I am used to "filling out" referring to a young lady assuming a more womanly shape.
I suppose it may be used by bodybuilders to refer to adding muscle mass.
This dialog seems strange to me. If person "B" is named "Jack" (a man's name) it would be odd for a man to be called "beautiful," as person A does. Likewise, a man adding muscle would not be a reason for him to think he is thought of as "beautiful."
If "Jack" is instead a female, the dialog makes more sense. Person B runs into person A after a long time and comments that she looks beautiful. She responds that he is just noticing that she has blossomed into an adult woman.