Hello, ladies and gentlemen, welcome to the Himax Technologies, Incorporated Second Quarter 2021 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 is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group.

Welcome everyone to Himax’s Second 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 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 financial results 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. Factors that could cause actual events or results to differ materially from those 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 nondriver products developed by the Company; demand for end-use applications products; reliance on a small group of principal customers; the uncertainty of continued success in 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 receivable 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" in its Form 20-F for the year ended December 31, 2020 filed with the SEC, as may be 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 will now 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 of the second quarter 2021, followed by the third quarter 2021 outlook. Jordan will then give an update on the status of our business, after which we will take questions. Our second quarter revenues and gross margin were both at the upper range of the guidance issued on May 6, 2021 and EPS exceeded the guidance. Revenues, gross margin and EPS, again, all reached all-time highs in the second quarter of 2021. For the second quarter, we recorded net revenues of $365.3 million, an increase of 18.2% sequentially and an increase of 95.3% compared to the same period last year. The sequential increase was at the upper range of the guidance of an increase of around 15% to 20% quarter-over-quarter. Gross margin was 47.5%, at the upper range of the guidance of 45.5% to 47.5% and a significant 7.3 percentage points improvement from the 40.2% of the first quarter 2021. Non-IFRS profit per diluted ADS was $0.624, exceeding our guidance of $0.54 to $0.602. IFRS profit per diluted ADS was $0.623, exceeding our guidance of $0.54 cents to $0. 60. Revenue from large display drivers was $85.4 million, up 22.2% sequentially and up 43.7% year-over-year with sales growing through all three major product areas, namely TV, monitor and notebook. Both monitor and notebook IC revenues delivered decent sequential increases thanks to continuous home working and distance education demands. TV revenue was up an impressive double-digit quarter-over-quarter mainly due to strong shipments of high-end TV products, including those to a world-leading end customer, as we…

Thank you, Eric. The semiconductor industry continues to go through a severe foundry shortage, especially in the mature process nodes where we are mainly anchored. With foundries running at more than full capacity while demand shows no indication of abating, the longlasting unaddressed supply-demand imbalance remains. In view of the foundry shortage and anticipated growing demand for the foreseeable future, we have entered into strategic agreements with foundry partners to cover both our short-term and long-term needs. We are in the process of entering into further such agreements as we speak, with some of them involving new foundry partners, leaving nothing untried to expand our capacity pool. Likewise, across various product lines, we are entering into strategic agreements with customers who wish to secure their IC supplies. Some of them are indirect customers who don’t necessarily source ICs directly from us but still wish to enter into supply deals with us to ensure that their direct vendors, mostly panel makers in our case, will get their desired supply quantities from us. All such contractual arrangements will help boost our future growth prospects and improve earnings visibility. Notwithstanding all these efforts, demand continues to outpace supply and we believe the imbalance could last well into 2022. However, we are on track for more accessible capacity to grow our business quarter by quarter this year. Looking further ahead, we expect to also secure more capacity for 2022 as compared to this year. We will provide more details as they come available. With that, now let us start with an update on the large panel driver IC business. For the third quarter, large display driver IC revenue is projected to increase more than 30% sequentially with all the three major product lines set for further growth. In Q3, we expect both monitor and…

Thank you. [Operator Instructions] Your first question comes from the line of Donnie Teng with Nomura Security.

Thank you, Jordan, and management team for taking my question. I have two quick questions. The first one is the gross margin trend. So, I think, Jordan has mentioned multiple times that foundry capacity, particularly for driver IC may not be easily resolved maybe in the coming one to two years. But our gross margin in the third quarter has been already surpassed 50% level. So just wondering in the real business practice with a further increased gross margin in the future we'll have some negative impact to our customers. And we may think that the gross margin to be relatively stable from fourth quarter and beyond. So that's the first question. And the second one is that I remember in early days that we have some meaningful sales exposure to smartphone after – a smartphone aftermarket for maintenance, right. So I'm curious about whether landmark still enjoy very high gross margin at the current time point. And how would the situation in the coming one to two quarters as you can see that smartphone demand in the third quarter particularly like in China is still not quite strong. Thank you.

Thank you, Donnie. Your first question about gross margin trend that our guidance for Q3 has been over 50% and whether – I guess your question is whether it can continue to go up or at least sustain at this high level or – and whether such high level of gross margin would be negative to customers. I think certainly gross margin enhancement is always our number one priority, at least among the top priorities. So, we have to try everything we can to travel our gross margin higher. But having said that at the end of the gross margin cross machine can only be determined by the market i.e. the demand, supply situation. And I think needless to say the fact that our gross margin is so high, it's partially, very importantly attributable to the fact that the foundry capacity is very tight and is pretty much a service market. So that is not deniable. Having said that, I think, our customers arguably do to have the power affinity to or soft higher costs coming out of ROIC because, afterall ROIC still accounts for a pretty low portion of the total cost. Even if you look only at their material cost, ROIC is definitely not among the top items are not even close. So if you are a panel maker and you are sitting on a multiple facts issue on costing you billions of dollars to build. And ROIC, while the price is coming up, you still need to have ROIC, otherwise you simply cannot run your factory. And the last thing you want to see is to see your factory sitting idle. Depreciation charge is going to kill you. So I think whether ROIC’s upward price trend will jeopardize the panel industry for cost – additional cost burden…

Got it.

Thank you, Donnie.

Your next question comes from the line of Jerry Su of Credit Suisse.

Thanks for taking my question.

Hello, Jerry?

Jerry, please state your question. Your next question comes from the line of Jon Lopez of Vertical Group.

Hi, thanks very much. Can you hear me all right?

Yes, Jonathan.

Fantastic. Thank you for taking the questions. I’ve two if I could. The first one, I guess, is more of a clarification. Can you just comment or confirm for this year for 2021, are you receiving a higher allocation of wafers in aggregate from your foundry partners? Do you have more wafers this year than you did in 2020?

Yes, we did. We do.

Okay, great.

Yes.

Helpful. And I know it’s early, but as you’re having conversations for 2022, is your expectation the same? Do you expect to get more wafers in 2022 versus 2021?

Again, we do. Jonathan I have to put the disclaimer is not that easy answer. The answer is yes, we do, but not by a great deal. So marginally, I cannot comment on how much exactly percentage wise. The fact is that the industry overall there is simply no new major capacity expansion this year and next year or even second half 2023, right. So you will be a miracle if we claim that we are going to up our capacity by like a lot, right, whether it’s this year or next year. But we mentioned in our prepared remarks, but we made the early move early last year, specifically for automotive, especially ROIC which is rather broader separate from the rest of those ROICs in technology. So in early last year, when the COVID-19 was hitting the world and the global automotive demand is coming down to that. We actually took the opportunity and struck a pretty good deal for a long time we sell foundry partner [indiscernible]. Having said that, we are very happy, because we did get to secure pretty decent growth for this year and next year, but it turns out the amount was still far less than actually the demand, when the demand started to pick up towards the end of last year, and certainly very much into this year and we’ll see you next year. So while our capacity increases specifically for automotive, in a pretty service factory portion, but the demand is still far outpacing supply. And we expect to see capacity increase for large panel – enter into next year and to some extent this year as well. And this is important. This is very important, because it’s not easy, because based on our internal estimates, acquire the display driver IC demand…

I see. Okay. So, sorry if I could summarize, it sounds like you're comfortable that you'll have more large panel – access to large panel capacity in 2022. Sounds like you're a little less sure on smartphone and on tablet. And I guess my follow-up there is that seems a little counterintuitive to me, just given aren't most of your large panel products produced on 8-inch standard processes or an 8-inch wafers, where capacity is ostensibly maybe a little less available.

Yes, it is counterintuitive. Jonathan, you actually you’re right. Well, before that a small correction, we are – yes, we expect to do better in large panel also in small panels of automotive business.

Right, sorry.

Now yes, it's counterintuitive, I think in the case of automotive for example, it's purely 8-inch and we just move faster than anyone else, because we have discussions with all OEMs, Tier-1s, we understand, we could foresee there will be offers of demand where nobody seemed to be ready for it. So, we get agreements. We just come prepared, and for the last panel is a combination of 8-inch and 12-inch some of the capacity increase for next year, and in fact, this year as well, actually loss for the new building of capacity in China, which I 8-inch – 12-inch sorry, which are 12-inch. There will be certain 8-inch new capacities accessible to us, causing rough – policy partners that we didn't have a business relationship with on that.

I see.

So it’s a newly developed foundry partner. And yes, there are situations which are specific to us, but I think you are right, an 8-inch overall is much harder to spend compared to 12-inch.

Understood. I'm sorry. I have one other quick one. And you can make the answer relatively quick. I don't know how much you'll be able to say, but there's been some discussion recently of a large Korean customer potentially looking to outsource some of their own OLED DDIC needs. I'm wondering if that's something that you would think is possible and is something that you would potentially look to participate in? The early shift, I am afraid I still cannot elaborate much more than that, but that is definitely a possibility. And we are definitely interested, subject to terms and conditions and other stuff.

Terrific, understood. Thank you very much for the thoughts.

Thank you, Jonathan.

Your next question comes from the line of Jerry Su of Credit Suisse.

Sorry, thanks for taking my question. I think my line just got cut off earlier. So the first question is on the second quarter spectrum guidance. I think you mentioned that 30% of revenue growth. I'm just wondering what do you think, what is the close rate for the monitor and notebook? Because I think in the press release or prepared remark, you only mentioned double digit growth and then TV is 20% growth, so I just wanted to double check on this? And then the second question is related to the competitive landscape. I think in China there's a – I think the China Government and also there is lot of companies are just trying to bring up more, increase the domestic usage or supply of the driver IC. How do you think about the potential threat to Himax or to the same players in the next one to three years? Thank you.

Thank you, Jerry. I guess your first question is about the Q3 growth statistically for monitor and notebook, is that right?

Yes.

Very strong actually, sequentially, let me see both monitor and notebook are in the range of about 50% growth sequentially, a combination of peso capacity, accessibility and certainly some price hike.

Okay. Got it.

And both sectors, we are, again our resources are limited and we are constrained by foundry shortage. So we played, okay our products to tools – certain products that we choose, right? So in the case of monitor, we are very largely in favor of gaming monitoring we tend to be high-end, high refresh rates and high retention and so on. And in the case of notebook is primarily uncertain a low power models, and we're actually quite excited about the notebook market needed to say present surprise for everybody because of the COVID where I don't need to repeat that. And I think we have, in terms of discussions with customers and they seem to be still pretty upbeat about the demand for the next few years, regardless of the pandemic been – having been kind of cooled down in most of the world. And also because of the pandemic and the change in people lifestyle notebook now, people are demanding better features and larger screens and better cameras and faster refresh and so on and so forth. So we are for example, we are moving towards a more high-end full HD or even VTT 1.4, such high end features are being, some of them are being designed and some of them are still being discussed developed together with customers and end customers. Something that we are actually quite excited about. Your second question, I suppose, as well, overall competition, for I actually talk about, with the answering gentleman's questions that in China, they are, they also the new constructions of – affects, which actually we quite welcome. We actually one of their earliest customers and we have entered into supply agreements with them and for the current demand and for our future demands as well. And we pay…

Okay, got it.

Thank you, Jerry.

This concludes our Q&A session. I will now turn the call back over to Jordan.

It's 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.

Again, this concludes today's conference call. Thank you for participating. You may now disconnect.