Seems to be saying it will pass all compressed audio unchanged in Auto-1 regardless of channels and will change everything but multi channel compressed audio in auto-2. Maybe?

The thing to remember about TV PCM is that they do not simply decode multi channel dolby signals and send out multi channel PCM like disc players or even the Apple TV. They will take a dolby 2.0 and 5.1 signal and convert them to PCM 2.0. So, when somebody tries to stream a Netflix show that is labeled 5.1, their AVR will report a PCM 2.0 signal if the TV is set to output PCM over optical/coaxial even if the content is Dolby Digital 5.1.