(PCH) - Get Report

said Tuesday that its first-quarter earnings would fall substantially below expectations because of startup problems at the paper maker's Minnesota pulp and paper division.

Shares of the Spokane, Wash.-based company dropped 1 1/8, or 3%, to 39 in early trading. (Potlatch shares closed down 1 1/16, or 3%, at 39 1/16).

Analysts polled by

First Call/Thomson Financial

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had been expecting 27 cents a share, with the lowest estimate at 25 cents.

An unfavorable sales mix at the new pulp mill in Cloquet, Minn., led to lower-than-expected production and higher costs, the company said in a statement.

The news of the shortfall comes just one day after its chief financial officer, Sandra Powell, announced her retirement.

L. Pendleton Siegel, Potlatch's chief executive, said he was disappointed with the production difficulties. But he said in a statement that "these setbacks, which are now fully resolved, should have no impact on the pulp mill's long-term contribution to earnings and shareholder value."

The company has four primary segments of pulp and paper, woods, printing papers and timber resources. At the time of its last quarterly earnings report in late January, Siegal said, "The startup proceeded very smoothly, and we continue to exceed production and quality targets,'' even though the print and paper segment lost $6.4 million in the fourth quarter vs. earnings $6.4 million in the prior fourth quarter.

In that quarter, the company also warned investors about "operational problems at the pulp and paperboard mill in Lewiston, Idaho," that offset the improving market conditions for pulp and paperboard.

The Minnesota mill falls under its print and paper division which accounts for about 21% of revenues.