Hello, ladies and gentlemen, welcome to the Himax Technologies, Incorporated Fourth Quarter and Full Year 2022 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 turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group. Please go ahead.

Thank you. Welcome everyone to the Himax fourth Quarter and full year 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 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, 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 will now 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 fourth quarter and full year 2022, followed by our first quarter 2023 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. We pre-announced preliminary key financial results for the fourth quarter 2022 on January 12, 2023, where revenues and EPS both exceeded guidance, while gross margin came in moderately below the guidance range issued on November 10, 2022. Today, our reported results for revenues, gross margin and EPS are all in line with the pre-announced results. Fourth quarter net revenues of $262.3 million increased 22.8% sequentially, substantially exceeding our guidance of an increase of around 4.0% to 8.0% sequentially despite the macro headwinds continuing to challenge our business. The increased sales momentum was attributed to our continuous efforts to deplete inventory, particularly in the smartphone and tablet TDDI segments. IFRS and non-IFRS gross margin both came in at 30.5%, a decrease from 36.0% and 36.3% respectively last quarter, and lower than the guidance range of 31.5% to 33.5%. Price erosion from offloading excess inventory was the predominant factor that adversely impacted our margin profile. Also contributing to margin contraction was higher cost of the inventory sourced primarily during 2021 and early 2022 when foundry and back-end pricings were higher due to capacity constraints. Yet, IFRS profit per diluted ADS was 24.1 cents, exceeding our guidance of 17.8 cents to 20.8 cents. Non-IFRS profit per diluted ADS was 27.3 cents, beating our guidance of 21.0…

Thank you, Eric. Historically, the first quarter has seasonally been the slowest of the year due to the Lunar New Year holidays. On the backdrop of sluggish global demand and a surge of Covid-19 cases in China despite their government lifting Covid restrictions, many Chinese factories extended their shutdown period through the Lunar New Year. This added uncertainty to an already stagnant business environment causing our customers to hesitate to place new orders, while cautiously managing their inventory levels and further clouding our business visibility. As uncertainty persists, our objective first and foremost is to strictly manage our inventory level, and we have been aggressive in doing so by sacrificing short term gross margin to offload excess stock. We also continue to curtail our wafer starts while striving to win more projects from customers specifically for the purpose of digesting our excess inventory. Our inventory position has much improved since its peak during the third quarter last year and we anticipate it will continue to decrease to near our historical average no later than the third quarter of 2023. With that said, our Q1 gross margin remains under pressure. As Eric mentioned earlier, the cost of our excess inventory is high from being sourced during tight capacity constraint in 2021 when foundry and backend prices were at peak levels. Another contributing factor to Q1 margin contraction stems from market price decline of certain unsold inventories which will necessitate write-downs. However, we believe this effect will gradually diminish throughout the year as the market has shown signs of recovery across many business areas. Notwithstanding the pressure from the destocking process, we continue to work diligently towards improving our gross margin as a primary objective. Despite the expected short-term margin compression, we remain confident in our gross margin prospects, backed particularly by…

Our first question comes from Jerry Su, Credit Suisse. Your line is now open.

My first question is that in your prepared remarks, you mentioned that the fourth quarter gross margin was impacted by some charges related to wafer foundry and also the backend for some unmet minimum loading. I want to know if this still impacting your first quarter and also the second quarter margin?

Thank you, Jerry. So shall I address the first question first, right?

Yes, please.

Okay. To give you a sort of, a more comprehensive story, such charges i.e. the charges related to our not fulfilling the LTA obligation, volume obligation whether be our foundry or backend partners and the resulting penalty incurred. Such charges in 2022, meaning last year, total about 1% of total sales of last year. Okay? And certainty it is very much backend loaded as you can imagine, because in the first half, in the first quarter of last year, there was actually still a shortage of supply, so there was no such issue, and it was starting mostly in the second half that we started to have to face such issues. The penalty, such penalty will still exist in Q1 this year, which will be a bit larger than that for Q4 last year. But we are not disclosing the detailed number here because they are not really the predominant factor leading to the slight contraction of our gross margin Q1 versus Q4. However, if you look ahead into the rest of the year, we believe when our inventory level becomes more normal and wafer start gradually normalizing, then there will certainly be less charges of this nature going forward for this year. Bear in mind we, I mean, certainly all these contracts are entered into when the industry was suffering from serious capacity shortage. And we believe quite a number of such contracts, while they may appear to be a bit problematic in some cases in the short-term, they remain important contracts for us going forward, or in the long-term. I would point out to our 28 nanometer LTA for smartphone OLED, and certainly equally important for our DDIC for automotive sector, which is a very strong supporting factor for success in the automotive market. So, and there are other LTAs primarily in the areas of smartphone and tablet TDDI, we are indeed facing demand issues. And with this project, again, when the industry recovers over time and also when our inventory level comes down to a more normal position, then there will be a lot less problematic. And in the meantime, we are certainly in discussion with our foundry partners, trying to achieve some flexibility in terms of execution of such contracts. For example, we may agree to extend the duration in exchange for a smaller penalty in the short-term, or we may exchange product line, by loading certain other products to them, more of certain other products to them in exchange for our shortage to meet our commitment for the LTA areas. So there are such negotiations and discussions going on, and we are in good progress so far. So I think while such penalty incurred throughout the year will depend largely on the market situation. But as we mentioned earlier, we believe the market will be recovered throughout the year, so we are not pessimistic about this going forward this year.

Okay, thank you. Second question is regarding the guidance outlook. For the first quarter revenue, I think you have guided large sized driver IC and also timing controller to decline sequentially. This seems to be a little bit different from your peers. I think they, I think they're guiding for up Q-o-Q. Can you give us some color on what you are seeing on the industry trend and why there is such a difference? And then on the automotive side, I think last year had a very strong growth, 50% year-over-year. How should we think about the growth for 2023? And then I also want to know what's your opportunity in miniLED also the microLED display for automotive, and how should we think about the midterm growth rate for this automotive business? Thank you.

Okay. There are a lot of questions. Let me see. To recap, your first question is about the large panel display and Tcon, okay, being different from peers. The second question is about automotive prospect for this year, basically, right? And third question is microLED and miniLED?

Yes, correct.

Okay. Can I address the second question first, automotive? I think it's probably the most important among the three questions, given our exposures to automotive market. We did suffer from a few quarters of sequential decline. Bear in mind, in Q1 last year we were sure suffering from shortage with our supply being short of the demand. And, but there's a sudden stop of demand, major disruption in China particularly, because there was a sudden lockdown across a big geographical area, especially, for example, in Sichuan, which is a local, a major center for automotive manufacturing. So a lot of our customers are stuck. They didn't know how to react to the overall lockdown. So while we shipped a lot of ICs to them with their solid demand in hand at that time, they were not able to produce them or ship their products because of lockdowns. So, inevitably the second quarter ICs we shipped to our customers became their inventory. And such inventory will then be digested throughout Q3, Q4 and even up to Q1 this year. Okay? So that explains big picture wise, why the automotive DDIC will suffer some decline sequentially over the last few quarters. However, our TDDI automotive, even during such period has demonstrated a very strong momentum, growing sequentially, certainly year-over-year strongly because it is a relatively new, and also it's in hot demand relatively speaking, because they are newer products, and which are typically designed for newer models, which are, many of which are EV models. And EV models in difficult times are encouraged by the government, incentivized by the government. So they are in better demand compared to traditional models. So, and therefore, our TDDI for a few factors I mentioned, still enjoyed very good momentum and growth even during this period…

Our next question comes from Jason Tsang with CLSA. Your line is now open.

My first question is, can you give us some details on your pricing trend in coming quarters? Do we plan to lower the, maybe wafer price or packaging price in coming quarters or in Q1? I mean, maybe for your non-LTA shipment? Thank you.

Whether is LTA or non-LTA, I think our foundry partners have made it rather public that they are not about to, in any meaningful way lower their listed price in this year. And I think the reason is quite simple. They are seeing high inventory levels across the board, with their customer, meaning IC design houses. So by lowering the price, they are unlikely to stimulate the demand. So why bothers? So whether it is LTA regulated price or non-LTA binding price, we are not anticipating the listed price from foundry to go down in any meaningful way this year. However, when it comes to good new orders, I think their doors are always open for specific deal by deal, case by case negotiations. Right? So that is first point on the supply side. On the demand side, there are, I would say, three points I want to mention. One, there are indeed overall price pressure upon us, because the economy, the overall economy, the macro factor is just very bearish and we have all seen our panel customers are losing money. Right? In a rather meaningful way. So I think they are under a lot of cost pressure as well. So such pressure will, to some extent, be transferred to us. And certainly, I mean, we were not agreed to all their price demands, and there will be a lot of negotiations, but there are some, indeed some price pressure. That is my first point. And my second point is, the products with excess inventory. I'm talking about mainly smartphone TDDI followed by tablet TDDI, primarily in these two areas where across the board we are seeing our peers are having certainly pretty meaningful excess inventory. So, and the demand is, the demand visibility is not positive either, right?…

And my second question is, during this down cycle, especially demand weakness, do we also see market competitions? I mean, maybe market share pressures for our large display or small display side?

I think the pressure comes primarily, on large display first, our strategy has been, I cannot say there's no such pressure coming from competition, but our strategy for TV has been to form a strong partnership directly with the leading end customer, with leading endbrand customer for their relatively high-end models. And certainly even with that, we are still subject to certain fluctuations, but I think the competition is a lot less compared to the mainstream TV models with the general panel maker customers or mainstream monitor or notebook models. For monitor and notebook, what's interesting to note is that certain leading end customers, especially the Americans are facing the struggle in between the U.S. and China are hedging the bet by asking their supply chain to be away from China and that certainly benefits us somehow. But certainly, we are also working very hard with our Chinese ecosystem suppliers. But although panel makers are still predominantly Chinese. But when it comes to the components, especially IC components, there is still such discussion. So I think certainly we will shift our focus more towards leading non-China end customers. Although we are all dealing with mainly Chinese panel makers, but leading non-China end customers and less on Chinese end customers. I'm talking about large panel, whether it's TV, notebook or monitor, I'm talking about large panel. So I think there appears to be this trend and actually, it's not coincidence, but we, even before the two governments struggle becomes apparent, before that, we have actually strategized ourselves as much by focusing, you know facing shortage, so we do make a choice, we need to bet on certain customers and in a way bet against certain other customers. And we have been strategizing our sales by forming partnerships with leading international end customers. So, such strategy kind of plays well when it comes to this new development in between China and the U.S.

And my last question is, I know that LTPS LCD now it's migrating -- is improving on the automotive applications. So do we, can we expect that this kind of migration can boost the adoption rate on the automotive TDDI?

Yes, indeed, as the resolution becomes higher and refresh rates becomes higher, touch panel, you know, fancier panel, I think the higher end fancier panels, there is a trend towards Low-Temp Poly panels as opposed to, I mean the traditional Amorphous silicon panels does enjoy cost advantage, but when it comes to higher end, higher resolution, higher refresh rate panels, Low-Temp poly does enjoy advantage and we are seeing many such projects together with our TDDI solutions going hand in hand, yes.

And so I have one follow up question, do we have penetration rate of automotive TDDI? That some kind of number?

For the overall industry, I don't have the number in hand, but I did mention earlier that for Himax alone, last year automotive TDDI accounted for about 17% of our total automotive sales. And certainly automotive TDDI in terms of ASPs are a bit higher than traditional DDIC, but in terms of revenue percentage not given the idea. However, bear in mind, our number is substantially higher than the industry average which we believe is well below 10%.

Below 10%. Okay.

Well below 10%, yes, so I would say our, such penetration number is probably kind of double the industry average and certainly we expect this number to steadily increase. It's not going to be as dramatic as how we saw in smartphone and tablet you know in the last few years. But I mentioned for Himax our sales, we expect the number to be up from around 17% last year to about 40% or above by 2025 or 2026. So that is certainly a major good news for us, yes.

Thank you, operator. So, as a final note, Eric Li, our Chief IR and 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.

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