSMC price. Let's just say TSMC announced publicly and we got a notice as well. Currently, they sent notice at the same time to every customer that's starting the beginning of next year, they're going to raise their price by 6%. Actually, for mature node, that is the node we are in. Ironically, it is actually very good news for Himax because TSMC in mature node, they are actually just playing catch up for pricing. Right now, I mean, it is common market knowledge that TSMC is less expensive. They price their mature node wafers less than literally all their peers. So I'm not going to comment on advanced nodes where TSMC is clearly the leader. But on the mature nodes, TSMC's position is not as dominant as their position in advanced nodes. They are actually playing catch-up. And our exposure to TSMC compared to our peers, we are the lowest, meaning we are using other foundries more heavily compared to our peers. That actually implies that historically compared to our competitors, our cost burden is actually higher, right? Now the reason why I say it's good news for us is not really about comparing with our competitors. It's mainly because we are hoping through TSMC raising their price, they will be able to squeeze out those weaker demands. And I just mentioned the first group against second group, right? A good portion of the first group, especially the OLED products, the ultralow power AI sensing products, we are using TSMC heavily. And we are suffering still pretty big time from shortage. And we are hoping through TSMC's raising their price, they get to squeeze out some of the weaker demand that we can enjoy better supply where we actually welcome such price increase. And…

Then maybe just one other question, if I may. Regarding the current competition landscape, what are you seeing for the competition coming from the Chinese fabless? I think, especially during the foundry supply constraint on this kind of environment, do you think Chinese fabless, they can come in and then create more inflexibility or take share from the existing display driver IC players? Thank you.

I think there is no straight answer, simple answer to cover all sectors it varies depending on the sector. For example, automotive, where we enjoy the best position, there's very, very little, if any, Chinese presence. It's a much harder -- much higher entry barrier and it takes much longer to see even any revenue contribution, right? So I think for various reasons, that is not their priority. So we feel little stress from there. For consumer electronics, I think their presence is much less in the areas of notebook and monitor and more in the area of smartphone and TV. For the simple reason that with smartphone and TV, there is a very strong Chinese end brand name presence in the marketplace compared to those in notebook and monitor, right? So I think they came in easier through TV and smartphone because they probably get better support from the end customer. So I think those 2 areas, honestly, especially on the low-end market, there will be more competition, yes. But I think our presence, certainly, we enjoy the best presence and highest presence in automotive. And we also enjoy a very good presence in monitor, probably to a slightly lesser extent in notebook, but our shares in notebook are still increasing. Our presence relatively speaking, is lowest in smartphone. This actually being one of the reasons. And certainly, we mentioned repeatedly in the previous earnings calls, our presence is lower in smartphone than before right now because we are limited by capacity. So with the limited capacity, we are allocating more capacity to support tablet compared to smartphone. With tablet again, less Chinese presence compared to smartphone end brand names, right. I think we are going to regain our smartphone presence once we start the AMOLED driver IC production, which we feel pretty good about. It will still take a little bit of time, but I think that is our strategy. We only come back hopefully with more presence once we start AMOLED. But with traditional TDDI, it's pretty bloody competition right now, yes.

Okay. Thank you.

Excuse me presenters. There are no further questions at this time. You may continue.

Okay. Thank you, operator. So, as a final note, Eric Li, our Chief IR Officer, will maintain investor marketing activities and continue to attend investor conferences. We will announce the details as they come about. Thank you and have a nice day.

This concludes today’s conference call. Thank you for participating. You may now disconnect.