Hello, ladies and gentlemen. Welcome to the Himax Technologies, Inc. Second 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. 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.

Thank you. Welcome everyone to the Himax second 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'll now like to turn the call over to Mr. Eric Li. Eric, the floor is yours.

Thank you, Mark. Thank you, everyone, for joining us. My name is Eric Li, Chief IRP Officer at Himax. On today's call, I first review Himax consolidated financial performance for the second quarter 2023, followed by our third 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 an IFRS basis. Challenging business conditions due to ongoing macro headwinds persisted during the second quarter. Yet we continued to execute successfully with gross margin surpassing the guidance range while both revenues and the EPS landed at the upper end of guidance range issued on May 11, 2023. Second quarter revenues registered $235 million, a decrease of 3.5% to 3.8% sequentially, yet at the upper end of our guidance range. This was attributable to improved order momentum, particularly in the automotive DDIC large display driver IC and the non-driver business. Gross margin came in at 21.7%, a decrease from 28.1% of last quarter, but above our guidance range of 20% to 21% due to a favorable product mix. A three previously reported Q2 gross margin was impacted significantly by a one-time expense related to the strategic termination of certain high-cost of foundry capacity agreements. In addition to price erosion related to the stocking. Q2 profit per diluted ADS was 0.5 cents at the upper end of the guidance range of minus 2.9 cents to 0.6 cents. Revenue from large display drivers came in at $45.4 million, a decrease of $14.3 sequentially yet above our prior guidance. Monitor IC sales surpassed our prior guidance up single-digit sequentially driven by our client's proactive pull forward in preparation for the Q2 sales festivals and the recovery of gaming display. Noble sales notably outperformed our guidance. Thanks to a strong…

Thank you, Eric. The prevailing sentiment in the consumer electronics market for semiconductor remains sluggish. Customers continue to exercise caution towards panel procurement, limiting our visibility into the second half for consumer products. However, we see improving business momentum in the automotive sector, our largest sales contributor, where a healthy rebound for the first-half weakness appears to be underway. As a reminder, the global automotive market experienced a severe downturn throughout the first half of the year as major Chinese automakers caught back production when implemented strict cost control measures due to intensified EV price competition, firstly impacting our first half sales. Now, looking ahead with renewed momentum in the automotive market. We believe the stage is set for sales rebound as we approach the end of the year supported by more favorable product mix, improved cost structure, and normalize inventory level, which should also lead to improved gross margin. In terms of gross margin for the third quarter, we expect substantial improvement from the Q2 trial, which was primarily related to the one-time early termination expense to foundry partners as we reported last quarter. I would like to stress again how this early termination decision was part of a crucial operating strategy for us. By sacrificing margin last quarter, we now have added flexibility where new weather starts are no longer bound by minimum fuel requirements and high weather costs set during the severe boundary capacity shortage period. Furthermore, we can now leverage diverse found resources for optimal operational efficiency, a much-improved cost structure, thereby maintaining our product competitiveness. Variable product mix shift is also a key factor contributing to our expected Q3 gross margin expansion. This is predominantly driven by increased automotive sales as discussed earlier. Thanks to a robust recovery in the Chinese automotive market, leading to…

[Operator Instructions]. Our first question will be coming from a Jerry Su of Credit Suisse. Your line is open.

Thanks for taking my question. Jordan I just want to ask you on the, you have previously noted that the second half revenue is likely to improve from first-half. So, judging from the guidance you provided already for third quarter, the star implies that the fourth quarter revenue should not recover from the third quarter first half. And then what are the drivers behind that? That's the first question. And then, in terms of the automotive, I think you have mentioned about the, a lot of the new the product in this area. But I want to ask about what is the pricing trend you are seeing for the automotive driver IC, or timing controllers, and then how does that compare with the other product line? And then maybe on the wafer pricing side as you have already terminated your long-term agreement with your function partner in second quarter. How should we think about get wafer cost interest have, can you benefit from some of the renegotiation or the wafer foundry price of a reduction to help your margin. Those are my three questions. Thank you.

Thank you, Jerry. Yes, I think there's a good likelihood, the Q4 were, we'll see a further recovery from the trial in Q3. However, as a disclaimer, we are very confident on the continuous growth of the money sector in Q4. However, in the consumer sector, the Q4 visibility theory remains quite low. So, it really depends on the outcome of how the markets going to develop for the consumer products. But in our current projection, yes, indeed second-half is likely to be better than first-half. And Q4 is hopefully going to recover from the trial in Q3. That's the first question. The second question, really there are quite a few questions surrounding, automotive sector. I think you mentioned pricing trend and specifically pricing trend for automotive sector compared to lows of other markets. I think, I mean, Himax does enjoy a very nice leading position. We dominate the market share in automotive sector, and inevitably we are seeing competition both internationally and coming from China. And certainly, for competitors, all of the approach they will take for this relatively new market for them is to undercut our price. But I think and certainly, I mean, in that end, you mentioned, you also asked a question about cost structure. I think certainly I'll elaborate a little bit on that in a few minutes, but certainly we are committed to continue to improve our cost through various means, including diversifying our foundry base as we reported earlier by terminating certain long-term agreements that's are not variable to us our longer competitiveness. So yes, we were certainly be prepared to compete on pricing by improving our cost structure vigorously. Having said that, I think automotive sector compared to consumer markets has a much higher entry barrier for newcomers, because of these very…

Yes, very clear. Thank you.

Thank you.

[Operator Instructions]. And our next question will come from Donnie Teng of Nomura. Your line is open.

Well, thank you. Mention for taking my question. I have only two questions. The first one is regarding to the automotive driver IC. So, I think you have made a very clear comment on the EV market recovery in China in the second half, and likely customers start to review some of the automotive driver IC inventory. But recently it's like some of the leading auto IDM companies or IC design companies mentioned about some slowdown in terms of some kind of automotive IC demand into the second half. So, I'm just wondering if you could give us some color on, in terms of the end market, do we have like a majority of the market in China or do we still have some exposure to the overseas market? So, that's the first question. And the second one is that I think you have mentioned about the cost structure will be into the first half of next year. I think we have a very good progress in terms of the growth margin recovery already in the third quarter. But in terms of a normalized gross margin, considering the cost structure improvement. Could you kind of give us some ideas? It is, like, for example, where is the normalized gross margin is compared with the COVID period in the '21 and 2022? Thank you.

Thank you, Donnie. The first question, the simple answer is, given our market share, you should not be surprised that our customer base, in terms of OEMs covers the whole world, not just China. We have mentioned in DDIC, our market share is about 40%. In TDDI, we believe our market share is even higher than that. Just that it's a relatively new market. So, market statistics are not particularly mature. So, we are not talking about that number out loud but we believe based on our internal count, our market share should be higher than that. And then know what you mean by timing controller. Our market share is even higher than TDDI. Again, based on the internal count, we believe it is probably 60% or higher. So, at LTDI, we are likely to be the pioneer, with mass production, the first mass production of the whole world expected to start from this quarter. So, we do enjoy the leading market share in Italy, in every single technology area for the automotive market. So, our end customer base does cover the whole world, all major continents, and all major markets. Now, you talk about other IT vendors, and their views on the second half. I think there could be a difference between us and those where there is a panel maker market in between for us, in between our sales and the P1 prior, in their case, they may not be the same. Now, so our first half, so I believe our first half, the first quarter, and second quarter our automotive revenue probably were more hampered compared to those. And our customers are just coming back and trying to restock and catch up for our supply, which otherwise should have been made in the first half. And more…

Your second question is about our cost and margin profile, I believe. I think I can say in the long-term, I mean, as a reminder, the intention is not to provide our long-term gross margin guidance. And just give a flavor of how we believe our gross margin trend is going to be like, as we take a longer term, look at the longer-term horizon.

I think it is probably difficult for us to see the same level of very high growth market during COVID at this peak. We're talking about where over 50%. Honestly, it is probably difficult to see in the coming years. However, whether our gross margin will return to the pre-COVID period when we typically had some 24%, 25% kind of gross margin. I don't think so, I'm not that pessimistic either. And I think there could be a lot of reasons to explain that. But I will emphasize on Himax specifically in our situation. I think we feel good about our going through a structural change in terms of our product mix and overall company profile. We said earlier in my prepared remarks that our automotive market is likely to account for almost 45% of our total sales this quarter. This was unheard of whether it is during COVID or pre-COVID, our automotive market at the time was at best 10 plus percent of our total sales. Now, this high percentage certainly comes from two factors. One, automotive has been growing very fast, and the automotive market for display is likely to outgrow other markets in the coming years. So, that is very good news for us. Certainly that 45% high number is also a result of a very sluggish consumer market, which pushed down other products contributions. So, but, in any case, in the long-term, our automatic market contribution is likely to be much, much higher than previously, so that is, what I say, fundamental change. And our automotive market does enjoy not just higher but also more stable and more predictable gross margin compared to other markets. So, again being having a high, much higher exposure to the automotive market in the next few years, I think is…

Thank you so much, Jordan.

Thank you.

And our next question will be coming from Tiffany Yeh of Morgan Stanley. Your line is open Tiffany.

Thanks, management for taking my questions. I have three questions. My first question is relating to the pricing side. As management mentioned earlier in the prepared remark and in the Q&A section that the smartphone and tablets market are seeing some pricing erosion. And I'm just wondering, what's the current pricing environment for like non-auto Tcon and large display driver ICs like TV? Are we seeing severe pricing competition now in the market? This is my first question.

Okay. Quick answer, I think we've seen the worst and now the market is actually stabilizing. The worst has been at a time when everybody suffers from overstock. And as we are nearing, I would say nearing the end of the stocking process throughout the whole industry. I think pricing has now become a healthier pricing environment. Certainly, that is my general comment as specifically I think TV is certainly stabilizing, IC being notebook and monitor also stabilizing. The automotive market also is holding up even tablets, I think stabilizing quite nicely. I think, I mean, from our point of view, the weak spot for now remains to be smartphones. Where we mentioned in our prepared remarks that there are certain, there are still a small group of our peers which steer are going through an aggressive stocking price process. But hopefully towards the end of the year or the next year, that will also come to an end. But I think so, so I think, I say we have gone through the worst because the inventory position is healthier, but certainly, we are still suffering from low visibility throughout the whole industry. So, what is going to detect our margin profile for non-automotive markets? I think that's just for Himax but throughout the whole industry. The end market demand is still sluggish. So, the end customers are definitely going to demand aggressive prices from us. While our foundry partners, because of low utilization, they are not really enjoying good profitability either. Some of our foundry partners are actually suffering from some losses already. So, can we get more aggressive pricing from our foundries, or can we, to help us substantially lower our costs, continue the law costs to support our end customers, or can the end customers support a more healthy environment, because their market may have studies to turn around that is yet to be seen, we don't know yet. But this IC design company, our current strategy certainly is not to just for the sake of enlarging our revenue size to make wave stars while knowing the new wave stars may not be, maybe loss-making business or not an unprofitable business. Our strategy is not to do that and not to compete too aggressively on those markets where some of our peers are still going through this stocking process.

My second question is, I want to ask about the foundries notes side. Are we seeing any specific foundry node that is still in shortage right now?

No. I don't think there is any, no. That is in shortage right now. I'm not too familiar with the very, very advanced Nodes. Like three millimeters, four millimeters, or five millimeters, but for the space we are aware of the answer is no.

Thank you. And my last question is regarding the technology side. Could you kindly provide us your view on the development of Gate on Array driver IC on Alto, in the next few years? Could you also share the current penetration rate of the GOA driver IC on Alto? Thank you.

Driver IC has been a very old thing that's been going around for, I don't know, maybe more than 10 years, and way over 10 years. So, it's not exactly the theme of the day, so to speak, because, customers who can adopt GOA technology have already done so. I'm talking about across different panels and different applications. So, get already big ages ago, I can't even recall when was upon a time a hit to guys by Himax because all of a sudden, our get-driver market was disappearing. But now get driver accounted for a very, very negligible portion of our business already because of the GOA technology which has been put in place for many years. So, it is not really a theme that we discuss about anymore.

Okay. Got it thank you for the color thank you for taking my question.

Thank you, Tiffany.

And I'm showing no further questions. I would like to hand the call over to Jordan for closing remarks.

As a final note, Eric Lee, our Chief IR, and PR Officer, will maintain investor marketing 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 concludes today's conference. Thank you for your participation. You may now disconnect.