Hello, ladies and gentlemen. Welcome to the Himax Technologies Incorporated First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. [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. Mark?

Welcome everyone to Himax’s first quarter 2021 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 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 the formal remarks, I would 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, the effect of the COVID-19 pandemic on the company’s business, general business and economic conditions and the state of the semiconductor industry, market acceptance and competitiveness of the driver and non-driver products developed by the company, demand for end-use application products, reliance on a small and group of principal customers, the uncertainty of continued success and technological innovations, our ability to develop and protect our intellectual property, pricing pressures, including declines in average selling prices, changes in customer order patterns, changes in estimated full year effective tax rate, shortage in supply of key components, changes in environmental laws and regulations, changes in export license regulated by export administration regulations, EAR, exchange rate fluctuations, regulatory approvals for further investments in our subsidiaries, our ability to collect accounts receivables and manage inventory 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 as maybe amended. Except for the company’s full year of 2020 financials, which were provided in the company’s 20-F and filed with the SEC on March 31, 2021, 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, Mark 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 first quarter 2021 followed by the second quarter 2021 outlook. Jordan will then give an update on the status of our business, after which we will take questions. We will review all financials on both IFRS and the non-IFRS basis. The non-IFRS financials exclude share-based compensation and acquisition-related charges. We have pre-announced the preliminary key financial results for the first quarter 2021 on April 7, as revenue, gross margin and EPS all exceeded the guidance issued on February 4, 2021. Today, our reported results for the revenue, gross margin and the EPS are all in line with pre-announced results. Revenue, gross margin and the EPS all reached all-time highs in the first quarter of 2021. For the first quarter, we recorded net revenue of $309 million, an increase of 12.1% sequentially and an increase of 67.4% compared to the same period last year. The 12.1% sequential increase of revenue exceeded our guidance of an increase of around 5% to 10% quarter-over-quarter with strong demand across all our major business segments. Gross margin was 40.2%, exceeding guidance of 37% to 38% and significantly improved from 31.2% of the fourth quarter 2020. IFRS profit per diluted ADS was $0.383, exceeding our guidance of $0.30 to $0.34. Strong sales and improved gross margin contributed to the better than expected earnings results. Non-IFRS profit per diluted ADS was $0.384, exceeding our guidance of $0.301 and $0.341. Revenue from large display drivers was $69.9 million, up 8.8% sequentially and up 13.9% year-over-year. Notebook revenue increased more than…

Thank you, Eric. We are still seeing a serious supply demand imbalance, where demand far outpaces supply despite foundries running at more than 100% capacity. Accompanying the rapid growth of 5G and high-performance computing, there is a noticeable increase in demand for semiconductor for advanced processes. The trend towards an ever more connected digital world also drives higher needs for mature nodes, notably demands from display driver IC, power management IC, CMOS image sensor, automotive industry and various AIoT devices that are already all around us and still increasing rapidly in number. Adding these all up, what we have is a structural shift in demand and supply dynamics, especially for the mature nodes, which have lacked meaningful capacity expansion for many years. As I mentioned on our last earnings call, we have managed to secure more capacity for this year compared to last year, with accessible capacity expected to grow quarter-by-quarter during 2021. Looking further ahead, we are taking measures to work with our strategic foundry partners to further enlarge our long-term capacity pool. We will give more details as they come about. Separately, taking advantage of the current favorable environment, we are also making efforts to reposition ourselves towards higher end and high value-added products by working more directly and closely with select leading end customers. We have made tremendous progress across various industries that we serve. For large display areas, we are pleased with the results so far in switching our focus more towards high-resolution TV, high-performance monitor and low power notebook. For smartphone, wearable and tablet, we are gearing up for the AMOLED driver IC development in partnership with strategic customers and foundry providers. For automotive market where we are already the leader in display driver IC, we are deepening our working relationships with Tier 1 players…

[Operator Instructions] And our first question comes from the line of Tristan Gerra from Baird. Your line is open.

Hi. Thanks for letting me ask a question. Could you quantify the price increases that you have been able to implement so far maybe on a year-over-year basis? And you expect to raise pricing further or is your – or do you think you are set basically with earlier year price changes?

It’s a simple question. And yes, if I have to answer it like with good confidence, then I think it’s a tricky question because across different applications, the price increase, especially you are asking about year-over-year actually varies by a lot. So I am afraid, I probably have to revert back to you after this about this question. But on your second part of the question of whether we think there will be further price increases from here, I think the answer is most likely yes. The – on the supply side, the foundry and even the back end, I think our costs still continue to on the – continue to be on its way up. So, I think we certainly do have to transfer the cost to our customers. And I think the reception for such proposed price increases from our customer is – has been okay in a sense that customers right now, actually, they are hoping for more delivery. And as long as we can make the delivery, price can always be discussed. So I think at least for the foreseeable future, we have good confidence that we will be – we should be able to transfer our costs into the customers. And the fact is that costs, I think for Q3, it still – will still be rising from somewhat from Q2.

Great. That’s very useful. And then the microdisplay design win that you have mentioned, are you expanding your customer base from the traction you had back from a few years ago or is that a renewed program at an existing customer?

No. It’s more of a new customer. It’s the world’s leading customer in this area, and it’s a very – like it’s pure industrial and business application. And it’s – we talked about in our prepared remarks is kind of designed for a very rugged robust kind of device to be used in a rush – in a harsh environment. So, it’s a new program. We are pleased that our technologies, they have niche very well, and this will be a pretty sizable volume of this kind in this market, I mean, head-mounted device.

Great. Thank you very much.

Thank you, Tristan.

And our next question comes from the line of Jerry Su of Credit Suisse. Your line is open.

Thank you for taking my question. I think my first question is regarding the guidance for the second quarter. I think you guided a large size driver IC to grow 20% and then overall smartphone is growing at about low-teens sequentially. So, can you quantify how much is coming from unit shipment growth and how should we think about your capacity in the second half of the year and also 2022?

I will be a little bit reluctant to give you a simple and straight answer because we discussed earlier, we are limited by capacity. So, we have to allocate our products into areas that we think are most needed by the customer for head-mounted supply and also represent a favorable product mix for us. So, we are actually shipping more towards higher end, higher price customers. With some of those customers are very receptive to higher prices. So, I think to give you exact quantity – percentage increase versus revenue percentage increase, I think it could be misleading in the sense that actually, the product mix is different, and we are more towards higher end products and to hear the customers’ demands are most needed, and therefore, we can, in some cases, charge higher for those customers. So, we are only now prepared to disclose revenue increase rather than quantity because that could be rather misleading – quantity could be rather misleading.

Okay. And then how about your planning for the capacity in the second half and also next year?

Capacity increase for second half or even into next year will only be marginal because, guess what, there is simply no major addition of capacity around in the industry. So, we are happy that we will be able to keep out the capacity already available to us. And also, there will be some marginal increases here and there from even different foundry suppliers. But overall, I would say it will only be marginal increase until we see, like, more structural addition of foundry capacity from cases where actually foundry partners are building new fabs. And in fact, there will be such additional foundry capacity, meaning building construction of new fabs. But if you take that into our overall already available foundry capacity pool, it will only still be kind of a marginal increase only.

Okay, got it. And then next question is regarding the end demand environment. Can you give us some – a sense on how do you see end demand for IT, monitor, notebook, TV? And also, are you seeing any impact coming from a smartphone, tablet given the rising issue of the pandemic inside emerging markets like India or other regions? Thank you.

Actually, I will start with automotive, which I believe you forgot to mention, not that you intend to ignore it. I think COVID certainly changed the dynamics altogether. And how COVID is going to end, I mean, it’s really nobody knows, right? But we all know COVID certainly has triggered the surge in demand, and therefore, embedded the current imbalance of supply and demand that the industry is suffering from. So when COVID, one way or the other, kind of end, certainly, we believe there will be some implication for the IT, monitor, notebook, etcetera, right, even cellphone and tablet. Now having said that, I think we also have to recognize the fact that after this long period of staying at home, people are kind of getting more used to working at home and being educated at home, right? So when COVID is over, it’s not going to be like people will just forget about their demand by staying at home. I think this will continue. But how this is going to change and how this is going to evolve, I think, certainly, we don’t know. We don’t have a very good answer. We just have to watch very closely. But our customers are telling us that this COVID situation and by staying at home for so long, people are getting used to it, and that does drive the behavior. And some behavior – change of behavior may be here to stay for long or even for good. For example, monitors, people used to demand only like, people used to prefer notebook rather the monitor, but now they have to like work or have participate in conference for so long or being educated, right? So monitor becomes a very important tool. And people not only demand for higher-quality monitor. They…

Okay. Thank you. Thank you, Jordan.

Thank you, Jerry.

And our next question comes from the line of Donnie Teng of Nomura Securities. Your line is open.

Thank you, Jordan and management for taking my questions. Congrats on the good results. The first question is also regarding to capacity, so I remember maybe last month, I discussed with management about the capacity outlook into second half. And the answer previously I had is like the second half capacity is getting even tighter. So there could be some – most of your shortage. But today’s prepared remarks said that Himax has secured more capacity for this year and will grow quarter-by-quarter during 2021. So just wondering, if you have secured some more foundry capacity, in the past month or is there anything changed in terms of our foundry capacity plan? And also another frequently asked question is that, as you know, foundry, they are also raising their wafer price for different kinds of ICs. I think driver ICs price has been raised a lot. So theoretically speaking, foundries driver IC wafer price has been raised a lot as well. But it seems like some foundries still diversify away from driver IC to other products such as like maybe power or memory products. So just wondering, in terms of foundry’s cost structure, why drive IC has been always the one who cannot get enough capacity? This is the first question.

Okay. So shall I start with your first question, i.e. your understanding from management last month – about a month ago about the overall – the industry’s second half outlook for tighter capacity versus our remarks about our ability to enlarge our capacity.

Yes, yes. Because previously, it sounds like – yes, please.

Okay, okay. Thank you. I think – my guess is there could be understanding. Actually, if you look at our last quarter’s earnings call, in our prepared remarks, we actually have already announced that we feel confident that our accessible capacity over this year will increase quarter-over-quarter, and we are sticking to that view. So we are actually repeating that in this quarter’s prepared remarks. I guess the management’s reference for a tighter capacity situation for the second half, I think, I guess, that probably is about the situation of the industry overall. I think across different segments for foundry, talking about large panel and, certainly, smartphone and automotive, all pretty serious. Actually, we are seeing our capacity shortage all across different – all our major applications, and in some cases, even packaging, especially for logic devices, such as our Tcon. So I think we are staying with our view that this year, our prediction is accessible foundry capacity to increase quarter-over-quarter, and there was no surprise taking place over last month of something. We have always feel we are prepared for that, and that has been our view since last quarter. And your second question about foundry’s capacity tightness, resulting price hikes, and yet they are still diversifying away from driver IC and how it started, what is the implication. I think, unfortunately, that is probably true. And if you ask me, I would say that is because – with driver ICs, we are all using what they call mature nodes, right? And mature nodes over the years have lacked enough application to fill up their demand. And driver IC happens to be an application, which brings very big volume and also very predictable and steady volume to foundry for them to rely upon as a very solid filter…

Yes. Thank you, Jordan. And then the last one is when entering into the second half based on current visibility, wondering if you could just rank the supply tightenings by different kind of driver ICs as well as different kind of technology nodes like to 12-inch or 8-inch per your perspective? Thank you.

Good question. I think 8-inch in the long-term will be more severe than 12-inch. I’m not sure – well, firstly, I have to admit, there is got to be some overbooking from our customers, right? However, I mean – and it’s very difficult for one to gauge how much is there exactly for the so-called overbooking portion. All we know is that even if we take all of that overbooking away, their "actual demand," we are still far from being able to meet them all, right? So – and it is, therefore, the customer knows even if they give us just the actual demand, we cannot bid the demand, and therefore, that kind of encourage them to give us more forecast. So when we talk about the degree of shortage, we have to be slightly careful because in different sectors, people do behave slightly different, and overbooking here may play a part. But I think whether it’s the second half or longer term, I think 8-inch will be more serious than 12-inch because, I mean, who is really building a new 8-inch tools? It’s very difficult to even get new tools, and it’s equally difficult to get the secondhand tools. And people have little incentive to build new 8-inch tools, right? So I think there is a structural fundamental issue here. And for that reason, I think automotive, which for traditional DDIC is entirely 8-inch, not just Himax, but across the whole industry, right? So I think the situation is pretty severe over there. And that is why we are encouraging our customers, including end customers, to accelerate and accelerate the adoption and mass production of TDDI because, guess what, for TDDI, we are switching to mature nodes of 12-inch. And we are going to replace or occupy some of…

Thank you, Jordan. Just one follow-up…

And our next question comes from the line of John Lopez. Your line is open.

Hi. Good morning. Can you hear me?

Yes. Yes, John.

Very good. Great, thanks so much. I really appreciate it. My first question is, I guess, I want to come back to the calendar Q2 guidance and perhaps ask you this way, excuse me, across the board, most – not all, but most semiconductor companies are guiding kind of flattish. And those companies have pretty reasonable exposure to market like TVs and PCs and automotive. You guys are guiding your display driver IC sales – if we take the other category out, you’re guiding your DDIC sales up about 15% roughly, give or take, quarter-to-quarter. Is that mostly price? I know you don’t want to get into specifics, and it sounds like there is some competition, but is it mostly price or are you also growing units at a time when it doesn’t appear like others are?

I think, Jonathan, yes, I – you’re right, I don’t want to get into specifics. But to give you a sense of – I mean single mathematics, right? If you look at our gross margin, right, we are guiding for increase from 40% to 44% – 46%, 47%, right? There is 6, 7 percentage points increase. And yet for – our revenue is 15% to 20%. And the cost increase, I can assure you, is not really that much, meaning the growth is still primarily driven by quantity rather than price. But yes, definitely, there is an element of price. But if you – I mean, if it’s all about price, then you would expect our margin will grow accordingly, right?

Got it. Okay. That helps. And actually, you’re hitting on the second topic I wanted to try and get out a little bit, which is if we look at the last couple of quarters, let’s say, from the middle of last year until right now, you guys have talked and others have talked about this very acute tightness and the ability or the requirement for foundry prices to go up. So over these last couple of quarters, the foundries have increased their gross margins. And by foundries, I mean, 200-millimeter heavy foundries by maybe 5, 6 percentage points. Your gross margin is up by 2,000 basis points. So what – how do we think about the difference between those two? In other words, why is your gross margin increasing so much faster than, say, the rate of change of the supplier?

I really can’t talk on behalf of my suppliers, and I think that is just the reality. And certainly, I mean, there is – from taking the goods from foundry to our output, right, there is a time difference. That probably partially explained it, but I don’t know. Honestly, I don’t know, but that is just a fact. I think we – I think certainly, panel industry is also enjoying good margin expansion and profit expansion. And they are in desperate need for display driver IC, which is really their major, major bottleneck for them to produce more panels, right? And if you look at the display driver IC, now withstanding the recent price hikes, driver IC still represents a relatively small portion of their material. Let alone, if you take into account their depreciation costs and utilities and overhead, right, that is a lot, meaning for a relatively small portion of their cost, if they don’t get their IC support, they can’t make the shipment. So meaning they are probably more eager than a lot of other industries because their overhead being so heavy, right? And the market is still pretty healthy to “bid up" the price – driver IC price. And yes – so I think there is a difference – fundamental difference in the sense that foundries – not foundries, sorry, panel makers, when they make the new fab, these days, you’re talking about, I don’t know, close to $10 billion, right? So they are not going to wait and sit around empty – idle with their $10 billion investment because they are not willing to pay 20% or 10% more for driver IC. I think that is probably a good explanation.

Sure. No, that makes sense. And sorry, just one last one, if I could. I want to talk about automotive for a second, and maybe I want to frame it this way. If we forget last year, if we forget COVID 2020 and go back to 2019, at that point, your automotive – if our numbers are right, your automotive revenue was around $115 million, give or take, and actually had declined a bit. And my recollection at that time was there was some discussion about maturity, sort of maturity of the automotive industry and maybe some penetration thresholds. So now if we kind of fast forward to this year, it sounds like you are going to, I don’t know, maybe not double, but company close to doubling. So you’re going to be about double versus what you were in 2019. Can you just help us understand the factors there? Is it all sort of a resurgence of demand or what are maybe the other variables that maybe bridges from 2019 to today?

I think it’s primarily because in – especially the first half of 2019, the COVID situation really drove the auto industry way down, and they are actually laying off their workers and shutting down their factories and suspended their purchase orders for semiconductor parts. And then towards the end of last year they kind of all of a sudden wake up and they – and ever since, they have been playing catch up, right? So on a year-over-year basis, you are talking about a particularly bad year last year, which was actually unusual. So if you extend the time frame a little bit longer to cover the few years earlier than last year, then you’ll see our display driver business for automotive have been growing very, very steadily and nicely almost quarter after quarter. And that is simply because in everybody’s cars, the new models have more panels and larger panels and high resolution panels than older models and that’s just a simple effect. It’s a very, very long growing trend. And I will see last year, especially the last three quarters of – the first three quarters of last year as an exception, driven by COVID. Now from here and going forward, as I mentioned, right, with the EV really coming into mainstream, when your passenger room becomes larger and people demand for better quality display, a larger display, even more displays, I think in terms of volume and complexity of display, meaning display demanding higher-end features, I think this is a very, very long-term growth opportunity for us. So – but – so this year, I think two factors. This is kind of a turning point, right. One is the COVID, and now it’s recovery and catching up in terms of volume; and two, the adoption of EV. And therefore, more and higher – more advanced panels and more panels. I think they kind of hit at the same point, start – pretty much starting from this year, being the turning point. So that is why we are very excited about automotive, and that is why we actually – we prepared pretty early, as I mentioned earlier, before even COVID where we didn’t know COVID is going to have such a big impact for the automotive industry, but we will gear up pretty aggressively in terms of getting ourselves ready for more capacity.

Understood. Thank you very much.

Thank you, Jonathan.

And at this time, I would like to turn it back to our President and CEO and Director, Mr. Jordan Wu, for the closing remarks.

As a final note, Eric Li, our Chief IR/PR Officer, will maintain investor 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 in today’s conference. This concludes the program. You may now disconnect.