Executives
Marc Siegel – President
David Stein – COO
Richard Galterio – EVP, IR
Jenny Liu – VP of Finance
James Wang – CEO and Chairman
Analysts
Ping Luo – Global Hunter Securities
Sophie Lam – Roth Capital Partners
Carl Doress [ph] with Doress Asset Management [ph].
James Stone with PSK Advisors
Albert Jones [ph] with Jones Investment [ph]
Keith Fraenberg [ph] with Vulture Funds [ph].
Tony Triscani [ph] with Astro Capital [ph]
China Direct, Inc. (CDS) 2Q 2008 Earnings Call Transcript August 7, 2008 4:30 PM ET
Operator
Welcome to the second quarter 2008 earnings call for China Direct. For those of you who maybe new to the company, China Direct trades on the NASDAQ Global Market under the symbol CDS. The company is a US-owned and operated diversified management and advisory services organization that provides a direct link between western investors and companies in the People's Republic of China. Through its two divisions the company serves as a vehicle that affords investors direct, diversified, and financially rewarding participation in the rapid growth of China’s economy. China Direct management services division, which includes its magnesium segment, clean technology segment, and the basic materials segment primarily focuses on acquiring controlling interest in Chinese business entities.
China Direct advisory services division provides a suite of consulting services to both Chinese entities seeking an access to the US capital market and North American entities seeking business opportunities in the PRC. For more information on the company please visit its website at www.chinadirectinc.com. Our call today will be hosted by Mr. Marc Siegel, President and Mr. David Stein, Chief Operating Officer. Additionally, Mr. James Wang, CEO and Chairman; and Richard Galterio, Executive Vice President; and Ms. Jenny Liu, Vice President of Finance will also be available during the Q&A session that will follow management’s discussion of the second quarter.
At this time I would like to refer to the Safe Harbor Statement 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 or market or otherwise make statements about the future, which statements are forward-looking and are 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.
At this time I would like to introduce Marc Siegel, President of China Direct. Mr. Siegel you may begin your call.
Marc Siegel
Thank you Julian and thank you all for joining us for our second quarter 2008 conference call. I am pleased to tell you that China Direct turned in its fifth consecutive quarter of record revenue at $77.6 million, a 91.7% increase over the $40 million that we reported in the second quarter of 2007. Significantly, this is also a 29% sequential revenue increase over our record 2008 first quarter, demonstrating a quarter-over-quarter continuation of China Direct’s robust growth.
Net income also set a record increasing 231% to $7.5 million in the second quarter of 2008. That compares with $2.3 million in the prior year period. Sequentially, net income was up 58% from the 2008 first quarter. Even with 10 million more shares than in the prior year’s second quarter, earnings per share still rose 73% in the 2008 second quarter to $0.26 per share versus $0.15 in the comparable 2007 quarter.
While we experienced progress in all of our segments in the second quarter, the majority of our revenue continued to come from our magnesium segment, which grew approximately 130% over the same period in 2007.
During the second quarter we significantly expanded our magnesium production in China with Baotou Changxin now operating with an annual production capacity of 12000 metric tons and Pan Asia opening a third 6,000 metric ton facility to bring its annual production to 18,000 metric tons. We anticipate that the expanded facilities will enable these two subsidiaries to generate annual revenue exceeding $100 million at an average price for magnesium at approximately 3,500 per metric ton.
In addition to our strong financial results, our second quarter was highlighted by several events that continue to elevate the status of our company in the public market. As we discussed on the last call, we moved our stock listing from the Amex to the NASDAQ Global Market. We believe that our NASDAQ listing will give China Direct a much higher profile among investors as will our addition in June to the Russell 3000 Index, which ranks US stocks according to global market capitalization.
The Russell listing also automatically includes us in the Russell Small Cap 2000 and their associated growth and in industries [ph] giving our stock considerably more institutional exposure.
While we are on the subject on the China Direct stock, I also want to mention that more than 94% of the preferred stock offering that we completed in February has been converted to common share, thereby eliminating nearly all of the related exposure to dividend expense going forward.
During the first six months of 2008, our current assets increased by nearly $30 million to $97 million including $26.4 million in cash. Our current liabilities increased slightly to $27.1 million. Stockholders equity also increased approximately $27 million to $70 million total dollars. I believe the financial gains the company has made over the past several quarters are the result of the consistent execution of a sound business strategy by our management team both in here and in China. We have positioned ourselves to be able to identify and capitalize on opportunities as they arise and we have done so.
They are abundant opportunities ahead. I will briefly address how we plan to approach them after our Chief Operating Officer, David Stein, gives you more detail of our second quarter and first six months. David.
David Stein
Thank you Marc. China Direct’s revenue for the second quarter increased to a record $77.6 million, as compared to $40 million for the second quarter of 2007.
Increased production at our magnesium segment, specifically at Chang Magnesium, Golden Magnesium, and Pan Asia Magnesium were the primary contributors for this increase.
Our gross profit for the second quarter of ’08 was approximately $13.5 million versus $3.7 million in the prior year’s second quarter. It is a roughly a 260% increase.
The total operating expenses for the second quarter of ’08 increased to approximately $2.6 million compared to approximately $850,000 in the second quarter of ’07. These increases were attributable to increased staffing to support our current and future operations.
Excluding non-cash items such as depreciation and stock based compensation, it is important to note that our operating expenses were relatively flat on a sequential basis. In addition, the expenses as our percentage of our gross profit as decreased to less than 20% in the 2008-second quarter as compared to 23% in the ’07 period.
Our net income for the second quarter of ‘08 increased to a record $7.5 million. That is compared to the second quarter of ‘07 when we reported net income of $2.3 million. On a GAAP basis for the second quarter of 2008, China Direct recorded earnings per basic share of $0.29 per share on 22.7 million shares as compared to $0.16 per basic share on 13.9 million shares in the second quarter of ‘07. Diluted earnings for the second quarter of ‘08 were $0.26 per share. That is on 25.4 million shares diluted. This compares to $0.15 per share on 15.4 million shares diluted for the second quarter of 2007.
It is important to note that shares underlying the options and warrants included in the diluted share count would result in an additional $37 million to China Direct. On a non-GAAP basis, excluding non-cash items of approximately $1.2 million, diluted earnings were $0.30 per share on 22.6 million shares diluted. This compares to $0.16 per share on 13.9 million shares diluted for the second quarter of ’07.
Looking at our magnesium segment, during the 2008-second quarter revenues from our magnesium segment were $55.7 million and just over $100 million for the full six months of ’08. This represents a 165% increase from revenues of $37.8 million recorded in the full six months of ’07, when at that time our magnesium segment consisted of just one entity Chang Magnesium.
Net income for the magnesium segment in the full six months of ’08 adjusted for our majority interest reached $6.7 million to roughly a 480% increase over the $1.2 million recorded in the full six months of 2007. The increase primarily came from acquisitions and the expansion of our production capacity at Chang Magnesium, Golden Magnesium, and as well as Pan Asia Magnesium.
The gross margin to Chang Magnesium and Golden Magnesium were impacted in this quarter by a short increase in certain raw materials, which during the quarter almost doubled as many suppliers stockpiled inventory in advance of the Olympics. Prices for the materials began to decline in July significantly and we anticipate the prices will return to normal pricing levels in the latter half of 2008.
Pan Asia Magnesium was not materially affected as it sold the end product at spot prices, which rose in constant with the cost of the raw materials. During the quarter, we increased our reserve for income taxes at Pan Asia Magnesium as a result of the new tax codes adopted in the PRC in the latter half of 2007.
Revenues from our consulting segment were $6.7 million for the second quarter of ’08 and $90 million for the full six months of 2008. This represents a 95% increase from the first six months of ’07 when we recorded revenues of $4.6 million. Our net income for this segment during the second quarter of ’08 was $4.6 million and $5.3 million for the first six months of ’08. This represents a 93% increase from the first six months of 2007, when we recorded net income of $2.8 million. This improvement in both revenue and net income is largely due to our newest consulting client, China Armco Metals, which completed a merger in the second quarter.
Revenue in our consulting segment varies depending upon the level of service the transaction was at and the addition of new clients.
Our basic materials segment totaled approximately $14.9 million of revenue in the 2008-second quarter. The total revenues for the first six months was $27.8 million. While revenue of Lang Chemical was relatively flat on a year-over-year basis, we anticipate Lang Chemical will improve their performance when we evaluate an additional investment in the manufacturing facility, which we believe can significantly expand our offerings within the segment and as well improve profit margins. The net income for the full six months of ’08 adjusted for our majority interest was approximately $300,000 for this segment. Additionally, we anticipate our zinc mining subsidiaries to commence operations in the latter half of 2008 and look forward to providing additional information regarding the progress at our next call.
In the second quarter we recorded $333,000 in revenues and a net loss of $91,000 related to our clean technology segment. As we begin operations in aluminum recycling excluding the progress towards the expected launch of our enterprise scale tire recycling facility at Yantai CDI Wanda. At Yantai CDI Wanda, we have received the necessary EPA approvals and expect construction of that facility to begin in the coming months. In the interim CDI Wanda is running tests on a continuous basis. We anticipate gathering a significant amount of data in the quarter as we run this machinery on a continuous basis. We further anticipate the evaluation of these results will be completed prior to year’s end.
Additionally, we received numerous machinery orders for Wanda’s smallest scale equipment and anticipate deliveries to commence in the latter half of 2008 resulting in a significant ramp in revenues when the machinery is delivered to fill those orders.
For the first six months of 2008, China Direct reported consolidated revenues of $137 million. That is compared to $71.4 million for the first six months of 2007. The gross profit was $24 million versus $7.2 million for the comparable 2007 period. The total operating expenses were $4.3 million in the 2008 six-month period compared to $1.7 million for first six months.
Our net income for the first six months of ’08 was $12.3 million versus $4.1 million for the same period in 2007. On a non-GAAP basis, which excludes non-cash items, including the Series A Preferred Stock offering in February, stock-based compensation, depreciation, and amortization, the fully diluted earnings for the first six months of 2008 was $0.54 per share compared to $0.29 per share in the same period of ’07.
On a non-GAAP basis, which again gives effect to the non-cash items mentioned above, fully diluted earnings per share for the first six months of ’08 were $0.24 per share. This compared to $0.27 per share for the first six months of ’07.
At this time, I will turn the call back over to Marc for additional comments.
Marc Siegel
Thank you David. As these results indicate China Direct is experiencing excellent growth by nearly all-pertinent metrics, not only in a year-over-year comparison but sequentially quarter-over-quarter. I would like to reiterate that we are very pleased with our performance for the first half of 2008 and our non-GAAP earnings of $0.54 per share compared to $0.29 in the same period in 2007, excluding those items we discussed earlier in this call.
Additionally, our GAAP net income for the first six months was $12.27 million. We remain very optimistic about our future as feel comfortable with our guidance that we provided to the investment community in our last quarterly press release and conference call.
While our guidance of $320 million in revenue and $26 million in net income for the full year remains unchanged, I would like call your attention to a potential change in two of our revenue sources. Number one, as you know we currently have a magnesium operation in Baotou China called Changxin. Our planned annual capacity of Baotou Changxin was 20,000 metric tons, which was incorporated in to our revenue guidance. Since we issued that guidance our Changxin management team has increased production estimates by 4000 metric tons for this year, which is not included in our guidance numbers and we will evaluate the potential to our outlook in the near future.
Additionally, they are several potential acquisition opportunities that currently exist that could alter our 2008 guidance. The completion of the acquisition of the magnesium operation in Baotou, Inner Mongolia that we announced in April remains active. However, we cannot give a definitive timetable on the completion at this time.
Because Changxin holds a license to produce 100,000 metric tons annually this acquisition offers a much larger opportunity that we initially anticipated. We are evaluating strategies as we speak to capitalize on this opportunity, which may include the potential for additional partners and joint venture development agreements. While on the subject on maximizing our ability to capitalize on opportunities, I would like to stress to our shareholders and investors that we continually are looking for ways to position our company to have the ability to act quickly and decisively when such opportunities arise. To that end we just received regulatory approval for a shelf registration of approximately $70 million in China Direct shares. At this time we do not have any immediate plans to sell these shares, but their availability may in the future enable us to seize on an accretive opportunity that could otherwise dilute us. It will also provide us with greater flexibility should we seek access to capital in the future and we believe it will enable us to secure that capital in a less dilute fashion than typical private equity financings.
As we may conclude, we remain confident in a strong performance for the remainder of the year. We anticipate continued strong contributions from our mag segment as the additional production from Baotou, Changxin, and Pan Asia operations enter further into the mix. We also believe our margins will benefit from a normalization of raw material costs as David mentioned and a continued upward trends in the overall magnesium market. We expect to see more growth in our consulting segment as well due to our continued emphasis on larger market cap companies such as our newest client, China Armco. China Armco is a rapidly growing metals distributor and is now entering the steel recycling industry. Trailing 12-month revenues for this company are in excess of $83 million.
While we still value and continue to serve our smaller clients, we believe our efforts to migrate to a larger company will ultimately have the effect of increasing the quality and the contribution of our consulting revenues.
We are very pleased with our financial and operational performance in the second quarter and the first six months of the year and I know that all of my management team shares my optimism regarding China Direct’s future. Our enthusiasm is based on a business plan that is working, on the strategy that is being meticulously executed and our subsidiaries that are being well managed. We continue to see enormous opportunities in our near future.
Now, Julian, allow me to thank everybody on the call and we can now begin the formal Q&A.
Question-and-Answer Session
Operator
Thank you. (Operator instructions) Your first question is from the line of Ping Luo with Global Hunter Securities.
Ping Luo – Global Hunter Securities
Hi, Marc, Steve, and Jim. This is Ping Luo. I have several questions regarding your financial statements, can you hear me?
Marc Siegel
Yes, we can hear you.
Ping Luo – Global Hunter Securities
That is very good. The first question is regarding your minority interest, you have compared to first quarter, second quarter you have a large earnings but you have less minority interest. This is – in the first quarter, you have $3.8 million in minority interest, in the second quarter $2.9 million. So, I just want to know any change in your ownership of your joint ventures?
Marc Siegel
Okay Ping, Richard Galterio will take that question.
Richard Galterio
Ping it was more in business mix, our consulting division, which we own 100% of conducted a transaction in the quarter. So that more represents a shift in our net income because that was 100% from the operating income. And Lou there is no minority pull back. So, there is no change in the joint ventures. There is no change in our ownership in any of the joint ventures. It was just a business mix in the quarter.
Ping Luo – Global Hunter Securities
So, going forward in the next couple of quarters, I want you to roughly your ownership, I know just you have 7 or 8 joint ventures, your roughly ownership on those joint ventures, how do I allocate the minority interest going forward?
Marc Siegel
What I could suggest that you do is after this call you can give us a call, we can provide a breakdown, but I think that also in our Q when we released it had the breakdown of each subsidiary as well as the breakdown of the minority interest deductions in each subsidiary. So, when we put out the form Q, it will be in those documents.
Ping Luo – Global Hunter Securities
Okay, thank you.
David Stein
Yes, Ping this is David Stein. If I could just add in the formal part of our Q, you will have an organizational chart, which displays the percentage ownership and as well you will have a line item, which shows each of the various entities in which we hold an interest. Now bear in mind we are always going to have at least a majority interest in all these entities.
Ping Luo – Global Hunter Securities
Right – okay.
David Stein
Okay.
Ping Luo – Global Hunter Securities
Okay, thank you –
David Stein
But again if you do have any confusion at all please give me a call here in the office, I will run you through all the various portfolio companies.
Ping Luo – Global Hunter Securities
I was just thinking, yes – I understand. The second one is regarding your non-GAAP net income, which you add back to the depreciation of 494,000. I want to know if this depreciation is just equipment entity related depreciation or any basically amortization of intangibles?
Marc Siegel
Jenny?
Jenny Liu
This is Jenny Liu. The depreciation expenses relating to the facilities that our facilities manufacture in China, those are fully disclosing (inaudible) fixed assets downward.
Ping Luo – Global Hunter Securities
Yes, I understand, yes, but because normally in our model, pro forma model, we don’t have depreciation regarding – related to the –
Jenny Liu
The reason in our press release we add those back because we considering those are non-cash. That is the only reason. Yes, I agree with you. Just two types of presentations. The reason we add on this depreciation is because it is a non-cash.
Ping Luo – Global Hunter Securities
Okay, my third question. Also the also the – I was previously given round about 13% effective tax rate for 2008 and 2009. I just want to know whether that – I see from the second quarter you have about 6.3% tax rate. So, I just want to have an idea, you know what will be the blended tax rate in the second half of 2008 and also 2009? Hello.
Marc Siegel
Yes, for the second half of 2008 we are looking at about a 12% tax rate.
Ping Luo – Global Hunter Securities
12%. Is that the same for 2009?
Marc Siegel
We are not sure yet. It depends on which segments perform.
David Stein
(inaudible) half income tax rate of 2008 because here we can drop ’07 and ’08 and Golden Mag was still have no income tax. So, next year, probably 14 maybe it is a little high.
Richard Galterio
(inaudible) It will definitively blend up higher. I think as we get closer to the end of the year, we will get some taxes from the different taxing authorities in China of where exactly we are going to be, we will be able to provide a better idea of that guidance probably more towards the end of the year of where that is going to be in 2009.
Ping Luo – Global Hunter Securities
Okay, all right. Thank you very much.
Marc Siegel
Thank you Ping.
Ping Luo – Global Hunter Securities
Thank you.
Operator
Your next question is from the line of Sophie Lam with Roth Capital Partners.
Sophie Lam – Roth Capital Partners
(inaudible) Hello can you hear me?
Marc Siegel
Yes.
Sophie Lam – Roth Capital Partners
Hello everybody. This is Sophie Lam and first of all congratulations on the quarter and I had a few enquiries. First of all, I like – I might have missed your comment about Baotou Changxin and I know that it was announced in February and scheduled to be complete by January 30. And I just would like to have your little bit more comment on this?
Marc Siegel
Sophie. I apologize, I couldn’t exactly understand your question. What would you like to know about Baotou Changxin?
Sophie Lam – Roth Capital Partners
No, it is about Baotou Xinjin.
Marc Siegel
Oh, Xinjin. Okay, Xinjin has a license for 100,000 metric tons. However, in looking at their books we have had a couple of difficulties as well as we have had negotiations with a couple of investors that would like to invest in Baotou Xinjin. So, we have not pulled the trigger on that transaction yet, even though we do have a definitive acquisition agreement. We are not sure exactly what we are going to do yet. James and I are traveling to China. We are leaving September 3. We have a meeting with our major international investors on September 9 and 10 to discuss possibilities about Xinjin. And that is all I would like to discuss about that at the present time.
Sophie Lam – Roth Capital Partners
Okay thank you. And my second question is about the magnesium division, I would like to know if the raw material prices are increasing starting (inaudible) and magnesium prices, spot prices are declining during the same time. I am just wondering, how do you protect, what is your gross margin?
Richard Galterio
This is Rich Galterio The answer to that question is there was – the raw material prices we believe were affected substantially in the second quarter as a result of fears out in the market place that the mining facilities and other facilities were going to be shut down in the area as a result of the air quality for the Olympics. That drove the prices of ferrous silicon and other materials up dramatically as everyone scrambled to have that supply in case they were shut down for a period of 6 weeks or 8 weeks prior to the Olympics and then coming out. It did not materialize to the extent that people were thinking. Those raw material prices have abated quite sharply in July and we would expect that there will be a continuation of a normalization in terms of the difference between the prices of the raw materials and the end prices of magnesium. In the third quarter we are already seeing that happening and we believe that that will happen over throughout the year.
Marc Siegel
I just like to say one thing to you Sophie. I think it is very important to note that it is our belief and this is not 100% positive, but it is our belief that we are the lowest cost producer of magnesium in the world, although we cannot control the sale price, we are doing our best to control the cost.
Sophie Lam – Roth Capital Partners
Okay then what was your ASP during the second quarter order in first half of ’08?
Marc Siegel
Can you repeat that, I couldn’t quite make that out? Can you repeat the question?
Sophie Lam – Roth Capital Partners
What is your average sales price during the second quarter or the first half of ’08?
Marc Siegel
Okay, average sales price for the second quarter was $3,700 per ton. For the first quarter it was $3,200 per ton. So, blended it is probably about $3400 to $3500.
Sophie Lam – Roth Capital Partners
Okay, and what would be your – what is management’s outlook for magnesium prices looking forward?
James Wang
I would say – this is James Wang. I would say probably between $4,000 to $5,000. We believe with mag price we will stabilize in the next 3 to 4 months.
Sophie Lam – Roth Capital Partners
Okay thank you and my last question would be an enquiry about your progress in the CDI Wanda operation. You mentioned a little bit ago about your expectation of machinery sales looking forward into the future?
Marc Siegel
Yes, this is Marc Siegel. We are getting more orders for our machinery. We are also working on the commercialization of our larger equipment. If we can improve that utilization of our larger equipment, which we hope we will know before year-end we think that Wanda could potentially be our largest division in 2009 and 2010.
Sophie Lam – Roth Capital Partners
Okay thank you to all. And that is it for my enquiry today.
Marc Siegel
Thank you very much. I appreciate your call.
Operator
Your next question is from the line of Carl Doress [ph] with Doress Asset Management [ph].
Carl Doress – Doress Asset Management
Hi good afternoon guys. I had just a couple of clarifications, can you clarify what the reserve increase was relating to the taxes that were mentioned?
Marc Siegel
I am sorry.
Carl Doress – Doress Asset Management
The question was
Marc Siegel
The reserve increase related to capacities, okay.
Carl Doress – Doress Asset Management
And what kind of changes went on there in terms of new tax law?
Marc Siegel
The new tax law announced in the latter half of 2007, which related to the foreign investment entities. So, it basically went from our dual tax code to a unified tax code. For those entities that were formed prior to the adoption of that law or that code they are still subject to the old rules where they received beneficial tax payment over a five-year period. Now our Pan Asia Magnesium operation was actually formed really just about the same time that the law was adopted. So, what we had tried to do was get a reprieve of those taxes and try to fall under the old tax codes. And we have not received any word on that matter. So, as a result what we did is as measure to guard against that is we increased our cash reserve related to that entity only during the second quarter of ’08.
Carl Doress – Doress Asset Management
What is the rate under the new regulations?
Marc Siegel
Greater than 25%.
Carl Doress – Doress Asset Management
Okay, could you discuss what the trend has been in magnesium pricing and secondly is there a place where observe this, we could on the way pick up prices of magnesium without having to subscribe to the service.
Richard Galterio
This is Richard Galterio. First there are different sites I believe you can use, magnesium.com and there is also accessmetal, (inaudible) production on magnesium association as well. The tricky part about those prices is a lot of them are reflect a lot of thinly treated prices that for argument at the height you were seeing magnesium prices reaching 6500 or 7000 per metric ton, but those reflected only a small amount of sales. So, they don’t necessarily show you a vast – similar to what you would see in the stock market. What we see is magnesium prices ramped dramatically as did many other commodities. There were also fears regarding the Olympics. So there was a stockpiling so to speak. As we said on the raw material there was also a stock piling on the end user side as they wanted to make sure that they had enough magnesium to withstand the lack of supply. So, when that lack of supply didn’t materialize to the extent that people were expecting magnesium prices have fallen off. That supply is working its way through the market rather quickly, and that is why we expect prices to normalize and ultimately – overall however, we expect that it will trend up over time.
Carl Doress – Doress Asset Management
Where is the price currently on – it is obviously on the way down, but what is the most recent good price?
Marc Siegel
(inaudible) 4200 to 4400.
Carl Doress – Doress Asset Management
Which website would you say is the best site to get prices that really reflect what is going on in the marketplace?
Marc Siegel
Okay, Asianmetals.com.
Jenny Liu
It requires registration.
Marc Siegel
It requires a registration. I think it is a free registration. Actually, it is a paid site. It is probably the most accurate.
Carl Doress – Doress Asset Management
Is there any site that is not a paid site that is available?
Marc Siegel
I will tell you what, if you email, if you could just send us an email to us with a general question requesting it, we can send you some information on it, but we need to move on now for this call.
Carl Doress – Doress Asset Management
Okay thank you.
Operator
Your next question is from the line of James Stone with PSK Advisors.
James Stone – PSK Advisors
Good afternoon. Great quarter. Talking about prices, could you talk a little bit about, give us some flavor on the competitive climate, any change in that from what you have been saying?
Marc Siegel
There is not much change. This is Marc Siegel on the competitive climate, James just came back from China. There has been one new entry into the arena. Merrill Lynch recently put $42 million into mag in the Shanxi province and we believe that they will be competitors but there is a potential they could be partners as well.
James Stone – PSK Advisors
Okay, next question is I did not catch all the numbers, could you repeat the pro forma net for the 3 segments, the magnesium, basic materials, and consulting?
Marc Siegel
Pro forma – not pro forma, but for the full six months of ’08 on the revenues it is $137 million.
James Stone – PSK Advisors
Revenue I have. It is the net I am interested in.
Marc Siegel
I am sorry. The net income for the full six months of ’08 was $12.3 million compared to $4.1 million in the same period in 2007.
James Stone – PSK Advisors
No, I am asking for the 3 segments, magnesium, materials, and consulting, segment by segment?
Marc Siegel
Segment by segment. We are going to have to get back to you. We have to pull that out and get back to you.
James Stone – PSK Advisors
If that will be in the Q. I will wait to access it.
Marc Siegel
Of course it is going to be in the Q.
James Stone – PSK Advisors
Okay, I will wait.
Marc Siegel
Okay, thank you.
James Stone – PSK Advisors
Inventory decreased a bit, can you tell us what was happening there?
Marc Siegel
Inventories decreased?
James Stone – PSK Advisors
Or did I miskey, I had inventory of $12 million for this quarter and $15 million for the first quarter.
Marc Siegel
Yes, Jenny.
Jenny Liu
(inaudible) compared to December 30 of ‘07 we increased this. The reason is because we reserved the raw material for the mag segment, and compared to March 30 of ’08 we slightly decreased this because we use those – reserve the raw material for our production for the second quarter.
James Stone – PSK Advisors
Is this the normal level of inventory that you want to keep when you look now, when you look at inventory to sales, are you shooting for a different number?
Marc Siegel
We are comfortable with that number. I think we are comfortable with the place in inventory because of the Beijing’s Olympics game and after that we are probably keep it actually a little bit lower.
Jenny Liu
Starting from July 2008 our raw material price in China is going back to normal. So, going forward the second quarter’s number we are very comfortable.
David Stein
But Jim it is for us [ph] to note that while you might see the gross amount of the inventory increase. It is also because we are also increasing our production at the same time. So, while the levels at each –
James Stone – PSK Advisors
I understand that, but I am looking to say is inventory to sales ratio or inventory returning power that you want to look at days of inventory, and the sort of range you normally are looking for?
David Stein
On that basis, per particular individual portfolio company, we expect inventory levels to decrease.
James Stone – PSK Advisors
Okay, next question then on the DSOs, they were up a tad, anything significant behind that?
Marc Siegel
Can you repeat the question, DSOs was that you said?
James Stone – PSK Advisors
DSOs, days sales outstanding receivable. By my arithmetic they went to 25 to 29. You may use slightly different arithmetic.
Marc Siegel
Jim, if we could do this and get it in more detailed numbers, if it would possible to give us a call after the call and we can get into the numbers a little bit more substantially with you on an individual basis?
James Stone – PSK Advisors
Okay, what are planning in share count going forward, and then I will call it quits?
Marc Siegel
What we are planning in share accounts.
James Stone – PSK Advisors
Right.
David Stein
(inaudible) Let me address that please, because there was confusion on the call. I want to perfectly clear. Okay? In this quarter on a diluted basis, weighted average common shares outstanding were 25.4 million. We do have 13 million options and warrants outstanding. They range in price from a penny up to $30. If all the warrants were exercised, all the warrants were exercised we would have 13 million additional shares outstanding, but we would also have $97 million in additional capital. If you would like when you call Jenny Liu later, his extension – her extension is 331, she can give you a copy of the exact breakdown of the options and the warrants.
Operator
Your next question is from the line of Albert Jones [ph] with Jones Investment [ph].
Albert Jones – Jones Investment
Hello gentlemen. Great quarter.
Marc Siegel
Thank you.
Albert Jones – Jones Investment
A couple of questions, during the 3 months just ended how many combined metric tons of magnesium did you guys sell and/or (inaudible) and what was the total revenues from the mag division?
Marc Siegel
The answer for the 3 months combined – for 6 months was 29,000 tons.
Albert Jones – Jones Investment
29,000 for the six months.
David Stein
For the six months combined magnesium distribution as well as manufacturing. We don’t break out the individual numbers because we don’t for competitive reasons.
Albert Jones – Jones Investment
Okay. What do you guys see as the impact that China Direct if an active futures market for magnesium is opened and starts trading. How will this affect sales [ph] particularly to the US or where import duties are really high?
Marc Siegel
You know it is a great question Al, we have heard rumors that there will be a futures market towards the end of this year. We have heard that there might be one in the London’s Metal Exchange, but we do believe that if there is a futures market, like most futures market it would allow for us to hedge as a manufacturer and will allow for people that want to gamble to speculate. We believe that the price of magnesium will actually trade higher if in fact there is a future’s market, but there is no assurance there will be one in the next 6 to 12 months.
Albert Jones – Jones Investment
Right, from what I have read is there a possibility of one in China as well.
Marc Siegel
Yes, that is true, but the one in China you know although China does 80% of the world’s production, one in China would not necessarily be indicative of worldwide sales. You must remember that for magnesium to come from Chinas to the US there is an 80% duty and so, but pure mag does not come into the US. What happens is almost like Sox [ph]. The magnesium goes to Canada, it turns into mag alloy and then makes it way into America. So, it is very, very difficult for you to say what the spot price would be right here in the US. Okay.
Albert Jones – Jones Investment
Yes. For the consulting division looks like you had a good quarter, a real good quarter there. It looks like you booked cash as well as some shares from the Armco deal. In the future, will there be future cash bookings on that deal coming forward in the next two quarters or one quarter or whatever?
Marc Siegel
The answer is there is potential cash and stock bookings coming forward. Okay. Armco was a very, very good deal for us. We raised the money in a very, very difficult environment and we anticipate doing more transactions the size of Armco in the next 6 to 12 months.
Albert Jones – Jones Investment
That is great to hear. How would you describe magnesium demand right now?
Richard Galterio
We – Al this is Rich. We are not seeing any trouble as far as volume is concerned and sell through of our magnesium that we produced. We have seen obviously some price erosion from the high, but as far as the demand for the actual magnesium it still remains very strong and we are still seeing a lot of active opportunities for very large quantities. As we have discussed in other calls, we do believe that the more magnesium that does come online from the production side the more usage for magnesium that will be out there and the most secure the supply, the more different operations will start using magnesium instead of aluminum and steel because of the aspect of the metal being lighter and stronger. So, we don’t see any significant slowdown in terms of actual production and actual distribution.
Albert Jones – Jones Investment
So, the quarter could have been even better if the price of raw materials wouldn’t have been so high. And you see that improving this quarter and the following quarter with the prices of the raw materials coming back down to a reasonable level.
Marc Siegel
I would say that is a fair statement.
Albert Jones – Jones Investment
I would say so too. Do you guys never give any production capacity utilization numbers, do you? Have you in the past at all?
Marc Siegel
It has been a difficult metric for us at this particular point in time because we have so many facilities that are just coming online that we have made those acquisitions. When it gets a little bit more mature and these things are up probably in 2009 we would be better able to do that, because we ramped these facilities, the first couple of months there are test runs that take place. They don’t – they can’t run at full capacity and as you know a vast majority of our production capacity has come online this year. It really wouldn’t be a relevant number at this point in time.
Albert Jones – Jones Investment
Have you had any disruptions at all in any of the production facilities in the last quarter?
Marc Siegel
Only one, in Pan Asia we needed to stop manufacturing for six hours during the middle of the day. We made that up in the evening time, which we were asked by the local authorities to do that.
Albert Jones – Jones Investment
Was that because of power or anything like that?
Marc Siegel
Not it is because of pollution.
Albert Jones – Jones Investment
Okay.
Marc Siegel
Now we will take any questions from you off line please. Let some people – some other people have a chance to ask a question because we are about the end the call.
Albert Jones – Jones Investment
Good enough. I will get back in the queue.
Marc Siegel
Thank you very much for following us.
Albert Jones – Jones Investment
All right. Thanks.
Operator
Your next question is from the line of Keith Fraenberg [ph] with Vulture Funds [ph].
Keith Fraenberg – Vulture Funds
Good afternoon gentlemen and congratulations on a great quarter.
Marc Siegel
Thank you.
Keith Fraenberg – Vulture Funds
I guess, I had one question and it is directed more towards Richard. With regard to the $70 million shelf, are you planning to outline the terms of usage of that shelf, possibly a fall on the stock price for you to issue shelf?
Marc Siegel
Steve, this is Marc Siegel. Let me – I try to do a lot of the structuring here of the financial instruments we use and I just want you to know that it is our plan not to use the shelf under $10 a share. That could change, but I want you to also understand that our $8 warrants that are out there, are subject – that are registered – are subject to re-saleability if we did any transaction under $8. It is not our plan to do so.
Keith Fraenberg – Vulture Funds
Great. That was my only question and again congratulations on a great quarter and look forward to the second half.
Marc Siegel
Thanks for calling in. Operator one more question.
Operator
Your final question is from the line of Tony Triscani [ph] with Astro Capital [ph].
Tony Triscani – Astro Capital
Hi, good afternoon. Congratulations on a great quarter. I just have a few questions. You have had a lot of acquisitions I guess close in the second quarter, can you take about what going from Q2 to Q3 what is your capacity?
Marc Siegel
Capacity for what Tony?
Tony Triscani – Astro Capital
Tony. Operator, we lost Tony?
Operator
Yes sir. I believe his line has disconnected.
Marc Siegel
Operator if we could, I would like to conclude the call.
Operator
Ladies and gentlemen, we have reached the end of the allotted time for question and answers. Thank you for participating in today’s conference call. Mr. Siegel do you have any closing comments.
Marc Siegel
Yes, I want to give our direct number. It is 954-363-7333 and ask for either myself, David Stein, James Wang, or Jenny Liu, and we will answer any questions or enquiries that anybody has. Thank you very much.
Operator
Thank you for participating in today’s conference call. You may now disconnect.
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