Hello, ladies and gentlemen. Welcome to the Himax Technologies, Inc. First Quarter 2023 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. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to hand the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

Welcome everyone to the Himax First Quarter 2023 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. 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, 2022 in the section entitled "Risk Factors", as may be amended. Except for the Company’s full year of 2022 financials, which were provided in the Company’s 20-F and filed with the SEC on April 6, 2023, 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 first quarter 2023, followed by our second quarter 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, acquisition-related charges and cash award. Despite the challenges of ongoing macro headwinds and seasonal effects, first quarter revenues and EPS both beat our guidance, while gross margin was within the guidance range issued on February 9, 2023. First quarter revenues registered $244.2 million, a decrease of 6.9% sequentially, but markedly better than our guidance of a decrease of 12.0% to 17.0% sequentially. The better-than-guided sales were attributable to increased order momentum particularly in the large display driver IC business and smartphone and tablet TDDI segments as well as our continuous efforts to deplete inventory. IFRS gross margin came in at 28.1%, a decrease from 30.5% last quarter, but within the guidance range of 28.0% to 30.0%. Gross margin was impacted by several factors. First and primarily, we incurred the high cost of our excess inventories that were sourced during a period when foundry and backend prices peaked. Second, we had to write-down certain unsold inventories due to market price declines. Finally, there was price erosion, a requisite part of the ongoing inventory offloading process. Yet, IFRS profit per diluted ADS was 8.5 cents, surpassing our guidance of 3.5 cents to 7.0 cents. Non-IFRS profit per diluted ADS was 11.5 cents, beating our guidance of 6.5 cents to 10.0 cents. Revenue from large display drivers was $53.0 million, an increase of 21.8% sequentially…

Thank you, Eric. Soft consumer consumption coupled with recession fears continue to present challenges to market demand and amplify uncertainty throughout the tech industry. The semiconductor industry appears to have come to a consensus to some degree with the expectation that inventory digestion will extend longer than previously projected. In the display market, end brands remain cautious toward their panel procurements, while panel makers implement stringent output controls and rigorous procurement scrutiny. Amidst ongoing macroeconomic uncertainty, our visibility remains limited as panel customers continue to shorten the duration of their forecasts. However, our inventory has been reduced to a comfortable level after several quarters of aggressive destocking. While our current inventory level is still somewhat above the historical norm, the good news is the remaining stocks are comprised of IC products which have a solid customer design-in base and long expected lifetimes. Moreover, after quarters of write-downs, the book costs of the stocks are at least equal to and, in many cases, much lower than the prevailing market prices. In light of the better-than-expected inventory offloading, we stand by our expectation that inventory will revert to historical levels no later than the third or fourth quarter of this year. In an effort to improve our cost structure for new wafer starts and maintain competitiveness, we have strategically terminated certain high-cost foundry capacity agreements recently prior to their expiration dates. This, however, has resulted in a significant one-time early termination expense incurred in the second quarter and hit our Q2 gross margin. In fact, this is the predominant factor for the second quarter gross margin contraction, on top of the price pressure incurred from destocking. Termination of the aforementioned capacity agreements is a crucial operational strategy for us whereby making a short-term sacrifice can help us achieve long-term gains. Moving forward,…

Thank you. [Operator Instructions] Our first question comes from Jerry Su with Credit Suisse. You may proceed.

Thanks for taking my question. Just want to follow-up on your previous comment about the second quarter guidance, which show the gross margins that was impacted by the termination of the wafer contracts. Can you give us an idea of what is the impact on the margin? How much of penalties that you are recognizing in the second quarter? That's the first question. And secondly, when I look at your large size driver IC outlook, it seems like that you are a little bit different for the industry because I look at the panel makers or back end or your driver IC peers all are expecting a sequential growth. Can you give us an idea of what is the discrepancy between your guidance versus the industry trend? Thank you.

Thank you, Jerry. On the first question, our last quarter gross margin was above 28%, just above 28%. And for this quarter, we are guiding for 20% to 21%, if we take the midpoint about 20.5% there's a differential of about 7%. So the impact from the termination of a long term contract, the impact is we said in the prepared remarks, the predominant factor. That means far greater than half. Right? That means far greater than half, meaning, with the 7% differential, far greater than half difference actually came from this termination, meaning without the termination, our margin would have been much closer to that of the previous quarter of 28.1% I think. Now the remaining difference I think comes primarily from the fact that in the second quarter, the automotive business was hit by what we described as certain global turbulence especially in the EV market in China, which actually is related to your second question, right? So, because our automotive market exposure is far greater than those of our peers at 30% to more than 35% historically, over the last, I don't know how many quarters, many quarters already. So the impact, especially TDDI, which is presumably on the fast track of growth every single quarter. But I mean, unexpectedly in Q2, we are now seeing some sequential decline, which we believe will be a short-term surprise and we emphasize in our prepared remarks that growth will resume probably strongly in the second half for automotive business, especially for TDDI where we are very, very confident that this temporary setback will be a short-term phenomenon. So, because the weighting of sales coming from automotive is so high for Himax and there is a short-term, how we call, market turbulence in automotive market. So that is why we…

I think my previous question regarding the revenue trend for this quarter was mainly large-sized driver IC, because I think you guided that the large-sized driver will decline of double-digit quarter-over-quarter. When we look at the guidance from the panel makers or your peers, apparently that they are guiding for some sort of growth, right, for a large-sized business. So the question was actually more related to this front. And then the other one on automotive, just a follow-up, can you elaborate a little bit about what is your end customer mix for automotive? Is it more Chinese customers or is it more global customers? Thank you.

You mean end customer? Do you mean the end customer?

Yes, end customer, panel end customers, if possible? Thank you.

Okay. I will probably give you an overview of the customer base. Now on the first question, I apologize for misunderstanding your question. Yes, we guided for some decline for large panel, where you see some of our peers have guided for large panel, guided for upside. I think it comes primarily from TV, the difference for TV. I think TV for most of our peers, including Himax is the largest sector by far in the large display space. Now, yes, we do see recovery for TV market and we have actually enjoyed over the past few quarters steady growth for TV driver. And also, another good news is, panel price through panel makers various measures has been stabilized and even going up a little bit going forward. But in this quarter, in particular, we don't get a full benefit because of the difference in customer base. Our TV panels are supplied primarily by Chinese makers, largely by Chinese makers and followed by Taiwanese panel makers. Our customer base is much more exposed in China than in Taiwan. While for certain reasons, leading end customers panel allocation decision, hopefully, is a short term decision but has swung from bigger focus on China to more focus on Taiwan. And so, it's really our end customers panel allocation that causes our probably different direction compared to our peers because our exposure is more towards Chinese panel makers. A lot more than Taiwan's panel makers, where the current trend the short-term trend is for allocation to go to Taiwan's panel makers more. So I think that is the main reason. But we are discussing extensively with end customers who we have a very direct technical and business relationship with. I think various measures are on the way and including our getting into more…

And this concludes the Q&A session. I’ll now turn the call back over to CEO, Mr. Jordan Wu for any closing remarks.

As a final note, Eric Li, our Chief IR/PR 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.

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