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Jeffrey Scott - [Scott Asset Management]

Stanley Ng - RedChip Companies

Longwei Petroleum Investment Holding Ltd. (LPH) F4Q2012 Earnings Conference Call September 17, 2012 10:00 AM ET

Operator

Good morning everyone and welcome to the Longwei Petroleum Investment Holding Limited Fiscal 2012 Earnings Conference Call. With me today is Longwei’s Chief Financial Officer Mr. Michael Toups.

Before I turn the call over to Mr. Toups, may I remind our listeners that in this call managements prepared remarks contain forward-looking statements which are subject to risks and uncertainties. And management may make additional forward-looking statements in response to your questions. Information regarding forward-looking statements except for historical information contain herein are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results and future periods to differ materially from forecasted results. Actual results may differ from those discussed today and therefore we refer you to more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission.

Now it's my pleasure to turn the call over to Longwei Petroleum’s Chief Financial Officer, Michael Toups. Mike, please go ahead.

Michael Toups

Thank you, John. I’d like to thank RedChip for helping us organize this call and we would like o welcome everyone who is joining us this morning. I’ll begin today’s call with a brief discussion of our operations followed by an overview of our fiscal 2012 operating results and then we will open up the line for some questions.

Longwei Petroleum is an energy company engaged in the storage and distribution of finished oil product within the PRC. Our oil and gas operations consist of transporting storage and selling finished petroleum products entirely within the PRC. Our headquarters are located within Taiyuan City in Shanxi Province Central China. We have a storage capacity of 120,000 metric tons located at two facilities; our Taiyuan headquarter facility has 50,000 metric ton storage capacity and our Gujiao facility has 70,000 metric ton storage capacity. We have the necessary licenses to operate and sell petroleum products not only within Shanxi but throughout the PRC. Our storage tanks have the largest storage capacity of any non-government operated entity within Shanxi Province.

Year-over-year 12 months results for fiscal 2012, our revenues increased 6% to 510.6 million compared to 481.6 million for fiscal 2011. Our Taiyuan and Gujiao storage facilities contributed 256.3 million and 233.8 million, respectively, and agency fees contributed an additional 20.5 million to revenues.

Our GAAP net income attributable to common shareholders increased 4.1% to 65.1 million compared to 62.5 million in fiscal 2011. Our basic earnings per share increased to $0.65 per share and diluted earnings per share were $0.61 per share compared to $0.64 basic earnings per share in 2011 and $0.62 per diluted earnings per share in fiscal 2011.

Our current assets increased 65.4 million or 45.9% to 208 million at June 2012 this compare to 142.6 million at June 30, 2011. We also continue to maintain a large deposit of 87.1 million paid in cash generated through operations toward the purchase of the assets of Huajie Petroleum.

Our stockholders equity increased 71.8 million or 27.4% to 333 million at June 30, 2012 compared to 262 million at June 30, 2011. Our sales increased most primarily due to an increase in product sales price. The weighted average sales price per metric ton of petroleum increased approximately 18% to $1200 per metric ton compared to $1019 per metric ton year-over-year.

We continue to allocate our product sales between our two facilities to better service our customers within the Central Shanxi region. Our revenues are derived from two segments; we have direct product sales and agency fees. Our direct product sales the company purchases, takes physical possession of, and sells diesel, gasoline, fuel oil and solvents. For agency fees, we act as a purchasing agent, earning a commission or an agency fee by allowing other large users to use our licenses and buying power to purchase directly from refineries.

For the year ended June 30, 2012, compared to the prior fiscal year, our product sales increased 32 million or 7% to 490 million, our agency fees, however, decreased approximately 2.9 million or 12.5% from 23.5 million to 20.5 million.

For the year end 2012 our direct product sales revenues accounted for 96% of total revenues, and in 2011 direct product sales accounted for 95.1% of total revenues. The agency fees again down 12.5% accounted for 4% of revenues in 2012 and 4.9% of revenues in 2011.

Our total sales volume for the year ended June 30, 2012 dropped 9% to 409,000 metric tons from 450,000 metric tons for June 2011. The drop in volume was primarily due to lower demand from certain customers because of rising fuel prices between the periods as well as the general economic slowdown in the PRC. During this timeframe, we also declined certain sales opportunities to maintain our margin range during a period of rising inventory costs; we also had to carefully manage our cash flow due to the large deposit for the Huajie Petroleum assets. Again this is the deposit of about 87.1 million that was paid through cash generated through operations.

The increase in the price per metric ton of petroleum was due to the increase in international crude oil prices during the year corresponding to price increases and adjustments set by the PRC to the retail petroleum prices. During the periods of fiscal 2011 and fiscal 2012, the PRC increased retail petroleum prices six times and decreased retail prices three times. Again that’s during the two year timeframe, however, during the one year period of 2012 they increased retail price two times but decreased it three times. So, over that two year period the price decreases occurred during 2012.

If you refer to page 8 in our 10-K as well as page 28 in our 10-K, we gave a listing on page 8 of the PRC price adjustments during one of two fiscal years. On page 28, we also gave a table showing those price increases and decreases and how they correspond to the adjustments in the Brent crude prices. The PRC adjust the retail price of petroleum on a formula based on a 22 business day moving average based on Brent crude, Dubai and Cinta, which are three crude prices primarily driven by Brent crude which once that price is adjusted plus or minus 4% the PRC will evaluate and adjustment to the retail price. As an example, at June 30, 2011 the Brent price was $111 a barrel. At June 30, 2012 the Brent price was $94 a barrel. Now that has subsequently increased over the last 2.5 months from $94 a barrel to $115 a barrel or an increase of 22% over that 2.5 month period because of unrest in the Middle East. Again we have to carefully manage and monitor our inventory and our advances to suppliers, at June 30, 2012, we developed large advances to suppliers to be able to lock in our pricing based on anticipated price increases, subsequently that price has now increased 22%. So, again the reason for the large increase and advances to suppliers at June 30, 2012 primarily driven by the anticipated price increase primarily driven by Brent crude prices.

Our revenues for fourth fiscal quarter of 2012 increased 7 million year-over-year from our third quarter which was a 5.5% increase, however our volume increased 8.2%. During this period in the fourth quarter there were price decreases in both May and June which because we had a higher volume growth, our percentage dollar growth was actually down slightly, but based on what we see it more of an economic turnaround specifically within Shanxi Province. Again our operating leverage was up quarter-over-quarter, 8.2% and we anticipate first quarter 2013 volume to be up over the fourth quarter. So, again we look at our volumes moving back up where last year we had some volumes moving down in the first and second quarter of last year. So, we anticipate volume growth quarter-over-quarter from the fourth quarter to this new first quarter of fiscal 2013.

During fiscal year in 2012, we had 46 major customers, each accounting for greater than 1% of revenues which was greater than approximately 5.1 million in revenue. No customer accounted for more than 2.7% of our total revenues, so we had good customer distribution in terms of numbers of customers and no customer concentrations. Our top 10 customers by revenues for 2012 accounted for 23.7% of our revenues and no single customer accounted for more than 7.3% of our accounts receivable. Again on our accounts receivable we managed those very closely everything trade within the terms. We have approximately 26 customers that we currently advanced trade terms to in terms of our accounts receivables. So, again we’ve had great success in terms of collectability on our accounts receivable, that’s very closely managed by the company and again we feel like we have got good customer distribution in terms of numbers of customers and spreading our business out.

When you look at our cost of sales increased by 38.4 million this year or 10% to 422 compared to 384 million for the year ended June 30, 2011. As a percentage of our total revenues, our cost of sales between the periods increased by 3% as a percentage of revenues. This increase was primarily due to higher weighted average costs during a period which was a period of rising and fluctuating international prices and an extended period of lower retail prices implemented by the PRC to contain inflation. During the first two quarters of our fiscal year end 2012, subsequently the PRC has been able to contain it's inflation has had two price increases in February and March to bring that price back up with subsequently because of the decrease in Brent crude prices lower the prices in June and May.

So, again the PRC is trying to more closely approximate the international prices of crude. If you look at their price adjustments and they have been more aggressive this year because they feel like the inflation is under control. In July there was an additional drop in the retail price but subsequently in August and September the prices have gone back up. So, the prices today, the retail prices approximate the prices going back to May of this year which was the first of three price decreases in the PRC. So, again we feel like the prices have gone back up and because we value our inventory on a weighted average method there is some smoothing out based on our cost of sales by averaging on a weighted basis the inventory across periods. So, we don't get the large price fluctuations but it average down in our fourth quarter, so our product sales gross profit was down in the fourth quarter on a quarter-over-quarter basis from 14% gross margin in the third quarter to a 12.8% gross profit in the fourth quarter of 2012. Again we feel like that will continue to trend backup because of the recent price increases at both August and September to bring that weighted cost basis the retail price back in line to where the international prices of crude should be.

Overall, our gross profit on product was 13.9% in 2012 compared to 16.2% in 2011. The overall gross profit was also affected by drop in agency fee revenue of 2.9 million in 2012. When the company earns the higher agency fee the net effect lowers the percentage of total cost of sales because there is no cost associated with the agency fee. So, the higher agency fee we earn is actually increases our gross profit because that your profit in terms of very little cost associated with agency fees. That was primarily driven by some of the slower growth in some of the economic sectors, industrial sectors and the PRC because some of our larger customers who can buy product direct and have direct ship has slowed some of their sales growth during the second and third quarters of the year.

Again we pay our market price to our refinery suppliers and we are trying to carefully manage our inventory levels to adjust to these pricing fluctuation. And we are looking at coming into a period with this first quarter of 2013 or we are coming into a quarter where prices were at all time lows base on retail prices being dropped in July but subsequently going up in August and September. So, we are looking at better volume quarter-over-quarter from third quarter to first quarter and again or gross margin will be somewhere in the same range as the fourth quarter only because the decrease in July but subsequently increased in August and September that will benefit primarily going into the second quarter of this year based on the weighted average basis of our inventory evaluation.

From a current asset standpoint, we increased 65.4 million or 45.9% to 208 million in terms of current assets on the balance sheet. This was primarily due to the increase in the advances to suppliers to lock in pricing and future availability of product to take advantage of the fluctuations and the international crude prices. Again we also maintained the cash deposits for the Huajie facility. Our current ratio currently is 24 to 1, as current assets to current liability and improves to 35 to 1 when you include the fixed asset purchase deposit were 295 million at June 30, 2012 and we currently have no long-term debt.

The average age of our inventory increased to 45 days from 41 days during the year ended 2012 compared to 2011 to account for additional product purchases for on hand inventory before a period of rising prices, again this is to take advantage of our large storage capacity during a period of anticipated price increases. During this time we also increased our advances to suppliers to lock in the pricing and availability based on the uncertainty associated with the international crude price from tensions in the Middle East.

Our ratio of supplier advances to inventory increased to approximately 2.1 to 1 at June 30, 2012 from 1.1 to 1 at June 30, 2011. And the combined balance of both inventory on hand and advances to suppliers increased 53.2 million or 49% to 162.5 million during the 12 month period. Again we are using our working capital to increase inventory and product availability based on changes in market prices. We are trying to balance this working capital to take advantage of these pricing opportunities as well as balancing the funding required to complete the Huajie Petroleum asset acquisition.

Our accounts receivable, advances to suppliers and inventory balances have now being built back up to what we consider historical levels last utilized back in December 2010 prior to when we began to build up the deposit for the Huajie facility. When you look at the working capital requirements and you look at the chart based on Brent crude prices, Brent crude prices had dropped to 18 month lows back near June 2012, so it was a prime time to be able to lock in inventory and again lock in our advances at that timeframe. We thought like it was a good use of our working capital in terms of trying to improve our margin going forward in 2013. Our Brent crude prices are up approximately 22% since that time, so again we felt like that was a good working capital investments for the company.

Again our working capital now is up to approximately over 200 million and as we look at this adding the new facilities of Huajie Petroleum assets again this will be an increase in our storage capacity by almost 60%, this is roughly 100,000 metric ton acquisition. So, again this requires a significant amount of working capital to be able to support this facility and something that we are looking at in terms of weighing the closing on the acquisition but making sure that we have the proper working capital for the facility.

We anticipate the completion of the approximately $110 million asset purchase as soon as possible based on our working capital management. Again the working capital requirements of this facility, we could have closed on the facility, but chose to invest working capital into inventory. Again Brent crude prices up approximately 22% over last 2.5 months, so we felt like that was a wise use of that working capital investment. Again we were able to get the closing on this facility extended through to the end of this calendar year, but the company is working to close on this as quickly as possible.

We are currently negotiating some potential financing opportunities for this which we think can help accelerate the ramp up of the facility. We have currently engaged a large investment bank, top 10 worldwide investment banks to help us look at strategic financing opportunities. This may take the form of potential debt or equity financing; it may also take other forms which the company is currently considering in terms of strategic financing opportunities going forward.

Again we will continue to operate within our business model. We feel like petroleum distribution is a growing opportunity within Central China. Shanxi Province’s growth again is accelerated over and above the general growth within the PRC which is anticipated to be somewhere between 7.5 to 8.2% for the year. For the PRC overall GDP growth Shanxi Province has forecasted to grow at approximately 13% GDP growth again China has announced a new economic stimulus plan that greatly benefit Shanxi Province in particular Taiyuan city is a gateway city in China for the West and the Southwestern China, so there is a number of large infrastructure projects going on there in terms of new high speed rail, new highway systems as well as expanding the coal mining operations within the region. So, we feel like we are well positioned going into this fiscal year, we look forward to closing on the Huajie facility assets and we think that this will greatly enhance our operations for fiscal 2013.

We have currently continued to operate the business in a manner that we think will allow us to grow most effectively again trying to manage our working capital position. We have also tried to improve our overall transparency with our shareholders. Again to that end in July we released the tax reconciliation reports that was a comparison of our SEC filings to the SAT which is the State Administration of Taxation as well as the SAIC filing. The report no material differences between our U.S. and PRC filings, we are very pleased with the findings of that report again to confirm the integrity of our accounting system and financial reporting. And we are continuing to work to try to strengthen shareholder confidence within the company.

John, I’d like to maybe address a few questions that have come up from shareholders and if we can kind of open it up for some general questions.

Again the number of the shareholders have asked about the closing on the facility, again this is the company’s top priority to get this closed. The reason we have not closed to this point and again that was primarily due to the fourth quarter and into the first quarter so far this year, again trying to best utilize our working capital like we got a very good return in terms of the advances to suppliers that we have been able to lock in also looking at some potential financing opportunities that will allow us to accelerate the growth within the Huajie region. We already have pre-sales going on in that region and have sales people on the ground working on that. So, we are looking to close on this facility very quickly and we think our shareholders will be very pleased with what we are doing to move that forward.

In terms of our audited financial statements, we had a good clean audits. Again the auditors are very particular in terms of looking at the Huajie acquisition, worked with our attorneys having attorney’s opinion based on the deposits that’s being paid and verification on that deposit funds, and the fact that deposit is refundable if for some reason the acquisition did not close. Again that was something that we went through in great detail with them as well as verifying funds based on advances to suppliers, cash on the bank as well as accounts receivable and inventory. So, we feel like it was a thorough audit and again going forward the company looks to try to improve an increased shareholder transparency and communication.

John, I know that I may have run over a little bit in terms of the discussion but we can go ahead and open it up, to see if there is any questions?

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from (inaudible).

Unidentified Analyst

[Question Inaudible]

Michael Toups

Shanxi has received a number of project to the new economic stimulus program with PRC there will be a lot of new infrastructure projects going on within Shanxi and again with the coal business picking up again within China. We feel like Shanxi Province we are looking at probably 13% GDP growth within the province for this year.

Unidentified Analyst

[Question Inaudible]

Michael Toups

We think so and again based on our forecast for this year based just on organic growth from our two existing facilities we had forecasted about 7 or 8% top line year-over-year growth. So, we feel like that the conservative estimate, we feel like based on what we are seeing currently in the growth in the fourth quarter as well as the growth we are seeing right now in the first quarter, and we feel like we will be able to hit those numbers.

Unidentified Analyst

[Question Inaudible]

Michael Toups

We certainly could based on roughly 200 million in working capital we certainly could feel off a portion of that, so it's a close on the acquisition. At this point we feel like it's a better investment where it was at June 30 to at least have the investment and the advances to suppliers based on the low point of crude prices at that point in time, roughly $95 a barrel based on Brent crude prices. So, we certainly could have closed on that acquisition, but again trying to manage the business and trying to maximize what we can get on the inventory because that’s a such a big investment by the company. We are trying to manage that, we felt like it was more prudent to move forward with the advances, hold off on closing the acquisition until we are at better working capital position to really be able to accelerate the growth at that facility.

Unidentified Analyst

[Question Inaudible]

Michael Toups

That’s right. And again we are operating with 120,000 metric tons and we had approximately 200 million of working capital. When you add another 100,000 metric tons over and above that, you can tell it requires a pretty good inventory investments to be able to run that at the rate that we feel like we can run it just based on anticipated sales out of that facility.

Unidentified Analyst

[Question Inaudible]

Michael Toups

And unfortunately right now we are under NDA with a couple of different groups in terms of potential financing opportunities to be able to close on that relatively quickly. So, I can’t go into great detail now, but hopefully that’s something where we will be able to discuss in little further detail in very short order. I’m in fact returning to China later today, now that we have the 10-K wrapped up here to try to move that forward and be able to close on that pretty quickly.

Unidentified Analyst

[Question Inaudible]

Michael Toups

We are trying to look at some different opportunities where the company again we have engaged the large international investment bank that acts as our investment banker who brought us several alternatives to look at and just trying to evaluate what is the right fit for the company and our shareholders going forward.

Unidentified Analyst

[Question Inaudible]

Michael Toups

What we are looking at in terms of moving into the new facility, we are probably looking at a 30 to 45 day ramp up time at that facility again turning on sales and being able to (inaudible). We think that we can ramp up revenues very quickly there we (inaudible) at this point adjusted any forecast based on that we have some previous forecast based on that facility. Again we think we can ramp this up very quickly once we close on the acquisition and again based on the timing and the initial financing that we get will update the forecast based on that. So, currently we are not putting down any new forecast for the Gujiao facility, but we will be coming out with that shortly.

Unidentified Analyst

[Question Inaudible]

Michael Toups

It's roughly approximately the same range. So, in our forecast we haven’t built-in any additional premium for Huajie. We think that company will be some premium just based on the approximately to other competitors in that region, but they were just probably a percent point or two but again for our forecasting purposes we have not built that in.

Unidentified Analyst

[Question Inaudible]

Michael Toups

Again this is a newer facility so far some of the building and equipment it will depend on whether it's storage tanks or just typical building, but moving typically in 20 year range some building are just based on the condition but typically 20 year type range for depreciation straight line.

Unidentified Analyst

[Question Inaudible]

Michael Toups

It will be relatively proportionate to the other facilities, again it's not labor intensive that these facilities will have some management team at the new facility because of the distance to the headquarters but it will be relatively proportionate to two facilities.

Unidentified Analyst

[Question Inaudible]

Michael Toups

Right now Mr. Lee is going to try to be there in October at the RedChip conference in October. He was planning to join us today, he was currently traveling in the PRC and again with the 12 hour time difference he travel was delayed so he was not able to join in connect with us on the call this evening in China.

Operator

And we will take our next question from (inaudible).

Unidentified Analyst

Two quick question, Kevin was very thorough so I don't want to be (inaudible). As I understand that I believe we are about five weeks away from the warrant expiration. Am I correct on that?

Michael Toups

Yes, those are three year's warrants and they expire on October 29.

Unidentified Analyst

Does that factor into the company’s decision making in any way as far as dealing with the potential financial avenue of potentially equity debt or whatever exactly we are discussing I understand you can’t give me the exact specific. But obviously we have five weeks until that decision is made for us just by the simple math of the calendar, what is the company’s dealings regarding that?

Michael Toups

At this point we are continuing to operate the business we really have not tried to let that factor into any of our decision making process at this point. So, at this point we are going to let those warrants just run a natural course and again they can be exercised at approximately $2.25 a share which of course would be at the premium to today’s price, but again we feel like today’s price is very much undervalued and with the (inaudible) two times and roughly less than half of book value. So, we feel like there is tremendous value there, we certainly encourage those current warrant holders if they chose to exercise we certainly like to move forward with that. But at this point we are trying not to let that cloud any decision that the company has to make in terms of moving forward with the closing on the acquisition or potential financing.

Unidentified Analyst

And then just sort of a follow-up, the potential financing equity shops or whatever it would be, are those dealing with Chinese or American funding sources, the combination of both just to give you an idea of what we are looking at here commercial lending?

Michael Toups

We are actually talking to both whether that’s primarily international related large banks or funds, that have expressed interest and working with the company. So, it could be a combination of both or one or the other.

Operator

And we will take our next question from Jeffrey Scott with [Scott Asset Management].

Jeffrey Scott - [Scott Asset Management]

The discussion about the 46 major customers, this is actually the first time you talked about the number and concentration of major customers isn’t it?

Michael Toups

We gave some numbers in last year 10-K but didn’t talk specifically in terms of the numbers of customers we talked about the concentration.

Jeffrey Scott - [Scott Asset Management]

Right, but not the number of them?

Michael Toups

Right.

Jeffrey Scott - [Scott Asset Management]

The inventory is a weighted average what was the dollars per metric ton for the inventory number as of June 30?

Michael Toups

The dollars per metric ton was at June 30, we had roughly 50,000 metric tons. Roughly on a cost basis it was somewhere around $1043.

Jeffrey Scott - [Scott Asset Management]

1043 per metric ton?

Michael Toups

Right.

Jeffrey Scott - [Scott Asset Management]

Okay. The advances to suppliers does that lock in availability or does it lock in price or both?

Michael Toups

It allows us to lock in both and because of the relationships that we have with our suppliers and just the importance so we are to these different suppliers, it allows us to lock in availability and gives us some flexibility on price where we can either lock in the price or we can be a little more flexible on price if we think that the price of oil will go down we don't have to necessarily lock into the price at that time of the event. So, if we think the price of oil is going to go down then we can actually be flexible with the supplier and that allow us to adjust based on when we take delivery to adjust to that new price.

Jeffrey Scott - [Scott Asset Management]

Do, you make that decision at the time that you actually advance funds that you transfer money?

Michael Toups

We don't have to. Basically, it's almost like a hedge where we can lock in but we won’t have to pay anything more because of some protection in terms if the price goes down. It really acts as a tremendous hedge for us in terms of protecting us where we won’t have to pay more because it's flexibility where we can actually pay less.

Jeffrey Scott - [Scott Asset Management]

The 7 to 8% growth that you are projecting is that in unit metric tons or is that in dollars?

Michael Toups

That’s actually in metric tons.

Jeffrey Scott - [Scott Asset Management]

Okay. So, that’s unit.

Michael Toups

Right.

Jeffrey Scott - [Scott Asset Management]

Okay. The agency business that went down, when agency by does not occur, is it because your customers are using lower volumes is it because your customers are buying are not using the agency function but are buying directly from (inaudible) agency or your customers getting their product from the other source?

Michael Toups

Typically it's because the customers are using a lower volume of product. If you look at the agency fees on just a pure volume basis, the agency fee relatively small number on our books because all we do is book the fee that we are not the whole pricing cost basis but just the fee, but the volume on those sales is probably 5 to 6 times the volume that we run through our facility. Now what that allows us to do is get better buying power with the refineries and again it's a direct shift to the customer. So, typically those customers are getting really the best price if they were able to get in the market, but typically when that’s down it's only because their overall order their volume or demand is down.

Jeffrey Scott - [Scott Asset Management]

So, that was agency customers, are you generally a sole source for them?

Michael Toups

Typically on a large purchases yes.

Jeffrey Scott - [Scott Asset Management]

Okay. So, the fact that your agency dollar volume went down and their usage of product went down by an equivalent amount?

Michael Toups

Yes.

Jeffrey Scott - [Scott Asset Management]

Okay. The competitive environment in Huajie for that acquisition, are you going to be getting your business are you going to be taking it away from wholesalers that are state owned or where are the customers sourcing their product now?

Michael Toups

There is couple of other privates distributors where they are buying some product down, but they actually were primarily be from taking it from state owned enterprises, (inaudible).

Jeffrey Scott - [Scott Asset Management]

Are they located close to the Huajie physical assets?

Michael Toups

No they are still quite some distance. So, what we see is really the customer demand a lot of that is just driven by the proximity to the customers.

Jeffrey Scott - [Scott Asset Management]

So, you will have rail delivery to Huajie?

Michael Toups

Yes.

Jeffrey Scott - [Scott Asset Management]

And it will be a shorter truck transport to the customer’s facilities?

Michael Toups

Exactly.

Jeffrey Scott - [Scott Asset Management]

And that’s what will drive volume to your facility ad away from the (inaudible).

Michael Toups

Yes.

Operator

And we will take our next question from Stanley Ng with RedChip Companies.

Stanley Ng - RedChip Companies

Just two quick questions, number one, let’s say if you can complete the acquisition of Huajie by the end of this month, how you require the ramp up the production at Huajie. And number two, and we line up the potential customer to buy the petroleum product from Huajie or simply say, how much time you need to ramp up sales?

Michael Toups

With that we are looking at approximately a 30 to 45 day ramp up. We’ve had some personnel and some sales people on the ground for us in the Huajie region again just mining that region for business. So, it's really just come it upon us to put oil in the tanks and we will customers ready to go. So, we feel like we have got some pre orders pretty well ready to go and again about 30 to 45 days to ramp that up.

Stanley Ng - RedChip Companies

You mean production or sales?

Michael Toups

Sales.

Stanley Ng - RedChip Companies

What about production?

Michael Toups

Again because we are just primarily in the storage business so there is really is no production involved, again we are just taking in products filling up the tanks. Again just ramping that up with our engineers get everything back on line with the petroleum product going into the tanks and then customer sales. So, we feel like in short order we can ramp up the sales side and again really no production involved because we are in the distribution business.

Stanley Ng - RedChip Companies

Your acquisition has hang on quite sometimes and I’m not sure whether you are really ready to using revenue at all. So, given a short period of time and its okay to stop generating revenue. And it only takes about 30 to 45 to ramp up sales, right?

Michael Toups

Yes.

Operator

Thank you, Mike. If you want to just wrap it up for us and give a final comment.

Michael Toups

Sure. Again John, thanks to RedChip and we appreciate everyone’s input on the call this morning. We like to thank our long-term shareholders for their patience and their support and we look forward to another strong financial performance in 2013. So, thank you.

Operator

That concludes today’s conference call we appreciate your participation.

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