China Direct Industries Q2 2009 Earnings Transcript

China Direct Industries, Inc. (CDII)

Q2 2009 Earnings Call

August 14, 2009 04:30 PM ET

Executives

Richard Galterio - Vice President, Public and Investor Relations

Huaqin (Kim) Chen - Controller and Internal Auditor

James Wang, Ph.D. - Chief Executive Officer and Chairman

Analysts

Amit Dayal - Rodman & Renshaw

Presentation

Operator

Welcome to the Second Quarter 2009 Earnings Conference Call for China Direct Industries. For those of you who may be new to the company, China Direct Industries is placed on the NASDAQ global markets under the symbol, CDII. China Direct Industries is a US-based company with operations in China in two core business segments; Magnesium Production and distribution of Basic Materials. The Company also provides advisory services to China-based companies through a system competing in global economy.

Headquartered in Deerfield Beach, Florida, China Direct Industries operates home subsidiaries throughout China. China Direct Industries provides a direct link between the Western investors and companies in the People's Republic of China. For more information on the company, please visit its website, www.cdii.net.

Our call today is hosted by Kim Chen, Controller; and Richard Galterio, Vice President of Investor and the Public Relations. Additionally, Dr. James Wang, CEO and Chairman, will also be available during the Q&A session that will follow management's discussion of the second quarter ended June 30, 2009.

At this time, I would like to read first the Safe Harbor Statements under the Private Securities Litigations Reform Act of 1995. During this conference call, management may discuss financial projections, information or expectations about the company's products and markets or otherwise make statements about the future, which statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These risks and uncertainties are detailed in the company's filings with the Securities and Exchange Commission including its most recent Form 10-Q filed on August 14, 2009.

At this time, I would like to introduce Mr. Richard Galterio, Vice President of Investor and Public Relations of China Direct. Mr. Galterio, you may begin the call.

Richard Galterio

Thank you operator, and all of you who are joining us for our second quarter 2009 conference call. As we stated in our previous call, we expected the second quarter to remain very challenging as global demand for magnesium was severely weakened due to the worldwide economic slowdown and continued weakness in the aluminum and automobile industries.

While we experienced continued weakness across all of our subsidiaries, the greatest impact was to our largest segment, Magnesium Production and Distribution as the average price of magnesium in its stock market declined by 8% from the first quarter of 2009.

For the second quarter of 2009, China Direct Industries recorded revenue of 20.40 million. And while revenues decreased substantially compared to the 77.56 million recorded in the second quarter of 2008, it remained fairly consistent with the first quarter of 2009 which totaled 20.68 million.

It is important to highlight that during the second quarter of 2009, performance in our Magnesium segment was negatively impacted from the renegotiation of a supply contract with a major customer. We elected to make a price in second (ph) to preserve this long-term relationship contributing to the substantial negative gross margin of our China Magnesium subsidiary as we have made advanced purchases of raw material as finished products to fulfill this contract at significantly higher prices than the ultimate sell price.

This contributed to a net loss of an approximately 1.1 million in our Magnesium segment and a loss per share on a non-GAAP basis, attributable to China Direct Industries, of $2.1 million or $0.9 per diluted and basic share in the second quarter of 2009. We would like to emphasize that this supply contract has been completed and we believe we have no additional exposure to any additional conceptions for this or any other customers.

While market conditions remained uncertain -- or remain uncertain excuse me, we see some improvement across all of our segments in the second half of 2009. Magnesium prices have shown modest improvement in recent weeks and price quoting activity has picked up as well.

We believe that these factors would make substantial pick up in our Magnesium assets later in 2009 and build a momentum into 2010. We believe the cycle of magnesium thus far the supply levels have tightened dramatically leading to a recent increase in the pricing environment. We expect further improvement as demand recovered in the remainder of 2009 and into 2010.

We will also lead it to our strategy requiring and constructing operations in China in our two core business segments of magnesium production and distribution, as well distribution of basic materials in China.

While our overall performance in the first half of 2009 declined substantially compared to the same period of 2008, our $5 million offering in the second quarter 2009 has further strengthened our balance sheet. We believe the economy in China has begun to rebound and the global economy is stabilizing.

We believe there are substantial opportunities in magnesium and basic materials for our organization with the financial strength and ability to capitalize on the weak environment and the lack of resources available to some of our cash strapped competitors as we prepare for recovery. We intend to be vigilant in monitoring cost and aggressive in pursuing these sales opportunities that are in front of us.

I would now like to briefly highlight the several areas in the quarter. First, we ended the first six months of 2009 with 13.8 million in cash, up from 11.6 million in the first quarter of 2009 and similar to the 14 million at year-end of 2008. We continue to have negligible long-term debt and our current ratio remains strong at 2.9.

Second; we continue to have discussions with world-class large end customers regarding long-term magnesium supply contracts and have shipped test quantities to a wider customers for evaluation and are working to send a test shipment to a second customer in the third quarter. We are satisfied with our progress to securing a stable long-term magnesium distribution relationship.

And third; we continued to diversify our holdings and capitalize on synergies within our organization and with our client companies. We formed CDII trading (ph) in the second quarter of 2009, our fully-owned industrial commodities trading operation to work with our subsidiaries and other trading partners and will discuss this organization in more detail later in the call.

At June 30, we had working capital of 33.4 million and stockholders' equity of 56.3 million or the equivalent of $2.11 per diluted share. we believe our company has weathered one of the worst economic downturns in China and particularly in our business segments and have taken steps or steps necessary to remain in a strong position to withstand the remainder of this difficult situation.

More importantly we believe the time has come to position the company to recovery and take advantage of our financial position relative to industry competitors and build for the future. I will discuss all these efforts we have made in its regards after our next caller Kim Chen who discusses our results for the first six months of 2009 in greater detail.

And now let me turn it over to Kim.

Huaqin (Kim) Chen

Thank you, Richard. For the second quarter of 2009, China Direct Industries have consolidated revenue of about $20.4 million compared to $77.6 million for the second quarter of 2008. Gross profit for the second quarter of 2009 was $658,000 versus $15.5 million for the comparable 2008 period.

Total operating expenses were $2.4 million in the second quarter of 2009 compared with 2.6 million for the previous year's second quarter. For the second quarter, we recorded a net loss of $2.9 million, including $800,735 in non-cash charges related to cost-based capitalization (ph) as compared to net income of 7.5 million in the second quarter of 2008. And the non-cash fixing (ph) which excludes the loss for stock-based compensation, we recorded a loss per diluted share of $0.09 compared to earnings comparative share of $0.28 during the full period in 2008.

And adjusting this, this effect Richard (ph) previously mentioned, we recorded a net loss applicable to our for the second quarter of 2009 of about 2.9 million, resulting in the loss per share of $0.12 or 24 million shares.

This compares to a gain of $0.26 per share for the second quarter of 2008 of 25 million shares.

Looking at our Magnesium segment; for the second quarter 2009, revenue from our Magnesium subsidiaries was $2 million. This was an improvement from the income of $4 million in the first quarter 2009, but a substantial decline from the revenue of $55.7 million recorded in the second quarter of 2008.

Net income of this segment for the second quarter of 2009, after adjusting for our 51% interest for the loss of 1.1 million compared to the $3 million net income recorded in the second quarter of 2008

As Richard mentioned earlier, the main causing a concession for our contract, this resulted in a negative gross margin of some large customer in the quarter. The decrease was also a result of continued weakness in demand and the prices for magnesium, resulting in a (inaudible) continuing to alter several facilities to reduce cost.

Next I will discuss our Consulting segment's results. Revenue from our Consulting segment was $322,000 for the second quarter 2009 as compared to $6.7 million in 2008. We recorded a net loss for the second quarter of net loss, including $600,000 in stock-based compensation.

Our Consulting segment recorded net income of 4.6 million in the second quarter of 2008. Revenue in Consulting varies, depending upon the level of period, transaction event of addition of new trends.

Next, our Basic Materials segment's revenue totaled $10 million in the second half of 2009 as compared to 50 million in the second quarter of 2008, thus periodically coming from long-term accruals continue its fee revenue in the second quarter.

Business at long-term accruals affected by the weakening economy as compared to 2008, but remains operationally profitable through that increase in profit margins from 3.1% to 5.6%.

Our Basic Material segment recorded net income of $56,000 for the second quarter of 2009. Adjusted for our majority interest, there was a slight improvement over net income of $68,000 recorded in the second quarter 2008.

At this moment, continues to delay the commencement of operations of our zinc mining subsidiary due to the current pricing of development for zinc. We continue to monitor the markets to becoming once we commence these operations. We continue to experience the impacts of the price quota in our core business segment in the second quarter of 2009 which led to be impacted our operation.

We generated revenue of approximately $20.4 million as both segments experienced sharp domestic and the global demand. The orange (ph) magnesium spot price in the second quarter of 2009 was $2200 at the time of our additional impetus for the first quarter of 2009, coming off the order several facilities.

This experienced our internal cost in the second quarter by basically to reflect certain operations. We continued towards implementing some financial control to reduce the deficiency and are reemploying to work diligently through these costs where necessary and will reduce inventory levels to keep our balance sheet strong and position our company to our future economic recovery.

In our implementing operating financial supplement systems (inaudible) and the offices our subsidiaries through similar the process and improved OpEx to financial effort on a permanent level.

We remain committed to enabling new accordance and of our financial information of all our subsidiaries by the end of 2009, which allows us to quickly respond to cumulative operating provisions. We are confident that this will improve our capability in 2009 and beyond.

At this time, I'll turn the call back over to Richard for some closing comments.

Richard Galterio

Thank you, Kim. Our results for the second quarter and first six months reflect the extremely challenging environment in our core operating segments in China that we experienced so far in 2009. Our customers in various industries including automobile manufacturing, aluminum alloying and steel production, both in China and throughout the world, has faced historic slowdowns. But our visibility has improved and the worst we believe is largely behind us. The near term improvement is expected to be gradual and continue to grow in momentum for the remainder of 2009 and into 2010.

As we mentioned earlier, we have seen the market pick up in quoting activity along with a rise in magnesium and stock prices in recent weeks. Additionally, steel production has picked up in China which should further bolster the demand environment for magnesium. We have worked up our exposure to the renegotiated supplied contracts and anticipate our raw material cost to rewind to our revenue.

As we stated previously, the current environment in magnesium has brought newer competitors into a sustainable position to deliver high cost structure and use of inefficient cost new production and most expansion projects by competitors.

This should build a constraint by magnesium supplies as world markets begin to recover. As we believe the recovery in our Basic segment is now taking shape, we have begun to shift our management efforts in preservation mode to look into opportunity across the Group and position ourselves for a return to growth.

Towards the end I will highlight some key areas. First, as we discussed earlier, the North (ph) CDII Trading, our industrial commodities trading organization, CDII Trading will fix our partners and subsidiaries and buying and selling various industrial materials. CDI Trading will also develop additional relationships of actively evolve and set of potential procurement process. We recorded the growth of this organization in the coming quarter and look forward to provide you with more information as it arrives.

Second, we are in the model in trying to acquire heavy truck parts manufacturer for our basic materials segment. Provided with (inaudible) and the transaction is subject to completion of systems (ph), our Board of Directors approval and the execution of definitive documents. If completed, we believe this transaction will have a positive impact on our performance in 2010.

And third; we acquired the International Magnesium Group as additive, which we plan to use to create a well identity for our magnesium holders. Through IMG, we will align our magnesium subsidiaries sales and marketing efforts. We are currently evaluating strategic options that may accrue but are not limited to further consolidation of our current holdings, opportunistic acquisitions in the current environment, as potential divesture asset that they do not quit into our strategic business for magnesium future.

We look forward to position our IMG operation as the premier magnesium producer and distributor in China as we move into 2010.

In closing, we would like to emphasize that our company is well capitalized with sufficient resources for our operations and we continue to pick the cost initiative to prevent this in this difficult environment. We are excited about the opportunities mentioned above and will continue to make the necessary adjustments as business conditions change or begin to improve. We remain confident that China Direct Industries will return to growth as move into 2010 with an eye towards internal and external expansion within our business segments.

Our entire team is dedicated to reach these goals.

Allow me to thank everyone again for joining us and now operator, if you can please begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Amit Dayal with Rodman & Renshaw.

Amit Dayal - Rodman & Renshaw

Thank you. Good afternoon, guys. Just Richard, could you just give me the transaction you mentioned in the closing remarks. I missed that, I am sorry -- what you are about to complete, I guess?

Richard Galterio

Were you talking about IMG?

Amit Dayal - Rodman & Renshaw

No, the one before the second...

Richard Galterio

Oh! You have me trespass (ph). James, just give a little color on that company?

James Wang, Ph.D.

Yes. This company is also actually (inaudible) for heavy trucks global supply to major heavy truck manufacturers in China. This is about 15 -- or $9 million in first half of 2009, about $1 million. So we are looking to well located in sales business. (inaudible)

Amit Dayal - Rodman & Renshaw

Okay.

James Wang, Ph.D.

The truck manufacturing business in China has been growing rather dramatically and in addition to that for heavy truck. So we think that it's a good industry for us to be in and as parts also are going to be made of various metals and hopefully, eventually more truck parts will be made out of magnesium parts. We think it's a very synergistic acquisition for us if we do indeed make it and we could probably improve our this profit margin and also supply different materials from our subsidiaries and partners into that business as well.

Amit Dayal - Rodman & Renshaw

So basically, current costs being...

James Wang, Ph.D.

No actually you see now, there are the trains, based in Shanghai.

Amit Dayal - Rodman & Renshaw

Thank you. Got it. So obviously, you look at adding more color of your new products in this.

James Wang, Ph.D.

Yeah.

Amit Dayal - Rodman & Renshaw

Okay, good. In your trading business, Richard, you and have the -- because it's a little bit previously as well, are you doing any quoting effort in capital ... providing some sort of a brokerage service to customer transactions.

Richard Galterio

Sure. Initially we thought a lot. As in ages in a number of transactions. We have a lot of irons in the flyer. We are very hopeful as to what might arrive out of this operation. I think we will eventually look for it if we build and we see the opportunity present itself to grow that business towards a level where we start taking down some of the transactions higher up, we certainly will look to view that. I think right now, we'd say for the foreseeable future, certainly and mostly in 2009, I would expect our truck transactions and then we will be more...

Amit Dayal - Rodman & Renshaw

Perfect. Have you in the past wanted, let me call into this, have you engaged any of the transactions so far or just trying to facilitate something?

Richard Galterio

I said at this particular certain time, when we will disclose what comes as it comes situation how quickly that we have a number of things that we're very excited about and we look forward to updating our progress in the very near future.

Amit Dayal - Rodman & Renshaw

And just a last question on this aspect; are we doing this like across the spectrum or we got a particular vertical we're focused on and that has driven business?

Richard Galterio

If you think about it, we have a very good launching pad. We have a number of different subsidiaries as well as a number of different consulting clients that operate in the industrial arena. So we had a supply side, the supply side for us to start with. We have people on board that do have relationships in a number of different areas and we are certainly does not think it scours on approach, but we certainly will be opportunistic on other things that become available as part of our organization.

Another thing we (inaudible) our heart, so to speak

Amit Dayal - Rodman & Renshaw

Right, I understand. In terms of facility related, how many of these facilities are available right now?

James Wang, Ph.D.

Right now we have a facility in Southeast Florida (ph) but others are on -- also China the Mainland. The operational turning out that we had half of the capacity in production of 500,000 a month. Right now we have assets something about range decline as well about 500 a month. So average I would say 400 (ph) capacity in the production.

Richard Galterio

We would expect that number to increase over the course of the next several quarters and hopefully become a part where the trajectory of business lines or we have the ability to walk out which started as we said earlier so we start our preparation magnesium stock prices have been up next year 8% in the last six weeks. The supply seems to be tightening up. So we have made preparations to re-launch. That re-launch schedule will be depending upon how our sales of continue to improve over the coming months.

Amit Dayal - Rodman & Renshaw

Do you have any report on what we see in the entry levels that's being held in the market in terms of the customers entities using the region for raw materials, I mean any insight on what being entry levels may be in the market, if not I can...

James Wang, Ph.D.

There's lots of different views on that depending upon the perspective. We are dealing with the size and from our perspective, are tightening up. And you said the environment there we actually have enough businesses that are coming up and making sales, obviously we do believe the environment started to pick and that's something that hasn't been around for a long time.

So, I think the price of, I think everybody is very worked up. All of our inventory and a lot of suppliers has come offline as a quite a few. We don't have the information and there is lot of publications out there. A lot of suppliers come offline and some that supply is offline and so, we see dramatic changes. We start to we think some under capitalized comparatives and some areas out there where spread over.

Amit Dayal - Rodman & Renshaw

Great. And just one last question, so you have been undergoing some negotiations in their U.S. entities and the last quarter take potential contains in aluminum space I guess over those. Are those negotiations still on, it's a comparative environment?

Richard Galterio

We expected as we said before, that there should be some hiccups along the line and supply may cross that. We had some difficulties with the Chinese intermediaries which we used for the transaction and made sure we had to renew our application in order to renew that supplier, we're working through reacquire or go through the softness that we need to do to reacquire it in the near future and we're talking as predicting that.

So we said in the last quarter, it is a process that's going to take time or so looking to move in that direction and are still very hopeful that we're going to eventually make it through under that there, but we still don't have any tangible timeframe for which we're going to be able to make it through that process and MD&A that came to us

Amit Dayal - Rodman & Renshaw

All right. Thank you, that's all I had.

Operator

(Operator Instructions). Your next question comes from Dave Rosenberg with Jefferies Securities. (ph)

Unidentified Analyst

Richard Jim, how are you?

Richard Galterio

Good David. How are you?

Unidentified Analyst

I am doing fine. I -- you have been very good to all of about, what happened in this quarter in the first half of the year, I want to look towards the second half and 2010. If you could cut cost and you say you implied, and you are saying that there are some questions regarding the new trading division. Based on what you said, basically you are saying that there is going to be limited cost there in those transactions which means most of this is going to be profit.

When you made trade, you crossed, is that correct?

Richard Galterio

That is correct.

Unidentified Analyst

Okay. And if I am not mistaking as you talked about in the metals area you mentioned capital managements. The price got low and it looks like all of these areas that the demand is picking up in China. Is that true?

Richard Galterio

Yes it is true and in a lot of different areas. It refers to a various expense about that and -- so they'll in probably remember this more than other people. Magnesium is certainly not a leading indicator amount. As a matter of fact, when we entered into magnesium a number of years ago which is moving from top a number of areas that drive smooth and we though that magnesium would eventually -- like the mix of magnesium.

(inaudible) one of the top capitalized companies in the magnesium industry.

Unidentified Analyst

So you expect, is what I'm saying in the second half of '09 this division, the trading division, should be profitable, should be a profit division, right away we'll have to wait for 2010 -- in this division.

Richard Galterio

I hope that it do, if you see transactions as far of our trade operations, where we capitalize strong.

Unidentified Analyst

Right. Right, I appreciate that and let's look at magnesium. You had mentioned the average price in the quarter was 2200, is that correct approximately? In the second quarter?

Richard Galterio

The average price.

Unidentified Analyst

Right.

Richard Galterio

(inaudible)

Unidentified Analyst

Going forward now, you mentioned, you said magnesium is picked up in the last six weeks, roughly 8%. Going forward, do you see your average price in terms of sales for the second half being higher than the average was in the first half of the second quarter this year?

Richard Galterio

I think we're really more concerned with our markets. When you look forward -- are a little tricky is that, you remain perfectly against those costs. For example, the contracts that we renegotiated at a much higher level where we purchased materials at a much higher level of cover, that was in cash -- amount material.

So, most importantly, I point to the 100 we could be making lot of purchases depending upon how we do as oppose recent rate that we had other income trade by that, I would be more concerned we believe that we position now where our margins are going to be in the high end of our revenue and whether that revenue is 2400 and 2700, we would rather in the margin in there as oppose to effecting it, that's exactly where the basement is getting we're looking very diligently to meet it at the margins but are flat.

Unidentified Analyst

Regarding two industries you mentioned auto and steel; given pick ups there in China, how do you see you did talk anyone in the automotive industry, what's picked up in steel regarding say as per the second half of the year 2010 to this year, can you talk about it?

Richard Galterio

(inaudible) Apart from this, that state of metal cost, there hasn't lot been any -- plan of forecast that last year comparison to level of products, although the first six months, we have not transferred not in the contract basically, -- or just accrued in that although our improvement is lot more they have in a second quarter

Unidentified Analyst

Increases.

Richard Galterio

Apparently but with the forecast from us. So, having in quarter we are in the first for you last optimistic to half of the and in then we'll see it will be increased eventually.

Unidentified Analyst

And it seems to be going forward, the way you have set up the company when you organized it, magnesium you've cut your cost as demand increases that you want to position as a growth should you made a comment of being the premier magnesium producer in China. As it's pretty more are we talking about by next year you could be the largest magnesium...

Richard Galterio

Right now we have a number different subsidiary that operate, I would say independently. And we are going to try to in order to move forward with a larger customer, we just want to create a brand identity, so whether its gold, and whether it shines, before the IMG company, so when you are coming to IMG, we'll know that you have a much deeper supply base than first example if you were going to our subsidiaries through distribution cost. And although I could be a current provider, our goal has always been to evaluate the cost being largest quite of an industry.

And certainly we have the opportunity as we've mentioned before, is to consolidate further a holding that's removed into 51% ownership we have require more for example, China Magnesium, the our Board of Directors. We have much closer and more intimate relationship and we may look to acquire competitors discounted as a result of the situation, and wait for turnaround. But I think the message that we want to get at is we do believe that the lowest of what we have experienced has moved behind us and that's not -- some of the clouds still around after the storm is over, but certainly we think we are headed into the light, into the second half of 2009 and certainly into 2010.

We preserved our capital, we have to lot of cash but we did have last year. Our balance sheet is relatively similar and we believe that we are now in a position that's a way to grow the company as opposed to a way to survive.

Unidentified Analyst

Right. If I read you correctly, you're telling me a number of players, previously first quarter, second quarter that were in the industry are now not there, because of the suppliers. So there may be with less prices certain companies that are not in business that we are supplying people in China now there was opportunity because these people have to find new suppliers for the magnesium. Is that correct?

Richard Galterio

Well it doesn't matter right now because they are going you hire 100 people around a year ago take in the period of high 50's around.

Unidentified Analyst

As demand increases, these people are not in business now and they're not going to be supplying the customers going forward.

Richard Galterio

Well, we think that, in order to gain a capital to do that, it's going to take time and it's going to be a curve where we're going to have an advantage that's going to income help us acquire customers. We've made some decisions both on the way up and on the way down that we believe creates the -- and we are were a lot higher and we've helped our customers when things have worked the other way. so we think we have been a prodigal supplier of -- we think we have some strong relationships that we can build on in the future.

So I will like to say that in the was I think was a pretty good position to look forward.

Unidentified Analyst

Right. And you had mentioned, when it comes to growth in magnesium growth you don't have to acquire other companies, you just were able to increase the percentage of ownership you have on this 51% company rather than going out and doing due diligence on a new company.

Richard Galterio

Yeah, I am sorry (inaudible)

Unidentified Analyst

That's true, but I am looking forward to and, you given this one question; have you given any projection for the second half of 2010 in terms of profitability?

Richard Galterio

Our visibility is getting better. We are working towards moving that in the block. I don't know exactly what time frame we are looking to do that in. But certainly I think become more clear and the sharp way is, we're a lot more optimistic, than we were last year.

Unidentified Analyst

Thank you. I appreciate it.

Operator

Your next question comes from (inaudible) Investment Management.

Unidentified Analyst

Hi. I tried to understand, what has happened to magnesium for the sharp drop besides the of course the precipitous drop in the economy? Also, in areas where people have cut back on magnesium because they felt that wasn't the way they wanted to go, is one question.

And second question is; what kind of catalyst can we look forward to for the increased usage of magnesium besides the economy improving? And in that we got, in the past week I read two articles about magnesium. One of them shows that few automobile companies, not the large ones but two automobile companies who are producers are increasing the usage of magnesium. On another article saying that car companies may not be increasing usage of magnesium. Did you elaborate a bit on what you see in that area and what might lie ahead and what catalyst we might look forward to?

Richard Galterio

Sure. Let's starts with your first question, the first part of your question first. Since the largest end users of magnesium, are steel manufacturing, in die casting for parts needed for the aerospace industry or for the automotive industry and also the third will be aluminum alloy.

It doesn't take far to see how much steel demand in the last six months had fallen off a cliff, aluminum right behind it. And certainly the automobile industry, especially in the U.S. was an uncertain mess until very-very recently. So if you could imagine an industry where your three biggest end markets all still walking out at the same time, that's kind of what we experienced all at once at stock at all. Which is why the magnesium stock prices which were at 4500 to 5000 at one point in May of 2008 go all the way down to right around 2000 heading out towards the end of the year.

So, we experience the demand from your three largest end markets disappear all at the same time. Well that's why you had precipitous drop in the prices and you have the moving from a situation where you didn't have enough supply so, you had probably about 40, 45% over-supply, literally overnight.

So, it isn't shocking but certainly is unparallel in the history that we'd look through in this industry and certainly one of the global... the worst and most of the people are not sure on this. So, that support that.

Now moving forward, what are the catalysts for the future, and part of this future are very simple. Magnesium is a stronger and lighter metal than aluminum and steel in certain usage, I mean certainly you are not going to build a magnesium building, but uses in automobile parts...

There is a tremendous drive for using magnesium. The automobile industry demanded to a improved fuel economy and really have to cash for profit and what they are trying to do is that per ton of economic fuel, cars off the road for new ones and they are actually the standards moving to 35 miles per gallon for the automobile industry is a daunting one because you have two ways to get that.

You would have to have better engine performance, so you are going to need lighter cars. And if you want to make lighter cars, you make lighter parts, which is why and I think you might have mentioned this in one of your articles that you might have read. Companies like BMW and the like are starting to make their engine blocks out of magnesium to save weight. And we believe -- and not just us but there is lot of you can look for from a number of different authorities on the automobile industry, is that the amount of magnesium used in the automobile industry per car likewise go up dramatically and a number of factors are all going to step up and there's going to be a new car lot more magnesium than there's been produced now that should be available for us in the long term.

Unidentified Analyst

Can I ask one another thing? What countries would you say, the largest part of your magnesium goes to? And I realize -- as far as I know, it doesn't go to the United States. What -- like that as in the changes in the concept that in the United States also?

Richard Galterio

We said that we are working towards that goal of moving towards it. China Magnesium has not arrived in the United States. We can apply for it, which we've made inroads towards. But our largest other than domestic and our domestic is our largest from what we put out domestically in China. China is the largest consumer of magnesium. But we also ship to Japan. We ship to Europe, we ship to Australia, Canada.

So we have distribution that's goes pretty worldwide for the terms we achieved, Canada is a decent part of it, as well as Europe and Australia. But, I think it's a vast majority, but a decent majority of our business is in domestic in China.

Unidentified Analyst

(inaudible) utilized in the production of automobiles in China and or in Korea?

James Wang, Ph.D.

It is the production of automobiles worldwide.

Unidentified Analyst

Okay, thanks so much.

Operator

And our next question comes from William Akont (ph) of Akont Associates.

Unidentified Analyst

Thanks. You used to give very specific guidance. I understand these uncertain times that you can't do that, but could you at least state what you expect higher sales in the third and fourth quarter and possibly a return to cost to profitability if not in the third quarter then in the fourth? This one not termed in guarantee but what's your expectation, you were saying that but I want to hear it more exclusively?

Richard Galterio

Well we've been cautious about giving guidance at this particular point in time because things have been so uncertain and we really tread a very difficult environment. When we see that environment improving, we would hope that that improvement will start to evidence itself in the coming months and in the coming quarters. And we believe that we does need a lot of piece of support together for us to move that into profitability.

And we are as I said, working very hard to get to that position and we're not in a position right now to give any guidance as we recognized to be. So suffices if to say, we do believe that we will improve over the coming quarters. We hope that momentum will pick up relatively speedily as we go along and we're willing to make every effort in our business efforts to do that. We are excited about the new opportunities that we have in some of the things that we're doing. We could be doing something better for us if they come to fruition and we will update everyone as soon as we have enough clarity to do so.

James Wang, Ph.D.

We had a set of one cost by our cash in the first six months of our alliance, because of the changes in magnesium and we also -- so within the last quarter income tax related we're going to have that in the in the sudden of our cost. So we both know this capital is kind of cost cutting made out in the next six months or we keep it primarily...

Richard Galterio

We're working very hard to get there. in the trends with in the first quarter of -- we see a launching pad and what we want to do is, like I said there maybe a key but we think that what's behind us is behind us and we are now focusing our efforts building, growing and reaching profitability in our on phase, we're looking to do that as quickly as possible and we're looking to do it prudently. So, we know that everyone as we go along and we're hoping to get an inclination, in the near future that we'll give more clarity as to the direction that we're moving up.

Operator?

Operator

This concludes the Q&A session. I will now turn the call back over to management for closing remarks.

Richard Galterio

We'd like to thank everyone for your support as shareholders and thank you for joining us for this call. Everyone at the company is working very diligently towards improving our operations and benefiting the shareholders. And we certainly will look forward to speaking with you again at the end of the third quarter and thank you all and that would be the end of call.

Operator

Thank you. This does conclude today's conference. You may now disconnect.

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