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 Second 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 e-mail HIMX@mzgroup.us, access the press release on financial portals or download 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 would now like to turn the call over to Mr. Eric Li. Eric, 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 second quarter 2022, followed by our third quarter 2022 outlook. Jordan will then give an update on the status of our business, after which we will take questions. The second quarter presented a challenging business environment, yet we continue to diligently focus on navigating these obstacles while positioning ourselves for long-term sustainable growth. Accelerating interest rate hikes to combat rising inflation, ongoing rolling lockdowns in China and the Russia-Ukrainian war continued to plague business activity and reduce consumer confidence. The gloomy visibility of our end customers led to reduced and shorter forecasts along with more stringent inventory controls across the board from brands to panel houses. We revised our guidance on June 20, 2022, to better reflect these soft conditions. Our second quarter revenues, gross margin and EPS were all in line with the updated guidance range. Second quarter net revenues of $312.6 million decreased 24.3% sequentially but were within our updated guidance of a decline of 22% to 27%. Our gross margin came in at 43.6%, a decrease from 47% last quarter, but within our initial guidance of around 43% to 45%. Non-IFRS profit per diluted ADS was 43.9 cents, at upper range of the updated guidance of 40.0 to 45.0 cents. IFRS profit per diluted ADS was 40.4 cents, at high end of the updated guidance of 36.5 to 41.5 cents. Revenue from large display drivers was $68.6 million in Q2, a decrease of 38% sequentially. TV and notebook IC revenues were down double digit sequentially due to customers' inventory control on the backdrop of slowing end market sell-through and reduced business visibility. Monitor…

Thank you, Eric. Several macro level factors continue to present significant headwinds to our business while also clouding visibility as we enter the second half of the year. Decades-high inflation, rapidly rising interest rates in addition to the ongoing war and potential for more China city lockdowns have caused widespread disruption to demand. Faced with frozen demand, piled-up inventory and eroding panel prices, end brands are downsizing their panel procurement plans. Consequently, panel makers all initiated downward and extended fab utilization adjustments along with rigorous IC inventory cuts. The sudden halt in demand together with the length of our production lead time has led to elevated inventory level for Q3. While in the midst of this inventory offloading cycle, we are naturally cutting back on new orders with our suppliers. However, the contracts that we entered with foundries and back-end suppliers when the industry experienced unprecedented demand in 2021 may incur charges if the minimum purchase orders are not fulfilled. While the negotiation with suppliers are still ongoing as we seek ways to increase flexibility in executing the agreements, such supplier charges have already been factored in for our Q3 guidance and is the predominant factor for the Q3 gross margin contraction. While we are uncertain about when the current business environment could turnaround, we believe our inventory will peak in Q3 as we curtail our new wafer starts and our customers continue to restock after inventory digestion. On the revenue front, we believe the growth will be restored in Q4, boosted by healthy demand for automotive and tablet segments, where there is better visibility. Yet LDDIC sector is still set to remain sluggish for the remainder of the year. Against the backdrop of challenging market conditions, we expect our Q4 gross margin to be still under pressure because the…

[Operator Instructions] And our first question comes from Jerry Su from Credit Suisse. Your line is now open.

Jordan, thank you for taking my question. I want to ask you about, I think, regarding the LTA , wafer capacity. I think -- wafer has been turning less tight for most of the process node except for the OLED related. So what is your current structure of these contracts with the foundries? Are you able to renegotiate for new terms? Or you are pretty much forced to keep the obligation and then perhaps will pay some penalties to the foundry suppliers? That's the first question. And then the second question is more regarding your comments about fourth quarter for the revenue to rebound. I know you mentioned about automotive and tablet. But can you give us more color about what you think tablet business for the fourth quarter could see some recovery. Thank you.

Thank you, Jerry. Firstly on LTA. Our LTA's actually cover mostly foundry, but also to some degree backends as well. Some are expiring towards the end of the year, but that is a small portion compared to the total. I said in my prepared remarks that we are negotiating indeed, I mean everybody , people are getting better and better picture about the short-term prospect of the market, right? And I mean, there's no need for me to elaborate. So I think us and our partners together, we are working to, as I said in our prepared remarks, to hopefully increase the flexibility for execution of those contracts. So we are not saying we are going to cancel the agreement or we are going to walk away from the agreement. Firstly, I mean, certainly, as a company, we need to honor the agreement. And secondly, we feel if you look into a longer-term horizon, time horizon, these contracts will still be very important for our long-term growth. So I think on a mutually understanding of goodwill basis, we are working to hopefully increase the flexibility for our execution on these contracts. Having said that though I want to repeat because this is important. In our Q3 guidance, we have factored in the potential penalties incurred by this agreement where our new wafer starts would be less than the minimum required according to the agreements. So those have been factored in and in fact, those charges represent the predominant portion of our Q3 margin contraction. So in short, I guess renegotiating, but we will continue to honor those contracts. If everything goes as planned without any major surprises, I think hopefully, Q4 such charges incurred to us will be less than those of Q3. For the simple reason that our obligation…

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.