Hello, ladies and gentlemen, welcome to Himax Technologies, Inc. Second Quarter 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group. Please go ahead.

Thank you. Welcome everyone to the Himax Third 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 session. If you have not yet received a copy of today’s results release, please email 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 will now turn the call over to Mr. Eric Li. The floor is yours.

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 third quarter 2022, followed by our fourth quarter 2022 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Our third quarter revenues and EPS beat the guidance, while gross margin was at mid-range of the guidance issued on August 11, 2022 despite macro headwinds continuing to challenge our business. Third quarter net revenues of $213.6 million decreased 31.7% sequentially but exceeded our guidance of a decrease of around 35% to 39% sequentially. Increased sales momentum in our small and medium-sized display driver segment contributed to the better-than-expected sales results. Gross margin came in at 36.3%, a decrease from 43.6% last quarter, but at the mid-range of the guidance range of 35.5% to 37.5%. Non-IFRS profit per diluted ADS was 17.0 cents, beating our guidance of 11.6 cents to 15.6 cents. IFRS profit per diluted ADS was 4.8 cents, exceeding our guidance of 0.2 cents to 4.2 cents. Revenue from large display drivers was $41.3 million in Q3, a decrease of 39.8% sequentially and below what we typically see on a seasonal basis. Customers across the board from brands to panel houses continued to impose stringent inventory control measures on the backdrop of slowing end market sell-through and de-stocking pressure. As guided, all three large display driver sectors, covering TV, monitor and notebook, were down double digit sequentially. Large panel driver IC sales accounted for 19.3% of total revenues for this quarter, compared to 22.0% last quarter and 27.9% a year ago. Moving on to our small and medium-sized display driver segment, revenue was $141.4 million, a…

Thank you, Eric. The near-term economic outlook appears bleak in the face of elevated inflation and rapidly rising interest rates which are hurting the market along with the ongoing fallout from China city lockdowns and geopolitical conflict. For the display application market, end brands are downsizing their panel procurements which consequently triggers panel makers to further lower fab utilization. Against this backdrop, our business visibility remains limited, especially in consumer centric products. As we continue to tread through this inventory offloading cycle, we are cautiously managing our new wafer starts, trying to strike a balance between inventory level and foundry contract fulfillment. A silver lining among the clouds is the automotive segment where visibility is relative better. This allows us to continue to maintain new orders to our foundry partners and back-end suppliers. Continuous orders in such segments coupled with our successful negotiation with suppliers will reduce the incurred charges in Q4 from contracts to secure capacity as compared to the third quarter. Judging by our current business pipeline and production plan, we believe our inventory level has reached the peak at the end of the third quarter. Looking into Q4, our gross margin is still under pressure due to price erosion from high inventory offloading while the cost of goods sold remains high as the inventory was sourced when foundry and back-end pricings were still at high levels. Despite the soft demand, we remain upbeat about our top line growth from several revenue streams that we consider our high visibility group, notably automotive, AMOLED, Tcon and WiseEye AI image sensing. In the automotive business, we expect TDDI sales momentum to pick up starting Q4 from the trough in the third quarter. For automotive DDIC, however, customers are still in the process of offloading their inventories accumulated intended for the…

Our first question comes from Donnie Teng from Nomura Securities. Your line is now open.

Congrats on the very strong results and guidance. My first question is regarding gross margin. I think, you have mentioned like foundries are lowering their price as well. And I think, we have seen some of them lowering the price quite aggressively. But at the same time, I think, our customers are still asking us to lower the price as well. So I think, it's pretty dynamic. But wondering if you could kindly comment on like, when do you think the gross margin would be the lowest point into next year and how should we expect the reasonable gross margin next year after the foundry lower the price and also, we lower our price to our customers?

Thank you, Donnie. It's an interesting question. It's dynamic and it's so evolving. You are right to say that the foundry is kind of lowering their price. Although in doing so they do expect volume from customers in exchange. Now the thing is, we, as an industry and Himax included, we are burdened with significantly high inventory, meaning our capability to give significant orders to foundry right now is quite limited. So actually, I think, on a negative note, you are likely to see, across the industry, gross margin continues to be under pressure because we are just offloading our inventory, which was sourced previously at a higher cost. And it doesn't matter really how foundry is lowering their price right now. So that is the major issue. However, for the products where the industry enjoys better visibility, certainly, we continue to place new orders to foundries. However, the foundries also are aware of this. So on those areas, typically, what we see is that they are priced down will then become less aggressive because they now actually, you do have to continue to place order because you don't have much inventory burden and the market remains visible and relatively strong. So I think and for Himax specifically, for next year, I mean, we will say, first of all, it's too early to comment on the whole year's gross margin because the macro uncertainty, you name it, you know what I'm talking about. It's still clouding the market, right? So I think, it's still too early to comment. However, I think we are still quite confident on what we called the strong visibility group. In my prepared remarks, and we also mentioned the same in last quarter, there are basically 4 major things in the next few years, which we call high visibility group, namely automotive business in general, and timing controller business and AMOLED business and lastly, our WiseEye ultralow power AI business. And these 4 segments together account for about 50%, over 50% of our total sales. So they are pretty significant. And they are all projected to enjoy better growth next year than our corporate average. They all are projected to enjoy better gross margin as well than our corporate average. And so I think that is our positive note. So mixing the negative and positive together, what is going to be the outcome for next year? I think, it's indeed too early to tell. However, I do believe, after this inventory destocking cycle is complete, which hopefully will be within 2 to 3 quarters from now. After this destocking cycle is complete, I think, we will emerge a better Company, gross-margin wise supported by this so-called high-visibility group of products. So that will be my kind of long answer to you, Donnie.

Very helpful. And maybe a housekeeping question is, like in the past 2 years, I think most of the semi and tech companies have hired lots of talents and employees but mostly facing quickly deteriorating outlook in the past few quarters. And I'm wondering, do you have any expectation on managing the OpEx into 2023? Is there any way you can control OpEx or we should model like the similar OpEx of this year?

I think that will be a fair assumption for your modeling purpose, I think that is right now, the plan, which is not to increase our non-IFRS OpEx. And certainly, IFRS OpEx will depend largely on our profitability. As you know, our RSU goes in line with our profitability. Now how do we do that? I think, again, back to my so-called high visibility group. For those product lines, we do need to continue to invest. However, we are likely to regroup our organization so that those people working on other product areas, many of them will be channeled through to support those product areas. That is 1 thing. That is 1 major thing. That is the way to control our headcount, knowing that actually, the business visibility is poor. And, so on selected areas, I think, we will continue to invest and expand, but we just have to do that more smartly. And again, 1 of the approaches is to re-channel some of the people from other areas into those focus areas. And we are still in the process of finalizing our BP for next year and it's very dynamic, a lot of uncertainties. But I think, also considering inflation, which is creating pressure for wage increase across the industry. And on the top of the fact that Taiwan is still -- high talent engineers are still in quite hot demand. So we have to remain competitive for such talents. So again, I think, the bottom line is, given the low visibility for the business, our target is to keep a flat OpEx expense next year compared to this year while still continuing to invest in those, especially for those high visibility group of product lines.

Understood. Thank you, Jordan. Congrats on the strong results. I will get back in queue.

[Operator Instructions] We have a question from the line Tiffany Yeh with Morgan Stanley. Your line is now open.

My first question will be about your future foundry adoption plan. Could you kindly let us know whether you will leverage more Chinese foundries in the future? And I have a follow-up for this.

We have been using Chinese foundries, although our vast majority of our foundry supplies still come from Taiwan, and also, a bit from Korea as well. China is a new source of supplier, and we do intend to collaborate with Chinese foundries. Now understanding the U.S.-China tension at the moment, right? So I think on the one hand, I mean, our Chinese customers would certainly love to see our using more Chinese foundries. On the other hand, I mean even our Chinese customers, let alone other international customers, they do need to target non-China customers. And for many of those non-China customers, they are, I mean, seeing the uncertainty, again, this current tension, the prevailing tension between China and U.S. They are worried. So they need to hedge against Chinese foundries. So I think, the good news is that, for guys like us, China is such a big foundry base. It doesn't matter how you strategize your foundry position. I'm talking about my customers or even end customers, you can't really get away with utilizing or counting on Taiwan as a sole foundry place. So I think that leaves us with a pretty good position. So I think looking forward, we are going to continue to count on Taiwan as our primary source of foundry supply while continuing to expand our China and Korean foundry bases.

Very clear. If possible, could you kindly let us know like your ideal proportion between Chinese, Taiwanese and Korean foundries?

I don't have the data right in front of me, right now. But there are product considerations. There are just areas where we find Korean foundries are quite suitable in certain areas, they do have capacity, they do have a track record and technology that is suitable for us. Likewise for China. But in China, we are now doing actually, across the board, quite a diversified line of product and areas, covering smartphone, tablet, to a lesser extent, TV and monitor. Our source of supply for automotive is still primarily Taiwan, almost exclusively Taiwan. And for example, our sensor is Taiwan plus Korea. So I don't exactly quantify them by percentage of our sourcing because I look at them more on a product and technology perspective. And if you like, I mean, our IR can follow up with you for a more specific number breakdown.

Okay. My second question is about your thoughts on the coming Chinese competitors. Could you kindly let us know whether you see any impact on your business from these like new Chinese competitors? And could you also share your plans in encountering more peer competition from them?

Yes. Thank you, Tiffany. It's a fair question. I think, China has always wanted to localize. It's a directive from the government for years. So it's nothing new to us. So throughout the years, we have been dealing with Chinese competition, all the time. And certainly, it's being intensified over the last few years because, again, Chinese government is giving it another push. So regardless, we are still doing our best to support our China customers, both in terms of technology and service and capacity and what not. And we are actually viewed by many of them, by vast majority of them as their strategic partners as well. I think, the fact that China wants to localize more, doesn't mean they are going to stop using foreign suppliers, outside suppliers. So our strategy is to upgrade our technology and our offering and try to, where possible, dominate in certain applications. For example, automotive, where our position remains quite dominant and Chinese competition is still having a hard time trying to get in because the qualification process, the technology requirements and the willingness for adoption from Tier 1 and end user customers, are all higher. The barriers are much higher, even for Chinese Tier 1s because many Chinese Tier 1s, they still have to deal with international end customers. Even for dealing with local end customers, much of leading local end customers still want better quality and better technology support. So that is 1 thing in automotive, we are working very hard to safeguard our position. And in the meantime, excluding Chinese competition. We are seeing Chinese competition most severe from 2 segments, TV and smartphone. Both segments share 1 common characteristic, which is in both, local Chinese end brands do master a major market share globally. So it's a push from the end customer that panel makers get to have an easier position in terms of introducing Chinese IC vendors to the end customers' products. Whereas if you look at notebook and monitor in comparison, where Chinese end customers presence is less compared to the 2 sectors I mentioned earlier. You see less Chinese competition. I'm not saying, this will last forever. So I'm saying, automotive will be the most difficult, not just for Himax across the board. It's just also a sector where Himax enjoys the best position and followed by notebook and monitor where the end customers, you have still pretty much international dominance. And lastly, TV and smartphone, where Chinese end customers do together command a pretty sizable market share. So that is 1 thing. And the other thing is, we are diversified into new businesses, such as our optics, such as our WiseEye where are really local competition, it's not really an issue as such. We are dealing with international customers, we are competing in international markets. So this China factor is relatively small in those areas. I hope that addresses your question.

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.